Month: February 2023

In this post, Lisa Fox, a senior associate in the litigation team at CMS, previews the decision awaited from the Supreme Court in London Borough of Merton v Nuffield Health Ltd.

Factual Background

Nuffield Health acquired Merton Abbey (the “Premises”) on 1 August 2016, when it bought the business of Virgin Active. It applied to the London Borough of Merton (“Merton”) for mandatory and discretionary rate relief. The application for mandatory relief was granted initially (representing 80% of the rates otherwise payable). However, following a visit by Council officers in November 2016, Merton withdrew the relief on the basis that the Premises was not being wholly or mainly used for charitable purposes.

Nuffield Health is a registered charity established “to advance, promote, and maintain health and health care of all descriptions and to prevent, relieve and cure sickness and ill health of any kind, all for the public benefit.” Among other things, it runs 112 fitness and wellbeing centres, including the Premises. The facilities at the Premises are primarily available to fee-paying Nuffield Health Gym members.

The issue before the judge in the High Court was whether Nuffield Health is entitled to mandatory relief from non-domestic rates in respect of its occupation of the Premises under the Local Government Finance Act 1988 (the “1988 Act”), s. 43(6)(a) of which applies where:

“the ratepayer is a charity or trustees of a charity and the hereditament is wholly or mainly used for charitable purposes (whether of that charity or of that and other charities).”

The High Court found in Nuffield Health’s favour, holding that the charity is and, at all times since 1 August 2016, has been entitled to mandatory relief from non-domestic rates in respect of the Premises. Merton appealed to the Court of Appeal.

Court of Appeal

Merton’s appeal of the High Court’s decision was advanced on four grounds as follows:

Ground 1 is that the judge was wrong to hold that Nuffield Health was not required to show that the Premises were being used for the public benefit, as an aspect of showing that the Premises were being used wholly or mainly for its charitable purposes.
Ground 2 is that the judge failed to apply the correct standard of public benefit for Nuffield Health’s use of the Premises.
Ground 3 is that, even if he applied the correct standard, the judge erred in his evaluation of whether the public benefit requirement was satisfied.
Ground 4 is that the judge was wrong to conclude that the Premises were not being used wholly or mainly for fundraising.

Grounds 2 and 3 arise only if Merton is successful on Ground 1, while Ground 4 can be seen as a free-standing ground.

Ground 1

In the appeal, as in the High Court, Merton relied on the express terms of section 43(6)(a) (“the hereditament is wholly or mainly used for charitable purposes (whether of that charity or of that and other charities)“), read with sections of the Charities Act 2011 (the “2011 Act”), ss. 2 and 4 which require a charitable purpose both to fall within the list in the 2011 Act, s. 3(1) and to be “for the public benefit” (as explained in the 2011 Act, s. 4). Merton claimed the judge was wrong to treat the public benefit as relevant only to the purpose or status of the charity, and not to the use of the hereditament. It was incumbent on Nuffield Health to show that its use of the Premises was not only for the advancement of health but was also for the public benefit.

Nuffield Health submitted that it was the duty of charity trustees to operate the charity to advance the public benefit and that, in assessing whether trustees were performing that duty, the correct approach was to look at the activities of the charity as a whole. The requirement under s. 43(6)(a) was that the hereditament be used wholly or mainly in the pursuit of charitable purpose(s), and this was to be judged by reference to the activities of the charity as a whole. Nuffield Health argued that the use of the Premises viewed in isolation does not have to be charitable, but it must be of material benefit to the delivery by the charity of its charitable purposes. Relying on Oxfam v Birmingham City Council [1976] AC 126 (“Oxfam”), it was submitted that the rating authority simply needed to consider whether the user of the premises was using them for charitable purposes or for investment or fundraising purposes.

Lord Justice Jackson took a purposive approach and preferred the broader construction of s. 43(6)(a) that treats the charitable purpose including the public benefit requirement as being part and parcel of the status of the charity ratepayer. To sense check this conclusion, he also looked at the legislative history behind the 1988 Act including the Pritchard Report which led to the Rating and Valuation Act 1961 for insights into the legislative purpose. He concluded, in particular by reference to the Pritchard Report’s general preference for clear, broad-brushed solutions over some anomalies in terms of the organisations that are eligible for rate relief that may otherwise be considered underserving, that eligibility for rate relief could be challenged at the level of charitable status by a local authority.  Lord Justices Jackson and Nugee agreed that the case law (Oxfam and Glasgow Corporation v Johnstone [1965] AC 609) did not support an argument that Nuffield Health must show that there is a public benefit specifically at the premises in question. They also preferred the arguments that local authorities are ill-suited and -qualified to judge whether a charity is performing its responsibilities, and that the Charity Commission as regulator is best placed to do this. Lord Justice Nugee summarised that the question would be best framed, on the basis of statutory interpretation of s. 43(6)(a) as whether the charity was using the premises for a purpose which is one of its charitable purposes (rather than whether the use constitutes the charitable purpose). Lord Justices Jackson and Nugee dismissed the appeal on this ground by a majority.

Ground 3

The Lord Justices agreed that Ground 2 was not the correct question to answer on the facts and therefore focussed on Ground 3.

Under this ground, Merton argued that Nuffield Health needed to show that it was using the Premises for the public benefit and that it failed to do so, by reason of the level of membership fees and the absence of any sufficient public benefit in the provision of services to non-members.

In examining this question, Lord Justice Richards considered case law on the meaning of ‘poor’ in Re Resch’s Will Trusts [1969] 1 AC 514 and on the extent of public benefit required in R (Independent Schools Council) v Charity Commission [2011] UKUT 421. He established that in order to be for the public benefit, a charity must not exclude the poor (the meaning of poor to include those of modest means and not to equate to ‘destitute’), and that provision for the poor must go beyond a de minimis or token benefit. No one size fits all amount of benefit is prescribed, rather, in any given case, it is for the trustees, in accordance with their obligations, to decide the level of benefit that would be adequate which any reasonable trustee could be expected to provide. While Lord Justice Richards found that there was a lack of evidence for the judge’s finding that monthly fees were affordable to those of modest means in the demographic which Nuffield Health was serving at the Premises, he considered it was relevant that other gyms in the area were offering similar services and facilities at materially lower membership charges, as this suggested there was a demand at more affordable levels. He then went on to consider evidence adduced by Nuffield Health regarding services provided to members of the public free of charge. These services included Health MOTS, Meet our Experts sessions and free one-day gym passes, as well as access for local schools to the pool for a charge. Lord Justice Richards concluded that the services available to non-members were very limited. In many cases, he found them to be typical of services provided by commercial operators for promotional reasons, and as such he deemed them token and therefore insufficient to satisfy the public benefit and charitable use test.

