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 intocontracted
tofor 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 informationfor
the business to be able to understand whether or not the consumer
can get the same deal elsewhereis 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
TERMSCLAUSE 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
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