This page forms the fourth 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.
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Imposed on them actually match net cost increases.29
12.4 A degree of flexibility in pricing may be achieved fairly in the following ways.30
- Where the level and timing of any price increases are specified (within narrow limits if not precisely) they effectively form part of the agreed price. As such they are acceptable, provided the details are clearly and adequately drawn to the consumer’s attention.
- Terms which permit increases linked to a relevant published price index such as the RPI are likely to be acceptable, as paragraph 2 of Schedule 2 to the Regulations indicates, subject to the same proviso.
- Any kind of variation clause may in principle be fair if consumers are free to escape its effects by ending the contract. To be genuinely free to cancel, they must not be left worse off for having entered the contract, whether by experiencing financial loss (for example, forfeiture of a prepayment) or serious inconvenience, or any other adverse consequences.
12.5 Terms of this kind, and acceptable amendments, are illustrated at Annexe A under Group 12. A right to pass on VAT increases does not attract these objections, since such changes are (a) outside the supplier’s control (b) publicly known and verifiable and (c) universally applicable, so that the consumer would not be any better off with a right to cancel. 30 Note the absence of a ‘valid reasons’ route to fairness. The OFT does not consider that use of ‘valid reasons’ normally justifies price increases, essentially on grounds stated in paragraph 12.3 that is, lack of verifiability. In home improvement contracts (guidance OFT737), discovery of ‘structural problems’ should not be a basis on which the consumer can be compelled to pay higher prices unless the term is qualified in the same way as a right to cancel on adverse survey – see paragraph 6.1.5 and note.
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Group 13: Supplier’s right of final decision – paragraph 1(m) of Schedule 2. Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of: (m) giving the seller or supplier the right to determine whether the goods or services supplied are in conformity with the contract, or giving him the exclusive right to interpret any term of the contract.
13.1 Terms are always likely to be considered unfair if they allow a supplier unilaterally to take himself outside the normal rules of law. Disputes over the meaning and application of contract terms can normally be referred to the courts if either party so chooses. Paragraph 1(m) illustrates two different kinds of term, which purport to take away this right from the consumer
13.2 Right for the supplier to determine whether he is himself in breach. If a supplier reserves the right to decide whether he has performed his contractual obligations properly, then he can unfairly refuse to acknowledge that he has broken them, and deny redress to the consumer. Such terms can have an effect comparable to clauses unfairly excluding liability for unsatisfactory goods and services.
13.3 An example would be a term allowing the supplier or his agent, if the consumer complains that goods are faulty or work has not been properly carried out, to undertake his own test or inspection to determine whether the complaint is well-founded. Such a term is much more likely to be fair if it provides for independent inspection or testing – provided that consumers are not required to meet the costs of this where it turns out that their complaint is well-founded.
13.4 Terms allowing the supplier to decide when the consumer is in breach of his or her obligations are open to comparable objection.
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13.5 Right to decide the meaning of terms. Similarly, if a supplier reserves the right to decide what a term in a contract means, then he is effectively in a position to alter the way it works so as to suit himself. It is not sufficient to say that the supplier will act ‘reasonably’. Such a term gives rise to the same objections as a right to vary terms generally, dealt with in Group 10.
13.6 This second kind of ‘final decision’ term, too, is more likely to be fair if an element of independent adjudication is introduced into it – if, that is, a consumer who is unhappy with the supplier’s interpretation of the contract can refer the matter to an independent expert or arbitrator. Note, however, that compulsory arbitration clauses involving sums £5,000 or less are always unfair and those involving sums of more than £5000 may also be unfair, see– paragraphs 17.1 to 17.3.
13.7 Relevant examples of terms are listed at Annexe A in Group 13.
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Group 14: Entire agreement and formality clauses – paragraph 1(n) of Schedule 2 Group 14(a): Entire agreement clauses Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of: (n) limiting the seller’s or supplier’s obligation to respect commitments undertaken by his agents.
14.1.1 Good faith demands that each party to a contract is bound by his or her promises and by any other statements which help secure the other party’s agreement. If a standard-form contract excludes liability for words that do not appear in it, there is scope for consumers to be misled with impunity.
14.1.2 These objections apply equally to other types of wording which have the same effect. Examples are clauses saying that employees or agents have no authority to make binding statements or amendments to the contract, or that contract changes may only be made in writing, or that they must be signed by a Director. Such terms all enable the supplier to disclaim liability for oral promises even when they have been relied on by the consumer reasonably and in good faith.
14.1.3 Consumers commonly and naturally rely on what is said to them when they are entering a contract. If they can be induced to part with money by claims and promises, and the seller can then simply disclaim responsibility by using an entire agreement clause, the scope for bad faith is clear. Even if such a term is not deliberately abused, it weakens the seller’s incentive to take care in what he says, and to ensure that his employees and agents do so.
