My son, like many over Christmas, was given an HMV gift card. He was looking forward to going down to HMV Gunwharf Quays on Saturday to cash it in. So when he heard that HMV were no longer honouring gift cards, he asked me how was this legal. After all, if your dad’s a lawyer, you expect him to know these things.
It’s an interesting question. The answer is a moral one, rather than a question of illegality. It is not unlawful to breach a contract.
In reality what HMV has done is breach its consumer contracts with gift card holders. By refusing my son’s gift card HMV will be breaching its contract with my son, the assignee of the gift card agreement formed when the buyer of the card bought it. Any argument by HMV that it has the contractual right to refuse to accept the card will not stand up. The card itself refers to other terms and conditions – these usually are not presented or explained to a consumer buying a gift card at the time of purchase, so cannot be considered to have been properly incorporated into the consumer contract (see, for example, the classic Thornton v Shoe Lane Parking Ltd  2 QB 163). A purchaser of a gift card online may have had to click through the relevant terms and conditions, so it is possible that HMV could claim online consumers are bound by the terms and conditions – it’s impossible to check right now, as the administrators have suspended any sales activity on the hmv.com website.
The question of incorporation is in any event irrelevant. Any term giving HMV the ability to avoid honouring a gift card would be unfair and unenforceable under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs). In particular, thanks to Google’s web cache, it is possible to read the HMV gift card terms and conditions. These include:
9. HMV reserves the right to add to or waive these terms and conditions on reasonable notice for legal, security or regulatory reasons or to discontinue the gift card scheme at any time in the event of circumstances beyond its reasonable control. Customers will be notified in advance via in-store displays and the HMV website in the event of any such change.
HMV cannot, surely, consider that this gives it the right to suspend gift cards indefinitely, particularly upon any argument that going into administration was ‘beyond its reasonable control’? This must be an unfair term under reg 5(1) of the UTCCRs? In addition, any claim by HMV that it has a right to refuse gift cards must also fall within the scope of the Unfair Contract Terms Act 1977. Section 3(2)(b) may not make use of HMV’s clause 9 possible, if a court agrees that the term used in this manner is unreasonable.
So why can’t my son nip off to Portsmouth County Court and file a small claim against HMV? The answer is that whilst HMV is in administration, no-one can commence proceedings against it without the leave of the administrators or the court (see paragraph 43(6) of Schedule B1 of the Insolvency Act 1986). It is unlikely that anyone at Deloitte will give my son the time of day, yet alone permission to bring a claim against HMV. Clearly the administrators will not be in a hurry to permit consumers to enforce their rights – it is suggested that there may be up to £100m value of gift cards in circulation.
So surely HMV must be guilty of some criminal offence, given that they must have known they were at risk of going into administration after the Christmas period, in continuing to sell gift cards that they knew consumers would be unable to use? Perhaps. It will come down to an assessment of intention and timing. No doubt HMV’s directors will claim that right up until Monday this week, they honestly thought they could keep HMV on the road, so HMV’s continued sale of gift cards over the Christmas period – the peak time for the sale of gift cards – was legitimate. Instructions to stop the sale of gift cards were reportedly issued as soon as the decision was made on Monday to put the company in administration. Others may think, “Bollocks. You knew.” Suspicions would be particularly aroused if the HMV administration is under paragraph 22 of Schedule B1 of the Insolvency Act 1986, as entering into administration by this route requires the directors to make a statutory declaration as to the solvency of the company and to give prior notice in certain cases. This at least implies some knowledge of the state of the company prior to the date the administration started (and sale of gift cards was suspended). If that was the case, then it is possible that the directors could be required to answer to fraud charges (fraud by false representation – sections 1 and 2 of the Fraud Act 2006).
If the administrators succeed, then the gift cards may eventually be honoured. Alternatively, the administrators may sell what they can of the business of HMV as a going concern and liquidate the rest, in accordance with their duties in the Insolvency Act 1986, distributing the proceeds to the company’s creditors. Sadly, trade creditors including gift card holders will be unsecured creditors, who come bottom of the pile. Any available assets are first distributed to the secured creditors (those with a charge over some of the company’s assets) and preferential creditors (defined in Schedule 6 of the Insolvency Act 1986 – mainly related to employees’ remuneration and pensions). Only when these are paid and the administrators costs have been met, will the remaining assets, if any, be realised and shared out amongst the unsecured creditors. In most cases, there is nothing left by the time it gets to the unsecured creditors, who end up with nothing.
Whatever the outcome, I know I’ll be out of pocket. Like many parents – or the Bank of Mum and Dad, as we are sometimes known – I’ll be “honouring” the value of the gift card and giving my son the cash when we are in HMV.