Transcript
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Unfair Terms
Linda Mulcahy
l.mulcahy@lse.ac.uk
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Structure ofthis six lecture topic
Key concepts
Incorporation ofexpress terms into
the contract Incorporation of
implied terms
Regulation of
unfair terms Mere
representations
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Key issues?
What is unfair? To what extent are the parties to
contracts free to include unfairterms in their contracts?
Do/should different rules apply fordifferent types of contract?
Should the courts police certainclauses and if so on what grounds?
When is the intervention of thecourt economically efficient/morally
just? Are there certain types of
transaction that are now regulatedrather than contracted?
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Bargaining naughtiness and substantive
unfairness
Fair bargain Fair result
Unfair bargain Fair result
Fair bargain Unfair result
Unfair bargain Unfair result
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Parties may decide in advance
Limit their liability tocertain types of breache.g cost of replacementitem
Exclude their liability
exemption clauses
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Exemption clauses
Way of reducingcontracting costsespecially where bulk
business around thesame service e.g., railwaytravel
Commonly used instandard form contracts
Because risks arereduced use of exclusionclauses can lead to areduction in price
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Problems
Encourages extensiveuse of restrictive
exclusion clauses Can unfairly distribute
risks
Can reflect inequalityof bargaining power
Common law controlshave provedinadequate
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Understanding exemption clauses
Incorporation
Interpretation
Intervention
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Investors Compensation v WestBromwich
[1998] 1 WLR 896 per Lord Hoffman
Interpretation is the ascertainment of themeaning which the document wouldconvey to a reasonable person having all
the background knowledge which wouldreasonably have been available to thepartiesat the time of the contract
almost all the old intellectual baggage of
legal interpretation has been discarded
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Interpretation
None of you nowadays will remember the trouble we had when Iwas called to the Bar with exemption clauses. They were printedin small print on the back of tickets and order forms and invoices.They were contained in catalogues or timetables. They were held tobe binding on any person who took them without objection. No one
ever did object. He never read them or knew what was in them.No matter how unreasonable they were, he was bound. All this wasdone in the name of freedom of contract. But the freedom was allon the side of the big concern which had the use of the printingpress. No freedom for the little man who took the ticket or orderform or invoice. The big concern said Take it or leave it. The littleman had no option but to take it.faced with this abuse of power by the strong against the weak by the use of the small print ofthe conditions the judges did what they could to put a curb on it.They still had before them the idol of freedom of contract. Theystill knelt down and worshipped it, but they concealed under theircloaks a secret weapon. They used it to stab the idol in the back.This weapon was called the true construction of the contract.
Lord Denning in George Mitchell v Finney[1983]
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Intervention by UK and EU Parliaments
Unfair Contract Terms Act 1977(UCTA). Source
Unfair Terms in Consumer ContractsRegulations 1999 (UTCCR)
No single instrument but both forms ofregulation may apply to same situation
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Unfair Contract Terms Act (UCTA)1977
Has to be a contract and theterms being challenged have tohave been incorporated or implied
Renders invalid certain contract
terms Generally only applies when the
defendant is acting in the courseof a business
Misleading name? It does notprovide a general standard of fair
terms and it has a lot to say aboutnegligence
Principle aim is to controlexemption clauses where one ofthe parties is a consumer
Does not control all unfair terms
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UCTA: main provisions -
negligence
Section 2(1): A term whichpurports to exclude or limitliability for death or personalinjury caused by the
defendants negligence isinvalid Section 2(2): A term which
purports to exclude or limitliability for other loss causedby negligence is invalid if it isnot reasonable
Both provisions applywhether someone is actingas a consumer or in thecourse of a business
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UCTA main provisions
Section 3: If theclaimant is dealing asa consumer OR on
the defendantsstandards terms thenexclusion or limitationof contractual duty is
invalid unless it isreasonable
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UCTA main provisions implied terms
Section 6(2): If buyer isa consumer terms
implied by statute cannot be excluded orrestricted
Section 6(3) If buyer isnot a consumerexclusion or restrictionof implied terms onlypossible is reasonable
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Mischief Impact of UCTA
Applies when
Death or PI bynegligence
Cant exclude Acting as aconsumer or not
Limitation of liabilityfor loss by
negligence
Must be reasonable Acting as aconsumer or not
Exclusion orlimitation ofcontractual duty
Must be reasonable Dealing as aconsumer or ondefendants standardterms
Exclusion of impliedcontract term Cant exclude Dealing as consumer
Exclusion of impliedcontract term
Must be reasonable Buyer not aconsumer
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UCTA reasonableness?Section11:
Burden is on defendant to showreasonable
Schedule 2 includes reference to:
The relative bargaining strength ofthe parties
Whether the consumer received an
inducement to agree to the term orcould have entered into a similarcontract with another party withoutthe term
Whether the customer knew or oughtto have known of the term
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Applying UCTA to contracts
Is the defendantacting in the course
of a business?
