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The implementation of the Unfair Contract Terms Directive in the United
the impact the proposed reforms to the law on unfair contract terms (undertaken
Kingdom
by the Law Commission) will have.2
Dr Christian Twigg-Flesner*
The Position Before the Directive
Introduction
Common Law
The purpose of this paper is to examine the implementation of the Unfair Contract
English law is a mixture of statute and case-law, although the law of contract is
Terms Directive (93/13/EEC) in the United Kingdom, taking particular account of
predominantly based on cases (i.e., the common law). Although most of the legal
judgments in cases involving the Unfair Terms in Consumer Contracts
provisions dealing with the control of unfair terms are statutory, the common law
1
Regulations 1994 and 1999. Although the Directive has been effective in the UK
had developed to principal mechanisms by which it could have some control over
for close to a decade, there have only been a few authoritative reported cases,
unfair contract terms.
including a decision by the House of Lords. It is interesting to consider how
The first relates to the incorporation of contract terms. A fundamental principle of
English judges have handled the various concepts in the directive, including the
contract law is that only those terms which have been effectively incorporated into
concept of good faith which notoriously causes concern for some common
a contract can be relied upon by one of the parties to that contract. This has been a
lawyers. It is encouraging to see that the courts have accepted the European
particular issue in situations where a customer (often a person who would be
character of the Regulations, and increasingly take into account not only relevant
regarded as a consumer) was faced with a term which was not shown to him
case-law of the European Court of Justice but also case law from other
before the contract was concluded. The basic rule is that reasonable steps must be
jurisdictions. However, it may be asked if, in their desire to be seen as Europe-
taken to bring such a term to the attention of the customer, although it was not
conscious, the courts are sometimes coming to conclusions on the interpretation of
crucial that the customer actually read and understood the term. This position was
the implementing rules too readily. A final point to be considered in this paper is
refined in cases such as the famous decision in Thornton v Shoe Lane Parking,3
which required that particularly onerous terms, i.e., terms which a person would
*
Law School, University of Hull, UK.
The Directive was first implemented in the Unfair Terms in Consumer Contracts
Regulations 1994, but there were some shortcomings in that implementation
(referred to in the main text, where appropriate), and the 1994 Regulations were
replaced with the Unfair Terms in Consumer Contracts Regulations 1999 (SI
1999/2083).
not reasonably expect in the particular contract, need to be drawn to the attention
1
2
3
Law Commission, Unfair Terms in Contracts, Report No. 292, February 2005.
[1971] 2 QB 163.
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of the customer.4 However, it had also been accepted by the courts that it may be
business-to-business contracts, and also, in limited circumstances, to private
sufficient for a term to be incorporated into a contract where the contract had been
contracts between two individuals.6 Some of the Act’s provisions operate
signed by the customer, irrespective of whether terms had been read or
differently depending on the type of contract under consideration. It should be
5
specifically drawn to his attention.
noted that some provisions of UCTA do not only apply to contract terms, but also
But even if a term had been validly incorporated, it was still possible to apply
to non-contractual notices. The following paragraphs only provide a brief outline
rules of construction which would render ineffective, or at least less potent, an
of the legislation to set the context for the subsequent discussion of the
unfair term such as an exclusion clause. The dominant rule here was the contra
implementation of the Unfair Contract Terms Directive.
proferentem rule, which would apply an interpretation to an ambiguous term least
The Act7 first deals with clauses seeking to exclude or limit liability for
favourable to the person who drafted it. This approach has its limits, however,
negligence. A term which seeks to limit to exclude liability for death or personal
where a term is phrased in sufficiently clear language. At common law, such
injury caused by negligence will always be ineffective.8 Other loss or damage
terms, if validly incorporated, could be relied upon even where they were severely
caused by negligence can only be excluded or limited if the term satisfies the
unfair. The controls over unfair terms offered by the common law were therefore
reasonableness test.9
not particularly extensive, and could be evaded by careful drafting.
A second set of provisions deals with terms excluding or restricting liability for
breach of certain obligations in relation to the sale and supply of goods. In a
Statute
contract with a person is dealing as a consumer, liability for a breach of the
In addition to the common law rules, legislation was adopted in 1977 to deal with
some types of unfair terms. This was the Unfair Contract Terms Act 1977
(UCTA), which is still in force today. Contrary to what its name might suggest,
UCTA does not provide a comprehensive measure for policing all the different
types of unfair contract terms in contracts. Its focus is mainly on exclusion and
limitation clauses. UCTA is not limited to consumer contracts; it applies to
4
This is often referred to as the “red-hand rule”, following Lord Denning’s
suggestion that such terms should be printed in red ink with a red hand pointing to
it.
5
L’Estrange v Graucob [1934] 2 KB 394.