This was the unanimous view of the three Lord Justices, with Lord Justice Jackson commenting obiter that Nuffield Health’s failure on Ground 3 may not be without consequences in the context of charity law given that its trustees are obliged to satisfy themselves in good faith that its provision is for the public benefit.

Ground 4

Ground 4 concerned whether the first instance Judge had been wrong to find that the Premises were not being used for fundraising. Lord Justice Richards found that because this case was concerned specifically with the use of the Premises (rather than gyms operated by Nuffield Health more generally) this ground would succeed only if Nuffield Health’s main use of the Premises was fundraising. Merton had not adduced evidence to show the budgeted and actual income and surplus generated by the operations at the Premises, and the uses to which Nuffield Health put any surplus. Even if that evidence had been before the court, the mere existence of a surplus does not automatically mean that the premises in question are being used mainly for fundraising. In addition it was not for Nuffield Health to prove the negative proposition, so he found against Merton.

By a majority (Lord Justices Jackson and Nugee, with Lord Justice Richards dissenting on Ground 1), the Court of Appeal dismissed Merton’s appeal.

Supreme Court

The Supreme Court gave Merton permission to appeal this decision. Lord Briggs, Lord Kitchin, Lord Sales, Lord Hamblen and Lord Leggatt will hear the appeal on 7 and 8 March 2023. The Supreme Court is asked to decide whether Nuffield Health is entitled to this mandatory relief in respect of its occupation of premises at Merton Abbey. The decision in the Supreme Court is likely to revisit Grounds 1 and 3 from the Court of Appeal decision, with the ultimate relevance of Ground 3 anticipated to again depend on how the Supreme Court decides on Ground 1.

On appeal from: [2021] EWCA Civ 91

Under the Value Added Tax Act 1994 (the “VAT Act“), “newspapers” are “zero-rated”, meaning Value Added Tax (“VAT“) is not charged on them. The question in this case is whether, between 30 August 2010 – 4 December 2016 (the “relevant period“), zero-rating extended beyond print newspapers to digital editions of newspapers, such as editions for e-readers, tablets, smartphones and websites.

News Corp UK & Ireland Ltd (“News Corp“) is the publisher of The Times, The Sunday Times, The Sun and The Sun on Sunday. News Corp argues that the digital editions of these publications were subject to zero-rate VAT for the relevant period, as they are “newspapers” for the purposes of the VAT Act. Commissioners for His Majesty’s Revenue and Customs (“”HMRC“) found that News Corp was not entitled to supply these digital editions at zero-rate VAT. News Corp appealed these decisions. The First-tier Tribunal found that digital editions are not “newspapers” for the purposes of the VAT Act, and so rejected News Corp’s claim for recovery of over £35 million. The Upper Tribunal allowed News Corp’s subsequent appeal. HMRC appealed to the Court of Appeal, which allowed its appeal. News Corp now appeals to the Supreme Court.

 

HELD – Appeal unanimously dismissed.

 

The issues in this case require the Supreme Court to apply principles of statutory interpretation and European Union law, since the relevant EU law has become “retained law”, and in any event the relevant period in this case expired before EU law would have ceased to apply.

The modern approach to statutory interpretation requires the courts to ascertain the meaning of the words used in light of their context and purpose. A statute should be interpreted taking into account changes that have occurred since it became law, even if those changes could not have been reasonably foreseen at the time the statute was enacted. This is known as the “always speaking principle”. Exceptionally, the always speaking principle will not be applied where it is clear, from the words used in the statute in the light of their context and purpose, that the relevant provision is tied to a historic interpretation.

With regard to EU law, it is well established that zero-rating provisions must be interpreted strictly, because they constitute exemptions to the general principle that supplies of goods and services by taxable persons should be subject to VAT. The need for strict interpretation is particularly marked where, as in this case, it does not involve mandated EU exemptions, but rather national law exceptions. The interpretation is also constrained by Article 110 of the Principal VAT Directive 2006/112 (the “standstill provision“), which requires that, so far as this appeal is concerned, categories of zero-rating cannot be expanded or extended beyond those which existed on 31 December 1975.

With these principles in mind, the starting point is the ordinary meaning of the word “newspapers” in its context as at 31 December 1975. At that date, “newspapers” referred only to printed newspapers. Those were the only kind of newspapers which existed at that time and digital editions lay many years in the future.

As for the purpose of the zero-rating of newspapers, the First-tier Tribunal found as a matter of fact that the social policy behind the zero-rating of newspapers was the promotion of literacy, the dissemination of knowledge and democratic accountability. However, while that social purpose might also extend to digital editions, that finding is of limited assistance in determining the correct interpretation of “newspapers” because that same purpose could equally apply to many items that cannot possibly be covered by the word “newspapers”, for example an online rolling news service. From the perspective of EU law, the purpose of the standstill provision was to prevent social hardship likely to follow from the abolition of existing national law exemptions. No social hardship could follow from the exclusion of digital editions from the ambit of the standstill provision as, at the time, nobody had access to them. Moreover, zero-rating for newspapers was seen as a transitional phase with the ultimate purpose being harmonisation across the EU with no VAT exemptions at all. This purpose, consistently with the strict approach to exemptions and the effect of the standstill provision, indicates that a narrow meaning should be given to the word “newspapers”.