What is the suspectclause limiting or
excluding?
Is the term automaticallyinvalid or subject to
reasonableness test?
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Unfair Terms in Consumer contracts
Regulations 1999
Aims to create an internal market whereconsumers can shop with similarprotection across EU
Scope goes beyond exemption clauses toany clause considered unfair
Only relates to consumers and sellers
Target standard contracts/any contract
not individually negotiated No interest in regulating core terms
(subject matter and price) as long as theyare in plain unintelligible language
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EU regulations main provisions
Regulation 8(1): A term found tobe unfair is not binding on theconsumer
Regulation 12: Office of fair
trading and other bodies mayseek injunction to prevent the useof the term
Regulation 5(1) unfair if, contraryto the requirements of good faith,it causes a significant imbalance inthe parties rights and obligations
arising out of the contract to thedetriment of the consumer Schedule 2 indicates what sort of
terms might be considered unfair
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Applying UTCCR
Is the contractbetween a
consumer and
business?
Is a standard formcontract used?
Is the term unfair?
Does the term define
subject matter or
price?
Is the term in plain and
intelligible language
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UCTA UTCCR
Type of clause Exclusion, limitation
indemnity
All standard termsexcept core terms
Type of relationship BusinessBusiness
Business-Consumer
Business-consumer
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Example
Sale of washing machineno liability if goods aredefective
Both UCTA and UTCCRapply but different outcome
UCTA: s6(2) clauseexcluding statutory implied
terms is always invalid
UTCCR: clause only invalidif unfair
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The particular problem of insulation of
core terms: regulation 6(2)
In so far as it is in plainintelligible language, theassessment of fairness of aterm shall not relate -
(a) to the definition of themain subject matter of thecontract, or
(b) to the adequacy of the
price or remuneration, asagainst the goods or servicessupplied in exchange.
Subject tofairness test
Unlesscomeswith 6(2)
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Director General of Fair Trading v First National Bank Plc
[2002] 1 AC 481
First case in which powers ofDirector came before courts
Banks make substantial amounts ofmoney from charging customers forbecoming, or attempting tobecome, overdrawn on their currentaccounts without priorauthorisation.
OFT concerned practice was unfair.It has been argued that areasonable consumer may well beflabbergasted to be charged forbeing overdrawn only a day
Sheltering such terms from a testof fairness does little to further thegoal of consumer protection.
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Court of Appeal
The term fell outsidethe UTCCR Reg 3(2)
because it was a coreterm
Director General
argued it was not acore term and fellwithin reg 3(2)
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House of Lords:
Lords Bingham, Steyn, Hope, Millett and Rodger
This case concerned fairness of a term in astandard form regulated credit agreementthat on default interest was chargeable after
judgment as well as before. The House of Lords emphasised that
Regulation 6 should be interpreted
restrictively, There is a difference between ancillary and
core terms: terms ancillary to the core of the bargain
should still be subject to assessment forfairness.
