UK: What´s Unfair About A Contract?

Taking Care To Be Fair
Last Updated: 24 October 2008
Article by Hannah Rigby

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 Ł5000; 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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.