To all those reading this I am David Gibbs; I am a Lecturer in Company and Commercial Law at the University of Hertfordshire.

I created this blog as a general out-let of ideas for my research, as well as keeping those interested up-to-date on my research and general interests.

I completed my PhD thesis at the University of East Anglia in 2014. The thesis was recommended for the award of PhD with no corrections. My external examiner was Prof. Simon Deakin (Cambridge) and internal examiner was Prof. Morten Hviid.
My PhD research centred on directors' duties and company law. The thesis was titled 'Non-Executive Self-Interest: Fiduciary Duties and Corporate Governance'. It was a doctrinal and empirical study on whether self-interest was suitably controlled amongst non-executive directors.

My supervisors were Prof. Mathias Siems, Prof. Duncan Sheehan, Dr. Sara Connolly and Dr. Rob Heywood

All opinions of any existing or future blogpost are my own. They do not necessarily represent the views of any of my associated institutions.
ORCID 0000-0002-6596-8536

Monday, 28 November 2016

Theresa May on Corporate Governance: A misguided approach?

When last I wrote, I rose some preliminary objections to the idea of employee representation on corporate boards in the UK. I am not against strengthening the position of employees because I do not believe the current 'normative consensus' espoused by Hansmann and Kraakman: that the best way to achieve aggregate social welfare is through running the company in the collective interests of shareholders.

However, I noted that giving employees a voice on the board would be nothing more than a palatable political response because of the legal structure in companies it probably would not change the way companies operate. An employee representative would be under the same duties as any other director and it may cause new conflicts of interest or raise questions as to their independent judgement.

Now, fortunately, her government appears to have rowed back from this position and it is being reported instead that the proposed reforms will include:

1. Introduce corporate governance codes to private companies
2. Require companies to publish pay ratio between CEO chief executive and average employee
3. Improve effectiveness of remuneration committees and the extent to which they should consult shareholders and the wider company
4. Introduce binding votes on executive pay packages

The reasons behind this reform are, supposedly, to 'increase public trust in business in the face of the rise in anti-globalisation and anti-business sentiment'.

In response to this, the common objection is dusted off that more controls on business and boards will lead to some sort of mass exodus of top management talent from the country, just as there was a mass exodus from Britain after Brexit and America after Trump... as if the only thing tying management to this country is whether or not shareholders have a binding say on their pay.

Yet, what I object to under these proposals is the government's inability to think outside the box. Everytime, there is a scandal we hear the same story: "More shareholder power", that is the answer, despite seemingly ignoring considerable evidence that shows increasing shareholder power does not improve business.

There is the work from Cheffins that shows increase in investor confidence often comes from essentially soft forms of control rather than granting shareholders more rights.

There is work from ArmourSiems et al that shows increasing shareholder power in some cases decreases prosperity as it significantly relates to reduced public listings.

We must also consider some of the seminal work on agency theory by the likes of Fama, who highlighted matters such as portfolio theory. Shareholders diversify their risk and have little incentive to monitor one company. There is also the problem of information asymmetries between company and shareholder, that even if they did have the incentive they may not be properly informed to make good or fully informed decisions.

There is also the fact the government point to other countries' practices, such as the US, France, and Australia, but ignore work by Tubner that highlights the impact of developing legal systems by analogy or legal transplant can result in legal irritants as laws operate out of context. Not to mention using Australia as an analogy for legal development of strengthening shareholder power ignores there own reforms of removing the 100-member rule that allows 100 shareholders to table resolutions at annual general meetings.

Then you have my own current work (forthcoming, so don't want to give too much away just yet) that shows even if shareholders tried to legally enforce anything against the company, the courts are parsimonious in allowing shareholders to enforce the company's rights due to restrictions on locus standi.

So, I am not sure the case is really made out, that the way to improve public confidence in business is to give shareholders more power. It is built on a faulty premise that: (1) we trust shareholders to make the right decision, or any decision at all; and (2) the faulty premise that the best way to achieve aggregate social welfare is to run companies for the shareholders' collective interest.

This begs the question, of course, what should we do? Now, I have many angles I could take on this, but I draw attention to Cheffins' work on whether law matters, and I also draw inspiration from Schynder's recent paper on why should law matter.

It would appear that the objective of reforming the law, i.e. why should law matter, is to improve public confidence. It does appear there are other objectives, such as deterrence, but confidence appears to be the main concern. The reasons for this are highlighted in the news article such as 'good governance helps companies take better decisions, for their own long-term benefit and the economy overall'; and 'businesses are a pillar of our society, creating employment opportunities and contributing significantly to funding our country's public services'. Seemingly if we are confident in what businesses are doing we can rely on them and we as the public and consumers become more confident in the market and continue to spend.

Cheffins points to the different ways investor confidence is improved, noting this is not achieved through increasing their rights. Factors such as financial intermediaries and the stock exchange are better at achieving this.  One must stress that this looked at increasing investor confidence, so one must be careful in drawing an analogy between investor and public confidence. But from this observation our working hypothesis could be increased shareholder rights will reduce public confidence in business.

