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You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Reports) >> Unfair Terms In Contracts [2005] SLC 199(3) (Report) (February 2005) URL: http://www.bailii.org/scot/other/SLC/Report/2005/199(3).html Cite as: [2005] SLC 199(3) (Report) |
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PART 3
A UNIFIED REGIME FOR CONSUMER CONTRACTS
BACKGROUND
3.1 The first of our terms of reference was to replace UCTA and the UTCCR with a single unified regime. The proposals put forward in the Consultation Paper[1] received broad support. The vast majority of respondents agreed that a unified regime would reduce uncertainty and confusion. They thought the uniformity offered by a single regime would provide greater clarity for consumers, businesses and enforcement authorities.
3.2 Our proposals on clarity and accessibility of the new regime[2] similarly received strong support. Respondents particularly welcomed the clarification of consumer law and mentioned that inconsistencies in the current regime benefit neither consumers nor their suppliers. Further, they criticised the formulaic and legalistic language of the current legislation and noted that it is confusing for consumers to have to search multiple sources to find the true state of the law. We agree with these criticisms. We have endeavoured where practicable to write the Draft Bill in plain language and to place much of the substance of the legislation in the body of the Bill. We hope this will limit the need for consumers to move back and forward between clauses and schedules, thereby making the legislation easier to understand.
(1) there should be a single piece of legislation for the whole of the UK;
(2) as far as possible, the new, unified regime should be clearer and more accessible to the reader rather than being based on UCTA or the UTCCR;
(3) with some minor exceptions, there should be no reduction of consumer protection;
(4) those terms that are of no effect under UCTA should remain of no effect; and
(5) other "non-core" terms (including terms that were individually negotiated) should be required to satisfy a "fair and reasonable" test.
3.4 The Consultation Paper contained a detailed comparison of UCTA and the UTCCR.[3] It is not intended to repeat that analysis here. A summary can be found in paragraphs 2.6 – 2.7 above.
GENERAL POLICIES
Geographical scope of the Draft Legislation
3.6 As we mentioned in the Consultation Paper,[4] UCTA contains separate provisions for England and Wales and Northern Ireland on the one hand (Part I) and Scotland (Part II) on the other. We provisionally proposed to unify the two parts in order to make integrated legislative provision for the whole of the UK. We said that some of the differences between the two Parts should be abolished and that some should remain but be preserved within a single instrument.[5]
No reduction in protections
3.10 In the Consultation Paper we stated that, subject to two exceptions to be discussed below, there should be no reduction in consumer protection.[6] This was supported by all the consultees who addressed the issue. It continues to be a key policy objective behind our recommendations on consumer contracts.[7]
3.11 This policy is subject to two exceptions. The first is that under the new scheme the definition of consumer should be limited to natural persons.[8]
3.12 The second is that we consider that certain sections of UCTA are no longer necessary and need not be replicated in the new scheme. Section 5 [section 19][9] (guarantee of consumer goods) seems to be superfluous and can be dropped without any loss of consumer protection.[10] We also propose not to replicate sections 9 [section 22] and 28 on the grounds that they are no longer of any practical effect.[11]
3.13 We recommend that there should be no significant reduction in consumer protection.
Terms of no effect
3.14 In the Consultation Paper we proposed that those terms which were of no effect under UCTA should remain of no effect under the new regime.[12] These cover exclusions or restrictions of liability for death or personal injury, for breach of the implied term that the seller is entitled to sell and for breach of any of the four implied terms of correspondence and quality. They are described in more detail in paragraph 3.43, below. Our proposals received overwhelming support from respondents, most of whom felt that the current system works in this respect and there is no reason to change it.
3.15 Below, in paragraph 3.45, we will recommend that those terms which were of no effect under UCTA should remain of no effect under the new regime.[13]
Other rules relating to "unfair" terms
3.16 In the Consultation Paper we said that it would not be appropriate to incorporate into our draft legislation other statutory and common law rules applying to potentially "unfair" terms in consumer contracts.[14] We had in mind statutory rules, for example relating to liability for defective products or rights of cancellation in consumer contracts. We were also thinking of common law rules that prohibit penalty clauses and terms excluding liability for fraud. However, we did propose to incorporate any changes necessitated by the SCGD.[15]
SPECIFIC ISSUES
Definitions
"Consumers" and "consumer contracts"
3.21 The Consultation Draft referred to persons acting for purposes that were "unrelated to" a business rather than things that were done otherwise than "in the course of" a business.[16] This was to clarify that where a party who is in business enters into a contract for purposes that are merely incidental to the core business but nevertheless related to it,[17] that party should not be treated as acting as a consumer. The great majority of consultees who expressed a view on this point agreed with our proposal. We now recommend preserving the approach taken in the Consultation Draft.
3.22 We recommend that the definition of a "consumer" should refer to a person acting for purposes unrelated to his or her business.[18]
natural persons
3.23 In the Consultation Paper we pointed out that in certain circumstances a company may act as a consumer for the purposes of UCTA.[19] The UTCCR apply only in favour of natural persons.[20] Our provisional conclusion was that the definition of a consumer should be limited to natural persons, as under the UTCCR.[21] This was supported by the majority of respondents, many of whom were concerned that there should be a uniform definition of "consumer". Those who addressed the issue of what form the definition should take overwhelmingly supported the UTCCR form of "natural person". We therefore maintain our position from the Consultation Paper in our final recommendations and the Draft Bill has been worded accordingly.
3.24 We recommend that under the new scheme only natural persons should constitute consumers. [22]
holding out
3.25 UCTA further excludes from the definition of "consumer" a person who holds himself out as making the contract in the course of a business.[23] Whilst this was not abolished by the SSGCR,[24] we felt compelled by the lack of any equivalent provision in the UTCCR or the SCGD to propose that this rule, or exception, be abolished.[25] A solid majority of respondents agreed. Therefore we recommend that the definition of "consumer" should include all natural persons who act outside the course of a business.[26] Persons should not lose their status as consumers merely by holding themselves out as acting in the course of a business.
auctions
3.27 It should be noted that the SSGCR[27] have come into force since the publication of our Consultation Paper. Regulation 14 amended the definition of "dealing as a consumer" in UCTA section 12 [section 25 (1)], so that an individual buying goods by competitive tender may now "deal as a consumer". Individuals buying at an auction will be excluded from the definition of consumer only if they are purchasing second-hand goods at a public auction which they have the opportunity of attending in person. The changes were required by SCGD. This means that for the purposes of UCTA the buyer of second-hand goods at a public auction will not generally be a consumer. It does not appear to have been the intention to affect the rights of such a buyer under the UTCCR, which contain no such exception.
3.29 We recommend that an individual buying second-hand goods at an auction which individuals may attend in person should not be treated as a consumer for the purposes of the parts of our scheme that replicate provisions found only in UCTA.[28]
goods of a type ordinarily supplied for private use or consumption
3.30 For a contract for the supply of goods to qualify as a consumer contract, UCTA also stipulates that the goods supplied should be of a type ordinarily supplied for private use or consumption.[29] In the Consultation Paper we proposed to abolish this rule[30] on the ground that it is incompatible with the SCGD. This recommendation was supported without objection by consultees. Since the publication of the Consultation Paper it has been abolished where the purchaser is an individual.[31] While it remains for those cases in which a company may act as a consumer, we are recommending that a company should never be a consumer under the new legislation.[32] Therefore UCTA section 12(1)(c) [section 25(1)] has not been replicated in the Draft Bill.
"Business"
3.32 The definition of "business" under the two instruments is similar but not identical.[33] The most obvious difference is that the definition in UCTA is not exhaustive but government departments and local or public authorities are expressly included. The definition given in the UTCCR is exhaustive. Businesses in public ownership are included.[34] It might be argued that the UTCCR definition does not include a contract between, say, a local authority and a consumer, but this seems an unlikely interpretation[35] and the OFT has secured the removal of unfair terms from a number of such contracts.[36]
3.33 In the Consultation Paper, we suggested that the new legislation should make it clear that contracts with government departments or local or public authorities can be consumer contracts.[37] This was unanimously accepted by respondents. The City of London Solicitors Company pointed out that, as government bodies and local authorities are increasingly offering "services" to consumers, they are raising expectations that the rules regulating businesses apply to them.
