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Cite as: Unfair Terms in Consumer Contracts Regulations 1994
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Unfair Terms in Consumer Contracts Regulations 1994
by
Brian St.J Collins
Lecturer in Law, School of Public Policy, Economics and Law, University of Ulster at Magee College.
Copyright © 1995 Brian St.J Collins.
First Published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.
Summary
This article examines the substantive provisions of the Unfair Terms in Consumer Contracts Regulations 1994 and compares the protection which these Regulations will afford to consumers with that which is currently available under common law and statutory provisions, in particular the Unfair Contract Terms Act 1977.
Web JCLI | [1995] 3 Web JCLI | Download this file
Contents
- Introduction
- Parties to whom the Regulations Apply
- Individually Negotiated Terms
- "Core" Terms
- Insurance Contracts
- "Core" Terms
- Fairness
- Good Faith
- Significant Imbalance
- List of Unfair Terms
- Significant Imbalance
- Effect of Unfair Term
- Choice of Law Clause
- Preventative Measures
- Schedule 3 - List of Unfair Terms
- Conclusion
- Choice of Law Clause
Introduction
In 1975 the European Commission's first draft proposal on unfair terms in consumer contracts appeared but it took some eighteen years for the contents of the Directive to be finally agreed. During the intervening period the format of the proposal changed greatly and that adopted on 5 April 1993(1) represents a significantly watered down version not only of the Commission's original proposal but also a number of the proposals put forward during that time. The Member States were required to implement the provisions of the Directive into national law by 31 December 1994 and this has been achieved in the United Kingdom by means of the Unfair Terms in Consumer Contracts Regulations 1994(2) made under the European Communities Act 1972 s 2(2). The Regulations became operative on 1 July 1995. Hitherto control over the use of unfair terms has been provided both by statute and under common law and in relation to the former the most important is the Unfair Contract Terms Act 1977. Like a number of other E.C.consumer protection measures, this Directive is one of minimum harmonisation and thus Member States are entitled to maintain or introduce stricter rules to control unfair terms. As a result therefore, as from 1 July, there are two separate regimes of control operating alongside and in certain instances overlapping one another. This problem of the relationship between the Regulations and the 1977 Act is one of the main difficulties which will be encountered by the courts and consumer law litigants when and if unfair terms cases come before the courts.
The purpose of this article is to examine the extent to which, if at all, the Regulations will afford greater protection to that already enjoyed by consumers in the United Kingdom. In order to assess adequately the effects of the Regulations, it will obviously be necessary to refer to the current state of the law on unfair terms and in particular the provisions of the 1977 Act. It is proposed that rather that presenting a critical evaluation of the practical effects of the Act, its provisions will be referred to as and when appropriate. Reference will also be made to the legal systems of some Member States, and in certain instances further afield, in order to demonstrate the likely effects of some of the novel provisions of the Regulations and also to highlight some of their possible deficiencies.
Parties to whom the Regulations Apply
Paragraph 3 of the Regulations specifies the scope of the transactions and parties to which they apply. It provides that they apply to "any term in a contract concluded between a seller or supplier and a consumer where the said term has not been individually negotiated". Whilst this provision may initially appear to be easy to understand, and for the courts to apply, there may be a number of difficulties encountered in attempting to interpret it.
It is clear that this provision is intended to protect individual consumers but not small business parties, which can be equally in need of protection when contracting with large commercial organisations. It thus appears that the Regulations are more restricted in their scope than the 1977 Act as the latter extends its protection to some business parties. For example the Act provides in s 3(1) that the provisions of the section apply to contracts where one party deals as consumer or where the contract is made on the other party's written standard terms of business. The latter provision obviously covers contracts made between business parties where the stronger insists upon the weaker contracting on the basis of the former's written standard terms. In such instances the weaker party is entitled to the reasonableness protection should any of the eventualities specified in s 3(2) occur(3). The courts have also participated in extending the Act's protection to business parties. In R and B Customs Brokers Co. Ltd. v United Dominion Trust Ltd.[1988] 1 WLR 321 the Court of Appeal decided that the sale of a used car to a "two-person company" of shipping brokers was a consumer transaction so that an exclusion clause in the contract could be held to be void. The company was not buying in the course of business because the transaction was not "an integral part of the business carried on".
It is interesting that in some jurisdictions, notably in Scandinavia, protection is afforded to small business parties. In Sweden, under the Contract Terms (Tradesmen) Act 1984, a business party may apply to the Market Court seeking an injunction to prohibit the use of an improper term by a stronger business concern. Under s 2 of the Act the Court must give special consideration to the need for protection of those who are in an inferior position in the contractual relationship. Additionally under the (Swedish) Contract Act s 36 a business party may apply to an ordinary court to have an unreasonable contract term declared unenforceable or adjusted and this applies to both standard form and individually negotiated contracts. Similar provisions exist in Denmark, Finland and Norway.
The fact that business parties cannot be considered, under the Regulations, to be consumers is stated in paragraph 2 which defines a consumer as "a natural person who, in making a contract ..., is acting for purposes which are outside his business". Thus a consumer is restricted to being a natural person who is acting outside "his" business. The use of the word "his" is extremely significant and can be interpreted more narrowly than the phrase "in the course of a business" which is used in the definition of "dealing as consumer" in s 12 of the Act(4) and which requires, for example, that the contract in question must be an integral part of the particular business activities.
The terms "seller" and "supplier" are also defined in paragraph 2 and once again the wording used is significantly different to that in the Act. They are defined as persons (not restricted to natural persons) who sell or supply goods ... and who in so doing are acting for purposes "relating to his business". The use of the word "his" in this context is again significant and the comments made above apply equally here. However the phrase "relating to" his business, can be interpreted as meaning that the contract in question does not need to be very closely connected to the person's business,for that person to be classified as a seller or supplier,and a much looser connection would qualify for" relating to" a person's business than would suffice for "in the course of a business". In this way the definitions of a "seller" and "supplier" under the Regulations are wider than the corresponding provisions in the 1977 Act.
Individually Negotiated Terms
The Regulations do not apply to all contracts between sellers or suppliers and consumers but only those in respect of which the terms have not been individually negotiated and the burden of proving negotiation rests with the seller or supplier(5). The obvious question which arises here is, what is meant by individual negotiation? An answer to this question is provided by sub-paragraph 3 of paragraph 1 which states that a contractual term is not to be regarded as having been individually negotiated where it is drafted in advance and the consumer has not been able to influence its substance. This is obviously meant to apply to standard form contracts, both written and oral, although the former are more commonplace and it is relatively seldom that a business party would employ an oral standard form contract. The mere fact that a business party were to change some of the features of his standard form contract would not automatically remove it from the standard form category as the Regulations provide that in cases where a term has been individually negotiated the other terms of the contract are still subject to the Regulations if an overall assessment of the contract indicates that it is a "pre-formulated standard contract"(6).