In this case the always speaking principle must be applied having regard to the EU law constraints imposed by the standstill provision, the principle of strict interpretation of VAT exemptions and the harmonising purpose of the law on VAT. These constraints significantly limit the always speaking principle and mean that it should not be applied liberally. As at 31 December 1975, the defining characteristics of a newspaper included: that it was news communicated through the medium of print in a physical form; and that the buyer of the newspaper obtained complete access to the news in that paper. There was no requirement of connectivity, so that access did not depend on owning or buying something else, such as a device. Those characteristics reflect a conceptual difference between newspapers, which are goods, and digital editions, which are services. The difference is one of kind, not merely degree. Given the significant difference, it cannot be said to be irrational to distinguish between the VAT treatment of printed newspapers and digital editions, and the rationality of such a distinction is borne out by the fact that it is drawn in EU VAT law. Having regard to the constraints of EU law, the always speaking principle cannot be applied to interpret “newspapers” as covering digital editions.

For these reasons, the Court concluded that the term “newspapers” in the VAT Act is not to be interpreted as including digital editions.

For the judgment, see:

Judgment (PDF)
Judgment on The National Archives (HTML version)
Judgment on BAILII (HTML version)

In this post, Rachel Free (Partner), Toby Sears (Partner) and Omri Shirion (Associate) of the CMS Intellectual Property team, preview the UK Supreme Court’s upcoming hearing of Thaler v Comptroller-General of Patents, Designs and Trade Marks. This case concerns the treatment under the Patents Act 1977 (the “1977 Act”) of inventions created by artificial intelligence (“AI”) machines in the absence of a human inventor.

The Appellant, Dr Stephen Thaler, previously appealed a decision of the UK Intellectual Property Office (“UKIPO”) that two UK patent applications should be deemed withdrawn because they named an AI machine, ‘DABUS,’ as the inventor. This decision was upheld by the High Court and subsequently by the Court of Appeal. Dr Thaler’s main argument was that DABUS should be named as an inventor, and that he, as the owner of the AI machine, should be able to apply for a patent on behalf of DABUS through the common law doctrine of accession. This argument was rejected by the Court of Appeal in [2021] EWCA Civ 1374. Dr Thaler has appealed the Court of Appeal decision to the Supreme Court, with a hearing date of 2 March 2023.

Background

The patent applications which are the subject of the appeal are GB1816909.4 and GB1818161.0 (concerning a food/beverage container and a light beacon respectively). No substantive issues were raised by the UKIPO with respect to the content of the patent applications (i.e. the inventions were presumed patentable). Section 13(2) of the 1977 Act requires a patent applicant to file at the UKIPO a statement identifying the ‘person or persons’ whom they believe is the ‘inventor or inventors’ of the invention which is the subject of the patent application. Where the applicant is not the same person as the inventor, they must also indicate the derivation of their right to be granted the patent. Ordinarily, this procedural requirement is not a challenge for patent applicants. However, as in this instance the inventions were created by an AI machine (rather than a natural person), the applications were filed in the name of the Appellant, alongside statements of inventorship explaining that DABUS, the AI machine, was considered to be the inventor and that the Appellant, as the owner of DABUS, derived the right to be granted the patents through the common law doctrine of accession. This raised the issue of whether such a machine could qualify as an ‘inventor’ for the purpose of Section 13(2) of the 1977 Act. It is worth also noting that the Appellant has litigated this issue (although with limited success) in various jurisdictions, including in Germany, at the European Patent Office (“EPO”), the United States, New Zealand, Taiwan, India, South Korea, Israel and Australia.

The UKIPO decided that DABUS could not be named as an inventor as only a natural person could be an inventor. It also stated that there is no valid chain of title from DABUS to the Appellant. This reasoning was subsequently upheld by both the High Court and the Court of Appeal.

The Appellant’s arguments

The Appellant has appealed the Court of Appeal’s decision on three bases:

That he is entitled to be granted patents for inventions created by DABUS. More generally, the owner of an AI machine is entitled to inventions generated by that machine and therefore to the grant of patents for those inventions, where they are patentable;
Section 13(2) of the 1977 Act does not require an applicant to name a natural person as an inventor; and
The Appellant had therefore satisfied Section 13(2) of the 1977 Act.

With respect to the first ground, the Appellant argues that there is a property right in an invention, which is distinct from the property right in a patent or patent application. The Appellant concurs with Birss LJ’s view in the Court of Appeal decision that the property right in an invention arises at the time the invention is created. Dr Thaler also submits that the right to be granted a patent differs from the right to an invention; from the right to an invention, one derives at least the right to the potential grant of a patent.

Given that the 1977 Act creates property in an invention and the Appellant owns DABUS, the Appellant submits that he is entitled to the patents via the common law doctrine of accession. In addition, Dr Thaler argues that first possession is widely recognised as a basis for ownership of unowned property and that he was the first rightful possessor of the inventions. As a result, he is entitled to the property rights in the inventions. Finally, the Appellant argues that if there is no proprietor of an invention created by an AI machine, then the owner of that machine would be unable to prevent the grant of a patent to a third person who illegitimately files a patent application for that invention.

As relates to the second ground, the Appellant argues that even if the 1977 Act requires a human inventor to be disclosed, this is not a substantive requirement concerning the patentability of an invention; Section 13(2) of the 1977 Act being a procedural requirement only. Moreover, the wording of the European Patent Convention (“EPC”) does not distinguish between human and non-human inventors, and EPO caselaw has previously established that AI-generated inventions are patentable. The Appellant submits that the UK is bound by the EPC and the substantive sections of the 1977 Act are framed to have, as far as possible, the same effects as the EPC.

Finally, the Appellant’s third argument is that Section 13 of the 1977 Act requires only the belief that a person is an inventor, and even if an AI machine cannot be designated an inventor, the UKIPO is not granted the power to investigate this by the 1977 Act. The Appellant also submits that Section 13(2) of the 1977 Act does not require proof of a patent applicant’s entitlement and similarly, that the UKIPO also cannot investigate this.

Preview of potential outcomes

As was stressed by Birss LJ in the Court of Appeal decision under appeal, although this case appears to be about whether AI machines can make patentable inventions, it in fact relates to determining the correct way for the UKIPO to process patent applications where the invention has been created by an AI machine. In fact, whether the inventions created by DABUS were patentable is not a disputed issue, there being no substantive issues with the patent applications.