3.34 We recommend that "business" should include the activities of government departments or local or public authorities.[38]
"Mixed" transactions
3.35 Neither UCTA nor the UTCCR deal in any great detail with the issue of "mixed" transactions, namely where an individual enters into a contract with a business partly for private purposes and partly for business purposes.[39] We proposed that there should be no special provision in the new legislation and that the nature of the contract – consumer or business – could be left to be determined by a judge on the facts of each case.[40] The majority of consultees agreed.
an individual … who makes the contract for purposes which are not related to any business of his…
This definition required that the contract must not be "related" to "any" business purpose. This would prevent any mixed transaction being a consumer transaction. Consider the case where a sole trader buys a car primarily for private use but with the intention of occasionally using it for business. Under the Consultation Draft's definition that contract could not be considered to be a consumer contract as it cannot be said that the contract was not related to the buyer's business.
3.37 To overcome this problem, the definition of consumer contract in the Draft Bill now provides that:–
"'Consumer contract' means a contract (other than one of employment) between
(a) an individual ("the consumer") who enters into it wholly or mainly for purposes unrelated to a business of his, and
(b) a person ("the business") who enters into it wholly or mainly for purposes related to his business."[41]
"Contract"
3.39 Most of UCTA's provisions apply only where there is a contract of the relevant type between the parties: the exception is for clauses dealing with business liability for negligence or breach of duty.[42] The UTCCR also speak of "contracts" concluded between a seller or a supplier and a consumer, but it has been suggested that the ECJ may adopt an autonomous view of "contract" which would include gratuitous supply arrangements.[43] The Consultation Paper therefore proposed that the new legislation should refer only to "contracts" and not attempt to include expressly those kinds of arrangements that may be within the potential EU concept of a contract.[44] This would allow the courts to interpret the word in line with the ECJ. Respondents overwhelmingly agreed. No definition of "contract" is contained in the Draft Bill.
3.40 We recommend that the controls in the Part of the new legislation dealing with consumer contracts[45] should relate only to "contracts", but "contract" should be left undefined.
Terms of no effect
3.41 Under UCTA attempts to exclude or restrict certain types of liability are simply of no effect [void]. Other exemption clauses may be valid if they satisfy the requirement of reasonableness.[46] In contrast, the UTCCR do not render any terms automatically void but subject them to a test of fairness.
General
3.43 Our recommendations cover terms excluding or restricting the following liabilities:
(1) for death or personal injury resulting from negligence [breach of duty] in any type of contract;[47]
(2) for breach of the implied term that the seller is entitled to sell (in contracts for sale or hire purchase)[48] or that the supplier is entitled to transfer the property (in other contracts that transfer property in goods);[49] and
(3) for breach of any of the four implied terms of correspondence and quality. Broadly, these state that goods should correspond with a description or sample, should be of satisfactory quality and should be fit for the buyer's purpose.[50] UCTA prevents these terms from being excluded or restricted both in contracts for sale and hire purchase,[51] and in other contracts for the supply of goods.[52]
3.44 Our recommendations also cover terms which subject a remedy for breaches of these liabilities to restrictive or onerous conditions which disadvantage a person pursuing such a remedy; or which prevent an obligation or duty arising, or limiting its extent.[53]
3.46 We provisionally proposed[54] that, in relation to consumers, category (1) above should include terms in contracts relating to the creation, transfer or termination of an interest in land.[55] This may represent the current law.[56] Again, respondents were overwhelmingly supportive of this proposal.
3.47 We recommend that exclusions or restrictions of business liability for death or personal injury caused by negligence [breach of duty] should be automatically ineffective even if they are part of a contract for the acquisition, transfer and termination of an interest in land.[57]
Consumer guarantees
3.48 UCTA section 5 [section 19] renders exclusion clauses set out in consumer "guarantees" of no effect; that is to say, they are ineffective to exclude liability to the consumer. As we mentioned above,[58] we do not think it is necessary to preserve this section. Its importance was diminished, first, by the breadth of the final version of section 2(1) [section 16] and, secondly, by the Consumer Protection Act 1987. The 1987 Act makes the manufacturer or distributor liable for loss caused by a defect in goods. Loss includes damage to consumer property above the value of £275. Liability under the 1987 Act cannot be excluded. Thus, as we pointed out in the Consultation Paper,[59] section 5 [section 19] seems only to be applicable in those cases where there is property damage of less than £275. Moreover, all it does is to make the clause automatically void rather than subject to a fair and reasonable test. We argued that the additional protection afforded by retaining section 5 [section 19] is so slight that it would be outweighed by the undesirability of adding to the complexity of the legislation. All but one of the consultees who responded on this point agreed.
3.49 We recommend that UCTA section 5 [section 19] should not be replicated in the new legislation.
Terms not individually negotiated
3.50 The UTCCR apply only to terms that, in the words of regulation 5(1), have "not been individually negotiated". Regulation 5(2) provides that terms shall always be regarded as not having been individually negotiated where they have been drafted in advance and the consumer has therefore not been able to influence the substance of the term. In contrast, the application of UCTA to terms in consumer contracts does not depend on whether the term was negotiated (though that may be relevant to the question of reasonableness).[60]
3.51 In the Consultation Paper, we pointed out that it would be possible to maintain this distinction. Effectively, this would mean that, following UCTA, exclusion and limitations of liability would be treated differently from unfair terms in general. To do so would make the legislation significantly more complex. We argued that there are good reasons in a consumer contract to apply the "fair and reasonable" controls to all terms (other than "core" terms) whether or not the terms had been individually negotiated. Consumers seldom have sufficient understanding of the possible impact of "non-core" terms to make any negotiation meaningful. We noted that, in its response to the European Commission Review of the Directive,[61] the UK Government had supported bringing negotiated clauses within the controls required by the Directive.[62] We provisionally proposed that the new regime should apply to both negotiated and non-negotiated terms and specifically invited comments on the practical and economic impact that this proposal would have.[63]
3.52 A large majority of consultees agreed with our proposal. They gave three main reasons. First, there is considerable uncertainty over when a term is individually negotiated. Second, a consumer may not realise the implications of negotiating. Third, the proposal would make the legislation simpler, while affecting very few cases. The OFT also gave evidence that firms are currently exploiting the fact that the UTCCR do not apply to individually negotiated terms.[64] Some of those who opposed the proposal argued that a term which had been explained to the consumer or on which the consumer had taken advice, should not be regarded as unfair. We agree, but think that this is relevant to whether or not the term is unfair. It is not a reason for excluding a negotiated term from review.
3.55 We recommend that any term in a consumer contract, with the exception of a "core" term,[65] should be subject to the "fair and reasonable"test, whether or not the term was individually negotiated.[66]
Terms not subject to control
The definition of the main subject matter and the contract price
3.57 In the Consultation Paper, we noted that the Directive does not require us to exempt the main subject matter of the contract from the scope of review and that several Member States have not done so.[67] However, we argued that the main subject matter (if properly defined) should not be subject to challenge. If it were, the challenge would seldom succeed. To omit the exception would interfere with freedom of contract. It would also give businesses little incentive to make clear to the consumer what the main subject matter is.
Terms which are to apply only in certain events, and which are separate from those describing the main features of the performance, do not seem to define the main subject matter. However, a provision to the same legal effect in the description of the main features may do so. So in a contract for a "holiday with travel by air", a clause in the "small print" allowing the company, in the event of air traffic control strikes, to carry the consumer by rail and sea seems to be reviewable for fairness; but it can be argued that if the holiday is "with travel by air or, in the event of strikes, by rail and sea", the option of mode of travel might be part of the definition of the main subject matter. In other words, whether the term relates to the definition of the subject matter depends (at least in part) on how the "deal" was presented to the consumer. This seems to be the corollary of a point made by the OFT:
In our view, it would be difficult to claim that any term was a core term unless it was central to how consumers perceived the bargain. A supplier would surely find it hard to sustain the argument that a contract's main subject matter was defined by a term which a consumer had been given no real chance to see and read before signing.[68]
We argued that if this is correct, then the question of "definition of the main subject matter" under the UTCCR is similar to the question whether the term purports to permit a performance substantially different from that which the consumer reasonably expected.
