As stated in Reg 5 for a term to be deemed unfair, the significant imbalance it generates must be contrary to good faith. Good faith is likely to require that contracting parties deal with each other in an open and honest way, taking into account their relative bargaining skills.4
In the case of Interfoto Picture Library Ltd V Stiletto Visual Programmes Ltd 1989,  1 All ER 348, Bingham LJ5 summarised the position. Most legal systems outside the common law enforce an overriding principle that parties should act in good faith when making and carrying out contracts. This does not simply mean that they should not deceive each other, but is in essence a principle of fair and open dealing. English law had committed itself to no such overriding principle, but had developed piecemeal solutions in response to demonstrated problems of unfairness.
One other strange feature of the definition of an unfair term is that no assessment must be made of the fairness of any term which defines the main subject matter of the contract or which concerns the adequacy of the price or remuneration, as against the goods and services supplied in exchange, in so far as these terms are in plain intelligible language’6 It may seem peculiar that these terms are excluded from the fairness requirement , but it has been suggested that the aim of the Regulations is to attack what may be called ‘unfair surprise’7 that is to say consumers tend to be aware of the price of the goods or services and the definition of the main subject matter of the contract but they tend to be unfamiliar with the countless terms found in the small print, which are the subject of regulation. In the case of Director- General of Fair Trading v First National Bank PLC (2002)8 , Lord Goodhart QC, on behalf of the bank, submitted that no assessment might be made of the fairness of the term because it concerns the adequacy of the bank’s remuneration as against the services supplied, namely the loan of money. A bank’s remuneration under a credit agreement is the receipt of interest. The term, by entitling the bank to post-judgment interest, concerns the quantum and thus the adequacy of that remuneration. This was the more obviously true if, as Lord Goodhart submitted, the merger rule as commonly understood is unsound. Where judgment is given for outstanding principal payable under a loan agreement and interest accrued up to the date of judgment, those claims (he accepted) are merged in the judgment. That is a conventional application of the principle of res judicata. But no claim for future interest has been the subject of adjudication by the court and such a claim cannot be barred as res judicata. The borrower’s covenant to pay interest on any part of the principal loan outstanding thus survives such a judgment, and Ex p Fewings (1883) 25 Ch D 338 was wrong to lay down any contrary principle. Lord Goodhart adopted the observation of Templeman LJ in Ealing LBC v El Isaac9
Where a term is held to be unfair, the consequences is that it ‘shall not be binding on the consumer’ but the ‘contract shall continue to bind the parties of it is capable of continuing in existence without the unfair term’ Regulation 7 further states that a seller or supplier shall ensure that any written term of a contract is expressed in plain intelligible language and if there is any doubt about the meaning of a written term, the interpretation most favourable to the consumer shall succeed.
The effect of a term being found to be unfair in accordance to the 1999 Regulations in set out in Reg 8(1) that, ‘unfair terms in a contract are not binding on the consumer’10, thus it is the individual term that is avoidable not the contract as a whole. This is subject to the proviso in Reg 8(2) that the rest of the contract is capable of continuing in existence without the unfair terms.11
The regulations try to preserve the notion of freedom to contract by first of all if the contract is individually negotiated then the contract will fall outside the regulations, second of all if a consumer has exerted any influence on a contract term within a standard form contract it will be assumed that the term will not be unfair, although the regulations will apply to the rest of the contract, lastly the regulations exclude terms that define the main subject matter of the contract and relate to the adequacy of the contract price from the ambit of the regulations, though such terms still have to comply with the general requirement of reg 7 that they are drafted in plain intelligible language.
Article 7(1) of the directive provided that Member States have to ensure that adequate and effective means exist to prevent the continued use of unfair terms in contracts concluded with consumers. Also Article 7(2) states that there must be a means by which any person or body that has a legitimate interest in protecting consumers can challenge that ‘contractual terms drawn up for general use are unfair’12
The major change made by the re-issue of the Regulations is in enforcement. The new Regulations maintain the Director General’s power to take injunctive action against terms he considers unfair13. But this power is also extended to a number of other ‘qualifying bodies’. These bodies are named in Schedule 1 to the Regulations, which is split into two parts. Part 1 lists public authorities that have a statutory basis, including most of the main national regulatory bodies, and all local authority trading standards departments. Part 2 is reserved for independent bodies, and currently includes only the Consumers’ Association.
