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Winning the battle against unfair contract terms

Published online by Cambridge University Press:  02 January 2018

Susan Bright
Susan Bright*
Affiliation:
St Hilda's College, Oxford University
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Abstract

The Director General of Fair Trading has recently won the first case seeking an injunction to restrain the continued use of unfair terms in consumer contracts. This represents only the tip of the iceberg in terms of the activity of the Unfair Contract Terms Unit established to enforce the Unfair Terms in Consumer Contracts Regulations. The sparsity of reported judicial decisions does not mean that the Regulations have been ineffective; far from it, numerous contracts across a variety of economic sectors have been amended following complaints made under the Regulations. It may still be early days in the battle against unfair contract terms but, as will be shown, the Regulations are proving to be a highly effective weapon in the consumer's armoury.

Type
Research Article
Information
Legal Studies , Volume 20 , Issue 3 , September 2000 , pp. 331 - 352
Copyright
Copyright © Society of Legal Scholars 2000

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References

1. SI 1994/3159.

2. Between 1 July 1995 and June 1999 the Office of Fair Trading's Unfair Contract Terms Unit received 4,140 complaints about unfair terms in standard contracts: Unfair Contract Terms, OFT Bulletin, Issue No 8, Dec 1999, p 40. The OFT issues regular Bulletins, available from its web site, reporting and commenting upon cases investigated. Since 1998, the reports on the monitoring work have been separated from the information on specimen terms. The first directory of specimen terms is expected to be published in 2000.

3. Directive 93/13.

4. J Bridgeman, speech to the Air Transport Users’ Council, 9 June 1999.

5. SI 1999/2083. The 1999 Regulations came into force on 1 October 1999.

6. The main differences between the 1994 and 1999 Regulations are that the enforcement powers have been extended beyond the Director General of Fair Trading to include other listed bodies; and the definitions of ‘seller’ and ‘supplier’ have been amended to remove the reference to a person who sells goods or supplies goods or services (all italicised words were problematic, as discussed in the text below). There are other changes: injunctive action may now be taken in the County Court (not merely in the High Court as under the 1994 Regulations); enforcement bodies have power to require disclosure of documents and information where this is necessary for enforcement purposes (reg 13); Sch 1 (exempting certain types of contracts) has been removed; Sch 2 (dealing with the assessment of good faith) has been removed; and some wording has been amended (for example, the ‘core provisions exemption’).

7. Debate about the scope of the 1994 Regulations was fuelled by the reference, in key definitions, to ‘goods’ and ‘services’, restrictions that were not to be found in the Directive, and which, arguably, excluded land contracts from the 1994 Regulations. The scope of the Regulations in the context of land contracts will be discussed further below.

8. As precedents build up, some businesses may begin to take heed, but many businesses will proceed regardless.

9. National Consumer Council Seeking Civil Justice - A Survey of People's Needs and Experiences (1995), referred to in H Collins Regulating Contracts (Oxford: Oxford University Press, 1999) p 87.

The European Court of Justice has recently held that a national court has power to evaluate the fairness of terms of its own motion: ‘In disputes where the amounts involved are often limited, the lawyers’ fees may be higher than the amount at stake, which may deter the consumer from contesting the application of an unfair term Oceano Grupo Editorial SA v Quintero C-240/98 to 244/98, 27 June 2000.

10. Terms found to be unfair: Falco Finance Ltd v Gough (28 October 1998, Macclesfield County Court), reported through Lawtel (mortgage terms); Kindlance Ltd v Murphy (1997, High Court of Northern Ireland), available on Lexis (mortgage terms); London Borough of Camden v McBride (1999) 1 CL 284 (tenancy term); Zealander & Zealander v Laing Homes Ltd (19 March 1999), reported through Lawtel (arbitration clause); Hartman v P & O Cruises Ltd 1998/3732 CL (damages for cancellation of holiday). Terms found to be fair: Broadwater Manor School v Davis (1999) 5 CL 208; Gosling v Burrard-Lucas (1999) 1 CL 197 (school fees in lieu of notice).

11. 1994 Regulations, reg 8(1), 1999 Regulations, reg 10(1)(a) or, following the 1999 Regulations, if a qualifying body has notified the Director that it agrees to consider the complaint, reg 10(1)(b).

