Draft Consumer Rights Bill - Business, Innovation and Skills Committee Contents


4  Part 2 of the draft Bill

Unfair Contract Terms

BACKGROUND

173. Under current legislation, the courts can consider the fairness of terms in consumer contracts. Where a court finds that a term is unfair, it is no longer binding on the consumer and cannot be enforced. The law on unfair contract terms is contained in two pieces of legislation, the Unfair Contract Terms Act 1977 (UCTA 1977) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs). The UTCCRs implement the Unfair Terms in Consumer Contracts Directive (Council Directive 93/13/EEC).[242]

174. UCTA applies to a broad range of contracts, and applies to individually negotiated as well as non-negotiated terms. UCTA focuses on exclusion clauses and covers terms that aim to exclude or restrict liability for:

causing death or personal injury;

other loss or damage caused by a breach of a duty of care;

breaches of certain terms implied by law; and

breach of contract generally.

The UCTA may render some terms 'of no effect', and provides that other terms are valid only if they are fair and reasonable.[243]

175. The UTCCRs apply to non-negotiated (standard term) consumer contracts. To be legally binding, contract terms must be 'fair' and written in 'plain, intelligible language'. A court may assess any term in consumer contract for fairness, unless the term falls within one or more of three exemptions. These are negotiated terms, terms that reflect the existing law, and the main subject matter or adequacy of the price. Even if a term is concerned with the "adequacy of the price" or "main subject matter" of the contract, it will be reviewable for fairness if it is not drafted in "plain, intelligible language". UTCCR provides that a non-negotiated term will be regarded as unfair if it causes "a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer".[244]

176. In a 2005 Report on unfair terms, the Law Commissions found that the two statutes have overlapping provisions with different scope and different effects, and that they use different concepts and terminology.[245] That report found that the existing law resulted in uncertainty for consumers and businesses.[246] In 2012 DBIS asked the Law Commissions to review and update its 2005 report in so far as it affected contracts between businesses and consumers.[247] The Law Commissions published their advice paper to DBIS in March 2013.

EXEMPTION FOR SUBJECT MATTER AND PRICE

177. The Law Commissions recommended that the exemption for subject matter and price should be reformed.[248] Key to this recommendation was uncertainty arising from a 2009 Supreme Court decision in the case of Office of Fair Trading v Abbey National plc,[249] in which it was held that charges for unauthorised overdrafts were exempt from assessment for fairness because they were price terms.[250] The Law Commissions' 2005 Report proposed that the exemption should not apply to payments which are "incidental or ancillary to the main purpose of the contract".[251] In Abbey National this test was considered too uncertain. The Supreme Court rejected the view that price terms could be divided into those which form the essential bargain and those which were ancillary.[252]

178. The Law Commissions found that businesses had been lulled "into a false sense of security" by the judgment and that the law remained highly uncertain for both consumers and businesses.[253] Their advice to DBIS was that terms relating to the price or main subject matter should be exempt from assessment for fairness only if they are "transparent" and "prominent".[254] The draft Bill implements this recommendation.[255] It provides that a term is "transparent" if it is in "plain and intelligible language, and (in the case of a written term) is legible".[256] A term is "prominent" if it is "brought to the consumer's attention in such a way that an average consumer would be aware of the term".[257]

179. The 'average consumer' test is widely used in European consumer law and is taken to mean someone who is "reasonably well informed, observant and circumspect".[258] Several witnesses argued that this was a high standard which may not confer strong consumer protection, especially for vulnerable groups.[259] The European Commission's Guidance states that there is some flexibility in the test, in that "the average consumer's level of attention is likely to vary according to the category of goods and services in question".[260]

180. The major change that the draft Bill would make to the current law is the requirement for "prominence".[261] This is aimed at preventing circumstances where extra charges or requirements which relate to the overall subject or price of the contract are concealed in the 'small print' and are therefore not clear to the consumer at the time they agreed to enter into the contract.[262]

