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Scottish Law Commission (Discussion Papers)
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URL: http://www.bailii.org/scot/other/SLC/DP/2002/119(3).html
Cite as: [2002] SLC 119(3) (DP)
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Part III
overlaps and differences between ucta and utccr
1. Introduction
3.1 In this Part we consider in more detail the extent to which there are overlaps and differences between UCTA and UTCCR.[1] As we shall see, the number of differences is significant, both in the broad scope of application, concepts and terminology and in more detailed matters, such as definitions.
3.2 We also note the impact of Council Directive 99/44/EC of 25 May 1999 on Certain Aspects of the Sale of Consumer Goods and Associated Guarantees (“SCGD”).[2] This is principally concerned with providing certain minimum rights and remedies for consumers in sales contracts. In essence, Member States must ensure that consumers have certain specified remedies if the goods do not conform to the contract,[3] and conformity is defined in terms that are broadly similar to sections 13–15 of the United Kingdom’s Sale of Goods Act 1979 (“SGA 1979”).[4] The rights and remedies are to be made inalienable by the consumer. Article 7(1) of SCGD states:
Binding nature
1. Any contractual terms or agreements concluded with the seller before the lack of conformity is brought to the seller’s attention which directly or indirectly waive or restrict the rights resulting from this Directive shall, as provided for by national law, not be binding on the consumer.
Member States may provide that, in the case of second-hand goods, the seller and consumer may agree contractual terms or agreements which have a shorter time period for the liability of the seller than that set down in Article 5(1). Such period may not be less than one year.
Implementation of the positive aspects of SCGD will be carried out by regulations to be made under the European Communities Act 1972, section 2(2).[5] Any changes necessary to implement Article 7(1) will, in the first instance, be included in those regulations[6] but the relevant parts of the regulations may later be superseded by the legislation proposed in this project.
3.3 A list of the most obvious differences between the existing regimes was given in Part II.[7] In this Part we set out the significant differences point by point. In Parts IV and V respectively we consider how the regimes for consumer contracts might best be combined and how the controls over consumer contracts might be extended to protect business, taking the points in roughly the same order.
2. Separate provisions for Scotland
3.5 We have already noted that UCTA contains separate provisions for England, Wales and Northern Ireland on the one hand and Scotland on the other.[8] UTCCR apply to the UK as a whole.
3. Consumer contracts, business-to-business contracts and other contracts
3.6 An obvious difference between UCTA and UTCCR is that UTCCR apply only to unfair terms in contracts between a seller or a supplier and a consumer,[9] whereas all but two of the various controls under UCTA apply to both consumer[10] and business-to-business contracts.[11]
3.7 However, the sections of UCTA that apply to both kinds of contract operate differently depending on whether or not the contract is a consumer contract. Exclusions and restrictions of liability that fall within sections 6 and 7 [ss 20 and 21] are simply of no effect against a party who deals as a consumer,[12] whereas as against a non-consumer they may be valid if they satisfy the requirement of reasonableness.[13] Section 3 [s 17] applies to both negotiated and non-negotiated terms in consumer contracts, but in non-consumer contracts only to terms that are part of the business’s written standard terms.[14]
3.10 Most of the controls of UCTA apply only to consumer contracts (that is, where one party makes the contract in the course of business but the other does not) and to contracts between businesses.[15] However, there is also limited control in relation to other contracts. This is provided by section 6. No seller or supplier under a hire-purchase contract, whether or not acting in the course of a business, may exclude his obligations as to title,[16] and non-business sellers may exclude or restrict their liability for breach of the implied terms as to correspondence to description or sample but only if the term is reasonable.[17] These controls will “bite” in two further types of contract: where neither party is making the contract in the course of a business and where a consumer sells goods, or lets them on hire-purchase,[18] to a business.[19]
4. Terms of no effect
3.9 Under UCTA, attempts to exclude or restrict certain types of liability are simply of no effect.[20] These are:
(1) business liability for death or personal injury caused by negligence or breach of duty;[21]
(2) liability for breach of the implied terms as to title in contracts for sale, hire-purchase or (except for Scotland) other transfer of property in goods;[22]
(3) liability for breach of the implied terms as to description, quality etc in contracts for the supply of goods to a person dealing as a consumer; [23] and
(4) a manufacturer’s or distributor’s liability in tort [delict] to a person injured by goods proving defective while in consumer use (where the exclusion or restriction is by means of a term or notice in a “guarantee” of the goods).[24]
3.10 All other terms caught by UCTA may be valid if they satisfy the requirement of reasonableness.[25] It is for the party claiming that a term satisfies the requirement of reasonableness to show that it does.[26]
5. Range of terms controlled
3.12 UCTA applies to only a limited range of potentially unfair terms. Despite its broad title,[27] nearly all its provisions[28] are aimed at clauses which in one way or another exclude or restrict the liability of a party.[29] Some sections of UCTA are aimed at the exclusion or restriction of particular kinds of liability in particular types of contract: thus sections 6 and 7 [ss 20 and 21] apply to exclusion or restriction of various implied terms in contracts of sale, hire-purchase, barter, hire, and work and materials.[30] Section 2 [s 16] is not limited to particular types of contract but applies only to exclusions or restrictions of a certain kind, namely of business liability[31] for negligence[32] (in England and Wales and Northern Ireland) and breach of duty (in Scotland).[33]
3.13 The section of UCTA with the broadest application is section 3 [s 17]. This applies to clauses that are used by a business in its written standard terms or in a contract with a consumer and that either purport to exclude or restrict the business’s liability for breach of contract,[34] or fall within section 3(2)(b) [s 17(1)(b)]. This paragraph is designed to catch certain types of clause which
are expressed not as excluding or restricting liability for the breach of subsisting obligations but as preventing the obligations to which they relate from arising or as providing that such obligations are to arise only in restricted or qualified form.[35]
It applies to clauses which purport to permit the business party
(i) to render a contractual performance substantially different from that which was reasonably expected of him, or
(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all …,
and subjects such clauses to the requirement of reasonableness.[36]
3.14 These provisions are capable of applying to clauses which allow the business to alter the substance of its own performance, for example by changing the hotel accommodation or the means of transport in a holiday contract,[37] changing the specification of goods in a contract of sale,[38] or cancelling the contract in certain circumstances.[39] They do not apply to clauses allowing the supplier to increase the price payable by the consumer since that is not a question of the supplier’s contractual performance.[40]
3.15 In contrast to UCTA, UTCCR are capable of applying to a term of any kind in a consumer contract of any type, so long as the term was not individually negotiated[41] and was unfair.[42] (The question of fairness does not apply to either the adequacy of the price or the definition of the main subject matter of the contract, provided it is in plain intelligible language.)[43] Thus UTCCR apply equally to clauses affecting the performance of either party and appear to cover a significantly wider range of types of term than UCTA.
6. Terms which have not been individually negotiated
3.16 UTCCR apply only to terms which, in the words of regulation 5(1), have “not been individually negotiated”. Regulation 5(3) makes it clear that if one party has put forward a pre-formulated standard contract, only the specific terms or those aspects of specific terms which have been individually negotiated will be exempt. It is for the business to show that the term was individually negotiated.[44]
3.17 Regulation 5(2) provides:
A term shall always be regarded as not having been individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term.
This appears to mean that a term may be regarded as not individually negotiated even though it was drawn up by the business for the specific contract, rather than being a standard term, provided that it was drawn up before the negotiations[45] and was not negotiated.[46]
3.18 In contrast, the application of UCTA to terms in consumer contracts[47] does not depend on whether the term was negotiated (though that may be very relevant to the question of reasonableness). The same is true in relation to non-consumer contracts with the exception of section 3 [s 17].
7. Terms not subject to control
(1) “Definitional” and “core” terms
3.19 Because UCTA is dealing with particular types of clause (exclusion clauses and restrictions of liability and indemnity clauses) there is no need for a statement of the terms to which it does not apply. In contrast, under UTCCR certain terms are exempt from the requirement of fairness. Terms relating to the definition of the main subject matter of the contract, provided they are in plain intelligible language, are exempt.[48] The adequacy of the price or remuneration, as against the goods or services supplied in exchange, is also exempt from assessment for fairness, again provided that the price or remuneration is in plain intelligible language.[49] These are sometimes referred to as the “core” terms.[50]
(a) Reasonable expectations and “definition of the main subject matter”
3.21 UCTA section 3(2)(b)(i) [s 17(1)(b)] is restricted in that it affects only clauses which purport to allow the business to perform in a way which is “substantially different” from what was “reasonably expected”.[51] As Lord Bingham MR pointed out in The Zockoll Group Ltd v Mercury Communications Ltd (No 2),[52] what was reasonably expected cannot be a question of relying on the proper construction of the contract because that would mean that there was no difference between the other party’s expectation and what, by reference to a term, the business claimed to be entitled to render. It seems to refer to the other party’s reasonable expectations derived from all the circumstances, including the way the contract was presented to him. This appears to mean that if it was made reasonably clear to a consumer that the business had the right to and might in fact perform in the way it is now seeking to do, the section will have no application.[53] Thus if a holidaymaker had been told that the hotel booked was still under construction and that, if completion was delayed, the holidaymaker would be put in another hotel of a stated category, and this is what in fact happened, it seems that the section would not apply.[54]
3.22 UTCCR would also apply to the examples we considered earlier of terms allowing a holiday company to change the hotel accommodation or the means of transport in a holiday contract, or to change the specification of goods in a contract of sale, or to cancel the contract in certain circumstances, unless the term can be classified as relating to the definition of the main subject matter.[55] This can also be difficult to determine.
3.23 Terms which are to apply only in certain events, and which are separate from those describing the main features of the performance, do not seem to define the main subject matter.[56] However, a provision to the same legal effect in the description of the main features may do so. So in a contract for a “holiday with travel by air”, a clause in the “small print” allowing the company, in the event of air traffic control strikes, to carry the consumer by rail and sea seems to be reviewable for fairness; but it can be argued that if the holiday is “with travel by air or, in the event of strikes, by rail and sea”, the option of mode of travel might be part of the definition of the main subject matter. In other words, whether the term relates to the definition of the subject matter depends (at least in part) on how the “deal” was presented to the consumer. This seems to be the corollary of a point made by the OFT:
In our view, it would be difficult to claim that any term was a core term unless it was central to how consumers perceived the bargain. A supplier would surely find it hard to sustain the argument that a contract’s main subject matter was defined by a term which a consumer had been given no real chance to see and read before signing …[57]
3.24 If it is correct that whether a term is part of the definition of the main subject matter depends in part on how the “deal” was presented to the consumer,[58] the question of “definition of the main subject matter” under UTCCR may in this respect be similar to whether the clause purports to permit a performance “substantially different from that which was reasonably expected” under UCTA.[59]
(b) Contingencies and “definition of the main subject matter”
3.25 However, the tests under UCTA and UTCCR are not interchangeable. The “definition of the main subject matter” seems to involve a second dimension. A consumer might “reasonably expect” a particular term (because, for instance, she had been warned of it) but yet the condition might not be “part of the main subject matter” because it is only to apply in certain circumstances, rather than defining the main subject matter. In DGFT v First National Bank plc[60] the term in question was a clause in a contract of loan giving the bank, in the event of a default by the borrower, the right to demand payment of the outstanding balance and accrued interest and further interest at the contractual rate after judgment up to the date of actual payment. Both the Court of Appeal and the House of Lords rejected the argument that the provision for interest fell within either “the main definition of the subject matter” or “adequacy of the price”. The courts agreed with the DGFT’s argument that the exemption is limited to those terms “which define the parties’ rights and obligations in the due performance of the contract”.[61] Lord Bingham quoted Chitty to the effect that there is an important “distinction between the term or terms which express the substance of the bargain and ‘incidental’ (if important) terms which surround them”.[62] Lord Steyn said that the offending term was not a “core term” because it was a “subsidiary term”.[63]
3.26 That clause was one that applied when the borrower was in default and it is easy to see that it did not form part of the main subject matter in that sense. But equally it seems arguable that a term that is to apply in a contingency which is not the fault of either party but which the consumer would not anticipate as likely, and therefore would not give careful consideration, is not part of the definition of the main subject matter. The clauses relating to the change of means of transport or accommodation, or to cancel the holiday even in circumstances beyond the holiday company’s control, would probably not form part of the main subject matter.[64]
(c) Adequacy of the price
In so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate – …
(b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.
In this case the meaning of the regulation seems to be not that the “price term” is exempt but that the issue of adequacy of the price is exempt.[65] The effect is that if the price payable is set out in clear language, the amount cannot be challenged. In contrast, a clause which allows the price to be increased in certain circumstances must be subject to review, as such clauses are referred to in the indicative list.[66] The distinction appears to be that, in the case of a price increase clause, it is not the adequacy of the price that is in question but the unfairness that may be caused to the consumer because the price may be changed.
3.28 The distinction is not always easy to apply, nor the extent of control clear. Take for example a “low cost” four-year loan which provides for a low level of interest to be payable for the first two years, and thereafter a higher rate; but which also provides that in the event of any default by the borrower within the first two years the rate of interest payable for the whole of the remaining period shall be at the higher rate. Thus a week’s delay in making a single payment might result in a very substantial increase in the overall cost to the borrower. We believe that the provision for the increase after two years is exempt from review, even if the rate of interest after two years seems significantly higher than is necessary to compensate for the lower rate in the first two years, provided that the provision is in “plain, intelligible language” and that it forms part of “the deal” as it was put to the consumer,[67] the “price” of the loan. The rates of interest payable go to the adequacy of price. On the other hand, the provision for an increased rate in the event of default may be challenged.[68] This is no more a question of adequacy than the price increase clause that appears on the indicative list.
3.30 Perhaps more controversially, we would say that the same may be true of a provision which allows the borrower to pay off the loan within the first two years but only at the price of having to make up the difference between the low rate paid and some higher rate over the period between the start of the loan and repayment. This depends, we believe, on whether at the time the contract was made the option of early repayment was presented to the consumer as a main feature of the contract.[69]
3.31 We have two bases for these arguments. The first rests on the First National Bank case.[70] It will be recalled that the clause in question in that case provided for the continuation of the contractual rate of interest after judgment. The Court of Appeal accepted two arguments made by the Solicitor-General on behalf of the DGFT: first, that since the term set out when the contractual rate would be payable, the question was not one of adequacy, and secondly that the relevant terms were
default provisions dealing with the situation where there is a breach of contract; it is not there that one finds defined the main subject matter of the contract … Terms concerned with the adequacy of the price or remuneration are … those which define the parties’ rights and obligations in the due performance of the contract.[71]
This second argument covers our example of a higher rate of interest payable after a default: it is not part of the original price but a default rate. But the logic of the Solicitor-General’s argument would also apply to a higher rate payable as a price of early repayment. This is not a “default” provision but nor is it part of the normal performance of the contract. We think that, as in the First National Bank case, a clause requiring a higher rate of interest as the price of early repayment could be described as “incidental” or “subsidiary”.
