winning the battle against unfair contract terms

Vol20 No 3 September 2000

Legal Studies

Winning the battle against unfair contract terms

Susan Bright* St Hilda’s College, Oxford University

The Director General of Fair Trading has recently won thefirst 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 activiv ofthe 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.

The Unfair Terms in Consumer Contracts Regulations 1994’ (the ‘1994 Regulations’) have transformed the protection available to consumers against the use of unfair terms in contracts. Since the introduction of the Regulations on 1 July 1995, the Office of Fair Trading has investigated thousands of terms in consumer contracts, leading to a significant number of contracts being altered

* I would like to thank Professor Basil Markesenis and Christopher Bright for their comments on an earlier draft. My thanks also to various people within the Office of Fair Trading, Department of Trade and Industry and the European Commission for their comments and for assistance with the provision of information, in particular, Mr P Bovey, Legal Adviser at the Department of Trade and Industry, Mr P Deft, Consumer Affairs Directorate, and Mr R Woolley, Head of the Unfair Contract Terms Unit. The help received has been invaluable. 1. SI 1994/3159.

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by the amendment or abandonment of the offending provision.? The Regulations implement the European Community Directive on Unfair Terms in Consumer Contracts of 1993 (the Unfair Terms Di re~ t ive ) ,~ and so form part of a EU-wide programme of consumer protection, but the impact has been particularly marked within the United Kingdom. A number of factors contribute to this.

The United Kingdom was some way behind other member states in controlling the use of unfair contract terms prior to the Directive. There was, quite simply, more catching up to be done. But i t is also clear that the manner selected for enforcement of the Regulations has proven particularly effective. Under the 1994 Regulations, the Director General of Fair Trading is given a duty to investigate complaints about unfair terms, described by him as ‘the most important extension of my consumer protection responsibilities since the 1970s’ .4 The Unfair Contract Terms Unit established in response has energetically pursued complaints and has been able to secure the alteration of contracts in several business sectors through a process of rigorous negotiations, with almost no need to resort to legal actions.

This article will explore how the Regulations have operated in these early years and will also discuss the significance of the recent alterations to the Regulations, the 1994 Regulations having been replaced by the Unfair Terms in Consumer Contracts Regulations 19995 (the ‘ 1999 Regulations’). The objective remains the same but the detail of the Regulations d i f fenh The major change relates to the enforcement mechanism. It is now not only the Director General of Fair Trading who has power to act against unfair terms but enforcement powers have been extended to other bodies, public and private. The opportunity has also been taken to amend the scope of the earlier Regulations so that there is no longer any room to argue that the Regulations apply less widely than the Unfair Terms Di re~ t ive .~ The effect will be to extend the reach and impact of the Regulations. For consumers this must be good.

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: Unfuir Contruct 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 I994 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.

Winning the battle against unfair contract terms 333

Quite apart from the advances made to consumer protection, the adoption of the European Directive was perceived as a significant step in the development of European law, representing the first inroad into general private law principles of contract law, and, perhaps, the start of a journey towards harmonisation of contract law. Five years on, it is time to be more circumspect. Even though their roots lie in a European Directive, the day-to-day interpretation of the Regulations appears as an essentially localised matter. In the United Kingdom, this interpretation has been led by the pro-consumer stance taken by the Unfair Contract Terms Unit. The Office of Fair Trading is to be congratulated in seizing the chance given to protect consumers in this way.

ENFORCEMENT OF THE UNFAIR TERMS IN CONSUMER CONTRACTS REGULATIONS

Although the UK Regulations can be relied on in private law disputes involving consumers, it is the Unfair Contract Terms Unit that has been at the forefront of action against unfair contract terms. Private law enforcement does not provide an effective way of regulating the standard inclusion of unfair terms in adhesion contracts: it is true that success in an individual action will mean that the term is not binding upon that consumer, but its impact beyond that consumer will be limited,* and there is no significant pressure on the business to discontinue future use of that term. Further, there will only ever be a trickle of private law actions, as most consumers prefer to deal with matters i n f~ rma l ly ,~ or not at all, rather than pursue complaints by formal legal mechanisms in which the costs of litigation (financial and otherwise) exceed the benefits that stand to be achieved.'d So far there has only been a handful of cases in which the consumer has, with mixed success, relied upon the 1994 Regulations."'

The administrative model of enforcement created by the 1994 Regulations (and extended by the 1999 Regulations) is a much more effective way of preventing the continuing use of unfair terms and changing contracting practice. Investigation into allegedly unfair terms usually follows a complaint made to the Director General of Fair Trading, who is under is a duty to investigate unless

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 ( 1 995), referred to in H Collins Regulating Contracts (Oxford: Oxford University Press, 1999) p 87. 9a. 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-240198 to 244198,27 June 2000. 10. Terns found to be unjair: Falco Finance Ltd v Cough (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 [ 19991 1 CL 284 (tenancy term); Zealander & Zealander v k i n g Homes Ltd (19 March 1999). reported through Lawtel (arbitration clause); Hartrnan v P &O Cruises Ltd 199813732 CL (damages for cancellation of holiday). Terms found to be fair: Broadwater Manor School v Davis [ 19991 5 CL 208; Gosling v Burrard-Lucas [1999] 1 CL 197 (school fees in lieu of notice).

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i t is 'frivolous or vexatious'." There is a strong flow of complaints made to the Unfair Contract Terms Unit,I? about half of which come from local authority trading standards departments and consumer advice organisations. The Unit has adopted a proactive response to complaints; not only will the particular term complained about be looked into, but the contract as a whole will be investigated. Indeed, investigations often spread beyond the particular contract to involve trade associations, and the Unit has initiated a number of sectoral investigations so that contracts used by traders in a similar line of business can be looked at together. So, for example, there has been notable success in securing the amendment of terms in mobile phone contracts, the sector about which there has been most complaint. By way of illustration, numerous amendments were agreed in relation to Vodafone contracts, including adjustment of the notice requirement (which had required three months' notice in addition to the minimum 12-month term), deletion of a clause providing for a substantial disconnection charge, and a reduction in the level of compensation payable by a consumer who terminates early.13 Other sectors which have been focused upon include the home improvement industry,14 vehicle rental, package holidays and, most recently, the Director General of Fair Trading has announced that he is investigating conditions of airline use." Discussions with trade associations are not always a response to complaints and may be on the initiative of the Office of Fair Trading.

