The Unfair Contract Terms Act

The brief discusses the Unfair Contract Terms Act of 1977 (UK) and the EC Directive on Unfair Consumer Contracts (Council Directive 93/13EEC). It then compares the Domestic English Legislation with the Council Directive to determine to what extent it complies with the Directive. The brief will then further investigate the manner in which the Government implemented the Directive. The brief further discusses the Commission’s proposals to consolidate the legislation and possible future developments.

Introduction

The Unfair Contract Terms Act 1977 (“Act") was adopted by the UK on 26 October 1977. [1] The Act was adopted to impose limits on the extent to which liability for breach of contract, for negligence or other breach of duty can be avoided by means of contract terms. [2] 

The act only applies to liability for breach of obligations or duties arising from business activities by a person or other legal entity, from the occupation of premises for business purposes [3] and includes any government department. [4] 

The Act is therefore not limited to the relationship between seller or supplier and consumer but also applies to other contracts between parties. The Court of Appeal in UDT Finance [5] held that the Act applies to businesses including companies.

Section 12 of the Act [6] describes a consumer as someone who is not in business or holding himself out to be so engaged, the other party is acting in the course of its business and in relation to a contract governed by the laws relating to the sale of goods or hire purchaser agreements are of a type that is ordinarily supplied for private use.

Section 12(2) provides that a person who attends an auction for second hand goods and buys at the auction is not a consumer. [7] 

The party who claims that someone is not acting a consumer has the burden of proof to show that the other is not a consumer. [8] 

The Council Directive on Unfair Terms in Consumer Contracts 93/13/EEC

The Council Directive on Unfair Terms in Consumer Contracts 93/13/EEC (‘Directive") was adopted on 5 April 1993. [9] The EC adopted the Directive to progressively establish the Internal Market. [10] The Internal Market does not have any internal borders to ensure that people, goods, capital and services can move freely between member states. [11] There were many disparities between the domestic legislation relating to contracts between suppliers and consumers of member states. [12] As a result of the disparities consumers were not sure of their rights when they enter into contracts with suppliers which in turn inhibited the free flow of goods and services between member states. [13] 

The Council adopted the Directive to ensure that uniform rules of law exist to regulate unfair contract terms. [14] The Directive does not apply to employment, contracts relating to succession rights, contracts relating to rights under family law and contracts relating to the incorporation and organization of companies or partnership agreements. [15] 

Article 2(b) and (c) of the directive provide that a consumer means a natural person who is acting for the purposes are outside his trade, business or profession whilst the seller or supplier is anyone who is acting for purposes relating to his trade. [16] 

A contract term shall be regarded us an unfair contract if it has not been individually negotiated and it leads to a significant imbalance in the rights and obligations of the parties as contained in the contract. The imbalance must be to the detriment of the consumer. The Directive further provides that such terms are contrary to the requirement of good faith. [17] 

Contract terms will not be regarded as being individually negotiated if it has been drafted in advance and the consumer did not have any control over the outcome of the terms. [18] 

The Directive imports the requirement of good faith and provides that the supplier may satisfy the requirement if he acts fairly and equitably with the other party whose legitimate interests he has to take into account. [19] 

The Directive provides for minimum protection and the member states are at liberty to provide for higher levels of protection. [20] 

The Unfair Terms in Consumer Contracts Regulations

The Unfair Terms in Consumer Contracts Regulations (“Regulations") came into force on 1 October 1999. [21] Section 2 of the Regulations repeals The Unfair Terms in Consumer Contracts Regulation 1994. [22] 

The Regulations implement the terms of the directive in English law. [23] 

The effect of the Regulations is to create a regime that is separate from the Unfair Contract Terms Act. [24] Lawson argues that when a term in a contract is disputed its validity must be determined against the Act and the Regulations [25] . Although the Act and the Regulations overlap in many areas [26] , they each have different coverage.

The Act applies to exclusion clauses in consumer and ordinary business contracts whilst the Regulations only deal with terms in contracts with consumers. [27] Whilst the Regulations only apply to contract terms that have not been negotiated, the Act applies to negotiated contracts too. [28] The Act applies to exclusion clauses contained in notices whilst the Regulations do not apply to such exclusion clauses. [29] The Regulations are not limited to exclusion clauses whilst the Act is thus limited. [30] 

Lawson argues that oral contracts will be covered by the Regulations. [31] Private contracts are excluded from the Regulations. The exclusion of contracts of employment, succession rights, family law and relating to the incorporation and organisation of companies and partnership agreements as contained in the 1994 Regulations has not been repeated in the Regulations but Lawson argues that they are excluded by implication so long as the fundamental requirement is met. [32] 

The Regulations provide that a term in a contract that has not been individually negotiated may in certain circumstances be judged unfair in which event the unfair term will not be binding on the consumer. [33] If the offending term can be severed from the rest of the contract and the contract can continue without it, the contract will still be enforceable but without the offending term. [34] 

Bradgate [35] says that the ambit of the Act is in some ways wider than the Regulations. The Regulations only apply to standard pre-drafted terms in consumer contracts and afford no protection to businesses or to consumers dealing on negotiated terms of the contract. [36] 

Some exclusions of liability are made completely ineffective by the Act, whilst the Regulations test the terms of the contract against what is deemed to be fair and the exclusion may still be enforceable if they are valid.

