Unfair Terms in Consumer Contracts

Current project status

• Initiation: Could include discussing scope and terms of reference with lead Government Department
• Pre-consultation: Could include approaching interest groups and specialists, producing scoping and issues papers, finalising terms of project
• Consultation: Likely to include consultation events and paper, making provisional proposals for comment
• Policy development: Will include analysis of consultation responses. Could include further issues papers and consultation on draft Bill
• Reported: Usually recommendations for law reform but can be advice to government, scoping report or other recommendations

This project is complete. Our recommendations have been accepted by the Government and now form Part 2 of the Consumer Rights Act 2015, which came into force on 1 October 2015.

The project

This project updated and implemented a previous report on unfair terms, but only for contracts between consumers and businesses.

In 2005, the Law Commission and Scottish Law Commission made recommendations to reform the law of unfair terms. The report and associated consultation paper can be found here.

In May 2012, the Department for Business Innovation and Skills asked the two Commissions to review and update these recommendations for contracts between businesses and consumers. We were also asked to examine the exemptions for “main subject matter” and “price” in the light of the litigation of bank charges (see below).

We published an issues paper seeking views in 2012. Our final advice to BIS was published on 19 March 2013.  A summary is available.

The price and main subject matter exemptions

The Unfair Terms Directive has been part of UK law since 1995.  It enables consumers and enforcement bodies, such as the Competition and Markets Authority, to challenge non-negotiated terms on the ground that they are unfair.  Under article 4(1) of the Directive, this is subject to an exemption for “the main subject matter of the contract” and “the adequacy of the price… as against the goods or services supplied in exchange”.

There was considerable uncertainty about the meaning of these words, following the 2009 Supreme Court decision in Office of Fair Trading v Abbey National plc.  The decision has been interpreted in different ways, which means that navigating the law requires significant legal expertise, and even then the outcome is uncertain.  It is difficult to predict which terms are price or subject matter terms and may, therefore, not be challenged.

In view of the litigation and uncertainty, we made the following recommendations:

• The exemptions should only apply to terms which are both transparent and legible.
  • A term is transparent if it is in plain, intelligible language and legible.
  • A term is prominent if a reasonably circumspect consumer would be aware of it.
• The exemptions should be rewritten in clearer language.
• The Directive includes an annex of terms which may be unfair, usually referred to as the “grey list”. The legislation should clarify that grey list terms do not fall within the exemption.
• Other terms which exploit “behavioural biases” in the way that consumers make decisions should be added to the grey list.

These recommendations have now been implemented in section 64 of the Consumer Rights Act 2015. Furthermore, section 63 gives the Secretary of State power to add terms to the grey list by statutory instrument.

Consolidating the Unfair Terms Act 1977 and the Unfair Terms Directive 1993

The 2015 Act now contains all the law of unfair terms affecting relationships between businesses and consumers. It therefore includes some protections previously found in the 1977 Act, including a ban on terms which exclude liability for death or personal injury.

Following our recommendations, unfair terms protection now applies to notices.  This should prove particularly useful in relation to end user licence agreements containing unfair terms.