In practice, the vast majority of cases are dealt with by negotiation and if the contract term is found to be unfair the Unfair Contract Terms Unit will require the business to provide an undertaking to discontinue the use of the unfair term." Court action has been seen as a last resort. Although the Director General of Fair Trading has power to apply for an injunction to restrain the use of unfair terms, this has, so far, occurred only once. This is a little surprising, given that the issues at stake are not insignificant. In relation to mortgages, for example, the Office of Fair Trading persuaded the City Mortgage Corporation (CMC) to reduce its dual interest rates and the manner of calculating the premium due on early redemption of the mortgage. The

11. 1994 Regulations, reg 8( I ) , 1999 Regulations, reg 10(l)(a) or, following the 1999 Regulations, if a qualifying body has notified the Director that it agrees to consider the complaint, reg 10(l)(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 Utfuir Contrtrct Terms, OFT Bulletin, Issue No 3. March 1997, pp 45-50. 14. See Unfulir Contrctcr Terms, OFT Bulletin, Issue No 5, October 1998, OFT 246,

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' [ 19981 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 Unfuir Contract Terms, OFT Bulletin, Issue No 6, April 1999, OFT 262, Pt 7.

pp 11-12.


financial costs to CMC must be great.” It is interesting to speculate just why this course of action has been so successful and why traders have, with varying degrees of willingness, complied with the requests to abandon or amend terms without forcing the issue to court. Presumably, the fear of bad publicity plays a part. There is also the fact that many of the terms are fair in part: by rewriting them the trader can still secure the protection needed whilst also being fair to the consumer; if left unamended, the terms may be wholly unenforceable against the consumer. Dealing with trade associations is also an efficient way of reaching businesses: as the representative figure within that sectoral activity, associations will often be anxious to present a positive public image and to maintain good working relationships with the Office of Fair Trading. Agreements reached at this level will be passed through to the trading bodies who use the association’s standard contract. By way of example, the Office of Fair Trading agreed a revised model contract for use by members of the British Vehicle Rental and Leasing Association. About 85% of companies in the industry belong to that association.I8 It is also less costly to proceed by way of undertaking than by paying the costs of going to court. However, what has been the practice over the last five years will not necessarily be the pattern of the future; if it emerges over time that the courts adopt a less consumer-orientated interpretation of the Regulations, there is the possibility that fewer cases will be settled by negotiation alone.

This administrative model of enforcement was not prescribed by the Directive. Although the Directive specifies that mechanisms must be in place to prevent the continued use of unfair terms in consumer contracts, the method deployed to achieve this end is left to member states. States could therefore select not only to hand this role to a public official (as in the United Kingdom and in Nordic countries), but to permit consumer organisations to bring actions to prevent the continued use of unfair terms (as in Germany and France), or (possibly) to use criminal sanctions.’’ The route chosen in the United Kingdom has proven

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 291. 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 ECConsumer 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 fur Europaisches Privatrechle, Westfalische Wilhelms-Universitat Miinster. 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~cconsumer/events/event29~en.html.

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effective, as already seen, but there were complaints that the 1994 Regulations failed to give a voice to consumer organisations. Article 7 of the Unfair Terms Directive requires member states to ensure that ‘adequate and effective means exist to prevent the continued use of unfair terms’ and that the means shall ‘include provisions whereby persons or organisations, having a legitimate interest under national law in protecting consumers’ may take action to have terms declared unfair.”’ In 1995 the Consumers’ Association sought to have the exclusion of bodies such as theirs declared to be an unlawful implementation of the Directive.?’ The judge, Hidden J, referred the question raised by the Consumers’ Association’s action to the European Court of Justice for a ruling on the Community law, but the point was never pursued, as the UK government announced its intention to address their concerns through an amendment to the 1994 Regulations.”

There are various models that could have been used to extend the enforcement powers beyond the Director General of Fair Trading. The approach adopted in the 1999 Regulations is to list additional specific bodies (statutory regulators, trading standards departments and the Consumers’ A~sociation)?~ as having powers to apply for an injunction to prevent the continued use of unfair terms.?‘ With the exception of the Consumers’ Association, these bodies can also notify the Director General of Fair Trading that they will investigate a complaint, and will then be under an obligation to do so.2s An alternative model would have been to facilitate action by any body that is able to show that it fulfils certain criteria - depending upon the criteria selected, this would have enabled organisations such as the National Consumers’ Council, Citizens’ Advice Bureaux and the Financial Services Authority, to apply to bring actions. This route was the preferred approach of the Department of Trade and Industry in its Consultation Paper,?6 which set out at some length the criteria that could be used

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 Implementution of the EC Directive on Uilfnir 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 lmplernentution ofthe EC Directive on Utlfair Tenns in Consumer Contracts, Further Consultation Document, September 1994. 21. R v Secretary of State for Trade mid Industry. ex 13 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:

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 Northem 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 I I . 26. Department of Trade and Industry Widening rhe scope for action under the Unjblir Contmct 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.

E-2827/95 WQ, 96/C 40/98.


by a court in deciding whether or not to recognise bodies. Nevertheless, this route proved to be impractical. It entailed the risk of wasted expenses for traders, who could be put to the trouble and expense of defending claims from bodies who might later turn out not to fulfil the specified criteria. Implementation would also have necessitated changes to the rules of court, which would have generated further delay. There is a risk, however, that having selected the list approach, non-listed bodies might bring fresh challenges. Although the emphasis of the Consumers’ Association case lay in the claim that it was unlawful to have empowered only one public body to bring actions, there must be some doubt as to whether it is within the Directive to deny this option to any body which can show that it has a ‘legitimate interest under national law in protecting consumers’ (art 7). It is likely, however, that there will be a second wave of listing: the Department of Trade and Industry has invited consumer bodies who wish to have enforcement powers under the Regulations to contact the Department.”

