Date 8 August 2011
The title to this article is quite alarmist. In part, this is to encourage you to read about what might be considered a dry topic but it is also because there may be hidden dangers in your terms and conditions. A High Court decision earlier this year has raised the question as to whether unfair contract terms are now illegal as well as unenforceable. One caveat though, I am only referring to consumer facing contracts as the business-to-business marketplace remains relatively dog eat dog.
Most consumer facing businesses have a single set of standard terms and conditions that apply to contracts with their customers (if not, they should think about getting some!) as rarely are such agreements specifically negotiated. An unfair term is essentially one which 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. That definition comes from section 5 of the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCA”).
The effect of an unfair term in a contract is that the term itself cannot be enforced by the business, although the overall contract shall continue in force if it is capable of existing without the unfair term.
The main classes of unfair terms that crop up in disputes tend to concern attempts by the business to exclude or limit liability to the consumer or requiring the consumer who fails to fulfill his obligation, to pay a disproportionately high sum in compensation.
Consumer Protection from Unfair Trading Regulations 2008 (“CPUTR”)
In addition to the UTCCA another set of consumer protection regulations were introduced in 2008 as part of an EU wide harmonisation directive.
The CPUTR makes unfair commercial practices illegal. There are prescribed circumstances describing automatically unfair commercial practices. However, the general position is that a commercial practice is unfair, if:
a) it contravenes the requirements of professional diligence; and
b) it materially distorts or is likely to materially distort the economic behaviour of the average consumer with regard to the product.
Or if it is misleading, a misleading omission or aggressive (specific detail as to the assessment of these criteria is given in the regulations).
It is the interaction between these regulations and the UTCCA which gives rise to the question are all unfair terms in consumer contracts now illegal.
Office of Fair Trading v Ashbourne
If you were to think of a consumer facing industry where there is a perception that the exploitation of customers is rife, then some might say that the health and fitness industry would be fairly close to the top of that list.
Many of you will be familiar with the terms and conditions that come with gym membership (eg lengthy notice periods / long initial fixed terms / hefty cancellation charges) when after not making the most of the service you decide to cancel your membership. This case concerned a firm that recruited members for gym and health and fitness clubs, provided them with standard form agreements and collected payments from members under those agreements.
After a decade of scrapping with the OFT over the content of the agreements, finally a prosecution was brought and in the High Court the Honourable Mr Justice Kitchen found that a number of the terms and conditions in the agreements were unfair and went further by saying:
“A trader may reasonably be expected not to include unfair terms in standard form agreements which he recommends; not to present standard terms in such agreements which are likely to deceive the consumer in relation to the rights of the gym club or his rights as consumer or the risks he may face; not to omit material information or provide information which is unclear; and not to demand payments which the consumer is not bound to pay. In recommending the use of these agreements which are unfair or contain unfair terms and in seeking payment of subscriptions under them which members are not bound to pay, the defendants have done all of the foregoing and have not acted in accordance with the standard commensurate with honest market practice and have caused consumers to take transactional decisions they would not otherwise have taken, namely to enter into such agreements and to make payments under them. In so far as the defendants have carried out such activities since 26 May 2008 they have therefore engaged in unfair commercial practices which have harmed the collective interests of consumers”
Conceptual Overlap
There is certainly conceptual overlap between the definitions of an unfair contract term under UTCCA and an unfair commercial practice under CPUTR.
The conclusion that can be drawn from this case is that there is a positive obligation on a business not to include unfair terms within its standard form agreements. By including such terms a business has not acted in line with honest market practice and the consequence being that the use of unfair terms are in themselves an unfair commercial practice. Unfair commercial practices are now a criminal offence and so the business could be liable for prosecution.
Whether this conceptual overlap is absolute is unclear. For example, whether the court would find that the use of a single unfair term in an agreement constitutes an unfair commercial practice is open to question as Ashbourne’s agreement was found to be unfair in a variety of ways.
Reviewing Standard Form Agreements
In light of this decision, it would be prudent for consumer facing businesses to review their terms and conditions, particularly in the following areas identified in the Ashbourne case:
- Minimum contract terms.
- Automatic renewal terms.
- Early termination charges.
- Notice provisions.
If you would like more information or advice relating to a specific matter, please do not hesitate to contact Chris Alexander on 01727 798000 or by email at chris.alexander@salaw.com.
© SA LAW 2011
Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them. You are recommended to obtain specific advice in respect of individual case