Part I
introduction

1. Terms of reference

1.1                                      In January 2001 the Law Commission and the Scottish Law Commission received from the Parliamentary Under Secretary of State for Consumers and Corporate Affairs a joint reference in the following terms:

2. Outline of the project

1.2                                      As the first paragraph of the terms of reference indicates, potentially unfair terms in contracts are at present subject to one or both of two quite separate legal regimes. If the term in question is one that purports to exclude or restrict the liability of one of the parties,[1] it is likely to be subject to the Unfair Contract Terms Act 1977 (“UCTA”). UCTA applies both to consumer contracts and to contracts between businesses.[2] It may have the effect that the exclusion or restriction of liability is completely ineffective; or it may invalidate the term unless it is fair and reasonable. If the term is in a consumer contract it will normally be subject to the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCR”),[3] which implement the European Directive of the same name (“the Directive”).[4] UTCCR can apply to almost any type of term[5] and will invalidate the term if it is unfair. Thus the two regimes have different scopes of application; to some extent they overlap; and they have different effects. In addition they use different concepts and terminology. The resulting complexity and inconsistency has been severely criticised.[6] The project covered by this consultation paper falls into three principal parts.

(1) A unified regime on unfair terms in consumer contracts

1.3                                      The first part is to consider the feasibility of a single, unified regime to apply to consumer contracts. As we explain in more detail in Part II, this part of the project is primarily an exercise in simplification. It is not proposed that there should be any significant increase in the extent of controls over terms in consumer contracts, nor any significant reduction in consumer protection. It is true that if the two regimes were to be unified into a simpler form, there would inevitably be some changes in the controls over potentially unfair terms in consumer contracts. This does require some consideration of underlying policy issues, but the changes proposed would be marginal.

1.4                                      This part of the project also examines the impact on exclusion clauses of the European Directive on certain aspects of consumer sales (“SCGD”).[7] The main aim of the SCGD is to ensure that consumers buying goods in any Member State have minimum rights as to the quality of the goods and their conformity to the contract, and have at least specified remedies if the goods do not conform. These points are not within the scope of this consultation paper. However, the SCGD also requires Member States to ensure that certain types of limitation and exclusion clauses in consumer contracts are invalid. The consultation paper considers how the requirements of the SCGD in relation to limitation and exclusion clauses can best be incorporated into the new legislation in such a way as to reduce the overall complexity of the law.

(2) Extending the controls

1.5                                      UCTA affects contracts between businesses but applies only to terms that, broadly speaking, purport to limit one party’s liability or obligations under the contract. Although the statutory definition of the terms caught by UCTA is wide, it does not apply to all types of term that are potentially unfair. In particular, terms that increase the obligations or liability of the other party are outside UCTA. This has sometimes resulted in businesses, and in particular small businesses, being faced with terms that are widely regarded as unfair but having no means of challenging their validity. Had the term in question been in a consumer contract, it would have been subject to the control of UTCCR, as these cover a wider range of terms. The second part of the project therefore considers extending the scope of the legislation to cover the kinds of unfair term in a “business-to-business” contract that are presently outside the scope of UCTA but that, had they been in a consumer contract, would have been within UTCCR. It also considers how any new legislation should incorporate the existing controls over business-to-business contracts.

1.6                                      For the most part UTCCR are in a much simpler style. In this they reflect the Directive that they implement and which they follow very closely indeed. However, parts of UTCCR, in particular the “indicative and non-exhaustive list of terms which may be regarded as unfair” contained in Schedule 2 (the “indicative list”), use terminology that is alien to English and Scots readers, lawyers and non-lawyers alike. As will be seen from Part IV, we have had considerable difficulty in identifying the kinds of clause which are intended to be included in the list. Moreover, although the main regulations are apparently clear, we have found that in order to interpret them in what we believe to be the correct way, it is frequently necessary to construe their words in ways that are not obvious; on occasions it is necessary to “read into” phrases a good deal that is not apparent on the face of the language.

1.7                                      The third part of the project is therefore to produce draft legislation that will be clearer and more accessible to the reader. Unusually for the Law Commissions, this consultation paper includes draft legislation prepared by Parliamentary Counsel.[8]

3. Structure of the paper

1.8                                      In Part II of the consultation paper we explain why the law has come to be in the complex and confusing form that it is, and describe the general scope of each part of the project in greater detail. In Part III we examine the precise differences between UCTA and UTCCR. In Part IV we consider how the two regimes might best be combined into a single regime, setting out various issues of general policy before looking at each relevant point in turn. In Part V we consider whether the wider controls of UTCCR should apply to contracts between businesses and, if so, whether they should apply only when the party disadvantaged by the term is a small business or an “occasional business customer” (in the sense that the transaction is not one that the business enters as a regular part of its business), or should apply to businesses in general. We also consider whether any extension should be restricted to the individual parties to the particular contract or whether the preventive controls of UTCCR should also be widened to include some, if not all, business-to-business contracts. This Part draws to some extent on comparative studies of other legal systems, which are described in more detail in Appendix A. “Private” sales, where neither party makes the contract in the course of a business, and sales by consumers to businesses are considered in Part VI. In Part VII, which is very short, we deal with non-contractual notices that purport to exclude business liability in tort or delict for death or personal injury, or other loss or damage, caused by negligence. In Part VIII we give a more detailed explanation of the major issues raised by the attempt to draft the provisional version of the new legislation in a way that is “clear and more accessible”. The draft itself forms Appendix B. Part IX is a summary of our provisional proposals and questions for consultees. The text of UCTA is reproduced in Appendix C, that of UTCCR in Appendix D, and the body of the Directive in Appendix E. Appendix F is a table summarising the differences between the two regimes and our proposals.

