Scottish Law Commission (Discussion Papers)

Application

·       Separate Parts for England and Scotland.

·       Apply to the UK as a whole.

·       There should be a single piece of legislation for the whole of the UK.

Parties protected

·       Most sections apply to both consumer and non-consumer contracts.

·       Apply only to contracts between a business seller or supplier and a consumer.

·       Should apply to both consumer and business-to-business contracts.

·       Sections 4 and 5 [ss 18, 19] apply only to consumer contracts.

·       Section 6(1) and (3) [s 20(1), (2)(ii)] apply to any party whatever their status.

·       UCTA s 6(1) and (3) [s 20(1), (2)(ii)] should be incorporated into the new legislation.

Terms of no effect

·       Exclusion or restriction of liability for death or personal injury caused by negligence [breach of duty].

·       Exclusion or restriction of liability for breach of the implied terms as to title in contracts for sale, hire-purchase or (except in Scotland) other transfer of property in goods.

·       Exclusion or restriction of liability for breach of the implied terms as to description, quality etc in contracts for the supply of goods to a person dealing as consumer.

·       Exclusion or restriction of liability, by means of a term or notice in a “guarantee”, of a manufacturer’s or distributor’s liability in tort [delict] to a person injured by goods proving defective while in consumer use.

·       There are no terms that are automatically of no effect. All terms are subject to the test of fairness.

·       Maintain present rules rendering some exclusions and restrictions of no effect (except in relation to guarantees); other terms to be subject to a reasonableness test.

Range of terms controlled

·       Applies only to terms excluding or restricting liability (except s 4
[s 18]).

·       Apply to any contractual term except “core” terms (see below).

·       Should apply to all terms (except “core” terms) both in consumer and in business-to-business contracts.

Terms not individually negotiated

·       Controls over specific types of term (ss 2, 4–7 [ss 16, 18–21]) apply whether or not clause was negotiated.

Section 3 [s 17] applies

(a)   to all consumer contracts;

(b)   in non-consumer contracts, only to written standard terms of business.

·       Only apply to terms that have been drafted in advance and not individually negotiated.

·       In business-to-business contracts, controls should apply to terms that have been drafted in advance and not individually negotiated.

·       Some exclusions are of no effect against any party; others are of no effect against consumers, but against non-consumers only if unreasonable (ss 6 and 7 [ss 20, 21]).

·       We ask whether the present protection afforded to businesses under UCTA ss 6 and 7 [ss 20, 21] (which apply to all terms, whether negotiated or not) should be retained.

Terms not subject to controls

(1) “Definitional” and “core” terms

·       Generally applies only to terms excluding or restricting liability (see above).

Section 3(2)(b) applies to a term entitling a party to render a performance “substantially different from that which was reasonably expected”, or no performance at all.

·       Terms that define the main subject matter of the contract,provided they are in plain intelligible language.

·       The legislation should exclude the main subject matter from the scope of review, but only in so far as

a)    it is not substantially different from what the consumer should reasonably expect, in the light of what he or she was told when or before the contract was made and all the other circumstances; and

b)    it is stated transparently.

·       Terms setting the price to be paid are beyond the scope of the legislation.

·       No control over the adequacy of the price, provided the relevant terms are in plain and intelligible language.

·       The adequacy of the price should not be subject to review where the price

a)  is not payable in circumstances substantially different from what the consumer reasonably expected, or calculated in a way which is substantially different from that; and

b)  is not one contained in a subsidiary term; and

c)  is transparent.

(2) “Mandatory” and “permitted” terms

·       Terms required or authorised by an enactment.

·       Terms required or (probably) authorised in any Member State or in Community legislation of immediate direct effect in the UK.

·       Terms complying with mandatory statutory rules should be exempt; also terms which are not substantially different from the default rules, provided they are in plain language.

Terms required or authorised by regulators

·       Terms required or approved by competent authorities, acting in the course of any statutory jurisdiction or function.

·       Possible that terms required or approved by regulatory agencies may be exempt.

·       Only terms that are required by regulators should be exempt.

International instruments

·       Terms made with a view to compliance with an international treaty to which the UK is a party, provided the term does not operate more restrictively than was contemplated by the agreement.

·       Terms which reflect provisions and principles of international treaties to which Member States or the Community are party.

·       Only terms which reflect what is required or authorised by international conventions (not those which merely reflect the principles of such conventions) should be exempt.