181. Which? submitted detailed examples of charges that were unlikely to be taken into account by consumers, even though they may be prominently and transparently disclosed:

Behavioural biases must be taken into account when deciding which terms are within the scope of the unfair terms legislation. Otherwise, some terms will remain 'unchecked' by competition yet the regulator may remain powerless to intervene and address any consumer detriment that such terms may cause.[263]

182. The draft Bill provides that a term is "prominent" if it is presented in such a way that the average consumer would be aware of it.[264] However, many submissions called for a clearer definition of "prominence".[265] Which? argued that for a term to be "prominent" under the draft Bill there should be a further requirement that it should be brought to the consumer's attention in such a way that the average consumer would appreciate its significance.[266]

183. Which? argued that only those prices a consumer can be expected to take into account during the purchasing process should be excluded, and that the "main price" payable under the contract was "a useful proxy" for this.[267] In a similar vein, a 2011 report by OFT on Consumer Contracts[268] provided evidence to suggest that consumers are not adequately protected by disclosure alone.[269] Narrowing the price exemption to refer to the "main price" would not render contractual terms concerning payment unfair, but would simply mean that they were assessable for fairness.

184. We conclude that the draft Bill must make it absolutely clear that incidental or ancillary payments do not form part of the exemption, and are therefore assessable for fairness. Furthermore, we conclude that the "prominence" requirement in clause 67(2) is uncertain and would be difficult to apply in practice.

185. We recommend that the price exemption should be narrowed to exclude only the main price that a reasonable consumer would take into account during the purchasing process. This would not automatically render any other clauses unfair, but would make them potentially assessable for fairness which would allow genuine consumer detriment to be tackled.

186. The definition of "average consumer" for Part 2 (Unfair Terms) of the draft Bill is a relatively high standard. "Prominence" is defined in the draft Bill by reference to the awareness of an "average consumer". As such, we recommend that clause 67(4) should be amended to provide that for a term to be "prominent", it should be "brought to the consumer's attention in such as way that an average consumer would be aware of the term and would appreciate its significance".

THE GREY LIST

187. The other main area of the Law Commissions' review and update of its 2005 report was Schedule 2 of the UTCCR.[270] This contains an indicative and non-exhaustive list of terms which may be regarded as unfair, which is known as "the grey list". It is reproduced exactly from the Unfair Terms Directive.[271] The terms on the list are not automatically unfair, but may be used to assist a court when considering the application of the fairness test to a particular case. Equally, terms not found on the list in Schedule 2 may be found by a court to be unfair by application of the fairness test.[272]

188. Following consultation in 2012, the Law Commissions recommended the following additions to the grey list, of terms which have the object or effect of:

·  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;

·  Giving the trader discretion to decide the amount of the price after the consumer has become bound by the contract; and

·  Giving the trader discretion to decide the subject matter of the contract after the consumer has become bound by it.[273]

189. The draft Bill would amend the grey list to include these terms.[274] Which? proposed a further term for inclusion on the grey list, on the basis that consumers who enter into minimum and fixed-term contracts have a legitimate expectation that the bargain will not change. The trader should only be able to change the bargain for a valid reason (for example a change to a market index outside of the trader's control), Which? argued, and the consumer should not be placed in a position where he is forced to accept the change.[275]

190. In oral evidence, Which? used the example of the Bank of Ireland UK's recent action to increase the rates payable on fixed term, base rate tracker mortgages.[276] About half way into the term of a 25 year base rate tracker mortgage, the bank increased the differential that was payable (the "x" in "base rate plus x") forcing many consumers with fixed term contracts to terminate. Although consumers had the option to terminate, they were unable to find equivalent deals and so suffered detriment. The ability to terminate the contract did not mean that the consumer could avoid detriment.[277]

191. We discussed this case with the Minister:

Q157 Paul Blomfield: Do you not think that is also a bit that needs significant attention? People bought into—contracted to—for a long period of time something that turned out not to be what they were paying their money into.

