Bristol Law Review 2013 by UBLC

BRIS TOL LAW REVIEW THE

2013 Edition

BRIS TOL LAW REVIEW THE

2013 Edition

Editor-in-Chief

Nicole Wong

Managing Editor

Senior Articles Editor

Senior Research Editor

Senior Manuscript Editor

Turan Hursit

Roopa Matthews

Milly Stokes Jenny Cook

Editors

Julianne Cirenza Jahan Meeran Sherman Ng

BRIS TOL LAW REVIEW THE

2013 Edition Dear Readers and Authors, As the Editor-in-Chief of the first ever Bristol Law Review (formerly the Bristol Law Journal), I could not be more excited to share this publication with you. This edition saw the implementation of a new editorial board structure, rigorous four-stage article selection process and brand-new cover and internal design. This Review also aimed to showcase exceptional articles penned authors from both undergraduate and postgraduate programmes, with topics ranging from the role of arbitration within consumer contracts to statutory interpretation from a linguistic perspective. Given the interesting perspectives provided on the various areas of law covered by this Review, each reader is bound to find an article which will pique his or her intellectual interest. While the publication serves as a focal point for the general excellence of the School of Law, it is also a celebration of the talents of the individual authors. The authors of the articles before you have all gone on to achieve highly in their chosen paths, be it in academia – gaining places on LLM and PhD programmes in the most prestigious universities within the UK and US – or practice – as solicitors and barristers in top firms and chambers in the City and beyond. I cannot thank the editors of this publication enough for their commitment and effort. Putting together this Review has been a challenge, as is always the case with first steps into new territory. The re-branding and re-shaping of the University’s official journal of legal scholarship was an ambitious and challenging task, but one which was ultimately made possible with the dedication of a very hard working (and understanding) team. I must especially thank my Managing Editor, Turan Hursit, without whom this publication could not be possible. I would also like to thank the many academics at the University of Bristol School of Law who offered their support to the publication by reviewing the selected articles and providing valuable commentary. Finally, I would also like to extend my gratitude to the University of Bristol Law Club for its support, both moral and financial, to the Review.

Nicole H.Y. Wong Editor-in-Chief Bristol Law Review 2013

BRIS TOL LAW REVIEW THE

2013 Edition

Temporary Agency Workers in the UK: Who is the Employer and Can Uncertainty be Avoided? Dominik Arnold.............................................................................................................9 The Right to Self and the Public/Private Divide: Why Those who Court Publicity may Abandon Their Rights Michael J Blitz............................................................................................................41 The Exhaustion of Domestic Remedies Rule: A Realistic Demand for Individuals who have Suffered Torture at the Hands of State actors? Sophie Gallop..............................................................................................................75 The Laws of Codes and Cases: A Comparative Analysis between Civil Law and Common Law Elenor Healy-Birt......................................................................................................109 The United Kingdomâ&#x20AC;&#x2122;s Response to Crisis: A Critical Examination of the New Regulatory Structure of Financial Services Supervision Nikoletta Kallasidou..................................................................................................117 The Arbitrability of Consumer Disputes - Buyer Beware Divyesh Menon..........................................................................................................147 Intentions and Intensions: Textualism, Intentionalism and the Role of Legislative Intent in Statutory Interpretation Jack Moulder.............................................................................................................167 Transfer Pricing by Multinational Enterprises: A Clash between Globalisation and Democarcy Varoom Saccaram......................................................................................................185

Temporary Agency Workers in the UK: Who is the Employer and Can Uncertainty be Avoided? Dominik Arnold

1. Introduction “The slow death of the Real Job is pulling society apart”.1 Agency work leaves existing provisions for regular employment unaltered while relaxing employment protection for temporary jobs, creating a two-tier system.2 One tier is enjoying full statutory protection while the other, offered little protection, is in a legal ‘no-man’sland’.3 The use of employment agencies is often the inadvertent consequence of the “burdens” created by employment regulations.4 In some cases, agency workers are used in order to conceal new hiring when this is considered undesirable either by the controlling organisation or by senior management.5 For some employers, the flexibility provided by agency work is a key argument for new hiring, while others use agency work to assess staff for permanent recruitment.6 In using agency workers, employers are able to outsource the risks inherent to employing workers to the agency in question whilst at the same time adapting the size of the workforce to short-term needs.7 The UK is the second largest employment agency market in the world and the largest in the EU.8 In 2007, 1.3 million people were working as temporary agency workers in the UK - about 4.5% of the total workforce.9 A lot of agency workers are found in low-level clerical positions, in the health and education sector, in hotels and 1 John Harris, The Guardian (London, 19 October 2007) <www.theguardian.com/commentisfree/2007/ oct/19/immigrationandpublicservices.businesscomment> accessed 10 June 2013. 2 Wolfgang Ochel, ‘The Political Economy of Two-tier Reforms of Employment Protection in Europe’ (2009) 25 IJCCLIR 237. 3 James v Greenwich London Borough Council [2008] ICR 545 [60] (Mummery LJ). 4 Guy Davidov, ‘Joint Employer Status in Triangular Employment Relationships’ (2004) 42 BJIR 727, 727. 5 ibid 743. 6 International Confederation of Private Employment Services, ‘The agency work industry around the world: Economic Report 2011 Editio’ (Ciett, 2011), 18 <www.ciett.org/fileadmin/templates/eurociett/ docs/stats/Ciett_Economic_Report_2011.pdf> accessed 10 June 2013. 7 Tineke Vaes and Tom Vandenbrande, ‘Implementing the New Temporary Agency Work Directive’ (2009) KU Leuven Publication No 1268, 19 <https://hiva.kuleuven.be/resources/pdf/publicaties/ R1268.pdf> accessed 10 June 2013. 8 ICPES (n 7). 9 Department for Business Enterprise and Regulatory Reform, ‘Agency Working in the UK: A Review of the Evidence’ (2008) Employment Relations Research Series No 93, 1 <http://webarchive.nationalarchives.gov.uk/20090609003228/http://www.berr.gov.uk/files/file48720.pdf > accessed 10 June 2013.

The Bristol Law Review

[Vol. 1

catering services, and in manufacturing.10 Statistics show that around 60% of agency workers choose temporary work because they are unable find a permanent job.11 Temporary agency work has two different faces. On the one side, there are the workers on the lowest end of the job scale with very poor working conditions and job insecurity, often from migrant backgrounds, with limited knowledge of English.12 On the other side of the scale are highly skilled workers, typically in the IT sector, who have deliberately chosen an agencies as their employers because this gives them flexibility and independence.13 These two groups have different expectations of and attitudes towards employment rights and job security.14 The supply of workers by employment agencies is regulated by the Employment Agencies Act 1973 and the Conduct of Employment Agencies and Employment Businesses Regulations 2003. This legislation distinguishes between “employment agencies”, which find permanent employment for workers with other companies, and “employment businesses”, which supply workers to other companies on a temporary basis.15 In practice (and in the case law), the term ‘employment agency’ is commonly used to refer to what would qualify as an “employment business” under the 1973 Act.16 Therefore this article will use the term “employment agency” synonymously with “employment business”. The 1973 Act and the corresponding Regulations say nothing about the employment status of agency workers.17 They merely address major abuses of ‘labour trafficking’, prohibiting agencies from requiring their workers to pay a proportion of their income to them, and requiring the agencies to be transparent about their terms.18 The question of whether agency workers are employees or independent contractors is left to the common law. The tests of the common law were developed for traditional employment relationships in which one could identify a ‘servant’ and a ‘master’. In the modern labour market, however, there is a trend towards fragmentation of the employment function among a variety of entities.19 The agency relationship is an example of this development; here the function of remuneration is split from the control 10 European Foundation for the Improvement of Living and Working Conditions, ‘Temporary Agency Work in an Enlarged European Union’ (EFILWC, 2006), 7 <www.ciett.org/fileadmin/templates/eurociett/docs/ef05139en.pdf> accessed 10 December 2013. 11 ICPES (n 7) 13. 12 Sonia McKay and Eugenia Markova, ‘The Operation and Management of Agency Workers in Conditions of Vulnerability’ (2010) 41 Indus Rel J 446, 448. 13 Patricia Leighton and Michael Wynn, ‘Classifying Employment Relationships - More Sliding Doors or a Better Regulatory Framework?’ (2011) 40 ILJ 5, 21. 14 See Janet Drucker and Celia Stanworth, ‘Mutual Expectations: A Study of the Three-Way Relationship between Agencies, their Client Organisations and White-Collar ‘Temps’’ (2004) 35 Indus Rel J 58, 72. 15 Michael Wynn, ‘Regulating Rogues? Employment Agency Enforcement and Sections 15-18 of the Employment Act 2008’ (2009) 38 ILJ 64, 65. 16 Simon Deakin and Gillian Morris, Labour Law (6th edn, Hart Publishing 2012) 182. 17 ibid. 18 Hugh Collins, Keith Ewing and Aileen McColgan, Labour Law (CUP 2009) 221. 19 Fang Lee Cooke, Jill Earnshaw and Jill Rubery, Who is the Employer? (Institute of Employment Rights 2002) 2.

2013]

The Bristol Law Review

function.20 As a result, agency workers are currently one of the least protected groups in the labour market.21 In this context, this article explores the legal status of agency workers in the UK and asks whether the current state of the law is satisfactory. It begins with an overview of the concept of employment status, demonstrating how agency workers fail to be classified as employees in most cases. The next section looks at the client of the agency as potential employer of the agency worker, examining the case law regarding the implied contract between worker and client. In the fourth section, this article turns to the agency as possible employer of the agency worker. Analysing the test of mutuality of obligation, it is argued that mutuality of obligation does exist in longer assignments. Evaluating the control test, this article argues that the agency delegates its control over the worker to the client by means of the contract between the agency and the client. This article will also demonstrate that the recognition of agencies as employers is intended by European law. The final section analyses the various possibilities for joint employer responsibility, examining both theoretical ideas and existing statutory solutions.

2. Employment Status as Key to Employment Rights The common law traditionally recognised two categories of individuals providing services to others: employees and independent contractors.22 A third category of ‘workers’ was introduced by statute.23 Most rights under the main relevant statute - the Employment Rights Act 1996 (ERA) - apply to employees only.24 These rights include the right to obtain a written statement of particulars of employment,25 the right not to be unfairly dismissed,26 the right to a minimum period of notice of termination of the contract27, and the right to a redundancy payment.28 Workers receive only limited protection under specific legislation such as the National Minimum Wage Act 1998 and the Working Time Regulations 1998.29 Independent contractors enjoy hardly any protection because they are considered to have sufficient bargaining power to look

20 Sandra Fredman, ‘Women at Work: The Broken Promise of Flexicurity’ (2004) 33 ILJ 299, 316. 21 Chris Forde and Gary Slater, ‘Agency Working in Britain: Character, Consequences and Regulation’ (2005) 43 Brit J Indus Rel 249, 252. 22 Collins, Ewing and McColgan (n 19) 192. 23 Douglas Brodie, ‘Employees, Workers and the Self-Employed’ (2005) 34 ILJ 253. 24 Simon Deakin, ‘Interpreting Employment Contracts: Judges, Employers, Workers’ (2004) 20 IJCCLIR 201, 202. 25 Employment Rights Act 1996, s 1. 26 ibid s 94(1). 27 ibid s 86(1). 28 ibid s 135(1). 29 Mark Freedland, ‘From the Contract of Employment to the Personal Work Nexus’ (2006) 25 ILJ 1, 20.

The Bristol Law Review

[Vol. 1

after themselves.30 While in other countries the employee status of agency workers is not disputed and the question is only who should be considered their employer, agency workers in the UK are usually not classified as employees,31 even though most of them will probably qualify as workers.32 Originally, the courts classified agency workers as neither employees nor self-employed; they had a unique “sui generis” status.33 This approach was unsatisfactory as it suggested that the courts are able to invent new categories of employment status at will.34 More recent cases have therefore tried to classify agency workers as either employees, workers, or independent contractors. But identifying the employer in situations in which the employer’s responsibilities have been divided among several entities is a problem given the prevailing concept of the employment contract as a bilateral relationship.35 According to the statutory definition, an ‘employee’ is an individual who has entered into or works under a contract of employment.36 A ‘worker’ is an individual who either works under a contract of employment or any other contract whereby he undertakes to perform personally work for another party whose status is not that of a client or customer.37 The meaning of ‘contract of employment’ has been left to be decided by the courts, applying common law tests.38 The tests that are best known are ‘control’, ‘integration’, ‘business reality’ and ‘mutuality of obligation’.39 The same tests are used to determine whether somebody is a worker “but with the boundary pushed further in the putative worker’s favour”.40 The tests of ‘control’ and ‘mutuality of obligation’ are the most relevant for the status of agency workers. The problem is that the agency is not required to find work for the worker and is not in control over the worker’s daily performance. The client pays the agency and no written contract exists between the worker and the client. Furthermore, the client is under no obligation to use the service(s) of the worker.41 The terms in the standard contracts issued by 30 Hugh Collins, ‘Independent Contractors and the Challenge of Vertical Disintegration to Employment Protection Laws’ (1990) 10 OJLS 353, 354. For a critical analysis of this reasoning, see Mark Freedland, ‘The Role of the Contract of Employment in Modern Labour Law’ in Lammy Betten (ed), The Employment Contract in Transforming Labour Relations (Kluwer 1995) 22. 31 Davidov (n 5) 733. 32 Trade Union Congress, ‘Agency Workers: Counting the Cost of Flexibility’ (TUC, February 2007), 8 <www.tuc.org.uk/sites/default/files/extras/sectorreport.pdf> accessed 10 June 2013. 33 Construction Industry Training Board v Labour Force Ltd [1970] 3 All ER 220; Ironmonger v Movefield Ltd t/a Deering Appointments [1988] IRLR 461. 34 Deakin and Morris (n 17) 183. 35 Judy Fudge, ‘The Legal Boundaries of the Employer, Precarious Workers and Labour Protection’ in Guy Davidov and Brian Langille (eds), Boundaries and Frontiers of Labour Law (Hart Publishing 2006) 297. 36 ERA, s 230(1). 37 ibid s 230(3). 38 Adrian Williams, ‘A Critical Appraisal of the Criteria Determining Employee Status’ (2003) 24 BLR 239. 39 Brodie (n 24). 40 Byrne Brothers (Formwork) Ltd v Baird and others [2002] ICR 667 [17] (Underhill QC). 41 Jeffrey Jupp, ‘Agency work: Legal black hole?’ (2005) 155 NLJ 1447.

2013]

The Bristol Law Review

employment agencies to their workers will usually specify that the temporary worker is self-employed and that he is not employed either by the agency or its client. The apparent effect of these provisions is that most employment law rights, in particular those protecting the employee, do not apply to temporary agency workers.42 The obvious solution to this problem might be a statutory one.43 Under section 23 of the Employment Relations Act 1999, the Secretary of State can confer employment rights on individuals who are otherwise neither employees nor workers. In 2002, the UK government launched a consultation process in which it asked whether employment status should be conferred to - inter alia - agency workers.44 In 2006, the government decided not to make any changes on the basis that “the present legal framework works appropriately”.45 The consulted employment agencies had warned that the extension of employment rights to agency workers would lead to increased costs which would have to be passed on to clients.46 In 2007, the UK government confirmed this position in a response to the European Commission’s Green Paper on Labour Work,47 rejecting the idea of giving everyone the same employment status.48 As a statutory solution is not achievable, this article will examine if the common law offers any possibilities for the improvement of the status of agency workers.

3. The Client as Potential Employer of the Agency Worker When asked who their employer is, many agency workers would probably point to the client of the agency. It is the client on whose site the worker conducts his daily work, often among regular employees of the client from whom the agency worker does not distinguish himself during a normal working day. The most obvious difficulty in establishing an employment relationship between the client and the worker is the lack of any direct contractual nexus.49 For a long time, it was accepted by the courts that a client who had never intended to enter into a contractual relationship with the worker and who had no obligation to pay the work-

42 Hugh Collins, Employment Law (2nd edn, OUP 2010) 41. 43 Michael Wynn and Patricia Leighton, ‘Will the Real Employer Please Stand Up? Agencies, Client Companies and the Employment Status of the Temporary Agency Worker’ (2006) 35 ILJ 301, 302. 44 Department of Trade and Industry, ‘Discussion Document Employment Status in Relation to Statutory Employment Rights’ (DTI, July 2002), 20 <www.delni.gov.uk/employment_status_consultation_document.pdf> accessed 10 June 2013. 45 Department of Trade and Industry, ‘Employment Status Review: Summary of Responses’ (DTI, March 2006), para 4 <http://webarchive.nationalarchives.gov.uk/+/http://www.berr.gov.uk/files/file27471. pdf> accessed 10 June 2013. 46 ibid para 16. 47 Commission, ‘Modernising labour law to meet the challenges of the 21st century’, COM (2006) 708 final. 48 Department of Trade and Industry, ‘European Commission Green Paper, ‘Modernising labour law to meet the challenges of the 21st century’ UK response’ (DTI, May 2007), 11 <http://webarchive.nationalarchives.gov.uk/+/http://www.berr.gov.uk/files/file39545.pdf> accessed 10 June 2013. 49 Malcolm Sargeant and David Lewis, Employment Law (5th edn, Pearson 2010) 35.

The Bristol Law Review

[Vol. 1

er could not be the employer.50 In 2001, the courts started to examine the tripartite contractual relationship between the agency, the worker, and the client in its entirety, which enabled them to consider the possibility of an implied contract between the worker and the client.51 Considering that section 230(1) ERA states that a “‘contract of employment’ means a contract of service or apprenticeship, whether express or implied...”, this approach was entirely legitimate.52 The first step was the decision of the Employment Appeal Tribunal (EAT) in Motorola Ltd v Davidson and Melville Craig Group Ltd,53 in which it was held that there was sufficient control by the client over the worker for potential employment status. A contract of service was implied between the client and the worker, particularly because the client had terminated the assignment after a disciplinary hearing without the knowledge of the agency.54 But the matter had only been argued on control.55 In Franks v Reuters Ltd,56 the Court of Appeal went one step further. The tribunal had found no contract with the client due to the lack of mutuality of obligation. The Court of Appeal found that the tribunal had erred in law in not considering whether an implied contract existed between the client and the agency worker.57 It stated that “dealings between parties over a period of years, as distinct from the weeks or months typical of temporary work or casual work, are capable of generating an implied contractual relationship”.58 The fact that the worker had been with the client for several years was considered to be a relevant factor which had to be taken into account.59 Franks suggested that the courts were willing to find an implicit variation in favour of an employment contract when an agency worker had become integrated into the client’s organisation.60 One year after Franks came the decision of Dacas v Brook Street Bureau (UK) Ltd,61 which was “likely to send shockwaves through many organisations in the UK and challenge some of the most basic assumptions about the commercial and legal advantages of using agency workers”.62 Mummery LJ, delivering the leading judgment, made it clear that employment tribunals should not determine the status of agency 50 ibid; Wickens v Champion Employment [1984] ICR 365; Costain Building and Civil Engineering Ltd v Smith [2000] ICR 215. 51 Peter McTigue, ‘Beyond the Contractual Veil: Agency Workers, Employee Status and Commercial Reality’ (2007) 16 Nott LJ 54, 58. 52 ibid. 53 [2001] IRLR 4. 54 Luca Ratti, ‘Agency Work and the Idea of Dual Employership: A Comparative Perspective’ (2009) 30 Comp Lab L & Pol’y J 835, 859. 55 Motorola v Davidson (n 54) [16]. 56 [2003] ICR 1166. 57 See David Christie, ‘The Matrix Revisited - Agency Workers and Employment Status’ (2003) 56 ELB 7, 8, agreeing with this decision. 58 Franks v Reuters (57) [29]. 59 ibid. 60 Douglas Brodie, ‘How Relational is the Employment Contract?’ (2011) 40 ILJ 232, 233. 61 [2004] ICR 1437. 62 David Christie, ‘Status Anxiety - New Guidance from the Court of Appeal on Agency Workers’ (2004) 60 ELB 2, 2.

2013]

The Bristol Law Review

workers without considering the possibility of an implied contract with the client.63 This suggested that it should be the norm for the client to be regarded as the employer of the agency worker.64 In Franks the court had emphasised the length of service of the worker, but in his concurring judgment in Dacas, Sedley LJ suggested that much shorter engagements were capable of leading to the assumption of an implied contract.65 Cable & Wireless plc v Muscat 66 was the first case in which an agency worker was held to be an employee of the client based on an implied contract of employment.67 In summary, the Court of Appeal held that the guidance of Dacas was binding and good law.68 It upheld the decision of the employment tribunal that Mr. Muscat was a direct employee of the client. On the facts, Muscat was an unusual case. First, it involved not a vulnerable, low paid worker, but a highly skilled telecommunication specialist. Second, the relationship in question was not a tripartite one but a quadrilateral one, in which Mr. Muscat had set up his own company which was then hired by the client through an employment agency. This made the judgment a fragile authority, easy to distinguish on the facts.69 Muscat was widely criticised for neglecting mutuality of obligation and placing undue weight on control,70 for not properly considering the parties’ contractual autonomy and capacity to make their own arrangements,71 and for being difficult to apply in practice.72 Two years later came a remarkable turnaround from the Court of Appeal: in James v Greenwich London Borough Council,73 the court referred to the common law test for implied contracts as laid down in The Aramis.74 Following this test, the court said that the proper question was whether it was necessary in the tripartite setting of worker, agency, and client to imply a contract of service between the worker and the client to explain the provision of work by the worker to the client or the client’s payment of the worker via the agency.75 Mummery LJ made it clear that it would be very unusual for any future appeal to have a real prospect of success if the tribunal’s conclusion regarding an implied contract of employment had been reached by apply-

63 64 65 66 67 68 69 70 71 72 73 74 75

Dacas v Brook Street (n 62) [69]. Christie, ‘Status Anxiety’ (n 63) 3. Dacas v Brook Street (n 62) [77]. [2006] ICR 975. Bryn Perrins (ed), Harvey on Industrial Relations and Employment Law (Butterworths 1975, as updated) Binder 1, AI-68. Cable & Wireless v Muscat (n 67) [306]. Perrins (n 68) Binder 1, AI-69; Guy Guinan, ‘Agent Protection - the Third Way’ (2006) 156 NLJ 591. Collins, Employment Law (n 43) 314; Frederic Reynold, ‘The Status of Agency Workers: a Question of Legal Principle’ (2006) 35 ILJ 320. Collins, Employment Law (n 43) 307. Edward Brown, ‘Protecting Agency Workers: Implied Contract or Legislation?’ (2008) 37 ILJ 178, 179. (n 4). [1989] 1 Lloyd’s Rep 213. This had already been suggested by Reynold (n 71). James v Greenwich (n 4) [51].

The Bristol Law Review

[Vol. 1

ing the correct test of necessity.76 He noted the limits of the courts in protecting agency workers and placed responsibility on legislators at national and European levels to implement reforms.77 This decision severely truncated the development of implied contracts between agency workers and clients.78 It created a presumption against an implied contract between the worker and the client.79 The probability of a client becoming the employer of the agency worker is now much lower, even when the relationship has lasted for a long period of time.80 In most cases, the dealings of the agency worker will be consistent with the existing contractual arrangements between the worker and the agency on the one hand and between the agency and the client on the other, so there will be no need to imply a contract of employment between the worker and the client. James is now considered as settled law,81 even though it has been criticised by some commentators82 The application of the necessity test in agency relationships was confirmed by the Court of Appeal in Tilson v Alstom Transport.83 According to James, a contract can still be implied if the express contracts are a sham or if they no longer reflect the conduct of the parties.84 An implied contract may still arise when the client has entered into direct negotiations with the worker regarding pay or other essential terms,85 or when the personal nature of the relationship is fundamental.86 But these cases will be rare as clients will be careful to “minimise overt communication on contractual matters”, referring all negotiations and disputes to the agency.87 While the idea of an implied contract between the client and the agency worker might be attractive, it does not represent the realities of the tripartite relationship. Clients usually have very clear views about the employment status of their temporary workers. They consider the conduct of the agency worker to be the agency’s legal 76 77 78 79 80 81 82

83 84 85 86 87

ibid [55]. ibid [58]. Michael Wynn, ‘End of Line for Temps?’ (2008) 158 NLJ 352, 353. Mark Freedland and Nicola Countouris, The Legal Construction of Personal Work Relations (OUP 2011) 166. Simon Honeyball, Honeyball & Bowers’ Textbook on Employment Law (11th edn, OUP 2010) 35. Tom Royston, ‘Agency Workers and Discrimination Law: Muschett v HM Prison Service’ (2011) 40 Indus Law J 92, 96; see for application of James: Beck v London Borough of Camden UKEAT/0121/08/ZT; Sridhar v East Living Ltd and another [2008] UKEAT/0476/07/RN. Wynn, ‘End of Line for Temps?’ (n 79) 353; Douglas Brodie, ‘Agency Workers: Common Law Stalemate’ (2008) 83 ELB 4, 6; McTigue (n 52) 59; Ewan McGaughey, ‘Should Agency Workers be Treated Differently?’ (2010) LSE Law, Society and Economy Working Papers 07/2010, 31 <http:// eprints.lse.ac.uk/32903/1/WPS2010-07_McGaughey.pdf> accessed 10 June 2013. [2011] IRLR 169. Michael Wynn and Patricia Leighton, ‘Agency Workers, Employment Rights and the Ebb and Flow of Freedom of Contract’ (2009) 72 MLR 91, 94; James v Greenwich (n 4) [58]. Michael Wynn, ‘Temporary Agency Working: Tide Turns on Temps’ (2008) 29 Co Law 275, 276; National Grid Electricity Transmission plc v Wood [2007] UKEAT/0432/07/DM; Harlow DC v O’Mahony [2007] UKEAT/0144/07/LA. Cave v Portsmouth Council [2008] UKEAT/0608/07/ZT: the client had been responsible for interviewing the worker and disputes over hours were resolved directly with the client. Wynn, ‘Tide Turns on Temps’ (n 86) 276.

2013]

The Bristol Law Review

responsibility.88 The agencies have the same understanding when offering their services.89 The reality is that it will be the agency that actually terminates the contract with the worker, following adverse reports from the client. The worker is accountable to the agency for performance in most cases.90 The legal obligation to pay the worker remains with the agency, which cannot withhold pay because the client has not yet paid.91 And even most agency workers see themselves as having a career with their agency, with training carried out by the agency.92 The next section of this article will therefore focus on the employment agency as employer of the agency worker.

4. The Agency as Potential Employer of the Agency Worker 4.1 The Contractual Relationship between the Agency and the Agency Worker The other possible employer of an agency worker is the employment agency. There is no need for an implied contract as the worker usually has a written contract with the agency. Once it is established that a worker has a contract of employment with the agency, it is unlikely that a contract with the client will be construed as well.93 Tax and national insurance legislation require the agencies to treat the worker as an employee.94 The courts, however, take the view that this is of no significance for the employment status for other purposes.95 The Conduct of Employment Agencies and Employment Businesses Regulations 2003 specify that the agency must issue a written statement to the worker indicating the status of the worker (but they do not prescribe a particular status).96 This in itself is rather curious, as the courts have stated many times that they will disregard a ‘label’ provided by the parties,97 and any agreement by an employee to waive his protective rights is void.98 The contract between the agency and the worker will often describe itself as one of a contract for services and expressly deny the worker employment status.99 There are even cases where the courts have disregarded a statement expressly designating the worker as an employee of the 88 Michael Wynn and Patricia Leighton, ‘Temporary Agency Working: Is the Law on the Turn?’ (2008) 29 Co Law 7, 11. 89 Davidov (n 5) 730. 90 ibid. 91 Wynn and Leighton, ‘Will the Real Employer Please Stand Up?’ (n 44) 309. 92 ibid; see for the improving reputation of agency work, Catherine Casey and Petricia Alach, ‘’Just a Temp?’: Women, Temporary Employment and Lifestyle’ (2004) 18 Work Employ Soc 459, 477. 93 Tamara Lewis, Employment Law: An Adviser’s Handbook (8th edn, Legal Action Group 2009) 153; Cairns v Visteon [2007] ICR 616. 94 Income and Corporations Taxes Act 1988, s 134; Social Security (Categorisation of Earners) Regulations 1978, Reg 5. 95 McMeechan v Secretary of State for Employment [1997] ICR 549 [561] (Waite LJ). 96 Reg 15(a); Wynn and Leighton, ‘Will the Real Employer Please Stand Up?’ (n 44) 302. 97 Deakin (n 25) 204. 98 ibid, noting the circularity of this prohibition; ERA, s 203. 99 John Bowers, A Practical Approach to Employment Law (7th edn, OUP 2005) 27.

The Bristol Law Review

[Vol. 1

agency and held that there was no contract of employment.100 Most claims of agency workers against their agencies have been unsuccessful.101 The courts very rarely categorise the relationship between the agency and the worker as a contract of employment.102 But in exceptional circumstances, the courts might even be willing to imply a contract of employment between the agency and the worker if this is necessary to give effect to the actual relationship between the parties.103 In the majority of cases, however, two tests have resulted in the rejection of employment status for agency workers: the mutuality of obligation test and the control test.104

4.2 The Mutuality of Obligation Test According to the mutuality of obligation test, a contract of employment is more than just performance of work in consideration of wages. There is a “second tier of obligation” consisting of mutual promises of future performance.105 In the leading case of O’Kelly v Trusthouse Forte plc,106 wine waiters who had been hired by a hotel as “regular casuals” were refused employment status by the Court of Appeal because they were under no obligation to offer their services to the hotel on a regular basis. This approach was later confirmed by the House of Lords in Carmichael v National Power plc,107 a case in which tour guides, who worked on a “casual as required” basis and were free to refuse to work, were not classified as employees. Under this test, an agency worker must establish that he not only provides his work in consideration for a wage, but that there is an expectation from both parties that the worker will provide future work in consideration of future wages.108 In Montgomery v Johnson Underwood,109 it was held that there had to be a minimum of mutual obligation before a contract of employment between the agency and the worker could be established. In a side note, Buckley LJ explained that he would “accept that an offer of work by an agency, even at another’s workplace, accepted by the individual for remuneration to be paid by the agency, could satisfy the requirement of mutual obligation”.110 In Brook Street Bureau (UK) Ltd v Dacas,111 an employment contract between the agency and the worker was rejected due to the lack of mutuality of obligation. The contract between Ms Dacas and Brook Street had stated that there was no

100 101 102 103 104 105 106 107 108 109 110 111

Wickens v Champion (n 51); Ironmonger v Movefield (n 34). Wynn and Leighton, ‘Is the Law on the Turn?’ (n 89) 12; Wynn, ‘Tide Turns on Temps’ (n 86) 275. James v Greenwich (n 4) [22]. Evans v Parasol [2011] ICR 37, applying James v Greenwich regarding worker status. Wynn and Leighton, ‘Is the Law on the Turn?’ (n 89) 10. Mark Freedland, The Personal Employment Contract (OUP 2003) 91. [1984] QB 90. [1998] ICR 1167. Wickens v Champion (n 51) [56]. [2001] ICR 819. ibid [40]. (n 62).

2013]

The Bristol Law Review

obligation of the agency to provide her with any assignments.112 In Secretary of State for Trade and Industry v Alade,113 the EAT based its decision regarding the lack of mutuality of obligation on a clause in the contract, which stated that the worker could leave without giving any notice.114 The most prominent exception in which an agency worker was awarded employee status against the agency is McMeechan.115 The terms of the agreement between the worker and the agency excluded any mutual obligations. The court distinguished between the general relationship of the two parties and the specific engagements. While no mutual obligations were found for the general relationship, it was held for the specific engagement that “the fact that the parties are not obliged in the future to offer, or to accept, another engagement with the same, or a different, client must be neither here nor there”.116 In Cornwall CC v Prater,117 the Court of Appeal confirmed that in the case of a succession of individual contracts for work, there can be mutuality of obligation relating to the work provided and performed under each contract. In Stephenson v Delphi Diesel Systems Ltd,118 a worker had claimed employment status against the client of the agency. The worker was denied employment status because he had no contractual relationship with the client. However, the EAT stated it was satisfied that there was a mutuality of obligation between the agency and the worker during the period the worker had been working for the client as the assignment had continued for many months.119 Applying McMeechan, the EAT further explained that a lack of a future obligation to accept work and the right to terminate the current work would not be fatal to the finding of mutuality of obligation.120 Nonetheless, the general view of the courts is that there is no mutuality of obligation between the agency and the worker, as there is no agency obligation to provide the worker with any work and similarly no worker obligation to accept an assignment.121 The mutuality of obligation test and its application to agency workers in particular have been widely criticised. Douglas Brodie contends that all employment contracts have a certain degree of mutuality of obligation - in the sense of exchange of work for remuneration - for the duration of the contract, even though that period might be very brief.122 He argues - in accordance with McMeechan - that mutuality of obligation regarding future performance is irrelevant in determining whether a spe112 113 114 115 116 117 118 119 120 121 122

ibid [31]. [2007] UKEAT/0591/06. ibid [16]. McMeechan v Secretary of State (n 96). ibid [565] (Waite LJ). [2006] ICR 731 (this case did not concern an agency relationship); see also Quashie v Stringfellow Restaurants Ltd [2013] IRLR 99, [10] and Drake v Ipsos Mori UK Ltd [2012] IRLR 973. [2003] ICR 471. ibid [16]. ibid [33]. McTigue (n 52) 57; Bryn Perrins (n 68) Binder 1, AI-67. Douglas Brodie, The Employment Contract: Legal Principles, Drafting, and Interpretation (OUP 2005) 10.

The Bristol Law Review

[Vol. 1

cific engagement constitutes a contract of employment.123 Michael Wynn and Patricia Leighton comment that it is unrealistic to apply the test of mutuality of obligation to the pre-assignment period.124 It is only once an agreement is reached and the worker has started his assignment that the employment relationship comes into being.125 Mark Freedland agrees that at least during specific assignments, a contract of employment may well exist.126 Other critics go further and argue that reasoning of the test of mutuality of obligation is circular.127 According to the mutuality test, a worker must negotiate a right for continuing employment in order to obtain statutory employment rights. But it is these statutory rights - in particular the protection from unfair dismissal, which is essentially a right for continuing employment - that should protect workers who are not in a position to negotiate such rights.128 What should be taken much more into account is the reason why employees are given legislative protection in the first place: because “they are in a subordinate and dependent position vis-à-vis their employers”.129 Employment rights were created to protect every worker who is not in a position to equally bargain his terms and conditions with his employer, not excluding agency workers.130 The need to amend the test of mutuality of obligation at least with regard to specific assignments of agency workers becomes obvious in the case of longer engagements (five years in the case of Dacas, two years in Montgomery). It might be questioned whether mutuality of obligation existed before Ms Dacas or Mrs Montgomery started their assignments. But once they had been working for a few months, there certainly was an expectation from them both (and equally from their agencies and their clients) for continuing employment at their respective clients’ sites. To refuse them employment status and the accompanying protection from dismissal simply because their contract did not give them a right for continuing employment is indeed circular. The EAT took a robust approach to this problem in Consistent Group Ltd v Kalwak.131 It classified the provision in the relevant contract, which stated that the workers were self-employed, as a sham and held that the fact that the contract provided unrealistic possibilities could not alter the true nature of the relationship if this was different from what happened in reality.132 This was reversed by the Court of Appeal,133 referring to the Snook doctrine, according to which there is a sham when both parties intend to mislead third parties.134 However, in light of the recent Supreme Court judg123 Douglas Brodie, ‘The Contractual Status of Agency Workers: Toms v Royal Mail’ (2006) 10 Edin LR 443; ‘Agency Workers: The Latest Moves on the Chess Board’ (2006) 72 ELB 2. 124 ‘Is the Law on the Turn?’ (n 89) 10. 125 ‘‘Will the Real Employer Please Stand Up?’ (n 44) 319. 126 Personal Employment Contract (n 106) 102. 127 McGaughey (n 83) 17. 128 ibid. 129 Williams (n 39). 130 McGaughey (n 83) 21. 131 [2007] IRLR 560. 132 ibid. 133 [2008] IRLR 505. 134 Snook v London and West Riding Investment Ltd [1967] 2 QB 786; see Wynn and Leighton (n 85) 100.

2013]

The Bristol Law Review

ment in Autoclenz Ltd v Belcher,135 Kalwak must be reconsidered.136 In cases where a single engagement has lasted for more than just a few months, the courts should look beyond a ‘no obligations’ clause because the parties have subsequently changed the original agreement by conduct.137 Employment tribunals should adopt a sensible view and not allow the substance of the relationship between the parties to be undermined by form.138 ‘No-obligations’ provisions in an agency contract are not conclusive if they do not represent the true intent of the parties.139 If the assignment has lasted longer than a few months, such provisions should be treated as a sham.

4.3 The Control Test 4.3.1 The Application of the Control Test to the Agency-Worker Relationship The second test having a major impact on the classification of the relationship between the worker and the agency is the control test. According to this test, an employee must agree that “in the performance of his service he will be subject to the other’s control in a sufficient degree to make that other master.”140 The control test asks: “Who lays down what is to be done, the way in which it is to be done, the means by which it is to be done, and the time when it is done?”141 Many claims of agency workers against their agency fail because of the lack of direct control of the agency, as it is usually the client who is in control of the worker’s performance.142 In Montgomery,143 an employment contract between the agency and the worker was rejected due to lack of control. The fact that the agency was able to terminate the contract of the worker was not sufficient.144 The court did consider McMeechan but noted the absence of any review or grievance procedures as between the agency and Mrs Montgomery – a factor which was seen to have played a significant role in McMeechan.145 However, Buckley LJ acknowledged that “an assignment provided and paid for by an employment agency might in certain circumstances give rise

135 [2011] IRLR 820. The Supreme Court specifically approved the approach of the EAT in Kalwak (n 132) [29]. See also Protectacoat Firthglow Ltd v Szilagyi [2009] ICR 825. 136 Deakin and Morris (n 17) 183; Astra Emir, Selwyn’s Law of Employment (17th edn, OUP 2012) 81. 137 Deakin and Morris (n 17) 168. 138 Emir (n 137) 8. 139 ibid. 140 Ready Mixed Concrete (South East) Ltd v Minister for Pensions and National Insurance [1986] 2 QB 497 [515] (MacKenna J). See also Yewens v Noakes (1880) 6 QBD 530 and Simmons v Heath Laundry Co [1910] 1 KB 543. 141 Lane v Shire Roofing Company (Oxford) Ltd [1995] IRLR 493 (Henry LJ). 142 Wynn and Leighton, ‘Is the Law on the Turn?’ (n 89) 9. 143 (n 110). 144 ibid [33]. 145 ibid [37].

The Bristol Law Review

[Vol. 1

to a sufficient framework of control being established.”146 In Dacas,147 the court noted that the agency did not exercise any relevant day-to-day control over Ms Dacas or her work and that the employment tribunal had therefore been correct to conclude that the contract with the agency was not a contract of service. In Secretary of State for Business, Innovation and Skills v Studders,148 the fact that the workers were obliged to perform assignments that they had accepted and that the agency exercised a modest degree of control in relation to holidays was not enough for the purpose of the control test. At the same time, the courts acknowledge that if there is sufficient control of an agency over a worker, there may be an employment relationship between the worker and the agency.149 In Astbury v Gist Ltd,150 which concerned a claim of a worker against a client, the EAT held that it was the agency who had to be considered as the employer despite a clause in the worker’s contract to the effect that this was not the case. The main reason was the existence of a detailed agreement that not only included information on working hours but also details of conduct and disciplinary rules.151 In Ncube and Others v 24/7 Support Services,152 the employment tribunal found that the agency workers were employed by the agency. The decision was in particular based on the close management and disciplinary control exercised by the agency and its obligation to provide regular training and the agency workers’ obligation to attend such training. While there are cases in which the courts acknowledge employee status because of a particular exercise of control by the agency, the reality of agency work requires in most cases that the daily conduct of the worker is entirely controlled by the client. This is not surprising, as it is on the client’s site that the agency worker performs his work. Nonetheless, this does not necessarily lead to the conclusion that no employment contract can exist between the worker and the agency due to a lack of control.

4.3.2 The Concept of Delegation of Control The power of the client to exercise control over the worker has to stem from the existing contractual arrangements between the parties.153 There is usually no explicit contractual nexus between the client and the worker (see section 3 above). The agency’s contract with the worker will normally require the worker to comply with the client’s instructions.154 The agreement between the agency and the client will stipulate that the worker is expected to carry out the assignments specified by the client. It may 146 147 148 149 150 151 152 153 154

ibid [41]. (n 62). [2011] UKEAT/0571/10. Kalwak (n 132) [76] (Elias J). The Court of Appeal did not discuss the issue of control when it allowed the appeal. See also Halsbury’s Laws of England (5th edn, 2009) vol 39, para 4. [2007] UKEAT/0619/06. ibid [33]. [2005] ET/2602005/05. Wynn and Leighton, ‘Will the Real Employer Please Stand Up?’ (n 44) 315 regarding the contract between the agency and the worker. See for example para 5 of the conditions of service as quoted in McMeechan (n 96) [553].

2013]

The Bristol Law Review

also provide that the client can set the working hours and shift patterns.155 Essentially, the agency delegates its power of control, originating from its contract with the worker, to the client. Such an arrangement is not unusual. The work required under a contract of employment can be performed for the benefit of a third party while the salary is still paid by the employer.156 While the agency is not the agent of the client when paying wages,157 the client may be the agent of the agency when exercising control over the worker. The most significant case in which the Court of Appeal considered this argument of delegation of control is Bunce v Postworth Ltd (t/a Skyblue).158 Here, an agency worker argued ‘delegated control’ against his agency. Keene LJ noted that the argument based on delegation had not previously been considered by the courts.159 He acknowledged that the client’s day-to-day control originated, as far as the worker’s obligation was concerned, in a term of the contract between the agency and the worker. But then he continued: “The law has always been concerned with who in reality has the power to control what the worker does and how he does it. In the present case, during the periods when the appellant was working on an assignment, it was the client, the end-user, who had the power to direct and control what he did and how he did it.”160 Concluding that the agency lacked the necessary control over the worker for him to be seen as their ‘servant’, he rejected the argument based on delegation.161 After Bunce v Postworth, the concept of delegation of control has only arisen in the tax case of Revenue and Customs Commissioners v Wright.162 Wright had engaged workers to work on specific contracts with main contractors. He gave the initial instructions to the workers himself, but the precise on-site instructions came from the foreman who was employed by the contractors. HMRC argued that the only possible conclusion was that the workers were the employees of Wright. The element of control exercised over the workers by the site foreman had to be regarded as delegation by Wright to a third party to exercise the control over the workers which Wright was entitled to exert. Applying Bunce v Postworth, the High Court rejected this conclusion. Keene LJ’s argument in Bunce v Postworth ignores the second contract in the tripartite arrangement between agency, client and worker: The contract between the agency and the client. The client’s control does not originate solely from the agreement of the worker with the agency. It is mainly based on the agreement of the agency with the client. It is this particular agreement in which the agency delegates its power of control, which originates from the agency’s agreement with the worker, to the client. Rejecting the idea of delegation of control while at the same denying the existence of an implied contract between the worker and the client means that there is 155 156 157 158 159 160 161 162

See the contract quoted in Stephenson v Delphi Diesel (n 119) 473. Collins, Ewing and McColgan (n 19) 220. Wynn and Leighton, ‘Will the Real Employer Please Stand Up?’ (n 44) 314; McMeechan (n 96) [33]. [2005] IRLR 557. ibid [28]. ibid [29]. ibid. [2007] STC 1684.

The Bristol Law Review

[Vol. 1

no legal explanation for the control exercised by the client over the worker. There are numerous situations in which the law is not concerned with who in reality has the power to control what the worker does. The fact that a nurse is under the control of a surgeon during an operation does not mean that the nurse becomes the surgeon’s employee.163 Elias J noted in the EAT decision in Kalwak that there are a number of cases where employees are in their daily tasks controlled more by a third party than by their employer.164 He mentioned cleaning staff sent out to clean a client’s premises and catering staff sent out into a workplace canteen. In both instances, the client for whom the employees clean or cater will exercise a greater degree of control than the employer, as the employer has delegated its power of control to the client. One does not even have to look that far to find examples of delegated control. While most employees are employed by a legal entity, the control over their work is usually not exercised by the company (or its directors) but by their direct supervisors. These supervisors are likewise employees of the company.165 It is an express or implied term of the employment contract of any employee that s/he shall comply with the instructions of his/her supervisor to be under a contract of service with the company.166 The company delegates its authority to exercise control over its employees to the supervisors. The concept of delegation of control over the employee is therefore necessary to explain the employment status of a high percentage of employees, even in situations where nobody doubts that the contract in question is a contract of employment.

4.3.3 The Secondment Cases Typical examples of an employer delegating the control over the employee to a third party are secondments.167 The lending of an employee’s services to another enterprise gives rise to triangular arrangements similar to those of agency relationships.168 Legal analyses of secondments are limited and yet very common.169 The idea behind a secondment is that the employee remains employed by the original employer during the secondment and will return to him upon termination of the secondment.170 Seconded workers will usually remain employees of the original employer from which they were seconded.171 Even though a secondment can be based on a contract of service between the temporary ‘employer’ and the employee, it may just be a case of the general employer directing the employee to undertake some work for the temporary 163 Morris v Winsbury-White [1937] 4 All ER 494. 164 (n 132) [33]. See also Mark Freedland, ‘Employment’ in Hugh Beal (ed), Chitty on Contracts, Specific Contracts (Sweet & Maxwell 2012) 39-015. 165 Paul Davies and Mark Freedland, ‘The Complexities of the Employing Enterprise’ in Guy Davidov and Brian Langille (eds), Boundaries and Frontiers of Labour Law (Hart Publishing 2006) 278. 166 Wardell v Kent County Council [1938] 2 KB 768 [783]. 167 Collins, Ewing and McColgan (n 19) 220. 168 Douglas Brodie, ‘The Enterprise and the Borrowed Worker’ (2006) 35 ILJ 87, 88. 169 (n 14) 20. 170 Priya Chanda, ‘Home and Away: Employment Rights of Employees Seconded to the UK’ (2013) EML 67. 171 Mark Bondi, ‘Tax and Benefits Notes: Transferred Allegiance’ (2012) Pensions World 47.

2013]

The Bristol Law Review

‘employer’ without the creation of a contract of service between the temporary ‘employer’ and the employee.172 Much of the litigation regarding seconded employees relates to whether the original employer or recipient of the worker’s services should be vicariously liable to a third party with respect to the worker’s acts.173 In Mersey Docks and Harbour Board v Coggins & Griffiths (Liverpool) Limited,174 the House of Lords decided that the permanent employer was liable for the negligence of a crane worker whose services had been supplied to another company. In Dowd v W. H. Boase and Company Limited,175 the Court of Appeal held that when an accident was caused by a driver hired out with his vehicle by his regular employer to a third party, it was prima facie the original employer who was vicariously liable. In the more recent Scottish case of Royal Bank of Scotland plc v Bannerman Johnstone Maclay,176 the Inner House took the view that regarding vicarious liability it was possible for an employee to be in the employment of his original employer whilst being on secondment to another company as financial controller.177 Regarding the question of who should be liable in case of an accident of the worker, the Court of Appeal decided in Morris v Breaveglen Ltd178 that the original employer was liable to his employee sent to work under a labour-only sub-contract, under the direction and control of the main contractor. The test for the existence of vicarious liability in tort is not necessarily identical to that for a contractual employment relationship, even though the question is the same: is there a contract of employment?179 There are cases in which the courts deemed the temporary ‘employer’ liable while confirming that the employee was in a contract of service with his original employer.180 In these cases, the courts’ reasoning was based on the lack of control by the original employer. This did not seem to affect the existing contract of service between the original employer and the worker. In most secondment cases, the question of control does not even arise. It is taken as self-evident that an employee can be sent to work at the premises of another company while still being employed by his original employer.181 In Cross v Redpath Dorman Long (Contracting) Ltd,182 it was held that where an employee is sent to work under the authority and direction of another company and his contract is varied to include 172 Lee Hung Kwong v Commissioner of Inland Revenue (2005) HKRC 90-151 [62]. 173 Robert Davies, ‘Contracting Out and the Retention of Employment Model in the National Health Service’ (2004) 33 ILJ 95, 110. 174 [1947] AC 1. 175 [1945] KB 301. 176 [2005] CSIH 39. 177 See Callum Jones, ‘Auditor’s Duties to Third Parties’ (2005) 18 Insolv Intel 154, 155. 178 [1993] IRLR 350. 179 Ian Smith and Gareth Thomas, Smith & Wood on Industrial Law (7th edn, Butterworths 2000) 16. 180 Donovan v Laing, Wharton and Down Construction Syndicate [1893] 1 QB 629; Denham v Midland Employers Mutual Assurance Ltd [1955] 2 QB 437. 181 See Wakeman v Quick Corporation [1999] IRLR 424: differences in pay were justified with secondment; Duncombe v Secretary of State for Children, Schools and Families [2011] UKSC 14: teachers could be employed by the Secretary of State while working in schools in Europe. 182 [1978] ICR 730.

The Bristol Law Review

[Vol. 1

terms and conditions of this company, the original company nevertheless remains his employer for unfair dismissal purposes at all times. In Pervez v Macquarie Bank Ltd (London Branch) and another,183 the claimant had been seconded from his original employer in Hong Kong to work for a London company for up to 12 months, extendable to a maximum of five years. His claim for unfair dismissal against the London company was dismissed by the employment tribunal on the basis that the claimant’s employer was the Hong Kong company and not the London one.184 The EAT held that by seconding an employee to work at an establishment in England, the Hong Kong company could “carry on business in England and Wales”, which gave the employment tribunal jurisdiction to hear a claim for unfair dismissal against the Hong Kong company (his original employer).185 The fact that the Hong Kong employer could not directly control its employee in London did not prevent the court from coming to the conclusion that the claimant was employed by the former company. The only contractual secondment case where a change of employer was held to have occurred is Fitton v Edinburgh City Council.186 In this case the Scottish EAT held that an employee who had been permanently seconded from the local council to a corporate body was no longer employed by the council. It noted that at the relevant time the required minimum of mutuality of obligation and control did not exist between the employee and the council. The facts of this case were somewhat unusual for a secondment, as halfway through the secondment the employee had asked for the post to be made permanent, and the council had confirmed in writing that she was to work ‘indefinitely’ for the corporate body. In all other cases, the sole explanation for the existence of a contract of service between the seconded worker and the permanent employer is a delegation of control from the permanent employer to the temporary ‘employer’. The same concept should be applied to agency relationships. As long as we reject the idea of an implied contract between an agency worker and the client, the concept of delegation of control is the only dogmatic explanation for the exercise of control of the client over the worker during the conduct of the assignment. Accepting this concept, we can no longer reject the existence of an employment contract between the agency and the worker due to a lack of control.

4.4 Recognition of the Agency as Employer as a Requirement of European Law? The Temporary Agency Work Directive (the ‘Directive’) came into force in December 2008. The key provision of the Directive is Art. 5, which introduces the principle of equal treatment between agency workers and workers directly employed by the client in respect of a limited number of “basic working and employment con183 184 185 186

[2011] ICR 266. ibid [7]. See Employment Tribunals (Constitution and Rules of Procedure) Regulations 2004, Reg 19(1). [2008] UKEATS/0010/07.

2013]

The Bristol Law Review

ditions”.187 “Basic working and employment conditions” relate to working time, overtime, breaks, rest periods, night work, holidays, public holidays, and pay.188 In the UK, the Directive was transposed into domestic law in the Agency Workers Regulations 2010 (the ‘Regulations’). In accordance with Art. 5(4) of the Directive, equal treatment is subject to a 12-week qualifying period.189 The so-called ‘Swedish derogation’ provides an exemption to the principle of equal treatment in relation to pay where a worker is employed permanently by the agency and continues to be paid between assignments.190 According to a first tribunal decision on this issue, the Swedish derogation does not only apply to new workers but can also be introduced in contracts of workers who already had a long-standing relationship with the same client.191 A positive side-effect of the derogation might be that it encourages agencies to conclude contracts of employment with their workers in order to avoid the application of the equal treatment provisions to their clients.192 The Directive does not deal with the problem of employment status and the accompanying rights.193 The Directive applies to workers “with a contract of employment or an employment relationship with a temporary-work agency”194 but leaves unanswered the question of what a contract of employment is to the laws of the Member States.195 Accordingly, in domestic law the provisions of the Regulations are not dependent on employee status at common law and neither do they affect that status.196 To be caught by the Regulations, agency workers must have either a contract of employment or any other contract to perform work and services personally for the agency.197 The Regulations still apply when other intermediaries are involved.198 Some commentators have indicated that an agency worker does not work ‘for’ the agency but for the client on behalf of the agency – a state of affairs rendering the Regulations a dead letter.199 A purposive interpretation of the Regulations may be necessary to solve this problem.200 Of interest is Art. 2 of the Directive. It states that “the purpose of this Directive is to ensure the protection of temporary agency workers and to improve the quality 187 Nicola Countouris and Rachel Horton, ‘The Temporary Agency Work Directive: Another Broken Promise?’ (2009) 38 ILJ 329. 188 Temporary Agency Work Directive, Art 3(1)(f). 189 Agency Workers Regulations 2010, Reg 7. 190 ibid Reg 10; Temporary Agency Work Directive, Art 5(2); Russell Bradley, ‘Agency Workers - Parity Lite?’ (2011) ELB 2, 3. 191 Bray & others v Monarch Personnel Refuelling, unreported ET judgment 28 September 2012. See on the other hand Department for Business, Innovation & Skills, ‘Agency Workers Regulations: Guidance’ (UK Government, May 2011), 38 <www.bis.gov.uk/assets/BISCore/employment-matters/ docs/A/11-949-agency-workers-regulations-guidance.pdf> accessed 10 June 2013. 192 Collins, Ewing and McColgan (n 19) 222. 193 Gwyneth Pitt, Employment Law (8th edn, Sweet & Maxwell 2011) 97. 194 Temporary Agency Work Directive, Art 3(1)(c). 195 ibid Art 3(2). 196 Perrins (n 68) AI-71. 197 Agency Workers Regulations, Reg 3(1)(b). 198 ibid Reg 3(3) and (4); BIS (n 193) 6. 199 Royston (n 82) 97; Pitt (n 194) 100. 200 ibid.

The Bristol Law Review

[Vol. 1

of temporary agency work...by recognising temporary-work agencies as employers”. The Directive therefore assumes the agency to be the worker’s employer.201 This assumption was introduced by the Committee on Employment and Social Affairs in order to “recognise the legitimacy of temporary work agencies whilst ensuring that their activities do not compromise existing standards in user companies and sectors”.202 It is not found in any of the substantial provisions of the Directive (and accordingly neither in the Regulations). While this may not oblige Member States to recognise agencies as employers, it arguably introduces a strong presumption that a contract of employment exists between the worker and the agency.203 Recognising agencies as employers of their workers may not be required but certainly welcomed by European law. It could also mean that the common law should be developed in accordance with this EU principle.204

5. The Possibility of Joint Employer Responsibility 5.1 Joint Employer Responsibility as a Possible Solution? As we have seen, most issues of controversy regarding agency workers originate in the partition of responsibilities between the client and the agency. The agency has a contract with the worker and is responsible for all pay and tax related issues (the ‘formal employer’). The client has no contract with the worker and does not effect any direct payments to him but acts in every other aspect like an employer (the ‘factual employer’).205 This concept of shared responsibility does not fit into the common law tests, especially the control test, and results in most agency workers being refused employee status. The traditional common law principle is that a servant cannot have two masters.206 One possible answer to this is to insist on the unity of the employer as a legal concept and ban the use of employment agencies.207 Until recently, this option was adopted by several European countries.208 Another approach is to acknowledge the phenomenon of ‘dual employership’209 or ‘multi agency employment relations’210 by recognising either several employing parties or one joint employing party.211 201 Leighton and Wynn, ‘Classifying Employment Relationships’ (n 14) 20. 202 Commission, ‘Proposal for a European Parliament and Council directive on working conditions for temporary workers’, COM (2002) 149 report, 19. 203 Countouris and Horton (n 189) 331. 204 McGaughey (n 83) 5. 205 Ratti (n 55) 857. 206 Laugher v Pointer (1826) 108 ER 204. 207 Simon Deakin, ‘The Changing Concept of the ‘Employer’ in Labour Law’ (2001) 30 ILJ 72, 81. 208 ibid; see also McGaughey (n 83) 7. 209 Ratti (n 55). 210 Davies and Freedland (n 166) 284. 211 Freedland, Personal Employment Contract (n 106) 42; Jeremias Prassel, ‘The Notion of the Employer’ (2013) 129 LQR 380, 397.

2013]

The Bristol Law Review

5.2 Splitting the Functions of the Employer between Agency and Client One possible solution is to split the functions of the employer between the agency and the client.212 This approach is adopted in UK legislation for a number of very specific issues. For example, responsibility for tax and national insurance payments213 and pension contributions214 is put onto the agency, while the client is responsible for ensuring compliance with health and safety legislation.215 The National Minimum Wage Act 1998216 and the Working Time Regulations 1998217 adopt a pragmatic solution by fixing liability onto the entity which is responsible for paying the worker when neither agency nor client is the employer.218 According to the Agency Workers Regulations 2010, both the agency and the client can be liable for a breach of equality duties, to the extent that each is responsible for that breach.219

5.3 The Dual Approach of Anti-Discrimination Legislation Anti-discrimination legislation is pragmatic in protecting agency workers from discrimination by both the client and the agency. For the purpose of anti-discrimination legislation, agency workers have a claim against the agency for any conduct of the agency (regardless of whether there is an existence contract of service between the parties).220 In most cases the worker will have a complaint against the conduct of the client rather than the one of the agency. Section 41 of the Equality Act 2010 concerning ‘contract workers’ addresses this problem to a certain extent.221 This provision intends to prevent discrimination of a worker who is employed by a sub-contractor (the agency) by the main employer (the client). The section may be applicable to an agency worker, but only if the worker is ‘employed’ by the agency.222 ‘Employment’ under the Equality Act 2010 is wider than ‘employment’ under the ERA as it means “employment under a contract of employment, a contract of apprenticeship or a contract personally to do work”.223 In Electronic Data Systems Ltd v Hanbury,224 212 Ratti (n 55). 213 Income and Corporations Taxes Act 1988, s 134; Social Security (Categorisation of Earners) Regulations 1978, Reg 5. 214 Pensions Act 2008, s 89(3). 215 Health and Safety at Work Act 1974, s 3(1). 216 Section 34. 217 Reg 36. 218 Paul Davies and Mark Freedland, ‘Changing Perspectives Upon the Employment Relationship in British Labour Law’ in Catherine Barnard, Simon Deakin and Gillian Morris (eds), The Future of Labour Law (Hart Publishing 2004) 142. 219 Reg 14(1) and (2). 220 Equality Act 2010, s 55. 221 Collins, Ewing and McColgan (n 19) 218. 222 ibid. 223 Equality Act 2010, s 83(2)(a). 224 [2001] UKEAT/128/00.