A relatively simple method of ensuring that the terms of a contract are individually negotiated could be for the seller or supplier to offer the consumer a wide range of terms from which the consumer would be free to select, although it would be necessary to ensure that they were not presented as a choice of standard form contracts. If the consumer was free to select the terms he wanted from a list prepared by the seller or supplier and the contract itself were to mention that the terms were so selected, then the contract would no longer be regarded as standard form.
A number of the provisions in the Directive are very similar to the provisions of the German law - AGB Gesetz 1976(7) and recently a case heard by the German Federal Supreme Court(8) dealt with the criteria for determining whether standard contract terms are negotiated. The relevant provision is contained in the AGBG 1976 s 1(2) which states that "there are no standard contract terms where the conditions of the contract have been negotiated in detail". In the course of its judgment the Court stated that giving information to the consumer on the contents of the term itself and explaining it to him is insufficient even where the consumer seems to be agreeing with the term which has been explained. Negotiation by the seller means more than merely discussing the term with the consumer;it requires that the consumer is given an adequate opportunity to protect his interests by having the possibility of influencing the contents of a pre-formulated term. Furthermore the seller must display a serious readiness to accept the possible modification of a clause but such modification is not essential in those cases where the consumer expresses his clear and plain consent after intensive bargaining. It is to be hoped that in future litigation on unfair terms where the issue being determined is whether a contract with a consumer is standard form or not, the courts will be prepared to further abandon the freedom of contract philosophy which is now outdated in consumer transactions and adopt a more proactive policy to protect consumers along the lines of the German AGBG 1976 s 2(1) as interpreted by the German Supreme Court.
"Core" Terms
Despite the statement in paragraph 3(1) that the Regulations apply to "any term in a contract ...", two further types of term are not subject to the fairness test therein, provided that the term is "in plain intelligible language". These are terms which define "the main subject matter of the contract" or which concern "the adequacy of the price or remuneration, as against the goods or services sold or supplied". This strangely worded provision represents an attempt to state a principle that is common to and well established in a number of European jurisdictions whereby "core" provisions,such as the main subject matter of the contract, are not subject to relevant fairness tests. Thus, the subject matter of the contract and the price being paid for it cannot be assessed for fairness but it is clear, from Recital 19(9) of the Directive, that they are factors which may be relevant when other terms of the contract are being so assessed. If the core provisions are not stated in plain intelligible language, then they can be subjected to the fairness test in paragraph 4 of the Regulations. Failure to state any of the terms of the contract in such language resulting in doubt as to their meaning can ultimately be of benefit to the consumer as paragraph 6 provides that in cases of doubt about the meaning of a term the interpretation most favourable to the consumer will prevail. This seems to be the only sanction which is imposed on a seller or supplier who does not use plain and intelligible language as paragraph 6 does not provide that terms which do not satisfy this requirement are unfair per se nor can they be considered unfair under the provisions of paragraph 4. It is however highly likely that such failure on the part of a seller or supplier would be one factor to be considered in the overall evaluation of fairness. It is strange that the Regulations simply impose a duty on sellers and suppliers to use such language but do not mention what is the sanction where they fail to do so.
There is one major difficulty involved in attempting to identify the exact terms which are excluded from having to satisfy the fairness criteria. It is clear that the provision relating to the adequacy of the price or remuneration is simply statutory recognition of the common law principle that consideration need not be adequate(10) but it is not at all as clear as to what is meant by the "main subject matter of the contract". How does one identify the main subject matter of a contract or what is the position where a seller or supplier states in a standard form non- negotiated contract that a number of its clauses are to be regarded as defining the main subject matter of the contract? Is it the case that as long as such specified clauses are clearly stated, they cannot be assessed for fairness? It is possible that if this latter practice could be interpreted as giving the seller or supplier the exclusive right to interpret any term in the contract,this would come within the provisions of sub-paragraph (m) of the indicative list of the terms which may be regarded as unfair in Schedule 3 to the Regulations and would hence be subjected to the fairness test. It seems strange that the non-core (and consequently the lesser important) terms are subjected to a fairness test while the vitally important elements of the contract are not. In the majority of cases the most important term in the contract, from the consumer's point of view, is likely to be the price that has to be paid for the goods or services and this core term is non-challengeable under the Regulations.
Another problem which could arise in this context is how will the law deal with a situation where the combination of the effects of a core and a related non-core term result in a detriment being suffered by the consumer? As the core term cannot be assessed and the non-core term on its own is not deemed to be unfair, does this mean that neither term is unfair and the consumer must accept the consequences?
Perhaps the most problematic situation which is likely to arise is, how does one decide which terms define "the main subject matter of the contract"? To answer this question will involve the courts in determining the function of contractual terms and deciding whether a particular term is aimed at excluding or limiting liability or whether it is obligation defining. The main proponent of the view that terms can be obligation defining is Professor Coote(11) and judicial support for this view can be traced as far back as 1874 in Jackson v Union Marine Insurance Co.(1874) LR 10 CP 125. There have been many cases where the courts have had to address this problem and perhaps the clearest pronouncement in this context is that of Donaldson J(12) in Kenyon Son & Craven Ltd. v Baxter Hoare & Co. Ltd.[1971] 2 All ER 708 where he stated:
"Protective conditions are of three distinct types : first, those which limit or reduce what would otherwise be the defendant's duty; second, those which exclude the defendants' liability for breach of specified aspects of that duty ....."
A clause, such as that commonly found in standard form contracts of carriage, that the carrier accepts no responsibility for delay, deterioration, mis-delivery or non-delivery of the goods can as legitimately be considered obligation defining as liability excluding and therefore not subject to the test of fairness in the Regulations.
A further complication which arises here is that the exemption from fairness examination applies only to terms which define the "main" subject matter of the contract and as no indication of any relevant criteria in this connection is given in the Regulations difficult questions of degree are likely to occur.
It is likely that the draftsmen of standard form contracts will attempt to evade the fairness test by manipulating contractual terms to have them classified as core terms,and it is to be hoped that the courts will interpret core terms very strictly and ensure that the majority of contractual terms are subject to fairness control.
It is important to remember that considerations of whether or not contractual terms have been negotiated or are core terms, are irrelevant in testing for reasonableness under the Unfair Contract Terms Act 1977 and although such terms may escape the fairness test under the Regulations, they fall within the scope of and thus are challengeable under the provisions of the Act. In this way the 1977 Act is of wider scope than the Regulations and in addition the Act applies its controls to disclaiming notices in tortious situations whereas the Regulations have no application to the law of torts. Other areas to which the Regulations do not apply are contracts relating to employment(13), contracts relating to rights of succession, contracts relating to family law rights and contracts relating to the incorporation and organisation of companies and partnerships. Also excluded from their control are terms which reflect current statutory terms and regulations and those permitted by international conventions to which the United Kingdom or the European Union is a party(14). On the other hand the Regulations do apply to contractual terms in general while the Act applies only to terms excluding or limiting liability or, in certain cases, terms excluding duties.
