Unfair Contract Terms
© Springer International Publishing Switzerland 2015Javier Plaza Penadés and Luz M. Martínez Velencoso (eds.)European Perspectives on the Common European Sales LawStudies in European Economic Law and Regulation410.1007/978-3-319-10497-3_6
6. Unfair Contract Terms
University of Bergen, Bergen, Norway
Hans Fredrik Marthinussen
Europe has a long standing tradition of law demanding good faith and fair dealing in contractual relationships. Such provisions have in many traditions been subject to harsh interpretation and “stretching” in order to deal with contract terms that are considered unfair. With time, many of these provisions have also been supplied with some form of regulation of standard terms.
In this chapter the Nordic regulations will then be compared with the CESL and the Draft Common Frame of Reference, and, through this comparative analysis, the author also hopes to contribute towards a further understanding of pan-European unfair contract terms regulations. In light of the differences, certain challenges for European businesses selling to Nordic countries under the CESL will be highlighted. Finally, this chapter will conclude with some comments on the possible development of common European legislation on unfair contract terms in the future.
KeywordsUnfair contract termsGood faith and fair dealingConsumer protectionDirective on unfair termsNo binding effect of the unfair contract term
Europe has a long standing tradition of law demanding good faith and fair dealing in contractual relationships. Such provisions have in many traditions been subject to harsh interpretation and “stretching” in order to deal with contract terms that are considered unfair.1 With time, many of these provisions have also been supplied with some form of regulation of standard terms.
The Nordic contract acts from the 1910s also contained provisions stating, roughly put, that a contract could not be enforced if it would be against good faith and fair dealing (§ 33). The Nordic contract acts were a result of joint Nordic legislative cooperation, and thus of common wording.2 Although dynamic in character through the use of adaptable terms such as good faith and fair dealing, these provisions were traditionally interpreted not to be applicable on the content of the agreement as such. According to the preparatory works, a distinct interpretation feature of the Nordic legal systems, their scope was limited to the circumstances at the conclusion of the contract. A general rule allowing scrutinising of unfair contract terms did not, therefore, exist.
During the 1970s and early 1980s all the Nordic countries, Denmark (1975), Sweden (1976), Finland (1983), Norway (1983) and Iceland (1986), introduced a general provision dealing with unfair contracts or unfair contract terms.3 This was a result of a decade of evolving consumer protection legislation first and foremost within the area of sales law. The provisions on unfair contracts were all introduced into the general statute on contracts § 36, and are broadly the same in design. The uniqueness of these legal provisions is the lack of limitations: they simply give the courts discretion to review unfair contract terms in general.4
This chapter will begin by presenting the basic features of these particular Nordic provisions, including a brief presentation of important or illustrative Supreme Court rulings. The Nordic regulations will then be compared with the CESL and the Draft Common Frame of Reference (DCFR), and, through this comparative analysis, the author also hopes to contribute towards a further understanding of pan-European unfair contract terms regulations. In light of the differences, certain challenges for European businesses selling to Nordic countries under the CESL will be highlighted. Finally, this chapter will conclude with some comments on the possible development of common European legislation on unfair contract terms in the future.
6.2 The Nordic Contract Acts, § 36
6.2.1 Structure and Wording of the Legislative Text
The Provisions5 State:
A contract may be modified or set aside, in whole or in part, if it would be unfair or in violation of honest dealing to enforce it. The same applies to other legally binding acts.
When making a decision under subsection (1), regard shall be taken to the circumstances existing at the time the contract was concluded, the terms of the contract and subsequent circumstances.
A contract may be modified or set aside, in whole or in part, if it is unfair or contrary to good business practice to enforce it. The same applies to unilateral binding acts.
Any decision to this effect should take into account not only the content of the agreement, the relationship between the parties and the circumstances at the conclusion of the contract, but also any subsequent developments and other circumstances.
The rules in the first and second paragraphs apply equally when it would be unfair to enforce commercial practice or other contractual customs.
A contract term may be adjusted or held unenforceable if the term is unfair with respect to the contract’s content, circumstances at the formation of the contract, subsequent events or other circumstances. If the condition is of such importance to the contract that it cannot reasonably be demanded that the rest of it should prevail unaltered, the contract may be altered, even in other respects, or be set aside completely.
When taking a decision under the first paragraph, special consideration is to be given to the need for protection of those who by virtue of being a consumer, or in any other way, hold an inferior position in the contract.
The first and second paragraphs apply equally to questions of the terms in other legal acts than contracts.
In questions of adjustment of certain contract terms in consumer relations, § 11 of the statute (1994:1512) about contract terms in consumer relations also apply.
If a contract term is unfair, or its application would lead to an unfair result, the term may be adjusted or set aside. In determining what is unfair, regard shall be had to the entire content of the contract , the positions of the parties, the circumstances prevailing at and after the conclusion of the contract, and to other factors.