The extension of powers beyond the Director General of Fair Trading meant that measures had to be put in place to ensure that there would be consistent approaches taken to unfair terms, effective co-ordination between the enforcement bodies, and to protect traders from multiple challenges. To this end, if a qualifying body intends to apply for an injunction, it must give the Director General of Fair Trading notice and then, unless a shorter period is authorised, cannot commence the action within 14 days.2x In addition, the qualifying body must inform the Director General of Fair Trading of all undertakings it receives and of the result of any applications for an injunction.?’ The fact that there is only a small number of bodies authorised to act does minimise the risk of a trader being in negotiation with several ‘enforcers’. The Director General of Fair Trading will remain the primary investigator and, as all investigations have to be reported to him, he will have an overview of all complaints. He retains a duty to disseminate information about the operation of the Regulations, not only about his own actions but also reporting on undertakings given to, and actions brought by, other qualifying bodies.’” In practice, dissemination has taken place through the issue of regular bulletins containing details of case reports, coupled with press releases reporting significant ‘triumphs’.

It is anticipated that the widening of the enforcement provisions, and the ability to apply for injunctive relief in the County Court, will increase the number of cases taken to court.” This may well impact upon the application of the Regulations. To date, the Office of Fair Trading has largely operated with a free hand, exercising a wide discretion to apply the Regulations in the interests of consumers. Judicial intervention may impose more checks and balances into their application. Of the few cases that have come before the courts so far, some have diverged from the approach taken by the Director General of Fair Trading.

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 hijunctions Directive: Implementation in the U K , 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.

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In a Northern Irish case, Kitidlance Ltd v Murphy,” Master Ellison held that the dual interest rate provisions in a mortgage were exempted from the fairness test in the Regulations by the ‘core terms’ exclusion (which is discussed below). In contrast, the Office of Fair Trading has always maintained that dual rates provisions are liable to review for fairness, an approach which also has some judicial support.33 There is also, however, the wider picture to consider. Although the Office of Fair Trading has largely operated in isolation, the source of the Regulations lies in the European Unfair Terms Directive. Questions of interpretation will ultimately be for the European Court of Justice, but it is unlikely that vast numbers of cases will be referred.3J Much of the wording of the Directive is based upon Continental notions and yet there is no obvious procedure in place to facilitate the sharing of experiences between member states. There has been an attempt to provide for this by establishing a database which pools information from member states about decisions, both judicial and administrative.’5 Although the database contains information about some 6,000 cases, it is not easy to use and does not give sufficient information to promote deep understanding about the meaning of phrases within the Directive. Occasional conferences have been held to assess the implementation of the Unfair Terms Directive, but if the Directive is to lead to a more harmonised approach towards unfair terms in consumer contracts, there needs to be a regular mechanism to ensure a consistency of approach, such as an advisory panel, spearheaded by the Directorate responsible for consumer affairs, DG XXIV.

THE SCOPE OF THE REGULATIONS - LESSONS ON ‘COPY-OUT’

European legislation has clearly created difficulties for English draftsmen. Faced with the task of implementing European measures, legislators have had to choose between a ‘copy-out’ technique which adopts the same, or very similar language to the Directive itself, and an ‘elaborative’ technique which comes down on one side or the other of choosing a particular meaning, in accordance with the traditional approach in UK legislation.36 Most UK legislation is elaborative. This is not to say that it eschews the use of general statements of principle to be applied by the judiciary, but it is generally the case that the scope of UK legislation is precisely defined.“ Whilst elaboration generates greater certainty, i t carries

32. (1997, High Court of Northern Ireland), available on Lexis. 33. Fdco Finunce Ltd 12 Cough (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: Oceatio Grupo Editorial SA 11 Mitrcicttia Quintero C-240198 to 244198, 27 June 2000. 35. The CLAB Europa database, available on the internet: http:l/europa.eu.intomm/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 21 8. 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 I 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 I .


with i t the risk that it might be a wrong implementation of the European legislation.

When implementing the Unfair Terms Directive, the Department of Trade and Industry broadly adopted a ‘copy-out’ approach but chose to elaborate on certain points. In particular, the application of the 1994 Regulations was limited to ‘goods’ and ‘services’ contracts even though this limitation had not appeared in the operative part of the Directive.3x Additionally, the definitions of ‘seller’ and ‘supplier’ are materially different between the 1994 Regulations and the Unfair Terms Directive. Under the Directive, “‘seller or supplier” means any natural or legal person who . . . is acting for purposes relating to his trade, business or profession, whether publicly owned or privately owned’ (art 2(c)). The definitions in the 1994 Regulations read: a seller ‘means a person who sells goods and who . . . is acting for purposes relating to his business’, a supplier ‘means a person who supplies goods or services and who . . . is acting for purposes relating to his business’ (reg 2, emphasis added). The references to a seller of goods and a supplier of goods and services generates two difficulties. First, are contracts relating to real property excluded by the references to ‘goods’ and ‘services’, as it is arguable that these expressions exclude immovable property under English law?”9 Secondly, would the 1994 Regulations apply only if the trader was selling or supplying?

The aim of the Unfair Terms Directive, as an internal market measure, is to achieve a uniform approach to the use of unfair terms in consumer contracts, at least at a minimal level of protection. Elaborating on the meaning of the Directive risks a loss of this uniform approach, and it became increasingly apparent that the UK’s decision to restrict the 1994 Regulations to ‘goods’ and ‘services’ contracts was out of line with the understanding within the European Commission,jo and the approach of other member states where the Unfair Terms Directive is applied to all consumer contract^.^' In terms of the day-to-day

38. See discussion of this point in S Bright and C Bright ‘Unfair Terms in Land Contracts: Copy-out or Cop Out?’ (1995) 1 11 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 3.20-2 1 (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).