(1) not substantially different from what the consumer reasonably expected; and
(2) stated in plain language.[69]
3.60 In the Consultation Paper, we also stated our provisional conclusion that, as currently under the UTCCR, the adequacy of the price should not be reviewable under the new legislation. This was on the assumptions (1) that the payment was not merely a sum payable under a default or similarly subsidiary term to which the consumer might have paid little attention;[70] and (2) that the payment was one that the consumer reasonably expected to make. We argued that payments due only on default are not "the price" within the meaning of the Directive and the UTCCR. Furthermore:
the same may be true of a provision which allows the borrower to pay off the loan within the first two years but only at the price of having to make up the difference between the low rate paid and some higher rate over the period between the start of the loan and repayment. This depends, we believe, on whether at the time the contract was made the option of early repayment was presented to the consumer as a main feature of the contract….
[W]hether an amount payable under the contract is subject to review may well depend on how the "deal" is presented to the consumer. If, for example, the consumer is told explicitly that the deal is "x% for two years and then y% for two years; you can pay off early but then you must make your payments up to z%", we think that the rates could not be challenged; they would then form part of the price the consumer knows he has to pay and the amounts go to the adequacy of the price. In other words, the exemption for the "adequacy of the price" should be interpreted in a similar way to that for the "main subject matter of the contract". The adequacy of the price will be exempt from review only to the extent that the sum payable was part of how the consumer "perceived the bargain"; and what the consumer should reasonably have expected to pay during the normal operation of the contract.[71]
(1) having to make the payment or the way in which it is calculated is not substantially different from what the consumer reasonably expected;
(2) the price is not contained in a subsidiary term; and
(3) it is stated in plain language.
3.63 We also argued that it was desirable, and indeed may already be the law, that terms must not only be in "plain, intelligible language" but be presented in a clear manner and accessible. This is because Recital 20 to the Directive states that "the consumer should actually be given the opportunity to examine all the terms".[72] Thus we asked consultees whether the requirement that the core terms be in plain language should be expanded to state that the term needed to be "transparent"[73] in the sense that it must be (a) expressed in plain language, (b) presented in a clear manner, and (c) accessible to the consumer.[74] A substantial majority of the consultees who responded on this point agreed with our suggestion to expand the requirement of "plain language" to that of "transparency". Some queried what "accessible to the consumer" meant. In the light of this uncertainty, we have decided to replace "accessible" with "available". Our aim here is to provide that any term which is not physically available to the consumer at the point of contracting is subject to review whether or not it is a "core" term. An example of a situation in which terms are not available to the consumer would be Thompson v LM & S Railway.[75] In this case, the ticket for travel referred the customer to the railway's standard terms and conditions in a separate document which the customer had to buy for 6d at a main railway station.
3.64 The OFT suggested to us that any term should be subject to review unless it is "readily legible". We have accepted that suggestion and the Draft Bill now includes legibility in the definition of "transparent".[76]
3.65 We recommend that the definition of the main subject matter of the contract should be immune from challenge as long as it is: (a) substantially the same as the consumer reasonably expected; and (b) transparent.[77]
3.66 We recommend that the price payable under a consumer contract should be immune from challenge as long as it is: (a) payable in circumstances substantially the same as those the consumer reasonably expected; (b) calculated in substantially the same way as the consumer reasonably expected; (c) not payable under a default or subsidiary term of the contract; and (d) transparent.[78]
Mandatory and permitted terms
3.67 Both UCTA and the UTCCR contain provisions designed to exclude from their operation terms that conform to what is required or permitted by other legislation, an international convention or the decision of a competent authority.[79] In the Consultation Paper, we made the following provisional proposals in respect of mandatory and permitted terms:–
(1) terms required or authorised by an international convention should be exempt from the new regime but terms which merely reflect principles said to be inherent in such a convention should not be;[80]
(2) terms not substantially different from a "default rule" of common law or statute (in other words, that would apply in the absence of the express contractual term) should continue to be exempt but only in so far as they are in plain language;[81]
(3) a term should not be exempt merely because it represents the law of another EU Member State;[82] and
(4) terms required by regulators should be exempt but not terms merely approved by regulators.[83]
3.70 One substantial objection came from the OFT who felt that this exemption would create an impediment to effective enforcement and would close off an avenue that they are beginning to use. We feel that if a rule of the common law is "unfair", the common law should be amended by targeted legislation rather than by the OFT using preventive powers. Alternatively, the courts themselves can change the common law rule. Thus the Draft Bill states that a term cannot be challenged under the general clause governing consumer contracts if it would lead to "substantially the same result as would be produced as a matter of law if the term were not included", provided that the term is also transparent.[84]
(a) required by an enactment or rule of law;
(b) required or authorised by an international convention; or
(c) required by a competent authority
should continue to be exempt under the new legislation.[85] Terms that produce substantially the same result as would be produced as a matter of law if the term were not included should be exempt, but only if the term is also transparent.
Excluded contracts
3.73 In the Consultation Paper, we looked in detail at five areas of contract law to see whether the relevant contracts should be specifically included or excluded from our proposed regime.[86] These are dealt with below.
The consumer as supplier
3.74 There are some contracts under which a consumer supplies goods or services to a business: for example, when a private motorist sells a car to a dealer. The UTCCR only apply to contracts "concluded between a seller or a supplier and a consumer":[87] this may mean that they would not protect the consumer when he or she is a seller or supplier. On the other hand, UCTA section 3 [section 17] applies where the consumer is the buyer or the seller, the supplier or the recipient.
3.75 In the Consultation Paper we proposed that the new regime should apply where a consumer is the seller or supplier.[88] Thus, for example, a consumer who sells a used car to a dealer would be able to challenge an unfair term in the dealer's conditions of purchase. Those who responded to this question unanimously supported the inclusion of these contracts into the regime; some believed it to be the law already but felt that it would be good to have it stated expressly in the legislation.
3.76 We recommend that the general control over unfair terms in consumer contracts should apply where a consumer is the seller or supplier. [89]
Expressly excluded categories of contract
3.77 The UTCCR do not expressly exclude any types of contract. In contrast, consumer contracts of insurance[90] and any contract so far as it relates to the creation, transfer or termination of interests in land[91] or the creation or transfer of securities or any rights or interests in securities[92] are excluded from UCTA in English and Scots law.
3.78 Because they are within the scope of the UTCCR, contracts of insurance, contracts for the transfer of an interest in land and contracts for the creation or transfer of interests in securities fall within the new regime.[93] Thus the Draft Bill does not include any exemption from the recommended controls over these kinds of consumer contracts.
Contracts of employment
3.81 We consider this issue in Part 6.
International contracts
Choice of law
The test to be applied
Fairness, reasonableness and good faith
3.84 When a term is subject to the UCTA controls and is not of no effect [void], under English law it must satisfy the requirements of reasonableness in section 11 if it is to be effective. Under Scots law the test as defined in section 24 is whether it was "fair and reasonable" to incorporate the term into the contract. The test in the UTCCR is whether the term is unfair. Regulation 5 (1)[94] provides:–
A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer.
3.86 We thought that it was neither necessary nor desirable to include an explicit reference to good faith.[95] First, the question of "forms and methods" of implementation of EU Directives is a matter for each Member State as long as the intended result is ultimately achieved. Secondly, good faith is a concept which is unfamiliar to English and Scots lawyers in this area of law.
3.89 As we explained in the Consultation Paper,[96] we consider that our proposed test does meet the requirements of the Directive. It will be easier for UK lawyers to apply than a more "European" test which makes express reference to good faith. Therefore we still recommend that the test should be one of "fairness and reasonableness".