3.33 This suggests that whether an amount payable under the contract is subject to review may well depend on how the “deal” is presented to the consumer. If, for example, the consumer is told explicitly that the deal is “x% for two years and then y% for two years; you can pay off early but then you must make your payments up to z%”, we think that the rates could not be challenged; they would then form part of the price the consumer knows he has to pay and the amounts go to the adequacy of the price.[72] In other words, the exemption for the “adequacy of the price” should be interpreted in a similar way to that for the “main subject matter of the contract”. The adequacy of the price will be exempt from review only to the extent that the sum payable was part of how the consumer “perceived the bargain”;[73] and what the consumer should reasonably have expected to pay during the normal operation of the contract.[74] This is in effect the approach taken by both the Court of Appeal and the House of Lords in the First National Bank case.
3.34 We have dwelt on the question of “price” at some length because we will recommend in Part IV that this difficult question be clarified in the new legislation. However, for present purposes we do not think it necessary to define further the precise differences in the kinds of term to which UCTA and UTCCR apply. It is clear that, on the one hand, there are many terms in consumer contracts which are subject to both regimes, though, as we shall see, the requirements of each regime may differ; on the other, that there are a number of potentially unfair terms which are within UTCCR but outside the scope of UCTA. We return to these points in Parts IV and V below.[75]
(2) Mandatory and permitted terms
3.35 Each instrument contains provisions designed to exclude from its operation terms which conform to what is required or permitted by other legislation, international convention or the decision of a competent authority.[76]
3.36 As to terms that conform to what is required by statutory provisions, the regimes appear similar.[77] One difference is that UTCCR curiously refer to terms that reflect mandatory statutory or regulatory provisions of any Member State,[78] so that apparently a term used by a supplier in the UK will not be subject to control if the term reflects such provisions of some other Member State, even though the contract has no connection with that Member State and the term does not reflect provisions of the UK. The Directive itself makes no mention of this, referring only to “contractual terms which reflect mandatory statutory or regulatory provisions”.[79] We are of the view that UTCCR are an incorrect incorporation of the Directive in this respect, and that terms reflecting mandatory statutory or regulatory provisions of some other Member State, but not of the relevant jurisdiction in the UK, should be subject to UTCCR.[80]
3.37 There is more difficulty over terms which are merely permitted by statute or other rules. These seem to be exempt from UCTA.[81] The position under UTCCR is far from clear. Regulation 4(2), like Article 1(2) of the Directive, exempts “contractual terms which reflect mandatory statutory or regulatory provisions”. Recital 13 to the Directive states that the phrase “mandatory statutory or regulatory provisions” includes “rules which, according to the law, shall apply between the contracting parties provided that no other arrangements have been established”. This makes the intention on “default” rules clear but is hard to fit with the words of Article 1(2) in the English text.[82] We believe that terms which are detrimental to the consumer but which in substance are not significantly different from the “default rule” that would otherwise apply under the general law are exempt, as suggested by Recital 13, though this has the consequence that such terms cannot be challenged even if they are not in “plain intelligible language”.[83]
3.38 On terms reflecting international conventions, the instruments are to similar effect. However, there are two differences. First, UCTA refers to international agreements to which the UK is a party,[84] but UTCCR refer to international conventions “to which the Member States or the Community are party”.[85] This may be significant, particularly as many Member States have ratified the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980 – “CISG”) but the UK has not. Secondly, UTCCR regulation 4(2)(b) refers to terms which “reflect the … principles of international conventions”. It has been argued that the effect of this is to exempt terms which follow the model of an international convention even though that convention is not applicable to the type of contract in question.[86] Thus the terms of a contract for domestic carriage which follow the model of a contract for international carriage under an international convention would be exempt. If this is correct it seems undesirable, as the convention will probably have been drawn up with international commercial transactions in mind, not domestic consumer ones, and its provisions may not be suitable for the latter. For this reason alone this interpretation seems doubtful.
3.39 It has been argued that any international supply contract governed by CISG will be exempt under the exception for terms reflecting international conventions, even if the contract contains exclusions or restrictions on liability, since the latter are permitted by CISG. It would seem to follow that a domestic contract modelled on CISG and containing exclusions would also have to be exempt.[87]
3.40 Terms required or approved by competent authorities, such as an industry regulator, acting in the course of any statutory jurisdiction or function are deemed to comply with the requirement of reasonableness (or to satisfy the fair and reasonable test) under UCTA.[88] There is some difficulty in interpreting UTCCR on this point. Regulation 4(2) exempts terms which reflect “mandatory statutory or regulatory provisions”. It appears that “regulatory” provisions means not rules imposed by a regulator but simply secondary legislation.[89] It is possible, however, that a term which a regulatory agency has required to be inserted in a consumer contract, or even one which the regulator has approved, is exempt on the ground that it “reflects” the statutory provisions empowering the terms to be set, or requiring that they be approved, by the regulator.[90] If such terms are not exempt, then UTCCR seem to operate more broadly than UCTA in this respect.
8. Excluded contracts
(1) Domestic contracts
1 (a) Consumers as suppliers
3.41 Repeating the words of the Directive,[91] UTCCR apply to contracts “concluded between a seller or a supplier and a consumer”.[92] This seems to cover all cases in which the business is the party providing the property[93] or service and the consumer is the recipient.[94] There is doubt, however, as to whether a sale by a consumer to a business (for example, the sale or trade-in of a used car to a dealer), or the provision of a service by a consumer to a business (for example, where a private person gives a guarantee of another person’s debt to a bank)[95] is within UTCCR.[96] On the one hand, the business is not the seller; on the other, “seller or supplier” is defined as:
any natural or legal person who, in contracts covered by these Regulations, is acting for purposes relating to his trade, business or profession, whether publicly owned or privately owned …[97]
The definition seems to suggest that it does not matter whether the business party was supplying or receiving. The question is whether this definition is taken to override the normal meaning of the words “seller or supplier”. Although UTCCR are following the English text of the Directive, it appears that in other language versions the wording is not limited to consumers as recipients of goods or services, and so it may be that this is the correct interpretation to follow.[98]
(b) Insurance, land, securities and guarantees
(1) contracts of insurance,[99]
(2) any contract so far as it relates to[100] the creation or transfer of any interest in land, or the termination of such an interest, and
(3) any contract so far as it relates to the creation or transfer of securities or of any right or interest in securities.[101]
For Scots law they are:
(1)contracts of insurance;[102]
(2)any contract which creates or transfers any interest in land;[103]
(3)any contract so far as it relates to the creation or transfer of securities or of any right or interest in securities;[104] and
(4)contracts of guarantee.[105]
3.44 There are no equivalent exclusions in UTCCR.
(c) Contracts of employment
3.45 UCTA applies to contracts of employment with the exception that section 2 does not apply “except in favour of the employee”.[106] It has been held that a contract of employment may be a consumer contract within the meaning of section 3 [s 17].[107] It is clear from Recital 10 that the Directive is not intended to apply to employment contracts. The 1994 Regulations expressly excluded employment contracts from their ambit. UTCCR do not do so, apparently assuming that an employment contract is not a consumer contract.[108]
(2) International contracts
3.46 UCTA section 26[109] exempts from the operation of certain sections any contract for the supply of goods made by parties in different States and which involves carriage of the goods between States, offer and acceptance across State borders or delivery in a different State to that where the contract was made. The section does not draw any distinction between consumer and non-consumer contracts.[110]
3.47 UTCCR has no similar exemption.[111] Thus UTCCR will apply whenever the law of part of the UK applies. Under the Rome Convention,[112] as implemented by the Contracts (Applicable Law) Act 1990, the two general principles are that the parties are free to choose the law to govern their contract,[113] and that in the absence of choice the contract shall be governed by the law of the country to which the contract has the closest connection.[114] However, first, under Article 3(3), a party cannot be deprived of the protection of the mandatory rules of a system to which all the other elements of the contract relate. Secondly, under Article 5 a consumer cannot be deprived of the protection provided by the mandatory rules of the law of the country of his habitual residence if one of three conditions is met.[115] These are that the contract was preceded by a specific invitation to the consumer or advertising in his country; or that the other party or his agent received the order in that country; or, in the case of sale of goods, that the goods were bought in another country in the course of a trip organised for that purpose by the seller. The Rome Convention applies to disputes heard in the UK whether or not the other party resides in a State which has ratified the Convention.[116] Thus many consumer contracts which involve delivery across State borders and which would thus escape UCTA will be subject to UTCCR.[117]
(3) Choice of UK law
3.48 UCTA also exempts from its operation contracts in which English or Scots law applies only because the parties have chosen English or Scots law to govern their contract.[118] The aim of this exemption was to avoid discouraging “foreign businessmen from agreeing to arbitrate their disputes in England or Scotland”.[119] There is no parallel provision in UTCCR or SCGD.
9. The test of validity
(1) “Fair and reasonable” versus “unfair”
(1) In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act … is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.
(2) In determining for the purposes of section 6 or 7 above whether a contract term satisfies the requirement of reasonableness, regard shall be had in particular to the matters specified in Schedule 2 to this Act; but this subsection does not prevent the court or arbitrator from holding, in accordance with any rule of law, that a term which purports to exclude or restrict any relevant liability is not a term of the contract. …
(4) Where by reference to a contract term or notice a person seeks to restrict liability to a specified sum of money, and the question arises (under this or any other Act) whether the term or notice satisfies the requirement of reasonableness, regard shall be had in particular (but without prejudice to subsection (2) above in the case of contract terms) to –
(a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and
(b) how far it was open to him to cover himself by insurance.
In Scots law, the test under UCTA is whether it was “fair and reasonable” to incorporate the clause into the contract. This is defined in section 24:
(1) In determining for the purposes of this Part of this Act whether it was fair and reasonable to incorporate a term in a contract, regard shall be had only to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties to the contract at the time the contract was made.
(2) In determining for the purposes of section 20 or 21 of this Act whether it was fair and reasonable to incorporate a term in a contract, regard shall be had in particular to the matters specified in Schedule 2 to this Act; but this subsection shall not prevent a court or arbiter from holding, in accordance with any rule of law, that a term which purports to exclude or restrict any relevant liability is not a term of the contract.
(2A) In determining for the purposes of this Part of this Act whether it is fair and reasonable to allow reliance on a provision of a notice (not being a notice having contractual effect), regard shall be had to all the circumstances obtaining when the liability arose or (but for the provision) would have arisen.
(3) Where a term in a contract or a provision of a notice purports to restrict liability to a specified sum of money, and the question arises for the purposes of this Part of this Act whether it was fair and reasonable to incorporate the term in the contract or whether it is fair and reasonable to allow reliance on the provision, then, without prejudice to subsection (2) above in the case of a term in a contract, regard shall be had in particular to –
(a) the resources which the party seeking to rely on that term or provision could expect to be available to him for the purpose of meeting the liability should it arise;
(b) how far it was open to that party to cover himself by insurance.
(4) The onus of proving that it was fair and reasonable to incorporate a term in a contract or that it is fair and reasonable to allow reliance on a provision of a notice shall lie on the party so contending.
It is submitted that the test is in substance the same in both jurisdictions.
3.50 Technically there appear to be no fewer than three slightly different tests of reasonableness under these provisions. The general test is that set out in section 11(1) [s 24(1)]. For cases falling within sections 6 and 7 [ss 20 and 21] only, the court is required to have regard to a list of “guidelines” specified in Schedule 2.[120] Thirdly, where the clause restricts liability to a specified sum, section 11(4) [s 24(3)] requires the court to have regard in particular to questions of the resources available to the party and insurance. However, in practice there is but a single reasonableness test, as the courts have said that they will take the factors referred to by the guidelines into account in all cases in which they appear relevant,[121] and questions of insurance are also treated as highly relevant in cases in which section 11(4) [s 24(3)] does not strictly apply.[122]
3.51 Under UTCCR regulation 5(1) the test is in very different words:
A contractual term which has not been individually negotiated shall be regarded as 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.
3.52 Regulation 6(1) provides:
Without prejudice to regulation 12,[123] the unfairness of a contractual term shall be assessed, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent.
3.54 One similarity is that both tests require the court to take into account the circumstances in which the contract is made. A second is that fairness or reasonableness is to be judged by the circumstances, as UTCCR regulation 6(1) puts it, “at the time of conclusion of the contract”. It appears from this that the relevant question under UTCCR is whether it was fair to include the clause in the contract, rather than whether the clause appears fair, or whether it is fair to rely on it, in the light of subsequent events. This is certainly the test under UCTA section 11(1) [s 24(1)]. SOGITA had applied a different test, namely, whether it would “be fair or reasonable to allow reliance on the term”, but the test was altered in UCTA to whether the term “is a fair and reasonable one to be included …” (England); whether it was “fair and reasonable to incorporate [the] term” (Scotland).[124]
(a) “Contrary to the requirement of good faith” and “significant imbalance”
3.57 There has been considerable debate in the legal literature as to the correct interpretation of the words of regulation 5(1). One view is that “contrary to the requirement of good faith” and “significant imbalance” are two separate but equal requirements, the first addressing issues of procedural fairness and the other of substantive fairness. Thus a term would be unfair only if it is shown both that in substance the term produced an imbalance between the rights and obligations of the parties to the consumer’s detriment; and that the process by which the contract was made was contrary to good faith.[125]
3.58 This approach would suggest a possible difference between UTCCR and UCTA. It suggests that a term will be unfair under UTCCR only if both substantive and procedural unfairness are present. In contrast, under UCTA it would appear permissible for the court to conclude that a clause is unreasonable simply because of its content (“substantive” unfairness) without there having been anything unreasonable in the way in which the contract was made or the term included in it (“procedural” unfairness).[126] For example, it seems open to a court to conclude that it was not reasonable for a business to exclude its liability for negligence causing loss or damage to property even though the business had taken care to point out the clause to the consumer and the consumer had not raised any protest.