6
Some provisions apply to all contracts (e.g., s.2 on negligence liability), some
only to consumer contracts (e.g., s.4 on unreasonable indemnity clauses), and
others operate differently depending on whether the contract is a business or a
consumer contract (e.g. ss.6/7 on excluding the terms implied by the legislation on
the sale and supply of goods).
7
The Act contains separate parts for England & Wales, and Scotland respectively.
In this section, reference is only made to the part dealing with England & Wales,
but the Scottish part contains corresponding provisions.
8
S.2(1) UCTA.
9
S.2(2) UCTA.
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obligations arising from the terms implied by the legislation on the sale10 or
11
liability incurred by that person for negligence or breach of contract, unless this
Where that person is not a
term is reasonable.17 UCTA also makes it impossible to use a secondary contract
consumer, an exclusion or limitation of liability for a breach of the same terms is
to exclude/restrict liability which could not be excluded/restricted under the main
supply
12
cannot be excluded against that person.
13
One
contract.18 Finally, to the extent that UCTA prevents the exclusion or limitation of
term which cannot be excluded irrespective of the type of contract is the implied
any liability (as set out above), it also prevents (a) subjecting the liability or its
permissible, provided that it satisfies the requirement of reasonableness.
14
term as to title.
enforcement to restrictive or onerous conditions; (b) excluding/restricting any
Perhaps the most potent provision in UCTA is s.3, which applies where one party
right or remedy in respect of the liability; (c) excluding/restricting rules of
is dealing as a consumer, or where one party deals on the other’s written standard
evidence or procedure.19
terms of business. In those circumstances, it is not possible for the business, or the
person whose standard terms are used, to restrict or exclude liability for his
The Reasonableness Test
breach of contract, unless such a term satisfies the requirement of
It was noted in the preceding outline of the main provisions of UCTA that many
15
Moreover, that person may also not (i) claim to be entitled to
terms will only then be effective if they satisfy the requirement of reasonableness.
perform substantially differently from what was reasonably expected of him, or
It is therefore appropriate to explain, briefly, how this test works. The key
(ii) not to perform some or all of the obligations under the contract.16
question in applying this test is whether the term at issue was a fair and reasonable
A further provision applies only to circumstances where a person is dealing as a
one to be included in the contract, having regard to the circumstances that were, or
consumer. This person cannot be required to indemnify another person for
ought reasonably to have been, in the contemplation of the parties when the
reasonableness.
contract was made.20 When the term at issue is one which seeks to exclude or limit
10
Sections 13 (description), 14(2) (satisfactory quality), 14(3) (fitness for
purpose) and 15 (correspondence with sample) of the Sale of Goods Act 1979, as
amended.
11
The sections in the Supply of Goods (Implied Terms) Act 1973 and the Supply
of Goods and Services Act 1982 corresponding with ss.13, 14 and 15 in the Sale
of Goods Act 1979. The wording of these sections is almost identical.
12
Sections 6(2) and 7(2) UCTA.
13
Sections 6(3) and 7(3) UCTA.
14
This term is implied by s.12 of the Sale of Goods Act 1979, as well as s.8 of the
1973 Act, and s.2 of the 1982 Act.
15
S.3(1)(a) UCTA.
16
S.3(1)(b) UCTA.
liability for a breach of the implied terms in contracts for the sale or supply of
goods,21 a list of factors provided in Schedule 2 UCTA must be considered in
applying the reasonableness test. Although these criteria are, strictly speaking,
limited to the application of the reasonableness test in the context of ss.6 and 7
17
S.4 UCTA.
S.10 UCTA.
19
S.13 UCTA.
20
S.11(1) UCTA.
18
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UCTA, the courts have also referred to this list when considering the
(a) the resources the person in whose favour the clause operates could
reasonableness of other exclusion/limitation clauses. The matters listed in
expect to have available for the purpose of meeting the liability
(b) how far it was open to that person to cover himself by insurance.22
Schedule 2 are the following:
(i)
(ii)
the relative bargaining strength of the parties, taking into account
Finally, it should be noted that the burden of establishing that a particular term
alternative means by which the customer’s requirements could have
satisfies the requirement of reasonableness is on the person who seeks to claim
been met
that it is reasonable. In effect, therefore, it is possible to raise the unreasonableness
whether the customer received an inducement to agree to the term,
of a clause by way of defence, and then it is for the other party to show that the
or whether he had the opportunity of entering into a similar contract
clause is, in fact, reasonable.
with other persons but without having to accept a similar term
(iii)
(iv)
(v)
whether the customer knew, or ought reasonably to have known of
Dealing as Consumer
the existence and extent of the term
As explained earlier, some provisions operate differently where on person is
where the term excludes or restricts relevant liability if some
“dealing as a consumer”. This is defined in s.12 UCTA. A person, which may be
condition was not complied with, whether it was reasonable at the
an individual or a legal person, is a consumer if (i) he does not make a contract in
time of contract to expect that compliance would be practicable
the course of a business (nor holds himself out as doing so), (ii) the other party
whether goods were manufactured, processed or adapted to the
does make the contract in the course of a business, and (iii) where the person is
special order of the consumer.
not an individual, and the contract is for the sale or supply of goods, the goods
must be of a type ordinarily supplied for private use or consumption.23 The
It is further provided that, in considering whether a term by which a contracting
interesting aspect of this definition is that it may apply to businesses, including
party seeks to limit its liability to a specified sum of money satisfies the
companies, as confirmed by the Court of Appeal in R & B Customers Brokers Ltd
requirement of reasonableness, the following is relevant:
22
S.11(4) UCTA.
