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IMPLEMENTING AN EC DIRECTIVE ON UNFAIR TERMS

Tim Kaye

Lecturer in Law,Faculty of Law, University of Birmingham.
< T.S.Kaye@bham.ac.uk>

Copyright © 1995 Tim Kaye.
First Published in Web Journal of Current Legal Issues in association with Blackstone Press Ltd.

Summary

This article considers the substantive effect of the Unfair Terms in Consumer Contracts Regulations 1994, and argues that despite their apparent commencement date of 1st July 1995 consumers have been able to claim the benefit of the protection afforded by the Regulations on the grounds that the Minister's specification of 1st July 1995 as the effective date of implementation is ultra vires.

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Contents: Introduction; The Unfair Terms in Consumer Contract Regulations; Problems; Direct Effect of an EC Directive; Indirect Effect; Claiming damages from the State; Ultra Vires

INTRODUCTION

The EC Directive on Unfair Terms in Consumer Contracts 93/13/EEC: L 95/29, designed to ensure that Member States outlaw many unfair terms in contracts with consumers, was agreed in Luxembourg on 5th April 1993. Article 10 of the Directive specifically requires that:

"Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive no later than 31 December 1994.... These provisions shall be applicable to all contracts concluded after 31 December 1994."

After some debate and two consultation exercises, the government at last purported to implement the Directive in the form of the Unfair Terms in Consumer Contracts Regulations 1994 (SI 3159/1994), which were made on 8th December 1994 and laid before Parliament six days later. The scheduled date for their commencement, however, was delayed under regulation 1 until 1st July 1995. Consumer groups anxiously awaiting the regulations to implement the Directive were apparently required to wait a little longer. The primary purpose of this article is to examine whether this six month delay in implementing the Directive is indeed lawful and effective in allowing both sellers of goods and suppliers of services to consumers to exploit unfair terms included in contracts made between 1st January and 30th June 1995. But let us start with an assessment of the substantive Regulations themselves.

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THE UNFAIR TERMS IN CONSUMER CONTRACTS REGULATIONS

Just as the Directive intended, the Regulations purport to prevent an "unfair term in a contract concluded with a consumer by a seller or supplier [being] binding on the consumer" (reg 5(1)), although the "contract shall continue to bind the parties if it is capable of continuing in existence without the unfair term" (reg 5(2)). An 'unfair term' for these purposes means, according to reg 4(1):

"any term which 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"

provided that "the said term has not been individually negotiated" (reg 3(1)). In other words, a seller or supplier can legitimately rely on an apparently unfair term if she can show -the burden of proof is upon her (reg 3(5)) - that it appears on a 'one-off' basis or in a 'one-off' consumer contract rather than in a standard-form contract. (Of course, the term must also avoid falling foul of some other legal provision such as the Unfair Contract Terms Act (UCTA) 1977, whose ambit remains unaffected by the making of the Unfair Terms in Consumer Contracts Regulations.) Also excluded from the force of these Regulations are contracts whose terms define either:

"the main subject-matter of the contract, ... or concern the adequacy of the price or remuneration, as against the goods or services sold or supplied" (reg 3(2)),

and contracts to which no consumer is a party. Regulation 2(1) defines a 'consumer' as "a natural person who ... is acting for purposes which are outside his business", so that businesses cannot for the purposes of these Regulations claim to be a consumer. This is quite different from the position under section 12(1) of UCTA, where businesses engaged in a transaction outside their normal business purposes can claim to be 'dealing as consumer' since the decision in R & B Customs Brokers Ltd v United Dominions Trust Ltd. [1988] 1 WLR 321.

Contracts relating to employment, succession and family law are also excluded from the ambit of the Regulations by virtue of schedule 1, as are contracts relating to the incorporation and organisation of companies and partnerships, and any term incorporated in order to comply with UK or EC law.

