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You are here: BAILII >> Databases >> The Law Commission >> UNFAIR TERMS IN CONTRACTS (A Joint Consultation Paper) [2002] EWLC 166(4) (3 July 2002) URL: http://www.bailii.org/ew/other/EWLC/2002/166(4).html Cite as: [2002] EWLC 166(4) |
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part Iv
replacing ucta and utccr by a unified regime
4.1 In Part II we identified the problem of overlap and inconsistency between UCTA and UTCCR.[1] The issues were considered in more detail in Part III. Some terms in consumer contracts are subject to both regimes; in relation to other terms, only one of the regimes applies but difficulty is caused by the fact that the concepts, terminology and definitions used in the two regimes, though similar, are subtly different. UCTA can apply to terms in contracts between businesses but UTCCR apply only to consumer contracts.
4.3 This Part concentrates on the regime for unfair terms in consumer contracts. The extension of the kind of controls imposed by UTCCR to business-to-business contracts is considered in Part V.[2] The controls imposed by UCTA on exclusion or restriction of liability by sellers who are not acting in the course of a business (that is, in “private” sales and sales by consumers to businesses) are considered in Part VI.
4.4 A new regime could take one of at least three broad forms:
(1)UCTA could be expanded to apply to all terms (except possibly “core terms”) and UTCCR revoked. This could be done, for example, by changing the application of section 3(2)(b) [s 17(1)(b)]. At present this section applies to terms used by a business in a consumer contract that would either entitle the business to render a performance substantially different from what was reasonably expected of it, or to render no performance at all. Such terms are valid only if they satisfy the requirement of reasonableness. The section could be amended to apply also to any term (except a “core term”, that is the definition of the main subject matter or the price) in a consumer contract which had not been individually negotiated.
(2)UCTA could be repealed, leaving UTCCR. This by itself would result in the protection currently offered to both consumers and non-consumers being significantly reduced unless UTCCR were also amended to make certain types of clause of no effect at all, and to extend the requirement that the terms be fair to certain other types of clause in non-consumer contracts, as under UCTA.[3]
(3)The new regime could follow a new model.
4.5 The choice of model is subject to a number of constraints, which are explored in the paragraphs that follow. In outline they are: (a) the requirements of the Directive; (b) the possible desirability of following the wording of the Directive; (c) the need for the new regime to have more uniform concepts, terminology and definitions; and (d) the possible desirability of drafting the whole instrument in a “clear and accessible” way.[4]
4.6 The UK is obliged to implement the Directive, so that the terms of the new instrument must offer at least as much protection to consumers as the Directive. Thus if it were to be based on UCTA, the expanded Act would have to include quite a number of changes of detail on points at which UCTA seems to offer less protection than UTCCR (this is explored in the next sections of this Part). On the other hand, the Directive allows Member States to provide a greater degree of consumer protection than the Directive requires;[5] so that, from this point of view, provisions of UCTA which are more generous than the Directive could remain.
4.7 UTCCR follow the wording of the Directive very closely. However, there is no obligation on Member States to follow the wording of Directives. Directives are defined by Article 249[6] of the Treaty,[7] which states that
A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods.
4.8 It seems that the terminology and concepts of any national legislation implementing a Directive are a matter of “form and methods” and therefore for the discretion of the Member States, provided that the words used achieve the result intended by the Directive.[8]
4.9 Even though the UK is not required to employ the language of the Directive when implementing it, there may be an advantage in doing so. It seems likely that there will be cases in the ECJ on whether Member States have properly implemented the Directive, and whether their courts have applied it correctly.[9] Such cases might give authoritative interpretations of the words of the Directive, for example the meaning of “contract”[10] or of “contrary to the requirement of good faith”.[11] If the UK legislation is in similar terms to the Directive, it will be easier to apply the jurisprudence of the ECJ to the interpretation of the UK legislation than if that legislation uses different terminology.
4.10 The price to be paid, however, is the relative unfamiliarity of the terminology of the Directive and the fact that some of the concepts used do not form part of English or Scots legal traditions. The point of European legislation in the form of Directives rather than Regulations is to allow Member States to implement the legislation in accordance with their own legal traditions. We would go so far as to say that parts of the Directive, in particular the indicative list of terms which may be unfair, are very difficult for even a lawyer from the UK to interpret.[12] It cannot be said that all the examples are “clear and accessible”. Keeping to the precise wording of the Directive would mean abandoning the third limb of this project.[13]
4.11 We reported in Part I that respondents to the DTI White Paper complained that having two regimes creates unnecessary complexity.[14] While the elimination of overlaps would help, the gain would be small unless there can also be uniformity of concepts, terminology and definitions, so far as this is compatible with the Directive and policy. Were the new legislation to combine the provisions of UCTA and UTCCR into a single piece of legislation but to preserve all the minor differences between the two existing regimes,[15] there would be no real reduction in complexity.
Making any replacement legislation clearer and more accessible to the reader, so far as is possible without making the law significantly less certain, by using language which is non-technical with simple sentences, by setting out the law in a simple structure following a clear logic and by using presentation which is easy to follow.[16]
4.13 This may mean that the new instrument cannot be modelled closely on either UCTA (which has frequently been said even by lawyers to be very difficult to understand[17]) or UTCCR (which are based closely on the Directive, in itself simpler than UCTA but, as we think Part III of this consultation paper shows, far from easy to interpret).
4.15 UCTA has separate provisions for England (Part I) and Scotland (Part II). UTCCR apply to the whole of the UK, with only minor variations for Scotland.[18] It would obviously influence the choice of model were it necessary to maintain separate parts for Scotland under an UCTA model but unnecessary to do so under other models.
4.16 We have considered the differences between Parts I and II of UCTA. Although the language of the two Parts is different, there are few differences in the substantive law between the two regimes. Some of these we provisionally propose should be abolished. Those which we provisionally propose should remain can easily be preserved within a single instrument which could be applied in general throughout the UK. Given that there should be uniformity of such laws throughout the UK and that, for Scotland, consumer law is a reserved matter,[19] we do not see the need for separate parts in any new instrument.
4.17 It is our provisional proposal that there be a single piece of legislation for the whole of the UK.
4.20 As we explained in Part II,[20] in order to give consultees a better idea of what is being proposed, Parliamentary Counsel has produced a draft of the parts of the new instrument which would be required were our provisional proposals in this Part to be accepted.[21] The draft will be found in Appendix B.
4.23 First, certain purported exclusions and restrictions of liability are simply of no effect under UCTA.[22]
4.24 Secondly, terms in consumer contracts which are subject to the requirement of reasonableness under UCTA sections 2(2), 3 and 4 [ss 16(1)(b), 17 and 18] include terms which may have been negotiated, whereas UTCCR apply only to non-negotiated terms.[23]
4.25 Thirdly, the burden of showing that a term is reasonable under UCTA rests on the business, whereas the burden of showing that the term is unfair under UTCCR appears to rest on the consumer.[24]
4.26 Fourthly, we noted in Part III some ways in which the definitions used by UCTA offer slightly more protection to consumers than do UTCCR. Thus section 3 [s 17] applies to sales by consumers to businesses as well as the more normal reverse case.[25] Terms are not exempt because they reflect the mandatory law of another Member State.[26]
4.27 There is one element of the additional protection that we think may safely be abolished. This is the separate rule that exclusions or restrictions 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 are of no effect.[27] Our reasons are explained more fully below, but are essentially that the changes that were made to the legislation proposed by the Law Commissions before its enactment as UCTA result in this provision giving almost no additional protection. It therefore seems to be unnecessary.[28]
4.28 It is our provisional view that the other elements of additional protection afforded by UCTA should be maintained. Each of them is valuable and desirable. Thus we think that the terms which UCTA renders automatically of no effect should continue to be treated in the same way. Although a court would probably find them “unfair” under UTCCR, it will strengthen the consumer’s hand in any negotiations with the supplier if there is absolutely no doubt that they are invalid.[29] In any event, some terms which would exclude or limit a consumer buyer’s rights under the SGA 1979, sections 13–15, will have to continue to be of no effect in order to comply with SCGD.[30] In relation to terms that have been negotiated, we argue below that it may be desirable to extend the application of the fairness test to terms in consumer contracts in general, whether or not they were negotiated (as under UCTA), rather than limiting the controls to terms that were not individually negotiated (as under UTCCR).[31] On the other issues we think that the UCTA approach is also the right one; they too are discussed in more detail below.[32] Moreover, we are not aware that the sections of UCTA in question have caused difficulty for businesses, and we have not heard of any call for any of the additional protection given by UCTA to be removed.
4.30 There are a number of other terms sometimes found in consumer contracts which are also of no effect in English or Scots law, either by statute or under common law rules. Statutory examples[33] are terms excluding liability for defective products,[34] for defective premises,[35] or in relation to various forms of carriage, and terms restricting rights of cancellation under consumer legislation.[36] Common law rules would include the rules against penalty clauses and terms excluding liability for fraud.
4.33 In the sections which follow we consider in detail how the two regimes might best be combined.
4.34 We have made the provisional proposal that, with one exception,[37] the protection afforded to consumers by UCTA should not be reduced. It follows that the new instrument should contain a list of terms which will simply be of no effect.
4.35 We provisionally propose that the terms set out below, at least in substance, should continue to be of no effect under the new regime:[38]
(1)exclusions or restrictions of business liability for death or personal injury caused by negligence [breach of duty] (in any type of contract);[39]
(2)exclusions or restrictions of liability for breach of the implied terms as to title in contracts for sale, hire-purchase or other transfer of property in goods;[40]
(3)exclusions or restrictions of liability for breach of the implied terms as to description, quality etc in contracts for the supply of goods to a consumer;[41] and
(4)terms which, in relation to any of the kinds of liability in (1)–(3) above,
(a) make the liability or its enforcement subject to restrictive or onerous conditions;
(b) exclude or restrict any right or remedy in respect of the liability, or subject a person to any prejudice in consequence of his pursuing any such right or remedy; or
(c) exclude or restrict rules of evidence or procedure.[42]
4.36 In relation to consumers there are a number of exemptions contained in UCTA that would exclude certain types of contract from the provisions under which these terms are of no effect.[43] The only such exemption that might be relevant to our proposals here relates to land.[44] We are not clear whether such a term would ever relate “to the creation or transfer of an interest in land, or to the termination of such an interest”,[45] but even if it does we think that it should be caught by the new regime.
4.41 There remains a question whether the fairness test should apply to all other terms or whether at least some terms that have been individually negotiated should continue to be exempted. In Part III we saw that, at present, UTCCR apply to a wide range of terms but only if the term was not individually negotiated, whereas the controls of UCTA section 3 [s 17] apply to consumer contracts whether or not the terms were part of the business’s standard terms, but affect only a more limited range of terms.[46] In order to maintain the existing level of consumer protection under UCTA, as we have proposed, on the one hand, and to comply with the Directive on the other, it is necessary to control terms which have been individually negotiated only if they are exclusion or limitation of liability clauses. However, in the following section we provisionally propose that the new legislation should apply to all terms in consumer contracts (with certain exceptions, such as “core” terms) whether the terms were negotiated or not.[47] This would make it unnecessary to specify exclusion and limitation of liability clauses, and other terms such as indemnity clauses, as UCTA does at present; these will fall under the general rule.[48] Instead the question will be, what terms should be excluded from the general control. This is taken up after the question of “negotiated terms”.[49]
4.42 UTCCR apply only to terms which were not individually negotiated, though a wider range of terms are covered than by UCTA. Terms that come within UCTA section 3 [s 17] (in effect, those that affect the business’s liability or the way it has to perform[50]), and are in a consumer contract, are subject to review whether they were negotiated or not. We have already indicated our provisional view that any greater protection given by UCTA should not be reduced. In the combined instrument, should review of terms which would have been outside the scope of UCTA but within UTCCR (in effect, terms that affect what are the consumer’s obligations rather than those of the business[51]) continue to be limited to non-negotiated terms? We believe that, as far as consumer contracts are concerned, the controls should extend even to terms that have been “negotiated”, for three reasons.