However, a term in a contract that has been made wholly ineffective by the Act cannot be resurrected by the Regulations on the basis that it has passed the test of fairness as provided for in the Regulations.

On the proviso that both the Act and the Regulations apply to the contract, one will have to first measure the excluded term against the Act and if it passes the provisions of the Act then one needs to measure it for fairness against the Regulations.

Bradgate points out that although the Regulations are more in line with the provisions of the directive than the 1994 regulations there are still a number of differences. [37] A litigant cannot rely on the Directive in a domestic case and if the Regulations cannot be interpreted consistently with the Directive, the party who seeks to rely on the Directive will fail. This does not mean that such party is without remedy. He or she may be able to recover compensation from the UK government for breaching its obligations under the Treaty establishing the European Community to implement the Directive pursuant to the principle contained in the judgement of Francovich. [38] 

Twigg-Flesner [39] notes that the courts have not yet had the opportunity to investigate whether the existence of the Regulations would affect some of the common law principles to a consumer contract.

The House of Lords confirmed in Kathum [40] that the “consumer" and “supplier and seller" included public bodies that are required to provide housing to tenants. The court interpreted the Regulations against the backdrop of the European character of the Directive.

The requirement of good faith in the Law of Contract is not part of English Law and required the courts to determine what good faith is. In Director General of fair Trading [41] the House of Lords had the opportunity to consider the application of the fairness test. At par 17 the court held that the member states do not have a common concept of fairness or good faith and it is required that each member applies the test based on its pre-existing law.

The court then goes on to say that significant imbalance will exist if a term is so weighted in favour of the supplier as to tilt their rights and obligations significantly in the supplier’s favour.

The requirement of good faith involves fair and open dealing. [42] 

Recommendations

The fact that there are two parallel systems and that the Unfair Contracts Act 1977 has not been repealed when the Regulations imported the Directive has been criticised. [43] 

The Law Commission investigated the feasibility of consolidating the two pieces of legislation. The report is known as the Unfair Terms in Contracts. [44] 

The most obvious recommendation is that the two pieces of legislation be consolidated. The Commission wishes to retain the current high level of consumer protection and the blacklisted terms will in all probability remain. [45] 

Another recommendation is that all terms as opposed to negotiated terms will be subject to the fairness test. This means that the proposed legislation will afford better protection than what is required under the Directive. [46] 

The Commission further proposed that the new legislation not refer to good faith but that the test for fairness should be whether the term was fair and reasonable. [47] Twigg-Flesner [48] is of the opinion that this departure could lead to the ECJ finding that the words of the Directive must be followed when it is implemented in Domestic Law and refers to the Netherlands [49] judgement as authority for the statement.

The Commission further proposes to redraft the indicative list of unfair terms to make them more understandable. [50] 

The Commission further provides that if a term is not transparent and drafted in plain language it will be an unfair term.

An important recommendation by the Commission is that the court should be able to raise the issue of unfairness mero motu pursuant to the judgement in Quintero. [51] 

The Commission further proposed that small businesses should be afforded similar protection as an individual consumer. [52] 

The European Commission has published the Green Paper on the Review of the Consumer Acquis in terms whereof the EC proposes more changes to the Directive.

Conclusion

The parallel legislation in the area of unfair contract terms is undesirable. It creates confusion amongst consumer. It is recommended that the proposals of the Commission be implemented to consolidate the legislation.

The fact that the EC is also in the process of proposing more amendments to the Directive means that the UK may fall further behind and may have to adopt a new Regulation to comply with the proposals of the EC once the amendments have been adopted. The preferred route is for the Government to accept the proposals of the Commission and to make amendments to the single legislation as and when required.

Bibliography

Books

Lawson R,. Exclusion Clauses and Unfair Contract Terms (8 Edition) (2005) Sweet & Maxwell

Bradgate R., & White F., Commercial Law (2007) Oxford University Press

Cases

Commission v Netherlands C-144/99 available at <http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=en&numdoc=61999J0144> as at 11 January 2010

Director General of Fair Trading v First National Bank [2002] 1 All ER 97, [2002] 1 Lloyd's Rep 489, [2001] 3 WLR 1297, [2002] 1 LLR 489, [2001] 2 All ER (Comm) 1000, [2002] 1 AC 481, [2001] UKHL 52, [2002] ECC 22 available at <http://www.bailii.org/uk/cases/UKHL/2001/52.html> as at 11 January 2010

Francovich and Bonifaci v Italy [1991] EUECJ C-6/90, [1991] ECR I-5357, [1993] 2 CMLR 66, [1992] IRLR 84, [1995] ICR 722, Case C-6/90 available at <http://www.bailii.org/eu/cases/EUECJ/1991/C690.html> as at 10 January 2010

Oceano Grupo Editorial & Quintero v Salvat Editores & Others [2000] ECR I-4941, [2000] EUECJ C-240/98, [2002] 1 CMLR 43 available at <http://www.bailii.org/eu/cases/EUECJ/2000/C24098.html> as at 11 January 2010

R &B Customs Brokers Ltd v UDT Finance Ltd [1988] 1 All ER 847

The London Borough of Newham v Khatun & Others [2004] EWCA Civ 55, [2004] NPC 28, [2004] HLR 29, [2004] BLGR 696, [2005] QB 37, [2004] 3 WLR 417, [2004] Eu LR 628 available at <http://www.bailii.org/ew/cases/EWCA/Civ/2004/55.html> as at 11 January 2010