Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 29th November 2011
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
THE HIGH COURT OF JUSTICE (No. 4762 of 2010) and (No. 9329 of 2010)
LORD JUSTICE MAURICE KAY Vice President of the Court of Appeal, Civil Division
LORD JUSTICE PATTEN
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Case No: A2/2011/0394
IN THE MATTER OF DIGITAL SATELLITE WARRANTY COVER LIMITED (Company Number 05986843)
AND IN THE MATTER OF THE FINANCIAL SERVICES AND MARKETS ACT 2000
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Digital Satellite Warranty Cover Limited
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THE FINANCIAL SERVICES AUTHORITY
Case No: A2/2011/0395
IN THE MATTER OF BERNARD FREEMAN and MICHAEL ANTHONY JOHN SULLIVAN READING AS “SATELLITE SERVICES” (a firm) (Company Number 05597928)
AND IN THE MATTER OF THE FINANCIAL SERVICES AND MARKETS ACT 2000
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
Bernard Freeman and Michael Anthony John Sullivan trading as “satellite SERVICES” (a firm)
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THE FINANCIAL SERVICES AUTHORITY
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Ms Lesley Anderson QC and Mr Lloyd Tamlyn (instructed by Brabners Chaffe Street LLP) for the Appellants
Mr Glen Davis QC and Ms Charlotte Cooke (instructed by the Financial Services Authority) for the Respondent
Hearing date : 26th July 2011
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“4. The respondents have each carried on the business of providing extended warranty contracts in relation to satellite television dishes, digital boxes and associated equipment such as cabling. The warranty plans were in similar, but not identical, form for each of the respondents.
5. Contracts with customers arose largely as a result of mail-shots to customers and telephone conversations between customers and salespersons (sometimes after cold calls). From databases which they had acquired, the respondents were able to target persons who had purchased Sky satellite systems and whose warranties (provided on purchase by the manufacturer or supplier) were shortly to expire.
6. The evidence about the terms of the contracts entered into by customers comprises different elements. First, there are copies of mail-shots to potential customers. Secondly, there is a script which was available to the salesperson which could be used as a map for the “pitch” made to the customer. Thirdly, in a few cases, there is a transcript of the actual telephone call: a small number of examples were referred to at the hearing. Fourthly, there are more formal written conditions which purport to contain the terms on which customers contracted with the respondents.
7. DSWC: An example of a mail-shot (including an application form for the extended warranty) is headed “IMPORTANT NOTICE REQUIRING URGENT ATTENTION” reminding the recipient that “Your sky digital satellite system warranty is due to expire. Why wait 3 days for a service call, when our unique same day service is available from only £6.49 per month”. The following contents of the mail-shot and the application form are to be noted:
a. The recipient is told that, without a warranty, a minimum call-out fee of £72 would be incurred. The customer is invited to “restore peace of mind and extend your sky digital warranty with us…”.
b. A highlighted box contains the words “Extend your warranty cover with unlimited call-outs” with “no repair bills, call-out charges or labour to pay”.
c. The application form is headed “Sky Digital Satellite Coverplan”.
8. A second mail-shot is described as a “FINAL REMINDER” to take up “this exclusive offer”. Introduced by the words “This is what your warranty will cover” is a box containing 6 bullet points the last of which read “Even covers accidental damage”.
“Now I do appreciate what you're saying HOWEVER Not only do you get unlimited call outs, you are covered for all repairs including outside dish, set top box, cables and remote control.”
10. Following such a telephone call, a customer taking out some form of cover would receive a document called a “Sky Digital Warranty Certificate” including the words “Fully Comprehensive Gold Option Benefits”. This included dish alignment and re-cabling and remote control unit cover. There is nothing in this document which would exclude cover in the case of accidental damage.
11. None of the above material suggests that DSWC is under any obligation other than to repair, or if repair is impracticable, to replace the equipment covered. There is no obligation to pay money either in respect of repair or replacement costs in fact incurred by a customer or in place of fulfilment of the repair or replacement obligation.
a. Condition A under “What is provided” purports to provide that a contract upon those terms comes into being upon signing and return of the application form duly completed or by verbal acceptance (presumably in the telephone call with the salesperson). There is nothing to suggest that a customer would know of these terms and conditions during the course of the telephone call.
b. Condition C refers to “repair or replace”. There is no obligation to meet any cost incurred by the customer.
c. Condition F provides that where a remote control unit needs replacing, it must be sent back to the service department when a replacement will be provided. There is no exclusion in this provision for accidental damage.
d. There is a section headed “What is not provided under your service contract with us”. Condition E under this heading excludes a case
“Where any damage to the Equipment has been caused by theft, attempted theft or intentionally, or the damage is caused by fire, explosion, dampness or liquid spillings or foreign bodies inside the Sky Box.”
e. And under Condition J, cover is not provided where the fault existed before the application form was sent.