Insurance Contracts
One type of contract which has hitherto been almost totally unregulated and to which the 1977 Act does not apply is insurance contracts. There is no doubt that these contracts frequently contain many draconian terms and thus their now being subject to the fairness test control in the Regulations is a very welcome reform of the law. A few examples of the terms commonly found in such contracts will clearly illustrate their lack of fairness. One such term grants an unqualified right of cancellation to the insurer but denies a corresponding right to the insured. This type of term is now deemed unfair as it falls within the scope of sub-paragraph (f) of the indicative list of unfair terms in Schedule 3 to the Regulations. Another commonly used term, which would now be unfair under sub-paragraph (q),is one which states that if a claim is disputed and the insured person fails to commence legal proceedings within one year of the claim being refused, the claim would be extinguished. Any such attempts by a business party to oust appropriate limitation periods are controlled by the Regulations. Other clauses imposing obligations on insured parties and which do not bind the insurer include terms in motor insurance policies which provide that when an accident occurs, the insured may not deny, admit or settle any claim without the prior authority of the insurer. However insurers almost invariably reserve the right to deal with claims at their complete discretion(15). It must be remembered that, as mentioned above, under paragraph 3(2), exemption from the fairness test is granted to "core" terms dealing with adequacy of price and subject matter definition and this is particularly significant in the context of insurance contracts. Recital 19 of the Preamble to the Directive provides that terms in insurance contracts which describe the insured's risk and the insurer's liability cannot be tested for fairness as "these restrictions are taken into account in calculating the premium paid by the consumer". This is an unfortunate provision as it can be argued that most,if not all, of the terms in these contracts define very precisely the risk being undertaken by the insurer and the price being paid therefor by the consumer. It therefore appears that the much needed protection for consumers who enter into insurance contracts may be significantly weakened as a result of this provision. However the provisions of paragraph 6 of the Regulations are important here and they may well benefit consumers in these circumstances. It will be remembered that this paragraph imposes the requirement that all written terms of a contract must be expressed in plain intelligible language and in cases of doubt, the interpretation most favourable to the consumer will prevail. This could potentially be a very serious problem for some insurance companies whose policies can be almost indecipherable to consumers or whose terms are presented in rather archaic style. This is one sector of business in particular in which the Director General of Fair Trading could play a vitally important role by agreeing with insurance companies on the types of terms which should be included in insurance contracts and thereby benefitting both consumers and insurance companies alike.
The final point of importance relating to the scope of the Regulations is that paragraph 3 specifies that they apply to contracts concluded between sellers or suppliers and consumers. It therefore appears that the scope of the Regulations is even further limited and only covers sale and supply of goods and supply of service contracts. Other commercial contracts do not fall within the scope of the Regulations whereas the provisions of the 1977 Act do extend in varying degrees to most of the other types of contracts(16).
Fairness
As mentioned above, the test to which unfair terms are subjected is that of fairness and this applies, with the exception of terms dealing with adequacy of price and main subject matter definition terms, (provided in written contracts that they are in plain intelligible language) to all terms which are alleged to be unfair. Unlike the 1977 Act there is no absolute ban on the use of any terms and hence in situations where, for example, a consumer is killed or suffers personal injuries as a result of the negligence(17) of the seller or supplier, there are two separate and different systems of control over exempting terms. Under the Regulations the term is effective if it is deemed to be fair while under the Act it is totally ineffective.The criterion for determining the fairness of a contract term is specified in paragraph 4(1) of the Regulations which provides that a term is to be regarded as unfair where it :
contrary to the requirement of good faith causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer".
Thus there are two elements which are relevant to the question of fairness, firstly,the concept of "good faith" and secondly, a significant imbalance causing detriment to the consumer.
Good Faith
While the latter of these elements may be simple enough to understand, the same does not apply to good faith which is unfamiliar to United Kingdom lawyers. Hitherto under U.K.law the main areas in which a requirement of good faith has existed are the law of insurance and equity but the concept of good faith has had no application to consumer contracts in general. However an interpretation of good faith was provided by Bingham L J in Interfoto Picture Library Ltd. v Stiletto Visual Programmes Ltd.[1988] 1 All ER 348 in which he stated that it meant more than that the parties should not deceive one another and that it was in fact a principle of fair and open dealing. On this basis he decided that as the term in issue was particularly onerous or unusual, it required to be prominently disclosed to the other party.
On the other hand, most European jurisdictions are familiar with this concept although its exact meaning varies slightly from country to country. It may be helpful to the courts when attempting to interpret the good faith requirement to look at the jurisprudence of some of the European jurisdictions. For example, in Germany, a requirement of good faith has existed in relation to consumer contracts since the AGBG was enacted in 1976. Under s 2(9)(1) of this law, any term in a consumer contract which places the consumer at such a disadvantage as to be incompatible with the requirements of good faith is totally void. Furthermore there is a general requirement of good faith in the Law of Obligations in the German Civil Code which requires both contracting parties to perform the contract in such a manner as good faith requires,regard being paid to general practice.
There is a certain amount of guidance given in the Regulations as to the elements which are important when assessing good faith. Schedule 2 provides that particular regard should be paid to four factors, three of which are also found to be guidelines in the application of the reasonableness test under s 11(2) of the 1977 Act (which deals with purported exclusions of liability for breach of the terms implied into contracts under which the ownership and/or possession of goods pass). These three factors are :
(a) the strength of the bargaining positions of the parties;
(b) whether the consumer had an inducement to agree to the term ;
(c) whether the goods or services were sold or supplied to the special order of the consumer.
Thus while some of the ingredients for good faith under the Regulations and those for reasonableness under the 1977 Act are similar, the Regulations are not employing the same test as the Act. This is because of the inclusion of a fourth factor, and the one which establishes a significant difference between the two concepts relates to:
"the extent to which the seller or supplier has dealt fairly and equitably with the consumer".
This factor requires the seller or supplier to act towards the consumer in a manner which is not unconscionable and this element is one which is common to most of the European jurisdictions whose jurisprudence includes a good faith element. Such conscionability may be evidenced in a number of ways, for example, by the seller or supplier during the negotiations prior to the contract providing the consumer with full and accurate information about the goods or services to be supplied; giving the consumer an element of choice in respect of the terms of the contract rather than presenting them on a take it or leave it basis; not exerting undue pressure or using unfair tactics against the consumer and so forth. It is clear that procedural matters such as these which occur prior to the contract being entered into are relevant in determining if the good faith requirement has been satisfied. This is because of the provisions of paragraph 4(2) of the Regulations which state that in assessing the unfair nature of a term, account shall be taken of "the nature of the goods or services for which the contract was concluded and referring, as at the time of the conclusion of the contract,to all circumstances attending the conclusion of the contract ...".
It is equally clear that in addition to procedural factors, substantive matters such as the actual terms of the contract itself between the parties; the size of print used in the case of excluding terms found in the contract and the use of plain and intelligible language will also be relevant in good faith determination and indeed it is possible that in this context the substantive matters may be given more weight. In summary, in determining whether the good faith requirement is satisfied, what is required is, as stated in recital 16 of the preamble, "an overall evaluation" of the interests of both parties involved.
