The Law Commission

 


PART 4

COMMERCIAL LAW AND COMMON LAW

TEAM MEMBERS^[1]

Government Legal Service

Tamara Goriely (Team Manager)

Joanna Perkins, James Robinson,

Simon Tabbush

Research Assistants

Inewari Diete-Spiff, Simon Forshaw

Christopher Kelly, Adam Sher



Prof. Hugh Beale

Commissioner

Unfair contract terms

4.1      In February 2005 we published a report and draft Bill jointly with the Scottish Law Commission.^[2] At present, two major pieces of legislation deal with unfair contract terms: the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999. They contain inconsistent and overlapping provisions, using different language and concepts to produce similar but not identical effects. An area of law that affects ordinary people in their everyday lives had been made unnecessarily complicated and difficult. The draft Bill rewrites both laws as a single regime, in a way that is much clearer and easier to follow. We have also plugged some gaps in protection.

4.2      For consumer contracts, our aim is to produce a single, unified regime that preserves existing levels of consumer protection. Thus, for consumers the draft Bill:

(1) extends to all the terms currently covered by the Regulations;

(2) includes negotiated clauses as well as standard clauses;

(3) continues to hold that terms which limit liability for death or personal injury, or which exclude basic undertakings about the quality and fitness of goods are ineffective;

(4) states that in claims brought by consumers, the burden of proof lies on the business to show that the term is fair;

(5) gives the OFT and other bodies additional powers to take action against notices. For example, the OFT would be able to demand that a sign in a store car-park saying "no liability is accepted for injury" is taken down.

4.3      The report also recommends improved protection for small businesses. We were told that small businesses frequently find themselves signing contracts that contain unfair terms, that the law does not currently allow to be challenged. This is especially true where a small farmer, manufacturer or builder supplies a much larger business. The small business may be required to indemnify the larger business for losses that are not their fault, or forfeit deposits, or accept variations of price after the contract has been agreed. They may find that the larger business has reserved the right to terminate a contract at will, or for only a minor default, while the small business is bound more rigorously by the contract.

4.4      The draft Bill includes special protection for the smallest and most vulnerable businesses, commonly referred to as "micro businesses", with nine or fewer staff. Under our proposals, these very small businesses will be able to challenge any standard term of the contract that has not been altered through negotiation, and is not the main subject matter of the contract or the price.

4.5      However, we do not wish to interfere where contracts are already sufficiently regulated, or where the business is sufficiently sophisticated to look after its interests. We exclude contracts for financial services, contracts over £500,000 and situations where the apparently small business is associated with other businesses, so that overall the group has more than nine employees.

Further work on simplifying consumer legislation

4.6      In July 2004, the Government published a consultative document on consumer strategy, which proposed further measures to simplify consumer legislation.^[3] We very much welcome this recognition of how important it is to make consumer law better known and easier to use. In October we sent a response to DTI which identified a particular need to reform the law on the sale and supply of goods and services.^[4] We look forward to continuing to work with the DTI and Scottish Law Commission to improve consumer law. Our work on unfair terms is one step, but there is more to do.

Company security interests

4.7      In August 2004 we published a consultative report, setting out detailed reforms of how the law treats charges and other security interests granted by companies (including draft legislation). We recommended a system of electronic "notice-filing", which would simplify the current system for registering a company charge, together with a comprehensive scheme for deciding the priority and status of security interests against other secured parties, unsecured creditors and buyers. We proposed that our scheme should apply not just to "traditional security" (such as mortgages and charges) but also to "quasi-security", such as leases, hire purchase and the sales of receivables. This followed a previous consultation paper, published in July 2002.^[5]

4.8      We received 69 responses to our consultative report. Most respondents welcomed electronic filing, which will make registering charges cheaper and easier. However, considerable concern was expressed about extending registration to "title-retention" devices such as leases and hire-purchases. We have been persuaded that it would not be appropriate to make fundamental changes to the way that title-retention devices operate only in the context of security interests granted by companies. We have therefore deferred further consideration of title-retention devices until we can look at how the law works for all debtors, including unincorporated businesses and consumers. We are however, recommending a more limited scheme of notice filing to apply to both traditional security and the sale of receivables. There is also a need to introduce greater certainty into how the law treats investment securities and bank accounts when they are used as financial collateral.

4.9      We plan to publish a final report in the summer of 2005.

The forfeiture rule and the law of succession

4.10      We have been asked to review a particular problem that arose from the case of Re DWS (deceased) [2001] Ch 568. The claimant's two grandparents had been murdered by their only son (the claimant's father). The grandparents died intestate, and the question was who should inherit their estate. The father was disqualified from inheriting under the "forfeiture rule", by which a murderer cannot inherit from his victims. The court found that the grandchild could not inherit either, because under intestacy law, grandchildren can only inherit once their parents are dead. In this case, the property went to more distant relatives.

4.11      In October 2003 we published a short consultation paper^[6] in which we proposed a change to intestacy law, so that where a potential heir forfeits property, it should be distributed as if that person had died. Most consultees agreed with us, and we are currently drafting a short Bill along these lines. We plan to publish a report and draft bill in July 2005.

Illegal transactions

4.12      We are continuing to review the law of illegal transactions, looking at the effect of illegality on claims in contract and trusts. The law on illegality has been criticised for being complex, uncertain and, on occasion, unjust. We originally proposed that where a contract is held to be illegal, the court should have a statutory discretion to enforce the contract.^[7] This proved controversial and we are considering whether the courts could develop a non-statutory solution to the problem. We intend to publish a report in 2005.

Note 1    Including those who were at the Commission for part of the period.    [Back]

Note 2    Unfair Terms in Contracts (2002) Law Com No 292; Scot Law Com No 199. This follows the Unfair Terms in Contracts (2002) Consultation Paper 166, Scot Law Com Discussion Paper No 119.    [Back]

Note 3    Department of Trade and Industry, Extending Competitive Markets: Empowered Consumers; Successful Businesses, July 2004.    [Back]

Note 4    Simplifying Consumer Legislation: a response from the Law Commission to the DTI’s Consultative Document on Consumer Strategy, 29 October 2004.     [Back]

Note 5    Registration of Security Interests: Company Charges and Property other than Land (2002), Consultation Paper No 164.     [Back]

Note 6    The Forfeiture Rule and the Law of Succession (2003), Consultation Paper 172.    [Back]

Note 7    Illegal Transactions: the Effect of Illegality on Contracts and Trusts (1999), Consultation Paper 154.    [Back]