The third criterion was restricted to apply only to non-individuals, i.e., legal
persons, by the Sale and Supply of Goods to Consumers Regulations 2002, which
implement Directive 99/44/EC on Consumer Sales.
23
21
As per ss.6 and 7 UCTA, mentioned above.
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v UDT Finance Ltd.24 Thus, a contract will only then be made “in the course of a
the latter, terms are not “blacklisted”, i.e., automatically ineffective, but always
business” if the transaction in question is either an integral part of the business, or
subject to the unfairness test, whereas some terms are automatically unfair under
25
if there was a degree of regularity of similar transactions. A business involved in
UCTA.
a one-off, or very occasional, contract could therefore be “dealing as a consumer”
for the purposes of s.12 UCTA. The Law Commission has proposed to amend this
Challenges posed by the implementation27
definition to limit the definition of “consumer” to individuals acting for purposes
There were several problems which were posed by the need to implement the
26
unrelated to their business.
Directive. It will be seen below that the notion of “good faith” has given rise to
considerable debate, although there is now an authoritative decision by the House
THE TRANSPOSITION OF THE DIRECTIVE INTO DOMESTIC LAW
of Lords which offers helpful guidance on how this concept should be interpreted.
The foregoing discussion has provided an outline of the legal framework for
Great difficulties were also caused by the requirement in Art.7 of the Directive,
controlling unfair contract terms that existed before the Unfair Contract Terms
which requires Member States to introduce provisions to ensure that terms could
Directive was adopted. It may be noted at this point that no change was made to
be challenged by organisations with a legitimate interest in protecting consumers.
these existing provisions as part of the implementation process. Consequently, the
The Department of Trade and Industry (DTI), the government department
Unfair Contract Terms Regulations 1999 operate alongside the Unfair Contract
responsible for the implementation of the Directive, thought that there was no
Terms Act 1977, and the existing common law rules. Unsurprisingly, this has
need to implement this provision at all, because such a procedure was unknown to
been widely criticised, because the overlap in the legislation has the effect of
domestic law and therefore could not be implemented. It was persuaded that this
subjecting some terms to multiple layers of control, with potentially different
position was untenable, and it therefore initially empowered what was then the
outcomes. The key difference between UCTA and the Regulations is that under
Director-General of Fair Trading28 to challenge unfair terms. The Consumers’
Association was unhappy with its exclusion from any rights to challenge unfair
24
[1988] 1 W.L.R. 321.
Note the different interpretation given to the phrase “in the course of a
business” in the context of s.14(2) of the Sale of Goods Act 1979 (implied term
that goods must be of satisfactory quality) in Stevenson v Rogers [1999] 1 All ER
613. In Feldaroll Foundry plc v Hermes Leasing (London) Ltd [2004] EWCA Civ
747 (11 May 2004), a case on s.12 UCTA, the Court of Appeal confirmed R&B
Customs Brokers. See Twigg-Flesner (2005) 112 Law Quarterly Review 41; Hall
(2004) 13(2) Nottingham Law Journal 62.
26
Law Commission, Unfair Contract Terms (2005), paras 3.22 and 3.24.
25
27
For a discussion of the problems with the 1994 Regulations, see R.Bradgate,
“Experience in the United Kingdom” in The Integration of Directive 93/13/EEC
Into the National Legal Systems (European Commission, 1999), available at
http://europa.eu.int/comm/consumers/cons_int/safe_shop/unf_cont_terms/event29
_en.htm [accessed 6 June 2005].
28
Now the Office of Fair Trading, following the entry into force of the Enterprise
Act 2002.
