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This page forms the second of our six-part series containing the full text of the Unfair Terms in Consumer Contracts Regulations 1999. To go back to page 1, click here. The link to the next page can be found at the bottom of this post.

Unfair contract terms guidance 26 Group 2(d): Time limits on claims

2.4.1 If a contract is to be considered balanced, each party’s rights must remain enforceable against the other for as long as is reasonably necessary, as well as being adequate in other respects. The law allows a reasonable time for making claims where the parties have not agreed a definite period between themselves, and this may be regarded as the benchmark of fairness.

2.4.2 The OFT is likely to object to a term that frees the supplier from his responsibilities towards the consumer where the consumer does not make a complaint immediately or within an unduly short period of time. This applies particularly where:

(a) a time limit is so short that ordinary persons could easily miss it through mere inadvertence, or because of circumstances outside their control, and

(b) faults for which the supplier is responsible which could only become apparent after a time limit has expired.

2.4.3 Prompt notification of complaints is desirable because it encourages successful resolution and is therefore to be encouraged. But taking away all rights to redress is liable to be considered an over-severe sanction for this purpose. Where goods are supplied, use of such a term is legally incapable of producing that effect and may amount to an offence, because it serves to restrict the consumer’s statutory rights.

2.4.4 Any fault found in goods within six months of the date of sale is assumed to be the supplier’s responsibility unless he can prove otherwise. It is therefore particularly misleading for contract terms to seek to exclude or limit the consumer’s right to redress for faulty goods during the first six months after purchase. As noted above the use of misleading terms may give rise to enforcement action as an unfair commercial practice.

2.4.5 A statement that statutory rights are unaffected, without explanation, will not make such a term acceptable to the OFT. A better Unfair contract terms guidance 27 approach is to insist on prompt notification in such a way as not to restrict consumers’ legal rights. One way to do this is to require notification of a complaint within a ‘reasonable’ time of (or promptly after) discovery of a problem.

2.4.6 There is similarly no objection to a term warning consumers of the need to check to the best of their ability for any defects or discrepancies at the earliest opportunity, and take prompt action as soon as they become aware of any problem. Concerns do not arise so long as there is no suggestion that the supplier disclaims liability for problems which consumers fail to notice.

2.4.7 Any kind of term which is designed to encourage consumers to act promptly is more likely to be fair, and to be effective, if clear language is used, and it is given appropriate highlighting.

2.4.8 The OFT’s view of what terms are fair and unfair is illustrated by examples of terms published at Annexe A under Group 2(d).

Unfair contract terms guidance 28 Group 2(e): Terms excluding the right of set-off

Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of:

(b) Inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier- including the option of offsetting a debt owed to the seller or supplier against any claim which the consumer may have against him.

2.5.1 Terms which deprive the consumer of a route to redress, as well as those which actually disclaim liability may be considered unfair. One legitimate way for the consumer to obtain compensation from a supplier is by exercising the right of set-off. Where a consumer has an arguable claim under the contract against a supplier, the law generally allows the amount of that claim to be deducted from anything the consumer has to pay. This helps prevent unnecessary legal proceedings.

2.5.2 If the right of set-off is excluded, consumers may have (or believe they have) no choice but to pay in full, even when there is something wrong with what they are buying. To obtain redress, they then have to go to court. The costs, delays, and uncertainties involved may in practice force them to give up their claim, and therefore deprive them of their rights.

2.5.3 There is no objection to terms which state the consumer’s normal legal obligation to pay promptly and in full what properly owes –that is, the full price, on satisfactory completion of the contract. But suspicion falls on terms which say, or clearly imply, that the consumer must in all cases complete his payment of the whole contract price, without any deduction, as soon as the supplier chooses to regard his side of the bargain as finished. They are likely to be seen as excluding the right of set-off even if they do not actually mention that right.

2.5.4 Exclusion of the right of set-off is particularly likely to be seen as harmful where the consumer is not fully protected by an effective right to ‘reject’–Unfair contract terms guidance 29 that is, to return what has been supplied for a full refund if it is unsatisfactory The right to reject can normally be exercised only in contracts which are wholly or mainly for the supply of goods. It does not apply in contracts for work alone, or where significant work has to be done, for example, in installing goods.

2.5.5 Even where the consumer can reject goods, a term excluding the right of set-off may be considered unacceptable. It restricts the consumer’s freedom to use other legitimate methods to exercise their statutory rights to redress, contrary to law Rejection is usually the preferred recourse for consumers who receive unsatisfactory goods, but not always. The consumer may have no time to start looking again for a new car, or wait for delivery of a replacement computer. Where departures from the promised specification are minor, accepting the product but paying a reduced price for it may be a better option, and consumers should not have their right to exercise that option removed or reduced.