12. During 1998, there was an average of 100 complaints monthly: Unfair Contract Terms, OFT Bulletin, Issue No 6, April 1999, OFT 262, para 1.12.

13. See Unfair Contract Terms, OFT Bulletin, Issue No 3. March 1997, pp 45–50.

14. See Unfair Contract Terms, OFT Bulletin, Issue No 5, October 1998, OFT 246, pp 11–12.

15. See the Director General of Fair Trading's speech to the Air Transport Users’ Council, 9 June 1999, available from the Office of Fair Trading website. For discussion of the 1994 Regulations and airline contracts, see D Grant ‘The Unfair Terms in Consumer Contracts Regulations and the IATA General Conditions of Carriage – A United Kingdom Perspective’ (1998) JBL 123.

16. Most undertakings are given informally in correspondence, but in cases of difficulty or doubt more formal undertakings are required; for specimens, see Unfair Contract Terms, OFT Bulletin, Issue No 6, April 1999, OFT 262, Pt 7.

17. Dual interest rates operate by offering an attractive ‘concessionary’ rate to borrowers, which reverts to the standard rate if the borrower defaults. Under the terms of the new undertakings, effective from 22 December 1997, CMC stated that it would no longer enforce a higher rate of 18% (considered by the OFT to be a penalty rate) on any borrower whose account became, or remained, overdue. Instead, the company's higher rate would be set at 12.4% -compared with its usual ‘concessionary’ rate of 9.9%, reported Unfair Contract Terms, OFT Bulletin, Issue No 5, October 1998, OFT 246, p 8. More recently, the OFT has issued detailed guidelines condemning the use of variable interest rates by banks and building societies where the consumer is locked into a relationship: see OFT, Press Notice, 13/00; OFT, Interest Variation Terms, OFT 297.

18. Reported in Unfair Contract Terms, OFT Bulletin, Issue No 5, October 1998, OFT 246.

19. The Directive does not state that the use of unfair terms should be prohibited, but that member states should use ‘adequate and effective means’ to prevent their continued use. It may be that criminal sanctions can be used: see G Howells and T Wilhelmsson EC Consumer Law (Aldershot: Dartmouth, 1997) p 112; M Tenreiro and J Karsten Unfair Terms in Consumer Contracts: Uncertainties, contradictions and novelties of a Directive, presented at a conference in Brussels in July 1999 and to be published in Rechtsangeichung und nationale privatrechle by the Centrum für Europäisches Privatrechle, Westfälische Wilhelms-Universität Münster. The paper by Tenriero and Karsten is referred to frequently below. Tenriero is Head of the Legal Matters Unit in Directorate General XXIV at the European Commission, although the views expressed in the paper are stated to be personal views. Proceedings of the Conference on the Unfair Terms Directive: 5 years on are reported at http://europa.eu.int/comm/dgs/health_consumer/events/event29_en.html.

20. The original proposal of the Department of Trade and Industry was that enforcement would only be by civil action by consumers; see Department of Trade and Industry Implementation of the EC Directive on Unfair Terms in Consumer Contracts, Consultation Document, October 1993. In the light of responses stating that implementing action was required, a later consultation document proposed enforcement by the Director General of Fair Trading; see Department of Trade and Industry Implementation of the EC Directive on Unfair Terms in Consumer Contracts, Further Consultation Document, September 1994.

21. R v Secretary of State for Trade and Industry, ex p The Consumers’ Association (28 February 1996), available on Lexis.

22. Other bodies also sought powers: a question was put to the European Commission as to whether local authorities and local courts should have enforcement powers: E-2827/95 WQ, 96/C 40/98.

23. The qualifying bodies are listed in Sch 1 as The Data Protection Registrar; the Director General of Electricity Supply, the Director General of Gas Supply; the Director General of Electricity Supply for Northern Ireland; the Director General of Gas Supply for Northern Ireland, the Director General of Telecommunications; the Director General of Water Services; the Rail Regulator; every weights and measures authority in Great Britain; the Department of Economic Development in Northern Ireland; and the Consumers’ Association.

24. 1999 Regulations, reg 12.

25. 1999 Regulations, reg 11.

26. Department of Trade and Industry Widening the scope for action under the Unfair Contract Terms Regulations, January 1998. The Department of Trade and Industry was concerned that the regime adopted should be compatible with the implementation of the EU Directive on Injunctions for the Protection of Consumers’ Interests 98/27/EC.