14. Mr Davis submits that, in cases where the script which I have described was followed in the course of a telephone conversation between the customer and the salesperson, a binding contract came into being. The terms of the contract in any individual case can, of course, only be ascertained from the contents of the conversation. Nonetheless, the form of the mail-shot and the script suggest that contracts may well have been entered into during the course of the telephone conversation the terms of which contracts would provide for more than repair or replacement in case of breakdown and would include at least accidental damage.
15. At best from DSWC's point of view, contracts would be governed by one of the two sets of terms and conditions which I have referred to. As before, there is no obligation on DSWC to pay money to the customer in any circumstances; the contractual obligation is to repair or replace. However, the list of exclusions under the heading “What is not provided” demonstrates that the repair and replacement obligation is perfectly general but subject to express exclusions. There is no exclusion for accidental damage, even where it has been caused as the result of negligent conduct on the part of the customer, although intentional damage is excluded. Apparently, therefore, there would be cover for a control unit damaged by being accidentally trodden on, or for a skybox accidentally knocked to the floor and thereby damaged. There is no exclusion for storm damage which would be relevant to satellite dishes installed outside a building. Nor is there exclusion for many other types of damage for instance, albeit unlikely, as the result of rodents chewing them or, a less unlikely occurrence, water damage from a leaking roof or overflowing bath neither of which could be described as “liquid spillage” within the exclusion.
19. The Partnership: There does not appear in the bundle a copy of any mail-shot from the Partnership. But there is a “Satellite Service Warranty Certificate” in similar form to the DSWC certificate referring to “Fully Comprehensive Gold Option Benefits”. It contains an additional benefit “annual service on your satellite digital equipment” and states that “your cover is fully activated to ensure peace of mind”.
20. There are some transcripts of telephone conversations between customers and salespersons. I deal with them under the Partnership heading although it is not entirely clear whether the salesperson was representing DSWC or the Partnership.
21. In the first place, there are transcripts of two conversations with potential customers in November 2010. During the course of one conversation, the salesperson (identified only as Jonathan) says that he is from “Digital Satellite” and that Sky Digital (the supplier and person providing the original warranty) “don't actually do the insurance themselves”. During the course of the other conversation, the salesperson (identified only as Carl) said “We deal, we cover your dish, your cables, your mobile control, set-top box, twenty-four hour unlimited call-outs, and also includes accidental damage as well”.
22. There is also a transcript of a conversation with an existing customer (Mrs L) concerning her direct debit. There are references by the salesperson (identified only as Danielle) to the customer's “policy” and to “cover” of the Sky box. Mrs L refers to telephoning to “insure my Sky package. I had it insured against breakdown and what have you.” It was not suggested to her that she was not insured against, for instance, accidental loss or storm damage or that she was covered only for precisely the same matters as the manufacturer's warranty covered. Mrs L asks “What actually will it cover me for? Just my Sky box?” to which Danielle responds “It will cover your box, your remote controls and also… Your cables on the inside of the flat”. I wonder what that last cover, in respect of cables, would be if the cover is restricted to repair and replacement in the same circumstances as falls within the manufacturer's warranty.
23. The terms and conditions in relation to the Partnership are similar to the later version of the DSWC conditions with extra provisions to deal with the annual service to be provided. The exclusions relevant for present purposes are materially the same. The observations made in relation to the DSWC terms and conditions apply equally to the Partnership terms and conditions.”
“A contract of insurance, then, must be a contract for the payment of a sum of money, or for some corresponding benefit such as the rebuilding of a house or the repairing of a ship, to become due on the happening of an event, which event must have some amount of uncertainty about it, and must be of a character more or less adverse to the interest of the person effecting the insurance.”
“17. ... the essentials of an insurance transaction are, as generally understood, that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded.
18. It is not essential that the service the insurer has undertaken to provide in the event of loss consists in the payment of a sum of money, as that service may also take the form of the provision of assistance in cash or in kind of the type listed in the annex Directive 73/239 as amended by Directive 84/641. There is no reason for the interpretation of the term 'insurance' to differ according to whether it appears in the Directive on insurance or in the Sixth Directive.”
The legislative history
“(6) … it is necessary to extend supervision in each Member State to all the classes of insurance to which this Directive applies;….”
