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OFT publishes new guidance on fairness in consumer contracts

The Office of Fair Trading (OFT) has published updated guidelines on what is and what is not acceptable in contracts for consumers. The new guidance replaces that which was published in 2001.17 Sep 2008

The Unfair Terms in Consumer Contracts Regulations (UTCCRs), from 1999, protect consumers from parts of the 'small print' of contracts which are unfair to the consumer. They demand that businesses act fairly in writing the contracts.

Many consumer contracts contain sections which the consumer is unlikely to read, including small print of great length, or boxes to tick which declare that the consumer has read and understood all parts of the contract when that is rarely true.

The Regulations provide that if a term is unfair it shall not be binding on the consumer. The remainder of the contract shall only remain in force if it is capable of doing so without the unfair term.

The Regulations also provide that the OFT must investigate any complaints about such terms. It has powers under the Enterprise Act 2002 to take action against traders where there is a danger of consumer harm.

"A standard term is unfair 'if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer'," said the guidance, quoting the Regulations. "Unfair terms are not enforceable against the consumer. The requirement of 'good' faith embodies a general 'principle of fair and open dealing'. It means that terms should be expressed fully, clearly and legibly and that terms that might disadvantage the consumer should be given appropriate prominence."

Companies cannot ask consumers to sign contracts which exclude the seller from liability for something when the law says that they are liable.

"Exclusions or restrictions of liability for death or injury caused by negligence are always legally ineffective," says the guidance. "But the fact that a term is void under other legislation – and thus, if it comes before a court, cannot have the harmful effect intended – is not something that the consumer may be aware of and so not only is such a term pointless, it is also potentially misleading. This is liable to make it actionable as an unfair commercial practice."

The guidance is designed to deal with the fact that consumers will not know the law as well as businesses and are often presented with pre-written contracts which they cannot negotiate. Because they must sign the existing contract if they are to purchase goods or services they are in a position of lesser power than if they were negotiating a contract.

The guidance says that sellers must not try to exclude themselves from liabilities on themselves. "If a contract is to be fully and equally binding on both seller and buyer, each party should be entitled to full compensation where the other fails to honour its obligations. Clauses which limit liability are open to the same objections as those which exclude it altogether," it says.

"Many types of contractual provision – not just terms which simply place an overall cap on available compensation – can have the effect of limiting a supplier's liability. They include, for example, terms which: (a) require consumers to meet costs that in law might be for the supplier to pay – for example, by making call-out charges non-refundable, or obliging the consumer to meet the costs of returning faulty goods to the supplier (c) limit the types of redress that are available – for example, allowing only credit notes, not cash refunds – or which give the supplier the choice as to what type of redress to give," it says.

The guidance explains to traders what they can do to limit their liability without breaking the law.

"Suppliers can protect their position in various ways which are in our view unlikely to be considered unfair under the Regulations – for example, by excluding liability for: (a) losses that were not foreseeable to both parties when the contract was formed (b) losses that were not caused by any breach on the part of the supplier, and (c) business losses, and/or losses to non-consumers," it says.

Another way in which suppliers sometimes reduce the likelihood that consumers will act on their legal rights is the use of guarantees. These seem to give the consumers rights but very often the rights they give are narrower than those every consumer has in law. Consumers are likely to think, therefore, that they do not have rights that they actually do have.

"There is no objection to guarantees that simply enlarge the scope of the consumer's ordinary legal rights – for example, by offering refunds or exchanges on a no-fault basis, or repairs regardless of the cause of the problem. But sometimes guarantees offer more limited rights than are available under the law, either because the benefits are less, or because their availability is made subject to special conditions or restrictions. These guarantees can reduce legal protection for consumers," says the guidance.

The rights that consumers have in law, and which guarantees might appear to limit, are called statutory rights. The OFT says that it is not enough in these cases to append the term 'statutory rights are not affected' to such contracts because most consumers will not know what this means.

"Simply including those words cannot be relied upon to achieve fairness under the Regulations. The OFT considers that adding an unexplained piece of legal jargon to contradict the effect of an unfair term does not result in fairness, and indeed is likely to involve a breach of the requirement to use plain and intelligible language," says the guidance.

Contracts sometimes contain declarations within them, such as declarations that the goods are not faulty or that the consumer has read and understood the whole contract. These can seem to restrict consumers' rights and can be unfair, the OFT says.

"Declarations can be acceptable if they are of matters wholly and necessarily within the consumer's knowledge (for example, their age), and a free choice is given as to what to say. But whether any declaration is in fact fair will depend on how it is used," says the guidance.

"In practice consumers often do not read, and rarely understand fully, any but the shortest and simplest contracts. It might be better if they tried to do so, but that does not justify requiring them to say they have done so whether they have or not. The purpose of declarations of this kind is clearly to bind consumers to wording regardless of whether they have any real awareness of it. Such statements are thus open to the same objections as provisions binding consumers to terms they have not seen at all," it says.

Examples of unfair terms

An annex to the guidance provides examples of terms deleted or amended in cases that the OFT has investigated. "It is not a list of terms that will always be found fair or unfair," says the OFT, "but it is intended to illustrate, in a practical way, how the OFT interprets the Unfair Terms in Consumer Contracts Regulations, and so help businesses to ensure their terms are fair and enforceable."

Terms from various agreements, removed for being unfair

  • No verbal agreements will be honoured.
  • This car wash is used entirely at owner's risk.
  • All conditions and warranties whatsoever (whether expressed or implied and  whether arising at common law or statute) … are hereby excluded to the extent permitted by law.
  • Your signature constitutes acceptance that all merchandise and indicates
    100 per cent satisfaction as per order.
  • On faulty items we regret you must pay shipping back to Scan and Scan
    will pay for the shipping back to you.
  • Management reserves the right to vary, revoke or add to these rules from time to time at its absolute discretion.
  • No verbal agreements will be honoured.

Terms amended after being deemed unfair

Original term: The support provided hereunder shall be substantially as described. This warranty is exclusive and is in lieu of all other warranties and Microsoft disclaims all other warranties, express or implied, including but not limited to warranties of merchantability and fitness for a particular purpose.

New term: Microsoft warrants that it will provide Support with reasonable care and skill, within a reasonable time, and substantially as described in this Agreement. Microsoft does not make any other promises or warranties about Support service.

Original term: If either you or we are in breach of the arrangements under this Agreement, neither of us will be responsible for any indirect or consequential losses that the other suffers as a result.

New term: If either you or we are in breach of the arrangements under this Agreement, neither of us will be responsible for any losses that the other suffers as a result, except those losses which are a foreseeable consequence of the breach.

Original term: In no event shall Microsoft or its suppliers be liable for lost profits or indirect, consequential, incidental, special or punitive damages … arising out of any breach or failure of Microsoft even if Microsoft or its suppliers have been advised of the possibility of such dangers.

New term: Microsoft's and its suppliers' liability shall not in any event include losses related to any business of the Customer such as lost data, lost profits or business interruption.

Original term: Sky may at any time vary or add to these Conditions as it deems necessary.

New term: [Sky may] change or add to Conditions … for security, legal or regulatory reasons … We will give you at least one month's notice of any changes or additions. We will not use this right to vary the terms of any special offer which applies to you … you may end this contract at any time … by giving one month's notice, if we tell you … we are going to change these conditions.