The Law Commission’s recommendations on unfair terms in contracts could introduce significant changes. David Lowe assesses their effects
The Law Commission and the Scottish Law Commission have recently published their final recommendations on the reform of the UK’s unfair contracts legislation: see Law Com 292/Scot Law Com No 199, which can be accessed at www.lawcom.gov.uk/lc_reports.htm.
Under English and Scottish law, parties are generally free to contract on the terms that they have agreed. The unfair contract terms legislation cuts across this principle and will, in certain circumstances, override the contractual arrangements between the parties. The proposed reforms are therefore important to all those involved in contracts of whatever nature, including leases, the sale of land and chattels, auction terms, estate agency terms, property management arrangements, valuation, and real estate consultancy.
The commission’s proposals are being considered by the Department of Trade and Industry, which has indicated that it will respond by the end of August. The availability of parliamentary time will be a key determinant, since the proposals will require primary legislation and this will inevitably take up valuable time.
Alternatively, some, but not all, changes might be achieved by way of secondary legislation, which would require less parliamentary time. The DTI might be tempted to combine the enactment of the proposals with the introduction of legislation to implement the Unfair Commercial Practices Directive (consumer protection legislation), which must be implemented by the end of 2007.
Background
The Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) both deal with unfair terms. However, they do not fit well together because the UTCCR is derived from European legislation, whereas the UCTA is home-grown. Inconsistencies and overlaps between the two include:
● Different scopes: The UCTA focuses on exclusion and limitation clauses only; the UTCCR deals with all contractual terms.
● Different definitions of “consumer”: The UTCCR refers to “natural” consumers, whereas the UCTA includes businesses that are acting outside the scope of their normal business.
● Different requirements: Under the UCTA, exclusion clauses must be reasonable, but the UTCCR requires such terms to be fair.
● Inconsistent terminology: Where a contract is subject to both the UCTA and the UTCCR, the necessary legal analysis will be complex.
The effect of the proposed reforms will vary and will depend upon the type of contract, but they will establish three separate streams of contracts: business-to-business, contracts with small businesses, and contracts with consumers.
Business-to-business contracts
These refer to contracts that are not with “consumers” or “small businesses” – the terms “consumer” and “small business” are explained below. Most commercial leases, property development agreements, property and facility management contracts, and commercial real estate arrangements such as valuation, disposal and acquisition agency arrangements will fall into this category.
When the Law Commission first issued its consultation on proposed reform, it suggested that the approach to business-to-business contracts and business-to-consumer contracts should be identical. In other words, it proposed an increase in the level of legislative interference by requiring that all terms in business-to-business contracts should be “fair”. This would have had a huge effect upon UK contract law.
Unsurprisingly, the respondents overwhelmingly objected to this increased interference with a party’s freedom to contract. The general response to the consultation showed that the overall thrust of the UCTA was reasonably well understood by businesses, and that they were not in favour of changing their approach.
Fortunately, the commission has responded positively, and is proposing only limited changes to business-to-business contracts. The key points are as follows.
Under the UCTA, contracts that relate to the “creation or transfer of an interest in land” are largely exempt. This means that these types of contract can include unreasonable exclusions and limitations of liability. The commission’s proposals contain a similar exclusion that would apply to a contract term that “relates to the creation, transfer, variation or termination of an interest or real right in land”. Note, though, that the scope of this limitation is limited; leases and contracts for the sale of land are exempt, but contracts for the sale of goods and the supply of services – property management and real estate consultancy, for instance – will remain subject to controls.
However, any attempt in a contract or notice to exclude liability for death or personal injury caused by negligence will continue to be unenforceable.
Exclusions or limitations of liability for negligence in contracts or notices must continue to be reasonable. This means that notices, typically in car parks, seeking to exclude all liability will continue, by and large, to be unenforceable. An exclusion or limitation of liability in written standard terms of business must also remain “fair and reasonable”.
The commission has suggested that anyone making a contract for purposes mainly related to his or her business should cease to be a “consumer”. This would be a significant change. Under the UCTA, a business that contracts outside the course of its business (for instance, a property company buying stationary supplies) might be able to argue that it has consumer protection under the UCTA. That benefit would be removed.