It is taken from this that increasing shareholder rights we would observe a decrease in public confidence in business. While I said it was a danger to draw analogies with investor confidence as to whether increased rights would reduce public confidence, the hypothesis can be supported by the idea that shareholders, with their lack of incentives, will fail to monitor the company properly to increase confidence; those that do monitor the company will only do so to increase their own personal wealth; and when things do turn sour shareholders will lack the appropriate legal mechanisms to enforce the desired standards through the courts or company resolution.

If we want to increase public confidence we need more imaginative ways of doing that. Now, I am openly in favour of good regulation of business. I am not necessarily going to say what regulation that should be, as I do not think it is a matter for company law, nor is there the space or time to do so here. But, for example, employment law could be strengthened to support the statement above. That we rely on business for employment opportunities. We are not going to be confident in business if we feel they can remove us from our role in favour of short-sighted profit. So getting the balance of employment law right can help increase confidence. Yet, this Conservative government has gone about restricting employment rights.

This then boils down to what I said previously, these reforms are nothing more than palatable political responses.

Wednesday, 10 August 2016

Employee Representation on Boards: Meaningful reform or a palatable policitcal response?

Theresa May has reignited the debate about whether boards should have employee representation. This will be similar to the practice on the continent in countries such as Germany, where worker participation is the norm in larger companies.

It is a response to tackle what many see going on in the corporate world as corporate greed, self-interest, malpractice and the like. Employee representation can help tackle this problem of immediate profit above all else by putting stakeholder interests at the heart of the company's decision making, referred to as the 'relational company' model. To this end, it is hoped we would see far fewer instances of the 'unacceptable face of capitalism'.

This is not all, it is part of an ongoing trend in company law reform to shift the burden from the state to internal measures to remedy corporate misfeasance. By placing control and decision making in the hands of those interested in the company they can rectify and/or remedy instances of corporate failure internally without the need for state interference.

So will employee representation really bring an end to profit above all else and radically reform corporate law? Here are some considerations as to why I think that answer would be 'no'.

One must first begin with 'what is the company'. It is a separate legal entity. It is the same as you or I are, legally speaking. Its differences are only practical. The same could be said of two natural persons, whereby legally they are treated the same as individuals but consist of practical differences. The end result is that the law seeks to adapt to those practical differences to remedy any potential unfairness whereby those practical differences cause an imbalance in any relationships one holds with another party. For example, a parent and a child are legally treated the same as individuals but hold practical differences. So when the two individuals engage in a relationship the law responds to account for those practical differences between the two individuals i.e. through aspects of family law.

Therefore, a company is able to own property, enforce its legal rights, have legal rights enforced against it and so on just as any other individual. But it cannot do this itself due to its practical limitations. It has no eyes to see, no ears to hear, no hands to write. It requires individuals to act for it. The right to do so is traditionally given to the directors. The right is derived from the company's constitution. Therefore it is the company, exercising its right, to allow another to act for it. Again, this is no different from, say, a natural person who does not have the capacity to act and requires someone to act for them, such as an individual with a severe disability.

So, how does the law respond to the practical differences where one is required to act for another? Anyone who undertakes to act for another's interests is recognised as owing them duties. A trustee will owe duties to beneficiaries. A director owes duties to the company. Equity imposes these duties to ensure the power the person has over the other is exercised in a manner society deems as 'proper'. In most instances this involves four key duties: 1) proper performance; 2) best interests; 3) care and skill; 4) loyalty. Arguably (1) is not a duty as it is simply an interpretation of the powers given to determine if they were exercised for the purpose given. But I do not want to get side tracked...

Therefore, the individual acting for the other, in this case our director, is acting in the other's interests, the company. Here we have the first issue with a relational model of the company. If one is to put the interests of the stakeholders at the heart of decision making, the law will only allow you to do that insofar as it is in the best interests of the company. Otherwise it would be treating the company differently from a natural person, which is not allowed. You could not legally force the company to put the interests of the stakeholders at the heart of the decision making process because it is tantamount to someone telling a natural person to put another's interests at the heart of their decision making process. The governance reform would then have no legal teeth. The law requires the directors to put the company's interests at the heart of the decision making process, not the stakeholders.

This then leads to the second problem. With its one-tier board the UK imposes the same duties on every director, whether they are an employee representative or not. Therefore, an employee representative can only put the employee's interests at the heart of the decision making process where it is in the interests of the company to do so. This further leads on to how an employee representative will be incentivised. The current remuneration packages of directors are all based on profit metrics that favour a shareholder-centric model of board governance. If employee's are incentivised in the same way, agency theory would tell us that they would only prefer the employee's interests as long as it favoured their own. If they are incentivised the same way as other directors, group-think would undoubtedly set in, as relying on the representative to make the decisions in the employee's interests where they stand to gain by making decisions against them is going to cause a considerable conflict of interests. The alternative is to incentivise them differently, which would artificially create a two tier board, which may very well cause division and split on the board rather than unity and cohesion.

