Consumer Rights Bill

Written Evidence Submitted by The Law Commission (CR 01)

 

Introduction

 

1.1 The Law Commission was set up by the 1965 Law Commission Act as an independent body to review and recommend reform to the law of England and Wales. The Law Commission aims to ensure that the law is fair, modern, simple and cost-effective.

1.2 The Consumer Rights Bill 2014 implements recommendations in two reports which we published jointly with the Scottish Law Commission. The reports are:

(1) Consumer Remedies for Faulty Goods (Faulty Goods Report); [1] and

(2) Unfair Terms in Consumer Contracts: Advice to the Department for Business, Innovation and Skills (Unfair Terms Report). [2]

1.3 These reports are part of a wider joint project to simplify consumer law. Our joint report on Consumer Remedies for Misleading and Aggressive Practices is being given effect by the Consumer Protection from Unfair Trading (Amendment) Draft Regulations 2013. [3]

1.4 Here we summarise the main recommendations in our faulty goods and unfair terms reports and highlight a few areas of concern regarding the Bill.

Faulty goods

 

The current law

1.5 The law concerning consumers’ remedies for faulty goods is unnecessarily complicated and uncertain. Two separate sets of remedies apply where goods fail to conform to contract. The traditional UK "right to reject" is supplemented by the European remedies set out in the Consumer Sales Directive 1999 (CSD).

1.6 Under the right to reject, a consumer may refuse to pay for the goods or (if they have paid already) claim a full refund. However, the right is lost once the consumer is deemed to have accepted the goods, which may happen "after the lapse of a reasonable time". [4] The case law on what amounts to a reasonable time provides little guidance on how long it lasts. In one case a consumer was said to have accepted a new car in less than four weeks; [5] in another, the buyer was entitled to reject a car after seven months. [6]

1.7 Meanwhile, the CSD introduces four new remedies, organised into two tiers. Consumers must first ask for a repair or replacement. If a trader fails to provide these within a reasonable time or without significant inconvenience, the consumer may move to the second tier – which consists of rescission and a reduction in price. Rescission resembles the right to reject, with one major difference: the consumer is not entitled to a full refund. Instead the trader may make some deduction for the use the consumer has had from the product.

Our recommendations

1.8 Our recommendations were designed to simply and clarify the law. In particular, we recommended that the right to reject faulty goods should last for a "normal period" of 30 days. Based on research with consumers, we thought that consumers would be able to understand, remember and assert a clear 30 day period.

1.9 We accepted that in many cases this would be a reduction in consumer rights: courts would often consider a longer period to be a reasonable time. This reduction was balanced against two further recommendations:

(1) The 30 day period would be applied flexibly in some circumstances. A longer period would be appropriate where it was reasonably foreseeable at the time of the contract that the consumer would not be able to test the goods within 30 days (for example, where a consumer buys a Christmas present in October, or a lawnmower in November). [7]

(2) Where the period was exceeded, and a consumer was unable to obtain a repair or replacement without unreasonable delay or significant inconvenience, the consumer would be entitled to a full refund without a deduction for use. [8]

1.10 In our research, consumers had been particularly critical of the deduction for use. Consumers said that if they had been unfortunate enough to buy a faulty product, and repairs and/or replacements had been unsuccessful, they would feel aggrieved if they were then charged for use of the product. Consumers felt that if the refund were reduced, they should be entitled to compensation for the inconvenience they had suffered (such as taking time off work to wait for repairs). A further problem was that there was no agreed method for valuing the use a consumer had had from a product, particularly where the product had intermittent faults for some time.

1.11 In practice, we were told that deductions for use were seldom applied – and where they were applied they led to disputes and ill-feeling. Consumers felt that where they had paid for new goods, they wanted new goods. If the first goods were faulty, they wanted to be able to start again, with enough money to buy other new goods, not second hand ones.

The Bill

1.12 Clause 22(3) of the Bill implements a 30 day right to reject. However:

(1) There is no extension for goods likely to be tested after a period of 30 days (such as the Christmas present bought in October, or a lawnmower in November); and

(2) Under clause 24(8), the final right to reject is subject to a deduction for use. Clauses 24(10) to (12) set out some limits: where the make and model of goods is not stated and there is no clear independent evidence of an active second-hand market no deduction can be made within the first six months.

1.13 BIS made clear in its evidence to the BIS Select Committee that clause 24 aims to protect the motor industry due to the rapid depreciation of cars. However, clause 24 may not achieve this. If a consumer rejects a new model of car after a few months there may not be an active second-hand market in that make and model of car, so no deduction for use will be made.

1.14 However, a make and model can be put on virtually any good, including ordinary household items such as a toaster or microwave. Furthermore, with eBay, it is possible to show a second-hand market in almost any good (even if second-hand prices are extremely low). A popular toaster would have a make and model and an active second-hand market on eBay, so a deduction for use would be made. This means that clause 24 instead of protecting the motor industry, seriously undermines consumers’ rights regarding a wide variety of goods.