The basic formula
the time when fairness should be assessed
3.92 In the Consultation Paper we argued that the question of fairness should be judged by reference to the time when the contract was agreed. Accordingly, if circumstances change during the performance of the contract – for example, if it becomes possible for one party to insure against a certain risk when previously they were unable to do so – this will not affect the fairness of the term. This provision is similar to the rule in section 11 [section 24] of UCTA, that reasonableness shall be determined by reference to "the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties to the contract when the contract was made". It also replicates the substance of the UTCCR regulation 6(1) where fairness is assessed "by referring, at the time of the conclusion of the contract, to all the circumstances". The formula provisionally proposed in the Consultation Paper was whether, judged by reference to the time the contract was made, the term is fair and reasonable.[97]
fairness in substance and procedural unfairness
3.93 We also argued that a term could be unfair because of its substance, whatever the circumstances in which the contract was made. Conversely, a term could be unfair simply because of the circumstances in which the contract was made; for example, if the consumer had no reason to suspect that such a clause was in the contract. In other circumstances the same term might be fair; for example, if the consumer had agreed to the term after being offered a choice and having an opportunity to read the terms.[98] We proposed that this should be reflected in the new legislation.
the consultation paper proposal and responses
3.95 The majority of consultees agreed with our proposals.
3.96 We recommend that whether a term is fair and reasonable should be determined (a) by reference to the time when the contract was made, and (b) by taking into account the substance and effect of the term, and all the circumstances existing when the contract was made.[99]
"Plain and intelligible language" and "transparency"
3.97 Mirroring the Directive, the UTCCR require that "any written term of a contract is expressed in plain, intelligible language".[100] They provide that a "core" term which is not in plain and intelligible language loses the exemption from the controls which it would otherwise have enjoyed. UCTA has no equivalent requirement. However, in assessing whether a term satisfies the requirement of reasonableness, a court may take into account whether it is intelligible[101] as well as other factors relating to "transparency".
3.98 In the Consultation Paper, we said that the use of plain and intelligible language was a vital aspect of fairness and, in any new legislation, should be listed specifically among the factors to be taken into account in assessing the fairness of a term.[102] For reasons explained above,[103] we refer to factors such as intelligible language as "transparency". Thus in the Consultation Draft the requirement of "transparency" appeared in relation to core terms[104] and to "default" terms that reflect the position as it would otherwise be at common law.[105] It also appeared in the list of matters relevant to the knowledge and understanding of the party adversely affected by the term.[106] However, it did not feature in the clause setting out the "basic test" of reasonableness.[107]
3.99 In the Consultation Paper we also argued that it should be possible for the court to hold a term to be unfair merely because it was not transparent; for example, because the term was expressed in complex language or printed in a small font size. We therefore proposed that a term should be capable of being found to be unfair principally or solely because it was not transparent.[108]
3.10 0 Consultees strongly supported the proposals on transparency. A substantial majority agreed that a term could be unfair solely or principally because it was not transparent.[109] Consequently, clause 14(1) of the Draft Bill expressly provides that whether a term is "fair and reasonable" should be assessed according to "the extent to which the term is transparent" as well as "the substance and effect of the term, and all the circumstances existing at the time it was agreed".
Guidelines
3.10 3 In the Consultation Paper, we also proposed that the new legislation should contain detailed guidelines on the application of the "fair and reasonable" test. This was supported by the majority of consultees, though there was some concern that it should be made clear that the guidelines were only indicative. They should not be so specific that the generality of the test would be eclipsed. We think that this concern is largely met by the way in which the Draft Bill requires the court to take the factors listed by the guidelines into account but allows the court to have regard to any other considerations.[110]
3.10 4 Those who opposed the use of guidelines did so because they thought guidelines might create loopholes to the detriment of consumers. Nevertheless, we feel that guidelines will help businesses and consumers alike in understanding the new regime. Thus clause 14(4) of the Draft Bill contains a non-exhaustive list of matters to be taken into account when assessing whether a term is fair and reasonable.[111] The guidelines we recommend refer to the following considerations:–
(a) the other terms of the contract,
(b) the terms of any other contract on which the contract depends,
(c) the balance of the parties' interests,
(d) the risks to the party adversely affected by the term,
(e) the possibility and probability of insurance,
(f) other ways in which the interests of the party adversely affected by the term might have been protected,
(g) the extent to which the term (whether alone or with others) differs from what would have been the case in its absence,
(h) the knowledge and understanding of the party adversely affected by the term,
(i) the strength of the parties' bargaining positions,
(j) the nature of the goods or services to which the contract relates.
Explanation of these guidelines is given in the Explanatory Notes to the Draft Bill. We hope that these Notes will provide useful assistance, particularly in understanding the relevance of "inequality of bargaining power" which, as we stated in the Consultation Paper,[112] is an ambiguous and much misunderstood concept. Further guidance on what terms are likely to be regarded as not "fair and reasonable" may also be obtained from the Draft Bill's version of the Indicative List.[113]
Interpretation in favour of the consumer
3.10 6 There is a common law rule that if the meaning of a term is doubtful or ambiguous, it will be construed against the interest of the party putting it forward.[114] The UTCCR require that "any written term of a contract is expressed in plain, intelligible language"[115] and provide that if there is doubt about the meaning of a written term, the interpretation which is most favourable to the consumer should prevail.[116] We provisionally proposed that the new legislation should include a rule of interpretation in favour of the consumer similar to this contra proferentem rule. Amongst those consultees who considered the issue, there was overwhelming support.[117] Accordingly, the Draft Bill contains a rule of interpretation that where there is doubt about the meaning of a term, the meaning most favourable to the consumer must prevail.[118]
Indicative List
3.10 8 The UTCCR contain an indicative or "grey" list copied from the Annex to the Directive, referred to as an "indicative and non-exhaustive list of terms which may be regarded as unfair". It appears that the list must be implemented in some form in order to comply with the Directive.[119] We recommend retaining the list in the new legislation.
3.10 9 In the Consultation Paper we proposed the following modifications to the Indicative List:–
(1) expanding the list to encompass terms that the OFT has required firms to stop using;[120]
(2) adding contractual terms which purport to exclude or restrict the business's liability in tort [delict] for loss or damage to the consumer other than death or personal injury;[121]
(3) reformulating the list in terms which are more directly applicable to UK law and more readily comprehensible to UK readers;
(4) as part of this reformulation, adding examples of potentially unfair terms to the general guidance on such terms already given in the list;[122] and
(5) providing a power to add to the list by Ministerial Order.[123]
Expanding the list
3.11 2 We recommend that the replacement for the Indicative List in the new legislation should not include the additional types of term against which the OFT has taken action; but the Secretary of State should have a statutory power to add appropriate terms to the list.[124]
Terms excluding business liability for negligence
3.11 3 In the Consultation Paper, we raised the question whether the onus should lie on the consumer to establish that a term is unfair if the term did not appear in the Indicative List. In that context, we thought that it would be important to add to the list terms which purport to exclude or restrict the liability of a business in tort [delict] for damage other than death or personal injury. In the event, we have decided that the burden of proving that a such term is fair should always fall on the business: and so the Draft Bill expressly provides.[125] In other words, the consumer does not need to rely on the term's appearance in the Indicative List to overcome any hurdle before challenging the term. Accordingly, there is no need to add such exemption clauses to the list for that reason.
3.11 4 However, in the Consultation Paper we also said, "although if terms are unfair the bodies listed in Schedule 1 to UTCCR can act to prevent their use even if they are not listed, it would be clearer for all concerned if they appeared on the list."[126] For this reason, we think that consideration should be given to using the statutory power to add to the list terms which purport to exclude or restrict the liability of a business in tort [delict] for damage other than death or personal injury.[127]
Reformulating the list
The use of examples
3.11 7 The Consultation Paper also considered the use of examples to illustrate the application of the terms in the Indicative List.[128] A substantial majority of respondents supported the use of examples, arguing that it would make the regime more "user-friendly". Those who did not agree were concerned that the presence of examples might affect the application of the "fair and reasonable" test and ultimately lead to greater uncertainty in the law. The Financial Services Authority (FSA) were concerned that examples of terms we considered to be unfair might not be regarded as unfair in other jurisdictions: this, they argued, could have adverse implications for consistency in cross-border business carried out by UK firms in Europe. There was also concern that as time passed and contractual drafting techniques changed, the examples might become dated and unhelpful.
