unfair terms (1)

8/3/2019 Unfair Terms (1)

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Unfair Terms

Linda Mulcahy

[email protected]


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Structure ofthis six lecture topic

Key concepts

Incorporation ofexpress terms into

the contract Incorporation of

implied terms

Regulation of

unfair terms Mere

representations


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Key issues?

What is unfair? To what extent are the parties to

contracts free to include unfairterms in their contracts?

Do/should different rules apply fordifferent types of contract?

Should the courts police certainclauses and if so on what grounds?

When is the intervention of thecourt economically efficient/morally

just? Are there certain types of

transaction that are now regulatedrather than contracted?


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Bargaining naughtiness and substantive

unfairness

Fair bargain Fair result

Unfair bargain Fair result

Fair bargain Unfair result

Unfair bargain Unfair result


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Parties may decide in advance

Limit their liability tocertain types of breache.g cost of replacementitem

Exclude their liability

exemption clauses


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Exemption clauses

Way of reducingcontracting costsespecially where bulk

business around thesame service e.g., railwaytravel

Commonly used instandard form contracts

Because risks arereduced use of exclusionclauses can lead to areduction in price


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Problems

Encourages extensiveuse of restrictive

exclusion clauses Can unfairly distribute

risks

Can reflect inequalityof bargaining power

Common law controlshave provedinadequate


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Understanding exemption clauses

Incorporation

Interpretation

Intervention


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Investors Compensation v WestBromwich

[1998] 1 WLR 896 per Lord Hoffman

Interpretation is the ascertainment of themeaning which the document wouldconvey to a reasonable person having all

the background knowledge which wouldreasonably have been available to thepartiesat the time of the contract

almost all the old intellectual baggage of

legal interpretation has been discarded


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Interpretation

None of you nowadays will remember the trouble we had when Iwas called to the Bar with exemption clauses. They were printedin small print on the back of tickets and order forms and invoices.They were contained in catalogues or timetables. They were held tobe binding on any person who took them without objection. No one

ever did object. He never read them or knew what was in them.No matter how unreasonable they were, he was bound. All this wasdone in the name of freedom of contract. But the freedom was allon the side of the big concern which had the use of the printingpress. No freedom for the little man who took the ticket or orderform or invoice. The big concern said Take it or leave it. The littleman had no option but to take it.faced with this abuse of power by the strong against the weak by the use of the small print ofthe conditions the judges did what they could to put a curb on it.They still had before them the idol of freedom of contract. Theystill knelt down and worshipped it, but they concealed under theircloaks a secret weapon. They used it to stab the idol in the back.This weapon was called the true construction of the contract.

Lord Denning in George Mitchell v Finney[1983]


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Intervention by UK and EU Parliaments

Unfair Contract Terms Act 1977(UCTA). Source

Unfair Terms in Consumer ContractsRegulations 1999 (UTCCR)

No single instrument but both forms ofregulation may apply to same situation


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Unfair Contract Terms Act (UCTA)1977

Has to be a contract and theterms being challenged have tohave been incorporated or implied

Renders invalid certain contract

terms Generally only applies when the

defendant is acting in the courseof a business

Misleading name? It does notprovide a general standard of fair

terms and it has a lot to say aboutnegligence

Principle aim is to controlexemption clauses where one ofthe parties is a consumer

Does not control all unfair terms


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UCTA: main provisions -

negligence

Section 2(1): A term whichpurports to exclude or limitliability for death or personalinjury caused by the

defendants negligence isinvalid Section 2(2): A term which

purports to exclude or limitliability for other loss causedby negligence is invalid if it isnot reasonable

Both provisions applywhether someone is actingas a consumer or in thecourse of a business


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UCTA main provisions

Section 3: If theclaimant is dealing asa consumer OR on

the defendantsstandards terms thenexclusion or limitationof contractual duty is

invalid unless it isreasonable


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UCTA main provisions implied terms

