England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BRISTOL DISTRICT REGISTRY
ON APPEAL FROM ORDER OF DISTRICT JUDGE BRITTON

		Claim No. 7BS31009 Bristol District Registry Lewins Place, Lewins Mead, Bristol BS1 2NR.
		11th November 2009

Mr. Justice Kitchin:

1. This is an appeal against a decision of District Judge Britton dated 24^th March 2009, whereby he stayed these proceedings on the ground that they relate to a matter which the parties have agreed must be settled by arbitration in Utah, USA. The appeal is brought with the permission of the judge.
2. The defendant is the UK subsidiary of Nu Skin Enterprises Inc., a US corporation based in Utah. In this judgment I shall refer to the defendant as "Nu Skin UK", Nu Skin Enterprise Inc. as "Nu Skin Inc." and the two companies collectively as "Nu Skin".
3. Nu Skin Inc. has a number of subsidiaries in different jurisdictions and they all carry on business supplying Nu Skin skin care products which they market via a network of distributors. These distributors are permitted to introduce further distributors, so creating over time a pyramid of distributors, all of whom sell Nu Skin products to members of the public.
4. A commission is paid on sales made by a distributor and on sales made by a person directly or indirectly introduced by the distributor. Consequently, distributors have an incentive both to sell Nu Skin products and to encourage and sponsor other potential distributors to join the network.
5. The claimant, Miss Kaye, was 23 years old when she became a Nu Skin distributor in February 2004. Over the course of the next three years she worked hard, evidently with some success, because she advanced to level 4 of the seven available levels of executive status within the Nu Skin organisation, achieving the title of "Ruby Executive". Then in 2007 the relationship between Miss Kaye and Nu Skin broke down, leading in August 2007 to the purported termination of the agreement by Nu Skin through their Distributor Conduct Review Committee.
6. The alleged breach of the agreement upon which Nu Skin rely was that Miss Kaye's father, Mr Tony Kaye, had an economic interest in the agreement in breach of the conditions which it incorporates and, indeed, that Miss Kaye's agreement was a sham, Tony Kaye having arranged for the agreement to be set up in her name. All of this is disputed by Miss Kaye who, in December 2007, commenced proceedings against Nu Skin UK alleging breach of contract. She said that as a Ruby Executive she would have expected to earn £20,000 per annum rising over three to five years to £250,000 per annum.
7. On 5^th March 2008, Miss Kaye applied for and obtained summary judgment in default for a sum to be determined by the court. Further directions were given on 25^th September 2008 and a case management conference was set for 5^th December 2008. In the meantime, on 10^th November 2008, Messrs Lawrence Graham LLP went on the record for Nu Skin UK, and on 2^nd December 2008 it applied for the proceedings to be stayed under section 9 of the Arbitration Act 1996 on the basis that the distributor agreement contained a binding arbitration clause; alternatively, for judgment to be set aside, because Nu Skin UK had a real prospect of successfully defending the claim.
8. The hearing before the judge took place on 24^th March 2009. Miss Kaye argued that directions should be given for a hearing to determine whether there was indeed an operative arbitration agreement because issues needed to be tried as to whether the arbitration clause was incorporated into the distributor agreement, it not having been drawn specifically to Miss Kaye's attention before she entered into the agreement; whether it would not be honest or conscionable in all the circumstances for Nu Skin UK to rely on the arbitration clause; and whether the requirement of reasonableness under section 3 of the Unfair Contract Terms Act 1977 ("UCTA") applied to the arbitration clause in issue, or at least the term requiring the seat of the arbitration to be Utah.
9. The judge rejected all of these arguments, stayed the proceedings, ordered Miss Kaye to pay one-half of Nu Skin UK's costs and, as I have indicated, gave Miss Kaye permission to appeal.
10. On this appeal, Miss Kaye submits that, first, there is an issue which requires trial as to whether the arbitration clause, or at least the term that provides that the seat of the arbitration should be Utah, ought to have been drawn specifically to her attention in order for it to be incorporated into the distributor agreement; or, alternatively, for it to be conscionable for Nu Skin UK to rely upon it.
11. Second, she submits there is an issue which requires trial as to whether, as a result in particular of its express positive representation that the contract was governed by the law of England and Wales, Nu Skin UK is estopped from relying on the arbitration clause or, at least, the term that provides that the seat of the arbitration should be Utah.
12. Third, she submits that section 13(2) of UCTA precludes consideration of the reasonableness of an agreement "to submit present or future differences to arbitration" of itself, but does not preclude consideration of other terms which exclude or restrict liability. The requirement that the seat of the arbitration should be Utah is one such term.
13. The distributor agreement in issue is entitled "Independent Distributor Agreement United Kingdom/Ireland". The parties to it were Miss Kaye, Nu Skin Inc. and Nu Skin UK. It records on its face that it will form the distributor's contract with Nu Skin Inc. together with what are described as "The Policies and Procedures". It also states: "Please make sure you have read and understood its contents before you submit this form."
14. There then follow the Policies and Procedures comprising three pages of standard terms and conditions. Clause 1.3 states:

