Unfair Terms in Consumer Contract Regulations

The Unfair Terms in Consumer Contract Regulations 1999 is an upgrade of an earlier law of the same title that was passed by the United Kingdom to comply with a European Economic Community directive. The present UTCCR law has additional features not found in the earlier version, among them, an enforcement regime of the terms and provisions of the directive and a fairness test. Between the two features, it is the latter that has stirred controversies. This is, perhaps, largely attributable to the fact that the English judicial system is not very familiar with a general standard form of fairness for contracts and mostly leave determination of fairness and equity in contracts to courts, which for its part rely on piecemeal common law general doctrines embodied in various statutes and case law. The main contention against the UTCCR’s fairness test is that it is both unwelcome and unnecessary because not only does it lead to confusion but is also redundant in the face of the existence of other fairness tests subtly incorporated in such sources as the law of misrepresentation, the UCTA 1977, and the duress and inequality of bargaining power doctrines.

On April 1993, the EEC issued Directive 93/13/EEC. This directive regulated unfair contract terms and provided the means of controlling them, stipulating for member states to adapt its provisions before 1994 ends. The EEC allows member states to adopt directives in the way they see fit and suitable to their domestic legislations condition, but generally, the member states either transpose the Directive domestically or incorporate it in its domestic legislation. For its part, UK had passed a previous legislation in 1977 with a fairness-regime theme, similar to the aforesaid directive; hence, UK had to pass a new piece of legislation for that purpose. Thus, UK passed the UTCCR in 1994, later updated it to the Unfair Terms in Consumer Contracts Regulations 1999. It differed from an earlier law, the 1977 Unfair Contract Terms Act, which was passed after the publication of Law Commissions Reports in 1969 and 1975, in scope of application and some other points. UCTA governs and regulates the terms that involve the duties and liabilities of traders to consumers also known as the exemption clauses, whilst the UTCCR regulates not only those terms but also terms affecting the obligations and liabilities of consumers to traders.1

The move to amend the UTCCR was provoked by an action of consumer organisations against the UK government in the High Court, later elevated to the European Court of Justice. The group alleged that the government was unable to meet its Community obligations because of its failure to provide “adequate and effective procedures to prevent the use of unfair terms.” This was because the UCCTR merely assigned the determination of these aspects to the Director-General of Fair Trading, which exercises injunction powers to force the removal or prevention of an unfair term, without providing for non-legal measures that can be easily availed of by consumers. When the Labour Party took over the helm of the government, one of the things it did was promise the amendment of the UCCTR to fully comply with the Directive, prompting the proponents to withdraw their case in court.2

The new UTCCR provided for an enforcement regime of the terms and provisions of the Directive as well as bring the domestic law closer to the wording and intent of the Directive. First, the power that was previously lodged in the Director-General of Fair Trading is now subsumed by the Office of Fair Trading (OFT) and other qualifying bodies,

1 Fairness in Consumer Contracts: The Case of Unfair Terms, 2edn, p. 75-76

2 Micklitz, Hans-W, p. 355-356

which makes possible the removal of contentious terms from consumer forms and contracts through mere negotiations without resorting to cumbersome legal process. The shift of functions made the complaint processes transparent through bulletins issued by the OFT detailing the status of complaints and the processes taken to resolve them. The shift to the OFT and other qualifying bodies made the UTCCR more acceptable and convenient to consumers who do not, as a usual course, turn to litigation to resolve consumer issues.3

The new UTCCR likewise introduced the concept of the “fairness test” in section 5(1). It provides that “A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.” As can be seen from the cited provision, the fairness test has two elements: lack of good faith as a prerequisite, and a resulting imbalance, which should be considerable, between the rights as well as obligations of the parties resulting in the disadvantage or injury to the consumer. In the case of Director General of Fair Trading v First National Bank 4, the court cited three elements making a separate count for “detriment of the consumer” to stress the idea that it is the consumer that is injured in any significant imbalance of the terms. The elements of the fairness test provide inference to both substantive and procedural unfairness with “significant imbalance” leading to substantive unfairness and “good faith” reflecting procedural imbalance, although in practice the two