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PROBLEMS

These Regulations are thus both broader and narrower in scope than the Unfair Contract Terms Act 1977. They are narrower because inter-business contracts are completely unaffected by the Regulations, whereas the Act on the other hand generally subjects inter-business exclusion and limitation clauses to a test of reasonableness (eg UCTA 1977, ss 2(2), 3, 6(3), & (3)) whilst completely prohibiting the exclusion of liability in such contracts for death or personal injury (UCTA 1977, s 2(1)), for failing to have title to goods at the time of an apparent sale (UCTA 1977, s 6(1)), or for breach of the obligations under section 2 of the Supply of Goods and Services Act 1982 (UCTA 1977, s 7(3A). But the Regulations are also wider in scope than the Act because they are not restricted in their application to exclusion and limitation clauses, and also because contracts of insurance and contracts relating to intellectual property and the creation or transfer of interests in land are all caught by the new Regulations whilst they are specifically excluded from the ambit of the Act (UCTA 1977, sch 1). The Director General of Fair Trading is also given powers under regulation 8 of the Unfair Terms in Consumer Contracts Regulations both to consider complaints about the use of unfair contract terms, and to apply for injunctions to restrain their use if he considers it appropriate to do so.

The Regulations come complete with a list in schedule 3 of seventeen "indicative and illustrative...terms which may be regarded as unfair" and though this list is not intended to be exhaustive, there would seem to be little in the Regulations which is likely to cause major problems of interpretation or understanding from the point of view of anyone trying to decide ex ante whether a term in a contract is likely to be found 'unfair' or not.

Two minor problems are nevertheless apparent. The first concerns the burden of proof. Under regulation 3(5), it is clearly for the seller or supplier who claims that a term was individually negotiated to show that it was. And the seller or supplier is also under an obligation to "ensure that any written term of a contract is expressed in plain, intelligible language" so that under regulation 6 "if there is doubt about the meaning of a written term, the interpretation most favourable to the consumer shall prevail." But nowhere in the Regulations does it say on whom the burden of proof rests when considering the notion of unfairness itself. Does the consumer have to show that the term in question is unfair, or does the seller or supplier have to demonstrate that the term is fair? Such an omission seems particularly odd in the light of the corresponding provisions in regulations 3(5) and 6, and is even more striking when compared to the explicit statement as to the burden of proof in relation to the concept of 'reasonableness' in section 11(5) of the Unfair Contract Terms Act 1977. This specifically states that it is "for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that it does." It is submitted, however, that the omission from the Regulations of a clear indication as to the burden of proof in relation to the question of 'unfairness' will prove to be only a minor difficulty since there will be very few terms on the borderline of fairness where the burden of proof could make a difference to the outcome of the case in question.

The one other minor difficulty likely to result from the implementation of the Regulations is in the definition or interpretation in regulation 4(1) of the concept of the 'requirement of good faith'. This is a concept which is literally foreign to English law and has been imported from the civil law systems of continental Europe. Potential problems of interpretation of this concept may therefore seem inevitable, at least for the first few years of the operation of these Regulations until a new jurisprudence of 'good faith' is established. However, schedule 2 requires that, "in making an assessment of good faith, regard shall be had in particular to" four factors listed there. Three of these, namely the strength of the bargaining positions of the parties, whether the consumer had an inducement to agree to the term, and whether the goods were supplied to the special order of the consumer, are virtually identical to 'guidelines' (a), (b) and (e) respectively for the application of the 'reasonableness' test in schedule 2 of the Unfair Contract Terms Act 1977. No new, uncertain test is therefore created by any of these factors.

That leaves only the fourth factor specified in schedule 2 of the Regulations, which concerns "the extent to which the seller or supplier has dealt fairly and equitably with the consumer". On the face of it, this could cause some problems of interpretation, but again these problems are more apparent than real because, after all, these are precisely the issues which already need to be canvassed in any case involving a contract where promissory estoppel or unconscionability is pleaded.

Even the suggestion that these regulations will have a significant impact on business costs is exaggerated. Such arguments were made in relation to the passage of the Unfair Contract Terms Act 1977 (at the time of an arguably equally unpromising economic period) and proved subsequently to be largely unfounded. Moreover, both the main subject-matter of the contract and the price to be paid remain untouched by these Regulations. Finally, consumers do not complain for the sheer hell of it. Businesses will only fall foul of these regulations if something has first gone wrong with the product sold or service supplied. Companies providing quality products have little to fear and everything to gain as their shoddy competitors will struggle to compete. Of course, it is true that some one-off costs will be incurred in the re-drafting of contracts in order to make them comply with the Regulations so as to avoid the potential intervention of the Director General of Fair Trading, but in comparison with the number of transactions for which the newly-drafted document is likely to be the legal basis, such expenditure will often be negligible.