If a term referred to in paragraph one is such that it would be unfair to enforce the rest of the contract after the adjustment of the term, the rest of the contract may also be adjusted or declared terminated.
A provision relating to the amount of consideration shall also be deemed a contract term.
The provisions of the Consumer Protection Act (38/1978) apply to the adjustment of consumer contracts.
Although all Nordic countries introduced a § 36 provision in their contract acts within a decade, this provision was not a result of joint legislative cooperation. However, it is evident that inspiration was sought from the other Nordic countries when drafting the individual provisions. The most thorough preparatory report, from Sweden6, clearly shows how Danish and Norwegian law was taken into consideration; and the other nations’ preparatory works are also clear on this point. This is also completely in accordance with Nordic legal culture.
Nevertheless, there are differences in the wording and construction of the different national provisions which are significant. One major difference is that while the Norwegian and Danish § 36 speak of unfair contracts in general, the Swedish and Finnish § 36 are limited to unfair contract terms . According to the Swedish and Finnish § 36, unfair contract terms may be set aside or changed; while according to the Norwegian and Danish § 36 unfair contracts may be set aside or altered.
Even though the Swedish and Finnish provisions are narrower in scope, covering only unfair contract terms, there is a possibility to set aside or alter the entire contract. Both provisions do state that in cases where the term in question is of such importance that it would be unreasonable to uphold the contract without it; the entire contract may be altered or left ineffective.
It is worth pointing out explicitly that the provisions in the contract acts § 36 do not only provide for setting contracts or contract terms aside if they are found unfair, they also provide their alteration.7 In practice, one must clearly assume that there will be limits as to how far a court will go with regard to rewriting or creating a new contract, but legally this is completely left to the discretion of the courts.
All provisions expressly point to a broad basis for the judgement of unfairness. They all mention the contents of the contract, circumstances at the time the contract was entered into, later developments, and even simply “other relevant circumstances”. A contract that would have been considered fair at the time it was entered into may, therefore, become unfair with the passing of time and changing circumstances. It is sufficient that the contract is unfair at the time it is scrutinised by the courts.
Another important factor is the relationship between the contracting parties, in particular if there is a mismatch in strength between them. In the Swedish provision it is expressly stated that particular concern is to be paid to the position of a weaker consumer party. In the Norwegian and Finnish texts, there is a reference to the consideration of the relationship in between the parties, which must obviously be interpreted similar to the Swedish text; and even though there is no explicit reference to this in the Danish text itself, it is evident that this factor is an important one also under Danish law.
The scope of § 36 is not limited to contracts between businesses and consumers, in contrast to the Directive on unfair terms in consumer contracts (EC 93/13). It is, however, undoubtedly of vast significance whether there is a contractual relationship where one party can be considered strong, and one weak, for the provision to be applied by the courts. This is expressly pointed out in several of the Nordic statutory texts and, in addition, the preparatory works clearly point to consumer protection and protection of the weaker party as a main purpose of the regulation, while, at the same time, pointing out that the threshold for setting aside or adjusting contracts is generally high. This may quickly lead to the conclusion that it is mainly in strong-weak party relationships that § 36 may be used.
It may, in addition, be noted that the Norwegian and Danish provisions include an alternative condition for the application of § 36: not only may the contract be set aside or altered if it is found to be unfair, it is also subject to judicial review if it is either found to be contrary to good business conduct (Norway) or contrary to honest dealing (Denmark). These alternatives are relatively close to the standard of good faith and fair dealing in § 33, but they differ in the way that they open up the broader revision process of § 36 (including alteration, not only invalidity). These standards are seldom used, or even referred to, and it has been claimed that they do not really make up an independent category in practice (Gomard 2005, p. 210).
6.2.2 § 36 in the Supreme Courts
The presentation of Supreme Court rulings can, of course, be done either by working forward from the first rulings after the passing of § 36, or by working backwards from the newest rulings. Due to the discretionary nature of § 36, this chapter will look at some current cases, giving a fairly good picture of how § 36 is perceived and applied in current Nordic jurisprudence.8
During 2012 and 2013, the Norwegian Supreme Court handled not less than three cases (“Lognvik”, “Fokus bank” and “Røeggen”)9 concerning consumers having invested in so-called “structured savings products”; ending with a Grand Chamber decision in the case called “Røeggen”. All cases concerned consumers’ purchases of rather speculative financial products, and they show how the Norwegian Supreme Court undertakes a broad analysis of the entire contract and circumstances related to it.
The starting point for all three cases was (to a somewhat different extent in each case) high risk financial products, which were bought before the financial crisis hit in 2008. In the Lognvik case, two consumers had loaned money to invest in financial products (indexed bonds). The consumers were guaranteed to have their investment back at the end of the 4 year investment period, after the deduction of underwriting fees by the bank, and thus the bank marketed the products as “guaranteed” savings products. Including interest on the loan (that was taken out to purchase these bonds), the total cost of these products amounted to 11 % of the sum invested. In other words, even though marketed as “guaranteed”, they contained a potential loss of 11 %. So in order for the investment to be profitable, the yields would have to exceed these costs.