However, the Supreme Court’s decision may still have far-reaching consequences for the protections available for AI-created inventions in the UK. If the Court of Appeal’s decision is upheld, then it would be unclear how AI-created inventions could be protected with patents in the UK (i.e. if neither the AI, nor its human owner can be named the ‘inventor’ and one must be named in a patent application). On the other hand, the appeal may be successful, with the human owner of DABUS being the first owner of the inventions and deriving the right to the grant of a patent for the AI-created inventions. This would provide greater certainty of legal protection for AI-created inventions and would encourage investment and innovation in this technological space. No matter which outcome is reached, a reasoned decision from the Supreme Court will be extremely useful to guide development of the law in the nascent field of generative AI tools.

Hearings in the Supreme Court are now shown live on the Court’s website.

On Monday 20th and Tuesday 21st February 2023, the Court will hear the case of Lifestyle Equities C.V. and another v Ahmed and another, on appeal from [2021] EWCA Civ 675. The case concerns two issues; 1) What is the nature and extent of the liability of a director, or senior executive employee, for causing a company to commit a civil wrong, for which a claim can be brought without a finding of fault by the wrongdoer (e.g. a ‘strict liability tort’)? Here, the strict liability tort was trademark infringement. 2) If a director is legally responsible for the tort, can they be ordered to pay profits made as a result of the tort to the wronged part (e.g. a ‘account of profits’), even if those profits were not personally received? Does this extend to the director paying back the portion of their salary that was attributable to the tort? The hearing will begin at 11am in Courtroom 1.

On Wednesday 22nd February 2023 the Court will hand-down the judgment in News Corp UK & Ireland Ltd v Commissioners for His Majesty’s Revenue and Customs [2023] UKSC 7. The Court will determine whether the Court of Appeal erred in finding that News Corp’s supplies of digital issues of The Times, The Sunday Times, The Sun and The Sun on Sunday were not supplies of “newspapers” within the meaning of the Value Added Tax Act 1994 (the “VAT Act”) such that they could not be zero-rated for Value Added Tax (“VAT”) during the period 30 August 2010 – 4 December 2016. The hand-down will take place at 9:45am in Courtroom 1.

On Wednesday 22nd and Thursday 23rd February 2023, the Court will hear the case of Morgan and others v Ministry of Justice (Northern Ireland), on appeal from [2021] NICA 67. The Court will consider whether section 30 of the Counter Terrorism and Sentencing Act 2021 is incompatible with Articles 5, 6, and/or 7 of the ECHR, and if so, what (if any) remedy is appropriate. The hearing will begin at 10:30am in Courtroom 1.

The following Supreme Court judgments remain outstanding: (As of 24/02/23)

The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) Nos. 2 and 3, heard 9-12 December 2019
East of England Ambulance Service NHS Trust v Flowers and Ors, heard 22 June 2021
Canada Square Operations Ltd v Potter, heard 14th June 2022
R (on the application of VIP Communications Ltd (In Liquidation)) v Secretary of State for the Home Department, heard 4th October 2022
Unger and another (in substitution for Hasan) v Ul-Hasan (deceased) and another, heard 20th October 2022
Chief Constable of the Police Service of Northern Ireland and another v Agnew and others (Northern Ireland), heard 14th-15th December 2022
Smith and another v Royal Bank of Scotland, heard 12th January 2023
Moulsdale t/a Moulsdale Properties v Commissioners for His Majesty’s Revenue and Customs (Scotland), heard 17th January 2023
Republic of Mozambique (acting through its Attorney General) v Privinvest Shipbuilding SAL (Holding) and others, heard 24-25th January 2023
Rakusen v Jepson and others, heard 26th January 2023
Trustees of the Barry Congregation of Jehovah’s Witnesses v BXB, heard 13th February 2023
R (PACCAR Inc and others) v Competition Appeal Tribunal and others, heard 16th February 2023.
Lifestyle Equities C.V. and another v Ahmed and another, heard 20th February 2023
Morgan and others v Ministry of Justice (Northern Ireland), heard 22nd February 2023

In this post, Henry Powell (Associate) and Antoni Hajdon (Of Counsel) in the Real Estate Disputes team at CMS, comment on the case of Barton & Ors v Morris & Anor in place of Gwyn Jones (deceased) [2023] UKSC 3 – handed down on 25 January 2023.

The Supreme Court allowed the appeal by a majority given in the judgment of Lady Rose. The case considered whether payment of commission / renumeration fell due where the only term for payment that was clearly agreed between the parties was not fulfilled. The use of implied terms or unjust enrichment to fill the gaps in the parties’ agreement split the Supreme Court and the courts below.

Background

Mr Barton and his affiliates (“Barton”) had for some years tried to purchase a property, Nash House, London, from the seller, Foxpace Ltd (“Foxpace”). The property had proved a problem to sell. Contracts were first exchanged between Foxpace and Barton’s consortium in December 2012 for a price of £6.3 million but Foxpace rescinded the contract the following May. Then, in June 2013, the parties exchanged contracts for a second time at a price of £5.9 million but this was also rescinded by Foxpace when Barton had difficulty in proceeding. Barton had outlaid in lost deposits and costs the sum of £1.2 million.

Shortly after the second sale fell through the parties discussed how Barton might recover his wasted outlay. As Barton had found a potential new purchaser for the property, Western UK (Acton) Limited (“Western”), it was agreed with Foxpace that Barton would be paid £1.2m for introducing that purchaser to Foxpace provided the sale completed at a price of £6.5 million or more. There was no agreement on the level of renumeration if the sale completed at a lower price.

Documents were drawn up for the sale of the property to Western for a price of £6.5 million. However, in August 2013 Western became aware that the property was within an area safeguarded for the construction of the HS2 rail link. Western and Foxpace renegotiated the contract for sale at a price of £6 million. Contracts were exchanged in September 2013 and the sale completed at that lower price.

Barton maintained that Foxpace owed him £1.2 million. Foxpace went into liquidation in May 2017 and convened a meeting of creditors. Rejecting Barton’s proof of debt, Foxpace recorded the debt in the sum of £1.

Decisions of the lower courts

Barton sought relief in the High Court, claiming £1.2 million in contract or, alternatively, due to an unjust enrichment of Foxpace.

