Timeshare mis-selling and Abbott v RCI Europe

When I first started to undertake work in respect of timeshares I found that the opinions I had to write were extremely long and challenging. If nothing else, the recent long-awaited decision in Abbott v RCI Europe [2016] EWHC 2602 confirmed that I had not been guilty of narcissistic prolixity.

The reasons for the inordinate length of the written work are the Byzantine complexity of the products being sold under the various timeshare arrangements, and the multiplicity of potential individual causes of action or defences. Timeshare disputes involve an unusual intersection between traditional black letter commercial chancery issues (such as rescission for misrepresentation, agency or entire agreement clauses, and so on) on the one hand, and what may broadly be called modern consumer law on the other.

Exchange programme

The defendant (RCIE) operates a timeshare exchange programme. It does not sell timeshare products as such. Instead it allows members to deposit their timeshare rights into the exchange system in return for an annual membership fee.

The exchange system works as follows: members own weeks of timeshare rights and place them into a weeks pool. The member is entitled to take a different week from the pool, subject to being comparable in terms of demand, supply, and quality. The system is managed by computer algorithms functioning by reference to concepts such as a deposit trading power and exchange trading power, which in theory reflect the likely demand and value for the week and resort in question.

However, up to 20 per cent of the members’ deposited timeshares never went into the weeks pool at all, but were allocated for rental purposes to non-timeshare owners, a process called segmentation.

Abbott, described by the judge as a test case, involved 487 claimants in all, with four claimants being identified as specimen actions. There was widespread dissatisfaction with the working of the exchange programme: there were insufficient exchanges available at the times when the claimants were able to go, and the standard of the accommodation available was disappointing. The claimants said the process of segmentation contributed to this.

RCIE said that renting out some of the rights was crucial to the success of the scheme and was to the advantage of the members. It said that its complex algorithms allowed it to balance timeshares across the system.

Permitted use clause

The claimants launched a challenge to the particular clause which RCIE used to exercise control over the system, the permitted use clause. In its widest form it was as follows: ‘By depositing your holiday ownership rights, you relinquish all rights to use them and agree that they may be used by RCI for any commercially reasonable purpose including without limitation to fulfil exchange requests by other RCI members, for inspection visits, promotions, rental, sale, marketing, or for other purposes at RCI’s sole discretion, including use in other exchange or accommodation programmes.’

The claimants argued that the clause should be struck down under the Unfair Terms in Consumer Contracts Regulations 1999. However, the judge made a significant finding of fact, namely that the occurrence of segmentation did not in practice cause a shortfall in the availability of holidays with which to swap.

This in itself proved fatal to the claimants’ case on this issue, but the judge went on to make some further observations on the 1999 Regulations and other arguments.

Under the 1999 Regulations, a term is unfair if ‘contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’.

In Abbott the judge held, rather abruptly, that there was ‘no significant imbalance’. Her reasons appear to be as follows:

• There was no relationship as such which could be in imbalance at all. There was simply a deposit into a pool for exchanges using the trading power allocated by RCIE and calculated by reference to its algorithms;

• By virtue of the Supply of Goods and Services Act 1982, RCIE was obliged to exercise its discretions in operating the scheme properly; therefore it could not do so arbitrarily, capriciously, or unreasonably; and

• Members could terminate their contracts at any time with no penalty, provided that their week had not already been taken up by another member.

In respect of the issue of good faith, the judge held that the case was markedly different from those where terms have been struck down as unfair under the 1999 Regulations, for example penal default interest or repossession claims.

The claimants ran a series of alternative actions based on the Unfair Contract Terms Act 1977, the Consumer Protection from Unfair Trading Regulations 2008, implied terms, breach of fiduciary duty, misrepresentation, and the operation of specific timeshare legislation. Each was shot down in turn.

Thus, the case illustrates the piecemeal application of a kind of cat’s cradle of many different regulations which can potentially be employed to deal with timeshare issues, but in each of which there is a problem with application to provide a satisfactory remedy. The case has been presented as a victory for the timeshare providers. However, perhaps the claimants fought on the wrong battleground.

Unfair commercial practices

The root problems with timeshare contracts are the methods by which they are sold and the very long term of the agreements, the increasing annual charges, and the owners’ inability to get out of the contract or sell to any third party.

The traditional position of practitioners seeking to challenge a timeshare contract would be an action in misrepresentation. This is, as I learned at sometimes bitter cost quite early in my career, often a case which is easy to say but very difficult to plead, present, and prove, particularly when an oral representation is relied on. The documentation surrounding a timeshare sale carries all sorts of information intended to defuse the possibility of a claim, while what is being said (or, crucially, merely suggested or not said) by the sales team on the ground is quite different.

What could work very well in this context are the concepts in the Consumer Protection from Unfair Trading Regulations 2008 (the CPRs). The CPRs create a general prohibition on ‘unfair commercial practices’, including a ‘misleading action’, a ‘misleading omission’, or an ‘aggressive practice’ as each is defined.

Let me give a practical example of what I would regard as an aggressive commercial practice. It is extremely common for timeshare purchasers to report two factors surrounding the circumstances in which they purchased their product. One is all-day presentations held in a hot room, in which the purchasers feel obliged to remain, with sales staff working in relays. Free alcohol is often provided. In short, the potential purchasers are subject to perfectly well-understood psychological practices to wear down their judgement and will. Sales staff use specific manipulative and persuasive techniques which appear to me to be based in what is known as neuro-linguistic programming.

The common law has great difficulties with translating that type of psychological pressure into a cause of action or a defence. But in my opinion it sits very well with a concept such as ‘aggressive commercial practice’. And there are many more practices, including the suggestion that the client’s children will inherit, used to persuade a client to purchase a further product with a ‘guaranteed’ exit. What I think needs to be understood by the courts is that practices like this go well beyond traditional sales patter. They are, indeed, coercive. So perhaps there is a need for courts to take a new look at what amounts to undue influence or duress in this context.

However, the sharper-eyed among you will see that from the practices described a misrepresentation action is indeed often appropriate – you just have to understand the representation, and why it is false.

The issue which has yet to be tested is the unreasonably long terms of timeshare contracts: 30 years is not uncommon. Purchasers find themselves unwittingly locked in, and the realisation occurs over time.

The 1999 Regulations implement EU Directive 93/13/EEC on unfair contract terms. It is the view of the Commission to the European Parliament that in appropriate circumstances long-term products could and should be challenged under that directive.

The way in which the directive and then the 1999 Regulations have been drafted appears to exclude consideration of the core terms of the bargain, and one can hardly get more of a core term than the duration: see OFT v Ashbourne Management Services Ltd [2011] EWHC 1237 (Ch). But in the same case the judge found that this fact did not rule out consideration of the length of the term completely. Therefore, at least in terms of being freed from continuing liability under the original timeshare contract, the matter is still open.

David Partington is a barrister at Park Square Chambers

@psqbar www.parksquarebarristers.co.uk