"For the mutual benefit of your business and the businesses of Nu Skin and its other Distributors, you agree to comply with the following procedures, as amended from time to time. These Policies and Procedures along with the Sales Compensation Plan ('SCP') and the Nu Skin Distributor Agreement for the three party Agreement among the company, Representative and Nu Skin Local [Nu Skin UK]. If you need any help in understanding these procedures, please contact the Nu Skin offices.

15. Clause 9 deals with contract breach, and reads:

"9.1 If a Distributor has violated any of the terms or conditions of the agreement, the Company may elect, at its discretion, to terminate the Agreement or to impose sanctions in one or more of the following ways, without limitation;

(i) Written warning advising that further violation may result in further sanctions;

(ii) Probation, which may include requiring you to take remedial action. The Company may review compliance with this Agreement;

(iii) Withdrawal or denial of an award, denying recognition on Company publications, or restricting participation in Company sponsored events for a specified period of time until certain conditions are satisfied;

(iv) Suspension of certain privileges, including but not limited to placing an order, participating in Company programmes, progressing in the SCP, or participating as a sponsor;

(v) Withholding of commissions for a specified period of time or until certain conditions are satisfied;

(vi) Imposing fines or other penalties permitted by law;

(vii) Injunctive relief or other remedies available by law.

9.2 The following procedure applies when the Company investigates a violation or other complaint or request for mediation;

(i) The Company will send a formal written notice of its intent to impose sanctions for a violation.

(ii) The Company will give you twenty (20) days from the date of dispatch of the notification letter to present your case for review by the Distributor Conduct Review Committee (DCRC)

(iii) On the basis of any information obtained from collateral sources, from the Company's investigation of the facts or from your response, the Company will make a decision regarding the appropriate sanction, which may include termination of the Agreement. The Company reserves the right to impose sanctions for violations of the Agreement on a case-by-case basis. The Company will promptly notify you of its decision. Any sanction will be effective from the date the notice is dispatched.

(iv) Representative may appeal the decision to an Internal Appeal Review.

(v) Any dispute or claim arising from this Agreement not resolved by the above procedure, or disputes between Distributors arising out of business relationships as Nu Skin independent contractors, shall be submitted to mediation in Utah, USA and failing a satisfactory result from mediation a continuing dispute shall be settled by binding arbitration in the same location."

16. Clause 13 is headed "Miscellaneous", and says, so far as relevant:

"13.1 This Agreement is governed by the law of the jurisdiction under which Nu Skin Local exists as a company. If any provision of the Agreement is held by any court to be unlawful, void or unenforceable that shall not affect any of the other provisions of the Agreement the remainder of which shall continue to be binding."

17. There is no dispute that the proper law of the agreement is therefore that of England and Wales.
18. Section 9 of the Arbitration Act 1996 provides:

"9. Stay of legal proceedings

(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.

(2) An application may be made notwithstanding that the matter is to be referred to arbitration only after the exhaustion of other dispute resolution procedures.

(3) An application may not be made by a person before taking the appropriate procedural step (if any) to acknowledge the legal proceedings against him or after he has taken any step in those proceedings to answer the substantive claim.

(4) On an application under this section the court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.

(5) If the court refuses to stay the legal proceedings, any provision that an award is a condition precedent to the bringing of legal proceedings in respect of any matter is of no effect in relation to those proceedings."

19. The application for a stay before the judge was made in accordance with section 9(1) to (3). Accordingly, Nu Skin UK submits that by reason of section 9(4) the court is obliged to grant a stay and that the grounds of appeal are misconceived. I shall now address them in turn.