27. The bodies need to show that they meet the criteria specified of being able to take ‘an independent and impartial approach to the use of the powers and act in the interests of consumers’ and show a ‘demonstrable track record of acting in the interests of consumers’: see Department of Trade and Industry Injunctions Directive: Implementation in the UK, January 2000.

28. 1999 Regulations, reg 12.

29. 1999 Regulations, reg 14.

30. 1999 Regulations, regs 14, 15.

31. Eg the Consumers’ Association plans to bring an action banning lock-in penalties used in mortgages, based on 1,500 borrowers.

32. (1997, High Court of Northern Ireland), available on Lexis.

33. Falco Finance Ltd v Gough (28 October 1998. Macclesfield County Court), reported through Lawtel.

34. As at the time of writing, only two cases have been referred. One was the Consumers’ Association case which has since been abandoned. The other case has recently been adjudicated on: Oceano Grupo Editorial SA v Murcicano Quintero C-240/98 to 244/98, 27 June 2000.

35. The CLAB Europa database, available on the internet: http://europa.eu.int/comm/dg24.

36. For further discussion, see the Cabinet Office The Guide to Better European Regulation (1999). See also L E Ramsey The copy-out technique: more of a ‘cop out’ than a solution? (1996) 17 Statute LR 218.

37. To take the Unfair Contract Terms Act 1977 as an example: the validity of an exclusion clause depends upon an open-textured concept, ‘reasonableness’, but Sch 1 to the Act clearly sets out which types of contracts are excluded from the scope of certain sections of the Act. For a comparative discussion of English styles of legislation and Continental Code-based systems. see Kotz ‘Taking Civil Codes Less Seriously’ (1987) 50 MLR 1.

38. See discussion of this point in S Bright and C Bright ‘Unfair Terms in Land Contracts: Copy-out or Cop Out?’ (1995) 111 LQR 655 at 655–656. The Department of Trade and Industry clearly inclined to the view that land contracts were outside the Directive, but acknowledged that there was room for doubt on this: see Department of Trade and Industry Guidance Notes on the Unfair Terms in Consumer Contract Regulations 1994, paras 3.20-21 (available on the DTI's website).

39. See Bright and Bright, above n 38, at 661–663.

40. The Directive ‘includes the sale of immovable goods’, Tenreiro and Karsten, above n 19. A similar reply was received from Tenreiro in response to my inquiry on this point. Compare also the position under the UK Competition Act 1998, under which land contracts are excluded for the most part by statutory instrument, whereas under EC law, arts 81 and 82 of the EC Treaty, land contracts are included.

41. In France, Belgium, Sweden, Italy and Germany, for example, the controls on unfair terms apply to contracts relating to land, although it must be noted that in some of these member states controls pre-existed the Unfair Terms Directive and were amended in order to implement the Directive. Some German writers have, however, argued for real estate and land law to be excluded from the Unfair Terms Directive on the grounds that the Community lacks competence to legislate on this: see H Heinrichs ‘Die Entwicklung des Rechts der Allgemeinen Geschaftsbedingungen im Jahre 1997’ (1998) NJW 1447. On the general competence of the European Commission in relation to land, see C Bright and S Bright ‘Europe, the Nation State and Land’ in S Bright and J Dewar (eds) Land LIW: Themes and Perspectives (Oxford: Oxford University Press, 1998) p 356. The CLAB Europa database, above n 35, contains information about Spanish cases applying the Directive to contracts for the sale of flats (eg Case Numbers ES000386, ES000483).

42. Eg: student accommodation, Anglia Polytechnic University, Lewes Tertiary College; mortgages. City Mortgage Corporation; holiday accommodation, Dales Country Cottages Ltd: Unfair Contract Terms, OFT Bulletin, Issue No 5. October 1998, OFT 246, pp 20, 36, 8–9, 26 respectively.

43. Brunswick Properties Unfair Contract Terms, OFT Bulletin, Issue No 5, October 1998, OFT 246, p 24.

44. The Regulatory Impact Assessment on the 1999 Regulations, dated 22 July 1999 states: ‘This is intended, in particular, to remove any uncertainty that, to the extent that the Directive applies to contracts relating to land, including leasehold and tenancy agreements and licences, the Regulations also apply to such contracts’, II, para 8.

