Fairness in Consumer Contracts

The Case of Unfair Terms

Chris Willett

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781351937399
• Edition: 1
• Topic: Law
• Subtopic: Consumer Law
• Index: Law

This book focuses on unfair contract terms in consumer contracts, in particular the existing legislation and the proposals by the Law Commissions for a new unified regime. In this context it considers, in particular, what we mean by fairness (both procedurally and in substance); the tools used; the European dimension; the move from general principles from the more piecemeal approach typical in UK legal tradition; and the further move in this direction as a result of the Unfair Commercial Practices Directive.

Chapter One

Introduction to Fairness Issues

1.1 The Context

Notions of fairness and good faith have been given considerable academic attention in recent years.¹ The discussions have ranged over a variety of themes. So, for example, commentators have considered the nature of the underlying policies and philosophies associated with fairness and good faith;² the more concrete meaning of concepts such as fairness and good faith in various doctrinal contexts;³ and whether legal recognition of general principles of fairness and good faith would be a positive thing.⁴

One factor, which must be considered when we talk about these issues, is the stage of the contractual relationship to which we are referring. First, there is the purely pre-contractual stage where the issue of fairness and/or good faith relates to the breakdown of negotiations.⁵

A second issue of fairness and/or good faith can arise in a situation where a contract has been concluded but concluded in circumstances and/or on terms which might in some way be said to offend against fairness or good faith. It is common in this context to speak of ‘procedural’ fairness, i.e. fairness in the process leading up to the agreement; and ‘substantive’ fairness, or fairness in substance, referring to fairness in the distribution of substantive rights and obligations under the contract. Sometimes an enquiry into procedural fairness and/or fairness in substance is simply referred to as an enquiry into the ‘fairness’ or ‘unfairness’ of the terms.

Thirdly, it may be possible to analyse rules of interpretation and gap filling from a fairness or good faith perspective. So we might question whether the interpretation or gap filling rules produce results which fairly balance the interests of the parties and/or which mean that the parties will be required to act fairly or in good faith.⁶

Fourthly, rules dealing with performance and changing contractual circumstances can be analysed from the perspective of fairness and good faith. Do these rules fairly balance the interests of the parties and require the parties to act in good faith?⁷

Finally the remedies set down by law for breach of contract can be analysed from fairness and good faith perspectives. Do these remedies fairly balance the interests of the parties? Do they allow the parties to behave in bad faith?⁸

1.2 The Core Purpose of the Book

The purpose of this book is to consider the second issue mentioned above i.e. the rules relating to the process leading to an agreement and the substance of that agreement. As indicated above, these rules are often simply summed up as being rules concerned with the ‘fairness’ or ‘unfairness’ of the terms. Of course the fairness of contract terms may be an issue in a variety of types of contract between different sorts of contractors. This book, however, is concerned with the fairness of terms in consumer contracts. In broad terms, this means contracts under which goods or services are supplied by a party operating in a business capacity to a party (the consumer) acting in a private capacity. The main rules considered are those of broad application which are contained in the Unfair Contract Terms Act (UCTA) 1977; and the Unfair Terms in Consumer Contracts Regulations (UTCCR) 1999.⁹ First and foremost the book seeks to unpack what is meant by fairness in the context of consumer contract terms; to highlight the legal and policy influences that underpin these rules and which may influence the development of the rules; and to reflect upon current challenges and possible future developments in the regulation of consumer contract terms. However, towards the end of the book the discussion broadens out to consider issues of fairness in consumer contracts going beyond the actual terms of the contract and also (briefly) some issues as to fairness in commercial contracts.

1.3 Basic Freedom and Fairness Ideas

Chapter Two sets out competing philosophies of contract: a freedom-oriented approach and a fairness-oriented approach. In short, the argument made is that a freedom-oriented approach tends to maximize the self-reliant freedom of the parties, both in relation to the process leading up to the bargain and in relation to the substantive terms which can be agreed to. If the parties are to have maximum procedural freedom in the making of an agreement this means that the law should define the basic idea of agreement fairly liberally and also that there should be limited scope to set the agreement aside on the grounds of procedural impropriety. If the parties are to have maximum substantive freedom this means that constraints on the substance of what can be agreed to should be kept to a minimum.