“(10) … it is desirable to require a minimum guarantee fund related to the size of the risk in the classes undertaken, in order to ensure that undertakings possess adequate resources when they are set up and that in the subsequent course of business the solvency margin shall in no event fall below a minimum of security;”
“Each Member State shall make the taking-up of the business of direct insurance in its territory subject to an official authorization.”
“An authorisation shall be given for a particular class of insurance. It shall cover the entire class, unless the applicant desires to cover only part of the risks pertaining to such class, as listed in point A of the Annex.”
“…. the following particulars or proof concerning:
(a) The nature of the risks which the undertaking proposes to cover; the general and special policy conditions which it proposes to use;
(b) The tariffs which it is proposed to apply for each category of business;
(c) The guiding principles as to reinsurance;
(d) The items constituting the minimum guarantee fund;
(e) Estimates relating to the expenses of installing the administrative services and the organization for securing business; the financial resources intended to cover them;
and in addition, for the first three financial years: (f) Estimates relating to expenses of management other than costs of installation, and in particular current general expenses and Commissions;
(g) Estimates relating to premiums or contributions and to claims;
(h) A forecast balance sheet;
(i) Estimates relating to the financial resources intended to cover underwriting liabilities and the solvency margin.”
“… the business of effecting and carrying out contracts of insurance against any of the following risks, namely,—
(a) risks of loss to the persons insured arising from the insolvency of debtors of theirs or from the failure (otherwise than through insolvency) of debtors of theirs to pay their debts when due;
(b) risks of loss to the persons insured arising from their having to perform contracts of guarantee entered into by them;
(c) risks of loss to the persons insured attributable to interruptions of the carrying on of business carried on by them or to reductions of the scope of businesses so carried on;
(d) risks of loss to the persons insured attributable to them incurring unforeseen expense; and
(e) risks neither falling within any of the foregoing paragraphs nor being of a kind such that the carrying on of the business of effecting and carrying out contracts of insurance against them constitutes the carrying on of insurance business of some other class.”
“Effecting and carrying out contracts of insurance against any of the following risks, namely-
(a) risks of loss to the persons insured attributable to interruptions of the carrying on of business carried on by them or to reduction of the scope of business so carried out;
(b) risks of loss to the persons insured attributable to their incurring unforeseen expense;
(c) risks neither falling within head (a) or (b) above nor being of a kind such that the carrying on of the business of effecting and carrying out contracts of insurance against them constitutes the carrying on of insurance business of some other class.”
“The wording of the Regulations appears to me to demonstrate that the allocation of particular insurances into their appropriate class of Regulations requires the need for an examination of the manner in which the particular risks are written. This is a question of the true construction of the wording of the cover (see per Lord Reid, at p. 468C) and the wording of the classes of the Regulations are directed to this question. In the context of the possibility of committing a criminal offence, by writing unauthorised insurance business, this interpretation is no doubt undesirable, artificial and unbusinesslike. And if it were not for the safeguard against prosecutions in section 81 of the Act of 1974 and the transitional provisions of the Regulations to which I come later, I should struggle even more strongly against this interpretation of the Regulations. But in his examination of the authorities Mr. Kentridge satisfied me that whenever it has been material to consider the nature of the precise interest or risk insured, its description in the contract is crucial. Thus, in Wilson v. Jones (1867) L.R. 2 Ex. 139, where a shareholder in a cable laying company took out cover on the successful laying and installation of a transatlantic cable of which part was subsequently lost at sea, it was held that he could recover because his insurance was upon the success of the adventure and not upon the cable itself, in which he had no insurable interest. Similarly in other well known marine insurance cases such as Joyce v. Kennard (1871) L.R. 7 Q.B. 78 and Cunard Steamship Co. Ltd. v. Marten  2 K.B. 624, where it was essential to determine whether the insurance was "on" goods or insurance against liability for goods, the wording of the cover and not the nature of the insurable interest was held to be decisive.
The conclusion to which I am driven, unfortunately from the point of view of what seems to me to be business sense, is that this is the approach which has to be adopted for the purpose of assigning the "nature of business" in Schedule 1 to its appropriate class of the Regulations.”
“Subsection (1) above shall not apply to general business consisting in the effecting and carrying out, by an insurance company that carries on no other insurance business, of contracts of such descriptions as may be prescribed, being contracts under which the benefits provided by the insurer are exclusively or primarily benefits in kind.”
“… the assistance provided for persons who get into difficulties while travelling, while away from home or while away from their permanent residence. It shall consist in undertaking, against the prior payment of a premium, to make aid immediately available to the beneficiary under an assistance contract where that person is in difficulties following the occurrence of a chance event, in the cases and under the conditions set out in the contract.
The aid may consist in the provision of benefits in cash or in kind. The provision of benefits in kind may also be effected by means of the staff and equipment of the person providing them.