45. See Bright and Bright above n 38; the argument put there seems to have been accepted in Kindlance Ltd v Murphy (1997, High Court of Northern Ireland), available on Lexis; and Tenriero and Karsten, above n 19. Further, since writing that article, there has been a decision of the European Court of Justice which held that the Doorstep Selling Directive (85/577), which applies to contracts related to the sale of ‘goods or services’ applies to the grant of credit facilities: Bayerische Hypotheken Und Wechselbank Ag v Edgar Dietzinger Case C-45/96 (1998) 2 CMLR 499.

46. Kindlance Ltd v Murphy (1997, High Court of Northern Ireland), available on Lexis; Falco Finance Ltd v Gough (28 October 1998, Macclesfield County Court), reported through Lawtel.

47. See Department of Trade and Industry Guidance Notes on the Unfair Terms in Consumer Contract Regulations 1994, para 3.22.

48. London Borough of Camden v McBride (1999) 1 CL 284.

49. See Regulatory Impact Assessment, dated 22 July 1999, II, paras 5, 11, Para 11 strongly suggests that the Regulations would apply to rented accommodation, and would address problems of ‘exploitation and onerous conditions imposed by landlords’ . The government has also suggested empowering an umbrella group for Housing Aid Centres to be added to the list of qualifying bodies for enforcement purposes, again suggesting that it understands land contracts to be within the Regulations: see J Holbrook ‘Unfair terms in housing contracts’ Legal Action, September 1999, p 26.

50. Unfair Contract Terms, OFT Bulletin, Issue No 8, December 1999, see case reports 14 (Jardine Macfarlane Ltd), 19 (Prime Lets), and 27 (Windmill Estates UK Ltd). Paragraph 1.6 reports that the OFT, after consulting leading counsel, had decided to act on the assumption that the Directive was intended to apply to contracts for interests in land.

51. The Department of Trade and Industry 1995 Guidance Notes on the 1994 Regulations explain the DTI's view that although a seller has to be a person who sells goods and contracts in his business capacity, reg 3.1 of the 1994 Regulations would apply equally where the consumer sells to the ‘seller’.

52. Tenreiro and Karsten, above n 19, p 12.

53. Brigden v American Express Bank Ltd (2000) IRLR 94; the employee was held to be acting as a consumer on the facts.

54. See M Tenreiro ‘The Community Directive on Unfair Terms and National Legal Systems’ (1995) 3 ERPL 273; Bright and Bright, above n 38, at 656.

55. For reasons of space, the exemption of mandatory statutory terms will not be further discussed here. Essentially, it excludes from review mandatory provisions of the law of member states, and international conventions on the assumption that such terms will always be fair (see 13th recital). On one view, the exemption will apply only if these terms are fair. See further Tenriero and Karsten, above n 19, pp 13–15.

56. See Tenreiro, above n 52, at 275–6.

57. Unfair Terms Directive, art 3; 1994 Regulations, reg 3; 1999 Regulations, reg 5.

58. See eg Zealander & Zealander v Laing Homes Ltd (19 March 1999), reported through Lawtel.

59. See Tenriero and Karsten, above n 19, p 16.

60. See Tenriero and Karsten, above n 19, p 17.

61. 1999 Regulations, reg 6(2). The wording in the 1994 Regulations differed: ‘In so for as it is plain, intelligible language, no assessment shall be made of the fairness of any term which - (a) defines the main subject matter of the contract, or (b) concerns the adequacy of the price or remuneration, as against the goods or services sold or supplied.’ (reg 3(2))

62. But Peter Gibson LJ reminds us in DGFT v First National Bank plc (2000) 2 WLR 1353 at 1364, that the test is not whether it can be called a ‘core term’ but whether it is within paras (a) and (b) of the Regulation.

63. But they must still be in ‘plain, intelligible language’, see below.

64. The wording in the 1999 Regulations follows the wording in art 4(2) of the Directive, whereas the wording of the 1994 Regulations was closer to the wording found in the nineteenth recital.

65. Howells and Wilehlmsson, above n 19, p 94.

66. Collins describes this as a form of market failure, see Collins, above n 9, p 230.

67. ‘…it would be difficult to claim that any term was a core term unless it was central to how the consumers perceived the bargain’, Unfair Contract Terms, OFT Bulletin, Issue No 2, September 1996, para 2.26.