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operations of the Office of Fair Trading, this also made investigation of complaints about land contracts difficult. Although the early OFT Bulletins report the investigation of a number of contracts that relate to land use, most of the contracts could be classified as 'service contracts'. So, for example, complaints were dealt with in relation to holiday accommodation, cloakroom use, student accommodation and mortgages.'2 Although each of these could be classified as a contract relating to land, the provider of the accommodation or finances could also be viewed as a 'service' provider and, thus, less contentiously brought within the 1994 Regulations. The closest case to a 'pure' land contract reported in the first seven bulletins involved the investigation of a business acting for property sellers by agreeing an asking price and then purchasing a 12-month option to buy the property.J' Although this clearly involves the creation of interests in land, it can also be classified as a contract for estate agency services, thereby enabling the Office of Fair Trading to assume jurisdiction. There are notable omissions from these Bulletins: no investigation of tenancy agreements, the taking ofrental deposits, and house sales. The implication is that the Office of Fair Trading acted cautiously, awaiting clarification as to whether or not there was jurisdiction to investigate complaints made in relation to contracts involving the creation and transfer of estates in land.

Consequently, the opportunity was taken with the review of the Regulations to amend the troublesome definitions. Even in the 1999 Regulations there is no clear statement on their application to land. Instead, the Department of Trade and Industry has chosen to move more closely towards a copy-out of the Unfair Terms Directive,Y and the definitions of 'seller' and 'supplier' now mirror those appearing in the Directive. Nevertheless, there can no longer by any real doubt that the 1999 Regulations do apply to land contracts as to other consumer contracts. Even under the 1994 Regulations, there were strong arguments based on the Community context of the Regulations that contracts relating to land were covered.'s In relation to mortgages it has been accepted judicially that the 1994 Regulations do apply," although it must be added that the strong financial services element of mortgages meant that there was always much less doubt that

42. Eg: student accommodation, Anglia Polytechnic University, Lewes Tertiary College; mortgages. City Mortgage Corporation: holiday accommodation, Dales Country Cottages Ltd: Urqkir Coritrcrct Trriris, OFT Bulletin, Issue No 5. October 1998, OFT 246, pp 20,36, 8-9. 26 respectively. 43. Brunswick Properties Unfair Coirtrurct 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'. 11, para 8. 45. See Bright and Bright above n 38; the argument put there seems to have been accepted in Kindluricu Ltd 1' 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: Boyerische H?pothekenUiid Wechselbank Ag v Edgar Dietzinger Case C-45/96 [ 19981 2 CMLR 499. 46. Kiiidlnnce Ltd ~ M u r p k y ( 1997. High Court of Northern Ireland), available on Lexis; Fdco Fincirrce Ltd I' Gough (28 October 1998. Macclesfield County Court). reported through Lawtel.


they were within the 1994 Regulations than other land contracts." There has also been a county court case applying the 1994 Regulations to a tenancy agreement, on the basis that the grant of the tenancy was the provision of a service.48 Although the judicial authority is thin, there is no contrary authority. The Department of Trade and Industry is moving cautiously towards the position that the majority of land contracts are within the Directive, particularly tenancy agreements, licences and mortgage^.^^ The eighth OFT Bulletin - published after the 1999 Regulations had been introduced - indicates a clear change of approach and reports the amendment of terms to tenancy agreements and rental deposits.'" The position under the 1999 Regulations is much stronger. Although it is ultimately for the European Court to clarify, it is increasingly apparent that the Unfair Terms Directive, and thus the 1999 Regulations with their copy-out wording, applies to all consumer contracts, including contracts relating to land.

The other limitation that the definitions in the 1994 Regulations suggested was that the Regulations would apply only in relation to contracts by which the trader was selling or supplying goods or service^.^' There can, however, be other contracts between sellers or suppliers and consumers, such as where the trader is buying a second-hand car from the consumer for resale or obtaining a guarantee from a consumer. These are also intended to be covered by the Unfair Terms Directive and the amendment to the definitions in the 1999 Regulations removes the earlier restriction.

Certain types of contracts were expressly excluded from the 1994 Regulations (Sch 1). These were the contracts listed in the tenth recital as being excluded from the Unfair Terms Directive: contracts relating to employment; contracts relating to succession rights; contracts relating to rights under family law; and contracts relating to the incorporation and organisation of companies or partnership agreements. This exclusion no longer appears in the Regulations, on the grounds that express exclusion is not necessary. The tenth recital explains the scope of the Directive as being limited to consumer contracts; and the view from within the Commission is that the excluded contracts are contracts which cannot be concluded between a seller/supplier and a consumer.s' On this view,

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 [ 19991 1 CL 284. 49. See Regulatory Impact Assessment, dated 22 July 1999, 11, paras 5, 1 I . Para 1 1 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 i t 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 I995 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.

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it is unnecessary to list them as exclusions. Indeed, the explanation as to why they appear at all in the tenth recital is that it copies a provision of the German AGB in which the exclusion is necessary because the German law is not restricted to consumer contracts. A recent English case has, however, held that an employment contract can be a consumer contract within the Unfair Contract Terms Act 1977, 53 and it may be that on this point English law and European law will be found to diverge. If this is the case, the Regulations will, of course, be interpreted in accordance with European law.

There is, perhaps, a tale of caution to be learned from the implementation of the Unfair Terms Directive. Even though the 1994 Regulations were based loosely on a copy-out approach, the attempts at elaboration led to subsequent difficulties. The explanation lies in part in the choices that were made at that time; key words were not understand through the eyes of ‘European law’ but were analysed as terms of English law. Given that there is not a common legal heritage within Europe, there is always the risk that English lawyers trained in the common law will fail to appreciate the depth of legal phrases and concepts used in European legislation. Perhaps it is inevitable that copy-out will become the normal method of implementation, but this simply passes the problem down the line to lawyers who have to advise clients on the meaning of legislation.