3 The Law of Contract, 6th edn, p.258

4 [2002] 1 All ER 97

types of unfairness in the context of the UTCCR are actually inseparable and overlapping.5

The introduction of the unfairness test to the new UTCCR is, however, viewed with pessimism by some quarters, some calling it unwelcome and unnecessary. There is, for example, concern that the introduction of the fairness test into the English justice system could propagate uncertainty in the law because of the existence of many other fairness tests available in the English common law. The redundancy of the UTCCR fairness test can be gleaned from the existence of similar tests in the English common law that replete the judicial system with the necessary tools to determine the existence or absence of fairness.

The element of good faith in the fairness test is viewed by certain quarters with suspicion because a general doctrine of good faith is contrary to the widely observed judicial pragmatism in determining fairness in contract terms. The common view is that a general standard of good faith will not prosper in the English judicial system because of the aversion of judges to adapt to one, relying instead on their own practical appreciation of the facts of the case. In addition, there is a difficulty in cornering the exact essence of the terms into words. Even authors Adams and Brownsword articulated this concern when they remarked:

For, what precisely does good faith means? Does it simply mean that a

party must always act with a clear conscience or are there some external

standards of good faith dealing? If the latter, are these external standards

set by a particular commercial community, or is there a critical moral

5 The Law of Contract, 6th edn, p. 271-272

benchmark for good faith? Moreover, where are the boundaries of a

good faith requirement to be drawn? 6

An example of the court’s aversion to any introduction of a general standard of good faith as contemplated in the UTCCR’s fairness test is illustrated in the 1992 case of Walford v Miles. 7 The case involves the sale of a business in which there was a pending negotiation of sellers and buyers. It was agreed between the parties during the negotiations that the sellers, in the meantime before a final decision has been reached, would not negotiate with any other parties. The sellers breached that agreement and held talks with another party. In court, the first purchasers pointed out that there was a collateral agreement on the side that the sellers must act in good faith by not entering into negotiations with other parties. This was rejected by the court on the ground that it was repulsive to the “adversarial position of the parties in pre-contractual negotiations”.8

The courts have also been known to have a tendency to steer clear from pronouncing the fairness or unfairness of terms of contracts. This observation is illustrated by Lord Denning’s reluctance to interfere in the agreed terms of contracts in the case of Lloyds Bank v Bundy.9 Albeit the court ruled in favor of the injured party on the ground of inequality of bargaining power, Lord Denning, nevertheless, made it clear his general distaste for court imposition over the freedom of contracts. He said:

6 Contract Law in Perspective, 4th edn, p. 143-144

7 [1992] 2 AC 128

8 Contract Law in Perspective, 4th edn, p. 143-144

9 [1975] QB 326

Now let me say at once that in the vast majority of cases a customer

who signs a bank guarantee or a charge cannot get out of it. No bargain

will be upset which is the result of the ordinary interplay of forces.

There are many hard cases which are caught by this rule. Take the case

of the poor man who is homeless. He agrees to pay a high rent to his

landlord just to get a roof over his head. The common law will not

interfere. It is left to Parliament. Next take the case of the borrower

in urgent need of money. He borrows it from the bank at a high rate

of interest and it is guaranteed by a friend. The guarantor gives his

bond and gets nothing in return. The common law will not interfere.10

As earlier discussed, UK passed the UCTA in 1977, well way ahead of the UTCCR. Although the two laws have definitive differences, they likewise overlap in certain aspects. It is the overlapping of the said laws that has the potential to create uncertainty in the English law. The UCTA itself, unlike the UTCCR, does not essay a specific unfairness test, but nevertheless provides for fairness standards through the so-called default remedies of benchmarks of fairness or reasonableness. These benchmarks can be gleaned from the type of terms that are regulated and governed by UCTA and these are the terms in contracts that generally exclude or restrict different types of liabilities such as liabilities for negligence, breach of contract, breach of implied terms as to title, description, quality, and fitness relative to sale and supply of goods contracts, and for misrepresentation. Proof that would point to the exclusion or restriction, in the contract, of liabilities in the aforesaid necessarily

10 Consumer Protection Law, 2nd edn, p.263

places the terms within the purview of the UCTA.11 The UCTA fairness test under the reasonable benchmark of default remedies point to a broader assessment of what is fair as opposed to the good faith doctrine of the UTCCR. In this sense, there is a possibility of overlap.