This also shows that in the UK, we technically do have employee representation on boards already. The board are required to act in the company's best interests. What is the company's best interests will often involve a consideration of the effect decisions will have on stakeholders. But this is only one consideration for the board, as it would be for you or me when we make decisions. Ultimately it comes down to what is best for the company, but to legally require anything else would be a major shift in the way the company is perceived and treated.

The UK approach to the company is pragmatic. The company is a separate legal entity and anyone acting for it has to put its interests first to account for its practical limitations. It shows that May's proposal is a palatable political response in an attempt to shift company regulation away from the state to internal measures by giving workers a voice on corporate boards. The end result is that when the next corporate scandal hits, government can blame the company rather than the system. However, this shows that the governance reform is unlikely to do much to change the way a company is run and for whom because the law would not facilitate this change. If you want to less of the unacceptable face of capitalism, May needs to recognise the company as a separate legal entity and take measures to strengthen the rights of those involved with the company i.e. special legislation on zero-hour contracts; enforcing existing employee rights; easier means to enforce consumer rights; better standards on environment pollution; better standards on community projects and infrastructure. Simply expecting all these things to happen by putting an employee on the board and doing nothing else is beggar's belief.

A final thought is that developing employee representation in the UK on the basis of analogy, overlooks the corporate governance failings those jurisdictions have seen. It was only last year the Volkswagen scandal broke. No amount of employee or stakeholder representation stopped what the legal rules did little to prevent. Governance reform is not meaningful reform. If you want change you need to make it in the individual's interests to chose that method of behaviour. Plastic bags, smoking, alcohol, even Pokémon Go are recent examples of modifying behaviour and none of these changes relied on just telling people to behave in a different way.

Thursday, 4 August 2016

The Handbook of Board Governance

Coming towards the end of a busy period of work, the blog has been neglected.

What has been keeping me busy. First, the Handbook on Board Governance. I have been asked to review it for a journal. I am only a chapter in but it promises to provide some useful insight (despite one pet peeve of an author describing the director's fiduciary duties as loyalty and care - there is no fiduciary duty of care!)

I am also quite interested to read one chapter that claims separate legal personality and limited liability is being continually eroded through increased shareholder accountability. As far as I have observed that it is in fact the opposite.

I have also been working on my British Academy Quantitative Skills Award, as it draws to an end this month. I have learnt about using STATA, dummy coding, mediating hierarchy, moderation, sobel test, and logistic regressions. I have used these and applied them to my work on derivative claims. The paper is focusing on 'practical convergence or legal irritants in shareholder protection'. The statistical evidence reveals very little shareholder protection since the introduction of the Companies Act 2006, suggesting that the formal change of legal rules has done little to nothing to meet the objectives of the reform.

Therefore, we are likely to see plenty more select committees and legislation to rectify corporate misfeasance such as that from the BHS scandal, because internal company processes are ineffective in dealing with it. The unacceptable face of capitalism will continue. Employee representation on boards to deal with it? A palatable political response that will have no effect in the UK. It fails to address the actual problems that exist in employment law and properly recognise the company's separate legal status.

Finally, I am working towards finishing a new thesis on fiduciary duties. More to follow in due course on this.

Wednesday, 8 June 2016

Fiduciary Duties of Non-Executive Directors and Capacity

It has been a while since I focused on this topic. Today I returned to it reading an article on the topic by Witney, 'Corporate Opportunities Law on the Non-Executive Director (2016) 16(1) JCLS 145.

The work cites my piece in the Company Lawyer that seeks to explain that a fiduciary duty of a director is often misunderstood because people struggle to grasp that an executive director generally takes responsibility for all interests of the company, which are broadly defined because a company cannot act by itself. It is completely reliant on its directors. But people look to narrow the interests of the company and focus on defining its interests rather than what the director takes responsibility for, which is the orthodox for fiduciaries. Thus, they seek to change the fiduciary jurisdiction and apply it differently to all directors than they would to other types of fiduciaries because they look to focus on the interests of the principal rather than what interests the director is responsible for.

Whilst it is possible to vary when it is owed, as the article explains by focusing on the scope, it is not possible to change the application of the duty once it is owed. Duties, including fiduciary ones, are monolithic. They cannot be varied once owed. They are inflexible, not flexible as Witney claims. Only when they apply is flexible because, as my article shows, it depends on what the fiduciary has responsibility for to the principal's interests.

The argued changes to application of fiduciary duties for directors, as a result of that confusion, comes in many different forms, that this article tries to advance with little plausible justification for it. For one, there is no such thing as corporate opportunities law. There is no such doctrine in the UK. He tries to use this to explain that the capacity you are acting in can affect whether you can avoid the application of fiduciary duties. That is also not possible. It shows a complete disregard for the meaning of loyalty. The purpose of the duty of loyalty is to regulate self-interest within the scope of the undertaking to the principal's interests. It bans self-interest to fulfil this purpose and demands loyalty to the principal's interests that you are responsible for. This is because the director stands in the stronger position, capable of manipulating information to prefer their own interests ahead of the ones they undertook to act for. It is therefore complete fiction that the capacity you are acting in affects the fiduciary duty. The idea that we can simply argue we were acting in a personal capacity to avoid acting for the interests you undertook to protect is a complete disregard for the duty. His example given, that it is none of the company's business to be offered investment opportunities that the director invests in personally, is just one way the duty could be abused and undermine that purpose. Witney offers no justification as to why it would not be a breach other than 'capacity' (I note he cites a couple of cases where there has been no breach of duty such as CMS Dolphin, Plus Group v Pyke, and West Coast Capital but all have been misapplied as to why there was no breach in those instances, I return to one example below). On that ground I could argue any conflicting investment was not conflicting simply because I was acting in a personal capacity. The duty of loyalty is strict in its application. Is there a risk of conflict i.e. did your personal interest conflict with the interests of the company you undertook to protect? If yes, there is a breach. Capacity is not an excuse and never has been. The flexibility Witney refers to is misapplied to fit his thesis. The flexibility is when the duty is owed, not how it is applied.