3.11 8 Given the preference of the majority of respondents and their utility for consumers, we still think that it is important to provide accessible examples of the terms set out in the Indicative List. However, it was put to us that previous experience of using examples in primary legislation has not always been happy: the examples may quickly date and may turn out to be incorrect. Accordingly, we believe that a suitable compromise can be reached by including the examples not in the Draft Bill but in the accompanying Explanatory Notes.[129]
The exceptions to the Indicative List
3.12 0 Attached to the Indicative List in the UTCCR is a list of exceptions[130] relating primarily to financial services contracts where the presumption of unfairness does not apply. In our Consultation Paper we stated that we were not aware that these exemptions had caused any difficulty and invited views on whether they should continue.[131]
The burden of showing unfairness
3.12 4 As we explained in Part 2, UCTA and the UTCCR deal differently with the question of which party to a consumer contract should carry the burden of establishing whether a contract term is fair or reasonable.[132] UCTA section 11(5) [section 24(4)] provides that the burden of proof rests on the party claiming that a term or notice satisfies the requirement of reasonableness.[133] In contrast, the UTCCR do not specifically allocate the burden of proof so it naturally falls on the party alleging that the term is unfair – that is, the consumer. However, where a term is clearly unfair, the court is able to raise the issue of fairness of its own motion.[134]
3.12 5 The Consultation Paper made no firm proposal on the burden of showing that a term is fair or unfair. Instead we asked consultees to consider the following options: (a) that the burden of showing that a term was fair should always be on the business; or (b) that it should be on the business only when the term was included in the Indicative List: otherwise, the consumer had to establish that the term was unfair. We included alternative versions in our Consultation Draft.[135]
3.12 7 On further reflection, we realised that the burden of showing that a term was fair and reasonable could not depend on whether it appeared in the Indicative List. This was because some of the paragraphs in that list only apply when the term has "unreasonable" or "disproportionate" elements. Thus any reference to the List in order to determine the burden of proving reasonableness would be circular. We have concluded that in individual (as opposed to preventive[136]) proceedings the burden should always rest on the business. This is for the reason given by the Scottish Consumer Council :–
the reasonableness of a term will only come into question where that term alters the consumer's rights or obligations from the usual position under the rules of contract law. In such cases, business is attempting to achieve an advantage, and should therefore bear the burden of justifying its position.
3.12 8 However, we have taken the view that a business should not have to justify any term of the contract unless and until the issue has been raised by the consumer (or by the court of its own motion) in relation to a specific term. In other words there must be sufficient grounds, whether these arise from the clause itself or from extrinsic points made by the consumer, for the court to infer that the fairness of the term is a real issue. We therefore recommend that the business should only have to prove a term is fair and reasonable once the court is satisfied that the fairness of the term is a real issue in the case. The Draft Bill makes provision to this effect.[137]
The effect of an invalid term
[Where a term is unfair and does not bind the consumer] [t]he contract shall continue to bind the parties if it is capable of continuing in existence without the unfair term.
Common sense suggests, however, that a term may have distinct parts and that only the unfair parts should be struck down. In Director General of Fair Trading v First National Bank plc,[138] counsel for the Director General seems to have accepted that the first part of the clause in question, stating that interest was payable on the amount outstanding, was fair but not the subsequent parts of the clause.
3.13 7 In the Consultation Paper we opted for a compromise: we proposed that, where part of a term is detrimental to the consumer and the rest is not, the business should only be prevented from relying on the detrimental part. It would be able to rely on any other part or parts of the term. The Consultation Draft expressly provided for this.[139] Most consultees who dealt with this issue supported our recommendations and the reasoning put forward in the Consultation Paper. On reflection, however, we think that an express provision to this effect is unnecessary. A term is not necessarily the same as a clause. One sentence or paragraph within a contract may contain several terms. Where one term ends and another begins will always be a matter of judgement on the facts of the case, but it will normally be relatively straightforward to identify each term and, if it is unfair, to prevent the business from relying on it without affecting the others. We think that adding a new concept to the legislation, namely "part of a term", may bring confusion rather than clarity.
3.13 8 We recommend that the provision in the Draft Bill that if a term of a consumer contract is detrimental to the consumer, the business cannot rely on the term unless the term is fair and reasonable,[140] should be applied so that when one of several terms in a clause is not fair and reasonable the remainder should be treated as effective.
3.14 0 We recommend that, where a term is shown to be unfair or partly unfair, the rest of the contract should continue in existence if possible.[141]
Attempted evasion
By secondary contract
3.14 1 Section 10 [section 23] of UCTA ("Evasion by means of secondary contract") ensures that the protection provided by the Act is not lost because of a second contract under which, for example, the party who would otherwise be protected agrees to waive that protection. This problem does not arise in the same way in the UTCCR: since these apply to any type of contract, the secondary contract itself could be held to be unfair.[142] We proposed retaining a provision subjecting terms in secondary contracts to the same controls as if they appeared in the main contract. Genuine agreements to settle an existing dispute should be exempted. There was unanimous support for our proposals and we confirm this recommendation.
3.14 2 We recommend retaining a provision, applicable to all types of contract governed by the new legislation, subjecting terms in secondary contracts to the same controls as if they appeared in the main contract; but that genuine agreements to settle existing disputes should be exempted.[143]
Preventive powers
3.14 3 UCTA allows individuals to treat particular terms as ineffective, but it does not prevent businesses from continuing to include them in their contracts. The use of terms falling within section 6 [section 20] has been made an offence by Orders made under the Fair Trading Act 1973, Part II.[144] However, other terms which were never of legal effect[145] or which, if challenged, would probably not have satisfied the requirement of reasonableness, continued to be used for years after UCTA came into force. This may have been simply because the businesses did not trouble to change them or it may have been a deliberate tactic to deter claims.
3.14 4 In contrast, the 1994 Regulations empowered the Director General of Fair Trading to bring proceedings for an injunction [interdict] against persons appearing to be using or recommending the use of unfair terms in contracts concluded with consumers.[146] The UTCCR have preserved this power and extended it to a number of "qualifying bodies". These include a variety of industry regulators, all weights and measures departments in Great Britain and the Consumers' Association.[147] Amending Regulations in 2001 added the Financial Services Authority to the list.[148]
The UTCCR and the Enterprise Act 2002, Part 8
3.14 6 Part 8 of the Enterprise Act 2002 came into force on 20 June 2003. It replaces Part III of the Fair Trading Act 1973 and the Stop Now Orders (EC Directive) Regulations 2001.[149] It gives enforcement bodies broad powers to prevent businesses using practices and terms that infringe various EC Directives, including the UTCCD. There is thus some overlap between the UTCCR preventive powers regime and Part 8 enforcement orders under the 2002 Act.
(1) The new legislation is intended to provide a plain, clear and accessible "code" for consumers wishing to understand their rights with regard to unfair contract terms. This is one of the fundamental objectives of the project. For that reason we are keen to have all the key provisions in one place. It is important for consumers to understand not only that they can challenge terms of contracts but that they can also complain about terms to a public body who will take action on their complaints.
(2) The qualifications at sections 211(1)(c) and 212(1) of the Enterprise Act 2002, namely that a domestic or community infringement must be an infringement which harms the collective interests of consumers, may be too restrictive for our purposes. We intend that the bodies with preventive powers should be required to consider all complaints about unfair terms. This should include complaints about unfair terms in general use in small market areas. We are not certain that these would be included under sections 211(1)(c) and 212(1) if unfairness in a very small market does not impact statistically on the consumer economy as a whole.
(3) Our overriding objection is that Part 8 contains no provisions allowing the consumer to bring a complaint to the attention of the enforcer and no provisions requiring the enforcer to act on the complaint. These are essential aspects of the regime now recommended. Part 8 is clearly intended to work in conjunction with other parts of the Enterprise Act, for example section 11, which create mechanisms through which unfair practices can come to the attention of enforcing bodies. We do not want to adopt these mechanisms, or the parts of the Enterprise Act that created them, for our scheme.