The law of misrepresentation likewise offers some kind of unfairness test that has similarities to that of the UTCCR. Misrepresentation is defined as “a false statement of fact (not of law or a mere expression of opinion), made by one party to the other before the contract, and made with a view to inducing the other party to enter into it”.12 Misrepresentation in contracts is governed by the Misrepresentation Act 1967. The law specifically regulates terms that restrict or exclude liabilities for misrepresentation and voids the same unless proven that they were entered into fairly and reasonably vis-à-vis the conditions existing at the time the contract was entered into and taking into account the circumstances known or should have been known to the parties.13

Two other categories by which a similar fairness test is employed by courts on terms of contracts found to be iniquitous are the doctrines held in common law cases such as Lloyds Bank v Bundy 14 on inequality of bargaining power and duress. As earlier discussed, the court ruled in Lloyds that there was inequality of bargaining power and hence, decided the case in favor of the complainant. In that case, a man guaranteed his own farmhouse to bail out his son whose business was tottering at the edge of bankruptcy. When the business

11 Fairness in Consumer Contracts: The Case of Unfair Terms, p.119-120

12 Mead, Larry et al, p.58

13 Mead, Larry et al, p.72

14 [1975] QB 326

did not recover, he agreed to raise the guarantee without being informed that the business was in a really serious condition. When the company totally collapsed, his farmhouse was foreclosed. The court held that the contract was voidable because of the uneven balance of power brought about by the lack of independent advice to the part of the father.

Yet, there are observers who see the advantage of adopting a general standard of fairness test such as that of the UTCCR and its generally-textured “good faith” element. They believed that its introduction into the English system is significant to reduce the courts’ propensity to excessively squeeze specific doctrines so as to arrive at judicious parity. Moreover, the common law piecemeal doctrines are believed to be not really suited to regulate contracts. The introduction, therefore, of the UTCCR’s fairness test is seen as a welcome and fresh development. In addition, these observers foresee that the challenges now being hurled against the UTCCR’s fairness test, specifically the ‘good faith’ will eventually be overcame as future treaties containing their own standards of fairness and good faith tests will permeate European jurisdiction and the EU will eventually compel its member states to adopt them, forcing the piecemeal English common law fairness doctrines to give way. More importantly, the existence of such terms and norms such as “good faith” is already present in the business community who has since understand and respect its significance especially when it comes to long-term contracts. This is in keeping with the spirit of cooperation, rather than hostility, being felt and shared in the business community. An open-textured standard like “good faith” is good because it allows the judiciary to explore conventional customs in the business sector and at the same time create a link between practice and formal law.15

15 Contract Law in Perspective, 4th edn, p. 144

The present UTCCR has been assailed for being a redundant addition to the English legal system with the potential of further muddling the courts’ determination of what constitutes fair contract terms considering the presence of other fairness tests incorporated in the many statutes and case law of the UK legal system. Much of the attack against the law stems from the presence of section 5(1) which provides for the fairness test of contract terms. The fairness test, with its dual elements of good faith and significant resulting imbalance, are seen to negatively impact the English legal system already saturated of similar tests incorporated in the UCTA, the law of misrepresentation and the duress and unequal bargaining power doctrines. There is a view that such a test will not see prosper in a judicial system highly biased against court intervention into the privacy of contracts and a standard model of determining what constitutes unfairness in contracts. There are contrary views, however. Observers with these contrary views believed that the unfairness test is good both for the courts and the parties to the contracts. For the courts, it will ease them away from squeezing out existing statutes and case law to determine what is fair because the UTCCR already provides them with a model and for the parties to contracts because they are more assured of standard and more equitable measure if fairness.