Between the jigs and the reels
The first judgment delivered under the new Consumer Rights Act dealt with the high-profile case of Michael Flatley v Austin Group Limited and whether an arbitration clause could be imposed upon a ‘consumer’. Graham Kenny does the soft-shoe shuffle
Riverdance star Michael Flatley recently brought proceedings in the commercial division of the High Court arising from damage caused to his home in Cork.
The case is significant, as it was the first time that the High Court considered various provisions of the new Consumer Rights Act 2022, including the question of what constitutes an ‘unfair term’ in consumer contracts.
The High Court also ruled on the enforceability of arbitration clauses in the context of litigation under the 2022 act.
Safety dance
Mr Flatley engaged AON plc to negotiate an insurance policy for his home, which he spent €30 million renovating. He agreed to pay Hiscox Société Anonyme an annual premium of €69,285.
Significantly, he also agreed that if there was any dispute regarding the terms of the policy, then any such dispute would be resolved by arbitration.
Arbitration has a long-standing tradition in Ireland and is governed by the Arbitration Act 2010. It is an alternative dispute resolution process whereby an independent arbitrator is appointed by the parties to hear their dispute.
The arbitrator then considers details of the dispute and issues a binding final determination. Arbitration is often an attractive alternative to litigation due to the speed of its decision-making, potentially lower costs, and its confidential nature.
In response to Mr Flatley’s claims in the High Court, Hiscox applied to refer the dispute to arbitration under article 8(1) of the UNCITRAL Model Law, which has the force of law in Ireland under section 6 of the Arbitration Act 2010.
Article 8(1) states: “A court before which an action is brought in a matter which is the subject of an arbitration agreement, shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”
Mr Flatley claimed that he was entitled to circumvent arbitration and litigate his dispute in the High Court on the basis that he was a consumer when agreeing the terms of his home-insurance policy.
Mr Flatley highlighted the following arbitration clause in his policy and claimed that it amounted to an unfair term in a consumer contract and so was not binding on him: “This insurance is governed by the laws of Ireland. Any dispute arising out of or relating to this insurance, including over its construction and validity, will be referred to a single arbitrator in Dublin in accordance with the Arbitration Act then in force.”
Twist and shout
The 2022 act was a significant piece of legislation that amended and consolidated the law relating to the rights and remedies in contracts between traders and consumers for the sale of goods and supply of digital content and other services. Mr Flatley sought to rely on the new provisions of the 2022 act.
In particular, he relied upon section 129(1), which states: “An unfair term of a consumer contract is not binding on the consumer.”
Section 132(1) of the 2022 act defined the meaning of ‘unfair’ as follows: “a term of a consumer contract shall always be unfair if its object or effect is … (d) to exclude or hinder a consumer’s right to take legal action or exercise a legal remedy, including by requiring the consumer to take a dispute to an arbitration procedure that is not governed by law, (e) to require a consumer to pay his or her own costs in respect of any arbitration.”
It was not disputed by the insurers that Mr Flatley was acting as a consumer within the meaning of the 2022 act, on the basis that he was acting “for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession”, as per section 2(1) of the 2022 act.
The dispute therefore centred primarily on whether the arbitration clause in the policy was unfair within the meaning of the 2022 act.
Let’s dance
Mr Flatley argued that the arbitration clause was unfair because it did not make it clear that the arbitration would be at no cost to him – that is, if he lost the arbitration, he would not be liable for the defendant’s costs.
The court considered that the thrust of Mr Flatley’s claim was that the reference to paying ‘his own costs’ in section 132(1) meant that, for an arbitration clause in a consumer contract to be fair, the arbitration could never be at a cost to a consumer.
The court resoundingly rejected this reasoning, noting that a consumer could decide to institute baseless or groundless arbitration proceedings against a trader, and the trader would have to discharge the trader’s own legal costs for winning the arbitration, but also pay the consumer’s legal costs for bringing the baseless/groundless claim.
Mr Justice Twomey concluded as follows: “The arbitration clause in this case makes no such reference to Mr Flatley having to pay his own legal costs of the arbitration. Indeed, it makes no reference to costs at all. Accordingly, applying the express language of section 132(1) to the facts of this case, there is no term in the arbitration clause which ‘requires a consumer to bear his or her own costs’.”