3.59 A second view of UTCCR is that “significant imbalance … to the detriment of the consumer” is in the nature of a threshold requirement: the clause cannot be regarded as unfair if any imbalance is either insignificant or is actually in the consumer’s favour. This leaves the main test of whether or not a term is unfair resting on the concept of “contrary to … good faith”. The question then arises of the meaning of “good faith” in this context. Can it consist entirely of substantive elements, not requiring any procedural impropriety?[127]
3.60 A third and converse approach is to say that the reference to good faith is no more than a “bow in the direction of [the]origins” of the German law on unfair terms[128] which was so influential on the Directive, and which in turn was a development from the initial case law on the good faith article of the German Civil Code.[129] German law is said now to pay scant regard to good faith when dealing with unfair clauses.[130] On this view, the critical question is whether there is a significant imbalance to the detriment of the consumer. This view is supported by the fact that the French legislature decided not to incorporate the good faith criterion in its legislation implementing the Directive. It is also a view that seems to be supported by the European Commission.[131]
3.61 However, the Recitals to the Directive seem to consider good faith to be an operative criterion, as they refer to the requirement of good faith being “satisfied by the seller or supplier where he deals fairly and equitably with the other party whose legitimate interests he has to take into account”.[132] The omission from the French legislation is partly explicable by the facts that French law already has a general requirement of performance in good faith, and that it would regard a supplier who sought to enjoy a disproportionate advantage to the detriment of the consumer as not acting in good faith.[133]
3.62 A final approach is to say that there are two routes to unfairness within UTCCR. A term which in itself causes a significant imbalance will be contrary to “good faith” and hence unfair. A term which appears in its substance not to have such an effect may in fact also be unfair if there has been a lack of procedural good faith.[134] This approach allows for both procedure and substance to be considered, but allows certain terms to be ruled unfair per se.
Unfairness in substance
3.63 It is submitted that, whichever approach is followed, it must be the case that substantive unfairness alone can make a term unfair under UTCCR. This is because the Director General of Fair Trading (“DGFT”) and the bodies listed in Schedule 1 have power to prevent the use of unfair terms and this may be done “in the abstract”, in the sense that the precise way in which the clause is presented to the consumer may not be known. If there had to be procedural unfairness this preventive power could only be used when the procedure was known to the DGFT or other body. Equally, the indicative list would lose much of its force. It is clearly aimed at terms which, for the most part, are thought to be unfair in substance. It makes separate provision for terms which have been incorporated by an unfair procedure, such as “irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract”.[135]
3.64 In the major reported case under UTCCR, DGFT v First National Bank plc,[136] Peter Gibson LJ delivering the judgment of the Court of Appeal appeared to support the argument that procedural unfairness is not a necessary requirement and that some clauses may cause such an imbalance that they should always be treated as unfair.[137] He remarked:
The element of significant imbalance would appear to overlap substantially with that of the absence of good faith. A term which gives a significant advantage to the seller or supplier without a countervailing benefit to the consumer (such as a price reduction) might fail to satisfy this part of the test of an unfair term.[138]
3.65 The Court of Appeal’s decision in this case also supports the argument. It will be recalled that the term in question was a clause in a contract of loan giving the bank, in the event of a default by the borrower, the right to demand payment of the outstanding balance and accrued interest and further interest at the contractual rate up to the date of payment. The provision for continued interest can have the result that, if judgment for the debt is given or the consumer obtains a “time order” permitting him to pay in instalments which he can afford, he may find that he still has to pay further sums by way of interest. In practice this continuing liability is unlikely to be raised for the court’s consideration, so that the court will not consider whether a time order might be needed or whether any time order being made should allow for this liability to further interest. Counsel for the bank accepted that the term in question could cause hardship but argued that it was not necessary to order the bank to amend the term; it would suffice to amend the forms given to the consumer so as to bring this to his attention. The Court of Appeal held that this would not be adequate to ensure that the problem would be dealt with, and indicated that unless the bank were to give a suitable undertaking it would issue an injunction requiring amendment of the term.[139]
convincingly demonstrate that the argument of the bank that good faith is predominantly concerned with procedural defects in negotiating procedures cannot be sustained. Any purely procedural or even predominantly procedural interpretation of the requirement of good faith must be rejected.[140]
This case therefore also suggests that under UTCCR, as under UCTA, a term may be invalid simply because of its substance, without the need for procedural unfairness.
Unfairness in procedure
irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract.[141]
This makes no reference to the substance of the term to which the consumer is bound. Suppose a consumer taking a film to be processed were asked to sign a contract which by reference incorporated the processor’s standard conditions, and the conditions included a term to the effect that the processor’s liability in case of loss of the film would be limited to providing the consumer with a new, unexposed film unless, when the contract was made, the consumer paid a higher price for a “guaranteed service”. Such a clause might be perfectly fair in substance.[142] However, if the consumer were not told she had this choice and was not given an opportunity to read the processor’s standard terms before the contract was made, it is submitted that the terms incorporated by reference would for that reason alone be unfair.[143]
3.68 It might be asked, how can a term that is fair in substance cause “a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer”, as required by regulation 5(1)? We think that there is “a significant imbalance in the parties’ rights and obligations arising under the contract” within the meaning of the Regulation if the consumer does not know what her rights and obligations are and, had she known, she would have been able to safeguard her interests or might not have entered the contract.[144]
Conclusions
3.69 Thus we reject the idea that a term cannot be unfair under UTCCR unless there is unfairness both in substance and procedure. Any of the other approaches to interpretation of UTCCR seems possible, though we do not think that the third approach is easy to reconcile with the wording of the Directive. Either the second or the fourth seems better. But the truth is probably that theories as to the exact roles to be played by “good faith” and “substantive imbalance” make very little difference in practice. The court should make, as Recital 16 to the Directive puts it, “an overall evaluation of the different interests involved” and consider whether the seller or supplier has dealt “fairly and equitably with the other party whose legitimate interests he has to take into account”,[145] and it is clear that on any of theories two, three or four the court has considerable leeway to decide what is or is not fair. What matters is how UTCCR will actually be applied.
(b) Are the tests under UCTA and UTCCR different?
3.70 We have argued that the tests under UCTA and UTCCR are similar in that a term may be unfair in substance, or because of the way it was “agreed”, or both. Some commentators have argued that the test of fairness under UTCCR and that of reasonableness under UCTA are different because the two pieces of legislation point to different factors to be taken into account. Thus regulation 6(1) requires the court to take into account “all the other terms of the contract”, which is not mentioned explicitly in UCTA.[146] However, as we pointed out earlier,[147] under either piece of legislation the court is free to take into account any relevant fact.
3.71 It is hard to resist the conclusion reached in Chitty:
There is … a profound similarity in the two tests … . [T]his does not mean … that the two tests will have the same significance, but their differences do not stem from use of the language, on the one hand, of “reasonableness” and, on the other, of “fairness” and “good faith.” Instead, they flow from the differences in ambit of the two pieces of legislation, in particular as regards the types of term to be tested.[148]
(2) Factors
3.72 UCTA directs the court to take into account various factors. Thus we have noted that section 11(4) [s 24(3)] directs the court to consider the insurance position; and that Schedule 2 contains a list of guidelines for application of the reasonableness test. Technically the latter applies only to questions of reasonableness under sections 6(3), 7(3) and (4), 20 and 21, but in practice the guidelines are applied more widely.[149] Some of the words of these guidelines found their way into Recital 16 of the Directive, along with the instruction to take into account whether the seller or supplier dealt “fairly and equitably with the other party whose legitimate interests he has to take into account”. These were repeated in Schedule 2 to the 1994 Regulations, but UTCCR follow the words of the Directive itself and do not instruct the court to have regard to any particular factors other than “all the circumstances attending the conclusion of the contract”.[150]
(3) Plain and intelligible language
3.73 Regulation 7(1) of UTCCR, mirroring the Directive, states:
A seller or supplier shall ensure that any written term of a contract is expressed in plain, intelligible language.
Curiously, no general sanction is stated other than that, if the meaning of a written term is in doubt, the interpretation most favourable to the consumer shall prevail.[151] The fact that the clause is not in plain, intelligible language is not even stated to be a factor to be taken into account in deciding whether the term is unfair, though no doubt a court could take it into account under its general assessment.
3.74 It has been argued that Article 5 (and by implication regulation 7(2), which is in the same terms) does contain a sanction beyond the normal common law rule that a clause should be interpreted against the interests of the party putting it forward,[152] in that it requires not just an interpretation in favour of the consumer but the interpretation most favourable to the consumer.[153] This may not be very different to the extreme way in which, before the advent of statutory controls over exemption clauses,[154] the courts sometimes applied the common law rule. However, regulation 7 may be somewhat stronger than the common law rule as it is applied in the UK courts today.[155] Even if it is correct that the regulation requires more than an application of the common law rule, it is, like all rules of construction, a weak weapon. Many clauses have only one possible meaning yet are in language which is neither plain nor intelligible to consumers.
3.75 There is a sanction when the term which is not in plain, intelligible language is a “core” term (the price or the definition of the main subject matter). In this case the term may be reviewed for fairness.[156]
3.76 UCTA has no equivalent requirement. The rule of interpretation against the party putting the clause forward will apply to any ambiguous term as a matter of common law. The court can take into account the intelligibility of a term, and other factors relating to “transparency”, in assessing whether it satisfies the requirement of reasonableness.[157]
(4) Indicative list
3.77 UCTA defines closely some of the terms to which it applies.[158] However, its broadest control over terms in consumer contracts is that in section 3(2)(b) [s 17(1)(b)], whose scope is not easy to define. UCTA does not provide examples of what terms might fall within this subsection, and the Law Commissions’ Second Report, on which UCTA is based, gives only one example.[159]
3.78 UTCCR contain an indicative list of terms which may be regarded as unfair.[160] This list is referred to in regulation 5(5), but there does not seem to be any presumption against a clause which appears on the list.[161]
(5) Burden of showing unfairness
3.79 Under UCTA the burden of showing that a term is fair and reasonable is on the party claiming that the term satisfies the requirement of reasonableness.[162] UTCCR, however, do not state which party bears the burden.[163] It seems that it is for the consumer to show that the term is unfair, as neither UTCCR nor the Directive make any provision to displace the normal burden of proof resting on the claimant.[164] If a clause appears in the “indicative and non-exhaustive list of terms which may be regarded as unfair” of Schedule 2 to UTCCR, then it has been said that this at least raises a inference that the term is unfair.[165] Nevertheless it is likely that the general common law rule in civil cases will still apply,[166] and the consumer who asserts that a term is unfair will have to prove that it is.[167]
3.80 It is not clear that this is affected by a decision of the European Court of Justice (“ECJ”) that a domestic court has the power, and possibly the duty,[168] to raise the issue of fairness of its own motion when the consumer does not do so (in the case in question because the action was undefended).[169] This presumably applies only when the unfairness of the clause is clear on the face of the documents or from the way that the case was presented to the court.[170] It may be argued that the business is still entitled to have its clause enforced unless the court has been convinced (by the consumer or otherwise) that the term is unfair.
10. Definitions
(1) “Consumer”
3.81 The definitions of “consumer” in the two pieces of legislation differ. UCTA section 12 provides:
(1) A party to a contract “deals as consumer” in relation to another party if –
(a) he neither makes the contract in the course of a business nor holds himself out as doing so; and
(b) the other party does make the contract in the course of a business; and
(c) in the case of a contract governed by the law of sale of goods or hire-purchase, or by section 7 of this Act, the goods passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption.
(2) But on a sale by auction or by competitive tender the buyer is not in any circumstances to be regarded as dealing as consumer.
(3) Subject to this, it is for those claiming that a party does not deal as consumer to show that he does not.
The Scottish provisions refer to a “consumer contract”. This is defined in section 25(1) as
a contract (not being a contract of sale by auction or competitive tender) in which –
(a) one party to the contract deals, and the other party to the contract (“the consumer”) does not deal or hold himself out as dealing, in the course of a business, and
(b) in the case of a contract such as is mentioned in section 15(2)(a) of this Act [namely, one which relates to the transfer of the ownership or possession of goods from one person to another] the goods are of a type ordinarily supplied for private use or consumption;
and for the purposes of this Part of this Act the onus of proving that a contract is not to be regarded as a consumer contract shall lie on the party so contending.
This definition is substantially the same as that in section 12.
3.82 Under UTCCR regulation 3(1),
“consumer” means any natural person who, in contracts covered by these Regulations, is acting for purposes which are outside his trade, business or profession.[171]
3.84 A second difference is as to the “persons” who may be a consumer. The Court of Appeal has held that a company may “deal as consumer” within UCTA if it enters a transaction which is only incidental to its business activity and which is not of a kind it makes with any degree of regularity.[172] Under UTCCR only a natural person can be a consumer.[173]
3.85 Thirdly, UCTA uses the test of whether the contract is made (by either party) in the course of business, whereas UTCCR define a consumer as a person acting “outside his trade, business or profession”. The latter formula appears to exclude from the application of UTCCR transactions that are related to a person’s business even if they are not a central or regular part of it. Moreover, the ECJ has held in relation to another Directive that a trader cannot claim that because the transaction was not a normal part of his business (in the case concerned, a contract to advertise the sale of the business), he is entitled to the protection granted by the Directive to “consumers”.[174] Following the R & B Customs case[175] it would seem that a sole trader who makes a contract which is only incidental to his business and not one he makes with any degree of regularity will be regarded as a consumer under UCTA.[176]
3.86 A fourth difference is that under UCTA, where the contract is one for the sale or supply of goods, a party will only be “dealing as consumer” if the goods supplied are of a type ordinarily supplied for private use or consumption.[177] There is no equivalent limitation in UTCCR, nor in SCGD.[178]
3.87 Fifthly, sales by auction or competitive tender do not count as consumer sales under UCTA,[179] whereas they can under UTCCR. SCGD permits business sellers to exclude their liability only in auction sales of second-hand goods and then only if the buyer can be present.[180]
3.88 A final difference is that under UCTA, a party will not deal as a consumer if he “holds himself out as” making the contract in the course of a business.[181] There is no such restriction in UTCCR or SCGD.
(2) “Business”
3.89 As a general rule, UCTA applies only to terms affecting “business liability”.[182] While this is an express provision of English law,[183] it is also true of Scots law.[184] There are two exceptions. The first are terms affecting liability for misrepresentation.[185] The second are clauses falling within section 6 [s 20] (sale and hire-purchase). This means that even a non-business seller[186] cannot exclude or restrict liability for breach of the implied terms under section 12 of the SGA 1979 (title), and can exclude or restrict her liability under section 13 (correspondence with description) or 15 (correspondence with sample)[187] only if the term satisfies the requirement of reasonableness.[188]
3.90 As we have seen, UTCCR applies only to contracts “concluded between a seller or a supplier and a consumer”,[189] and “seller or supplier” is defined as a business.[190]
“business” includes a profession and the activities of any government department or local or public authority.
3.92 UTCCR regulation 3(1) provides that
“seller or supplier” means any natural or legal person who, in contracts covered by these Regulations, is acting for purposes relating to his trade, business or profession, whether publicly owned or privately owned.
