Unfair Terms in Consumer Contracts Regulations - Case Study Example

An exclusion clause seeks to exclude from a contract some term (such as one imposing a duty of care) that would otherwise be implied; a limitation clause seeks to limit liability for any breach of such a term. The general rule is that the parties are free to determine the terms of their own contract. However there have been cases where a plaintiff has attempted to incorporate an onerous term into a contract without providing adequate notice to the claimant In order to ensure parity in bargaining power the courts would look for evidence that the term was incorporated into the contract and that the claimant had adequate notice of it. Hence in Olley v Marlborough Court Hotel [1949] the claimant's fur coat was stolen from her hotel room. There was a notice on the back of the bedroom door excluding liability for the theft of precious items which were not left with the manageress. The Court of Appeal decided that as the claimant had signed the contract before leaving her coat in her hotel room the exclusion was not part of the contract. Consumer contracts are governed by two pieces of overlapping legislation, the Unfair Contract Terms Act (1979) and the Unfair Terms in Consumer Contracts Regulations (1999), which we shall refer to as the UCTA 1979 and UTCCR 1999 respectively. It should be noted from the outset that a claimant may only seek redress from a disputed contractual term under the UTCRR 1999 if the disputed term falls within the ambit of the Sale of Goods legislation. The UCTA 1979 is broader in scope, but does not cover all types of contract and is limited to exclusion and limitation clauses. Looking at the decided cases in this area it would appear that the court first determines whether the disputed clause(s) is 'unfair' within the meaning of the legislation, and then looks at whether the plaintiff meets the requirement to be dealing with a business as a consumer. The rationale seems to be the way in which the remedies work. An unfair term can be void ab initio regardless of the status of the parties, but if it is within a consumer contract this may impact on what remedy the court orders. Strictly it could simply be a replacement item rather than just rejection of the term from the contract or damages. Since Melinda is using the dishwasher for both her business and her family we must first determine whether she is covered by the legislation. This is an important question as neither the UCTA 1979 nor the UTCCR 1999 apply to business to business transactions - the claimant must be a consumer for the purposes of the legislation. There will be no redress under the UTCCR 1999 if Melinda is not acting in the capacity of a consumer. The UTCCR 1999 defines a consumer as any natural person who, in contracts covered by these Regulations, is acting for purposes which are outside his trade, business or profession''. Under s12 UCTA 1979 a party to a contract 'deals as consumer' in relation to another party if he does not make contracts of that type in the course of a business, and the other party does make contracts of that type in the course of a business. On the facts before us prima facie Melinda has purchased the dishwasher to be used partially in her business. The question is whether this would prevent her relying on the UTCCR 1999 and/or the UCTA 1979 In Peter Symmons & Co v Cook [1981] Peter Symmons & Co were a firm of surveyors. The firm bought a used Rolls Royce from Cook, a car dealer, for 9,000. Before the car had done 2,000 miles it became apparent that it would be cheaper to replace it than to repair it. Peter Symmons & Co claimed damages from Cook on the grounds that he was in breach of both express and implied terms of the contract namely: Cook had warranted that the car was in excellent condition (an express term); As the car was not of merchantable quality Cook was in breach of s.14(2) Sale of Goods Act 1893(implied); and As the car was not reasonably fit for the purpose Cook was of s.14 (3) Sale of Goods Act 1893 (implied). Cook denied that any express warranty had been given, and contended that the implied conditions set out in the Sale of Goods Act 1893 did not apply because the sale was a non consumer sale and the terms were therefore excluded by virtue of s.6 Unfair Contract Terms Act 1977 as they had been expressly disclaimed. In determining whether Peter Symmons & Co was 'dealing as a consumer' Mr R Rougier QC said: There would be judgment for Symmons & Co for 4,000. On the evidence, Symmons & Co were 'dealing as consumers' within the meaning of s.12 Unfair Contract Terms Act 1977 and their rights under the Sale of Goods Act 1893 could not be excluded. For a sale to fall outside the category of a consumer sale by virtue of Symmons & Co's buying in the course of business, the buying of cars must form at the very least an integral part of the buyer's business or a necessary incidental thereto. Only in those circumstances could the buyer be said to be on an equal footing with the