The Bristol Law Review

[Vol. 1

an agency worker was held to be ‘employed’ for the purpose of the Race Relations Act 1976 (RRA) even though he was not employed for the purpose of the ERA. In BP Chemicals Ltd v Gillick,225 a worker was held to be ‘employed’ by the agency for the purpose of the Sex Discrimination Act 1975. Agency workers were therefore not excluded from bringing anti-discrimination claims against the client by reason of their self-employed status.226 The case of Muschett v HM Prison Service227 introduced some uncertainties in this respect.228 The Employment Tribunal had rejected Mr Muschett’s argument that he was an employee of the employment agency for the purpose of the RRA.229 Permission to appeal in this point was granted neither by the EAT nor by the Court of Appeal and the finding that Mr Muschett did not have a personal contract with the agency remained unchallenged.230 As none of the courts involved even considered Electronic Data Systems, Muschett should not be used as precedent to cut off agency workers from anti-discrimination claims against the clients231 despite suggestions that this case may set agency workers beyond the protection of anti-discrimination law.232 The term ‘employee’ in section 41(5) Equality Act 2010 should be interpreted in the wide meaning of section 83 of the same Act,233 which includes agency workers.234 Support for this proposition can be found in the European Court of Justice (ECJ) case of Allonby v Accrington and Rossendale College,235 in which agency workers were held to be ‘workers’ for the purpose of EU Treaty provisions on equal pay.236 This enabled the agency workers to bring an equal pay claim against the client of the agency. The claim itself failed because there were multiple sources of pay, preventing comparison of the agency worker’s wage with the one of a comparator who was employed by the client.237

5.4 The Possibility of Joint Employer Status Another solution for the problem of ‘dual employership’ is the recognition of 225 226 227 228 229 230 231 232

233 234 235 236 237

[1995] IRLR 128; see also Patefield v Belfast City Council [2000] IRLR 664, applying Gillick. Deakin and Morris, Labour Law (n 17) 185. [2010] IRLR 451. Royston (n 82) 97. Muschett v HM Prison Service [2008] UKEAT/0132/08 [28]. Royston (n 82) 96. ibid 98. Susan Fanning, ‘Case of the Week: Muschett v HM Prison Service’ Personnel Today (Surrey, 3 February 2010) <www.personneltoday.com/hr/case-of-the-week-muschett-v-hm-prison-service> accessed 10 April 2013; Ashley Brown and Christopher Hitchins, ‘Recent Judgment Highlights Loophole in Discrimination Legislation for Agency Workers’ HR Magazine (Kent, 16 February 2010) <www.hrmagazine.co.uk/hro/employment-law/1017471/recent-judgment-highlights-loophole-discrimination-legislation-agency-workers> accessed 10 April 2013. Deakin and Morris, Labour Law (n 17) 185. Royston (n 82) 96. [2004] 1 CMLR 35. (n 82) 101. Deakin and Morris, Labour Law (n 17) 186. The question of equal pay is now at least partly addressed by the Agency Workers Regulations 2010.

2013]

The Bristol Law Review

joint employer status with joint and several liability.238 When we see the contractual triangular relationship as a whole, the common law tests for employment status apply to the situation of agency workers.239 In the decision of the Court of Appeal in Dacas, Mummery LJ recognised that an agency worker may have a contract of service with “more than one entity exercising the functions of an employer, namely the employment agency and the end-user jointly”.240 Sedley LJ agreed that this possibility “of a trilateral contract of service, meaning simply a contract in which one side’s obligations are divided or shared between two of the three parties, would also remain for consideration”.241 The idea of joint employers is not that far-fetched. In the USA for example, the judiciary has often found employment agencies and clients to be ‘joint employers’.242 In the UK, joint employer status may exist in tort. Dual vicarious liability of two separate employers for the negligence of one employee was introduced in Viasystems (Tyneside) Ltd v Thermal Transfer (Northern) Ltd,243 where is was held that this provided a coherent solution to the problem of the borrowed employee. However, the policy considerations regarding vicarious tort liability are not necessarily the same as the ones regarding contractual issues, in particular unfair dismissal cases.244 While the former concern the protection of the injured party, the latter concern protection of the worker.245 In Cairns v Visteon,246 the EAT denied the existence of a triangular contract as the worker did have a contract of employment with the agency. In cases where no contract of employment exists with either the agency or the client, policy considerations could require the recognition of joint employer status. UK legislation does know a concept similar to joint employer status for one specific issue. According to the Employment Relations Act 1999, agency workers have the right to be accompanied at disciplinary and grievance hearings.247 If the worker has no contract of employment with the agency, this right is exercisable against both the employer and the agency.248 At the EU level, the ECJ is far from accepting joint employer status.249 In Allonby, the fact that the level of pay received by the agency worker was influenced by the amount paid by the client to the agency was not sufficient for a “single source of pay” in the sense of equal pay legislation. The ECJ refused to see the contractual 238 Davidov (n 5) 740; McGaughey (n 83) 26; Wynn and Leighton, ‘Will the Real Employer Please Stand Up?’ (n 44) 313. 239 Ratti (n 55) 867. 240 (n 62) [19]. 241 ibid [78]. 242 Davidov (n 5) 734; M.B. Sturgis Inc. (2000) 331 NLRB 1298. 243 [2005] EWCA Civ 1151; criticised by Robert Stevens, ‘A servant of two masters’ (2006) 122 LQR 201. 244 Cairns v Visteon (n 94) [16]. 245 ibid; See however Sedley LJ, in Daca (n 62) [72], justifying employment status with vicarious liability considerations. 246 Lewis (n 94). 247 Section 10 and 13(1)(b); Ratti (n 55) 852. 248 Section 13(2). 249 Ratti (n 55) 872.

The Bristol Law Review

[Vol. 1

arrangements between the client and the agency as sufficient to create a dual set of responsibilities.250 The idea of joint employer status has been criticised. It remains unclear how employment legislation would apply to such relationships251 and it could potentially result in uncertainty.252 Guy Davidov provides convincing explanations on the issues of minimum wage and working hours, arguing that client and agency would simply have to co-ordinate their activities.253 Regarding collective bargaining rights, he differentiates between long-term and short-term agency workers.254 This illustrates the difficulty of finding a single solution for different models of agency work. What might work for an agency worker on a two-year assignment with the same client could bring undesirable results for a worker who is changing clients every two months. Regarding unfair dismissal, Ewan McGaughey argues that the primary liability should lie with the party responsible for the misconduct, but if the responsible party goes insolvent, then the less responsible one should be jointly liable.255 Regarding liability for failure to give reasonable notice or for redundancy, she maintains that it would be preferable to hold only the agency liable.256 This again demonstrates the difficulty of providing adequate solutions in a model of joint and several employer liability. While McGaughey’s proposal is attractive, it would be difficult to apply to different areas of employment legislation. A major statutory redrafting would be required and appropriate solutions would have to be found to ensure that responsibility was split or shared in appropriate cases.257 Given the current economic climate, the expectation that such mechanisms will impose undue costs on businesses would make such legislative changes difficult.258

6. Conclusion Temporary agency workers are one of the least protected groups in the UK labour market. Individuals working in agency relationships usually belong to the most vulnerable groups in the UK. This article has indicated that legislation and the common law have failed to adequately address this phenomenon. While the Agency Workers Regulations 2010 brought some improvements, the main issue - the lack of employment status - remains unsolved. Some statutes handle these triangular employment relationships in a practical way, splitting the functions of the employer between the agency and the client. The recognition of joint employer status with joint and several 250 251 252 253 254 255 256 257

Fredman (n 21) 317. Garreth Wong, ‘Whose Employee Am I Anyway?’ (2004) 154 NLJ 610, 611. Wynn and Leighton, ‘Will the Real Employer Please Stand Up?’ (n 44) 313. Davidov (n 5) 740. ibid. (n 83) 27. ibid. Simon Deakin, ‘Does the Personal Employment Contract Provide a Basis for the Reunification of Employment Law?’ (2007) 36 ILJ 68, 82. 258 ibid.

2013]

The Bristol Law Review

liability, however, remains a concept which has little chance of being implemented. The courts refuse to recognise the client of the agency as employer due to the lack of any contract with the worker. While this position may instinctively seem wrong, it does reflect economic reality and the understanding of all involved parties about their relationships. If we want to continue to give businesses the flexibility of hiring staff on short notice without having to worry about long-term commitments, we must maintain the general setup of agency working. However, giving businesses access to a flexible workforce does not necessarily mean that these workers have to be left without any employment protection. Agency work essentially outsources many of the risks of employment. The client pays the agency a fee which is considerably higher than the wage of the worker, and in consideration of this fee, the agency should be prepared to take on all of the risks attaching to its role as employer of the worker. The common law has failed to recognise agencies as employers by applying tests that have been developed for the traditional bilateral master-servant relationship. This article has demonstrated that, after a few months on a single assignment, the test of mutuality of obligation between the agency and the worker is met, and any contractual provision contrary to this should to be treated as a sham. On the issue of the control test, this article has argued that the agency delegates its control over the worker to the client. When exercising control over the daily conduct of the worker, the client acts as an agent of the agency. As a result, the agency should be classified by the courts as the employer of the agency worker. This outcome would also be in line with the principles of the Temporary Agency Work Directive.

The Bristol Law Review

[Vol. 1

Bibliography Primary Sources English Legislation Employment Rights Act 1996 Equality Act 2010 Health and Safety at Work Act 1974 Income and Corporations Taxes Act 1988 Pensions Act 2008 European Legislation Agency Workers Regulations 2010 Employment Tribunals (Constitution and Rules of Procedure) Regulations 2004 Social Security (Categorisation of Earners) Regulations 1978 Temporary Agency Work Directive (EC) 2008/104 English Case Law The Aramis [1989] 1 Lloydâ&#x20AC;&#x2122;s Rep 213 Astbury v Gist Ltd [2007] UKEAT/0619/06 Autoclenz Ltd v Belcher [2011] IRLR 820 Beck v London Borough of Camden UKEAT/0121/08/ZT BP Chemicals Ltd v Gillick [1995] IRLR 128 Bray & others v Monarch Personnel Refuelling, unreported ET judgment 28 September 2012 Bunce v Postworth Ltd (t/a Skyblue) [2005] IRLR 557 Byrne Brothers (Formwork) Ltd v Baird and others [2002] ICR 667 Cable & Wireless plc v Muscat [2006] ICR 975 Cairns v Visteon [2007] ICR 616 Carmichael v National Power plc [1998] ICR 1167 Cave v Portsmouth Council [2008] UKEAT/0608/07/ZT Consistent Group Ltd v Kalwak [2007] IRLR 560 Consistent Group Ltd v Kalwak [2008] IRLR 505 Cornwall CC v Prater [2006] ICR 731 Costain Building and Civil Engineering Ltd v Smith [2000] ICR 215 Construction Industry Training Board v Labour Force Ltd [1970] 3 All ER 220 Cross v Redpath Dorman Long (Contracting) Ltd [1978] ICR 730 Dacas v Brook Street Bureau [2004] ICR 1437 Denham v Midland Employers Mutual Assurance Ltd [1955] 2 QB 437 Donovan v Laing, Wharton and Down Construction Syndicate [1893] 1 QB 629 Dowd v W. H. Boase and Company Limited [1945] KB 301

2013]

The Bristol Law Review

Drake v Ipsos Mori UK Ltd [2012] IRLR 973 Duncombe v Secretary of State for Children, Schools and Families [2011] UKSC 14 Electronic Data Systems Ltd v Hanbury [2001] UKEAT/128/00 Evans v Parasol [2011] ICR 37 Fitton v Edinburgh City Council [2008] UKEATS/0010/07 Franks v Reuters [2003] ICR 1166 Harlow DC v O’Mahony [2007] UKEAT/0144/07/LA Ironmonger v Movefield Ltd t/a Deering Appointments [1988] IRLR 461 James v Greenwich London Borough Council [2008] ICR 545 Lane v Shire Roofing Company (Oxford) Ltd [1995] IRLR 493 McMeechan v Secretary of State for Employment [1997] ICR 549 Mersey Docks and Harbour Board v Coggins & Griffiths (Liverpool) Limited [1947] AC 1 Montgomery v Johnson Underwood [2001] ICR 819 Morris v Breaveglen Ltd [1993] IRLR 350 Morris v Winsbury-White [1937] 4 All ER 494 Motorola Ltd v Davidson and Melville Craig Group Ltd [2001] IRLR 4 Muschett v HM Prison Service [2008] UKEAT/0132/08 Muschett v HM Prison Service [2010] IRLR 451 National Grid Electricity Transmission plc v Wood [2007] UKEAT/0432/07/DM Ncube and Others v 24/7 Support Services [2005] ET/2602005/05 O’Kelly v Trusthouse Forte plc [1984] QB 90 Patefield v Belfast City Council [2000] IRLR 664 Pervez v Macquarie Bank Ltd (London Branch) and another [2011] ICR 266 Protectacoat Firthglow Ltd v Szilagyi [2009] ICR 825 Quashie v Stringfellow Restaurants Ltd [2013] IRLR 99 Ready Mixed Concrete (South East) Ltd v Minister for Pensions and National Insurance [1986] 2 QB 497 Revenue and Customs Commissioners v Wright [2007] STC 1684 Secretary of State for Business, Innovation and Skills v Studders [2011] UKEAT/0571/10 Secretary of State for Trade and Industry v Alade [2007] UKEAT/0591/06 Simmons v Heath Laundry Co [1910] 1 KB 543 Snook v London and West Riding Investment Ltd [1967] 2 QB 786 Sridhar v East Living Ltd and another [2008] UKEAT/0476/07/RN Stephenson v Delphi Diesel Systems Ltd [2003] ICR 471 Tilson v Alstom Transport [2011] IRLR 169 Viasystems (Tyneside) Ltd v Thermal Transfer (Northern) Ltd [2005] EWCA Civ 1151 Wakeman v Quick Corporation [1999] IRLR 424 Wardell v Kent County Council [1938] 2 KB 768 Wickens v Champion Employment [1984] ICR 365 Yewens v Noakes (1880) 6 QBD 530

The Bristol Law Review

[Vol. 1

Other Case Law Allonby v Accrington and Rossendale College [2004] 1 CMLR 35 Lee Hung Kwong v Commissioner of Inland Revenue (2005) HKRC 90-151 M.B. Sturgis Inc. (2000) 331 NLRB 1298 Royal Bank of Scotland plc v Bannerman Johnstone Maclay [2005] CSIH 39 Secondary Sources --Halsbury’s Laws of England (5th edn, 2009) Bondi M, ‘Tax and Benefits Notes: Transferred Allegiance’ (2012) Pensions World 47 Bowers J, A Practical Approach to Employment Law (7th edn, OUP 2005) Bradley R, ‘Agency Workers - Parity Lite?’ (2011) ELB 2 Brodie D, ‘Employees, Workers and the Self-Employed’ (2005) 34 ILJ 253 --The Employment Contract: Legal Principles, Drafting, and Interpretation (OUP 2005) --‘Agency Workers: The Latest Moves on the Chess Board’ (2006) 72 ELB 2 --‘The Contractual Status of Agency Workers: Toms v Royal Mail’ (2006) 10 Edin LR 443 --‘The Enterprise and the Borrowed Worker’ (2006) 35 ILJ 87 --‘Agency Workers: Common Law Stalemate’ (2008) 83 ELB 4 --‘How Relational is the Employment Contract?’ (2011) 40 ILJ 232 Brown A and Hitchins C, ‘Recent Judgment Highlights Loophole in Discrimination Legislation for Agency Workers’ HR Magazine (Kent, 16 February 2010) <www. hrmagazine.co.uk/hro/employment-law/1017471/recent-judgment-highlights-loophole-discrimination-legislation-agency-workers> accessed 10 April 2013 Brown E, ‘Protecting Agency Workers: Implied Contract or Legislation?’ (2008) 37 ILJ 178 Casey C and Alach P, ‘’Just a Temp?’: Women, Temporary Employment and Lifestyle’ (2004) 18 Work Employ Soc 459 Chanda P, ‘Home and Away: Employment Rights of Employees Seconded to the UK’ (2013) EML 67 Christie D, ‘The Matrix Revisited - Agency Workers and Employment Status’ (2003) 56 ELB 7 --‘Status Anxiety - New Guidance from the Court of Appeal on Agency Workers’

2013]

The Bristol Law Review

(2004) 60 ELB 2 Collins H, ‘Independent Contractors and the Challenge of Vertical Disintegration to Employment Protection Laws’ (1990) 10 OJLS 353 --Employment Law (2nd edn, OUP 2010) --Ewing K and McColgan A, Labour Law (CUP 2009) Commission, ‘Proposal for a European Parliament and Council directive on working conditions for temporary workers’, COM (2002) 149 report --‘Modernising labour law to meet the challenges of the 21st century’, COM (2006) 708 final Cooke FL, Earnshaw J and Rubery J, Who is the Employer? (Institute of Employment Rights 2002) Countouris N and Horton R, ‘The Temporary Agency Work Directive: Another Broken Promise?’ (2009) 38 ILJ 329 Davidov G, ‘Joint Employer Status in Triangular Employment Relationships’ (2004) 42 Brit J Indus Rel 727 Davies P and Freedland M, ‘The Complexities of the Employing Enterprise’ in Guy Davidov and Brian Langille (eds), Boundaries and Frontiers of Labour Law (Hart Publishing 2006) --and Freedland M, ‘Changing Perspectives Upon the Employment Relationship in British Labour Law’ in Catherine Barnard, Simon Deakin and Gillian Morris (eds), The Future of Labour Law (Hart Publishing 2004) Davies R, ‘Contracting Out and the Retention of Employment Model in the National Health Service’ (2004) 33 ILJ 95 Deakin S, ‘The Changing Concept of the ‘Employer’ in Labour Law’ (2001) 30 ILJ 72 --‘Interpreting Employment Contracts: Judges, Employers, Workers’ (2004) 20 IJCCLIR 201 --‘Does the Personal Employment Contract Provide a Basis for the Reunification of Employment Law?’ (2007) 36 ILJ 68 --and Morris G, Labour Law (6th edn, Hart Publishing 2012) Department for Business Enterprise and Regulatory Reform, ‘Agency Working in the UK: A Review of the Evidence’ (2008) Employment Relations Research Series No 93 <http://webarchive.nationalarchives.gov.uk/20090609003228/http://www.berr.gov. uk/files/file48720.pdf > accessed 10 June 2013 Department for Business, Innovation & Skills, ‘Agency Workers Regulations: Guid-

The Bristol Law Review

[Vol. 1

ance’ (UK Government, May 2011), 38 <www.bis.gov.uk/assets/BISCore/employment-matters/docs/A/11-949-agency-workers-regulations-guidance.pdf> accessed 10 June 2013 Department of Trade and Industry, ‘Discussion Document Employment Status in Relation to Statutory Employment Rights’ (DTI, July 2002) <www.delni.gov.uk/employment_status_consultation_document.pdf> accessed 10 June 2013 --‘Employment Status Review: Summary of Responses’ (DTI, March 2006) <http:// webarchive.nationalarchives.gov.uk/+/http://www.berr.gov.uk/files/file27471.pdf> accessed 10 June 2013 --‘European Commission Green Paper, ‘Modernising labour law to meet the challenges of the 21st century’ UK response’ (DTI, May 2007) <http://webarchive.nationalarchives.gov.uk/+/http://www.berr.gov.uk/files/file39545.pdf> accessed 10 June 2013 Drucker J and Stanworth C, ‘Mutual Expectations: A Study of the Three-Way Relationship between Agencies, their Client Organisations and White-Collar ‘Temps’’ (2004) 35 Indus Rel J 58 Emir A, Selwyn’s Law of Employment (17th edn, OUP 2012) European Foundation for the Improvement of Living and Working Conditions, ‘Temporary Agency Work in an Enlarged European Union’ (EFILWC, 2006) <www.ciett. org/fileadmin/templates/eurociett/docs/ef05139en.pdf> accessed 10 June 2013 Fanning S, ‘Case of the Week: Muschett v HM Prison Service’ Personnel Today (Surrey, 3 February 2010) <www.personneltoday.com/hr/case-of-the-week-muschett-vhm-prison-service> accessed 10 April 2013 Forde C and Slater G, ‘Agency Working in Britain: Character, Consequences and Regulation’ (2005) 43 Brit J Indus Rel 249 Fredman S, ‘Women at Work: The Broken Promise of Flexicurity’ (2004) 33 ILJ 299 Freedland M, ‘The Role of the Contract of Employment in Modern Labour Law’, in Lammy Betten (ed), The Employment Contract in Transforming Labour Relations (Kluwer 1995) --The Personal Employment Contract (OUP 2003) --‘From the Contract of Employment to the Personal Work Nexus’ (2006) 25 ILJ 1 --‘Employment’ in Hugh Beal (ed), Chitty on Contracts, Specific Contracts (Sweet & Maxwell 2012) --and Countouris N, The Legal Construction of Personal Work Relations (OUP 2011) Fudge J, ‘The Legal Boundaries of the Employer, Precarious Workers and Labour Protection’ in Guy Davidov and Brian Langille (eds), Boundaries and Frontiers of

2013]

The Bristol Law Review

Labour Law (Hart Publishing 2006) Guinan G, ‘Agent Protection - the Third Way’ (2006) 156 NLJ 591 Harris J, The Guardian (London, 19 October 2007) <www.theguardian.com/commentisfree/2007/oct/19/immigrationandpublicservices.businesscomment> accessed 10 June 2013 Honeyball S, Honeyball & Bowers’ Textbook on Employment Law (11th edn, OUP 2010) International Confederation of Private Employment Services, ‘The agency work industry around the world: Economic Report 2011 Editio’ (Ciett, 2011) <www.ciett. org/fileadmin/templates/eurociett/docs/stats/Ciett_Economic_Report_2011.pdf> accessed 10 June 2013 Jones C, ‘Auditor’s Duties to Third Parties’ (2005) 18 Insolv Intel 154 Jupp J, ‘Agency work: Legal black hole?’ (2005) 155 NLJ 1447 Leighton P and Wynn M, ‘Classifying Employment Relationships - More Sliding Doors or a Better Regulatory Framework?’ (2011) 40 ILJ 5 Lewis T, Employment Law: An Adviser’s Handbook (8th edn, Legal Action Group 2009) McGaughey E, ‘Should Agency Workers be Treated Differently?’ (2010) LSE Law, Society and Economy Working Papers 07/2010, 31 <http://eprints.lse.ac.uk/32903/1/ WPS2010-07_McGaughey.pdf> accessed 10 June 2013 McKay S and Markova E, ‘The Operation and Management of Agency Workers in Conditions of Vulnerability’ (2010) 41 Indus Rel J 446 McTigue P, ‘Beyond the Contractual Veil: Agency Workers, Employee Status and Commercial Reality’ (2007) 16 Nott LJ 54 Ochel W, ‘The Political Economy of Two-tier Reforms of Employment Protection in Europe’ (2009) 25 IJCCLIR 237 Perrins B (ed), Harvey on Industrial Relations and Employment Law (Butterworths 1975) Pitt G, Employment Law (8th edn, Sweet & Maxwell 2011)

The Bristol Law Review

[Vol. 1

Prassel J, ‘The Notion of the Employer’ (2013) 129 LQR 380 Ratti L, ‘Agency Work and the Idea of Dual Employership: A Comparative Perspective’ (2009) 30 Comp Lab L & Pol’y J 835 Reynold F, ‘The Status of Agency Workers: a Question of Legal Principle’ (2006) 35 ILJ 320 Royston T, ‘Agency Workers and Discrimination Law: Muschett v HM Prison Service’ (2011) 40 Indus Law J 92 Sargeant M and Lewis D, Employment Law (5th edn, Pearson 2010) Smith I and Thomas G, Smith & Wood on Industrial Law (7th edn, Butterworths 2000) Stevens R, ‘A servant of two masters’ (2006) 122 LQR 201 Trade Union Congress, ‘Agency Workers: Counting the Cost of Flexibility’ (TUC, February 2007), 8 <www.tuc.org.uk/sites/default/files/extras/sectorreport.pdf> accessed 10 June 2013 Vaes T and Vandenbrande T, ‘Implementing the New Temporary Agency Work Directive’ (2009) KU Leuven Publication No 1268 <https://hiva.kuleuven.be/resources/ pdf/publicaties/R1268.pdf> accessed 10 June 2013 Williams A, ‘A Critical Appraisal of the Criteria Determining Employee Status’ (2003) 24 BLR 239 Wynn M, ‘Regulating Rogues? Employment Agency Enforcement and Sections 1518 of the Employment Act 2008’ (2009) 38 ILJ 64 --‘End of Line for Temps?’ (2008) 158 NLJ 352 --‘Temporary Agency Working: Tide Turns on Temps’ (2008) 29 Co Law 275 --and Leighton P, ‘Will the Real Employer Please Stand Up? Agencies, Client Companies and the Employment Status of the Temporary Agency Worker’ (2006) 35 ILJ 301 --and Leighton P, ‘Temporary Agency Working: Is the Law on the Turn?’ (2008) 29 Co Law 7 --and Leighton P, ‘Agency Workers, Employment Rights and the Ebb and Flow of Freedom of Contract’ (2009) 72 MLR 91 Wong G, ‘Whose Employee Am I Anyway?’ (2004) 154 NLJ 610

The Right to Self and the Public/Private Divide: Why Those who Court Publicity may Abandon Their Rights Michael J Blitz1 “Funnily enough, I read in the Independent this morning that apparently… I trade on my good name, and therefore there’s a public interest defence in going into my private life, but I wasn’t aware I traded on my good name. I’ve never had a good name. And it’s made absolutely no difference at all. I’m the man who was arrested with a prostitute and the film still made tons of money. It doesn’t -- it doesn’t matter’” - Hugh Grant2 “It seems to me that those who seek and welcome publicity of every kind bearing upon their private lives so long as it shows them in a favourable light are in no position to complain of an invasion of their privacy by publicity which shows them in an unfavourable light” – Bridge LJ3 The ‘super-injunction’ controversy in spring 2011 laid bare an unfortunate truth; that for all the developments of UK privacy law in the post-Human Rights Act era, the courts have yet to fully rationalise a fundamental issue – where does private life end and public life begin? 4 Even the golden opportunity of the Leveson Report merely repeated the same empty platitude that “those who actively engage in the ‘celebrity industry’… may enjoy a lower level of protection when it comes to privacy”.5 It

1 To Helen Norman and Steven Greer for inspiring me; to Tony Prosser for guiding me; to Chris Willmore for believing in me; and to my parents for supporting me. 2 Leveson Inquiry: Transcript of Afternoon Hearing 21 November 2011 (Levison Inquiry, 21 November 2011) 86 <www.levesoninquiry.org.uk/wp-content/uploads/2011/11/Transcript-of-Afternoon-Hearing-21-November-2011.pdf> accessed 30 June 2013. 3 Woodward v Hutchins [1977] 1 WLR 760, 765. 4 For a brief background to the controversy and UK privacy law, see Joint Committee on Privacy Injunctions, Privacy and Injunctions (2010-12, HL 273, HC 1443) chs 1-2 <www.publications.parliament. uk/pa/jt201012/jtselect/jtprivinj/273/273.pdf> accessed 30 June 2013. For an example of five different approaches, see the five separate judgments in Campbell v Mirror Group Newspapers [2004] UKHL 22. 5 Lord Justice Leveson, ‘An Inquiry into the Culture, Practices and Ethics of the Press’ (The Leveson Inquiry, November 2012), 620 <www.gov.uk/government/uploads/system/uploads/attachment_data/ file/270939/0780_i.pdf> accessed 30 June 2013 (‘Leveson Report’); 440 (“this was despite the author having ‘decided to bring “the public” into the heart of the first module [of the enquiry]”).

The Bristol Law Review

[Vol. 1

appears almost certain that, in line with history,6 substantive legislation will not be forthcoming.7 The best that can be hoped for is Parliamentary guidance,8 likely to be framed as broad political statements rather than precise legal rules.9 It appears that the judiciary will once again be responsible for developing the framework into which any new privacy approach will be placed.10 These developments come at a time when the traditional English reluctance to recognise a right to one’s personality11 may be under threat from the European Court of Justice. The decision in Arsenal Football Club plc v Reed12 goes against a long line of authorities categorically stating that ‘branded’, or endorsed, products are commemorative (and therefore descriptive) rather than an indication of official endorsement.13 In Arsenal, the ECJ determined that such merchandise (in this case scarves bearing the logo of the famous football club) invokes “a guarantee that all the goods or services bearing it have been manufactured or supplied under the control of a single undertaking which is responsible for their quality”,14 even if the name was a “badge of support, loyalty or affiliation”.15 The wrong committed by Mr. Reed was not deceiving consumers into believing the merchandise was official, but violating the right of the club to control the supply of merchandise bearing its trade mark.16 The protected exclusive source17 was not the producer of the scarf, but the manufacturer of the product described – Arsenal Football Club itself. The impact of Arsenal on domestic English law has not yet been tested in a broad sense, but it has reopened the debate on whether a broad right to personality should, or in fact must, be recognised.18 Although there has been much debate sur6 Alexandra Sims, ‘“A Shift in the Centre of Gravity”: The Dangers of Protecting Privacy Through Breach of Confidence’ (2005) 1 IPQ 27, 30-31. 7 Joint Committee (n 3) 5; The Leveson Report may have inspired the creation by Royal Charter of a new regulatory system, but there are no indications of any intention to address the scope of privacy itself – see ‘Press regulation deal struck by parties’ BBC News (London, 18 March 2013) <www.bbc. co.uk/news/uk-21825823> accessed 30 June 2013. 8 Christopher Hope and Tom Whitehead, ‘No privacy law to gag press, Jeremy Hunt Says’ The Daily Telegraph (London, 19 May 2011) <www.telegraph.co.uk/news/uknews/law-and-order/8524478/Noprivacy-law-to-gag-press-Jeremy-Hunt-says.html> accessed 30 June 2013. 9 ibid. 10 As has been the case thus far – see Campbell (n 3). 11 See Tanya Aplin and Jennifer Davis, Intellectual Property Law: Text, Cases, and Materials (OUP 2009) ch 7; Jan Klink, ‘50 Years of Publicity Rights in the United States and the Never Ending Hassle with Intellectual Property and Personality Rights in Europe’ (2003) IPQ 363, 363-376. 12 [2003] Ch 454. 13 Eg not registrable as trade marks with distinctive character, see Aplin and Davis (n 10) ch 7; DIANA, PRINCESS OF WALES Trade Mark [2001] ETMR 254; JANE AUSTEN Trade Mark [2000] RPC 879; ELVIS PRESLEY Trade Marks [1999] RPC 567. 14 Arsenal (n 11) [48]. 15 ibid [27]; the decision was finally accepted domestically on appeal – Arsenal Football Club plc v Reed [2003] RPC 696. 16 Including on unrelated products – Trade Marks Act 1994, ss 5(3) and 10(3). 17 William Cornish, David Llewelyn and Tanya Aplin, Intellectual Property: Patents, Copyrights, Trade Marks & Allied Rights (7th edn, Sweet & Maxwell 2010) 655. 18 Helen Norman, ‘Time to blow the Whistle on Trade Mark Use?’ (2004) IPQ 1; Klink (n 10) 369.

2013]

The Bristol Law Review

rounding an individual’s ability to protect their publically-exploited image through US-style ‘publicity rights’,19 the impact of personality rights on an individual’s private life has slipped under the radar. This paper intends to demonstrate that a right to one’s personality, whether legally protected or not,20 forms the most coherent basis from which to analyse the extent of an individual’s right to a private life. First the philosophical foundations of privacy are explored, and it is concluded that a right to privacy is best understood as respect for an individual’s self-determination in engaging with others. It is then suggested that current conceptions of the public / private divide fail to embody this understanding. Instead, an intellectual property style ‘right to personality’ is proposed as the starting point for the assessment, and an understanding of how information moves from the private to the public domains is expounded.

Chapter 1: Privacy and Human Relations 1.1 Privacy for Sale It is important to make an initial distinction between that which I shall term ‘factual privacy’, and ‘legal privacy’. This is best achieved by comparing the positions of individuals and companies. It is easy to envisage matters that could be conceived as ‘private’ to a company – that which is desired to remain inaccessible. Examples would include the key ingredients to a successful recipe, or the circumstances surrounding a directorial resignation. Private law provides a means to this end. Deliveries can be unloaded on private property inaccessible to the public and directors can be bound to confidence. This raises an important question. If an ability to purchase ‘factual privacy’ on the free market is sufficient for companies, why is it insufficient for individuals? 21 It is suggested that there are four key reasons. First, the Human Rights regime affords protection to individuals purely by virtue of their humanity. As such, certain markets are declared illegitimate, including the market for respect for privacy. Secondly, the difference between ‘economic interests’ and ‘dignitary interests’ must be considered.22 Economic interests have value only in their financial realisation. Monetary damages can fully rectify the damage caused, even if quantification is difficult.23 The sole purpose of an economic interest, whether it is an exclusive recipe, the moral principles of the organisation, or attraction towards a company image, is to gain a benefit on the market. Correspondingly, it is the market that determines the 19 Huw Beverley-Smith, The Commercial Appropriation of Personality (CUP 2002) 171-189. 20 Ie potentially as a ‘phantom intellectual property right’ – Andrew McGee and Gary Scanlan, ‘Phantom Intellectual Property Rights’ (2000) IPQ 264. 21 Nb the European Court of Human Rights is beginning to accept that companies can have ‘human’ rights; see eg Ringier Axel Springer v Slovakia [2012] 54 EHRR SE4. 22 Beverly-Smith (n 18) ch 1. 23 ibid 10.

The Bristol Law Review

[Vol. 1

value of the interest. In contrast, dignitary interests reflect that which is of non-economic value.24 Examples include a positive reputation, freedom from mental distress,25 and physical liberty. The benefit inherently attaches to a single individual26 who is the sole force in evaluating its worth. Although dignitary interests can be converted into economic interests,27 the converse is not true. Unlike money, the value of dignitary rights is temporally confined, and no amount of effort can undo the wrongs of the past. Similarly, an individual cannot transfer his dignitary rights to another. As such, the violation of a dignitary right cannot be rectified, and monetary compensation will only ever be an imperfect substitute for the loss.28 Further, although individuals are able to sell their dignitary interests, this is not expected. Individuals are entitled to pursue non-financial value.29 As such, the commodification of dignitary interests without the individual’s consent is to be avoided. In light of this distinction, it can be seen that the privacy interests of companies are purely economic. Companies exist for the sole purpose of financial gain. In contrast, the privacy interests of an individual have a dignitary element. Therefore, it is entirely inappropriate to expect an individual to engage with the free market in order to obtain his privacy. To do so would financially commodify the right without consent. Unlike companies, where the purchase of factual privacy is with a view to a financial gain, the result for an individual may be a net loss. Thirdly, the free market model leaves the individual open to market forces. A farmer living in the remote highlands is sufficiently uninteresting that information about him, and therefore his privacy, may have no economic value at all. In contrast, the price that a high-profile celebrity such as Madonna or David Beckham must pay to make privacy invasions economically unviable is likely to be considerably higher. Similarly, an outgoing, enthusiastic, friendly individual is able to obtain a higher social value than a shy, anxious and withdrawn individual, provided these characteristics remain socially desired. Such a difference in value is entirely inconsistent with a universal right to privacy and the equal value of persons. Finally, individuals are physical entities. The mere limits of space mean that seclusion for everyone is not an option. In fact, the denial of a ‘network of personal, social and economic interactions’ involved may be itself a breach of privacy.30 Instead, 24 25 26 27

ibid. ibid 10-11. Although the altruistic may gain value from the knowledge that others gain from them. Cf Beverly-Smith (n 18) 10-11 who argues that the trading of dignitary interests is ‘absurd’ and does ‘not normally’ occur. However, it is suggested that such a trade is not impossible - it is not inconceivable that an individual would accept £100 to be confined to a room for an hour. That this does not happen is due to the fact that a purchaser can rarely get as much benefit from the relinquishment of the right as the holder can from its retention. 28 Beverly-Smith (n 18), 10. 29 Samuel Warren and Louis Brandeis, ‘The Right to Privacy’ (1890) 4 Harv LR 193, 195 (“only part of the pain, pleasure, and profit of life lay in physical things. Thoughts, emotions and sensation demanded legal recognition”) 30 Slivenko v Latvia [2003] 39 EHRR 490 [96].

2013]

The Bristol Law Review

human life is inherently communal, and it may not be factually possible to buy privacy back from the market. In contrast, as abstract entities, companies do not face the same problem. Even if a physical presence is required, interaction with the outside world in a limited and controlled manner is an advantage, rather than a disadvantage. If a free market model of privacy is inappropriate, then the grant of ‘legal privacy’ must protect individuals beyond their ‘factual privacy’. This is the first key value of a privacy right.

1.2 Privacy as Autonomy As Moreham has persuasively argued, privacy is more than solitude.31 The difference between a hermit and an individual in a state of privacy is an expression of desire,32 and an appeal to privacy is an appeal for that desire to be respected.33 A right to privacy is, at its heart, an exercise of self-determination.34 This has been variously referred to as ‘informational autonomy’35 or ‘the right to be left alone’36, but the outcome remains unchanged – protection is premised not on restrictions on the uses of information, but on the ability to prevent its release in the first place. The individual alone has the right to determine whether or not to reveal information. The effect is twofold. First, an individual is protected from becoming a commodity, a pawn used for the ends of another.37 It is unsurprising that the European Charter of Human Rights envisaged privacy as central to the exercise of political liberty in a ‘genuine democracy’38 in an anti-authoritarian post-World War II Europe.39 Secondly, the individual is free to develop his personality without outside influence.40 Privacy allows an individual to create a dichotomy between his internal and external self. Prima facie, a breach of privacy may be said to occur when the desires of an individual are not respected – when another usurps his self-determination. This is the second key value of privacy.

1.3 Privacy as Engagement 31 Nicole Moreham, ‘Privacy in the common law: a doctrinal and theoretical analysis’ (2005) 121 LQR 628, 636-638. 32 ibid. 33 See eg Leveson Report (n 4) 595, regarding JK Rowling and her children. 34 ibid. 35 Gavin Phillipson, ‘Transforming Breach of Confidence? Towards a Common Law Right of Privacy under the Human Rights Act’ (2003) 66 MLR 726, 732. 36 Thomas Cooley, A Treatise on the Law of Torts (2nd edn, Callaghan & Co 1888) 29. 37 See Peter Birks, ‘Harassment and Hubris: The Right to an Equality of Respect’ (1997) 32 IJ 1; Leveson Report (n 4) 602. 38 Steven Greer, The European Convention on Human Rights: Achievements, Problems And Prospects (CUP 2006) 15, citing Arthor Robertson, The Council of Europe: Its Structure, Function and Achievements (Stevens & Sons 1961) 2. 39 Article 8 was one of the original 11 cast in 1948; see ibid ch 1. 40 Botta v Italy [1998] 26 EHRR 241 [31]; Campbell (n 3) [12].

The Bristol Law Review

[Vol. 1

It is uncontroversial that protection of privacy extends beyond the protection of information – Nissenbaum argues that privacy protection also demands control over physical access.41 However, it is suggested that information itself is a fundamentally flawed basis upon which to construct any part of privacy jurisprudence. Instead, the issue is best conceptualised as one of engagement, a notion that is capable of transcending the informational and the physical.42

1.3.1 - Information is Singular Information, by its nature, refers to one matter. At its most basic, information is a single fact concerning a state of affairs. Single pieces of information may of course imply other pieces of information, but each is a separate fact. However, this approach does not truly reflect the nature of relationships between individuals. In reality, one act of consent43 implies disclosure of a wide of range of pieces of information. Consent to enter another’s living room necessarily implies consent to observe the ornaments on the mantelpiece or the photos on the wall. It is absurd to suggest that consent is granted over each piece of information individually – they are inherently packaged together in a manner that is artificial to separate.44 If the homeowner were asked what had been consented to, he would reply ‘to look at my living room’. One effect of the singular nature of information is that it is limited temporally. As a definite statement of affairs, a piece of information has no ability to change with the situation. When matters develop, new information is created, and new consent must be implied in respect of that information. If one is granted consent to enter another’s living room every day for a week, an informational approach would require fresh consent should the furniture be moved to a different position or the number of sweets in the bowl on the table reduced – consent could not be given over information not already in existence. Again, it is farcical to argue that this consent is actually given. The invitation to enter another’s living room covers all information available at the time of entry, existing presently or not. In contrast, engagement transcends information. The core of engagement is interaction between individuals. Although the release of information may be a necessary part of such interaction, engagement is not defined or limited as such. It operates at a higher level, automatically encompassing the necessary information. Engagement presupposes continued interaction and is a continual, rather than discrete, concept. As such it can presuppose future information coming into existence and being released.

41 Helen Nissenbaum, ‘Protecting Privacy in an Information Age: The Problem of Privacy in Public’ (1998) 17 L & Phil 559, 592. 42 This is similar to Moreham’s ‘access’ requirement – (n 30) 639 – however the word ‘engagement’ is preferred as reflecting the active nature of individual interaction. 43 As an exercise of self-determination; Phillipson (n 34) 742. 44 Unless such separation has been explicit eg permission to “look at everything in my living room except those photos”.

2013]

The Bristol Law Review

1.3.2 Information does not encompass action Information is passive. It describes, rather than is, a statement of affairs. This has two profound effects on privacy. First, an informational approach cannot invoke an effective notion of spatial privacy. Although spatial proximity may cause the release of information, this is not the wrong complained of. Similarly, although private space in a physical sense may form part of privacy, the right is “to be left alone”45 or “to enjoy one’s private space free from unwelcome interferences”.46 Especially with the advent of modern technology, the intruder need not be anywhere near the person upon whose privacy he is intruding.47 It is submitted that the right of spatial privacy is in fact the right to be free from forced engagement with others – or conversely, the right to engage only with those of your choosing.48 The second effect is that personal information has no inherent link to its subject. As such no individual may claim right over it once factual control has been relinquished - consent is to dissemination alone. A purely informational approach only protects factual privacy – indeed Prosser conceptualises the arrangement as contractual.49 The Breach of Confidence action attempts to construct the link required to allow an individual to exercise control. However, it is suggested that this is a needless exercise. All personal information must have been obtained by some means – it is tied to a relationship of some kind between the subject and the person obtaining. The legitimacy of the knowledge of the information is inherently tied to that relationship, and the relationship is that to which consent has been given. This can be best demonstrated by Moreham’s example of the lady changing in front of an open window, observed at a distance by her ex-partner. Having previously observed her naked he gains no information that he was not already entitled to by consent,50 so a purely informational approach would conclude that no breach of privacy has occurred.51 Yet that is the opposite to the instinctive analysis of the situation. It is submitted that this is because the breach has nothing to do with the information, and everything to do with how it was obtained – the non-consensual engagement with the subject.

1.4 The Core of Privacy It is suggested that effective protection of privacy must extend beyond factual 45 Cooley (n 35) 29. 46 David Harris and others, Law of the European Convention on Human Rights (2nd edn, OUP 2009) 367. 47 As recognised in various phone tapping cases – Harris and others (n 45) 368; Rachael Mulheron, ‘A Potential Framework for Privacy? A Reply to Hello!’ (2006) 69 MLR 679, 701. 48 James Rachels, ‘Why Privacy is Important’ (1975) 4 Phil & Pub Aff 323, 328. 49 William Prosser, ‘Privacy’ 48 CLR 383, 420. 50 It would be absurd to argue that the break-up has denied him the right to remember how his ex-partner looks naked. 51 Moreham (n 30) 649.

The Bristol Law Review

[Vol. 1

privacy, and encompass respect for the self-determination of individuals in determining their engagements with others.

Chapter 2: Current Conceptions of Privacy The vehicle of choice for protecting privacy under the law of England and Wales has been the extended form of Breach of Confidence, given full recognition in Campbell v News Group Newspapers.52 The “shift in the centre of gravity”53 away from confidentiality and towards “misuse of private information”54 was predicted and intended to cement the place of privacy in the post-Human Rights Act era.55 However, the exercise has been far from successful. Significant concerns have been raised about the form of the action,56 but it also clear that no substantive conception of the public / private divide, in line with the three values described above, has been forthcoming. This chapter analyses the failings of the conceptions running through the jurisprudence.

2.1 The ‘Secrecy Conception’ The first limb of the Breach of Confidence test, in both traditional and extended forms, requires that the information “be of a confidential nature”.57 Although this has not been equated to an absolute bar on access, and there exists an element of degree,58 the basic principle remains that information cannot be private if it is freely available, or in the “public domain”.59 The clear flaw with the secrecy conception is that legal privacy is limited to the extent of factual privacy. Only if information has been sufficiently protected by other means can it obtain the value necessary to affect the recipient’s conscience.60 One cannot be bound to not take ‘unfair advantage’61 of that which is not an advantage at all. ‘Breach of confidence protects secrecy, whereas not all privacy issues are necessarily secret’.62 However, the secrecy conception is also flawed on a theoretical level. The justification, at least in the context of traditional breach of confidence, is that no more 52 53 54 55 56 57 58 59 60 61 62

Campbell (n 3). ibid [51]. ibid [14]. Phillipson (n 34). Eg Tanya Aplin, ‘The Development of the Action for Breach of Confidence in a Post-HRA Era’ (2007) 1 IPQ 19; Sims (n 5). Coco v Clark [1968] FSR 415, 419-420. Phillipson (n 34) 736-738: “fuzzy judgments of degree”; AG v Observer [1990] 1 AC 109 (‘Spycatcher’); cf the concept of ‘prior art’ in patent protection – Cornish (n 16) ch 5. Eg the structure of Narcotics Anonymous meetings in Campbell (n 3) [27]; ADT v United Kingdom (2001) 31 EHRR 33 [25]-[26]. Douglas v Hello! (No 3) [2005] EWCA Civ 595 [119]. Seager v Copydex [1967] 1 WLR 923, 931. Sims (n 5) 46; see also Mulheron (n 46) 692-694.

2013]

The Bristol Law Review

damage can be done once there has been general disclosure.63 However, such damage is cast in exclusively economic terms, creating a conception of the ‘public domain’ inconsistent with dignitary interests. This is best illustrated by the third party effect in Breach of Confidence. An individual disclosing information contrary to a duty of confidence may still bind the person to whom he discloses, so long as the conscience of that individual is affected.64 Even though this process may be repeated ad infinitum, the fiction of non-disclosure is maintained because none of the recipients are free to use the information disclosed to them. A distinction is drawn between the information itself, and its exploitation. In contrast, information in a privacy context has no plurality of value – exploitation65 arises by knowledge alone. In the case of the ad infinitum dissemination, all the damage has been done even though the information has never left the private domain.66 Further, the Secrecy Concept casts privacy as a right expendable by breach. As illustrated in Spycatcher67 and B v H Bauer,68 breach of an obligation of confidence may release the information into the public domain, rendering it unprotected against all others.69 The value of the right reduces to zero once any breach has occurred. Such a position is the exception, rather than the expectation,70 and can only be justified where economic compensation is an appropriate substitute for the right defeated. The final blow to the secrecy conception is a failure to respect autonomy. Information readily available to others does not mean that it has been released in the exercise of self-determination. 71 On the contrary, it may have been released despite the exercise of self-determination.

2.2 The ‘Spatial Conception’ The spatial conception classifies acts as public or private dependent on their location. It has been criticised as being a particularly blunt method of analysis,72 and although rejected by the European Court of Human Rights in Peck v United Kingdom73 appears to have lived on domestically in X v Y.74 Although an undisputable element of the right ‘to be left alone’ is ‘the notion of a private space into which no-one else 63 64 65 66 67 68 69 70 71 72 73 74

Spycatcher (n 57) [260]. ibid. By forced engagement. Sims (n 5) 43-44; Douglas (n 59) [105] (“fresh intrusion of privacy” with each “additional viewer”). (n 57) [286]; cf dissent at [271] (Lord Griffiths). [2002] EMLR 8 [23]-[24]. X (formerly known as Mary Bell) v SO [2003] EMLR 37 [63] (“once published, the knowledge is there and all are free to disseminate”). Eg ‘equity’s darling’. Woodward (n 2) 764. Virginia Mantouvalou, ‘Human Rights and Unfair Dismissal: Private Acts in Public Spaces’ (2008) 71 MLR 912, 921 (“the subtleties of the distinction between public and private”); Phillipson (n 34) 736. [2003] 36 EHRR 41 [58]. X v Y (Employment: Sex Offender) [2004] EWCA Civ 662.

The Bristol Law Review

[Vol. 1

is entitled to enter’75, there is little justification for using spatial analysis to limit the extent of privacy. First, English law provides very little provision for communal rights over land. To speak of ‘public’ land is therefore deceptive. ‘Public land’ refers to land over which others have been granted a right of access by the private landowner. A practical problem of classification arises – when is an individual observed by the public at large, or simply by other private actors? Is a suspect in a police station cell observed by all, or simply the officers and other detainees?76 These questions have become more complicated since technology permits interaction in spaces that have no physical presence.77 However, the interplay between property and privacy rights in this context has deeper theoretical flaws. Privately-owned property is protected from unwanted interference78, and as such an individual on such property benefits from a zone of physical control.79 However, this is only a form of factual privacy dependent on the exercise of rights by the landowner. To find that it is also the basis for legal privacy implies that rights over land include rights over the individuals present on that land. This goes far beyond that granted to landowners in accordance with theories of private property. Instead, Self-determination attaches to an individual.

2.3 - The ‘Access Conception’ Linked to the Secrecy and Spatial Conceptions of privacy is the ‘Access Conception’. This differs in that it relies upon others having actually had access to information, rather that this being a possibility.80 One argument in favour of the Access Conception is what Nissenbaum terms the ‘normative justification’. 81 To protect by legal privacy information, which has been in fact received by others, is an undue restriction of the liberty of those others.82 However, this argument must be seen for what it is – a justification. In human rights terms, the argument cannot go to the engagement of a right to privacy, only its violation. The two are distinct, and considerations from one should not influence the other.83 As a justification, the significance of the interest must be weighed.84 Although the ability of individuals to discuss that to which they have access has the potential to go to an important interest, for example the search for the truth, it will not necessarily 75 76 77 78 79 80 81 82 83 84

Harris and others (n 45) 367. PG v United Kingdom [2008] 46 EHRR 51. Eg online chat rooms, Facebook, Twitter etc; Nissenbaum (n 40). By right to bring actions in trespass, nuisance etc. Nissenbaum (n 40) 569-570. In some cases an intermediate option has emerged – eg Mary Bell (n 68) [53] (“generally accessible”); Jonathan Morgan, ‘Privacy in the House of Lords, Again’ [2004] 120 LQR 563, 564. Nissenbaum (n 40) 570-575. Charles Fried, ‘Privacy’ (1968) 77 Yale LJ 475, 493 (“just exercise of rights by others”). Campbell (n 3) [21] (Lord Nicholls); cf Greer (n 37) suggests conflicts are solved by redefining the scope of the right itself. Phillipson (n 34) 756.

2013]

The Bristol Law Review

do so. It is suggested that in the vast majority of cases the benefit will be only to the observer. This alone should not suffice to tip the balance in favour of free speech by default – the transition from a matter of interest to the public to a matter of public interest85 cannot be presumed. The second argument in favour of the access conception is consent. Although entirely consistent with self-determination in engagement, it cannot be presumed that an individual consents merely by virtue of their public presence.86. An enquiry must still be made as to the extent of any consent in relation to both in quantity and quality. As recognised in Peck v United Kingdom87, mere presence in public does not imply a blanket intention to engage with all people on all matters.88 Such is the difference between self-harming and engaging in a demonstration.89 Similarly, consent to observation cannot be equated to consent to engagement, which would be an overly informational view of a right to privacy that fails to take into account the depth of personality.90 Information that an individual is crying in a public place is clearly very different in nature to engagement with that grief.91

2.4 - The ‘Damage Conception’ Phillipson argues that the decisions in Venables v News Group Newspapers92 and Mary Bell93 ‘specifically affirm that a court may grant an injunction against the publication of information, regardless of the circumstances in which it is obtained, based solely upon the damage that disclosure of the information in question may do to the Convention rights of the person to whom the information relates’94 If this were correct95, it would be groundbreaking in legal theory. Private law may prohibit the causation of a certain outcome,96 but this is determined in advance and is not influenced by the amount of tangible loss caused. Not all that is valuable is worth protecting.97 The same applies in relation to privacy – “not every act or measure which adversely affects moral or physical integrity will interfere with the right to respect to

85 86 87 88 89 90 91 92 93 94 95 96 97

Mosley v United Kingdom [2012] EMLR 1 [114]. They may not be acting as a free agent – Nissenbaum (n 40) 595. Peck (n 72). Nissenbaum (n 40) 580 (“public expression as a sign, as strongly suggestive, of something more than preference”). Peck (n 72). Nissenbaum (n 40) 595. ibid 575-578 (‘empirical’ justifications). [2001] EWHC 32. Mary Bell (n 68). Philipson (n 34) 745 (emphasis added). This author suggests that it was actually the correct application of the balancing exercise. KGM v NGN [2010] EWHC 3145 [34] – that C ‘robust’ not determinative where matters were ‘genuinely private’. Eg Unjust Enrichment. Cf University of London Press v University Tutorial Press [1916] 2 Ch 601, 610.

The Bristol Law Review

[Vol. 1

private life guaranteed by Art.8”.98 Although consideration of the damage caused by breach is appropriate when balancing opposing rights,99 it cannot have any effect on the original content of individual privacy.

2.5 The ‘Expectation Conception’ The Expectation Conception bases the extent of privacy on the expectation of its beneficiary. This is the conception currently preferred by the domestic and Strasbourg courts.100 It is however an overexpression of either factual privacy or individual will, depending on whether a factual or normative conception is preferred. 101 A Factual Expectation Conception draws the limits of privacy according to how an individual predicts that others will behave. It is clear that such a right has no substance beyond enforcing consistency. The trends of the free market and “contemporary standards of morals and behaviour”,102 rather than self-determination, reign supreme. A Normative Expectation Conception does not fare any better. The law is not averse to enforcing a party’s expectations. Contractual damages are assessed on the assumption of performance,103 and injunctions are granted to protect against anticipated breach.104 However, it would break new ground to allow such expectation to wholly inform the content of a legal right. Although contractual damages may be forward-looking, the expectation to be fulfilled must have been one originally agreed. Law regulates behaviour, not vice versa,105 and expectations must be of the protection of a right as objectively defined. A Normative Expectation Conception fails to understand that self-determination is freedom of choice rather than freedom of outcome. The addition of a reasonableness requirement does not address these flaws. A reasonable factual expectation has the sole additional effect of binding the individual to accuracy – there is only a change in the level of protection for the overly optimistic or pessimistic. A reasonable normative conception reverts to objective control over acceptable expectations at the expense of the individual, without any attempt to answer the question of “what is reasonable?”

98 Bensaid v United Kingdom [2001] 33 EHRR 10 [46]. 99 Michael Blitz, ‘How, if at all, might the second paragraphs of Articles 811 ECHR be more consistently and appropriately applied by the European Court of Human Rights?’ (LLM Coursework, University of Bristol 2012). 100 Campbell (n 3); Von Hannover v Germany [2004] EMLR 21 [51]. 101 Moreham (n 30) 647; There is currently confusion over which is to be used – see eg Ferdinand v MGN Ltd [2011] EWHC 2454 [47], cf [56]. 102 ABC v Lenah Game Meats [2001] HCA 63 [42]. 103 “The rule in common law is that where a party sustains a loss by reason of a breach of contract he is… to be placed in the same situation… as if the contract had been performed” – Robinson v Harman [1848] 1 Exch 850, 855. 104 Civil Procedure Rule 25. 105 Cf international customary law; see Malcolm Evans, International Law (3rd edn, OUP 2010).

2013]

The Bristol Law Review

2.6 The ‘Classification Conception’ The ‘Classification Conception’ envisages that information can be automatically classified as private because of its fundamental importance to private life.106 However, information alone cannot assist in the search for the desire of the individual to whom it relates. Predictions may be made based upon the behaviour of others, but they remain predictions. This was most aptly demonstrated in Theakston v MGN Ltd107 whereby the status of information on sexual relationships, considered a ‘most intimate aspect of private life’108 was affected by the desires109 of those involved.110 In the absence of actual knowledge, the court must merely speculate that the individual to whom the information relates is a rational actor. However, to do so involves concessions to other conceptions – the sensitivity of medical records was originally justified by the damage caused by disclosure.111 Further, a classification alone may not provide sufficient information to enable a prediction to be made - ‘medical’ data covers a scope of information ranging from the deeply intimate to the mundane.112

2.7 The Control Conception The Control Conception is based on “whether…there is a sense in which the subjects of the occasion sought to exercise control, and thus choice over who could observe the occasion”.113 Although this is the closest conception to respect for self-determination in engagement, three flaws remain. First, although the control required need not be fully effective, it must still be sought by a means external to privacy protection, allowing a concession to factual privacy. Secondly, observation, being inherently spatial, is a narrower concept than engagement. In the context of Douglas v Hello! (No 2)114, the first formulation of the conception, it is suggested that in fact the Douglasses had not sought to exercise any control over who could engage with their wedding – they had invited by proxy the entire potential readership of OK Magazine.115 Finally, an individual is required to reassert control in every factual instance – the singular nature of information is reinforced.

2.8 Conclusion The current conceptions either do not fully respect the three values outlined in 106 107 108 109 110 111 112 113 114 115

For examples see Phillipson (n 34) 733. [2002] EWHC 137. Dudgeon v United Kingdom [1982] 4 EHRR 149 [52]. Albeit in a normative expectation sense. Theakston (n 106) [64]. Z v Finland [1998] 25 EHRR 371 [95]. Campbell (n 3) [157]; see also A v B Plc [2003] QB 195 [207]. Phillipson (n 34) 738, discussing Douglas v Hello! (No 1) [2001] QB 967 (original emphasis). [2005] 4 All ER 128. Although this argument was rejected by the House of Lords in OBG v Allan [2008] 1 AC 1.

The Bristol Law Review

[Vol. 1

Chapter One, or impose normative values without an appropriate balancing exercise. This is a result of the constraints of Breach of Confidence, and the necessity of linking the distinguishable concepts of information and individual.116

Chapter 3: The Right to Self 3.1 A Pure Right to Privacy The question therefore remains – what does a fully-fledged, unrestricted right to privacy based on self-determination in engagement look like? In other words, how is the shift made from the protection of factual privacy to the protection of legal privacy? This chapter argues that the best conception of an unrestricted117 privacy right is as a right to one’s self or personality. As an intangible concept, this must be matter of intellectual, rather than physical, property.118 Such a proposition is not novel. Not only has a right to privacy been argued to stem from a right to personality,119 but natural law justifications for intellectual property also begin with some form of right to self.120 Lockean justifications suggest that when an individual mixed his labour with something, it becomes his property,121 presupposing that an individual has a right to his labour. Hegelian theories take a more explicit view; that property is obtained by the embodiment of will in an external object.122 This ‘duality’ between personality and entity can be seen most clearly in the protection of creator’s ‘moral rights’ to a performance independent of the owner’s economic rights.123 To natural law theorists, the right to self is not understood as a result of intellectual property, but as being at its very heart.

3.2 Creation and Information A right to personality gives content to that which is being protected. This goes to the distinction between information and engagement. Information is objective, fixed, and exists independently of its subject. In contrast, engagement is inherently tied to a person. Usurping self-determination in engagement is not the taking of information, but the provision of access to a person against their will. When a newspaper prints a story about a celebrity, they are not only disseminating the information, but also inviting the reader to be present in the situation.124 The difference between information 116 117 118 119 120 121 122 123 124

Phillipson (n 34) 732 (“confidentiality values” trumping “privacy values”). The correct starting point – Phillipson (n 34) 749 and onwards. Beverly-Smith (n 19) 277. Warren and Brandeis (n 29). J Thomas McCarthy, The Rights of Publicity and Privacy (2nd edn, West Group 2001) para 2.5 (“there is probably nothing more strongly intuited as the notion that my identity is mine”). Beverly-Smith (n 19) 292. Georg Hegel, Elements of the Philosophy of Right (Wood AW ed, Nisbet HB tr, CUP 1991) 67-72. Cornish (n 17) 513. Campbell (n 3) [169] (“photographs… add colour and conviction”).