To return to the cases he cites, mentioned above: He says these cases show that it is clear that a director is not bound by their duties all the time. Is it? But consider Plus Group v Pyke and CMS Dolphin that are glossed over to advance his thesis. Of course a director can resign even though it would be harmful to the business. But there is clearly no conflict of interest in resigning. What interest is he acting in conflict with by resigning? None. But take the example further. The director resigns to take an opportunity personally. If the director has responsibility for the interest that is a conflict of interests. He is still well within his right to resign but his motivation makes it a breach because he is doing it due to a conflict of interests. It has nothing to do with his capacity.

Thus Witney misunderstands what I said when I advance that a court needs to consider what the director has responsibility for. He says this is only one relevant factor in determining whether the duty was owed as a director cannot unilaterally determine the scope of their duty. No, it is the only factor in determining the scope initially, because there are no constructive fiduciaries and yes, they cannot unilaterally determine the scope of duty as much as the principal cannot unilaterally determine it. The scope is set based on what the parties mutually agreed the fiduciary's responsibility would be. If the director did not take responsibility for the matter then they cannot be required to owe a duty of loyalty. If the director does take responsibility, whether it be unilaterally, voluntarily, or contractually then the duty is owed.

I agree with the premise of Witney's article though, that the broad application of fiduciary duties can make it difficult for non-executives to practically take on multiple roles, which they often do. However, that is not the company's problem. The House of Lords have long shown little sympathy for an individual who puts themselves in a position of conflicting duties. A non-executive does not have to take on multiple roles to fulfil their function to one principal. The Court of Appeal made it clear that the court will only permit self-interest where acting for multiple principals is inherent to the business. If non-execs want to take on conflicting opportunities then get authorisation from the principal. The conservative line is not a problem. Flagrant disregard for the duty is, however.

Now to apply this to non-executives, as my paper briefly did, they do not necessarily take responsibility for all the interests of the company. Executive directors generally do as a presumption because the company simply cannot act without them. Therefore, there is some flexibility in when the duty is owed for non-executives to accommodate their multiple appointments, but that is not the same as advocating a change in the way the duty is applied. The added benefit of this approach compared to the capacity approach is certainty. We can say with certainty what the director's (non-exec or exec's) responsibility was. Saying what capacity they were acting in is riddled with uncertainty.

So finally, to return to Plus Group v Pyke, the director in that case avoided liability because the facts demonstrated he no longer had responsibility for the interests of the company as they had been effectively forced out of the company in all but name. It had nothing to do with capacity. Capacity has never been inherent in common law or equity.

Saturday, 4 June 2016

Can Companies Vote in the EU Referendum?

With the impending EU referendum, there is a natural drive to get those who can vote to register. Who can and cannot vote is not always straight forward, but the question here is whether companies can vote?

The answer is, of course, no. Thank-you very much for reading this post...

but this leads to another question, should companies be able to vote? So, on some quick research in to politics and the law on voting, a helpful comment from a colleague, pre existing knowledge of company law I will tackle this question.

To me, this question took on more pertinence after the decision in Prest v Petrodel Resources Ltd [2013] UKSC 34. It arguably has significance well beyond simply acknowledging the obscurity of piercing the veil. To summarise the decision, the court effectively held that the court will never pierce the corporate veil and hold those behind it responsible for the company's liabilities and obligations. Privity applies to companies as much as it does to you or me. Where the company is used as a vehicle to avoid personal liability and obligations, there is always an equitable tool on hand to hold the company liable in its own right. So in Prest, the husband's transfer of assets to the company were held on a bare trust in divorce proceedings for the wife. It did not have to hold the company liable for the divorce to recover the property, which would have been absurd.

What we see an emergence of here is that final step to full recognition of the company as a separate legal entity. Responsible completely by itself, with no lingering possibility of controllers being liable personally for the company's debts. Its limitations are merely practical, not legal. I often remember being taught in my undergraduate days that a company cannot drive a lorry, used as an example to demonstrate the limits to its legal liability. Whilst it is true that it cannot drive a lorry, this is not a legal limit, it is a practical one. It could still be liable, where that lorry crashes, for negligence, if they failed to train the driver properly, for example.

