This page forms the third 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 43 Group 6: Cancellation clauses – paragraph 1(f) of Schedule 2 Group 6(a):
Unequal cancellation rights Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of: (f) authorising the seller or supplier to dissolve the contract on a discretionary basis where the same facility is not granted to the consumer …
6.1.1 Fairness and balance require that consumers and suppliers should be on an equal footing as regards rights to end or withdraw from the contract. The supplier’s rights should not be excessive, nor should the consumer’s be over-restricted. This does not, however, mean a merely formal equivalence in rights to cancel, but rather that both parties should enjoy rights of equal extent and value.
6.1.2 Excessive rights for the supplier. Cancellation of a contract by the supplier can leave the consumer facing inconvenience at least, if not costs or other problems. Where that is so, a unilateral right for the supplier to cancel without any liability to do more than return prepayments is likely to be considered unfair (see Group 6(b), on terms which exclude even that liability).
6.1.3 This applies particularly to terms which explicitly say that the supplier can cancel at will, without having any valid reason. But it also applies to terms which permit cancellation for vaguely defined reasons,21 or in response to any breach of contract (however trivial) by the consumer. Such terms may be intended to allow the supplier to do no more than protect himself legitimately from problems beyond his control or from serious misconduct by the consumer. But the potential effect as well as the purpose of terms is relevant to fairness, and if wording is loosely drafted and open to abuse it
21 See Group 18(g), on terms which allow the supplier too much freedom to decide if the consumer is in breach, as opposed to those which permit imposition of the specific penalty of cancellation.
Unfair contract terms guidance 44 is liable to be seen as unbalancing the contract.
6.1.4 There is normally no objection to terms which reflect the ordinary law, by allowing the supplier to end the contract if the consumer is in serious breach. See Group 5 on what may fairly be said about claims in damages in such circumstances.
6.1.5 A right to cancel where the consumer is not at fault, with liability only to return prepayments, may be acceptable if it is non-discretionary – that is, can operate exclusively where circumstances make it impossible or impractical to complete the contract. But certain other conditions may also need to be met.
- Attention needs to be drawn to the risk of cancellation if it is a real possibility.
- The circumstances should be clearly and specifically described. There should be no listing of matters that could be within the supplier’s control – for example, industrial disputes with the supplier’s own employees, equipment breakdown, or transportation difficulties.
- The supplier should be required to find out and inform the consumer as soon as possible if such circumstances do apply, explaining the reasons for the proposed cancellation if they are not obvious.
6.1.6 Inadequate rights for the consumer. A term can also be unfair if it undermines the consumer’s legitimate cancellation rights. Clauses frequently state or imply that the consumer cannot cancel the contract in any circumstances, or only with the supplier’s agreement. In law, each party has a right to end the contract if the other commits a serious breach of it. A term that purports to rule out all possibility of cancellation by the consumer is potentially misleading and unfair.
22 In home improvement and similar contracts which provide that the supplier or his agent will carry out a survey and may cancel if structural problems are found that make work impracticable, the
OFT considers that, if the term is to be fair, it should provide that the survey should be carried out within a stated reasonable time (for example, 14 days) and that written reasons for cancellation should be given
Unfair contract terms guidance 45
6.1.7 Again, there is normally no objection to terms which merely reflect the ordinary law. A cancellation clause may fairly forbid consumer cancellation where the supplier is not in breach of the contract, and alert the consumer to his or her liability in damages for wrongful cancellation (see Groups 4 and 5 for what is unlikely to be unfair).
6.1.8 Examples of both fair and unfair cancellation clauses of various kinds can be found at Annexe A under Group 6.
Unfair contract terms guidance 46
Group 6(b): Supplier’s right to cancel without refund Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of:(f) … permitting the seller or supplier to retain the sums paid for services not yet supplied by him where it is the seller or supplier himself who dissolves the contract.
6.2.1 Cancellation clauses which allow the supplier to cancel without acknowledging any right on the part of consumers to a refund of prepayments can be particularly open to abuse. This applies equally to pre-contractual deposits and sums paid when (or after) the contract is entered into.
6.2.2 As with cancellation rights generally, concern arises particularly where such a term could be used at the discretion of the supplier. But even a more restricted right to cancel, for example, along lines indicated in paragraph
6.1.5, is likely to be unfair if it could allow retention of prepayments for which the consumer has received no benefit.