2013]

The Bristol Law Review

and engagement is familiar to intellectual property lawyers, and is most apparent in copyright. The difference is between the protected creation and its communication. Although a melody must be recorded in permanent form to qualify for protection,125 it is not the notation itself that is protected. This distinction is most clearly reflected in infringement. The work exactly as recorded need not have been precisely copied; it is the engagement with the underlying creation that is prohibited. In the Irish Supreme Court case of Gormley v EMI Records,126 the defendant had “copied what had been told, and the manner of telling it, even though she had put the story in her own language”.127 Like a protected creation, violation of another’s personality “does not depend on the particular method of expression adopted”.128 Information about the individual is merely a symbol of his protected identity.129 This distinction allows the debate on personality to move beyond discussions of property in pure information.130

3.3 Access and Control The second reason a right to personality is appropriate is that intellectual property is well-versed in the distinction between access and control.131 Proprietors of copyrights and patents may display their creations to the world, but reserve for themselves the sole right to determine their use. It suggested that this reflects the realities of engagement – an individual offers access to themselves, but not control.132 An invitation to engage does not encompass the ability to invite others into a similar position - nemo dat non quod habet.133 Law, rather than fact, determines the extent of the ‘public domain’ in which there are no controls on use.

3.4 A Right ‘In Rem’ A right to personality protects against the problem of replication. Engagement is replicable, especially since modern technology allows for even the most intimate of moments to be recorded and replayed at will. Ownership of the original is worthless when there is no control over reproduction. Protection is therefore needed from the free-market. Intellectual Property provides that protection not by the artificial creation

125 Copyright Designs and Patents Act 1988, s 3(2). 126 [2000] 1 IR 74. 127 Hector MacQueen, ‘“My tongue is mine ain”: Copyright, the Spoken Word and Privacy’ (2005) 68 MLR 349, 364. 128 Warren and Brandeis (n 28) 198. 129 Prosser (n 48) 403. 130 Douglas (n 60) [119]. 131 Warren and Brandeis (n 28) 204-205; Nissenbaum (n 40) 596; Hazel Carty, ‘The Common Law and the Quest for the IP Effect’ (2007) IPQ 237, 238. 132 Warren and Brandeis (n 28) 205 (privacy is avoiding “being owned or possessed”). 133 Halsbury’s Laws of England (5th edn, Lexis Nexis 2010) vol 45(2) (reissue) para 575.

The Bristol Law Review

[Vol. 1

of a relationship with a third party,134 but by the demarcation of a domain of exclusivity that is protected by virtue of ownership. A fundamental flaw in Breach of Confidence reasoning is the basis of prohibition rather than consent. Although Campbell recognised the need for this prohibition to be inferred from conduct, the default position remains that none are bound. Such a starting point cannot provide effective protection for self-determination – until permission to engage is granted it must be presumed to be reserved.135

3.5 Similar Objectives Intellectual Property shares a key goal with privacy – facilitating the development of creation without external influence. Utilitarian justifications for Intellectual Property focus on providing an incentive to invent – when others can profit from your creation, the investment required is worthless. Similarly, the need for a sphere free from intrusion is understood as a utilitarian justification for privacy rights.136 Restricted access provides the incentive to develop one’s character – the ability to withhold one’s personality until content with its state provides the incentive for development.137

3.6 Conclusion It is suggested that a ‘right to personality’ is the best description of that which privacy seeks to protect.

Chapter 4: Licences That a right to privacy can be conceptualised as an Intellectual Property style right to one’s personality only tells half the story of the public / private divide. The tension in the rights system must be recalled – simply because a right is engaged, it does not mean it is infringed. There are situations where pursuit of free expression demands that an individual’s self-determination in engagement must be overruled and the decision handed to others - in Intellectual Property terms, where compulsory licencing is necessary.138 This chapter explores the situations in which a right can be limited, and in particular how recognising a right to personality demands that those who seek publicity may be unable to subsequently demand privacy. By way of illustration, four examples of individuals run through this chapter, and the solutions proposed advanced to each in turn. These are:

134 135 136 137 138

An unidentified individual, walking along a public street at midday, wear-

Warren and Brandeis (n 28) 211-213. Phillipson (n 35) 743. Beverly-Smith (n 19) 301-308. Patrick Masiyakurima, ‘The Trouble with Moral Rights’ (2005) 68 MLR 411, 419-425. Eg compulsory licensing in the patent system – Patents Act 1977, s 48.

2013]

· · ·

The Bristol Law Review

ing a red shirt139 A protester at an animal rights march The Chief Executive of a small company Kate Middleton140

4.1 Consent (from Information to Engagement)

It must be recalled that self-determination in engagement has not only a negative dimension, but also a positive one. The exercise of the right in its positive sense is an invitation for defined persons to engage with the individual in a defined way. It therefore cannot be said that acceptance of that invitation by those to whom it has been granted is in any way an usurpation of the individual’s self determination. Such a proposition is in itself unremarkable,141 and it is well established in law by the ‘Choice Conception’ model privacy. However, the proposition must be re-cast once the substance of privacy shifts away from ‘information’ and towards ‘engagement’.

4.1.1 Options The first effect of the shift is a marked expansion in the range of options available to an individual.142 In respect of information only two options are available – disclosure or retention. It is not possible to partly-tell information.143 In contrast, engagement operates on a sliding scale in respect of both context and depth.144 In respect of context, individuals can invite others to engage with them in different conditions. These can, but need not necessarily, be spatial. There is a difference in the type of engagement between people meeting in coffee shops and meeting in each other’s homes. The latter includes an invitation to engage, at least to some extent, in each other’s domestic affairs. The question of depth is an enquiry into the qualitative extent of the engagement offered. The greater the depth, the more of one’s personality or self is disclosed. There is a marked difference between an individual informing another of the loss of a loved one, and an invitation to engage with his grieving process.145 Although broad distinctions may be made between physical, informational and emotional engagement, the latter being of a deeper level that the former, the question scale is continuous rather than discrete – physical, informational (i.e. the release of information) and emotion139 Nissenbaum (n 40) 572 (red sweater). 140 Duchess of Cornwall and prominent member of the British Royal Family. 141 McGee and Scanlan (n 19) 274; Warren and Brandeis (n 28) 199 (“the right is only lost when the author himself communicates his production to the public”). 142 Phillipson (n 35) 740 (the ‘differentiated approach’). 143 Although it is of course possible to disclose some, but not all, information relating to a particular matter. However, under an informational analysis this is merely the splitting of a block of information into component parts. Once a single fact is reached, it cannot be only partly disclosed. 144 Rachels (n 47) 328 classifies this as the “kind and degree of knowledge”; see also Phillipson (n 35) 742. 145 Leveson Report (n 4) 656 – discussion of the potential impropriety of engagement with grief.

The Bristol Law Review

[Vol. 1

al engagement are subject to subtleties of degree.146 Such is the difference between speaking to someone and following them, between a description and a photograph,147 and between the sharing of grief and the sharing of philosophical beliefs on life and death.148 It is important that considerations affecting context and depth remain separate149 - one does not imply the others. That an individual invites a domestic cleaner into his home does not suggest an invitation to engage deeply with the activities occurring therein. Similarly, deep discussion between friends of their medical issues does not suggest a similar permission in respect of personal finances.

4.1.2 Temporal Constraints The second effect of a shift of focus information to engagement is that temporal constraints are removed. Engagement, being premised on the commencement of continuation of a relationship, has the possibility of prospective effect. In fact, it is suggested that the majority of instances of consent to engagement involve permission for the relationship to continue on the same basis. The removal of temporal constraints provides a legitimate basis on which to conceptualise future acts as public or private. The fiction of implied consent based on previous acts or attitudes draws inferences from more information than it is able to provide. In contrast, in an engagement model only one form of consent matters – that which is actually granted.

4.1.3 Revocation The third effect of the shift from information to engagement (and the resultant link between information and subject) is a legitimisation of the right of an individual to revocation. Since consent is not abandonment but control, an individual may terminate the right of another to engage with him at any point. A model of privacy premised on self-determination demands that this decision is respected.150 However, what is prima facie a severe limitation on freedom of expression in tempered by two important observations. First, revocation of engagement operates prospectively rather than retrospectively. The legitimacy of another’s actions must be judged at the time they occur.151 This is not possible in an informational approach to privacy – information is singular and is therefore either legitimate or illegitimate. It cannot explain why, returning Moreham’s example, the woman observed naked without consent by her ex-boyfriend 146 Although generally speaking, physical, informational and emotional engagement will by necessity of fact presuppose each other, this will not always be the case – for example where information is provided remotely. 147 Creation Records v News Group Newspapers [1997] EMLR 444, 455; Douglas (n 60) [84]. 148 See also Parker’s astronaut example, discussed by Moreham (n 30) 651. 149 cf Nissenbaum (n 40) 581-586 (both combined as ‘contextual integrity’). 150 Leveson Report (n 4) 602. 151 Peck (n 72) [86]; Sunday Times v United Kingdom [1979-80] 2 EHRR 245 [49].

2013]

The Bristol Law Review

can object to his knowledge of the information on this occasion, but would be considered as stepping beyond the realms of privacy to demand that the ex-boyfriend’s initial knowledge of the same information was also illegitimate. It is suggested that the answer is that without renewed engagement, there can be no renewed damage. Secondly, although consent must be respected, it need not be communicated explicitly. In the vast majority of cases it will be inferred “by conduct”.152 This is different from the ‘Choice Conception’ thus far expounded by the courts – the search is for that already existing rather than for a legal fiction.153 Improper concessions to the subjective desire conception are avoided. An individual is held to consistency - it is not open for him to grant consent then deny the results. Even if revocation is express, future engagements may grant new consent. Thirdly, the possibility of revocation is not incompatible with the notion that those who “court publicity”154 should be afforded less protection. Instead, the notion is refined to affect those who continually “court publicity”. It is suggested that these are the individuals who, in publically exploiting that which they claim to be private, create an inconsistency which the law must address.155 In contrast, the individual who decides after a short stint of fame that they would prefer a life outside the media spotlight is protected - there is no inconsistency, only a single choice.

4.1.4 Extent If a right to self-determination in engagement is enforceable against all in a negative sense, its exercise in a positive sense must also be able to have an effect on all. An individual’s permission for others to engage cannot be affected by the others’ ignorance or lack of intention to utilise that permission. The scope of consent must therefore be analysed on the basis of potential, rather than actual, recipients.156 However, such scope must remain tied to self-determination; else the flaws of the ‘secrecy conception’ resurface. Disclosure of information to one friend may include consent for other friends of similar relationships to have knowledge, but may not include consent for that information to be disseminated to the world at large.157 However, should that friend be a journalist for a national newspaper and the context of disclosure is an interview, consent to engage has been granted to all with the potential to read the final published article.158 The focus on the individuality of recipients is important – although an individual may gain consent by his status as a member of a particular group, the consent to engagement attaches to him personally. Such focus 152 153 154 155 156

Prosser (n 48) 419. Engagement is an objective act from which consent can be objectively determined. Leveson Report (n 4) 443. Michael Tugendhat and Iain Christie, The Law of Privacy and the Media (1st edn, OUP 2002) 344. The ‘secrecy conception’ attempts to do this with information through the ‘public domain’ – however engagement model expands scope of putting into public domain, thus respecting consent – also no numerical threshold, third parties bound by lack of consent, not assumed to have free-reign on information. 157 Rachels (n 47) (fundamental choice of who to engage with). 158 MacQueen (n 126) 375.

The Bristol Law Review

[Vol. 1

avoids the need to define a ‘public domain’.

4.1.5 Examples Let us apply these principles to the examples set out at the beginning of this chapter. It is suggested that the individual on the street wearing a red jumper has consented to a low-level physical engagement.159 This consent applies to all,160 and as such it would not be a breach of privacy for another to watch him, or to tell others about him. The consent granted by the animal rights protester is similar, yet broader. Consent has been granted161 not only to physical engagement, but also to engagement with their beliefs. It would therefore not breach their privacy should others be informed of those beliefs. In contrast the CEO of a small company has most likely not consented to any physical engagement beyond that of any other individual. He has however consented to engagement with his professional life. Although information on his corporate role and his professional activities would not therefore be private, protection would extend to his domestic life.162 Kate Middleton has consented to almost absolute engagement in all areas of her life. She has invited or published photographs of herself in both professional and domestic contexts, and released much personal information on her domestic life and romantic relationships. It is therefore submitted that photos taken of her wearing swimwear on a private beach163 did not breach her privacy.

4.2 Legitimate Restriction The need for a ‘public interest defence’ has been acknowledged since the beginning of modern conceptions of privacy.164 Effectively running a modern state requires a degree of usurpation of individual self-determination. Electoral registers protect against fraud and non-anonymity for victims and defendants is essential to an open system of criminal justice.165 The legitimacy of significant invasions of privacy in 159 By conduct – although McGee and Scanlan (n 19) argues that one is anonymous in public (267), he concedes the presence of ‘perceived attributes’ (271). 160 As all may access the street. 161 Again by conduct. 162 A factual incarnation of McGee and Scanlan (n 19) 276. 163 ‘Kate Middleton pregnant bikini pictures: William ‘hurt’ by intrusion’ Metro (London, 14 Feb 2013) <http://metro.co.uk/2013/02/14/kate-middleton-pregnant-bikini-pictures-william-hurt-by-intrusion-3477349> accessed 30 June 2013. 164 Warren and Brandeis (n 28) 214-216; Prosser (n 48) 413; cf McGee and Scanlan(n 19) 273 – no right of personality at all where there is a public interest. 165 Although the ongoing debate about anonymity for rape suspects highlights that this is not necessarily an aim to be pursued at all costs – see eg ‘Sex case defendants ‘should get anonymity’’ BBC News (London, 16 February 2013) <www.bbc.co.uk/news/uk-21487266> accessed 30 June 2013; Klink (n 10) 379.

2013]

The Bristol Law Review

pursuit of the suppression of crime is similarly well established.166 However, the scope of legitimate invasions in an inter-partes context has not been fully rationalised. The distinction drawn is between that ‘of’ public interest and that ‘in’ the public interest.167 The two are generally seen as mutually exclusive, with the former referring to “tittle-tattle”168 or “idle gossip”169, and the latter relating to information required to correct a false impression of those with some form of public role.170 However, little has been expounded on why such correction is important, and why such logic is applied only to those with some form of public capacity - the “logical connection between the plaintiff and the matter of public interest”.171 Does the a public interest ‘in’ exposing the sexual relations between the Chief Executive of a part-nationalised bank and a member of his staff172 remain in relation to the manager of a local high street branch of the same bank? What if the sexual relations, though still adulterous, were with another completely unconnected with his work? It is submitted that the correct rationalisation may be found in the concept of market efficiency.

4.2.1 ‘Privacy Capital’ Legal protection affords privacy a value not obtainable under a free-market model – the right of self-determination grants an individual what may be loosely termed ‘Privacy Capital’.173 An individual is free to do as he wishes with that capital. He may decide to retain the value for himself, living as private a life as possible. Although such a detached existence may be attractive to some, it is equally unattractive for others. Those others, in exercising their self-determination in a positive manner, trade that capital for other forms of capital valuable to them.174 Inter-personal individuals may exchange their privacy capital for enhanced relationships with others (‘Relational Capital’), and those ‘selling their story’ demand a financial premium for interviews and photographs (‘Economic Capital’175). However, the route taken by most in the business of self-marketing is the exchange for ‘Image Capital’ – by holding themselves out for engagement with others, they invite a perception to be formed of their personality.176 It is on Image Capital that this chapter focuses. 166 Although Peck (n 72) demonstrates that the ‘margin of appreciation’ is broad, it is not limitless. 167 Mosley (n 84) [114]; Leveson Report (n 4) 442; Von Hannover (n 99) [60] (“debate of general interest”). 168 Leveson Report (n 4) 474. 169 Warren and Brandeis (n 28) 196. 170 McGee and Scanlan (n 19) 274; Von Hannover (n 99) [63] (those exercising ‘official functions’). 171 Prosser (n 48) 414. 172 Goodwin v News Group Newspapers [2011] EWHC 1437. 173 Fried (n 81) terms this ‘moral capital’, but in light of the following discussion this term is avoided to prevent inadvertent deception (484). 174 Jean-Baptiste Say, A Treatise on Political Economy (1st edn, Lippincott, Grambo & Co 1803) 153 (“products are paid for with products”). 175 Or ‘money’ in layman’s terms. 176 It is not necessary to label this perception as ‘positive’ or ‘negative’ – the image is of the person and the value is determined by others.

The Bristol Law Review

[Vol. 1

Such exchanges are not offensive to the legal protection of privacy - a right to decide with whom to engage177 includes the right to engage with all people and upon such conditions as the individual chooses.178 In fact, such transfer to Image Capital and the corresponding ability to control other’s perceptions of oneself may arguably be an underlying justification for privacy protection.179

4.2.2 Markets and Information In making the exchange from Privacy Capital to other forms of Capital, the individual has “put themselves on the market”.180 The ‘product’ being sold is themselves, as limited by the depth and context of the consent offered, and the form of access is an intellectual property style right of use. The ‘purchasers’ are those to whom consent has been granted. Like any market, the market in Image Capital is prone to imperfections. One such imperfection is information asymmetry. This describes the situation where the purchaser has insufficient information to value accurately that in which he is investing.181 The result is twofold. First, individuals cannot act as free economic agents, over-valuing that in which they invest. Secondly, other market participants are unable to gain the full value of their products.182 In terms of Image Capital, a celebrity who chooses not to disclose a shameful hidden past gains undeserved Image Capital. Similarly, other celebrities without anything to hide are able to gain less image capital than they deserve, as buyers factor in the risk of deception. A right to privacy is a direct contributor to information asymmetry. Granting an individual absolute self-determination severely restricts the free-flow of information into the market. The market is therefore running inefficiently.

4.2.3 Market Efficiency as a Legitimate Objective It is suggested that there are four primary reasons why efficiency in the Image Capital market is, in human rights terms, a “legitimate aim”,183 the pursuit of which permits derogation from an absolute right of privacy.

177 Rachels (n 47). 178 This is to be distinguished from the protection from the free-market as discussed in chapter one, where ‘privacy’ must be purchased from others in the form of other legal rights. 179 Hence privacy protecting ‘development’ of personality – Botta (n 39) [32]. 180 Leveson Report (n 4) 597 (“trade on their… image”). 181 George Akerlof, ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’ (1970) Q J Econ 488, 489. 182 ibid. 183 Ie an interest in pursuit of which a right may be justified; see European Convention on Human Rights, Arts 8-11; see also Peter Kempees,‘“Legitimate aims” in the case-law of the European Court of Human Rights’ in Paul Mahoney and others (eds), Protecting Human Rights: The European Perspective (Carl Heymans 2000) 659.

2013]

The Bristol Law Review

4.2.3.1 Subsequent Markets vital.

Image Capital may itself be transferred into other capital in which efficiency is

The most pertinent example is the electoral system. All citizens are granted capital in the form of the right to vote (‘Voting Capital’).184 Voting Capital is, subject to certain limits, granted to candidates in exchange for values important to the voter.185 One such value is Image Capital – people vote for candidates whom they perceive positively. Imperfections in the market for Image Capital therefore transfer into the market for Voting Capital. This is clearly an unacceptable outcome – a democratic market must be as efficient as possible else the coercive power of the state is legitimised inappropriately. It is therefore essential that voters are not deceived by inaccurate representations.186 This justification can be applied to any market with a need for efficiency and in which Image Capital can be exchanged. These generally encompass markets for the ability to represent or exercise the powers of the state.187

4.2.3.2 ‘Failure of Consideration’ This justification applies regardless of the type of capital into which Image Capital is transferred, although particularly pertinent is the transfer into Economic Capital. Consumers pay a premium for products endorsed by a favoured celebrity,188 or to do business with a bank manager of whom they approve. Similarly, businesses may employ persons in a public role only if they represent certain approved values. Should the image projected by the individual be in some way misleading, those purchasing the individual’s Image Capital have been misled and therefore attached an inappropriate premium. In effect, they have paid for a different product to that provided. In the language of Unjust Enrichment, there has been a “failure of consideration”.189 Those persuaded to watch a certain film by the casting of their favourite actor might resent having paid the ticket price if that actor is subsequently exposed as having unrevealed unappealing attributes. It is important however to note that exposure is not a prerequisite for protection. The deception is present from the moment the premium 184 See eg Barry Weingast and Donald Wittman, The Oxford Handbook of Political Economy (OUP 2006) ch 2; Anthony Downs, An Economic Theory of Democracy (Harper 1957). 185 Although the rationality of this process is disputed, see eg Donald Wittman, ‘Reply to Caplan: On the methodology of testing for voter irrationality’ (2005) 2 Econ J Watch 22; examples of limits include buying votes see eg ‘Italy election: Berlusconi tax letter causes outrage’ BBC News (London, 20 February 2013) <www.bbc.co.uk/news/world-europe-21521877> accessed 30 June 2015. 186 Campbell (n 3) [148]. 187 Eg Pay v United Kingdom (2009) 48 EHRR SE2; X v Y (n 74); nb Goodwin (n 171) puts all CEOs into this category, although it is suggested that there is no specific need for efficiency in CEO selection – accountability is to the shareholders, who are economic investors. 188 Hence protection may be available in ‘passing off’ – Irvine v Talksport [2003] EWCA Civ 423. 189 Peter Birks, ‘No Consideration: Restitution After Void Contracts’ (1993) 23 UWAL Rev 195; Andrew Burrows, The Law of Restitution (OUP 2011) ch 14.

The Bristol Law Review

[Vol. 1

is paid. Similarly, the premium paid may not be economic – anything of value to the individual, for example emotional investment, has been paid under false pretences.

4.2.3.3 Preventing Deception Beyond the protection of capital held by individuals, it is suggested that in the market for Image Capital, the prevention of deception per se is a legitimate aim. Part of the value of Image Capital is that celebrities are “role models that give orientation on lifestyle and articulate ways of behaving, feeling and thinking in contemporary society”.190 As such, deception by role models leads to an inaccurate assessment of self-worth by those who draw a comparison. In itself, this affects the individual’s ability to develop his own character. Instead, individuals are best served by the availability of a variety of role models. Authenticity is itself a desirable goal.191

4.2.4 Proportionality The determination of a legitimate aim alone does not suffice to justify an invasion of privacy – the aim must be balanced with the right. Although the ECHR has yet to establish a model for this exercise,192 the UK approach to proportionality was approved in R (Daly) v SSHD.193 Using the UK approach, once the aim of efficiency in the Image Capital market has been demonstrated as legitimate, two further questions remain: 1. Is the breach of privacy “rationally connected” to the aim? 2. Is the breach of privacy “no more than is necessary” to fulfil the aim?194

4.2.4.1 Rational Connection In order for privacy to remedy market inefficiency, the information must be directed at market participants and affect the value of the product. The relevant market reflecting the scope of consent granted, the same investigation into depth, context and extent as discussed above must be completed.195 Information disclosed to non-participants in the market does not fulfil any of the aims discussed above. Similarly, information not affecting the value of the product must also be disregarded196 - if a celebrity’s gain has not come from an image of sobriety, disclosure of drug use can have no effect 190 Klink (n 10) 364, citing Richard Dyer, Heavenly Bodies: Film Stars and Society (1st edn, Roultedge 1986) 8. 191 Masiyakurima (n 136) 428. 192 Blitz (n 98) 3-4. 193 [2001] 2 AC 532 [27]. 194 ibid. 195 Warren and Brandeis (n 28) 215. 196 ibid.

2013]

The Bristol Law Review

on the value of their Image Capital.197 Similarly some, but not all, celebrities “trade on their wholesome image”.198

4.2.4.2 Not More Than Necessary The requirement that the release of private information is not “more than necessary’” goes to the difference between market feedback and market creation. The creation of market efficiency may demand the release of a large amount of information such that the true picture may emerge. There can be no scope for restrictions on the “unnecessarily embarrassing”199 where the individual has chosen to gain from their image.200 However, market feedback does not justify the creation of a market in personality contrary to the will of the subject – a distinction must be drawn between supply and demand. That others desire to invest in the Image Capital of another does not oblige them to provide this opportunity – such is the fundamental principle of self-determination that privacy protection enshrines. In justifying invasions of privacy for the aim of market efficiency, care must be taken to ensure that the market was created legitimately, by the consent of the individual.201

4.2.5 Examples Let us return once again to the examples by way of demonstration of that expounded above. First, although the individual wearing a red shirt in public may have created some form of Image Capital, the subject matter is extremely limited – he has held himself out as nothing more than a normal citizen, and it is difficult to envisage information that would affect that value. However, the situation would be different should he be wearing a red Manchester United shirt. The subject matter of the Image Capital has expanded as he now holds himself out as having positive feelings towards Manchester United. It would therefore not be a breach of his privacy to expose that he is actually a fervent supporter of Liverpool Football Club. Secondly, the animal rights protester has created Image Capital in relation to his positive feelings towards animals. It would therefore be legitimate to expose that he keeps his own animals in poor conditions.202 Thirdly, the CEO of a small company has transferred his Image Capital partly into economic capital – he has obtained the position by appearing to shareholders and the public at large that he is able to run a business. As such, previous instances 197 The distinction between Naomi Campbell and other models – Campbell (n 3) [38]. 198 Leveson Report (n 4) 597. 199 David Bedingfield, ‘Privacy or Publicity? The Enduring Confusion Surrounding the American Tort of Invasion of Privacy’ (1992) 55 MLR 111, 114. 200 Cf Phillipson (n 35) 753-754. 201 See eg Leveson Report (n 4) regarding Charlotte Church’s parents (594). 202 McGee and Scanlan (n 19) advance a similar example (277).

The Bristol Law Review

[Vol. 1

of causing significant financial loss would be legitimately disclosable. However, provided he has not gained professionally from any assertions concerning his domestic arrangements, revelations of his sexual infidelity would not be remedying a market imperfection, but creating a new market contrary to his self-determination. Finally, Kate Middleton has created Image Capital with regard to her respectable nature. It is therefore legitimate to reveal instances in her past that detract from this image.

Conclusion It is suggested that, whether or not such an approach is adopted in its entirety, the conception of privacy as a right to self, limited by the exercise of legitimate permission and the need to correct market inefficiencies, is the most satisfactory manner of conceptualising the public / private divide. Present conceptions do not afford sufficient protection to self-determination or engagement, or allow free-market considerations an illegitimate role. The pure conception of privacy must be absolute self-determination in engagement, best understood as an intellectual property style right to self. Any limitations must be justified objectively, and be as consistent as possible with respect for the underlying self-determination. It would be wrong to consider that this model involves a radical shift in favour of individual privacy at the expense of freedom of speech. Although individuals gain in the ability to be the sole determinant of what, if any, level they wish to engage with others, the ability is tempered by the fact that consent is to be determined objectively. The aim is not upholding individuals’ expectations, but respecting their freely and rationally made decisions. The proposed conception provides a framework within which an individual may make decisions. In particular, those who project an image to others must take care to ensure that the image is accurate. There is informational autonomy, but it comes with consequences. Consequence is not, however, offensive to a rights regime – the right to free speech may prevent censorship, but it does not prevent an individual with belief unacceptable to others from being ostracised. Those pursuing freedom of speech, generally represented by the media, also benefit from the proposed conception. A move away from information towards engagement and relationship broadens the basis upon which information about individuals may be legitimately exposed. The media is no longer limited to ‘setting the record straight’,203 or deriving their consent from specific incidents – the entire image presented by the individual may be undermined, and consent is obtained prospectively and in relation to a broad context of events. The greatest development proposed is that of ‘nuanced consent’, the law’s reflection of what is being granted. Although it is conceded that the concepts of ‘extent’ and ‘depth’ will, for practical purposes, require a degree of further definition, this is not a task beyond the courts. The primary objective is avoidance of the blunt ‘all or 203 Campbell (n 3) [44]; Woodward (n 2) 764.

2013]

The Bristol Law Review

nothing’ approach of informational conception and its effect of laying bare the lives of those who place but one foot in the public eye. Of course, each man’s gain is another’s loss, and the inability to force engagement in a certain context might be considered a disadvantage. In particular, those who believe that elected politicians or other public figures should fulfil certain criteria may feel denied.204 However, such concerns ignore demand and market competition. The criteria of politicians is driven by the demands of the electorate – the British may demand a candidate with marital fidelity, but Silvio Berlusconi’s lengthy stint of power demonstrates that Italian voters might not. Voters, rather than democracy itself, determine the characteristics of a ‘good’ political leader, and the proposed model of privacy does not fetter the ability of voters to make the appropriate demands. In fact, the power of democracy allows ideals to update rather than stagnate.205 This demand will inevitably lead to supply – there will always be those willing to allow voters to engage with them in certain areas in exchange for an increased likelihood of election. The same can be applied to all areas in which there is a desire for engagement – there will always be those who value their privacy less than the fame and money obtained from allowing people the engage in ‘idle gossip’ about their love lives. Fears of over-zealous privacy protection driving the press out of business206 are unfounded.207 The proposed model is concerned with ensuring that only those choosing to participate in the market in personality are compelled to. Further, although the proposed model justifies the invasion of privacy when market correction is required, it avoids causing harm to individuals’ core dignitary interests. An individual who has placed an element of their life ‘on the market’ for gain has abandoned their dignitary interests208 - there can be no more ‘hurt feelings’.209 The value of their Image Capital is a question for the market – dignity extends to a respect for choice in disclosure, but not to a right to a positive reputation. As a market participant, the individual must accept exposure to market forces, including external corrective measures if necessary. An individual’s image may be protected through positive image rights, but negative publicity cannot be prevented.210 Finally, as has been demonstrated by illustration, the proposed conception has universal application. Although the ‘obvious beneficiaries’ of privacy law are the famous, all individuals live out their lives in both public and private.211 Notions of engagement and image, although more often disputed by those in positions of notoriety, apply equally to all. The Leveson report was a chilling reminder that, for all the virtues of free speech, privacy must also be taken seriously. More is required than another ‘shift in Campbell (n 3) [148]. Goodwin (n 171) [138], Mantouvalou (n 71) 914. Campbell (n 3) [143]. See also Mary Bell (n 68) [39]. Although the transition may not have been to a full economic interest, it is suggested that the ‘selling’ of privacy capital is sufficient. 209 Bedingfield (n 198) 114. 210 Klink (n 10) 365. 211 MacQueen (n 126) 373. 204 205 206 207 208

The Bristol Law Review

[Vol. 1

the centre of gravityâ&#x20AC;&#x2122;; breach of confidence is unfit for purpose and a new model is required. It is suggested that the right to personality and the associated self-determination in engagement is ready to fill that gap.

2013]

The Bristol Law Review

Bibliography Primary Sources English Legislation Civil Procedure Rules 1998 (SI 1998/3132) Copyright, Designs and Patents Act 1988 Patents Act 1977 Trade Marks Act 1994 English Case Law A v B Plc [2003] QB 195 AG v Observer [1990] 1 AC 109 Arsenal Football Club plc v Reed [2003] RPC 696 B v H Bauer [2002] EMLR 8 Campbell v Mirror Group Newspapers [2004] UKHL 22 Coco v Clark [1968] FSR 415 Creation Records v News Group Newspapers [1997] EMLR 444 DIANA, PRINCESS OF WALES Trade Mark [2001] ETMR 254 Donald v Ntuli [2011] 1 WLR 294 Douglas v Hello! (No 1) [2001] QB 967 Douglas v Hello! (No 3) [2005] EWCA Civ 595 ELVIS PRESLEY Trade Marks [1999] RPC 567 Ferdinand v MGN Ltd [2011] EWHC 2454 Goodwin v News Group Newspapers [2011] EWHC 1437 Irvine v Talksport [2003] EWCA Civ 423 JANE AUSTEN Trade Mark [2000] RPC 879 Kaye v Robertson [1991] FSR. 62 KGM v NGN [2010] EWHC 3145 Mills v News Group Newspapers [2001] EMLR 957 Murray v Express Newspapers [2008] EWCA Civ 446 OBG v Allan [2008] 1 AC 1 R (Daly) v SSHD [2001] 2 AC 532 Robinson v Harman [1848] 1 Exch 850 Seager v Copydex [1967] 1 WLR 923 Theakston v MGN Ltd [2002] EWHC 137 University of London Press v University Tutorial Press [1916] 2 Ch 601 Venables v News Group Newspapers [2001] EWHC 32 Woodward v Hutchins [1977] 1 WLR 760 X (formerly known as Mary Bell) v SO [2003] EMLR 37 X v Y (Employment: Sex Offender) [2004] EWCA Civ 662.

The Bristol Law Review

[Vol. 1

European Case Law ADT v United Kingdom (2001) 31 EHRR 33 Arsenal Football Club plc v Reed [2003] Ch 454 Bensaid v United Kingdom [2001] 33 EHRR 10 Botta v Italy [1998] 26 EHRR 241 Dudgeon v United Kingdom [1982] 4 EHRR 149 Mosley v United Kingdom [2012] EMLR 1 Pay v United Kingdom (2009) 48 EHRR SE2 Peck v United Kingdom [2003] 36 EHRR 41 PG v United Kingdom [2008] 46 EHRR 51 Ringier Axel Springer v Slovakia [2012] 54 EHRR SE4 Slivenko v Latvia [2003] 39 EHRR 490 Sunday Times v United Kingdom (1979-80) 2 EHRR 245 Von Hannover v Germany [2004] EMLR 21 Von Hannover v Germany [2012] EMLR 16 Wainwright v United Kingdom (2007) 44 EHRR 40 Z v Finland [1998] 25 EHRR 371 Other Case Law ABC v Lenah Game Meats [2001] HCA 63 Secondary Sources --Halsbury’s Laws of England (5th edn, Lexis Nexis 2010) --‘Italy election: Berlusconi tax letter causes outrage’ BBC News (London, 20 February 2013) <www.bbc.co.uk/news/world-europe-21521877> accessed 30 June 2015 --‘Kate Middleton pregnant bikini pictures: William ‘hurt’ by intrusion’ Metro (London, 14 Feb 2013) <http://metro.co.uk/2013/02/14/kate-middleton-pregnant-bikini-pictures-william-hurt-by-intrusion-3477349> accessed 30 June 2013 -- Leveson Inquiry: Transcript of Afternoon Hearing 21 November 2011 (Levison Inquiry, 21 November 2011) <www.levesoninquiry.org.uk/wp-content/uploads/2011/11/Transcript-of-Afternoon-Hearing-21-November-2011.pdf> accessed 30 June 2013 --‘Press regulation deal struck by parties’ BBC News (London, 18 March 2013) <www.bbc.co.uk/news/uk-21825823> accessed 30 June 2013 --‘Sex case defendants ‘should get anonymity’’ BBC News (London, 16 February 2013) <www.bbc.co.uk/news/uk-21487266> accessed 30 June 2013

2013]

The Bristol Law Review

Aplin T, ‘The Development of the Action for Breach of Confidence in a Post-HRA Era’ (2007) 1 IPQ 19 --and Davis J, Intellectual Property Law: Text, Cases, and Materials (OUP 2009) Akerlof G, ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’ (1970) Q J Econ 488 Bedingfield D, ‘Privacy or Publicity? The Enduring Confusion Surrounding the American Tort of Invasion of Privacy’ (1992) 55 MLR 111 Beverley-Smith H, The Commercial Appropriation of Personality (CUP 2002) Birks P, ‘No Consideration: Restitution After Void Contracts’ (1993) 23 UWAL Rev 195 --‘Harassment and Hubris: The Right to an Equality of Respect’ (1997) 32 IJ 1 Blitz M, ‘How, if at all, might the second paragraphs of Articles 811 ECHR be more consistently and appropriately applied by the European Court of Human Rights?’ (LLM Coursework, University of Bristol 2012) Burrows A, The Law of Restitution (OUP 2011) Carty H, ‘Advertising, Publicity Rights and English Law’ (2004) IPQ 209 --‘The Common Law and the Quest for the IP Effect’ (2007) IPQ 237 Cooley T, A Treatise on the Law of Torts (2nd edn, Callaghan & Co 1888) Cornish W, Llewelyn D and Aplin T, Intellectual Property: Patents, Copyrights, Trade Marks & Allied Rights (7th edn, Sweet & Maxwell 2010) Downs A, An Economic Theory of Democracy (Harper 1957) Dyer R, Heavenly Bodies: Film Stars and Society (1st edn, Roultedge 1986) Evans M, International Law (3rd edn, OUP 2010) Fried C, ‘Privacy’ (1968) 77 Yale LJ 475 Greer S, The European Convention on Human Rights: Achievements, Problems And Prospects (CUP 2006) 15, citing Arthor Robertson, The Council of Europe: Its Structure, Function and Achievements (Stevens & Sons 1961) Harris D, O’Boyle M, Warbrick C and Bates E, Law of the European Convention on Human Rights (2nd edn, OUP 2009)

The Bristol Law Review

[Vol. 1

Hegel G, Elements of the Philosophy of Right (Wood AW ed, Nisbet HB tr, CUP 1991) Christopher Hope and Tom Whitehead, ‘No privacy law to gag press, Jeremy Hunt Says’ The Daily Telegraph (London, 19 May 2011) <www.telegraph.co.uk/news/ uknews/law-and-order/8524478/No-privacy-law-to-gag-press-Jeremy-Hunt-says. html> accessed 30 June 2013 Joint Committee on Privacy Injunctions, Privacy and Injunctions (2010-12, HL 273, HC 1443) Kempees P,‘“Legitimate aims” in the case-law of the European Court of Human Rights’ in Paul Mahoney P, Matscher F, Petzold H and Wildhaber L (eds), Protecting Human Rights: The European Perspective (Carl Heymans 2000) 659 Klink J, ‘50 Years of Publicity Rights in the United States and the Never Ending Hassle with Intellectual Property and Personality Rights in Europe’ (2003) IPQ 363 Lord Justice Leveson, ‘An Inquiry into the Culture, Practices and Ethics of the Press’ (The Leveson Inquiry, November 2012) <www.gov.uk/government/uploads/ system/uploads/attachment_data/file/270939/0780_i.pdf> accessed 30 June 2013 MacQueen H, ‘“My tongue is mine ain”: Copyright, the Spoken Word and Privacy’ (2005) 68 MLR 349 Mantouvalou V, ‘Human Rights and Unfair Dismissal: Private Acts in Public Spaces’ (2008) 71 MLR 912 Masiyakurima P, ‘The Trouble with Moral Rights’ (2005) 68 MLR 411 McCarthy J, The Rights of Publicity and Privacy (2nd edn, West Group 2001) McGee A and Scanlan G, ‘Phantom Intellectual Property Rights’ (2000) IPQ 264 Moreham N, ‘Privacy in the common law: a doctrinal and theoretical analysis’ (2005) 121 LQR 628 Morgan J, ‘Privacy in the House of Lords, Again’ [2004] 120 LQR 563 Mulheron R, ‘A Potential Framework for Privacy? A Reply to Hello!’ (2006) 69 MLR 679, 701. Nissenbaum H, ‘Protecting Privacy in an Information Age: The Problem of Privacy in Public’ (1998) 17 L & Phil 559

2013]

The Bristol Law Review

Norman H, ‘Time to blow the Whistle on Trade Mark Use?’ (2004) IPQ 1 Phillipson G, ‘Transforming Breach of Confidence? Towards a Common Law Right of Privacy under the Human Rights Act’ (2003) 66 MLR 726 Prosser W, ‘Privacy’ 48 CLR 383 Rachels J, ‘Why Privacy is Important’ (1975) 4 Phil & Pub Aff 323 Say J, A Treatise on Political Economy (1st edn, Lippincott, Grambo & Co 1803) 153 Sefton G, ‘The judiciary have created a tort of privacy in English law “by the back door”’ (LLB Dissertation, University of Exeter 2012) Sims A, ‘“A Shift in the Centre of Gravity”: The Dangers of Protecting Privacy Through Breach of Confidence’ (2005) 1 IPQ 27 Tugendhat M and Christie I, The Law of Privacy and the Media (1st edn, OUP 2002) Warren S and Brandeis L, ‘The Right to Privacy’ (1890) 4 Harv LR 193 Weingast B and Wittman D, The Oxford Handbook of Political Economy (OUP 2006) Westin A, ‘Privacy and freedom’ (1968) 25 Wash & Lee L Rev 166 Wittman D, ‘Reply to Caplan: On the methodology of testing for voter irrationality’ (2005) 2 Econ J Watch 22 Macleod C and Wood A, ‘The Picasso case, famous names and branding celebrity’ (2006) 17 Ent LR 1

The Exhaustion of Domestic Remedies Rule: A Realistic Demand for Individuals who have Suffered Torture at the Hands of State actors? A Study with particular reference to individual applications to the Human Rights Committee and the African Committee on Human and Peoples’ Rights Sophie Gallop1

Introduction The exhaustion of domestic remedies is generally considered to be one of the “time-honoured principles”2 of international law, and has been recognised by the International Court of Justice as a “well established rule of customary International law”3. Indeed, the exhaustion principle originated from as early as the medieval practice of reprisals4, and has, in relatively recent history, evolved again through transplantation from its original sphere of international diplomatic protection, to the context of international human rights law, where it has become a commonplace fixture in international human rights instruments5. The exhaustion principle provides that any application by an individual to an international tribunal should be rejected, until such a time as the individual has exhausted all domestic remedies available to them in the State where the violation is alleged to have occurred. It is the satisfaction of the exhaustion principle, or its circumvention, which allows an international human rights tribunal to examine an alleged violation. As Fawcett and Schochet have correctly noted the exhaustion principle is, in reality, a conflict rule that resolves disputes of jurisdiction between municipal courts and international tribunals6, leaving the international tribunal as a court of last resort, rather than a court of first instance7. The exhaustion principle has successfully transitioned into the sphere of inter1 Thanks to my family, friends and boyfriend who supported me throughout, and to Rachel Murray, whose guidance helped me get this paper completed a couple of weeks earlier than originally anticipated. 2 Matthew H Adler ‘The Exhaustion of the Local Remedies Rule after the International Court of Justice’s Decision in ELSI’ (1990) 39 ICLQ 641, 641. 3 Interhandel (Switzerland v United States of America) [1959] ICJ Rep 6, 27. 4 See Antônio AC Trindade, ‘Origin and Historical Development of the Rule of Exhaustion of Local Remedies in International Law’ (1976) 12 Belgian Rev Int’l L 499. 5 See below (p 8). 6 James ES Fawcett ‘The Exhaustion of Local Remedies: Substance or Procedure’ (1954) 31 BYBIL 452, 454; Paula R Schochet ‘A New Role for an Old Rule: Local Remedies and Expanding Human Rights Jurisdiction under the Torture Victim Protection Act’ (1987) 19 Colum Hum Rts L Rev 223, 235. 7 Schochet (n 5) 227.

The Bristol Law Review

[Vol. 1

national human rights and is now a typical provision in human rights covenants. The exhaustion principle is found in both the International Covenant on Civil and Political Rights8 (hereafter the ICCPR), the First Optional Protocol to the ICCPR9 which permits individual applications to the Human Rights Committee (hereafter the HRC), and the African Charter on Human and Peoples’ Rights10 (hereafter the ACHPR). The exhaustion principle is particularly emphasised in the ACHPR where it is reiterated twice in the treaty text11; where it states that: “[t]he Commission can only deal with a matter submitted to it after making sure that all local remedies, if they exist, have been exhausted”12. Similarly in the ICCPR it is stated that the HRC may deal with matters referred to it “only after it has ascertained that all available domestic remedies have been invoked and exhausted in the matter, in conformity with the generally recognized principles of international law”13. Although this article has elected a focus on the ICCPR and the ACHPR, the exhaustion principle is also found in many other significant HR instruments. The European Convention on Human Rights14, for example, states that the Court may only deal with the matter after all domestic remedies have been exhausted, according to the generally recognised rules of international law15. Similarly the Rules of Procedure of the Inter-American Commission on Human Rights demands that the Commission verify whether the remedies of the domestic legal system have been pursued and exhausted in accordance with the generally recognised principles of international law16. Additionally, as Adede has noted, “before [a] committee on human rights may receive petitions from individuals... “all available domestic remedies [must] have been invoked and exhausted”, a phrase which has become standard provision in United Nations instruments on human rights”17. Consequently it is found in almost all United Nations human rights treaties18. It is additionally important to note that the individual’s duty to exhaust all available domestic remedies is closely tied to the State’s duty to provide domestic remedies

8 1966. 9 1966. 10 1981. 11 ibid Arts 50 and 56. 12 ibid Art 50. 13 ICCPR (n 7) Art 41(c). 14 1950. 15 ibid Art 35(1). 16 Rules of Procedure of the Inter-American Commission on Human Rights 2009, Art 31. 17 A O Adede ‘A Survey of Treaty Provisions on the Rule of Exhaustion of Local Remedies’ (1977) 18 Harv Int’l L J 1, 4. 18 See Office for the High Commissioner on Human Rights ‘Human Rights Bodies - Complaints Procedures’ (United Nations, 2013) <www.ohchr.org/EN/HRBodies/TBPetitions/Pages/HRTBPetitions. aspx#individualcomm> accessed 16 August 2013; also Riccardo Pisillo Mazzeschi ‘Exhaustion of Domestic Remedies and State Responsibility for Violation of Human Rights’ (2000) 10 Ital Yrbk Int’l L 17, 20.

2013]

The Bristol Law Review

for the individual to exhaust19. Indeed the exhaustion principle is based on the assumption that such remedies exist, and are available, effective and sufficient20. Therefore, if the international tribunal finds that domestic remedies have not reached these thresholds the individual will be permitted to circumvent the exhaustion principle, as discussed in detail below. Despite the extensive analysis of the exhaustion principle, it has yet to be examined in light of violation of a specific human right. In this paper the specific right being considered is torture. Although the notion of torture is widely recognised, its exact scope remains somewhat unclear21. Notwithstanding the lack of a comprehensive and exact definition, the act of torture has been clearly distinguished from other, related, but less severe violations of human rights. The European Court of Human Rights, for example, noted that torture constituted an “aggravated and deliberate form of cruel, inhuman and degrading treatment”22, and drew a distinction that should be made due to the “very serious and cruel suffering”23 endured by victims of torture. Consequently torture is considered by the International Committee of the Red Cross to be one of the “ultimate abuses of human rights”24. Indeed international human rights case law has recognised that there is a “special stigma”25 attached to a finding of torture. This is not surprising given the case law that has come before international human rights tribunals which have included allegations of torture involving “wall standing, hooding, subjection to noise, deprivation of sleep, deprivation of food and drink.... and severe beatings”26. Sadly, as a consequence of such treatment, victims of torture may be left in fear for their lives or those of their families, suffering from psychiatric disturbances and living with severe mental and physical disabilities27. Both the African Commission and the HRC have experienced a vast number of communications alleging to be victims of torture which have fallen at the exhaustion of domestic remedies hurdle, found in their respective covenants. The ACHPR is the youngest regional human rights system28, but in its short history the African Commis19 Silvia D’Ascoli and Kathrin M Scherr ‘The Rule of Prior Exhaustion of Local Remedies in the International Law Doctrine and its Application in the Specific Context of Human Rights Protection’ (2007) European University Institute Working Paper 2007/02, 18 <http://cadmus.eui.eu/bitstream/handle/1814/6701/LAW_2007_02.pdf> accessed 16 August 2013. 20 See Ambatielos Claim (Greece, United Kingdom of Great Britain and Northern Ireland) [1956] 12 RIAA 19, 120. 21 Robert J Spjut ‘Torture Under the European Convention on Human Rights’ (1979) 73 AJIL 267, 270. 22 Republic of Ireland v United Kingdom, App no 5310/71 [1978], para 167. 23 ibid. 24 International Committee of the Red Cross ‘Torture: the ultimate abuse of human rights’ (International Committee of the Red Cross, 2010) <www.icrc.org/eng/resources/documents/misc/lse-torture-110505. htm> accessed 16 August 2013. 25 Ireland v UK (n 21) para 167. 26 Spjut (n 20) 267. 27 Office for the High Commissioner for Human Rights ‘Report from the Expert Seminar on Freedom from Torture and Ill Treatment of Persons with Disabilities’ (Geneva, December 2007), 2 <www2. ohchr.org/english/issues/disability/docs/torture/seminartorturereportfinal.doc> accessed 25 August 2013. 28 Dinah Shelton, Remedies in International Human Rights Law (2nd edn, OUP 2006), 13.

The Bristol Law Review

[Vol. 1

sion has been inundated with complaints about very serious human rights violations29. Unlike other regional systems30, where scholars and lawyers have had a significantly longer time to reflect on, analyse and develop the case law, the African system has relatively little analysis regarding the problems it faces due to torture within the Continent or the effect of the exhaustion principle. The ICCPR has, in comparison, a more established history, but a much more varied case law, receiving communications from all corners of the globe. It too has received numerous complaints of torture, many of which have fallen at the exhaustion of domestic remedies hurdle. It is in this context that three separate but related issues are examined. Firstly the wisdom of transposing the rule to the human rights context is queried, especially in the light of the “special stigma” associated with torture and the particularly vulnerable position victims of torture find themselves in. Secondly the practical application of current exceptions, established in the case law of the HRC and the African Commission, in the context of torture is investigated and the strengthening of such exceptions is suggested. Finally different mechanisms employed in the nineteenth century are considered, including mechanisms with the capacity to recognise particularly serious breaches of human rights such as torture, as alternatives to the exhaustion principle in the human rights context31.

Chapter 1: Rationale for the Exhaustion Principle (i) Rationale for the Rule in the Sphere of Diplomatic Protection The rationale for the exhaustion principle as a part of general customary international law has received broad attention from international scholars, and a widely accepted rationale32 for its employment has been provided by Borchard33. Yet, even in the broad and well-established scope of diplomatic protection, that rationale has been convincingly challenged34. Typically the exhaustion principle arises in the field of diplomatic protection when an individual voluntarily conducts business in a foreign State, and during that endeavour he is injured by that State. Contrary to the field of human rights, in the sphere of diplomatic protection the parties to the international litigation would both be 29 Nsongurua J Udombana ‘So Far, So Fair: The Local Remedies Rule in the Jurisprudence of the African Commission on Human and Peoples’ Rights’ (2003) 97 AJIL 1, 16. 30 ECHR (n 13); Inter-American Convention on Human Rights 1969. 31 It should be noted, due to the limited scope of this paper a number of issues relating to the exhaustion principle in the human rights framework cannot be addressed; for a thorough analysis of the rule other aspects such as the nature of the rule, the concept of direct injury, the issue of waiver and the concept of denial of justice should also be examined. 32 Daivd R Mummery ‘The Content of the Duty to Exhaust Local Judicial Remedies’ (1964) 58 AJIL 389, 390. 33 See Edwin M Borchard ‘Theoretical Aspects of the International Responsibility of States’ (1929) 1 ZaoRV 224. 34 See Chittharanjan F Amerasinghe ‘The Exhaustion of Procedural Remedies in the Same Court’ (1976) 12 ICLQ 128.

2013]

The Bristol Law Review

States; consequently the individual would have to rely on the goodwill of his own natural State to bring an international claim against the respondent State. For the claimant State to be able to bring such a claim the individual (or alien as they would be understood in this context) must have satisfied all domestic remedies available in the respondent State. Borchard suggested that this rule was appropriate for several reasons. Firstly that by conducting business in a foreign State the individual is presumed to have submitted to the law of that State. Secondly the rule was crucial to protect State sovereignty and the integrity of local courts. Thirdly the respondent State should be given an opportunity to do justice in its own way. Fourthly local courts were required to ascertain whether the injury was a deliberate act of State and fifthly, if the injury was a deliberate act of State, that State must be unwilling to correct the wrong35. This reasoning has been consistently cited as effectively justifying the use of the exhaustion principle in the field of diplomatic protection. Yet it has been convincingly challenged by a number of scholars. Amerasinghe, for example, has noted that Borchard’s fourth and fifth reasons are really irrelevant36. He notes that the fourth reason presented above relates to the imputability of the offence and only relates to achieving justice, which alone cannot be considered a justification37. Additionally Amerasinghe notes that the fifth reason “appears to put the cart before the horse”38 as it justifies the rule on the assumption that it already exists and domestic remedies are always available and satisfactory; this is an incorrect presumption. The arguments presented by Amerasinghe are convincing, and in some respects do not go far enough. Borchard’s arguments solely reflect the interests of the respondent State. In theory the exhaustion principle can be seen as beneficial to all four interested parties: the individual, the respondent State, the claimant State and the international community. However it is clear that the exhaustion principle gives primacy to the interests of the respondent State, through the protection of State sovereignty39, allowing the State to do justice by its own means40, permitting the State to regulate its own internal affairs41 and the avoidance of publication of disputes42. It is undoubtedly advantageous for other parties. As Mummery notes, claimant States have a vested interest in ensuring the rule is respected, as the exhaustion principle will be equally upheld in cases brought against their interests43. The international community also has an interest in upholding the exhaustion principle, which prevents international tribunals being inundated with vast numbers of complaints, and avoids incidents of international friction44. Finally the individual has an interest in accessing justice that is 35 36 37 38 39 40 41 42 43 44

Borchard (n 32) 240. Amerasinghe, ‘Exhaustion of Procedural Remedies’ (n 33) 1288. ibid. ibid. Chittharanjan F Amerasinghe, Local Remedies in International Law (2nd edn, CUP 2004) 58. Interhandel (n 2) para 27. ibid. Mummery (n 31) 391. Mummery (n 31) 392. Ibid; Trindade, ‘Rule of Exhaustion’ (n 3) 526.

The Bristol Law Review

[Vol. 1

both expeditious and relatively inexpensive45, which should be accessed, in theory at least, more easily through the domestic courts. Yet it remains clear that the exhaustion principle undoubtedly primarily serves the interests of one party to the litigation. Amerasinghe notes that at its most extreme it can be seen to “take into account only the interest of the respondent state”46. The individual has no interest in accessing justice that is expeditious and inexpensive, but also practically defective and unsatisfactory; individuals would not seek remedies that took extended periods of time and were significantly more expensive unless alternatives remedies were deficient. Additionally having to exhaust such inadequate remedies results in the individual incurring a great loss of time and money47. It is consequently concluded that the exhaustion principle, even in its original sphere of diplomatic protection, whilst practical, has been unsatisfactorily justified in terms of the interested parties, other than the respondent State48. In light of its clearly partisan bias towards the interests of the respondent State and the entirely different emphasis of human rights law, as compared to the sphere of diplomatic protection, the wisdom of transposing the exhaustion principle to the field of human rights is analysed below.

(ii) Wisdom of Transposing the Rule Despite its prevalence in international human rights instruments, the wisdom of transposing such a high benchmark from the commercial context to the human rights context is questionable, especially when the allegations of human rights abuses include torture. The reasoning provided by Borchard does not satisfactorily justify the transposition of the principle in relation to human rights litigation, especially in the context of a violation of torture. The rationale for the rule in general international law clearly favours the State, and makes the concerns of the respondent State a priority. This justification cannot be maintained in relation to human rights litigation. Firstly, to make State sovereignty a priority in international human rights litigation would be a manifest anachronism; human rights law is a direct challenge to the concept that State sovereignty is absolute and that States can act in any way they choose within their own jurisdiction without international ramifications. The birth of human rights law marked a move away from the Machiavellian concept that the State was the centre of international relations and the actions of State officials were beyond moral challenge, running counter to the prioritisation of the respondent State by the exhaustion principle, seen in the context of diplomatic protection. Indeed the aim of human rights treaties such as the ICCPR and the ACHPR is “to promote universal respect for, and 45 Ivan L Head ‘A Fresh Look at the Local Remedies Rule’ (1967) 5 ACDI 142, 151. 46 Chittharanjan F Amerasinghe ‘The Rule of Exhaustion of Domestic Remedies in the Framework of International Systems for the Protection of Human Rights’ (1968) 28 ZaoRV 257, 260. 47 Amerasinghe, Local Remedies (n 38) 61. 48 See above (p 13).

2013]

The Bristol Law Review

observance of, human rights and freedoms”49 through the effective protection of the vulnerable individual, again a principle that runs counter to the protection of State sovereignty. This has led some commentators to suggest that purpose of the inclusion of the exhaustion principle in human rights legislation is “unclear”50, and amounts to the unjust “blind protection of national sovereignty”51. Secondly the prioritisation of the State through the exhaustion principle puts the State in a position of relative power over the individual who has the burden of exhausting the remedies that the State has chosen to provide. Yet the State is already the far more powerful party to the international dispute having access to far greater resources and being inevitably much more experienced in participating in municipal proceedings. The actions of the State cause the relative positions of power to be further exaggerated, particularly in the context of human rights abuses. The victim of human rights abuses will, to a much greater extent than those individual in the diplomatic protection context, find themselves in a position of fear, vulnerability and isolation52. In addition should the individual exhaust domestic remedies and advance to the international tribunal, unlike in the diplomatic context, the individual must represent themselves without the support of a State. Consequently throughout the entire process the individual is placed at a severe disadvantage; a fact only exacerbated by the inclusion of the exhaustion principle. Thus its transplantation into the human rights context allows the State to, in a sense, “[to] derive an advantage from its own wrong”53, a result which is clearly inequitable and unsatisfactory. Thirdly the purported benefit for the individual in pursuing domestic remedies, that is an efficient and speedy resolution, may in reality be achieved more easily through an international body than a domestic court54. Additionally recourse to an international tribunal may provide the safest and most advantageous justice for the individual. Fourthly a similar situation arises when one considers the supposed advantages to the international community. Although the international community may seek to avoid international tribunals becoming overwhelmed by individual applications, this consideration is largely counteracted by the fact that human rights are now seen as the concern of all States and peoples55. The assurance of such rights are seen as an important factor in the maintenance of international peace and security56. Consequently the international community has a vested interest in ensuring that the exhaustion principle is not used to protect State sovereignty and to avoid international supervision of State 49 Universal Declaration of Human Rights 1948, preamble. 50 Hugh I Manke ‘The Exhaustion of Domestic Remedies in the United Nations Sub-Commission on Prevention of Discrimination and Protection of Minorities’ (1975) 24 Buff L Rev 643, 644. 51 ibid 665. 52 See below (p 17). 53 Theodor Meron ‘The Incidence of the Rule of Exhaustion of Local Remedies’ (1959) 35 BYBIL 83, 100. 54 D’Ascoli and Scherr (n 18) 8. 55 Universal Declaration of Human Rights (n 48) preamble. 56 ibid.

The Bristol Law Review

[Vol. 1

responsibility57, to the detriment of the protection of human rights. Consequently it may be concluded that Borchard’s assertion that the exhaustion principle is beneficial to all parties cannot be convincingly maintained in the human rights context. Thus, as Duruigbo concluded, there are “no compelling reasons exist for applying the rule of exhaustion of local remedies in the same way in the arena of human rights protection as the practice in the context of diplomatic protection”58.

(iii) Why is the Exhaustion Principle Particularly Problematic in the Context of Torture? (a) Under Reporting The act of torture has been recognised as a particularly severe and serious violation that attracts a “special stigma”59. The consequences of torture that victims face cannot be underestimated. Many are left physically and mentally disabled60, and live in constant fear of the torture reoccurring. As a consequence many may feel unwilling to put themselves in danger again by making a complaint to domestic authorities thereby attracting attention to themselves. Whilst complaints to an international authority may attract similar attention from the offending State, the risks are somewhat mitigated by the fact there will be international recognition of the situation, meaning that any further attacks on the individual could be publicised, causing the State diplomatic embarrassment. Consequently the exhaustion principle, and a particularly strict application of the rule in the human rights context, may lead to an under-reporting of severe human rights abuses, a consequent failure to monitor serious violations and in turn, a failure to discourage and prevent future human rights transgressions.

(b) Risk to the Person A related consideration is that there is a correlation between incidents of severe human rights abuses and lack of independence and impartiality in the judiciary61. Consequently victims of torture must either exhaust domestic remedies, which are fruitless and may put them in grave danger, or establish before the international tribunal that domestic remedies are futile62; a fact that may in reality be very difficult to prove63. 57 Udombana (n 28) 12. 58 Emeka Duruigbo ‘Exhaustion of Local Remedies in Alien Tort Litigation: Implications for International Human Rights Protection’ (2006) 29 Fordham Int’l L J 1245, 1268. 59 Ireland v UK (n 21) para 167. 60 OFHCHR, ‘Expert Seminar’ (n 26). 61 Office of the High Commissioner for Human Rights, ‘Independence and Impartiality of the Judiciary, Jurors and Assessors and the Independence of Lawyer’ (Resolution 1994/41, 53rd Meeting, Geneva, March 1995) <www.unhchr.ch/Huridocda/Huridoca.nsf/0/297efd3ff64b33a0802566db0051679a?Opendocument> accessed 25 August 2013. 62 Manke (n 49) 651. 63 See below (p 18).