2.5.6 Clauses subjecting set-off to penalty. Concerns are particularly likely, whatever the subject matter of the contract, where consumers are subject to an immediately effective penalty 6 if they do not pay the whole contract price when demanded – for example, where there is a loss of guarantee rights, or of a right to a discount of the price.

2.5.7 The above objections do not apply to terms designed only to deter consumers from withholding amounts that are disproportionate to the fault in the goods or services. Other relevant examples of terms considered acceptable may be found at Annexe A under Group 2(e).

2.5.8 Full payment in advance. The OFT objects to terms which have the indirect effect of excluding liability, unfairly. For example, the right of set-off is the concern here relates to penalties that might take effect independently of any resolution of the dispute in the consumer’s favour, and without intervention of the court. That is not true of interest rate penalties, since if the consumer is withholding part of the contract price, he is bound to withhold the interest on it too. While he does that, it is the supplier, not the consumer, who is in the position of having to take his claim to court.

There is no serious objection to guarantee rights being suspended until due payment has been made – again, a problem occurs where the penalty is effective regardless of subsequent resolution of the dispute.

Unfair contract terms guidance 30 effectively removed where consumers are required to discharge their duty to pay in full (or nearly in full) before the supplier has finished carrying out his side of the contract. Such terms also leave consumers at risk of loss if the supplier becomes insolvent.

2.5.9 The OFT objects to such terms in contracts under which a substantial amount of work is carried out individually for the consumer after full, or nearly full, payment has been made. In such cases, the proper incentive to perform work with reasonable care and skill is weakened or removed. The OFT’s objections also apply to ‘accelerated payment’ clauses, which demand all or most of the full contract price if the consumer breaks a contractual obligation – for example, to allow work to start on or by a certain date.8

2.5.10 There is no objection to ‘stage payment’ arrangements which fairly reflect the supplier’s expenditure in carrying out the contract, and which leave consumers holding until completion a ‘retention’ of an amount reasonably sufficient to enable them to exercise an effective right of set-off. Fairness may also be achieved, even if full payment is required in advance, if such an amount is held under secure arrangements which guarantee that it will not be released until any dispute is resolved by independent adjudication.

Unfair contract terms guidance 31 Group 2(f): Exclusion of liability for delay

2.6.1 The law requires that goods should be delivered, and services carried out, when agreed, or, if no date is fixed, within a reasonable time. A term which allows the supplier to fail to meet this requirement upsets the balance of the contract. This applies not just to terms which simply exclude all liability for delay, but also to standard terms allowing unduly long periods for delivery or completion of work, or excessive margins of delay after an agreed date. The effect is the same – to allow the supplier to ignore the convenience of customers, and even verbal commitments as to deadlines.

2.6.2 Such a term is particularly likely to be considered unfair since, if the contract says nothing on the issue of timing, the obligation on the supplier is only to be reasonably prompt in carrying out his side of the bargain. In fact, the law is even more accommodating than this implies, since, if that requirement is not met, the consumer has no immediate right to cancel. He or she must set a deadline,10 which allows the supplier a further reasonable time, and can then take action only if that date is missed.

2.6.3 The fact that delays can be caused by circumstances genuinely beyond the supplier’s control does not make it fair to exclude liability for all delays however caused. Such terms protect the supplier indiscriminately, whether or not he is at fault.

2.6.4 Contracts sometimes say that ‘every effort’ will be made to honour agreed deadlines, yet still exclude all liability for any delay. This leaves the consumer with no right to redress if no effort is actually made. Guarantees of this kind are largely valueless.

The concern here is delayed completion. Terms which effectively allow the supplier to carry out interim stages of the contract (for example, where delivery is by instalments), without the consent of the consumer, can cause inconvenience other than just delay.

This is in order to make ‘time of the essence’ for legal purposes – which will enable the consumer to cancel the contract if the deadline is not adhered to and will not affect his right to sue for damages in any event.

Unfair contract terms guidance 32

2.6.5 Clauses excluding liability for delay may be acceptable where they are restricted in scope to delays unavoidably caused by factors beyond the supplier’s control but such terms should not enable the supplier to refuse redress where he is at fault, for example in not taking reasonable steps to prevent or minimise delay. Where examples of such factors are stated, then, in order to be clearly fair, they should only be matters which are genuinely outside the supplier’s control, not situations such as shortage of stock, labour problems, etc, which can be the fault of the supplier.

