Is there any role left for the Unfair Contract Terms Act 1977 following the implementation of the Unfair Terms in Consumer Contracts Regulations 1999?

The Unfair Terms in Consumer Contracts Regulations 1999 were enacted in to UK domestic law in implementation of the EC Directive on Unfair Terms in Consumer Contracts. However the regulations were placed parallel to the Unfair Contract Terms Act 1977 (UCTA) there was no attempt to integrate the two or even to amend the existing legislation. Thus we have scope for debate as to whether the existing legislation still has a role to play or are the Regulations enough to regulate the unfair terms. There is much to be considered when tackling such a question.

One may see the Unfair Terms in Consumer Regulations 1999 at once both wider and narrower than the Unfair Contract Terms Act 1977. The regulations may be wider in that they apply to any unfair term in any consumer contract. However at the same time they may be narrower where there application is only upon consumer contracts and terms that are not individually negotiated. I will look, in more detail, at this distinction. Furthermore I will look at the test of reasonableness used in UCTA and the test of fairness used in the regulations, which may differ.

Jurisdictional Issue

Although the Regulations act as an addition to the consumers rights of action under UCTA the scope of the two rights differ in significant respects. We see this where UCTA is limited in its application to particular types of clauses such as exclusion, limitation and indemnity clauses. For example s.2 of the 1977 Act makes any clause, which attempts to limit or exclude liability for death or personal injury, caused by negligence, automatically invalid. However any attempts to limit or exclude liability for other loss or damage, caused by negligence, is only invalid if it fails the reasonableness test. This differs from the Regulations, whose application is not limited to particular terms. The regulations apply to all terms in standard form contracts. The terms are first subjected to a fairness test if the term is found to be unfair then it is invalid.

It has been argued that s.2 of UCTA does not extend to clauses that define the duties and obligations of the parties. Thus a limitation or exclusion clause which defines the duties and obligations of the parties would fall outside the scope of UCTA. How would the courts deal with this? In the case Phillips Products Ltd v Hayland and Hamstead Plant Hire Co Ltd [1987] such a matter arose before the courts. Here a clause was included which defined the obligations of Hayland thus excluding liability for any loss or damage caused by the hired excavator and driver. The court held that under s.13- (1), s.2 is said to encompass ‘terms and notices, which exclude or restrict the relevant obligation or duty’. Although this extends s.2 to duty defining clauses difficulty still remains as to which duty-defining clauses would come under the Act and which would not. There is no criteria which can be used.

The scope of s.13 was an issue in Smith v Eric S Bush [1990]. Here lord Templeman stated that the act applies to ‘all exclusion notices which would in common law provide a defence to an action for negligence’. Lord Griffiths interpreted section 13 to say that a ‘court must decide whether a duty of care would exist ‘but for’ the exclusion clause’. This means that if a duty of care does exist which is excluded by the clause then this comes under the scope of section 2. Lord Jauncey states that s.13 was ‘entirely appropriate to cover a disclaimer ...

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These judgements seem to stretch the extent to which s.2 applies to duty-defining clauses. Thus again there is a failure to provide guidance as to the extent to which s.2 applies to such clauses. Surely the above judgements are too broad and so this may result in an uncertainty where by it is decided upon a case by case basis. Thus it may be a matter of the exercise of judges discretion in determining the extent.

If we contrast this case with Thompson v T Lohan (Plant Hire) Ltd [1987] here the courts held that s.2 of UCTA can not be applied to condition 8. This was because here Thompsons widow received damages from the general employers who then sought to recover an indemnity from the hiring employers under condition 8. Although at first instance this seems similar to the Phillips, upon closer examination one can see that the issue in this case is one of transferring liability from the original employers to the hiring employers. Thus because damages were claimed from the original employers it can not be said that liability is being excluded. However one may argue that since the original employer is recovering indemnity then does this not counteract the damages paid to the hiring employer and so in effect the original employers are excluding their liability. The distinction made in the Phillips and Thompson case between excluding and transferring liability is rather unstable and adds to the uncertainty in determining where and when UCTA applies. Mckendrick mentions a ‘misconception of the function of exclusion clauses’ which suggests that there is at present confusion as to whether exclusion clauses simply exclude liability or are they also concerned with transferring liability?

The Regulations are much broader in the sense that they are not confined in their application to any particular type of term. Hence the issues of jurisdiction which arise under UCTA should not be a problem here. They are applied to those terms which are not ‘individually negotiated’. This seems to suggest that they apply to standard form contracts. The basis for this is that surely those terms, which have been negotiated, would be agreed on acknowledgement of fairness. However one must note problems with fairness may arise when there is inequality of bargaining power. The regulations acknowledge this and thus they are mainly concerned with regulating unfair terms between the consumer and a business (including public bodies) where one may claim the greatest inequality exists. Furthermore Schedule 2 lists terms which may be considered unfair (grey list). We can see that the grey list goes beyond attempts to exclude liability for negligence or breach of contract. For example it extends to clauses which enable businesses to alter the terms of the contract unilaterally without valid reason. Does this mean that the broadness of the regulations is enough to replace the role of the 1977 Act?