Section 6(2): If buyer isa consumer terms

implied by statute cannot be excluded orrestricted

Section 6(3) If buyer isnot a consumerexclusion or restrictionof implied terms onlypossible is reasonable


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Mischief Impact of UCTA

Applies when

Death or PI bynegligence

Cant exclude Acting as aconsumer or not

Limitation of liabilityfor loss by

negligence

Must be reasonable Acting as aconsumer or not

Exclusion orlimitation ofcontractual duty

Must be reasonable Dealing as aconsumer or ondefendants standardterms

Exclusion of impliedcontract term Cant exclude Dealing as consumer

Exclusion of impliedcontract term

Must be reasonable Buyer not aconsumer


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UCTA reasonableness?Section11:

Burden is on defendant to showreasonable

Schedule 2 includes reference to:

The relative bargaining strength ofthe parties

Whether the consumer received an

inducement to agree to the term orcould have entered into a similarcontract with another party withoutthe term

Whether the customer knew or oughtto have known of the term


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Applying UCTA to contracts

Is the defendantacting in the course

of a business?

What is the suspectclause limiting or

excluding?

Is the term automaticallyinvalid or subject to

reasonableness test?


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Unfair Terms in Consumer contracts

Regulations 1999

Aims to create an internal market whereconsumers can shop with similarprotection across EU

Scope goes beyond exemption clauses toany clause considered unfair

Only relates to consumers and sellers

Target standard contracts/any contract

not individually negotiated No interest in regulating core terms

(subject matter and price) as long as theyare in plain unintelligible language


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EU regulations main provisions

Regulation 8(1): A term found tobe unfair is not binding on theconsumer

Regulation 12: Office of fair

trading and other bodies mayseek injunction to prevent the useof the term

Regulation 5(1) unfair if, contraryto the requirements of good faith,it causes a significant imbalance inthe parties rights and obligations

arising out of the contract to thedetriment of the consumer Schedule 2 indicates what sort of

terms might be considered unfair


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Applying UTCCR

Is the contractbetween a

consumer and

business?

Is a standard formcontract used?

Is the term unfair?

Does the term define

subject matter or

price?

Is the term in plain and

intelligible language


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UCTA UTCCR

Type of clause Exclusion, limitation

indemnity

All standard termsexcept core terms

Type of relationship BusinessBusiness

Business-Consumer

Business-consumer


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Example

Sale of washing machineno liability if goods aredefective

Both UCTA and UTCCRapply but different outcome

UCTA: s6(2) clauseexcluding statutory implied

terms is always invalid

UTCCR: clause only invalidif unfair


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The particular problem of insulation of

core terms: regulation 6(2)

In so far as it is in plainintelligible language, theassessment of fairness of aterm shall not relate -

(a) to the definition of themain subject matter of thecontract, or

(b) to the adequacy of the

price or remuneration, asagainst the goods or servicessupplied in exchange.

Subject tofairness test

Unlesscomeswith 6(2)


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Director General of Fair Trading v First National Bank Plc

[2002] 1 AC 481

First case in which powers ofDirector came before courts

Banks make substantial amounts ofmoney from charging customers forbecoming, or attempting tobecome, overdrawn on their currentaccounts without priorauthorisation.

OFT concerned practice was unfair.It has been argued that areasonable consumer may well beflabbergasted to be charged forbeing overdrawn only a day

Sheltering such terms from a testof fairness does little to further thegoal of consumer protection.


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Court of Appeal

The term fell outsidethe UTCCR Reg 3(2)

because it was a coreterm

Director General

argued it was not acore term and fellwithin reg 3(2)


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House of Lords:

Lords Bingham, Steyn, Hope, Millett and Rodger

This case concerned fairness of a term in astandard form regulated credit agreementthat on default interest was chargeable after

judgment as well as before. The House of Lords emphasised that

Regulation 6 should be interpreted

restrictively, There is a difference between ancillary and

core terms: terms ancillary to the core of the bargain

should still be subject to assessment forfairness.