3.93 There are obvious similarities between the two, but also some possible differences.[191]
(a) “Occasional sales”
3.94 UCTA applies only if the party is acting in the course of a business.[192] It is possible that this may exclude activities which are merely incidental to the business and are not carried out regularly. Thus we saw earlier that when the question is whether the other party is acting in the course of a business or is dealing as a consumer, the Court of Appeal has held that a company may “deal as consumer” within UCTA if it enters a transaction which is only incidental to its business activity and which is not of a kind it makes with any degree of regularity.[193] UTCCR’s definition is broader in referring to purposes “relating” to a trade, business or profession. Curiously, CSD’s definition is closer to that of UCTA than of UTCCR: a “seller” is defined as a person who sells consumer goods in the course of his trade, business or profession.[194]
3.95 However, we do not believe that there is any practical difference between the definitions on this point. Although the Court of Appeal has held that a company may be a consumer within UCTA when buying, we doubt whether the courts would apply the same interpretation of UCTA when the question is whether the seller or supplier is acting in the course of a business, as the Court of Appeal has also held that the sale of an item which is not regularly sold by the seller is still within the course of business within the meaning of the SGA 1979.[195]
(b) Contracts with government departments or local or public authorities
3.96 UCTA’s definition of business is not exhaustive but it expressly includes government departments and local or public authorities. UTCCR’s definition is exhaustive. It includes businesses in public ownership.[196] It might be argued that it does not include a contract between, say, a local authority and a consumer, but this seems an unlikely interpretation,[197] and the OFT has secured the removal of unfair terms from a number of such contracts.[198]
(3) “Party” and third party beneficiaries
(a) UCTA: English law
3.97 A term in a contract may attempt to remove or limit the right of a third person to sue one of the parties to the contract in tort. There is no doubt that such a provision (as against the third party, it is a non-contractual notice rather than a contractual term) may be subject to UCTA.[199]
3.98 The Contracts (Rights of Third Parties) Act 1999 creates an exception to the doctrine of privity of contract. If a contract provides that a third party may enforce one of its terms, or if the term is expressed to be for the third party’s benefit and on the construction of the contract it does not appear that the parties did not intend the term to be enforceable by the third party, the third party may enforce the term in her own name.[200]
3.99 Such enforcement is subject to any relevant terms,[201] which would include any clause limiting the liability of the promisor (the party who has undertaken the obligation to the third party). Even if the limitation is one which, were it to apply as between the original parties to the contract, would fall within UCTA, the third party cannot, with one exception, challenge its validity under UCTA.
3.102 It appears that, if the other contracting party (the promisee) were to seek to enforce the contract term for the third party’s benefit, the promisee could rely on section 3 or other provisions of UCTA to challenge the limitation of the promisor’s liability on the grounds that, as against the promisee, the limitation is unreasonable.[202]
(b) UCTA: Scots law[203]
3.103 Scotland has known the ius quaesitum tertio for many years. It has been argued that section 17 of UCTA does not apply where a tertius has title to sue since the tertius is not a party to the contract.[204] The controls in sections 20 and 21 do not apply to a tertius for the same reason. However, both sections 16(1)(a) (death and personal injury caused by breach of duty) and 16(1)(b) (other loss or damage caused by breach of duty) seem to apply whether the pursuer is the original party to the contract or a third party claiming a right under it.[205]
(c) UTCCR
3.104 The position under UTCCR is less clear. These, like the Directive, refer to clauses which produce a significant imbalance in the rights and obligations of the parties,[206] in contracts concluded with a consumer by a seller, as not being “binding on the consumer”.[207] This suggests that it is only the contracting consumer who will benefit from UTCCR, not a third party beneficiary. The Law Commission Report on Contracts for the Benefit of Third Parties expressed the view that the 1994 Regulations appear not to apply to limitations on the rights of third parties.[208] We are not aware of any reason to take a different view of UTCCR, nor of any later authority on the point.
(d) SCGD
(4) “Contract”
3.106 Most of UCTA’s provisions apply only where there is a contract of the relevant type between the parties (the exception is for clauses dealing with business liability for negligence or breach of duty[209]). Thus if there is some agreement between the parties but it does not amount to a legally enforceable contract (for example, in England, an agreement under which one party is to provide a gratuitous service[210] or an agreement for the supply of water to a consumer by a company acting under statutory duty[211]), only terms attempting to exclude the supplier’s liability for negligence will be subject to UCTA’s control. UTCCR also speak of “contracts” concluded between a seller or a supplier and a consumer, but it has been suggested that the ECJ may adopt an autonomous view of “contract” which would include such supply arrangements.[212]
11. Application outside contract
3.107 UCTA applies not only to contract terms but also to notices which would exclude or restrict tortious or delictualliability for negligence or breach of duty outside any contract,[213] where the liability is “business liability”.[214] There is no equivalent in UTCCR.[215] However, again it is possible that the ECJ might take an autonomous view of contract on this point also and hold that any agreement between the parties, such as that a person might enter another’s land free of charge, amounts to a contract within the meaning of the Directive.[216] Were the entry in connection with the occupier’s business and were the entrant there for private purposes, the Directive would then apply.
12. Effect of invalid exclusion or restriction
3.108 Part I of UCTA (which applies to England and Wales and Northern Ireland) does not contain a specific provision on the effect of an exclusion or restriction being held invalid.[217] Where an exclusion or restriction is invalid under Part I of UCTA (whether it is automatically invalid or fails the requirement of reasonableness), it is simply of no effect and the parties’ relationship is as if the exclusion or restriction had not existed.[218] However, two issues arise (in relation to both Parts I and II). First, can a term of a contract which offends UCTA remain partly effective (to the extent that it also contains exclusions or restrictions which do not offend UCTA), or is the term invalid as a whole? Secondly, if in principle a term may remain partly effective, where part of a term would in itself be reasonable, can it still be reasonable even if another part of the same term is unreasonable or of no effect at all? Or does the inclusion of the unreasonable or void part render the clause as a whole unreasonable?
3.109 In respect of the first issue, in relation to England and Wales and Northern Ireland, Part I sets out those exclusions or restrictions which a person cannot achieve by way of a contractual term (or a notice).[219] Part I does not state the effect of an exclusion or restriction being held to be ineffective,[220] and does not state whether a term can be partly effective.[221] Treitel believes that terms may be “partly effective”.[222] Chitty takes the same view in the case of a term which covers different types of injury.[223] To say that, where a term in a contract excludes liability for negligence in respect of all types of harm, the term may be partly effective, would be consistent with section 2(2). The few reported cases do not provide clear guidance.[224] On balance, we believe that a term of a contract which offends Part I of UCTA can remain partly effective, to the extent that it also contains exclusions or restrictions which do not offend UCTA.
3.110 In respect of the first issue, in relation to Scotland, Part II sets out those contractual terms (or notice provisions) which are ineffective. Part II provides that offending terms (or notice provisions) shall be void, or of no effect,[225] and does not state whether a term can be partly effective. There is no statutory definition of a “term”. It is arguable that a single group of words (for example a single clause of a contract) may consist of more than one term. However, on balance, we believe that in view of the drafting of Part II it is more likely that a court would hold that a clause of a contract was a single term and was either wholly effective or wholly ineffective.[226] On balance, we therefore believe that a term of a contract which (wholly or partly) offends Part II of UCTA will be wholly ineffective.
3.111 In respect of the second issue, the “reasonableness test” in section 11 (of Part I) is applied to a “contract term” or “notice”. UCTA does not define what is meant by a “term”. The current approach of the English courts is to say that the offending part of a term cannot be severed.[227] The effect of this is that the term as a whole will be unreasonable and that the non-offending part cannot be relied upon.[228] In the previous paragraph we concluded that a term which offends Part II will be wholly ineffective. On that basis, the second issue does not arise in relation to Scotland.
3.113 UTCCR cover a greater range of terms and, while in many cases the contract will be workable without the offending term, this may not always be the case.[229] For example, even a term which gives the main definition of the subject matter may be held unfair if it is not in plain, intelligible language.[230] It might be difficult to enforce a contract which no longer contains a definition of the subject matter. Regulation 8 therefore provides that the offending term shall not be binding on the consumer and the contract shall continue to bind the parties “if it is capable of continuing in existence without the unfair term”.
13. Evasion of the legislation
(1) Secondary contracts
3.114 Section 10 [sDan and Kathryn 23] of UCTA (“Evasion by means of secondary contract”) reads as if it were designed to ensure that the protection provided by the Act is not lost because of a second contract under which, for example,[231] the party who would otherwise be protected agrees to waive that protection.[232] This problem does not arise in the same way in UTCCR: since these apply to any type of contract, the secondary contract itself could be held to be unfair.[233]
3.115 The legislative history of UCTA in fact suggests that section 10 [s 23] was aimed at a different situation, namely where in an agreement between A and B it is agreed that B will not enforce his rights under a second contract between himself and C.[234] The proposer of the amendment which became section 10 [s 23] gave the example of a consumer who had had central heating installed by one company and then approached another company in the same group to service it. The servicing company should not be permitted to require the consumer to give up any rights he might have against the installer if an exclusion of those rights in the installation contract would not have been valid. Again this problem does not arise in UTCCR as the terms of the secondary contract could be held to be unfair.[235]
(2) Evasion by choice of law
3.116 Each instrument contains provisions designed to ensure that it will apply notwithstanding any attempt to avoid it by a choice of law clause. UCTA will apply, despite a term applying the law of a country outside the UK, when the contract would otherwise be subject to the law of the UK.[236] UTCCR have a parallel provision but referring, not to a term applying the law of a country outside the UK, but to a clause applying the law of a non-Member State in place of that of a Member State.[237] The actual formulation is:
These Regulations shall apply notwithstanding any contract term which applies or purports to apply the law of a non-Member State, if the contract has a close connection with the territory of the Member States.
It should be noted that while the parties cannot avoid UTCCR by choosing the law of a non-Member State, they are free to choose the law of another Member State. Thus if a contract which has its closest connection with England and Wales is agreed to be subject to the law of some other Member State, UTCCR will not apply. Instead the consumer will receive the protection provided by the Directive as implemented in that other Member State.[238]
3.117 This seems to mean that if the Directive were to be interpreted less (or more) liberally in the law of the Member State chosen than in England and Wales, the consumer would receive less (or more) protection.[239] It would also allow the choice of the law of another Member State even though the contract has a closer connection with England and Wales and the latter law gives greater protection than is required by the Directive.
3.118 If the term under challenge is affected by both UCTA and UTCCR, it is not clear which anti-avoidance provision should take precedence.[240]
14. Prevention
3.119 UCTA renders terms invalid but it does not prevent businesses continuing to use terms which automatically have no effect. The use of terms falling within section 6 [s 20] has been made an offence by orders made under the Fair Trading Act 1973, Part II,[241] but other terms which are of no legal effect,[242] or which if challenged would probably be found not to satisfy the requirement of reasonableness, continued to be used for years after UCTA came into force. This may have been simply because the businesses did not trouble to change them or it may have been a deliberate tactic to deter claims.
3.120 Article 7 of the Directive provides:
1. Member States shall ensure that, in the interests of consumers and of competitors, adequate and effective means exist to prevent the continued use of unfair terms in contracts concluded with consumers by sellers or suppliers.
2. The means referred to in paragraph 1 shall include provisions whereby persons or organizations, having a legitimate interest under national law in protecting consumers, may take action according to the national law concerned before the courts or before competent administrative bodies for a decision as to whether contractual terms drawn up for general use are unfair, so that they can apply appropriate and effective means to prevent the continued use of such terms.
3. With due regard for national laws, the legal remedies referred to in paragraph 2 may be directed separately or jointly against a number of sellers or suppliers from the same economic sector or their associations which use or recommend the use of the same general contractual terms or similar terms.
3.121 The 1994 Regulations empowered the DGFT to bring proceedings for an injunction [interdict] against persons appearing to him to be using or recommending the use of unfair terms in contracts concluded with consumers.[243] UTCCR have extended this power to a number of “qualifying bodies”, including a variety of industry regulators, all weights and measures departments in Great Britain and the Consumers’ Association.[244] Amending Regulations in 2001 added the Financial Services Authority to the list.[245]
3.122 The precise scope of the preventive powers is subject to some debate. For example, it has been questioned whether action can be taken against a firm that purports to “use” an unfair term but does so in a way which means that it is not effectively incorporated into the contract, or where the term is ineffective for other reasons (for example it is a penalty and therefore void). Consumers will not necessarily know that the term is ineffective and may still be deterred from claiming, or may consider themselves bound by the term.[246] In relation to terms which are ineffective for other reasons, we consider that the term is subject to control: our view is that UTCCR must be interpreted so that such a term is both one of the “terms in contracts concluded between a seller or a supplier and a consumer”, and is unfair despite its invalidity, because the indicative list contains examples of terms which, independently of the Directive, would be of no effect under several legal systems.[247] On terms not effectively incorporated, we believe that a court would take a purposive approach to the interpretation of regulation 12 and would hold that a firm is “using … an unfair term drawn up for general use in contracts concluded with consumers” even if the term is not incorporated.[248]
3.123 Another question is whether the preventive powers can be used where the terms used omit important information. It has been suggested to us that this is a problem. The OFT and other qualifying bodies under UTCCR do not have the power to specify or suggest the information that should be included, but are limited to drawing attention to the unclear nature of the term and requesting that it be redrafted. However, we are unsure of the extent of this problem. We discuss this further in Part IV.[249]
15. Conclusions
(1) The existence of two instruments is misleading. A term may not be of the type covered by UCTA yet fall foul of UTCCR.
(2) Conversely, a term may have been negotiated with the consumer and so be exempt from UTCCR, but be caught by UCTA.
(3) Terms approved by industry regulators may be exempt from UCTA but may not be exempt from UTCCR.
(4) Several important types of contract are exempt from UCTA but are subject to UTCCR.
(5) While UCTA is fairly precise in what types of exclusion or limitation of liability clause will be invalid in a consumer contract, the scope of application of section 3(2)(b) [s 17(1)(b)] is less than clear, and there are no indicative lists to give further guidance. Conversely, it is difficult to be sure which terms fall outside UTCCR because they are “core terms”.
(6) UTCCR seem to have a plain language requirement, but it is hard to be sure to what extent either instrument really requires this or that the term be conspicuous.
(7) The burden of proof of “fairness” seems to be different from that of “reasonableness”.
(8) Both UTCCR and UCTA apply to consumer contracts, but the definition of “consumer” for each purpose differs.
(9) Each regime applies only to (broadly speaking) “business liability”, but the definitions of business may differ.
(10) UCTA sometimes applies to claims by third party beneficiaries; UTCCR do not.
(11) The very notion of what amounts to a contract may differ under UCTA and UTCCR.
(12) While UTCCR apply to the whole of the UK, UCTA has separate (though very similar) provisions for England, Wales and Northern Ireland and for Scotland.
(13) UTCCR apply only to consumer contracts, while UCTA applies very differently to consumer contracts and non-consumer contracts.