seller. There was a breach of the express warranty that the car was in excellent condition. The car was not of merchantable quality nor reasonably fit for the purpose. Peter Symmons & Co established that s.12 examines the capacity in which the buyer purchases the goods. It is not sufficient that the buyer is a business. The test is, whether the buyer is purchasing the goods as an 'integral part of the buyer's business'. The purchase of the Rolls Royce was not an 'integral part of Peter Symmons & Co business'. Had the vehicle been more utilitarian, say a works van then the Court may have decided differently as this purchase might be construed as an 'integral part of their business' as a surveyor. More recently in R & B Customs Brokers Co Ltd v United Dominions Trust Ltd [1988] the Court of Appeal decided that although the claimants occasionally bought cars for business use they were still 'dealing as a consumer' as this activity was merely incidental to their business activities rather than integral to their business since the transaction lacked the degree of regularity one would expect if the activity was integral. On the basis of these two cases it is submitted that Melinda would derive protection under the UCTA as she has clearly not regularly been purchasing dishwashers so that the other side could argue that she was dealing with them as a business. Purchasing the washing machine is incidental to carrying on her business and not integral to it. That is she is not purchasing it for resale for example. In this eventuality the clause would be void under the UCTA 1979. The position under the UTCCR 1999 is not as transparent. It is submitted that the courts are more than likely to follow the reasoning of cases decided under the UCTA 1979 and find that for the purposes of this transaction Melinda was acting in her capacity as a natural person. In the unlikely event that the Court was not satisfied with Melinda's status as a consumer or a 'natural person' under the 'degree of regularity' test, then we would draw its attention to s3 UCTA 1979 which broadens the definition of 'deals as consumer' to include those parties who have accepted the other's written standard terms of business. Where that is true, the other party cannot, by reference to any contract term, exclude or restrict any liability in respect of the breach except in so far as the contract term satisfies the requirement of reasonableness. In St Albans City and District Council v ICL [1996] the Council purchased hardware and software from ICL. As a result of a computer error the Council suffered a loss of 1,314,846. Scott Baker J declared ICL in 'plain breach of contract'. he then looked at the exemption clause which sought to limit ICL's liability to a maximum of 100,000 for defective equipment, programs or services. In particular ICL sought to deny liability for indirect or consequential losses or profits however arising. After determining that this was a business to business contract, Nourse LJ said: So the question is reduced to this. Did the plaintiffs 'deal' on the defendant's written standard terms of business [] Thus it is clear that in order that one of the contracting parties may deal on the other's written standard terms of business within section 3(1) it is only necessary for him to enter into the contract on those terms. [] The consequence of that finding is that the defendant cannot rely on clause 9(c) except in so far as it satisfies the requirement of reasonableness We now have to determine whether this exclusion clause is reasonable for the purposes of the UCTA 1979 and/or fair for the purposes of the UTCCR 1999. For the UCTA 1979 definition there are 2 heads to examine. The first is Electromart's liability for the damage to the business and the loss to the restaurant. S2(1) UCTA allows such a clause to remain valid if it is 'reasonable'. How then is the word 'reasonable' defined Under s11(5) it would be for Electromart to satisfy the court that the attempted exclusion was reasonable. The reasonableness test is laid down in s.11 UCTA 1979 and states that a term will be adjudge fair and reasonable 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. The court also has to take into account the guidelines in Schedule 2 UCTA 1979. The strength of bargaining power of the parties and notice of the clause are only two of the many factors which have to be considered when deciding whether the clause is reasonable. The court also takes into account the effect of the clause on the respective parties. This is demonstrated clearly in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd (1983). After looking at the historical method of bargaining between seed suppliers and farmers Lord Bridge of Harwich said: The evidence was that a similar limitation of liability was universally embodied in the terms of trade between seedsmen and farmers and had been so for very many years. [] The decisive factor, however, appears from the evidence of four witnesses called for the appellants, two independent