1.9                                      An initial research project on the first two parts of the project was carried out for the Department of Trade and Industry by Dr Simon Whittaker of St John’s College, Oxford. Dr Whittaker’s report demonstrated that while consolidation would not be straightforward, it was feasible. It highlighted a number of issues that would need detailed consideration. The matter was then referred to the Law Commissions. This consultation paper draws on Dr. Whittaker’s report, and we would like to acknowledge the considerable help that we derived from it. We would also like to acknowledge the help that has been given us by colleagues from the Unfair Contract Terms Unit of the Office of Fair Trading, the Financial Services Authority, OFGEM and OFTEL. We are also most grateful for assistance we have received from Professor Michael Bridge of University College, London; Susan Bright of Oxford University; Professor Andrew Burrows of Oxford University; Professor Peter Butt of the University of New South Wales; Dr Gerhard Dannemann of Oxford University; Professor Nick Gaskell of Southampton University; Professor Johnny Herre of the Stockholm School of Economics; Professor Martijn Hesselink of the University of Amsterdam; Professor Elizabeth Macdonald of the University of Wales, Aberystwyth; Richard Mawrey QC; Professor Dr Hans–W Micklitz of the University of Bamberg; Professor Robin Morse of King’s College, London; Professor Christina Hultmark Ramberg of Gothenburg University; and Mr R G A Youard. It would, of course, be entirely unfair and unreasonable not to include the usual disclaimer to the effect that responsibility for this consultation paper is ours alone.

5. Overview of our provisional proposals

1.10                                      In Part IV we provisionally propose that the provisions of UTCCR and those of UCTA that apply to consumer contracts should be combined into a single regime. This would not follow the model of either existing piece of legislation; instead it should be put into clearer and more accessible form.[9] Terms which currently are automatically of no effect under UCTA should, with one exception, remain so under the new legislation.[10] All other terms except “core” terms (that is the definition of the main subject matter and the adequacy of the price, insofar as they are set out in a transparent way), terms required by law[11] and terms that merely set out what is, in substance, the general law anyway,[12] would be subject to a “fair and reasonable” test.[13] This would include both negotiated and non-negotiated terms.[14] The definitions of the main subject matter of the contract and of the exemption for the adequacy of the price would be clarified to reflect what we believe to be the existing position.[15] There would be clearer definitions of which terms are exempt because they are required by industry regulators. The legislation would contain detailed guidelines on the application of the “fair and reasonable” test.[16] It would also include a list of terms which would be presumed to be unfair unless the business showed otherwise.[17] This list would reflect the indicative list contained in the Annex to the Directive, but would contain examples of unfair terms found in the UK instead of, or in addition to, those listed in the Directive. (We ask consultees whether the business should also have to show that any other term which is to the detriment of the consumer is nonetheless fair and reasonable, or whether the burden should be on the consumer to show that a term not listed is unfair.[18]) The bodies currently authorised under UTCCR to take action to prevent the use of unfair terms would continue to be so authorised.[19] We ask whether their powers should be extended to allow them to prevent businesses repeating practices of negotiating terms which are nonetheless unfair.[20] Certain sections of UCTA that no longer seem to perform a useful function would not be reproduced in the legislation.[21]

1.11                                      In Part V we provisionally propose that the controls over terms in individual business-to-business contracts should be widened to include all terms that have not been negotiated, rather than merely exclusions and restrictions of liability as under UCTA.[22] (We ask consultees whether it is necessary to retain the existing controls over some exemption clauses even when they have been negotiated.[23]) The control would be in the form of a “fair and reasonable” test, as for consumer contracts.[24] It would not be limited to protecting small businesses, or those making contracts which are not part of their ordinary course of business; as under UCTA, those would be factors to be taken into account in deciding whether or not the term is fair and reasonable.[25] There would be a shorter list of terms presumed to be unfair unless shown otherwise; in any other case a party alleging that a term is unfair would have the burden of showing that.[26] There would be exemptions for “core terms” and those required by law or setting out what is the general law. The contracts which are exempt from UCTA would remain exempt from the new controls[27] (with the possible exception of “cross-border” contracts on which we seek views from consultees[28]). (We ask whether there is a case for extending the preventive controls over unfair terms in consumer contracts to cover unfair terms in business-to-business contracts.[29])

1.12                                      In Part VI we consider the existing controls that apply to contracts for the sale or supply of goods when the seller or supplier is not acting in the course of a business. We ask whether consultees agree with us that these controls should be retained. In Part VII we provisionally propose that the existing controls over non-contractual notices purporting to exclude or restrict business liability in tort or delict for negligence be reproduced in the new legislation;[30] and that the authorised bodies be empowered to prevent the use of such notices.[31]