If Reg.3(2) was to be so widely construed

that such a term fell within the ambit of acore term it would defeat the purpose ofCouncil Directive 93/13.

Consequently, the term had to satisfy thefairness requirements contained in Reg.4 ofthe Regulations;


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But

Having regard to the context of the agreement,the term did not cause a significant imbalance inthe parties' respective rights and obligations andtherefore was not unfair for the purposes of

Reg.4. In assessing the fairness of a term under Reg.4,the court was required to consider whether thesupplier had dealt openly and fairly. In cases likethe instant case concerning the provision ofcredit, a borrower would accept that a lenderwould not lend if it might not be able to recover

all its principal and interest. First Direct's standard agreement set out the

nature of the borrower's obligations clearly andunambiguously.


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Reflections

A more literal approach tothe interpretation of theRegulations than is perhapsdesirable.

The trial judge and Court of

Appeal both emphasisedthat the purpose of theDirective, and thus theRegulations, was to ensureadequate consumerprotection.

A pertinent principle, notexpressly articulated by

any of the judges but latentin the judgments of thelower courts, is that ofunfair surprisein relationto such terms


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Abbey National v OFT

Are unplanned overdraft fees in banks standardcontract core terms outside of the scope of UTCCR?

Are the terms part of the essential bargain betweenbank and client - the price or remuneration, as againstthe services supplied in exchange"

OFT wanted to investigate The banks contended that any such investigation would

be circumscribed by the provisions of reg.6(2). Court not considering whether charges were fair but

whether they were regulated CA ([2009] EWCA Civ 116) Ancillary in nature:

Consumers much less likely to take into account termswhich will only apply in certain circumstances


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Supreme Court[2010] 1 A.C. 696

Lord Phillips; Lord Walker; Lady Hale; Lord Mance; Lord Neuberger

SC came to opposite conclusion. Bank charges levied on personal current account customers in

respect of unauthorised overdrafts constituted part of theprice or remuneration for the banking services providedwithin the meaning of the UTCCR 1999 reg 6(2)(b)

The regulation contained no indication that only an "essential"price or remuneration was relevant. Any monetary price orremuneration payable under the contract would naturally fallwithin the language of the regulation.

The Court of Appeal had gone too far in interpreting thelanguage of the Directive and the Regulations

As a result the Office ofFair Trading was not entitled toassess the fairness of such charges.

The only question for the court when applying Regulation6(2)(b) is whether the term in question relates to any part ofthe contractual consideration.


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Reflections..

This approach has the advantage of absolving thecourts from difficult questions regarding what ismerely ancillary, but greatly expands the scope ofRegulation 6, thereby reducing the amount ofprotection given to consumers.

The Supreme Court was content to allow a lessrestrictive interpretation of Regulation 6 since itidentified the purpose of the Regulations not to beconsumer protection but rather consumer choice.

Very literal interpretation

OFT has now stated that it will not pursue itsinvestigation further: (OFT 1154, Personal Current

Accounts - Unarranged Overdraft Charges: Decision

on an investigation under the UTCCRs and next steps(December 2009) Now favours legislative intervention

Lord Walker noted that it is open to the legislature toafford greater rights to consumers, and that otherEuropean countries, notably Germany, have chosento do this.


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In conclusion

The law regarding unfair terms inEnglish law generally issomething of a mess and can bedifficult for consumers to

understand The co-existence of the

Regulations and the UnfairContract Terms Act 1977 isunnecessarily complicated.

A helpful first step would be toadopt the Law Commission'sReport, Unfair Terms in Contracts(Law Com. No. 292 (2005).


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So what?

UCTA is better for claimant isclause is one which will always betreated as invalid

UCTA is as good as UTCCR is theclause is subject toreasonableness test under UCTAor unfairness test under UTCCR

More certainty about what isunfair under UCTA?

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