16 LEGISLATIVE REGULATION OF UNFAIR TERMS
CHAPTER 16
LEGISLATIVE REGULATION OF UNFAIR TERMS
INTRODUCTION
In the last chapter, we looked at how terms are incorporated into contracts and the various devices employed by the judiciary to limit the scope of limitation and exclusion clauses. Apart from isolated statutory measures, the legal struggle against such unfair terms was carried on until the 1970s by the judges, who as we saw in the last chapter, devised a variety of weapons to render such clauses inoperative. This is especially the case where they operated against the interests of consumers in contracts for the sale of goods or supply of services. The problem was that judicial regulation merely drove the drafters of exclusion clauses to renewed efforts to produce ‘judge-proof’ forms of words to which the judiciary did not always feel equipped to respond. The main problem was that the judges felt that they had no general power to strike down unreasonable exclusion clauses as being, for example, against public policy and therefore void. They felt that the concept of freedom of contract overrode such an approach. It was left, instead for Parliament to take up the challenge.
There are now hundreds of statutory provisions dealing with such issues as tenancies, consumer credit, hire purchase and package holidays. Following the lead of the common law, each of these interferes with the freedom to contract by regulating the terms of certain contracts and determining what sorts of liability can be excluded from them. It is not the purpose of this chapter to examine the whole body of civil and criminal law, the regulatory mechanisms and voluntary codes of practice which now exist to protect the consumer from unsafe products, qualitatively deficient goods and services, fraudulent trading practices and the other matters. The main aim is to concentrate on the legal response to unfair and oppressive terms in contracts made between businesses and consumers and others, which has culminated in the passing of the Unfair Contract Terms Act 1977 and the coming into effect of the European Community Directive on Unfair Terms in Consumer Contracts 1994 and Unfair Terms in Consumer Contracts Regulations 1999. One of the reasons for this emphasis is that this was the first legislative attempt to introduce standards about exclusion clauses into the general law of contract.
The common law approach to exclusion clauses is reflected in many of the provisions of the legislation which has been used in recent decades to complement or reinforce judicial precedent. However, the Unfair Contract Terms Act (UCTA) 1977 and European codes also go beyond the common law and have introduced additional hurdles to jump for those attempting to rely on exclusion clauses. These two pieces of legislation overlap substantially, with the result that some types of term are regulated by both and others by just one. Consequently, it is now open to consumers to challenge certain contract terms on the basis that they are void or ‘unreasonable’ under the UCTA or ‘unfair’ under the regulations. In many cases the result will be the same, but the fact that the concepts of reasonableness and fairness are different means that there is considerable scope for confusion.
Owing to the confusion caused by the parallel provisions of domestic and European Law, the Law Commission was asked by the government to review the law in the field with the aim of replacing existing provisions with a single Act written in plain, accessible language. A final report and draft Bill was produced by the Commission in 2005. Whilst the government has accepted the report in principle, it has committed itself to evaluating the potential impact of the reforms before attempting to implement them. Moreover, at the time of going to press, the draft Bill appears to have been caught up in a backlog of unimplemented reports that would benefit the consumer. As a result, the approach taken in this chapter has been to describe the law at it currently stands and outline the proposals for change which have been put forward by the Law Commission.
THE UNFAIR CONTRACT TERMS ACT 1977
Despite its title, the Unfair Contract Terms Act (UCTA) does not deal with all contracts or unfair terms, but focuses instead on exclusion clauses. This has been done in an effort to protect consumers and others from particularly unfair limitations of liability. The general thrust of the Act is to regulate those terms which enable one party to offer a performance which is substantially different from that expected. Legislative interventions have provided a hierarchy of protection depending on the type of liability which a party is attempting to exclude, the status of the person seeking to avoid the clause and the characteristics of the person seeking to rely on it. In order to understand fully the provisions of the Act, it is necessary to appreciate that it is based on the premise that there are two types of contracting party: those who are dealing as consumers and those dealing as businesses. Potentially, this allows for three different types of contract to be concluded and this point is illustrated in Figure 16.1.
Figure 16.1 : The three different types of contract contracting with
| contracting with | ||
| business party | + | business party |
| business party | + | non-business (consumer) |
| non-business | + | non-business |
The Act is limited in its application in that it only subjects certain contracts to scrutiny. These are contracts between two businesses or contracts between a business and a consumer. According to s 11, ‘business liability’ can only occur under the Act if one of the parties is acting in the course of a business or the occupation of business premises. On the other hand, s 12 makes clear that a person deals as a consumer if they do not make, or hold themselves out as making, the contract in the course of a business and the other party does make the contract in the course of a business. In other words, you cannot be a consumer under the Act unless you are dealing with someone who is acting in the course of a business. This means that, when one party deals with another outside a business environment, neither is treated by the Act as a consumer. It would seem then, that the conferment of the status of consumer depends on the circumstances rather than the person. This approach reflects the fact that the Act is primarily concerned with protecting the interests of consumers when dealing with businesses.