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DIRECT EFFECT OF AN EC DIRECTIVE

The main problem, therefore, concerns the effective date of commencement for these Regulations. Since, as the Explanatory Note appended to the Regulations makes clear, they are designed to implement an EC Directive, yet apparently fail to do so in full by reason of the delay in their implementation, the issue of direct effect of the Directive itself comes inevitably to mind. Although under Article 189 of the EC Treaty, a Directive cannot be 'directly applicable' to individual citizens of a Member State of the EC, it can be directly effective provided that it is "unconditional and sufficiently precise" (Case 152/84 Marshall v Southampton & South West Hampshire Area Health Authority (Teaching) [1986] ECR 723 at p 748) and leaves Member States "no discretionary power" (Case 41/74 Van Duyn v Home Office [1974] ECR 1337 at p 1347) in the manner of its implementation.

This sort of effectiveness is commonly known as vertical direct effect, in which a citizen is able to rely on the Directive as though it had been implemented into domestic national law, provided that his claim is actually against the Member State itself. (See Case 41/74 Van Duyn v Home Office [1974] ECR 1337; Case 8/81 Becker v Finanzamt Munster-Innenstadt [1982] ECR 53.) A Directive cannot, however, be directly effective before the time-limit for implementation has expired. (Case 148/78 Pubblico Ministero v Ratti [1979] ECR 1629.) The time limit specified in the Unfair Terms in Consumer Contracts Regulations expired by virtue of Article 10 on 31st December 1994, so it would appear that as far as contracts made between 1st January and 30th June 1995 inclusive are concerned, any potentially unfair terms in contracts between a consumer and the British State could - notwithstanding the failure of the British government to implement the Unfair Terms in Consumer Contracts Regulations within the proper time - be judged directly against the EC Directive on Unfair Terms in Consumer Contracts. Since the Regulations are modelled on the Directive - even down to an identical "indicative and illustrative list of terms which may be regarded as unfair" - it would appear both that the Directive is sufficiently clear to be directly effective against the State and also that any terms which would have been considered voidable for unfairness under the Regulations must still have become voidable on 1st January 1995 whatever the official date for the implementation of the Regulations may be.

Moreover, in Case 152/84 Marshall v Southampton & South West Hampshire Area Health Authority (Teaching) [1986] ECR 723 the European Court of Justice ruled (at p 749) that:

"where a person involved in legal proceedings is able to rely on a Directive as against a State he may do so regardless of the capacity in which the latter is acting, whether employer or public authority."

Thus contracts between consumers and (say) the Post Office will be caught by the direct applicability of the EC Directive, as will contracts between consumers on the one hand, and local authorities, NHS Trusts and self- governing schools on the other.

However, particularly with so much that was previously in the public sector now having been privatised - although some privatised utilities may still be considered to be part, or 'emanations', of the State (see Griffin v South West Water Services Ltd [1995] IRLR 15) - such contracts must amount to a tiny fraction of all those into which consumers enter. But since, according to Article 189, a Directive is binding only on "each Member State to which it is addressed":

"It follows that a Directive may not of itself impose obligations on an individual and that a provision of a Directive may not be relied upon as such against such a person." (Steiner, EC Law 4th ed. (London: Blackstone Press) 1994, p 34.)

Arguments that EC Directives should be directly effective in a horizontal fashion as between private legal persons have therefore fallen on deaf ears. Indeed, the main policy reason behind the concept of vertical direct effect - that the State should not profit from its failure to implement Community law - is clearly inapplicable when the person or body with whom or which a consumer has a contract is not itself part of the machinery of the State.