If Reg.3(2) was to be so widely construed
that such a term fell within the ambit of acore term it would defeat the purpose ofCouncil Directive 93/13.
Consequently, the term had to satisfy thefairness requirements contained in Reg.4 ofthe Regulations;
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But
Having regard to the context of the agreement,the term did not cause a significant imbalance inthe parties' respective rights and obligations andtherefore was not unfair for the purposes of
Reg.4. In assessing the fairness of a term under Reg.4,the court was required to consider whether thesupplier had dealt openly and fairly. In cases likethe instant case concerning the provision ofcredit, a borrower would accept that a lenderwould not lend if it might not be able to recover
all its principal and interest. First Direct's standard agreement set out the
nature of the borrower's obligations clearly andunambiguously.
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Reflections
A more literal approach tothe interpretation of theRegulations than is perhapsdesirable.
The trial judge and Court of
Appeal both emphasisedthat the purpose of theDirective, and thus theRegulations, was to ensureadequate consumerprotection.
A pertinent principle, notexpressly articulated by
any of the judges but latentin the judgments of thelower courts, is that ofunfair surprisein relationto such terms
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Abbey National v OFT
Are unplanned overdraft fees in banks standardcontract core terms outside of the scope of UTCCR?
Are the terms part of the essential bargain betweenbank and client - the price or remuneration, as againstthe services supplied in exchange"
OFT wanted to investigate The banks contended that any such investigation would
be circumscribed by the provisions of reg.6(2). Court not considering whether charges were fair but
whether they were regulated CA ([2009] EWCA Civ 116) Ancillary in nature:
Consumers much less likely to take into account termswhich will only apply in certain circumstances
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Supreme Court[2010] 1 A.C. 696
Lord Phillips; Lord Walker; Lady Hale; Lord Mance; Lord Neuberger
SC came to opposite conclusion. Bank charges levied on personal current account customers in
respect of unauthorised overdrafts constituted part of theprice or remuneration for the banking services providedwithin the meaning of the UTCCR 1999 reg 6(2)(b)
The regulation contained no indication that only an "essential"price or remuneration was relevant. Any monetary price orremuneration payable under the contract would naturally fallwithin the language of the regulation.
The Court of Appeal had gone too far in interpreting thelanguage of the Directive and the Regulations
As a result the Office ofFair Trading was not entitled toassess the fairness of such charges.
The only question for the court when applying Regulation6(2)(b) is whether the term in question relates to any part ofthe contractual consideration.
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Reflections..
This approach has the advantage of absolving thecourts from difficult questions regarding what ismerely ancillary, but greatly expands the scope ofRegulation 6, thereby reducing the amount ofprotection given to consumers.
The Supreme Court was content to allow a lessrestrictive interpretation of Regulation 6 since itidentified the purpose of the Regulations not to beconsumer protection but rather consumer choice.
Very literal interpretation
OFT has now stated that it will not pursue itsinvestigation further: (OFT 1154, Personal Current
Accounts - Unarranged Overdraft Charges: Decision
on an investigation under the UTCCRs and next steps(December 2009) Now favours legislative intervention
Lord Walker noted that it is open to the legislature toafford greater rights to consumers, and that otherEuropean countries, notably Germany, have chosento do this.
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In conclusion
The law regarding unfair terms inEnglish law generally issomething of a mess and can bedifficult for consumers to
understand The co-existence of the
Regulations and the UnfairContract Terms Act 1977 isunnecessarily complicated.
A helpful first step would be toadopt the Law Commission'sReport, Unfair Terms in Contracts(Law Com. No. 292 (2005).
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So what?
UCTA is better for claimant isclause is one which will always betreated as invalid
UCTA is as good as UTCCR is theclause is subject toreasonableness test under UCTAor unfairness test under UTCCR
More certainty about what isunfair under UCTA?
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