Ground 1: the arbitration clause was not incorporated into the distributor agreement. Alternatively, it is not fair or would be unconscionable to hold Miss Kaye bound by that clause

20. It is now well established that there are various ways in which the effectiveness of particular contract terms may be qualified. One of these is the requirement that particularly onerous or unusual conditions are brought fairly and reasonably to the attention of the other party, failing which they may be found never to have formed part of the contract; alternatively, the other party may be relieved from liability under them. This requirement of fairness has found particular expression in the context of exemption clauses. As Denning LJ observed in J. Spurling Limited v. Bradshaw [1956] 1 WLR 461 at 466:

"Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient."

21. But the principle is plainly not limited to cases involving exemption clauses. In Interfoto Library Ltd v. Stiletto Ltd. [1989] 1 QB 433, the Court of Appeal was concerned with an appeal between commercial parties which imposed upon the defendant an obligation to pay an exorbitant charge for the retention of certain photographic transparencies supplied by a lending library.
22. Dillon LJ approached the matter on the basis that the failure by the plaintiff to draw the defendant's attention particularly to the relevant condition had the consequence that it never became part of the contract between the parties. As he explained at page 438F:

"Condition 2 of these plaintiffs' conditions is in my judgment a very onerous clause. The defendants could not conceivably have known, if their attention was not drawn to the clause, that the plaintiffs were proposing to charge a "holding fee" for the retention of the transparencies at such a very high and exorbitant rate.

At the time of the ticket cases in the last century it was notorious that people hardly ever troubled to read printed conditions on a ticket or delivery note or similar document. That remains the case now. In the intervening years the printed conditions have tended to become more and more complicated and more and more one-sided in favour of the party who is imposing them, but the other parties, if they notice that there are printed conditions at all, generally still tend to assume that such conditions are only concerned with ancillary matters of form and are not of importance. In the ticket cases the courts held that the common law required that reasonable steps be taken to draw the other parties' attention to the printed conditions or they would not be part of the contract. It is, in my judgment, a logical development of the common law into modern conditions that it should be held, as it was in Thornton v. Shoe Lane Parking Ltd. [1971] 2 QB 163, that, if one condition in a set of printed conditions is particularly onerous or unusual, the party seeking to enforce it must show that that particular condition was fairly brought to the attention of the other party.

In the present case, nothing whatever was done by the plaintiffs to draw the defendants' attention particularly to condition 2; it was merely one of four columns' width of conditions printed across the foot of the delivery note. Consequently condition 2 never, in my judgment, became part of the contract between the parties.

23. Bingham LJ preferred to consider whether it was fair to hold the defendant bound by the condition. He put it this way, at page 445:

"The tendency of the English authorities has, I think, been to look at the nature of the transaction in question and the character of the parties to it; to consider what notice the party alleged to be bound was given of the particular condition said to bind him; and to resolve whether in all the circumstances it is fair to hold him bound by the condition in question. This may yield a result not very different from the civil law principle of good faith, at any rate so far as the formation of the contract is concerned".

24. In the context of the particular case before the court he continued:

"Turning to the present case, I am satisfied for reasons which Dillon L.J. has given that no contract was made on the telephone when the defendants made their initial request. I am equally satisfied that no contract was made on delivery of the transparencies to the defendants before the opening of the jiffy bag in which they were contained. Once the jiffy bag was opened and the transparencies taken out with the delivery note, it is in my judgment an inescapable inference that the defendants would have recognised the delivery note as a document of a kind likely to contain contractual terms and would have seen that there were conditions printed in small but visible lettering on the face of the document. To the extent that the conditions so displayed were common form or usual terms regularly encountered in this business, I do not think the defendants could successfully contend that they were not incorporated into the contract.

The crucial question in the case is whether the plaintiffs can be said fairly and reasonably to have brought condition 2 to the notice of the defendants. The judge made no finding on the point, but I think that it is open to this court to draw an inference from the primary findings which he did make. In my opinion the plaintiffs did not do so. They delivered 47 transparencies, which was a number the defendants had not specifically asked for. Condition 2 contained a daily rate per transparency after the initial period of 14 days many times greater than was usual or (so far as the evidence shows) heard of. For these 47 transparencies there was to be a charge for each day of delay of £235 plus value added tax. The result would be that a venial period of delay, as here, would lead to an inordinate liability. The defendants are not to be relieved of that liability because they did not read the condition, although doubtless they did not; but in my judgment they are to be relieved because the plaintiffs did not do what was necessary to draw this unreasonable and extortionate clause fairly to their attention. I would accordingly allow the defendants' appeal and substitute for the judge's award the sum which he assessed upon the alternative basis of quantum meruit."