2.6.6 Where there is a risk of substantial delay, a right for the consumer to cancel without penalty may additionally help achieve fairness in relation to an exclusion of liability for delay caused by circumstances beyond the supplier’s control. It will not make acceptable a term which allows the supplier to delay at will.

2.6.7 The term ‘force majeure’11 is sometimes used in clauses of this kind. It is legal jargon and best avoided, and should never be used without clear explanation. Plain language is required for consumer contracts by Regulation 7.  Used in contracts to describe events which could affect the contract but which are completely outside the parties’ control. Unfair contract terms guidance 33 Group 2(g): Exclusion of liability for failure to perform contractual obligations12

2.7.1 A term which could allow the supplier to refuse to carry out his side of the contract or any important obligation under it, at his discretion and without liability, has clear potential to upset the balance of the contract to the consumer’s disadvantage. This applies not only to terms which allow the supplier to refuse to carry out his side of the bargain altogether, but also to those which permit him to suspend provision of any significant benefit under the contract.

2.7.2 These terms may be unobjectionable if – for example, they

  • enable the supplier to deal with technical problems or other circumstances outside his control
  • or if they protect the interests of other innocent third parties, and
  • or if they act to enhance service to the customer.

But the potential effect, as well as the intention behind, contract terms has to be considered. If an exclusion clause goes further than is strictly necessary to achieve a legitimate purpose it could be open to abuse, and is liable to be seen as unbalancing the contract.

2.7.3 Such a term is more likely to be considered fair if:

(a) it is narrowed in effect, so that it cannot be used to distort the balance of the contract to the disadvantage of the consumer;

(b) it is qualified in such a way – for example, by specifying exactly the circumstances in which it can be used – that consumers will know when and how they are likely to be affected;

The 2(g) category relates exclusively to terms which exclude the supplier’s liability to provide redress for failure to perform contractual obligations. Terms which bind the consumer to continue with a contract (that is, to pay) regardless of whether the supplier defaults represent a different form of unfairness

Unfair contract terms guidance 34 (c) there is a duty on the supplier to give notice of any proposal to rely on the term, and a right for the consumer to cancel before being affected by it, without penalty or otherwise being worse off for having entered the contract.

2.7.4 Sometimes such terms operate in effect as penalties, allowing the supplier to deny consumers a benefit under the contract on the grounds that they are in breach of their obligations. In such a case, it is essential that undue discretion is not reserved to the supplier in making the decision, and that there is no scope to impose a disproportionate sanction.

This page forms the fourth of our 12 part series containing the full text of the Unfair Terms in Consumer Contracts Regulations 1999. To go back to page 1, click here. The link to the next page can be found at the bottom of this post.

Unfair contract terms guidance 35 Group 2(h): Guarantees operating as exclusion clauses

2.8.1 A guarantee can leave consumers less well able to seek redress, in the event of default by the supplier, than they would be under the ordinary law.

If it does then it will raise the same concerns as exclusion or limitation clause can do.

2.8.2 There is no objection to guarantees that simply enlarge the scope of the consumer’s ordinary legal rights – for example, by offering refunds or exchanges on a no-fault basis, or repairs regardless of the cause of the problem. But sometimes guarantees offer more limited rights than are available under the law, either because the benefits are less, or because their availability is made subject to special conditions or restrictions 13. These guarantees can reduce legal protection for consumers.

2.8.3 Certain legal rights are ‘implied’ into all contracts by law, and some of these cannot be removed by any terms used by the supplier. But others can be lost if the guarantee conflicts with them, leaving the consumer worse off. Ordinary consumers cannot be expected to know which rights to redress remain legally unaffected, and so are at risk of losing any practical benefit from them.

2.8.4 Consumer contracts often include statements that statutory rights are unaffected. The aim is to achieve minimum compliance with legislation 14 designed to protect consumers, by ensuring they are not misled into thinking these rights have been removed. But simply including those words cannot be relied upon to achieve fairness under the Regulations. The OFT considers that adding an unexplained piece of legal jargon to contradict the effect of an unfair term does not result in fairness, and indeed is likely to

Note that, in addition, even in the absence of any attempt to reduce the rights conferred on consumers, it is illegal under the Consumer Protection from Unfair Trading Regulations to present rights given to consumers in law as a distinctive feature of the trader’s offer. 14 The main legislation requiring use of such a statement was repealed by the Consumer Protection from Unfair Trading Regulations as from 6 April 2008 (see above, page 10). However, it remains the case that consumer guarantees in contracts for the sale of goods have to contain a statement that the consumer has statutory rights which are not affected by the guarantee.