Excluded contracts

(1) Domestic contracts

Consumers as suppliers

·       Section 3 [s 17] applies to contracts irrespective of whether the consumer is the buyer or seller, supplier or recipient.

·       Unclear whether UTCCR apply to contracts where the consumer is the seller or supplier.

·       The legislation should apply where the consumer is the seller or supplier.

·       Contracts of insurance.

·       Apply to all consumer contracts without any such exclusions.

·       In relation to consumer contracts, there should be no exclusion of insurance, land or securities contracts (required by Directive 93/13/EEC).

·       Contracts relating to land, securities, or (in Scotland) guarantees.

·       All of the exemptions should be maintained so far as they relate to business-to-business contracts.

·       In business-to-business contracts:

a)    contracts relating to intellectual property or company matters;

b)    unless the contract attempts to exclude or restrict liability for negligence [breach of duty] in respect of death or personal injury:

i)     any contract of marine salvage

ii)     any charterparty of a ship or hovercraft

iii)    any contract for the carriage of goods by ship or hovercraft.

·       Contracts of employment are not excluded, except that s 2 applies only in favour of the employee.

·       Contracts of employment are beyond the scope of the legislation.

·       We ask whether contracts of employment should be covered by the new regime, and, if so, whether they should count as consumer contracts, as business-to-business contracts, or as a separate category subject to some but not all of the controls.

(2) International contracts

·       Certain sections do not apply to contracts for the supply of goods made by parties in different States which involve the carriage of goods between States, offer and acceptance across State borders, or delivery in a State other than that in which the contract was made.

·       No such exception; apply whenever the law of a part of the UK applies.

·       Terms restricting liability for breaches of SGA 1979 ss 13–15 in cross-border consumer contracts should be subject to the legislation (required by SCGD).

·       Rules making other exclusions of no effect should also apply to cross-border contracts (“fairness” test at least required by Directive 93/13/EEC).

·       We ask whether international business-to-business contracts should be exempted from the controls proposed for domestic contracts.

(3) Choice of UK law

·       Contracts in which English or Scots law applies only because the parties have chosen that law to govern their contract.

·       No such exclusion.

·       No such exclusion for consumer contracts (partly required by Directive 93/13/EEC and SCGD).

The test of validity

·       Whether the term was a fair and reasonable one to include in the contract.

·       A term is unfair if, contrary to good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.

·       Whether, judged by reference to the time the contract was made, the term is fair and reasonable.

·       In case of doubt, terms are interpreted against the party relying on them.

·       In case of doubt, the interpretation most favourable to the consumer prevails.

·       In both consumer and business-to-business contracts, it should be a separate ground of unfairness that the term is not “transparent” – ie plainly expressed, clearly presented and accessible.

Factors to be taken into account in applying the test

·       Circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.

·       All the circumstances attending the conclusion of the contract.

·       All the other terms of the contract, or of another contract on which it is dependent.

·       There should be detailed guidelines relating both to fairness in substance and to procedural fairness.

·       Factors listed in Schedule 2 guidelines and s 11(4).

·       No other factors listed in the regulations (though some in the Recitals to the Directive).

Burden of showing unfairness

·       Burden of showing that the term is fair and reasonable is on the party claiming that it is.

·       No statement of which party bears the burden; probably on the consumer.

·       We ask whether the burden should either

i) be on the party claiming that the term is fair and reasonable to show that it is; or

ii) be on the party claiming that it is not fair and reasonable to show that it is not, unless it falls within Schedule 2, in which case it is for the party claiming that the term is fair and reasonable to show that it is.

·       In business-to-business contracts, where a term is not included in the indicative list, the burden of proving that it is not fair and reasonable should be on the party disputing it.

Definition of consumer

·       One party neither makes the contract in the course of a business nor holds himself out as doing so; and

·       The other party does make the contract in the course of a business.

·       Any natural person who, in contracts covered by the regulations, is acting for purposes outside his trade, business or profession.

·       Limited to an individual who makes the contract for purposes which are not related to any business of his.

The requirement that the person does not hold himself out as making the contract in the course of a business will not be included. (Required by SCGD)

·       Whether goods passing under the contract are of a type ordinarily supplied for private use or consumption.

·       In the case of contracts governed by the law of sale of goods or hire-purchase the goods will not have to be of a type ordinarily supplied for private use or consumption. (Required by SCGD)

Auction sales

·       The buyer in a sale by auction or by competitive tender is not considered a consumer.