The majority of the Supreme Court, four out of five judges, came to the conclusion that the agreement was not unfair, and thus upheld it. They stated that if one looked solely at the price paid for the possibility of an uncertain yield, the price would seem unfair. Even though the investment was a package presented by the bank, the majority of the Court stated that how the investment was financed, by loan or other ways, should not be taken into account—a statement later heavily criticised in legal literature. The majority of the Supreme Court also stated that the investor had to bear the risk of his own investment decisions, unless there were “qualified defects” in the information given by the bank. One judge found that the product’s main function was to promote a marketing strategy without proper foundation, that the information given to the consumer had been misleading and that the bank’s financial “adviser’s” advice to invest in the product was not a reasonable one.
The Fokus bank case involved more experienced consumers, who were more aware of the risks involved in the product they had purchased, which was a highly geared investment. After the ruling in the Lognvik case, it was no surprise that the consumers lost in the Supreme Court. Then, the Supreme Court had to consider yet another case very similar to Lognvik, where there were inexperienced consumers that had been persuaded to buy similar bonds to the ones in Logvik, the so-called Røeggen-case. The Supreme Court decided to deal with the case in the Grand Chamber, which is provided for in cases of utmost importance.10
In Røeggen, 11 judges unanimously found that the agreement had to be set aside as unfair, in accordance with the Contract Act § 36. This ruling provides a representative picture of a Nordic contract revision under § 36, at least under the Norwegian-Danish regime where the provision opens up the possibility of finding the contract as a whole to be unfair.
The Supreme Court started by stating that contracts containing elements of speculation or risk cannot be set aside solely on the grounds that the risk materialises. An investor has to bear the risk of his own expectations of the development of the market, as long as these are not based on misleading information from the other contracting party. The last part of the sentence is as important as it should be obvious in consumer contracts, and hopefully in accordance with most European legislation. It was, however, an important correction after the slip in the Lognvik ruling, where the Supreme Court demanded that there be a qualified defect in the information given. The Supreme Court further stated that Røeggen was a non-professional investor, being approached by his bank with an investment proposal. The bank’s duty of care when providing information, therefore, had to meet a high standard; and when selling risky, complex financial products to a non-professional investor, a bank has to make sure the customer understands the content of the contract he enters into, and not give misleading or false information about important factors with regard to the decision whether to invest or not. The Supreme Court concluded that the information given in the Røeggen case, where the bank had focused almost solely on potential gains with classic “small print-warnings”, was insufficient. Moreover, given the total picture—the cost of the product, the risk involved, the lack of proper information about these risks, and the relationship between the parties—the Supreme Court concluded that the entire agreement had to be set aside.11
The Røeggen ruling is representative of the broad approach taken to setting aside or adjusting contracts in accordance with § 36. In the lower courts in the Lognvik-case, Lognvik’s counsel had also argued along the lines of § 33 with its standard for good faith and fair dealing, but that seemed to lead the case into a narrower judgment of the information provided; while § 36 clearly opened up the possibility of taking all relevant circumstances into consideration. It can be pointed out that the distinction may not be a sharp one, but it was clearly of importance in these cases.
The Røeggen ruling fits well into a tradition where consumer cases make up the core of § 36 disputes. The “professional” party must not necessarily be a medium sized or large corporation. In the Supreme Court case published in Rt. 1991, p. 147, a tenant’s complaint was heard that a time limitation in her rental contract was unfair, and it was set aside. The apartment building was a set up as a single purpose company, owned by one person. He was clearly the professional party to the rental contract, and the result would probably have been the same if he had also owned the building himself instead of through a corporation.
This last ruling leads on to a point that does not stand out quite so clearly from the Røeggen ruling: ordinarily, also in cases regarding the Norwegian and Danish § 36, the question will be whether a contract term in question is to be found unfair.12
The strong consumer element of the provision in the Contract Act § 36 is quite evident if one looks at cases where professionals have invoked it. Wilhelmsson (2008, p. 124) points to a total of seven Finnish Supreme Court cases where adjustment of the contract has been denied because the parties where found to be of equal strength. Giertsen (2012, p. 211) points out a total of 11 Norwegian Supreme Court decisions where a professional party invoked § 36, and none of them led to the revision of the contract. In Sweden, the famous Bergman and Beving case published in Nytt Juridiskt Arkiv (NJA) 1979, p. 483 shows the same restraint with regard to using § 36 for commercial contracts: even though it was a large company against a small one, including standard terms and a far reaching exclusion of liability clause, the Swedish Supreme Court did not find grounds for its revision under § 36.