2013]

The Bristol Law Review

Additionally individuals may well be subject to extreme domestic governmental pressure to drop their claims64. This reality flies in the face of the assumption that the State will provide effective remedies65, whilst placing a difficult and dangerous burden on the individual. In this respect the exhaustion principle may be seen as inappropriate in the context of severe human rights abuses.

(c) Type of Persons Likely to be Targeted The employment of torture as a State policy has an explicit political aim; it is intended to harm particular individuals or groups of individuals66. In many cases particular socio-economic or political groups are targeted, who are considered to be a threat to, or different from, the executive power. Instances of prolonged human rights violations are often linked to inter-state divides between different racial, religious or cultural groups67, where targeted groups may also have faced generations of discrimination. Since many victims of torture are poor and uneducated68 they may be ignorant of or unaware of human rights procedures, both domestic or international. The lack of funds or knowledge may mean that victims of torture find it very burdensome to either exhaust all available domestic remedies, or prove that such remedies are futile. This again means that the exhaustion principle may produce a manifest anachronism in the field of human rights, by effectively preventing the victim of torture from accessing justice. The application of the exhaustion principle thus undermines the purpose of monitoring and preventing human rights abuses.

(d) A Strict Application As Fawcett has noted the exhaustion principle is the “favourite objection... to international claims”69, indeed as Udombana has observed: “[i]n almost all cases of human rights violations lodged before human rights tribunals... the respondent state, usually with barely any time for reflection, challenges their admissibility on grounds of nonexhaustion of local remedies”70. The exhaustion principle thus forms a hugely significant, if not the most signifi64 Jane A Peddicord ‘The American Convention on Human Rights: Potential Defects and Remedies’ (1984) 19 Tex Int’l L J 139, 150. 65 Manke (n 49) 651. 66 Jose Quiroga and Jame M Jaranson ‘Politically Motivated Torture and its Survivors: A desk study review of the literature’ (2005) 16 Torture 22, 1. 67 For example, the persecution of Shia Muslims in Northern Iraq (1991) or the Rwandan Genocide involving the slaughter of the Tutsi’s by the Hutu population (1994). 68 Manke (n 49) 645. 69 Fawcett (n 5) 452. 70 Udombana (n 28) 20.

The Bristol Law Review

[Vol. 1

cant, part of the jurisprudence of international human rights tribunals71. The exhaustion principle is clearly seen as a very important weapon in the armoury of the respondent State, and thus there is a prevailing concern amongst commentators that a strict application of the exhaustion principle will simply result in the protection of the interests of States72: the protection of sovereignty73 and tempering of State responsibility74. These concerns have, unfortunately, proven correct; for as Duruigbo notes: “[g]lobal and regional human rights institutions have been vigorous in applying the local remedies, resulting in the dismissal of many complaints for non-exhaustion of remedies”75. Unfortunately statistics from the African Commission remain unavailable as to how many communications are rejected on the ground of non-exhaustion of domestic remedies76; however Udombana has suggested it is safe to assume that of all inadmissible applications “two-thirds of the cases” fail due to non-exhaustion77. Other human rights tribunals have seen the number of admissible applications suffer as a result of a harsh application of the exhaustion principle. The European Court of Human Rights, for example, has rejected 99% of applications submitted to it78; should Udombana’s rather conservative estimation be correct, then 66% of applications to the European Court are rejected as a result of the exhaustion principle. In comparison the HRC and the African Commission have a much more encouraging rate of admissibility of individual applications. Udombana estimates that the HRC has, on average, declared only 29% of applications inadmissible79, whilst the African Commission only 32% inadmissible80. These figures are promising and show that both Commissions have taken a flexible and pragmatic approach in interpreting the exhaustion principle in favour of the individual. However this development should be regarded carefully, as the African Commission has consistently reiterated the rule81. The principle remains a constant source of friction for applicants since it has, what Duruigbo has termed, “the lethal capacity to destroy the very purposes of securing effective protection of human rights”82. (iv) A Necessary Evil? Despite the serious drawbacks of the exhaustion principle it can be seen as a necessary evil in the context of human rights for several reasons. Whilst this author is 71 Gordon L Weil ‘Decisions on Inadmissible Applications by the European Commission of Human Rights’ (1960) 54 AJIL 874, 874. 72 D’Ascoli and Scherr (n 18) 8. 73 Schochet (n 5) 232. 74 Duruigbo (n 57) 1254. 75 ibid 1272. 76 See Udombana (n 28). 77 ibid 14. 78 Weil (n 70) 879. 79 Udombana (n 28) 14. 80 ibid. 81 ibid 13. 82 Duruigbo (n 57) 1267.

2013]

The Bristol Law Review

sceptical of the need to protect State sovereignty and allow the State to achieve justice by their own means, the exhaustion principle is undoubtedly an integral mechanism in limiting the number of successful applications to international tribunals and it encourages the respondent State to provide effective domestic remedies for victims. Also, without the exhaustion principle it seems unlikely that the right to make individual applications under the ACHPR or ICCPR would have been granted; as Cancado Trindade has noted the exhaustion principle is “the price to be paid” for such a right83. Two conclusions may be drawn from these facts. Firstly, even though the exhaustion principle is a necessary evil, it does not mean that alternative options would not have been just as, if not more, appropriate; especially in the context of acts of torture, as addressed in chapter three. Secondly given the apparent lack of equity behind the transplantation of the exhaustion principle into the sphere of human rights it is concluded that its existence is somewhat of an anachronism, which detrimentally affects the interests of the individual. To counteract the disadvantages that the exhaustion principle inflicts on the individual it is vital that the HRC and the African Commission interpret the principle in the broadest possible terms and in favour of the individual.

Chapter 2: What Current to the Exhaustion Principle Currently Exist? Are Those Exceptions Sufficient to Protect Victims of Torture? (i) Introduction In light of the arguments presented above, it seems only pragmatic and equitable that the exhaustion principle be interpreted flexibly, recognising valid exceptions that mitigate the otherwise prejudiced application of the principle. To some extent this has been achieved in the case law of the HRC and the African Commission; it is, however, submitted that the recognition of exceptions to the exhaustion principle has been inconsistent, and there is a significant danger that current exceptions may be interpreted too restrictively to be realistically accessible for victims of torture. It has been widely recognised that the exhaustion principle should not be applied too rigidly, even within the sphere of diplomatic protection. In the Interhandel case, for example, Judge Armand-Ugon stated that: “The principle of the exhaustion of local remedies is not absolute and rigid; it has to be applied flexibly according to the case. Some situation or facts may entitle the Court to accede to a request, even if the remedies have not been completely exhausted”84. A similarly prudent opinion was expressed in the Norwegian Loans Case: 83 Antônio AC Trindade ‘Exhaustion of Local Remedies under the UN Covenant on Civil and Political Rights and its Optional Protocol’ (1979) 28 ICLQ 734, 755. 84 Interhandel (n 2) 87.

The Bristol Law Review

[Vol. 1

“[T]he requirement of exhaustion of local remedies is not a purely technical or rigid rule. It is a rule which international tribunals have applied with a considerable degree of elasticity”85. In the sphere of human rights litigation it has been extensively acknowledged that the exhaustion principle should be applied with greater flexibility than in the commercial and diplomatic contexts, with greater favour shown to the individual than the State86. This approach acknowledges the fundamental differences between diplomatic protection litigation and human rights litigation,including the differences in parties to the action and the different types of remedy sought. Thus, as D’Ascoli and Scherr have noted, in this context, “a broader interpretation of the norms in favour of the individual victim is to be preferred to a restrictive one”87. Pertinently the duty of an individual to exhaust local remedies has been interpreted in light of the parallel duty of the state to provide an effective remedy for the individual88. Thus, whilst the claimant must still make “considerable efforts to exhaust local remedies, he should not have to go to unreasonable lengths”89. In light of this more pragmatic approach the HRC and the African Commission have tended towards a case by case interpretation of the exhaustion principle90, which focuses not only on the individual’s exhaustion of the domestic remedies, but also on whether the State has provided an acceptable remedy. Yet, despite this apparently more pragmatic and flexible approach, it is submitted that the interpretation of the exhaustion principle may not be sufficiently broad to mitigate the particularly vulnerable position that victims of torture find themselves. In both the African Charter and the Optional Protocol to the ICCPR the only exception explicitly recognised in the treaty text is realised when domestic remedies are unduly prolonged91. This narrow interpretation of the exceptions was adopted despite calls from some State delegates that the words “or appear to be insufficient, illusory or ineffective in securing adequate redress”92 were included in the treaty text of the ICCPR as additional automatic exceptions. This narrow treaty definition of the exhaustion principle has, unfortunately, not always been met with a creative and pragmatic interpretation by tribunals. As Meron has noted it is: “increasingly difficult to plead successfully before international tribunals that justice would be denied in the courts of the respondent State... [and] even more difficult to convince an international tribunal that in certain cases it would be unjust or

85 86 87 88 89 90 91 92

Certain Norwegian Loans (France v Norway) [1957] ICJ Rep 39. D’Ascoli and Scherr (n 18) 12. ibid Mummery (n 31) 411. ibid 395. Schochet (n 5) 229; Udombana (n 28) 15. ACHPR (n 7) Art 56(5); Optional Protocol to the ICCPR (n 8) Art 2 and 5(2)(b). Chilean and Ghanaian Delegates; see United Nations, UN Doc A/C.3/L.1355 and A/6546, 50, para 26; see also Trindade, ‘Exhaustion of Local Remedies under UN Covenant’ (n 82) 752.

2013]

The Bristol Law Review

unreasonable to compel the individual to seek [such] justice”93.

(ii) Why is the Creation of Valid Exceptions to Accommodate Instances of Torture so Important? The increased difficulty faced by individuals in reaching international human rights tribunals has not necessarily met with a significant fall in human rights violations94 or an increase in the number of cases and ease of access to justice at the domestic level95. This has coincided with increasing unwillingness by States to bring other States to account for the human rights abuses committed in their jurisdiction96. It is therefore critical that the exhaustion principle is interpreted in the light of the individual situation97; indeed to interpret the exhaustion principle too restrictively, as noted above, would run counter to the purpose of human rights instruments such as the African Charter and the ICCPR98. It is clear that the exhaustion principle is employed by States as a tool to hinder human rights claims from being addressed by international tribunals and to protect State interests99. Consequently the importance of ensuring a flexible interpretation of the exhaustion principle cannot be understated. The ability of individuals to resort to international human rights tribunals must be ensured, to guarantee that the system works both equitably100 and to fulfil its function101. Indeed an important aspect of the protective mandates of international human rights tribunals takes the form of receipt of communications from individuals102. It has been concluded by some commentators that the role of the human rights tribunals is to address situations of gross and systematic violations of human rights, and not to consider individual applications103. Consequently it has been suggested that exceptions that recognise situations of gross and systematic violations are appropriate, whilst the establishment of exceptions pertaining to individual allegations of torture are ultra vires of the role of human rights tribunals. It is submitted, however, that 93 Meron (n 52) 83-84. 94 For example, the Special Rapporteur on Torture currently has 32 pending requests to visit States suspected of committing torture; see Office for High Commission on Human Rights (Special Rapporteur for Torture) ’Country Visits’ (United Nations, 2013) <www.ohchr.org/EN/Issues/Torture/SRTorture/ Pages/Visits.aspx> accessed 21 July 2013. 95 See generally Udombana (n 28). 96 Aisling Reidy, Françoise Hampson and Kevin Boyle ‘Gross Violations of Human Rights: Invoking the European Convention on Human Rights in the Case of Turkey’ (1997) 15 NQHR 161, 172. 97 ibid 164. 98 ACHPR (n 8) preamble: “duty to promote and protect human and people’ rights and freedoms... in Africa”; ICCPR (n 7) preamble: “recognition of the inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world”. 99 See below (p 18-19). 100 Peddicord (n 63) 150. 101 See above (n 97). 102 Udombana (n 28) 2. 103 See Reidy, Hampson and Boyle (n 95).

The Bristol Law Review

[Vol. 1

this analysis is short-sighted, and fails to recognise the broader circumstances relating to particularly serious violations of human rights. As explored above torture is a particularly grave crime with far reaching consequences for victims104, and as such the act of torture must be viewed in a particularly serious light. In a broader context however, instances of torture are symptomatic of an underlying situation often involving “desperate and despotic Governments”105, who, to maintain control, may regularly violate many other less serious human rights106. In Jawara v the Gambia107, for instance, despite the fact that the nature of the torture alleged did not amount to a systematic violation, those instances cited were indicative of the underlying political instability in the Gambia, where abuses of less serious human rights, such as freedom of expression and movement, were commonplace108. Therefore, given the exceptionally vulnerable position that victims of torture find themselves in, the obstacles victims may face, and the fact that torture is symptomatic of other human right abuses, it is suggested that the recognition of exceptions particularly pertaining to instances of torture by the HRC and the African Commission is not only intra vires of both commissions’ powers but is supportive of their mandates.

(iii) Current Exceptions and Their Applicability to Incidents of Torture Currently, the only exception recognised in the treaty text of the Optional Protocol to the ICCPR and the ACHPR is when the remedies offered are unduly prolonged109. Therefore exceptions to the exhaustion principle have been interpreted in light of the State’s duty to provide remedies which are available, sufficient and adequate110. This duty was originally recognised in the diplomatic context111 and then successfully transposed to the human rights context112. In their broadest terms, exceptions may be seen as the inverse or reflection of the State’s duty to provide an available, effective and sufficient remedy; thus an individual is not obliged to exhaust any local remedy which they can prove is unavailable, ineffective or insufficient113. If a State is unable to fulfil its duty to provide such a remedy, then the individual is relieved of 104 See above (p 10). 105 Office for the High Commissioner for Human Rights ‘Torturers will be Brought to Justice Sooner or Later’ (United Nations, 24 June 2011) <www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=11180&LangID=E> accessed 26 August 2013. 106 ibid. 107 Comm nos 147/95 and 149/96 (2000). 108 ibid para 3. 109 ACHPR (n 9) Arts 50 and 56(5); Optional Protocol to the ICCPR (n 8) Art 2. 110 Udombana (n 28) 21: “The Supreme Tests: Availability, Effectiveness and Sufficiency”; see also Mummery (n 31) 395: “The Receiving State’s Role: To Provide an Effective Remedy”. 111 Nielsen v Government of Denmark, App No 33488/96 [1967], 142:”... recourse should be had to all legal remedies available under the local law which are in principle capable of providing an effective and sufficient means of redressing the wrongs...” 112 Jawara (n 106) 31: “three major criteria could be deduced ... in determining [the] rule, namely: the remedy must be available, effective and sufficient.” 113 Duruigbo (n 57) 1261.

The Bristol Law Review

2013]

their corresponding duty.

(a) Remedies that are Unavailable In the first instance should the individual be unable to make use of the remedy in their particular circumstances that remedy is considered unavailable114, and the individual is excused from exhausting it. Both the African Commission and the HRC have recognised, for example, that remedies cannot be considered available to individuals who do not have access to legal aid, and are thus unable to afford legal representation115. Both commissions have confirmed that the remedy must be sufficiently certain in practice, as well as in theory; thus a remedy that exists at a legislative level, but on a practical level the individual has been prevented from accessing, will also be considered unavailable116. Finally an individual need not seek to exhaust remedies where there are no remedies to exhaust117; as such a remedy cannot be considered available. The exception granted by both the African Commission and the HRC recognising that when an individual does not have access to legal aid remedies cannot be considered available to them is particularly welcomed in the context of torture, where victims of torture are often part of a racial, religious or cultural group that suffer socio-economic discrimination118 and therefore less able to access legal aid. Although the creation of exceptions are welcomed, they are viewed with a degree of careful scepticism. The availability test has, for example, produced somewhat of a contradiction in the case law of the African Commission. In the case of Jawara v the Gambia119 the African Commission held that remedies would be considered unavailable to the claimant who was unable to return to the respondent State to seek justice there. However in the later case of Legal Defence Centre v the Gambia120 it was held that “the victim does not need to be physically present in a country to avail himself of available domestic remedies, such could be done through his counsel”121. The motivation behind this change in policy is unclear, and it evidently places a huge burden on the victim, whilst protecting State sovereignty. This change has left a void in ‘available’ exceptions for victims of torture. Due to the treatment such victims endured at the hands of the State, they may well, for their own safety, flee the State where the torture took place and feel unable to return. In light of this, the decision in The Legal Defence Centre122 is, as Udombana has noted,: 114 D’Ascoli and Scherr (n 18) 12. 115 African Commission on Human and Peoples’ Rights, ‘Six Annual Activity Report of the African Commission’ (African Commission on Human and Peoples’ Rights 1992-1993), Annex VIII para 6(c) <www.achpr.org/files/activity-reports/6/achpr12and13_actrep6_1993_eng.pdf> accessed 21 July 2013; see Udombana (n 28) 31; see also Reid v Jamaica HRC, Comm no 250/1987 [1990]. 116 Modise v Botswana, Comm no 97/93 [2000]. 117 Head (n 44) 154; Duruigbo (n 57) 1263. 118 See above (p 18). 119 See above (n 97). 120 Comm no 219/98 [2000]. 121 ibid para 7. 122 LDC v Gambia (n 119).

The Bristol Law Review

[Vol. 1

“singularly flaccid and unconvincing, in fact self-contradictory, to say that a “victim does not need to be physically in a country to avail himself of available domestic remedies,” when that victim has been disabled, through the heinous actions of the state, from returning to the country”123. Therefore it is submitted that the decision in Jawara124 must be reinstated so that victims of torture before the African Commission may have access to justice in cases where they are forced to flee from a regime of torture and repression. To demand that an individual conducts legal proceedings to exhaust domestic remedies, when they cannot enter the State, will demand an exorbitant amount of funds, be extremely arduous and inconvenient and will inevitably dissuade victims of torture, forced to flee the perpetrating State, from accessing justice; thus undermining the human rights framework. Additionally it is suggested that the exception recognised in Modise125, that where the respondent State wilfully obstructs the individual from making use of the domestic courts then local remedies cannot be considered available, has so far only recognised a flagrant example of such practice. In this case the “wilful obstruction” was clear due to the repeated deportations of the claimant over a period of sixteen years. However in many cases such wilful obstruction may be more subtle; Peddicord, for example, has noted that many petitioners may have domestic remedies constructively denied to them126, for instance the denial of political rights, which form a substantive part of the claim, are also factors which are employed to place such remedies out of reach. For a victim of torture, who will often be held incommunicado127, it may be impossible for them to access a domestic remedy that is, theoretically, available. Reidy, Hampson and Boyle also noted cases before the European Court where petitioners were subject to intimidation in order to have them withdraw their application128. If a State is willing to use intimidation to obstruct justice on the international plane, it seems more than probable that such action could take place at the domestic level, where the State wields much greater power and influence. It is submitted that a victim of torture may be particularly vulnerable to such intimidation for several reasons. Firstly the victim has already been subject to State brutality, thus he is aware of what a State actor is capable of and may therefore be less willing to oppose the State in the face of renewed threats. Intimidation may be a very fruitful tool for the State to employ. Secondly in cases of egregious human rights violations such as torture, the State has a vested interest in keeping such violations out of the public eye, and may be willing to use intimidation to avoid diplomatic embarrassment. Finally a State willing to employ torture as a tool for repression of individuals may well be willing to use intimidation to ensure that such torture is not made public 123 124 125 126 127

Udombana (n 28) 26. Jawara v Gambia (n 106). Modise v Botswana (n 115). Peddicord (n 63) 151. Edmond McGovern ‘The Local Remedies Rule and Administrative Practices in the European Convention on Human Rights’ (1975) 24 ICLQ 119, 125. 128 Reidy, Hampson and Boyle (n 95) 167.

2013]

The Bristol Law Review

knowledge. Therefore it is submitted that the exception recognised in Motise must be construed broadly by the African Commission, and introduced by the HRC, to acknowledge more subtle incidents of constructive denial of access to justice faced by victims of torture. Without such an interpretation the harsh application of the exhaustion principle may undermine the human rights process. In reality the process of exhausting domestic remedies remains arduous enough to be considered unavailable in many cases. Often individuals will be unable to show that seemingly available domestic remedies have been denied to them129, and thus be refused justice at both a national and international level. Additionally the exhaustion of domestic remedies will likely take a significant number of years and be an immense financial burden130, effectively either making such remedies unavailable or unattractive enough that in many cases justice is not pursued.

(b) Remedies that are Ineffective For a remedy to be considered effective it needs to offer the individual a reasonable prospect of success131, and also be capable of offering the individual an effective means of redress132. As a consequence a claimant is only required to exhaust remedies which rectify the situation that they find themselves in. In Aminu v Nigeria133, for example, it was held that available remedies could not be considered effective, as legislation remained in place which permitted state officials to continue to arbitrarily detain and torture individuals. A broad approach to these remedies has been taken in human rights litigation; broader than in the traditional context of diplomatic protection134, so that any administrative, legislative or judicial remedy may be considered an acceptable form of redress135. The threshold for proving that a remedy is ineffective is relatively high. The African Commission has held, for example, that an argument that local remedies are not likely to be successful, with no attempt to engage the remedy, will not suffice to show that a remedy is ineffective136. The HRC has similarly stated that domestic remedies must be exhausted, even when they are inconvenient137, or do not produce a result that

129 130 131 132 133 134

Peddicord (n 63) 151. Udombana (n 28) 35. Jawara (n 106) paras 32 and 38. D’Ascoli and Scherr (n 18) p12. Comm no 205/97 [2000]. Adede (n 16) 5: “...treaties outside the field of HR generally adopt a narrow definition of “local remedies””. 135 Due to the confines of this paper an in-depth analysis of this area cannot be adequately undertaken. For detailed commentary on the breadth of remedies an individual must exhaust see Adede (n 16). It is suffice to note that such a broad interpretation is a disadvantage to the individual who may have to exhaust a significant number of remedies. 136 Manjang v The Gambia, Comm no 131/94 [1993]; see Udombana (n 28) 28. 137 For example, in T.K. v France, Comm no 220/1987 [1989], the HRC rejected the argument that the use of translation services affected the complainant’s ability to make effective use of the courts.

The Bristol Law Review

[Vol. 1

is favourable to the claimant138. The first important exception relates to the ability of victims to appear before independent judiciaries. The link between serious human rights violations and the weakening of safeguards for lawyers and the judiciary has been recognised by the United Nations and the High Commissioner for Human Rights139. Of particular note is the established link between grave human rights violations, including torture, and the likelihood of incidents of non-independent judiciaries140. In cases where it is clear that the judiciary is not impartial, human rights tribunals have created exceptions to the exhaustion principle on the grounds that such remedies could not be considered effective. The African Commission has thus held that where an individual has been brought before a tribunal that is not independent then such a tribunal cannot be seen as effective141. Such an exception is important for several reasons; firstly, and most obviously, a victim is highly unlikely to receive an effective remedy from such a court. Secondly, by attempting to engage a prejudiced court, the victim of torture puts themselves at great risk as such a court is unlikely to protect the victim. The court may even alert the administration and assist them in suppressing the individual. Although perhaps manifestly obvious, it is evident that a State engaging in torture is unlikely to be voluntarily providing effective remedies to victims of such practices. Although the HRC and the African Commission have recognised that the lack of an impartial judiciary means that an effective remedy will likely be denied to an individual, this exception was recognised in a case where lack of independence was particularly conspicuous. In Amnesty International v Sudan, for example, the lack of impartiality was clear as the Sudanese government had set up tribunals composed of the very individuals suspected of violating human rights142. However in cases where the administration do not set up tribunals, and rely instead on the courts already in place, lack of independence is not uncommon, though it is more inconspicuous. Unlike the European system, the HRC and the African Commission are likely to be faced with many cases alleging lack of independent national courts143, either because judges are subjected to intimidation or because they are cooperating with the administration. Despite the fact that the majority of African Constitutions containing clauses pertaining to impartial judiciaries “[w]ith limited exceptions, however, judicial independence in Africa has not always descended from the realm of the ideal to that of the actual”144. Similar problems are encountered by the HRC which, faced with communications from all over the World, is likely to receive a significant number where national judiciaries lack sufficient independence. Yet in such cases proving lack of independence is formidable. Where courts

138 139 140 141 142 143 144

Udombana (n 28) 32. OHCHR, Impartiality of the Judiciary (n 60). ibid. Amnesty International and Others v Sudan, Comm nos 48/90, 50/91, 52/91 and 89/93 [1999]. ibid para 51. Udombana (n 28) 16. ibid.

2013]

The Bristol Law Review

have been approached and proved either ineffective or endangering145, the individual must provide prima facie evidence of attempts to exhaust domestic remedies. In such case “it might be difficult, at times impossible, for applicants to obtain certified true copies of judgments”146. In cases where the individual has not approached the Courts due to prior knowledge that such an endeavour would be endangering or futile, proof of this lack of independence may be very challenging. Cases cited by Udombana, for example, include cases where decrees have been passed or constitutions amended147, and thus lack of independence or futility is nearly indisputable. However, in many cases such repression will be much more subtle and for a victim lacking significant resources, as is likely amongst victims of torture148, proving that a judiciary is partisan may be an insurmountable task. It is thus suggested that the exception recognised in Modise149 be expanded in individual cases of torture where there is a significant risk that the victim would have approach a non-independent judiciary, and thus a presumption that national courts are ineffective, unless proven otherwise by the respondent State. Such a presumption would effectively redress the imbalance faced by victims of torture. Whilst it is both accepted and expected that such a decision from either the HRC or the African Commission would be unpopular, in such circumstances, human rights tribunals must rise above such political considerations and ensure that the balance is redressed, and the victim protected. The second pertinent exception to the exhaustion principle is that of cases of administrative practice, or in cases of repeated serious and grave violations of human rights, when it is considered that remedies cannot be effective, and will thus be “necessarily sidestepped or rendered inadequate”150. Although there is not the scope in this paper to address such an area in sufficient detail it is on note that the African Commission151 has recognised that in cases of administrative practice the remedies offered cannot be considered effective. This recognition is based on the correct assumption that “such a pattern requires the sanction of the State at some level”152 and thus the State cannot be relied upon to provide an effective remedy for the individuals concerned. For victims of an administrative practice of torture such an exception would be invaluable before the HRC or the African Commission. However whilst this exception is welcomed, the threshold to prove an administrative practice is relatively high; the European Court of Human Rights, for example, failed to recognise that gross and systematic violations were occurring in Turkey, despite the fact that this was “pleaded

145 146 147 148 149 150

See above (p 31). Udombana (n 28) 18. ibid 16. See above (p 18). Modise v Botswana (n 115). Norway, Sweden Denmark and the Netherlands v Greece, Comm nos 3321/67, 3322/67, 3323/67 and 3344/67 [1969]; Donnelly and Others v UK, App no 5577/22 [1973]. 151 Amnesty International (n 140). 152 Reidy, Hampson and Boyle (n 95) 162.

The Bristol Law Review

[Vol. 1

consistently... [i]n over 60 cases”153. Additionally it is of little use in cases where the allegations of torture do not amount to an administrative practice but are indicative of underlying political instability and tyranny, as in Jawara154, where exceptions suggested elsewhere in the paper would be needed for the HRC or the African Commission to examine such a situation.

(c) Remedies that are Insufficient Finally it has been noted that remedies must be sufficient for an individual to be obliged to exhaust them; thus any remedy that is incapable of redressing the harm in a specific case will be considered inadequate for the purposes of the exhaustion of principle155. The African Commission has held, for example, that remedies cannot be considered sufficient if the individual cannot avail himself of them due to a generalised fear for his own life, or for those of his relatives156. This exception is of particular importance in the context of torture, where victims may have well-founded fears that their lives or their safety are in serious danger; as a consequence this exception is particularly welcomed. Additionally reassuring is that case law has shown that international human rights tribunals demand a relatively high standard of justice in cases of particularly serious human rights violations, including incidents of torture. In Lawless v Ireland157, for example, the European Commission on Human Rights held that an internment commission did not constitute an adequate remedy as it was unable to secure the individual’s release or award him compensation. Similarly the HRC has stated that “purely disciplinary and administrative remedies cannot be deemed to constitute adequate and effective remedies... in the event of particularly serious violations of human rights”158. The high standard of domestic remedies demanded by human rights tribunals is also welcomed. It ensures that in cases of torture the administration cannot simply give compensation to the victim, but must additionally conduct inquiries, bring perpetrators to justice, and take steps to guarantee that such egregious violations cannot be repeated159. Consequently remedies may have the dual purpose of recompensing the victim and deterring such actions in the future. However, whilst important steps have been made it is submitted that the situation, as it currently stands, remains insufficient for a victim of torture. As Shelton has noted: “[a] credible and fair legal system should remedy every significant invasion of rights, but usually does not”160. At present no UN treaty body has the competence to order 153 154 155 156 157 158 159 160

ibid 165. Jawara v Gambia (n 106). Cyprus v Turkey, App nos 6780/74 and 6950/75 [1975]. Jawara v Gambia (n 106) para 35. App no 332/57 [1961]. Arhuaco v Colombia, Comm no 612/1995 [1996]. Shelton (n 27) 15-16. ibid 90.

The Bristol Law Review

2013]

compensation or any other remedies, and whilst recommendations can be made they do not specify the amount that should be compensated161; this is in comparison to the African Commission which has provided extensive guidance in this area. For applicants to the HRC an inconvenient gap in the case law remains where there are ambiguities about what exactly will constitute a sufficient remedy; for example how much compensation should be awarded to a victim of torture, what types of inquires should be undertaken and by whom, and what punishment should the perpetrator of torture face. These ambiguities mean that no standards have been set, and thus only flagrantly inadequate awards of compensation or deficient punishments for wrongdoers may capture international condemnation and attention. In such circumstances individuals may refrain from pursuing justice where the cost, risk, and time spent is not worth the minimal justice that could be awarded. It is thus suggested that the HRC take steps to set standards which clarify in more precise terms what are sufficient levels of compensation, and what constitutes a sufficient inquiry etc.

(iv) Do Established Exceptions Go Far Enough? Udombana has concluded that the current practice of the African Commission has been “so far, been fair”162 when interpreting exceptions to the exhaustion principle. This author tentatively agrees that current exceptions established by both the African Commission and the HRC are encouraging, but submits that current exceptions need to be interpreted broadly to encompass situations where victims of torture may otherwise be constructively denied access to remedies. Whilst some commentators may see this as ultra vires of the purpose of human rights tribunals, as noted above, given the indicative nature of torture in respect of other human rights abuses, the identification of acts of torture may be very auspicious. In light of this it is suggested that particular exceptions be interpreted broadly, or new ones established, to accommodate situations where the victim is likely to have suffered intimidation or forced to flee the respondent State. Additionally exceptions need to broadened to protect individuals where there is a significant risk they will be faced with a non-independent judiciary, whose partisan behaviour may not be as conspicuous as current examples in the case law. Finally it is noted that the HRC should take steps to clarify what a sufficient remedy should entail, and thus set a standard to which the international community may aspire.

Chapter 3: Are There Alternatives to the Exhaustion Principle More Suited to Dealing with Instances of Torture? Whilst the exhaustion principle has been recognised as a “well established rule of customary international law”163, in practice many experiments in the twentieth century have used very different mechanisms. As Trindade has noted, it seems that alter161 ibid 10. 162 Udombana (n 28) 3. 163 Interhandel (n 2) para 37.

The Bristol Law Review

[Vol. 1

natives to the exhaustion principle seem to have been rather overlooked by drafters of modern international human rights instruments164. Of experiments attempted in the twentieth century two are of particular interest when considering alternatives to the exhaustion principle in the context of acts of torture. This paper is not the first to consider alternatives or modifications to the exhaustion principle165; however alternatives with emphasis on making international tribunals more accessible for victims of particularly serious violations has not, so far, been discussed in depth in the literature.

(i) The System of Navigation of the Rhine (the Rhine System) The Rhine System is a commercial international arrangement concerned with the securing safe navigation of the Rhine, and has five state signatories to its revised Convention166. The Rhine System is very unusual in that it provides for the creation of specific domestic tribunals to act as a court of first instance in civil and commercial matters arising under the Rhine Convention167. These domestic tribunals are monitored by the Central Commission168 and their decisions are binding in all signatories to the Rhine Convention169. A particularly unique feature of the Rhine System is that the parties, after appearing before the domestic tribunal, may choose to appeal170 to either the High Court of State in which the domestic tribunal is based171, or appeal directly to the Central Commission172. The Central Commission’s resolutions are binding when adopted unanimously, unless a contracting State informs the Commission it refuses its approval173, and any decisions adopted by a majority constitute recommendations174. In many ways the Central Commission is similar to the HRC and the African Commission; it was created specifically to deal with a particular international convention and is permitted to receive communications from individuals which it gives either binding resolutions or recommendations on. However it would be negligent to fail to recognise the fact that situations dealt with by the Central Commission also differ greatly from the HRC and the African Commission. Firstly the Rhine System is a commercial and civil arrangement rather than a human rights one, thus the complaints are of a very different nature and the interests of the parties to the litigation differ greatly from those in the human rights context. Yet, in of itself, this does not make the Rhine arrangement an unsuitable consideration in the 164 Antônio AC Trindade ‘Exhaustion of Local Remedies in International Law Experiments Granting Procedural State to Individuals in the First Half of the Twentieth Century’ (1977) 57 NILR 373, 373. 165 ibid; Herbert W Briggs ‘The Local Remedies Rule: A Drafting Suggestion’ (1956) 50 AJIL 921. 166 Revised Convention for Rhine Navigation 1963. 167 ibid Art 33. 168 ibid Art 45. 169 ibid Art 40. 170 ibid Art 37. 171 ibid Art 38. 172 ibid Art 43. 173 ibid Art 46. 174 ibid.

2013]

The Bristol Law Review

human rights context; one must remember that the exhaustion principle was itself rooted in the commercial context of diplomatic protection and transplanted across. Secondly the Rhine system is much smaller than either ACHPR or the ICCPR as it only has five State signatories, and a very limited number of residents in those States would have an interest in pursuing a complaint before the Central Commission. Consequently it is unlikely that the Central Commission would face the same risks as the African Commission and the HRC in being overwhelmed by the sheer volume of potential communications. In fact, in comparison, the Central Commission has been somewhat underwhelmed as individuals have chosen to pursue appeals in domestic courts in the majority of cases175. Despite these differences the Rhine System presents an arrangement where, unlike the under the exhaustion principle, the burden of litigation seems to be distributed much more evenly between the parties to the litigation. There are numerous advantages to such a system; firstly the domestic tribunals are specific to the Rhine System, and are monitored by the Central Commission. The use of specific tribunals encourages specialisation, which means that such tribunals should be far better equipped to deal with the abnormal situation brought before them, than general courts. Additionally the fact that the domestic tribunals only deal with such cases means that those cases and their progress can be easily monitored by the Central Commission. Should this system be transferred to the human rights context it would allow the domestic tribunals to be specialised in human rights litigation and further allow progress to be monitored by the HRC or the African Commission encouraging a much more transparent system. Secondly the Rhine System continues to protect State sovereignty and allows the State to do justice by its own means by ensuring that the court of first instance is a domestic tribunal. However, in comparison to the exhaustion principle, the distribution of responsibility is much more fairly distributed. Under the Rhine System the individual is only obliged to pursue domestic remedies at the first stage (that is the specialised tribunal), and at the second stage the individual has the choice to pursue the appeal before the domestic courts or before the Central Commission. In the human rights context should the individual feel that the domestic courts will provide justice that is less than adequate, or that pursuing their case through the domestic courts will put them in danger then they may instead pursue their appeal at the African Commission or the HRC. This would be particularly advantageous for victims of torture, who may well be faced with a domestic judiciary who are not impartial or independent176. Unfortunately the transplantation of the Rhine System to the human rights context risks the HRC and the African Commission becoming overburdened by individual applicants unwilling to pursue appeals through domestic tribunals. Yet currently the HRC and the African Commission are both significantly overburdened, and a considerable part of the jurisprudence of both Commissions is formed by the exhaustion principle177. 175 Trindade, ‘Exhaustion of Local Remedies in International Law Experiments’ (n 163) 374. 176 See above (p 31). 177 Weil (n 70) 874.

The Bristol Law Review

[Vol. 1

(ii) Upper Silesian Experiment The Upper Silesian Experiment was an experiment conducted by the Council of the League of Nations established in by the German-Polish Convention on Upper Silesia of 1922178. It was undertaken to protect minorities living in Upper Silesia territory after World War I, between 1922 and 1937. The experiment was very unusual as it established a multiplicity of remedies179 and allowed individuals the option of petitioning three different international bodies; the Council of the League of Nations (hereafter the League Council), the Mixed Commission and the Arbitral Tribunal. Like the HRC and the African Commission the League Council had the competence to receive and deliver decisions on individual petitions180. The Upper Silesian system allowed individuals to address petitions directly to the Council of League181 when those petitions were “sufficiently important” and “urgent”182; thus distinguishing situations that were particularly serious, from those that could be dealt with sufficiently through the relevant domestic courts. In such cases League Council made it clear in the case law that the exhaustion principle did not apply, stating that the “right of petition may be exercised even though it be still possible to secure redress at the hands of the national authorities”183. The second tier of the Upper Silesian Experiment was created to deal with other petitions. Like the Rhine System the second tier of the experiment demanded the creation of regional organisations, in this case a German and Polish Minorities Office for the region, both representing their respective Governments. These offices received petitions not deemed urgent or sufficiently important to appear before the League Council. Like the exhaustion principle in the ICCPR and the ACHPR a condition for admissibility before the Minorities Office was that complaints should have previously been brought before the local administrative authorities184. The Minorities Office would attempt to reach a settlement with aggrieved individuals before referring the matter to the Mixed Commission, which could give a non-binding opinion185. Finally the Arbitral Tribunal dealt with specific instances and also acted as a court of appeal after cases were brought before the Mixed Tribunal. The Upper Silesian Experiment created a much more complicated mechanism for examining individual complaints than seen under the HRC or the African Commission. However many of the more subtle complexities of this system permitted a more equitable mechanism for coping with complaints. Unlike the Rhine System the Upper Silesian Experiment was more akin to the 178 cf League of Nations Official Journal (1922) 3(6(ii)), 542 and 806. 179 Trindade, ‘Exhaustion of Local Remedies under UN Covenant (n 82) 381. 180 cf Marek St Korowicz ‘The Problem of the International Personality of Individuals’ (1956) 50 AJIL 533, 554. 181 German-Polish Convention on Upper Silesia of 1922, Art 147 (German-Polish Convention). 182 ibid. 183 Franz Bernheim Petition (1933); see League of Nations Official Journal (1933) 14(7(i)), 934-935. 184 German-Polish Convention 1922, Art 150. 185 Trindade, ‘Exhaustion of Local Remedies in International Law Experiments’ (n 163) 383.

2013]

The Bristol Law Review

human rights context, being a minorities system rather than a purely commercial system. Consequently it may be seen as a more appropriate consideration than the Rhine System, although this, as noted above, may be somewhat of a false assumption given that the exhaustion principle was transplanted from the commercial context. However a similar difference in sheer scale, noted in the Rhine System, can be seen in the Upper Silesian Experiment compared to that of the ICCPR and the ACHPR. The Upper Silesian Experiment was created to deal with problems emanating from one small region, rather than from multiple States, and consequently the risk of overburdening the League Council, the Mixed Commission or the Arbitral Tribunal were significantly diminished, as compared to international human rights organisations. Despite these differences, the Upper Silesian Experiment is noteworthy in the context of human rights, especially in circumstances involving allegations of torture. The experiment grants individuals who have suffered sufficiently serious wrongs and whose cases are urgent, the right to be seen before an international body without prior exhaustion of domestic remedies. The transplantation of this concept to the human rights context would be hugely advantageous to individuals who had suffered particularly serious breaches of their human rights, such as torture. As explored above, victims of torture may be reluctant to attempt to exhaust domestic remedies for fear of retaliation or due to lack of funds. The ability to go straight to an international body would significantly diminish the risk of reprisals given the likely international attention, and would guarantee a fair hearing and ensure that real justice is achieved. In this case the risk of overburdening the HRC and the African Commission would be significantly abated by the fact that a threshold for automatic circumvention of the exhaustion principle would be created, thus ensuring that only the most serious and important cases involving particularly grave violations would be permitted this route of access to the commission. For all other cases the exhaustion principle would still apply which would effectively protect State sovereignty, encourage the State to provide effective remedies and further prevent the overburdening of either Commission. As with the Rhine System once again notes the advantages of domestic tribunals made specifically for the human rights context, which may gain better expertise and be better monitored than general local courts.

(iii) A Possibility for an Alternative System? It may be concluded that alternative systems from the nineteenth and twentieth century provide a very workable blueprint for drafters to base future international human rights conventions on. In fact the systems presented above seem to far more equitably spread the burden and responsibility of human rights litigation between the parties, and better redress the disadvantages faced by victims of human rights abuses. The Upper Silesian Experiment presents a particularly interesting alternative for victims of particularly serious human rights abuses, such as torture. Unfortunately, in reality, the superseding of the exhaustion principle by a more effective, specialised and equitable system is highly doubtful. The exhaustion principle has become commonplace in the human rights context and drafters are unlikely to stray from the

100

The Bristol Law Review

[Vol. 1

established norm. It is additionally highly improbable that States would accept or ratify alternative mechanisms which allowed further infringements on their sovereignty. Yet the continued application of the exhaustion principle, and the need to establish a myriad of exceptions to maintain any semblance of equity in the human rights system, seems short-sighted when more workable alternatives could be considered.

Conclusion It has been widely acknowledged that the exhaustion principle places too heavy a burden on victims of human rights abuses, a fact that, as demonstrated above, may be particularly detrimental for victims of torture. The danger is that the strict application of the exhaustion principle will place an overwhelming burden on victims, who, due to fear of reprisals or an inability to spend vast amounts of time and funds exhausting domestic remedies, may be unable to pursue justice for the grievances suffered. Not only would this be of great detriment to the individual, it would undermine the purpose of human rights conventions: obstructing the monitoring and prevention of human rights abuses in offending States. It can thus be concluded that the continued application of the exhaustion principle must be met with a great degree of practical flexibility by the HRC and the African Commission. In particular the link between incidents of torture and the risk of a non-independent judiciary cannot be ignored. Without such an interpretation the respondent State may hide behind the exhaustion principle and avoid international responsibility, thus denying individuals redress or acknowledgment of the atrocities they have faced. Whilst the case law of the HRC and the African Commission has, so far, provided a degree of optimism, it is unclear how established exceptions will be applied to more complex and ambiguous cases. There is a danger that the HRC and African Commission may themselves use the exhaustion principle to avoid ‘touchy’ and difficult cases186, such as those involving torture. It is thus submitted that the HRC and the African Commission must ‘be bloody, bold and resolute’ by continuing to recognise relevant exceptions, and apply established ones to future cases involving serious violations of human rights, such as torture, with a great degree of flexibility and pragmatism; thus ensuring that victims of torture are permitted access to justice. Without such flexibility the entire system of human rights is threatened. Although the creation of a number of extensive exceptions may be seen as undermining the exhaustion principle itself, it is crucial to remember that there is “nothing sacrosanct”187 about the rule. With this in mind, alternatives which do not demand a vast array of exceptions to achieve equity should be considered by future drafters of human rights conventions. As demonstrated above, alternate systems from the nineteenth century can provide practical solutions that continue to protect State sovereignty, safeguard tribunals from being overburdened by applications, but also effectively prevent States from abusing the system thus protecting the individual. In particular the 186 Udombana (n 28) 34. 187 Trindade, ‘Exhaustion of Local Remedies in International Law Experiments’ (n 163) 380.

2013]

The Bristol Law Review

101

Upper Silesian Experiment could provide a very useful blueprint for a mechanism that recognises the â&#x20AC;&#x153;special stigmaâ&#x20AC;?188 of very serious violations such as torture. What is apparent is that the system must continue to evolve. Communications relating to torture will likely be presented to the HRC and the African Commission for decades to come. Over this time the acts of torture will be adapted and States will become better versed in subversively denying domestic remedies, leaving the victim in an ever more vulnerable position. Thus, be it through the expansion of current exceptions and the creation of new ones, or through the transplantation of an entirely new and more appropriate mechanism, with respect to the crime of torture neither Commission can allow itself to stagnate.

188â&#x20AC;&#x192; Ireland v UK (n 21) para 167.

102

The Bristol Law Review

[Vol. 1

Bibliography Primary Sources Legislation and Legal Instruments African Charter on Human and Peoplesâ&#x20AC;&#x2122; Rights 1981 German-Polish Convention on Upper Silesia of 1922 Revised Convention for Rhine Navigation 1963 European Convention on Human Rights 1950 Franz Bernheim Petition (1933) Inter-American Convention on Human Rights 1969 Rules of Procedure of the Inter-American Commission on Human Rights 2009 International Covenant on Civil and Political Rights 1966 First Optional Protocol to the International Covenant on Civil and Political Rights 1966 Universal Declaration of Human Rights 1948 Case Law Ambatielos Claim (Greece, United Kingdom of Great Britain and Northern Ireland) [1956] 12 RIAA 19 Aminu v Nigeria Comm no 205/97 [2000] Amnesty International and Others v Sudan, Comm nos 48/90, 50/91, 52/91 and 89/93 [1999] Arhuaco v Colombia, Comm no 612/1995 [1996] Certain Norwegian Loans (France v Norway) [1957] ICJ Rep 39 Cyprus v Turkey, App nos 6780/74 and 6950/75 [1975] Donnelly and Others v UK, App no 5577/72 [1973] Interhandel (Switzerland v United States of America) [1959] ICJ Rep 6 Jawara v the Gambia, Comm nos 147/95 and 149/96 [2000] Lawless v Ireland, App noÂ 332/57 [1961] Legal Defence Centre v the Gambia Comm no 219/98 [2000]. Manjang v The Gambia, Comm no 131/94 [1993] Modise v Botswana, Comm no 97/93 [2000] Nielsen v Government of Denmark, App no 33488/96 [1967] Norway, Sweden Denmark and the Netherlands v Greece Comm nos 3321/67, 3322/67, 3323/67 and 3344/67 [1969] Reid v Jamaica HRC, Comm no 250/1987 [1990] Republic of Ireland v United Kingdom App no 5310/71 [1978] T.K. v France, Comm no 220/1987 [1989]

2013]

The Bristol Law Review

103

Secondary Sources Adede AO ‘A Survey of Treaty Provisions on the Rule of Exhaustion of Local Remedies’ (1977) 18 Harv Int’l L J 1 Adler MH ‘The Exhaustion of the Local Remedies Rule after the International Court of Justice’s Decision in ELSI’ (1990) 39 ICLQ 641 African Commission on Human and Peoples’ Rights, ‘Six Annual Activity Report of the African Commission’ (African Commission on Human and Peoples’ Rights 19921993) <www.achpr.org/files/activity-reports/6/achpr12and13_actrep6_1993_eng. pdf> accessed 21 July 2013 Amerasinghe CF ‘The Exhaustion of Procedural Remedies in the Same Court’ (1963) 12 ICLQ 1285 --‘The Formal Character of the Rule of Local Remedies’ (1965) 25 ZaoRV 445 --‘The Rule of Exhaustion of Domestic Remedies in the Framework of International Systems for the Protection of Human Rights’ (1968) 28 ZaoRV 257 --‘The Exhaustion of Procedural Remedies in the Same Court’ (1976) 12 ICLQ 128 --‘The Local Remedies Rule in an Appropriate Perspective’ (1976) 36 ZaoRV 727 --‘Wither the Local Remedies Rule’ (1990) 5 ICSID Review 292 --Local Remedies in International Law (2nd edn, CUP 2004) Bagge A ‘Intervention on the Ground of Damage Caused to Nationals, with Particular Reference to Exhaustion of Local Remedies and the Rights of Shareholders’ (1958) 34 Br Yrbk Int’l L 162 Borchard EM ‘Theoretical Aspects of the International Responsibility of States’ (1929) 1 ZaoRV 224 --‘The Local Remedies Rule’ (1934) 28 AJIL 729 Briggs HW ‘The Local Remedies Rule: A Drafting Suggestion’ (1956) 50 AJIL 921 Brownlie I ‘The Individual before Tribunals Exercising International Jurisdiction’ (1962) 11 ICLQ 701 Bruegel JW ‘The Right to Petition an International Authority’ (1953) 2 ICLQ 542 Cassese A, International Law (OUP 2005) De Schutter O, International Human Rights Law (CUP 2011) D’Ascoli S and Scherr KM ‘The Rule of Prior Exhaustion of Local Remedies in the International Law Doctrine and its Application in the Specific Context of Hu-

104

The Bristol Law Review

[Vol. 1

man Rights Protection’ (2007) European University Institute Working Paper 2007/02 <http://cadmus.eui.eu/bitstream/handle/1814/6701/LAW_2007_02.pdf> accessed 16 August 2013 Duruigbo E ‘Exhaustion of Local Remedies in Alien Tort Litigation: Implications for International Human Rights Protection’ (2006) 29 Fordham Int’l L J 1245 Fawcett JES ‘The Exhaustion of Local Remedies: Substance or Procedure’ (1954) 31 BYBIL 452 Haesler T, The Exhaustion of Local Remedies in the Case Law of International Courts and Tribunals (AW Sijthoff 1968) Head IL ‘A Fresh Look at the Local Remedies Rule’ (1967) 5 ACDI 142 Iluyomade BO ‘Dual Claim and the Exhaustion of Local Remedies Rule in International Law’ (1977) 10 Vand J Transnat’l L 83 International Committee of the Red Cross ‘Torture: the Ultimate Abuse of Human Rights’ (International Committee of the Red Cross, 20 October 2010) <www.icrc.org/ eng/resources/documents/misc/lse-torture-110505.htm> accessed 16 August 2013 International Committee of the Red Cross ‘Torture: the ultimate abuse of human rights’ (ICRC 2010) <www.icrc.org/eng/resources/documents/misc/lse-torture-110505.htm> accessed 16 August 2013 Korowicz ‘The Problem of the International Personality of Individuals’ (1956) 50 AJIL 533 Law CHP, The Local Remedies Rule in International Law (E Droz, 1961) Lissitzyn OJ ‘The Meaning of the Term Denial of Justice in International Law’ (1936) 30 AJIL 632 Manke HI ‘The Exhaustion of Domestic Remedies in the United Nations Sub-Commission on Prevention of Discrimination and Protection of Minorities’ (1975) 24 Buff L Rev 643 Mazzeschi RP ‘Exhaustion of Domestic Remedies and State Responsibility for Violation of Human Rights’ (2000) 10 Ital Yrbk Int’l L 17 McGovern E ‘The Local Remedies Rule and Administrative Practices in the European Convention on Human Rights’ (1975) 24 ICLQ 119 Meron T ‘The Incidence of the Rule of Exhaustion of Local Remedies’ (1959) 35

2013]

The Bristol Law Review

105

BYBIL 83 Mummery DR ‘The Content of the Duty to Exhaust Local Judicial Remedies’ (1964) 58 AJIL 389 --‘Increasing the Use of Local Remedies’ (1964) 58 ASIL PROC 107 Odinkalu CA ‘The Individual Complaints Procedure of the African Commission on Human and People’s Rights: A Preliminary Assessment’ (1998) 8 Transnat’l L & Contemp Probs 359 Office of the High Commissioner for Human Rights, ‘Independence and Impartiality of the Judiciary, Jurors and Assessors and the Independence of Lawyers’ (United Nations, 1994) <www.unhchr.ch/Huridocda/Huridoca.nsf/0/297efd3ff64b33a0802566db0051679a?Opendocument> accessed 25 August 2013 --‘Independence and Impartiality of the Judiciary, Jurors and Assessors and the Independence of Lawyer’ (Resolution 1994/41, 53rd Meeting, Geneva, March 1995) <www.unhchr.ch/Huridocda/Huridoca.nsf/0/297efd3ff64b33a0802566db0051679a?Opendocument> accessed 25 August 2013 --‘Report from the Expert Seminar on Freedom from Torture and Ill Treatment of Persons with Disabilities’ (Geneva, December 2007), 2 <www2.ohchr.org/english/issues/ disability/docs/torture/seminartorturereportfinal.doc> accessed 25 August 2013 --‘Torturers will be Brought to Justice Sooner or Later’ (United Nations, 24 June 2011) <www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=11180&LangID=E> accessed 26 August 2013 --‘Human Rights Bodies - Complaints Procedures’ (United Nations, 2013) <www. ohchr.org/EN/HRBodies/TBPetitions/Pages/HRTBPetitions.aspx#individualcomm> accessed 16 August 2013 Office for High Commission on Human Rights (Special Rapporteur for Torture) ’Country Visits’ (United Nations, 2013) <www.ohchr.org/EN/Issues/Torture/SRTorture/Pages/Visits.aspx> accessed 21 July 2013 Peddicord JA ‘The American Convention on Human Rights: Potential Defects and Remedies’ (1984) 19 Tex Int’l L J 139 Pisillo Mazzeschi R ‘Exhaustion of Domestic Remedies and State Responsibility for Violation of Human Rights’ (2000) 10 Ital Yrbk Int’l L 17 Quiroga J and Jaranson JM ‘Politically Motivated Torture and its Survivors: A desk study review of the literature’ (2005) 16 Torture 22 Randelzhofer A and Tomuschat C (eds), State Responsibility and the Individual - Reparation in Instances of Grave Violations of Human Rights (Martinus Nijhoff Publish-

106

The Bristol Law Review

[Vol. 1

ers 1999) Reidy A, Hampson F and Boyle K ‘Gross Violations of Human Rights: Invoking the European Convention on Human Rights in the Case of Turkey’ (1997) 15 NQHR 161 Reyes H ‘The Worst Scars are in the Mind: Psychological Torture’ (2007) 89 Int’l Rev Red Cross (2007) 591 Robertson B ‘Exhaustion of Local Remedies in International Human Rights Litigation - the Burden of Proof Reconsidered’ (1990) 39 ICLQ 191 Schochet PR ‘A New Role for an Old Rule: Local Remedies and Expanding Human Rights Jurisdiction under the Torture Victim Protection Act’ (1987) 19 Colum Hum Rts L Rev 223 Schwebel SM ‘Arbitration and the Exhaustion of Local Remedies Revisited’ (1989) 23 Int’l Law 951 --and Wetter JG ‘Arbitration and the Exhaustion of Local Remedies’ (1966) 60 AJIL 484 Shelton, Remedies in International Human Rights Law (2nd edn, OUP 2006) Spjut RJ ‘Torture Under the European Convention on Human Rights’ (1979) 73 AJIL 267 St Korowicz M ‘The Problem of the International Personality of Individuals’ (1956) 50 AJIL 533 Starke JG ‘Imputability in International Delinquencies’ (1938) 19 Br Yrbk Int’l L 104 Tardu ME ‘United Nations Response to Gross Violations of Human Rights: the 1503 Procedure’ (1980) 20 Santa Clara L Rev 559 Trindade AAC, ‘Exhaustion of Local Remedies in Relation to Legislative Measures and Administrative Practices - the European Experience’ (1976) 18 Mal LR 257 --‘Origin and Historical Development of the Rule of Exhaustion of Local Remedies in International Law’ (1976) 12 Belgian Rev Int’l L 499 --‘Exhaustion of Local Remedies in International Law Experiments Granting Procedural State to Individuals in the First Half of the Twentieth Century’ (1977) 57 NILR 373 --‘Exhaustion of Local Remedies under the UN Covenant on Civil and Political Rights and its Optional Protocol’ (1979) 28 ICLQ 734 --The Application of the Rule of Exhaustion of Local Remedies in International Law: Its rationale in the international protection of individuals rights (CUP 1983)

2013]

The Bristol Law Review

107

Udombana NJ ‘So Far, So Fair: The Local Remedies Rule in the Jurisprudence of the African Commission on Human and Peoples’ Rights’ (2003) 97 AJIL 1 United Nations, UN Doc A/C.3/L.1355 and A/6546 University of Minnesota Human Rights Center ‘Part 2: The Convention on the Rights of Person with Disabilities’ (Univeristy of Minnesota) <www1.umn.edu/humanrts/ edumat/hreduseries/HR-YES/chap-6.html> accessed 25 July 2013. Weil GL ‘Decisions on Inadmissible Applications by the European Commission of Human Rights’ (1960) 54 AJIL 874 Willson CL ‘Changing the Charter: the United Nations Prepares for the Twenty-First Century’ (1996) 90 AJIL 115

The Laws of Codes and Cases: A Comparative Analysis between Civil Law and Common Law Eleanor Healy-Birt The theory of legal traditions attempts to classify legal systems according to history, legal sources and ideology.1 Many of the legal systems of Europe, and those countries shaped by her, have been identified as belonging to the civil or common law traditions. This article will argue that the traditional associations of cases with common law and codes with civil law have been shaken by recent developments. The complex modern roles of these two sources will be illustrated with four examples: England’s statute-based land law, the French courts’ development of strict liability in delict, the codification of Californian law, and judicial tactics for compensating pure economic loss in Germany. Additionally, it will be shown that the situation is further complicated by the traditional attitudes of participants in the legal systems to these sources, which ensure that the two traditions remain distinct. The established legal sources in the two traditions can be outlined as follows. The common law of England has been developed by judges since Norman times. Coke and Blackstone strongly disliked statutes, which overrule conflicting case law, believing they destroyed the balance of the common law.2 Consequently, statutes typically addressed specific situations in precise language, and were strictly interpreted.3 On the Continent, many systems designate legislation as the sole legal source (besides the now insignificant ‘custom’4) and have codes outlining entire areas of law. Judges interpret legislation broadly so it remains relevant. The writers of the French Code Civil of 1804 desired a uniform national law5 and believed legislating should be the preserve of political leaders. Article 5 confines adjudication to the specific facts of the case, prohibiting general pronouncements. The German Bürgerliches Gesetzbuch (BGB) appeared a century later. Neither legal system, nor their offspring, acknowledges cases as legal sources. The distinction between civil and common law legal sources is not as clear-cut as is classically portrayed. David writes that English statute books are no smaller than those on the Continent.6 He contends that minimal legislative interference should no longer be expected as modern governments restructure society through detailed legal 1 Konrad Zweigert and Hein Kötz, An Introduction to Comparative Law (Tony Weir tr, 3rd edn, OUP 1998) 68. 2 Jack Beatson, ‘Has the common law a future?’ (1997) 56 CLJ 291, 299-300. 3 Peter De Cruz, Comparative Law in a Changing World (3rd edn, Cavendish 2007) 503. 4 Nigel Foster and Satish Sule, German Legal System and Laws (4th edn, OUP 2010) 52. 5 David Pollard, Sourcebook on French Law (2nd edn, Cavendish 1998) xiii. 6 René David ‘Sources of Law’ (1984) International Encyclopedia of Comparative Law vol 2 ch 3, 3-101/102.