3.125 It is not clear that all of the differences can be removed without reducing significantly the protection given to consumers. For example, to remove the complete ban on terms excluding a seller’s liability for breach of the implied terms under the SGA 1979, sections 12–15, and to rely simply on the “fairness” test under UTCCR, would reduce the protection currently afforded to consumer buyers.[250] Nonetheless, it should be possible to devise a simpler regime with fewer differences and overlaps. How this might be done is considered in Part IV.
Ü Þ
[1]As amended by Unfair Terms in Consumer Contracts (Amendment) Regulations 2001, SI 2001 No 1186 (on this amendment see para 3.121 below).
[2]This was due to be implemented by 1 January 2002. Draft regulations have been circulated for consultation (see n 5 below) and regulations will be brought into effect later this year.
[3]These are set out in Arts 3 and 5.
[4]Art 2(2). Art 2(2)(d) is rather wider than SGA 1979 in that “public statements” by the producer or his representative have to be taken into account. It appears that the Directive does not cover conformity with an express term of the contract, as Art 2(2) appears to treat “conformity” within the meaning of the Directive as being confined to the matters listed. (Equally, UCTA ss 6 and 7 [ss 20, 21] do not affect clauses restricting liability for express undertakings: Border Harvesters Ltd v Edwards Engineering (Perth) Ltd 1985 SLT 128 (OH); British Fermentation Products v Compair Reavell [1999] 2 All ER (Comm) 389.)
[5]An initial Consultation Document was circulated by DTI on 4 January 2001 (DTI, EC Directive 1999/44/EC on Certain Aspects of the Sale of Consumer Goods and Associated Guarantees: First Consultation of 2001, URN 00/1471); a further Consultation Document and draft Sale and Supply of Goods to Consumers Regulations 2002 (“SSGCR”) were circulated on 26 February 2002 (DTI, Second Consultation Paper on EC Directive 1999/44/EC on Certain Aspects of the Sale of Consumer Goods and Associated Guarantees, URN 02/538, No CA 004/02).
[6]The changes proposed in the draft SSGCR of 26 February 2002 are described at para 4.153, n 187 and 4.163, n 196 below.
[7]Paras 2.18 – 2.19 above.
[8]See para 2.13 above. There are few substantive differences between the two regimes: see para 4.16 below.
[9]Whether this distinction should be maintained, or the protection of UTCCR extended to some businesses, is discussed in Part V below.
[10]In addition, what amounts to a consumer contract differs under the two pieces of legislation: see in particular paras 3.81 – 3.88 below.
[11]The two exceptions are s 4 [s 18] (unreasonable indemnity clauses) and s 5 [s 19] (“guarantee” of consumer goods).
[12]Sections 6(2) and 7(2) [ss 20(2)(i), 21(1)(a)(i) and 21(3)(a)]. The terms to which these provisions apply are explained in para 3.9 below.
[13]Sections 6(3) and 7(3) [ss 20(2)(ii), 21(1)(a)(ii) and 21(3)(a)].
[14]For Scotland, though s 17(1) does not seem to require that the standard terms be in writing, the effect of the definition of “customer” in s 17(2) is that for non-consumer contracts to be covered by the section the standard terms will need to be written. Section 3 [s 17] has the broadest application of any section of UCTA; see para 3.13 below.
[15]This is because ss 2–7 apply only to “business liability”: s 1(3). For Scotland a similar result is obtained as a result of ss 16(1), 17(2), 18(2) and 21(3).
[16]Under SGA 1979, s 12, or SOGITA, s 8; see UCTA, s 6(1) [s 20(1)].
[17]Under SGA 1979, ss 13 and 15, or SOGITA, ss 9 and 11; see UCTA, ss 6(3) and (4) [s 20(2)(ii)]. SGA 1979, s 14 and SOGITA, s 10 do not affect sellers or suppliers who are not acting in the course of a business.
[18]This seems an unlikely situation.
[19]See Part VI below.
[20]The position in Scotland is similar to that in England, but differences between the wording of the relevant provisions may have consequential effects on terms which contain wider exclusions or restrictions than those listed in this paragraph. See paras 3.108 – 3.113 and 4.180 below.
[21]Section 2(1) [s 16].
[22]Sections 6(1) and 7(3A) [s 20(1); there is no equivalent of s 7(3A) for Scots law].
[23]Sections 6(2) and 7(2) [ss 20(2), 21(1)(a)(i) and 21(3)(a)].
[24]Section 5 [s 19].
[25]Section 2(2) [s 16(1)] (other loss or damage caused by negligence); s 3 [s 17]; s 4 [s 18] (indemnities in consumer contracts); s 6(3) [s 20(2)] and s 7(3) [s 21(1)(a)(ii), (3)(a)] (description, quality, etc in non-consumer contracts for supply of goods); s 7(4) [s 21(1)(b), (3)(b)] (right to transfer possession, etc in contracts of hire, etc).
[26]Section 11(5) [s 24(4)]. See further para 3.79 below.
[27]The draft Bills contained in the Second Report were entitled the Exemption Clauses (England and Wales) Bill and the Exemption Clauses (Scotland) Bill. The wider title was given to the combined (and rather differently drafted) Bill during its passage through Parliament. See Hansard (HC) 6 May 1977, vol 931, col 819.
[28]The exception is s 4 [s 18], which covers clauses requiring a consumer to indemnify either the other party or a third person (eg an employee of the other party) for liability incurred to another (eg to a neighbour or member of the public who has been injured in the course of performance). It also applies to clauses requiring the consumer to indemnify a third person for liability to the consumer herself. (A clause requiring the consumer to indemnify the other party for liability which the other party had incurred to the consumer would in effect be an exclusion clause and would be caught by other sections of the Act: Phillips Products Ltd v Hyland [1987] 1 WLR 659 (CA).)
[29]Section 13 defines this widely, including (but only for the purposes of ss 2 and 5–7: s 3 has its own provision on this point, see below) terms which would prevent the relevant obligation arising (eg “There is no implied obligation that the goods sold shall be of satisfactory quality” or, more simply, “sold as seen”). The parallel provisions for Scotland are s 25(3) and (5): while the wording differs slightly the substantive effect is the same.
[30]Section 6 [s 20] applies to sale and hire-purchase contracts, covering clauses which exclude or restrict liability for breach of the implied terms as to title, etc, and conformity with description or sample, quality or fitness for a particular purpose; s 7 [s 21] does the equivalent for other types of contract “under or in pursuance” of which possession or ownership of goods passes.
[31]Section 1(3) [s 16(1)].
[32]Similarly, s 8 (which amends Misrepresentation Act 1967, s 3) applies to any kind of contract but only to clauses excluding or restricting liability, or the remedies available, for misrepresentation. There is no parallel Scottish provision as the Misrepresentation Act 1967 does not apply to Scotland.
[33]Breach of duty means (a) a breach of a contractual obligation to take reasonable care; (b) a breach of a delictual duty to take reasonable care; and (c) a breach of the duty of reasonable care imposed by s 2(1) of the Occupiers’ Liability (Scotland) Act 1960: s 25(1).
[34]Section 3(2)(a) [s 17(1)(a)].
[35]Second Report, para 143. The Law Commissions gave the example of the clause in Anglo-Continental Holidays Ltd v Typaldos Lines (London) Ltd [1967] 2 Lloyd’s Rep 61. This allowed the defendant travel agent to change steamers, sailing dates, rates and itineraries without prior notice. The contract was between two travel agents, but clauses of this general type are to be found in some package holiday contracts (albeit heavily qualified and of less severity). Package holiday contracts are now subject to Package Travel, Package Holidays and Package Tours Regulations 1992, SI 1992 No 3288 (implementing Council Directive 90/314/EEC on package travel, package holidays and package tours (OJ L158, 23 June 1990, p 59) but these regulations seem not to affect this point, merely providing that “where the organiser is constrained before the departure to alter significantly an essential term of the contract” the consumer must be given the right to withdraw from the contract without penalty (reg 12(a)). The Code of Conduct of the Association of British Travel Agents reiterates this requirement (s 2.2).
[36]The Scottish provision, s 17(1)(b), is worded as follows:
… in respect of a contractual obligation, to render no performance, or to render a performance substantially different from that which the consumer or customer reasonably expected from the contract;
if it was not fair and reasonable to incorporate the term in the contract.
It is submitted that this is substantially the same as s 3(2)(b).
[37]Cf Williams v Travel Promotions Ltd, The Times 9 March 1998 (CA); P & O Steam Navigation Cov Youell [1997] 2 Lloyd’s Rep 136 (CA).
[38]These three examples would fall within s 3(2)(b)(i) [s 17(1)(b)]; it would also be necessary for the consumer to show that the change was substantially different from what was reasonably expected.
[39]This would fall within s 3(2)(b)(ii) [s 17(1)(b)]. See Timeload Ltd v British Telecommunications plc [1995] EMLR 459 (CA). A well-known pre-Act case in which the clause seems to fall within the words of s 3(2)(b)(ii) [s 17(1)(b)] is Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576 (PC) (clause in bill of lading contract stating that the carrier’s responsibility for the goods would “cease absolutely after the goods are discharged” from the ship). In all the four cases mentioned in the text it would be open to the business to show that the term in question satisfied the requirement of reasonableness. [In Scotland, the reasonableness test is contained in s 24(1).] There is considerable doubt about the scope of s 3(2)(b)(ii) [s 17(1)(b)]. Treitel (at pp 228 and 232) argues that it does not catch clauses which are drafted in such a way that the business has no obligation to perform in any circumstances at all, but does apply if there is a contractual obligation but the business is given a wide discretion whether to perform at all or in full. In the unusual case in which the clauses seems to remove any obligations to perform in certain circumstances, we think that the section is to be interpreted as applying whenever, but for the term in question, there would be an obligation to perform. This would bring in clauses making time of the essence when it would not otherwise be so, though Treitel argues against such an interpretation on the ground that this was not what was intended. Obviously this unsatisfactory form of drafting must be avoided in any new legislation. For discussion of the difficulties from a Scottish perspective, see M G Clarke’s notes to UCTA s 17 in Scottish Current Law Statutes Annotated.
[40]See Paragon Finance v Nash [2001] EWCA Civ 1466, [2002] 1 WLR 685. Treitel, p 224, gives the further example of clauses in a guarantee given on the creditor’s standard form which strip the guarantor of the protection of the rules which would otherwise limit his obligation (such as that the guarantor will be released if the creditor gives the debtor extra time to pay). Again these do not affect the creditor’s performance. At p 252, Treitel identifies also, and for essentially the same reason, terms within UTCCR, Sched 2, paras 1(h), (l), (o) (insofar as it goes beyond set-off) and (p).
[41]See para 3.16 below.
[42]See para 3.51 below.
[43]Reg 6(2). See paras 3.19 – 3.34 below and, on plain intelligible language, para 3.73 below.
[44]Reg 5(4).
[45]This appears to be the meaning of “drawn up in advance”: see Treitel, p 247.
[46]M Furmston (ed), The Law of Contract (Butterworths Common Law Series, 1999) (“Butterworths”)para 3.103 (referring to the 1994 Regulations). A further question is whether the term is still to be regarded as non-negotiated when the other party has tried to negotiate an improvement but has failed to obtain one. In St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481,the Court of Appeal held that if the defendant’s general conditions of contract remained untouched by the negotiations, then the final deal had indeed been made on the defendant’s standard terms for the purposes of UCTA, s 3(1)[s 17(1)]. As Nourse LJ pointed out at p 491, “as a matter of plain English ‘deals’ means ‘makes a deal’, irrespective of any negotiations that may have preceded it”. This decision has since been followed in South West Water Services Ltd v International Computers Ltd [1999] BLR 420 (QBD).
[47]See para 3.7 above.
[48]Reg 6(2). On plain intelligible language see para 3.73 below. In relation to the definition of the main subject matter it appears to be the term that is exempt from review. See also Recital 19 to the Directive, which reads:
Whereas, for the purposes of this Directive, assessment of unfair character shall not be made of terms which describe the main subject matter of the contract …
We shall see later that, in relation to price, it is the issue of adequacy rather than the price term that seems to be exempt: see para 3.27 below.
[49]Reg 6(2).
[50]Though in DGFT v First National Bank plc [2000] QB 672, 686, Peter Gibson LJ pointed out that the phrase does not appear in the regulations; the question is whether the term falls within what is now reg 6(2).
[51]Curiously, s 3(2)(b)(ii) is not so qualified. Similarly, for Scotland, it seems that the reference in s 17(1)(b) to a term enabling a party to render no performance is not so qualified: see para 3.13, n 36 above.
[52][1999] EMLR 385, 395.
[53]P & O Steam Navigation Cov Youell [1997] 2 Lloyd’s Rep 136, 142, per Potter LJ; W Photoprint v Forward Trust Group (1993) 12 Tr LR 146; Megaphone International Ltd v British Telecommunications plc, The Independent 1 March 1989.
[54]It has been argued that a similar test of what should reasonably have been expected should be used to decide, for the purposes of s 6 or 7 [s 20 or 21], whether the clause concerned was an attempt to exclude liability by excluding the relevant duty or was simply defining what the contract was about, eg that a painting was not being sold as the work of a particular artist: J Beatson (ed), Anson’s Law of Contract (27th ed 1998 – “Anson”) p 185. See also the discussion of the current interpretation of s 13 of UCTA: E Macdonald, “Exclusion Clauses: the Ambit of s 13(1) of the Unfair Contract Terms Act 1977” (1992) 12 LS 277, and “Mapping The Unfair Contract Terms Act 1977 and the Directive on Unfair Terms in Consumer Contracts” (1994) JBL 441.
[55]See para 3.15 above.
[56]See para 3.25 below.
[57]Unfair Contract Terms Bulletin 2 (OFT 170, September 1996) para 2.26.
[58]It has been pointed out (Butterworths, para 3.104) that this is not wholly consistent with Recital 19, which reads:
… whereas the main subject matter of the contract and the price/quality ratio may nevertheless be taken into account in assessing the fairness of other terms; whereas it follows, inter alia, that in insurance contracts, the terms which clearly define or circumscribe the insured risk and the insurer’s liability shall not be subject to such assessment since these restrictions are taken into account in calculating the premium paid by the consumer …
Unfortunately the Recital cannot be taken literally as almost any term, including for example exemption clauses which are clearly not core, may affect the price to be paid by the consumer.
[59]For the similar wording of the Scottish provisions [s 17(1)(b)], see para 3.13, n 36 above.
[60][2000] QB 672 (CA); reversed on the point of whether the term itself was unfair, [2001] UKHL 52, [2002] 1 AC 481 (HL). The case was decided under the 1994 Regulations, but the differences between these and UTCCR do not seem relevant to the point at issue. See further para 2.15 above.
[61][2000] QB 672, 685; [2001] UKHL 52, [2002] 1 AC 481 (HL), especially at [12], [34] and [43].Chitty, para 15‑026, gives another telling example: a clause giving the supplier the right to determine the price at the date for delivery or to increase the price without giving the consumer the right to cancel the contract is listed in Sched 2, para 1(l) as a term which may be unfair.
[62][2001] UKHL 52at [12], referring to Chitty, para 15-025.
[63]Ibid, at [34]. Lord Hope said at [43] that it was “a default provision”.
[64]This is not, of course, to say that the term applying in these situations would necessarily be unfair. That would depend on what it provided.
[65]See SWhittaker, “Judicial Interventionism and Consumer Contracts”(2001) 117 LQR 215, 219. This difference of treatment between “definition of the main subject matter” (where the term seems to be exempt: see para 3.19 above) and “adequacy of the price” seems to be reflected in the Directive at Recital 19. This reads:
Whereas, for the purposes of this Directive, assessment of unfair character shall not be made of terms which describe the main subject matter of the contract nor the quality/price ratio of the goods or services supplied …
The Recital makes sense only if the word “terms” qualifies only the words “which describe the main subject matter of the contract”, because no term in a contract will describe the quality/price ratio of the goods or services supplied. It must be that ratio (ie the issue of adequacy) that is exempt. Admittedly this means interpreting the Recital as if it read “… nor of the quality/price ratio …”.
[66]Sched 2, para 1(l): terms which have the object or effect of
providing for the price of goods to be determined at the time of delivery or allowing a seller of goods or supplier of services to increase their price without in both cases giving the consumer the corresponding right to cancel the contract if the final price is too high in relation to the price agreed when the contract was concluded.
[67]The reason for the second qualification will appear from para 3.33 below.
[68]See Falco Finance Ltd v Gough (1999) 17 Tr LR 526 (Macclesfield Cty Ct).
[69]A similar example might be a provision in a pension scheme allowing the subscriber to leave the scheme subject to an “exit fee” of 10% of the accumulated benefits; and the conclusions we give below would apply equally.
[70][2000] QB 672 (CA) and [2001] UKHL 52, [2002] 1 AC 481 (HL); para 3.25 above.
[71]Ibid at p 685(CA),[24]–[25] (HL).
[72]This assumes that the rates are in “plain intelligible language”.
[73]Cf Unfair Contract Terms Bulletin 2 (OFT 170, September 1996) para 2.26, quoted at para 3.23 above.
[74]Cf paras 3.25 – 3.26 above.
[75]See esp paras 5.2 – 5.6.
[76]UCTA, s 29; UTCCR, reg 4(2).
[77]UCTA, s 29(1)(a); UTCCR, reg 4(2)(a).
[78]Reg 4(2)(a).
[79]Art 1(2).
[80]Unless the term reflects principles of international conventions to which the UK or the Community are party. See para 3.38 below.
[81]UCTA, s 29(1)(a) exempts provisions which are “authorised or required” by legislation. This seems to cover both terms which are compulsory and those which are allowed even though not compulsory (eg the example given by Treitel, p 253, in the context of UTCCR, of the permitted 50% minimum payment clause in a regulated hire-purchase agreement). It seems likely that a term which merely restates the general “default” rule which applies in the absence of contrary agreement (eg if, in a contract for the sale of a used car to a car dealer, it were stated that time for payment by the dealer was not of the essence: see SGA 1979, s 10) would be treated as “authorised”.
[82]Chitty, paras 15-028 – 15-029, asks whether “mandatory” adds anything.
[83]See para 3.73 below.
[84]Section 29(1).
[85]Reg 4(2)(b).
[86]Treitel, p 253; Chitty, para 15-031 is to the same effect.
[87]Treitel, p 254. We have difficulty with this argument, at least in so far as it is suggested that this would mean that consumer contracts for carriage on terms “reflecting” CISG would be exempt. However, it is doubtful whether a consumer contract would ever “reflect” the principles of CISG since it is clear from CISG Art 2(a) that consumer transactions are not meant to be covered, albeit that the test of what is a consumer contract under CISG depends on the nature of the goods rather than the purpose of the transaction.
[88]Section 29(2). We assume the regulator is a public authority and will be approving the terms in the exercise of a statutory function. In Timeload Ltd v British Telecommunications plc [1995] EMLR 459 the CA held that the DGFT, who had seen the terms and had not objected to the term in question, was a public authority, but Lord Bingham MR expressed grave doubts as to whether the DGFT approved them in the exercise of a statutory function. Section 29(2) does not apply if the authority itself is a party to the contract. Terms which are simply of no effect (see para 3.9above) are not exempted under this provision.
[89]The French text refers to “dispositions … réglementaires”, which normally means secondary legislation.
[90]Chitty, para 15-030, which points out that Recital 13 refers to “provisions which directly or indirectly determine the terms of consumer contracts”.
[91]Art 1(1).
[92]Reg 4(1).
[93]Under the 1994 Regulations the definitions of “seller” and “supplier” referred to sellers and suppliers “of goods” (reg 2(2)). This created doubts as to whether land transactions were caught by the 1994 Regulations and whether the Directive had been implemented correctly: see SBright and C Bright,“Unfair Terms In Land Contracts: Copy Out or Cop Out?”(1995) 111 LQR 655.
[94]Most academic commentators are now of the opinion that UTCCR and the Directive do apply to all consumer contracts: see S Bright, “Winning the Battle Against Unfair Contract Terms” (2000) 20 LS 331, 339–341; SWhittaker, “Unfair Contract Terms, Public Services and the Construction of a European Conception of Contract”(2000) 116 LQR 95, 99; Chitty, paras 15-004 ff. At the 1999 Brussels Conference, “The ‘Unfair Terms’ Directive, Five Years On”, both Mario Tenreiro (Opening Comments) and Professor Wilhelmsson (Introduction to Workshop 1) adhered to this view. Bradgate, at the same conference (Experience in the UK), expressed the view that if the Directive is limited to contracts for the sale and supply of goods or services, then it may not apply to contracts for computer software as the legal status of computer software is still not definitively settled.
[95]For a full discussion see Chitty, paras 15-018 and 44-120, where it is suggested that the ECJ might take an autonomous view of the question.
[96]Again at the 1999 Brussels Conference both Mario Tenreiro and Professor Wilhelmsson asserted that these contracts are covered by the Directive. See also SBright, “Winning the Battle Against Unfair Contract Terms” (2000) 20 LS 331, 341.
[97]Reg 3(1), repeating Art 2(c) of the Directive.
[98]Chitty correctly points out that this would cause difficulty in UTCCR because it would then seem that contracts of employment might be covered by the Regulations, whereas Recital 10 of the Directive states that contracts relating to employment are to be excluded. See para 3.45 below.
[99]The exclusion of the application of UTCCR to terms in insurance contracts which “clearly define or circumscribe the insured risk and the insurer’s liability” (Recital 19 of the Directive; see para 3.27, n 65 above) is much narrower than the total exclusion of insurance contracts in UCTA. Hence as Treitel, p 250, points out, a clause requiring the consumer to give notice of insurance claims within an unreasonably short period could be unfair under UTCCR, but would not be affected by UCTA. See also HCollins, “Good Faith in European Contract Law” (1994) 14 OJLS 229, 242–243, who welcomes the inclusion of insurance contracts in the Regulations, saying that “consumer insurance contracts represent the abyss of exploitation permitted by free markets”.
[100]In Electricity Supply Nominees Ltd v IAF Group Ltd [1993] 1 WLR 1059, 1063–1064, it was held that any covenant that is integral to a lease is exempt. This was followed in Unchained Growth III plc v Granby Village (Manchester) Management Co Ltd [2000] 1 WLR 739 (CA). Transactions of a different kind included in the same document as the lease would not be exempt. It may be that a clause which deals with an exempt subject matter but which forms merely a subsidiary part of a non-exempt contract will not make the main contract exempt, but will itself be exempt still: Micklefield v SAC Technology Ltd [1990] 1 WLR 1002 (Ch D), 1008 (share option within contract of employment).
[101]None of the other exemptions in Sched 1 appear to affect consumer contracts, either because there is an express saving in favour of persons dealing as consumer or because the nature of the contract (eg for the formation of a company: para 1(d)) makes it implausible that either party could be dealing as a consumer. Another exception is more problematic: that of any contract so far as it relates to the creation or transfer of any interest in various forms of intellectual property. Chitty, para 15-022, takes the view that this excludes from UCTA “contractual licences under which use of computer software is permitted”. However, this argument was rejected in The Salvage Association v CAP Financial Services Ltd [1995] FSR 654 and does not appear to have been taken since; we understand that most intellectual property practitioners regard the point as definitively decided by the Salvage Association case. It was not raised in St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481 (CA). Para 14-096 of Chitty, by contrast, is neutral on the point.
[102]Section 15(3)(a)(i).
[103]These are not listed in s 15(2) and are therefore excluded. The Act does apply to “a grant of any right or permission to enter upon or use land not amounting to an estate or interest in the land”: s 15(2)(e).
[104]These are not listed in s 15(2) and are therefore excluded.
[105]These are not listed in s 15(2) and are therefore excluded.
[106]Sched 1, para 4. This appears to mean that the employee can limit her liability to the employer for negligence but not vice versa. In Scotland UCTA applies to contracts of employment: s 15(2)(b).
[107]In Chapman v Aberdeen Construction Group plc 1993 SLT 1205, 1209 the court took the view that an employee does not contract “in the course of a business” when she hires out her labour: consequently, the contract of employment is a consumer contract. There is some disagreement over how s 3 applies. It has been said that an employment contract can be the employer’s “written standard terms of business”: Liberty Life Assurance Co Ltd v Sheikh, The Times 25 June 1985 (CA). The contrary was said in Brigden v American Express Bank Ltd [2000] IRLR 94, but Morland J, partly relying on the Scottish case, held that the employee was dealing as a consumer so that s 3 applied for that reason.
[108]Chitty, para 15-021.
[109]As amended by Contracts (Applicable Law) Act 1990, s 5 and Sched 4.
[110]The form of s 26 can be confusing. Section 26(1) allows parties to international contracts to exclude or restrict liability. Section 26(2) then exempts terms which would otherwise be caught by s 3 or 4 (ie the English law controls) or Part II of UCTA (ie the Scots law controls).
[111]Nor does SCGD.
[112]EC Convention on the Law Applicable to Contractual Obligations (Rome 1980).
[113]Art 3.
[114]Art 4.
[115]See generally Chitty, para 31-087.
[116]See Chitty, para 31-022.
[117]And even if the contract does not meet one of the three conditions referred to, and thus is subject to the law of another State, it will of course be subject to the Directive if the State is a member of the EU.
[118]Section 27(1). The choice of law may be either express or implicit: see Benjamin’s Sale of Goods(5th ed 1997) para 25-086.
[119]Second Report, para 232.
[120]This list survives from SOGITA, from which ss 6 and 7 [ss 20, 21] are derived (see para 2.12 above).
[121]Eg Rees Hough Ltd v Redland Reinforced Plastics Ltd (1984) 27 BLR 141, 151; Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600, 608.
[122]Eg Phillips Products Ltd v Hyland [1987] 1 WLR 659.
[123]This deals with the powers of certain bodies to seek injunctions [interdicts] to prevent the continued use of unfair terms (see para 3.119 below).
[124]In their Second Report, the Law Commission recommended use of the SOGITA test (para 183), but Parliament preferred the Scottish Law Commission’s recommendation (at para 177). Lord Elwyn-Jones, the then Lord Chancellor, stated that
the Scottish approach, by limiting the importance of considerations attaching to a particular case, should facilitate the creation of case law and so help to reduce future uncertainty.
Hansard (HL) 23 May 1977, vol 383, col 1134.
The test of whether the term was a fair one to be included seems to have two consequences. On the one hand a party which puts into its contract terms a clause which is fair at the time can rest assured that the term cannot be rendered invalid by subsequent events. On the other hand, a party which might reasonably limit its liability to some extent, or might reasonably exclude certain liabilities, but which inserts a clause purporting to give it wider protection which would not be reasonable, will not be able to rely on the clause at all.
[125]The speech of Lord Bingham in DGFT v First National Bank plc [2001] UKHL 52, [2002] 1 AC 481 may appear to support this “double requirement” approach. Lord Bingham said, at [17]:
A term falling within the scope of the Regulations is unfair if it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer in a manner or to an extent which is contrary to the requirement of good faith. The requirement of significant imbalance is met if a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour … The requirement of good faith in this context is one of fair and open dealing.
However, his Lordship was not addressing directly the point whether both substantive and procedural unfairness is required.
[126]The distinction between “procedural” and “substantive” unfairness derives from a famous article by A A Leff, “Unconscionability and the Code – The Emperor’s New Clause” (1967) 115 U Pa L Rev 485. The notion of “procedural unfairness” (as contrasted to “contractual imbalance”) found its way into English law in the speech of Lord Brightman in Hart v O’Connor [1985] AC 1000 (PC) at p 1018.
[127]R Brownsword, G Howells & T Wilhelmsson, “Between Market and Welfare: Some Reflections on Article 3 of the EC Directive on Unfair Terms in Consumer Contracts” in C Willett, Aspects of Good Faith (1995) pp 25–59, make a persuasive argument that “good faith” could and should be read as an entirely substantive test. They argue that because the 1994 Regulations allow for a pre-emptive challenge to the validity of contractual clauses, it is difficult to see how procedural conditions can apply to the test, unless there is a different test for pre-emptive and ex casu challenges. Further, reliance on questions of procedural impropriety does not effectively promote a fair European standard form, since it would be impossible to regulate unfair terms without getting entangled in secondary questions of procedural abuse, and enables dealers to evade the effects of the Directive. If good faith must be read as comprising a procedural element, they say that it should be a question of choice – whether the requirement of good faith is satisfied depends on whether a different reasonable standard form was realistically on offer to the consumer, which is indirectly a substantive test. See also HCollins, “Good Faith in European Contract Law” (1994) 14 OJLS 229, who points out that the Directive states that it is the term, as opposed to the negotiating procedures, which must be in bad faith and that it would therefore be wrong to confine the requirement of good faith to procedural matters.
[128]Chitty, para 15-034, referring to Gesetz zur Regelung des Rechts der Allegemeinen Geschaftsbedingunged (Act on Standard Contract Terms – “AGBG”) of 1976.
[129]MTenreiro, “The Community Directive on Unfair Terms and National Legal Systems”[1995] 3 ERPL 273, 277.
[130]See the discussion of s 9 of the AGBG 1976 (which contains a reference to the principle of good faith) in N Reich and H-W Micklitz, Consumer Legislation in the Federal Republic of Germany (1981) pp 270–272.
[131]The Head of the Legal Matters Unit in DG XXIV, Mário Tenreiro, writing in his personal capacity in “The Community Directive on Unfair Terms and National Legal Systems”(1995) 3 ERPL 273, 279 (having discussed the thinking that guided the Commission in drafting the Directive) has said:
Let us be clear: there is no way that a contractual term which causes “a significant imbalance in parties’ rights and duties arising under the contract to the detriment of the consumer” can conform with the requirement of “good faith”. Indeed, the opposite is true: a term is always regarded as contrary to the requirement of “good faith” when it causes such an imbalance.
By 1999, at least, this was the official Commission view – see proceedings of the Brussels Conference 1999, Introduction by M Tenreiro and E Ferioli (“Examen comparatif des législations nationales transposant la directive 93/13” in “L’intégration de la directive 93/13 dans les systèmes législatifs nationaux”) and Professor V Roppo, Preliminary Document to Workshop 3, “The Definition of ‘Unfairness’: The Application of Art 3(1), 4(1) – and of the Annexes of the Directive”.
[132]Recital 16. In the Final Report to Workshop 3 of the Brussels Conference it is stated (para 3.3) that the main aim of the Commission’s view above is clearly political, to avoid the risk of the criterion of good faith becoming a potentially harmful criterion for consumers and reducing the level of consumer protection. The Chairman (Professor Roppo) said that the DG’s position is hardly compatible with the wording of the Article, that to assert otherwise would leave the reference to good faith with a purely literary, symbolic or rhetorical value, and that the criterion of good faith is positively incorporated into the additional criteria for judging fairness in Art 4(1) so that the criterion of good faith must affect the evaluation of unfairness.
[133]Chitty, para 15-034.
[134]SBright, “Winning the Battle Against Unfair Contract Terms” (2000) 20 LS 331, 348. Bright argues that the decision in DGFT v First National Bank plc, especially at first instance, supports this approach. The approach may however be criticised by a similar argument to that raised by Brownsword, Howells and Wilhelmsson (see n 127 above) in that it creates two tests for unfairness, one a purely substantive one to be judged by the tests set out in UTCCR (ie essentially for pre-emptive challenge), and another to be judged by procedural criteria. However, in Bright’s approach it is the nature of the term that decides whether procedural considerations will come into play (an unfair term will not be saved by good procedure) as opposed to the timing of the challenge.
[135]Sched 2, para 1(i).
[136][2000] QB 672 (CA); reversed on the point of whether the term itself was unfair, [2001] UKHL 52, [2002] 1 AC 481. The case was decided under the 1994 Regulations but the differences between these and UTCCR do not seem relevant to the point at issue.
[137]At pp 686–687. He read a passage to this effect from H Beale, “Legislative Control of Fairness: The Directive on Unfair Terms in Consumer Contracts” in Beatson and Friedmann (eds) Good Faith and Fault in Contract Law (1995) p 245.
[138][2000] QB 672, 687C.
[139]The Court of Appeal’s references to procedural measures as mere “palliatives”, which could not prevent the term being unfair, show that the real problem with the term was its substantive unfairness: C Mitchell, “Unfair Terms in Consumer Contracts” (2000) 116 LQR 557.
[140][2001] UKHL 52, at [36].
[141]Sched 2, para 1(i).
[142]Cf Woodman v Photo Trade Processing Ltd, unreported, 7 May 1981 (cited in R Lawson, “The Unfair Contract Terms Act: A Progress Report” (1981) 131 NLJ 933, 935), a case under UCTA holding that a clause limiting liability to the cost of a new film was unreasonable when the consumer was not offered this choice.
[143]Another example is a clause requiring notification of any defects within a specified time:
If the consumer is not aware of such a term, it will work to cause significant imbalance to the detriment of the consumer even though the substance of the term is not unfair. This weaves together matters of substance and procedure.
SBright, “Winning the Battle Against Unfair Contract Terms” (2000) 20 LS 331, 348. A similar argument may be made about terms that are not in “plain intelligible language” (see para 3.73 below) or terms that purport to state the parties’ rights and obligations in a misleading way. See also OFT, Unfair Contract Terms Bulletin 3, p 12, quoted at para 4.71 below.
[144]EMacdonald, “The Emperor’s Old Clauses: Unincorporated Clauses, Misleading Terms and the Unfair Terms in Consumer Contracts Regulations” (1999) 58 CLJ 413; LKoffman and E Macdonald, The Law of Contract (4th ed 2001) p 235:
It can be suggested that a purposive approach is required by the Directive and certainly in relation to the question of the creation of a “significant imbalance in the rights and obligations of the parties” the terms, or clauses, could be regarded as distorting the rights which the consumer believes he, or she, has and thus creating an imbalance in the rights and obligations which will be, effectively usable under the contract. It may be that that should be regarded as sufficient for the unfairness test.
[145]See LKoffman and E Macdonald, The Law of Contract (4th ed 2001) pp 233–234.
[146]Anson, p 197; Treitel, p 249. It has been said that the Directive makes it clear that it is the interaction of terms which is important in determining fairness (ie a term is unfair if it causes significant imbalance in the rights of the parties under the contract as a whole), whereas UCTA deals only with individual terms in isolation: M Dean, “Unfair Contract Terms: The European Approach” (1993) 56 MLR 581, 583.
[147]Para 3.54 above.
[148]Chitty, para 15-050. C Willett, “Directive on Unfair Terms in Consumer Contracts” (1994) 2 Consumer LJ 114, 120, suggests that the UK courts should take a broadly similar approach to unfairness under Art 3 of the Directive as is taken to unreasonableness under UCTA, looking at substantive risk allocations in the context of the bargaining environment and appreciating that both can influence the overall position. Treitel, p 258, says it is “possible to imagine” cases where the two tests might lead to different results, eg where one provision has guidelines on a particular point and the other does not.
[149]See para 3.50, n 121 above.
[150]Reg 6(1).
[151]This does not apply in proceedings brought under reg 12 (see para 3.119 below). It has been argued that even in proceedings by or against an individual consumer, the interpretation which is “most favourable to the consumer” should be that which is best for the consumer in the light of the fairness test, so that what would otherwise be the least favourable interpretation should be adopted if that would result in the clause being held unfair and therefore not binding: Butterworths, para 3.56.
[152]Often still referred to as the contra proferentem rule.
[153]M Tenreiro and E Ferioli, “Examen comparatif des législations nationales transposant la directive 93/13/” at the 1999 Brussels Conference “The ‘Unfair Terms’ Directive, Five Years On: Evaluation and Future Perspectives”, p 9.
[154]Eg Webster v Higgin [1948] 2 All ER 127.
[155]See Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 851:
… any need for … judicial distortion of the English language has been banished by Parliament’s having made these kinds of contracts subject to the Unfair Contract Terms Act 1977.
[156]Reg 6(2). The DGFT interprets this, when read with Recital 20, as also requiring that the terms must be properly drawn to the consumer’s “attention”: OFT, Unfair Contract Terms Bulletin 4, pp 13–18.
[157]Cf Stag Line Ltd v Tyne Shiprepair Group Ltd (The “Zinnia”) [1984] 2 Lloyd’s Rep 211, 222, where Staughton J said:
I would have been tempted to hold that all the conditions are unfair and unreasonable for two reasons: first, they are in such small print that one can barely read them; secondly, the draughtsmanship is so convoluted and prolix that one almost needs an LLB to understand them. However, neither of those arguments was advanced before me, so I say no more about them.
On “transparency” see paras 4.104 – 4.109 below.
[158]In particular see s 13(1) [s 25(3)], which gives a (non-exhaustive) list of clauses which, for the purpose of the Act, count as exclusions or restrictions of liability.
[159]Second Report, paras 143–146. The example is the clause in Anglo-Continental Holidays Ltd v Typaldos Lines (London) Ltd [1967] 2 Lloyd’s Rep 61; see para 3.13, n 35 above. However the Law Commissions do refer to dicta in two other cases, the facts of which involve terms which give one party a wide discretion as to how to perform: Glynn v Margetson & Co [1893] AC 351 (“liberty to deviate” clause) and Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576 (PC) (see para 3.14, n 39 above).
[160]Sched 2. The list is copied from the Annex to the Directive. It is often termed a “grey” list.
[161]DTI, Implementation of the EC Directive on Unfair Terms in Consumer Contracts 93/13/EEC, A Consultation Document (October 1993) states that where a term in the Annex does not fall within the scope of UCTA “it will be for the consumer to demonstrate that the term is unfair according to the test in Art 3(1)”.
[162]UCTA, s 11(5) [s 24(4)]. In Sheffield v Pickfords Ltd (1997) 16 Tr LR 337 the Court of Appeal said that, if the party relying on the term does not raise UCTA in its pleadings, then the implication is that it is arguing that the term is reasonable. Hence the issue becomes live and the other party will not be penalised for not raising the point. Lord Woolf MR continued that it would be preferable for the party seeking to rely on the term to state in its pleadings that it was entitled to rely on that term under UCTA, but it was not said that that party was required to do so. See also Killick v PricewaterhouseCoopers (No 1) [2001] 1 BCLC 65.
[163]Except to say that a seller or supplier who claims that a term was individually negotiated must show that it was: reg 5(4).
[164]Cf reg 5(4) (for the party claiming that a term was individually negotiated to show that it was). Chitty, para 15-047, contemplates that the ECJ may develop a European view on where the burden of proof under the Directive lies, and might hold that, since the purpose of the Directive is to protect consumers, the burden of proving fairness should be placed on the business. S Weatherill, “Prospects for the Development of European Private Law Through ‘Europeanisation’ in the European Court – the Case of the Directive on Unfair Terms in Consumer Contracts”(1995) 3 ERPL 307, 317, also argues that, as a consequence of the general aim of the Directive to protect consumers, the burden of proof must be taken to lie on the business. However, the European Commission’s opinion is that there is no burden of proof at all, since it is an issue of law, and not a matter of fact to be substantiated by the parties: V Roppo, Introduction to Workshop 3, “The Definition of ‘Unfairness’: The Application of Art 3(1), 4(1) – and of the Annexes of the Directive”, at the 1999 Brussels Conference, “The ‘Unfair Terms’ Directive, Five Years On”. The Final Report on the Workshop disputes this apparent oversimplification, stating that those taking part in the discussion largely agreed with the proposition that if a term appears in the Annex the burden is on the supplier to prove it is fair, and otherwise the consumer must show it is unfair.
[165]Cheshire, Fifoot & Furmston, p 218; Treitel refers to them as “prima facie unfair terms”, p 251. M Dean, “Unfair Contract Terms: The European Approach” (1993) 56 MLR 581, 587, suggests that it would be “unlikely for them to be found fair”.
[166]Chitty, para 15-047, referring to Cross & Tapper on Evidence (8th ed 1995) pp 133–134.
[167]See DTI, Implementation of the EC Directive on Unfair Terms in Consumer Contracts 93/13/EEC, A Consultation Document (October 1993). The result, criticised by C Willett, “Directive on Unfair Terms in Consumer Contracts” (1994) 2 Consumer LJ 114, 121, is that, even though all the terms in the Annex are indicatively unfair, if the term is an exemption clause under UCTA the business will have to prove it is reasonable, but if not, the consumer will have to prove it is unfair. See also R Brownsword, G Howells and T Wilhelmsson, “Between Market and Welfare: Some Reflections on Article 3 of the EC Directive on Unfair Terms in Consumer Contracts” in C Willett, Aspects of Good Faith (1995) p 34, who suggest that such a weak interpretation offers much less protection to the consumer than was intended in the Directive.
[168]SWhittaker, “Judicial Interventionism and Consumer Contracts”(2001) 117 LQR 215, 218.
[169]Océano Grupo Editorial SA v Rocíó Murciano Quintero (C-240/98)[2000] ECR I-4941. In this case it was the unfair nature of the clause which led to the actions being undefended. It gave the sellers of encyclopaedias on credit the right to sue consumers in the courts of a region in which they had their principal place of business, but far from where the consumers lived.
[170]SWhittaker, “Judicial Interventionism and Consumer Contracts”(2001) 117 LQR 215, 217.
[171]SCGD uses a different definition again, defining a consumer as
any natural person who, in the contracts covered by this Directive, is acting for purposes which are not related to his trade, business or profession.
We are not convinced that this formula is materially different.
[172]R & B Customs Brokers Co Ltd v United Dominions Trust Ltd [1988] 1 WLR 321 (purchase of car for personal and business use of directors).
[173]There is one exception. The Arbitration Act 1996, ss 89–91, provides that in a consumer contract an arbitration clause is unfair so far as it relates to a claim for a “modest” amount (currently fixed at £3,000), and for this purpose a legal person may be a consumer (s 90).
[174]Criminal proceedings against Patrice Di Pinto, Case C-361/89 [1991] ECR I-1189 (Directive 85/577/EEC). See also Benincasa v Dentalkit Srl, Case C-269/95 [1997] ECR I-3767 (on the Brussels Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters (1968)).
[175][1988] 1 WLR 321; see n 172 above.
[176]The Court of Appeal relied on the decision of the House of Lords in Davies v Sumner [1984] 1 WLR 1301, where s 1 of the Trade Descriptions Act 1968, which creates a criminal offence in respect of false or misleading trade descriptions made in the course of business, was considered. For criticism of this approach see S Jones and D Harland, “Some Problems Relating to Consumer Sales – R & B Customs Brokers Ltd v United Dominions Trust Ltd”(1989-90) 2 JCL 266, 272–275; R Kidner, “The Unfair Contract Terms Act 1977 – Who Deals as Consumer?” (1987) 38 NILQ 46; D Price, “When is a Consumer not a Consumer?”(1989) 52 MLR 245. See also Chapman v Aberdeen Construction Group 1993 SLT 1205 (distinguished on facts). In Stevenson v Rogers [1999] QB 1028 (sale by fisherman of his old working boat held to be made in course of business within SGA 1979, s14(2)) Potter LJ, delivering the leading judgment, also seems to cast some doubt on the R & B case. The legislative history of s 14(2) showed a clear intention to widen the scope to cover any sale made by a business and, had the CA in the R & B case considered s 14(2), instead of comparing s 12to the criminal statute, the Trade Descriptions Act, it might have concluded that it was desirable to construe s 12 of UCTA in the same way. However, Potter LJ also points out that the decisions are in a sense consistent in that each interpretation has the effect of giving more protection to the buyer. See further HCollins, “Good Faith in European Contract Law” (1994) 14 OJLS 229, 240; E Macdonald, “Mapping The Unfair Contract Terms Act 1977 and the Directive on Unfair Terms in Consumer Contracts” (1994) JBL 441, 458; C Willett, “The Directive on Unfair Terms in Consumer Contracts and its Implementation in the United Kingdom”(1997) 2 ERPL 223, 229. Willett, for example, gives the example of a solicitor who buys a car for use in her business, arguing that the car will not have been bought “in the course of a business”, and so the solicitor would be within the UCTA definition of “consumer”, but that it will have been bought for business purposes, so that the transaction will not be protected by UTCCR. She will also fall outside SCGD: see n 171 above.
[177]Section 12(1)(c) [s 25(1)]. The restriction seems to derive from the Molony Report (see paras 465–469). Presumably the aim is to enable the business to decide more easily when it will be dealing with a consumer.
[178]See n 171 above.
[179]Section 12(2) [s 25(1)].
[180]Art 1(3).
[181]Section 12(1)(a) [s 25(1)]. The First Report (see paras 87, 92 and 95) recommended this qualification without giving an example of holding out, nor is there an example in the preceding Working Paper No 18, para 51. A possible example would be a person buying for private use or consumption who presents a card to claim a trade discount: Cheshire, Fifoot & Furmston, p 204. Another example may be a person asking for “trade terms” at a builder’s merchant. However it has been argued that such behaviour implies nothing about carrying on a business but merely implies the buyer is entitled to the same discount as a trade buyer: R Kidner, “The Unfair Contract Terms Act 1977 – Who Deals as Consumer?” (1987) 38 NILQ 46.If the R & B Customs case is correct (see n 176 above), it would appear that the consumer would have to hold out that the transaction was one that he made regularly or as an integral part of his business.
[182]Section 1(3).
[183]Section 1(3).
[184]Section 16 expressly stipulates that the controls are restricted to breach of duty in the course of a business. Since the other controls only apply to consumer or written standard form contracts which must involve at least one party who is dealing in the course of business, the Scottish provisions in effect only apply to business liability [ss 17–19, 21, 25].
[185]Section 8, amending Misrepresentation Act 1967, s 3. This provision does not apply to Scotland.
[186]Nor a hire-purchase supplier who is not acting in the course of a business, if such an animal exists. The relevant sections for hire-purchase are SOGITA, ss 8 and 9.
[187]There are no implied terms as to quality or fitness for purpose under s 14 if the seller is not selling in the course of a business (for hire-purchase the equivalent section is SOGITA, s 10).
[188]Since the seller is not acting in the course of a business, the other party cannot be “dealing as consumer” within the definition of s 12 [s 25(1)] even if she is in fact buying for private purposes.
[189]Reg 4(1).
[190]Reg 3(1).
[191]A further difference relates to UCTA’s exclusion of occupier’s liability to visitors allowed onto land for educational or recreational purposes not connected to the occupier’s business, though this will not normally be under a contract and it is dealt with in Part VII below. This exception does not apply in Scots law.
[192]There are exceptions under s 6 [s 20]: see para 3.8 above.
[193]R & B Customs Brokers Co Ltd v United Dominions Trust Ltd [1988] 1 WLR 321 (purchase of car for personal and business use of directors).
[194]Art 1(2)(c).
[195]Stevenson v Rogers [1999] QB 1028: see n 176 above. The Second Report seemed to intend to exclude from control only supply in a “purely private” capacity: para 9.
[196]Thus it does not seem that UTCCR are limited to contracts between profit-making organisations and consumers, so that a contract between a pupil and an educational charity might be covered: Chitty, para 15-016. The same seems true of UCTA: Chitty, para 14-063; R Kidner, “The Unfair Contract Terms Act 1977 – Who Deals as Consumer?” (1987) 38 NILQ 46, 53.
[197]Chitty, para 15-016, which says that the definition clearly does include a local authority but gives no argumentation. In “Unfair Contract Terms, Public Services and the Construction of a European Conception of Contract”(2000) 116 LQR 95, S Whittaker states that it is a fairly clear proposition that, according to the Directive, the provider of the service (as opposed to business) may be publicly or privately owned. See also “Rapport sur l’application de la Directive 93/13/1993 aux prestations de service public”, a report by the National Consumer Council and L’Institut National de la Consommation to the European Commission in 1997 (eds Hall and Tixador) p13, which states that the Directive’s application to public authorities in principle is clearly confirmed by Art 2, and by Recitals 14 and 16 of the preamble.
[198]See Chitty, para 15-016, n 61.
[199]See Smith v Eric S Bush [1990] 1 AC 831 (HL); Killick v PricewaterhouseCoopers (No 1) [2001] 1 BCLC 65, 72; Melrose v Davidson & Robertson 1993 SLT 611 (1st Div); Bank of Scotland v Fuller Peiser 2002 SLT 574.
[200]Sections 1(1) and (2).
[201]Section 1(4).
[202]See Contracts for the Benefit of Third Parties (1996) Law Com No 242, para 13.10 (vi). It is not completely clear whether the third party could argue that the clause is unreasonable as between the original parties and therefore of no effect, so that in effect the third party can enforce his or her rights irrespective of the clause, but it seems unlikely. In effect that would be to allow a non-party to challenge the clause, and that seems to be beyond the terms of UCTA.
[203]Section 17(1)(a) provides that an unfair term shall have no effect as against a consumer or customer. The latter is defined in terms of persons who are parties to the contract: ss 17(2) and 25. It is submitted that s 17(1)(b) is similarly restricted.
[204]H MacQueen, “Third Party Rights in Contract: English Reform and Scottish Concerns” (1997) 1 Edin LR 488.
[205]It has been argued that the rule should be the same on either side of the border: ibid, p 493. See further para 4.176 below.
[206]Reg 5(1).
[207]Reg 8(1).
[208](1996)Law Com No 242,para 13.10 (x).
[209]See Part VII below.
[210]This would be unenforceable as a contract under English law for want of consideration. In Scots law, the absence of consideration does not prevent an agreement operating as a gratuitous contract: that said, such contracts are rare. Because it refers to contracts, it is submitted that UCTA does not apply to voluntary unilateral obligations.
[211]Agreements for the supply of gas, electricity and telecommunications are all now considered contractual following the privatisation of the industries. The position for the water industry is unclear as the old statutory duty to supply (which has been removed from the regulation of the other three industries) appears to remain. See Read v Croydon Corpn [1938] 4 All ER 631 and the Water Industry Act 1991, which imposes on water undertakers a duty to supply domestic premises upon reasonable request (s 52). Furthermore there do not appear to be any proposals to remove or alter this duty. See DETR, Water Bill - Consultation on Draft Legislation (31 January 2001) and DEFRA, Water Bill – Consultation on Draft Legislation: Government Response (May 2002).
[212]Chitty, para 15-020; SWhittaker, “Unfair Contract Terms, Public Services and the Construction of a European Conception of Contract”(2000) 116 LQR 95. For UK law the question of reviewing the terms of supply of utilities is likely to be theoretical as the terms are regulated and will thus be exempt under reg 4(2): see para 3.40 above. However, if necessary the terms of the relevant supply licences could be used to require the use of fair terms even when there is no contract.
[213]Section 2 [s 16]. This includes both direct and vicarious liability: s 1(4) [s 25(2)].
[214]Section 1(3) [s 16]. This includes liability arising from the occupation of land for business purposes except where the injured party was allowed access to the land for recreational or educational purposes not connected to the occupier’s business. This exception does not apply under Scots law.
[215]Unless the notice is part of an “agreement” which might fall within an autonomous definition of “contract”: see para 3.106 above.
[216]Such an agreement might already be recognised as a gratuitous contract in Scots law.
[217]Part II of UCTA (which applies to Scotland) provides that offending terms are void, or shall be of no effect: see, for example, ss 16(1) and 17(1).
[218]The limited range of terms to which UCTA applies (see para 3.12 above) means that in many cases the contract will still be workable without the offending term. Where for example a term restricting damages is invalid, the general rule applies, viz that the party in breach is liable for all damages which are not too remote and which could not have been avoided by taking reasonable steps in mitigation.
[219]See, eg, s 2(1) and (2).
[220]Part II contains specific provisions which address the status of such an exclusion or restriction: see para 3.110 below.
[221]For example, a term which purports to limit a business’s liability for any kind of loss or damage caused by its negligence to £1,000. Under section 2(1) liability for death or personal injury cannot be excluded. Can the limit in relation to other forms of loss or damage be relied upon (subject to the other provisions of UCTA)?
[222]Treitel, pp 235–236.
[223]Chitty, para 14-093.
[224]In Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600, 605, Lord Donaldson MR stated that ss 3 and 7 of UCTA “would render ineffective any clause” which excluded or restricted liability. However, in R W Green Ltd v Cade Bros Farms [1978] 1 Lloyd’s Rep 602 it was held that earlier legislation (which was consolidated and modified in UCTA) permitted a clause to be partly effective.
[225]See, for example, ss 16(1)(a), (b).
[226]This might depend upon whether the clause could be regarded as a single unit and whether the exclusion or limitation could therefore be regarded as a single limitation upon the rights of the other party.
[227]See Chitty, para 14-091, and Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600, 607, per Stuart-Smith LJ. However, a previous, unreported Court of Appeal case, Trolex Products Ltd v Merrol Fire Protection Engineers Ltd, 20 November 1991, seems to disagree to some extent. The court held that where a term purports to exclude liability which under UCTA cannot be excluded in any circumstances and also liability which can be excluded subject to the test of reasonableness, the term is ineffective to exclude the former liability but could be upheld as reasonable in respect of the latter exclusion. The court expressly left open the question of whether one can sever when only reasonableness is in issue (ie when no part is automatically unfair).
[228]This is so even if in the actual event the liability he has incurred, and against which he seeks to rely on the clause, is of the kind which he could reasonably have excluded or limited. See Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573 (exclusion of liability for misrepresentation); though cf Skipskredittforeningen v Emperor Navigation [1998] 1 Lloyd’s Rep 66.
[229]Only in very exceptional cases should the courts consider that the contract is not capable of continuing in existence without the term: M Tenreiro, “The Community Directive on Unfair Terms and National Legal Systems” (1995) 3 ERPL 273. Treitel, p 257, argues that the issue might arise if essential terms were contained in a document that was not binding on the consumer because she did not have a real opportunity to become acquainted with it, as this seems to imply that none of the terms in that document will be binding.
[230]See reg 6(2).
[231]Section 10 was the result of an amendment in Parliament. As Treitel points out (p 239), it does not use the same terminology as the bulk of the Act and this create some doubts about its precise scope. Interestingly, the language of s 23, while equally elaborate, is different from that of s 10.
[232]There have been difficulties in distinguishing a waiver from a settlement of a claim between the parties. In Tudor Grange Holdings Ltd v Citibank NA [1992] Ch 53, the Court of Appeal held that s 10 did not apply to the compromise of a dispute, appeasing previous concerns that it might do so if construed literally: eg L S Sealy, “Unfair Contract Terms Act” [1978] CLJ 15, 19; and F M B Reynolds, “The Unfair Contract Terms Act 1977”[1978] LMCLQ 201, 206.Treitel, pp 240–241, also points out that an agreement to vary an existing contract might be treated as a new contract and therefore within s 10 [s 23]. Hence, Treitel says, the varied term will be totally ineffective even if the original term was only subject to, and satisfied, the test of reasonableness. R Hooley, “A Reasonable Compromise: Tudor Grange Holdings v Citibank” [1991] LMCLQ 449, 453–454, suggests that s 10 [s 23] only operates to exclude those terms which would have been totally ineffective in the original contract, and does not affect those terms which would have been subject to the test of reasonableness. See also I Brown, “Secondary Contracts and Section 10 of the Unfair Contract Terms Act”(1992) 108 LQR 223; J Cumberbatch, “The Limits of Compromise: Tudor Grange Holdings Ltd v Citibank NA”(1992) 55 MLR 866. In this respect Part II of UCTA is much better in specifically providing that settlements are not affected: s 15(1).
[233]Unless the waiver were the main subject matter of the secondary contract. This issue is considered in more detail in para 4.190 below.
[234]See Treitel, p 239, referring to Hansard (HL) 4 July 1977, vol 385, cols 57–59, 511–514. It is thought that the language of s 23 lends itself better than the language of s 10 to that construction. Section 10 does not apply when the right which the second contract purports to remove is in tort not in contract: Neptune Orient Lines Ltd v JVC (UK) Ltd (The “Chevalier Roze”) [1983] 2 Lloyd’s Rep 438.
[235]In the Tudor Grange case (see n 233 above), Browne-Wilkinson VC at [1992] Ch 53, 66–67, suggests that s 10 does not apply where the parties to both the contracts are the same. This interpretation is doubted by E Macdonald, “Mapping The Unfair Contract Terms Act 1977 and the Directive on Unfair Terms in Consumer Contracts” (1994) JBL 441, 453. Chitty describes the scope of the section as “enigmatic”: para 14-078. The words of the section seem apt to cover a second contract between the same parties.
[236]UCTA, s 27(2). This applies to all cases of contracts with a consumer resident in the UK if the steps necessary for making the contract were taken there; in other cases, if the term was imposed mainly for the purpose of evading UCTA. The section seems to apply to both express and implicit choices of foreign law: Benjamin’s Sale of Goods(5th ed 1997) para 25-089. If the law chosen is more favourable to the consumer, he may take advantage of that: Dicey and Morris, para 33-029.
[237]UTCCR, reg 9.
[238]Conversely, in an English court UTCCR would be applied not only if the law of a non-Member State had been chosen when the contract had a close connection with England but also if it had no close connection with England but did have one with another Member State: see Dicey and Morris, para 33-042, which also discusses the meaning of “close connection”.
[239]Dicey and Morris, para 33-040.
[240]Ibid.
[241]Consumer Transactions (Restrictions on Statements) Order 1976, SI 1976 No 1813, as amended by Consumer Transactions (Restrictions on Statements) (Amendment) Order 1978, SI 1978 No 127.
[242]For example, exclusions of liability for death or personal injury.
[243]1994 Regulations, reg 8.
[244]Reg 12 and Sched 1. UTCCR contain a number of ancillary powers and obligations: regs 10–13.
[245]Unfair Terms in Consumer Contracts (Amendment) Regulations 2001, SI 2001 No 1186.
[246]E Macdonald, Exemption Clauses and Unfair Terms (1999) pp 174 and 193, and “The Emperor’s Old Clauses: Unincorporated Clauses, Misleading Terms and the Unfair Terms in Consumer Contracts Regulations” (1999) 58 CLJ 413.
[247]For an example, see the discussion of Sched 2, paras 1(a) (exclusion of liability for death or personal injury) and (1)(c) (“potestative conditions”), para 4.133 below.
[248]Cf E Macdonald, “The Emperor’s Old Clauses: Unincorporated Clauses, Misleading Terms and the Unfair Terms in Consumer Contracts Regulations” (1999) 58 CLJ 413, 426–427.
[249]See paras 4.196 – 4.199 below.
[250]By UCTA, ss 6(1) and (2).
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