4.43 First, to limit the extension to terms that have not been individually negotiated while preserving the protection given by UCTA, so that some negotiated terms remain subject to control while others are not, would perpetuate the existing difficulties in determining the scope of the two provisions.[52]
4.44 Secondly, the width of the controls over negotiated terms in consumer contracts under UCTA section 3 [s 17] is such that the extension to all individually negotiated terms (other than “core terms”[53]) would have only a marginal impact on business.
4.49 A first possible argument is that there are some obligations which businesses simply should not be able to evade or restrict, by whatever means.[54] The argument was made in relation to clauses purporting to exclude or restrict the seller’s obligations under SGA 1893, sections 12–15. In their First Report the Law Commissions accepted the reasoning of the Molony Committee that such clauses “deny [the consumer] what the law means him to have”;[55] “as between the retailer and private consumer the burden of liability under the implied conditions and warranties should fall upon the retailer.”[56] However, it is clear that present public policy does not absolutely preclude the exclusion or limitation of some obligations to consumers, provided the particular term is fair and reasonable. Thus in cases not involving death or personal injury, exclusions or limitations of liability for negligence [breach of duty] are permitted if the clause is reasonable. In their Second Report the Law Commissions recommended this on the pragmatic basis that in many cases the victim is likely to be covered by insurance (particularly in relation to property damage) and does not need to pay extra to the business for “double cover”. Given present public policy, and the absence of a consensus as to which obligations should be “unalterable”, we do not believe that this argument provides support for the imposition of controls upon individually negotiated terms.
4.50 A second argument is more persuasive. It is that for any negotiations to be meaningful, the customer must genuinely understand the proposed term and must be able to assess its possible impact. Where the customer is a consumer, there are likely to be few cases in which she will have the necessary knowledge (except in relation to the “core” items such as the subject matter of the contract and the price[57]). Therefore it may be better to subject all terms (other than core terms, which the consumer can be expected to understand)[58] to control even when they have been “negotiated” .
4.52 Thus it seems appropriate that clauses which exclude or restrict the business’s liability to a consumer for negligence [breach of duty] causing death or personal injury should be subject to control whether or not the clause was negotiated: this is, of course the position under UCTA.[59] The complete ban on businesses excluding their liability for breaches of sections 12–15 of the SGA 1979, whether the exclusion is negotiated or not, can also be supported on this ground as well as on the ground first discussed.[60] With the other types of potentially unfair clause to which UTCCR apply but UCTA does not, the case is less strong but can still be made. A business might “negotiate” other types of clause without the consumer having a clear idea of the risk that the proposed clause represents to her. Suppose it were agreed between a consumer and a builder employed to construct an extension that the builder might make extra charges in some circumstances, or might suspend work or work unusual hours. If this had been negotiated (the latter examples might be the only way the builder could “work in” the customer), should the clauses be subject to threat of review? (We put it in terms of “the threat of review” because it seems unlikely that many genuinely negotiated clauses would actually be held to be unfair.) A lot depends on what is meant by “negotiated”. The business may genuinely be prepared to negotiate, but the consumer may not have a full grasp of what she is agreeing or its implications; not realise, for example, how likely the circumstances are to occur, the cost that the builder is genuinely likely to incur, or, in the case of the agreement to allow the builder to work at unusual hours, the risk that neighbours may be able to prevent him from doing so, thereby putting the consumer in breach of contract.
4.53 Therefore we think there is a good case for bringing negotiated terms within the new instrument. An individually negotiated term is very unlikely to be held to be unfair if the business has taken reasonable steps to ensure that the particular consumer understands what has been agreed and its foreseeable implications for her.[61] We note that Denmark, Finland, France and Sweden have not excluded negotiated terms from the scope of their legislation, apparently without problems arising.[62] We also note that the UK Government, in its response to the European Commission Review of the Directive,[63] favoured bringing negotiated clauses into the scope of the controls required by the Directive.[64] The reasons given are similar to those we gave above.
4.55 We suggested earlier that what amounts to a “core term” (or, more properly, the “definition of the main subject matter of the contract”) will be exempt from review under UTCCR if it is in plain and intelligible language and is similar to the concept of the performance that the consumer should reasonably expect. However, the two ideas are not interchangeable. We argued[65] that the consumer might “reasonably expect” (because he had been warned of it, for instance) some condition which is not part of the “main subject matter” because it is only to apply in certain situations (for example, a force majeure clause). In order to comply with the Directive, it may therefore be necessary to ensure that terms are subject to review when they do not form part of the main subject matter, even if they were reasonably to be expected. In other words, to ensure that merely “subsidiary”[66] or “incidental”[67] terms are excluded, the definition should continue to refer to the “main subject matter”. Conversely, we think that the legislation should make clear what we already believe to be its import, namely that a term will not define the “main subject matter” if it is different from what the consumer reasonably expects.
4.56 Not all Member States have included the exemption for terms which define the main subject matter of the contract.[68] This may solve the problem of defining the scope of the exemption; but we consider that to omit it would have disadvantages.
4.59 We think that it is possible to make the concept of the “core term” rather more concrete than it is at present, and still comply with the Directive,[69] by combining the two tests and qualifying “main subject matter” by what the consumer should reasonably expect. We suggest something along the following lines, excluding from review only those terms which
set out in plain language the main subject matter of the contract in a way that is not substantially different to what the consumer reasonably expected.
(1)that the new legislation should exclude the main subject matter from the scope of review, but
(2)only in so far as
(a) it is not substantially different from what the consumer should reasonably expect, and
(b) it is stated in plain language.[70]
4.61 UCTA does not apply to clauses which set the price payable under the contract. Under UTCCR the adequacy of the price is exempted from review so far as the term in question is “in plain intelligible language”.[71] Our provisional view is that a term which fixes the price in a way which is difficult for the consumer to understand should be subject to review, and (insofar as the term was not individually negotiated) this is currently required by the Directive.
4.62 We argued in Part III that the exemption from review of “the adequacy of the price” in regulation 6(2) is already subject to the same kind of limitation as the “definition of the main subject matter of the contract”: namely, the “price” means only the amount of the “main price” rather than any price contained in a “subsidiary” or “incidental” term. We think this is a correct approach from the point of view of policy, because only in that case can we be confident that the consumer will not be unfairly surprised and that the amount payable will be subject to the discipline of the market. We provisionally propose that the new legislation make this clear. This may require an expansion of the definition of the “adequacy of the price” exemption presently used by UTCCR, in order to ensure that prices set in “subsidiary” or “incidental” terms are not exempted. A suggested draft will be found in Appendix B.[72]
4.63 On the other hand, at least for the purposes of individual review, we see no strong case for bringing a clear term stating the “main price” within the scope of the new legislation. Certainly there are cases in which consumers agree to pay quite exorbitant prices through ignorance of the normal price for such goods or services. Stories of, for example, elderly people being persuaded to pay over the odds for building repairs are only too common.[73] However, an extension of the law in order to deal with this problem is unnecessary and might be undesirable. First, most consumers are relatively alert to the question of price. Secondly, we think that for individual cases there are already adequate remedies. In English law the problem can be dealt with under the doctrine of unconscionable bargains.[74] Although there are not many cases and they relate primarily to land transactions, we consider that the doctrine can apply to the deliberate overcharging of consumers and to exploitation of the consumer’s circumstances. While Scots law does not recognise a general doctrine of unconscionable bargains, specific doctrines exist (for example, facility and circumvention) by which grossly unfair contracts can be struck down.[75] Thirdly, given that even in reasonably competitive markets prices do vary significantly (not least because of the different costs faced by traders working in different locations and on different scales, factors which may not be apparent to the average consumer), the authorities might be faced with a large number of challenges to allegedly unfair prices and there would be much scope for argument.[76] Moreover, it would often turn into arguments about the competitiveness of the market, arguments with which neither courts nor many consumer protection organisations are well-equipped to deal.
4.64 A rather different question is whether the bodies listed in Schedule 1 to UTCCR should have power to act against businesses which appear to make a practice of overcharging. This appears to be outside the present powers even of the DGFT. Under the Fair Trading Act 1973, Part III, the DGFT may take proceedings against businesses persisting in a course of conduct which is detrimental and unfair to consumers,[77] but for this purpose “unfair” is defined to mean in breach of the criminal law[78] or
in breach of contract or in breach of a duty (other than a contractual duty) owed to any person by virtue of any enactment or rule of law and enforceable by civil proceedings …[79]
Overcharging, even if it leads to the contract being voidable for unconscionability, is not a breach of duty any more than is use of unfair terms (even terms automatically void under UCTA).[80]
that the terms and conditions on, or subject to, which the consumer transaction was entered by the consumer are so harsh or adverse to the consumer as to be inequitable.[81]
4.66 Moreover, the Government’s response to the European Commission’s Review of the Directive[82] states that the Government accepts that there is a need to protect vulnerable consumers against deliberate overcharging in certain circumstances. It therefore favours retaining the exemption for the price/quality ratio except where the price is exorbitant or grossly contravenes the ordinary principles of fair dealing.[83]
(1)having to make the payment, or the way in which it is calculated, is not substantially different from what the consumer, in the light of what he was told when or before the contract was made and all the other circumstances, should reasonably expect, and
(2)the price is not one contained in a subsidiary term,
provided that the price is stated in plain language.[84]
4.69 We noted in Part III various differences between the existing regimes on this issue.[85] Given that this is a question of exemption from the Directive, there is no legal objection to UK law allowing narrower exceptions than does the Directive.[86]
4.70 We have already expressed disquiet that the Directive exempts terms which reflect the principles, as opposed to the requirements, of international conventions.[87] We provisionally propose that terms required or authorised by an international convention to which the UK is party should be exempt from the new “reasonableness” regime, but not terms which merely reflect the principles of such a convention.
4.71 We think that both regimes exempt a term which merely reflects what would be the law even in the absence of the term, and we think that it is proper to exempt terms that in substance are not significantly different[88] to the “default rule” that would otherwise apply under the general law, subject to one qualification. As we noted in Part III, the current exemption under UTCCR has the consequence that such terms cannot be challenged even if they are not in “plain intelligible language”. This appears to give rise to real difficulties: the OFT has found
clauses which reflect the general contractual position concerning damages for breach of contract, but in a misleading way. Contracts sometimes give the impression that, if they are cancelled by the consumer, the company can recover all the profit it would have made. In law the supplier actually has a duty to “mitigate his losses” …[89]
4.73 We provisionally propose that the exemption for terms which reflect what would be the law in the absence of contrary agreement should not apply unless the terms are in plain language.[90]
4.74 We see no reason to follow UTCCR in exempting terms which do not reflect the law of the relevant part of the UK but the law of some other Member State.[91] We provisionally propose that a term should not be exempt merely because it represents the law of another Member State.
4.75 It is our understanding that the Directive may not exempt from the fairness test terms approved by industry regulators unless the terms are required by that regulator.[92] We think that in principle terms which are required by a regulator should be exempt, but those that have merely been approved by a regulator should not be exempt. A term might be approved by a regulator in one context but be applied in another in which it operates unfairly.
4.76 It is our provisional proposal that terms required by regulators should be exempt, but not those merely approved by a regulator.[93]
4.77 There are some contracts under which the consumer supplies goods or services to the business (for example when a private motorist sells a car to a dealer). If such a contract contains terms that operate to the detriment of the consumer, they are subject to the controls of UCTA.[94] The position under UTCCR is not wholly clear.[95]
4.79 The terms of these are exempt from UCTA but will be subject to the new regime as they are subject to UTCCR.[96]
4.80 In Part III we noted that, whereas employment contracts appear to be outside the scope of UTCCR, they are to some extent within UCTA, and that some courts have treated the employer as acting in the course of its business and the employee as a consumer.[97] Such contracts would therefore fall within the definition of a consumer contract unless specifically exempted. We think that the employee should in any event be able to limit her liability for negligence towards the employer, as currently in England under UCTA Schedule 1, paragraph 1(4).[98] Subject to that, we see no reason to exempt employment contracts from the regime we propose. But they could be included in the regime without necessarily being treated as consumer contracts or subjected to the same controls as consumer contracts. It is arguable that the employee is in the “business” of hiring out her labour, and that the contract should therefore be subject to the controls which in Part V below we propose should apply to business-to-business contracts. This might have implications for the level of protection provided. Under our proposals, the controls applicable to business-to-business contracts would in some respects be less stringent than those applicable to consumer contracts, and, if contracts of employment were regarded as business-to-business contracts, employees would to that extent be less well protected. Terms of employment which have been individually negotiated, for example, would not be subject to control.[99] Again, there is at present no provision for policing the use of unfair terms in business-to-business contracts, and it is debatable whether any such provision should now be made;[100] categorising employment contracts as consumer contracts might therefore bring them within the scope of preventive controls which would not otherwise apply.