109

110

The Bristol Law Review

[Vol. 1

reforms.7 Many common law systems have seen “legislative activities at a dizzying pace”.8 Meanwhile, the Continent has experienced increased judicial activism. Cummins believes World War II made citizens doubt the ability of governments alone to provide justice. Furthermore, many European codes are over a century old, and judicial creativity has become necessary for the law to keep pace with a fast-evolving society.9 Consistency in the law has required deference to the decisions of higher courts, not unlike the common law doctrine of precedent, and may be mandatory for constitutional decisions.10 The following examples will illustrate the changes in legal sources across the civil and common law worlds. The first example is from England, where there have been over three hundred new Acts of Parliament in the last decade.11 Whole areas of law are now governed by statute, of which land law is an excellent example. The Law of Property Act 1925 (LPA) lists the legal interests in land,12 and, in combination with the Land Registration Act 2002 (LRA), creates one way in which legal dispositions may be made: by deed13 and registration.14 Legal interests in land and their disposition can only be understood by reading the legislative provisions. The increasing proportion of statute-based law in England requires a new approach to legislation. Beatson suggests more intention-conscious interpretation,15 similar to the approach of civil law. Lord Diplock has already observed a “trend … towards the purposive construction of statutory provisions”16 which can only continue as the scope and role of legislation grow. The next example comes from the civil law of France. The judicial invention of strict liability has developed the law of delict far beyond its five codal articles (13821386). Traditionally, liability was premised on fault, as required under Article 1382 before compensation could be ordered. However, industrialisation presented French courts with cases where fault could not be proven but justice seemed to demand compensation. In the late 1800s, courts began to use Article 1384, which attaches liability to those who have an object in their custody that causes damage, to presume fault in road accidents.17 7 ibid. 8 Henrietta Mensa-Bonsu, ‘Conspiracy in Two Common Law Jurisdictions – A Comparative Analysis’ (1992) 4 AFJICL 419, 419. 9 Richard J Cummins ‘The General Principles of Law, Separation of Powers and Judicial Decision in France’ (1986) 35 ICLQ 594, 596. 10 Zweigert and Kötz (n 1) 262. 11 National Archives ‘United Kingdom Public General Acts’ (UK Government) <www.legislation.gov.uk/ ukpga> accessed 26 December 2011. 12 Law of Property Act 1925, s 1. 13 Law of Property Act 1925, s 52. 14 Land Registration Act 2002, ss 4 and 27. 15 Beatson (n 2) 312. 16 Carter v Bradbeer [1975] 1 WLR 1204 (HL) 1206. 17 Pollard (n 3) 225.

2013]

The Bristol Law Review

111

In the Jand’heur case,18 the Cour de Cassation definitively declared it was not necessary to establish personal fault; custodianship alone created liability. In the Blieck case,19 Article 1384 was used to impose vicarious liability in a circumstance outside the exhaustive list contained in the Code. Giliker believes this interpretation is so broad it “arguably … contradicts the very structure of the code”.20 This area of French law, then, is a product of judicial creativity and can only be understood by studying case law. The third example is from the common law of the United States that developed after the Declaration of Independence in 1776. The USA has long experimented with codification to solve the early problem of creating a new legal system, and the modern difficulty of the heavy caseload of such a vast country. Dudley Field’s attempt at codification in the nineteenth century was designed to preserve the common law.21 Today, the American Law Institute produces Restatements of the Law, which are essentially codifications of case law, so not in themselves legal authorities. The most successful codification in the US has to be the State of California’s twenty-nine Codes. The breadth of the California Codes is no less than that of those originating in Europe. For example, the Civil Code contains the law regarding contracts. Article 1550 outlines the four requirements for the existence of a contract. One of these is consideration, and this is explained in Article 1605 as a “benefit conferred” or a “prejudice suffered”, and there are further details on determining the validity of contracts in the light of the consideration provided. This statement of a general principle, instead of a specific provision, has more in common with civil law’s codes than the statutes of England. The final example is from Germany, which has a far more comprehensive Code than France. Even here, recent judicial glosses on older statutes can have greater persuasive authority than the original text.22 This principle was stretched to its limit in the Soroya case,23 where damages were awarded for defamation. Article 253 of the BGB permits compensation for non-pecuniary damage where stipulated by law, and at the time no statute permitted compensation for defamation. The Constitutional Court declared that judges must fill in legislative silences, using common sense and general principles of justice, and the decision stood. This case remains controversial,24 but is strong evidence that even in Germany judges may exercise creative powers. The specific area of German law which has enjoyed much judicial creativity is compensation for pure economic loss. Article 823 of the BGB lists the damaged 18 Ch réun, 13 February 1930, D.P.1930.1.57. 19 Ass plén, 29 March 1991, D.1991.324. 20 Paula Giliker ‘Codifying tort law: lessons from the proposals for reform of the French Civil Code’ (2008) 57 ICLQ 561, 565. 21 Louis F Del Duca and Alain A Levasseur ‘Impact of Legal Culture and Legal Transplants on the Evolution of the US Legal System’ (2010) 58 AJCL Supplement 1, 9. 22 Foster and Sule (n 3) 53. 23 BVerfGE 34, 269 (1973). 24 David P Currie ‘Republication – Separation of Powers in the Federal Republic of Germany’ (2008) 9 GLJ 2113, 2124-2129 <www.germanlawjournal.com/pdfs/Vol09No12/PDF_Vol_09_No_12_21132178_Articles_Currie%201.pdf> accessed 24 December 2011.

112

The Bristol Law Review

[Vol. 1

interests which must be compensated. Economic loss is not listed here, and so the courts have developed various methods of awarding compensation when they believe it is warranted. They have created a “right to an established and operative business”25 as “any other right” under Article 823. This principle has been refined by subsequent cases to make defendants liable for direct, fault-based interferences with another’s business.26 A different tactic has been employed to compensate claimants who suffer when a defendant fails to fulfil his contractual duties to another: the contract with protective effects in favour of a third party,27 which is a purely judicial invention. Thus, Germany has also experienced the development of case-based areas of law, despite its codal tradition. Having looked at four specific examples of civil and common law legal systems borrowing law-creating techniques from the other tradition, a note of caution should be added. Merryman, who provides a rather simplistic account of civil law, admits that the difference between judicial processes in the two traditions “does not lie in what the courts in fact do, but in what the dominant folklore tell them they do”.28 However, one should not conclude that the two traditions now operate in the same way, for this “dominant folklore” exerts a powerful force. The final section of the essay will address the real complexity of the issue in the way legal practitioners continue to perceive and use legal sources within their traditions. First, we return to the flurry of legislation in England. There is still no programme for complete codification, and the current approach of incremental legislative change targeting specific issues will, Beatson claims, make the “law even more of an amalgam of common law and statute”.29 The major reforms to land law are the perfect illustration – the legislation abolished an old and complicated feudal-based system, but much common law remains. For example, section 1 of the LPA lists the interests capable of existing at law, but does not define them, meaning knowledge of older cases remains vital. Judges also continue to develop the law separately from the legislation. For example, section 36 LPA provides that severing a joint tenancy to create a tenancy in common can be done by notice or “other acts or things”.30 Judges have indeed developed other methods of severance, most notably in Williams v Hensman.31 When judges refine these other methods, they cite the case rather than section 36’s “other acts or things”.32 Both draftsmen and judges consider that statutes are not the only source of law in their area. Cases continue to develop the law, often as a parallel system. Any fears of case law becoming less relevant cannot be realised whilst practitioners continue to value and support its flexibility. 25 26 27 28 29 30 31 32

RGZ 58, 24 (1904). BGHZ 29, 65 (1958). BGH VersR 1972, 274 MDR 1972, 316 (1971). John Henry Merryman The Civil Law Tradition (SUP 1985) 47. Beatson (n 2) 301. Law of Property Act 1925, s.36. (1861) 70 ER 862 (Ch). Eg Carr v Isard [2006] EWHC 2095, [2006] All ER 343.

2013]

The Bristol Law Review

113

Secondly, in France, allegiance to the Code and the certainty it brings remains strong. For all the judicial ingenuity in areas such as strict liability, the aforementioned cases explain the principles as products of the Code. French judgments rarely refer to previous cases33 and give the impression of being unequivocal statements of fact,34 often simply offering a codal article as justification. Although to the common lawyer this may seem like a poorly-disguised sham, the ideological importance of the Code as legal source is undiminished. A whole movement of recodification has been observed across the civil law tradition,35 because judicial creativity has no legitimacy as a source of law. Instead of discussing the possibility of affirming the legal authority of cases, France instead proposes to reform the Code to contain a strict liability article.36 When the courts depart significantly from the Code, the reaction of civil law is not to surrender to the reality of judicial law-making, but to reform and reinforce the Code. Thirdly, even in California, it is not true to say a fully codified system exists. Federal law, not codified, operates alongside state law, and the Codes themselves come under threat. In Li v Yellow Cab Co37 the Supreme Court of California decided it could develop the law beyond the Civil Code and appeared to overrule an explicit codal provision. Englard believes the court views the Code as a continuation of the common law, enabling continual adaptation to new circumstances.38 He concludes that the Code has failed and become lost inside the common law because the state did not embrace the civil law approach to interpretation.39 Instead of treating the Code as an overarching framework from which small strands may be extended and developed, it has been viewed as a ‘still’ of a particular moment of the common law, which can be subsequently developed by judges. Fourthly, German legal thinking continues to be determined by the BGB. This more comprehensive and less outdated code has required German judges to make new law less often than their French counterparts. Judges use the BGB as the “primary building block”,40 citing it as the justification for their decisions. When judges do develop new principles, such as those outlined above, they slot them into the BGB’s framework. The “right to an operative business” fits into Article 823, and the protection of third parties falls under the law of contract. Markesinis suggests that German judges use codal provision justifications to disguise their own policy considerations, particularly in the relation to recovery for pure economic loss.41 However, this does 33 Zweigert and Kötz (n 1) 123. 34 De Cruz (n 3) 259. 35 Oliver Remien ‘Editorial: On the trend towards recodification and reorientation in private and business law’ (2008) 12 EJCL <www.ejcl.org/123/editor123.html> accessed 23 December 2011. 36 Giliker (n10) 570. 37 13 Cal.3d 804 (1975). 38 Englard Izhak ‘Li v Yellow Cab Co – A Belated and Inglorious Centennial of the California Civil Code’(1977) 65 CLR 4, 11. 39 ibid 20. 40 Markesinis Basil ‘Judicial Style and Judicial Reasoning in England and Germany’ (2000) 59 CLJ 294, 297. 41 ibid 304-308.

114

The Bristol Law Review

[Vol. 1

not prove that they no longer believe that balancing competing policy considerations was the task of the BGBâ&#x20AC;&#x2122;s creators. Recovery for pure economic loss is still unusual, suggesting that the wishes of the writers of the BGB are seldom ignored, unless justice demands otherwise, and only then when a solution can be assimilated into the rest of the Code. This article has demonstrated that both the civil and common law traditions have moved away from their traditional sources of law and have, perhaps subconsciously, acknowledged the contributions that legislation can make to certainty, and case law to flexibility. However, the situation is far more complex than a general mix of two equally important legal sources. The importance of traditional sources of law in each system is still fundamental, and informs practitionersâ&#x20AC;&#x2122; attitudes to the creation and application of law to such an extent that convergence between the two traditions is no more likely today than it was one hundred years ago.

2013]

The Bristol Law Review

115

Bibliography --Translation of French Code Civil (Legifrance) <http://lexinter.net/ENGLISH/civil_code.htm> accessed 26 December 2011 --Translation of German Civil Code (Bundesministerium der Justiz) <www.gesetze-im-internet.de/englisch_bgb/> accessed 26 December 2011 --Translations of German Legal Decisions (Texas Law School) <www.utexas.edu/law/ academics/centers/transnational/work_new/german/toc.php#headinh3> accessed 26 December 2011 Beatson J, ‘Has the common law a future?’ (1997) 56 CLJ 291 Cummins RJ, ‘The general principles of law, separation of powers and judicial decision in France’ (1986) 35 ICLQ 594 Currie DP, ‘Republication – Separation of Powers in the Federal Republic of Germany’ (2008) 9 GLJ 2113 <www.germanlawjournal.com/pdfs/Vol09No12/PDF_ Vol_09_No_12_2113-2178_Articles_Currie%201.pdf> accessed 24 December 2011 David R and others, ‘Structure and Divisions of the Law’, International Encyclopedia of Comparative Law (1974) vol 2, ch 2 David R, ‘Sources of Law’, International Encyclopedia of Comparative Law (1984) vol 2, ch 3 De Cruz P, Comparative Law in a Changing World (3rd edn, Cavendish 2007) Del Duca LF and Levasseur AA, ‘Impact of Legal Culture and Legal Transplants on the Evolution of the US Legal System’ (2010) 58 AJCL 1 Englard I, ‘Li v Yellow Cab Co – A Belated and Inglorious Centennial of the California Civil Code’ (1977) 65 CLR 4 Foster N and Sule S, German Legal System and Laws (4th edn, OUP 2010) Giliker P, ‘A role for tort in pre-contractual negotiations? An examination of English, French and Canadian law’ (2003) 52 ICLQ 969 --‘Codifying tort law: lessons from the proposals for reform of the French Civil Code’ (2008) 57 ICLQ 561 Glenn HP, Legal Traditions of the World: Sustainable Diversity in Law (4th edn, OUP 2010)

116

The Bristol Law Review

[Vol. 1

Hoeflich MH, ‘Transatlantic friendships and the German influence on American law in the first half of the nineteenth century’ (1987) 35 Am J Comp L 599 Markesinis B, ‘Judicial Style and Judicial Reasoning in England and Germany’ (2000) 59 CLJ 294 Mensa-Bonsu H, ‘Conspiracy in Two Common Law Jurisdictions – A Comparative Analysis’ (1992) 4 AFJICL 419 Merryman JH, The Civil Law Tradition (SUP 1985) Midgley JR, ‘To what extent should third parties have contractual rights? A South African perspective’ (1993) 42 ICLQ 136 National Archives ‘United Kingdom Public General Acts’ (UK Government) <www. legislation.gov.uk/ukpga> accessed 26 December 2011 Pollard D, Sourcebook on French Law (2nd edn, Cavendish Publishing 1998) Reimann M and Zimmermann R (eds), The Oxford Handbook of Comparative Law (OUP 2006) Remien O, ‘Editorial: On the trend towards recodification and reorientation in private and business law’ (2008) 12 EJCL <www.ejcl.org/123/editor123.html> accessed 23 December 2011 Youngs R, Sourcebook on German Law (2nd edn, Cavendish 2002) Zweigert K and Kötz H, An Introduction to Comparative Law (Tony Weir tr, 3rd edn, OUP 1998)

The United Kingdom’s Response to Crisis: A Critical Examination of the New Regulatory Structure of Financial Services Supervision Nikoletta Kallasidou

Chapter 1: Introduction and Background 1.1 Introduction According to Ian Morris, “History teaches us that when the pressure is on, change takes off.”1 The recent economic turmoil was no exception to the rule, but rather it was an affirmation of the view given above. The catastrophic collapse of financial institutions following the spread of the financial crisis has triggered policy-makers to re-examine the supervisory models and to develop the optimal way for the restoration of financial stability.2 At a universal level much work has been put into place since 2008 to address the causes of the financial crisis and supervisory failings.3 In the UK, the financial crisis manifested itself with the unexpected demise of Northern Rock in 2007, and spread throughout the UK banking system, resulting in, inter alia, the acquisition of HBOS bank by Lloyds, the bail out of the Royal Bank of Scotland, as well as the collapse of a number of other Institutions.4 This series of catastrophic events led to a realisation that there had been a missing link in the overall structure of financial regulation.5 It was against this background that regulatory reform was placed on top of the political agenda at a domestic level. The new Coalition Government in 2010 announced its plans for an extensive overhaul of the regulatory architecture and put forward an ambitious programme for reform, hoping to restore public confidence and prevent future crises.6 The UK’s official response was enunciated in the Financial Services Act 2012, which came into force on the 1st of April 2013. The new legislation resulted in the split 1 Why the West Rules – for Now: The Patterns of History, and What They Reveal About the Future (1st edn, Farrar, Straus and Giroux 2010). 2 Joseph Ackermann, ‘The new architecture of financial regulation: Will it prevent another crisis?’ (2010) Special Paper 194, LSE Financial Markets Group Paper Series, 1 <www.lse.ac.uk/fmg/workingPapers/specialPapers/PDF/SP194.pdf> accessed 3 August 2013. 3 Laura Cox and others, ‘United Kingdom Regulatory Reform: Emergence of the Twin Peaks’ (2012) 95 COB 1, 2. 4 Eliahu P Ellinger, Eva Lomnicka and Christopher Hare, Ellinger’s Modern Banking Law (5th edn, OUP 2012) 26. 5 Charles AE Goodhart, ‘The Macro-Prudential Authority: Powers, Scope and Accountability’ (2011) 2 OECD J Financial Market Trends 97, 99. 6 Explanatory Notes to the Financial Services Act 2012 (FSA 2012), para 3, quoting from the Government publication: The Coalition: Our Programme for Government.

117

118

The Bristol Law Review

[Vol. 1

of the Financial Services Authority (FSA) into two separate authorities, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), while a new committee, the Financial Policy Committee (FPC), was established within the Bank of England (BoE) in order to perform macro-prudential oversight functions.7 This paper focuses on this very change of the regulatory architecture in the UK. It aims to critically examine its implications in order to reach a conclusion on whether the new regulatory framework is indeed what the UK needs to restore its financial stability. It will attempt to analyse whether this alteration of the regulatory framework is capable of handling future challenges posed by the ever-evolving commercial realities of the global financial markets. It is worth mentioning that the regulatory response is classified in several categories: The substance of regulation, the behaviour of the Banking industry, fiscal measures and the structure of regulation and supervision.8 Although this paper focuses on the UK’s response to crisis with respect to the structure of regulation - the making of rules, and supervision - the application of those rules, the former categories fall beyond the scope of this thesis “and will not be elaborated upon?” The recent crisis has brought home the importance of financial regulation. The role of financial regulation in generating and maintaining financial stability is undisputable, as finance is inextricably associated with the prosperity of modern economies and it is part and parcel of day-to-day life.9 Since all financial systems rest ultimately on confidence, financial regulation constitutes an essential economic force in helping us handle the complexity and often the resulting chaos that a financial system entails.10 According to Mayes, an effective and workable regulatory and supervisory regime is a precondition for stability.11 To this end, how the institutions for financial services and supervision are set up and structured is crucial, since this can critically impact the quality of financial services supervision, financial stability and financial development.12 The structure of financial regulation therefore deserves close attention. This forms the justification of the research question. The analysis of the paper proceeds as follows: After this introduction, the paper will present the shortcomings and weaknesses of the old regulatory structure. This will serve as a foundation to comprehend the rationale behind the Government’s decision to alter the financial services’ regulatory structure. A brief account of the consultation phase and the resulting Government’s proposals will subsequently be 7 Eilis Ferran, ‘The Reorganisation of Financial Services Supervision in the UK: An Interim Progress Report’ (2011) University of Cambridge Faculty of Law Research Paper 49/2011, 1 <http://dx.doi. org/10.2139/ssrn.1952705> accessed 10 July 2013. 8 Rosa M Lastra and Geoffrey Wood, ‘The Crisis of 2007–09: Nature, Causes and Reactions’ (2010) 13 J Int Econ L 531. 9 Emilios Avgouleas, Governance of Global Financial Markets: The Law, the Economics, the Politics (CUP 2012). 10 Edward PM Gardener, Theory and practice in banking supervision: some reflections (Bangor 1986) 14. 11 David G Mayes, Liisa Halme and Aarno Liuksila, Improving Banking Supervision (Palgrave 2001) 65. 12 Martin Melecky and Anca M Podpiera, ‘Institutional structures of financial sector supervision, their drivers and historical benchmarks’ (2013) 9 J Financ Stabil 428.

2013]

The Bristol Law Review

119

introduced. Chapter 2 will focus on the key aspects of the reform in detail with the aim to identify its strengths and weaknesses. Each of the newly created bodies will also be considered in turn. The criticisms posed by the Treasury Select Committee (TSC) and the Joint Committee with regard to the new arrangements during the consultation process will be used as a background to the analysis. In Chapter 3, the paper will engage in a discussion with regard to the strengths and weaknesses of the Government’s decision to put the BoE at the apex of the regulatory structure by conferring to it the responsibility for prudential supervision. The paper will end with the inferences and concluding remarks drawn from the whole of the analysis.

1.2 A Review of the Old Tripartite System and Why It Failed Following the 1997 elections the new Labour Government announced its intention to engage in a revolutionary reform of the financial services regulatory architecture that would strip the Bank of England of its supervisory role.13 This led to the establishment of the FSA, which became the UK’s single monolithic regulator. Thus, responsibility for financial stability in the UK was collectively shared by the Treasury, the BoE and the FSA.14 The Bank of England Act 1998 and the Financial Services and Markets Act 2000 (FSMA) provided the legal bases on which this tripartite regulatory structure was formalised. The interconnecting roles of the three institutions were set out in a Memorandum of Understanding (MoU), which established the framework for co-operation among the three bodies in order to achieve the common objective of financial stability.15 The Bank was charged with maintaining the stability of the monetary and financial system16. The Treasury was responsible for overseeing the tripartite regulatory structure and for authorising support operations in the event of a crisis, 17 while responsibility for prudential supervision as well as of conduct of business aspects had been assigned to the FSA. At that time it was conceived that the consolidated model of regulation and supervision would be ideal for a growing and dynamic financial services sector.18 The alignment and overlap of prudential and conduct of business regulatory objectives, rather than the difference between them, made claims that the integrated regulator was the most suitable model in resolving efficiently and effectively situations of contradictory objectives.19 Such a one-stop Organisation was thought to be more capable to assess the big picture of the financial industry and thus increase efficiency by elim13 14 15 16 17 18

Eilis Ferran, ‘The Break-up of the Financial Services Authority’ (2011) 31 OJLS 455. Alastair Hudson, The Law of Finance (1st edn, Sweet & Maxwell 2009) 750. Ellinger (n 4) 28-34. Cox (n 3) 3. ibid. Clive Briault, ‘Revisiting the Rationale for a Single National Financial Services Regulator’ (2002) FSA Occasional Paper Series No 16 <http://garrettforms.house.gov/uploadedfiles/briault_c_2002_revisiting_the_rationale_for_a_single_national_financial_services_regulator.pdf> accessed 3 August 2013. 19 Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 464.

120

The Bristol Law Review

[Vol. 1

inating duplicated support functions.20 Indeed, a climate of financial stability existed post-1997 and the UK’s approach to regulation was believed to have been crucial towards the flourishing of the UK’s financial markets.21 However, a decade later, the whole system was put to the test during the 2008 crisis and it was found wanting. The wide mandate of the FSA, which included both prudential regulation and conduct of business aspects was proved to be too ambitious to be effective.22 The economic turmoil provided evidence that placing financial regulation of the whole financial system in the hands of a single giant Organisation would inevitably lead to trade-offs amongst the several objectives. In the case of the FSA, conduct of business supervision became the top priority and this was done at the expense of prudential supervision.23 Furthermore, there were fundamental problems with macro-prudential analysis. Such lack of macro-prudential perspective and the failure to specify as well as to utilise macro-prudential tools to spot and combat systemic risks that existed were, according to Turner, “far more important to the origins of the crisis than any specific failure in supervisory process relating to individual firms.”24 The FSA’s approach to macro-prudential supervision was also problematic. Too much reliance was posed on tick-box compliance with rules, while a proper in-depth and strategic analysis, which is pivotal in terms of the effectiveness of prudential regulation, was placed on the sidelines, thus leading to significant gaps.25 According to Lord Turner, the FSA’s regulatory philosophy in supervision was also inefficient. It was based upon blind confidence in the markets and on the idea that the markets develop self-correcting mechanisms.26 This resulted in an excessive focus on the supervision of individual firms rather than on the system as a whole.27 Further, the FSA’s supervision was focused primarily on organizational structures, systems and processes rather than assessing the overall strategy of firms.28 Even more concerning, the crisis highlighted the key weakness of the tripartite system as a whole, rather than the FSA in itself.29 The tripartite arrangement was proved to contain a number of inherent weaknesses in dealing with the financial cri-

20 Martin Čihák and Richard Podpiera, ‘Integrated financial supervision: Which model?’ (2002) 19 N Amer J Econ Fin 135, 138. 21 Iain Begg, ‘Regulation and Supervision of Financial Intermediaries in the EU: The Aftermath of the Financial Crisis’ (2009) 47 JCMS 1107, 1108. 22 Ellinger (n 4) 29. 23 Financial Services Authority, ‘The Turner Review: A Regulatory Response to the Global Banking Crisis’ (FSA 2009), para 2.7 <ww.fsa.gov.uk/pubs/other/turner_review.pdf> accessed 3 August 2013. 24 ibid. 25 HM Treasury, A new approach to financial regulation: judgement, focus and stability (Cm 7874, 2010) para 1.7. 26 Treasury Committee, Banking Crisis: regulation and supervision (HC 2008-09, 767) para 14. 27 Financial Services Authority (n 23) para 2.6. 28 Treasury Committee, Banking Crisis (n 26) para 16. 29 Philip Rawlings, ‘Reform of Bank regulation in the United Kingdom: The Opening Salvo’ (2010) 25 JIBLR 522, 523.

2013]

The Bristol Law Review

121

sis.30 The system’s success was heavily dependent upon a strong working relationship and co-operation between the FSA, the BoE and the Treasury. Yet, in 2007 it became apparent that the relationship between the three bodies was not strong enough. The tripartite authorities did not seem to have a clear leadership structure and there were apparent problems with regards to the communication between the three Institutions, arising from their different cultures and working styles.31 Also, amongst the most important weaknesses of the tripartite structure was that the Bank could exercise a veto power over the Treasury’s proposed actions, therefore making a coordinated action between the Bank and the Treasury impossible.32 Thus, the three institutions did not work as collaboratively as they should have done, resulting in each blaming the other for the crisis.33 Instead of assuming a more alert role in order to avoid the crisis, they unsuccessfully attempted to intervene ex- post.34 Further, the very structure of the tripartite arrangements was flawed in that the body, the FSA, assigned with the authority to oversee the individual banks, was different from that of the Bank of England, the institution possessing the necessary funds and resources to act as the lender of last resort upon a potential failure of a particular bank.35 Therefore, while the Bank had statutory responsibility for financial stability, it had limited tools to deliver it. Yet, as Darling noted, the real problem was the fact that the system had been operating for over a decade in good times.36 As a result, during the 10-years that preceded the financial crisis, the system was thought to be operating effectively. The Bank had concentrated on its monetary policy responsibilities, and although it was in charge of maintaining financial stability, it never appeared necessary for the Bank to properly comprehend the critical relationships within the Banking system.37 At the same time the FSA had been too busy with consumer issues instead of examining the systemic risks, while the Treasury had not considered financial regulation as a priority.38 To say that the banking crisis was solely a consequence of the failed tripartite system would be too simplistic.39 It has been repeatedly argued that the roots of the crisis have a global character focused on the global economic imbalances, the failure to understand and assess the risk, the gradual build-up of debt across the financial system as well as the failure to ensure capital liquidity.40 Yet, to explain the crisis purely in terms of global trends and exogenous events is to ignore the role of financial

30 31 32 33 34 35 36 37 38 39 40

HM Treasury, Judgement, Focus and Stability (n 25) paras 1.1-1.4. Treasury Committee, The run on the Rock (HC 2007-08, 56-I) paras 281-284. Treasury Committee, Accountability of the Bank of England (HC 2010-12, 874) para 28. Alistair Darling, Back from the Brink: 1000 Days at Number 11 (Atlantic Books 2011) 20. Kevin Keasey and Gianluca Veronesi, ‘Lessons from the Northern Rock affair’ (2008) 16 JFR & C 8. Treasury Committee, Accountability of the Bank of England (n 32) para 20. Darling (n 33) 20. ibid. ibid. Jonathan Kirk and James Ross, Modern Financial Regulation (1st edn, Jordan Publishing 2013) 2. HM Treasury, Judgement, Focus and Stability (n 25) 3.

122

The Bristol Law Review

[Vol. 1

regulation in correcting market failures.41 There were indeed real and major failings in the way the tripartite system handled the causes of the crisis and these failures have significantly contributed to the extent and magnitude of the boom. Whether a different regulatory model would be able to cope with such titanic forces is highly questioned.42 However the climate prevailing at that time was that the reform of the regulatory system was an essential constituent for the consolidation of the British economy. The timing of the 2010 elections provided the political parties with the opportunity to use their proposals as a key vote-winning topic.43

1.3 The Proposals for Change The newly elected Conservative Government, after announcing its intention to ‘embark on a programme of reform to renew the UK’s system of financial regulation’44, produced a number of consultation documents45, setting out its forthcoming plans. First and foremost feature of the recommendations was the abolition of the ‘failed tripartite system’ and the restoration of the Bank to a position of centrality in supervision.46 More specifically, it consulted on the abolition of the FSA and the adoption of the so-called “twin peaks” structure of regulation, which refers to the model whereby the conduct of business is distinct from prudential regulation.47 Thus, in place of the unitary regulator (FSA) and the other tripartite arrangements, the Government envisaged the creation of three new regulatory bodies, each with a specific mandate and clarity of responsibility.48 These bodies are: the Financial Policy Committee (FPC), which sits within the Bank of England, and has been assigned with the responsibility of macro-prudential regulation; the Prudential Regulation Authority (PRA), which, as a subsidiary of the Bank is in charge of the supervision of individual financial firms; and lastly, the Financial Conduct Authority (FCA) which is responsible for the supervision of conduct of business.49 The consultation papers were followed by 41 Joseph E Stiglitz, ‘The Role of the State in Financial Markets’ in Proceedings of the World Bank Annual Conference on Developmental Economics (World Bank 1993); Financial Services Authority, ‘A Guide to Market Failure Analysis and High Level Cost Benefit Analysis’ (FSA 2006) <http://spi-romania.eu/admin/filemanager/files/bulgaria/0.3.fsa__a_guide_to_market_failure_and_cba.pdf> accessed 3 August 2013. 42 James Perry and others, ‘The new UK regulatory landscape’ (2011) 84 COB 1, 2. 43 ibid. 44 HM Treasury, Judgement, Focus and Stability (n 25) 4. 45 HM Treasury, Judgement, Focus and Stability (n 25); A new approach to financial regulation: building a stronger system (Cm 8012, 2011); A new approach to financial regulation: the blueprint for reform (Cm 8083, 2011). 46 Conservative Party, ‘From Crisis to Confidence: Plan for Sound Banking’ (Policy White Paper, 2009) <http://conservativehome.blogs.com/files/planforsoundbanking.pdf> accessed 3 August 2013. 47 Michael W Taylor, ‘Twin Peaks’ (2009) Financial World Online <http://fwarchive.ifslearning.ac.uk/ financial_world/Archive/2009/2009_09sept/Features/Michael%20Taylor/pdf/17268.pdf> accessed 14 July 2013. 48 HM Treasury, Blueprint for Reform (n 45) para 1.13. 49 Treasury Committee, Financial Regulation: a preliminary consideration of the Government’s proposals (HC 2010-11, 430-I) para 1.

2013]

The Bristol Law Review

123

more than 350 formal responses50, which constructively contributed towards refining the Government’s proposals and ultimately towards the emergence of the Financial Services Act 2012, which provided the legal basis for the new structure.

1.4 Conclusion Overall, the purpose of this introductory Chapter was to provide the basis upon which the remainder of this paper is structured. The research question has been set out more explicitly while the justification of the research question, the approach and scope of the paper have been defined. The Chapter also referred to the major criticisms and shortcomings of the old tripartite system, which gave rise to the proposals for reform as outlined above.

Chapter 2: The New Regulatory Landscape 2.1 Introduction This Chapter focuses on the salient features of the Act with respect to the rearrangement of the regulatory structure with the aim to identify their strengths and weaknesses. The new role of the Bank of England as well as the new bodies that have emerged, that is the FPC, the PRA and the FCA, are analysed and discussed in turn. The criticisms, comments and pre-legislative scrutiny put forward by the Treasury Select Committee (TSC) as well as by the Joint Committee are used as a background to the analysis as they help identify the aspects of the legislation that the Government did not change, despite the criticisms and concerns expressed. The issues therefore raised in the discussion are some of the contentious aspects of the regulatory reform that were raised during the pre-legislative scrutiny process.

2.2 The Bank of England and the Financial Stability Objective The BoE’s objective has been modified so as to reflect the BoE’s new role and expansion of responsibilities.51 It has changed from ‘to contribute to the protection and enhancement of financial stability’ to ‘to protect and enhance the stability of the system of the UK.’52 Although in terms of the wording no substantial alteration has been made, the revised objective signifies the end of the tripartite system era, whereby the Bank was sharing the responsibility for financial stability with the FSA. As the Chairman of the Bank’s Court, Sir David Lees, said, “under the previous arrangements, the Bank had a responsibility only to ‘contribute’ to financial stability” which resulted in the Bank’s focus remaining on monetary policy aspects.53 The Bank’s revised objec50 51 52 53

HM Treasury, Blueprint for Reform (n 45) para 1.15. HM Treasury, Blueprint for Reform (n 45) para 1.29. FSA 2012, s 2(2). Treasury Committee, Accountability of the Bank of England (n 32) para 23.

124

The Bristol Law Review

[Vol. 1

tive suggests that now the BoE is the ultimate guardian of financial stability. Evidently, financial stability is a key term within the newly introduced legislation. It is a concept difficult to define in practice and also, given the complexity of today’s financial markets, financial stability is even harder to reach.54 Although these concerns were highlighted by the TSC, which encouraged the Government to provide a more detailed view as to what it considers to constitute financial stability, no detailed definition of the concept was produced. Yet, on the other hand, to incorporate in the legislation a settled definition of such a rigorous concept, whose meaning changes over time, would run the risk of setting in stone a definition that proves to be unfit and inflexible over time.55 Therefore, under the 2012 Act, the power to determine the strategy in relation to financial stability for the Bank rests with the Court of Directors, while the FPC and the Treasury must provide consultations for the Court on the determination of a financial stability strategy.56 Both the TSC as well as the Joint Committee made claims that the Court’s role should be enhanced in order to efficiently cope with its new responsibilities. In particular it was argued that the Court was an anachronism and that it should be replaced with a new smaller Supervisory Board, comprising of eight members, instead of the existing twelve, with prudential policy expertise so as to ensure that they successfully carry out the duties of the Board.57 These recommendations have not been fully considered by the Government. Instead, an Oversight Committee has been established as a sub-committee of the Court, consisting of the non-executive directors with the responsibility of keeping under review the Bank’s decisions with respect to its financial stability policy.58 Since the exact recommendations on the Court’s structure have not been implemented, doubts remain as to whether the Court is appropriate for assuming such a major policy-setting role.59

2.2 Financial Policy Committee (FPC) As it has been mentioned above, the core weakness of the old regulatory structure was, according to the Government, the fact that ‘no single Institution had the responsibility and authority of powers to monitor the system as a whole.’60 The Government therefore envisaged the creation of the FPC to fill this gap. Therefore, the FPC is responsible for macro-prudential regulation; to monitor the financial system as a whole.61 As a body formed within the BoE, the Committee’s core objective was set out as ‘contributing towards the protection of the Bank’s financial stability objective.’62 54 55 56 57 58 59 60 61 62

Treasury Committee, Financial Regulation (n 49) para 11. Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 3. FSA 2012, s 4; Financial Services and Markets Act 2000 (FSMA 2000), s 9A. Treasury Committee, Accountability of the Bank of England (n 32) para 41. FSA 2012, s 3; Bank of England Act 1998 (BEA 1998), s 3A. Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 4. HM Treasury, Judgement, Focus and Stability (n 25) para 1.6. James Perry and others, (n 42) 7. FSA 2012, s 4; BEA 1998, s 9C(1).

2013]

The Bristol Law Review

125

In order to properly carry out its role, the Committee was assigned with the responsibility of identifying, monitoring and subsequently removing aggregate systemic risks and vulnerabilities with the goal to protect and enhance the UK financial system’s resilience.63 However, it should be noted that the FPC is a policy committee, rather than a regulator in itself, which means that it does not supervise financial firms directly, but rather it has been vested with the power to make recommendations and give directions to the PRA and the FCA on how to implement any regulatory interventions.64 Whilst the initial proposals envisioned the FPC’s role to be solely the enhancement of financial stability, the debates during the consultation process highlighted the interaction between financial stability and economic growth, inducing therefore the Government to refine and complement the FPC’s objectives.65 The TSC also emphasised in its report that enhancing financial stability involves trade-offs with a number of other policy objectives, including economic growth.66 The new legislation has therefore inserted a secondary objective for the FPC, which is to support the Government’s economic policy including its objectives for growth and employment.67 The Treasury is under a duty to make recommendations to the FPC at least once a year about “matters that the FPC should regard as relevant to its understanding of the financial stability objective, the FPC’s responsibility for achieving that objective and matters that the FPC should consider when exercising its powers.”68 However, the Act specifies that these remit letters issued by the Treasury are not binding. This, at least theoretically, means that ultimately it is the FPC that decides on whether or not to accept the recommendations of the Treasury. This approach was heavily criticised by the Joint Committee which argued that this would result in lack of political accountability, therefore urging the Government to amend the legislation so that the Treasury, and not the FPC, has the final say about the interpretation of the remit of the FPC.69 Despite these concerns, the Government did not follow the Joint Committee’s recommendations per se. Instead, a reporting mechanism has been inserted whereby the FPC must report on whether it accepts the Treasury’s recommendations and if not, to explain and publish the reasons for disregarding them.70 On the one hand, it is true that the FPC needs to be able to function independently and making the Treasury remits binding on the FPC would compromise the Committee’s independence.71 On the other hand, however, the FPC has a crucial role to play and it is likely to make decisions with respect to financial stability that will not be 63 64 65 66 67 68 69

FSA 2012, s.4; BEA 1998, s 9C(2). FSA 2012, s 4; BEA 1998, ss 9H and 9N-9Q. HM Treasury, Blueprint for Reform (n 48) para 1.26. Treasury Committee, Financial Regulation (n 49) para 38. FSA 2012, s 4; BEA 1998, s 9C(1). FSA 2012, s 4; BEA 1998, ss 9D and 9E. Joint Committee on the draft Financial Services Bill, Draft Financial Services Bill (2010-12, HL 236, HC 1447) para 49. 70 FSA 2012, s 4; BEA 1998, s 9E(3). 71 Richard Barwell, Macroprudential Policy: Taming the wild gyrations of credit flows, debt stocks and asset prices (Palgrave Macmillan 2013) 82.

126

The Bristol Law Review

[Vol. 1

popular with the Government or the general public.72 In this sense, the “explain” part of the reporting obligation does not go as far as allowing the Treasury to actually dictate the strategy with respect to financial stability, but usefully indicates that the FPC should have some discretion to neglect recommendations from the Treasury.73 On the one hand it could be argued that the legislation fails to give the Treasury an adequate say. However, it should be noted that the 2012 Act has introduced special provisions relating to the financial crisis whereby the Bank is required to notify the Treasury for the need for public funds,74 which make it almost impossible in practical terms for the FPC not to comply with the Treasury recommendations. The Government clarified in the proposals its commitment to creating an “open, accountable and effective FPC.”75 Indeed, the mechanisms that apply to the FPC need to be proportionate with the FPC’s wide-ranging powers.76 To this end, both internal and external channels of accountability have been introduced. The Court of Directors internally reviews the FPC’s procedures in order to ensure the Committees’ contribution to the Bank’s financial stability objective.77 The involvement of the Court in the operation of the FPC is not convincing enough. As Goodhart argues, ‘it is difficult to believe that the involvement of the Court in the operation of the FPC was ever meant to put them in a position of opining on the validity of the FPC’s policy.”78 Externally, the FPC is accountable to the Parliament through its six-month financial stability reports, as well as the Bank’s annual report, which will be laid to the Parliament by the Treasury.79 Furthermore, the TSC will scrutinize the FPC’s performance. The FPC is indirectly accountable to the Treasury through formal meetings between the Governor of the Bank and the Chancellor, which will be followed by a published high-level record of the discussion.80 It should be noted that the FPC is a sub-committee of the Court rather than a committee of the Bank in its own right, like the Monetary Policy Committee is.81 The TSC expressed considerable criticism on this aspect, arguing that the fact that the FPC does not have equivalent standing with the MPC might result in the FPC being viewed as less powerful.82 The Government’s decision not to change the FPC’s sub-committee status is therefore problematic, given the primary statutory responsibility that the FPC has for maintaining financial stability. With regards to the composition of the FPC, eleven members in total make up the FPC’s membership, consisting of the Governor of the Bank, the three Deputy 72 73 74 75 76 77 78 79 80 81 82

Cox (n 3) 13. Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 4. FSA 2012, ss 58-63. HM Treasury, Blueprint for Reform (n 45) para 1.27. Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 4. FSA 2012, s 4; BEA 1998, s 9A. Goodhart (n 5) 114. FSA 2012, s 4; BEA 1998, s 9W. ibid. FSA 2012, s 4; BEA 1998, s 9B. ibid.

2013]

The Bristol Law Review

127

Governors of the Bank, the chief executive of the FCA, one Bank executive director appointed by the Governor, four external members appointed by the Chancellor and a non-voting representative of the Treasury.83 A concern that was highlighted by the TSC during the consultation process was the over-dominance of the FPC’s membership by the BoE, which runs the risk of producing the ‘groupthink’ effect within the FPC.84 Given the imbalance between the external membership and Bank employees, it is doubtful whether this small number of external members will be able to challenge the BoE ‘alliance’ and have a fair say by providing alternative perspectives.85 The Government chose not to follow the TSC’s proposal to increase the number of external members, although it agreed that the members should have appropriate experience in financial services.86 Nevertheless, it could be argued that, without a balance between internal and external members, crucial doubts regarding the credibility of the FPC will remain.

2.3 Prudential Regulation Authority (PRA) In headline terms, the Prudential Regulation Authority (PRA) has been established as a subsidiary of the BoE and is the UK’s prudential regulator for individual firms, such as banks, insurers, building societies and a limited number of investment firms,87 while the FCA is responsible for conduct of business. However, the detail is more complex because in reality the PRA’s scope with respect to regulatory authority is limited to prudential supervision of the firms that are considered to be important for the British financial system.88 In numbers, the PRA is responsible for roughly 3,000 firms while responsibility for prudential regulation for the rest of the firms lies with the FCA.89 This means that most firms are supervised for both prudential and conduct purposes by the FCA, while only the firms that are considered to be systemically important are dual-regulated by the PRA and FCA.90 One of the major concerns expressed by the TSC was that the PRA’s efforts would be focused on the supervision of medium and high-impact firms.91 As the TSC stated, the experience with Northern Rock has shown that a failure of a low-impact company still endangers a systemic loss of confidence and thus the PRA would need to have a strong justification for reducing the supervisory effort for such low-impact Institutions.92 In this sense, the mechanism for the identification of the “PRA-designat83 84 85 86 87 88 89

ibid. Treasury Committee, Financial Regulation (n 49) paras 40-50. Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 5. FSA 2012, s 4; BEA 1998, s 9B(3). HM Treasury, Blueprint for Reform (n 45) 3. Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 10. Oliver Haill, ‘Why the FSA was split into two bodies’ Financial Times (London, 8 May 2013) <www.ftadviser.com/2013/05/08/regulation/regulators/why-the-fsa-was-split-into-two-bodies-SX5toVpnEQtBbYNlcUC9xJ/article.html> accessed 26 July 2013. 90 Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 10. 91 Treasury Committee, Financial Regulation (n 49) para 91. 92 ibid.

128

The Bristol Law Review

[Vol. 1

ed activities” is central to the new regulatory system.93 Pursuit to the new s.22A of the FSMA, the designation of “PRA-regulated activities” may be set out by the Treasury by means of an order.94 Further, the PRA’s approach with regards to the identification of systemically important firms needs to be clear. The size, complexity, business type and interconnectedness of a financial institution constitute the criteria that the PRA has adopted in order to determine the scale of a firm’s potential impact.95 Although in general terms the mechanisms introduced for the identification of the firms eligible for PRA designation are clear, it needs to be seen how they will be applied in practice in the long term. The PRA is required to contribute to the promotion of financial stability by way of micro-prudential supervision.96 More specifically, its general objective is “to promote the soundness and safety of PRA-authorised persons.”97 The 2012 Act acknowledges that the PRA should seek to ensure two things: first, to ensure that the business of PRA-authorised persons is conducted in such a way so that it does not adversely affect the stability of the financial system and second, to minimise any potential adverse effects on financial stability.98 This suggests that the PRA has not been envisaged as a zero-failure regulator. Instead, the PRA’s approach rests on the idea that firms are indeed allowed to fail, however the PRA’s responsibility is to ensure that the failure does not penetrate the financial system and harm the system’s financial stability by taking the necessary actions. The Joint Committee welcomed this approach and agreed that the fundamental concern for the PRA when regulating firms should be to prevent firms, either by the way they conduct their business or in case of failure, from threatening the stability of the system.99 The Government further assured that the PRA’s supervisory approach is to have greater focus on the resolvability of financial firms so as to ensure that failures arise in an orderly manner and that systemic impact is minimised.100 The PRA also has a second objective, which focuses on insurance and is framed as ‘contributing to the securing of an appropriate degree of protection for policyholders.’101 This insurance objective has perhaps been designed in order to deal with concerns that the PRA‘s focus on the financial stability implications of banks may result in a lack of emphasis on non-systemic firms, like insurers.102 93 Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 10. 94 FSA 2012, s 9; FSMA 2000, s 22A. 95 Prudential Regulation Authority, ‘The Prudential Regulation Authority’s approach to Banking supervision’ (Bank of England 2013) <www.bankofengland.co.uk/publications/Documents/praapproach/ bankingappr1406.pdf> accessed 3 August 2013, para 49. 96 Andromachi Georgosouli, ‘The FCA-PRA coordination scheme and the challenge of policy coherence’ (2013) 8 CMLJ 62, 64. 97 FSA 2012, s 5; FSMA 2000, s 2B(2). 98 ibid, s 2B(3). 99 Joint Committee (n 69) para 76. 100 Treasury Committee, Financial Regulation: a preliminary consideration of the Government’s proposals: Government’s Response to the Seventh Report from the Committee (HC 2010-2012, 958) para 27. 101 FSA 2012, s 6; FSMA 2000, s 2C(2). 102 Cox (n 3) 16.

2013]

The Bristol Law Review

129

The Government was rather enthusiastic to encourage regulators to move away from a tick-box compliance, which was found to constitute part of the problems associated with the FSA.103 Indeed, much emphasis has been placed on the fact that the PRA’s approach to supervision will be judgement-led. This implies that the PRA staff should now spend more time in understanding the firms’ business and subsequently use its judgments in order to address vulnerabilities within individual firms.104 It has been submitted that the success of such judgement-led regulation is ultimately dependent on the expertise and competence of the PRA staff.105 To this extent, it remains doubtful whether the FSA staff, the majority of which joined the PRA, is well equipped and prepared to make regulatory decisions, since they were used to the tick-compliance approach.106 Further, it remains to be tested how the PRA will be able to handle situations where disagreements exist between the PRA’s judgments and the board of a supervised firm.107 Responsibility for the conduct of business of all firms rests with the Financial Conduct Authority (FCA). In essence, the FCA replaces the FSA since it has inherited the majority of the FSA’s market conduct regulatory functions and is in charge of the prudential regulation of firms not regulated by the PRA.108 The FCA has a critical range of duties in addition to consumer protection and its remit is considerably wider than the PRA.109 The TSC highlighted the importance of framing the FCA’s remit in a clear and unambiguous manner.110 Thus, its statutory objectives have considerably evolved since the 2010 proposals. The FCA’s strategic objective has been amended from ‘protecting and enhancing the confidence in the UK financial system’ to ‘ensuring that relevant markets function well.’111 This amendment emerged due to the TSC’s concern that the original formulation would run the risk of encouraging the FCA to pursue a course of seeking to enhance confidence in markets when that confidence might be misplaced.112 It should be noted however that the TSC recommended the removal of the strategic objective altogether.113 Arguably, amending the strategic objective rather than removing it runs the risk of generating further uncertainties for the future of conduct regulation since it is difficult to define when the markets function ‘well’ and how this can be measured.114 The FCA’s strategic objective is defined by the pursuit of its three operational 103 104 105 106 107 108 109 110 111 112 113 114

HM Treasury, Blueprint for Reform (n 45) 3. Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 12. Treasury Committee (n 49) para 95. ibid. ibid. Perry (n 42) 4. Cox (n 3) 17. Treasury Committee (n 49) para 118. FSA 2012, s 6; FSMA 2000, s 1B(2). Treasury Committee, Financial Conduct Authority (HC 2010-12, 1754) para 34. ibid paras 29-30. Charlotte Hill and Victoria Silver, ‘Conduct Regulation: déjà vu?’ Financial Risks Today (London, March-April 2012), 39 <www.shlegal.com/Asp/uploadedFiles/File/Newsletters/2012_newsletters/03_12/financial%20risks%20today.pdf> accessed 3 August 2013.

130

The Bristol Law Review

[Vol. 1

objectives, which are to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the British financial system and to promote effective competition in the interests of consumers.115 The greatest talking point in relation to the operational objectives is the FCA’s role with respect to competition.116 The promotion of competition became an operational objective subsequent to the recommendations put forward by the TSC, which urged the Government to place the concept of competition at the centre of the FCA’s culture.117 However, Ferran submitted that the FCA’s competition objective may create tensions in the relationship between the PRA and the FCA since there is the potential that certain actions taken by the FCA, in its capacity as competition regulator, could pose a threat to stability, thus giving rise to more situations in which the PRA veto power118 might have to be invoked.119 Additionally to these specific objectives, the legislation includes a number of other regulatory principles that the FCA must have regard in discharging its general duties.120 Although the focus of the FCA’s objectives has been considerably narrowed compared to the FSA, this complex arrangement of strategic and operational objectives as well as the incorporation of the ‘have regard’ duties are conflicting to the overall idea upon which the new structure was envisioned, which is simplicity and clarity.121 Consequently, there are doubts as to whether the statutory mandate provides an unambiguous basis for action for the FCA. It remains to be seen how the FCA will handle its several tiers of objectives and duties over time and whether it will perform better than its predecessor.

2.5 Coordination between the FCA and the PRA While the split of the FSA into PRA and FCA addresses, to a considerable extent, the criticisms in relation to the broad mandate that the FSA could not handle, it gives rise to a number of other concerns. At the core of these concerns is how the two authorities will co-operate and interact with each other, since the effective co-ordination between the FCA and the PRA is a pre-requisite for the success of the new regulatory framework. To this end, the Government has legislated a variety of coordination mechanisms. The general framework of the coordination scheme is set out in the Financial Services Act.122 More specifically, under sections 3D and 3E of the amended FSMA, the two bodies are under a duty to ensure a co-ordinated exercise of their functions and maintain a Memorandum of Understanding (MoU) on issues relating to the coordination and cross-membership of Boards.123 115 116 117 118 119 120 121 122 123

FSA 2012, s 6; FSMA 2000, ss 1C-1E. Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 14. Treasury Committee (n 112) para 28. FSA 2012, s 6; FSMA 2000, s 3I. Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 14. FSA 2012, s 6; FSMA 2000, s 1B(5). Treasury Committee (n 112) paras 17-18. Georgosouli (n 96) 65. FSA 2012, s 6; FSMA 2000, ss 3D-3E.

2013]

The Bristol Law Review

131

The TSC, after considering the unsatisfactory past experience with the FSA, the Bank of England and the Treasury operating under a MoU, has recommended that the relationship between the FCA and PRA be settled explicitly in primary legislation.124 Regardless of the TSC’s scrutiny, substantial aspects with regards to the coordination of the two bodies have been left uncovered. Specifically, although the legislation provides for a general duty to coordinate, the threshold of this duty has been left to the MoU, which does not provide more details to this effect.125 Also, the failure of the Act to provide clear and fully-fledged guidance with respect to the coordination of the two bodies gives rise to potential regulatory gaps or overlap.126 However, the statutory provisions with regard to the regulator’s requirement to review the MoU annually and that any revisions to it must be laid before the Parliament127, might assist to minimise these risks. Nevertheless, as Georgosouli argues, the articulation of these accountability mechanisms is still insufficient in the sense that a problem in the effectiveness of the PRA-FCA relationship will only be identified after a year of a cumbersome cooperation.128 The risk of the PRA and the FCA taking inconsistent approaches to prudential regulation is another notable issue that was given considerable weight during the pre-legislative scrutiny process.129 More specifically, the Joint Committee was concerned that under the draft Bill, the PRA alone could approve individuals holding significant influence in dual regulated firms.130 Although the general duty for the PRA and the FCA to consult one another was part of the draft Bill131, it would have still been possible for the PRA to exercise its responsibility to approve without consulting the FCA. To address this concern, the Government has amended the legislation so that now the FCA has to give its consent before the PRA approves any persons performing significant influence functions in a dual-regulated firm.132 This requirement is certainly a step in the correct direction and it addresses to a considerable extent the risk of divergent approaches that could produce adverse ramifications for the dual-regulated firms that are on the receiving end.133 The PRA’s veto power, which allows the PRA to intervene to prevent the FCA from taking action where it considers that such action could threaten financial stability134, appears problematic in that it blurs the balance of power between the PRA and the FCA, which are supposed to have equal status.135 Thus questions remain as to 124 125 126 127 128 129 130 131 132 133 134 135

Treasury Committee (n 112) para 90. Georgosouli (n 96) 67. Treasury Committee (n 112) para 90. FSMA 2000, s 3E(4)-(6). Georgosouli (n 96) 70. Joint Committee (n 69) para 291. ibid. FSA 2012, s 6; FSMA 2000, s 3D. FSA 2012, s 6; FSMA 2000, s 55F(2). Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 12. FSMA 2000, s 3I. Georgosouli (n 96) 67.

132

The Bristol Law Review

[Vol. 1

the appropriateness and justification of introducing a veto over the FCA’s powers.136 Although the threshold for the PRA veto is high and several measures have been introduced so as to make the PRA properly accountable for the use of the veto,137 inter-institutional tensions are still possible and even if the veto power is never used, it still runs the risk of turning the FCA into a junior partner.138 Further, the legislation fails to set out in more detail the circumstances in which a veto could be used.139 In any event, the right of the PRA to direct the FCA to refrain from its actions should be seen as symbolic. As Smethurst argued, if the veto power is ever used, there can be no clearer sign that co-ordination and cooperation has failed”.140 The FCA-PRA cooperation mechanisms adopted by the UK are not new. Australia has adopted similar arrangements for the coordination of the Australian Prudential Regulation Authority and the Australian Securities and Invest,141 and evidence has shown that the coordination of supervisory efforts by two distinct authorities is not always effective.142 Therefore shortcomings with respect to the cooperation between the FCA and the PRA should be expected and perhaps they should be viewed as an unavoidable disadvantage that the “twin peaks” model of financial supervision entails.

2.6 Conclusion The Government has come a long way within a short period and the pre-legislative scrutiny stage has contributed towards a progressive and proactive refinement of the reform. The new legislation reflects a major shift in the objectives of the UK Government. The first and foremost goal of the UK government is now the preservation of financial stability. Overall, the new Government’s reform programme considered that the most problematic aspect under the tripartite model was that no institution had the capacity nor the responsibility to monitor the system as a whole, to identify the mischief and act upon it in due time, and that the only competent body to undertake such a role was the BoE.143 The next chapter therefore engages in an in-depth evaluation of the suitability of the Bank of England as a prudential regulator in order to determine whether the Government’s decision was indeed the correct one in a climate of crisis management.

136 Treasury Committee (n 112) para 78. 137 Treasury Committee, Financial Conduct Authority: Report on the Government’s Response (HC 201012, 1857) paras 35-38. 138 Georgosouli (n 96) 68. 139 Treasury Committee (n 112) para 78. 140 James Smethurst, ‘Twin Peaks: Bridging the Gap. Co-ordination under the New Regulatory Framework’ (2012) 27 JIBLF 33, 35. 141 Georgosouli (n 96) 66. 142 Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 476. 143 Philip Rawlings, ‘Bank Reform in the UK: Part II – Return to the Dark Ages?’ (2011) 8 ICR 55, 64.

2013]

The Bristol Law Review

133

Chapter 3: The Bank of England Takes It All The Strengths and Weaknesses of Transferring Responsibility for Prudential Supervision to the Bank 3.1 Introduction The BoE’s role as a prudential supervisor could be characterised as déjà vu.144 The Bank used to be in charge of the prudential supervision of financial institutions under the Banking Act 1987 until 1997. Within days of coming into power, the Labour Government considered the passing of regulatory power from the Bank to the FSA as a necessary step to end financial scandals and financial crises.145 The shortcomings of the pre-1997 supervisory system were already exposed during the 1980’s and 1990’s with the bankruptcy of Johnson Matthey Bankers and the failure of the Bank of Credit and Commerce International Banks, and it was against this background that the Bank was stripped of its supervisory responsibilities back then.146 Unsurprisingly, a decade later, following another credit crunch, yet bigger in magnitude than any other economic boom that took place in the past, the BoE has once again clocked in. Such metronome of cyclicality suggests that the Bank’s inevitable superiority as prudential supervisor should not be assumed and that there are arguments for and against placing prudential supervision within the BoE.147 The purpose of this chapter is therefore to examine these arguments in order to conclude whether the Government has properly considered the potential risks of combining monetary policy and prudential supervision within the Bank.

3.2 Prudential Supervision In or Outside the Bank of England? Clearly, the theoretical consensus, apart from the 1990’s banking failures, behind the Labour Government’s decision to opt for the separation of prudential supervision from the Bank cannot be ignored.148 A fundamental argument back then was that the Bank’s monetary policy and prudential supervision would inevitably lead to conflicts of interest.149 There were concerns that institutional failures could potentially undermine the reputation of the Bank and that there would be serious moral hazard risks due to the assumption by Institutions that in case of financial hardship they 144 Clare Chambers, ‘Cyclical deja vu: emancipation of the FSA and the rise of the Bank of England once more’ (2010) 13 FRI 1 <www.nabarro.com/downloads/financial_regulation_international_aug_2010. pdf> accessed 3 August 2013. 145 ibid. 146 Eilis Ferran,‘Examining the UK experience in adopting the single financial regulator model’ (2003) 28 Brook J Int’l Law 257. 147 Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 11. 148 Yong-Woo Lee, ‘The Breakup of the UK Financial Services Authority and its Implications’ (2012) 4 KCMI 62, 69. 149 ibid, 68.

134

The Bristol Law Review

[Vol. 1

could rely on bailouts.150 There was also the issue of conflict of objectives. To this end, Goodhart and Schoenmaker argue that monetary policy and supervisory policy cannot both be placed under the auspices of the Bank due to the fact that the former is counter-cyclical while the latter pro-cyclical.151 Therefore, by combining prudential supervision with monetary policy, the Bank becomes unable to properly adjust the interest rates when needed to fight inflation at times when banks are likely to fail.152 Although Padoa-Schioppa asserts that no persuasive evidence has been established in relation to the conflicts of interest argument153, Ferran submits that these lines of argument remain relevant and are of particular importance.154 However, the coin is always two-sided. The Conservative White Paper155 put a number of arguments in order to justify its decision to locate prudential supervision within the Central Bank. These arguments relate to the need for the effective and comprehensive transmission of information between monetary activities and supervisory matters.156 The Government further explained that such monopolisation of powers of the Bank of England is premised on the idea that central Banks can bring together monetary stability with systemic regulation, and are therefore key players as far as prudential regulation is concerned.157 Also, the Government, when asked to explain the reasons for making the PRA a subsidiary of the Bank, stated that such action would lead to a more effective cooperation and harmonized action between the micro-prudential regulator, which addresses firms-specific risks, and the Bank of England, which through the FPC, addresses system-wide risks.158 The question on whether a Central bank should also be in charge of pursuing financial stability through prudential oversight has been a long-standing one and while there are arguments for and against, there is no overwhelming case on either side. Despite this, Central Banks cannot be completely excluded from the supervisory arena.159 The basis for this argument is that the soundness of the banking sector and the implementation of monetary policy by the Central Bank are inter-related in the sense that the banking sector is the main channel through which monetary policy is transmitted.160 So in essence the Central Bank’s role as the lender of last resort and 150 Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 466. 151 Charles Goodhart and Dirk Schoenmaker, ‘Institutional Separation between Supervisory and Monetary Agencies’ (1993) Special Paper 52, LSE Financial Markets Group Paper Series, 7 <www.lse.ac.uk/ fmg/documents/specialPapers/1990s/sp52.pdf> accessed 3 August 2013. 152 Tomasso Padoa-SchioppaBegg,, prevent another crisis?’,terprise Affairs ‘Financial supervision: insider or outside central banks?’ in Jeroen JM Kremers, Dirk Schoenmaker and Peter J Wierts (eds), Financial Supervision in Europe (Edward Elgar 2003) 165. 153 ibid. 154 Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 466. 155 Conservative Party (n 46). 156 Marcus Killick, ‘Twin peaks – a new series or a new chimera? An analysis of the proposed new regulatory structure in the UK’ (2012) 33 Comp Law 366, 374. 157 HM Treasury, Judgement, Focus and Stability (n 25) para 2.13. 158 HM Treasury, Building A Stronger System (n 45) para 3.38. 159 Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 466. 160 Lee (n 148) 70.