INTERPRETATION OF THE REGULATIONS

Given the activity of the Unfair Contract Terms Unit over the last few years, there is now a considerable body of guidance that has been published in the OFT Bulletins illustrating its approach towards the interpretation of the 1994 Regulations and their application to consumer contracts. In its energetic pursuit of complaints, the Unfair Contract Terms Unit has been overtly ‘pro-consumer’, unhampered by doubts expressed in other quarters about the proper interpretation of, in particular, the unfairness provisions. Whether or not the Directive is being correctly applied will ultimately be a question for the European Court of Justice, but the process is not helped by the abstruse language and style used. This obscurity results from the protracted evolution of the Directive and the involvement of member states with differing legal styles and traditions.s4 It is misleading to assume that each provision of the Directive is a carefully chosen phrase of intended meaning; the strange conjunction of tests and phrases appears to owe much to various compromise positions that were adopted in the course of the legislative process. Against this background, we shall explore how the Regulations are being interpreted.

The fairness test: excluded terms

In essence, the Unfair Terms Directive subjects all terms in consumer contracts to a test of fairness; terms that fail this test will not be binding on the consumer.

53. Brigden v Aniericarz Express Bank Lrd [ 20001 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.


There are, however, two important exceptions to this which are carried through into the UK Regulations: negotiated terms, and mandatory statutory terms.”

Early drafts of the Unfair Terms Directive aimed to regulate the fairness of all consumer contract^.^^ During the legislative process, these provisions were amended and the Directive that was eventually adopted applies the fairness test only to ‘a contractual term which has not been individually negotiated’.’’ The fact that the consumer has received legal advice does not mean that the terms are deemed to have been neg~tiated.~’ Further, the Directive states that it will not be individually negotiated where it has been drafted in advance. Notwithstanding the somewhat ambiguous wording of art 3.2, even if several terms have been negotiated within a contract, this will not prevent other, non- negotiated, terms from being reviewed for fairness.” Nor will the negotiation of a term which fails to produce any modification mean that the term is no longer classified as a non-negotiated term.@’

The fairness test and core provisions

The 1999 Regulations provide that:

‘in so far as it is in plain, intelligible language, the assessment of the fairness of a term shall not relate - (a) to the definition of the main subject matter of the contract, or (b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.’ (reg 6(2))h’

Such terms have become known as the ‘core provisions’.62 The 1994 Regulations were worded somewhat differently, stating that ‘no assessment shall be made of the fairness of any term’ defining the main subject matter or relating to the adequacy of the price. The 1994 wording suggests that the core provisions are altogether excluded from the fairness test,b3 a view that is commonly expressed. The later wording has shifted the emphasis. It may be that core provisions are not excluded altogether and that such terms are capable of being

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 Zeulunder & Zeulander v Laing Homes Ltd (1 9 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 Bunk 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.

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assessed for fairness but, in doing so, the adequacy of the price itself and the definition of the main subject matter will not be assessed for fairness.64 In practice, both the Office of Fair Trading and the courts have taken the view that the core provisions were excluded from review, albeit on the older wording. Nevertheless, as the exempted ‘core provisions’ were narrowly defined the difference in approach is not likely to be significant. The intention behind this provision in the Directive appears to have been to exclude from the scope of the Directive ‘anything resulting directly from the contractual freedom of the parties’.65 This fits with consumer behaviour: most consumers will focus upon the price and quality of goods when deciding whether or not to enter the contract, and these aspects of the contract can, therefore, be said to reflect a free choice in the majority of non-monopoly cases. Other terms of the contract will, however, seldom form part of the decision making process. There is no real market in non-core contractual termshh which explains why consumers need greater protection against unfairness in relation to non-core terms which have not been negotiated.

In determining whether or not a term is a core provision, the Office of Fair Trading has asked whether the clause is a core term that the consumer would have concentrated on in deciding whether or not to enter the contract.” There have not been many case studies involving para (a) but two reports in the OFT Bulletins describe core terms which, as they do not relate to the price paid, presumably come with para (a): an insurance clause which prevented a claim on the policy if the loss was also covered by any other policy,6X and the expiry date on gift vouchers.hy It is surprising that both of these are viewed as core terms,’” especially on a view of the Regulations which excludes core provisions from assessment for fairness at all. It is generally thought that the core terms exemption should be interpreted in a very restrictive way.” One way of interpreting para (a) (but clearly not the approach which the OFT followed) would be to ask what the consumer would say she had bought if asked, and this will be the main subject matter of the contract. In relation to the gift vouchers, for example, she would have said, ‘ I have bought some gift vouchers’. This is the main subject matter; the expiry date is a subsidiary term. Non-core terms will be subjected to the fairness test and, as will be seen, this may require the term to be brought to the attention of the consumer. If, therefore, a subsidiary

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’, Unfuir Contrucr 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 i t 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.


term apparently limits the main subject matter, this limitation must be made clear to the consumer, and reflected in the price paid.7’

In relation to paragraph (b) the price/quality ratio is excluded, but not other terms relating to the price. The OFT Bulletins report numerous cases of price variation clauses being amended or deleted, drawing support for the intervention from para I ( ] ) in the illustrative list of potentially unfair terms.73 The Office of Fair Trading also treats price changes following default by the consumer as subject to review for fairness, an approach now supported by the Court of Appeal decision in DGFT v First National Bank.74 Default related pricing clauses have come before the courts on three occasions. The first context in which they arose was in relation to private law actions relating to mortgages, concerning the provision for dual interest rates. Dual interest rates are particularly common in lending to ‘non-status’ borrower^;^^ the lender offers an attractive concessionary rate of interest which reverts to a higher ‘standard’ rate as soon there is any default by the borrower. The Office of Fair Trading regard such terms as unfair and oppressive, particularly when the differential between the two rates is great, and do not regard dual interest rate provisions as being core term^.'^ Judicial responses to the applicability of the Regulations to dual interest rates have been mixed. In Falco Finance Ltd v Judge Elystan Morgan treated a dual interest rate provision as within the Regulations without discussing the core terms ‘exemption’. By contrast, in Kindlance v Murphy,7x Master Ellison, even though he appeared to agree with the Office of Fair Trading’s criticism of the use of dual interest rates, took the view that he had no jurisdiction to assess the fairness of the provision as it concerned ‘the adequacy of the price or remuneration’. It is submitted that the better approach is not to treat the dual interest rates’ provision as within para (b): although a court cannot assess the substantive fairness of the pr iceheres t rate per se, it is permitted to look at the default mechanism which triggers the loss of the concessionary rate, and at how clearly this is explained to the borrower. This approach is supported by the remarks of Peter Gibson LJ in DGFT v First National Bank.7q Although addressing a different provision, he commented that the term in issue before him did not ‘concern the adequacy of the remuneration, relating as it does only to a case where the borrower is in default’.