6.2.3 Where a supplier cancels in response to a serious breach of the contract (see paragraph 6.1.4) by the consumer, he may be entitled to retain all or some monies pre-paid by the consumer by way of compensation for any loss directly caused by the breach. However, a term is likely to be unfair if it makes a substantial prepayment non-refundable in all cases of cancellation on consumer default, regardless of whether any such loss has occurred.
Unfair contract terms guidance 47
Group 7: Supplier’s right to cancel without notice –paragraph 1(g) of Schedule 2 Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of:(g) enabling the seller or supplier to terminate a contract of indeterminate duration without reasonable notice except where there are serious grounds for doing so.
7.1 In most kinds of contract, a sudden and unexpected cancellation by the supplier may cause inconvenience, and sometimes expense, for the consumer. Even in a ‘continuing’ contract, which either party is entitled to cancel at any time, the supplier should normally give reasonable notice of termination.
7.2 This point does not, of course, apply only to suppliers. Consumers can be fairly required to give notice of termination, provided the period of notice required is reasonable (see Group 8).
7.3 A right for the supplier to cancel a contract without notice may be fair if its use is effectively restricted to situations in which there are ‘serious grounds’ for immediate termination. These might be circumstances in which there is a real risk of loss or harm to the supplier or others if the contract continues for even a short period – for example, where there is a reasonable suspicion of fraud or other abuse.
7.4 However, fairness is likely to require that some clear indication is given of the nature of any ‘serious grounds’ for cancellation without notice. If the consumer will be unaware whether an immediate cancellation is or is not contractually justified, he is in no position to seek redress if it is not, and the term will in practice be open to abuse.
Unfair contract terms guidance 48
7.5 In contracts for financial services – for example, banking and credit contracts – the Regulations indicate that there may be a need only for the supplier to have a ‘valid reason’ for cancellation without notice, and to inform the consumer of the decision to cancel as soon as possible.23 Such a term should, however, not be drafted in such a way that it could in practice be used arbitrarily to suit the interests of the supplier.
23 Paragraph 2 of Schedule 2. In a few stated specialised areas, there may be no need for notice at all. These are not exemptions from the control of the Regulations, but examples of circumstances in which there is unlikely to be risk of significant detriment to consumers. Any ‘cancellation without notice’ term may still be unfair if it satisfies the criteria of unfairness set out in Regulation.
Unfair contract terms guidance 49
Group 8: Excessive notice periods for consumer cancellation – paragraph 1(h) of Schedule .2 Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of:(h) automatically extending a contract of fixed duration where the consumer does not indicate otherwise, when the deadline fixed for the consumer to express his desire not to extend the contract is unreasonably early.
8.1 A clause which states how long a contract has to run is likely to be among its most important ‘core’ terms24 If a lesser term in small print can be used, relying on customer inertia, to extend the contract period beyond what the consumer would normally expect, it is not a core term, and is liable to be considered unfair.
8.2 Particular suspicion attaches to a term in a contract for a fixed period which, if early notice to cancel is not given, automatically commits the consumer to a renewed fixed term.
8.3 The OFT considers that an over-long cancellation notice term may also be unfair in a contract which continues indefinitely rather than for a fixed term. Consumers entering such contracts normally expect to be able to end it a reasonable time after they decide they no longer want or can no longer afford what is provided under it. If they are required to make a cancellation decision too far ahead of time, they are liable either to forget to do so when they need to, or wrongly to anticipate their future needs. In either case, the effect of the term is the same as that of an ‘automatic renewal’ clause – they experience an unintended extension of their payment obligations.
8.4 Terms of this kind are illustrated at Annexe A under Group 8. 24 See page 8 above and paragraphs 19.12-19.15 below for information about core terms.
Unfair contract terms guidance 50
Group 9: Binding consumers to hidden terms 25 – paragraph 1(i) of Schedule 2 Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of: (i) irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract.
9.1 Terms which have the effect of making consumers agree to accept obligations of which they can have no knowledge at the time of contracting are open to serious objection. It is a fundamental requirement of contractual fairness that consumers should always have an opportunity to read and understand terms before becoming bound by them (see Part IV).