seedsmen, the chairman of the appellant company, and a director of a sister company []. They said that it had always been their practice, [] to negotiate settlements of farmers' claims for damages in excess of the price of the seeds, if they thought that the claims were 'genuine' and 'justified'. This evidence indicated a clear recognition by seedsmen in general, and the appellants in particular, that reliance on the limitation of liability imposed by the relevant condition would not be fair or reasonable. Under the UTCCR 1999 in order to be deemed fair a term must pass 2 tests. The first is whether the term itself is unfair and the second test is whether it covers the requirement of good faith. Like UCTA's notion of reasonableness', unfair' is not defined, but there is guidance. The definition of an unfair term is anything which would appear to significantly imbalance rights and responsibilities against the consumer. For example, a clause might be unfair if it allows the business to terminate the contract or unilaterally vary a term without extending the same freedom to the consumer. The fact that this term is onerous on the consumer and has not been individually negotiated would deem it automatically unfair under the UTCCR 1999. Further unfairness' in the UTCCR includes the phrase contrary to the requirements of good faith'. Unfortunately the notion of good faith is recent in English law and there have not been many cases on the matter. However an interpretation of good faith was provided by Bingham L J in Interfoto Picture Library Ltd. v Stiletto Visual Programmes Ltd.[1988] in which he stated that it meant more than that the parties should not deceive one another and that it was in fact a principle of fair and open dealing. On this basis he decided that as the term in issue was particularly onerous or unusual, it required to be prominently disclosed to the other party. (Collins 1999) Collins also points out that the UTCCR 1999 incorporates some of the same criteria for defining goodwill in Schedule 2 as the UCTA 1979 uses to define reasonableness. He notes that the only difference between them is "the extent to which the seller or supplier has dealt fairly and equitably with the consumer". Otherwise both pieces of legislation require the court to take into account bargaining power, inducements and whether the goods/services were specially commissioned and hence not standard items. Another matter which arises under the UTCCR 1999 but not under the UCTA 1979 is the 'technical legal language' used in the service contract. Under UTCCR 1999 this is one of the factors the court must take into account when determining goodwill. The UTCCR 1999 imposes an obligation to write standard-form contracts in terms intelligible to the consumer. In the event that a term is not clear to the average consumer the term will be interpreted in the way most favourable to the consumer (Matsumoto). This is very similar to the common law contra proferentem rule where ambiguities or uncertainties in interpreting a clause were held against the party relying on it: Lancashire CC v Municipal Mutual Insurance [1996]. An insurance company sought to avoid paying out exemplary damages awarded for police brutality and other misdemeanours. The policy covered all sums awarded "as compensation". The Court of Appeal held that in cases of ambiguity an instrument should be construed more strongly against its maker. On the facts we would assume that the flooding of the dishwasher has resulted from a defect in its manufacture or design rather than as a result of negligence in operating the machine. Based on the reasoning in George Mitchell (Chesterhall) Ltd we are confident that the court would find the term to be unreasonable. Of course Electromart may be able to show that the clause is standard throughout the white goods industry and be able to demonstrate that Melinda had adequate notice of it prior to signing the contract. On the other hand one would expect Electromart to have negotiated insurance for such defects and also to be able to claim from the original equipment manufacturer. Melinda's insurers might be wary of paying out for the damage caused by a brand new machine and would certainly be seeking compensation from Electromart as being primarily at fault. This would lead to more unnecessary litigation. Further, it would be against public policy to allow Electromart to escape liability for the sale of equipment which was defective. The second head pertains to the Sale of Goods Act 1979. One assumes that Melinda would also be seeking redress under s15 of the Sale of Goods Act (1979) since the dishwasher does not appear to have been of merchantable quality. Under s6 (2) (a) UCTA 1979 the exclusion clause is void in attempting to negate liability for this if Melinda is adjudged to be a consumer, or valid only if it passes the reasonable test if she is adjudged to be acting in her capacity as a business which has signed the standard terms of another business (s6 (3) UCTA 1979). In the event that