Significant Imbalance
The second element involved in the test of fairness is that the term must cause a significant imbalance in the contractual rights and obligations of the parties to the consumer's detriment. This involves two important points of interpretation with which courts will be faced and it is likely that different interpretations of this expression will be given in different jurisdictions.
The more difficult of these two points is that the wording of paragraph 4(1) suggests that significant imbalance is the result of unfairness but this is surely incorrect. Significant imbalance is a cause of unfairness, not a consequence of it and the only way in which the courts can really make sense of this provision is to apply its spirit rather than its strict wording. Judges will have to examine the substantive provisions of the contract to ascertain whether the limitations on the trader's liabilities and obligations are balanced by the inclusion of appropriate terms favouring the consumer, such as a proportionate reduction in the price of the goods or services being provided. It must however be remembered that, as mentioned above, the courts may not assess a price term in itself for fairness but it may certainly pay attention to the price being charged in the context of significant imbalance.
There is also a difficulty involved because of the use of the word "significant" which the courts will also have to interpret. It is not unfair for a term to cause an imbalance, the imbalance must be significant. This begs the question, has the law decided that there is an acceptable level of imbalance and if so, at what stage does it move from being acceptable to being significant? No examples or characteristics of "significant" are given in the Regulations and it will take quite some time before any precedents are set by case law on this point.
It has already been stated above that the concept of good faith, and hence fairness, is wider than that of reasonableness under s 11(2) of the 1977 Act. However this is not the only instance in which the scope of fairness under the Regulations is more comprehensive than that of reasonableness under the Act. Paragraph 4(2) of the former provides that in assessing the unfairness of a term, in addition to examining the nature of the goods or services involved, "all circumstances attending the conclusion of the contract" should also be taken into account. The corresponding and more restricted provisions in s 11(1) of the Act provides that reasonableness is to be determined by deciding whether the excluding term is a fair and reasonable one to be included in the contract "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". This latter provision is obviously narrower than that provided by the Regulations as the circumstances of which the parties were or ought to have been aware at the time of the contract being made, is only one of the factors that may be relevant when examining all the circumstances "attending the conclusion of the contract". It should therefore be more advantageous for a prospective "unfair terms" litigant to challenge a term on the basis of the wider interpretation of unfairness in the Regulations rather than on the narrower interpretation of reasonableness in the Act. However there are some possible disadvantages to be considered by a consumer taking this course of action. Firstly if the term being challenged is one which is banned by the Act (eg under s 2(1))(18), it would be more beneficial to challenge it under the Act as the Regulations subject all alleged unfair terms (to which they apply) to the fairness test. Secondly the issue of the burden of proof should also be considered. As mentioned immediately below, it appears that the burden of proving unfairness under paragraph 4 of the Regulations rests upon the consumer - the Regulations make no specific reference to this point- while it is the responsibility of the party alleging that a challenged term is reasonable under the Act to so prove. The party on whom the burden of proof lies in the case of a challenge to one of the terms listed in Schedule 3 to the Regulations seems to be the seller or supplier who must prove the term to be fair in the circumstances - again the Regulations are silent here.
List of Unfair Terms
The final provision in relation to fairness is contained in paragraph 4(4) which provides that Schedule 3 to the Regulations contains an "indicative and non-exhaustive list" of terms which may be considered as unfair. The list contains seventeen such terms covering such eventualities as granting the seller or supplier the right to exclude liability for inadequate performance of the contract; requiring the consumer to pay a disproportionately large amount as compensation for breach of contract and granting the seller or supplier the right to decide whether the goods or services are in conformity with the contract. A large number of the listed terms are already subject to one or more of the reasonableness tests under the 1977 Act but the list does contain some terms which are not so controlled. One of the main difficulties associated with the list is the fact that it is indicative in nature and non-exhaustive and as most of the terms are taken from grey and black lists in other European jurisdictions, it is difficult to identify exactly common characteristics which apply to terms which have the doubtful honour of appearing on the list. It will therefore be quite a difficult task to determine in future which other terms, if any, should be added to it.
A further difficulty with the list lies in the fact that both paragraph 4(4) and Schedule 3 refer to terms which "may" be regarded as unfair. Neither of those provisions states that the terms are to be considered unfair in the first instance with the burden of proof imposed upon the seller or supplier who is entitled to adduce evidence to show that in the particular circumstances of the case, the use of the term is not unfair. It can be assumed from the spirit of the Regulations that this is what is meant but the Regulations do not specify that this is the case. If a consumer litigant can prove that the term which he alleges is unfair, is contained on the list or should be added to it, it must then be the responsibility of the trader to demonstrate that in the circumstances, the term is fair. This should however have been made clear in the Regulations. On the other hand, if a consumer litigant is challenging a term which is not a listed term then the burden of proving unfairness remains upon the consumer. It is therefore of vital importance for consumers to ensure that when they challenge a term as being unfair, it either is or is capable of being included in the list. Again for this reason, identification of the "qualifications" for terms being listed assumes a large degree of importance.
Effect of Unfair Term
Paragraph 5 of the Regulations specifies the sanction to be imposed in cases where a term is considered to be unfair. It provides that any unfair term in a contract with a consumer will not be binding on the consumer. The other terms of the contract continue in existence and bind both parties except if the contract is not capable of continuing in existence without the unfair term.
It is unfortunate that in deciding which sanction should accompany the use of an unfair term, the one which has been selected is not likely to be particularly effective. The weakness of the sanction is that it is the same as that found in sections 2(2) and 3(2) of the 1977 Act and despite the operation of that Act for some 19 years, there is evidence that it is not uncommon to find contracts containing terms which are ineffective under the legislation. There are no provisions in the Regulations to ensure that this practice will not be adopted here as well and a further weakness exists in that, as mentioned above, there are no provisions which impose a ban on the use of particular terms, as is the case under certain sections of the 1977 Act(19).
There are many examples which currently exist within the Member States of the European Union which could have been adopted in the Regulations and are likely to have proved to be more effective. A good example is provided by Luxembourg's Consumer Protection Act 1983 articles 5 and 6. Under article 5 any consumer or supplier's organisation which is represented on the Prices Board may request a court to declare the terms of a consumer contract null and void; if (under article 6) a seller or supplier uses a term which has been declared void against him, he is liable to a substantial fine.
In Portugal under its Decree Law No.446 of 25 October 1985 articles 8 and 9,certain unfair terms may not be used in consumer contracts and if in spite of this such terms are used, then the entire contract is declared null and void. Similar provisions exist in Spanish law under the General Law on Consumer Protection 1984 article 10.
In the writer's opinion greater protection would have been afforded to consumers had the Regulations stated that in cases where an unfair term is used the term would be void and the consumer would be given the option of deciding whether or not to continue with the contract.