9.2 It is not ‘hidden terms’ themselves that are indicated to be unfair, but any term which binds the consumer to accept or comply with them – or, in legal jargon, ‘incorporates’ them ‘by reference’. However, terms of whose existence and content the consumer has no adequate notice at the time of entering the contract may not be binding under the general law, in any case, especially if they are onerous in character.
9.3 We also object to terms which require consumers to accept that they are bound by the terms of other linked contracts (for example, insurance contracts) or rules or regulations unless they are given an appropriate chance to read them.
9.4 This is not to say that every detail of information about an agreement must be included in a single contract document. Indeed, relying solely on lengthy terms and conditions to communicate with consumers is positively unhelpful. Face-to-face explanation serves a valuable purpose, as do brochures, executive summaries, and other forms of written guidance –Unfair contract terms guidance 51 particularly as a means of drawing attention to the more important terms.The overriding requirement is that consumers are effectively alerted – before committing themselves – to all contractual provisions that could significantly affect their legitimate interests.
9.5 Cooling off periods. If important details of the agreement cannot be communicated, a ‘cooling off’ period needs to be allowed. This means a specified period of time in which consumers can read the terms and pull out without penalty or loss of prepayments if they find the agreement is not what they expected. This may be appropriate wherever a contract is lengthy or complex, or where it contains terms to which consumers need to give careful consideration. It is required by law26 in some situations, particularly where a contract is entered at a distance –that is, by post, telephone or internet.
9.6 Terms of this kind are illustrated at Annexe A under Group 9. 26 Consumer Protection (Distance Selling) Regulations 2000.
Unfair contract terms guidance 52
Group 10: Supplier’s right to vary terms generally – paragraph 1(j) of Schedule 2 Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of: (j) enabling the seller or supplier to alter the terms of the contract unilaterally without a valid reason which is specified in the contract.
10.1 A right for one party to alter the terms of the contract after it has been agreed, regardless of the consent of the other party, is under strong suspicion of unfairness. A contract can be considered balanced only if both parties are bound by their obligations as agreed.
10.2 If a term could be used to force the consumer to accept increased costs or penalties, new requirements, or reduced benefits, it is likely to be considered unfair whether or not it is meant to be used in that way. A variation clause can upset the legal balance of the contract even though it was intended solely to facilitate minor adjustments, if its wording means it could be used to impose more substantial changes. This applies to terms giving the supplier the right to make corrections to contracts at its discretion and without liability.
10.3 Such a term is more likely to be found fair if:
(a) it is narrowed in effect, so that it cannot be used to change the balance of advantage under the contract – for example, allowing variations to reflect changes in the law, to meet regulatory requirements or to reflect new industry guidance and codes of practice which are likely to raise standards of consumer protection
(b) it can be exercised only for reasons stated in the contract which are clear and specific enough to ensure the power to vary cannot be used at will to suit the interests of the supplier, or unexpectedly to consumers (see paragraph 11.5)
Unfair contract terms guidance 53
(c) there is a duty on the supplier to give notice of any variation, 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.
10.4 A term which merely says that variations will only be ‘reasonable’ or will only be made ‘reasonably’, is unlikely to be any fairer than one which contains no such qualification, unless there can be little doubt in a reasonable consumer’s mind as to what sort of variation, broadly speaking, such wording allows, and in what circumstances. Where the criteria of reasonableness are vague, or clearly meant to include the best commercial interests of the business, there will be scope for the supplier to change the bargain unfairly to the detriment of consumers, simply on the basis that he needs to protect his profit margins.
10.5 A reasonableness requirement is most likely to be acceptable where fair-minded persons in the position of the consumer and supplier would be likely to share a common view as to what would be ‘reasonable’– for example, where a ‘reasonable charge’ clearly means a charge sufficient to meet specific open-market costs.
10.6 Examples of general variation clauses which have been considered unfair, and of acceptable amendments, are illustrated at Annexe A under Group 10.
10.7 Groups 11 and 12 below set out our objections to two more particular kinds of variation clause, and suggest ways in which they can be modified to achieve fairness.
Unfair contract terms guidance 54
Group 11: Right to change what is supplied – paragraph 1(k) of Schedule 2. Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of: (k) enabling the seller or supplier to alter unilaterally without a valid reason any characteristics of the product or service to be provided.