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terms under the Regulations, and it brought a challenge to the UK’s
profession, whether publicly owned or privately owned”.32 It should, however, be
implementation of Art.7. A reference to the European Court of Justice was made,
noted that, following the implementation of the Directive on the Distance Selling
but before the ECJ had to decide this question, new Regulations were adopted
of Financial Services,33 the definition of “seller or supplier” is widened for the
which significantly altered the implementation of Art.7. The current procedure is
purposes of Regulations 4(1)34 and 8(1)35 to include a “distance supplier” of
discussed further below.
financial services, or an intermediary, as defined in the Financial Services
(Distance Marketing) Regulations 2004. The English Court of Appeal was
recently asked to consider whether the definitions of “consumer” and “seller or
Scope and Substance of the Implementing Regulations
supplier” extended to public authorities, such as a council, providing housing to
Consumer contracts
tenants.36 In drawing on the interpretation given to the concept of an
It was pointed out earlier that the Directive is now implemented in the Unfair
“undertaking” in the field of competition law, the Court held that the council’s
Terms in Consumer Contracts Regulations 1999 (“UTCCR”).29 This is the second
activities as a provider of housing did amount to a professional activity, rather
measure implementing the Directive, and the text of the present UTCCR is very
than being an activity pursued simply as a statutory obligation.
similar to that of the Directive. Indeed, the wording of the indicative list of unfair
terms is exactly the same. Like the Directive, the UTCCR apply to contracts
Non-negotiated terms
concluded between a consumer and a seller or supplier.
As with the Directive,37 the UTCCR apply only to terms which have not been
A consumer is defined as “any natural person who, in contracts covered by these
individually negotiated.38 A term will always be regarded as not individually
Regulations, is acting for purposes which are outside his trade, business or
negotiated where it has been drafted in advance, and the consumer has been
30
profession”,
31
which is identical to the Directive’s definition. The same is true
unable to influence the substance of the term.39 Moreover, even where a particular
with regard to the definition of “seller or supplier”, which appears in both the
UTCCR and Directive as “any natural or legal person who, in contracts covered
by these Regulations, is acting for purposes relating to his trade, business, or
29
SI 1999/2083.
Reg.3(1) UTCCR.
31
Art.2(b).
30
32
Reg.3(1) UTCCR; Art.2(c).
Directive 2002/65/EC
34
Reg.4(1) specifies the contracts to which the UTCCR apply;
35
Reg.8(1) sets out the consequences of finding that a particular term is unfair.
36
The London Borough of Newham v Kathu, Zeb and Iqbal, and the Office of Fair
Trading (Interested Party) [2004] EWCA Civ 55 (24 February 2004).
37
Arts.3(1) and (2).
38
Reg.5(1).
39
Reg.5(2).
33
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term, or some parts of a contract have been individually negotiated, the UTCCR
where the bank had obtained a court judgment against the consumer. Such a
will still apply to the rest of the contract if an overall assessment of the contract
judgment would require that the loan and any interest which had accrued at the
40
The burden of showing
time of the judgment had to be repaid in instalments set by the court. The effect of
that a term was individually negotiated falls on the seller or supplier claiming that
the term was that further interest would built up whilst the consumer was repaying
indicates that it is a pre-formulated standard contract.
41
this is the case.
the loan and existing interest in accordance with the court order. Before the House
of Lords could consider the fairness of this term, it had to consider whether this
Exclusion of core terms and others from scope of fairness test
fell within the exception for “core terms”; in other words, was it a term
As well as negotiated terms, so-called “core terms” also fall outside the scope of
concerning the adequacy of the price or remuneration as against the goods or
42
the fairness test. Thus, as in the Directive, the assessment of fairness of a term
services sold or supplied? It was held that a term in a loan agreement specifying
shall not relate to the definition of the subject matter of the contract, or the
the interest to be charged in the course of repaying the loan was, indeed, such a
adequacy of the price or remuneration as against the goods or services supplied. A
term; however, the term at issue in this case did not concern interest that would be
number of court case have considered when a particular term may be regarded as a
charged whilst the loan was being repaid in accordance with the agreement, but
term defining the “price or remuneration” for which goods or services are
only took effect once a consumer had defaulted, and a judgment had been
supplied. Thus, in Director-General of Fair Trading v First National Bank,43 the
obtained. The term was therefore not exempt from the application of the fairness
44
only House of Lords Decision on the Regulations so far, the DGFT had objected
test.45 This approach was followed in Bairstow Eves London Central Limited v (1)
to a term in a standard-form credit agreement which specified that where a
Smith, (2) Stacy Hill and Darlingtons (a firm).46 This case involved an estate
consumer had defaulted on his obligations to repay the credit in accordance with
agency agreement, under which the estate agents would charge a commission on
the agreement, the bank was entitled to full repayment of the loan and any interest
the sale of a flat. This agreement referred to a standard rate of commission of 3%,
outstanding, and that interest would continue to accrue on the loan until it had
but also provided for an “early payment discounted commission rate” of 1.5%.
been paid off in full. Crucially, the obligation to pay interest was to extend even
The discounted rate was available for 10 days after the sale of the flat had been
completed, after which the estate agent had the option to demand the standard
40
Reg.5(3).
Reg.5(4).
42
Art.4(2).
43
[2001] UKHL 52; [2001] 1 All ER 97, HL.
44
In fact, this case involved the 1994 Regulations, but the decision can be applied
to the current Regulations.
41
rate. The solicitors acting for the vendors of the flat arranged for payment to be
made on the day of completion, but failed to pay the correct amount (based on the
45
The application of the fairness test in this case is considered further below.