Minister: I understand the argument but, equally, a company might offer a particular deal but circumstances beyond their control might change hugely and mean it has to change the terms of that deal. They would not be able to do so unless the consumer is able to get the same deal elsewhere. That bit of information—for the business to be able to understand whether or not the consumer can get the same deal elsewhere—is potentially very onerous. What that might lead to is that company not offering a good deal at all in the first place-these kinds of deals that could hugely benefit consumers.[278]

192. The Minister's argument did not take into account that Which?'s proposed additional grey list term would allow a trader to change the bargain for a valid reason (for example, change to a market index outside of the trader's control). Which? further argued that paragraph 25 of Schedule 2 should be amended so it only exempts price variations to the extent those changes are caused by changes to a financial market rate or index that the trader does not control.[279] Currently, the clause exempts price rises where these are within the provider's control.[280]

193. We have seen robust evidence in the Bank of Ireland case that consumer detriment arises if the right to terminate the contract does not offer the consumer the genuine ability to avoid the adverse impact of the change.

194. We therefore recommend that the following term is added to the grey list (Schedule 2 Part 1):

A term (including those within the scope of paragraph 22 of Schedule 2 Part 1) which has the object or effect of permitting a trader to increase the price of, or alter unilaterally any characteristics of, goods, digital content or services during any minimum contract period or before the end of a contract of a specified duration without a valid reason or where the consumer is not free to dissolve the contract without being disadvantaged.

195. We recommend paragraph 25 of Schedule 2 should be amended so that it only exempts price variations to the extent those changes are caused by changes to a financial market rate or index that the trader does not control.

OTHER REQUIREMENTS FOR CONTRACT TERMS—CLAUSE 71

196. Clause 71 sets out "other requirements for contract terms":

(1) A trader must ensure that a written term of a consumer contract, or a consumer notice, is transparent.

(2) If a term of a consumer contract is especially onerous or unusual, the trader must ensure that the term is drawn particularly to the consumer's attention.

(3) Whether a term of a contract is especially onerous or unusual is to be determined, in particular, by reference to the subject matter of the contract.

197. Several submissions argued that the clause would operate to modify the fairness test and lower consumer protection. The Law Commission described it as its "one main concern" and a "retrograde step".[281] The OFT argued that there was a risk of unintended consequences because the clause appeared to suggest that specifically drawing the consumer's attention to a term may be sufficient to remedy any unfairness. It argued that "transparency alone cannot turn a substantially unfair term into a fair one".[282] There was also widespread confusion over the consequences of breach of clause 71.[283]

198. The Law Commission and the OFT expressed concern that clause 71 appeared to suggest a threshold to be met for a term to be "prominent".[284] The Law Commission restated Recommendation 7 of its advice to the Government in March 2013:

To be prominent a term must be presented in such a way that the average consumer would be aware of the term. The more unusual or onerous the term, the more prominent it needs to be.[285]

199. The Law Commission suggested that the Government should review the definition of "prominent" in the draft Bill, to clarify that in deciding whether a term is appropriately prominent the court should consider several factors, including whether the term is unusual or onerous, and whether the prominence is in line with guidance prepared by regulators.[286] We received a significant amount of evidence calling for clarification of the concept of prominence in the draft Bill,[287] and on this basis we conclude that the definition should be reviewed.

200. We conclude that there is a risk that clause 71 ('other requirements for contract terms') might operate in practice to modify the fairness test. As drafted, clause 71 confuses rather than clarifies the concept of "prominence".

201. We therefore recommend that clause 71 ('other requirements for contract terms') is struck out.

Order making powers

202. Clause 66(3) would give the Secretary of State the power to amend entries in Part 1 and Part 2 of Schedule 2. Part 1 contains grey list terms, which may be regarded as unfair. Part 2 limits the scope of Part 1. The Government proposes that this order making power, for which there is no exact precedent, should be subject to the negative parliamentary scrutiny procedure.[288]

203. We note that the order making power in clause 66(3) would allow primary legislation to be amended. We believe that any amendments to the grey list or the existing list of limitations should be subject to an appropriate level of scrutiny, to ensure adequate protection for both consumers and businesses.