By contrast, a fairness-oriented approach seeks to balance the interests of the parties to the contract, and in particular to protect the substantive and procedural interests of the consumer. By the ‘substantive interests’ of the consumer I mean the interests affected by the substantive rights and obligations provided for by the terms. The rights and obligations stipulated for in the terms may affect important physical, proprietary, economic and social interests of the consumer. From a fairness-oriented perspective terms may be unfair where these consumer interests are unduly compromised. By the ‘procedural interests’ of the consumer I mean the interests that are affected by what happens in the process leading to the conclusion of the contract. Here, the consumer is affected by whether he is in a position to give ‘informed consent’ to the substantive terms (i.e. whether he is in a position to appreciate what he is agreeing to); whether he has a choice in relation to the substantive terms; and by his bargaining position relative to the trader. From a fairness-oriented perspective, if there is a lack of transparency (such that the consumer would find it difficult to give informed consent) then there may be an unacceptable compromise on the ability of the consumer to protect his interests at the pre-contractual (‘procedural’) stage. In addition, if there is a lack of choice for the consumer or if he is in a weaker bargaining position then, once again, there may be an unacceptable compromise on the ability of the consumer to protect his interests at the pre-contractual (‘procedural’) stage.

1.3.1 Possible Approaches to Testing for Unfairness

Chapter Two then goes on to further unpack exactly how we might test for unfairness; and the ways in which various unfairness issues relate to one another. Essentially, the argument is that we need to seek to base fairness standards around certain concrete norms such as default rules and reasonable consumer expectations. Terms that are detrimental to consumers by reference to benchmarks such as these should generally be the main focus of attention. The review of fairness might then potentially involve a full analysis of fairness in substance and fairness in procedure. Fairness in substance can be more fully assessed by considering such factors as the degree to which the term deviates from a default rule or allows for compromise of the reasonable expectations of the consumer; the particular types of interest affected by the term; whether the impact of the term could have been minimized by insurance cover; and whether any unfairness is counterbalanced by other terms that are especially favourable to the consumer.

In relation to the process leading to the contract, fairness means paying attention to factors that may prevent the consumer from protecting his interests in the agreement process. The first issue (and something that must be fundamental to fairness) is that the consumer should be in a position to give informed consent. This means that terms should be transparent; and if a term is not transparent this should strongly suggest that the term is unfair; and it is argued that this should be the case both where there is overall substantive unfairness and where a term is detrimental to consumers even although it is balanced out by another term and there is no overall substantive unfairness. It is also argued that where traders choose to include terms reflecting important legal rights these terms should be transparent and that sometimes it should be compulsory to include terms reflecting important legal rights as this may affect pre-contractual consumer understanding as to other terms and help consumers to protect themselves post-contractually against these other terms.

A further departure from a freedom-oriented approach (and therefore a more strongly fairness-oriented approach) involves taking account of other procedural factors (i.e. procedural factors other than transparency) which may affect the ability of consumers to protect their interests at the procedural stage. On this sort of approach where a term compromises the substantive interests of the consumer it will be relevant to ask whether alternative (and substantively fairer terms) were available. If no such alternative terms were available then the term agreed to is more likely to be viewed as unfair. Also, on this approach, if a term compromises the substantive interests of the consumer, it will be relevant to consider whether the consumer was in a weaker bargaining position when the term was agreed to. If so, then the term agreed to is more likely to be viewed as unfair. However, it is argued that lack of choice and the weaker bargaining position of the consumer are always secondary factors by comparison with lack of transparency. While it is feasible to say that a term that is significantly substantively detrimental to consumers is always unfair if there is a lack of transparency, it is not feasible to say that such a term is always unfair on the basis of a lack of choice or the weaker bargaining position of the consumer.