Choice of Law Clause
It would be quite easy for traders to ensure that consumers would not receive benefits under the Regulations if it were possible for traders to exclude their provisions. It is not however possible to so avoid these provisions as paragraph 7 states that the Regulations will apply despite the use by a trader of a clause purporting to apply the law of another country as the law applicable to the contract. Provided the contract has a "close connection with the territory of the Member States", any choice of law evasion tactic on the part of traders will not be successful. If a trader attempts to apply such a "foreign" law it would be declared inoperative and the U.K. courts would apply the provisions of the Contracts (Applicable Law) Act 1990. This has implemented in the UK. the terms of the Rome Convention 1980(20) dealing with the establishment of uniform choice of law rules for contractual obligations throughout the European Union. In cases where the chosen law is declared inoperative article 4 of the Convention provides that the applicable law will be the law of the country with which the contract is most closely connected and in determining such connection, factors such as the location of the parties' business or residence and the place where the contract was made or was to be performed can be examined.
An anti-evasion provision similar to that contained in the Regulations exists in s.27(2) of the 1977 Act which provides that the Act applies, despite the existence of a contract term purporting to apply the law of another country other than the U.K.in the following circumstances :
(1) where it appears to the court (or arbitrator) that the term has been imposed to enable the party imposing it to evade the operation of the Act ; or
(2) at the time the contract was being made one of the parties dealt as consumer and that consumer was then habitually resident in the UK. and the necessary steps for making the contract were taken in the UK.
Preventative Measures
It is unrealistic to expect individual consumers to challenge the alleged use of unfair terms by sellers and suppliers in all but the most exceptional circumstances.It has long been established that well founded fears of expensive litigation and ignorance in relation to rules of law, legal procedures and so forth will deter consumers from enforcing their rights in court. It has equally been recognised that a more effective system for protecting consumers' rights is to provide some type of administrative agency charged with the task of safeguarding and promoting rights on behalf of consumers. The Directive provided in article 7 that Member States were to ensure that "adequate and effective means exist to prevent the continued use of unfair terms" and went on to state that "persons or organisations,having a legitimate interest under national law in protecting consumers" could refer the question of whether a tern was unfair either to a court or to an administrative tribunal.
Initially the Department of Trade and Industry, in its first consultation document(21), wrongly decided that nothing needed to be done to implement the provisions of article 7(1) and (2) but changed its opinion later having received replies to a further consultation document(22). It decided to impose a duty upon the Director General of Fair Trading to take preventative steps against the use of unfair terms. This has been implemented in the Regulations by paragraph 8 which provides in sub-paragraph (1) that the Director General is under a duty to consider any complaint which is made to him that a term "drawn up for general use" is unfair. There is no restriction on the persons who may complain and once a complaint has been made, unless it appears to be frivolous or vexatious, the Director General must investigate it.However this duty to investigate applies only to contract terms which have been drawn up for "general use" and it may be that there will be problems of deciding in certain cases whether a term has been so drawn up. Obviously terms drawn up by a trade association which is recommending to its members the use of a standard form contract containing those terms,are drawn up for general use and may be validly challenged. But what about a trader who drafts his own standard form terms or amends a trade association standard form contract by inserting therein his own terms and it is one of his own terms which is being challenged. Can those terms be considered to be "drawn up for general use"? It is to be hoped that the Director General will interpret the phrase as widely as possible and not merely restrict himself to dealing with the most extreme unfair terms.
If the Director General considers that a term about which he has received a complaint is unfair, he may either bring proceedings for an injunction against the person using or recommending the use of the term or he may get an undertaking from the trader involved in respect of the continued use of the term. Once he has come to his decision about the appropriate course of action to take, he is under a duty to give his reasons for adopting that course of action. If he applies for an injunction, the court is able to grant it on whatever terms it considers appropriate and it can be addressed not just to the trader concerned but also to a relevant sector of industry. This also applies in respect of a term which has not actually been used but which is being recommended for use. It is interesting that the injunction granted by the court, in addition to applying to the actual unfair tern in respect of which the proceedings have been brought can also be made applicable to any similar term or a term having the same effect.
Whilst this duty on the Director General, which is quite novel in U.K. law is to be welcomed particularly in terms of its potential benefits for consumers, there are some areas where doubt as to the meaning of these provisions may arise. In order to take appropriate action the Director General must decide whether the tern complained about is unfair and while there can be no doubt that he will consider a term unfair if it falls within the terms listed in Schedule 3, what is the position where the term alleged to be unfair does not fall therein? Does it mean that the Director General will be under an obligation to examine the term using the fairness criteria in paragraph 4 of the Regulations and be able to satisfy himself that there has been a breach of the good faith requirement which has caused a significant imbalance and so forth to the detriment of the consumer? If in these circumstances the Director General does apply for an injunction, does he have to prove to the satisfaction of the court that the term is unfair?
It is however possible that there could be a further beneficial effect by the Director General using the power given to him by paragraph 8(7) of the Regulations under which he may arrange for the dissemination of whatever information and advice he considers appropriate to whatever bodies he considers appropriate. In the past the Director General has been very active in utilising his powers under the Fair Trading Act 1973 s 124 to agree codes of practice with various trade associations and he could initiate a similar practice in respect of unfair terms by virtue of paragraph 8(7). It is likely that informed traders and trade associations will be concerned about the implications of these Regulations and the business world would therefore welcome an indication of what terms they could use in their standard form contracts which would satisfy the fairness requirements. Thus there is the potential here for the Director General to agree sets of fair terms with various business sectors which would almost amount to a system of pre-validation of standard form contract terms.
Schedule 3 - List of Unfair Terms
As mentioned earlier, paragraph 4(4) of the Regulations states that Schedule 3 contains an indicative and non- exhaustive list of terms which may be regarded as unfa0ir. This provision, implementing article 3(3) of the Directive, is quite different to corresponding provisions in earlier versions of the Directive such as the 1992 version which contained two lists, the first specifying terms which were to be regarded as unfair in all circumstances and the second specifying those which were only to be considered unfair in those cases where the terms of the contract had not been individually negotiated.A number of the terms found in the Schedule are quite similar to those covered by provisions in the 1977 Act, particularly s 13 and the general controls imposed thereon are also rather similar. The provisions of s 13(1) of the Act are as follows :
"To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents -(a) making the liability and its enforcement subject to restrictive or onerous conditions ;(b) excluding or restricting any right or remedy in respect of the liability, or subjectimg a person to any prejudice in consequence of his pursuing any such right or remedy ;
(c) excluding or restricting rules of evidence or procedure
and (to that extent) sections 2 and 5 to 7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty".
Thus it can be seen that the purpose of this section is to control what can be termed indirect exclusion clauses in the same manner as orthodox exclusion clauses. Its scope is quite comprehensive in that paragraph (a) would include clauses such as those providing that a claim had to be made within a specific time period shorter that the limitation period(23) or those imposing an onerous pre-litigation procedure on a prospective plaintiff.
Paragraph (b) would include the following clauses : clauses excluding a remedy to which the plaintiff would otherwise be entitled(24),for example a clause denying a party the right to rescind a contract which has resulted from misrepresentation; clauses restricting a party's liability to certain types of loss only; clauses stating that a defective article will be replaced but money will not be returned; clauses stating that if a member of a trade association sues another member or the association itself, he shall thereby lose his membership thereof.
