Drafting consumer contracts

In the last ten years the Office of Fair Trading ‘OFT’ has considered over 9,000 consumer contracts under the Unfair Terms in Consumer Contracts Regulations (SI 1999/2083).

The regulations establish a challenging environment for those who draft consumer contracts to ensure compliance. They also offer an opportunity for consumers to challenge unfair terms in the courts or by complaining to the OFT or to their local Trading Standards Department.

The OFT publish details of their decisions in a quarterly Bulletin.

This article provides guidance on drafting consumer contracts and ensuring compliance with the regulations.

The Extent of the Regulations

The regulations apply to non-negotiated contracts between business suppliers and consumers. The regulations do not apply to individually negotiated and to business-to-business contracts.

Unfair terms are not binding upon the consumer. But, a contract containing an unfair term continues to bind the parties so long as the contract is capable of continuing in existence minus the unfair term.

The Core Terms

The regulations do not apply to the core terms of a contract – price and quality. But core terms only remain exempt from the regulations where they are expressed “in plain intelligible language.” Where the price or subject matter of a contract is difficult to ascertain or where some other uncertainty or lack of clarity is present within the contract, the regulations may apply.

Treating the Consumer fairly

The concept of fair dealing is the central aim of the regulations. If a contractual term is fair then it is vires the regulations. By regulation 5(1) a term is unfair 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.”

The language and presentation of Consumer Contracts

Regulation 7(1) holds that consumer contracts must be written in plain and intelligible language. Technical phrases and jargon cannot be used. Words and phrases such as, ‘indemnify’,  tort, ‘without prejudice, ‘time of payment shall be of the essence’, ‘irrevocably indemnify’, ‘warranted vehicles’, lien, ‘consequential loss’ and ‘implied by law’, have all been held by the OFT to be void.

Consumer contracts must also be clearly and legibly presented. Potentially detrimental and important terms should be highlighted. Contracts printed in small font and which some consumers may find illegible may be void. Sentences should be short and contain one contractual term per sentence.

Potentially Unfair Terms

Schedule 2 of the Regulations contains an indicative and non-exclusive list of 17 ‘grey terms’ which may be unfair. Although terms which fall within the scope of the list are only potentially unfair, it is likely that the OFT will consider them to be unfair in the absence of a countervailing term which redresses the balance in the consumers favour. Effectively, terms which fall within the grey list should be considered to be presumptively unfair.

The ‘grey terms’ are considered below.

Terms which exclude liability in Delict

The Regulation excludes terms which limit liability for death and injury. These terms should be avoided altogether.

Terms which exclude or limit liability for breach of contract

A term which has as its object the limitation of the legal rights of a consumer in the event of partial or total non performance of the contract may be unfair. If any limitation is attempted it must be appropriate and in good faith. Any restriction of the consumers’ statutory rights will be void. Generally, the use of these terms should be avoided.

Unilateral Termination Terms

Terms which allow the supplier to unilaterally terminate all or part of the contract may be unfair. Terms which allow termination on an arbitrary basis will be always be difficult to justify. Terms which state that the contract may be terminated in the event of a material breach of contract may be fair. For example the OFT upheld a clause which allowed a canal boat operator to unilaterally refuse to release a boat where the renter was an unsuitable person. Unsuitability could include drunkenness and inability to operate the boat or for general safety reasons. If this type of term is used then an illustrative list of good reasons for refusal to perform should be included.

Termination of a contract without notice

Clauses allowing the supplier to terminate a contract of indeterminate length without notice will usually be considered to be unfair. In Falkirk Sunbeds, Bulletin 1 Case No 6,  the term provided that management could refuse entry without providing reasons. This term was found to be void. But in American Golf, Bulletin 5 page 18, a term allowing a consumer to be suspended or expelled from the golf club for acting illegally or bringing the club into disrepute was held be acceptable.

Penalty Clauses

Terms which allow the supplier to retain a deposit where the consumer cancels the contract will normally be unfair. This provision effectively outlaws the retention of deposits or the use of penalty clauses in consumer contracts.

In JK Lynch Construction Ltd, Bulletin 15 Case No 9, a term which provided for a high rate of interest to be paid in the event of a failure by the consumer to perform his part of the contract was held to be unfair.