HHJ Pearce, sitting as High Court Judge, held that Barton was not entitled to any payment. There was no written agreement on which either party could rely; rather, the trial judge found a binding oral agreement. The oral agreement was that Barton would be paid £1.2 million for making the introduction if Western bought the property for at least £6.5 million. The agreement did not provide for what would happen if the sale completed for anything less than that sum. HHJ Pearce decided that, in those circumstances (i.e. the silence of the contract regarding a sale at less than £6.5 million), Foxpace was not contractually obliged to pay anything to Barton.

The claim in unjust enrichment was rejected on the basis that such a claim would undermine the contractual terms agreed between the parties, which was beyond the principle in Macdonald Dickens & Macklin (a firm) v Costello & Ors [2012] QB 244. However, HHJ Pearce assessed that, if his decision regarding unjust enrichment was overturned on appeal, the reasonable fee that would be payable to Barton was £435,000.

The Court of Appeal allowed Barton’s appeal. Asplin LJ, with whom Males LJ and Davis LJ concurred, held that the contract was silent as to what happened if the property sold for less than £6.5 million and so a claim in unjust enrichment would not undermine the express terms of the contract. Foxpace would be unjustly enriched if it received the benefit of the introduction to Western without paying Barton a reasonable fee and the court gave judgment on that basis for the sum assessed by HHJ Pearce.

The Court of Appeal also suggested in obiter comments that there was scope for the implication of a term into the contract for a reasonable fee to be paid to Barton if the property sold for less than £6.5 million.

Foxpace appealed to the Supreme Court. By that time, Foxpace was in liquidation as its sole director, Mr Gwyn Jones, had died – the appellants, Morris and another, were his personal representatives.

The Supreme Court’s findings

Lady Rose, with whom Lord Briggs and Lord Stephens agreed, gave the majority judgment allowing Foxpace’s appeal.

The oral agreement was a unilateral contract

The Supreme Court noted that HHJ Pearce had found as a matter of fact that there was an oral contract between Barton and Foxpace. The judge did not find that it was an express term of the agreement that Barton would be paid a fee if the property was sold for less than £6.5 million. Barton was under no obligation to make the introduction of Western to Foxpace. Nothing would have happened under the contract if he did not disclose the name or took no steps to involve Western in the transaction.

Accordingly, the parties had entered a unilateral contract and its express terms were that if the property did sell to Western for at least £6.5 million then Foxpace would be obliged to pay Barton £1.2 million.

A term should not be implied into the contract

Lady Rose looked at two bases on which terms can be implied into contracts, specifically if the court finds that there should be:

1. Terms implied as a matter of fact (e.g. those necessary to give business efficacy to the contract or so obvious that they go without saying).

In this case the majority in the Supreme Court considered that the contract worked without the implication of any terms to protect Barton in the event of the property selling for less than £6.5 million. Simply put, it was a risky bargain and the court should not interfere with the parties’ allocation of risk. Barton would recover a very large fee if the property sold for £6.5 million (or more) but nothing if it did not. It was not obvious what the parties would have agreed should happen in the event that the property sold for less than £6.5 million and it was not necessary to imply a term to give business efficacy to the contract.

2. Terms implied as a matter of law (e.g. the term is an incident of the particular kind of contract or there is a statutory interpolation of a term into an agreement).

Lady Rose noted that the fee of £1.2 million was several times the reasonable fee for the introduction and was calculated on the basis of recouping Barton’s losses from the two abortive purchases of the property that he had been involved in previously. This particular set of facts combined with the fact that Barton was not acting as an estate agent meant that this was not a contract of a particular type which warranted the implication of a term regarding renumeration.

Lady Rose also considered the Supply of Goods and Services Act 1982, s 15 (as amended by the Consumer Rights Act 2015, s 100(5)). The majority in the Supreme Court decided that section 15 did not imply a term into the contract predominantly because section 15 is directed to contracts where no consideration or price is fixed by the contract, however, the agreement between Barton and Foxpace did fix the consideration in the event of the target price being met or exceeded in the sale.

Unjust enrichment

Unjust enrichment has four elements, three of which were not in dispute in this case. Unsurprisingly, the disputed element was whether or not the enrichment was unjust. The unjust factor that Barton relied on was a failure of basis. The basis, on Barton’s case, was that the property would be sold for £6.5 million and that the parties both assumed this would happen. When that failed to happen (i.e. the sale completed at a lower price) the basis failed.

The majority in the Supreme Court were wary of allowing a remedy via unjust enrichment that would redistribute the risks which, they considered, the parties had provided for in their agreement. In rejecting the claim based on unjust enrichment the court had regard to many of the same factors it found relevant when rejecting the implication of a term as a matter of fact. In short, where a contract stipulates what circumstances must occur in order to impose a legal obligation to pay (thus allocating risk if that event does not occur) that necessarily excludes any obligation to pay in the absence of those circumstances (either an obligation to pay via an implied term or due to unjust enrichment).

Dissenting judgments

Interestingly, a fundamental reason why Lord Leggatt and Lord Burrows disagreed with the majority, is that they viewed the meaning of silence in the contract in a very different way.

Lady Rose considered that the silence of the contract, in relation to Barton’s renumeration where the sale completed for less than £6.5 million, meant that no obligation to pay should arise. Lord Leggatt and Lord Burrows considered that a term should be implied as a matter of law, that a reasonable renumeration should be paid, and that the silence in the contract on this point meant that such an implied term was not excluded by the parties.

Comment

Deciding where the balance between certainty and fairness lay in this case split the justices of the Supreme Court in addition to the lower courts on appeal. This judgment suggests the majority believe it should fall with the former – that a gap in a commercial contract was intended and so the law cannot assist the party who comes out of a bad deal badly.

This approach echoes the earlier decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor (Rev 1) [2015] UKSC 72. The court will respect the bargain struck by the parties and will only imply a term into it if it is absolutely necessary, and only the least onerous term needed to achieve the objective of giving business efficacy to the deal if it does.

In the light of this decision, parties negotiating a deal may want to consider and agree what will happen if the primary plan does not come together.

Hearings in the Supreme Court are now shown live on the Court’s website.

This week, the Supreme Court is hearing two cases.