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 Tcnreiro 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 I994 Regulations, Sch 3. Paragraph 1 ( I ) 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-storus 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 ( 1 997. High Court of Northern Ireland), available on Lexis. 79. [2000] 2 WLR 1353.

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The other default related pricing provision arose in the First Nurional Bank case itself, the first legal action to be brought by the Director General of Fair Trading under the Regulations. The relevant clause provided for interest to be payable at the contractual rate until a judgment debt is fully paid, meaning that even after all instalments ordered to be paid by a court had been paid (when the borrower would expect the debt to have been repaid), a large sum would still be owed. The usual common law position is that the contract merges with the judgment and the interest payable after judgment is governed by statute. It is, however, possible for the parties to provide for there to be no merger, and the question here is whether this is a ‘core term’ or not. Neither the first instance judge, Evans-Lombe J, nor the Court of Appeal thought this provision exempted from a review for fairness. The reasoning on this aspect in the Court of Appeal is based on the fact that the clause applies only in a default situation and, adopting the arguments advanced by the Solicitor-General, it does not state the rate payable but provides only for the contractual rate to continue to be payable. Evans-Lombe J followed reasoning which is similar to that used by the Office of Fair Trading:

‘ I do not think that the average borrower seeking a home improvement loan from the Bank would consider default provisions as one of the important terms of the agreement which he would have under consideration in deciding whether or not to accept an offer of advance.’*”

In effect, he asked whether the consumer would have regarded this as one of the important terms to consider in deciding whether or not to enter the contract. As he would not have done, it was not excluded from an assessment of fairness. Even core terms can be reviewed if they are not written in plain, intelligible language.81 This is clearly required by the Regulations. The Office of Fair Trading has also been willing to review core terms when the term has been hidden away in the contract and not brought to the attention of the consumer,x2 revealing a keenness to deal not only with issues of substantive fairness but also procedural fairness:

‘Recital 20 of the relevant Directive (93/13) makes clear that the aim is not just the substitution of plain words for legal jargon but rather that consumers are given a real chance to read and understand contracts before becoming bound by them.’x3

This ‘purposive’ approach is entirely appropriate in the context of Community law, with its teleological approach to the interpretation of legislation and the principle of effeet utile, which provides that preference should be given to the construction which gives it fullest effect and maximum practical value.x‘

On the whole, there has been a ‘consumer-orientated’ approach to reg 6(2), especially para (b). A term is seen as ‘core’ only if the consumer would have

80. Director General of Fair Trading 1’ First Nuriorzcil Bankplc [2000] 1 WLR 98 at 107. 81. See eg Unfair Corztruct 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. Ur!fuir Contrcict Terms, OFT Bulletin. Issue No 6, April 1999, OFT 262, para 1.25. 84. An approach increasingly familiar to the English judiciary: Pepper v Hurt [ 19931 AC 593. See, the Rt Hon Sir Thomas Bingham ‘Some Comparative Reflections’ in B Markesenis (ed) The Grudunl Convergence (Oxford: Clarendon Press, 1994) p 166.


treated it as such and it relates to the price or defining the subject matter. This means that even a provision that does relate to the price or subject matter will not be excluded from review if it was not brought to the consumer’s attention, and therefore could not have been something which the consumer focused on. Even a core term will not survive intact if it is not written in plain, intelligible language.

Assessment of fairness

Under the Regulations, a term that is unfair is not binding on the consumer. It will be unfair if it has not been individually negotiated and, ‘contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’ .*’

There has been considerable discussion about how this should be interpreted. Much of the debate centres around the question of whether unfairness is concerned solely with substantive matters, based upon a single criterion, ‘significant imbalance etc’ contrary to good faith, or whether there can be unfairness if there is either substantive unfairness or procedural unfairness, the guide for procedural unfairness being the ‘good faith’ requirement.x6 To search for the true and intended meaning of the provision is, however, a futile exercise. Tenreiro, who was involved in much of the discussion on the draft Directive, illustrates how the test for unfairness began as a series of independent criteria which gradually were whittled down and merged into one test during the negotiation^.^' The ‘good faith’ requirement remains as a complementary requirement to ‘significant imbalance etc’ because the Commission was determined to retain the concept of good faith given its significance to certain Continental legal systems, in particular Germany whose legislation heavily influenced the shape of the Directive.** It could not survive as a stand-alone test, however, in the face of opposition from member states, such as the United Kingdom, who are less familiar with good faith as a legal concept.*’ In the absence of a clear Community ruling on ‘unfairness’, there is as yet no firm meaning given to the expression used in the Directive: the meaning will evolve over time.

Nevertheless, there are indications within the Directive that unfairness is to do with both substantive terms and procedure. The recital concerned with good faith illustrates a concern for matters of conduct: ‘the strength of the bargaining positions of the parties, whether the consumer had an inducement to agree to the term and whether the goods or services were sold or supplied to the special order of the consumer’,90 and, importantly, ‘the requirement of good faith may

85. 1994 Regulations, reg 4( I ) ; 1999 Regulations, reg 5( 1). 86. Or whether both substantive und 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)Aspecrs ojFairnes.7 in Conrracr (London: Blackstone, 1996) p 25. 87. See Tenreiro, above n 52 at 274-6. 88. Chirry on Conrrucrs (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 Fuulr in Conrracr Lriw (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).