Therefore, something I often say to anyone who asks about company liabilities, rights, or obligations, if you find yourself treating the company differently than you would a natural person then you have done something wrong. For example, saying shareholders own the company is treating a company differently from a natural person, as you cannot own a person. A shareholder merely owns the share. Whilst the law may seek to regulate the company's relationships in a way that is responsive to nuances, that is no different from other relationships involving natural persons.

Therefore, now the company has been fully recognised as a separate legal person, completely responsible for its own rights, liabilities and obligations, should it not be able to vote on those issues that can affect those rights, liabilities and obligations?

Now, I am not pretending that there are not some obvious and strong arguments that they should not vote. Nor am I advocating that they should, simply exploring if they should. I am also hoping I am not completely ignorant of some reason why the shouldn't or can't vote in a way that makes this post seem more ridiculous than it might already appear. So let's review some of the arguments and authorities.

The starting point is that there is nothing that says a company cannot vote because the law sets out that citizens can vote and provides a, seemingly exhaustive, list of those who cannot, which does not include companies.

The Treaty on the Functioning of the European Union, Art 22 provides that a citizen is entitled to vote. Equally, who can vote has to be compliant with any Human Rights provisions. But who can vote has always been a national decision, so a 'citizen' is defined nationally under the British Nationality Act 1981. While a company might not, yet, be classed as a citizen, the legislation includes the ability to apply for citizenship. To apply there needs to be a 'real' connection and capacity. The latter would not be an issue, but the 'real' connection might be difficult, but if its registered office and place of incorporation is in the UK then this, or either, might be enough to establish a real connection.

The next step would be whether they are entitled to vote if they are a citizen. The Representation of the People Act 2000 bases this on citizenship, in line with Art 22, with no restrictions on companies.

Ignoring the existing law, one may consider whether the law should enable it to do so, if it currently does not permit it.

The policy argument is the one stated, if they are a separate legal person with its own capacity it should be able to have a democratic voice on how its position may be effected by political decisions.

Now there are obviously practical difficulties in voting as a company. In a referendum though it is a one off vote, not linked to any particular constituency. The directors, as the guiding mind of the company. The vote would need in the best interests of the company, compliant with Companies Act 2006, s.172.

Granting a person with legal capacity the right to vote would not be anything new, as there is precedent for it. Women over the age of 30 were granted the right to vote in 1918 and over 21 in 1928. Whilst companies were recognised as having separate legal status in 1897 in Salomon v Salomon (1897) AC 22, it was not until a few years ago that it was fully recognised that a company's controllers will not be liable for the company's obligations. Therefore, an argument advanced that 'why would companies be given the vote when women did not have it', cannot be sustained without question. A woman had clearly become a separate legal person with full legal capacity from their husband or the like, and should be given the vote. This was not as clear for companies. It is now after the decision in Prest.

One point is that allowing a company to vote would destroy the equality among citizens, regardless of wealth and education but they are equal for the purposes of the democratic principle. Yet, companies are of different size and wealth. They may be less or more powerful than an individual or another company. The principal 'one person, one vote' never said that person had to be natural.

Another is that certain companies may operate contrary to public policy. One argument presented is that a tobacco company's view cannot prevail as it should be restrained for health reasons. But on such logic you could ban any smoker from voting. That itself is contrary to the democratic process. Take a more concrete example and prison inmates' rights to vote. Their incarceration might be a result of a law they disagree with. Their right to vote for a politician that might support their release by overturning such a law should not be banned from voting. Therefore, a company should be entitled to vote to support their position, even if it runs contrary to the current public policy of the existing Parliament.

One practical problem is subsidiaries. How many votes should a group of companies get? If companies were to get votes, specialised rules would have to be set out to prevent abuse, with the democratic process eroded by faceless, shell companies dictating the direction of the legislature.

A historical point might offer some further pause for granting the vote to companies. It is the legislature who needs to control who votes. Otherwise it cannot be taken to be seen as supreme. Thus, when companies were granted that status, it was previously as a result of Royal Charter. Parliament, however, was the donor of the right to vote. Giving companies the right to vote would enable to Crown to reassert some power over voting, questioning Parliamentary supremacy. However, companies are now traditionally formed through registration with a public body, in the UK that is Companies House. Therefore, such companies registered would not undermine parliamentary supremacy. However, other type of companies, such as those formed under a Royal Charter should be denied such a right if companies were to be given one.

A final problem might be a result of a company's practical limitations. It cannot age per se and therefore could never reach the age of maturity to vote. Yet this could be overcome by adjudging its age by number of years since its incorporation.

Overall, the company, now with full legal capacity, has a case for the right to vote. If it were to be given a vote, it should be one vote, with certain restrictions. But it is arguably undemocratic to not allow one with full legal capacity to vote.

Any observations, always welcome to hear them.

Friday, 22 April 2016

What's Wrong with the Consumer Rights Act 2015?

I have now been teaching the Consumer Rights Act 2015 for a year, and having prepared lectures and classes on it, now seems like the time to review the observations I have made. Of course there is the risk some of these observations may be completely wrong, as there is very little case law on this Act, and it is not meant to be a review of all the Act, only those areas that I cover teaching Commercial Law.