On Monday 13th and Tuesday 14th February 2023, the Court will hear the case of Trustees of the Barry Congregation of Jehovah’s Witnesses v BXB, on appeal from [2021] EWCA 356. The Court of Appeal found that the Trustees were vicariously liable for a rape committed by one of their elders, and the Trustees are appealing against this decision. The hearing will take place in Courtroom One, with the Tuesday sitting being a half day.

On Thursday 16th February 2023, the Court will hear R (PACCAR Inc and others) v Competition Appeal Tribunal and others. This case considers litigation funding agreements known as ‘damages-based agreements’, whereby the funder is entitled to recover a percentage of any damages recovered in a claim, and whether they fall within the meaning of the legislation which regulations such agreements. The judgment being appealed can be found at [2021] EWCA Civ 299.

Further details of the hearings can be found on the Supreme Court’s listings page.

The following Supreme Court judgments remain outstanding: (As of 16/2/23)

The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) Nos. 2 and 3, heard 9-12 December 2019
East of England Ambulance Service NHS Trust v Flowers and Ors, heard 22 June 2021
Fearn and others v Board of Trustees of the Tate Gallery, heard 7th December 2021
Canada Square Operations Ltd v Potter, heard 14th June 2022
R (on the application of VIP Communications Ltd (In Liquidation)) v Secretary of State for the Home Department, heard 4th October 2022
Unger and another (in substitution for Hasan) v Ul-Hasan (deceased) and another, heard 20th October 2022
Chief Constable of the Police Service of Northern Ireland and another v Agnew and others (Northern Ireland), heard 14th-15th December 2022
Smith and another v Royal Bank of Scotland, heard 12th January 2023
Moulsdale t/a Moulsdale Properties v Commissioners for His Majesty’s Revenue and Customs (Scotland), heard 17th January 2023
Republic of Mozambique (acting through its Attorney General) v Privinvest Shipbuilding SAL (Holding) and others, heard 24-25th January 2023
Rakusen v Jepson and others, heard 26th January 2023
Trustees of the Barry Congregation of Jehovah’s Witnesses v BXB, heard 13th February 2023
R (PACCAR Inc and others) v Competition Appeal Tribunal and others, heard 16th February 2023.

In this post, Jack Prytherch, Of Counsel in the Tax team at CMS, previews the decision awaited from the Supreme Court in Commissioners for His Majesty’s Revenue and Customs v Vermilion Holdings Limited. The appeal was heard by the Supreme Court on 7 February 2023.

The Supreme Court was asked to consider whether the grant of an option to acquire share capital in the appellant (“VHL”) to one of its directors should be treated as an employment-related securities option for the purposes of section 471 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”), and thus chargeable to income tax and national insurance contributions (“NICs”). References below to legislation are to ITEPA unless stated otherwise.

Background

In early 2006, an equity fund raising took place whereby VHL was incorporated and became the new holding company of Vermilion Software Ltd.

Mr Noble, acting through his company Quest Advantage Ltd (“Quest”), advised technology businesses on fundraising, business growth, acquisitions and divestments. Quest produced a business plan and financial projection in respect of the fund raising, while the law firm Dickson Minto were instructed as VHL’s legal advisers. In lieu of fees for their respective services, Quest and Dickson Minto were each granted options to acquire 2.5% of equity in VHL.

By December 2006, VHL was in serious financial difficulty. As part of the rescue package put in place in 2007, it was agreed that Mr Noble would become a director (working 1 to 2 days per week over the following year in return for £4,167 per month).

Under the terms of the refinancing implemented as part of the rescue package, existing equity holders in VHL agreed to their equity stakes being diluted. However, Quest’s and Dickson Minto’s existing options were immune from dilution as their terms referred to an equity percentage rather than a fixed number of shares. To avoid disparity with other equity holders, Quest and Dickson Minto agreed to a reduction in the value of their options in line with the broader dilution, achieved through the lapse of the existing options and Quest/Dickson Minto each being granted new options to acquire 1.5% of equity in VHL (in respect of Quest, the “2007 Option”).

In November 2016, VHL was sold to a US-listed company. In anticipation of that sale, Mr Noble had replaced Quest as the named shareholder under the 2007 Option. Following the exercise of his 2007 Option, Mr Noble then received a payment of £636,238.

Section 471 provides as follows (so far as relevant):

“(1) This Chapter applies to a securities option acquired by a person where the right or opportunity to acquire the securities option is available by reason of an employment of that person…
…
(3) A right or opportunity to acquire a securities option made available by a person’s employer….is to be regarded for the purposes of subsection (1) as available by reason of an employment of that person unless –
(a) the person by whom the right or opportunity is made available is an individual, and
(b) the right or opportunity is made available in the normal course of the domestic, family or personal relationships of that person…”

It was common ground that the exclusions in subsections 471(3)(a) and (b) did not apply. On a literal reading of subsection 471(3), therefore, the fact that Mr Noble was a director of VHL meant that the 2007 Option was an employment-related securities option; meaning that the payment received on exercise would be subject to income tax and NICs (rather than capital gains tax). VHL sought clearance from HMRC that such literal reading should not apply in the circumstances of this case, where (according to VHL) the 2007 Option had simply replaced the earlier option (which HMRC accepted was not an employment-related securities option).

HMRC disagreed and determined that the exercise of the 2007 Option gave rise to a charge to income tax and NICs.

Decisions of the Tribunals

At the first instance appeal, the First-tier Tribunal (Tax Chamber) (“FTT”) held as a matter of fact that Mr Noble’s right to acquire the 2007 Option emanated from the right under the earlier option – it had not been caused “by reason of an employment” within the meaning of subsection 471(1). Contrary to that finding, subsection 471(3) had the effect of deeming the right to have been so caused. The FTT decided that this anomaly gave rise to an injustice. On that basis, having examined case law on the interpretation of deeming provisions, the FTT concluded that subsection 471(3) should be limited in effect in the circumstances of this case.

On further appeal, however, the Upper Tribunal (Tax and Chancery Chamber) (“UT”) held that the FTT had erred in treating as a matter of fact that the right to acquire the 2007 Option emanated from the right under the earlier option. For the purposes of subsection 471(1), the employment need not be the only reason for the grant of the 2007 Option. In this case, it was sufficient that Mr Noble’s employment was a condition of the benefit being granted. On that basis, the UT overturned the FTT’s decision.