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INDIRECT EFFECT

For contracts falling into this category and made between 1st January and 30th June 1995, it is therefore necessary to consider the concept of so-called 'indirect effect'. This emphasises the importance of Article 5 of the EC Treaty, which requires Member States to "take all appropriate measures" to ensure fulfilment of their Community obligations (Case 14/83 Von Colson and Kamann v Land Nordrhein-Westfalen [1984] ECR 1891; Case C 106/89 Marleasing SA v La Comercial Internacional de Alimentacion SA [1992] CMLR 305 at pp 322-3) so that domestic courts are bound to interpret domestic law in such a way as to ensure that the objectives of each Directive are achieved. Thus in Litster v Forth Dry Dock & Engineering Co. Ltd. [1990] 1 AC 546 the House of Lords was prepared to interpret a domestic regulation contrary to its prima facie meaning in order to comply with EC Directive 77/187 on the grounds that the domestic regulation in question had been introduced precisely for the purpose of complying with the Directive.

Since the Unfair Terms in Consumer Contracts Regulations 1994 were introduced explicitly for the purpose of implementing the EC Directive on Unfair Terms in Consumer Contracts, the idea of giving the latter indirect effect may seem compelling. The fact that the wording of the two texts is virtually identical certainly lends weight to that view. But this strategy must founder in the case of these particular Regulations, since it is surely somewhat beyond the pail of any known canon of judicial interpretation to construe a commencement date of 1st July 1995 as really meaning 1st January 1995! In Litster Lord Oliver did say (at p 577) that:

"the United Kingdom's Treaty obligations to the Community enable the court, where necessary, to supply by implication words appropriate to comply with those obligations."

But it is difficult to see how the addition of any new words could somehow transform the date of commencement of the Regulations from 1st July to 1st January 1995. Indeed, in Webb v EMO Air Cargo (UK Ltd) [1992] 4 All ER 929 Lord Keith (who had presided in Litster) opined (at p 940) that:

"a national court must construe a domestic law to accord with the terms of a directive in the same field only if it is possible to do so."

These words have since been quoted with approval and applied by Blackburne J in Griffin v South West Water Services Ltd [1995] IRLR 15, who said (at p 32):

"Applying a purposive approach to s 188 [of the Trade Union and Labour Relations (Consolidation) Act 1992], and bearing in mind the words of Lord Keith, I am quite unable to construe that section as if the qualification 'recognised' in its reference to an independent trade union did not exist."

It is submitted that it is similarly impossible to construe regulation 1 of the Unfair Terms in Consumer Contracts Regulations as if the month of "July" had not been mentioned in relation to the Regulations' commencement date.

In other words, whilst the purposive approach encouraged by the concept of indirect effect permits judges to "supply" or add words to domestic regulations in order that the latter achieve the objectives intended by EC Directives, this approach does not allow the judiciary completely to rewrite domestic law by deleting words or phrases which are inappropriate or incompatible with such Directives, since this would effectively allow in horizontal direct effect by the back door.

Consumers entering into standard-form contracts with other private parties between 1st January and 30th June 1995 inclusive cannot therefore be assisted by the concept of indirect effect.

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CLAIMING DAMAGES FROM THE STATE

Joined cases C 6 & 9/90 Francovich and Bonifaci v Italy [1992] IRLR 84 offer an alternative solution. In this case a group of employees sought compensation from the Italian government for its failure to implement Directive 80/987 designed to guarantee the payment of arrears of wages to employees in the event of their employer's insolvency. The time-limit for the implementation of the Directive had expired but although the Directive was not itself sufficiently clear and precise to be directly effective the Court of Justice held that a Member State was required to compensate individuals if it failed to implement a Directive in accordance with Article 5 of the EC Treaty provided that the following conditions were satisfied at p 88:

(a) the result required by the Directive includes the conferring of rights on individuals;

(b) the content of those rights may be determined by reference to the provisions of the Directive; and

(c) there was a causal link between the breach of the member state's obligation and the damage suffered by the claimants.

In principle, Francovich seems to provide a complete solution to the problem faced by consumers entering into standard-form contracts with other private parties between 1st January and 30th June 1995 inclusive. But three practical difficulties are presented by this decision. First, it is not entirely clear whether a Francovich action against a Member State is available where a Directive has ostensibly been implemented but is faulty in the manner of such implementation, or whether it is restricted in its application merely to cases where there has been a complete failure to implement a Directive, as in Francovich itself. Secondly, a Francovich action effectively involves a 'two-stage' procedure for any potential plaintiff. She has initially to establish her case against the potential private defendant before moving on to her action against the Member State. Then she will have to show that it was primarily because of the government's failure to implement the Regulations that her claim against the aforesaid private party would fail. Thirdly, for many potential plaintiffs hoping to benefit from the Unfair Terms in Consumer Contracts Regulations, making use of Francovich would be like taking a sledgehammer to crack a nut. Claims against private parties (large or small) are daunting enough for most consumers: taking on the might of the state is simply not worth the aggravation.