1: Another layer of Regulation
The CRA 2015 aims to consolidate existing law and make new provisions in respect of goods, services and digital content. It also does so for unfair terms and consumer notices. The need for such reform is detailed in the Act's explanatory notes, that consumer law was seen as unnecessarily complex and fragmented. Indeed no fewer than 10 Acts would have to be covered to even begin to understand consumer law.

While the Act has consolidated the law in respect of supply of goods, services, digital content, and unfair terms and notices there is still a need to look at other legal provisions if a consumer is to understand their rights, even in these areas the Act has consolidated. There are still the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 SI 2013/3134 in force as well as the Consumer Protection Act 1987 for dangerous goods. The Misrepresentation Act 1967 is also still be applicable. Indeed, the CRA 2015 makes explicit reference to the 2013 Regulations requiring the reader to read that Act as well, see, for example, section 11(4).

Therefore, the Act's purpose of consolidation might have been met in part. The law on unfair terms can now be found in one place, generally. However, the Act does not seem to have made many attempts to make the law more understandable. The Explanatory Notes state that the law was unnecessarily complex, so now that complexity is in fewer places rather than lots. In fact, there might be even more complexity, as I detail below.

2. Services or Goods contract?
Previously the law on whether the contract was a goods contract or something else i.e. services was not particularly easy to ascertain. For it to be a goods contract it would have to fall within the definition of the Sale of Goods Act 1979, s.2 otherwise the consumer would be unprotected. Therefore the Supply of Goods and Services Act 1982 was introduced to give consumers similar protection in transactions where there was a transfer of goods other than one covered by the SGA 1979 and for services.

The main issue was where both goods and services were provided it was not clear whether the transaction was a sale of goods, transfer of goods, or services. The significance may not be important in many cases but in some instances a consumer may be left unprotected or with less protection under one provision than another, highlighting the legal complexities facing a consumer.

For example, a transfer of goods where they are to be installed by a service provider will be protected by the SGSA 1982 implied terms as to sale by description and satisfactory quality, which are both strict liability. The property in those goods does not transfer until the installation is complete. Therefore, if the installation is faulty then the consumer will have a remedy. However, if it is a service contract the service provider only has to exercise reasonableness in their service provision. Therefore, if they are not negligent in the installation, i.e. because they follow the manufacturer's instructions, the consumer will be left without a remedy. Whether it was a goods or services contract was not a clear test, which looked at the substance of the contract, Robinson v Graves [1935] 1 KB 579.

This issue is partly dealt with by the CRA 2015, s.5. Sale of goods, transfer of goods including manufactured goods are to be dealt with as supply contracts, meaning the consumer has the protection of those implied terms with strict liability. Therefore, goods that are to be manufactured would not be dependent on a test of substance to see whether it is one for goods or services. However, it appears that is as far as the CRA 2015 goes in rectifying that problem. It still seems that where both goods and services are provided the consumer will be dependent on the substance test to determine what their rights are. While this might be understandable, because it might be unfair to burden sellers with strict liability for products they did not manufacture, they are in a better place to assess the quality etc. of the goods they purchase from a manufacturer. Coupled with the fact the CRA 2015, s.48 offers no definition for what a services contract is, it seems the Act has missed an opportunity to fully clarify this complexity.

3: The lines blurred between a term and a representation
One of the new provisions is CRA 2015, s. 50 that makes pre and post contractual representations about service provisions an implied term of the contract, provided it is taken in to account by the consumer in making a decision about the services.

The difficulty here is that terms and representations are not the same thing and might cause some litigation on the matter. The reasons it was brought in is detailed in the Act's Explanatory Notes para 246, which were to stop service providers making inflated claims about their service provisions they can offer and to ensure parts of the 2013 Regulations (another reference to them) are enforceable.

Thus, if the consumer can show they took a representation in to account then this would amount to a breach of contract. However, terms and representations are distinct and making a representation a term creates uncertainty. It was already possible for a consumer to show a statement was both a representation and a term, but now, it seems, it is only a term. For example, a representation could be a term depending on the importance of the statement to the consumer, Bannerman v White (1861) 10 CBNS 844. So is it required that the consumer show there was a representation or the representation amounted to a term?

If the Act is taken literally the two things required are 'a representation' and 'take in to account'. This suggests that it would require a dual objective/subjective test. First a representation would form the objective assessment. Under common law for a representation to become a contractual term depends on whether the individual making the representation should bear contractual responsibility rather than whether they have agreed, Heilbut, Symons & Co v Buckleton [1913] AC 30, HL. Whether an individual should bear contractual responsibility appears to be a value judgement depending on matters such as the relative importance the consumer placed on the statement made, Bannerman, and any special knowledge the service provider had, Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623; Chess Ltd v Williams [1957] EWCA Civ 5; [1957] 1 WLR 370.

It is questionable whether this will be followed, that the consumer will need to show that the service provider should bear contractual responsibility. If not then the other option is to simply show the standards for a misrepresentation, which might be innocent, fraudulent, negligent, or statutory. These generally require a statement of fact, to be made to the claimant, and induce them in to the contract.