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be satisfied by the seller or supplier where he deals fairly and equitably with the other party whose legitimate interests he has to take into account’. In practice, both the Unfair Contract Terms Unit and the English judiciary have looked both to substance and procedure in determining fairness.”

There does, however, remain a very real difficulty in working out what unfairness means. It is generally accepted that a term which leads to ‘significant imbalance etc’ is automatically contrary to good faith (and therefore unfair). If this is so, it is hard to see how procedural matters can play an independent role within this provision, especially as a procedural irregularity alone does not appear to be enough to trigger intervention; after all, the wording requires not only that i t be contrary to good faith, but that in addition it cause a ‘significant imbalance etc’, which must surely be substantive. So, procedural unfairness will only suffice if it leads to substantive unfairness. None the less, it is submitted that there are two routes to unfairness within this Regulation. A term will be unfair if it is so unfair that it causes a significant imbalance etc to the detriment of the consumer; this is to be judged not ‘by personal concepts of inherent fa i rne~s’~? but by the tests set out in the Regulations. Some terms, however, may notperse, cause a significant imbalance etc but have the potential to do so if they are not drawn to the attention of the consumer. This could apply, for example, to a clause requiring notification of any defects within a reasonable time. If the consumer is not aware of such a term, it will work to cause sigcificant imbalance to the detriment of the consumer even though the substance of the term is not unfair. This weaves together matters of substance and procedure.

This approach is supported by the decision in First National Bank, the case concerning the fairness of a term in a loan agreement which provided that interest was payable at the contractual rate on all moneys owing, even after judgment, until the debt was fully discharged. At first instance, the judge very clearly adopted this two-stage test. He asked firstly if the clause was unfair (a substantive issue). Finding it not to be unfair, he then accepted that ‘surprise’ might make a term unfair if it ‘unfairly deprives consumers of a benefit or advantage which they may reasonably expect to receive’.‘I3 The Court of Appeal’s analysis is not broken down in the same manner, but it is evident that both procedure and substance play a part. In the Court of Appeal the relevant clause was thought to be unfair in the sense that it caused a ‘significant imbalance in the rights and obligations of the parties by allowing the Bank to obtain interest after judgment in circumstances when it would not obtain interest under [statute] . . . and no specific benefit to compensate the borrower is provided, and it operates to the detriment of that consumer’. In addition, the relevant term created ‘unfair surprise and so does not satisfy the test of good faith’. Each three of these elements - absence of good faith, significant imbalance, and detriment to the consumer - was found to exist. Although the Court of Appeal does not clearly state that procedural irregularities can lead to substantive unfairness (being

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 Llilfair Contruct Tentis, OFT Bulletin, Issue N o 4, December 1997, OFT 202. 92. Peter Gibson LJ in DGFT v First Nutionul Burzkplc [2OOO] 2 WLR 1353 at 1366. disapproving of the test used by Evans-Lombe J at first instance. 93. DGFT v First Nariorinl Bar7k p / c (20001 I WLR 98 at 1 10.


unnecessary because of the finding that the term was - in itself - substantively unfair), the reasoning in the judgment does support this view.

Similarly, the Office of Fair Trading has taken the view that full disclosure and an opportunity to read the terms of a contract is important to the issue of fairness and the bulletins give examples of terms which were viewed as potentially unfair because the consumer had no chance to find out about them before committing herself.94

In the day-to-day operation of the Regulations the so-called ‘grey list’ has proven very useful. This is a list of terms which ‘may be regarded as unfair’, contained in the Annex to the Directive, and copied in both the 1994 and 1999 Regulations. Although some commentators have suggested that it identifies ‘those terms which would rarely satisfy the test of fairness and are therefore effectively void’,95 Harvey J in Zealander v k i n g g h has recently stated that they do not create rebuttable presumptions, but are ‘merely guidelines’. For the Office of Fair Trading, the grey list terms are ‘under substantial ~uspicion’.~’ In addition, the courts have found Sch 2 to the 1994 Regulations a useful guide. This Schedule lists the matters referred to in the good faith recital (recital 16, discussed above), such as the bargaining positions of the parties. So, for example, in finding the dual interest provision contrary to good faith in Falco Finance,” Judge Elystan Morgan drew attention to the fact that Mr Gough was in a weakened bargaining position (Sch 2(a)), and was given powerful inducements in the form of having to pay no solicitor’s or surveyor’s fees, and the seeming attraction of the concessionary interest rate (Sch 2(b)). In the move to closer copy-out of the Directive, these matters are no longer referred to in the 1999 Regulations. Although the recitals to Directives are not of binding legal effect, they are persuasive and informative, and it is perhaps regrettable that these guidelines as to ‘good faith’ no longer appear in the Regulations as it is clear that the courts have found them useful to refer to.

The OFT Bulletins contain numerous examples of clauses that have been found unfair.y8a Common examples are terms that limit or restrict liability for shortcomings in the quality of goods and services (particularly those that exclude liability for delay), clauses that exclude liability for oral statements made by employees and agents, price variation clauses, and clauses requiring full payment in advance of the consumer receiving the goods or services being purchased.9y The variety of clauses investigated is huge and it is only by reading the bulletins

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 h i n g Homes Ltd (1 9 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. 98a. The European Court of Justice has recently held an exclusive jurisdiction clause to be unfair: see Oceano Grupo Editorial SA v Quintern C-240198 to 244198.27 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.’

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that it is possible to appreciate the extent of the activity of and the width of the jurisdiction assumed by the Office of Fair Trading.