25. This principle has also attracted some consideration in the context of agreements containing arbitration clauses. In Stretford v. Football Association Ltd [2007] EWCA 238; 2 All ER (Comm) 1, the Court of Appeal was concerned with an argument by a football agent that an arbitration clause was in conflict with his rights under art. 7 of the European Convention on Human Rights ("ECHC"). The court held that where parties have voluntarily or freely entered into an arbitration agreement they are to be treated as waiving their rights under article 6. However, in order to be an effective waiver, the arbitration agreement must also be agreed without constraint and not run counter to any important public interest. The Strasbourg jurisprudence did not explain precisely what was meant by "constraint", but it appeared to the court that existing principles of the common law and equity fully protected the profferee. These included not only the principles of duress, undue influence and mistake but also the principle explained in Interfoto that "onerous and unusual terms must be brought to the attention of the profferee".
26. In the context of the case before it, the court concluded the arbitration was not required by law or compulsory but had become standard in the rules of sporting organisations like the FA. Further, to strike down clauses of this kind would have a far-reaching and undesirable effect on the use of arbitration in the context of sport generally. There was no question of constraint, nor was there any public interest consideration to stand in the way of arbitration.
27. In Sumakan v. Commonwealth Secretariat [2007] EWA 243, [2007] 2 All ER (Comm) 23, another appeal heard at the same time as the Stretford case, the Court of Appeal considered an arbitration clause which excluded the jurisdiction of the court for the purposes of section 69(1) of the Arbitration Act 1996 and whether it offended the Interfoto principle as a matter of domestic law or by virtue of article 6 of the ECHC. The court concluded it did not. The exclusion agreement was not unusual or onerous; it imposed on both parties a limit on the right of appeal; it did not exclude the parties' rights to bring to the court irregularities in the arbitral process, and it was common in a commercial context, when arbitration was agreed, to agree to limit the right of appeal.
28. I conclude from both of these cases that the Interfoto principle are applicable to contracts containing arbitration clauses but, plainly, all the relevant circumstances must be taken into account in deciding whether or not the particular arbitration agreement in issue is unusual or onerous and, if it is, whether it has been brought fairly and reasonably to the attention of the other party.
29. In the context of the present dispute, I did not understand it to be seriously disputed that the general terms and conditions contained in the three pages entitled "Policies and Procedures" were incorporated into the distributor agreement. The question to which this appeal gives rise is whether there is an issue to be tried as to whether clause 9.2(v) was incorporated, and in particular that part of the clause which requires Utah to be the seat of any arbitration, or whether it is fair to hold that it is binding upon Miss Kaye.
30. In my judgment, the following points are material. At the outset, regard must be had to the nature of the distributor agreement and the character of the parties to it. It is an agreement in standard form drafted by Nu Skin and it includes a series of relatively complex conditions which it may be difficult for a potential distributor fully to understand.
31. Moreover, clause 1.3 of the agreement invites the potential distributor to contact Nu Skin in the event that he or she has any difficulty in understanding its terms. Miss Kaye submits, in my judgment, with some force, that this is an invitation to place trust and confidence in Nu Skin and does not indicate to a prospective distributor that he or she should treat the terms with suspicion, or as an offer put forward in a hostile commercial negotiation which requires careful analysis and independent advice.
32. As for the parties, Miss Kaye was 23 years old, and I have no evidence to suggest that she had any prior experience of agreements of this kind or took independent legal advice. In contrast, Nu Skin must have been well aware of the full effect of the terms they were proffering.
33. Turning to the circumstances in which the agreement was made and the information conveyed to Miss Kaye, her solicitor, Mr. Jolly, has served a witness statement in which he says that Miss Kaye gained the impression from the documents presented to her that the distributor agreement was governed by English law and that she would have a remedy in this jurisdiction in the event of a breach of its terms by Nu Skin. Moreover, if Nu Skin made known to all their distributors that any dispute had to be resolved by arbitration in Utah, there would likely be a "catastrophic exodus". In this regard, Miss Kaye feels completely misled.
34. As for the arbitration clause itself, this appears at the end of clause 9 and is preceded by a relatively complex set of provisions which I have set out. The implication of these provisions is that any alleged misconduct by a distributor will be considered and may be reviewed by the Distributor Conduct Review Committee. Thereafter, there is a further right of appeal to an internal appeals review, all suggesting, as Miss Kaye submits, a fair and paternal approach to the resolution of disputes, when in fact clause 9 provides no remedy of this kind in respect of a complaint by a distributor against Nu Skin. The only remedy available to a distributor such as Miss Kaye is that provided by clause 9.2(v) and involves engaging in an arbitration in Utah.
35. In all these circumstances, there is, it seems to me, a real issue as to whether the practical effect of clause 9 is to exclude a distributor of modest means from any effective remedy at all and as to whether it is both onerous and unusual in agreements of this kind. Further, it seems to me that there is a real issue as to whether Nu Skin fairly and reasonably brought clause 9.2(v) to Miss Kaye's attention.
36. Turning to the decision of the judge, he dealt with the argument based upon the Interfoto principle from paragraph 8. He expressed the view that the principles were simply not applicable "by way of factual matrix to the facts of this case" and he then distinguished the Interfoto case on the basis that it was a consumer-type of case. By contrast, he continued, the present dispute concerned a commercial transaction.
37. I agree with the judge that the present case is indeed a commercial transaction, albeit one to which one of the parties was only 23 years old and may have had no prior commercial experience at all. Nevertheless, I consider it is clear that the Interfoto principle are as applicable to commercial transactions as to any others, although, plainly, all relevant circumstances must be taken into account. In the case of a commercial transaction, that may have a significant bearing on whether a particular clause is onerous or unusual, and whether it was fairly brought to the attention of the other party.
38. It is against this background that the judge considered whether the clause was one upon which Nu Skin could rely, and, in paragraph 10, he concluded that they could. Moreover, he considered that there was no point in adjourning the application and having further evidence. He took the view that the plain words of the agreement spoke for themselves.
39. In my judgment, the judge fell into error here, too. I believe that further evidence may assist the just determination of this issue. In particular, I have in mind the following. First, I believe that the court would be assisted by evidence of the personal circumstances of Miss Kaye and the circumstances in which she entered into this distributor agreement. Second, I believe the court would also be assisted by evidence as to whether the arbitration clause is onerous or unreasonable and, in particular, whether or not it will in practice mean that Miss Kaye has no real prospect of pursuing her claim. Third, in my judgment it would also be helpful to know how common arbitration clauses of the kind set forth in clause 9.2(v) are in distributor agreements of this kind and, in particular, how common it is to have an arbitration clause which provides for the seat of arbitration in a country far away from the territory where the distributor is living and carrying on business. Finally, it would, in my judgment, be of assistance to have evidence as to the notice which Miss Kaye had of the arbitration clause in this distributor agreement and its effect, her understanding of the avenues open and the procedures available to her to pursue a grievance and how she arrived at that understanding.