Paragraph (c) would include the following clauses : clauses attempting to make certain evidence inadmissible - such as a clause which provides that one fact is to be conclusive evidence of another fact or a term stating that failure to take a certain course of action (eg. complaining) within a specified time amounts to conclusive evidence that, for example, the goods comply with the contract; a term stating that a signature on a document is indisputable evidence of the occurrence of some event; clauses stating that a party is deemed to have accepted or agreed to something(25).
These clauses are not meant to be an exhaustive list of indirect clauses but merely a selection of the more commonly used restrictive terms which can be found in present day and usually standard form contracts. The restrictions which are imposed upon their use depend upon the type of injury or loss suffered by the plaintiff and the way in which liability has arisen. Against this brief background of section 13, the terms contained in Schedule 3 can be considered. It should be remembered that under paragraph 4(4) of the Regulations the terms specified in the Schedule thereto are terms which may be regarded as unfair and each case will require to be considered on its own merits. The Schedule provides that any term that has one of seventeen effects may be considered unfair. Such effects, which are commonly found on black and grey lists in several European jurisdictions, fall into five broad categories which are :
(a) excluding or limiting liability ;
(b) granting the trader unilateral decision making power to alter the terms or terminate the contract :
(c) imposing obligations on the consumer without corresponding obligations being assumed by the trader :
(d) granting rights exclusively to the trader :
(e) making consumer access to justice more difficult.
As the list is non-exhaustive and only indicative in nature, it could be argued that any term which does not fall strictly within the list but which is similar to one of the effects mentioned above should qualify for inclusion.
The first effect is one whereby a seller or supplier attempts to limit or exclude liability for an act or omission which has caused the death of or personal injury to a consumer. It is difficult to see how this provision adds anything of substance to current U.K. law. In relation to sellers of goods and suppliers of services, liability for actions or failures to act which cause death or personal injury is based on the tort of negligence or the Fatal Accidents legislation or, should the seller be deemed to be the manufacturer of the goods (such as an own- brander), on the provisions of the Consumer Protection Act 1987. Section 2(1) of the 1977 Act provides (in those cases to which it applies) that where a person's negligence (as widely defined in s.1(1)) causes personal injury or death, liability therefor cannot be excluded. A very similar provision is contained in the Consumer Protection Act 1987 s 7 prohibiting the manufacturer (as widely defined(26))from excluding liability for injury or loss resulting from a defect in his product.
The second effect is that whereby a seller or supplier attempts to limit or exclude liability for total or partial non-performance or inadequate performance of his contractual obligations. These eventualities are already adequately covered in U.K. national law. Section 3 of the 1977 Act deals with similar circumstances and provides that such liability may be excluded if it is reasonable to do so. However it should be remembered that this section applies only to situations where one party deals as consumer or on the other party's written standard terms of business. Furthermore under common law if a party attempts to exclude liability for total non- performance of his contractual obligations, this could be regarded as reducing the contract to a mere declaration of intent and the aggrieved party could claim total failure of consideration.
It is interesting that this clause starts by stating that the term in question must have the effect of "inappropriately" excluding or restricting the rights of the consumer and this wording suggests that an examination of the circumstances relating to and the facts of the case should be carried out to determine whether it is appropriate to depart from the liability norm in question. This may be an interesting consideration in those cases to which only the Regulations,and not the Act,apply such as insurance contracts.
The third effect is that whereby the consumer is bound by the terms of the agreement whilst the performance of the contract by the seller or supplier is dependant on a condition with which the latter is free to comply or disregard. Should the seller or supplier decide not to comply with the condition on which the contractual performance was dependant,again the consumer could claim total failure of consideration or indeed could claim that the lack of consideration on the part of the seller or supplier prevented a contract from coming into existence in the first place. Alternatively it could perhaps be argued that the clause could be treated as a "binding in honour only" clause and if this is the case the Schedule represents a substantial benefit to U.K. consumers as to date the courts have decided that binding in honour only clauses and contracts are not legally binding(27).
The fourth effect is one whereby the seller or supplier is entitled to retain money paid by the consumer in the event of the consumer failing to perform the contract but the consumer is not granted a reciprocal right. It can be argued that this type of term is currently controlled by two sets of provisions, one statutory and the other common law. It appears that this type of term could fall within the scope of s 13(1)(b) of the 1977 Act in that in cases where a party fails to carry out his contractual obligations the other party is entitled to a remedy and a term denying that party such a right can be considered to be an exclusion clause and hence subject to the appropriate control imposed by the Act. The common law provision restricting this sort of practice is that relating to penalty clauses which it could be argued could be applicable here. Various factors, in particular the amount of money involved would have to be examined in order to ascertain if the term could amount to a penalty clause in which case the courts would refuse to enforce it.
The fifth effect is one whereby a consumer who fails to carry out his contractual obligations is required to pay a disproportionately large sum in compensation. This is clearly a penalty clause and the comments immediately above apply here also.
The sixth effect consists of two types of provisions both of which are controlled under current national law. The first is authorising a seller or supplier to dissolve the contract on a discretionary basis whilst denying a reciprocal right to the consumer. It is arguable that this type of practice could amount to the seller or supplier offering no contractual performance at all which would thus be subject to control by s 3 of the Act. The other type of provision in this clause is one permitting the seller or supplier to retain money paid by the consumer for goods or services which have not yet been supplied and it is the seller or supplier who has dissolved the contract. This type of practice clearly amounts to total failure of consideration in respect of which the consumer would be entitled to claim.
The seventh effect concerns the seller or supplier having a right to put an end to a contract of indeterminate duration without reasonable notice except where there are serious grounds for doing so. The issues which are likely to arise here are,what is meant by reasonable notice and serious grounds ? Obviously objective criteria will have to be determined against which to judge these issues. U.K. law is already very familiar with the concept of reasonable notice and indeed has developed it to a high level of refinement, particularly in relation to the incorporation of exclusion clauses in contracts, and it may well be that some of the currently existing rules can be used in this connection. It does appear that this type of practice cannot be interpreted as falling within any of the provisions of the Act and that there are no other statutory or common law provisions restricting its use. Therefore its inclusion in the Schedule may be of benefit to U.K. consumers. The provisions in this clause do not apply to:
- transactions in transferable securities, financial instruments and other products or services where the price is linked to fluctuations in a stock exchange quotation or index or a financial market rate that the seller or supplier does not control ;- contracts for the purchase or sale of foreign currency, traveller's cheques or international money orders denominated in foreign currency ;"
and they are said to be
"without hindrance to terms by which a supplier of financial services reserves the right to terminate unilaterally a contract of indeterminate duration without notice where there is a valid reason, provided that the supplier is required to inform the other contracting party or parties thereof immediately".
The eighth effect is that whereby the trader may automatically extend the duration of a fixed term contract without giving the consumer a reasonable opportunity to object. In this case the trader is imposing upon the consumer the burden of contacting the trader within a very short period of time to inform him of the fact that he does not want the duration of the contract to be extended. If the consumer fails to meet the deadline imposed by the trader his silence shall be deemed to be acceptance of the extension of the contract duration. This type of practice is currently dealt with under the common law which provides that in the absence of exceptional circumstances the silence of the offeree cannot be deemed to be acceptance of the offer(28).Thus,consumers confronted with such a clause as this could,subject to the circumstances of the case, use this silence rule for protection.