(1)whether contracts of employment should be covered by the new regime at all; and
(2)if so, whether they should count as consumer contracts, or as business-to-business contracts, or as a separate category subject to some (but not necessarily all) of the controls that apply to consumer contracts.
4.82 Although both consumer and non-consumer “cross-border” contracts for the supply of goods are exempt from UCTA, there is no exemption for cross-border contracts of sale in SCGD. Thus the absolute ban on sellers to consumers restricting their liability for breaches of sections 13–15 of the SGA 1979 will in future have to apply to cross-border sale contracts. Other cross-border contracts for the supply of goods are not uncommon: for example, some UK car hire companies will provide cars at overseas locations.[101] Such contracts are covered by UTCCR, which equally have no exemption for international contracts. It would be possible to distinguish these other contracts from sales, merely subjecting them to the “reasonableness” regime of the new legislation, but it is our provisional view that there is no reason to reduce the consumer’s protection from the level he would enjoy were the goods to be supplied in the UK.[102] We also consider that the prohibition on sellers contracting out of their obligations as to title (which applies whether or not the other party deals as a consumer) should apply to cross-border contracts. We provisionally propose that the controls should apply to terms in cross-border contracts for the supply of goods to consumers in the same way as they would apply to the same terms in a domestic contract.
4.85 It does not necessarily follow that the list of terms which, under the new legislation, will continue to be of no effect at all[103] should apply to other types of contract under which the ownership or possession of goods passes just because the parties have chosen that it should be governed by English or Scottish law.[104] However, we see no strong reason why, in a consumer contract, this exemption should continue, and at least one reason why it should not. The consumer, faced with the prospect of making a contract under the law of the supplier’s country because the supplier will not agree to the law of the consumer’s country, might be willing to accept English or Scots law as a compromise just because she believes that under Scots or English law the consumer has strong rights. It would be misleading were those rights not to apply in full to her contract.
4.88 Our provisional view is that the legislation should attempt to give the greatest possible guidance to both business and consumer.[105] This means departing from the wording of the Directive and also expanding somewhat on the “fair and reasonable” criterion of UCTA.
4.89 The basic criterion used in the Directive is whether or not the term is unfair; that in UCTA, whether or not the clause is fair and reasonable. If there is any difference between them, we consider that the new legislation should use the latter since the double requirement must make it more favourable to the consumer. It is possible that “fair” by itself might be read as meaning that, so long as the business was not acting unfairly in any subjective sense (for example, it had no intention of harming the consumer’s interest), the term is not unfair.[106] The “fair and reasonable” criterion may give more guidance and we think it would be preferable to adopt it. To avoid all doubt it could be stated that everything required by good faith should also be required by this test, but our provisional view is that this is unnecessary.
4.90 UTCCR uses the phrase “significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.” We do not find the concept of imbalance, stated as baldly as it is in the Directive, helpful. It tends to suggest that a harsh clause may be justified if it can be shown that the contract is a reasonable balance in terms of value for money. This is often not the point. As we showed earlier,[107] frequently the harsh terms are “balanced” by a low price, but the consumer did not appreciate the harshness of the terms or did not want such a deal, and therefore it is unfair. But we think that the more general question of fair balance between the interests of the parties is central to the question of fairness.[108] We think it might be referred to in the guidelines we propose below.[109]
4.91 As we saw in Part III,[110] the phrase “significant imbalance” in UTCCR[111] is capable of a variety of interpretations. It at least seems to mean that minor, “insignificant” imbalances are not subject to review; in other words that a term is not subject to review unless a certain threshold is crossed. Given that under the new legislation almost any term might fall within the scope of the review, should a threshold requirement of this type be included? In our view, this depends on the question of burden of proof. If the business will have the burden of showing the fairness of any term which departs from the general law in a way that the consumer claims to be against his interests, there seems to be some merit in a threshold requirement to avoid the business having to justify even trivial departures from the general rule. If, however, the burden of proving that the term is not fair and reasonable is to be on the consumer (where the term is not one on the so-called “grey list” of terms likely to be unfair), there seems to be no need for a threshold. The burden of proof issue is discussed below,[112] but for the moment we will assume that a threshold requirement is not necessary.
4.93 Both UTCCR and UCTA apply the test of fairness as of the time the contract was made.[113] We consider that the new legislation should do the same.
4.95 A question which we have found difficult is whether the “fair and reasonable” test should be supplemented by guidelines or lists of factors to be taken into account in assessing fairness and reasonableness, or should be left to stand alone. UCTA has some guidelines both in section 11 [s 24] and in Schedule 2. The recitals to the Directive[114] refer to various factors (the strength of the bargaining position of the parties, whether the consumer had an inducement to agree to the term, and whether the goods or services were sold or supplied to the special order of the customer) which appear to be taken from Schedule 2 to UCTA, and these were included in the 1994 Regulations. However, there is no such list in the Directive itself and the factors have been omitted from UTCCR.
4.96 We think that it would be useful to include at least a list of factors for assessing the fairness of the substance of the term, in order to provide consumers, businesses and the courts with the clearest possible guidance on how this test should be applied. We suggest that the new legislation should spell out a series of factors which should be taken into account, building in some or all of the guidelines in Schedule 2 to UCTA.[115] We suggest that in the guidelines as to substance there should be a reference to the balance of the interests of the parties, and the risks to the consumer. We should also include references to
(a)the extent to which the term (on its own or in conjunction with other terms) differs from what would apply in the absence of express provision on the point, or from terms required by any relevant authority;[116]
(b)the possibility and likelihood of insurance (as in UCTA section 11(4) [s 24(3)] but in broader terms); and
(c)other ways in which the consumer might protect his position (for example, getting advice on the transaction from an expert).[117]
(a)the consumer’s knowledge and understanding, and
(b)the strength of the bargaining positions of the parties,
as well as the other matters referred to by Article 4(1) of the Directive (the nature of the goods and services and the other terms of the contract or of any other contract on which it is dependent).
4.100 The consumer’s knowledge and understanding should be considered in the light of
(a)previous dealings, if any;
(b)whether the consumer knew of the term;
(c)whether she understood the meaning and implications of the term;
(d)what consumers in her position would normally expect of a contract of the general type which appeared to her to be on offer; and
(e)the complexity of the matter.
The following would also be relevant in all cases, but particularly when the matter is complex:
(f)the information given to the consumer about the terms, at or before the time the contract was made;
(g)whether the contract was “transparent”;[118]
(h)the way the contract was explained to her;[119]
(i)whether she had a reasonable opportunity to absorb the information before making the contract;
(j)whether she took, or could reasonably be expected to take, professional advice; and
(k)whether she had a realistic subsequent opportunity to cancel the contract without charge.
4.101 Factors relevant to the relative bargaining strength of the parties would include
(a)whether the transaction was an unusual one for either of the parties;
(b)whether the consumer was offered a choice over the term;
(c)whether she had an opportunity to seek a more favourable term;
(d)whether she had an opportunity to enter into a similar contract with other persons, but without that term;
(e)whether there were alternative means by which her requirements could have been met; and
(f)whether it was reasonable, given her abilities, for her to take up any such opportunities.
4.102 This list is rather fuller than that in UCTA but tries to set out what we understand to be the major issues in relation to unfair terms. In particular we have indicated the factors that we think are relevant to inequality of bargaining power, which we think is an ambiguous and much misunderstood phrase.[120]
4.104 In Part III we noted that UTCCR require all terms to be in plain and intelligible language, and that a “core term” which is not in plain and intelligible language will lose the exemption it would normally enjoy; but that otherwise the only explicit sanction is that the clause will be interpreted in the way most favourable to the consumer. We consider that the use of plain and intelligible language is a vital aspect of fairness and we think that it should be listed specifically among the factors that should be taken into account in assessing fairness. The language should also be unambiguous, if that is not already covered by the phrase “plain and intelligible”.[121]
4.105 Like the OFT,[122] however, we think that it is not sufficient that the term is in plain and intelligible language if it is in print that is hard to read, if the terms are not readily accessible to the consumer, or if the layout of the contract document is hard to follow. We think that all these factors (which collectively we refer to as “transparency”) should be made relevant to the decision on fairness.
4.106 We provisionally propose
(1)that the factors to be taken into account in assessing fairness should include whether the contract is “transparent”, in the sense of being expressed in plain language, presented in a clear manner and accessible to the consumer; and
(2)that transparency should also be a condition of exemption for “core” and default terms.[123]
4.111 We provisionally propose that the rule of interpretation in favour of the consumer should be stated in the new instrument. We would welcome consultees’ views on what form this statement should take.[124]
4.112 UTCCR contain an indicative list, or “grey” list, copied from the Annex to the Directive. It appears that legislation needs to contain such a list in order to comply with the Directive.[125] In any event the indicative list appears to have been found useful, at least by the OFT in its work in seeking to eliminate unfair terms, and we are not aware of any call to remove it. Two questions may be asked. First, should the indicative list be expanded to include other clauses which have been found to be unfair? Secondly, not all the examples on the indicative list are easy to understand. The language is complex and the examples sometimes refer to concepts from other legal systems which seem to have no exact equivalent in the laws of England and Scotland. Should the list be reformulated, “translating” the examples into terms which are recognisable to readers from the UK and, if it is permissible to do so, omitting altogether any that are not?[126]
4.113 On the first question, it seems sensible to consider whether there are any terms which the OFT has required firms to stop using, or organisations to cease recommending, although the terms are not listed. This suggests that at least the following types of clause should be added to the list:[127]
(1)terms allowing a supplier to impose an unfair financial burden, such as giving it the power to demand an advance or stage payment or (in the case of a utility supplier) a payment based on an estimate at its discretion;[128]
(2)terms transferring unfair risks to consumers, for example through indemnity clauses or clauses which permit the supplier to impose additional charges;[129]
(3)onerous enforcement clauses, such as clauses allowing a supplier to repossess goods from the consumer or to sell goods left in the supplier’s hands when the consumer is in breach of contract without first giving the consumer the chance to cure the breach, or despite the breach being slight;[130]
(4)exclusions of the consumer’s right to assign guarantees or agreements;[131]
(5)consumer declarations about contractual circumstances, such as that the consumer has read the terms of the agreement or has examined goods prior to purchase;[132]
(6)exclusions or limitations of the consumer’s non-contractual rights under data protection or other legislation;[133]
(7)terms allowing the supplier to deliver or perform in a manner or at a time left to its discretion;[134] and
(8)terms giving the supplier the right to determine unilaterally whether the consumer is in breach of contract or has acted improperly.[135]
4.114 There are potentially unfair terms in financial services agreements which are not included in either the existing list or the list of additions suggested above. However, the Financial Services Authority has power to issue separate guidance dealing with these.[136] We understand that it intends to do so and therefore such terms need not be included in the general legislation on unfair terms.
4.115 The OFT has recently issued a Guidance on Unfair Terms in Tenancy Agreements.[137] We do not include examples from this area in the consultation paper because the issue is currently being examined by the Law Commission in the context of its work on housing tenure.[138]
4.116 It would seem sensible to add contractual terms which purport to exclude or restrict the business’s liability in tort [delict] for loss or damage other than death or personal injury. These terms are subject to the reasonableness test under UCTA,[139] and it is up to the business to show that the term is fair and reasonable.[140] When we come to discuss the burden of proof, it will be seen that one possibility is that businesses will bear the burden of showing that any term on the list is fair, but that with other terms the burden of showing that the term is unfair will be on the consumer. If this is the solution finally adopted, it will be important to add these terms to the list in order to preserve the current position. Further, 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.[141]We also think that it should be possible to add to the list by Ministerial Order.
4.118 The second question, whether the list should be reformulated in terms which would be more directly applicable to UK law, and which would be more readily understandable to UK readers, is not easy to answer. To “translate” the list into UK terms, while ensuring that it complies with the Directive, is not easy. Moreover, as we shall see below,[142] some of the existing paragraphs have no real relevance to UK law, or seem to cover terms that, in the context of UK law, do not seem unfair. We do not believe that correct implementation of the Directive requires the legislation to include a direct equivalent to every paragraph of the Annex to the Directive, any more than it requires legislation in identical language,[143] though there is no clear authority on this point.