Effect of finding of unfairness

The Unfair Terms Directive and the Regulations provide that an unfair term will not be binding on the consumer,Im although the contract itself will continue to bind the parties if it is capable of continuing in existence without the unfair term. ’“I It is clear that the phrase ‘not binding’ was carefully selected to be neutral and avoid the nuances of meaning within differing legal traditions of classifying terms as void, voidable, or considered as non-existent.“’? The early Department of Trade and Industry consultation documents on implementation of the Directive interpret this as meaning ‘voidable’.Io3 It should, however, be seen as making the term void, as Master Ellison suggested in Kindlance v Murphy,l” the intention is that certain legal consequences should follow from the classification, including that ‘the judge shall declare a term as unfair and refuse to enforce it ex oflcio, without any need for special demand from the consumer’ . l o S

This provision seems to demand that if a term is unfair, it is simply unenforceable against the consumer; if several terms are tainted by unfairness, they will all be unenforceable. Neither the Directive (art 6), nor the Regulations, appear to envisage that anything akin to the ‘blue pencil’ rule can be applied whereby the offending term can be saved in part if it is possible to sever the unfair component of the term.’06 Yet precisely this was done by Master Ellison in Kindlance v Murphy. lo’ The offending provision here related to the mode of calculation of moneys due under a mortgage in the event of default; the unfair components being the calculation of rebate in accordance with what is known as the ‘Rule of 78’ and providing for a deferred settlement date of six months.Iox

100. 1994 Regulations. reg 5( 1); 1999 Regulations, reg 8( I ) . 101. 1994 Regulations, reg 5(2); 1999 Regulations, reg S(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 ( 1 997, 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 Lnw ofContract (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).


The Master adopted the approach to severance used in English case law and did not delete the entire default clause but removed the part that referred to the Rule of 78 and the deferral of the settlement date. It is unclear whether or not this will be regarded as a legitimate response under the Directive, but in the circumstances of the case this seemed appropriate as the retained part of the clause provided that the default enabled the mortgagee to ‘treat the whole balance of capital as fallen due together with interest due but unpaid’. Tenriero and Karsten also envisage that in certain cases some adjustment may need to be made to a contract following the removal of unfair terms: ‘The holes left by these terms in the contract have to be filled only if absolutely necessary. The judge has two ways of proceeding: either by applying the supplementive law applicable, if existing, or by using equity.’lW What supplemental law and equity involve is not explained, but it maybe that, notwithstanding the seemingly absolute requirement of the wording in the Directive, a jurisprudence will evolve which will enable the courts, where necessary, to a d o p something akin to the English doctrine on severance.

TRANSPARENCY

There are two limbs to the transparency provisions of art 5. The first states that written terms must always be drafted in ‘plain, intelligible language’. The Office of Fair Trading have provided a lot of guidance on this:”” contractual terms should not be in small print or obscure wording; they should avoid the use of jargon, complicated definitions, foreign words and phrases (such as force majeure), and reference to statutory provisions which will be meaningless to most consumers. It is also important to give consumers an opportunity to examine all the terms. The second limb of art 5 does not say that unclear terms will not be binding on the consumer (contrast the position for other ‘unfair’ terms) but applies what is effectively a contruproferenturn rule to them: ‘Where there is doubt about the meaning of a term, the interpretation most favourable to the consumer shall prevail.’”’ It seems that unclear terms may come within both arts 3 and 5: if, on an unfavourable reading, the effect of the term is to cause a ‘significant imbalance . . . to the detriment of the consumer’, it can be treated as an unfair term and, thus, not bind the consumer; if, however, the term is not unfair within art 3, it must still be interpreted in the manner most favourable to the consumer. Further, in enforcement actions by the Director General of Fair Trading and other qualifying bodies, the second limb of art 5 does not apply,”’ which means that if a term, given its least favourable interpretation, might be unfair, then the body is able to apply for an injunction against its continuing use.

109. Tenriero and Karsten, above n 19, p 26. 110. See, especially, Unfair Contract Terms, OFT Bulletin, Issue No 2, September 1996,

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.

pp 8-13.

352 Legal Studies

THE WAY AHEAD

Further change is likely in the United Kingdom."'" There is an uneasy relationship between the Unfair Contract Terms Act 1977 and the Regulations. Even before the introduction of the 1994 Regulations there was criticism of the decision to implement the Directive by means of separate Regulations rather than by taking the opportunity to replace the earlier Act with a comprehensive code.l13 Although the two regimes are overlapping, they operate differently, thus generating complexity for both businesses and consumers seeking to clarify their positions. Consolidation of the two will not be easy, particularly given the government's penchant for copy-out of European Directives. Nevertheless, research is underway to determine the best way to achieve consolidation.'IJ

It is clear that there is much work still to be done in the United Kingdom to ensure that unfair terms are eradicated from consumer contracts."' Both the European Commission and, locally, the Director General of Fair Trading are keen to apply the Directive widely in order to effect the twin policies of consumer protection and promotion of the internal market that it was designed to achieve. The United Kingdom did well to adopt a hybrid administrative/judicial model of enforcement. Individual consumers have redress through the judicial system. Yet reliance on private action alone would never go far towards addressing the widespread use of unfair terms. Nor is it likely that action by consumer organisations would be as effective as public enforcement. There would be issues of resources and motivation. Imposition of a duty to investigate complaints on a public official assures that the concerns of individual consumers, competitive firms, and watchdog bodies will be addressed alike. Further, the enthusiastic assumption of this role by the Office of Fair Trading has ensured that not only has a wide spectrum of contracts been investigated but that a strong message has been sent out that unfair terms will not be tolerated. Traders who are unwilling to amend contracts voluntarily can resist, thereby ensuring that the matter is aired before the courts in the application for an injunction. Together, these parallel methods of enforcement will advance the interests of consumer protection in an effective and controlled manner.

112a. The Commission is also consulting on amendments to the Directive. The DT1 issued a consultation paper in July 2000, European Conirnission Review of Directive 93/13/EEC on Unfair T e r m 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 Implenientation qf'the EC Directive on Unfair Tenns in Consumer Conrrucrs (93/13/EEC), A Further Consultation Document, September 1994, p 3. See also F M B Reynolds 'Unfair Contract Terms' (1994) 1 10 LQR 1. 114. Department of Trade and Industry Modern Markets: Confident Consumers, July 1999, Cm4410, 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 Conrract Ternis, OFT Bulletin, Issue No 4. December 1997, OFT 202. p 5 .

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