The Unfair Contract Terms Act

Categories: Contract

Essay, Pages 9 (2233 words)

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In the present essay the problem covered will be The Unfair Contract Terms Act 1977, known as UCTA and the Unfair Terms in Consumer Contract Regulations 1999, known as UTCCR. As things stand at present, consumers are faced with two pieces of legislation in a vital area of contracts. The main areas analysed will consist of a historical background of the Act and the Regulations, a comparison between them but also the inconsistencies and overlaps which exist regarding these two layers of complex regulation.

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After this thorough analysis is complete a conclusion will be drawn on the bases of what was covered.

Situation in UK Legislation to combat unfair terms was first passed in the 19th century. Until 1994 the controls centred on clauses which exclude or limit liability; the principal Act is now The Unfair Contract Terms Act 1977 (UCTA). However, in 1993 the European Council of Ministers passed a Directive on Unfair Terms on Consumer Contracts[1] which applies (with limited exceptions) to unfair terms of any type in consumer contracts.

The Directive was implemented in the UK by Regulations made under European Communities Act 1972; these have now been superseded by the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR)[2].

The Regulations did not amend or repeal UCTA; they provide an additional set of controls. The resulting structure is complex and proposals have been made to simplify it by combining the two sets of rules into a single one, modified legislative scheme[3]. The Regulations operates side by side with UCTA, so that is possible for a term to be valid under the Regulations and not the Act, and conversely.

Or, to put the same point in another way, a party wishing to rely on a contract term will have to satisfy to both requirements of both sets of rules.

The scope of the Regulations, however, differs significantly from that of the Act, so that often only one set of rules will apply[4]. If the term in question is one that purports to exclude or restrict the liability of one of the parties, it is likely to be subject to UCTA. UCTA applies both to consumer contracts and to contracts between businesses[5]. It may have the effect that the exclusion or restriction of liability is completely ineffective; or it may invalidate the term unless “satisfies the requirement of reasonableness”[6]. If the term is in a consumer contract it will normally be subject to UTCCR.

UTCCR can apply to almost any type of term that has not been “individually negotiated”, and it will invalidate the term if it is “unfair. ” However, UTCCR do not apply to “core” terms involving the subject matter or the price of the goods and services[7]. Historical background The enactment of the Unfair Contract Terms Act 1977 introduced a major addition to the mechanisms for controlling exemption clauses. The power to override exemption clauses found to be unreasonable has been introduced in the case of implied terms in the sale of goods by the Supply of Goods (Implied Terms) Act 1973.

The 1977 Act, however, applies more extensive controls to a wide range of categories of contract, so that, for contracts within the scope of the Act, the courts for the first time had a general and direct means of control of the use of exemption clauses. The application of UCTA may render an exemption clause either totally unenforceable, or unenforceable unless shown to be reasonable[8]. The EC Directive on Unfair Terms in Consumer Contracts (93/13/EC) was the first major European Intervention into the heartland of domestic contract law.

The Directive was initially implemented into English Law by the Unfair Terms in Consumer Contracts Regulations 1994 (SI No 1994/3159). The Regulations came into force on 1 July 1995 but were revoked and replaced by the Unfair Terms in Consumer Contracts Regulations which came into effect on 1 October 1999. Overlaps and differences between UCTA 1977 and UTCCR 1999 The drafting of UCTA is not entirely straightforward; its name is misleading, being both too broad and too narrow. It is too broad, because UCTA does not deal with all unfair contract terms, only terms which exclude or limit liability.

It is also too narrow, because is not confined to exclusion and limitation provisions in contracts, but covers attempts to exclude or limit non-contractual liability as well[9]. The legislative technique that has been employed in the Regulations is one of “copy-out”, that is to say that the Regulations use the same, or virtually the same, language as the Directive itself. The principal motivation behind the copy-out approach is the desire to avoid liability on the part of the State for a failure to implement the Directive properly[10]. Beside the linguistic approach there are other obvious differences between the acts.

UCTA contains separate provisions for England, Wales and Northern Ireland on the one hand and Scotland on the other hand but UTCCR applies to the UK as a whole. Another important difference between UCTA and UTCCR is that UTCCR apply only to unfair terms in contracts between a seller or a supplier and a consumer, whereas all but two of the various controls under UCTA apply to both consumer and business-to-business contracts[11]. However, the sections of UCTA that apply to both kinds of contract operate differently depending on whether or not the contract is a consumer contract.

Exclusions and restrictions of liability that fall within sections 6 and 7 [s 20 and 21] are simply of no effect against a party who deals as a consumer, whereas as against a non-consumer they may be valid if they satisfy the requirement of reasonableness[12]. No seller or supplier under a hire-purchase contract, whether or not acting in the course of business, may exclude his obligations as to title, and non-business sellers may exclude or restrict their liability for breach of the implied terms as to correspondence with description or sample but only if the term is reasonable.

Under UCTA, attempts to exclude or restrict certain types of liability are simply of no effect[13]. All other terms caught by UCTA may be valid if they satisfy the requirement of reasonableness. In contrast, under UTCCR no terms are automatically of no effect; the terms to which UTCCR apply must simply not be fair. UTCCR apply only to terms which, in the word of regulation 5(1), have not been “individually negotiated”. Regulation 5(3) makes it clear that if one party has put forward a pre-formulated standard contract, only the specific terms or those aspects of specific terms which have been individually negotiated will be exempt.