(4) Our recommendations for consumer contracts cover contracts for the transfer of an interest in land. These are not covered by Part 8.
Preserving the UTCCR's provisions
(1) the OFT and qualifying bodies are still able to seek injunctions [interdicts] as set out in regulation 12;
(2) the OFT and qualifying bodies[150] still have the power to require a person to supply documents and information as described in regulation 13. The conditions on the use of that power are preserved;[151]
(3) qualifying bodies are still required to notify the OFT of undertakings given to them or the outcome of any applications made by them for injunctions [interdicts] or to enforce previous court orders, as set out in regulation 14;
(4) the OFT is still subject to the publication, information and advice obligations as set out in regulation 15; and
(5) the burden of proving that the term is unfair remains on the OFT or qualifying body.
Expanding the basic powers
3.15 2 In the Consultation Paper we proposed that the preventive powers should be extended to terms which under UCTA are automatically of no effect in any circumstances.[152] When presenting a combined regime, it did not seem sensible to restrict the power of review to that inherited from the Directive. While such terms can of course be challenged as unfair, our proposal would save the authorised body from the burden of having to show that the term was unfair. It would also be clear to businesses that the use of such terms is likely to be prohibited. Our proposals were welcomed by a majority of consultees. In particular, the OFT supported the proposed change.
3.15 3 We recommend that the powers should extend to preventing the use of any terms that under the Draft Bill[153] would be automatically ineffective.[154]
3.15 4 In the Consultation Paper we noted concerns that terms or notices which are not incorporated into a contract may be outside the scope of the OFT's powers.[155] Consumers are unlikely to know whether or not a term has been effectively incorporated and may wrongly believe that it is a legally enforceable provision. It seems desirable that the relevant bodies have a power to take action even where an objectionable "term" has not been – nor is likely to be – effectively incorporated into the contract. This includes terms which the business has tried to incorporate but failed to do so; and notices which may not even have been intended to form part of the contract but were meant to deter consumers from claiming. A substantial majority of our respondents supported this proposal.
3.15 5 We recommend that the preventive powers should cover terms that the business has tried to incorporate into the contract but failed; and notices which may not even have been intended to form part of the contract.[156]
3.15 6 During consultation, the OFT drew our attention to the problem of businesses making a practice of regularly imposing unfair terms which had a bespoke or negotiated element. An example is where a business encourages a sales force negotiating contracts with consumers to insist on very high deposits for work not yet undertaken. It might be the case that the sales person is instructed to ask for, say, a 100% deposit but to reduce the figure in the face of a reluctant consumer to anything above 75%.[157] However, the UTCCR only confer preventive powers in relation to complaints made about terms "drawn up for general use".[158] Concern was therefore expressed that the OFT or other regulators could be precluded from taking action against a term negotiated in this way on the grounds that it is an individually negotiated term. We think it desirable to ensure that preventive powers under the new legislation can be exercised in situations where an unfair term is regularly imposed on consumers, albeit with a bespoke or negotiated element to the term.
3.15 7 We recommend that the OFT or other regulator should have power to seek an injunction [interdict] against the use of unfair terms of a kind which the business usually seeks to include in the type of consumer contract in question.[159]
3.15 8 A substantial majority of consultees supported our proposal that the new legislation should make it clear that a term can fail the fair and reasonable test principally or solely because it lacks transparency.[160] It was also widely agreed that this principle should extend into preventive powers so that the OFT and qualifying bodies are able to take action in respect of terms that are not fair and reasonable principally or solely because they are not transparent, even if the term is not substantively unfair. This is now the position under the Draft Bill.[161]
3.16 0 In the Consultation Paper we asked whether enforcement bodies should have the power to act against terms that omit important information.[162] This was supported by only a minority of those who responded on the question. On further reflection, we do not think it is necessary. If the business uses a term which omits important information so that it is misleading, then the term itself may be unfair. No special provision is required to achieve this. If the business's terms say nothing on a particular topic so that in effect it relies upon the general law, we do not think it is appropriate for the powers against the use of unfair terms to be used to force the business to provide a written statement of the general law.
The burden of proof in preventive proceedings
3.16 2 We proposed in the Consultation Paper that in respect of the burden of proving that a term is unfair, the new legislation should follow the current law[163] and the burden of proof should be on the OFT or qualifying body, as the case may be. A clear majority of those who responded said that the burden should not be on the business. The principal reason given was the skill and resources of the OFT. We agree. The OFT has much greater resources than the typical individual consumer and should not find it as difficult to collate the evidence necessary to establish its case. Moreover, we think that a reverse burden of proof in preventive proceedings would be unduly restrictive for business.
3.16 3 We recommend that the burden of showing that a term is unfair in proceedings brought by an authorised body under its preventive powers should be borne by the authorised body.[164]
Terms not replicated
3.16 5 There are three sections of UCTA which do not need to be reproduced in the new legislation in any form. Section 5 [section 19] which prevents 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] was considered earlier.[165] The others are section 9 [section 22], which was originally inserted to deal with the fundamental breach doctrine, and section 28 which was a temporary measure pending implementation of the Athens Convention. These provisions, which apply to business contracts as well as to consumer contracts, are discussed in Part 6.[166]
Note 1 See Terms of Reference, Consultation Paper, para 1.1 and generally at paras 2.20 – 2.29 and 4.17. [Back] Note 2 See Consultation Paper, paras 2.35 – 2.39 and 4.19. [Back] Note 3 In Part III and Appendix F. In the Consultation Paper, we also noted the impact of Council Directive 99/44/EC of 25 May 1999 on Certain Aspects of the Sale of Consumer Goods and Associated Guarantees (“SCGD”). Where necessary this section refers back to SCGD in order to explain the background to some of our recommendations. The SCGD was implemented by the Sale and Supply of Goods to Consumers Regulations 2002 (“SSGCR”), SI 2002 No 3045, which came into effect on 31 March 2003. [Back] Note 4 Consultation Paper, para 2.13. [Back] Note 5 Ibid, para 4.16. [Back] Note 6 Ibid, paras 4.22 – 4.29 and 4.205 – 4.207. [Back] Note 7 Some further small reductions have arisen in the protection afforded by UCTA to consumers in the course of unifying and restructuring the regime. We do not think these reductions are practically significant. Where these occur they are discussed in the Report. See para 3.129, below. [Back] Note 8 See below, para 3.23 – 3.24. [Back] Note 9 See Consultation Paper, paras 4.205 – 4.207. [Back] Note 10 This is further discussed at para 3.48, below. [Back] Note 11 See below, paras 6.36 – 6.42. [Back] Note 12 See Consultation Paper, paras 4.34 – 4.35. [Back] Note 13 See Draft Bill, clauses 1 and 5. [Back] Note 14 Paras 4.30 – 4.31. [Back] Note 15 See above, para 