4.119 A second point is that the OFT, particularly in its Unfair Contract Terms Guidance (“OFT Guidance”),[144] has done a great deal to explain how in its view the indicative list applies to various types of contract term. A possible drawback of reformulating the indicative list would be that the experience in using it, particularly in the OFT, might be lost. If the indicative list were to be reformulated, officials and others used to applying the indicative list would have to adjust to the new list.
4.120 On the other hand, to keep the indicative list in its present form would mean abandoning, as least as far as the list is concerned, any attempt to make the new legislation clear and accessible to the reader.[145] We therefore think that we should attempt to “translate” the indicative list. It is our view that in reformulating the list it should be possible to draw on the experience of the OFT and the guidance that it has so usefully issued. If the reformulation can be made successfully, the result would be a list which is no harder to apply than the OFT Guidance but which is more authoritative and avoids the need for a preliminary “translation” process. We also think that the reformulation can be sufficiently close to the terms of the Annex to the Directive that it is most unlikely that infringement proceedings would be threatened.
4.122 However, it seems to us that whether the list can be reformulated successfully can only be tested by experiment. To enable consultees to assess whether reformulation is likely to be successful and therefore worth pursuing, this consultation paper considers the reformulation of a number of paragraphs. The draft Bill in Appendix B contains the relevant provisions for consultees to evaluate. The consultation paper discusses, and the draft Bill provides replacements for,[146] paragraphs 1(a)–(e) of Schedule 2 to UTCCR. We think this is a sufficient sample to reveal the main issues that would be involved in preparing a complete new list along the lines suggested above. Once again we should stress that the inclusion of these drafts in the consultation paper does not create any presumption that this will be the approach the Law Commissions will finally recommend.[147]
4.123 A preliminary point is that the indicative list serves two purposes. One is to give information to businesses and consumers as to what, in an individual case, is likely to be regarded as an unfair clause. The second is to make it easier for the OFT (and the other bodies listed in Schedule 1) to ensure that unfair terms are not used by businesses, and for businesses to know what terms are likely to be unacceptable. The second purpose may make it desirable to have a wider list than is needed for the first purpose. Under UCTA certain clauses are automatically ineffective, and we have provisionally proposed that this should remain the case under the new legislation.[148] Some of these terms appear in the indicative list. For the first purpose it is not necessary to include them in the new list, but it has been suggested to us that they should be included for the second purpose. However, to make it clear that there can be no doubt that these clauses are null, we propose that they be placed in a separate list. We think that this can be done by a clause simply referring to the sections of the new legislation which renders the terms of no effect.[149]
4.124 We invite views as to whether the list, and therefore the preventive powers under UTCCR regulations 10-15, should be extended so as explicitly to include contract terms which are automatically of no effect under other parts of the new legislation.[150]
4.125 Even if the list is reformulated using more familiar language and concepts, it may be hard for the lay reader to appreciate, from a general description of the type of clause, what is actually involved. We think it would be useful to include specific examples of clauses in the list. There would be a provision that the examples are not to be interpreted as limiting the way in which the general words of each item in the list are to be construed. We think it might also be helpful if the new legislation included examples of the kinds of term which are brought within the scope of UCTA by section 13 [s 25(3)].[151] So that consultees may see what we intend, the next paragraph gives some draft examples, and more are contained in Schedule 2 to the draft Bill in Appendix B. Alternatively, it may be thought better to leave examples to publications such as the OFTGuidance.
(1)making the consumer’s rights or remedies subject to restrictive conditions (for example, that claims must be notified within a short period, or that defective repairs will only be put right if the goods are returned to a particular place at the consumer’s expense);
(2)excluding or restricting any right or remedy that would otherwise be available to the consumer (for example, preventing the consumer from terminating the contract, or limiting the damages that may be claimed, or preventing the consumer from deducting any compensation due to her from any payments still due by the consumer);
(3)providing that a consumer who exercises her rights or remedies will be subject to some prejudice (for example, providing that the consumer will invalidate any rights which she has against the business if she exercises a right to have defective work put right by a third party); and
(4)excluding or restricting rules of evidence or procedure (for example, providing that a decision of the business, or a third party, that work done is not defective is to be conclusive).
Such terms would probably fall within at least one category in the indicative list,[152] so, if the new indicative list is to include examples, arguably there should be examples of these terms too. However, whereas the indicative list is relevant only to the provisions that prevent reliance on terms which are unfair, UCTA section 13 [s 25(3)] applies equally for the purpose of the provisions that render certain terms automatically invalid. Its counterpart in the new legislation therefore cannot appear solely in the new indicative list. In the draft Bill, clause 16 provides that certain kinds of term or notice count as an “exclusion or restriction of liability” and clause 17 gives one or more examples of each kind. Paragraph 1 of the new indicative list in Schedule 2 includes terms in a consumer contract which attempt to exclude or restrict liability to the consumer for breach of contract, and cross-refers to the examples of this in clause 17.
4.127 UTCCR Schedule 2, paragraph 1(a) refers to terms which have the object or effect of
excluding or limiting the legal liability of a seller or supplier in the event of the death of a consumer or personal injury to the latter resulting from an act or omission of that seller or supplier.
Many of the terms which fall under this sub-paragraph are automatically of no effect, because the liability in question is either for negligence [breach of duty][153] or for a failure of the goods supplied to comply with the implied terms as to quality or correspondence with description or sample under the SGA 1979 or parallel legislation or common law rules for other contracts.[154] Thus they would be covered by the provision proposed in the previous paragraphs. However it is conceivable that liability for death or personal injury might arise from failure to comply with some other express or implied term of the contract. This would fall under the “fair and reasonable test” provisionally proposed for terms in general, and such clauses should arguably be referred to in the reformulated list. But very few cases will fall into this category, and we therefore doubt that it would be helpful to refer to it in the Schedule. We invite views on whether the reformulated list should refer to any clause which purports to exclude or restrict a business’s liability for the death of or personal injury to a consumer and is not covered by the part of the list dealing with clauses that are automatically of no effect.
4.128 Paragraph 1(b) of UTCCR Schedule 2 refers to terms
inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier or another party in the event of total or partial non-performance or inadequate performance by the seller or supplier of any of the contractual obligations, including the option of offsetting a debt owed to the seller or supplier against any claim which the consumer may have against him.
Again, many of the clauses that fall within this will automatically be of no effect, but there will be many others which will be subject to the proposed “fair and reasonable” test, so the substance of this paragraph must be retained. We think it is unnecessary and confusing to refer to the various ways in which the contract may have been broken by the business,[155] and suggest referring simply to “breach of contract”. On the other hand, when it comes to types of exclusion or restriction, we think that it would be useful to give more than the single example of set-off. For reasons we have explained,[156] other examples are contained in the draft Bill in clause 16, which is supplemented by examples in clause 17. Paragraph 1 of Schedule 2 to the draft Bill therefore refers simply to “Terms which attempt to exclude or restrict liability to the consumer for breach of contract”, and refers to clause 17 for examples of such terms.
4.129 The final words of UCTA section 13(1) [s 25(5)[157]] provide:
… and (to that extent) sections 2 and 5 to 7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty.
4.130 These words have been judicially criticised as “obscure”.[158] They were aimed at clauses which attempt to exclude altogether some obligation or duty that otherwise would exist, for example a clause which purports to exclude “all conditions or warranties, express or implied”, or to deny that there is any obligation to take reasonable care.[159] The idea seems to be that a clause which attempts to prevent the business having an obligation or duty which it would have in the absence of the clause, should be treated as an exclusion of liability for breach of the duty. As Slade LJ said, delivering the judgment of the Court of Appeal in Phillips Products Ltd v Hyland:
… in considering whether there has been a breach of any obligation … or of any duty …, the court has to leave out of account, at this stage, the contract term which is relied on by the defence as defeating the plaintiffs’ claim for breach of such obligation or such duty …[160]
This has been described as a “but for” test.[161]
4.132 UTCCR Schedule 2, paragraph 1(c) lists terms which have the object or effect of
making an agreement binding on the consumer whereas provision of services by the seller or supplier is subject to a condition whose realisation depends on his own will alone.
4.133 This appears to refer to two situations neither of which, so far as we are aware, is common in the UK. The first is where the consumer is said to be bound by an offer which has not been accepted by the business.[162] The second is the so-called “potestative condition”, where the business’s obligation to perform is dependent on the occurrence of some condition and the occurrence or non-occurrence of that condition is entirely within the control of the business.[163] An example might be a loan agreement which purports to bind the consumer/borrower but which states that the business/lender is under no obligation to advance any money unless the loan is approved by its managers.
4.134 We doubt whether either type of clause is commonly found in consumer contracts in the UK. Quite apart from UTCCR, we consider it very unlikely that the consumer would be bound by the contract in either case. In the first case the consumer would normally be free to withdraw the offer and in the second the court would probably hold that the contract was no more than a declaration of intent by the business. However, were such terms to be used in the UK they would be very misleading to consumers, who would be unlikely to know their rights; and it seems sensible to retain them in the list so that it is clear that action may be taken to prevent their use.[164]
4.136 Paragraph 1(d) of UTCCR Schedule 2 refers to terms
permitting the seller or supplier to retain sums paid by the consumer where the latter decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the seller or supplier where the latter is the party cancelling the contract.[165]
4.137 This paragraph appears to cover a number of different situations:
(1) where the consumer is entitled to withdraw from the contract, but will lose a sum paid (probably a deposit);[166] the business is equally entitled to withdraw, but without having to pay an equivalent amount to the consumer;[167]
(2) where, if the consumer wrongfully refuses to perform the contract, he will lose a sum paid; but there is no provision for an equivalent amount to be paid by the business if it wrongfully refuses to perform;[168] and
(3) (possibly) where the consumer will lose a sum paid if he decides justifiably not to perform because the business has committed a serious breach of the contract.[169]
4.139 We note that the OFT has attempted to make sense of paragraph 1(d) by interpreting it as striking at all clauses which provide that the consumer, whether he has the right to withdraw or has broken the contract, will lose prepayments of amounts that go beyond the business’s loss.[170] We think that it would be better to replace the sub-paragraph by a provision covering a term which would entitle the business, when the consumer exercises a right to withdraw from the contract or when the contract is terminated for the consumer’s breach, to retain a payment (made by way of deposit or otherwise) which is not reasonable in amount.[171] We consider that this would be sufficiently close to the paragraph in the Annex to the Directive from which UTCCR Schedule 2, paragraph 1(d) is copied to avoid any real risk of challenge for non-implementation. We provisionally propose that paragraph 1(d) of the indicative list be replaced by a reference to a term entitling the business, on withdrawal by the consumer or termination of the contract because of the consumer’s breach, to retain a pre-payment which is not reasonable in amount.
4.140 Paragraph 1(e) of UTCCR Schedule 2 refers to terms
requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation.
4.141 This would apply to clauses by which a party agrees that, if she breaks the contract, she will pay a fixed or determinable sum as compensation, and the sum exceeds a genuine pre-estimate of the likely loss. In UK law such clauses are regarded as “penalty” clauses and are unenforceable.[172] Thus there is no need to include them on the list for the purposes of protecting individual consumers; but to do so makes it easier for the OFT and others to prevent their use.[173] We consider that this paragraph should be reformulated in terms which make clear what test is to be applied (that is, explain the penalty rule).[174]
4.142 The OFT Guidance points out that the sub-paragraph also covers clauses which require the consumer to reimburse the business for its costs, without limiting them to what was reasonable, or to reimburse its expenses without taking into account what could reasonably have been avoided. We consider that the reformulation should cover these points,[175] and paragraph 4 of Schedule 2 to the draft Bill accordingly gives examples of terms which it would cover.
4.143 It is our provisional view that the list should contain examples. We invite comments on this general question as well as on the individual examples that we have discussed, and on the relevant parts of the draft Bill,[176] in terms of both substance and style.