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1.5% commission rate). After some time, the estate agents demanded payment of
invoke the insurance policy. It was accepted that the term specifying exclusions
the full 3% commission rate and commenced proceedings in the country court. At
from the insurance policy was a “core term” as it formed part of the specification
that point, it was argued that the term was unfair, with which the court agreed.
of the risks covered by the policy,49 but it was also argued that the particular
The estate agents did not dispute the finding of unfairness, but argued that the
exclusion was insufficiently clear and precise to include a jet-ski within the
term came within the “core terms” exception. The High Court held that only the
meaning of “motorised waterborne craft”. The decision turned on the meaning of
term providing for the 1.5% rate was a core term, whereas the term specifying the
craft, and, having considered the ordinary meaning of the term as used in
“standard commission” rate was not. The court observed that in the ordinary
dictionaries and other documents, the court held that it complied with the
course of things, the 1.5% rate would be charged, and the 3% rate would only then
language required in Reg.6(2), and was therefore not subject to the application of
be applied where there had been a delay in paying the commission. As it is
the fairness test.
common practice to settle all sums due on the completion date, the estate agents
would usually only receive the lower rate of commission; consequently, the higher
Scope and application of the unfairness test
rate would only be applicable where the consumer had been in default.
The test of unfairness also mirrors the wording in the Directive.50 Thus, a term is
unfair “if, contrary to the requirement of good faith, it causes a significant
The “core terms” exception is subject to the proviso that these terms are presented
imbalance in the parties’ rights and obligations under the contract, to the detriment
Consequently, a core term which is not in such
of the consumer”.51 It is further provided that, in assessing whether a term is
language would be subject to the assessment of fairness. The UK courts have
unfair, account should be taken of “the nature of the goods or services for which
hitherto not had to deal with circumstances where such a term failed the
the contract was concluded and by referring, at the time of conclusion of the
in plain intelligible language.
47
requirement of plain and intelligible language, although the issue was raised in
Bankers Insurance Company Ltd v South and Gardner.48 This case concerned a
travel insurance policy, which excluded from its scope accidents caused by the
insured consumer whilst in possession of, inter alia, “motorised waterborne craft”.
The insured had seriously injured another person with a jet-ski and sought to
46
[2004] ECHC 263 QB (20 February 2004).
Reg.6(2).
48
[2003] EWHC 380 (QB) (7 March 2003).
47
49
There is a risk that such an interpretation, if taken outside the context of
insurance policies, could produce a wide interpretation of the “core terms”
exclusion which, it is submitted, should be rejected. The Office of Fair Trading at
one stage seemed in danger of falling into this trap when it suggested that the
conditions of a consumer guarantee were “likely” to fall within this exception and
therefore not be subject to review (Office of Fair Trading, Unfair Contract Terms
Bulletin 2 (1996), p.30). See further Twigg-Flesner, Consumer Product
Guarantees (Ashgate, 2003) pp. 193/4.
50
Art.3(2).
51
Reg.5(1).
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contract, to all the circumstances attending the conclusion of the contract and to
whereas the Court of Appeal decided that it was not.55 For both courts, the
all the other terms of the contract or of another contract on which it is
decision turned on the question of whether the obligation to pay post-judgment
52
dependent.” It should be noted that this is expressed to be without prejudice to
interest was unfair to the consumer. In the House of Lords, this issue was, to an
Regulation 12, which deals with the public enforcement of the Regulations by the
extent, side-stepped. It was observed that the legislative framework on consumer
Office of Fair Trading and other bodies (see below). As such challenges will not
credit agreements56 did not permit the County Court to award statutory interest on
occur in the context of a specific consumer contract, the circumstances at the time
a judgment debt for agreements subject to the Consumer Credit Act 1974. A
of concluding the contract will obviously be of very limited relevance. In addition
lender could therefore only obtain additional interest after a judgment if a term in
to these criteria, the indicative and non-exhaustive list of unfair terms in Schedule
the loan agreement so provides. Although the inclusion of such a term and its
2 UTCCR (which is identical to that in the Directive) can, and often is, be
consequences would be surprising to a consumer, and would have potentially very
considered when applying the fairness test.
significant financial consequences, it was nevertheless not an unfair term. The
It will come as no surprise that the inclusion of the “good faith” test gave rise to
House of Lords took this view because there was nothing in the legislative
an intense debate, both among academics and practitioners, about the meaning and
framework on consumer credit that would point towards a prohibition of an
scope of this notion. In particular, it has been asked whether “good faith” and
agreement to charge further interest after a judgment. The real problem was
“significant imbalance” are two separate limbs which combine procedural and
therefore a flaw in the legislation, and not the term itself.
substantive elements, or simply elements of one general test of unfairness. Court
In the course of their speeches, several of the Law Lords offered their
decisions applying this test were therefore eagerly awaited.
observations on the interpretation of the “good faith” notion. Lord Bingham,
The leading case on the application of the fairness test is Director-General of Fair
Trading v First National Bank, aspects of which have already been discussed.