204. We therefore recommend that the affirmative procedure should apply to the order making power in clause 66(3).


242   See the Law Commissions, Unfair Terms in Consumer Contracts: Advice to the Department for Business, Innovation and Skills, March 2013, paragraphs 1.1-1.4 Back

243   Ibid., paragraphs 1.18-1.20 Back

244   Ibid., paragraphs 1.21-1.24 Back

245   The Law Commissions, Unfair Terms in Contracts, 2005 Back

246   Ibid., paragraphs 1.4-1.5 Back

247   The Law Commissions, Unfair Terms in Consumer Contracts: Advice to the Department for Business, Innovation and Skills, March 2013, paragraphs 1.7-1.11 Back

248   The Law Commissions, Unfair Terms in Consumer Contracts: Advice to the Department for Business, Innovation and Skills, March 2013, paragraphs 2.1-2.43 Back

249   [2009] UKSC 6, [2010] 1 AC 696 Back

250   Ibid., paragraphs 2.5-2.6 Back

251   The Law Commissions, Unfair Terms in Contracts, 2005, Appendix A Part 2 Clause 4(5) Back

252   The Law Commissions, Unfair Terms in Consumer Contracts: Advice to the Department for Business, Innovation and Skills, March 2013, paragraphs S.8 and S.17 Back

253   The Law Commissions, Unfair Terms in Consumer Contracts: Advice to the Department for Business, Innovation and Skills, March 2013, paragraph S.11 Back

254   The Law Commissions, Unfair Terms in Consumer Contracts: Advice to the Department for Business, Innovation and Skills, March 2013,paragraphs S.17 and S.18 Back

255   Clause 67(2) Back

256   Clause 67(3) Back

257   Clause 67(4) Back

258   Clause 67(5), Ev 97 Follow-up letter from the Department for Business, Innovation and Skills to the Clerk of the Committee Back

259   For example Ev 75 and Q 46 and Q 47 Back

260   Ev 97 Follow-up letter from the Department for Business, Innovation and Skills to the Clerk of the Committee Back

261   Clause 67(2) and clause 67(4) Back

262   See Explanatory Notes, paragraph 2.40 and Government Response, 2013, page 40 Back

263   Ev 87 Back

264   See above Back

265   For example, Ev 60-1, Ev 57, Ev w87 Back

266   Ev 91 Back

267   Ibid. Back

268   Office of Fair Trading, Consumer Contracts, 2011 Back

269   Ibid., page 7 Back

270   The Law Commissions, Unfair Terms in Contracts, 2005, paragraphs 3.108-3.123 Back

271   Explanatory Notes, paragraph 233 Back

272   Ibid. Back

273   The Law Commissions, Unfair Terms in Consumer Contracts: Advice to the Department for Business, Innovation and Skills, March 2013,paragraph S.28 Back

274   Schedule 2 paragraphs 5, 13 and 14 Back

275   Ev 88 Back

276   Q54 Back

277   Q54, Ev 88 Back

278   Q157 Back

279   Ev 88 Back

280   Schedule 2, paragraph 25 Back

281   Ev 72 Back

282   Ev 74 Back

283   For example, Ev w100, Ev w10, Ev 75, Ev w130, Ev 89 Back

284   Ev 72 and Ev 75 Back

285   Ev 72 and The Law Commissions, Unfair Terms in Consumer Contracts: Advice to the Department for Business, Innovation and Skills, March 2013, paragraph 4.46 Back

286   Ev 72 Back

287   See above Back

288   Ev 97 Memorandum to Committee on Draft Consumer Rights Bill Delegated Powers Back


 
previous page contents next page


© Parliamentary copyright 2013
Prepared 23 December 2013