The assistance activity does not cover servicing, maintenance, after-sales service or the mere indication or provision of aid as an intermediary.”
“….. make the provision of assistance to persons who get into difficulties in circumstances other than those referred to in Article 1 subject to the arrangements introduced by the First Directive. If a Member State makes use of this possibility it shall, for the purposes of applying these arrangements, treat such activity as if it were listed in class 18 in point A of the Annex to the First Directive without prejudice to point C thereof.
The preceding paragraph shall in no way affect the possibilities for classification laid down in the Annex to the First Directive for activities which obviously come under other classes…..”
“Contracts of insurance providing either or both of the following benefits, namely—
(a) assistance (whether in cash or in kind) for persons who get into difficulties while travelling, while away from home or while away from their permanent residence; or
(b) assistance (whether in cash or in kind) for persons who get into difficulties otherwise than as mentioned in sub-paragraph (a).”
Are the contracts of insurance within Schedule 1 to the RAO?
“70. In my judgment, a contract for repair or replacement only in the event of breakdown or malfunction which does not oblige the insurer to indemnify the insured for costs which the insured himself incurs does fall within paragraph (b) of class 16 Schedule 1 (or if not within paragraph (b), then within paragraph (c)). I do not consider that there is any material distinction when it comes to determining whether a contract falls within class 16 between a contract which provides only for repair or replacement and one which also provides an indemnity for costs actually incurred by the insured. In each case, the risk covered is essentially the same; it is the possibility of the equipment breaking down or malfunctioning. It is the cover, not the risk which is different in the two cases. If the equipment does break down or malfunction, then it is inevitable that the insured will need to incur cost if he is to have a set of working equipment: he will either have to pay for its repair or he will have to replace it. In my view, a contract which brings about the result which he would otherwise have to pay to achieve (ie having functioning equipment) can properly be categorised as a contract which protects him from financial loss. And this is so whether or not the insurer is obliged to pay the cost incurred by the insured if, in fact, the insured himself pays for the repair or replacement in the first instance. The contract which provides only for repair and replacement, and not for payment of any indemnity, therefore falls within paragraph (b) of class 16.
71. That result is not, I consider, to give paragraph (b) of class 16 a strained or unnatural meaning. It would be a strange result, to my mind, if such a contract did not fall within paragraph (b) but one which provided, in addition, an obligation on the insurer to pay, in certain circumstances, the cost actually incurred by the insured would do so. Suppose, for example that the contract does contain such a payment obligation but also gives the insurer the option to effect the repair or replacement itself or at its own cost and so that the insured is not entitled to claim reimbursement unless the insurer has had the opportunity (following notification of a claim) to exercise its option. Such a contract would clearly be within paragraph (b); but, in substance, the risk covered is the same under both contracts, the risk of breakdown or malfunction.
72. But if I am wrong in that, and a literal reading is to be adopted, so that a contract must, if it is to fall within paragraph (b), contain a provision which requires the insurer to indemnify the insured for costs which the latter has actually incurred, then a contract which provides only for repair or replacement falls, I consider, within paragraph (c). The risk covered, on this hypothesis, is not the risk of loss attributable to incurring unforeseeable expense (ie repair or replacement costs) but is the risk of having equipment which does not work. Equipment which does not work is inevitably going to be worth less than equipment which does work; and it may well be that the measure of the loss is no different, or not significantly different, from the cost or repair or of replacement if repair is impossible. Whatever the quantum of the loss, it is a financial loss.”
“In my judgment, whatever test one applies, it is clear that the contracts effected by DSWC and the Partnership were insurance contracts within one of classes 8 and 9. The provision of cover for accidental loss or damage cannot be seen as so integral with or subsidiary to the provision of cover in the case of breakdown or malfunction as to result in the entire contract taking its character from the latter cover. This cover is not minor nor is it ancillary to the cover for breakdown or malfunction. Accordingly, even if the provision of cover only in the form of repair or replacement and only in the case of breakdown or malfunction does not require authorisation, the provision of cover in accordance with the standard terms and conditions does require authorisation. This conclusion, which I regard as clear, makes it unnecessary to consider whether customers generally or in particular cases, entered into binding contracts before being presented with the standard terms and conditions and, if so, the terms of such contracts. ”
“ There are two different levels at which the court undertakes the task of interpretation in this case. The first level is that of the Sixth Directive, because, although that has no legal force as such in the United Kingdom, it is now well-established that the court must interpret domestic legislation in accordance with any applicable European directive. So the court has to satisfy itself as to the meaning of that underlying legislation. The second level at which the court must undertake the task of interpretation is at the level of the VATA 1994. This of course is domestic law. The former task must be carried out in accordance with the principles laid down by the Court of Justice, which is the final arbiter on what Community legislation means. The latter task, however, is conducted under the principles of domestic law but for the purpose not of interpreting the statute in the ordinary way but of fulfilling the requirement of European Union law that a national court should interpret a statute which implements a directive, so far as possible, in the light of the wording and purpose of that directive.