our argument does not persuade the court of Electromart's liability we would draw its attention to s 7 of the Consumer Protection Act 1987 which unambiguously states that liability to a person who has suffered loss or damage caused wholly or partly by a defect in a product cannot be limited or excluded by any contract term. On-site Service Contract The first thing we note is that the on-site service contract is a separate contract from the contract for the sale of the dishwasher; it has its own terms and its own separate consideration of 45.00. Once again we would have to clarify Melinda's status to ensure she fell within the terms of the UCTA 1979 as before. We submit that the earlier reasoning will suffice, and that Melinda will be treated as a consumer either under s 3 or s12. Regardless of the term it is not possible to limit liability for death or injury arising from negligence be it under the UTCCR (Schedule 2) or S2 (1) UCTA (1979). The term will therefore be void, and the contract will be read as if it did not exist when Melinda signed the contract. Note that Electromart will be deemed vicariously liable for the resulting damage as Noreen is acting in her capacity as their employee and does not appear to be on a frolic of her own: Joel v Morison [1834]. Electromart's insurers could sue Noreen if it can be shown that she failed in her implied duty to exercise due care and skill: Lister v Romford Ice [1957]. a majority of the House of Lords allowed a firm of insurers to directly sue an employee who was responsible for knocking down a pedestrian while working for Romford Ice. The employee was liable to indemnify the employer and consequently the insurers were able to recover the money they had to pay out. However, employer liabvility insurers are unlikely to do this unless there is evidence of collusion between Melinda and Noreen (to defraud them deliberately) or of wilful misconduct on Noreen's part. Conclusion The two pieces of legislation which govern fair/reasonable terms in consumer contracts overlap in some areas; leave much to judicial interpretation and in the case of the UCTA 1979 provides limited redress for business to business contracts. Generally academics such as Collins and Raggert criticise the legislation for not going far enough to protect all persons (natural or otherwise) against all onerous contract terms including 'core' terms such as the consideration (price). The Law Commission has proposed a draft bill which will consolidate the legislation and do much to clarify definitions. The Law Commission proposes a uniform subjective test based upon "the knowledge and understanding of the party adversely affected by the term". (Raggett 2005). Prior to the UTCCR 1999 Melinda would have had to sue Electromart in order to have the terms struck out as being either void and or unreasonable. However now Melinda has the option to sue and/or request that the Office of Fair Trading (OFT) investigate the matter with a view to them issuing an injunction against Electromart to cease the use of unfair terms. We would recommend that she first involve the OFT as not only does it have the power to impose injunctions in cases like this, in the event of non-compliance by Electromart the OFT has a much deeper pocket than Melinda who is self-employed and a parent. Bibliography Books Koffmann & MacDonal, 2004. The Law of Contract. 5th Edition. LexisNexis. Martin J & Turner C (Eds)., 2004. Unlocking Contract Law. Hodder & Stoughton. McKendrick, E., 2005. Text, Cases & Materials Contract Law. OUP Online Boone, K. Unfair Contract Terms Act. Available at: http://kevinboone.com/ucta.html Collins, Brian St.J. (1995). Unfair Terms in Consumer Contracts Regulations 1994. Web Journal of Current Legal Issues. Available at: http://webjcli.ncl.ac.uk/articles3/collins3.html Matsumoto, Professor Tsuneo. Control of Unfair Terms in Consumer Contracts - EU And Japan Compared. Hitotsubashi University. . Available at: http://www.kclc.or.jp/english/sympo/EUDialogue/amatsu.htm Office of Fair Trading. Your Rights - Unfair Terms in Contracts. (2004). Available at: http://www.consumerdirect.gov.uk/your-rights/fs_c07.shtml Raggett, J. (2005). Technology Update: New Unfair Contract Terms legislation proposed. Available at: http://www.wragge.com/publications/hottopics/default_4724.htm The Unfair Terms in Consumer Contracts Regulations 1999. Statutory Instrument 1999 No. 2083. Crown Copyright 1999. Available at: http://www.opsi.gov.uk/si/si1999/19992083.htm Cases George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd (1983) AC 803 Interfoto Picture Library Ltd. v Stiletto Visual Programmes Ltd [1988] 1 All ER 348 Joel v Morison [1834] 6 C&P 501 Lancashire CC v Municipal Mutual Insurance [1996] 3 All ER 545 Lister v Romford Ice [1957] 1 All ER 125 Olley v Marlborough Court Hotel [1949] 1 All ER 127 Peter Symmons & Co v Cook (1981) NLJ 758 R & B Customs Brokers Co Ltd v United Dominions Trust Ltd (1988) 1 All ER 847 St Albans City and District Council v ICL (1996) 4 All ER 481 Read More