53
echoing his observations in Interfoto Library Ltd v Stiletto Visual Programmes
Ltd,57 said that good faith involves
This case concerned the fairness of a term by which a bank could charge further
interest on the outstanding part of a loan even after a court judgment regarding the
repayment of the loan had been given. In the lower courts, there had been a
divergence of opinion, with the High Court holding that the term was fair,54
52
Reg.6(2).
See above at X.
54
[2000] 1 W.L.R. 98.
53
55
[2000] 2 W.L.R. 1353, CA.
In particular, the County Courts (Interests of Judgment Debts) Order 1991.
57
[1989] Q.B. 433. He noted that good faith “does not simply mean that [parties]
should not deceive each other…; its effect is perhaps most aptly conveyed by such
metaphorical colloquialisms as ‘playing fair, ‘coming clean’ or ‘putting one’s
cards face upwards on the table’. It is in essence a principle of fair and open
dealing…” (at p.439).
56
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“… fair and open dealing. Openness requires that terms should be
imbalance in the parties’ obligations under the policy to the consumer’s detriment,
expressed fully, clearly and legibly, containing no concealed pitfalls or
and the term was therefore unfair.
traps. Appropriate prominence should be given to terms which might
operate disadvantageously to the customer. Fair dealing requires that a
In some instances, legislation provides that certain terms are always to be
supplier should not, whether deliberately or unconsciously, take
regarded as “unfair” under the UTCCR. For example, Regulation 5(6) UTCCR,
advantage of the consumer’s necessity, indigence, lack of experience,
added as part of the implementation of Directive 2002/65/EC on distance sales of
58
weak bargaining position…”
financial services, deems as unfair any term which states that a consumer has to
prove whether a distance supplier or intermediary, of financial services complied
Similarly, Lord Steyn emphasised that good faith was not merely a procedural
with all the obligations under the legislation implementing that Directive.61
requirement (requiring open dealing), but also a substantive one.59 Indeed, some
Furthermore, as noted above, UCTA 1977 also “black-lists” certain terms.
terms are inherently unfair and therefore always capable of being challenged
successfully.
Consequences of Unfairness
If a term is unfair, then it will not be binding on the consumer,62 although it will
In the later case of Bankers Insurance Company Ltd v South and Gardner, the
continue to bind the seller or supplier. However, if the contract is capable of
insurance policy also required that the insured consumer had to report in writing
continuing without the unfair term, then the unaffected terms remain binding on
as soon as reasonably possible full details of any incident which might result in a
both parties.63 It is not clear if a term which consists of several parts will be
claim under the insurance policy; moreover, any formal documentation relating to
ineffective against the consumer in its entirety, or whether it is only the unfair part
the claim had to be forwarded to the insurer immediately on receipt. Although
that is not binding. In Bankers Insurance Company, the judge thought that it was
there may be good reasons why it is important to provide such information
possible to declare a term unfair only to the extent that it denied recovery
quickly to the insurer, there was a risk that a consumer would lose his cover for
“whatever the consequences of the breach”, although this would seem to be an
transgressing procedurally.
60
In the courts view, this created a significant
incorrect application of the Regulation.
61
58
Paragraph [17] of the judgment.
Paragraph [36].
60
[2003] EWHC 380 at paragraph [34] .
59
See also the Unfair Arbitration Agreements (Specified Amount) Order 1999 (SI
1999/2167) creates a conclusive presumption that a requirement to use arbitration
is unfair where the amount in dispute is below £ 5,000.
62
Reg.8(1).
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It may be noted that the UTCCR do contain any provisions on compensation for
The Indicative List of Unfair Terms
losses incurred as a result of having relied on a term subsequently found to be
In applying the unfairness test, it is possible to have regard to the indicative list of
unfair, and such matters are left to the common law.
unfair terms, found in the Annex to the Directive and implemented verbatim in
Schedule 2 to the UTCCR. Indeed, the courts have tended to refer to the indicative
terms in considering whether terms are unfair, although have generally expressed
Transparency Requirement
their ultimate decision on the basis of the unfairness test in Regulation 5 itself.
64
As required by the Directive, the UTCCR also specify that any written term of a
65
The indicative list has been more useful for ex ante challenges to contract terms,
contract is expressed in plain, intelligible language. It may be noted in passing
i.e., where the unfairness of a particular term is not raised in the context of a
that the wording of the implementing legislation departs from the originating
specific case, but where steps are taken to prevent the continued use of unfair
provision in the Directive, referring simply to “any written term of a contract”,
terms in accordance with Regulations 10-15 UTCCR, which implement Article 7.
rather than “terms offered to the consumer in writing”, although this variation
These provisions are outlined in the following section.
does not produce a difference in the substance of the UK provision.