Unfair contract terms guidance 36 involve a breach of the requirement to use plain and intelligible language.

2.8.5 If a guarantee is to be made fair by adding any kind of statement about the consumer’s legal rights, the words used need to have some practical meaning for the ordinary consumer. This may be achieved by, for example, giving an indication as to what sort of protection is involved and/or indicating where advice on it can be obtained.

2.8.6 Any guarantee which gives consumers substantially less protection than their ordinary rights is unlikely to be made fair merely by addition of a qualifying statement of any kind. In the OFT’s view, such a guarantee should be discontinued altogether, or its terms should be brought into line with the consumer’s legal rights.

Unfair contract terms guidance 37 Group 3: Binding consumers while allowing the supplier to provide no service 15– paragraph 1(c) of Schedule 2 Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of: (c) making an agreement binding on the consumer whereas provision of services by the seller or supplier is subject to a condition whose realisation depends on his own will alone.

3.1 This is a very narrowly defined form of unfairness. It applies (a) only in contracts for services, (b) only where the consumer is bound to go on paying (not where he or she is merely prevented from seeking compensation) in the event of the supplier’s default, and (c) only where the supplier can get out of performing his obligations by quoting some circumstance which is in practice under his control.

3.2 A term binding customers to go on paying when services are not provided as agreed is clearly open to even stronger objection than the exemption clauses considered under the heading Group 2(g). That kind of term excludes the supplier’s liability to provide compensation for breach of contract but does not prevent the consumer cancelling.

3.3 In general, clauses allowing a business some flexibility in the performance of its duties under the contract can in principle be acceptable where they specify the circumstances in which any contractual obligations may not be observed. But this does not apply where the circumstances in question are effectively under the control of the supplier. 15 Group 15 has similar characteristics, but is less narrowly defined.

Unfair contract terms guidance 38 Group 4: Retention of prepayments on consumer cancellation 16 paragraph 1(d) of Schedule 2

Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of: (d) permitting the seller or supplier to retain sums paid by the consumer where the latter decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the seller or supplier where the latter is the party cancelling the contract.

4.1 Terms are always likely to be considered unfair if they exclude the consumer’s rights under contract law to the advantage of the supplier. A basic right of this kind is to receive a refund of prepayments made under a contract which does not go ahead, or which ends before any significant benefit is enjoyed. In certain circumstances consumers are entitled to a refund even where they themselves bring the contract to an end.

4.2 Any party to a contract normally has the right to cancel it and receive a full refund of any prepayments (possibly compensation as well) where the other breaks the contract in such a way as to threaten its whole value to him. A term which makes any substantial prepayment or deposit entirely non-refundable, whatever the circumstances, conflicts with this principle.

4.3 Where customers cancel without any such justification, and the supplier suffers loss as a result, they cannot expect a full refund of all prepayments. But a term under which they always lose everything they have paid in advance, regardless of the amount of any costs and losses

Note that retention of a prepayment is often a form of penalty, and so could be challenged by reference to subparagraph 1(e), but it is dealt with by reference to subparagraph 1(d) since that makes specific reference to it. 17 What is said in these paragraphs assumes there are no special statutory provisions governing cancellation rights, such as apply under legislation relating to distance selling (see below paragraphs 18.6.6), consumer credit and other particular areas.

Unfair contract terms guidance 39 caused by the cancellation, is at clear risk of being considered an unfair penalty.

4.4 In principle, there may be no objection to a financial penalty for pulling out of the contract that applies equally to both parties. In practice whether or not such an apparently ‘balanced’ provision is fair depends on a number of factors, and in particular on whether it confers any real benefit on the consumer, comparable to that enjoyed by the supplier A ‘balanced’ solution is likely to be acceptable only where there is a roughly equal risk to each party of losing out as a result of the other’s cancelling. In many forms of contract, the supplier has no particular interest in being able to cancel, and therefore his agreeing to accept a severe penalty for doing so does not ‘balance’ fairly a term imposing a heavy penalty on the consumer for cancelling.

4.5 A way to improve the fairness of such a term is to ensure that it does not go beyond the ordinary legal position. Where cancellation is the fault of the consumer, the business is entitled to hold back from any refund of prepayments what is likely to be reasonably needed to cover his net costs or the net loss of profit resulting directly from the default.18 There is no entitlement to any sum that could reasonably be saved by, for example, finding another customer.

4.6 Alternatively, the prepayment may be set low enough that it merely reflects the ordinary expenses necessarily entailed for the supplier. A genuine ‘deposit’– which is a reservation fee not an advance payment – can quite legitimately be kept in full, as payment for the reservation. But of course such a deposit will not normally be more than a small percentage of the price; otherwise it is liable to be seen as a disguised penalty.

