The financial services industry is one of the primary users of standard form documentation where consumers are invariably presented with proforma loan contracts, insurance contracts etc. Where standard documentation is used, individual negotiation of contractual terms is unlikely and those general terms may be unfair in the particular circumstances. However, the EU Directive on Unfair Terms in Consumer Contracts (Council Directive 93/13/EEC) which has been transposed into Irish law by the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995 (the "Regulations") attempts to redress the balance in favour of consumers where standard form documentation is used.

With effect from 1 January 1995 any term in a contract of sale or supply to a consumer which is unfair will not be binding on the consumer although other provisions in the contract may remain enforceable.

The Regulations only apply to contracts where sellers or suppliers sell or supply goods or services to consumers in the course of business. A consumer is defined as a natural person acting for purposes outside his or her business. The Regulations do not apply to the core provisions of consumer contracts such as price and the nature of the goods or services supplied to the consumer.

All contractual terms in consumer contracts must be written in plain and intelligible language. The Regulations apply to all terms which have not been individually negotiated with the consumer, although this does not imply that all such terms will be regarded as unfair. The onus of proving the fairness of such terms is on the supplier of the goods or services.

The Regulations cannot be avoided by artificially choosing the law of a non-EU Member State to be the governing law of the contract. Certain consumer contracts covering employment, succession rights, rights under family law, the incorporation and organisation of companies and partnerships, are excluded from the Regulations.

When is a contract term regarded as unfair?

While all the related circumstances will be taken into account, a term will be regarded as unfair if:

- contrary to the requirements of good faith

- it causes a significant imbalance in the parties' rights and obligations under the contract

- to the detriment of the consumer

- taking into account the nature of goods or services which are the subject of the contract.

When deciding whether a term satisfies the requirement of good faith the following factors will be taken into account:

(i) the strength of the bargaining position of the parties;

(ii) whether the consumer had an inducement to agree to the term;

(iii) whether the goods or services were sold or supplied to the special order of the consumer; and

(iv) the extent to which the seller or supplier has dealt fairly and equitably with the other party whose legitimate interests are to be taken into account.

The Regulations contain a schedule with a sample list of terms which may be treated as unfair. Of particular significance in the context of standard documentation are any terms which irrevocably bind a consumer to a term with which he has had no real opportunity of becoming acquainted.

Enforcement of the Regulations

The principal practical sanction is the unenforceability of a particular unfair term. Furthermore, the Director of Consumer Affairs can request sellers or suppliers to desist from using unfair terms in their contracts. The Regulations also allow the Director or any person to apply to court for an order prohibiting the continued use of an unfair term. There are no criminal sanctions for using an unfair term.

An "authorised officer" acting for the Director may enter and inspect business premises, to copy documents and to question personnel. Fines can be imposed for failure to comply with a request from an authorised officer or for impeding or obstructing the exercise of the officer's powers.

Action to be taken

It will be necessary for all sellers and suppliers and particularly financial institutions who deal with consumers to review their contract terms to see whether any of them could be considered unfair. In addition, contractual terms should be rewritten in plain English.

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.