2013]

The Bristol Law Review

135

overseer of payment systems can only be implemented through supervisory powers. More specifically, the confidential information gathered for supervisory purposes is particularly important for the monitoring of payment systems and the safe-proofing of other essential infrastructures that are necessary for the smooth operation of monetary policy.161 Indeed, at the time of creation of the FSA, critics of the UK tripartite arrangements alleged that the removal of bank regulation from the BoE’s lender of last resort responsibilities was highly risky since such action would jeopardise the Bank’s ability to adequately perform its lender of last resort responsibilities.162 Also, information-related synergies may work the other way round; that is where a Central Bank’s expertise into financial market developments assists with the effective performance of supervision.163 However, it should be noted that under the new regime, neither the Bank itself, nor the FPC have direct information-gathering powers.164. More specifically, the power to collect information in relation to financial stability rested with the FSA under the previous arrangements and following the enactment of the Financial Services Act 2012 this power has now been passed to the PRA.165 The PRA is required to provide the Bank with any information that it considers relevant or that may contribute to the achievement of the Bank’s financial stability objective.166 This requirement applies even if the Bank has not requested any sort of disclosure of information.167 Therefore the successful and adequate flow of information within the Bank is highly dependent on how effectively the PRA will carry out its obligation to transfer financial stability-related information to the Bank. In this respect, it could be argued that the establishment of the PRA as a subsidiary of the Bank is beneficial in that in this way it is able to carry out its requirement to provide the Bank with information more efficiently, as compared to the FSA, which was an autonomous independent body. So, as it has been explained above, due to the fact that the Bank cannot entirely disappear from the supervisory field, the alternative to placing the micro-prudential regulator within the Central Bank, is to establish proper arrangements to ensure the effective coordination between the independent supervisory body and the Bank.168 Taking into account that this was the rationale behind the old tripartite arrangements and that such cooperation between the FSA and the BoE did not actually take place, resulting in the system being unable to cope under the tension of the crisis, it could be said that shifting prudential supervision under the BoE appears to be an effective way of dealing with the cooperation deficiencies that took place in the past. Besides that, the UK is not alone in restoring its central bank to a position of centrality in supervi161 Padoa-Schioppa (n 152) 169. 162 Michael W Taylor, ‘The Road from “Twin Peaks” – And the Way Back’ (2009) 16 CJIL 61, 64. 163 David Green, ‘The Relationship between Micro-Macro-Prudential Supervision and Central Banking’ in Eddy Wymeersch, Klaus J Hopt and Guido Ferrarini (eds), Financial Regulation and Supervision: A post-crisis analysis (OUP 2012) 59. 164 Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 9. 165 FSMA 2000, s 165A. 166 FSMA 2000, s 354C. 167 Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 9. 168 Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 467.

136

The Bristol Law Review

[Vol. 1

sion.169 A number of other European Countries have also moved towards a twin peaks approach, amongst them, Belgium and France placing responsibility for prudential supervision of financial markets on their Central Banks while responsibility for conduct matters is vested in external bodies.170 While there is merit in the arguments favoring the combination of monetary policy with supervisory policy, not everyone is convinced that the Government’s decision to establish the FPC within the Bank and to make the PRA a subsidiary of the Bank was conducive. In modifying the regulatory structure, the Government made claims that there was no hope in the model of the single integrated prudential regulator and consumer regulator because experience has shown that such a model inevitably leads to a focus on consumer protection at the expense of prudential supervision.171 Similarly, the fact that systemic regulation has now migrated within the BoE creates an identical argument: There is still a potential risk that trade-offs will be generated between prudential supervision and monetary policy since now a single entity, the Bank, is responsible for both.172 Furthermore, there are doubts with regards to the necessity of making the PRA a subsidiary of the Bank. More specifically, a fundamental question that arises from the new arrangements is whether the PRA is adequately distant from the Bank’s responsibilities for monetary functions.173 The Government highlighted the importance of the PRA’s operational independence and that the PRA’s operational independence is further supported by the fact that the PRA has a strong independent board of which the majority are non-executives.174 At the same time it has been repeatedly stated that the rationale behind placing firm-specific regulation under a subordinate body of the Bank is that in this way responsibility for macro- and micro-prudential regulation is brought together under the aegis of the Bank.175 Clearly, there is a contradiction in the Government’s flow of arguments, which suggest that the design of the structure was rather driven by pragmatic considerations, such as the desirability to split prudential and market conduct supervision, rather than the actual principle of making the PRA a subsidiary of the Bank.176 In order to demonstrate the effects of the establishment of the PRA as a subsidiary of the Bank, a comparative look at the Australian model is warranted. In Australia both the possibility to vest responsibility for prudential regulatory functions in the Reserve Bank of Australia (RBA), as well as the possibility to establish a new standalone regulator have been considered. It was concluded that the benefits of separating prudential supervisory responsibilities from the RBA, substantially outweigh the case

169 170 171 172 173 174 175 176

Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 1. ibid. Conservative Party (n 46) 23. Killick (n 156) 374. Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 14. HM Treasury, Building A Stronger System (n 45) para 3.37. Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 468. ibid.

2013]

The Bristol Law Review

137

against separation.177 Thus, the Australian Prudential Regulation Authority (APRA) was established as a stand-alone regulator not under the auspices of the RBA. Particular weight was given to the argument that there are non-bank areas of prudential regulation involved, which could not be sufficiently dealt with if the amalgamated regulatory role migrated to the Central Bank.178 The argument goes that inevitably a Central Bank’s approach to regulation is prejudiced by the fact that it is a bank itself.179 Thus, assigning the responsibility for prudential regulation to the Central Bank would run the risk that it would approach regulation from a limited banking perspective.180 This contention is particularly relevant to the new British regime, under which the PRA is responsible for the regulation of institutions other than Banks, such as insurers and investment firms. However, despite these pertinent arguments, the UK chose not to follow the Australian supervisory model at the more detailed level, despite the fact that it was considered with enthusiasm.181

3.3 Conclusion Overall, there is no clear-cut indication in terms of the optimal way of assigning supervisory tasks. The question on whether the Bank of England should be in charge of prudential supervision attracts both for and against arguments. In one respect, the Government’s decision to give such wide-ranging powers to the Bank is understandable, since at the time of the proposals, the prevailing mood was that the notion of having an Institution responsible for individual banks separate from the one that has the money, capacity and resources to act in the case of a bank failure, was risky and flawed.182 However, the discussion above seems to suggest that the UK Government has not carefully considered all the risks that the transfer of prudential regulation to the BoE entails.183 Nevertheless, the decision to move prudential supervision to the Bank is acceptable and it remains to be seen how it is going to function in practice.

Chapter 4: Concluding Remarks A Critical Evaluation of the New Regime The purpose of this paper was to examine the new regulatory architecture in the UK. It aimed to examine critically the implications of the new structure of financial services supervision in order to determine whether the new regime is the optimal way for the restoration of financial stability in the UK. The first Chapter provided the fodder for the analysis that followed. The major shortcomings of the old regulatory 177 Financial System Inquiry, ‘Financial System Inquiry Final Report’ (Commonwealth of Australia 1997), 313-316 <http://fsi.treasury.gov.au/content/FinalReport.asp> accessed 15 August 2013. 178 ibid 313. 179 ibid. 180 ibid. 181 Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 468. 182 Treasury Committee, Accountability of the Bank of England (n 32) para 22. 183 Killick (n 156) 377.

138

The Bristol Law Review

[Vol. 1

arrangements were presented and the consultation and proposals stage of the reform was briefly outlined. Chapter 2 focused on the salient features of the Financial Services Act 2012, which provided the legal basis for the new institutional structure, in order to identify and examine its strengths and weaknesses. Chapter 3 looked at the arguments for and against placing the responsibility for prudential supervision in the hands of the BoE in order to evaluate the Government’s decision to restore the Bank to a position of centrality and conclude whether the potential risks of this rearrangement have been properly considered. The remainder of this paper draws on the inferences from the whole of the analysis. Overall, the recent reform has marked the end of the ‘tripartite system’ with the single integrated regulator approach and the rise of the ‘twin peaks’ approach. Under the new structure, three new bodies have been created, namely the FPC, which is responsible for macro-prudential regulation, the PRA, which is in charge of micro-prudential regulation and the FCA, which is meant to play a central role in the supervision of the financial services conduct. The Government’s decision to set up focus-specific regulatory agencies has received wide acceptance, in that regulatory agencies perform better when they are dedicated to a more specific remit.184 One of the fundamental criticisms of the old regime was directed towards the failure of the FSA to manage its multiple regulatory objectives, resulting in an over-focus in the conduct of business at the expense of prudential supervision. With the adoption of the new regime, this is no longer a concern since the design of the new institutional structure guarantees that prudential regulation of systemically financial firms is the exclusive function of the PRA, rather than one amongst the many responsibilities of a single integrated regulatory body.185 This is the main advantage of the objective-oriented approach that the UK has now opted for, so long as particular care is taken to ensure that the institutional boundaries do not threaten the consistent implementation of the agencies’ distinct agendas.186 A fair evaluation of the new regime however, can only be conducted by looking at the aspects of the reform at a more detailed level. As it has been discussed above, the Bank’s role in regulating the financial services has been significantly bolstered under the 2012 Act, since its objective is now to protect and enhance financial stability. However, the despite its new responsibilities, the Bank’s governance structure has not been revised so that it corresponds to its new role.187 Both the Joint Committee and the TSC expressed concerns with regard to the suitability of the Court of Directors in setting the strategy of the Bank’s financial stability objective and ensuring that the Bank’s objectives are met.188 It is doubtful whether the establishment of the Oversight Committee within the Court instead of the replacement of the Court with a new Supervisory Board, consisting of expert individuals, adequately addresses these concerns. 184 Georgosouli (n 96) 62. 185 Andreas Kokkinis, ‘The Financial Services Act 2012: The Recent Overhaul of the United Kingdom’s Financial Regulatory Structure’ (2013) 24 ICCLR 325, 328. 186 ibid. 187 Cox (n 3) 8. 188 Treasury Committee (n 32), Accountability of the Bank of England, paras 39-41.

2013]

The Bristol Law Review

139

The establishment of the FPC within the Bank was created in response to the criticism that under the old tripartite regime, no institution was responsible of the overview of the system as a whole. Although Mervyn King doubts that the establishment of the FPC, even before 2007, could have resulted in the banking crisis being avoided,189 the formation of the FPC can be considered as a fundamental step towards enhancing macro-prudential supervision. Similar bodies, responsible for overseeing the system as a whole, have evolved around the world as a result of the international consensus that has emerged with respect to the need to strengthen macro-prudential regulation.190 In this sense, the establishment of the FPC can be seen as an aspect of the new regime that goes beyond local politics.191 The objectives framed for the FPC are dynamic since they combine financial stability and economic growth, which are closely inter-connected. The Government has rightly inserted the requirement for the FPC to give reasons for not complying with the Treasury’s recommendations with respect to how the FPC should interpret its financial stability and economic policy objectives. This “explain” mechanism adequately addresses the criticisms that the Treasury was left on the sidelines192 while at the same time protecting the FPC’s independence. However, considerable concerns remain with regard to the over-dominance of the FPC by the BoE, which makes it difficult for its external members to challenge the BoE “house” thinking and provide alternative perspectives.193 It should be noted, however, that the Government has recognised the need for the FPC to be exposed to different viewpoints in order to effectively carry out its role, and has acknowledged that although currently the composition of the FPC cannot be changed, it will consider appointing another external member when making future appointments.194 The PRA’s objectives are clear and structured, and due to the fact that the PRA has a narrower remit, it is expected to perform better than the FSA. However, it should be noted the mechanisms introduced for the scope of PRA-designated activities as well as the extent to which the PRA will adopt effective criteria for the identification of systemically important firms constitute important parameters for the success and viability of the new structure. The several layers of objectives that the legislation has introduced for the FCA constitute the major concern with regard to the FCA’s effectiveness. Having in place a set of easily identifiable and achievable objectives for each body is part and parcel of a successful regulatory system.195 Although this idea is, in general terms, reflected in the 189 Treasury Committee, Financial Regulation (n 49) 18. 190 Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 467; Eilis Ferran and Kern Alexander, ‘Can Soft Law Bodies be Effective? Soft Systemic Risk Oversight Bodies and the Special Case of the European Systemic Risk Board’ (2010) 6 ELR 751. 191 Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 467. 192 Willem H Buiter, ‘Accountability of the Bank of England’ (Citi Economics, Global Economics View, Citi 2011) 3. 193 Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 5. 194 HM Treasury, The Government’s response to the Parliamentary Commission on Banking Standards (Cm 8661, 2013) paras 5.32-5.33. 195 Hill (n 114) 39.

140

The Bristol Law Review

[Vol. 1

new legislation, the FCA’s multiple objectives seem contradictory, especially when it is recalled that the need to give regulators specific objectives was a substantial part of the rationale behind the abolition of the FSA in the first place.196 The split of the FSA into PRA and FCA implies that the success of the new model is highly dependent on the effective co-ordination and interaction between the two bodies. The requirement that FCA has to give its consent before the PRA approves any persons performing significant influence functions in a dual-regulated firm addresses to a large extent the concern with regard to the inconsistency of approaches to prudential regulation. However, problems in PRA-FCA coordination should be expected since the twin peaks model that the UK has now opted for is inevitably more complex than the old one.197 The difficulties that the two bodies are expected to encounter in avoiding inter-institutional conflict and unnecessary duplications runs the risk of undermining the coherent implementation of their agendas and ultimately increase the cost of compliance. 198 Further, although in one respect the PRA veto constitutes a clear manifestation that the post-crisis objectives of financial regulation are centred on the safeguarding of financial stability, on the other, it designs the PRA-FCA coordination in a way that is likely to turn the FCA into a junior regulator.199 The new regulatory structure restores the BoE to a position of centrality in supervision. Due to its unavoidable involvement during the crisis in the resolution of failing banks as the lender of last resort, the Bank became the most competent institution to be assigned supervisory responsibilities by a Government in search of fresh ideas for structural change.200 However, the discussion that took place in Chapter 3 has demonstrated the Bank’s inevitable superiority should not be assumed. Particular controversy has arisen with respect to the PRA being established as a subsidiary of the Bank. On the one hand, there are claims that the location of the PRA is justifiable, given the strong complementarity between monitoring the safety of banks and intervening to prevent crises.201 However doubts remain as to whether the PRA is adequately distant from the Bank’s monetary functions. There are arguments that the decision to assign micro-prudential supervision in the Bank’s direction, through the creation of a new subsidiary of the Bank in charge for firm-specific supervision, was not a corollary to the creation of the FPC.202 Also, evidence from Australia has shown that one of the reasons it fared so well during the crisis was because it had very strong macro credentials at the start of the crisis.203 The high interest rates and a budget surplus that were not distorted since the Bank did not have to focus on prudential supervision as well as monetary policy, thus allowing room for strong support 196 197 198 199 200 201 202 203

Ferran, ‘Reorganisation of Financial Services Supervision’ (n 7) 14. Kokkinis (n 185) 328. Padoa-Schioppa (n 114) 164. Georgosouli (n 96) 73. Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 459. Kokkinis (n 185) 328. Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 567. OECD’s Directorate for Financial and Enterprise Affairs, ‘The Financial Crisis: Reform and Exit Strategies’ (OECD 2009) <www.oecd.org/regreform/sectors/43091457.pdf> accessed 18 August 2013, 18.

2013]

The Bristol Law Review

141

for the economy.204 The UK therefore could have followed the Australian “twin peaks model” on a more detailed level. Instead of assigning responsibility for micro-prudential regulation to the Bank, the PRA could have been established as an autonomous independent body while at the same time the Government could legislate for strong communication mechanisms between the BoE and the PRA.205 Nevertheless, the new structure has not been tested yet and as such the decision to move prudential supervision to the BoE appears unchallenged. One thing must be made clear: There is no ideal institutional model. All regulatory structures for financial regulation have their flows and trade-offs are inevitable, regardless of which institutional architecture is adopted. Therefore, while the new regulatory structure may give a solution as to the multiple objectives management since it allows for clearer focus on different aspects and goals, the solution is not a perfect one and shortcomings must be expected.206 However, as the German philosopher Lichtenberg said: “I cannot say for sure whether things will get better when we change; but what I can say is they must change if they are to get better.”207 Therefore it is not unusual to change the regulatory bodies, their powers and scope of activities following a regulatory failure.208 Empiricism will show the extent to which the new structure will be successful and whether the benefits of the new structure outweigh its shortcomings. Overall, the prevention of future crises does not depend entirely on the architecture of the financial services supervision. At any rate, the link between regulatory structure and financial stability is only a tentative one.209 Modifying the regulatory structure does not guarantee overcoming regulatory failures.210 While some sort of regulatory change is indeed essential in the aftermath of a financial crisis, it would be wrong to assume that it is not the only parameter for the success of a financial system.211 The focus now has to be on making this chosen model work as well as possible and the effectiveness of this architecture will be seen when it is faced with the other parts of the jigsaw. Ultimately, we do not merely question whether the new regulatory architecture fits its purpose, but also, whether the attitude and approach to supervision do as well.

204 205 206 207 208 209 210

ibid. Killick (n 156) 374. Ferran, ‘Break-up of the Financial Services Industry’ (n 13) 455. Ackermann (n 2) 15. Roger McCormick, Legal Risk in the Financial Markets (1st edn, OUP 2006) 23. Kokkinis (n 185) 328. Jeffrey Carmichael, ‘Australia’s Approach to Regulatory Reform’ in Alexander Fleming, David T Llewellyn and Jeffrey Carmichael (eds), Aligning Financial Supervisory Structures with Country Needs (World Bank Institute Learning Resources Series 2004) 113. 211 House of Lords and House of Commons, Changing banking for good: Report for the Parliamentary Commission on Banking Standards (2013-14, HL 27-II, HC 175-II) para 913.

142

The Bristol Law Review

[Vol. 1

Bibliography Primary Sources Bank of England Act 1998 Financial Services Act 2012 Financial Services and Markets Act 2000 Secondary Sources Ackermann J, ‘The new architecture of financial regulation: Will it prevent another crisis?’ (2010) Special Paper 194, LSE Financial Markets Group Paper Series <www. lse.ac.uk/fmg/workingPapers/specialPapers/PDF/SP194.pdf> accessed 3 August 2013 Avgouleas E, Governance of Global Financial Markets: The Law, the Economics, the Politics (CUP 2012) Baber G, ‘A new approach to financial regulation: a step in the correct direction?’ (2012) 31 Co Law 3 Barwell R, Macroprudential Policy: Taming the wild gyrations of credit flows, debt stocks and asset prices (Palgrave Macmillan 2013) Begg I, ‘Regulation and Supervision of Financial Intermediaries in the EU: The Aftermath of the Financial Crisis’ (2009) 47 JCMS 1107 Briault C, ‘Revisiting the Rationale for a Single National Financial Services Regulator’ (2002) FSA Occasional Paper Series No 16 <http://garrettforms.house.gov/ uploadedfiles/briault_c_2002_revisiting_the_rationale_for_a_single_national_financial_services_regulator.pdf> accessed 3 August 2013 Carmichael J, ‘Australia’s Approach to Regulatory Reform’ in Fleming A, Llewellyn DT and Carmichael J (eds), Aligning Financial Supervisory Structures with Country Needs (World Bank Institute Learning Resources Series 2004) Chambers C, ‘Cyclical deja vu: emancipation of the FSA and the rise of the Bank of England once more’ (2010) 13 FRI 1 <www.nabarro.com/downloads/financial_regulation_international_aug_2010.pdf> accessed 3 August 2013 Čihák M and Podpiera R, ‘Integrated financial supervision: Which model?’ (2002) 19 N Amer J Econ Fin 135 Conservative Party, ‘From Crisis to Confidence: Plan for Sound Banking’ (Policy White Paper, 2009) <http://conservativehome.blogs.com/files/planforsoundbanking.

2013]

The Bristol Law Review

143

pdf> accessed 3 August 2013 Cox L and others, ‘United Kingdom Regulatory Reform: Emergence of the Twin Peaks’ (2012) 95 COB 1 Darling A, Back from the Brink: 1000 Days at Number 11 (Atlantic Books 2011) Ellinger EP, Lomnicka E and Hare C, Ellinger’s Modern Banking Law (5th edn, OUP 2012) Ferran E, ‘Examining the UK experience in adopting the single financial regulator model’ (2003) 28 Brook J Int’l Law 257 --‘The Break-up of the Financial Services Authority’ (2011) 31 OJLS 455 --‘The Reorganisation of Financial Services Supervision in the UK: An Interim Progress Report’ (2011) University of Cambridge Faculty of Law Research Paper No 49/2011 <http://dx.doi.org/10.2139/ssrn.1952705> accessed 10 July 2013 --and Kern A, ‘Can Soft Law Bodies be Effective? Soft Systemic Risk Oversight Bodies and the Special Case of the European Systemic Risk Board’ (2010) 6 ELR 751 --Moloney N and Hill JG, The Regulatory aftermath of the global financial crisis (CUP 2012) Financial Services Authority, ‘A Guide to Market Failure Analysis and High Level Cost Benefit Analysis’ (FSA 2006) <http://spi-romania.eu/admin/filemanager/files/ bulgaria/0.3.fsa__a_guide_to_market_failure_and_cba.pdf> accessed 3 August 2013 --‘The Turner Review: A Regulatory Response to the Global Banking Crisis’ (FSA 2009) <ww.fsa.gov.uk/pubs/other/turner_review.pdf> accessed 3 August 2013 Financial System Inquiry, ‘Financial System Inquiry Final Report’ (Commonwealth of Australia 1997) <http://fsi.treasury.gov.au/content/FinalReport.asp> accessed 15 August 2013 Gardener EPM, Theory and practice in banking supervision: some reflections (Bangor 1986) Georgosouli A, ‘The FCA-PRA coordination scheme and the challenge of policy coherence’ (2013) 8 CMLJ 62 Goodhart CAE, ‘The Macro-Prudential Authority: Powers, Scope and Accountability’ (2011) 2 OECD J Financial Market Trends 97 --and Schoenmaker D ‘Institutional Separation between Supervisory and Monetary Agencies’ (1993) Special Paper 52, LSE Financial Markets Group Paper Series <www.lse.ac.uk/fmg/documents/specialPapers/1990s/sp52.pdf> accessed 3 August 2013

144

The Bristol Law Review

[Vol. 1

Green, D, ‘The Relationship between Micro-Macro-Prudential Supervision and Central Banking’ in Wymeersch E, Hopt KJ and Ferrarini G (eds), Financial Regulation and Supervision: A post-crisis analysis (OUP 2012) Haill O, ‘Why the FSA was split into two bodies’, Financial Times (London, 8 May 2013) <www.ftadviser.com/2013/05/08/regulation/regulators/why-the-fsa-was-splitinto-two-bodies-SX5toVpnEQtBbYNlcUC9xJ/article.html> accessed on 26 July 2013 Hill C and Silver V, ‘Conduct Regulation: déjà vu?’ Financial Risks Today (London, March-April 2012) <www.shlegal.com/Asp/uploadedFiles/File/Newsletters/2012_ newsletters/03_12/financial%20risks%20today.pdf> accessed 3 August 2013 HM Treasury, The Government’s response to the Parliamentary Commission on Banking Standards (Cm 8661, 2013) --Judgement, Focus and Stability (n 25); A new approach to financial regulation: building a stronger system (Cm 8012, 2011) --A new approach to financial regulation: judgement, focus and stability (Cm 7874, 2010) --A new approach to financial regulation: the blueprint for reform (Cm 8083, 2011) House of Lords and House of Commons, Changing banking for good: Report for the Parliamentary Commission on Banking Standards (2013-14, HL 27-II, HC 175-II) Hudson A, The Law of Finance (1st edn, Sweet & Maxwell 2009) Joint Committee on the draft Financial Services Bill, Draft Financial Services Bill (2010-12, HL 236, HC 1447) Keasey K and Gianluca V, ‘Lessons from the Northern Rock affair’ (2008) 16 JFR &C8 Killick M, ‘Twin peaks – a new series or a new chimera? An analysis of the proposed new regulatory structure in the UK’ (2012) 33 Comp Law 366 Kirk J and Ross J, Modern Financial Regulation (1st edn, Jordan Publishing 2013) Kokkinis A, ‘The Financial Services Act 2012: The Recent Overhaul of the United Kingdom’s Financial Regulatory Structure’ (2013) 24 ICCLR 325 Lastra RM and Wood G, ‘The Crisis of 2007–09: Nature, Causes and Reactions’ (2010) 13 J Int Econ L 531 Lee YW, ‘The Breakup of the UK Financial Services Authority and its Implications’ (2012) 4 KCMI 62

2013]

The Bristol Law Review

145

Padoa-Schioppa T, ‘Financial supervision: insider or outside central banks?’ in Kremers JJM, Schoenmaker D and Wierts PJ (eds), Financial Supervision in Europe (Edward Elgar 2003) Mayes DG, Halme L and Liuksila A, Improving Banking Supervision (Palgrave 2001) McCormick, R, Legal Risk in the Financial Markets (1st edn, OUP 2006) Melecky M and Podpiera AM, ‘Institutional structures of financial sector supervision, their drivers and historical benchmarks’ (2013) 9 J Financ Stabil 428 Morris, I, Why the West Rules – for Now: The Patterns of History, and What They Reveal About the Future (1st edn, Farrar, Straus and Giroux 2010) OECD’s Directorate for Financial and Enterprise Affairs, ‘The Financial Crisis: Reform and Exit Strategies’ (OECD 2009) <www.oecd.org/regreform/sectors/43091457. pdf> accessed 18 August 2013 Pan EJ, ‘Structural Reform of Financial Regulation’ (2011) 19 Transnat’l L & Contemp Probs 796 Perry J and others, ‘The new UK regulatory landscape’ (2011) 84 COB 1 Prudential Regulation Authority, ‘The Prudential Regulation Authority’s approach to Banking supervision’ (Bank of England 2013) <www.bankofengland.co.uk/publications/Documents/praapproach/bankingappr1406.pdf> accessed 3 August 2013 Rawlings, P, ‘Bank Reform in the UK: Part II – Return to the Dark Ages?’ (2011) 8 ICR 55 --‘Reform of Bank regulation in the United Kingdom: The Opening Salvo’ (2010) 25 JIBLR 522 Smethurst J, ‘Twin Peaks: Bridging the Gap. Co-ordination under the New Regulatory Framework’ (2012) 27 JIBLF 33 Stiglitz JE, ‘The Role of the State in Financial Markets’ in Proceedings of the World Bank Annual Conference on Developmental Economics (World Bank 1993) Taylor, MW, ‘The Road from “Twin Peaks” – And the Way Back’ (2009) 16 CJIL 61 --‘Twin Peaks’, Financial World Online (2009) <http://fwarchive.ifslearning.ac.uk/ financial_world/Archive/2009/2009_09sept/Features/Michael%20Taylor/pdf/17268. pdf> accessed 14 July 2013. Treasury Committee, Accountability of the Bank of England (HC 2010-12, 874)

146

The Bristol Law Review

[Vol. 1

--Banking Crisis: regulation and supervision (HC 2008-09, 767) para --Financial Conduct Authority (HC 2010-12, 1754) --Financial Conduct Authority: Report on the Government’s Response (HC 2010-12, 1857) --Financial Regulation: a preliminary consideration of the Government’s proposals (HC 2010-11, 430-I) --Financial Regulation: a preliminary consideration of the Government’s proposals: Government’s Response to the Seventh Report from the Committee (HC 2010-2012, 958) --The run on the Rock (HC 2007-08, 56-I) Willem H Buiter, ‘Accountability of the Bank of England’ (Citi Economics, Global Economics View, Citi 2011) 3

The Arbitrability of Consumer Disputes: Buyer Beware Divyesh Menon

1. Introduction: From Subject-Matter Arbitrability to Arbitrability of Contractual Relationships Arbitrability, as it is commonly understood, involves distinguishing between disputes that may be submitted to arbitration and those reserved ‘exclusively to the domain of the courts’1. The doctrine manifests itself in Article II(1) and Article V(2) (a) of the New York Convention 1958 (‘NYC’), with almost identical provisions in the English Arbitration Act 19962 (‘EAA’). As the language of the aforementioned provisions alludes to, it is principally concerned with identifying particular categories of ‘subject matter’ that are deemed ill suited for settlement via a private adjudicative mechanism such as arbitration. In essence, it is a ‘gateway question’3 where the ‘exercise of contractual freedom ends and the public interest in adjudication begins’4. In terms of procedural mechanics, arbitrability is both a condition of the validity of the arbitration agreement and consequently, of the arbitrators’ jurisdiction. In the realm of commercial or business-to-business (‘B2B’) transactions, an increasingly deferential attitude of favor arbitrandum5 has taken root amongst most developed legal systems, widening the scope of arbitrable subject matter and leading some commentators to predict the eventual death of inarbitrability6. While subject matter arbitrability has liberalised, there have been increasing legislative and judicial interventions to regulate arbitration in the non-commercial sphere, where the particular nature of the contractual relationship, such as in employment and consumer contracts, is believed to require heightened scrutiny or special protection for one of the parties. In other words, whereas conventional subject-matter arbitrability is driven by a ‘public interest’ in the proper administration of the law in specific areas, like competition or intellectual property, arbitrability of consumer disputes is underlined by a ‘public interest’ in ensuring access to justice by guarding against the imbalances in the relationship between the parties or particular features in the process of adjudication that may put the consumer at a disadvantage. 1 Alan Redfern and others, Redfern and Hunter on International Arbitration (5th edn, OUP 2009) 123. 2 ss 81(1)(a) and 103(3). 3 George A Bermann, ‘The “Gateway” Problem in International Commercial Arbitration’ (2012) 37 Yale J Int’l L 1, 2. 4 Thomas E Carbonneau and François Janson, ‘Cartesian Logic and Frontier Politics: French and American Concepts of Arbitrability’ (1994) 2 Tul J Int’l & Comp L 193, 194. 5 Bernard Hanotiau, ‘What Law Governs the Issue of Arbitrability?’ (1996) 12 Arb Int’l 391, 393. 6 Karim Youssef, ‘The Death of Inarbitrability’ in Loukas A Mistelis and Stavros L Brekoulakis (eds), Arbitrability: International and Comparative Perspectives, (Kluwer 2009), 66.

147

148

The Bristol Law Review

[Vol. 1

Instead of relying on arbitrability provisions, such interventions take the form of specific legislation targeting the validity of arbitration clauses in defined species of contractual relationship. While not strictly concerned with subject-matter arbitrability in its pure form, the end result of such interventions is to fundamentally exclude certain classes of dispute from arbitration in a similar way. So, it is in light of this shift towards non-arbitrability of non-commercial contractual relationships that an analysis of the arbitrability of consumer disputes must be viewed. In examining the arbitrability of consumer disputes, this discussion seeks to do two things. First it will set out the particular nature of business-to-consumer (‘B2C’) contracts which makes arbitration, particularly when imposed in the form of binding pre-dispute clauses, potentially onerous so as to entail substantial risks of denying access to justice and therefore provides a compelling case for firm safeguards to prevent oppression and strong intervention to correct imbalances. Second, it will assess the English legal framework in the area, as influenced by EU legislation and jurisprudence, to determine not only if the protection afforded to consumers is adequate but whether it is sufficiently clear and precise such that consumers can transact with the assurance that they will not be compelled into arbitration down the line.

2. Consumer Disputes: Distinct Challenges Deserve Distinct Protective Solutions Concerns about consumer arbitration are premised both on the objective nature of B2C contracts and the subjective circumstances of consumers, which cumulatively conspire to generate distinct challenges ‘peculiar’ to the world of commercial arbitration7. Commercial arbitration, which has influenced the development of most international, national and institutional arbitral norms, assumes the balance of respective strength between the parties but where this balance is compromised; ‘arbitration becomes asphyxiated’8. This ‘asphyxiation’ has two dimensions – procedural and substantive9 – the asymmetrical nature of the B2C relationship gives rise to circumstances in which an arbitration clause may be imposed on the consumer in a procedurally oppressive manner and the actual requirement of mandatory arbitration risks substantively exacerbating this imbalance further. The procedural imbalance stems form the ‘presumptively gross disparity’10 in bargaining power and sophistication during B2C contract-formation such that, unlike commercial parties bargaining at arms length, consumers have little scope to influence the contents of the offer. These standard-form contracts, known as adhesion contracts 7 Donna M Bates, ‘Consumer’s Dream Or Pandora’s Box: Is Arbitration a Viable Option for Cross-Border Consumer Disputes’ (2004) 27 Fordham Int’l L J 823 8 Robert Plaisant and Henry Motulsky in Antoine Kirry, ‘Arbitrability: Current Trends in Europe’ (1996) 12 Arb Int’l 373, 388. 9 Similar analytical framework used by Jonathan Hill, Cross-Border Consumer Contracts (OUP 2008) 193 and Susan Schiavetta, ‘Does the Internet Occasion New Directions in Consumer Arbitration in the EU?’ (2004) 3 JILT <www2.warwick.ac.uk/fac/soc/law2/elj/jilt/2004_3/schiavetta/> accessed 20 March 2013. 10 Gary B Born, International Commercial Arbitration (3rd edn, Kluwer 2009), 827.

2013]

The Bristol Law Review

149

in American legalese or ‘click-wrap’ contracts in e-commerce, are proffered by suppliers on a ‘take it or leave it’11 basis such that the supplier is effectively able to exploit consumers’ informational and power deficit to impose favourable terms. While the risks of unfair terms apply to consumer contracts generally, pre-dispute arbitration clauses, like most other dispute resolution clauses (‘DRCs’), raise additional red flags since they are in substance ‘immaterial to the core of the transaction’12 and are thus unlikely to receive much scrutiny from the consumer, who in any case is likely illequipped to meaningfully assess the comparative value of alternative dispute resolution mechanisms. Further, while arbitration – with its flexibility, confidentiality, cross-border enforceability and limited scope for review – suits the demands of commercial dispute resolution, the process risks substantively accentuating the pre-existing imbalances in the B2C context. First, a key advantage of arbitration is the flexibility it affords the parties to design the process. However, when one party, in this case a supplier who enjoys significant informational superiority, unilaterally imposes the terms, there is a real risk that the resulting clause and process – including the choice of seat, procedural law and applicable law - may be manipulated such as to ‘tilt the playing field’13 in their favour. Not only could the terms, such as the selection of an applicable law that provides a lower level of consumer protection, make it more difficult for the consumer to vindicate his rights but the mere existence of potentially onerous terms, like a foreign seat or a complex and/or costly institutional provider, could have an inherent deterrent effect. Second, is the ‘repeat player effect’ first popularised by Glanter14. While the inherent handicaps for ‘one-shotters’ are true of litigation generally, the private and flexible nature of arbitration leaves them more vulnerable to the effects of familiarity-deficit, incumbent bias and inadequate procedural safeguards. Paulsson goes further, suggesting that it is in the interest of an entrepreneurial arbitrator with a pecuniary interest in repeat business to rule expansively on his own jurisdiction and then in favour of the supplier on the merits so as to increase the prospect of future appointment.15 This is more than just a theoretical risk, since in the US16, which has a long-established practice of consumer arbitration, there are now significant concerns regarding clear bias in favour of businesses and the alarming emergence of institution11 Alexander J Bělohlávek, ‘Autonomy in B2C Arbitration: Is the European Model of Consumer Protection Really Adequate?’ (2012a) CY Arb 17, 24. 12 David S Schwartz, ‘Enforcing Small Print to Protect Big Business: Employee and Consumer Rights Claims in an Age of Compelled Arbitration’ (1997) Wis L Rev 33, 57. 13 Schiavetta (n 9) 14 Marc Galanter, ‘Why the “Haves” Come Out Ahead: Speculations on the Limits of Legal Change’ (1974) 9 L & Soc’y Rev 95, 96. 15 Jan Paulsson, ‘Moral Hazard in International Dispute Resolution’ (Inaugural Lecture as Holder of the Michael R Klein Distinguished Scholar Chair, University of Miami School of Law, 29 April 2010), 5 <www.arbitration-icca.org/media/0/12773749999020/paulsson_moral_hazard.pdf> accessed 20 March 2013. 16 Dan Slater, ‘Neutrality Questions Continue to Dog Arbitration Firm’ Wall Street Journal (New York, 21 April 2008) <http://blogs.wsj.com/law/2008/04/21/neutrality-questions-continue-to-dog-arbitration-firm/> accessed 20 March 2013.

150

The Bristol Law Review

[Vol. 1

al providers explicitly catering to business interests. One report found that a popular consumer arbitration provider had ruled against consumers in 93.8% of cases17. Third, and most significantly, is the potential for high costs in arbitration. It is not just the resource imbalance between consumer and supplier and the threat it poses to equality of arms that is of concern. Rather, it is the costs of the entire arbitration process – which can include representation, arbitrator’s fees, institutional and administrative costs and hiring premises – relative to the pecuniary value of consumer claims, which are generally modest, that renders it a cost-ineffective dispute resolution mechanism for most consumer disputes. Consumer claims, such as for defective products or services, tend to be low-value. The OFT estimates ‘most’ domestic consumer complaints are under £200018 while a Eurobarometer survey found that 98% of cross-border consumer contracts in the EU involved sums under €500019. Meanwhile, the increasing professionalisation of arbitration has resulted in the escalation of costs and fees compared to the fast-track County Court claims procedure20. The possibility of foreign seats and languages entails further risks of upstream costs for travel and translation. The prospect of being saddled with runaway costs can therefore act as a serious deterrent to consumers vindicating their legal rights, effectively restricting their access to justice. The potential for burdensome expenses must also be viewed in light of the comparatively restricted availability of public funding for impecunious consumer-disputants. In the Funding Code21, which sets guidelines for the provision of civil legal aid in England and Wales, one of the factors considered is whether the matter has a ‘significant wider public interest’22. While this may be difficult to satisfy generally, the ‘bar is set even higher’23 for arbitration as its confidential procedure and limited scope of appeal on points of law limits the opportunity for setting legal precedent or generating wider consumer awareness. Additionally, while the Code24 extends funding for arbitration disbursements, fees for legal counsel are expressly excluded. This can be particularly problematic in arbitrations given the need for competent legal counsel familiar with the specialised arbitral rules and norms. Further, it has been not-

17 John O’Donnell, ‘The Arbitration Trap: How Credit Card Companies Ensnare Consumers, Public Citizen’s Congress Watch’ (Public Citizen 2007), 15 <www.citizen.org/documents/ArbitrationTrap. pdf> accessed 20 March 2013. 18 Office of Fair Trading, ‘Mapping UK consumer redress: A summary guide to dispute resolution system’ (OFT1267, Crown 2010), 42 <www.oft.gov.uk/shared_oft/general_policy/OFT1267.pdf> accessed 20 March 2013. 19 TNS Opinion & Social, ‘Consumer protection in the internal market’ (Special Eurobarometer 298, Wave 69.1, Eurobarometer 2008), 16 <http://ec.europa.eu/consumers/strategy/docs/eurobar_298_report_final_en.pdf> accessed 20 March 2013. 20 OFT (n 18) 46. 21 Established under the Access to Justice Act 1999, s 8. 22 Funding Code: Criteria, Part 1, s 5.7.5 <www.justice.gov.uk/downloads/legal-aid/funding-code/Funding_Code_Criteria_May_2011.pdf> accessed 20 March 2013. 23 David A Collins, ‘Compulsory Arbitration Clauses in Domestic and International Consumer Contracts’ (2008) 19 King’s L J 335, 353. 24 s 2.1.

2013]

The Bristol Law Review

151

ed25 that, while the arbitration bar has expanded significantly in the past two decades, arbitration practitioners continue to command a premium rate relative to their peers at the general civil and commercial bar. On the whole, while arbitration is well suited to a commercial relationship, a B2C relationship constitutes a wholly different dynamic, requiring particular safeguards. While the abovementioned risks may factor, in some measure, into all consumer arbitration agreements – including post-dispute submission agreements and non-binding clauses, the consumer’s vulnerability is especially pronounced in the context of binding pre-dispute clauses. The inclusion of such clauses in consumer contracts are increasingly viewed as having less to do with securing an efficient means of dispute resolution and more as a means by which suppliers seek to deter consumers from pursuing their claims altogether. There is therefore a compelling case for strong protection of consumers in these circumstances.

3. The Law: The Anglo-EU Legal Framework Before delving into the Anglo-EU framework, it is worth noting that the US approach to binding pre-dispute clauses has been considerably more liberal, routinely upholding clauses26 and subjecting them to the much less intrusive contract law doctrine of unconscionability. The precise divergence between the US and the EU is beyond the scope of this discussion but suffice to say that particular features of the American legal system – such as class actions, civil jury trials and punitive damages – act to alter the dynamics of B2C consumer dispute resolution in their context27. Even then, there has been considerable pressure and several, albeit failed, attempts to pass comprehensive reform that would invalidate such clauses28. The EU, on the other hand, adopts a ‘protectionist’29 approach to regulating dispute resolution involving consumers. This approach has its jurisprudential roots in both the right to a fair trial enshrined in Article 6 ECHR and the commitment to ensuring a ‘high level of consumer protection’ in Article 169 TFEU. Its protectionism is evident in the Brussels I Regulation (BIR), which provides special jurisdictional rules for cross-border consumer disputes30 designed to allow consumers to litigate primarily in their home forum31 and the Rome I Regulation (RIR), which dictates that the chosen applicable law must not deprive the consumer of the protection afforded to him by mandatory rules of his home forum32. 25 Margaret Doyle, Katrina Ritters and Steeve Brooker, ‘Seeking Resolution: The Availability And Usage Of Consumer-To-Business Alternative Dispute Resolution In The United Kingdom’ (National Consumer Council 2004), 77 <www.berr.gov.uk/files/file11557.pdf> accessed 20 March 2013. 26 Green Tree v Randolph [2000] 531 US 79. 27 Christopher R Drahozal and Ray J Friel, ‘A Comparative View of Consumer Arbitration’ (2005) 71 Arb 131, 138. 28 Arbitration Fairness Act 2007; Arbitration Fairness Act 2013. 29 Collins (n 23) 335. 30 Section 4 of Chapter II. 31 Art 16. 32 Art 6(2).

152

The Bristol Law Review

[Vol. 1

Arbitration is, of course, excluded from both the aforementioned frameworks and is instead regulated in the consumer context through the Unfair Terms in Consumer Contracts Directive (the ‘Directive’), which has as one of its express aims – protecting consumers against ‘abuse of power’ by suppliers in ‘one-sided contracts’ that unfairly exclude essential rights33. While different jurisdictions have transposed the Directive variously and with modifications, the UK elected for a verbatim ‘copy out’ transposition via the Unfair Terms in Consumer Contracts Regulation (UTCCR) 1999. The UTCCR applies to all consumer contracts that fall within the meaning of reg. 4(1) and is doubly extended to arbitration clauses by s89 EAA, with one amendment – s91 EAA deems an arbitration agreement (both pre and post-dispute) automatically unfair, and therefore invalid, if it relates to a claim for a pecuniary remedy under £500034. To fully appreciate the position and options available to an English consumer faced with a binding pre-dispute arbitration clause, three aspects must be examined – a) when does a consumer fall within the material scope of the UTCCR, b) when and how can a consumer avail himself of UTCCR protections and c) how will courts apply the provisions and in what circumstances will a clause be found unfair and invalid.

a. The Material Scope of the UTCCR A consumer comes within the ambit of the UTCCR if he is a natural person, acting in a non-business capacity, contracting with a supplier that is acting in the course of its business.35 It is clear that the scope of the Regulation specifically contemplates the kind of vulnerable consumer for whom arbitration might be oppressive i.e. those transacting for goods and services generally intended for final, personal consumption, and so has been restrictively interpreted to exclude intermediaries and legal rather than natural persons36. s91 EAA further narrows the band of disputes that may incur the UTCCR’s intervention to those seeking a remedy exceeding £5000. The absolute prohibition on arbitration of low-value claims is a clear and sensible way of excluding arbitration in cases where the costs of the process are likely to exceed the value of the claim and would therefore be both manifestly onerous on the consumer and unnecessary in light of the faster, lower-cost County Court small claims track37. Accordingly, the profile of consumers who may seek to invoke the UTCCR are typically those who have transacted for high-value goods such as automobiles or service contracts such as holiday packages or residential building and construction contracts. It has been noted that the relatively narrow category of potential consumer-claimants renders the provisions practically insignificant38. Nevertheless, the mere possibility that some consumers may be denied access to justice justifies a full exposition of the legal protections 33 34 35 36 37 38

Preamble. Unfair Arbitration Agreements (Specified Amount) Order 1999. Regs 3(1) and 4(1). Cape SNC v Ideal Service SRL (C541/99) [2002] 2 All ER 657. Claims below £10,000: the Civil Procedure Rules 1998, Part 27. Collins (n 23) 339.

The Bristol Law Review

2013]

153

offered to English consumers.

b. When and How can a Consumer Invoke the UTCCR? In terms of the procedural mechanics, it is useful to map out when and how a consumer, faced with a binding arbitration clause in the underlying contract, may invoke the UTCCR to avoid arbitration. In the case of a consumer-claimant, seeking a remedy for a defective product or service for example, the consumer should commence proceedings in an English court, establishing jurisdiction over an EU-based supplier under the BIR39 or a non-EU supplier under traditional rules, which the supplier would likely contest by invoking the arbitration clause and seeking a stay of proceedings under s9 EAA. At this point, the consumer could raise the UTCCR to plead the unfairness and thus invalidity of the clause. It has been suggested that since the main aim of the clause is to deter consumer action in the first instance, once litigation is commenced the supplier is unlikely to see much benefit in asserting the arbitration clause and is unlikely to do so40. This, however, ignores the aforementioned procedural and substantive benefits that the supplier could accrue if successful in upholding the clause as well as the effect that protracting out proceedings could have in jading the consumer’s resolve and draining his resources. In the case of a consumer-defendant, being sued for non-payment for example, the picture is not as straightforward, since the consumer could choose to challenge the arbitration at various stages and before different forums. At the pre-award stage, the consumer may plead the invalidity of the clause to challenge the jurisdiction of the tribunal. Alternatively, he could wait until an award has been rendered and seek to set it aside before a supervisory court at the seat41 or simply wait for the supplier to bring recognition and enforcement proceedings, raising the UTCCR to resist the award then42. In practice, however, the most sensible route for an English consumer would be to forbear from any participation in the arbitral proceedings and resist an award at the enforcement stage. The only situation in which it might be advisable for a consumer-defendant to actively challenge the tribunal’s jurisdiction or seek to set aside a resulting award at the seat would be in the case of a foreign-seated arbitration where the consumer has substantial assets in that jurisdiction or another foreign jurisdiction in which enforcement may be sought. Such a scenario is unlikely in the consumer context and made more improbable by the fact that supplier is unlikely to have access to information about the consumer’s assets and will need the assistance of an English court obtain disclosure of such information anyway. So, the primary focus of our analysis will therefore centre on the application of the UTCCR in an English court. A few further factors pertaining to the overall scope of the UTCCR must be not39 Art 16(1). 40 Julia Hörnle, ‘Legal Controls on the Use of Arbitration Clauses in B2C e-commerce Contracts’ (2008) 2 Masaryk UJL & Tech 23, 34. 41 EAA, s 67, for English-seated arbitrations. 42 EAA, s 66, for an English award and s 103 EAA for a foreign award in a NYC jurisdiction.

154

The Bristol Law Review

[Vol. 1

ed. While the choice of a foreign seat or applicable law may factor into the assessment of whether the clause is unfair, neither restrict a consumer’s ability to avail himself of the UTCCR before an English court. Neither s89 EAA nor the UTCCR distinguish between a foreign and domestic arbitration and both instruments expressly provide that the Regulation applies regardless of the law applicable to the arbitration agreement or its underlying contract43. So long as the consumer comes within the material scope44 of the Regulation, the court will at the very least consider the unfairness of the clause. The ECJ’s decisions in Mostaza45 and Asturcom46 went further, effectively placing a duty on national courts seised of an action to set aside or enforce an award to assess the unfairness of a clause, if necessary of its own motion, even where the consumer failed to raise the objection throughout prior arbitral proceedings. In other words, a consumer who submits to the jurisdiction of the tribunal without pleading unfairness only to raise it at a setting aside application, as in Mostaza, or a consumer who is entirely passive throughout the arbitral proceedings and does not even raise it at enforcement proceedings, as in Asturcom, can still expect a national court to consider the unfairness of the clause sua sponte. These decisions significantly enhance the level of intervention and scope for review afforded to courts under the Directive, so much so that even the most ‘nonchalant and ill-advised’47 consumer may rely on their national courts to protect them from an unfair clause. The ECJ justified their decisions by emphasising the ‘nature and importance of the public interest’48 underlying the consumer protection objectives of the Directive such that it necessitates ‘positive corrective action’49 by the courts. In so doing, the ECJ effectively elevated the Directive to a fundamental rule of EU law deserving treatment equivalent to that afforded to mandatory rules of public policy50. An inadvertent knock-on consequence of this could be that an attempt by a supplier to derogate from the provisions of the UTCCR, or Directive generally, or the failure of a tribunal to consider the unfairness of the arbitration clause may alone constitute grounds for setting aside or refusing enforcement51 as contrary to public policy52. While purely speculative and yet untested, it is not far-fetched given, as Piers notes, the increasingly interventionist attitude of the ECJ in its zealousness to secure the effectiveness and equivalence of EU law, even at the risk of impinging on the procedural integrity of arbitration and moving the EU

43 44 45 46 47 48 49 50 51 52

EAA, s 89(3) and UTCCR, Reg 9. Regs 3(1) and 4(1). Case C-168/05 Elisa María Mostaza Claro v Centro Movil Milenium SL [2006] ECR 1-10421. Case C-40/08 Asturcom Telecomunicaciones SL v Cristina Rodríguez Nogueira [2009] ECR I-09579. Vanessa Mak, ‘Standards of Protection: In Search of the ‘Average Consumer’ of EU Law in the Proposal for a Consumer Rights Directive’ (2010) 19 ERPL 25, 30. Asturcom (n 46) para 52. Mostaza Claro (n 45) para 26. Maud Piers, ‘Consumer Arbitration And European Private Law: A Seminal Consumer Arbitration Model Law For Europe’ (2013) 2 ERPL 247, 264. s 103(3); NYC Art V(2)(b). Case C-126/97 Eco Swiss China Time Ltd v Benetton International NV [1999] ECR I-3055.

2013]

The Bristol Law Review

155

towards a position of ‘absolute consumer protection’.53

c. Application of the UTCCR Provisions to Binding Pre-Dispute Arbitration Clauses Firstly, it must be noted that the mere existence of consumer protection legislation with regard to arbitration or the fact that the consumer falls within the material scope of the Regulation does not in and of itself render consumer disputes non-arbitrable. While arbitrability does not seem to have been explicitly pleaded or addressed by the courts, it is implicit in the ECJ judgments above and English decisions that have upheld consumer arbitration clauses54 that consumer disputes are not inherently incapable of ‘settlement by arbitration’55. Whether a clause will in fact be found unfair and invalidated will turn on the application of the UTCCR provisions. While noting the ‘lack of clarity’56 and ‘substantial ambiguity’57, several commentators have gone on to conclude that binding pre-dispute arbitration clauses are ‘likely to be viewed as unfair’58 and ‘generally be unenforceable’59. In reality, however, the wording and structure of the Regulation/ Directive and their application by the courts makes such an outcome far less clear and certain than it would appear at first glance. The core of the unfairness test is set out in reg. 5 and is triggered by any term that has not been individually negotiated60. This would cover the sort of ‘pre-formulated standard-form contracts’ that typify most consumer transactions, both on and offline, as well as more complex service contracts that are usually pre-drafted by the supplier. A key contention has been the nature of the inquiry into ‘significant imbalance’ and ‘good faith’ and whether these constitute two separate limbs requiring an assessment of substantive and procedural elements of the contract respectively or form part of a more ‘holistic general test’61 of unfairness. Lord Bingham’s dictum in Director General of Fair Trading (DGFT) v First National Bank62, now the authoritative English statement on reg. 5(1), held it to be a ‘composite test covering both the making and 53 Maud Piers, ‘Consumer Arbitration in the EU: A Forced Marriage with Incompatible Expectations’ (2011) 2 JIDS 209, 229. 54 Heifer International v Helge Christiansen and others [2007] EWHC 3015. 55 EAA, ss 81(1)(a) and 103(3). 56 Julia Hörnle, ‘Online Dispute Resolution in Business-to-Consumer E-commerce Transactions’ (2002) 2 JILT <http://www2.warwick.ac.uk/fac/soc/law/elj/jilt/2002_2/hornle/> accessed 20 March 2013. 57 Jean R Sternlight, ‘Is the U.S. Out on a Limb? Comparing the U.S. Approach to Mandatory Consumer and Employment Arbitration to that of the Rest of the World’ (2002) 56 U Miami L Rev 831, 844. 58 Hörnle (n 56). 59 Hill (n 9) 213; also Sternlight (n 57) 844; John MacLeod, Consumer Sales Law (2nd edn, Cavendish 2006) 98; Arnold Vahrenwald, ‘Out-of-court dispute settlement systems for e-commerce: Part II - The Protection of the Recipient’ (Joint Research Centre 2000), 12 <http://vahrenwald.com/publication/ index.html> accessed 20 March 2013. 60 Reg 5(1). 61 Elizabeth Macdonald, ‘Unfair Terms in Consumer Contracts’ (2005) LQR 38, 40. 62 [2001] UKHL 52.

156

The Bristol Law Review

[Vol. 1

the substance of the contract’63. While the regulation provides that a court should take into account the ‘nature of the goods or services’ and ‘ all the circumstances attending the conclusion of the contract’64, precisely what crosses the threshold of ‘significant imbalance’ and ‘good faith’ and exactly how these two aspects interface with each other is far from obvious. For that we turn to the case law under the UTCCR on both arbitration and other DRCs, such as choice-of-court and adjudication clauses, which raise similar considerations. A term which causes significant imbalance is one that is ‘so weighted in favour of the supplier as to tilt the parties’ rights and obligations significantly in his favour’65. While factors like the repeat-player effect and a consumer’s unfamiliarity with arbitration may feed into the evaluation, a reading of the case law and academic literature suggests that three factors are particularly liable to incur the ire of the court – choice of foreign applicable law, choice of foreign seat and costs. Though no reported cases have dealt with this specific issue, both Collins66 and Schiavetta67 posit that the choice of a foreign applicable law that provides substantially lower levels of consumer protection than the consumer’s home forum will almost certainly be deemed unfair. Equally liable is the choice of a foreign seat. The ECJ’s decision in Océano Grupo v Quintero68 and Steel J’s obiter dicta in Standard Bank v Apostolakis69, both in respect of an exclusive jurisdiction clause in favour of the supplier’s home forum, confirm that a DRC that would compel a consumer to litigate in an alien forum carries ‘significant potential costs and inconvenience’70 such as to cause a ‘significant imbalance to the detriment of the consumer’71. While choice of a foreign law and seat will only factor in cross-border transactions, that does not mean domestic consumer contracts designating English law and seat are immune from the UTCCR – the key focus of analysis here, is costs. The focus of the court is not on individual consumers’ ability to afford arbitration or even the costs of arbitration relative to litigation, but rather the costs of the process relative the value of the claim. So in Mylcrist Builders v Buck72, there was a ‘clear case’73 of imbalance where the arbitrator’s fees exceeded £2,000 in respect of a claim just over the £5,000 threshold. In Zealander & Zealander v Laing74, the arbitration clause only covered part of the claim and would have required the consumer to litigate the remaining matters separately, therefore resulting in ‘at least inconvenience and possibly 63 64 65 66 67 68 69 70 71 72 73 74

ibid para 17. Reg 6(1). DGFT (n 62). Collins (n 23) 353. Schiavetta (n 9). Joined Cases C-240/98 to C-244/98 [2002] 1 CMLR 43. [2001] EWHC 493. ibid para 49. Océano Grupo (n 68) para 24. [2008] EWHC 2172. ibid para 55. [2000] 2 TCLR 724.

2013]

The Bristol Law Review

157

injustice’75. While it is no doubt sensible to evaluate the proportionality of costs, a cost-based analysis of fairness risks compounding the uncertainty around the validity of consumer arbitration clauses in two ways. First, suppliers who have included arbitration clauses that, prima facie, comply with all other requirements of fairness (English law and seat, good faith etc.) will be left in a state of flux until after the dispute has arisen and the pecuniary value of the claim is ascertained. Second, while a court assessing fairness after an award is rendered (e.g. setting aside or enforcement stage) will be able to make a fairly accurate assessment of cost-proportionality, a court considering a clause at the pre-arbitration stage (e.g. where the consumer initiates litigation) will essentially be required to engage in a ‘speculative assessment’76 of the costs likely to be incurred by the consumer. Moreover, costs alone will not always result in a finding of unfairness as evidenced by Heifer77 and a string of cases on domestic adjudication clauses – Lovell Projects v Legg78, Westminster Building v Beckingham79, Allen Wilson Shopfitters v Buckingham80 – where the courts acknowledged the potential for significant costs yet upheld validity. For a complete analysis, the ‘good faith’ limb of the unfairness test must be considered. To start with, English common law is instinctively uneasy with the European civil law concept of ‘good faith’. Nevertheless, the HL in DGFT held it to mean ‘fair and open dealing’ encompassing fairness in respect of whether the supplier took advantage of the consumer contrary to the ‘good standards of commercial morality and practice’ and openness in according appropriate prominence to potentially disadvantageous terms81. In applying the test to DRCs, English courts have focused their inquiry on the procedural aspects and manner in which the contract was concluded by asking if the consumer would have been surprised if his attention had been drawn to the clause at the point of contracting82. It would seem that for most run-of-the-mill standard-form contracts, the answer to the question will almost invariably be affirmative. So in Picardi v Cuniberti, the supplier’s failure to give appropriate prominence to the adjudication clause in a contract drafted by the supplier’s trade body was deemed to breach the good faith requirement83. However, underlying these decisions is the suggestion that ‘the unfairness might be overcome by careful explanation of its meaning and effect’84. In other words, where the supplier brin.gs the clause specifically to the attention of the consumer, it may be possible to overcome the presumed lack of openness and fairness. Moreover, in Heifer, Lovell, Westminster and Allen Wilson, 75 ibid 725. 76 Alexander J Bělohlávek, B2C Arbitration: Consumer Protection in Arbitration (Juris Publishing 2012), 46. 77 Heifer International (n 54). 78 [2003] BLR 452. 79 [2004] EWHC 138. 80 [2005] EWHC 1165. 81 DGFT (n 62) para 17. 82 Mylcrist (n 72) para 51. 83 [2002] EWHC 2923, para 131. 84 Standard Bank (n 69) para 47.