Outlawed clauses
One of the most interesting features of the Act is that it renders completely void certain types of clause, whatever the circumstances in which they were negotiated. The Act renders six main types of exclusion clause inoperative on the basis that they attempt to deny specific rights to contracting parties that social policy requires they should have. The ban is total, pays no heed to the intentions of the parties so valued by the classical model and gives the judiciary no discretion to amend the contract in any way where these clauses are present. The relevant clauses are summarised in Figure 16.2.
Figure 16.2 : Unfair Contract Terms Act 1977 outlawed exclusion clauses
| outlawed exclusion clauses | section |
| negligence – any liability for negligently causing death or personal injury cannot be excluded by businesses | 2(1) |
| manufacturers’guarantees – liability for negligence in the manufacture or distribution of goods usually supplied for private use cannot be excluded when the goods are used by a consumer | 5 |
| implied terms – statutory implied undertakings as to ownership to title in sale of goods and hire-purchase contracts | 6(1) |
| implied terms – statutory implied undertaking relating to conformity with description or sample in sale of goods and hire-purchase contracts cannot be used against a person dealing as a consumer | 6(2) |
| implied term – statutory implied undertakings relating to quality or fitness for purpose in contracts for sale of goods or hire-purchase cannot be used against a person dealing as a consumer | 6(2) |
| other undertakings – relating to description, fitness, sample or quality cannot be used against a person dealing as a consumer | 7(2) |
Not all of the outlawed clauses detailed above relate to contractual liability. Section 2 relates to clauses or notices which purport to exclude business liability for negligence. According to s 1(1), negligence means breach of a contractual duty to take reasonable care or exercise reasonable skill and a breach of a tortious duty. The latter might arise, for example, in respect of a notice at a sporting event that spectators attend free of charge and for which there is no contract. Section 5 also extends the Act beyond the scope of contract law. It prevents the use of clauses which restrict or exclude liability for loss or damage that arises from manufacturers’ negligent defects which manifest themselves when the goods are in ‘consumer use’. The section is therefore concerned with the manufacturer–consumer relationship where there is no contract between the parties rather than the supplier–consumer relationship.
One of the most important provisions for the general law of contract is s 6(2). This establishes that in consumer transactions, business liability for breach of the statutorily implied obligations relating to the satisfactory quality and fitness for purpose of goods cannot be excluded or restricted by any contract term. This section follows the lead taken by the Sale of Goods and Supply of Services legislation in requiring that certain terms are implied into consumer contracts by the legislature. Since legislation requires that they be written in, it seems logical that the person dealing with a consumer should not then be able to exclude them. It would be on this basis that the exclusion clause in the Karsales (Harrow) Ltd v Wallis (1956) hire-purchase case could now be struck down by reference to the Act rather than the notion of fundamental breach.
The tests of reasonableness
The exclusion clauses which do not fall into one of the six categories rendered void by the Act may nonetheless be subjected to a second type of control, that of the test of reasonableness. Significantly, the burden of proof regarding reasonableness lies with the party seeking to rely on the clause, a factor which facilitates the undermining of such a clause by consumers. Wherever the Act provides that a contract term or notice must meet the requirement of reasonableness, the time for assessing its reasonableness is the time when the contract was made. This means that an assessment is made against the background of the circumstances which were, or ought reasonably to have been, known to the parties at that time. If a clause is considered to have been reasonable at the time the contract was made, then its effectiveness will not be impaired by subsequent events or conduct such as the effect of breach. It has been argued that to provide otherwise would amount to ‘changing the rules in the middle of the game’. Figure 16.3 outlines the sort of terms which are subjected to this additional test.
Figure 16.3 : Unfair Contract Terms Act 1977 test of reasonableness key exclusion clauses subject to test of
| reasonableness | section | can apply to |
| negligence – terms which attempt to exclude negligent liability for loss or damage other than personal injury or death | 2 | business and business business and consumer |
| standard form contract – terms which attempt to exclude or restrict liability for breach when party attempting to rely on clauses is in breach | 3(2)(a) | business and business business and consumer |
| standard form contracts – terms which attempt to allow for a contractual performance which is substantially different from what was expected | 3(2)(b)(i) | business and business business and consumer |
| standard form contracts – terms which attempt to allow for no contractual performance at all to be rendered | 3(2)(b)(ii) | business and business business and consumer |
| implied terms – terms which attempt to exclude or restrict liability for breach of the statutorily implied terms in sale of goods or hire-purchase contracts | 6 | business and business |
| breach – exclusion clauses in contracts where the contract is justifiably terminated | 9 | business and business business and consumer |