But this article should not be taken as accepting that the government has effectively delayed the implementation of the EC Directive on Unfair Terms in Consumer Contracts as far as most consumers are concerned. The sophistication of EC law itself may offer little assistance, but the old homespun methods of the common law are, it is submitted, rather more effective in this instance.

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ULTRA VIRES

The Unfair Terms in Consumer Contracts Regulations 1994 were ostensibly made under the power conferred on the Secretary of State by section 2(2) of the European Communities Act 1972. This states:

"any designated Minister or department may by regulations, make provision -

(a) for the purpose of implementing any Community obligation of the United Kingdom, or enabling any such obligation to be implemented...."

It is clear therefore that the Secretary of State has no power delegated to him under this Act to make regulations which do not implement a Community obligation, or which have the effect of subverting a Community obligation.

Since Article 10 of the EC Directive on Unfair Terms in Consumer Contracts specifically requires that the regulations promulgated by the Secretary of State must be in force "no later than 31 December 1994" so that they "shall be applicable to all contracts concluded after 31 December 1994", it is obvious that the Secretary of State has exceeded the powers vested in him under the European Communities Act 1972 by delaying the implementation of the Unfair Terms in Consumer Contracts Regulations 1994 until 1st July 1995.

Since the commencement date of the Regulations is thus clearly ultra vires, it follows that it can be struck out by domestic courts without the need for any reference to the European Court. However, the rest of the Regulations appear to fulfil their ostensible purpose of giving effect to the Directive, so that the Secretary of State has acted within his powers in promulgating them. It is submitted that the proper course of action here is to sever the offending phrase in regulation 1, namely "and shall come into force on 1st July 1995", from the rest of the Regulations in line with the following dicta of Lord Bridge in DPP v Hutchinson [1990] 2 AC 783 at p 804:

"A legislative instrument is textually severable if a clause, a sentence, a phrase or a single word, may be disregarded, as exceeding the law-maker's power, and what remains of the text is still grammatical and coherent....A legislative instrument is substantially severable if the substance of what remains after severance is essentially unchanged in its legislative purpose, operation and effect."

Since the Unfair Terms in Consumer Contracts Regulations are capable of subsisting on their own in substantially the same form and with a perfectly grammatical and coherent text without the addition of a commencement date of 1st July 1995, it is submitted that the courts should strike down only the phrase quoted above whilst leaving the rest of the Regulations untouched.

This does, of course, prompt the question as to the day on which the Regulations can be viewed as having been brought into operation. Paragraph 1(1)(b) of schedule 2 of the European Communities Act 1972 prohibits a statutory instrument issued under section 2(2) from taking effect before the date on which it was made. Thus the earliest date on which the Regulations could have come into effect was 8th December 1994. However, Article 10 of the Directive did not compel the government to bring such regulations into effect before 1st January 1995. It therefore follows that no individuals would have been able to demonstrate the necessary cause of action by showing that they had suffered loss by reason of the Secretary of State's ultra vires action until that day had arrived. (Bodies such as the Consumers' Association and National Consumer Council would, presumably, have had locus standi to seek judicial review of the commencement date of the Regulations from the date on which they were made (ie 8th December 1994)). Thus 1st January 1995 must be the date on which the Unfair Terms in Consumer Contracts Regulations 1994 became law.

There is thus no need to strain the English language in order to give the Directive indirect effect. Nor is there a need to sue the government when a consumer falls victim to an unfair term in a standard-form contract. And the anomalies which can be caused by giving a Directive direct effect are also avoided. The Unfair Terms in Consumer Contracts Regulations can be treated as having been effective since 1st January 1995 for all consumer transactions to which they are supposed to applicable, no matter whether they be with the state or with private bodies or individuals. And since the limitation period for actions in contract remains six years, this could prove to be an important weapon for consumers into the next millennium.

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