4.144 Like the Annex to the Directive, UTCCR Schedule 2(2) exempts certain types of term from the indicative list. The exceptions relate to terms in financial services contracts allowing termination by the supplier, or allowing it to alter interest rates and other charges, where there is a valid reason;[177] allowing suppliers to alter unilaterally the conditions of contracts of an indefinite duration, provided adequate notice is given and the consumer has the right to terminate the contract; various terms in transactions in transferable securities, financial instruments and other products or services;[178] and price indexation clauses.[179] We are not aware that these exemptions have caused any difficulty. In any event they do not prevent the clause being held to be unfair.
4.147 We do not think it would be right to apply the UTCCR approach of leaving it to the consumer to show that the term is unfair in all cases.[180] This would weaken the consumer’s position in comparison to the position under UCTA.[181]
4.148 One alternative approach is to say that, even though the new legislation would affect a greater range of terms, it would still be justifiable to place the burden on business. This is because the reasonableness of the term will not come into question unless it alters the consumer’s rights or obligations from what they would otherwise be under the normal rules of contract law for the kind of transaction in question.[182] It does not seem inappropriate to require the business to justify this departure from the normal rule, whether it be, for example, a clause allowing the retailer to charge the manufacturer’s list price at the date of delivery or a limitation of liability clause.[183]
4.149 A second alternative is to say that a business which follows the proposed guidance by avoiding the listed terms should get some benefit therefrom. Therefore a business which includes in its contract a term which is in the list of terms that are potentially unfair should bear the burden of proving that the term is fair and reasonable. Other terms should also be subject to review but only if the consumer shows, or the court is satisfied,[184] that the term is not fair.
4.152 We noted in Part III that the definition of “consumer” under UTCCR differs from that of a person who “deals as consumer” under UCTA.[185]
4.153 In the R & B Customs case[186] it was held that a company may deal as a consumer under UCTA, so that a clause excluding the supplier’s liability to the company was of no effect. We return to this question in Part V where we discuss the protection needed for businesses. (Our provisional conclusion is that the definition of consumer can be limited to natural persons as under UTCCR. Companies will still be protected, but by a “reasonableness” test.)[187]
4.155 Some transactions, particularly purchases, may be made partly for business and partly for private purposes. Furthermore, the degree of intended business and private use can vary significantly. For example, a sole trader might purchase a vehicle for use in the business during the week, using it privately at weekends; whereas an individual might purchase a car for personal use, occasionally using it in the course of employment.[188] We therefore think that the most appropriate method of classifying these transactions as either consumer or business would be to assess each on its facts, according to the purpose for which it was predominantly intended.
4.156 Neither UCTA nor UTCCR seem to deal with the issue whether or not such a transaction should count as a consumer contract.[189] This does not seem to have given rise to difficulties and we think that the decision as to whether a transaction is a business or a consumer transaction should continue to be determined by the judiciary.
4.158 We have seen that under UCTA, where the contract is one for the sale or supply of goods, a party will be “dealing as consumer” only if the goods supplied are of a type ordinarily supplied for private use or consumption.[190] There is no equivalent limitation in UTCCR. The aim of the restriction in UCTA (which was taken from the earlier SOGITA) was to make it easier for the seller or supplier to know whether the customer was to be treated as a consumer.[191] The Law Commissions considered a parallel requirement for consumer services contracts but concluded that it is not possible to identify a service as being of a kind normally provided for private (as opposed to business) use.[192] Should this aspect of UCTA be preserved?
4.160 There remains the issue whether this requirement should continue to apply to contracts for the supply of goods other than sale in which terms excluding the supplier’s liability are of no effect if the other party is “dealing as consumer”. The advantage to suppliers of knowing more clearly where they stand has to be set against (a) the added complexity of continuing to have two definitions within the same piece of legislation and (b) the slightly reduced protection that consumers would have if this exception were retained. We note that the draft regulations proposed by the DTI for the implementation of SCGD would effect the same change in the case of non-sale contracts as SCGD requires in the case of contracts of sale.[193]
4.162 The terms used at auction sales are subject to UTCCR but a buyer at auction or by competitive tender does not deal as a consumer within UCTA.[194] In practical terms the impact of this is that the seller may exclude or restrict its liability under SGA 1979 sections 13–15, provided the term satisfies the requirement of reasonableness. The question of auction sales had divided the members of the Law Commissions, some taking the view that the terms at auction should not be subject to any control at all, others being in favour of the solution ultimately adopted, but all were agreed that there should be no absolute ban on contracting out at auction. The principal reason appears to have been that it will often be difficult for the auctioneer to know whether the buyer is or is not a trader.[195]
Member States may provide that the expression “consumer goods” does not cover second-hand goods sold at public auction where consumers have the opportunity of attending the sale in person.[196]
Member States may allow sellers of second-hand goods generally to limit their liability but only by fixing a shorter time period, of no less than one year, during which the seller will be liable for non-conformity.[197]
4.165 SCGD contains no explicit mention of sales by competitive tender.[198] Therefore we provisionally propose that sales by competitive tender no longer be exempted from counting as “consumer” contracts.
4.166 UCTA excludes from the definition of “consumer” a person who holds himself out as making the contract in the course of a business.[199] Although it seems rather unfair that a person who has held himself out as buying in the course of a business should nonetheless be able to claim the protection due to a consumer, there is no equivalent rule in SCGD; therefore this limitation can no longer apply even to the absolute ban on contracting out in contracts of sale. It would be possible to preserve the exception in relation to other contracts for the supply of goods, but we see less advantage in doing so than in having a uniform regime for all contracts for the supply of goods to consumers. This is also what is proposed by the DTI.[200] Similarly it would be possible to preserve the exception in relation to contracts other than those for the supply of goods, but again we think it is more important to ensure consistency than to withhold the statutory protection in a few cases where it is arguably not deserved.
4.167 We provisionally propose
(1) that the absolute ban on contracting out in consumer contracts should apply in favour of a person who is in fact a consumer even if he has held himself out as making the contract in the course of a business – whether or not the contract is one of sale (in which case this is required by SCGD) – and
(2) that, for the purpose of determining whether a contract other than one for the sale or supply of goods is a consumer contract, and is therefore subject to the fair and reasonable test, the definition of a consumer should include such a person.
4.168 We suggested in Part III that there is probably no difference between the definitions of business in UCTA and UTCCR over the question of “occasional sales”,[201] but this depends on which of two possible interpretations will be taken by the courts.
4.170 We also suggested that there may possibly be a difference in that the definition of “business” in UCTA explicitly includes “the activities of any government department or local or public authority”.[202] It is likely that UTCCR apply to contracts under which public authorities sell or supply to consumers, but this is not completely clear. Contracts in the normal sense between government departments or local or public authorities and consumers are common and we see no good reason for excluding their terms from the controls which will apply to other consumer contracts.
4.172 In Part III we said that it is uncertain whether, or to what extent, UTCCR apply to arrangements under which goods or services are supplied and which do not amount to contracts under UK law. It has been argued that the ECJ may develop an autonomous interpretation of the word “contract” in the Directive so that the Directive will apply to some such arrangements.[203]
4.176 We explained in Part III that third party beneficiaries of a contract who have the right to enforce a term of the contract under the Contracts (Rights of Third Parties) Act 1999 cannot rely on any provisions of UCTA except section 2(1).[204] In Scots law a third party with a ius quaesitum tertio is unlikely to be able to rely on many of the provisions of UCTA as he is unlikely to be regarded as a party to the contract. However, he may apparently rely on any part of section 16, so that he may challenge clauses excluding business liability not only for death or personal injury but also for other loss or damage caused by breach of duty. UTCCR do not seem to apply to third party beneficiaries at all and, while the language of SCGD is not incompatible with its application to third party beneficiaries, we do not believe that it will be held to apply in favour of them.
4.177 Because this matter has been covered by very recent legislation in England, and we have received no complaint as to its operation, we propose that the new legislation should take the same approach as the existing law. Thus (in England) the promisor would be prevented from limiting its liability[205] to the third party for death or personal injury caused by negligence; in other cases the third party would not be able to challenge the fairness of the terms. In cases in which the promisee takes action to enforce the terms of the contract for the third party’s benefit the terms would be subject to the usual controls. In Scotland there has been no call for change, and we provisionally propose that the status quo be preserved there also, so that such terms should be of no effect in the first case and be subject to challenge in both the other situations.
4.179 If an exclusion or restriction of liability or other term is invalid under UCTA it is simply of no effect, but the remainder of the contract stands.[206] This causes no problem with exclusion and limitation of liability clauses; the parties revert to the general rules on liability. UTCCR cover a greater range of terms and, while in many cases the contract will be workable without the offending term, this may not always be the case.[207] Regulation 8 therefore provides that the offending term shall not be binding on the consumer and the contract shall continue to bind the parties “if it is capable of continuing in existence without the unfair term”. Given that the new legislation will cover the same wide range of terms, there must be the possibility that, when the unreasonable terms have been removed, the remainder of the contract will be insufficient to be enforceable (or to be enforced without hardship to one party or the other).
4.181 There is a difficult point as to exactly how this should be implemented. Under UCTA the question is whether the term (normally an exclusion or limitation of liability clause) is “a fair and reasonable one to be included”[208] or, for Scotland, whether it was “fair and reasonable to incorporate” the term in a contract.[209] In Part III we concluded that, in Scotland, a term which partly offends Part II of UCTA is wholly ineffective.[210] We also noted that, in Stewart Gill Ltd v Horatio Myer & Co Ltd,[211] the Court of Appeal held that the words of Part I mean that (in England) an unreasonable part of a term cannot be severed so that the rest can then be relied upon. Stuart Smith LJ said:
Nor does it appear to me to be consistent with the policy and purpose of the Act to permit a contractor to impose a contractual term, which taken as a whole is completely unreasonable, to put a blue pencil through the most offensive parts and say that what is left is reasonable and sufficient to exclude or restrict his liability in a manner relied upon.[212]
4.183 UTCCR provide that “an unfair term … shall not be binding”.[213] It is not clear whether the court can put a blue pencil through the offending parts of a clause and leave the rest, but it seems likely that it can. Suppose a single clause were to provide that the consumer might be required to pay a higher price in two different circumstances, and the extra charge in one situation would be entirely fair but not that in the other; could the court strike out the unfair charge leaving the fair one? It seems likely that the court is entitled, under UTCCR, to treat a clause as divisible into separate “terms” and to strike down only those which are unfair, leaving the rest.[214] However, it would be possible for the new legislation to require that the court strike down the clause as a whole, in order to deter businesses from including over-wide clauses in the hope of deterring claims and then, if the claimant persists nonetheless, seeking to rely on the parts of the clause that are reasonable.
4.187 It is obviously important to ensure that the controls over unreasonable terms are not circumvented by businesses providing fair terms in one contract and then securing the consumer’s agreement to a separate contract which limits the consumer’s rights under the first one, except where the second contract is part of a genuine settlement of an existing dispute. Section 10 of UCTA [s 23[215]], which may in part be aimed at this problem, has given rise to difficulties of interpretation as it is not easy to distinguish the unacceptable evasion from the (acceptable) settlement.
4.193 Consumers should not be deprived of their rights by a clause stating that the contract shall be subject to a foreign law when the contract would otherwise be governed by the law of England or of Scotland. UTCCR seem to allow the choice of the law of another Member State although the contract has a close connection, or even its closest connection, with a UK jurisdiction.[216] This seems wrong in principle, since UK legislation may give greater protection than that of the Member State chosen and to subject the contract to the latter law might well be unfair.
4.194 It should be made clear that the rules on unfair clauses in consumer contracts are mandatory so that, if the contract has a close connection to the UK, they will be applied under the Rome Convention despite a choice of another system of law.[217]
4.195 UTCCR have extended the power 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 to a number of “qualifying bodies”, including not only the DGFT but a variety of industry regulators, all weights and measures departments in Great Britain, the Consumers’ Association and, most recently, the Financial Services Authority.[218] Whether or not this was required by the Directive, there seems no reason to change the provisions if they are working well.
4.196 It is possible that the scope and terms of review of unreasonable clauses under the new instrument will be slightly wider than under UTCCR.[219] It would not be sensible to confine the preventive powers just to those required by the Directive.