It is for the business to show that the term was individually negotiated. In contrast, the application of UCTA to terms in consumer contracts does not depend on whether the term was negotiated (though that may be relevant to the question of reasonableness)[14]. Because UCTA is dealing with particular type of clauses[15] there is no need for a statement of the terms to which it does not apply. In contrast, under UTCCR certain terms are exempt from the requirement of fairness[16]. UCTA has much more serious restrictions on its application to certain types of consumer contract.

For English law, certain consumer contracts are excluded from the operation of UCTA, as is set out in Schedule 1[17]. There are no equivalent exclusions in UTCCR. Repeating the words of the Directive[18], UTCCR apply to contracts “concluded between a seller or a supplier and a consumer”[19]. This seems to cover all cases in which the business is the party providing the property or service and the consumer is the recipient. There is doubt, however, as to whether a sale by a consumer to a business or the provision of a service by a consumer to a business is within UTCCR.

One the one hand, the business is not the seller; on the other, “seller or supplier” is defined as: “any natural or legal person who, in contracts covered by these Regulations, is acting for purposes related to his trade, business or profession, whether publicly owned or privately owned”. In contrast, UCTA section 3 [s 17] applies whether the consumer[20] is buyer or seller or recipient. When a term is subject to the control of UCTA and is not simply ineffective, in English law the test under UCTA is whether the clause “satisfies the requirement of reasonableness”.

In Scots law, the test under UCTA is whether it was “fair and reasonable” to incorporate the clause in the contract. Under UTCCR regulation 5(1) the test is in very different words then UCTA: “a contractual term which has not been individually negotiated shall be regarded as unfair if, 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”.

Regulation 6(1) provides: “the unfairness of a contractual term shall be assessed, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent”. Clearly there are some close similarities on some points but there are differences too.

One similarity is that both tests require the court to take into account the circumstances in which the contract is made. A second is that fairness or reasonableness is to be judged by the circumstances, as UTCCR regulation 6(1) puts it, “at the time of conclusion of the contract”. It appears from this that the relevant question under UTCCR is whether it was fair to include the clause in the contract, rather than whether the clause appears fair, or whether it is fair to rely on it, in the light of subsequent events.

There are certainly differences in the factors to which the two instruments specifically refer, but as neither limits the courts’ consideration to these it is hard to see that this is a difference in substance. Where a term is unfair under UTCCR, it is unenforceable on the consumer[21]; this sanction does not apply to the obligation to use plain, intelligible language. Where a term is unfair and so not binding on the consumer, the remainder of the contract “shall continue to bind the parties if it is capable of continuing in existence without the unfair term”[22].

This implies that where a term contains an unfair element the whole term is affected so that the contract must be read without the whole term[23]. UCTA defines closely some of the terms to which it applies[24]. However, its broadest control over terms in consumer contracts is that in section 3(2)(b) [s 17(1)(b)], whose scope is not easy to define. UCTA does not provide examples of what terms might fall within this subsection. UTCCR contain an indicative list of terms which may be regarded as unfair[25].

This list is referred to in regulation 5(5), but there does not seem to be any presumption against a clause which appears on the list. Under UCTA the burden of showing that a term is fair and reasonable is on the party claiming that the term satisfies the requirement of reasonableness[26]. UTCCR, however, do not state which party bears the burden[27]. It seems that it is as neither UTCCR nor the Directive make any provision to displace the normal burden of proof resting on for the consumer to show that the term is unfair, the claimant.

The definitions of “consumer” in the two pieces of legislation differ. The first is that the UCTA definitions[28] of contracting as consumer depend on the other party acting in the course of a business, and the definitions of business under UTCCR and UCTA differ as well. A second difference is as to the “persons” who may be a consumer. The Court of Appeal has held that a company may “deal as consumer” within UCTA if it enters a transaction which is only incidental to its business activity and which is not of a kind it makes with any degree of regularity[29].

Under UTCCR only a natural person can be a consumer. Thirdly, UCTA uses the test of whether the contract is made (by either party) in the course of business, whereas UTCCR define a consumer as a person acting “outside his trade, business or profession”. As a general rule, UCTA applies only to terms affecting “business liability”. While this is an express provision of English law, it is also true of Scots law. There are two exceptions. The first are terms affecting liability for misrepresentation[30]. The second are clauses falling within section 6 [s 20] (sale and hire-purchase).

This means that even a non-business seller cannot exclude or restrict liability for breach of the implied terms under section 12 of the SGA 1979 (title), and can exclude or restrict her liability under section 13 (correspondence with description) or 15 (correspondence with sample) only if the term satisfies the requirement of reasonableness. As we have seen, UTCCR applies only to contracts “concluded between a seller or a supplier and a consumer”[31], and “seller or supplier” is defined as a business[32].

Although the reasonableness test and the test for unfairness are not the same, they may well lead to the same result in practice. There is some established guidance on reasonableness under the 1977 Act. The OFT publishes guidance on unfair terms, which takes with the decision of the House of Lords in Director General of Fair Trading v First National Bank plc [2001] UKHL, [2002] 1 AC 481 and subsequent case law, constitutes some guidance on the interpretation of unfairness under the regulations.