Many of the principles of modern contract law were formed during the laissez-faire nineteenth century. Back then it was thought wrong to interfere with private agreements. Nowadays the law can afford contractual protection to the party considered to be the weaker. This article takes a closer look at how this works.

This area of the law, dealing with fairness in contracts, is dominated by four pieces of legislation, one of them very new: the Unfair Contract Terms Act 1977 (UCTA); the Unfair Terms in Consumer Contracts 1999; the new Consumer Protection from Unfair Trading Regulations 2008; and, finally, the 2006 Consumer Credit Act. Let's look at each in turn.

Unfair contract terms

The purpose of UCTA is to protect consumers and businesses in situations where they have been afforded little or no room for negotiation because they are required to contract on the basis of the other party's standard terms. To achieve this protection UCTA provides statutory restrictions on a party's ability to exclude its liability for a breach, contract out of statutory implied terms, and limit its liability for negligence.

So UCTA says that terms implied under the Sales of Goods Act 1979 (ie, those that relate to quality, fitness for purpose and correspondence with description/sample) cannot be excluded by any other contract term in any situation in which the buyer deals as a "consumer", and that in all other cases they are still subject to the test of reasonableness. Similarly, where one party contracts on its own written standard terms of business, or contracts with a person who is dealing as a consumer, then to be enforceable any term must satisfy the reasonableness test if it:

  • excludes or restricts that party's liability for breach of contract; or
  • purports to entitle it to deliver a contractual performance substantially different from that which was reasonably expected; or
  • purports to entitle it to deliver no performance at all.

Key definitions

A party "deals as a consumer" if it does not make the contract in the course of a business, but the other party does. That said, it is possible under UCTA for a business to qualify as "a consumer" if it enters into a contract in an arena which is sufficiently different from its normal activities.

Dealing on "standard terms" does not require every single term to be fixed in advance, nor does it preclude negotiations as to quality or price. But if the negotiations leave the terms of the standard contract "effectively untouched", then the contract can still be deemed to constitute "written standard terms of business".

In order to pass the "reasonableness" test a contract term must have been "a fair and reasonable one ... having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made". Schedule two of UCTA provides the following non-exhaustive list of guidelines to help assess reasonableness:

  • The strength of the parties' relative bargaining positions (taking into account alternative means by which the customer's requirements could have been met).
  • Whether any inducement was given to the customer to agree to the term, or whether the customer had the opportunity to enter into a similar contract with someone else without having to accept a similar term.
  • Whether the customer knew (or ought reasonably to have known) of the existence and extent of the term, taking into account (among other things) normal trade practice and any previous dealings between the parties.
  • Where a term excludes or restricts liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance would be practicable.
  • Whether the goods were manufactured, processed or adapted to the special order of the customer.

Regulating consumer contracts

The Unfair Terms in Consumer Contracts Regulations 1999 also apply, as you might expect, to contracts between a consumer and a supplier of goods or services. If a contract falls within the scope of these regulations then any terms which have not been individually negotiated can be examined to determine whether they are 'unfair'. It is for the seller/supplier to show that the term in question has been individually negotiated and scrutiny cannot be avoided simply by claiming that some of the terms have. The regulations require each term to be examined individually to ascertain whether it has been drafted in advance and whether the consumer has had an opportunity to influence its substance.

If a term falls within the scope of the regulations, and "if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations under the contract, to the detriment of the consumer", it will be regarded as unfair and, therefore, not binding on the consumer. That said, the contract as a whole will still bind the parties if it is capable of continuing in existence minus the unfair term.

A term's fairness depends neither on the definition of the main subject matter of the contract nor the adequacy of the price/remuneration versus the goods/services supplied. Instead the following further factors are considered:

  • the nature of the goods or services;
  • the circumstances surrounding the conclusion of the contract; and
  • the other terms of the contract or of any other contract on which it depends.

These factors are only guidelines, each term being assessed on its own merits. The regulations provide some assistance in this by, for example, annexing an indicative and non-exhaustive list of terms which may be regarded as always unfair. These include making an agreement binding on a consumer when the provision of services is subject to a condition the realisation of which depends on the supplier's will alone, or requiring a consumer who fails to fulfil an obligation to pay a disproportionately high sum in compensation.

The Office of Fair Trading (OFT) can take legal action to prevent the use of such unfair standard terms, but it can determine neither whether a term is unfair nor whether any individual consumer is entitled to compensation; these questions are for the courts. However the OFT does consider complaints about the unfairness of a contract term, and it will publish its results on its website and via press releases, thus exposing the contractor to unwelcome publicity as well as helping to build a case-file of terms already judged unfair by the OFT.