The indicative list is just that – it is a list of terms which may be unfair, but it is
If there is doubt about the meaning of a term, i.e., where it is ambiguous, then the
not inevitable that a term included in Schedule 2 will always be unfair. The list
meaning most favourable to the consumer prevails.66 As already pointed out, there
does not have the status of a black list, and it is perfectly possible that a term
is no specific sanction envisaged under the UTCCR for circumstances where a
found in the list may be regarded as fair in the circumstances of a particular case.
term does not comply with the requirement of transparency. It will be seen shortly
However, as has been pointed out above, there are specific terms which are
that it is nevertheless possible to take action under the mechanism adopted to
“blacklisted”, either under the UTCCR, or under UCTA, which continues in force.
implement Art.7 of the Directive to bring to an end the use of contract terms
which are not presented in plain, intelligible language.
Public enforcement
When the Directive was first implemented through the 1994 Regulations, Art.7 of
the Directive was implemented by giving the Director-General of Fair Trading the
power to challenge unfair terms.67 It must be conceded that this has generally been
63
Reg.8(2).
Art.5.
65
Reg.7(1).
66
Reg.7(2).
64
67
For an analysis of the OFT’s role in this context, see G.Howells, “Good Faith in
Consumer Contracting” in Brownsword, Hird and Howells (eds.), Good Faith in
Contract – Concept and Context (Ashgate, 1999).
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done successfully, as evidenced by the Unfair Contract Terms Bulletins,68
Under the current system,71 the Office of Fair Trading (OFT)72 retains a dominant
published at regular intervals by the Office of Fair Trading and containing details
role, although many more bodies, known as “qualifying bodies”, have been given
of those terms which have been changed or deleted following intervention by the
the power to challenge unfair terms. There are two types of qualifying bodies,
69
However, no other organisation with an interest in consumer protection
listed in the two parts of Schedule 1 to the UTCCR.73 Prior to amending the
was initially empowered to act under the UTCCR, and this eventually led the
Regulations, the Department of Trade and Industry proposed to specify the criteria
Consumers’ Association (now known as Which?) to challenge the correctness of
a “qualifying body” would have to meet in order to have locus standi to act under
the UK’s implementation of Article 7 of the Directive. This got as far as a
the UTCCR, rather than to list these by name, but in view of the additional hurdle
reference to the European Court of Justice, but this was abandoned when the 1999
that this would create for such bodies, it is probably better to have the Schedule
OFT.
70
Regulations came into effect.
which lists the “qualifying bodies” and can easily be amended through secondary
legislation.
68
There are now close to 30 such Bulletins, available via the Office of Fair
Trading Website at http://www.oft.gov.uk.
69
See further S.Bright, “Winning the battle against unfair contract terms” (2000)
20 Legal Studies 331 for a detailed account of the OFT’s activities.
70
Case C-82/96 R v Secretary of State for Trade and Industry ex parte (1) the
Consumers’ Association and (2) Which? Ltd (1996) O.J. C 145/3. See also
J.Dickie, “Article 7 of the Unfair Terms in Consumer Contracts Directive” (1996)
4 Consumer Law Journal 112.
71
It may be noted that there is some duplication in that action may also be taken
by enforcers under Part 8 of the Enterprise Act 2002. In this context, a breach of
any of the provisions of the UTCCR which harms the general interests of
consumers is regarded as a “Community Infringement”. This means that
Community enforcers (those included in the list published in the Official Journal
of the European Union) are able to challenge unfair terms, in accordance with the
procedure envisaged under the Injunctions Directive (98/27/EC). The first step
for an enforcer will be to consider accepting an undertaking by the trader
concerned to stop the infringement. If that is not successful, he may apply to a
court to obtain an enforcement order. This will require the trader concerned to
cease the infringement, and not to repeat it in the future. A breach of an
enforcement order can lead to further action being taken.
72
This has now formally replaced the Director-General of Fair Trading, although
the Director-General’s office had already been commonly known as the OFT
before it was formally created when the Enterprise Act 2002 came into effect.
73
Part One includes the various regulators, as well as Trading Standards
Departments; Part Two includes the Consumers’ Association. See C.TwiggFlesner, “The Unfair Terms in Consumer Contracts Regulations 1999: New
powers for the regulators and the Consumers’ Association” (2000) 10 Utilities
Law Review 41.
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As well as its own powers of challenge, the OFT is responsible for co-ordinating
has relied on undertakings or informal persuasion to bring about changes to
the activities of other qualifying bodies to prevent a multiplicity of challenges to a
contract terms to which it objected. If a qualifying body succeeds in obtaining an
particular term. A qualifying body which seeks to take action must inform the
undertaking, or if it has applied to a court for an injunction, then it must notify the
74
OFT of any proposed action.