It remains the case that only the Director General has an unqualified duty under the Regulations to consider and deal with complaints about unfair terms, and to give reasons for his decision to apply or not to apply for an injunction. The ‘qualifying bodies’ listed in part 1 of Schedule 1 may come under such a duty, but only if they choose to accept it. Until and unless they notify the Director General that they agree to deal with a complaint, they are bound only by the usual requirements of administrative reasonableness and fairness.
All qualifying bodies are subject to notification requirements about cases they decide to pursue, and the Director General is subject to new publication requirements. Together they make the Director General of Fair Trading the focal point for holding and publishing information about enforcement.
Further changes have been made to the enforcement regime under the Regulations. Firstly, Injunctive action under the Regulations may now be taken in the County Court, not merely as under the 1994 Regulations in the High Court. This is expected make it easier for local authorities to take enforcement action. The right to issue court proceedings was first used in the case of Director- General of Fair Trading v First National Bank (2000), the case was about a clause in the banks standard loan agreement which stated: Interest on the amount which becomes payable shall be charged in accordance with condition 4, at the rate stated in paragraph D overleaf (subject to variation) until payment after as well as before any judgment (such obligation to be independent of and not to merge with the judgment).14 At first instance the trial judge decided that this term was not unfair, but the Court of Appeal disagreed in the light of the inequality of bargaining power between the contracting parties and took a broad approach to the issue of fairness.15
The second further change was, the Director General and the statutory qualifying bodies were given power by Regulation 13 to require disclosure of documents and information where this is necessary for enforcement purposes. It is expected that this will significantly improve the monitoring of compliance with undertakings given to drop or amend contract terms.
In conclusion I would say that the effect of the Unfair Terms in Consumer Contracts Regulations 1999 on whether a term is to be deemed fair or unfair prevents an injustice on consumers who may not have strong bargaining power against larger corporations. The regulations have also given more qualifying bodies the right to take action against unfair contracts which will most likely help decrease the level of unfair terms in future contracts and greater equality for consumers.
An advantage of the 1999 regulations is that they take into account the previous 1977 and 1994 regulations which mean that there is greater protection for consumers from unfair terms.
The fact that the regulations are confined in their scope to consumer contract means that it is kept out of the commercial sphere where the need for certainty is greatest. So the uncertainty which the regulations will initially create is not the grave cause for concern which it would be if it applied to international contracts for the sale of goods.16
Overall the 1999 Regulations have had a significant effect on unfair terms, which will must likely result in a decrease of unfair terms being used in contracts.
- C. Elliott and F. Quinn, Contract law 3rd Edition, 2001
- E Mc Kendrick, Contract Law 4th Edition, 2000
- E Mc Kendrick, Contract Law 5th Edition, 2003
- Unfair Contract Terms; A case report bulletin issued by the Office of Fair Trading Issue No 8 December 1999
- Lecture notes
- Unfair Terms in Consumer Contracts Regulations 1999
1 Unfair Terms in Consumer Contracts Regulations 1999 Reg 5(1)
2 Unfair Terms in Consumer Contracts Regulations 1999 Reg 6
3 C Elliott and F Quinn, Contract Law 3rd Ed 2001 pg 123
4 C Elliott and F Quinn, Contract Law 3rd Ed 2001 pg 123
5 Bingham LJ, Interfoto Picture Library Ltd V Stiletto Visual Programmes Ltd 1989,  1 All ER 348.
6 Unfair Terms in Consumer Contracts Regulations 1999 Reg 6(2)
7 E Mc Kendrick, Contract Law 4th Ed 2000 pg 367
8 Director- General of Fair Trading v First National Bank PLC (2002) 1 ALL ER 97
9  2 All ER 548 at 551,  1 WLR 932 at 937.
10 Unfair Terms in Consumer Contracts Regulations 1999 Reg 8(1)
11 Unfair Terms in Consumer Contracts Regulations 1999 Reg 8(2)
12 P Richards, Law of Contract, 5th Ed 2001
13 Unfair Contract Terms; A case report bulletin issued by the Office of Fair Trading Issue No 8 December f1999
14 Director- General of Fair Trading v First National Bank (2000)
15 C Elliott and F Quinn, Contract Law 3rd Ed 2001 pg 124
16 E Mc Kendrick, Contract Law 5th Ed 2003 pg 282