1.1, n 6. [Back] Note 16 Consultation Draft, clause 15. [Back] Note 17 R & B Customs Brokers Co Ltd v United Dominions Trust Ltd [1988] 1 WLR 321 (a company which purchased a car for the personal and business use of its directors was treated as a consumer). [Back] Note 18 See Consultation Draft, clause 26. [Back] Note 19 R & B Customs Brokers Co Ltd v United Dominions Trust Ltd [1988] 1 WLR 321 (purchase by a company of a car for personal and business use of directors). See also Feldarol Foundry plc v Hermes Leasing (London) Ltd [2004] EWCA Civ 747. [Back] Note 20 See Consultation Paper, para 3.84. [Back] Note 21 Ibid, para 4.153. [Back] Note 22 See Draft Bill, clause 26(1), which refers to “an individual”. This will not affect the Arbitration Act 1996 ss 89 – 91, which provide that in a consumer contract an arbitration clause is unfair so far as it relates to a ‘modest’ amount (currently fixed at £5,000; by the Unfair Arbitration Agreements (Specified Amount) Order 1999, SI 1999 No 2167 reg 3), and for this purpose a legal person may be a consumer (s 90). [Back] Note 23 Section 12(1)(a) [s 25(1)]. [Back] Note 24 See above, para 3.4, n 3. [Back] Note 25 See Consultation Paper, paras 4.166 – 4.167. [Back] Note 26 Thereby excluding any person actually acting in the course of his or her business. [Back] Note 27 See para 1.1, n 6, above. [Back] Note 28 See Draft Bill, clause 5 and, for the exception of some buyers at auction, clause 5(6). [Back] Note 29 UCTA, s 12(1)(c) [s 25(1)]. [Back] Note 31 SSGCR reg 14, inserting a new s 12(1A) [s 25 (1A)] into UCTA. [Back] Note 32 See para 3.24, above. [Back] Note 33 See UCTA, s 14 [s 25(1)]; “‘business’ includes a profession and the activities of any government department or local or public authority” and UTCCR, reg 3(1); “‘seller or supplier’ means any natural or legal person who, in contracts covered by these Regulations, is acting for purposes relating to his or her trade, business or profession, whether publicly owned or privately”. [Back] Note 34 Thus it does not seem that the UTCCR are limited to contracts between profit-making organisations and consumers; and so for example a contract between a pupil and an educational charity might be covered: Chitty on Contracts (29th ed 2004), para 15-021. The same seems true of UCTA: Chitty, para 14-065; R Kidner, “The Unfair Contract Terms Act 1977 – Who Deals as Consumer?” (1987) 38 NILQ 46, 53. [Back] Note 35 Chitty, para 15-021 says that the definition clearly does include a local authority. In “Unfair Contract Terms, Public Services and the Construction of a European Conception of Contract” (2000) 116 LQR 95, Simon Whittaker states that it is a fairly clear proposition that, according to the Directive, the provider of the service (as opposed to business) may be publicly or privately owned. See also “Rapport sur l’application de la Directive 93/13/1993 aux prestations de service public”, a report by the National Consumer Council and L’Institut National de la Consommation to the European Commission in 1997 (eds Hall and Tixador) p 13, which states that the Directive’s application to public authorities in principle is clearly confirmed by Art 2 and Recitals 14 and 16 of the preamble. [Back] Note 36 SeeChitty, para 15-021, n 81. [Back] Note 37 See Consultation Paper, para 4.171. [Back] Note 38 Clause 26(1) defines a consumer contract as one between a consumer and a business and clause 32(2) specifically includes a public authority in the definition of a business. [Back] Note 39 UCTA, s 5 [s 19] deals with this but only for the purposes of that section. UCTA s 12(3) [s 25(1)] provides that it is for the person claiming that a party is not dealing as a consumer to prove that. This is replicated in the Draft Bill, clause 16(3). See Consultation Paper, para 4.156, n 189. [Back] Note 40 See Consultation Paper, paras 4.155 – 4.157. [Back] Note 41 See Draft Bill, clause 26. [Back] Note 42 UCTA, s 2 [s 16]. [Back] Note 43 Chitty, para 15-026; S Whittaker, “Unfair Contract Terms, Public Services and the Construction of a European Conception of Contract” (2000) 116 LQR 95. [Back] Note 44 See Consultation Paper, paras 4.172 – 4.175. [Back] Note 45 The controls imposed in Part 1 apply also to notices that purport to exclude liability in tort [delict]. See Part 6, below. [Back] Note 46 See Consultation Paper para 3.9 – 3.10. [Back] Note 47 See UCTA, s 2(1) [s 16(1)(a)]; Draft Bill, clause 1. This restriction applies across the board to all contractual exclusion clauses in any kind of contract and to notices purporting to exclude liability in tort [delict]. On the latter, see Part 6, below. [Back] Note 48 UCTA, s 6(1) [s 20(1)]. See Draft Bill, clause 5. [Back] Note 49 UCTA, s 7(3A) [s 21(3A)]. This does not apply to hire contracts. Instead terms which restrict or exclude liability for breach of the implied term to transfer possession in hire contracts (set out in the Supply of Goods and Service Act 1982, s 7 [s 11H]) are subject to the reasonableness test (under UCTA s 7(4) [s 21(1)(b)]). We did not think that UCTA s 7(4) [s 21(1)(b)] needs to be replicated in the consumer part of the Draft Bill because there is a general “fair and reasonable” clause covering all terms in consumer contracts. [Back] Note 50 Sale of Goods Act 1979, ss 13,14 & 15. Similar terms are implied into hire-purchase contracts by the Supply of Goods (Implied Terms) Act 1973, ss 9, 10 & 11; into other contracts for the transfer of property in goods by the Supply of Goods and Services Act 1982, ss 3, 4 & 5; [ss 11C, 11D & 11E] and into contracts for hire by the Supply of Goods and Services Act 1982, ss 8, 9 & 10 [ss 11I, 11J & 11K]. [Back] Note 51 UCTA, s 6(2) [s 20(2)(i)]. [Back] Note 52 UCTA, s 7(2) [s 21(1)(a)(i)]. Contracts covered by these sections include contracts of barter and exchange, for work and materials, and of hire. [Back] Note 53 Draft Bill, clause 30. This replicates the effect of UCTA, s 13 [s 25(3) & (5)]. [Back] Note 54 See Consultation Paper, para 4.37. Since “goods” refers to moveables (see, for example, s 61(1) Sale of Goods Act 1979) and does not include land, controls over contracts for the supply of goods cannot extend to contracts relating solely to interests in land. [Back] Note 55 See UCTA, Sch 1 paragraph 1(b), according to which a contract “so far as it relates to” the creation or transfer of an interest in land is exempt from sections 2 – 4 of the Act. [Such contracts are not included in s 15(2).] [Back] Note 56 It is hard to see how such a clause – as opposed to the contract in which it is found – could “relate to the creation or transfer of an interest in land”: see Consultation Paper, para 4.36. [Back] Note 57 Clause 1 is therefore drafted without any limitation in respect of transactions for land. [Back] Note 59 See Consultation Paper, para 4.206. [Back] Note 60 Section 3 [s 17] applies to consumer contracts whether or not the terms were part of the business’s standard written terms. The same is true of s 4 [s 18] (indemnity clauses) and those parts of s 7 [s 21] that apply a test of reasonableness. See further below, para 3.164. [Back] Note 61 See Consultation Paper, para 2.16. The European Community has recently announced plans to review eight directives, including that on Unfair Terms in Consumer Contracts. See Communication from the Commission to the European Parliament and the Council, “European Contract Law and the review of the acquis: the way forward”, COM (2004) 651 final of 11 October 2004. [Back] Note 62 UK Response to the European Commission, DTI, 22 February 2001, response A1(a). [Back] Note 63 See Consultation Paper, paras 4.42 – 4.54. [Back] Note 64 See below, para 3.156. [Back] Note 65 And one that is automatically ineffective under the provisions already discussed: above, para 3.45. [Back] Note 66 See Draft Bill, clause 4. [Back] Note 67 See Consultation Paper, para 4.56. [Back] Note 68 Ibid, paras 3.23 – 3.23 (footnotes omitted). [Back] Note 69 See Consultation Draft , clause 6. [Back] Note 70 See Consultation Paper, paras 3.27 – 3.34. That the price does not include sums payable on default or under an incidental or subsidiary term was decided in Director General of Fair Trading v First National Bank plc [2001] UKHL 52, [2002] 1 AC 481. [Back] Note 71 Consultation Paper, paras 3.30 and 3.33 (footnotes omitted). [Back] Note 72 