Trade association or industry-standard terms such as JCT construction contracts and standard commercial property conditions will not be exempt or receive special treatment.
The guidance on what is “reasonable” will be expressed slightly differently. Contracts will need to be “transparent”, that is, they must be readily available, legible, presented clearly and written in plain English. The commission also suggests relating the issue as to whether a liability cap is reasonable to the availability, or non-availability, of insurance.
Two key issues relating to the interpretation of the UCTA have not been addressed. First, it is not clear to what extent negotiation will be required in order to avoid terms being “written standard terms of business” (in which exclusions/limitations must be reasonable). Recent cases have applied a broad test and have led to uncertainty. The commission notes the deliberate lack of a definition in the UCTA, concluding that a definition is impossible and should be left to the courts.
Second, what constitutes a reasonable cap on liability? Recent case law demonstrates that the courts’ view of what is “fair and reasonable” varies substantially depending upon the type of contract, the sector and a range of other factual issues. The courts generally dislike a limit of liability, in written standard terms of business, to the amounts payable under a contract. This approach is likely to be unenforceable. However, it is not clear what is a reasonable cap. The commission does not comment on this issue.
Small business contracts
Most respondents to the consultation acknowledged that small businesses are more likely to have unfair terms imposed upon them. The reforms would offer such businesses increased protection.
Small businesses are specifically defined; only those with nine or fewer employees would have the benefit of the regime. In addition, all contracts with a value of more than £5m, as well as FSA-regulated contracts, will be excluded from the regime.
The commission proposes that any standard contract terms in a contract with a small business must be “fair and reasonable”, except for core terms fixing the price and describing the goods or services that the business is buying. This change will benefit small businesses, although contracts for the creation or transfer of an interest in land would be excluded.
This means that small businesses and consumers would enjoy similar protection, although the former would not be protected against negotiated terms, and would also have to prove that a term is not “fair and reasonable”. By contrast, in the case of claims brought by consumers, all terms in a consumer contract would have to be fair and reasonable, and the onus would be on businesses to show that their contracts were fair.
These changes would greatly increase the risks for any organisation that regularly contracts with small businesses.
Consumer contracts
In broad terms, consumer protection will not be significantly reduced. The key issues are as follows.
● Consumers will benefit from a single regime and current inconsistencies will be eliminated.
● Land contracts will not be excluded; this reflects the position under the UTCCR and means that leases and land transfers will continue to be subject to the consumer regime.
● All the terms in a consumer contract, including negotiated terms (but not core terms on price and description of goods or services), will have to be “fair and reasonable”. If not they will be unenforceable.
” An indicative list will be compiled of the types of clause that are likely to be unfair; for example, clauses limiting liability and one-sided termination clauses. Examples given include clauses that:
– require a deposit of 25%, where there is no reasonable justification to hold more than 10%;
– require a late-paying consumer to pay a high rate of interest;
— prevent set off;
– require claims to be made within a short period; and
– provide for the automatic renewal of a contract, namely “evergreen contracts”.
The commission also suggests that the Office of Fair Trading should have increased powers to act against unfair terms.