Finally, in Chapter Two, I consider the idea of a fairness regime within which there is protection of the substantive interests of the consumer, even where there has been a reasonable degree of procedural fairness and overall substantive fairness (or where terms are preemptively disallowed, there being no opportunity even to consider whether there is procedural fairness). These approaches move furthest along the fairness spectrum away from a traditional freedom-oriented approach. Various rationales for this are discussed: protection of the basic substantive interest; a presumption of procedural unfairness; an agenda to standardize substantive terms across a sector so as to enhance the practical usefulness of transparency; and the practical need to promote clear, effective consumer protection.

1.4 The Regimes: Overview and Background

Chapter Three sketches the basic nature of the two existing regimes: (UCTA) 1977 and (UTCCR) 1999 and the plans to create a single regime. (The UTCCR are an updated version of the UTCCR 1994 which were passed in order to implement The Directive on Unfair Terms in Consumer Contracts¹⁰ – known as the Unfair Terms Directive, hereafter the ‘UTD’). The chapter then considers the ways in which the law should and may be affected by the broader legal and policy background, by the European Court of Justice (ECJ) and by the fairness traditions of other Member States. ECJ jurisprudence thus far tells us that the test of unfairness should be approached by balancing the interests of the parties, i.e. by considering the respective benefits and detriments caused to the parties by the term. It is also clear that the ECJ will not interfere with the application of the test to the facts by national courts; although there does appear to be a readiness to take the view that a term should always be seen as unfair where there are no substantive benefits at all to the consumer (and this may well be the case whatever procedural fairness happens to exist). What is not clear is the extent to which the ECJ will be prepared to further flesh out the concept of unfairness; although it must be possible that any further fleshing out of the test would emphasize the importance of transparency as a fundamental requirement.

1.5 Default Rules, Reasonable Expectations and Reasonableness under UCTA

Chapter Four identifies the basic notions of fairness in substance underlying UCTA as default rules relating to the responsibilities of traders; along with ‘reasonable expectations’ that consumers may have as to the way in which traders will perform their obligations. Generally, if a term deviates from these fairness benchmarks the result is that the term is subject to a general ‘fair and reasonable’ test (in broad terms this involves a review of substantive and procedural factors and it seems to be accepted that – procedural fairness notwithstanding – terms can fail the test based on their substantive features/effects). However, the chapter also highlights those default rules that are treated as absolute fairness norms (deviation from which is always wholly ineffective); and considers the rationales for such an approach.

The chapter also considers the relationship between the UCTA fairness benchmarks and the proposed new regime. Essentially the point here is that the ‘detriment’ trigger proposed for the new regime would cover all of the terms already covered by the UCTA. However (being an ‘open fairness norm’) it would also cover forms of exclusion or restriction of the trader’s responsibilities that would not necessarily be caught by UCTA (and, of course, it would cover those terms not caught by UCTA, but caught by the UTCCR, for example those terms that impose obligations and liabilities on the consumer).

1.6 The UTCCR

Chapter Five considers various issues surrounding the test of unfairness under the UTCCR and the way in which it has been approached by the courts. A term is unfair under the UTCCR where ‘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’.¹¹ In contrast to UCTA, there is no statutory control trigger as such under the UTCCR. So a term does not need to satisfy a particular statutory formula in order to be subject to the good faith/significant imbalance test just outlined. Equally, there is no exclusive list of terms to which the test applies (although we shall see that the indicative list of terms that may be regarded as unfair¹² provides considerable guidance). The test applies to all terms that are not positively excluded. So, first of all Chapter Five discusses the exclusion of individually negotiated terms from the test of unfairness; why this is probably an undesirable exclusion; and the plans to remove it. However, the other exclusions are best understood in the context of the terms that the test is most focused on and we are in the best position to work out what the test ...