It would then have to be shown that the consumer took it in to account, forming the subjective part. Inducement under common law is a fairly low threshold requiring the consumer to show it was one of the reasons they entered in to the contract.

4: Weaker/Simpler Remedies
This leads on from the terms/representation divide. If a representation is now a term only then the consumer can no longer benefit from the remedies that a misrepresentation offers. It is easier to get out a contract for a misrepresentation than it is a breach of contract. The latter requires the term to be a condition i.e. a serious breach, while the former allows recession for any misrepresentation regardless of its significance, albeit recession can be denied by the court with reference to equitable considerations, Misrepresentation Act 1967, s.2(2).

The measure of damages may also be different for a representation and term. A remedy for breach of term is forward looking, looking to put the individual in a position they would have been in if the contract had been performed. A remedy for a misrepresentation is backward looking, looking to put the individual in a position they would have been in had they not entered the contract.

By making representations terms, the consumer is seemingly denied the choice of remedy that is most favourable to them.

As well as remedies for service contract representations, remedies for supply of goods contracts have also changed. The CRA 2015, ss.19-24 contains remedies including a short term right to reject of 30 days, a right to repair or replacement, a right to a price reduction, and a final right to reject if there has been a breach of contract as stated in CRA 2015, s.19(1). The issue here is to do with damages. The Act stipulates that other remedies can be pursued, s.19(9)-(11), which includes damages, s.19(11)(a), but does not give guidance on the calculation for damages. The Sale of Goods Act 1979, ss.51-53 do not apply the CRA 2015, Chapter 2 Part 1, which is the supply of goods contracts. Therefore damages would seemingly be calculated using the common law rules from Hadley v Baxendale (1854) 9 Ex 341. The same issue arises for specific performance, where the SGA 1979, s.52 permits specific performance at its discretion but this is mainly discretionary, Beswick v Beswick [1968] AC 58, HL.

5. Remedies: Repeat Performance
For service contracts the CRA 2015, s.55 makes available the remedy for repeat performance. The difficulty with this is, is what is the doctrine of repeat performance? And how does it differ from specific performance, which is also made available by way of s.54(7)(c)?

The Explanatory Notes at para 263 state that repeat performance can require the service provider to properly perform the service by doing it again, or part of it. It also states repeat performance is in addition to specific performance. Thus repeat performance, to be available, would seemingly require the service complained of to have already been carried out, otherwise literally repeat performance will not be possible since it is yet to have been done. In such instances, where the consumer requires performance and it has not been done at all they would have to rely on specific performance.

Why such a distinction is made is unclear and appears unnecessary and complex, the exact thing the Act was trying to remedy. The Explanatory Notes, para 263, 273 make it clear why repeat performance is provided for as an additional remedy since specific performance is an equitable remedy and not a right, and will only be provided for at the court's discretion. If that is the case why not simply make specific performance simpler by catching specific and repeat performance in section 55 rather than some elaborate and somewhat arbitrary distinction?

6: Acceptance
Consumer protected under the Sale of Goods Act 1979, ss.34-35 could lose their right to reject where they accept a breach of condition. In such instances their claim would be reduced to a breach of warranty and their claim would be in damages only.

These sections no longer apply to consumers, yet the CRA 2015 makes no corresponding provisions about acceptance. The point of acceptance is to balance the consumer's need to inspect the goods to check whether they comply with the contract against the seller's need for finality.

Yet, with no provisions on acceptance, barring any statutory limitations, it seems the buyer cannot lose the right to reject if they can establish a breach of contract. This raises a question of why there is a need for a 30 day short term right to reject and a final right to reject if a consumer cannot lose the right to reject through acceptance. The only plausible reason is that after 30 days a consumer cannot use their final right to reject or a price reduction until the seller has had a chance to repair where this is possible, s.24(5).

The lack of acceptance may also be detrimental to the seller but this is offset by s. 24(8), which allows a deduction from any refund due to the consumer based on any use the consumer has enjoyed since the goods were delivered, but this is only available after 6 months has passed, s.24(10).

Overall, the lack of acceptance may swing the balance of power too much in favour of consumers who may use products for up to 6 months and return them on the basis of a breach of contract, which sellers may have difficulty demonstrating otherwise.

7: Unfair Terms
One thing to note about unfair terms is that the law was supposedly consolidated. Well, it consolidates the legislation but not common law. The rules on incorporation and interpretation are still found there and so the consolidation is only partial.

8: Remedies for Digital Content
The consumer is entitled to compensation for damage caused to a device or to other digital content, where digital content is supplied, CRA 2015, s.46. Therefore, remedies for damage to other digital content or device is one of compensation and not damages. Thus, you are compensated for the loss suffered. This is not available though where the supplier exercised reasonable care and skill.

Alternatively the consumer can require the trader to repair the damage within a reasonable time if this is possible. However, it seems the consumer can only have one or the other. There is no provision for compensation to be given where the repair fails. This seems highly unsatisfactory if correct, since the consumer would be left without a remedy for the damaged device or other digital content. The remedy left would be the ones for the faulty digital content supplied, which may be insignificant compared to the value of the device itself, i.e. a mobile phone or a computer.