OFT of this.81 The OFT is under a general obligation to publish details of
Both the OFT and any qualifying body have the power to apply to a court for an
undertakings given to it or to a qualifying body, as well as of any injunctions
injunction to prevent the use, or the recommendation to use, an unfair term which
obtained. This is done through the regular publication of its Unfair Contract
75
has been drawn up for general use in contracts concluded with consumers.
In
Terms Bulletins.
most instances, this will be the result of a complaint received by the OFT or
qualifying body. If a complaint is made to the OFT, it is under a duty to consider
the complaint, unless it appears to be frivolous or vexatious, or where a qualifying
Evaluation
body has notified the OFT that it will consider the complaint.76 Thus, complaints
can also be made to any of the qualifying bodies; so-called “Part One Qualifying
Reform Proposals
Bodies” will be under a duty to consider any complaints once they have notified
As noted previously, when the UTCCR were adopted, UCTA remained in force
the OFT of their agreement to do so.77 Both the OFT and Part One qualifying
and was not amended or repealed. The existing of these parallel regimes, and the
bodies have the power to demand that relevant documents, as well as information
overlap between them, has been the subject of considerable criticism. After much
about the use of such documents, which may be pre-formulated standard contracts
debate, the Department of Trade and Industry asked the Law Commission a few
to be used in dealings with consumers.78
years ago to work on consolidating the two pieces of legislation. The Law
Instead of applying for an injunction, the OFT or a qualifying body may instead
Commission presented its final report in February 2005.82 It would go far beyond
accept an undertaking from the person using or recommending the unfair term to
the scope of the present paper to offer a thorough analysis of the many proposals
79
80
amend the term, or stop its use altogether. Indeed, with one exception, the OFT
put forward by the Law Commission; instead, the following paragraphs will select
74
Reg.12(2).
Reg.12(1).
76
Reg.10(1).
77
Reg.11(2). Note that this does not apply to Part Two Qualifying Bodies.
78
Reg.13.
79
Reg.10(3) and Reg.11(2)
75
80
The litigation in Director-General of Fair Trading v First National Bank,
discussed in previous sections.
81
Reg.14.
82
This can be accessed at http://www.lawcom.gov.uk/files/lc292.pdf.
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those features which are particularly relevant with regard to the transposition of
the current “good faith” test with the proposed “fair and reasonable” test.83 There
the Unfair Contract Terms Directive.
would be a substantive set of guidelines to assist with the application of the new
The obvious change would be the introduction of a single Act of Parliament which
fairness test. In a further departure from the wording of the Directive, it is
would combine, and improve, the UTCCR and UCTA. The Law Commission
proposed to re-draft the indicative list of unfair terms to make it more intelligible
wants to ensure that the existing level of consumer protection is retained, which
to a domestic audience.
entails that terms which are currently black-listed will remain so under the new
With regard to the transparency requirement, i.e., the need for contract terms to be
law.
in plain and intelligible language, the new legislation would permit this to be
A significant change to the current position is that all terms in a consumer
taken into account in assessing whether a term satisfies the fairness test.
contract, with the exception of core terms, would be subject to the fairness test.
Consequently, a term which is not transparent could be regarded as unfair solely
This would include negotiated as well as non-negotiated terms, and would be a
for that reason.
significant step beyond the requirements of the Directive. It is further proposed
There would also be a specific provision requiring courts to raise the unfairness of
that the control of unfair terms would be available where the consumer is, in fact,
a contract term of their own motion, in line with the judgment in C-240/89
acting a seller or supplier of goods or services to a business.
Oceano Grupo Editorial SA v Rocio Murciano Quintero.84
There would be a further, and perhaps more controversial, departure from the
It may also be noted that there are plans to introduce specific protection for small
current implementation of the Directive. It is proposed that the general test of
businesses, which would be very similar to that for consumers.
fairness to be applied would be whether the term in question was a “fair and
At this stage, there is only a report, and it is not clear if the government will
reasonable” one. This would mean that there would be no mention of “good faith”
accept the report and introduce legislation to implement its recommendations. The
in the new legislation. This is bound to be controversial, especially in view of the
report was prepared at the request of the Department of Trade and Industry, and
ECJ’s decision in C-144/99 Commission v Netherlands [2001] ECR I-3541 which
seems to take the position that legislation implementing a Directive should reflect
the language of that Directive, although the full scope of this judgment remains
uncertain. The Law Commission does not regard this as an obstacle to replacing
83
Note H.Beale, “Unfair Terms in Contracts: Proposals for Reform in the UK”
(2004) 27 Journal of Consumer Policy 289, who, writing in a personal capacity,
argues that the decision does not mean that national language must use the
language of the Directive (at p.303). In view of the general position embodied in
Article 249 of the EC Treaty, this would seem to be the better view, although the
ramifications of Commission v Netherlands remain unclear.
84
[2000] ECR I-4941.
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there should be some interest in adopting the proposals it contains. However,
Parliamentary time is required and it will depend on governmental priorities.
15