Decision of the Court of Session

The Court of Session, by a majority of 2:1, upheld the appeal and restored the FTT’s original decision.

In the majority, Lord Malcolm held that the statutory provisions should be applied in a purposive fashion and adopting a realistic view of the facts. In this case, the 2007 Option was not granted to Mr Noble because he was a director, nor was it a fringe benefit of his employment. Rather, the rescue package and refinancing caused both the directorship and the 2007 Option; they were not a cause of each other. The UT had therefore erred in determining that Mr Noble’s employment was a condition of the benefit being granted. Lord Malcolm also agreed with the FTT on the limited application of subsection 471(3): Parliament did not intend that tax would be payable on the basis that something should be deemed to have occurred by reason of an employment when it had already been established that the employment was not a reason for it.

Lord Doherty, also in the majority, agreed that the FTT was entitled to have concluded that Mr Noble’s right to acquire the 2007 Option had not been caused by reason of his employment, and that the facts in this case did not engage the deeming provision in subsection 471(3). On the facts, it would be “anomalous, absurd and unjust” if the right to acquire the 2007 Option were to be treated as having been made available to Mr Noble by his employer.

Dissenting, Lord Carloway agreed with the UT that Mr Noble’s employment was a condition of the 2007 Option being granted. Lord Carloway also disagreed that the 2007 Option was caught by the legislation only on a “literal” view of subsection 471(3); rather, it was simply affording that deeming provision its plain and ordinary meaning in the statutory context. On that basis, Lord Carloway held that the appeal should be dismissed.

Comment

The decision of the Court of Session was finely balanced. Indeed, Lord Doherty made clear in his opinion that he had initially intended to refuse the appeal but had changed his mind upon further reflection and having read the other Lords’ decisions. It was no surprise then that HMRC were granted permission to appeal.

While the Supreme Court’s eventual decision will undoubtedly have important implications for the interpretation of section 471 and the principles to be applied in respect of deeming provisions more broadly, it is worth remembering that the facts in this case are of course unique. As Lord Carloway’s opinion suggested, VHL and Mr Noble could have potentially structured their arrangement by way an amendment to the existing option (rather than the new grant of the 2007 option) to avoid triggering section 471.

On appeal from [2021] EWCA Civ 21

This appeal concerned the validity of a provision in a lease which allows the landlord to revise the proportion of the overall costs of maintaining the wider estate that a leaseholder should pay by way of a service charge.

The dispute related to long leases of residential flats in a block in Southsea, Hampshire. The leaseholders were required to pay service charges towards the overall costs incurred by the landlord in maintaining the building and wider estate. Each lease provided that the leaseholder was to pay a specific percentage of the overall costs “or such part as the Landlord may otherwise reasonably determine”.

The landlords (Aviva Investors Ground Rent GP Limited and Aviva Investors Ground Rent Holdco Limited) sought to re-apportion the service charges by varying from the percentages specified in the leases. A number of the leaseholders (the Appellants) objected to this and brought a claim in the First-tier Tribunal. They claimed that the re-apportionment was unreasonable and in any event void on account of section 27A(6) of the Landlord and Tenant Act 1985.

Section 27A of the Act allows for disputes relating to service charges in residential leases to be resolved by application to the First-tier Tribunal (in England or the Leasehold Valuation Tribunal in Wales). Section 27A(6) provides that an agreement by a residential tenant “is void in so far as it purports to provide for a determination (a) in a particular manner, or (b) on particular evidence, of any question which may be subject of an application [to the First-tier Tribunal under section 27A] ”. In essence this means that a clause in a lease which gives the landlord the right to determine issues relating to the service charges that ought to be determined by the Tribunal will not be effective, but the exact scope of this provision was in dispute in this case.

The First-tier Tribunal rejected the leaseholders’ complaints. It held that the provision of the leases giving the landlords the ability to vary the proportion of the service charge payable by each tenant was not void. It also determined that the re-apportionments were reasonable.

On the leaseholders’ appeal the Upper Tribunal held that the re-apportionment provision was void on account of Section 27A(6). There was therefore no ability to vary the apportionment and so the leaseholders only had to pay the percentage of the costs originally fixed in their leases unless they agreed otherwise.

On the landlords’ further appeal the Court of Appeal held that the re-apportionment provision was not wholly void. Instead the effect of section 27A(6) was to transfer the discretion to vary the service charge proportions from the Landlord to the First-tier Tribunal. It therefore allowed the appeal and restored the decision of the First-tier Tribunal.

 

HELD – The Supreme Court unanimously dismissed the leaseholders’ appeal and, for reasons different to those given by the Court of Appeal, approved the decision of the First-tier Tribunal that the revised apportionment is valid.

 

The key issue for the Court was the true effect of Section 27A(6) of the Landlord and Tenant Act 1985. That Act provides various controls on a landlord’s ability to determine the service charge payable by tenants. Section 27A gives the First-tier Tribunal jurisdiction to decide whether a service charge demanded by a landlord is or would be payable. It does not give any details about how the First-tier Tribunal is to decide what is payable. The natural inference is that it will make any determination based on the provisions of the lease and any applicable contractual or statutory restrictions, for example it can determine whether the costs claimed have been reasonably incurred as is required by the Act. That would not include the First-tier Tribunal exercising for itself management decisions that are within the discretion of the landlord, such as deciding what works to carry out.

The Court considered that section 27A(6) is plainly an anti-avoidance provision, which is designed to preserve the jurisdiction of the First-tier Tribunal. It is not the purpose or effect of Section 27A(6) to enlarge the jurisdiction of the Tribunal or to deprive the landlord’s managerial decisions of their ordinary contractual effect. Rather its purpose is to prevent the parties to a lease agreeing a different mechanism to determine a question that could otherwise be decided by the First-tier Tribunal. Therefore, a contractual provision will be void only to the extent it purports to oust the jurisdiction of the Tribunal, for example by making the landlord’s (or some other person’s) decision final and binding, or requiring the Tribunal to presume or ignore certain facts.