Friday, 15 April 2016

Corporate law full circle, yet still inadequate?

"Other recommendations include a continuation of the present prohibition of no-par shares, a requirement that share premiums (paid-in surplus) be made unavailable for dividends, that secrecy as to corporate control be prevented by requiring disclosure of their identity by persons who are beneficial owners of substantial shareholdings, and that certain changes be made in the rules governing shareholders' meetings and in those which relate to winding-up of companies." (my emphasis added)

You might be forgiven for thinking that this is a quote about recently proposed company law reform. The reference to identifying beneficial owners of shares is a contemporary issue proposed to reduce the possibility of tax avoidance and evasion. Transparency being the panacea to all of life's problems, if you believe Transparency UK and Tax Research UK.

However, this is not a quote about the recent debate, it is in fact a response to the 1945 Cohen Report on Company Law Amendment by Professor Dodd at Harvard University in 1945 Harvard Law Review Vol 58 p1258. 71 years ago this was proposed and it was knocked back. Recent debate after the decision Eckerle [2013] EWHC 68 also raised questions not only about who beneficiaries were but also if they were sufficiently protected from investment intermediaries who legally hold the shares.

The response is, company law is not working sufficiently. Transparency of who owns these companies and shares, more liability on those who act for companies or shareholders.

Yet, far from me believing that transparency will resolve the matter, it is not even a company law problem and therefore, reforming company law will not solve the problem. The problem here is tax law.

Take, for a moment, that a register of beneficial shares is introduced. Who is actually going to be on that register? Will you or I be on that register as beneficiaries of shares invested in through our pension schemes? What about wealthy individuals in other jurisdictions where kidnapping and money laundering are much more prevalent? There would have to be some exceptions and a defined scope of what is disclosed, when and where. Those companies and trusts that are legitimately run should not be forced to disclose private wealth either, whether on or off shore. Those exceptions and scope will be exploited and do nothing to prevent individuals intent on avoiding or evading tax from doing so.

It is difficult to see why we should treat a company differently from a natural person. If we say all beneficial interests in shares have to be disclosed then why not force disclosure in other senses where a natural person may simply hold someone's wealth for them not through shares but through non-dom status or simply being domicile in a different jurisdiction? I speculate, but there are probably other ways of avoiding tax and a beneficial ownership register is unlikely to have much effect. It might deter some politicians and public figures and companies but for the majority of smaller fish, would we really be concerned? Would these bigger companies just not exploit other means minimising their tax liabilities?

Prest v Petrodel Resources Ltd [2013] UKSC 34 sort of brought us full circle in company law from Salomon v Salomon [1897] AC 22. A company is a separate legal entity, as recognised in Salomon but the question arose as to when those behind it could be liable for the company's obligations and liabilities. Essentially, the answer was never and this was the issue in Prest where it was all but confirmed that the company is responsible just like you or I for our obligations and liabilities, and the courts would not hold those behind the company responsible for the company's liabilities and obligations. Thus, even if there is a beneficial register, company law would not hold the beneficiaries liable for anything the company has done, so it is not company law that requires any reform. If you want to make these individuals liable it is tax law that requires reform. Arguably, tax law might not even need reform, since if the company is used to evade tax, which is unlawful, then the individuals would be liable in their own right. However, if they want to make tax avoidance unlawful then tax law needs to change. If they want to tackle tax evasion then there needs to be cross-border co-ordination on tax law. It is not company law that is inadequate.

Without going in to more detail, if there wants to be more enforcement then there needs to be better enforcement. Over the years the state has been taking a more hands off approach, expecting shareholders to do more but equipping them with no tools or incentives to do so. So all of a sudden the state is realising that they need to do something and improve their own enforcement powers. It was 1945 as well that Cohen recognised that shareholders were inadequate monitors and the Board of Trade (now BIS) had ineffective powers in the Companies Act 1929 to investigate misfeasance.

In short, one should take great caution in listening to the drum that Transparency UK and Tax Research UK are beating very loudly. These problems have come up before and just disclosing everything is not an appropriate answer. Their rhetoric is to marginalise anyone through brash language who does not agree with them, and do not adequately engage with criticisms or concerns. If you do not believe me about the brash language just listen to BBC Radio 4's Today show on the 15th April at 08:10 where Richard Murphy of Tax Research UK speaks and 12th April from 08:45 where Robert Barrigton of Transparency International UK speaks, both highly dismissive of any argument against transparency. Indeed Murphy argues that he is a Professor in International Political Economy, and contends markets operate better with greater transparency... well that is one argument, his professorship status has little to do with that though, and it certainly is not the case that full transparency makes for a better market, particular in a liberal market economy where competition is more important than a co-ordinated market economy. It is a problem with "rational" economics and economists. The fact is the argument for transparency is not as simple as market value and financial gain, maximising returns in the short term. It is a complex issue with competing interests and considerations that cannot be boiled down to 0s and 1s.

This has very much been the start of a new project and getting the ideas down. Let's see where this goes...