Clauses can be drafted to enable compensation to be paid in the event of the contract being terminated. Where the contract stipulates that compensation is payable the compensation must be reasonable and apply to both parties. Compensation sums must only reflect the loss otherwise they will act as a penalty on the defaulter.

Discretionary Termination Clauses

Terms which allow the supplier to unilaterally terminate the contract at his discretion will usually be unfair. Termination clauses, if insisted upon, must be balanced and give equivalence to the consumer.

Automatic extension of a fixed term contract

A contract term which provides for a fixed term contract to be automatically extended “when the deadline fixed for the consumer to express his desire not to extend the contract is unreasonably early” may be regarded as unfair.

This inelegant provision reduces the opportunity to extend the length of a contract without the consumer’s knowledge. In Autonet 2000, Ltd Bulletin 17 Case No 4, a car alarm agreement term was struck down as being unclear and for providing that the fixed term contract was automatically extended unless the consumer specifically requested that it be terminated.

It may be possible to draft a clause allowing the contract to be continued beyond its natural life if the term is equivalent and allows both parties the same right. Otherwise unilateral terms such as this appear to be unbalanced in favour of the supplier and should be avoided.

Binding consumers to hidden terms

Contracts which incorporate terms contained in other documents or which cannot be consulted by the consumer are likely to be unfair. This provision has an obvious impact on contracts which attempt to incorporate notices, standard terms and conditions, regulations, codes of practice, industry standards and the like.

The OFT do recognise that some documents cannot be readily incorporated into contracts. In Travel 2 Ltd, bulletin 24 Case No 42, a reference to an International Air Convention was allowed on the understanding that copies of the relevant Convention would be made available to the consumer if requested.

Contracts should ideally have all its terms contained within the body of the document. If a contract refers to other documents, those documents should be given to the consumer or made available to him.

General Variation Clauses

Terms which allow the supplier to unilaterally vary the contract without a valid reason will normally be unfair. The OFT describe these terms as general variation clauses.

In Vodaphone Ltd, Bulletin 18 Case No 24, the company sought to rely upon terms which allowed the contract to be varied at the supplier’s instance. The clause was amended and the supplier’s right to vary was limited to extraneous factors outwith his control such as changing regulatory requirements. The supplier also bound himself to inform the consumer of any changes.

General variation clauses can be drafted in such a way as to be fair. An acceptable variation clause is likely to be one which is limited in its scope and bilateral. A contract which allows for a variation in its terms should generally provide for a notice period and make provision for the consumer to resile.

Variation of Product Supplied

Terms which allow the supplier to make changes to the product supplied without the consumer’s agreement may be void by reason of unfairness. Minor and reasonable changes will normally be fair. In Page & Moy Ltd Bulletin 20 Case No 17 a booking condition in a holiday contract which stated that the supplier was not responsible for any change in the destination airport had to be amended to provide that the supplier would provide free transport if the destination airport was altered.

Variation of Contract Price

Any unilateral change in the contract price will, in the absence of good reason, be unfair. Where a supplier insists upon such a clause he can consider inserting a provision allowing the consumer to cancel the contract and obtain reasonable compensation. Contracts for goods and services which are subject to price volatility such as fuel can be framed to acknowledge this but must normally allow the consumer to withdraw from the contract at short notice upon intimation of the price rise.

Terms allowing the Supplier to interpret the meaning of the Contract

Terms which allow the supplier the right to unilaterally interpret the contract are likely to be unfair.

In Initial Electronic Security Systems Ltd, Bulletin 17 Case No 13, a term allowing the supplier complete discretion on what action to take in the event of him receiving the alarm signal was held to be unfair. The revised term allowed the supplier to take such action as was reasonably necessary.

Disclaimers and Entire Agreement clauses

Terms which limit the supplier’s obligation to respect representations made by his employees or agents or which make any verbal commitments made by the supplier subject to written formality may be unfair.

Entire agreement terms are quite common in consumer contracts and usually attempt to exclude verbal representations made by the supplier’s salesmen. A typical term would read “this agreement comprises the entire contract between the parties.”

In Bulletin 14 Case No 1, the OFT said that virtually all entire agreement clauses are potentially unfair. But, entire agreement terms have been regarded as fair by the OFT where they state that “it is the suppliers intention that this agreement consists the whole agreement between the parties.” This distinction is difficult to understand and I would submit that such a term would be ineffective in the face of evidence of the supplier making extra-contractual assurances to the consumer which he failed to adhere to. I would advise that entire agreement clauses of this nature should be avoided.