The ninth effect is irrevocably binding the consumer to terms that he had no reasonable opportunity of becoming acquainted with at the time of the making of the contract. A factor which would be relevant in this connection is the type of language used in the contract documentation (assuming that the contract is written) and if it were plain intelligible language it is unlikely that the consumer could successfully complain at a later stage. Another relevant factor would be the time at which the consumer became acquainted with the term and should this occur after the contract has been concluded - a practice which is restricted under our current national law - clearly the trader would not be permitted to rely thereon. It is however regrettable that this effect deals only with the consumer not having the opportunity of becoming acquainted with the unfair term as it is likely that there will be many occasions where the consumer will be made aware of a term with which he does not agree but because of lack of bargaining power he has no option but to accept. The extent to which a consumer would be protected under the current law depends upon a number of factors including for example the harshness of the term involved.
The next effect deals with permitting the seller or supplier to unilaterally alter, without a valid reason, the terms of the contract. If such a term were to be deemed to be effective it would entitle the seller or supplier to "render a contractual performance substantially different from that which was reasonably expected of him" and thus any such term would,under s 3 of the 1977 Act, be required to satisfy the appropriate reasonableness test.
As was the case with effect seven above, this clause does not apply to the two categories of contract mentioned there and in addition the clause is said by Schedule 3(2) to be:
"without hindrance to terms under which a supplier of financial services reserves the right to alter the rate of interest payable by the consumer or due to the latter, or the amount of or other charges for financial services without notice where there is a valid reason provided that the supplier is required to inform the other contracting party or parties thereof at the earliest opportunity and that the latter are free to dissolve the contract immediately".
The eleventh effect is one permitting the seller or supplier to unilaterally alter without a valid reason any characteristics of the goods or services to be provided. This again is a provision which is clearly subject to control under s 3 of the Act on exactly the same grounds as the category immediately above.
The twelfth effect is one permitting the seller or supplier to determine the price of the goods at the time of delivery or permitting him to increase the price without giving the consumer in either case the right to cancel the contract if the final price is too high compared with the original. In a large number of business transactions,particularly cases where the price of the goods or services when supplied to the seller or supplier can fluctuate,it is perfectly reasonable to insert this type of term into a contract and this is quite a common business practice today. However where there is no valid reason for such unilateral price increases the term permitting the seller or supplier to do so is clearly unfair. There is currently no control under national law over this type of term and therefore the inclusion of this provision in the "unfair" list is to be welcomed.
This clause again is one which is not applicable in the case of the two contracts highlighted above and in addition it is
"without hindrance to price indexation clauses,where lawful,provided that the methods by which prices vary is explicitly described".
The next effect is one which can quite clearly fall within the scope of sections 2, 3, 6 and 7 of the Act as it relates to attempts by the seller or supplier to exclude or restrict liability for breach of the express or implied terms of the relevant contract. It also attempts to grant to the seller or supplier the exclusive right to interpret any term of the contract. Additionally this type of clause is covered by paragraph (c) of s 13(1) which controls the exclusion or restriction of rules of evidence and procedure and thus this term in the Schedule adds nothing to U.K. national law.
The next three effects deal with the seller or supplier attempting to limit the extent to which he must respect any commitments entered into on his behalf by an agent - depending on the nature of the contract,this provision could fall within the scope of sections 2, 3, 6 and 7 of the Act ;insisting that even though he himself has not carried out his contractual obligations, the consumer must do so -again here it would appear that an action based on total failure of consideration would be available to the consumer ; granting to the seller or supplier the right to transfer his contractual obligations and rights in such a way that the effects of any guarantees given to the consumer would be reduced except in those cases where the consumer agreed therewith - once again depending on the nature of the contract, sections 2, 3, 6 and 7 could apply here.
The final effect is also one which clearly falls within the scope of s 13(1), this time paragraphs (b) and (c). It applies to any clause which excludes or hinders the right of the consumer to take legal action or exercise any legal remedy (including the reference of any disputes to arbitration); unduly restricting the evidence available to the consumer or imposing upon him a burden of proof which should rightly lie upon the seller or supplier. All of these clauses are subject to restrictions under the Act except for that relating to arbitration. Under s 13(2) any written agreement to refer a dispute to arbitration is not subject to any of the Act's controls. The inclusion of this provision in the Schedule is to be welcomed as although it can be argued that such references can be to the benefit of the consumer,there have been occasions where the consumer has not in fact benefitted therefrom.(29)
Thus of the seventeen effects specified in the Schedule, there are only three which are not currently controlled by either statute or the common law. They consist of clause three - where the consumer is bound to perform while the trader may perform at his discretion - but this clause is only uncontrolled if it is interpreted as being a "binding in honour only" clause ; clause seven - where the trader may end a contract of indeterminate duration without giving reasonable notice to the consumer and clause twelve - where the trader may determine the price at the time of delivery or may increase the price without permitting the consumer to cancel the contract. It can therefore be concluded that the added protection to consumers from the listed terms will be minimal and indeed some of the concepts involved in both clauses seven and twelve are not unfamiliar to U.K. courts. The rules on reasonable notice - relevant to clause seven - have already been mentioned while controls over price clauses - relevant to clause twelve - can be found in, for example,consumer credit law. One area in which the listed terms may be of significant benefit is that of insurance contracts which although they fall outside the scope of the Act, are subject to control by the Regulations.
Conclusion
One of the reasons why the adoption of this Directive was so delayed was that when the Commission first started discussing it,a number of Member States decided to introduce their own national law on unfair terms. It was therefore decided to postpone the introduction of a Directive in this area for some time. The provisions which have been so introduced are quite different in the various Member States and almost invariably provide more protection to consumers than do these Regulations. Also because of the minimalist nature of the Directive it is most unlikely that its implementation by the Member States will lead to a greater degree of uniformity of control over unfair terms. An example of the diversity which exists and which will not in any way be affected by the introduction of the Regulations is in the area of grey and black list terms. In Germany under the AGBG 1976 s 2 paragraphs 10 and 11 there is a black list of terms which are absolutely prohibited in consumer contracts and a grey list of terms which are voidable at the option of the consumer. In Italian law under the Italian Civil Code 1942 article 1341 terms which have an effect broadly similar to s 13 of the Unfair Contract Terms Act 1977 are of no effect unless they have been specifically approved in writing and similar provisions exist in Luxembourg by virtue of the Loi Relative a la Protection Juridique du Consommateur 1983 and the Luxembourg Civil Code article 1135. Provisions making certain clauses void and/or voidable at the option of or on behalf of consumers also exist in the legal systems of Portugal,Spain,Ireland,the Netherlands and Denmark. Furthermore in Germany and Greece there is prior administrative control of insurance contracts, while Spanish law requires the participation of consumer representative organisations in the drafting of standard term contracts by public utilities and monopoly suppliers. Finally,in this connection it is worth mentioning that some of the Member States,notably France and Denmark,have established boards and committees which act on behalf of consumers to prohibit, restrict or regulate the use or proposed use of terms alleged to be unfair. Despite the introduction of the Regulations,consumers in some of the Member States will have more protection because of the provisions of their national law, than will consumers in the U.K.