68. Unfair Contract Terms, OFT Bulletin, Issue No 5, October 1998, OFT 246, at p 116 (Pickford's removal insurance).

69. Unfair Contract Terms, OFT Bulletin, Issue No 6, April 1999, OFT 262, report 56.

70. Although it may be that the classification was immaterial as they were both treated as reviewable in any event; one because it was not in plain, intelligible language, and the other because it was not drawn to the consumer's attention.

71. Tenriero and Karsten, above n 19, p 20.

72. Insurance contracts raise particular difficulties. They are excluded from the main provisions of the Unfair Contract Terms Act 1977. One reading of recital 19 to the Unfair Terms Directive suggests that limitations on the insurer's liability are not subject to the fairness test, but Tenreiro and Karsten write: ‘… in order to avoid control of fairness, low standards insurances should warn the consumer about this low standard and… should be cheaper!’ (above n 19, p 20).

73. The list is contained in 1999 Regulations, Sch 2, formerly 1994 Regulations, Sch 3. Paragraph 1(1) refers to terms: ‘providing for the price of goods to be determined at the time of delivery or allowing a seller of goods or supplier of services to increase their price without in both cases giving the consumer the corresponding right to cancel the contract if the final price is too high in relation to the price agreed when the contract was concluded.’

74. (2000) 2 WLR 1353.

75. Borrowers with low or impaired credit ratings who have to borrow in the secondary markets.

76. Office of Fair Trading Non-status lending, Guidelines for lenders and brokers, Revised November 1997, OFT 192, paras 49 and 52.

77. (28 October 1998, Macclesfield County Court), reported through Lawtel.

78. Kindlance Ltd v Murphy (1997, High Court of Northern Ireland), available on Lexis.

79. (2000) 2 WLR 1353.

80. Director General of Fair Trading v First National Bank plc (2000) 1 WLR 98 at 107.

81. See eg Unfair Contract Terms, OFT Bulletin, Issue No 5, October 1998, OFT 246, at p 116 (Pickford's removal insurance).

82. See eg Unfair Contract Terms, OFT Bulletin, Issue No 6, April 1999, OFT 262, report 56 (the expiry date on gift vouchers was potentially unfair as it was not drawn to the attention of consumers).

83. Unfair Contract Terms, OFT Bulletin, Issue No 6, April 1999, OFT 262, para 1.25.

84. An approach increasingly familiar to the English judiciary: Pepper v Hart (1993) AC 593. See, the Rt Hon Sir Thomas Bingham ‘Some Comparative Reflections’ in B Markesenis (ed) The Gradual Convergence (Oxford: Clarendon Press, 1994) p 166.

85. 1994 Regulations, reg 4(1); 1999 Regulations, reg 5(1).

86. Or whether both substantive and procedural unfairness is required: for a range of interpretations, see R Brownsword, G Howells and T Wilhemsson ‘Between Market and Welfare’ in C Willett (ed) Aspects of Fairness in Contract (London: Blackstone, 1996) p 25.

87. See Tenreiro, above n 52 at 274–6.

88. Chitty on Contracts (London: Sweet & Maxwell, 28th edn, 1999) at 15–034.

89. Good faith notions have begun to filter into discrete aspects of English law. See generally, J Beatson and D Friedman (eds) Good Faith and Fault in Contract Law (Oxford: Clarendon Press, 1995), esp E Farnsworth (ch 6); W Ebke and B Steinhauer (ch 7), H Beale (ch 9).

90. Revealing the imprint of the English negotiating team? Cf the Unfair Contract Terms Act 1977, Sch 2, paras (a), (b).

91. The Office of Fair Trading states that good faith will often ‘turn on whether the trader's marketing practices, documentation, and administrative procedures enable consumers to know exactly what they are doing, and to pull back from commitment at any point until the whole picture is clear to them’: P Edwards The Challenge of the Regulations, in Unfair Contract Terms, OFT Bulletin, Issue No 4, December 1997, OFT 202.

92. Peter Gibson LJ in DGFT v First National Bank plc (2000) 2 WLR 1353 at 1366. disapproving of the test used by Evans-Lombe J at first instance.