Terms which impose formality barriers in the way of varying the contract will also be considered as unfair. Typically, these terms assert that the contract can only be varied with the written consent of the supplier or a director or that some other formality be gone through. This barrier to variation effectively prevents the consumer from seeking even minor changes to a contract. As a rule such terms are regarded by the OFT as unfair.

Binding consumers to the contract after supplier default

Terms which provide that the supplier may default but the consumer remains bound by the contract may be unfair. Reported examples are limited perhaps because such a term is so patently unfair that even the most zealous of drafters balk at its inclusion. But examples do exist. In Maples Stores plc Bulletin 3 page 77, a term held that failure by the supplier to make delivery of the goods did not entitle the consumer to repudiate. Unsurprisingly, this term was held to be unfair.

It is difficult to envisage any term binding the consumer to the contract but not the supplier surviving the fairness test.

The Suppliers right to assign unilaterally

Terms which allow the supplier to assign the contract without the consent of the consumer may be unfair. Contracts which allow both parties to assign are likely to be fair as it balances the rights of each party.

Restricting consumers legal remedies

Terms which exclude or restrict a consumer’s legal rights are invariably unfair.

Terms commonly falling within this category include those limiting statutory rights, common law remedies, imposing arbitration upon the consumer or limiting jurisdiction or choice of law.

The limitation of jurisdiction or choice of law remains the single most common attempt to curtail consumer rights. Jurisdiction or choice of law clauses should be avoided altogether as they are generally worthless.

Other Potentially unfair terms

The list of potentially unfair terms in Schedule 2 is non-exclusive. Categorisation is difficult but where a term does not fall within Schedule 2 then the test to be applied is one of fairness and good faith.

The following is a set of recent examples of uncategorised terms which the OFT have considered to be unfair.

In RDC, Bulletin 20 Case No 19, the seller reserved the right to withhold or cancel delivery of the goods where the consumer was in breach of contract. This term was unbalanced in favour of the supplier, the consumer not having a reciprocal right. In Lastminute.com, Bulletin 20 Case No 12, the responsibility for goods lost or damaged in transit was transferred to the consumer. This too was unfair. A holiday booking contract in  Page & Moy Ltd, Bulletin 20 Case No 17, which contained a provision which held that any amendments to the contract within six weeks of the booking would be treated as a cancellation and charges applied. This was considered was considered to be unbalanced and contrary to good faith. The term also acts as a penalty clause.

The test of good faith is often a matter of fine judgement. In Law Pack Publishing, Bulletin 20 Case No 18, a standard letting agreement provided that the landlord was entitled to recovery of the property if any part of the rent was unpaid after 10 days. The OFT agreed that if the term was amended to allow a 21 day period then it would be fair.

The Regulations application to Heritage

The regulations apply to the sale and lease of heritage to consumers where the supplier is a business.

In Khatum v London Borough of Newham. [2003] EWHC 2326 (Admin) the High Court held that the regulations apply to local authorities even where they are supplying tenancies under a statutory duty. 

The OFT have issued a guide to Landlords and letting agents giving guidance on the regulations and their effect on residential leases.

The regulations apply to new build missives which are prepared by the builder and are in a pre-printed, non-negotiable form.

The regulations do not apply to the sale of heritage between one consumer and another.

Conclusions

The regulations instil a certain amount of discipline into contractual draftsmanship.  Adherence to the regulations will result in a well crafted contract which is easily digested by the consumer. The drafters challenge is to ensure the contract protects their client’s interests and remains fair to the consumer and thus free from challenge.

The following checklist should assist drafters in ensuring compliance with the regulations: -

1. Is the contract legible, well laid out and are the important terms highlighted?

2. Is the term short, to the point, drafted in plain English and jargon free?

3. Do you need the term in the first place? If the term merely states the law then the answer is no. If the term dilutes the consumers pre-existing rights then it should be avoided.

4. Is the term balanced and fair?

5. Does the term give the supplier enhanced rights which statute or the common law would not imply? If so is this enhancement counterbalanced by a corresponding right in favour of the consumer?

6. If the contract incorporates other documents are they readily available to the consumer?

John Carruthers Advocate, 6th August 2004.