4.7 The OFT’s view of what terms are fair and unfair is illustrated by examples of terms published at Annexe A under Group 4.18.

Unfair contract terms guidance 40 Group 5: Financial penalties – paragraph 1(e) of Schedule 2 Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of: (e) requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation.

5.1 It is unfair to impose disproportionate sanctions for breach of contract. A requirement to pay more in compensation for a breach than a reasonable pre-estimate of the loss caused to the supplier is one kind of excessive penalty. Such a requirement will, in any case, normally be void to the extent that it amounts to a penalty under English common law.

5.2 A requirement to pay unreasonable interest on outstanding payments, for example at a rate excessively above the clearing banks’ base rates, is likely to be regarded as an unfair penalty. It makes the consumer pay more than the cost of making up the deficit caused by the consumer’s default. The same applies to a requirement to pay excessive storage or similar charges where the consumer fails to take delivery as agreed.

5.3 Other kinds of penal provisions which may be unfair are damages and costs clauses saying that the supplier can:

  • claim all his costs and expenses, not just his net costs
  • claim both his costs and his loss of profit where this would lead to being compensated twice over for the same loss
  • claim his legal costs on an ‘indemnity’ basis that is, all costs, not just costs reasonably incurred. The words ‘indemnity’ and ‘indemnify’ are also objectionable as legal jargon.

5.4 Potentially excessive penalties. A penalty that states a fixed or minimum sum, to be paid in all cases, will be open to challenge if the sum could be too high in some cases.

Unfair contract terms guidance 41 5.5 Assessment of unfairness focuses on the effect terms could have, not just the purposes they are intended to serve. Thus a clause may be unfair if it allows the supplier excessive discretion to decide the level19 of a penalty, or if it could have that effect through being vague, or unclear, or misleading about what consumers will be required to pay in the event of default.

Consumers rarely know about technical issues such as ‘mitigation’ of loss, and so can easily be misled into thinking that the supplier can claim more than is really the case.

5.6 Cancellation penalties and charges. A term which says, or is calculated to suggest, that inflated sums could be claimed if the consumer cancels the contract is likely to be challenged as unfair. For example, a penalty for wrongful cancellation that requires payment of the whole contract price, or a large part of it,20 is likely to be unfair if in some cases the supplier could reasonably reduce (‘mitigate’) his loss. If, for example, he could find another customer, the law would allow him to claim no more than the likely costs of doing so, together with any difference between the original price and the re-sale price.

5.7 There is unlikely to be any objection to terms which fairly reflect, in plain language, the ordinary legal position – that is:

  • requiring the consumer to pay a stated sum which represents a real and fair pre-estimate of the costs or loss of profit the supplier is likely to suffer, or
  • stating simply that the consumer can be expected to pay reasonable compensation, or compensation according to law.

Note, however, that a term which purports to reflect the law on damages is open to challenge if it is potentially misleading. Terms giving an excessive discretion as to whether a penalty should be imposed at all – that is, as to whether the consumer is in breach – involve an entirely different form of unfairness, and are dealt with in Group 18(g). 20 This includes, of course, a substantial prepayment, but loss of prepayments is specifically mentioned by Schedule 2 at paragraphs 1(d) and (f), and therefore is covered under Groups 4 and 6(b).

Unfair contract terms guidance 42 5.8 Disguised penalties. Objections under the Regulations to an unfair financial penalty can apply to any term which requires excessive payment in the event of early termination, or for doing anything else that the supplier has an interest in deterring the consumer from doing. This includes terms in contracts under which consumers agree to make regular payments for services provided over a period of months or years, which state that they may cancel, but will remain liable to make all the payments agreed. The OFT considers such terms are particularly open to objection where they relate to a period of over one year.

5.9 The Regulations are concerned with the intention and effects of terms, not just their mechanism. If a term has the effect of an unfair penalty, it will be regarded as such, and not as a ‘core term’. Therefore a penalty cannot be made fair by transforming it into a provision requiring payment of a fee for exercising a contractual option.

5.10 Examples of both fair and unfair penalty clauses of various kinds can be found at Annexe A under Group 5.

5.11 More information about how the OFT has interpreted these principles as they apply to financial penalties in the holiday and financial services sectors can be found in OFT’s Guidance on unfair terms in package holiday contracts (OFT 668, published March 2004 pp19-20 and Annexe C) and Calculating fair default charges in credit card contracts, a statement of the OFT’s position (OFT842, published April 2006).

Continue to Part 3

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