4.197 In Part III we noted doubts about the position where a term has not effectively been incorporated into the contract – is the business “using” the term?[220] – and as to whether a term may be unfair simply because it is not “in plain, intelligible language”. Earlier we suggested that lack of “transparency”[221] of a term should be a ground for saying that the term is unfair.[222]
4.199 We also noted in Part III that it has been suggested that terms which omit important information might not be regulated effectively under the current regime.[223] However, we are unsure to what extent this is a problem and whether it is necessary to increase the qualifying bodies’ powers in this area.
4.201 The burden of proof was discussed in relation to the reasonableness test above.[224] It is suggested that a similar burden of proof could apply to preventive proceedings.
4.202 We invite views on the question of who should bear the burden of proof in preventive proceedings.
4.203 It is only possible for an authorised body to act against a term which is used or recommended for use regularly. This does not necessarily mean, however, that the authorised body should never be able to act against a term which was negotiated. We have been told that some firms are making a practice of “negotiating” the deposit to be paid by the consumer when she signs a contract for work and materials, but that the “negotiations” almost inevitably result in the consumer paying an unfairly large deposit. This is because the limits within which the salespersons can negotiate are tightly defined and if they make an agreement outside the limits they stand to lose their commission. This raises the question whether the authorised bodies should be empowered under the new legislation to act against particular “practices of negotiating unfair terms”.[225]
4.205 There are three provisions in UCTA which may not need to be reproduced in the new legislation. The first is section 5 [s 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] to a person injured by goods proving defective while in consumer use. The question here is whether there is any need for a separate provision on guarantees. When it was first drafted, as part of the original Law Commission Bill,[226] the clause that became section 5 [s 19] would have had a substantial effect because what is now UCTA section 2 [s 16] was much narrower in its effect. The ban on excluding or restricting liability for death or personal injury caused by negligence would have been limited initially to the liability of employers to their employees, of carriers to passengers, of the occupiers or managers of car parks to users and to liability for accidents involving devices for the movement of persons.[227]There would have been power to extend the ban to other kinds of business liability by Ministerial Order.[228] In the event, Parliament passed section 2(1) [s 16(1)(a)] in very broad terms so that, quite apart from UCTA section 5 [s 19], a manufacturer can never exclude its liability for death or injury caused by negligence.
4.206 What the section does achieve is to prevent a manufacturer or distributor excluding its liability for other loss or damage caused to a consumer, whereas under section 2(2) [s 16(1)(b)] such a clause may be valid if it is fair and reasonable. In practice the only liability in question will be liability for damage to other property of the consumer.[229] This was seen by the Law Commissions to be of importance.[230] However, its importance has been very much diminished by the Consumer Protection Act 1987. The 1987 Act makes the manufacturer or distributor liable for a defect in the goods without fault having to be proved by the consumer,[231] and it applies not only to death or personal injury but also to property damage above the value of £275.[232] That liability cannot be excluded.[233] Thus section 5 [s 19] seems to bite only in those cases where there is property damage of less than £275, and all it does is to make the clause automatically invalid rather than subject to a fair and reasonable test. Meanwhile, the overlaps in coverage between this section and section 2 of UCTA [s 16] and the Consumer Protection Act 1987 add significantly to the complexity of the law and make the position confusing to non-lawyers and lawyers alike. It is our provisional view that the additional protection provided by section 5 [s 19] is of such slight value to consumers that its value is outweighed by the complexity it causes.
4.208 The second provision that may no longer be needed is UCTA section 9 [s 22]. Section 9(1) [s 22(a)] was inserted to ensure that the so-called doctrine of fundamental breach, under which a party might escape the effect of a clause which would otherwise limit his rights by terminating the contract for fundamental breach, would not prevent a valid clause applying. The doctrine has been overruled by the House of Lords.[234] Section 9(2) [s 22(b)] appears to have been aimed at the associated understanding that if the contract had been affirmed, the clause would be binding.
4.209 Our provisional view is that neither part of section 9 [s 22(a), (b)] of UCTA is still required.
4.211 Our provisional view is that section 28 of UCTA can now be repealed without replacement.[235]
[1]See para 2.21 above.
[2]We make the provisional proposal that, at least as far as controls over clauses in individual contracts (as opposed to preventive controls) are concerned, it is both desirable and feasible to extend the controls in this way. This would mean that some, or even most, of the current sections of UCTA dealing with exclusion and limitation of liability in business-to-business contracts could be repealed, and the “consumer” regime, with specific modifications, applied to both types of contract. If this extension were not made, the existing controls over exclusion and limitation of liability clauses in business contracts would presumably be retained, either in their existing form or in a form which is closer to that proposed for consumer contracts (for example, in respect of the reasonableness test to be applied and of ancillary matters such as its application to international contracts).
[3]Sections 2(1), 5, 6(1) and (2), 7(2) [ss 16(1)(a), 19, 20(1) and (2), 21(1)(a) and (3)(a)] (clauses of no effect); ss 2(2), 3, 6(3) and 7(3) [ss 16(1)(b), 17, 20(2), 21(1)(a) and (b), 21(3)(a) and (b)] (clauses in non-consumer contracts which are valid if fair and reasonable).
[4]For the sense in which we use this phrase see paras 2.35 – 2.39 above.
[5]Art 8 provides that
Member States may adopt or retain the most stringent provisions compatible with the Treaty in the area covered by this Directive, to ensure a maximum degree of protection for the consumer.
We do not think that any of the existing or proposed provisions on unfair terms will be incompatible with the Treaty (eg infringe its competition provisions).
[6]Formerly Art 189.
[7]Treaty Establishing the European Community (Rome, 1957), as amended by Treaty on European Union (Maastricht, 1992) and Treaty of Amsterdam (1997) (OJ No C 340, 10.11.97, p 173).
[8]This view has been confirmed by the ECJ in Commission v Germany (C-131/88) [1991] ECR I-825, para 6. The Court stated:
… the transposition of a directive into domestic law does not necessarily require that its provisions be incorporated formally and verbatim in express, specific legislation; a general legal context may, depending on the content of the directive, be adequate for the purpose provided that it does indeed guarantee the full application of the directive in a sufficiently clear and precise manner so that, where the directive is intended to create rights for individuals, the persons concerned can ascertain the full extent of their rights and, where appropriate, rely on them before the national courts.
See also Commission v Italy (C-363/85) [1987] ECR 1733; Commission v Germany (C-29/84) [1985] ECR 1661.
[9]The first reported case is Océano Grupo Editorial SA v Rocíó Murciano Quintero (C-240/98)[2000] ECR I-4941, on whether the court may raise the question of fairness on its own motion when the consumer fails to defend an action brought by the business.
[10]Cf para 3.106 above.
[11]Cf paras 3.57 – 3.62 above.
[12]See further paras 4.118 – 4.122 below.
[13]See para 4.120 below.
[14]Para 2.22 above.
[15]For example, if the UTCCR definition of a consumer contract were used to determine whether the clauses of the contract are caught by a general fairness test, but the UCTA test were used to determine whether the contract is one in which certain terms are automatically of no effect. A practical example of the sort of complexity we have in mind will occur if reg 6 of the draft SSGCR is brought into effect. For the purposes of SGA 1979 ss 13–15 and SOGITA ss 9–11, section 6 of UCTA would be amended to provide a definition of a consumer that is different to the one under UCTA s 12. The section 12 definition would continue to apply to UCTA ss 3 and 4. The principal difference between the two definitions is that for the purposes of s 6 only a natural person may be a consumer.
[16]The broad aim is similar to that of the Tax Law Rewrite project: see Inland Revenue report, The Path to Tax Simplification (December 1995) and The Path to Tax Simplification: A Background Paper.
[17]Professor F M B Reynolds said in 1978:
The general effect is one of extreme complexity, and it is most unfortunate that such a major consumer-oriented reform … should be such a dramatic example of that strange, internally self-referent complexity so often to be found in UK statutes. It will for a considerable period be a bold layman (and perhaps even lawyer) who advises on it with confidence.
“The Unfair Contract Terms Act 1977” [1978] LMCLQ 201, 201–202. See also L S Sealy, “Unfair Contract Terms Act” [1978] CLJ 15, 17, who says: “What a shocking example of ‘legislation by reference’ – and this in a consumers’ measure!”
[18]Reg 3(1) has different definitions of “court”, and reg 3(2) substitutes for references to “injunctions” references to “interdicts”.
[19]As far as Scotland is concerned, consumer protection is a matter reserved for the Westminster Parliament (Scotland Act 1998, s 30 and Sched 5 (C7)), but for Northern Ireland consumer matters (except consumer safety in relation to goods: see Northern Ireland Act 1998, Sched 3, para 37) fall within the competence of the Northern Ireland Assembly because they are not listed in Sched 3 to the Northern Ireland Act 1998.
[20]Para 2.37 above.
[21]There is not at this stage a full “indicative list” of potentially invalid clauses, and the draft does not deal with the powers of the OFT and others to prevent businesses using unfair terms (see UTCCR regs 10–15 and Sched 1), nor with the extension of the scope of the Regulations to protect businesses (see the second paragraph of the terms of reference at para 1.1 above, and Part V below).
[22]See ss 2(1), 5, 6(1) and (2), 7(2) [ss 16(1)(a), 19, 20(1) and (2), 21(1)(a) and (3)(a)]; para 3.9 above.
[23]Para 3.16 above.
[24]Para 3.79 above.
[25]Para 3.41 above.
[26]Para 3.35 above.
[27]Section 5 [s 19].
[28]See para 4.205 below.
[29]Although mandatory terms may seem to prevent business having the flexibility to offer reduced protection at reduced cost, there are advantages to business in the certainty of knowing that such clauses simply cannot be relied on by either the business or its competitors.
[30]See para 1.4above and draft SSGCR, reg 6.
[31]See paras 4.42 – 4.54 below.
[32]See paras 4.34 – 4.35, 4.77 – 4.78, 4.146 – 4.150 and 4.152 – 4.167below.
[33]A full list can be found in Chitty, paras 14-106 ff.
[34]Consumer Protection Act 1987, s 7.
[35]Defective Premises Act 1972, s 6(3) (England only).
[36]Eg Consumer Credit Act 1974, ss 67 and 173(1); Consumer Protection (Distance Selling) Regulations 2000, SI 2000 No 2334, reg 25.
[37]See para 4.27 above.
[38]We deal later with various ancillary matters, such as the definition of “dealing as consumer”, that relate to terms which are no effect: see paras 4.151 – 4.194below.
[39]Cf UCTA, s 2(1) [s 16(1)(a)]; para 3.9 above. On liability in tort see Part VII below.
[40]Cf UCTA, ss 6(1) and 7(3A) [s 20(1)]; para 3.9above.
[41]Cf UCTA, ss 6(2) and 7(2) [ss 20(2), 21(1)(a)(i) and (3)(a)]; para 3.9 above. The definitions of “consumer” and “business” are discussed in paras 3.81 – 3.96 above; the question whether the terms listed should be of no effect when the contract is governed by English or Scots law only because the parties have so chosen, in para 3.48 above.
[42]Cf UCTA, s 13: to the extent that Part I prevents the exclusion or restriction of any liability, it also applies to terms of the kind listed, which have the practical effect of excluding or restricting liability without actually doing so. The corresponding provision for Scotland, s 25(3), achieves the same result through an interpretation provision: any reference in Part II to excluding or restricting any liability includes terms of this kind. Clause 16 of the draft Bill adopts the latter approach, and cl 17 gives some examples.
[43]UCTA, Sched 1.
[44]UCTA, Sched 1, para 1(b).
[45]UCTA, Sched 1, para 1(b). Although we are not aware of any cases specifically on this point, the OFT did mention terms excluding liability for personal injury or negligence in their Guidance on unfair terms in tenancy agreements. However, even if such a term were to be incorporated into a tenancy agreement, we are unsure whether it would relate to “the creation or transfer of an interest in land” in line with the test set out in Electricity Supply Nominees Ltd v IAF Group Ltd [1993] 1 WLR 1059, and confirmed in Unchained Growth III plc v Granby Village (Manchester) Management Co Ltd [2000] 1 WLR 739 (CA).
[46]Para 3.12 above.
[47]See paras 4.42 – 4.54below.
[48]A section dealing with business liability for other loss or damage caused by negligence may be needed to cover liability to non-consumers: see paras 5.45 and 8.18 below. It will also be necessary to have provisions dealing with the exclusion of this kind of liability in tort [delict] by means of non-contractual notices: see Part VII below.