93. DGFT v First National Bank plc (2000) 1 WLR 98 at 110.

94. See eg The Guarantee Guild Ltd, and Plastic Windows Federation, Unfair Contract Terms, OFT Bulletin, Issue No 2, September 1996, pp 25, 31 respectively.

95. M Dean ‘Unfair Contract Terms: The European Approach’ (1993) 56 MLR 581 at 587.

96. Zealander & Zealander v Laing Homes Ltd (19 March 1999), reported through Lawtel.

97. Edwards, above n 89, p 22.

98. Falco Finance Ltd v Gough (28 October 1998, Macclesfield County Court), reported through Lawtel.

The European Court of Justice has recently held an exclusive jurisdiction clause to be unfair: see Oceano Grupo Editorial SA v Quintero C-240/98 to 244/98, 27 June 2000.

99. ‘Full payment in advance’ clauses have been a particular problem in the home improvement industry; see eg OFT Press Release 55/98 announcing Limelight Group plc's agreement to delete such clauses. The DGFT, John Bridgeman, states: ‘my advice to anyone dealing with home improvement companies is to refuse to sign a contract requiring all or nearly all the money to be paid before the work has been satisfactorily completed.’

100. 1994 Regulations, reg 5(1); 1999 Regulations, reg 8(1).

101. 1994 Regulations, reg 5(2); 1999 Regulations, reg 8(2). It is interesting that in DGFT v First National Bank plc (2000) 2 WLR 1353, the injunction sought was wider than necessary to meet the reasons why the DGFT argued that the clause was objectionable, and the Court of Appeal invited the parties to agree an amendment to the injunction sought so that it would operate more narrowly.

102. Even in English law the terms are not always given the same meaning.

103. ‘If found to be unfair, the consumer may choose to strike them from the contract (under the so-called blue pencil rule)’: Department of Trade and Industry, Implementation of the EC Directive on Unfair Terms in Consumer Contracts (93/13/EEC), A Consultation Document, October 1993.

104. Kindlance Ltd v Murphy (1997, High Court of Northern Ireland), available on Lexis.

105. Tenreiro, above n 52, at 282.

106. For a discussion of the English law on severance of promises, see Treitel The Law of Contract (London: Sweet & Maxwell, 10th edn, 1999) pp 467–471.

107. Kindlance Ltd v Murphy (1997, High Court of Northern Ireland), available on Lexis.

108. The details of the Rule of 78 (found in the Consumer Credit (Rebate on Early Settlement) Regulations 1983, Sch 2) are complex, but were designed for short term unsecured lending - its use in relation to secured lending to non-status borrowers has been condemned by the Office of Fair Trading (see Office of Fair Trading, Non-status Lending, Guidelines for Lenders and Brokers, revised November 1997, OFT 192, para 59).

109. Tenriero and Karsten, above n 19, p 26.

110. See, especially, Unfair Contract Terms, OFT Bulletin, Issue No 2, September 1996, pp 8–13.

111. The same wording is used in the Regulations: 1994 Regulations, reg 6; 1999 Regulations, reg 7(2).

112. Article 5.2, Unfair Terms Directive; 1999 Regulations, reg 7(2). This did not appear in the 1994 Regulations.

112a. The Commission is also consulting on amendments to the Directive. The DT1 issued a consultation paper in July 2000, European Commission Review of Directive 93/13/EEC on Unfair Term in Consumer Contracts. Three broad areas are being consulted on: 1. the scope of the directive (whether any of the exclusions should be removed); 2. whether the Directive should set out what is required by the transparency principle; 3. whether compensation should be payable to consumers for loss suffered because of an unfair term.

113. Department of Trade and Industry Implementation of the EC Directive on Unfair Terms in Consumer Contracts (93/13/EEC), A Further Consultation Document, September 1994, p 3. See also F M B Reynolds ‘Unfair Contract Terms’ (1994) 110 LQR 1.

114. Department of Trade and Industry Modern Markets: Confident Consumers, July 1999, Cm 4410, para 6.15.

115. ‘In our experience - despite developments such as the introduction of the Unfair Contract Terms Act 1977 20 years ago - the use of unfair terms remains a serious problem in the United Kingdom. Most of the consumer contracts brought to our notice prove to contain terms that we consider potentially unfair.’ Unfair Contract Terms, OFT Bulletin, Issue No 4, December 1997, OFT 202, p 5.