11.1 The OFT’s objections to variation clauses generally are set out under Group 10. A variation clause of the particular kind described in the wording above allows a supplier to substitute something different for what he has actually agreed to supply. This conflicts with the consumer’s legal right to receive something that is in all significant respects what he or she agreed to buy, not merely something similar or equivalent.
11.2 Consumers are legally entitled to expect satisfactory quality in goods and services, but that does not mean it is fair to reserve the right to supply something that is not what was agreed but is of equivalent standard or value. Terms should respect both the right to receive products that are as described and the right to satisfactory quality, not one or the other.
11.3 A clause which allows the supplier to vary what is supplied is most likely to be considered fair if it is clearly restricted to minor technical adjustments which can be of no real significance to the consumer, or changes required by law.
11.4 If the intention is to permit changes that are more significant, but still only limited in scope, another approach is possible. This is to ensure that the consumer fully understands and agrees to the change in advance. The contract will need to set out clearly what variation might be made, and in what circumstances, and define how far it can go, for example if the consumer orders goods of a certain colour but agrees to accept one of a range of others if that is not available.
Unfair contract terms guidance 55
11.5 valid reasons. Stating a valid reason why a particular change may be necessary can also help if it serves to ensure the customer is aware of, and accepts the possibility of, the sort of change that may occur. But a reason can be considered ‘valid’ only if its inclusion in the contract offers real protection to the consumer against encountering unexpected and unacceptable changes in his or her position. Vague or unclear reasons are unlikely to be considered valid. In any case, no statement of reasons can justify making consumers pay for a product substantially different from what they agreed to buy.
11.6 Rights to cancel. Where circumstances could prevent the supply of the goods or services agreed (or a version of them that the consumer has indicated is acceptable) then the consumer should be able to cancel the contract, and receive a refund of prepayments. Where it is known that, for example, a chosen item could be unavailable from the manufacturer, that risk should be drawn to the consumer’s attention.
11.7 A term which could allow the supplier to vary what is supplied at will – rather than because of bona fide external circumstances – is unlikely to be fair even if customers have a right of cancellation and refund. The consumer should never have to choose between accepting a product that is not what was agreed, or suffering the inconvenience of unexpectedly not getting, for example, goods for which he or she may have an immediate need, or a long-planned holiday, just because it suits the supplier not to supply what was promised.
11.8 The OFT’s objections do not apply to terms saying that suppliers can vary the specification of products featured in their brochures or other advertising, provided customers are told at the point of purchase how what they are buying differs from what was advertised.28
11.9 For illustrative examples of terms allowing variation to what is supplied, both those considered unfair and amendments considered acceptable, see 27 Note that cancellation rights existing independently of a variation clause may not suffice to make that clause fair if it could be used to remove or change them. 28 For more information on this point see paragraphs 3.3 to 3.5 of the guidance on package holidays
Unfair contract terms guidance 56
Annexe A under Group 11.Unfair contract terms guidance 57 Group 12: Price variation clauses – paragraph 1(l) of Schedule 2 Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of:
(l) providing for the price of goods to be determined at the time of delivery or allowing a seller of goods or supplier of services to increase their price without in both cases giving the consumer the corresponding right to cancel the contract if the final price is too high in relation to the price agreed when the contract was concluded.
12.1 The OFT’s objections to variation clauses generally are set out under Group 10. If a contract is to be considered balanced, each party should be sure of getting what they were promised in exchange for providing the ‘consideration’ they agreed to provide. A clause allowing the supplier to increase the price – varying the most important of all of the consumer’s contractual obligations – has clear potential for unfairness.
12.2 Any purely discretionary right to set or vary a price after the consumer has become bound to pay is obviously objectionable. That applies particularly to terms allowing the supplier to charge a price on delivery of goods that is not what was quoted to the consumer when the order was placed. It also applies to rights to increase payments under continuing contracts where consumers are ‘captive’ – that is, they have no penalty-free right to cancel.
12.3 A price variation clause is not necessarily fair just because is not discretionary – for example, a right to increase prices to cover increased costs experienced by the supplier. Suppliers are much better able to anticipate and control changes in their own costs than consumers can possibly be. In any case, such a clause is particularly open to abuse, because consumers can have no reasonable certainty that the increases