1.15 There is also a clash between the emphasis on an active second-hand market in clause 24(10) and the statement in clause 24(8) that a deduction for use should take into account the use the consumer has had of the goods. The second-hand price may bear little relationship to a consumer’s use of the goods, as the following example shows.

On 20 April Sandra buys a camera for £800 to take on a two week holiday in June. Between April and June, she hardly uses it. On holiday she uses a great deal, but after one week it breaks. On 20 June, Sandra takes the camera to the shop for repair. On 25 June, the camera is returned, and she uses it a couple of times – but when she goes to a friend’s wedding on 20 August it breaks again. Sandra rejects the camera under clause 24.

1.16 How should Sandra’s use of the camera be valued? The problem is that clause 24 will encourage disputes, as the trader and the consumer will view the issue differently:

(1) The trader will provide "clear independent evidence" under clause 24(10) to show that the second hand value of the camera is £500 – and will probably start by suggesting a deduction of £300. The trader will point out that Sandra has had the use of the product for five months, during which she has probably taken several hundred photos.

(2) Sandra will point out that the second-hand value of the camera bears no relationship at all to the use she has had from it. The reason she bought the camera was to take pictures of her holiday – and this failed. She should receive the full £800. In fact, she should also be compensated for the distress in not having photos of her trip, which she had saved for six years. Also she did not have use of the camera for five months. Between 10 June and 25 June it was broken.

1.17 The Bill provides little guidance on how to resolve this issue, which is likely to become inflammatory. We fear that disputes over deductions for use may undermine the simplicity and certainty of the new rights. Cases will be more likely to proceed to court. The trader will give evidence of second-hand value, while the consumer goes through every occasion on which they used the goods, and their disappointment when the goods failed them.

1.18 We would urge Parliament to look at this again. One solution may be not to provide any deduction for the first six months. If the deduction for use is to continue, we feel that it is particularly important to provide a longer initial period to reject the goods where it was clear that the goods would not be inspected for several months (such as the lawnmower bought in November).

Unfair Terms

 

The current law

1.19 The Law Commission and Scottish Law Commission have long been concerned to simplify the law on unfair contract terms. In 2005 we published a report on this subject, [9] which we updated in 2013.

1.20 The most controversial area is the exemption for subject matter and price, as set out in Article 4(2) of the Unfair Terms Directive (UTD). [10] The UTD states that a fairness assessment may not relate to "the definition of the subject mater of the contract" or to "the adequacy of the price and remuneration… as against the services or goods supplied in exchange", provided that the term is "in plain intelligible language". These words have been copied out in Regulation 6(2) of the Unfair Terms in Consumer Contract Regulations 1999 (UTCCR), and have proved particularly difficult to interpret.

1.21 The issue has generated complex litigation, culminating in the 2009 Supreme Court decision, Office of Fair Trading v Abbey National plc. [11] The Supreme Court overturned the Court of Appeal and held that charges for unauthorised overdrafts were price terms and thus exempt from a fairness assessment. A large majority of consultees agreed that the law was now unduly uncertain. Consumer groups and enforcement bodies felt that this undermined the effectiveness of the legislation.

1.22 In a world of price comparison websites, there is increasing pressure on traders to advertise low headline prices, whilst earning their profits through other charges. Given this potential undermining of competition, the law should provide effective tools to combat unfair charges buried in small print.

1.23 The current uncertainty has the potential to damage businesses as well as consumers. If a business uses an ancillary price term to subsidise a low headline price, the business is put at risk if the term is later found to be unfair.

Our recommendations

1.24 We made 33 recommendations to simply the law on unfair contract terms. The central reform was that the exemptions for price and main subject matter should be reformulated to apply only to terms which are transparent and prominent.

1.25 The Annex to the UTD contains "an indicative and non-exhaustive list of terms which may be regarded as unfair". This "grey list" is reproduced word for word in Schedule 2 of the UTCCR. We reviewed the grey list and recommended that:

(1) The grey list should be retained, substantially in its current form, with three additions to deal with systemic problems. These are terms which have the object or effect of:

(a) permitting the trader to claim disproportionately high sums in compensation or for services which have not been supplied, where the consumer has attempted to cancel the contract;

(b) giving the trader discretion to decide the amount of the price after the consumer has become bound by the contract; and

(c) giving the trader discretion to decide the subject matter of the contract after the consumer has become bound by it.

(2) The legislation should clarify that all terms on the grey list should be reviewable for fairness, irrespective of whether they also fell within the exemption for main subject matter and price.

(3) The legislation should clarify that the exceptions to the grey list (in paragraph 2 of Schedule 2) may be reviewed for fairness unless they fell within the exemption for main subject matter and price.

The Bill

1.26 We are very pleased to see that the Bill implements almost all of our recommendations. In particular, clause 64 implements our recommendation that the exclusion for main subject matter and price should apply only if the term is transparent and prominent.

1.27 Meanwhile Schedule 2 includes our recommended additions to the grey list (at paragraphs 5, 12 and 14).

February 2014