Regulating unfair trading

The Unfair Commercial Practices Directive (UCPD), adopted in May 2005, aims to harmonise unfair trading laws in all EU member states by protecting consumers from economic harm with a general prohibition on businesses using unfair commercial practices.

The UK adopted the UCPD as the Consumer Protection from Unfair Trading Regulations 2008. These came into force in May and are now the mainstay of the UK's fair trading legislation regulating business-to-consumer commercial practices. Applying the maximum harmonisation approach, existing consumer laws are amended to ensure that where they overlap they conform to the principles of the regulations.

The rules to determine when a commercial practice will be deemed 'unfair' fall broadly into three categories: general prohibitions; specific examples of misleading actions/omissions and aggressive commercial practices; plus an annex of 31 practices that will be deemed unfair in any circumstances.

General prohibitions

Unfair commercial practices are always prohibited. An unfair commercial practice is one which runs contrary to the requirements of professional diligence, or which contravenes the market standards expected of a trader, and which materially distorts a consumer's economic behaviour (or is likely so to do). Such a practice may normally occur before, during or after a commercial transaction, to be judged by the standards of "the average consumer".

'Professional diligence' can best be summarised as the standard of skill and care which a trader may reasonably be expected to exercise towards a consumer, in line with honest market practices or the general principles of good faith which prevail in that trader's business sector. It will thus differ from market to market and sector to sector. Although the regulations contain no definitions for "good faith" and "honest market practice" it is always sensible to review the appropriate OFT codes and guidance where available.

Misleading and aggressive practices

A "misleading" commercial practice is an action or omission which either contains false information (ie, is untruthful) or will in some way deceive (or be likely to deceive) the average consumer into taking a transactional decision that he would not otherwise have taken.

An "aggressive" commercial practice is one which, by means of harassment, coercion or undue influence, significantly impairs (or is likely to impair) the average consumer's freedom of choice or conduct and so causes him (or is likely to cause him) to take a transactional decision that he would not otherwise have taken.

In addition to commercial practices which are "misleading" or "aggressive", the Regulations also ban unfair commercial practices which do not fall within these two specific prohibitions, creating a kind of safety net to 'future proof' the Regulations.

Always unfair

Schedule 1 lists the 31 practices that will always be considered unfair. These include:

  • falsely stating that a product will be available for a very limited period of time in order to obtain an immediate decision;
  • making personal visits to the consumer's home and ignoring requests to leave and/or stay away;
  • failing to respond to pertinent correspondence in order to dissuade a consumer from exercising his contractual rights.

The consequences of a summary conviction for breaching the regulations is a maximum fine of £5000; on an indictment the penalty rises to a fine and/or up to two years' imprisonment. Where a corporate body commits an offence with the consent or involvement of a specific director or manager (or any other 'officer' of the company) the regulations also provide for the prosecution of the individual.

Consumer Credit

Sections 19 to 22 of the Consumer Credit Act 2006 introduced the new concept (and a test for it) of "unfair relationships" in credit agreements with individuals and small partnerships. The Act grants a Court extensive powers to modify a credit agreement if it determines that the contractual relationship between the creditor and the debtor is 'unfair' to the debtor as a consequence of any of the following:

  • any of the terms of the agreement or any related agreement;
  • the way in which the creditor has exercised, or enforced, any of its rights under the agreement or any related agreement;
  • any other thing done (or not done) by, or on behalf of, the creditor, either before or after the making of the agreement or any related agreement.

Thus the term "unfair relationship" is widely defined. In reaching its determination the court must also consider all matters it thinks relevant, whether related to the creditor or the debtor. If the credit agreement is found to give rise to an unfair relationship, the courts powers include being able to:

  • require the creditor to repay any sum paid by the debtor, in whole or in part, or to refrain from doing anything in connection with the agreement or any connected agreement;
  • reduce or discharge any sum payable by the debtor in respect of the agreement;
  • set aside any duty imposed on the debtor;
  • alter the terms of the agreement.

Take care

So, whilst we might wish that individuals and companies should be free to negotiate the terms of their contracts without intervention or interference, it is not that simple. In most commercial arm's-length transactions between parties 'freedom of contract' remains an important principle, but where consumer contracts are concerned this principle has been eroded by legislation aimed at protecting the weak by regulating contract terms and prohibiting 'unfair' behaviour. This is a tricky legal landscape to negotiate, as the OFT's new guidance on unfair terms reconfirms. So, you need to take care to be fair out there.

www.lg-legal.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.