In comparing the main provisions of the 1977 Act and the Regulations, it can be seen that there are advantages and also some disadvantages in each. While the Act applies to consumers, it defines this category widely enough to include some business parties but gives a rather restricted definition to the terms seller and supplier. In the Regulations the term consumer is defined narrowly and the terms seller and supplier defined widely. The Regulations apply to all non-negotiated contract terms although those dealing with adequacy of price and main subject matter definition are excluded from being assessed for fairness as indeed are some aspects of financial services contracts. The issue of whether contract terms are negotiated or not is irrelevant as far as the Act is concerned as its provisions apply to both but its controls only extend to terms which purport to exclude or restrict contractual liability or,in tortious situations the duty upon which liability would be based. Core terms are not excluded from the reasonableness tests under the Act.
Perhaps the main difference between the two measures is in relation to the tests to which unfair terms are subject and the issue of the burden of proof appropriate to each. Under paragraph 4 of the Regulations, in order to establish unfairness the consumer must prove the elements of lack of good faith causing a significant imbalance in the parties' rights and duties to his detriment. While some of the factors which constitute the element of good faith are relevant also to the test of reasonableness in s 11(2) of the Act,(and it could be argued that significant imbalance could be relevant to the reasonableness tests in s 11(1) and (2)), the test of fairness is different to reasonableness as there are more elements to be proven to establish unfairness. In relation to the terms contained in the list in Schedule 3 of the Regulations, it appears that the burden of proof is imposed upon the seller or supplier to prove that the term used is fair in the circumstances of the case. Under the provisions of the Act however,the burden of proving that a term satisfies the requirement of reasonableness is imposed upon the business party and unlike the approach adopted in the Regulations,some unfair terms are totally banned while the others are subject to a test of reasonableness.
There is no requirement in the Act concerning the use of plain intelligible language although a failure to use such language could be relevant in the determination of reasonableness. Under the Regulations a seller or supplier is required to use such language in his contract documentation although the sanction to be imposed for failure to do so is quite vague.
One provision in the Regulations about which consumers should be optimistic is the role to be played by the Director General of Fair Trading in combatting the use of unfair terms. It is unrealistic,as mentioned above, to expect consumers to go to court to tackle the use of unfair terms by commercial organisations and a vigorous programme by the Director General to provide information to businesses coupled with the possibility of court proceedings for failure to cease the use of unfair terms could achieve much for consumers in the years to come.
In conclusion it should be mentioned that the Regulations are very significant in that they represent a vitally important step in the "Europeanisation" of consumer contract law in the U.K. We are now witnessing the introduction of concepts into our national law which have existed in European jurisdictions and have provided consumers with a level of protection not hitherto available in this country. The good faith requirement represents the extension of a further equitable principle(30) into contract law and its success in protecting consumers will depend upon the interpretation placed upon it by the courts. It is to be hoped that rather that restricting its meaning to something akin to the concept of reasonableness,the judiciary will look to the legal systems of some of our European partners and adopt an interpretation which is in keeping with the spirit and intention of the Directive.
Footnotes
(1) No. 93/13/EEC; published at O J 1993 L95/29. Back to text
(2) S I 1994/3159. Back to text
(3) This sub-section provides that a business party may effectively rely upon an excluding term, provided it is
reasonable to do so, to:
(1) exclude liability for breach of contract;Back to text
(2) exclude liability for performing the contract in a way which is substantially different to that expected by the other party;
(3) exclude liability for failing to carry out part of or the entire contract.
(1) A party to a contract "deals as consumer" in relation to another party if -Back to text
(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.
(5) The Unfair Terms in Consumer Contracts Regulations 1994 paragraph 3(5). Back to text
(6) Paragraph 3(4) of the Regulations. Back to text
(7) The full title is Gesetz Zur Regelung des Rechts der Allgemeinen Geschaftsbedingunen. Back to text
(8) [1992] Neue Juristische Wochenschrift 1107. Back to text
(9) On using the preamble to interpret a Directive, see Marleasing SA v La Commercial Internacional de Alimentation SA [1992] 1 CMLR 305. Back to text
(10) See, for example, Chappell and Co. Ltd. v Nestle Co. Ltd.[1960] AC 87. Back to text
(11) See B.Coote 'Exception Clauses' (particularly chapter 1) (London, Sweet and Maxwell, 1964) Back to text
(12) As he then was. Back to text
(13) Section 2(1) and (2) of the 1977 Act apply to contracts of employment but only in favour of employees and thus again the scope of the Act is wider than the Regulations. Back to text
(14) Schedule 1 to the Regulations. Back to text
(15) For these examples see Rebecca Evans, 'Article 7 of the Unfair Contract Terms Directive: the Consumer Perspective' - seminar paper presented at University of Warwick, May 1994. Back to text
(16) See Schedule 1 to the Act. Back to text
(17) Defined in s 1(1) of the 1977 Act to include, the breach "(a) of any obligation, arising from the express or implied terms of a contract, to take reasonable care or exercise reasonable skill in the performance of the contract". Back to text
(18) This sub-section provides:
"A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence".Back to text
(19) Sections 2(1), 5, 6 and 7. Back to text
(20) For special provisions relating to consumer contracts, see the Rome Convention 1980 articles 5 and 9(5). Back to text
(21) Department of Trade and Industry - Implementation of the EC Directive on Unfair Terms in Consumer Contracts (93/13/EEC)- A Consultation Document October 1993. Back to text
(22) Department of Trade and Industry - Implementation of the EC Directive on Unfair Terms in Consumer Contracts (93/13/EEC) - A Further Consultative Document September 1994. Back to text
(23) Atlantic Shipping Co. v Dreyfus [1922] AC 150. Back to text
(24) Ernest Beck and Co. v Szymanowiski and Co. [1924] AC 43. Back to text
(25) Lowe v Lombank Ltd. [1960] 1 All ER 611. "I ...confirm that I ...have examined the goods described in the schedule to the agreement and acknowledge that the same is/are in good order and condition, and to my ...satisfaction in every respect". Back to text
(26) The word "producer" is defined in section 1(2); see also s 2(2). Back to text
(27) Rose and Frank Co. v Crompton and Bros. Ltd. [1925] AC 445; Jones v Vernon's Pools Ltd. [1938] 2 All ER 626; Appleson v Littlewood Ltd. [1939] 1 All ER 464. Back to text
(28) Felthouse v Bindley (1862) 11 CBNS 869. Back to text
(29) For example, in an arbitration in 1977 under the Association of British Travel Agents code of practice the consumers received £25 in compensation while the legal costs amounted to £1800. Back to text
(30) See equitable rules on undue influence, penalties, forfeitures and mistake. Back to text