The Court disapproved the Court of Appeal’s interpretation of Section 27A(6) and the previous case law it was based on. That interpretation would have the effect that every discretionary management decision which would affect the amount of a tenant’s service charge, such as what works to carry out, would be transferred to the First-tier Tribunal. This would greatly extend the jurisdiction of the First-tier Tribunal. It is unlikely that an anti-avoidance provision would be intended to have that effect, and a natural reading of the provision does not require it. Moreover, it would also have undesirable consequences, in that a landlord would never safely be able to incur costs without first seeking a decision of the First-tier Tribunal as to whether those could be charged to its tenants. This could lead to a flood of applications that would overwhelm the tribunal system.

The Court also disagreed with the leaseholders’ approach, which the Upper Tribunal adopted. That would have the effect of removing altogether the ability to vary the apportionment, even though re-apportionment was not offensive to the purpose of legislation. This would leave the apportionment fixed for the 125-year term of the lease, which is a commercially unattractive result that the parties had not intended.

In this case, the agreement that the landlords were entitled to adjust the proportions of the leaseholders’ service charges did not remove the jurisdiction of the First-tier Tribunal. The Tribunal was still able to review whether the adjustments were reasonable, as was required by the leases. The Tribunal had determined that they were reasonable. Therefore section 27A(6) of the Landlord and Tenant Act 1985 was not engaged, and the re-apportionments were valid.

To read the judgment, please see:

Judgment (PDF)
Judgment on The National Archives (HTML version)
Judgment on BAILII (HTML version)

To read the Press Summary, please see:

Press summary (HTML version)

To watch the hearing, please see:

Watch hearing

8 Dec 2022
Morning session
Afternoon session

On appeal from [2022] NICA 15

These proceedings challenge the lawfulness of the Northern Ireland Protocol (“the Protocol”), which formed part of the agreement between the United Kingdom (“the UK”) and the European Union (“the EU”) regarding the UK’s exit from the EU. The Protocol was given legal effect by section 7A (“section 7A”) of the European (Withdrawal) Act 2018 (“the 2018 Act”).

The Appellants rely on three grounds of appeal.

Ground One argues the Protocol is incompatible with Article VI of the Acts of Union 1800 (“Article VI”), the Acts which provided for the Union of Great Britain and Ireland. The trade limb of Article VI states “[His] Majesty’s subjects of Great Britain and Ireland shall … be on the same footing … in respect of trade”. The Appellants argued the Protocol means the people of Ireland are not ‘on the same footing’ in respect of trade because, for example, the Protocol requires payment of a charge on goods which may be moved into the EU.

The first instance judge found that if there is any conflict between section 7A of the 2018 Act which incorporates the Protocol into UK law and the Acts of Union 1800, section 7A is to be preferred. The Court of Appeal found that Article VI is modified by the Protocol, via section 7A.

The Appellants also argued that the Crown does not have the power to make treaties that do not comply with Article VI. The lower courts found section 7A takes priority over any incompatible provisions of Article VI.

 

Ground Two relates to section 1(1) of the Northern Ireland Act 1998 (“the NIA 1998”). Section 1(1) of the NIA 1998 says Northern Ireland remains part of the UK unless the majority of the people of Northern Ireland consent via a poll. The Appellants argued there can be no substantial change to the status of Northern Ireland without this, the Protocol changed the status of Northern Ireland, and this was unlawful as the poll procedure was not followed.

The lower courts found section 1(1) of the NIA 1998 did not affect the legality of the changes made by the Protocol.

 

Ground Three challenges the lawfulness of the Protocol on Ireland/Northern Ireland (Democratic Consent Process) (EU Exit) Regulations 2020 (the “2020 Regulations”). Section 8C of the 2018 Act provided the power to make the 2020 Regulations. The 2020 Regulations permitted the Northern Ireland Assembly to vote on the continued application of Articles 5 to 10 of the Protocol without the need for cross-community support as required by section 42 of the NIA 1998. The Appellants argued that section 8C does not enable the making of regulations which are incompatible with the NIA 1998.

The lower courts found that deciding whether the Articles should continue to apply relates to the making of treaties and is within the competence of the UK Government. Cross-community support is not required.

 

HELD – The Court unanimously dismissed the appeals on all three grounds.

 

Ground One: Dismissed as Article VI is subject to the Protocol such that any parts which conflict with the Protocol are suspended.

First, the Protocol is incorporated into UK law by section 7A. Section 7A stipulates that all enactments are to have effect subject to section 7A. Consequently, Article VI is modified to the extent it conflicts with the Protocol via section 7A.

The debate about whether the Acts of Union and/or the Acts enabling the UK’s withdrawal from the EU are statutes of a constitutional character, is academic. The suspension, subjugation, or modification of rights contained in an earlier statute may be effected by express words in a later statute. A clear answer has been provided by Parliament in relation to any conflict between the Protocol and any other enactment. The Acts of Union and Article VI remain in place but are modified to the extent and for the period during which the Protocol applies.

Second, Parliament, by enacting the 2018 Act and the European Union (Withdrawal Agreement) Act 2020, authorised the making of the Protocol. The clear intention of Parliament in enacting these Acts was to permit the Crown to make the Protocol.

 

Ground Two: Dismissed as the Supreme Court has previously held that section 1(1) of the NIA 1998 does not regulate any change in the constitutional status of Northern Ireland other than the right to determine whether to remain part of the UK or become part of a united Ireland. There is no reason to depart from this finding.

 

Ground Three: Dismissed as section 7A amended the existing law such that the system created by the 2020 Regulations was lawful without the requirement of cross-community support. The 2020 Regulations were lawfully made. The Court acknowledged the potential force in the Appellants’ argument that cross-community support is still required for matters outside the Assembly’s legislative competence. However, all enactments are to be read subject to section 7A. Section 7A had already modified section 42 of the NIA 1998. The 2020 Regulations were compatible with section 42 of the NIA 1998 as modified. There is therefore no incompatibility between the 2020 Regulations and section 42 of the NIA 1998.

To read the judgment, please see:

Judgment (PDF)
Judgment on The National Archives (HTML version)
Judgment on BAILII (HTML version)