Ibid, para 3.75, n 156. [Back] Note 73 Ibid, para 4.106(1). [Back] Note 74 Ibid, para 4.106 and Consultation Draft, clause 6(6). [Back] Note 75 [1930] 1 KB 41. [Back] Note 76 See Draft Bill, clause 14(3). [Back] Note 77 See Draft Bill, clause 4(2). [Back] Note 78 See Draft Bill, clause 4(3) and (5). [Back] Note 79 UCTA, s 29; UTCCR, reg 4(2). [Back] Note 80 See Consultation Paper, para 4.70. [Back] Note 81 Ibid, para 4.73. [Back] Note 82 Ibid, para 4.74. [Back] Note 83 Ibid, para 4.76. [Back] Note 84 Draft Bill, clause 4(4). [Back] Note 85 See Draft Bill, clause 22 and Sch 3. [Back] Note 86 See Consultation Paper paras 4.77 – 4.86. [Back] Note 88 See Consultation Paper, para 4.78. [Back] Note 89 See below, paras 6.14 – 6.27 for further discussion on controls over terms excluding liability for breach of statutory implied terms in contracts where a consumer supplies goods to a business or to another individual. [Back] Note 90 See Sch 1 [s 15(3)(a)(i)]. [Back] Note 91 See Sch 1 [Not listed in s 15(2) and therefore excluded]. [Back] Note 93 See Consultation Paper, para 4.79. [Back] Note 94 And the text of Directive 93/13, art 3(1). [Back] Note 95 See Consultation Paper, paras 4.7 – 4.10 and 4.87 – 4.106. [Back] Note 97 See Consultation Paper, para 4.94. [Back] Note 98 See Consultation Paper, paras 3.63 – 3.69. [Back] Note 99 Draft Bill, clause 14(1). [Back] Note 101 See Consultation Paper, para 3.76, n 157. [Back] Note 102 Ibid, para 4.104. [Back] Note 103 See paras 3.63 – 3.64. [Back] Note 104 See paras 3.56 – 3.58, above. [Back] Note 105 See para 3.67(2), above. [Back] Note 106 Consultation Draft, Schedule 1, para 3(1)(g). For a discussion of this list of matters, see below, para 3.103. [Back] Note 107 Consultation Draft, clause 9. [Back] Note 108 See Consultation Paper, paras 4.107 – 4.109. [Back] Note 109 Some consultees were in favour of our using the word “clear” instead of “transparent”. However, we think that “clear” could be taken to mean only that the language of the term should be plain and easily comprehensible. We wanted to ensure that factors such as legibility and presentation should also be taken into account. [Back] Note 110 At clause 14(4). [Back] Note 111 The Consultation Draft made reference to a schedule containing a lengthy list of factors to be taken into account in determining whether a term was fair and reasonable. In the Draft Bill this list has been condensed and brought into the main body of the Bill. Since the list is expressed to be non-exhaustive, there is nothing to prevent a court from taking into account additional factors not contained in the condensed list. [Back] Note 112 See Consultation Paper, para 4.102. [Back] Note 113 See paras 3.117 – 3.119, below. [Back] Note 114 Still often referred to as the contra proferentem rule. [Back] Note 116 Reg 6(2), reflecting Directive, Art 5. The rule does not apply to proceedings brought under reg 12. In some cases it may be in the interests of the consumer to give an exclusion term a narrow meaning (so as to prevent it from excluding the liability that has arisen). More commonly, it will be in the consumer’s interests to give the term a wide meaning, so as to show that it is unreasonably broad. For discussion of this point, see M Furmston (ed), Butterworths Law of Contract (2nd ed 2003) para 3.107. [Back] Note 117 It is possible that a specific statutory provision is required in spite of the common law rule. In Commission v Kingdom of the Netherlands Case C-144/99 [2001] ECR I-3541, the ECJ held that the Netherlands were in breach of the implementation requirements by relying on a “settled” rule of interpretation rather than specifically transposing Articles 4(2) and 5 into legislation. It is our understanding that a settled rule of Dutch law does not have the status of a binding precedent of common law, so it remains uncertain whether the UK is bound to transpose these Articles into legislation (See Beale, “Unfair Terms in Contracts: Proposals for Reform in the UK” (2004) 27 J Consumer Policy 289). However, we think it is desirable to do so. [Back] Note 118 See Draft Bill, clause 16. This will not apply to proceedings under Schedule 1: see clause 16(2). [Back] Note 119 In Commission v Sweden Case C-478/99 [2002] ECR I-04147, the ECJ held that the list in the Directive's Annex need not be directly included in national legislation implementing the 1993 Directive. However, the Court stated that “[i]nasmuch as [it] is of indicative and illustrative value, it constitutes a source of information both for the national authorities responsible for applying the implementing measures and for individuals affected by those measures,” and so its “form and method of implementation [must] offer a sufficient guarantee that the public can obtain knowledge of it” (Chitty 15-069, n 279). We think that the usefulness of the list as a source of information will be enhanced by retaining the list in the new legislation itself. [Back] Note 120 Specifically those listed in the Consultation Paper at para 4.113. [Back] Note 121 See Consultation Paper, para 4.116. [Back] Note 122 See Consultation Paper, paras 4.125. [Back] Note 123 See Consultation Paper, para 4.116. [Back] Note 124 See Draft Bill, clause 14(7). [Back] Note 125 Draft Bill, clause 15. [Back] Note 126 See Consultation Paper, para 4.116. [Back] Note 127 The controls imposed on non-contractual notices that purport to exclude liability in negligence are discussed in Part 6, paras 6.28-6.35. [Back] Note 128 Consultation Paper, paras 4.125 – 4.143. [Back] Note 129 See Explanatory Notes, Appendix A, para 101. [Back] Note 131 Consultation Paper, paras 4.144 – 4.145. [Back] Note 132 Consultation Paper, para 3.79. [Back] Note 133 The Scottish provision provides that “[t]he onus of proving that it was fair and reasonable to incorporate a term in a contract or that it is fair and reasonable to allow reliance on a provision of a notice shall lie on the party so contending.” [Back] Note 134 This was the ruling of the European Court of Justice in Oceano Grupo Editorial SA v Quintero (Joined Cases C-240/98 to C-244/98) of 27 June 2000, [2000] ECR I-4941. [Back] Note 135 See Consultation Draft, clause 13. [Back] Note 136 See below, para 3.163. [Back] Note 138 [2001] UKHL 52; [2002] 1 AC 481. See the speech of Lord Hope, at para 41. [Back] Note 139 Consultation Draft, clause 6(2). [Back] Note 140 Draft Bill, clause 4(1). [Back] Note 141 See Draft Bill, clause 24. [Back] Note 142 Unless the waiver were the main subject matter of the secondary contract. See Consultation Paper, paras 4.187 – 4.192 for a discussion in detail. [Back] Note 143 See clause 23. [Back] Note 144 Consumer Transactions (Restrictions on Statements) Order 1976, SI 1976 No 1813, as amended by Consumer Transactions (Restrictions on Statements) (Amendment) Order 1978, SI 1978 No 127. [Back] Note 145 For example, exclusions of business liability for death or personal injury. [Back] Note 146 1994 Regulations, reg 8. [Back] Note 147 UTCCR, Reg 12 and Sch 1. [Back] Note 148 Unfair Terms in Consumer Contracts (Amendment) Regulations 2001, SI 2001 No 1186. [Back] Note 149 SI 2001 No 1422. [Back] Note 150 See Enterprise Act 2002, s 11. [Back] Note 151 These conditions are also set out in UTCCR, reg 13. [Back] Note 152 See Consultation Paper, para 4.204. [Back] Note 153 Under Draft Bill, clauses 1(1) and 5. [Back] Note 154 See Draft Bill, clause 7 and Sch 1, in particular paras 1 and 3(1) and (2). [Back] Note 155 See Consultation Paper, paras 3.122 and 4.197 – 4.198. [Back] Note 156 See Draft Bill, clause 7 (especially clause 7(d)) and Sch I, especially para 5(3). [Back] Note 157 These figures are chosen at random and should not be taken to delimit the Law Commissions' view of what might, or might not, constitute an unfair term. [Back] Note 159 See Draft Bill, Sch 1, para 3(4). [Back] Note 160 See para 3.100, above. [Back] Note 161 See Draft Bill, clause 14 and Sch 2. [Back] Note 162 See Consultation Paper, paras 4.199 – 4.200. [Back] Note 163 Under the UTCCR, there is no provision displacing the normal burden of proof (compare UCTA s 11(5) [s 24(4)]). Accordingly, in preventive proceedings the burden of showing that the term is not fair rests on the party alleging that the term is not fair – ie on the OFT or qualifying body. [Back] Note 164 See Draft Bill, clause 16(2). [Back]