14.1.4 Such terms are often defended on the grounds that they achieve ‘certainty’ as to what statements bind the parties. But they do so only at the unacceptable price of excluding the consumer’s right to redress for
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Misrepresentation and breach of obligation.
14.1.5 The ordinary law of contract strikes a fairer balance. It respects the need for certainty, in that it assumes a coherent contractual document normally contains all the terms of the agreement.32 But it allows for the possibility that the court may have to take other statements into account in order to work out the real intentions of the parties, and to prevent bad faith.
14.1.6 There is no objection to wording which warns the consumer that the law favours written terms, so long as it does not undermine the court’s power to consider other statements where necessary. For example, the contract may include an explanatory statement that it is a binding document, and advising consumers to read it carefully and ensure it contains everything they want and nothing they are not prepared to agree to.
14.1.7 Such a warning can, in fact, strengthen the effect of written terms, provided that consumers are genuinely likely to see, understand and act on it. If so, there is less scope for misunderstanding, and thus less likelihood of plausible allegations that oral statements were relied on. But that will not be so unless the warning is drawn to the attention of the consumer, for example, by appropriate highlighting. Also, the agreement must be clearly drafted to be fully comprehensible to them, and they must get an adequate opportunity to read it before it is signed. That is, in any case, required by the legislation.
14.1.8 The effect of such a warning may be further reinforced if the consumer is explicitly encouraged to ask questions and clarify uncertainties. Giving a telephone number to ring and a ‘cooling-off’ period in which this can happen may also be helpful. The OFT’s specimen terms listing provides examples of other ways in which terms of this kind which have been revised to meet objections under the Regulations – see Annexe A, under Group 14(a).
32 This is known to lawyers as the ‘parole evidence’ rule.
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Group 14(b): Formality requirements Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of: (n) making [the seller’s] commitments subject to compliance with a particular formality.
14.2.1 If a contract is to be considered balanced, the rights it confers must be secure and enforceable, not vulnerable to being lost without good reason. Under the general law, contracts normally remain binding on both parties unless a breach by one of them threatens the whole value of it for the other.
14.2.2 It is often administratively convenient if the consumer complies with formalities – for example, procedures involving paperwork – and may even be sensible from the consumer’s own point of view. But that does not justify a business opting out of important obligations where the consumer fails to comply with a minor or procedural requirement and commits a trivial breach.
14.2.3 Unless the need to observe a formality is obvious and important, or is prominently drawn to the attention of consumers, they may overlook or forget it. That is particularly so if it has to be complied with sometime in the future without any reminder. Terms imposing severe penalties for trivial breaches committed inadvertently are open to strong objection.
14.2.4 Obviously where compliance with a formality involves disproportionate costs or inconvenience, the potential for unfairness is even greater. An example would be a requirement to use registered post for written notification when notification by ordinary post would be perfectly adequate.
14.2.5 A formality requirement may be considered fair if: (a) it requires a consumer to do no more than is reasonably necessary
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(b) any sanction for non-compliance is proportionate and does not involve loss of important rights for the consumer, and (c) the need to comply with the formality is adequately drawn to the consumer’s attention as close as possible to the time when it has to be complied with.
14.2.6 The more severe the penalty, the more clear and prominent must be the information about how to avoid it.
14.2.7 Terms of this kind, and acceptable amendments, are illustrated in Group 14(b) of Annexe A.
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Group 15: Binding consumers where the supplier defaults – paragraph 1(o) of Schedule 2. Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of: (o) obliging the consumer to fulfil all his obligations where the seller or supplier does not perform his.
15.1 A term binding customers to go on paying when goods or services are not provided as agreed is clearly open to even stronger objection than the exemption clauses considered under Group 2(g), or terms allowing the supplier to cancel at will – see Group 6. Those terms exclude the supplier’s liability to provide compensation for breach of contract, but do not require the consumer to continue to perform his side of the bargain.
15.2 An example of this type of provision is a clause in a contract for the supply of goods by instalments, which does not allow the consumer the right to cancel if the supplier fails to make delivery of an instalment.
15.3 Similar objections are likely if consumers are tied in to a continuing contract for services despite the supplier exercising a power to suspend provision of some benefits under the contract, unless the circumstances in which suspension can take place are strictly limited and certain other conditions are met
15.4 The fairness of rights to suspend services may be improved where the consumer does not have to continue to pay during periods of suspension. Another possibility may be for the contract period to be extended without additional cost to ensure that the consumer receives all the services and benefits contracted for.
