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Consumer class arbitration in the UK: where we are and what next?

We are all consumers and, on occasion, we face disputes with traders who provide us with goods or services. Most consumer disputes, if not resolved amicably, will end up in court. However, the last two decades saw the growth of consumer arbitration in the US, with an increasing number of consumer contracts originating in the US containing arbitration clauses. The question is whether consumer arbitration will take hold outside the US, and in particular in the UK.

There are two broad strands to the issue of consumer arbitration.

The first is the question of whether arbitration is appropriate for consumer disputes. Here the focus is on the unequal bargaining power of the trader and the consumer. The main concerns are the preservation of access to justice and effective remedies, as well as ensuring the consumer’s due process rights. In the EU and the UK these issues have been broadly dealt with under the banner of consumer protection from unfair terms.

The second question is the availability of collective redress mechanisms. In many consumer disputes, the small size of similar or identical individual claims makes them uneconomical to pursue other than on a collective basis. Such collective redress may take many forms, including class action in state courts, or class, mass or collective arbitration.

The two strands have an obvious point of interaction. The availability of collective redress mechanisms helps redress the balance of bargaining power in favour of the consumer, which thereby affects the overall assessment of whether an arbitration clause is unfair to the consumer.

So where do we currently stand in the UK and in what direction might we move in the future?

Arbitration agreements under the unfair terms legislation

The UK law on consumer arbitration is largely derived from EU law, and centres on the concept of fairness. The EU Directive 93/13 (the directive) on unfair terms in consumer contracts provides that a term is regarded as unfair if it has not been individually negotiated and it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer. In relation to arbitration, the directive provides that a term may be regarded as unfair where it has the object or effect of:

“… excluding or hindering the consumer’s right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions”.

The directive has been implemented in the UK, most recently, through the Consumer Rights Act 2015 (CRA 2015). In addition, sections 89-91 of the Arbitration Act 1996 (AA 1996) and the Unfair Arbitration Agreements (Specified Amount) Order 1999 extend the application of the relevant provisions of the CRA 2015 to arbitration. In brief, under UK law:

  • Compulsory consumer arbitration agreements relating to claims of £5,000 or less are automatically unfair under section 91(1) of the AA 1996, and are therefore unenforceable against the consumer.
  • Arbitration clauses in consumer contracts relating to claims over £5,000 may also be found unfair to be under the CRA 2015.
  • An arbitration clause in a consumer contract is likely to be judged as unfair if its effect is to exclude or hinder the consumer’s right to take legal action before the courts, if the arbitrator’s fees are relatively high compared with the amount of the claim, and the impact of the arbitration clause would not have been apparent to a layperson (Mylcrist Builders Limited v Mrs G Buck).

Collective redress mechanisms

Bilateral consumer arbitration is widely available in the UK. Indeed, following the implementation of the EU Directive 2013/11/EU through the Alternative Dispute Resolution for Consumer Disputes (Competent Authorities and Information) Regulations 2015 (as amended), all businesses must provide consumers with information on alternative dispute resolution options, including arbitration services.

At the same time, class or collective arbitration is not currently possible under the AA 1996. Based on the fundamental principle of party autonomy, the AA 1996 does not provide for specific features of class arbitration, such as class formation on an opt-out basis. Another difficulty arises in relation to confidentiality: the need for publicity and transparency in class arbitration is inconsistent with the principle of privacy and confidentiality of arbitration under English law.

At the EU level, the European Commission is in the process of reviewing evidence on the effect of the non-binding Recommendation on common principles for injunctive and compensatory collective redress mechanisms in the Member States concerning violations of rights granted under Union law (the recommendations) published in 2013. The recommendations focus on court-based collective redress mechanisms and set out a number of important safeguards against abusive litigation, such as the prohibition on punitive damages, preservation of the “loser pays” principle and regulation of third party funding. Careful consideration of those safeguards, whilst outside the scope of this note, would also be necessary in the class or collective arbitration context.

Potential future developments

It is clear that for consumer class or collective arbitration to develop in the UK, a significant legislative change will be required. It seems that changes to the AA 1996 would be required to clarify the availability of class or collective arbitration, whether specifically in the consumer context or more broadly. This might need to be followed by a revision of unfair terms legislation, though it is possible that the availability of class or collective arbitration would become part of the factual and legal context against which fairness of a clause is assessed.

It is worth noting that the drivers of class arbitration in the US (respondents’ attempts to avoid class action in US courts, including jury trials and discovery process), are weaker or absent in the UK. The case for class arbitration will need to be articulated more clearly. For example, the advantages of arbitration in cross-border cases will need to be spelt out, including in relation to issues of jurisdiction and enforcement. Other factors might include the broadening of dispute resolution options for consumers, the regulatory effect of class arbitration (as a form of collective redress), and potentially lower costs and quicker awards compared with court litigation. In short, it will likely take much work and strong advocacy for consumer class arbitration to develop in the UK.

King & Spalding Grigori Lazarev Jessica Trevellick

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