David Lowe is a partner at Wragge & Co LLP
|
Main points to consider |
|
● This is merely a proposal for reform. It is not clear if, when and how the proposals will become law ● In broad terms, business-to-business contracts will remain the same. Contracts for the transfer or creation of interests in land will continue to be largely exempt. A key issue for draftsmen of contracts for the supply of goods and services (for example, estate agencies, property and facilities management contracts, and sale of chattels) will be selecting a reasonable and enforceable cap on liability ● A new regime will be introduced for small businesses (those with nine or less employees). This will change the risk profile of contracts with small businesses (contracts for the transfer or creation of interests in land will be largely exempt). Organisations that regularly contract with small businesses will need to monitor developments closely ● The law affecting consumer contracts will be simplified and will continue to apply to contracts relating to land. Organisations that contract with consumers (residential leases, standard land sale terms, estate agency) should review their consumer contracts |
|
Business-to-business contracts |
|
|
Current law |
Proposed law |
|
● Liability for death/personal injury arising from negligence cannot be excluded in a contract or notice |
No change |
|
● Liability for negligence can be excluded in a contract or notice only if the exclusion is reasonable |
No change |
|
● An exclusion or limitation in a party’s written terms of business must be reasonable |
No change |
|
● Exclusions of liability (other than for death/personal injury) in contracts for the creation or transfer of land need not be reasonable |
No change |
|
● A business acting outside the course of its business might have this protection as a consumer |
Businesses will lose additional protection |
|
● No exemption for industry standard contract terms (for example, JCT) |
No change |
|
● Exclusions of the warranty that goods are of satisfactory quality must be reasonable |
Dropped |
|
● Guidelines as to what is amended and reasonable |
Guidelines expanded |
|
● The burden of proving the reasonableness of the exclusionclause will lie with the person wanting to rely upon the clause |
No change |
|
Renting homes: The consumer approach |
|
Alongside its general work on unfair consumer contracts, the Law Commission is also engaged in a major project to reform housing law. The principal recommendations were set out in Renting Homes (November 2003). A final report and draft bill will be published later this summer. The starting point is that landlords are offering a service for which occupiers have to pay. The latter are therefore consumers. The commission proposes that principles that apply to other consumer contracts – namely agreements must be fair and transparent – should also apply to rental contracts. Further, both landlords and occupiers should be able to establish their mutual rights and obligations by referring to their contractual agreement. Many landlords do not provide clear tenancy agreements. At present, they often fail to mention the effect of protective legislation. To understand the exact legal relationship between landlord and occupier, parties have to read their agreements alongside a complex body of statute and case law. Unsurprisingly, many are unable to discover the true status of their legal position. The commission proposes that both parties have a written statement of their occupation agreement. This will state their legal relationship — including those matters that parliament wants to regulate — without the parties having to refer to additional sources of information. Model agreements, using plain language, will increase understanding, on the part of both landlords and occupiers, of their rights and obligations. Some may find this approach radical, but it is more evolutionary than revolutionary. Since 1999, the UTCCR have applied to tenancy agreements. The commission’s recommendations merely ensure that these principles apply to all occupation contracts. In developing these proposals, the commission undertook one of its largest consultation exercises, receiving more than 400 submissions to consultation papers. Members addressed almost 100 public meetings throughout the country, hearing from representatives of all key stakeholders – landlords, agents, tenants, advisers, financiers, the judiciary and policy makers – at central and local government level. There was widespread support for the proposals. The implications are: 1. Parties will no longer have to discover their legal position by considering the complex interaction of a tenancy agreement (often poorly drafted) with a large body of law that experts only are aware of. 2. Occupation contracts will be divided into two types: one having a large degree of security of tenure, used by social landlords and those private landlords that want to rent on the same terms as social landlords; and the other being similar to the current assured shorthold tenancy, used by private landlords and social landlords in specified circumstances (for example, for probationary agreements). 3. Standard model agreements will be prescribed in regulations (drafted in consultation with the industry). These will be written in plain language. Landlords that use a model agreement will do so in the knowledge that they cannot be challenged as being contrary to the UTCCR. They will be widely available and downloadable from relevant websites. 4. Landlords will be required to provide contract holders with a written statement of the contract, by attaching a cover sheet setting out key terms (rent, names of the parties) and any special terms, to the standard model agreement. Appropriate (non-criminal) sanctions will apply to landlords that fail to comply. 5. The scheme will apply to all occupation contracts, save those excluded either because they fall within other statutory schemes (eg long leases over 21 years) or for obvious social policy reasons (eg holiday lets). Abuse of power in landlord-tenant relationships is always a possibility. But any law seeking to regulate the relationship will be ineffective if those to whom the law applies do not know what it provides. The consumer approach offers a better regulatory framework, which will benefit landlords and contract-holders. Professor Martin Partington, a Law Commissioner |