158

The Bristol Law Review

[Vol. 1

the courts were willing not only to find that ‘good faith’ had been adhered to in standard-form consumer contracts but that the subjective circumstances of the consumer were sufficient to overcome the potential imbalance caused by the clause. Though not the only or even conclusive factor, a common thread in these judgments was the consumer’s access to ‘competent and objective advice’85 before contracting. This risks turning the test into a highly subjective assessment that could produce absurd results where a single supplier contracting in precisely the same manner with two different consumers, one with the benefit of legal advice and the other without, could have the arbitration clause upheld in the former and invalidated in the latter. The final aspect of the UTCCR that must be examined is the ‘indicative and non-exhaustive list of terms which may be regarded as unfair’86, precisely item 1(q). There has been much academic discussion regarding the exact meaning of ‘arbitration not covered by legal provisions’ with the possibilities ranging from equity clauses87, clauses excluding the right to appeal to a court on questions of law88, statutory arbitration schemes89, to all arbitration agreements in consumer transactions90. In at least two English decisions91, the courts seem to take the view that the ‘legal provisions’ most likely refer to statutory arbitration schemes found in continental Europe and ‘whatever its precise meaning’92, the operative part of 1(q) – ‘excluding or hindering a consumer’s right to take legal action’ – would cover most binding arbitration clauses in consumer contracts in any case. The more important question is what effect 1(q), and the ‘grey list’ generally, has on the burden of proof i.e. does an arbitration clause within the material scope of the UTCCR create a rebuttable presumption of unfairness thereby placing the burden on the supplier to show otherwise or is it merely a checklist of clauses to which courts should be especially sensitive to. Belohlávek93, relying on the different language versions of the Directive, argues that the list should merely serve as a reference of examples of potentially unfair clauses and not create a prima facie presumption of unfairness. There is some support for this in the language employed by Lord Bingham in DGFT in referring to Schedule 2 as ‘good examples of terms which may be regarded as unfair’ (emphasis added) but the issue has not been decisively addressed thus far. The question of burden of proof is not a trivial one, not only because it changes the dynamics of a challenge but also because, if the burden is on the consumer, who starts from a position of informational asymmetry, it could entail additional practical difficulties in adducing evidence of unfairness.

4.Conclusion

85 86 87 88 89 90 91 92 93

Westminster Building (n 79) para 31. Schedule 2. Vahrenwald (n 39) 149. Edwin Peel, Treital on the Law of Contract (10th edn, Sweet & Maxwell 2005), 274. Bruce Harris, Rowan Planterese and Jonathan Tecks, The Arbitration Act 1996: A Commentary (3rd edn, Blackwell 2003), 392. William W Park, ‘The New English Arbitration Act’ (1998) 13 Mealey’s Int’l Arb Rep 21, 21. Mylcrist (n 72) para 51 and Zealander (n 74) 729. Zealander (n 74) 729. (n 76) 72.

2013]

The Bristol Law Review

159

The English approach to consumer arbitration is a mixed bag. On one end of the spectrum are clauses that are patently invalid (pre and post dispute clauses relating to claims below £5,000). On the other end, are clauses ‘unlikely’94 to fall foul of the law, such as non-binding clauses (which remove the element of compulsion), post-dispute arbitration/submission agreements, and pre-dispute clauses that are individually negotiated and thus fall outside the scope of the UTCCR. Caught in the middle are binding pre-dispute arbitration clauses included in standard-form contracts. The positive news for consumers is that the law clearly seems to adopt a protectionist posture in their favour. But in choosing to adopt the bare minimum standards of protection prescribed by the Directive, the law is left lacking clarity and certainty. As it stands, English consumers may not, in fact, be able to rest all that easy and will need to continue being vigilant about the inclusion of arbitration clauses in the course of their transactions. Of course, as Hill notes95, much of the preceding discussion may well have little practical relevance given the exceptionally narrow circumstances in which consumer arbitration clauses will ever incur judicial exegesis. Combine that with the fact that the OFT has ‘energetically’96 enforced the Regulations through administrative mechanisms and the general ‘chilling effect’97 the UTCCR has had on suppliers’ inclusions of arbitration clauses in English consumer transactions, and the entire discussion may seem to be a frivolous exercise in scholarly rumination. Nonetheless, the existence of a not insignificant risk of some consumers being denied access to justice as a result of a pre-dispute arbitration clause justifies the need for due attention to the area. Moreover, the lack of clarity and certainty here creates risks. A consumer who is ill-advised about the perceived validity of a clause may very well be deterred from vindicating his rights altogether. Furthermore, from the supplier’s perspective, a lack of certainty about the validity of different DRCs and mechanisms invariably affects businesses’ ability to effectively manage litigation risk. The necessity for and objectives of consumer protection in the context of pre-dispute arbitration clauses are clear, and appears to be shared by the English legislation and judicial decisions. What is not clear is the benefit derived from adopting these ‘nebulous’98 and convoluted provisions when much firmer and simpler provisions would help achieve a more definitive legal position for both consumers and suppliers. Continental jurisdictions have transposed the Directive without shying away from the need for clear and distinct rules with regard to binding pre-dispute arbitration clauses. Sweden prohibits arbitration in consumer transactions altogether99 while Austria only 94 Office of Fair Trading, ‘Unfair Contract Terms Guidance: Guidance for the Unfair Terms in Consumer Contracts Regulations 1999’ (OFT311, Crown 2008), para 17.3 <www.oft.gov.uk/shared_oft/reports/ unfair_contract_terms/oft311.pdf> accessed 20 March 2013. 95 (n 9) 215. 96 Susan Bright, ‘Wining the Battle against Unfair Contract Terms’ (2000) 20 LS 331, 342. 97 Christopher R Drahozal and Ray J Friel, ‘Consumer Arbitration in the European Union and the United States’ (2003) 29 N C J Int’l L & Com Reg 357, 348. 98 Collins (n 23) 345. 99 Swedish Arbitration Act 1999, s 6.

160

The Bristol Law Review

[Vol. 1

allows arbitration agreements for disputes already pending100. Germany adopts an especially well-balanced approach, allowing pre-dispute arbitration clauses only where it is contained in a separate document and specifically brought to the attention of the consumer101, thereby addressing the key concern of consumers’ ex ante apathy towards DRCs. Caught between the American approach of party autonomy/minimal curial intervention and European consumer protectionism, it seems the UK is once again left stranded somewhere in the mid-Atlantic.

100 Zivilprozessordnung (Austrian Code of Civil Procedure), s 617. 101 ibid s 1032(5).

2013]

The Bristol Law Review

161

Bibliography Primary Sources English Legislation Access to Justice Act 1999 Arbitration Act 1996 The Civil Procedure Rules 1998, SI 1998/3132 The Unfair Terms in Consumer Contracts Regulation 1999, SI 1999/2083 The Unfair Arbitration Agreements (Specified Amount) Order 1999, SI 1999/2167 European Legislation, Conventions and Treaties Council Directive 93/13/EEC of 5 April 1993 on Unfair Terms in Consumer Contracts [1993] L95/29 Council Regulation (EC) 44/2001 of 22 December 2000 on Jurisdiction And The Recognition And Enforcement Of Judgments In Civil And Commercial Matters [2001] OJ L12/1 Council Regulation (EC) 593/2008 of 17 June 2008 on The Law Applicable To Contractual Obligations [2008] OJ L177/6 (Rome I Regulation) European Convention on Human Rights [1950] OJ C103/1 Consolidated Version of the Treaty on the Functioning of the European Union [2012] OJ C326/1 Other Legislation and Conventions Arbitration Fairness Act of 2007, S. 1782 / H.R. 3010 (110th Congress) Arbitration Fairness Act of 2013, S. 878 / H.R.1844 (113th Congress) Austrian Zivilprozessordnung (Code of Civil Procedure) German Zivilprozessrecht (Code of Civil Procedure) Swedish Arbitration Act 1999 (SFS 1999:116) United Nations Convention On The Recognition And Enforcement Of Foreign Arbitral Awards 1958 (New York Convention) English Case Law Allen Wilson Shopfitters v Anthony Buckingham [2005] EWHC 1165 Bryen & Langley Limited v Martin Rodney Boston [2004] EWHC 2450 Director General of Fair Trading v First National Bank [2001] UKHL 52 Gennaro Maurizio Picardi v Paolo Cuniberti [2002] EWHC 2923 Heifer International Inc v Helge Christiansen and others [2007] EWHC 3015 Lovell Projects Ltd v Legg and Carver [2003] BLR 452 Mylcrist Builders Ltd v Mrs G Buck [2008] EWHC 2172

162

The Bristol Law Review

[Vol. 1

Richard Zellner v Phillip Alexander Securities and Futures Limited [1997] ILPr 730 Standard Bank London Ltd v Apostolakis & Anor [2001] EWHC 493 Westminster Building Co Ltd v Andrew Beckingham [2004] EWHC 138 Zealander & Zealander v Laing Homes Ltd [2000] 2 TCLR 724 European Case Law Case C-40/08 Asturcom Telecomunicaciones SL v Cristina Rodríguez Nogueira [2009] ECR I-09579 Case C-541/99 Cape SNC v Idealservice SRL [2001] ECR I-9049 Case C-126/97 Eco Swiss China Time Ltd v Benetton International NV [1999] ECR I-3055 Case C-168/05 Elisa María Mostaza Claro v Centro Movil Milenium SL [2006] ECR 1-10421 Joined Cases C-240/98 and C-244/98 Océano Grupo Editorial SA v Roció Murciano Quintero and Salvat Editores SA v José M Sánchez Alcón Prades and Others [2000] ECR I-4941 Other Case Law Green Tree Financial Corp-Ala. v Randolph [2000] 531 US 79 Secondary Sources Alqudah MA, ‘Consumer Confidence in Online Cross-Border Business-to-Consumer Arbitration’ (2008) <https://lra.le.ac.uk/jspui/bitstream/2381/4166/1/2008%20Alqudah%20M.%20 A.%20PhD.pdf> accessed 20 March 2013 Bates DM, ‘Consumer’s Dream Or Pandora’s Box: Is Arbitration a Viable Option for Cross-Border Consumer Disputes’ (2004) 27 Fordham Int’l L J 823 Bělohlávek AJ, ‘Autonomy in B2C Arbitration: Is the European Model of Consumer Protection Really Adequate?’ (2012) CY Arb 17 --B2C Arbitration: Consumer Protection in Arbitration (Juris Net 2012) Bermann GA, ‘The “Gateway” Problem in International Commercial Arbitration’ (2012) 37 Yale J Int’l L1 Born GB, International Commercial Arbitration (3rd edn, Kluwer 2009) Briggs A, Agreements on Jurisdiction and Choice of Law (OUP 2008) --and Rees PJ, Civil Jurisdiction and Judgments (5th edn, Informa 2009)

2013]

The Bristol Law Review

163

Bright S, ‘Wining the Battle against Unfair Contract Terms’ (2000) 20 LS 331 Carbonneau TE and Janson F, ‘Cartesian Logic and Frontier Politics: French and American Concepts of Arbitrability’ (1994) 2 Tul J Int’l & Comp L 193 Collins DA, ‘Compulsory Arbitration Clauses in Domestic and International Consumer Contracts’ (2008) 19 King’s L J 335 Doyle M, Ritters K and Brooker S, ‘Seeking Resolution: The Availability And Usage Of Consumer-To-Business Alternative Dispute Resolution In The United Kingdom’ (National Consumer Council 2004) <www.berr.gov.uk/files/file11557.pdf> accessed 20 March 2013 Drahozal CR and Frie RJ, ‘Consumer Arbitration in the European Union and the United States’ (2003) 29 N C J Int’l L & Com Reg 357, 348 --‘A Comparative View of Consumer Arbitration’ (2005) 71 Arb 131 Ebers M, ‘From Oceano to Asturcom: Mandatory Consumer Law, Ex Officio Application of European Union Law and Res Judicata’ (2010) 18 ERPL 823 Fawcett JJ and Carruthers JM, Cheshire, North & Fawcett: Private International Law (14th edn, OUP 2008) Fentiman R, International Commercial Litigation (OUP 2009) Funding Code: Part 1 – Criteria <www.justice.gov.uk/downloads/legal-aid/funding-code/Funding_Code_Criteria_May_2011.pdf> accessed 20 March 2013 Galanter M, ‘Why the “Haves” Come Out Ahead: Speculations on the Limits of Legal Change’ (1974) 9 L & Soc’y Rev 95 Hanotiau B, ‘What Law Governs the Issue of Arbitrability?’ (1996) 12 Arb Int’l 391 Harris B, Planterese R and Tecks J, The Arbitration Act 1996: A Commentary (3rd edn, Blackwell 2003) Hill J, Cross-Border Consumer Contracts (OUP 2008) Hörnle J, ‘Online Dispute Resolution in Business-to-Consumer E-commerce Transactions’ (2002) 2 JILT <www2.warwick.ac.uk/fac/soc/law/elj/jilt/2002_2/hornle/> accessed 20 March 2013 --‘Online Dispute Resolution: The Emperor‘s New Clothes’ (2003) 17 IRLCT 27 --‘Legal Controls on the Use of Arbitration Clauses in B2C e-commerce Contracts’ (2008) 2 Masaryk UJL & Tech 23

164

The Bristol Law Review

[Vol. 1

Kirry A, ‘Arbitrability: Current Trends in Europe’ (1996) 12 Arb Int’l 373 Macdonald E, ‘Unfair Terms in Consumer Contracts’ (2005) LQR 38 MacLeod J, Consumer Sales Law (2nd edn, Cavendish 2006) Mak V, ‘Standards of Protection: In Search of the ‘Average Consumer’ of EU Law in the Proposal for a Consumer Rights Directive’ (2010) 19 ERPL 25 Mechantaf K, ‘Balancing Protection And Autonomy In Consumer Arbitrations: An International Perspective’ (2012) 78 Arb 232 Mistelis LA and Brekoulakis SL (eds), Arbitrability: International and Comparative Perspectives (Kluwer 2009) O’Donnell J, ‘The Arbitration Trap: How Credit Card Companies Ensnare Consumers, Public Citizen’s Congress Watch’ (Public Citizen 2007) <www.citizen.org/documents/ArbitrationTrap.pdf> accessed 20 March 2013 Office of Fair Trading, ‘Unfair Contract Terms Guidance: Guidance for the Unfair Terms in Consumer Contracts Regulations 1999’ (OFT311, Crown 2008) <www. oft.gov.uk/shared_oft/reports/unfair_contract_terms/oft311.pdf> accessed 20 March 2013 --‘Mapping UK consumer redress: A summary guide to dispute resolution system’ (OFT1267, Crown 2010) <www.oft.gov.uk/shared_oft/general_policy/OFT1267. pdf> accessed 20 March 2013 Park WW, ‘The New English Arbitration Act’ (1998) 13 Mealey’s Int’l Arb Rep 21 Paulsson J, ‘Moral Hazard in International Dispute Resolution’ (Inaugural Lecture as Holder of the Michael R Klein Distinguished Scholar Chair, University of Miami School of Law, 29 April 2010) <www.arbitration-icca.org/media/0/12773749999020/paulsson_moral_hazard.pdf> accessed 20 March 2013 Peel E, Treital on the Law of Contract (10th edn, Sweet & Maxwell 2005) Piers M, ‘Consumer Arbitration in the EU: A Forced Marriage with Incompatible Expectations’ (2011) 2 JIDS 209 --‘Consumer Arbitration And European Private Law: A Seminal Consumer Arbitration Model Law For Europe’ (2013) 2 ERPL 247 --‘Spillovers Of European Consumer Law: Validity Of Arbitration Agreements...And Beyond’(2011) 22 Am Rev Int’l Arb 625

2013]

The Bristol Law Review

165

Plaisant R and Motulsky H, ‘L’Arbitrage et les Conflits du Travail’ (1956) Rev Arb 80 Redfern A and others (2009) Redfern and Hunter on International Arbitration (5th edn, OUP 2009) 123 Riefa C, ‘Uncovering the Dangers Lurking Below the Surface of European Consumer Arbitration’ (2008) Consum J 2010 Schiavetta S, ‘Does the Internet Occasion New Directions in Consumer Arbitration in the EU?’ (2004) 3 JILT <www2.warwick.ac.uk/fac/soc/law2/elj/jilt/2004_3/schiavetta/> accessed 20 March 2013 Schwartz DS, ‘Enforcing Small Print to Protect Big Business: Employee and Consumer Rights Claims in an Age of Compelled Arbitration’ (1997) Wis L Rev 33 Slater D, ‘Neutrality Questions Continue to Dog Arbitration Firm’ Wall Street Journal (New York, 21 April 2008) <http://blogs.wsj.com/law/2008/04/21/neutrality-questions-continue-to-dog-arbitration-firm/> accessed 20 March 2013. Sternlight JR, ‘Is the U.S. Out on a Limb? Comparing the U.S. Approach to Mandatory Consumer and Employment Arbitration to that of the Rest of the World’ (2002) 56 U Miami L Rev 831 Tang ZS, ‘Private International Law in Consumer Contracts: A European Perspective’ (2010) 6 J Priv Int L 225 TNS Opinion & Social, ‘Consumer protection in the internal market’ (Special Eurobarometer 298, Wave 69.1, Eurobarometer 2008) <http://ec.europa.eu/consumers/ strategy/docs/eurobar_298_report_final_en.pdf> accessed 20 March 2013, 16. Twigg-Flesner C, ‘The Implementation of the Unfair Contract Terms Directive in the United Kingdom’ (2007) 8 CIL 235 Vahrenwald A, ‘Out-of-court dispute settlement systems for e-commerce: Part II The Protection of the Recipient’ (Joint Research Centre 2000) <http://vahrenwald. com/publication/index.html> accessed 20 March 2013 Winn JK and Webber M, ‘The Impact of EU Unfair Contract Terms Law on U.S. Business-to-Consumer Internet Merchants’ (2006) 62 Bus Law 1 Youssef K, ‘The Death of Inarbitrability’ in Mistelis LA and Brekoulakis SL (eds), Arbitrability: International and Comparative Perspectives (Kluwer 2009)

Intentions and Intensions: Textualism, Intentionalism and the Role of Legislative Intent in Statutory Interpretation Jack Moulder Statutes have been treated historically as existing in a semantic vacuum. However, they often do not yield to interpretation on their face, giving rise to much debate in the literature about the proper interpretation of statutes. The topic begs a question which strikes at the very fundament of theories of meaning: ‘by virtue of what fact does a text or utterance mean what it means?’ In Part I, I will expand on the issue under discussion and give some of the background to it, including some of the standard positions taken, and arguments given, in the legal literature. In Part II, I will discuss some relevant concepts and distinctions familiar to linguists and philosophers of language. In Part III I will undertake some more in-depth discussion of the implications of the insights outlined in Part II for the topic of statutory interpretation. In Part IV, I will summarise the main points of the essay and conclude.

I. The Problem of Statutory Interpretation With a view to underscoring the importance of the debate which surrounds the notion of legislative intent, and in the interests of presenting the overarching problem of statutory interpretation faithfully, I quote William Eskridge Jr.: “The Justices have engaged in this same debate for decades in statutory interpretation cases: Is the statute ambiguous on its face, or does it have a ‘plain meaning’? Is the plain meaning of the statute rebutted by compelling legislative history to the contrary? Or does the legislative history only reinforce the apparent meaning of the statutory text?”1 A great deal of the literature on the topic is given over to the question of whether or not judges should appeal to the intentions of the legislature in interpreting statutes. However, much of this debate has been marred, and, to an extent, perpetuated, by failure to appreciate certain distinctions which have become fundamental to the work of linguists and philosophers of language. As such, one of my aims will be to attempt to clarify certain aspects of human communication in such a way that the relevant issues surrounding statutory interpretation may at least become more intelligible. 1 William N Eskridge, ‘The New Textualism’ (1990) 37 UCLA L Rev 621, 623.

167

168

The Bristol Law Review

[Vol. 1

While I will make reference to some existing legal theories of statutory interpretation, I could not hope to exhaust the positions on the matter; there seems to be almost as many of these as there are participants in the debate. The meat of current debate, however, exists between two broad camps, and I shall introduce these so as to delimit the conceptual spectrum on which the debate is situated. It should become clear during the course of this discussion that these positions are not so much theoretical as ideological, and any progression we might hope to make in the debate will require us to dispense with the rhetoric employed on both sides. I shall not ultimately align myself with either position as such, since the motivation for holding either of them appears to hinge on considerations of what the law actually is, rather than what the objective of statutory interpretation ought to be. That matter is beyond the scope of my inquiry, along with differences between particular legal systems. Likewise, I will not actively bind myself to a particular theoretical stance on linguistic matters. Given certain differences between statutes and everyday language use, one might argue that the greatest contribution which linguistic thinking of the last half-century can make is in the form of distinctions rather than theories. This matter will be addressed briefly in section III.

The Originalist Dichotomy In this section I shall introduce the two broad camps alluded to above. They are referred to in the legal literature as ‘textualists’ and ‘intentionalists’. Both are related to what is known as the originalist school of thought: that the court should act as a faithful agent of the legislature2. One of the central questions of the matter which legal scholars are keen to address is whether this aim is better achieved by appeals to the words of the statute or the actual intent of the legislature in enacting that statute. It has been noted by some3 that the distinction between more plausible versions of textualism and intentionalism are not nearly so disparate in their outlook as is commonly asserted by critics. Others4 have further argued that viable accounts on either side are in fact convergent. It is important to recognise that the labels given to these camps are little more than rough approximations of their ideological foundations, if that. ‘Textualism,’ indeed, was a label attributed to that position by its critics, rather than its advocates, and Nelson in particular reminds us that its connotation “tends toward caricature”5. It would also seem natural from the juxtaposition of textualism and intentionalism to assume that the former’s proponents disregard the notion of intent. This is an excessively blunt characterisation of the textualist thesis. Of course, any such characterisation will necessarily be blunt to a certain degree; there is much 2 ibid 628. 3 Caleb Nelson, ‘What is Textualism?’ (2005) 91 Va L Rev 347, 348. 4 Stephen Neale, ‘Textualism with Intent’ (UCL-Oxford Colloquia, 18 November 2008) <www.ucl. ac.uk/laws/jurisprudence/docs/2008/08icollineale.pdf> accessed 10 October 2010; ‘The Intentionalism of Textualism’ in Andrei Marmor and Scott Soames (eds) Philosophical Foundations of Language in the Law (OUP 2011). 5 Nelson (n 3) 348.

2013]

The Bristol Law Review

169

disagreement over substantive issues even amongst the textualist ranks6, however a quote from another prominent legal academic will allow us to establish a first approximation of the distinction: “Whereas intentionalists believe that legislatures have coherent and identifiable but unexpressed policy intentions, textualists believe that the only meaningful collective intentions are those reflected in the public meaning of the final statutory text.”7 The first question, then, surrounds the use of a particularly crucial piece of terminology – ‘intention’ – which appears to have been taken for granted by many. The term ‘intention’ in this setting could be used to refer to either of two distinct concepts. It could, on the one hand, refer to the purpose which the statute was enacted to achieve, that is, the inequity it was enacted to remedy. On the other, it could refer to the intention to cause the interpreter to come to believe something. One finds that the term ‘intention’ is often used as a catch-all for both meanings in the legal literature, usually with no qualification as to which concept is being brought to bear. The distinction is not a trivial one. A statute may have a purpose, but it may not have an intention. The intention belongs to the lawgiver. Legislative purpose is rooted in policy, and for the purposes of this essay I will not use the term ‘intent’ as a synonym for ‘purpose’. My reasons for this should become clearer during Part II with further discussion of ‘meaning’. For the time being, it will suffice to say that in using the term ‘intention’ without further qualification I shall mean specifically informative intentions: not intentions that the statute should rectify i, but intentions to cause the interpreter to come to believe that p, and the intention to use the words of the statute to achieve this end. The intentionalist position which textualists seek to denounce is one that advocates the interpretation of the statute with respect to the legislature’s actual intentions. A well-known case which may shed some light on this position is Church of the Holy Trinity v United States8. This is in many respects the prototypical case of the intentionalist position prevailing in a US decision, according to textualist Justice Antonin Scalia9 and Stephen Neale10. The case arose due to questions over an employment contract between the Church of the Holy Trinity in New York and an English priest, and whether it was in breach of the 1885 Contract Labor Law. The priest had agreed to relocate to New York from England, despite the statute forbidding “the importation and migration of foreigners and aliens under contract or agreement to perform labor or service of any kind in the United States, its territories, and the District of Columbia”11. The court’s ultimate decision was to uphold the contract, allowing the priest to remain 6 7 8 9

Neale, ‘Intentionalism of Textualism ‘(n 4) 3. John F Manning, ‘Textualism and Legislative Intent’ (2005) 1 Va L Rev 419, 424. [1892] 143 US 457. A Matter of Interpretation: Federal Courts and the Law (Amy Gutmann ed, Princeton University Press 1997) 10 ‘Textualism with Intent’ (n 4). 11 Holy Trinity v US (n 8) 459.

The Bristol Law Review

170

[Vol. 1

in the country and continue to offer his services. There was no dissenting judgment, and the decision’s rationale was given voice by the opinion of Justice David J. Brewer in which he asserted that “a thing may be within the letter of the statute and yet not within the statute, because [it is] not within its spirit, nor within the intention of its makers.”12 Such a view clearly makes no appeal to the wording of the statute, and so can neither be supported nor contradicted on the basis of language. The idea that actual intentions can be recovered in this setting appears to beg justification, and numerous academics and judges over the course of decades have railed against the notion of socalled ‘original intent’. The standard arguments given by these figures are outlined in the following section.

Textualist Objections to Intentionalism Below, I have summarised the four most prevalent arguments advanced by the various critics of intentionalism and/or proponents of textualism: (i) (ii) (iii) (iv)

It is not clear that a pluralistic entity, such as the legislature, can actually have intentions; Ignoring (i), it is not clear how we would reliably determine the intentions of the legislature; Ignoring (i) and (ii), it is not clear that the legislature would collectively en tertain specific enough communicative intentions in enacting a statute for them to be worth recovering, and; Ignoring (i), (ii) and (iii), if by enacting a text the legislature merely means what it intends to mean, it is not clear what place there is for the text at all.

(i) This first objection is what Eskridge terms ‘the realist criticism’, pertaining to the existence of legislative intent and raised by legal realist Max Radin13. As Justice Frank Easterbrook has opined, “intent is elusive for a natural person, fictive for a collective body”14. The legislature is not one person. Neither is it the only group of people to have influence over policies. The realist criticism is based upon the psychological truism that intentions cannot exist independently of a mind, and that a unified intention cannot exist across a group, any more than that group has a unified mind15.

12 13 14 15

Eskridge (n 1) 629. ‘Statutory Interpretation’ (1930) 43 Harv L Rev 863. ‘Text, History and Structure in Statutory Interpretation’ (1994) 17 Harv JL & Pub Pol’y 61, 547. Eskridge (n 1) 633 and 642; Manning (n 7) 431.

2013]

The Bristol Law Review

171

(ii) The second objection Eskridge calls ‘the historicist criticism’16, pertaining to the discoverability of legislative intent. Statutes, unless repealed or replaced, remain in force indefinitely; for example, three clauses of the Magna Carta remain in force today, more seven hundred years after their enactment17. These are Clause 1; the freedom of the English Church, Clause 9; the ancient liberties of the City of London and Clause 29, a right to due process. It is not clear how we may have any idea of what the legislature intended to communicate by using the words that they did, even under the assumption that they held clearly defined common intentions. Radin notes, on the passing of legislation, that “the only external act [of legislators] is the extremely ambiguous one of acquiescence, which may be motivated in literally hundreds of ways”18.

(iii) The parties that influence the formulation of statutes are varied and often opposed in ideologies and thus policy intentions. The idea of a joint policy intention is based upon the cooperation of individuals toward achieving a certain shared goal. Trying to attribute joint intentions to competing interest groups seems a complex if not insurmountable endeavour, unless we say that the shared goal is simply to pass the statute. However, this would be unenlightening, if not circular, and has nothing to do with specifically communicative intentions in any case. Justice Scalia has asserted that any instance of litigation is the result of an ambiguous statutory provision19, thus for any issue where a piece of legislation has been called into question, either the statute was poorly drafted or the legislature likely did not have an intention both unified and precise. One of the core processes that the legislature carries out in the general procedure of enactment is to seek compromises. Marmor characterises compromises as “tacitly acknowledged incomplete decisions”20, that is, issues on which the legislature has no determinate policy. In addition, as Radin21, among others, has pointed out, statutes are specifically designed to cover a certain scope of cases. Given that the legislature envisages statutes as applying to a range of cases, ascertaining their collective intent in passing a statute cannot necessarily give us a definitive answer to the question of whether the statute applies in a given case.

16 17 18 19 20 21

Eskridge (n 1) 644. Magna Carta. Radin (n 13) 870-871. (n 9) 22. Andrei Marmor, ‘The Pragmatics of Legal Language’ (2008) 21 Ratio Juris 423, 436 (n 14).

172

The Bristol Law Review

[Vol. 1

(iv) If, as Alexander and Prakash22 assert, an utterance such as “gleeb gleeb gleeb” can be meaningful as long as the speaker means something by it, then we might ask ourselves in what sense the words of a statute contribute towards a reasonable interpretation of it at all.

II. Towards a Meaning of Meaning Statutory interpretation shares the same fundamental issues encountered in attempting to characterise human communication in general. How is it that a linguistic string, an essentially ambiguous representation of a thought, may yield in an audience an unambiguous metarepresentation of that thought? When we see an example of an ambiguous expression, we are inclined to say “it could mean x, or it could mean y”. Consider the following: 1. John threw the ball outside. Given a determinate referent for ‘John,’ we could infer one of two propositions, the difference between them being whether or not John himself was outside when he threw the ball. In layman’s terms, one might say that the expression could mean either of these propositions. However, the use of such phraseology clouds what we are saying. More cautiously speaking, we could say that (1) could be used by a speaker to cause an audience to believe either of these two propositions. This is the beginning of an answer to one of the questions raised earlier in the essay, namely: when we say that an expression could mean something, by virtue of what discovery could we satisfy ourselves that the expression does mean that in a given context, to the exclusion of a potential alternative? Herbert Paul Grice, in his seminal work on meaning23 introduced a distinction between what he called ‘natural meaning’ and ‘non-natural meaning’, or ‘meaningNN’. What we are interested in here is the latter sense of meaning, set out by Grice in the following terms: 2. (a)“A meantNN something by x” is (roughly) equivalent to “A intended the utterance of x to produce some effect in an audience by means of the recognition of this intention.” (b) “x meantNN something” is (roughly) equivalent to “somebody meantNN something by x.”

22 Larry Alexander and Saikrishna Prakash, ‘“Is That English You’re Speaking?” Some Arguments for the Primacy of Intent in Interpretation’ (2004) 41 San Diego L Rev 967. 23 ‘Meaning’ in x, Studies in the Way of Words (HUP 1957).

2013]

The Bristol Law Review

173

Integrating (2a) and (2b), then, for an expression to meanNN something in a given context is for a speaker to have an intention to use that expression to communicate a particular proposition in that context to an audience by means of the audience’s recognition of that intention. As such, the expression’s meaningNN is simply what the speaker intends to communicate by it. Let us now return to the present topic with another quote from John Manning:“Classical intentionalists emphasize that meaning depends on what the speaker actually intends to convey.”24 The fallout of Grice’s handling of meaningNN is that the term ‘meaning’ as used in this sense can only claim currency in the context of speaker intentions. If Manning is taken to be using the term in this sense, the assertion which he attributes to the intentionalists is clearly true. The meaning of an expression, in the non-natural, metaphysical sense, is determined wholly by what the communicator intended to mean by it. One feels that Manning and the remainder of the textualist cohort must understand something quite different by the term ‘meaning’. They cannot be referring to meaning in the sense of meaningNN. Neither could they be referring to what is said, in the Gricean sense, for it is widely if not universally conceded amongst them that sentences do not yield propositions of their own accord, that is, with no reference to extralinguistic information25 Let us return to the very first quotation of Manning from part I, repeated below for convenience: “Whereas intentionalists believe that legislatures have coherent and identifiable but unexpressed policy intentions, textualists believe that the only meaningful collective intentions are those reflected in the public meaning of the final statutory text.”26 It is not at all obvious what we are to understand by the term ‘public meaning’, and it is an inquiry to which part III will be dedicated. Notwithstanding this difficulty, I will consider the substantive issue raised by Manning, pertaining to the kinds of intention which might be involved in communication. Textualists maintain that the meaning of the statute does not necessarily depend on the actual intentions of the legislature. It is not immediately clear what they are ruling out here, for Grice27 distinguishes between different categories of intention and the role of each in communication: “Only what I may call the primary intention of an utterer is relevant to the meaningNN of an utterance. For if I utter x, intending (with the aid of the recognition of this intention) to induce an effect E, and intend this effect E to lead to a further effect F, then insofar as the occurrence of F is thought to be dependent solely on E, I cannot regard F as in the least dependent on recognition of my intention to induce E.”28 24 25 26 27 28

Manning (n 7) 428. ibid; Eskridge (n 1); Nelson (n 3). Manning (n 7) 424. ‘Meaning’ (n 23). ibid 221.

174

The Bristol Law Review

[Vol. 1

In short, when a man wishes his audience to do something, he must first cause them to believe something. He may give them a piece of information on the basis of which they come to believe something, and it may be as a result of that that they act according to his wishes. I shall refer to these as primary and secondary intentions; a primary intention is the intention to inform an audience that p, while a secondary intention is the intention that the audience should decide on a particular course of action on the basis of believing that p. Grice’s contention is that secondary intentions are not strictly relevant to the meaningNN of an utterance. However, they may provide evidence on the basis of which the meaningNN might be discovered. It seems that intentionalists see no wrong in utilising this evidence, as illustrated earlier by the decision in Church of the Holy Trinity. Textualists, meanwhile, have some difficulty articulating their position on this matter because the distinction between the two tiers of intention is often ignored. They quite clearly reject the idea that the ‘purpose’ of a statute, that is, its secondary-intended function, should be regarded as relevant to its interpretation; such was the reason for the controversy over Church of the Holy Trinity in the first place. However, it is not entirely clear whether or not they reject the search for the primary intention in the same way. One might ask whether it would even be prudent to do so. To answer such a question, however, will require an examination of the nature of interpretation itself.

The Nature of Interpretation So far we have established that the actual meaning of an utterance, or meaning, is simply what the speaker intends his audience to come to believe, based on the NN recognition of that intention. Stephen Neale’s29 view of the aim of statutory interpretation is that it is intimately related to the conception of meaningNN. According to Neale, it is patently true that the intent of the legislature is what we are attempting to recover in interpreting statutes, and the only genuine disagreement between textualists and intentionalists is with respect to what evidence may be admissible in achieving this end: “Meaning and interpretation form a pair: to interpret x is to determine, establish or identify what x means. This idea presupposes that there is some fact of the matter as to what x means.” Neale30 This ‘fact of the matter’ is the speaker’s intended meaning, the discovery of which would satisfy an audience as to the meaningNN of the utterance. Thus the very act of interpreting an action, utterance or statute presupposes not only the existence of an intended meaning, but also that the intended meaning is what we wish to discover. Neale goes on to distinguish the notions of a theory of meaning and a theory of interpretation. The former hinges upon the metaphysical question of what the speaker means by uttering x, with which we are already familiar. The latter hinges upon the epistemic question of how one is to determine what the speaker means by x. Interpretation, then, is a matter of forming hypotheses about a speaker’s informative intention 29 Neale, ‘Textualism with Intent’ (n 4); ‘Intentionalism of Textualism’ (n 4). 30 Neale, ‘Intentionalism of Textualism’ (n 4).

2013]

The Bristol Law Review

175

on the basis of certain evidence. As Wilson & Sperber31 point out, there can never be a proof of the nature of this intention in a given scenario, only confirmation. Pragmatic32 reasoning is a form of non-demonstrative inference, thus is essentially defeasible.

The Status of the Text The claim that an expression means what its communicator intends the audience to understand him as meaning by using it has raised objections from the textualist camp, which are captured by argument (iv) above. Justice Scalia has argued that the intentionalist approach is untenable because, among other reasons, it suggests that there is no place for the text. If we think it possible to access the legislature’s intentions, and this is what we seek to discover in interpreting statutes, then we must clarify the role that the words of the statute play in the process of statutory interpretation. To appeal to the seemingly bizarre implications of this, if the legislature merely means what it intends to mean, why does it matter what words they use? Why could Magna Carta not have consisted solely of the words ‘gleeb gleeb gleeb’? There is an important constraint here, mentioned by Grice33 and echoed by Neale34. It is a constraint on the formation of genuine intentions: a constraint on what a speaker or legislature can justifiably intend to achieve by uttering or enacting x. “A must intend to induce by x a belief in an audience, and he must also intend his utterance to be recognized as so intended […] Moreover, A’s intending that the recognition should play this part implies, I think, that he assumes there is a chance that it will in fact play this part.”35 In short, one cannot intend something which one believes to be impossible. This immediately places bounds on the semantic relativism of objection (iv) by reminding us that, although a speaker’s informative intention may be what we attempt to discover in interpreting an utterance, the utterance itself is a primary source of evidence in achieving that end and this constrains what a speaker can intend by using the words he does. It would appear that Justice Scalia’s objection on these grounds amounts to little more than an appeal to ridicule. The status of the text is well-recognised by other textualists, however. Eskridge writes that under a conception of the court as a faithful agent of the legislature, “statutory text is important as the best evidence of legislative

31 Dan Sperber and Dierdre Wilson, Relevance: Communication and Cognition (2nd edn, Blackwell 1986), 65. 32 By ‘pragmatic’, I refer here to the branch of linguistics devoted to speaker’s meaning: that is, the meaning of given utterances in context. 33 Grice (n 23). 34 Neale, ‘Textualism with Intent’ (n 4). 35 Grice (n 23) 219.

The Bristol Law Review

176

[Vol. 1

intent or purpose”36. Contra Alexander & Prakash37, a communicator cannot intend to communicate anything to an English audience by uttering ‘gleeb gleeb gleeb’, at least in the absence of a pre-existing convention which he might share with the audience regarding what he would mean in using this phrase. In part II we have established first that the meaningNN of an expression or text is what the communicator intends his audience to come to believe. Secondly, to interpret something is to construe it as the product of an intention, and to use the evidence at one’s disposal to construct a hypothesis about that intention. Finally, a text is (strong) evidence of both the existence and the nature of an informative intention, and no more. If we had direct access to speaker intentions, there would be no need for interpretation, no need for a text, and that is the fact of the matter. If any of the arguments (i)-(iv) are to be taken seriously, however, the actual meaning of a statute may not necessarily be helpful regarding the particular legal issue in question, even if it can be discovered. The fundamental problem of statutory interpretation is the difficulty in reconciling the actual informative intentions of the legislature with what intentions we may reasonably attribute to them, and what needs to be established in order to resolve the particular dispute at hand. Next, I shall examine an idea put forward by various legal academics and judges alike; an idea referred to as ‘public meaning’38, ‘authoritative meaning’39 or, perhaps most notably, ‘objectified intent’40.

III. Objectified Intent So far I have outlined problems for both the intentionalist and textualist positions, and explicated the link between meaning and intent. In this section, I will examine the concept of objectified intent touted by jurists and legal academics, and bring out some problems for it both on its own merits and in light of what has already been discussed. According to prevailing pragmatic theories, speakers’ intentions underpin our assumptions that a text can mean something. Prominent examples of this intention-based type of theory are Neo-Gricean pragmatics and Relevance Theory, based upon assumptions about ‘cooperativeness’ and ‘relevance’, respectively. However, the status of legislative intent is contentious. Were it the case that the broad intentionalist position would not be compromised by accepting that the process of intention recovery is fallible, the problems attributed to it by textualists to it would lose their power. At this point it would be clear that both textualist and intentionalist approaches involve identification of the apparent intent of the lawgiver on the basis of certain evidence. However, this would not refute the arguments (i)-(iv), it would merely allow intentionalists to sidestep them in favour of the difficulties already experienced by textualists. Textualists have attempted to resolve their own difficulties 36 37 38 39 40

Eskridge (n 1) 626. (n 21). Manning (n 7). Alexander and Prakash (n 22). Scalia (n 9).

2013]

The Bristol Law Review

177

by appealing to a concept of ‘objectified intent’, calculated based on what intentions a rational, cooperative and sufficiently informed user of the language would attribute to the legislature. Manning frames the idea as follows: “While the textualists’ view of the legislative process requires them to reject the classical intentionalists’ anthropomorphic treatment of the legislature, it by no means necessitates a wholesale rejection of any useful conception of legislative intent. […] Ascribing […] objectified intent to legislators offers an intelligible way for textualists to hold them accountable for whatever law they have passed, whether or not they have any actual intent, singly or collectively.”41 As we have seen, legislative intent is a problematic notion. What should be uncontroversial, however, is that the parties involved in passing the statute agreed on its wording. Such is the textualist gambit. As such, we do not want to ask what the legislature actually intended by enacting a statute, but what they apparently intended by virtue of the words they used. How should we characterise objectified intent, and how could it be implemented? It seems as if Scalia’s idea of objective intent is in line with what Alexander & Prakash42 call the ‘authoritative meaning’ – an interpretation of the text which can be objectively agreed upon. In addition, Alexander & Prakash argue that in the absence of an actual author, the only way we can make sense of a text is to attribute the text’s formation to a hypothetical author: one that has an intention to convey a meaning using English. How can we attempt to construct a hypothetical speaker’s meaning on the basis of purely linguistic input? We must bring a certain framework to bear on the act of interpretation, and make a minimal set of assumptions about this hypothetical author in order to come to a ‘reasonable’ interpretation. This leads to further questions, such as on what basis an interpretation might be deemed reasonable in this setting. Perhaps a reasonable interpretation is one that is commonly acceptable. Remember that the overarching criticism of legislative intent, that which unites arguments (i)-(iv), is that it is esoteric. It is unreasonable to expect those bound by a law to divine the subjective intent of the lawgiver, and it follows that what should be binding is that which can be objectively established. One way to create an objective yardstick for the interpretation of utterances is to propose a standard. This is effectively what Grice43 undertook (albeit for everyday language use) in formulating his conversational maxims, unified by his Cooperative Principle. Such maxims can be objectively discerned in ways which subjective speaker’s intentions cannot, lending themselves more readily to an interpretive exercise. They also allow for mediation of text and intent by a common standard against which the text may be judged. The upshot of this would be that rather than judging the text based on what the legislature intended, we would end up judging what the legislature intended based on evaluation of the text against the assumptions about the way the legislature usually uses words, as outlined by these 41 Manning (n 7) 432-433. 42 (n 22). 43 Grice (n 23).

178

The Bristol Law Review

[Vol. 1

principles. Such actions would in all likelihood generate intentions not genuinely held by the legislature, but if we assume that the legislature chose their words with the understanding that they would be judged within this framework then all that we can say is that any falsely generated intention would not conflict with any consensus that the legislature did hold. In short, it allows the lawgivers to be held accountable for their output, irrespective of their actual intentions in creating it. There is divergence here between what intentions they may have entertained and those which may be attributed to them. This would seem to be the most realistic approach to squaring the textualist and intentionalist positions if what we seek to do is to draw determinate propositions from essentially ambiguous text. The consequence of objectified intent is that the lawgivers must observe the principles governing legislative language use and draft laws accordingly, and the interpreters must recognise that the lawgivers observe those standards. The benefit of appealing to a normative standard is that it offers a third perspective, abstracted away from communicator and audience. If the communicator and audience assume mutual adherence to such principles of interpretation, then the communication may be anchored in convergence toward them, rather than the reciprocity involved in metacognition and the uncertainty which follows. The legislator will gear the text so as to be interpreted with reference to these interpretive principles, while the audience will expect him to do so, and so will refer to the principles in reaching conclusions about the text’s meaning. The success of the communication in this case relies minimally on the mutual reliance on the normative standard. Unfortunately, we cannot simply apply Grice’s framework in the legal setting. One immediately obvious reason for this is that, as discussed previously, the act of passing statutes is not a necessarily cooperative one. In Grice’s terms, the process may lack a “mutually accepted direction”44. As a result, the legislature may conspire to remain silent on strictly relevant matters in the interests of reaching an agreeable compromise. Ordinary speakers attach significance to this sort of silence. In using the same words, an ordinary speaker would be understood to be saying something by virtue of their very underinformativeness on a strictly relevant matter. This is extremely familiar territory to pragmatists as the realm of ‘quantity implicature’. Consider the following: 3. Person A: What have these electoral campaigns come to? It’s all rhetoric and no substance. Person B: Votes are votes. Person B’s utterance offers no a posteriori insight whatsoever. However, the assumption that his utterance was nonetheless intended as an informative contribution to the discussion drives the derivation of further assumptions which might explain his choice of utterance and hence what he meant by it. Without the overarching assump44 ibid 5.

The Bristol Law Review

2013]

179

tion of cooperativity, though, this mechanism ceases to function. Of course, this is an extreme example employed for the sake of illustration. Let us consider the role of informativeness in the context of legislative wording. In Smith v United States45, a dispute arose as to the correct interpretation of the phrase ‘use of a firearm’. The United States Supreme Court ruled that the exchange of a gun for two ounces of cocaine constituted using a firearm in relation to a crime. The court appealed to the notion of ‘plain language’ to pass this judgment, as Justice O’Connor wrote: “Had Congress intended the narrow construction the petitioner urges, it could have so indicated. It did not, and we decline to introduce that additional requirement on our own. […] It is one thing to say the ordinary meaning of ‘using a firearm’ includes using a firearm as a weapon, since it is the intended purpose of a firearm and the example of use that most immediately comes to mind. But it is quite another to conclude that, as a result, the phrase also excludes any other use. Certainly that does not follow from the phrase ‘uses…a firearm’ itself.”46 The term ‘ordinary meaning,’ as we have seen, is vague in the extreme. The two most immediate interpretations of it are the meaning that may be divined from the text alone, and the meaning that a rational and cooperative speaker would assign to that text. These are rather different interpretations of the phrase, and O’Connor’s argumentation appears to rest on each at different points. Linguistic indeterminacy renders the first of these possibilities somewhat impotent for the purposes of statutory interpretation. This leaves us with the second possibility: the interpretation which a rational and cooperative person would ascribe to the text. “Under the dissent’s approach…even the criminal who pistol-whips his victim has not used a firearm within the meaning of 924(c)(1), for firearms are intended to be fired or brandished, not used as bludgeons.”47 O’Connor appears to use this point as an argument against the dissenting opinion. However, it is not clear whether or not the statute should in fact be enforced in such a scenario. The use of a gun to hit someone is not difficult to foresee. On a common sense view, had the legislature intended this usage to be inferred, they would not have bothered to characterise the weapon so specifically as a ‘firearm’, but might merely have used ‘weapon’ instead. To use such a term as ‘firearm’ to the exclusion of many other illicit items such as knuckledusters or swords implies that those items would not have been useful in carrying out the sorts of acts which the statute was formulated to prevent. What unites the set of things that can reasonably be called a firearm is that they fire bullets, and this characteristic unites them to the exclusion of other objects, indeed other weapons, that might be employed 45 [1993] 508 US 223. 46 ibid 229-230 (O’Connor J). 47 ibid 72.

180

The Bristol Law Review

[Vol. 1

in carrying out a crime. Thus it could be maintained that this statute would have nothing to say about a set of circumstances where someone battered someone else to death with a gun. Of course, such an act as bludgeoning someone with a gun should rightly be unlawful, but that does not necessitate the interpretation of this particular statute as forbidding it. Neither does the statute forbid rape, torture or theft, though these are illegal activities, and we have no qualms about saying that they are beyond its scope. As such, it would appear that Justice O’Connor’s above argument is fallacious. Nevertheless, this remains a common sense view, and one which may not hold in light of what has been discussed so far. Despite the fact that in everyday conversation we might take this phrase to denote firing or threatening to fire a firearm, we must be attentive to the fact that the legislature did not specify ‘fire or threaten to fire,’ which, under legal standards of brevity, would be perfectly acceptable. The textualists are mistaken that we can interpret statutes in the same way that we would interpret any other utterance, not least because when interpreting statutes we have much less information at our disposal than when interpreting ordinary utterances. ‘The context is impoverished,’ as Marmor48 puts it. Quite apart from the inapplicability of Grice’s framework directly to statutory interpretation, there is a more general issue with the notion of objectified intent. Observe that these principles which we would seek to develop could either be normative or descriptive, that is, they could either (a) prescribe an interpretive framework acting both progressively and retroactively, or (b) formalise a system which is already in place. Neither is obviously acceptable. Implementing a set of normative principles, as discussed above, minimally presupposes that the legislature was observing them when the statute was passed. We cannot pretend that past legislatures bore any framework in mind which we might now seek to develop. Nor could we claim that our principles might have descriptive adequacy: there has never been any overriding consensus, at any point in time when the matter has been seriously considered, about how to interpret statutes. This generates certain doubts over the applicability of any formal framework of objectified intent if the goal of our enterprise is to yield definitive interpretations of statutes. It may be the case that judges should be able to withhold definitive judgment on the provisions of the statute and turn to other means of procuring a just outcome for a case.

IV. Conclusion I have attempted to give an account of a number of issues surrounding statutory interpretation, and to clarify aspects of them in doing so. My handling of the subject has been necessarily bounded by the focus of my inquiry, however it is only with resolution of the issues lying within these bounds that relevant debates among legal scholars may gain any real ground. The first result of the inquiry has been the clarification that the essence of interpretation is to attempt to discover what a communicator is attempting to convey. 48 Marmor (n 20).

2013]

The Bristol Law Review

181

Strictly speaking, it makes no sense to ask what a word or phrase means in the absence of an assumption that it was used by a rational communicator to achieve some communicative end. The second has been the establishment of the status of the statute as an instrumental piece of evidence in the process of discovering legislative intent. Despite the radical criticism that appealing to legislative intent renders the statute impotent, constraints on what one may expect to communicate by using a particular word or phrase reaffirms the primacy of the enacted text. The third has been that objectified intent, if the device is to be useful in any meaningful way, should be codified via principles of legislative language in such a manner as to be explicit and accessible to legislator and layman alike. It may be that the only way to close the gaps in statutory language is to understand it as a field of technical language use, involving specialised conventions. If so, there must be specialised systems for interpreting certain linguistic constructions and their sovereignty must be universally acknowledged. If we wish to obtain from statutes interpretations that are precise, consistent and unobjectionable, it may be that such a conclusion is unavoidable. That raises new questions. One such question concerns the value of ambiguity. As we have seen, a legislature may conspire to leave in certain ambiguities in the interests of passing statutes. As textualists claim, the chief goal of passing statutes is to agree on wording, not motives49. This gives rise to a forced choice between interpretations which are definite but detached from the rein of any genuine intentions and interpretations which in crucial respects may not be informative at all. This problem does not find its roots in the nature of meaning, or what it is for a statute to mean something. It is caused by the underdetermination of intent brought about by legislative compromise.

49â&#x20AC;&#x192; Nelson, â&#x20AC;&#x2DC;What is Textualism?â&#x20AC;&#x2122; (n 3) 370.

182

The Bristol Law Review

[Vol. 1

Bibliography Primary Sources Church of the Holy Trinity v United States [1892] 143 US 457 Smith v United States [1993] 508 US 223 Secondary Sources Alexander L and Prakash S, ‘“Is That English You’re Speaking?” Some Arguments for the Primacy of Intent in Interpretation’ (2004) 41 San Diego L Rev 967 Blakemore D, Understanding Utterances: An Introduction to Pragmatics (Blackwell 1992) Breheny R, Katsos N and Williams J, ‘Are Generalised Scalar Implicatures Generated by Default? An on-line investigation into the role of context in generating pragmatic inferences’ (2006) 100 Cognition 434 Brewer S, ‘Exemplary Reasoning: Semantics, Pragmatics and the Rational Force of Legal Argument by Analogy’ (1996) 109 Harv L Rev 925 --(ed), Precedents, Statutes, and Analysis of Legal Concepts (Garland Publishing 1998). Carston R, ‘Informativeness, Relevance and Scalar Implicature’ in R Carston and S Uchida (eds), Relevance Theory: Applications and Implications (John Benjamins 1998) --Thoughts and Utterances: The Pragmatics of Explicit Communication (Blackwell 2002) --‘The Explicit/Implicit Distinction in Pragmatics and the Limits of Explicit Communication’ (2009) 1 Int’l Rev Pragmatics 35. Easterbrook F, ‘Text, History and Structure in Statutory Interpretation’ (1994) 17 Harv JL & Pub Pol’y 61 Eskridge WN, 1990, ‘The New Textualism’ (1990) 37 UCLA L Rev 621 Grice HP, ‘Logic and Conversation’ in Studies in the Way of Words (HUP 1991) --‘Meaning’ in Studies in the Way of Words (HUP 1991) --‘Utterer’s Meaning and Intention’ in Studies in the Way of Words (HUP 1991) Kramer A, ‘Common Sense Principles of Contract Interpretation (and How We’ve Been Using Them All Along)’ (2003) 23 OJLS 173 Levinson S, Presumptive Meanings: The Theory of Generalised Conversational Im-

2013]

The Bristol Law Review

183

plicature (MIT Press 2000) Lewis D, Convention (HUP 1969) Manning JF, ‘Textualism and Legislative Intent’ (2005) 1 Va L Rev 419 --‘What Divides Textualists from Purposivists?’ (2006) 73 Colum L Rev 106 Marmor A, Interpretation and Legal Theory (2nd edn, Hart 2005) --‘The Pragmatics of Legal Language’ (2008) 21 Ratio Juris 423 Neale S, ‘Textualism with Intent’ (UCL-Oxford Colloquia, 18 November 2008) <www.ucl.ac.uk/laws/jurisprudence/docs/2008/08icollineale.pdf> accessed 10 October 2010 --‘The Intentionalism of Textualism’ in Andrei Marmor and Scott Soames (eds) Philosophical Foundations of Language in the Law (OUP 2011) Nelson C, ‘What is Textualism?’ (2005) 91 Va L Rev 347 Prince EF, ‘Language and the Law: A Case for Linguistic Pragmatics’ (1982) Sociolinguistics Working Papers No 94 <http://eric.ed.gov/?id=ED252056> accessed 10 October 2010. Radin M, ‘Statutory Interpretation’ (1930) 43 Harv L Rev 863 Ross SF, ‘The Limited Relevance of Plain Meaning’ (1995) 70 Wash ULQ 1057 Scalia A, A Matter of Interpretation: Federal Courts and the Law (Amy Gutmann ed, Princeton University Press 1997) Schiffer S, Meaning (Clarendon Press 1972) Sinclair MBW, ‘Law and Language: The Role of Pragmatics in Statutory Interpretation’ (1985) 46 U Pittsburgh L Rev 373 Sinnott-Armstrong W, ‘What is Legal Interpretation? Word-Meaning in Legal Interpretation’ (2005) 42 San Diego L Rev 465 Soames S, ‘What Vagueness and Inconsistency Tell Us About Interpretation’ in A Marmor and S Soames (eds), Philosophical Foundation of Language in the Law (OUP 2011) --‘Vagueness and the Law’ in A Marmor (ed), The Routledge Companion to Philosophy of Law (Routledge 2012) Sperber D and Wilson D, Relevance: Communication and Cognition (2nd edn, Blackwell 1986)

Transfer Pricing by Multinational Enterprises: A Clash between Democracy and Globalisation Varoon Saccaram

1. Introduction This paper argues that transfer pricing as used by multinational enterprises (MNEs) gives rise to a tension between democracy and globalisation at the outset of the 21st Century. Before casting the lens on the transfer pricing rules used to regulate MNEs, it will be necessary to appreciate the terms ‘democracy’ and ‘globalisation’ as used in the context of this essay. The rationale behind the ‘arm’s length’ principle and its workings will be discussed and it will be shown that this principle is not devoid of problems. The logic of collective action is used as a framework to conceptualise MNEs into small groups. Being smaller than countries, MNEs are better coordinated; this enables them to exploit the OECD (Organisation for Economic Cooperation and Development) Guidelines. This is also because these guidelines are enshrined in a soft law approach. Overall, this exploitation hinges on the progress of countries and smaller businesses and also hinders the reputational value of MNEs. In addition, the ‘reasonable business person’ test promulgated by the Canadian Supreme court (SCC) in the GlaxoSmithKline case further undermines the arm’s length principle as well as the OECD Guidelines. This case also underlies the interplay between legal concepts and accounting principles. As an appropriate starting point, it is vital to define the term ‘globalisation’. In this essay, it is given its basic meaning. In essence, globalisation refers to the process by which businesses or other organisations develop international influence or start operating on an international scale1. According to Pichhadze2, globalisation can be identified as one of the socio-economic changes that has affected the application of the ‘arm’s length’ standard as will be explored later. Within the taxation framework, globalisation refers mainly to the exercise of the influence of MNEs which allows them to shift their profits around in other jurisdictions. These are also known as tax havens, where corporate income tax is lower than what MNEs would have paid in the domestic setting where the company is actually incorporated. In essence, MNEs are the consequences of the relatively high cost of certain international market transactions3. One of the methods through which the shifting of risks, assets and even profits can be achieved is via the use of transfer pricing. This is a mechanism for allocating income

1 ‘Globalization’ (Oxford Dictionary) <http://oxforddictionaries.com/definition/english/globalization> accessed 20 August 2013. 2 Amir Pichhadze, ‘Canada’s Transfer Pricing Test in the Aftermath of GlaxoSmithKline Inc.: A Critique of the Reasonable Business Person Test’ (2013) 20 ITPJ 144, 150. 3 Eduardo Baistrocchi, ‘Tax disputes under institutional instability: theory and implications’ (2012) 75 MLR 547, 550.

185

186

The Bristol Law Review

[Vol. 1

through various subsidiaries around the world4. Every country relies on the assumption that two subsidiaries of the same company can bargain with each other in order to come to a price equivalent to an arm’s length transaction5. However, globalisation has also benefited domestic economies by impacting positively on countries’ corporate income tax regimes by boosting trade and increasing foreign direct investments6. Finding an ad hoc definition of ‘democracy’ is more complicated. In the context of this paper, the definition of democracy is narrower than the traditional ‘government of the people, for the people, by the people.’ In the framework of taxation, what we mean by democracy being affected is basically that the traditional tax principles and fundamental rights of taxpayers could be in crisis because of the influence of new sources of tax law in a globalised world7. Hence, it gives the impression that common taxpayers are paying a higher effective tax rate than MNEs. However, this turn of events remains unfair to businesses which operate and pay their full tax bill8 and to smaller businesses which do not have the resources to open up subsidiaries offshore and shift their profits around. Having identified what ‘globalisation’ and ‘democracy’ represent in this essay, the next step is to delve further into the issue of transfer pricing and how its use by MNEs leads to a clash between globalisation and democracy. The rest of this article is devoted to this purpose. The structure of this paper is as follows: Section 2 conceptualises transfer pricing rules for MNEs as promulgated by the OECD under the arm’s length principle. Section 3 explains how the OECD guidelines have been developed increasingly in favour of MNEs in the last few years and uses Mancur Olsen’s Logic of Collective Action to illustrate how MNEs are able to exploit countries. Light is also shed on the soft law approach inherent in the OECD Guidelines. Section 4 examines the recent decision of the Canadian Supreme Court in the GlaxoSmithKline case. It is used as a case study to show how this clash between democracy and globalisation remains increasingly pertinent even in a domestic framework. The last section concludes by looking at the way forward in the international transfer pricing arena.