·       Sales of second-hand goods by auction, where the consumer can be present, will not be subject to the absolute ban on contracting out.

·       Sellers by competitive tender will not be permitted to contract out. (Required by SCGD)

Definition of business

·       “Business” includes a profession and the activities of any government department or local or public authority.

·       “Seller or supplier” means any natural or legal person who, in contracts covered by the regulations, is acting for purposes relating to his trade, business or profession, whether publicly owned or privately owned.

·       It should be made clear that “business” includes a profession and the activities of a government department or local or public authority.

·       The party is acting in the “ordinary course of business”.

·       Refer to “relating to trade, business or profession”.

·       A contract will be treated as a business transaction even if the item sold is not one normally sold or supplied.

Third party beneficiaries’ rights

·       England

A third party claiming rights under the Contracts (Rights of Third Parties) Act 1999 cannot challenge the validity of a clause, except under s 2(1) if it attempts to exclude liability for personal injury or death.

·       Unclear, but it would appear that the regulations only apply to the rights of the consumer and not the rights of a third party beneficiary.

·       For both England and Scotland, the present position under UCTA should be maintained.

·       Scotland

Third parties can challenge a clause if it attempts to exclude liability for death, personal injury, or other loss or damage caused by breach of duty.

They may not be able to challenge clauses under section 17.

Application outside contract

·       Does not apply to the provision of gratuitous services or where there is a statutory duty to provide a service (eg an agreement for the supply of water).

·       Unclear whether applicable to provision of gratuitous services or where there is a statutory duty to supply goods or services. Suggestion that ECJ might adopt view of contract that includes these agreements.

·       The new legislation should refer simply to consumer “contracts” so that the legislation could be interpreted in line with any future European legislation.

·       Applies to notices excluding liability in tort [delict] for negligence [breach of duty].

·       Do not appear to apply to notices; but suggestion that the ECJ might interpret “contract” within the meaning of the Directive to include circumstances where such notices are used.

·       Should apply to notices excluding liability in tort [delict] for negligence [breach of duty].

Effect if term is held invalid

·       The term is of no effect and the parties’ relationship continues as if the term had not been included in the contract.

·       The term is not binding on the consumer, and the contract continues to bind the parties if it is capable of continuing in existence without the unfair term.

·       The term should be of no effect to the extent that it is detrimental to the consumer, and the contract should continue to bind the parties if it is capable of continuing in existence without the unfair term.

Evasion of legislation

“Secondary contracts”

·       A person is not bound by a term which seeks to prejudice or take away rights under another contract if they relate to liabilities of which the Act prevents exclusion.

·       The position on settlements in England is unclear; in Scotland they are exempt.

·       The second contract would be equally subject to the legislation, unless it had no other subject matter so that the relevant term was a “core” term.

·       There should be a provision subjecting terms in “secondary contracts” to the same controls as if they appeared in the main contract. Genuine agreements to settle a dispute should be exempted.

Evasion by choice of law

·       UCTA applies irrespective of terms applying the law of a country outside the UK, if the contract would otherwise be subject to the laws of the UK.

·       The regulations apply irrespective of any terms applying the law of a non-Member State in place of a Member State, if the contract has a close connection with the territory of the Member States.

·       In consumer contracts, it should be made clear that, if the contract has a close connection with the UK, the new legislation will apply irrespective of a choice of another system of law.

Prevention

·       Nothing to prevent continued use of terms that are invalid.

·       The use of terms falling under section 6 is an offence under orders made under the Fair Trading Act 1973, Part II.

·       The DGFT and certain “qualifying bodies” can bring proceedings for an injunction [interdict] against persons appearing to use or promote the use of unfair terms in consumer contracts.

·       The DGFT and certain “qualifying bodies” will be empowered to bring proceedings for an injunction [interdict] against persons appearing to use or promote the use of unfair terms in consumer contracts. (Required by Directive 93/13/EEC)

·       Unclear whether these powers extend to terms that are not effectively incorporated into the agreement.

·       These bodies should be able to prevent the use of ineffectively incorporated contract terms, and of any term which is unfair because it is not transparent.

·       We invite views as to whether these bodies should have powers to act against practices of negotiating terms which are nonetheless unfair.

·       We ask whether the preventive controls should be extended to unfair terms in business-to-business contracts.