Unfair Terms in Consumer Contracts: a new ... - Law Commission

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PART 3 THE PURPOSE OF UNFAIR TERMS INTERVENTION 3.1 A discussion of the policy behind unfair terms legislation needs to start with its purpose. As discussed below, unfair terms legislation was a response to the problems raised by standard form contracts. It has played an important role in protecting consumers against hidden terms, especially in new or growing markets such as the mobile phone market in the late 1990s. 3.2 Unfair terms legislation assumes that consumers are rational but too busy to read the many complex standard terms presented to them. When presented with the right information in a way they can understand, they make good decisions. 3.3 Recent economic literature suggests that consumers are only rational up to a point. 1 As we discuss below, consumers approach products with many forms of behavioural biases, which may be exploited by traders. There are no easy answers to problems caused by behavioural biases. Some problems can be corrected by improved competition or improved information. Other problems are addressed by the Consumer Protection from Unfair Trading Regulations 2008 (CPRs), 2 which protect consumers from traders’ misleading or aggressive practices. In some other cases, consumers must live with the consequences of their decisions. 3.4 As we argue in Part 8, it is important that unfair terms legislation continues to fulfil its primary role, which is to protect consumers against unfair surprise. Unfair terms legislation cannot, however, solve all the problems of the market place and it should not protect consumers against the consequences of their own poor decisions. THE PROBLEMS OF STANDARD FORM CONTRACTS 3.5 In our 2002 Consultation Paper, we explained that the courts found it difficult to deal with the problems which emerged in the nineteenth century from the development of standard form contracts. Standard terms can be beneficial to both parties, provided that they strike a fair balance between them. They enable the parties to make complex contracts with the minimum of time or trouble. 3.6 The problem, however, is that standard terms are usually not subject to any competitive pressure. We quoted Lord Reid in Suisse Atlantique, who neatly summed up the problem with standard terms: 1 See D Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions (2008); D Kahneman, Thinking Fast and Slow (2011); and R Thaler and C Sunstein, Nudge: Improving Decisions about Health, Wealth, and Happiness (2008). The implications for enforcement bodies are discussed in OFT1324 (May 2011): Consumer Behavioural Biases in Competition, a report for the OFT by S Huck, J Zhou and C Duke, p 6. 2 SI 2008 No1277 18
In the ordinary way the customer has no time to read them, and if he did read them he would probably not understand them. And if he did understand and object to any of them, he would generally be told he could take it or leave it. And if he then went to another supplier the result would be the same. 3 3.7 This statement highlights two problems. First, consumers rarely have the time or opportunity to read standard terms, let alone understand them. This opens the possibility that they will be taken by an unfair surprise. 3.8 Secondly, even if consumers are aware of the term, there is not a lot they can do about it. The business will not agree to remove the term, and the consumer is likely to find that other suppliers’ terms are similar. 3.9 This led to the paradox identified by the influential economist Professor Peter Diamond in 1971. If no consumers read the small print, a firm cannot attract custom by offering efficient contracts, and if all firms offer the same terms, it is not worth any consumer spending time to discover this. 4 The result is that the position can easily be reached where even in a competitive environment all providers offer standard terms which are unfavourable to consumers; and where this position is reached, it becomes entrenched. Traders have more to gain by offering low headline prices than in offering fair terms. 3.10 The problem is similar to that identified by Professor Akerlof in his Nobel prize winning essay on the “market for lemons”. 5 In the US, a “lemon” is a second hand car which looks adequate but proves defective. Akerlof explained that without legal protection, poor quality cars would drive out the good. The owners of good cars would not be paid an adequate price, and would withdraw their cars from the market. As better cars are withdrawn, the average quality would fall. This would lead to a reduction in price, leading more and more owners to withdraw. The same analysis can be applied to hidden contract terms. Information asymmetry would lead a race to the bottom. 6 3.11 The difficulties caused by standard terms were eloquently expressed by Lord Denning, in his “uniquely colourful and graphic style”: 7 3 Suisse Atlantique Société d’Armement Maritime SA v Rotterdamsche Kolen Centrale [1967] 1 AC 361, p 406. 4 P Diamond, “A model of price adjustment” (1971) 3(2) Journal of Economic Theory 156. For discussion, see M Armstrong and J Vickers, “Consumer Protection and Contingent Charges” (2012) Journal of Economic Literature 50:2, 477, p 489. 5 G Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism” (1970) 84 Quarterly Journal of Economics 488. 6 See Michael Schillig, “Directive 93/13 and the ‘price term exemption’: a comparative analysis in the light of the “market for lemons rationale” (2011) International & Comparative Law Quarterly 933, p 936. 7 George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 at 812G by Lord Bridge. 19
Page 1: Unfair Terms in Consumer Contracts:
Page 4 and 5: © