Scottish Law Commission (Discussion Papers)

The Law Commission

(Consultation Paper No 166)

The Scottish Law Commission

(Discussion Paper No 119)

UNFAIR TERMS IN CONTRACTS

A Joint Consultation Paper

London: TSO

The Law Commission and the Scottish Law Commission were set up by the Law Commissions Act 1965 for the purpose of promoting the reform of the law.

The Law Commissioners are:

The Right Honourable Lord Justice Carnwath CVO, Chairman
Professor Hugh Beale, QC
Mr Stuart Bridge
Professor Martin Partington, CBE
Judge Alan Wilkie, QC


The Secretary of the Law Commission is Mr Michael Sayers and its offices are at Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ.

The Scottish Law Commissioners are:

The Honourable Lord Eassie, Chairman
Mr Patrick S Hodge, QC
Professor Gerard Maher
Professor Kenneth G C Reid
Professor Joseph M Thomson


The Secretary of the Scottish Law Commission is Miss Jane L McLeod and its offices are at 140 Causewayside, Edinburgh EH9 1PR.

This joint consultation paper, completed on 3 July 2002, is circulated for comment and criticism only. It does not represent the final views of the two Law Commissions.

The Law Commissions would be grateful for comments on this consultation paper before 8 November 2002. Comments may be sent either –

(a) by post to:

The Law Commission		The Scottish Law Commission
Tamara Goriely		Mrs Gillian B Swanson
Law Commission		Scottish Law Commission
Conquest House		140 Causewayside
37-38 John Street		Edinburgh
Theobalds Road		EH9 1PR
London WC1N 2BQ
Tel: 020-7453-1264		Tel: 0131-668-2131
Fax: 020-7453-1297		Fax: 0131-662-4900

or (b) by e-mail to:

tamara.goriely@lawcommission.gsi.gov.uk          gillian.swanson@scotlawcom.gov.uk

It would be helpful if, where possible, comments sent by post could also be sent on disk, or by e-mail to the above addresses, in any commonly used format.

Any request to treat all, or part, of a response to this consultation paper in confidence will, of course, be respected, but if no such request is made the Law Commissions will assume that the response may be quoted or referred to in subsequent publications or made available to third parties.

The text of this consultation paper is available on the Internet at:

http://www.lawcom.gov.uk

http://www.scotlawcom.gov.uk

Contents

EXECUTIVE SUMMARY	SUMMARY
ABBREVIATIONS USED IN THIS CONSULTATION PAPER	ABBREVIATIONS
PART I: INTRODUCTION	PART I
1. Terms of reference	1.1
2. Outline of the project	1.2
(1) A unified regime on unfair terms in consumer contracts	1.3
(2) Extending the controls	1.5
(3) Making the new legislation "clearer and more accessible to the reader"	1.6
3. Structure of the paper	1.9
4. Acknowledgements	1.10
5. Overview of our provisional proposals	1.11
PART II: AN OVERVIEW OF THE LEGISLATION ON UNFAIR TERMS AND OUR PROPOSALS	PART II
1. The need for legislation on unfair terms	2.1
2. A brief history of legislative controls over unfair terms in the UK	2.10
3. A summary of the principal differences between UCTA and UTCCR	2.17
4. Replacing UCTA and UTCCR with a unified regime	2.20
5. Extending the scope of UTCCR to protect businesses	2.30
6. Making the new legislation "clearer and more accessible to the reader"	2.35
7. The impact of our proposals	2.40
PART III: OVERLAPS AND DIFFERENCES BETWEEN UCTA AND UTCCR	PART III
1. Introduction	3.1
2. Separate provisions for Scotland	3.5
3. Consumer contracts, business-to-business contracts and other contracts	3.6
4. Terms of no effect	3.9
5. Range of terms controlled	3.12
6. Terms which have not been individually negotiated	3.16
7. Terms not subject to control
(1) "Definitional" and "core" terms	3.19
(a) Reasonable expectations and "definition of the main subject matter"	3.21
(b) Contingencies and "definition of the main subject matter"	3.25
(c) Adequacy of the price	3.27
(2) Mandatory and permitted terms	3.35
8. excluded contracts
(1) Domestic contracts
(a) Consumers as suppliers	3.41
(b) Insurance, land, securities and guarantees	3.43
(c) Contracts of employment	3.45
(2) International contracts	3.46
(3) Choice of UK law	3.48
9. the test of validity
(1) "Fair and reasonable" versus "unfair"	3.49
(a) "Contrary to the requirement of good faith" and "significant imbalance"	3.57
Unfairness in substance	3.63
Unfairness in procedure	3.67
Conclusions	3.69
(b) Are the tests under UCTA and UTCCR different?	3.70
(2) Factors	3.72
(3) Plain and intelligible language	3.73
(4) Indicative list	3.77
(5) Burden of showing unfairness	3.79
10. Definitions
(1) "Consumer"	3.81
(2) "Business"	3.89
(a) "Occasional sales"	3.94
(b) Contracts with government departments or local or public authorities	3.96
(3) "Party" and third party beneficiaries
(a) UCTA: English law	3.97
(b) UCTA: Scots law	3.103
(c) UTCCR	3.104
(d) SCGD	3.105
(4) "Contract"	3.106
11. Application outside contract	3.107
12. Effect of invalid exclusion or restriction	3.108
13. Evasion of the legislation
(1) Secondary contracts	3.114
(2) Evasion by choice of law	3.116
14. Prevention	3.119
15. Conclusions	3.124
PART IV: REPLACING UCTA AND UTCCR BY A UNIFIED REGIME	PART IV
1. Introduction	4.1
2. Models for the replacement regime	4.4
(1) Constraints	4.5
(a) Requirements of the Directive	4.6
(b) The language of the Directive	4.7
(c) Simplicity	4.11
(d) "Clear and accessible legislation"	4.12
(e) Possible extension to protect businesses	4.14
(f) Scotland	4.15
(2) Provisional conclusions on the model to be used	4.18
3. General policies	4.21
(1) No reduction of consumer protection	4.22
(2) Incorporation of other statutory and common law rules	4.30
4. Combining the regimes	4.33
(1) Terms of no effect	4.34
(2) Terms which must be "fair" or "fair and reasonable"	4.40
(3) Individually negotiated terms	4.42
(4) Terms not subject to control
(a) "Core terms"
"Definition of the main subject matter" and what "was reasonably expected"	4.55
Adequacy of the price	4.61
(b) Mandatory and permitted terms	4.69
(5) Excluded contracts
(a) Consumers as suppliers	4.77
(b) Insurance contracts and contracts for the transfer of land or securities	4.79
(c) Employment contracts	4.80
(d) International contracts	4.82
(e) Choice of UK law	4.83
(6) The test to be applied	4.87
(a) The basic test	4.89
(b) Factors to be taken into account	4.95
Fairness in substance	4.96
Procedural fairness	4.97
(c) Plain and intelligible language	4.104
(d) Indicative lists	4.112
An expanded list	4.113
Reformulating the list in UK terms	4.118
Terms which are always of no effect	4.123
The new examples	4.125
Liability for death or personal injury	4.127
Exclusion and limitation of liability clauses	4.128
Consumer bound when the business is not	4.132
Deposits and retention of money paid	4.136
Penalty clauses	4.140
Existing exemptions	4.144
(e) Burden of showing that term is reasonable	4.146
(7) Ancillary questions	4.151
(a) Definitions
"Consumer"	4.152
Should companies ever count as consumers?	4.153
"In the course of business"	4.154
Mixed transactions	4.155
"Goods of a type ordinarily supplied for private use and consumption"	4.158
Sales by auction or competitive tender	4.162
Holding oneself out as making the contract in the course of a business	4.166
"Business"
"Occasional sales"	4.168
Contracts with government departments or local or public authorities	4.170
"Contract"	4.172
(b) Third party beneficiaries	4.176
(c) Effect of invalid exclusion or restriction	4.179
(d) Evasion of the controls
Secondary contracts	4.187
Evasion by choice of law	4.193
(8) Prevention	4.195
(9) Provisions no longer required	4.205
PART V: EXTENDING THE PROTECTION AGAINST UNFAIR TERMS TO BUSINESSES	PART V
