Misrepresentation, Non-Disclosure and Breach ... - Law Commission

The position of small businesses under the FOS scheme
5.165 At present, the FOS makes a distinction between small businesses based on its
assessment of the sophistication of the business in question. The most
vulnerable businesses will be treated as consumers, while others will not. For
example, in a survey we made of FOS decisions on misrepresentation and nondisclosure,
49 a fish and chip shop was treated in the same way as a consumer,
while an insurance broker was not. We found some cases where small
businesses had been expected to volunteer information in the absence of
questions. For example, the FOS held that a landlord should have revealed that
his tenant was unsatisfactory even though the proposal form did not ask about
this, whereas a consumer would not have been expected to make a disclosure on
a matter about which no question had been asked. 50
Options for reform
5.166 In the Law Commissions’ joint report on Unfair Terms in Contracts, we concluded
that businesses with nine or fewer employees were often particularly vulnerable
and required specific protection against unfair contract terms. We have
considered whether such “micro businesses” are also vulnerable in applying for
insurance. Should they, for example, be treated as consumers and only be
required to answer the questions asked?
5.167 We think that the arguments that we used in our report on Unfair Terms in
Contracts, which have been accepted in principle by Government, apply equally
to insurance. In essence, these were that a small business is, in most relevant
respects, in no better position than a consumer. As a result they seldom have a
good understanding of the small print of contracts. Even if they do, they very
seldom have the resources or the bargaining power to persuade the other party
to offer improved terms.
5.168 The problem with having special rules for small businesses, however, is that it is
extremely hard to define small business in a way that is neither over-inclusive nor
arbitrary.
5.169 The problem of over-inclusiveness is that some firms may have very few
employees but be highly sophisticated. In the context of unfair contract terms, we
were told that in the capital markets it was common to use special purpose
vehicles to conduct extremely complex deals. We developed several additional
tests to exclude such companies, including a value limit on the contracts that
could be reviewed and an exclusion for all financial services contracts (on the
grounds that they were already regulated). We recommended that insurance
contracts should be excluded, as they are from many sections of the Unfair
Contract Terms Act 1977.
49 See Appendix C, para C.100 below.
50 See Appendix C, para C.101(2) below.
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