Interestingly, the court noted the important role that the threat of legal costs plays in discouraging unmeritorious claims in a litigation context and that to accept Mr Flatley’s arguments would mean that such a disincentive would not apply to consumer arbitration.
The court highlighted the perverse consequences this may have in operating as an incentive to bring unmeritorious claims in consumer arbitration.
Harlem shuffle
Mr Flatley also advanced the argument that the arbitration clause was an unfair term on the basis that it was “not governed by law” and thus violated section 132(1)(d) of the 2022 act.
In dismissing this claim, the court relied upon the 2006 case of Marshall v Capital Ltd t/a Sunworld, which held that arbitrations in Ireland that are carried out pursuant to the Arbitration Act 2010 are governed by law.
The court noted Justice Murphy’s comments as follows: “The arbitrator has no power to disregard the law. While he or she has a wide measure of discretion to decide how a dispute is to be resolved, such decisions must be according to the law unless the parties agree to an arbitrator acting as amiable compositeur, the arbitrator must conduct the case according to rules of law.”
Mr Flatley relied on a variety of other clauses within the 2022 act to claim that the arbitration clause was not ‘transparent’ and was therefore unenforceable, as per section 134.
Section 134(2) states: “A term of a consumer contract is transparent if … (c) the term is made available to the consumer in a manner that gives the consumer a reasonable opportunity to become acquainted with it before the conclusion of the contract, irrespective of whether or not such an opportunity is availed of ... (e) any costs or other financial consequences deriving from the term would be comprehensible to the average consumer.”
The court rejected the argument that the arbitration clause was not transparent, on the basis that the claim was based upon a misinterpretation of – that is, that the arbitration should be at no cost to Mr Flatley and that his lawyers’ fees should be paid, even if he lost.
As no such wording could be read into the clause, there was no issue of a lack of transparency regarding its meaning.
Hips don’t lie
Finally, Mr Flatley claimed that the arbitration clause was unenforceable due to an absence of good faith.
In this regard, Mr Flatley relied upon section 130(1) of the 2022 act, which states: “A term of a consumer contract is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties rights and obligations under the contract to the detriment of the consumer.”
In support of this claim, Mr Flatley highlighted that the providers of insurance had determined to terminate his policy before its expiry date, and that this amounted to bad faith within the context of section 130(1).
The court again rejected this reasoning and held that the termination of a contract does not impact on whether a consumer contract contains an unfair term or not.
The arbitration clause is either an unfair term or it is not an unfair term and, as such, a decision by the insurer to terminate the policy has no impact on whether it is unfair.
Mr Justice Twomey concluded as follows: “[Mr Flatley] agreed to arbitrate any dispute he had with Hiscox. However, he is seeking to avoid his responsibility to Hiscox, by now seeking to litigate his dispute with Hiscox.
"For this reason, this court has little hesitation in referring this dispute to arbitration, particularly as there is nothing ‘unfair’ in the possibility of Mr Flatley having to pay his own legal costs and those of Hiscox, if an arbitrator finds against him in his claim against Hiscox.”
Dancing in the moonlight
Mr Flatley’s legal fancy footwork, while ultimately unsuccessful, has provided practitioners with a wealth of knowledge in relation to how the Irish courts will interpret issues such as alleged unfair terms, lack of transparency, and traders not acting in good faith with regards to consumers.
It is interesting that there does not appear to have been any reference to European case law in this matter, which arguably could have created a more consumer-orientated lens through which to view the relevant facts.
It is also significant to note the recognition by the court of the contractual choice of the parties to opt out of litigation and determine to resolve their dispute through arbitration.
The enforcement by the High Court of such arbitration clauses will contribute to Ireland’s attractiveness as a venue for the hearing of future international disputes.
Graham Kenny is a partner in dispute resolution and litigation in Eversheds Sutherland LLP
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Graham Kenny
Graham Kenny is a partner in dispute resolution and litigation in Eversheds Sutherland LLP