1. Introduction	5.1
2. Existing protection in business-to-business contracts	5.2
3. The case for "individual" controls over business-to-business contracts	5.7
4. Terms which are of no effect in business-to-business contracts	5.8
(1) Business purchasers as consumers	5.9
(2) Obligations as to title in the sale of goods	5.13
5. the case for extending the range of terms subject to a "fairness" test in individual business-to-business contracts	5.15
(1) Unfair terms in standard form contracts	5.16
(2) Terms that do not exclude or restrict liability	5.19
6. the range of businesses to be protected	5.26
(1) Small businesses	5.27
(2) Occasional business customers	5.31
(3) General protection for business	5.35
7. "Standard" or "non-negotiated" terms, or all terms?
(1) Should any controls apply to negotiated contracts?	5.41
(a ) Extended controls	5.43
(b) Existing controls	5.45
(2) "Standard" terms or "not individually negotiated terms"?	5.48
8. Exemptions from the new regime
(1) "Core" terms	5.60
(2) Mandatory and permitted terms	5.62
(3) Excluded contracts
(a ) Terms not subject to UCTA in business-to-business contracts	5.64
(b ) International contracts	5.67
(c ) Choice of English or Scots law	5.71
(d) Utilities and the definition of contract	5.73
9. The test to be applied
(1) The basic test	5.74
(2) Plain and intelligible language	5.76
(3) The list of factors	5.82
(4) An indicative list	5.84
(5) Burden of proof	5.89
10. Ancillary questions	5.91
(1) Third parties	5.92
(2) Secondary contracts	5.94
(3) Evasion by choice of law	5.95
(4) Effect if term invalid	5.96
11. Preventive action	5.98
PART VI: SALE OR SUPPLY OF GOODS NOT RELATED TO BUSINESS	PART VI
1. Obligations as to title	6.2
2. Correspondence with description or sample	6.6
PART VII: NON-CONTRACTUAL NOTICES EXCLUDING BUSINESS LIABILITY FOR NEGLIGENCE OR BREACH OF DUTY	PART VII
1. Introduction	7.1
2. Non-contractual notices should be controlled	7.2
3. A separate provision for all exclusions and restrictions of liability for negligence	7.4
4. Preventive action	7.5
PART VIII: PUTTING THE NEW LEGISLATION INTO CLEAR, ACCESSIBLE TERMS	PART VIII
1. Introduction	8.1
2. Limits to the third limb of the project	8.7
3. Simpler structure and language, and more explanation	8.12
4. The parts of the draft Bill	8.15
"Consumer", "business" and "private" contracts	8.16
Exclusions and restrictions of liability for negligence [breach of duty]	8.18
General provisions	8.19
Definitions	8.21
Form of the legislation	8.22
5. Negligence liability [liability for breach of duty]
Clause 1: Contract terms or notices excluding or restricting business liability for negligence	8.23
Clause 2: Exceptions from section 1 for England and Wales	8.25
Clause 3: Effect of agreement to, or awareness of, term or notice	8.26
6. Consumer contracts	8.27
Clause 4: Sale to, and hire-purchase by, consumer: terms of no effect	8.29
Clause 5: Other contracts under which goods pass to consumer: terms of no effect	8.33
Clause 6: Other terms detrimental to consumer of no effect unless fair and reasonable	8.34
Clause 7: Sale to, and hire-purchase by, business: effect of certain terms	8.43
7. Private contracts
Clause 8: Sale of goods and hire-purchase: effect of certain terms	8.44
8. Business-to-business contracts	8.45
9. General provisions
Clause 9: The fair and reasonable test	8.46
Clause 10: Savings for mandatory and regulatory provisions	8.50
Clause 11: Secondary contracts	8.51
Clause 12: Effect on contract of term having no effect	8.52
Clause 13: Burden of proof	8.53
10. Interpretation
Clause 14: "Negligence" and "breach of duty"	8.55
Clause 15: "Consumer contract", "the consumer" and "the business"	8.56
Clause 16: "Exclusion or restriction of liability"	8.58
Clause 17: Examples of "exclusion or restriction of liability"	8.59
Clause 18: Interpretation of other expressions	8.60
11. The Schedules
Schedule 1: Factors relevant to fairness	8.61
Schedule 2: Terms that are presumed to be unfair	8.62
12. Questions for consultees	8.63
PART IX: PROVISIONAL PROPOSALS AND QUESTIONS FOR CONSULTEES	PART IX
APPENDIX A: PROTECTION FROM UNFAIR TERMS AFFORDED TO BUSINESSES IN OTHER JURISDICTIONS	APPENDIX A
1. Australia	A.3
Businesses treated as consumers	A.4
Discrete controls on business-to-business contracts	A.8
2. New Zealand	A.11
Businesses treated as consumers	A.12
Pro-active preventive measures	A.16
3. Canada	A.18
Businesses treated as consumers	A.19
Discrete controls on business-to-business contracts	A.20
Pro-active preventive measures	A.21
4. The USA	A.26
Businesses treated as consumers	A.27
5. France	A.30
6. Germany	A.33
Businesses treated as consumers
General contractual conduct	A.34
Standard terms	A.36
Discrete controls on business-to-business contracts	A.40
Pro-active preventive measures	A.41
7. The Netherlands	A.42
Businesses treated as consumers	A.43
Discrete controls on business-to-business contracts	A.45
Pro-active preventive measures	A.46
8. Sweden	A.48
Businesses treated as consumers	A.50
Pro-active preventive measures	A.52
APPENDIX B: DRAFT UNFAIR TERMS BILL	APPENDIX B
APPENDIX C: THE UNFAIR CONTRACT TERMS ACT 1977	APPENDIX C
APPENDIX D: THE UNFAIR TERMS IN CONSUMER CONTRACTS REGULATIONS 1999	APPENDIX D
APPENDIX E: COUNCIL DIRECTIVE 93/13/EEC ON UNFAIR TERMS IN CONSUMER CONTRACTS	APPENDIX E
APPENDIX E: OUTLINE OF UCTA, UTCCR AND OUR PROPOSALS	APPENDIX E