15.5 Terms of this kind, and acceptable amendments, are illustrated in Group 15 of Annexe A. Not to be confused with a right to arrange a schedule of delivery to suit the supplier’s convenience.
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Group 16: Supplier’s right to assign without consent – paragraph 1(p) of Schedule 2. Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of:(p) giving the seller or supplier the possibility of transferring his rights and obligations under the contract, where this may serve to reduce the guarantees for the consumer, without the latter’s agreement.
16.1 If a supplier sells (‘assigns’) his business, consumers will find themselves dealing with someone else if the contract is a continuing one (like an insurance contract) or, when it is for a single transaction, if any problem arises with the goods or services supplied to them. Their legal position should be unaffected by the ‘assignment’. A term is unlikely to be fair if it allows the supplier to sell on to someone else who offers a poorer service.
16.2 The last three words of the quotation above point to one solution – for the consumer to be consulted and assignment to be permitted only if he or she consents. Where services are being provided, and payment is being made, on a continuing basis (as, for example, with membership of a club) a more practicable approach may be for the consumer to have a penalty-free right of exit if he objects to an assignment. Alternatively, an assignment clause may be considered fair if it allows the supplier to assign only in circumstances which ensure that the consumer’s rights under the contract will not be prejudiced.
16.3 Note that Schedule 2 mentions only suppliers’ rights to assign. Terms which deprive the consumer of the right to assign are therefore dealt with separately in Part III, Group 18(d).
16.4 Group 16 of Annexe A illustrates one relevant term.
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Group 17: Restricting the consumer’s remedies – paragraph 1(q) of Schedule 2 Schedule 2, paragraph 1, states that terms may be unfair if they have the object or effect of: (q) excluding or hindering the consumer’s right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions, unduly restricting the evidence available to him or imposing on him a burden of proof which, according to applicable law, should lie with another party to the contract.
17.1 Such terms have an effect similar to that of exclusion and limitation clauses– see Groups 1 and 2. As noted there, any term which could be used – even if that is not the intention – to prevent or hinder customers from seeking redress when the supplier is in default tends to upset the balance of the contract to the consumer’s disadvantage.
Compulsory arbitration clauses
17.2 Under section 91 of the Arbitration Act 1996, a compulsory arbitration clause is automatically unfair if it relates to claims of £5000 or less. This is an exceptional example of a term that is always unfair under the Regulations regardless of circumstances. A compulsory arbitration clause forbidden by the 1996 Act is both legally ineffective and open to regulatory action in all cases.
17.3 If an arbitration clause is to be used, it should be free from the element of compulsion. Such a clause can, for example make clear that consumers (or both parties) have a free choice as to whether to go to arbitration or not. Arbitration in the UK is fully covered by legal provisions, and so non compulsory arbitration clauses are unlikely to encounter objections provided they are in clear language and not misleading.
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Exclusive jurisdiction and ‘choice of law’ clauses
17.4 Consumers should not be prevented from starting legal proceedings in their local courts – for example, by a term requiring resort to the courts of England and Wales despite the fact that the contract is being used in another part of the UK having its own laws and courts. It is not fair for the aggrieved consumer to be forced to travel long distances and use unfamiliar procedures. International Conventions lay down rules on this issue, which are part of UK law 34 Terms which conflict with them are likely to be unenforceable for that reason, too.
17.5 The OFT’s specimen terms listing indicates examples of terms dealing with arbitration and choice of law which the OFT has not considered to be unfair– see Annexe A, under Group 17.
34 The Brussels Convention, implemented by the Civil Jurisdiction and Judgments Act 1982, as amended, and the Rome Convention, implemented by the Contracts (Applicable Law) Act 1990.
Terms which seek to make consumers contract under the law of a state where they have substantially less protection (for example, a non-EU country) are particularly likely to be unfair, especially if they conflict with the Rome Convention rules.
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III ANALYSIS OF OTHER TERMS CONSIDERED POTENTIALLY UNFAIR
Group 18: Other terms
Some terms fail the test of fairness set out in Regulation 5 without falling obviously within any of the categories set out in Schedule 2. The list in Schedule 2 reproduces the Annexe to the Unfair Contract Terms Directive.
As this implies, the types of term featured are those commonly used over the EU as a whole, not in any one Member State. The list is expressly said to be non-exhaustive. The OFT has found a range of different types of term being used in the UK which have a potential for unfairness comparable to that illustrated by items in Schedule 2, but which operate in different ways.
Some of the more commonly occurring kinds of term not obviously illustrated by examples in Schedule 2 are commented upon below. The same headings and subheadings are used as in Annexe A, except for terms considered to breach the plain language and transparency requirements of the Regulations, which appear in Group 19. This type of term is also commented on below, in Part IV of this guidance.