 In both the cases cited above, the English courts had the advantage of a preliminary ruling from the Court of Justice. Where there is no preliminary ruling from the Court of Justice and difficulties arise because the case cannot be said to be acte clair, it may be necessary to seek a preliminary ruling from the Court of Justice. Customs & Excise seek a reference for a preliminary ruling if they are unsuccessful on this appeal. In Kobler v Austria  QB 848,  All ER (EC) 23,  2 WLR 976, the Court of Justice held that in special circumstances a state can be liable if the final court of appeal in a member state declines to refer a question of the interpretation of the EC treaties to the Court of Justice, and takes a wrong view of the EC law. This may lead to national courts taking a more restrictive view of acte clair in the future.
 The Court of Justice lays down the obligations of national courts with respect to European Union legislation. The Court of Justice has held that the national court's obligation is to interpret domestic legislation, so far as possible, in the light of the wording and the purpose of a directive in order to achieve the result pursued by the directive and thereby comply with Community obligations: see Marleasing SA v La Commercial Internacional de Alimenation SA at para 8. In this judgment, I refer to this obligation as the Marleasing principle. It is sometimes also referred to as the principle of conforming interpretation. The Court of Justice has held that the obligation may apply even if the relevant legislation was passed before the relevant Community legislation: Webb v EMO Air Cargo (UK) Ltd  QB 718,  4 All ER 115,  3 WLR 941 and see S.Vogenauer, Richtlinienkonforme Auslegung Nationalen Rechts, (1997) ZEuP 158.
 The approach described above makes it clear that, while under European Union law the member states are bound to interpret national legislation so far as possible in conformity with the wording and purpose of a directive, it is for domestic law to determine how far the domestic court can change other provisions of purely domestic law to fulfil this obligation. Thus in this situation the national court is not concerned to ask what interpretative approach is adopted by the courts of the other member states of the European Union. The question how far it can go under the guise of interpretation, and whether it can for instance adopt what would otherwise be regarded as a strained construction, is a matter for domestic law.
 Normally when construing domestic legislation, the English courts must find the meaning of the words which Parliament has used. In the context, however, of legislation which requires to be construed in a way which is compatible with European Union law or with the rights conferred by the European Convention on Human Rights, the English courts can adopt a construction which is not the natural one. The process, however, remains one of interpretation: the obligation imposed by the Court of Justice is only to interpret national law in conformity with a directive “so far as possible”. That raises the question when a process ceases to be that of legitimate interpretation and trespasses into the field of lawmaking that is the task of Parliament and not the courts.”
“Whereas the First Council Directive (73/239/EEC) of 4 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance (4), hereinafter referred to as the "First Directive", as amended by Directive 76/580/EEC (5), eliminated certain differences between the laws of Member States in order to facilitate the taking-up and pursuit of the above business;
Whereas considerable progress has been achieved in that area of business involving the provision of benefits in kind; whereas such benefits are governed by provisions which differ from one Member State to another; whereas those differences constitute a barrier to the exercise of the right of establishment;
Whereas, in order to eliminate that barrier to the right of establishment, it should be specified that an activity is not excluded from the application of the First Directive for the simple reason that it constitutes a benefit solely in kind or one for which the person providing it uses his own staff or equipment only; whereas, therefore such provision of assistance consisting in the promise of aid on the occurrence of a chance event should be covered by the above Directive, taking into account the special characteristics of such assistance;
Whereas an undertaking offering assistance contracts must possess the means necessary for it to provide the benefits in kind which it offers within an appropriate period of time; whereas special provisions should be laid down for calculating the solvency margin and the minimum amount of the guarantee fund which such undertaking must possess;”
“estimates relating to the expenses of installing the administrative services and the organization for securing business ; the financial resources intended to cover them, and, where the risks to be covered are listed under No 18 in point A of the Annex, the resources available to the undertaking for providing the promised assistance;”
“Whereas the harmonization of insurance contract law is not a prior condition for the achievement of the internal market in insurance; whereas, therefore, the opportunity afforded to the Member States of imposing the application of their law to insurance contracts covering risks situated within their territories is likely to provide adequate safeguards for policyholders who require special protection;”
Lord Justice Aikens :
Lord Justice Maurice Kay :