Ground 2: estoppel arising from a representation that the contract was governed by the law of England & Wales

40. I can deal with this ground very shortly. The proper law of the distributor agreement is, indeed, the law of England and Wales. Moreover, there is nothing inherently inconsistent between clause 9 and clause 13. It seems to me that if Miss Kaye fails on her first ground of appeal, then she must fail on this ground, too.

Ground 3: section 13(2) of UCTA

41. The relevant statutory provisions are sections 3 and 13 of UCTA, which read:

"3 Liability arising in contract

(1) This section applies as between contracting parties where one of them deals as consumer or on the other's written standard terms of business.

(2) As against that party, the other cannot by reference to any contract term-

(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or

(b) claim to be entitled –

(i) to render a contractual performance substantially different from that which was reasonably expected of him, or

(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all, except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.

13 Varieties of exemption clause

(1) To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents-

(a) making the liability or its enforcement subject to restrictive or onerous conditions;

(b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice in consequence of his pursuing any such right or remedy;

(c) excluding or restricting rules of evidence or procedure;

and (to that extent) sections 2 and 5 to 7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty.

(2) But an agreement in writing to submit present or future differences to arbitration is not to be treated under this Part of this Act as excluding or restricting any liability."

42. Miss Kaye submits that the exclusion contained in section 13(2) is limited to the term which contains the arbitration agreement and does not apply to other terms relating to the conduct of the arbitration and, in particular, any additional agreement as to the seat of the arbitration.
43. I am unable to accept this submission. The arbitration clause in issue must be considered as a whole, and it is an agreement in writing to submit present or future differences to arbitration. Section 13(2) is mandatory and clearly ousts the agreement from the provisions of UCTA.

Conclusion

44. It follows that this appeal succeeds on the first ground only and I propose to make directions, with the assistance of counsel, to have the issue determined as speedily and economically as possible.
- - - - - - - - -