[49]See paras 4.55 – 4.76 below.
[50]See para 3.14above.
[51]Ibid.
[52]See paras 3.12 – 3.15 above.
[53]See paras 3.19 – 3.34 above.
[54]This argument has often been made in relation to the duty to take reasonable care. In France, for example, it is considered that any attempt to exclude delictual liability is contrary to public policy and ineffective: B Nicholas, French Law of Contract (2nd ed 1992) p 232. In English and Scots law this has only been accepted clearly in relation to intentional (or reckless) wrongdoing, for example, fraud: S Pearson & Son Ltd v Dublin Corpn [1907] AC 351; see Chitty, para 6-129.
[55]Molony report, para 435, cited in First Report, para 68.
[56]First Report, para 73.
[57]See paras 4.55 – 4.68 below.
[58]See para 3.32 above.
[59]The Law Commissions had not recommended a complete ban. The Second Report recommended that such clauses and notices should be completely ineffective only where one party in a comparatively weak position places a high degree of reliance for his personal safety on the care and skill of another, such as in contracts of employment or of carriage, or in relation to car parks (paras 85–94). The report also recommended that the Secretary of State should have order-making powers to extend the protection against such terms to other similar situations (paras 95–97). However, Parliament inserted a complete ban when it became apparent that there were numerous areas where the order-making powers might be required, and after it had been pointed out that such powers had not been very effective in previous application. See Hansard (HL) 23 May 1977, vol 383, cols 1102–1103; Second Report, paras 57–58.
[60]Para 4.49 above.
[61]It does not seem from the consultation papers or reports that the Law Commissions ever considered limiting the controls in consumer contracts to written standard terms.
[62]Commission Report on the Implementation of Council Directive 93/13/EEC of 5 April 1993 on Unfair Terms in Consumer Contracts (Brussels, 27 April 2000) COM (2000) 248, p 14.
[63]See para 2.16 above.
[64]UK Response to the European Commission, DTI, 22 February 2001, response A1(a).
[65]Para 3.25 above.
[66]The description used by Lord Steyn in DGFT v First National Bank plc [2001] UKHL 52, [2002] 1 AC 481 (HL), at [34]; para 3.25 above.
[67]The description used by Lord Bingham: ibid, at [12].
[68]The European Commission reports that Denmark, Finland, Greece, Luxembourg, Portugal, Spain and Sweden have not exempted such terms: Commission Report on the Implementation of Council Directive 93/13/EEC of 5 April 1993 on Unfair Terms in Consumer Contracts, (Brussels, 27 April 2000) COM (2000) 248, p 15.
[69]It should be recalled that there is no objection to more stringent review than the Directive requires. See para 4.6 above.
[70]On whether this should be changed to a requirement of transparency, see para 4.107 below.
[71]Para 3.19 above. Commission Report on the Implementation of Council Directive 93/13/EEC of 5 April 1993 on Unfair Terms in Consumer Contracts, (Brussels, 27 April 2000) COM (2000) 248, p 15, has raised the question whether the price should be subject to review, noting that several Member States have not transposed this limitation into their law. We are not aware of any demand for price to be reviewable. Most Member States, including the UK, allow for contracts to be avoided where there is a serious disparity coupled with some overreaching behaviour: see O Lando and H Beale (eds), Principles of European Contract Law, Parts I and II (Kluwer Law International 1999) pp 263–265.
[72]See clause 6.
[73]See the DTI consultation paper, “Proposals to amend the Consumer Protection (Cancellation of Contracts Concluded Away from Business Premises) Regulations 1987”, published on 10 June 1998; also G Holgate, “Curbing Doorstep Selling” (1999) 18 Tr Law 33.
[74]See Chitty, paras 7-075 to 7-088.
[75]See H MacQueen and J Thomson, Contract Law in Scotland (2000) pp 147 ff.
[76]If the price were to be subjected to review, we think that the test for fairness of the price would have to be much stricter than that for other terms. It could either be set in terms of a factor above the market price (eg at least twice the normal market price) or, preferably, in terms of the deliberate overreaching of ill-informed consumers (eg the elderly persons who are overcharged for building work) or exploitation of their urgent needs (eg the mini-cab driver who is asked to take an injured person to hospital when no ambulance is available and who charges what both parties know to be several times the normal fare).
[77]Fair Trading Act 1973, s 34.
[78]Section 34(2).
[79]Section 34(3).
[80]There seems to be no right to compensation, as distinct from avoidance of the contract. That is so in the analogous case of non-disclosure: Bank Keyser Ullman SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665, CA (aff'd on other grounds [1991] 2 AC 249); see Chitty 6-135.
[81]Trading Malpractices (OFT, July 1990) para 5.27.
[82]See para 2.16 above.
[83]UK Response to the European Commission, DTI, 22 February 2001, response A1(c)(ii).
[84]On the requirements we would impose in this respect see para 4.104 below.
[85]See paras 3.35 – 3.40above.
[86]See para 4.6 above.
[87]See para 3.38 above.
[88]To the detriment of the consumer.
[89]Unfair Contract Terms Bulletin 3 (OFT 188, March 1997) p 12.
[90]On the requirements we would impose in this respect see para 4.104 above.
[91]Para 3.36 above.
[92]Para 3.40 above.
[93]Even the fact that a term has been required by a regulator will not protect it if it is one of those which are of no effect under UCTA: see para 3.40 above. We propose that this position should continue.
[94]Note that UCTA prevents the consumer from excluding or restricting certain liabilities to the business: see para 3.9 above. This is considered in Part VI below.
[95]See para 3.39 above.
[96]See para 3.43 above. As to whether the exemptions should continue to apply as far as, under the new regime, terms would continue to be simply of no effect, see para 4.36 above.
[97]See para 3.45 above.
[98]This exemption does not apply in Scots law.
[99]See paras 5.41 – 5.59 below.
[100]See paras 5.98 – 5.111 below. There may be other differences too. It is arguably inappropriate, for example, to allow terms in business-to-business contracts to be found unfair simply because they are not “transparent” (paras 5.80 – 5.81 below); if this view prevails, and employment contracts are treated as business-to-business contracts, non-transparent terms of employment would be binding where they are not otherwise unfair. Again, we suggest at paras 5.84 – 5.88 below that the new indicative list of terms which may be found unfair should be narrower for business-to-business contracts than for consumer contracts; and this would have implications for the burden of proof in the case of terms which fall within the wider list but not the narrower.
[101]Car hire companies’ websites reveal that in some cases the contract will be with a subsidiary in the location overseas, but in others it is stated that the consumer’s contract will be with the UK company.
[102]The DTI has proposed that changes required by SCGD in the case of contracts of sale should also be made in relation to other contracts for the supply of goods. See para 4.160 below.
[103]See paras 4.34 – 4.35 above.
[104]Nor, in contracts of sale, to obligations as to title; para 3.9 above.
[105]So far as possible, it should also be the same as the test to be used in judging terms in contracts with non-consumers: see para 5.74 below.
[106]Although we do not believe that this would be a correct interpretation of the Directive or UTCCR.
[107]Paras 2.5 – 2.7 above.
[108]Paras 3.57 – 3.71 above.
[109]See paras 4.95 – 4.103below.
[110]See paras 3.57 – 3.62 above.
[111]Reg 5(1).
[112]See para 4.146 below.
[113]Para 3.54 above.
[114]See Recital 16. The Directive is set out at Appendix E below.
[115]We do not include item (d) because we think it would go better in the “grey” list.
[116]Cf mandatory and permitted terms: paras 4.69 – 4.76 above.
[117]We considered adding (in line with Recital 17) whether the transaction was an unusual one for the business, so that it was fair for it to use terms placing less risk on it than for more usual transactions. This we understand to be the thrust of UCTA, Sched 2(e). We suspect that it is of very limited relevance to consumer transactions as opposed to business-to-business contracts.
[118]See paras 4.104 – 4.109 below.
[119]It would be possible to include references to plain and intelligible/simple language, ease of reading the document, prominence, etc – but we consider that this might be too much detail for legislation rather than guidance notes to businesses.
[120]Case law suggests that the phrase is used in two senses: (a) lack of sophistication and (b) lack of market power. See for example Lord Denning’s reference to “his bargaining power which is grievously impaired by reason of his needs or desires, or by ignorance or infirmity”: Lloyds Bank Ltd v Bundy [1975] QB 326, 339 (CA). Compare with Dawnay, Day & Co Ltd v De Braconier D’Alphen [1997] IRLR 285, 292 (HC); and St Albans City and District Council v International Computers Ltd [1995] FSR 686 (QBD), where bargaining power is viewed as a matter of position and strength within the market place.
[121]See Treitel, p 256.
[122]Cf para 3.75, n 156 above.
[123]See paras 4.60, 4.68 and 4.73 above.
[124]The draft Bill in Appendix B does not include such a provision.
[125]Chitty, para 15-051, says the Annex must be included because of Art 3(3). That is perhaps not obvious on the wording but the European Commission has brought infringement proceedings against Denmark, Finland and Sweden, whose legislation did not originally contain an indicative list. See Report from the Commission on the Implementation of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, COM(2000) 248 final of 27 April 2000, para III(2) p 16. However, on 31 January 2002Advocate General Geelhoed issued an opinion on the Swedish case above stating that the indicative list did not have to be transposed into domestic legislation because it was illustrative and not prescriptive and binding. The Court has yet to give its judgment in this case.
[126]Whether this is permissible is discussed in paras 4.6 – 4.10 above.
[127]This list is taken from Unfair Contract Terms Bulletin 13 (OFT 330, April 2001) p 69 with some additions from Unfair Contract Terms Guidance (OFT 311, February 2001) Annex A.
[128]See OFT Guidance, Annex A, Group 18(a). This refers also to deposits though these will usually fall within Sched 2, para 1(d).
[129]Ibid, Group 18(b). Some additional charges will fall within Sched 2, para 1(l).
[130]Ibid, Group 18(c). We omit clauses permitting landlords to repossess premises, for the reasons given in para 4.115 above.
[131]Ibid, Group 18(d).
[132]Ibid, Group 18(e).
[133]Ibid, Group 18(f).
[134]Ibid, Group 18(g).
[135]Ibid.
[136]Financial Services and Markets Act 2000, ss 157 and 158.
[137]OFT 356 (November 2001).
[138]See Renting Homes – 1: Status and Security (2002) Consultation Paper No 162.
[139]Section 2(2); see para 3.10, n 25 above. They are not covered by UTCCR Sched 2, para 1(b), which refers only to “contractualobligations”. Notices which are not themselves terms of a contract and which exclude liability in tort [delict] are discussed in Part VII below.
[140]Section 11(5).
[141]Terms which would limit the supplier’s liability for death or personal injury fall within Sched 2, para 1(a), but the indicative list does not refer to liability for other losses.
[142]Para 4.133 below.
[143]See paras 4.7 – 4.10 above.
[144]OFT 311 (February 2001).
[145]See paras 2.35 – 2.39 above.
[146]Sched 2.
[147]See para 2.38 above.
[148]Paras 4.34 – 4.35 above.
[149]Sched 2 to the draft Bill contains no such clause because the Bill does not yet replicate the preventive powers under UTCCR regs 10–15 to which such a clause would be relevant.
[150]The issue of non-contractual notices that purport to exclude business liability in tort [delict] for death or personal injury caused by negligence is discussed in Part VII below.
[151]See para 4.35(4) and n 42 above.
[152]UTCCR Sched 2, para 1(b): see para 4.128 below.
[153]This cannot be excluded or restricted under UCTA s 2(1) [s 16(1)(a)]; and see clause 1 of the draft Bill.
[154]This cannot be excluded or restricted under UCTA ss 6(2) and 7(2) [ss 20(1), 21(1)(a) and (3)(a)]; and seeclauses 4 and 5 of the draft Bill.
[155]This wording probably reflects the tradition of some continental systems which treat total and partial non-performance, and different forms of non-performance such as non-performance and defective performance, under separate legal provisions and lack a unitary concept of breach of contract. A prime example is the German BGB. Recent reform proposals would introduce the unitary notion: see H-W Micklitz, “The New German Sales Law: Changing Patterns on the Regulation of Product Quality” in (2002) Journal of Consumer Policy (forthcoming).