2. Transfer Pricing Rules for MNEs This section discusses the transfer pricing rules regulating MNEs over the world. The basic foundation for determining transfer prices lies in the arm’s length principle. The weaknesses and rationale behind this principle are underlined from both an economic and managerial viewpoint. 4 Drucker J, ‘How offshore tax havens save companies billions’ (National Public Radio, 17 March 2011) <www.npr.org/2011/03/17/134619750/how-offshore-tax-havens-save-companies-billions> accessed 20 August 2013. 5 ibid. 6 OECD, Action Plan on Base Erosion and Profit Shifting (OECD 2013). 7 Jóse Calderón, ‘The OECD Transfer Pricing Guidelines as a source of tax law: Is Globalization reaching the tax law?’ (2007) 35 Intertax 4. 8 Nicola Lewis, ‘Tax avoidance by large multinationals in the UK is unfair to small businesses’ (Marketline 23 October 2012) <www.marketline.com/blog/tax-avoidance-by-large-multinational-companiesin-the-uk-is-unfair-to-small-businesses/> accessed 20 August 2013

The Bristol Law Review

2013]

187

Transfer prices relates to the prices charged between associated enterprises located in different tax jurisdictions for their intercompany transactions9. Transfer pricing applies in the internal market where the unit price assigned to products between the parent company and its subsidiaries governs10. This distinction between internal and external market is crucial because: firstly, MNEs can control the transfer price in the former but not the market price in the latter11 and secondly, the pricing mechanism does not apply at all in the internal market12. To this end, the determination of the prices at which enterprises transfer tangibles and intangibles to associated enterprises is crucial. These prices determine the income and expenses, and hence, the taxable profits of associated enterprises in different tax jurisdictions13. To ensure that MNEs do not manipulate these transfer prices, the underlying practice governing transfer pricing is that of the arm’s length principle as set forth in Articles 7 and 9 of the OECD Model. Whilst Article 7 relates to branches and the concept of permanent establishment (PE), it is Article 9 of the OECD Model Tax Convention that forms the basis of the discussion in this essay. It relates to associated enterprises and states that: “Where: a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly. b) a Contracting State includes in the profits of an enterprise of that State — and taxes accordingly — profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made be9 Chris Devonshire-Ellis, Andy Scott and Sam Woollard, Transfer Pricing in China (Springer 2011) 3. 10 Andre Gabor, Pricing: Concepts and Methods for Effective Marketing (CUP 1988) 113-4. 11 Baistrocchi, ‘Tax disputes under institutional instability’ (n 3) 551. 12 Robert G Eccles, The Transfer Pricing Problem: A Theory for Practice (Lexington Books 1986) 19. 13 OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD 2009) para 1.2.

188

The Bristol Law Review

[Vol. 1

tween independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other.” According to Roxan14, ‘the driving forces for the emergence and evolution of the arm’s length principle have been the two technological innovations related to globalisation: the emergence of MNEs after the globalisation boom (1820-1914) and the emergence of international trade in intangibles as of the second globalisation boom (1945-present)’. In simpler terms, the arm’s length principle seeks to compare the price charged between associated enterprises and that which would have been charged between independent enterprises under similar circumstances. Comparability has been identified to be a fundamental requirement in applying transfer pricing methodologies. To this end, the OECD Guidelines15 laid down five factors in an effort to find appropriate comparables: the characteristics of the property or services transferred; the functions of the related parties; the contractual terms between the related parties; the economic circumstances of the related parties; and the business strategies pursued by the related parties. However, comparability is not as straightforward to achieve; it can be distorted by several variables. According to Devonshire-Ellis et al16 comparability is achieved if firstly, there are no differences between the controlled and uncontrolled transactions; secondly, if differences do exist, they do not materially affect the condition being examined; and thirdly, reasonably accurate quantitative adjustments can be made to get rid of the effects of the differences. Yet, it should also be borne in mind that transactions within MNEs may not be directly comparable with those which take place between independent enterprises;allowances have to be made in comparing their prices with the prices payable between independent enterprises. As a result, it might be better to apply the arm’s length rules on a transaction-by-transaction basis, as a matter of principle17 to arrive at the most precise approximation of fair-market value. The OECD Committee on Fiscal Affairs has, for a long time now, identified the process of establishing an arm’s length price as complex and difficult especially when there is a lack of a common approach to the matter18. Fortunately, as will be seen later in this paper, the development of the OECD Guidelines have been more far-reaching over the last couple of years in a combined approach to tackle the scourge of aggressive tax avoidance by MNEs. The rationale behind having the arm’s length principle as a basis for regulating 14 Ian Roxan, ‘Introduction’ in Eduardo Baistrocchi and Ian Roxan (eds) Resolving Tranfer Disputes: A Global Analysis (CUP 2012) 7. 15 OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators (OECD 1995) paras 1.18-1.35. 16 (n 9) 4. 17 Toshio Miyatake, ‘General Report’ in Toshio Miyatake and Robert H Green (eds) Transfer Pricing and Intangibles (Sdu Fiscale & Financiële Uitgevers 2007) 29. 18 OECD, OECD Report on Transfer Pricing and Multinational Enterprises (OECD 1979) 10.

2013]

The Bristol Law Review

189

the transfer pricing policies of MNEs is that it puts associated and independent enterprises on a more equal footing for tax purposes and it avoids the creation of tax advantages or disadvantages that would otherwise misrepresent the relative competitive positions of either type of entity19. This can also be analysed from a managerial point of view. According to the OECD Guidelines20, MNEs have an incentive to use arm’s length prices to judge the real performance of their different profit centres. Significant support for this can be found in the literature relating to the nature and form of the corporate group. For this purpose, the lens is cast on the Landers-Posner debate which related mainly to the protection of creditors under the corporate group. This argument also applies inherently to MNEs as virtually all MNEs use the corporate group to do business. In basic terms, the holding company (parent) represents the firm’s public face and is normally the only group member that discloses financial results whereas below lies the subsidiaries which hold most of the firm’s operational assets and which often have their own subordinate entities that can extend layers deep and interlock in brain-teasing ways21. Landers22 argued that managers of such corporate groups might shift assets of subsidiaries around to keep them away from creditors. Famously, then-Professor Richard Posner23 responded that these barriers actually made life easier for creditors, and more importantly, for the purposes of this essay, he argued that senior executives in most corporate groups use subsidiary-level profits to evaluate the group’s mid-level managers. Hence, these managerial performance reports would be distorted if the managers regularly shifted assets from one subsidiary to another. The scenario feared by Landers is also unlikely to take place as the arm’s length principle follows the approach of treating the members of an MNE group as operating as separate entities rather than as inseparable parts of a single unified business whereby attention is focused on the nature of the dealings between those members24. Nonetheless, according to theorists Fletcher and Pantelidaki25, if an MNE is really intent on paying less taxes and is willing to exploit risk-shifting opportunities, it may realise location savings by moving its manufacturing activity to an affiliate in a foreign country where the wages and production costs are much lower than in the country where the parent company is incorporated. As a consequence, the OECD Guidelines26 allow tax authorities to adjust the transfer price in order to ensure compliance and hence achieve consistency with the arm’s length principle. However, it should also be borne in mind that transfer pricing is not an exact science and instead requires the exercise 19 20 21 22 23 24 25 26

OECD, 2009 Transfer Pricing Guidelines (n 13) para 1.7. ibid para 1.5. Richard Squire, ‘Strategic Liability in the Corporate Group’ (2011) 78 U Chi L Rev 605, 611-612. Jonathan M Landers, ‘A Unified Approach to Parent, Subsidiary, and Affiliate Questions in Bankruptcy’ (1975) 42 U Chi L Rev 589, 622. Richard A Posner, ‘The Rights of Creditors in Affiliated Corporations’ (1976) 43 U Chi L Rev 499, 513. OECD, 2009 Transfer Pricing Guidelines (n 13) para 1.6. Roger Fletcher and Stephanie Pantelidaki, ‘United Kingdom Report’ in Toshio Miyatake and Robert H Green (eds) Transfer Pricing and Intangibles (Sdu Fiscale & Financiële Uitgevers 2007) 617. OECD, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD 2010) para 1.3.

190

The Bristol Law Review

[Vol. 1

of judgement on the part of both the tax administration and taxpayer27. In addition, tax administrations should not automatically assume that the transfer pricing policies of MNEs are for the purpose of the manipulation of their profits even though certain policies are undertaken for the wider aim of tax fraud or tax avoidance28. Irrespective of the purpose, the ultimate result of transfer pricing manipulation usually encompasses two main outcomes. According to Baistrocchi29, it may trigger harmful competition at a global level among tax jurisdictions whereby countries could lower their corporate tax rates to encourage incorporation in their own jurisdiction. Furthermore, transfer pricing manipulation gives an advantage to MNEs in comparison to other non-multinational firms which are unable to use this type of international tax planning strategy. Nevertheless, the use of the arm’s length principle is not devoid of problems. In addition to it not being a fool-proof formula which gives a single figure, several other weaknesses can be identified in its working. Firstly, it leads to disputes. To resolve these, several procedures are available such as litigation, arbitration and the use of the Mutual Agreement Procedure30. However, it is beyond the scope of this essay to examine these dispute resolution techniques although this has been succinctly covered in other works.31 Secondly, even where the rules are applied on a transaction-by-transaction basis, there are undoubtedly cases where the taxpayer elects to aggregate two or more transactions, where one involves intangibles: for example, the ‘roundtrip problem’.32 Finally, there is always the danger and fear of double taxation. Even in seeking to fix its transfer prices on the arm’s length basis, an MNE will usually face problems if it is confronted with conflicting requirements by different tax administrations, sometimes from within the same country.33 Coupled with this, the Action Plan on BEPS34 has highlighted how the divergences between approaches to transfer pricing documentation requirements usually generates significant administrative expenses for businesses. Furthermore, Silberztein, Bennett and Lemein35 have stated the importance of recognising that the arm’s length principle is not the problem nor the solution to all concerns expressed by countries in relation to cross-border taxation and that it should not be stretched beyond the standard set by Article 9 of the OECD Model Tax Convention on Income and Capital. Over the years, the OECD Guidelines on Transfer Pricing have been reformed and remodelled to reflect the dynamic nature of the international tax planning arena, 27 28 29 30 31 32 33 34 35

OECD 2009 Transfer Pricing Guidelines (n 13) para 1.12. ibid para 1.2. (n 3) 552. Miyatake (n 17) 35. See particularly Eduardo Baistrocchi and Ian Roxan, Resolving Tranfer Disputes: A Global Analysis (CUP 2012). Fletcher and Pantelidaki (n 25) 617. OECD, 1979 Report on Transfer Pricing (n 18) 9. OECD, Action Plan on BEPS (n 6) 22. Caroline Silberztein, Mary C Bennett and Gregg D Lemein, ‘The OECD Discussion Draft on the Transfer of Intangibles (Revision of Chapter VI of the OECD Transfer Pricing Guidelines) – Main Comments’ (2013) 41 Intertax 60, 61.

2013]

The Bristol Law Review

191

especially in view of the increasingly prominent role which MNEs have played in the business world. At the heart of these guidelines has been the arm’s length principle. A move away from this principle would abandon the sound theoretical basis currently in place and would threaten the international consensus whilst also increasing the risk of double taxation.36 In fact, experience under the arm’s length principle has become sufficiently broad and sophisticated to establish a substantial body of understanding among both businesses and tax administrations.37 Having explained the working of the arm’s length principle, explored the rationale behind it and highlighted its weaknesses in this section, the next section explains via the logic of collective action, how the OECD Transfer Pricing Guidelines have evolved in a manner favourable to MNEs and how this has given rise to a clash between democracy and globalisation today.

3. Logic of Collective Action In this section, the Logic of Collective Action as developed by Mancur Olson38 is used as a theoretical framework applied to the core dynamic of transfer pricing rules as developed by the OECD. The theory is summarised and then extrapolated in order to be applied to MNEs and countries. Coupled with the manner in which OECD Guidelines have evolved in their favour, MNEs have also played a part in taking advantage of countries in the last couple of decades since they have been growing at a faster rate than the latter. The second part of this section explores how the OECD guidelines have deviated from a hard law to a somewhat softer approach in the international tax planning arena. This has given increasing power to the MNEs to influence the OECD guidelines in the context of harsh international tax competition for capital.

3.1 The Theory: Logic of Collective Action The logic of collective action was put forward by Olson and advances the argument that there is a ‘surprising tendency for the exploitation of the great by the small in the sharing of the costs of efforts to achieve a common goal in small groups’39. According to Olson40, the larger the group, the farther ‘it will fall short of obtaining an optimal supply of any collective good, and the less likely that it will act to obtain even a minimal amount of such a good’. In other words, the larger the group, the less likely it is to further its common interests. One important point should be noted here. This does not seem to be the case for countries in this situation. On the contrary, there are signs that they are quite united in their attempt to tackle the problem which transfer pricing manipulation is posing as part of the bigger issue of tax avoidance by MNEs. For instance, in the latest G20 summit, the leading economies agreed a deal along with 36 37 38 39 40

OECD, 2009 Transfer Pricing Guidelines (n 13) para 1.13. ibid para 1.14. The Logic of Collective Action: Public Goods and the Theory of Groups (HUP 1971). ibid 3. ibid 36.

192

The Bristol Law Review

[Vol. 1

other countries to move towards a global tax system that is fair and fit for purpose for the modern economy41. In addition, sometimes even small groups have to provide themselves with public goods. This is because ‘any organisation, large or small, works for some collective benefit that by its nature will benefit all of the members of the group in question’42. However, two other points should be made about small groups as a whole: firstly, whether it will be providing a collective good; and secondly, if positive, then whether the amount of the collective good will is sufficient for it to be Pareto-optimal43. The rationale for certain small groups to provide themselves with collective goods is that within them, at least one of their members will find that ‘his personal gain from having the collective good exceeds the total cost of providing some amount of that collective good’44. Other theories have also been proposed in order to ascertain how MNEs engage in transfer pricing manipulation. Theorists Bidaud et al45 have distinguished between three different transfer pricing models based on decision and delegation power: decentralised, centralised and network. On their part, Dharmapala and Riedel46 have developed an approach to analysing profit-shifting behaviour among MNEs by exploiting earnings shocks at the parent firm and analysing how these propagate across the affiliates of the MNE group. Their model shows that ‘under a very general formulation of the costs of profit-shifting, the amount of profit shifted from the (high-tax) parent firm to low-tax affiliates is larger when the parent company’s profits are high’. Baistrocchi47 has advanced a theory analogous to the one in this paper which was also grounded in the logic of collective action whereby taxpayers form a large group which have a tendency to be exploited by a smaller group consisting of the tax bureaucracy. However, the parameters are different in this scenario. This paper assumes that countries are taken as the larger group and MNEs represent the smaller group within the framework encapsulated in Olson’s theory. In this scenario, the common interest of the small group is their aspiration to pay as little tax as possible through the manipulation of transfer pricing. Yet, one important distinction needs to be made when conceptualising the group size of MNEs. Whilst it is being assumed in this essay that MNEs are the smaller group, it should be borne in mind that MNEs form part of the broader business community. This community, as a whole, is neither a privileged or intermediate group - it is a large, latent group48. Hence, the reader should not be under the impression that the whole business industry is under scrutiny here. Instead, it is only those MNEs which indulge in transfer pricing manipulation to improve their tax 41 ‘G20 backs plan to stop global tax avoidance and evasion’ BBC News (London, 20 July 2013) <www. bbc.co.uk/news/uk-23389695> accessed 20 August 2013. 42 Olson (n 38) 21. 43 ibid 27. 44 ibid 33. 45 Hérve Bidaud, Pim Fris and Emmanuel Llinares, ‘The tax department›s role in sustainable transfer pricing’ (2012) 22 IT Rev 41, 42. 46 ‘Earnings shocks and tax-motivated income-shifting: Evidence from European multinationals’ (2013) 97 J Public Econ 95. 47 (n 3) 549. 48 Olson (n 38) 145.

2013]

The Bristol Law Review

193

situations that are being placed under the loop. According to Olson49, ‘small groups are not only quantitatively, but also qualitatively different from large groups’. This is rather ironic for MNEs in their capacity as small groups: they now represent a large proportion of global GDP as was recognised in the Action Plan on BEPS50. It also shows the ground they have covered over the last few decades to make a mark on the international market. Countries, on their part, have also grown more powerful as larger groups. For instance, Marti and Küttel51 have pointed out how Switzerland has continually attempted to bolster its position with a series of corporate tax reforms whose appeal has also been “reinforced by the ordinary corporate income tax charge, in addition to the availability of well qualified staff, a high standard of living and political stability. These factors represent, overall, crucial criteria for selecting the location of corporate headquarters. For example, in some cantons, the corporate tax rate ranges from 12.7% to approximately 16% which is well below the European Union (EU) and OECD average.” However, to what extent is it realistic to classify MNEs as small groups? Undeniably, the powers and influence of certain MNEs today could be said to be more far-reaching than countries themselves. For example, it has been considered whether certain MNEs, like the Big Four audit firms, might be too big to fail52. However, there are two reasons as to why this assumption is not unrealistic. Firstly, the demise of Arthur Anderson serves a purposeful reminder that nothing is too big to go under. Secondly, Allen, Ramanna and Roychowdhury53 have countered this claim by arguing that such firms are more likely to express concerns and protect themselves especially in the audit industry, whereby the oligopoly has tightened.

3.2 MNEs as Small Groups The primary reason as to why MNEs, in their capacity as small groups, are able to exploit countries is in line with Olson’s54; that the former are, by nature, more efficient and viable than the latter. This is because the larger the group, the more organisation it will need in the sense that a higher number will be required for any kind of group agreement within the large organisation55. It also has the effect of increasing bargaining expenses which further leads to higher organisational costs within the large group. This is because, as Olson56 has recognised, ‘costs of organisation are an 49 50 51 52 53

54 55 56

ibid 52. OECD, Action Plan on BEPS (n 6). ‘Why multinationals are relocating to Switzerland’ (2011) 22 IT Rev 90, 90. Martha Lagace, ‘Are the Big Four Audit Firms too big to fail?’ (Harvard Business School Working Knowledge, 4 February 2013) <http://hbswk.hbs.edu/item/7169.html> accessed 20 August 2013. Abigail M Allen, Karthik Ramanna and Sugata Roychowdhury, ‘The Auditing Oligopoly and Lobbying on Accounting Standards’ (2012) Harvard Business School Accounting & Management Unit Working Paper No 13-054 <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2187947> accessed 20 August 2013. (n 38) 52. ibid 46. ibid.

194

The Bristol Law Review

[Vol. 1

increasing function of the number of individuals in the group’. Yet, MNEs represent basically profit-maximising firms and as such, they cannot be blamed for trying to pay less tax. Consequently, they have traditionally relied on the argument that they have a duty to shareholders to minimise their tax bills.57 Nonetheless, according to Olson’s theory58, if the firms in an industry are maximising profits, the profits for the industry as a whole will be less than they might otherwise be. As stated earlier, the business community as a whole, in comparison to MNEs, is not fully organised59. This can be accounted for by acknowledging how the business community is made up of several industries which regroups many MNEs and as such, all these small groups tend to have diverging interests from one another. While efficiency and viability relate to the basic nature of the groups, Olson60 also advances that smaller groups are, by organisational structure, better coordinated than larger groups. Georg Simmel61 has also previously provided support for this argument contending that small, centripetally organised groups are usually better able to call on and use all their energies. To this end, the smaller groups, MNEs can often defeat the larger, latent groups, which are normally supposed to prevail in a democracy as the latter are generally unorganised and inactive62.

3.3 Transfer Pricing Manipulation Up to this point, we have identified the nature and behaviour of MNEs as small groups and countries as larger groups. This next part of the essay will illustrate how the former have benefited from the development of the OECD Transfer Pricing Guidelines in their favour at the expense of the latter which has enabled MNEs to exploit countries, and how it has further given rise to a tension between democracy and globalisation. In the first place, the objectives behind the OECD Guidelines are discussed. Further, the lens is cast on the reasons as to why MNEs manipulate their transfer pricing policies to exploit countries. Two main lines of reasoning can be identified to support this claim: Firstly, the OECD Guidelines on Transfer Pricing have evolved increasingly in the favour of MNEs over the last decades. Secondly, they are enshrined in a soft law regulation regime which further gives MNEs the power to exercise their influence on these guidelines.

3.3.1 Evolution of the OECD Guidelines MNEs have been able to exploit countries via transfer pricing manipulation because certain aims of the OECD Guidelines are not clear and do not achieve their purpose. Whilst they set out the minimum threshold of procedural fairness for the 57 58 59 60 61 62

BBC (n 41). (n 38) 10. ibid 147. ibid 52. The Sociology of Georg Simmel (Kurt H Wolff tr, Free Press 1950). Olson (n 38) 128.

2013]

The Bristol Law Review

195

proper enforcement of OECD-based transfer pricing legal systems63, according to the Action Plan on BEPS64, the development of the OECD Transfer Pricing Guidelines have been ‘exacerbated by the increasing sophistication of tax planners in identifying and exploiting the legal arbitrage opportunities and the boundaries of acceptable tax planning. Thus they have provided MNEs with more confidence in taking aggressive tax positions and also opened up opportunities for MNEs to greatly minimise their tax burden.’ The BEPS report65 also noted that several studies have shown the increased disconnect between the location where value creating activities and investment take place and the location where profits are reported for tax purposes. The objectives behind having the OECD Transfer Pricing Guidelines are first considered. According to Bidaud, Fris and Llinares66, a properly designed transfer pricing system achieves several objectives: Firstly, it enables the MNE to operate efficiently; and secondly, it allows for transparency as an enabler for smooth communication with tax authorities. Coupled with these two aims, a third goal can be identified. These guidelines attempt to reach an international consensus on a specifically sensitive matter that affects both MNEs as well as countries67. Calderon68 has found this to be problematic on the grounds that they restrict the implementation of domestic legislations from the principles of the local tax regime. Yet, Calderon fails to acknowledge that diverging domestic transfer pricing rules would enhance the ability of MNEs present in several jurisdictions to shift their risks to offshore tax havens. For instance, according to Dharmapala and Riedel69, it is the differences across countries in tax rates and systems that create opportunities for tax arbitrage by MNEs, in particular through the strategic choice of transfer prices for goods and services as well as through the strategic use of debt financing across affiliates. To this end, it seems better to harmonize domestic laws onto a common platform. The OECD Guidelines seek to fulfil this precise purpose. Fourthly, from an economic perspective, the OECD Guidelines aim to contribute to the reduction of the transaction costs associated to the commercial flows and transnational investment as well as reducing the opportunities of tax arbitrage for MNEs70. Yet, it seems that the OECD guidelines have focussed too much on legal structures rather than on the economic substance of intra group arrangements and have therefore given rise to opportunities for BEPS.71 This can be corroborated by the increasing number of high-profile MNEs which have recently been accused 63 Eduardo Baistrocchi, ‘The transfer pricing problem’ in Eduardo Baistrocchi and Ian Roxan (eds) Resolving Tranfer Disputes: A Global Analysis (CUP 2012) 10. 64 OECD, Action Plan on BEPS (n 6) 8. 65 ibid. 66 (n 45) 41. 67 Raymond Vernon, ‘Sovereignty at bay: ten years after’ in Theodore H Moran (ed), Multinational corporations: the political economy of foreign direct investment (Lexington Books, 1985) 256. 68 (n 7) 7. 69 Dharmapala and Riedel (n 46) 95. 70 Lorraine Eden, Taxing Multinationals: Transfer Pricing and Corporate Income Taxation in North America (University of Toronto Press 1998), 71. 71 Heather Self, ‘Addressing base erosion and profit shifting’ (2013) 2 BTR 117, 119.

196

The Bristol Law Review

[Vol. 1

of engaging in aggressive tax avoidance strategies72. The ability of MNEs to engage in such immoral but completely legal behaviour is also attributed to the fact that the international tax regime has not kept pace with the speed and dynamism with which the business world has evolved. Despite the updated OECD Guidelines which also includes a test that tax authorities’ decisions on transfer pricing disputes should avoid both double taxation73 and double non-taxation74, the Action Plan on BEPS75 has identified how MNEs have been able to misuse and misapply transfer pricing rules to separate income from the economic activities and to shift it into low-tax environments. Very often this results from ‘transfers of intangibles and other mobile assets for less than full value, the over-capitalisation of lowly taxed group companies and from contractual allocations of risk to low-tax environments in transactions that would be unlikely to occur between unrelated parties’76. According to Russo and Petzold77, the onus is on revenue authorities to verify the consistency with the arm’s length principle of the remuneration of cross-border transactions that a taxpayer conducts with foreign affiliates. This reflects the discrepancy between tax monitoring by countries and tax compliance by MNEs. As the smaller groups are engaged in tax compliance, it seems that they (MNEs) are better coordinated and can thus exploit several economies through dodgy transfer pricing transactions. Over the years, as the Guidelines have developed, MNEs have increasingly benefited from the creation of certain instruments which pan out in their favour. One such instrument is the Advanced Pricing Agreement (APA). According to Roxan78, even though the mutual agreement procedure (MAP) is available under most double tax conventions (DTC) to help resolve transfer pricing disputes, negotiation is not always enough. To this end, the APA is considered to be a valuable alternative. APAs also offer “extensive opportunities for groups to optimise their overall tax burden as well as to achieve further benefits such as reducing compliance costs and gaining certainty in a risk-averse climate. By entering the APA process, taxpayers are increasingly demonstrating that they are willing to approach their tax authorities proactively to discuss transfer pricing issues on a prospective basis rather than discuss facts and circumstances of years’ past”79. Finally, MNEs are capable of taking advantage of international instability in the tax planning arena whereby there are constantly calls for reforms whilst the working of existing principles are being debated simultaneously in the media and academic 72 Barford V and Holt G, ‘Google, Amazon, Starbucks: The rise of tax shaming’ BBC News (London, 21 May 2013) <www.bbc.co.uk/news/magazine-20560359> accessed 20 August 2013. 73 (n 26) para 4.44. 74 ibid para 4.150. 75 (n 6) 19. 76 ibid 20. 77 Raffaele Russo and Oliver Petzold, ‘OECD puts spotlight on tax planning and use of losses’ (2012) 22 IT Rev 23, 24. 78 (n 14) 4. 79 Benjamin Koch and Christopher Studer, ‘The success story of the Swiss APA regime’ (2011) 22 IT Rev 94, 96.

2013]

The Bristol Law Review

197

literature. For instance, as Silberztein, Bennett and Lemein80 have highlighted, ‘if an essential piece of transfer pricing guidance is amended to tackle some very specific structures, the OECD risks jeopardizing the operation of the principle for the vast majority of transactions which are not the ones tax administrations are presumably concerned with.’ This is also irrespective of whether such structures in effect depart from what independent parties do or would have done in comparable circumstances. This can also be epitomized through the media circus that surrounded another controversial instrument: the Common Consolidated Corporate Tax Base (CCCTB). With the CCCTB, MNEs in Europe would no longer have to deal with up to 27 different tax systems and compliance was expected to be reduced81. Furthermore, the CCCTB’s formulary apportionment approach would still give MNEs the opportunity to exploit the alternative transfer pricing regulations since it would not eliminate the risk of artificial shifting of profits as companies would still be able to play with the apportionment factors82. This originated in the European Commission which proposed the abolition of separate accounting rules for corporate taxation of MNEs within the borders of the European Union, to be replaced by a system of profit consolidation and formula apportionment83. Yet, its weaknesses could not be concealed. Ashley84 pointed out how the formulary apportionment method would be more costly and timely to implement albeit being more accurate. For these reasons, the CCCTB was rejected by tax directors of MNEs on the grounds that they were not convinced that their compliance costs will be reduced, especially in cases where their companies have operations outside of the zone of implementation85.

3.3.2 Soft Law Approach to the OECD Guidelines The framework within which the guidelines exist is now considered. As a starting point, it should be noted that OECD Guidelines on Transfer Pricing are followed both by members and non-members of the OECD. This wide implementation is indicative of the major force that represents the OECD in an international tax regime86. The OECD87 has identified three groups which are harmed when MNEs minimise their tax burdens: Firstly, governments have to cope with less revenue and a higher cost to ensure compliance; Secondly, individual taxpayers are harmed when tax rules permit businesses to reduce their tax burden by shifting their income away from jurisdictions 80 (n 35) 62. 81 Salman Shaheen, ‘Europe’s common tax base: How it could change your business’ (2011) 22 IT Rev 14, 15. 82 Sophie Ashley, ‘It is transfer pricing but not as we know it’ (2011) 22 IT Rev 23, 24. 83 Commission, ‘Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee - Towards an Internal Market without tax obstacles - A strategy for providing companies with a consolidated corporate tax base for their EU-wide activities’ COMM (2001) 582 final. 84 (n 82) 23. 85 (n 81) 17. 86 Eden (n 70) 96. 87 (n 6) 8.

198

The Bristol Law Review

[Vol. 1

where income producing activities are conducted; and thirdly, MNEs themselves may face severe reputational risks when their effective tax rate is viewed as being too low. This can be illustrated through the example of Starbucks which had a very negative advertising campaign run against it on the news and social media as the situation was deemed to be unfair both to small businesses and ordinary taxpayers. On their part, the OECD Guidelines are preserved in a soft law approach which has endowed MNEs with the power to influence the OECD guidelines, as they are not bound by it in any way. MNEs, being well aware of this,use this opportunity to influence the treatment they get in domestic jurisdictions. This is because, as Vogelaar88 has pointed out, the OECD Guidelines, on their own, do not legally integrate a binding law for the Member States of the OECD. For instance, the recent decision in the GlaxoSmithKline case makes clear that the OECD’s 1979 Guidelines and the OECD’s 1995 Guidelines are not as controlling as if they were a Canadian statute. However, that does not mean that the OECD Guidelines lack legal value. Although they do not entail the mandatory legal enforcement effects that the hard law provisions generate, they do constitute a source of soft law, which despite its non-binding nature, has a considerable impact in solving the conflicts posed by the global activities of the MNEs89. Further support for this soft law approach has also come from the unanimous adoption of these Guidelines in the OECD and to an extent, this has played a part in attaching some legal value to these principles90. According to Vogel and Kagan91, these soft law materials compel countries to actually examine whether the recommended measures are in line with the policies of their respective tax administrations. Still, one danger could arise in the case of a domestic law implementing the arm’s length principle inconsistently with the OECD Guidelines. This would be contrary to the principles of free flow of capital and the elimination of barriers on commerce and transnational investment, and could even spawn a number of tax conflicts for the affected taxpayers92. Eventually, it would lead to a divergence of interests between the smaller taxpayers within a democracy and companies operating at a global level. Engelen93 has further labelled the elaborative soft law as merely principles that provide guidance to the interpretation, elaboration, or application of hard law. For him, ‘the hard and soft law are inter-dependent and the latter obtains authority and broadens the meaning of the former’94. This view has also been endorsed by Calderon95, who highlighted the dual legal nature of the OECD Guidelines in that they constitute instruments of a soft law with certain effects of hard law. Despite being 88 ‘The OECD Guidelines: their philosophy, history, negotiation, form, legal nature, follow up procedures and review’ in Horn (ed) Legal Problem of Codes of Conduct for MNEs (OECD 1980), 127. 89 Calderón (n 7) 9. 90 ibid 10. 91 Dynamics of Regulatory Change How Globalization Affects National Regulatory Policies (University of California Press 2004). 92 Calderón (n 7) 12. 93 Frank Engelen, Interpretation of Tax Treaties under International Law (IBFD 2014), 457. 94 ibid 458. 95 (n 17) 21.

2013]

The Bristol Law Review

199

globally recognised as soft law, Calderon96 advanced that the OECD Transfer Pricing Guidelines have evolved throughout the last few decades; without totally losing their nature of soft law, to a degree, into an instrument of hard law. They have become a set of ‘internationally agreed principles that delimit the content and criteria of application of the arm’s length principle’ and have surpassed their originally intended legal value and effects97. In other words, the Guidelines could be seen as being an instrument of hard law regulation in all but name. However, this argument can be easily attacked on the grounds that these laws do not have the same legal value as substantive hard laws. As will be extrapolated in the next section, Canadian courts have made it clear that the OECD guidelines do not displace their domestic provisions. In fact, it all depends on the respective jurisdiction. Thus, each member state may choose with what level of strictness it wants to apply the Guidelines98. For example, in Swiss tax law, there are no direct provisions regarding transfer pricing. Hence, the Swiss Federal Tax Administration (SFTA) issued a circular instructing their tax administration to give regard to the OECD Transfer Pricing Guidelines when assessing MNEs. However, the SFTA has no requirement for the MNE to demonstrate for each transfer pricing method chosen, why or why not their chosen method gives an arm’s length solution99. Hence, the transfer pricing method may be accepted even when inter-quartile ranges have been used to determine an arm’s length range100. This shows how in certain jurisdictions, the law is clearly in favour of MNEs which gives them significant flexibility in manipulating the arm’s length principle. From a broader perspective, the soft law approach can be seen as problematic for four major reasons. Firstly, Calderon101 has argued that the soft law regulations are elaborated without direct or indirect intervention of the competent national parliaments. Secondly, according to Rose and Page102, the soft law is adopted through a process that does not include public discussion, official publicity and transparency compared to the process through which domestic law is usually implemented in democratic countries. Instead, the rules of a ‘fair and due’ process are bypassed and it is political or financial coercion which influence the nature of these rules for corporations. Again, this leads to a scenario of commoner versus corporation whereby the latter seems to be enjoying policy-making which is under less scrutiny compared to the controversial domestic taxation rules imposed on the common population. Thirdly, it is unclear whether these soft laws can be questioned by a judicial legal review or whether any international control can be exercised on their legitimacy or even their 96 ibid 20. 97 ibid. 98 Alberto Vega, ‘International governance through soft law: The case of the OECD transfer pricing guidelines’ (2012) TranState Working Papers No 163 <http://econstor.eu/bitstream/10419/59530/1/717832643.pdf> accessed 20 August 2013. 99 Koch and Studer (n 79) 95. 100 ibid. 101 (n 7) 27. 102 Richard Rose and Edward C Page, Law-making through the Backdoor (European Policy Forum 2001), 20.

200

The Bristol Law Review

[Vol. 1

enforcement103. Fourthly, McIntyre104 has identified how the features of soft law could cause serious problems as they are partial and their content is frequently unbalanced, having minimized the interests and rights of the ordinary taxpayers in a democracy. Undeniably, this soft law phenomenon has impacted rather adversely on the legitimacy and democratic guarantees needed to provide, to produce and enforce the law in any democratic state governed by the rule of law105. This was foreseen by theorists Pagan and Wilkie106 who had taken the stance that tax authorities of countries should abandon the conventional concept of ‘nation’ and should have adopted a more global position in the implementation of rules relating to the taxation of MNEs. Had such a position been taken by the OECD member states, it is highly doubtful that MNEs would have been able to manipulate transfer pricing policies, influence the OECD Guidelines or even take undue advantage of countries to the extent that is prevalent today. To counter this, the Action Plan on BEPS107 has highlighted how the rules should be improved in order to put more emphasis on value creation in highly integrated groups, tackling the use of intangibles, risks, capital and other high risk transactions to shift profits. Several measures have been identified to improve the legitimacy and democratic control of the soft law in relation to multinationals by Calderon108: “to promote greater transparency in the procedures in the elaboration of the ‘rules’, arbitrate the possibility to control the legality of the soft law regulations (access to courts), articulate mechanisms in order to take into account the interests and rights of those affected by the soft law regulations and articulate mechanisms to favour a major political control of the national representatives in international organisms and organisations that elaborate the soft law”. This emphasis on transparency laid upon by the Action Plan on BEPS109 seeks to take a holistic approach to the subject by revamping the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime. However, the problem with the Action Plan is that it seems extremely ambitious and it is feared that it will be very difficult to achieve consensus within the OECD110. Increased transparency, it is believed, would reduce the asymmetry of information between taxpayers and tax administrations which has so far undermined the administration of the arm’s length principle and enhanced opportunities for BEPS according to the Action Plan 103 Bruce Zagaris, ‘Exchange of Information Policies at the millennium: balancing enforcement with due process and international human rights’ (2001) 30 Tax Man Int’l J 464, 464. 104 ‘Options for Greater International Coordination and Cooperation in the Tax Treaty Area’ (2012) 56 BIFD 250, 250. 105 Ramon J Jeffery, The Impact of State Sovereignty on Global Trade and International Taxation (Kluwer 1999), 175. 106 Transfer Pricing Strategy in a Global Economy (IBFD 1993), 26. 107 (n 6) 14. 108 (n 7) 29. 109 (n 6) 18. 110 (n 17) 121.

The Bristol Law Review

2013]

201

on BEPS111. Increasingly, governments are cooperating internationally to exchange information about MNEs which are further subject to tax audits and which will make the latter face a “daunting array of rules concerning documentation of transactions; disclosure of financial information, transparency of tax issues, analyses of tax reserves, and reasoned conclusions regarding tax exposures”112. Unless these measures are implemented, there will be no consensus between the OECD Guidelines on an international front and domestic provisions. The following section provides an interesting example of such a situation.

4. GlaxoSmithKline Case in Canadian Supreme Court This section examines the case of Canada v. GlaxoSmithKline Inc.113 (hereinafter ‘the Glaxo case’) and illustrates how this decision of the Canadian Supreme Court (SCC) further denotes a tension between democracy and globalisation. The SCC judgement, by re-affirming the stance taken by the Federal Court of Appeal (FCA) in GlaxoSmithKline Inc. v. Canada114, has undermined the arm’s length principle in order to pave the way for the ‘reasonable business person test’.

4.1 Background The taxpayer, GlaxoSmithKline Inc. (Glaxo Canada), is a subsidiary of Glaxo Group, a UK company which is itself a subsidiary of Glaxo Holding Plc. The Minister of National Revenue reassessed Glaxo Canada for the taxation years 1990, 1991, 1992 and 1993 on the grounds that the latter paid an amount greater than would have been reasonable in the circumstances had they been dealing at arm’s length for ranitidine, the active ingredient in the anti-ulcer drug, Zantac115. Under the reassessment, the income of Glaxo Canada increased by some $51 million on the basis that it had overpaid for the amount of ranitidine purchased116. Glaxo Canada disputed this reassessment to the Tax Court on the grounds that the transfer price was ‘reasonable in the circumstances’117. The trial judge, Rip ACJ, ruled against Glaxo Canada who later appealed to the FCA and urged the court to interpret s. 69(2) as requiring a reasonable business person test.

4.2 The ‘Reasonable Business Person’ Test This test involves “comparing the price in the controlled transaction to the price that would have been agreed to by ‘reasonable business persons’ if, hypothetically, the 111 112 113 114 115 116 117

(n 6) 22. Koch and Studer (n 79) 96. [2012] SCC 52 [2010] FCA 201 Glaxo (n 113) [2] (Rothstein J). ibid [11] (Rothstein J). ibid [8] (Nadon J).

The Bristol Law Review

202

[Vol. 1

parties were dealing at arm’s length”118. Surprisingly, Nadon J119, who was giving the unanimous judgement of the FCA, duly obliged. He explained that ‘reasonable business person’ test, required an inquiry into the economically relevant circumstances that an arm’s length purchaser would consider relevant when deciding what price to pay. Nadon J120 further explained that a s.69(2) “inquiry directs a trier of fact to assess whether any reasonable business person, standing in the appellant’s shoes but dealing at arm’s length with Adechsa (a Swiss affiliate of Glaxo Group), would have paid the amount paid by the appellant to the Adechsa”. Further, if a reasonable business person could be expected to agree to pay the price paid by the appellant, s. 69(2) would not apply121. To remedy this, the Minister appealed higher up to the SCC. The issue on appeal hinged upon the application of the now repealed s. 69(2) of the Income Tax Act, R.S.C 1985, c. 1 (5th Supp) (hereinafter the ‘Act’) and more specifically, what circumstances are to be taken into account in determining the reasonable arm’s length price against which to compare the non-arm’s length transfer price122. The 1985 version of s. 69(2) applicable to the years 1990-1993 reads as follows: “(2) Where a taxpayer has paid or agreed to pay to a non-resident person with whom the taxpayer was not dealing at arm’s length as price, rental, royalty or other payment for or for the use or reproduction of any property, or as consideration for the carriage of goods or passengers or for other services, an amount greater than the amount (in this subsection referred to as “the reasonable amount”) that would have been reasonable in the circumstances if the non-resident person and the taxpayer had been dealing at arm’s length, the reasonable amount shall, for the purpose of computing the taxpayer’s income under this Part, be deemed to have been the amount that was paid or is payable therefore” (emphasis added). In essence, the question before the SCC was, according to the now defunct s. 69(2), whether the prices Glaxo Canada paid Adechsa for ranitidine were greater than what would have been reasonable if Adechsa and Glaxo Canada had been dealing at arm’s length. It seems that the court struggled with the question of whether Canada’s transfer pricing provision requires an empirical arm’s length test, a hypothetical arm’s length test or a hybrid of both and this may have blurred their vision in their delivering of the judgement according to Pichhadze123. Interestingly, the SCC endorsed the approach taken by the FCA and ruled in 118 119 120 121 122 123

Pichhardze (n 2) 153. Glaxo (n 113) [69]. ibid [40]. ibid [41] (Nadon J). ibid [3]. (n 2) 152.

2013]

The Bristol Law Review

203

favour of Glaxo Canada. Rothstein J124 made four rather salient points: Firstly, he highlighted the use of the term ‘reasonable doubt’ in s. 69(2) to illustrate how comparators will not be identical in all material respects in almost any case and that some leeway should be allowed in the determination of the reasonable range. For him, as long as a transfer price is within what the court determines is a reasonable range; the requirements of the section should be satisfied. Secondly, he emphasized how transfer pricing should not result in a misallocation of earnings that fails to take account of the different functions, resources and risks in each party whether it is the owner of the intellectual property (the parent) or the one engaged in the secondary manufacture and marketing of the product. Thirdly, he made clear that both parties’ independent interests should be taken into consideration when establishing prices. Finally, he pointed out that higher-than-generic transfer prices are justified and that they are not necessarily greater than a reasonable amount under s. 69(2). Even though this decision has been qualified as business-friendly by Kennedy and Rolph125, they acknowledge that the reasons given by Justice Rothstein should strike a cautious note for related parties engaged in multi-faceted transactions as is common in the MNE-context anyway. Moreover, it will be important for businesses to precisely document all the related party cross-border transactions they undertake and to consider the tax implications, including withholding tax and the implications of such transactions in their future dealings.

4.3 Analysis Kennedy and Rolph126 have identified the importance of the SCC decision in the Glaxo case for a two-fold reason: Firstly, this decision establishes the supremacy of Canadian law over the OECD’s transfer pricing guidelines for MNEs. Secondly, it could have important ramifications in the light of recent OECD initiatives such as the BEPS report127 and the Action Plan on BEPS128. In other words, this can be seen a step back for Canadian jurisprudence at a time when the whole of the international community seems united in clamping down on transfer pricing manipulation by MNEs. However, this vital point about OECD Guidelines needs to be reiterated: they form part of a broader soft law approach to regulation in the international tax planning arena. For this reason, perhaps it should be accepted that Canadian courts only consider the OECD Guidelines as not very persuasive in applying the Canadian domestic transfer pricing provisions129. Overall, whilst this marks a victory for businesses130, it cannot be said to be a step forward in the right direction for the evolution of Canada’s Glaxo (n 113) [61]-[64]. ‘GlaxoSmithKline case: legal form and economic relevance prevail’ (2013) 24 IT Rev 47. ibid. OECD, Addressing Base Erosion and Profit Shifting (OECD 2013) (n 6). David G Duff and Byron Beswick, ‘Transfer pricing disputes in Canada’ in Eduardo Baistrocchi and Ian Roxan (eds) Resolving Transfer Disputes: A Global Analysis (CUP 2013). 130 Pichhardze (n 2) 161. 124 125 126 127 128 129

204

The Bristol Law Review

[Vol. 1

transfer pricing regime. Instead, it merely reflects how MNEs are able to get their way in today’s environment and again illustrates the preponderance of global companies over ordinary taxpayers within a democracy. This decision of the SCC has been brutally attacked by Pichhadze131. He has made the case that the reasonable business person test is not consistent with US Regulations. Besides, he has contended that the reasonable business person test is not consistent with either the arm’s length principle and or the OECD Guidelines. Whilst it is beyond the scope of this paper to examine the former, the latter is put into perspective later in this section. Indeed, there exist several subtle signs that the test promulgated by the SCC differs from the arm’s length principle. On the one hand, the reasonable business person test is essentially focussed on ascertaining what a reasonable transfer price would be whereas on the other hand, the arm’s length result, which is manifested by arm’s length transactions in the market place, can be valued by alternative means such as price or net profits132. In addition, when dealing with the reasonable business person test, if taxpayers are faced with a situation somewhat similar to the facts of the Glaxo case, they cannot simply rely on the SCC decision to superficially claim that generic product sales are not comparable in their analyses. Once again, smaller businesses and ordinary taxpayers within a democratic society are undermined at the expense of the greater good for globalisation. Instead, they will have to determine the economically relevant characteristics for their own related party transactions. This plays in favour of MNEs because identifying such characteristics and determining whether two transactions are comparable will often be subjective133 and hence it will not be surprising to see MNEs slipping through the fingers of the tax authorities. The real factor disturbing the tax authority, according to Kennedy and Rolph134 was how Glaxo World structured its international affairs outside Canada to minimise tax, even though this was not relevant to the case as long as its arrangements with the Canadian resident entity taxpayer were reasonable in the circumstances. Consequently, this has given rise to a clash between the taxpayer and the tax authority which has been going on for more than 20 years. A further issue which distinguishes the reasonable person test from the arm’s length transaction relates to the relevant section which was in place at the time. According to Picchadze135, even if s. 69(2) was interpreted as allowing the courts to apply any transfer pricing method they choose, having Canadian courts apply transfer pricing methods that are inconsistent with those in the OECD Guidelines would place s. 69(2) at odds with Canada’s international commitments. In this way, he quite rightly points out that it is unlikely that Parliament intended such an outcome and this again leads to a clash between transfer pricing rules in Canada and the OECD rules influ131 ibid 155-161. 132 ibid 157. 133 Gordon Denusik, Jason Evans and Warren Novis, ‘Canada’s Supreme Court ruling on Glaxo - A few more items to consider’ (2012) 13 ITPJ 15. 134 (n 125) 3. 135 (n 2) 156.

2013]

The Bristol Law Review

205

encing other jurisdictions. It is quite difficult to disagree with the Minister in the SCC decision136 who argued that this state of affairs would leave Canadian jurisprudence at odds with the approach adopted by its partners in the OECD. Thirdly and more evidently, this decision seems biased in favour of MNEs and certain critics have sought to make a case for it. Indeed, theorists Hill, Kirkey and Alary137 have welcomed this decision on the grounds that it reflects current commercial reality. For them, the real-world business circumstances, in which related parties operate on a daily basis, are not similar to those of unrelated parties, thus making it difficult to find a true transfer price attributable to related party transactions. To this end, when allocating profits within a related party setting, one must proceed with the assumption that related parties can indeed operate independently of one another, which creates a fictitious event138. The justification for this statement lies in the fact that when examining an intercompany transaction, all relevant circumstances affecting the business reality of such a transaction must be considered instead of plainly abiding by a black letter reading of the arm’s length principle as contained in the OECD guidelines. Whilst Picchadze139 has gone as far as arguing that the reasonable business person test has rendered the arm’s length analysis irrelevant, this would be an overstatement in the opinion of this author. Only time will tell how this decision will really impact Canadian jurisprudence. At present, it has certainly infused the risk of uncertainty and arbitrariness in the transfer pricing analysis140

5. Concluding Remarks and the Way Forward This essay has shown how transfer pricing manipulation by MNEs leads to a clash between companies with a global influence and ordinary taxpayers within a democracy. This paper started by defining ‘globalisation’ and ‘democracy’ in a transfer pricing framework to suit present purposes. The difficulties in using the “arm’s length” principle have been highlighted, especially when dealing with comparability and how it may lead to disputes. However, it remains superior than the proposed alternatives to it. Its validity lies in its economic prowess to evaluate management’s performance as well as its established presence on the international front. Mancur Olson’s Logic of Collective action has been utilised as a framework to pigeon-hole countries into larger groups and MNEs into smaller ones. Significant effort has been devoted to justifying this categorisation of MNEs and countries. Whilst other theories proposed have been mentioned briefly, this paper has argued that, MNEs, in their capacity as small groups, are more efficient and are better coordinated than countries. To this end, they are able to exploit economies. That remains the most significant finding of this essay. The ability of MNEs to engage in such immoral behaviour is furthered by the unclear objectives behind the OECD Transfer Pricing 136 137 138 139 140

Glaxo (n 113) [1]. ‘Glaxo: Supreme Court of Canada rules on first TP case’ (2012) 23 IT Rev 65. ibid. (n 2) 158. ibid 157.

206

The Bristol Law Review

[Vol. 1

Guidelines, the existence of devices such as APAs and impending reforms which are being debated such as the CCCTB. Furthermore, the OECD Guidelines themselves are confined in a soft law approach to regulation. Although these soft law measures do not lack legal value, it is undeniable that they are not as substantive as hard law provisions usually encapsulated in statutes. Consequently, several measures have been identified to improve the legitimacy and democratic control of the soft law. The case of GlaxoSmithKline Inc. represents a noteworthy illustration of the weaknesses of the soft law approach in the OECD Guidelines. The arm’s length principle has been completely bypassed by the SCC to accommodate the ‘reasonable business person’ test whereby the touchstone for ascertaining whether a transaction is at arm’s length has been identified to be ‘all the economically relevant circumstances’. Whilst this decision does affirm the supremacy of Canadian law over the OECD, it is groundbreaking in that it undermines the original arm’s length principle found in the OECD Guidelines. It also elevates the MNE constituency to a higher plane at a time when countries are united against them. Inevitably, this will lead to a bigger tension between globalisation and democracy. Whilst MNEs may have won this round as adjudicated by the Canadian Supreme Court, this fight is far from over. As the late Margaret Thatcher pertinently pointed out: “You may have to fight a battle more than once to win it.” For now, it’s game on!

2013]

The Bristol Law Review

207

Bibliography Primary Sources Legislation Income Tax Act 1985 Case Law GlaxoSmithKline Inc. v. Her Majesty the Queen, [2008] TCC 324 GlaxoSmithKline Inc. v. Canada [2010] FCA 201 Canada v. GlaxoSmithKline Inc. [2012] SCC 52 Secondary Sources --‘G20 backs plan to stop global tax avoidance and evasion’ BBC News (London, 20 July 2013) <www.bbc.co.uk/news/uk-23389695> accessed 20 August 2013 --‘Globalization’ (Oxford Dictionary) <http://oxforddictionaries.com/definition/english/globalization> accessed 20 August 2013 Allen AM, Ramanna K and Roychowdhury S, ‘The Auditing Oligopoly and Lobbying on Accounting Standards’ (2012) Harvard Business School Accounting & Management Unit Working Paper No 13-054 <http://papers.ssrn.com/sol3/papers. cfm?abstract_id=2187947> accessed 20 August 2013 Ashley S, ‘It is transfer pricing but not as we know it’ (2011) 22 IT Rev 23 Baistrocchi E, ‘Tax disputes under institutional instability: theory and implications’ (2012) 75 MLR 547 -- ‘Transfer pricing dispute resolutions: the global evolutionary path (1799-2011)’ in Baistrocchi E and Roxan I (eds) Resolving Tranfer Disputes: A Global Analysis (CUP 2013) --‘The transfer pricing problem’ in Baistrocchi E and Roxan I (eds) Resolving Tranfer Disputes: A Global Analysis (CUP 2013) Barford V and Holt G, ‘Google, Amazon, Starbucks: The rise of tax shaming’ BBC News (London, 21 May 2013) <www.bbc.co.uk/news/magazine-20560359> accessed 20 August 2013 Bidaud H, Fris P and Llinares E, ‘The tax department’s role in sustainable transfer pricing’ (2012) 22 IT Rev 41 Boone P and Haupt M, Transfer pricing documentation for business restructurings (2013) 20 ITPJ 127

208

The Bristol Law Review

[Vol. 1

Calderón J, ‘The OECD Transfer Pricing Guidelines as a source of tax law: Is Globalization reaching the tax law?’ (2007) 35 Intertax 4 Commission, ‘Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee - Towards an Internal Market without tax obstacles - A strategy for providing companies with a consolidated corporate tax base for their EU-wide activities’ COMM (2001) 582 final

Denusik G, Evans J and Novis W, ‘Canada’s Supreme Court ruling on Glaxo - A few more items to consider’ (2012) 13 ITPJ 15 Devonshire-Ellis C, Scott A and Woollard W, Transfer Pricing in China (Springer 2011) Dharmapala D and Riedel N, ‘Earnings shocks and tax-motivated income-shifting: Evidence from European multinationals’ (2013) 97 J Public Econ 95 Drucker J, ‘How offshore tax havens save companies billions’ (National Public Radio, 17 March 2011) <www.npr.org/2011/03/17/134619750/how-offshore-tax-havens-save-companies-billions> accessed 20 August 2013 Duff DG and Beswick B, ‘Transfer pricing disputes in Canada’ ‘Transfer pricing disputes in Canada’ in Baistrocchi E and Roxan I (eds) Resolving Transfer Disputes: A Global Analysis (CUP 2013) Eccles RG, The Transfer Pricing Problem: A Theory for Practice (Lexington Books 1986) Eden L, Taxing Multinationals: Transfer Pricing and Corporate Income Taxation in North America (University of Toronto Press 1998) Engelen F, Interpretation of Tax Treaties under International Law (IBFD 2004) Fletcher R and Pantelidaki S, ‘United Kingdom Report’ in Toshio Miyatake and Robert H Green (eds) Transfer Pricing and Intangibles (Sdu Fiscale & Financiële Uitgevers 2007) Gabor A, Pricing: Concepts and Methods for Effective Marketing (CUP 1988) Hill D, Kirkey M and Alary P, ‘Glaxo: Supreme Court of Canada rules on first TP case’ (2012) 23 IT Rev 65 Jeffery RJ The Impact of State Sovereignty on Global Trade and International Taxa-

2013]

The Bristol Law Review

209

tion (Kluwer 1999) Kennedy CMC and Rolph B, ‘GlaxoSmithKline case: legal form and economic relevance prevail’ (2013) 24 IT Rev 47 Koch B and Studer C, ‘The success story of the Swiss APA regime’ (2011) 22 IT Rev 94 Krishnamurthy V, ‘Canada: Supreme Court ruling in GlaxoSmithKline case’ (2013) 20 ITPJ 78 Lagace M, ‘Are the Big Four Audit Firms too big to fail?’ (Harvard Business School Working Knowledge, 4 February 2013) <http://hbswk.hbs.edu/item/7169.html> accessed 20 August 2013 Landers JM, ‘A Unified Approach to Parent, Subsidiary, and Affiliate Questions in Bankruptcy’ (1975) 42 U Chi L Rev 589 Leaders of the G20, ‘G20 Leaders Declaration’ (G20 Summit, Los Cabos, June 2012) <www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131069. pdf> accessed 20 August 2013 Lewis N, ‘Tax avoidance by large multinationals in the UK is unfair to small businesses’ (Marketline 23 October 2012) <www.marketline.com/blog/tax-avoidanceby-large-multinational-companies-in-the-uk-is-unfair-to-small-businesses/> accessed 20 August 2013 Maisto G, ‘OECD Revision of Chapters I-III and IX of the Transfer Pricing Guidelines: Some comments on hierarchy of methods and re-characterization of actual transactions undertaken’ in Weber D and Van Weeghel S (eds) The 2010 OECD Updates (Kluwer 2011) Marti A and Küttel R, ‘Why multinationals are relocating to Switzerland’ (2012) 22 I T Rev 90 McIntyre MJ, ‘Options for Greater International Coordination and Cooperation in the Tax Treaty Area’ (2012) 56 BIFD 250 Miyatake T, ‘General Report’ in Miyatake T and Green RH (eds) Transfer Pricing and Intangibles (Sdu Fiscale and Financiele Uitgevers 2007) Muller J, ‘BEPS case study’ (2013) 24 IT Rev 29 OECD, OECD Report on Transfer Pricing and Multinational Enterprises (OECD

210

The Bristol Law Review

[Vol. 1

1979) --Tax Aspects of Transfer Pricing Within Multinational Enterprises: The United States Proposed Regulations: A Report by the Committee on the Fiscal Affairs on the Proposed Regulations under Section 482 IRC (OECD 1993) --OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators (OECD 1995) --Harmful Tax Competition: An Emerging Global Issue (OECD 1998) --OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD 2009) --OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD 2010) --Action Plan on Base Erosion and Profit Shifting (OECD 2013) --Addressing Base Erosion and Profit Shifting (OECD 2013) --‘Declaration on Base Erosion and Profit Shifting’ (Meeting of the OECD Council at Ministerial Level, Paris, 29-30 May 2013) <www.oecd.org/mcm/CMIN%282013%2922-FINAL-ENG.pdf> accessed 20 August 2013 Olson M, The Logic of Action: Public Goods and the Theory of Groups (HUP 1971) Pagan JC and Wilkie JS, Transfer Pricing Strategy in a Global Economy (IBFD 1993) Pichhadze A, ‘Canada’s Transfer Pricing Test in the Aftermath of GlaxoSmithKline Inc.: A Critique of the Reasonable Business Person Test’ (2013) 20 ITPJ 144 Posner RA, ‘The Rights of Creditors in Affiliated Corporations’ (1976) 43 U Chi L Rev 499 Rose R and Page EC (2001), Law-making through the Backdoor (European Policy Forum 2001) Roxan I, ‘Introduction’ in Eduardo Baistrocchi and Ian Roxan (eds) Resolving Tranfer Disputes: A Global Analysis (CUP 2013) Russo A, ‘Chapters I and II of the 2010 OECD Guidelines: Capita Selecta’ in Weber D and Van Weeghel S (eds), The 2010 OECD Updates (Kluwer 2011) --and Petzold O, ‘OECD puts spotlight on tax planning and use of losses’ (2012) 22 IT Rev 23 Sadiq K, ‘The fundamental failing of the Traditional Transfer Pricing Regime – Applying the arm’s length standard to Multinational Banks based on a Comparability Analysis’ (2004) 58 BIFD 67 Self H, ‘Addressing base erosion and profit shifting’ (2013) 2 BTR 117

2013]

The Bristol Law Review

211

--‘Transfer pricing: time for reform’ (2013) 150 Accountancy 40 Shaheen S, ‘Europe’s common tax base: How it could change your business’ (2011) 22 IT Rev 14 Silberztein C, ‘The 2010 Update to the OECD Transfer Pricing Guidelines’ in Weber D and Van Weeghel S (eds), The 2010 OECD Updates (Kluwer 2011) --Bennett MC and Lemein GD, ‘The OECD Discussion Draft on the Transfer of Intangibles (Revision of Chapter VI of the OECD Transfer Pricing Guidelines) – Main Comments’ (2013) 41 Intertax 60. Simmel G, The Sociology of Georg Simmel. Translated by K H Wolf (Free Press 1950) Simmel G, Soziologie Untersuchungen über die Formen der Vergesellschaftung (Duncker & Humblot 1908) Stone G and Syed R, ‘Addressing base erosion and profit shifting: An examination of the OECD’s recent report’ (2013) 14 ITPJ 4 Squire R, Strategic Liability in the Corporate Group (2011) 78 U Chi L Rev 605 Vega A, ‘International governance through soft law: The case of the OECD transfer pricing guidelines’ (2012) TranState Working Papers No 163 <http://econstor.eu/ bitstream/10419/59530/1/717832643.pdf> accessed 20 August 2013 Vernon R, ‘Sovereignty at bay: ten years after’ in Moran T H (ed), Multinational corporations: the political economy of foreign direct investment (Lexington Books 1985) Vogel D and Kagan RA, Dynamics of Regulatory Change How Globalization Affects National Regulatory Policies (University of California Press 2004). Vogelaar TW, ‘The OECD Guidelines: their philosophy, history, negotiation, form, legal nature, follow up procedures and review’ in Horn N (ed) Legal Problem of Codes of Conduct for MNEs (OECD 1980) Wang J, ‘A tentative improvement: comments on OECD discussion draft on the transfer pricing of intangibles’ (2013) 20 ITPJ 136 Zagaris B (2001), ‘Exchange of Information Policies at the millennium: balancing enforcement with due process and international human rights’ (2001) 30 Tax Man Int’l J 464