I mentioned that the regulations are narrower in that they apply to consumer contracts only where the terms have not been ‘individually negotiated’. Section 3(1) of UCTA extends the application to regulate clauses, which seek to exclude or limit liability for breach of contract between ‘contracting parties where one of them deals as a consumer or on the other’s written standard terms of business’. So potentially this could apply to contracts between businesses.

The Test of Reasonableness and the Test of Fairness

Although discussed above the issue of jurisdiction seems to be overcome by the Regulations, thus questioning the role of UCTA, one may argue that the reasonableness and fairness tests are important in determining which terms are dealt with.

The regulations adopt a fairness test. Regulation 5(1) contains a definition of unfair terms which states that ‘A contractual term which has not been individually negotiated shall be regarded as 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’. Here we see that it is applicable to pre formulated standard form contracts where the consumer has not been able to influence the substance of the terms. Although the regulations give some guidance as to its scope through schedule 2, a list of terms which may be regarded as unfair, its criteria is laid out within the Regulation 5(1).

In determining fairness, ‘core terms’ must not be assessed so long as they are in ‘plain intelligible language’. The reason for this is that the regulations are aimed at those parts of the contract, which the consumer may not be familiar with. For example the consumer is familiar with the price but may not be familiar with terms found in the ‘small print’.

Furthermore when assessing good faith, Schedule 2 states that the strengths of the bargaining positions of the parties should be regarded. This may also be relevant in assessing whether a ‘significant imbalance’ has been caused ‘in the parties’ rights and obligations under the contract’. This is because if the bargaining positions are considerably varied then the stronger party, usually the business, may impose greater obligations upon the consumer, thus acting in ‘detriment to the consumer’. The consideration of bargaining positions is also a vital element used in the test of reasonableness under UCTA.

Reasonableness is assessed at the date of making the contract. Section 11(1) states ‘The term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made’. It can be argued that this definition gives a very wide discretion to the courts to determine what is and what is not reasonable. However the circumstances which are considered by courts include an assessment of the bargaining powers of the parties, whether the exclusion clause was freely negotiated, the extent to which the parties were legally advised, the availability of insurance, the extent to which the party seeking to rely on exclusion clause sought to explain the effects to the other party. In examining how this test is applied in case we can look at Woodman v Photo Trade Processing [1981]. Here liability was limited to the cost of the film Photo Trade would not be liable for any consequential loss. However the courts held that the clause failed the reasonableness test since it does not provide any alternative for the consumer. The consumer only had one option. Thus this suggests that there should be a two-tier system of service which allows the consumer to decide whether to take the risk, in which case the clause may be reasonable.

Here we see that largely it is up to the judges discretion as to whether a limitation or exclusion clause is reasonable and often we see that the courts tend make judgements favourable to the consumer rather than the business.

However certain clauses are void by virtue of the 1977 Act, which attempt to exclude liability for death and personal injury caused by negligence. We do not see this in the regulations, here the terms are found unfair rather than automatically void.

Enforcement Provisions under the Regulations

The 1999 Regulations have enlarged the enforcement powers by introducing additional enforcement mechanisms. Consumers tend to be reluctant to resort to litigation to enforce their rights thus statutory bodies such as trading standards department and telecommunications have been given enforcement powers. A major development has been that the Director General of Fair Trading has been given power to prevent the continued use of unfair terms. These enforcement mechanisms claim to make the regulations more effective in reducing the use of unfair terms in standard form contracts.

Conclusion

As we can see both the 1977 Act and the Regulations deal with the same issues however they deal with these issues in different ways. Thus it has been argued that when the regulations were introduced they should not have been brought in parallel with the 1977 Act rather the existing legislation should have been wholly reconsidered. The problems mentioned above with UCTA should have been re examined and the regulations should have been integrated with UCTA to produce one coherent source of regulation.

There has been call for reform on this basis. The Law Commission Consultation Paper Unfair Terms In Consumer Contracts (2002) proposes replacing 1977 Act and 1999 Regulations with a single piece of legislation. Thus when looking at the question at hand this provides evidence that it is not felt that either one of the legislation’s at present can alone regulate unfair terms.

Although the 1999 Regulations extends in its regulation far beyond the regulation of exclusion and limitation clauses and encompassing a wider variety of terms it is still confined. Thus it has been suggested that reforms should include an extension from applying to just consumer contracts and those not negotiated individually to business –to business contracts and those which are negotiated individually. Because surely there may be circumstances where contracts are negotiated individually however significant differences in bargaining power render some terms unfair. Furthermore just as the consumer is weaker than the business it can be the case where a small business is dealing with a large corporation which also calls for regulation.

Thus although in some respects the 1999 regulations are in certain ways effective they are not in any sense without criticisms as is the case with UCTA. And one may conclude that the role of both pieces of legislation is significant until we have reform, which brings about a coherent set of rules.