[156]See para 4.126 above.
[157]Section 25(5) provides:
In sections 15 and 16 and 19 to 21 of this Act, any reference to excluding or restricting liability for breach of an obligation or duty shall include a reference to excluding or restricting the obligation or duty itself.
[158]By Lord Donaldson MR in Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600, 605–606.
[159]In the case of a notice excluding liability in tort [delict], the target was a notice that purports to exclude the duty of care. See the draft clause 12(2) in the Second Report, p 147.
[160][1987] 1 WLR 659, 664.
[161]Both the “but for” test and the last part of s 13(1) [s 25(5)] have been criticised for failing to draw a “distinction between the purely verbal displacement of a primary duty and the circumstantial displacement of the primary duty”: D Yates, Exclusion Clauses in Contracts (2nd ed 1982) p 78; E Macdonald, Exemption Clauses and Unfair Terms (1999) pp 92–95. What seems to be meant is that the court should not pretend that the term does not exist at all; rather it should decide whether in all the circumstances including the existence of the clause (which might have been drawn to the consumer’s attention), the duty would arise. Thus if a car is sold “with all faults”, and in all the circumstances of the case it is clear that the consumer intends to buy the car “as it is”, the clause should not be treated as “excluding a duty” and therefore of no effect. On the other hand if the only reason that there might be no obligation to deliver a car of satisfactory quality is that there is a clause to that effect in the terms of the written contract signed by the consumer, but (for instance) there is no reason to think that the consumer was aware of the clause, the clause should be treated as excluding the duty. Thus, as in Smith v Eric S Bush [1990] 1 AC 831 (HL), the court will not treat such a clause as preventing the duty arising but as an exclusion/limitation clause that is subject to the controls. See also McCullagh v Lane Fox & Partners Ltd [1996] 1 EGLR 35. We do not think that the proposed formulation would prevent a court from reaching a just result in the first sort of case where, for instance, neither party intended that the seller should be under any obligation as to quality; it would simply conclude that, even if the clause were invalid, the circumstances of the case did not give rise to any obligation or duty.
[162]In a number of legal systems an offer, at least when it is stated as having a time limit, is irrevocable within that time: see H Kötz, European Contract law: Formation, Validity and Content of Contract: Contract and Third Parties, vol 1 (1997) p 23. In English law the offer may be revoked at any time before acceptance unless the offeror has promised to keep it open and either the promise was made by deed or the offeree provided consideration for it. In Scots law, the offer can also be revoked at any time before acceptance unless the offeror has promised to keep it open. As the promise is made in the course of business, there is no need for it to be constituted in writing. There is no need for the offeree/promisee to have provided consideration: Requirements of Writing (Scotland) Act 1995, s 1(2)(a)(ii).
[163]B Nicholas, French Law of Contract (2nd ed 1992) pp 159 ff.
[164]See para 2 of Sched 2 to the draft Bill. For a discussion of preventing the use of unfair terms which are in any event of no legal effect, see para 3.119 above.
[165]As a matter of construction the paragraph does not seem to require that the “loss of deposit” be matched by compensation where the business is not given a right to cancel. Nor does it govern the case where the deposit is simply unreasonably large: but see para 1(e).
[166]The paragraph refers to the consumer deciding not to “conclude or perform”; but in English and Scots law if the contract is not concluded the business will have no right to retain any sums paid but equally cannot be liable to pay compensation. (The consumer would not have the right to recover a payment if the arrangement were an “option” contract, but this cannot be what is contemplated since under an option the business would not have the right to withdraw.)
[167]Thus a holiday-maker may have the right to cancel her booking until a number of days before the holiday, losing her deposit, but without further liability; the holiday company may have the right to cancel the holiday if, for example, insufficient bookings are received for it to be viable. It seems that under UTCCR the “loss of deposit clause” would be “potentially unfair” unless the holiday company, were it to cancel, would be liable not only to refund the deposit, but also to pay the same amount again to the holiday-maker.
[168]It is not clear whether this means that the “loss of deposit” clause must be matched by a clause providing for agreed compensation of an equivalent amount, or whether it would suffice that the business should be liable for at least an equivalent amount of unliquidated damages.
[169]This is referred to in the OFT Guidance, para 4.2, though to treat the paragraph as referring to this situation seems to give little weight to the second part of it.
[170]OFT Guidance, para 4.5.
[171]This effectively applies the “penalty clause rule” to deposits and forfeiture of payment clauses, whether the consumer is in breach of contract or is exercising a contractual right to withdraw.
[172]See Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 (HL).
[173]In fact the paragraph may go slightly wider than “penalty clauses”. Whether a clause is penal is, in English and Scots law, determined by asking whether it was a genuine pre-estimate of the loss judged at the time the contract was made. If it was, the clause is valid even if the amount agreed turns out to be much greater than the actual loss. The paragraph seems to reflect the continental tradition, which is to ask whether the sum is disproportionate to the loss actually suffered. However, as the fairness of the term is to be judged as of the time the contract is made, we think that the paragraph can only be read as referring to the anticipated loss, as the actual loss cannot be known at that time.
[174]Our draft reflects current law in the UK, but the Scottish Law Commission has proposed significant amendments: see the Report on Penalty Clauses (1999) Scot Law Com No 171.
[175]The OFT Guidance also refers to “disguised penalties”, in the sense of payments that must be made when the consumer exercises a so-called right to withdraw from the contract. These will be within the proposed reformulation of sub-para (d): see above.
[176]Sched 2.
[177]Para 2(a) and (b).
[178]Para 2(c).
[179]Para 2(d).
[180]Subject to the point that the court may raise unfairness of its own motion: see para 3.80 above.
[181]On the general policy of not reducing existing consumer protection, see paras 4.22 – 4.29 above.
[182]If this approach were to be followed, it would probably be necessary to introduce a “threshold” test along the lines that the term should not be subject to challenge unless it caused a significant imbalance to the detriment of the consumer: see para 4.91 above.
[183]The burden of proof in collective proceedings is a separate issue: see paras 4.201 – 4.202below.
[184]This is to deal with the problem identified in Océano Grupo Editorial SA v Rocíó Murciano Quintero (C-240/98)[2000] ECR I-4941 of the consumer who does not defend an action against her. See para 3.80 above.
[185]Para 3.81 above.
[186][1988] 1 WLR 321; see para 3.85 above.
[187]See Part V below. Draft SSGCR reg 6(1) would amend UCTA s 6 so that, for the purposes of SGA 1979 ss13–15 and SOGITA ss 9–11, a person would deal as consumer only if he is a natural person.
[188]Companies usually provide a procedure for claiming expenses in such situations.
[189]UCTA s 5 [s 19] does deal with “mixed” transactions; it applies when goods are being used or are in a person’s possession “otherwise than exclusively for the purposes of a business”. It seems that this formula was used because under s 5 it is the liability of the manufacturer or other person offering the guarantee which is in question, not that of the supplier, and it was thought that, as by definition there is no contract between manufacturer or other person and the claimant, the question of whether the contract of sale with the supplier was or was not made by the claimant “dealing as consumer” was not relevant. See the Second Report, para 102.
[190]Section 12(1)(c) [s 25]. The restriction seems to derive from the Molony report (see para 400).
[191]First Report, para 86.
[192]Second Report, para 150.
[193]Draft SSGCR, reg 6(3).
[194]UCTA, s 12(2) [s 25]; see para 3.87 above.
[195]See the Second Report, paras 115–119, especially 115(b). Of the various arguments in favour of treating auction sales differently, this is the one which seems still to apply after the decision that all sales made in the course of business should be subjected to the reasonableness test.
[196]Art 1(3). Draft SSGCR reg 6(2) would amend UCTA s 6 to provide that, for the purposes of SGA 1979 ss 13–15 or SOGITA ss 9–11, a person will not “be regarded as dealing as consumer if (a) the goods in question are second-hand goods, and (b) the contract is made at public auction where persons dealing as consumers have the opportunity of attending in person.”
[197]Art 7(1), second para.
[198]It is perhaps arguable that the word “auction” in consumer Directives should be interpreted to include sales by competitive tender. This is because Council Directive 1997/7/EC on the protection of consumers in respect of distance contracts (the “Distance Selling Directive”) OJ L114, 4/6/1997, p 19, which gives cancellation rights to consumers who “shop” on the internet, does not apply to on-line auctions (Art 3(1)); see Consumer Protection (Distance Selling) Regulations 2000, SI 2000 No 2334, reg 5(1)(f). This is presumably because it is not feasible to sell by auction if the buyer has a right to cancel. The same is true, however, of sale by competitive tender; and it may therefore be that sale by competitive tender is to be considered as a form of sale by auction for the purpose of both that Directive and (by analogy) SCGD.
[199]Section 12(1)(a) [s 25(1)].
[200]Draft SSGCR, reg 6(3).
[201]See para 3.94 above.
[202]Section 14 [s 25(1)].
[203]Para 3.106 above.
[204]Which prevents the exclusion or restriction of business liability for death or personal injury caused by negligence.
[205]If this were business liability: see para 3.9 above.
[206]See paras 3.108 – 3.113 above.
[207]Only in very exceptional cases should the courts consider that the contract is not capable of continuing in existence without the term: MTenreiro, “The Community Directive on Unfair Terms and National Legal Systems”(1995) 3 ERPL 273.
[208]Section 11(1).
[209]Section 24(1).
[210]See para 3.110 above.
[211][1992] QB 600 (CA).
[212][1992] QB 600, 609. Lord Donaldson MR put it graphically, at p 607:
The issue is whether “the term [the whole term and nothing but the term] shall have been a fair and reasonable one to be included.”
A previous, unreported Court of Appeal case, Trolex Products Ltd v Merrol Fire Protection Engineers Ltd, 20 November 1991, seems to disagree to some extent. The court held that where a term purports to exclude liability which under UCTA cannot be excluded in any circumstances and also liability which can be excluded subject to the test of reasonableness, the term is ineffective to exclude the former liability but could be upheld as reasonable in respect of the latter exclusion. The court expressly left open the question of whether one can sever when only reasonableness is in issue (ie when no part is automatically unfair).
[213]Reg 8(1).
[214]This gets some support from DGFT v First National Bank plc [2001] UKHL 52, [2002] 1 AC 481 (HL), where Counsel for the DGFT 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, providing that interest should be payable even after judgment and that the obligation to pay it should not merge with the judgment. See the speech of Lord Hope, at [41].
[215]This is in rather different (and clearer) terms.
[216]See para 3.116 above.
[217]As yet the draft Bill includes no provision to this effect.
[218]Reg 12 and Sched 1. The Regulations contain a number of ancillary powers and obligations: regs 10–13. The FSA was added by the Unfair Terms in Consumer Contracts (Amendment) Regulations 2001.
[219]See, eg, para 4.194 above.
[220]Para 3.122above.
[221]For the sense in which we use the word “transparent” see para 4.105 above.
[222]See para 4.106 above.
[223]See para 3.123 above.
[224]Paras 4.146 – 4.150 above.
[225]An alternative would be to leave this question for more general legislation on unfair trading: cf para 4.67 above.
[226]Second Report, draft Bill, cl 10.
[227]Second Report,para 94; see para 2.12 above.
[228]Second Report, para 97.
[229]The manufacturer will not be liable in tort to the consumer for defects in the goods themselves after the decision of the House of Lords in Murphy v Brentwood District Council [1991] 1 AC 398. It is in theory possible for the manufacturer to be liable for defects in the goods under the principle of Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520, which was not overruled by the Murphy case. However, that depends on the consumer being able to show a special relationship with the manufacturer, and, as Lord Roskill pointed out in the Junior Books case (at p 547), that is very unlikely to occur in a consumer transaction.
[230]See the Second Report,paras 98–105.
[231]Section 2.
[232]Section 5(4).
[233]Section 7.
[234]Photo Production Ltd v Securicor Transport Ltd [1980] AC 827.
[235]And with it Merchant Shipping Act 1995, s 184(2). Discussions are currently under way to amend the Convention. We are told that, in the unlikely event that the Government is unhappy with the amendments, it would consider denouncing the Convention. If this were to occur, the proposed legislation would have to include a section comparable to s 28.
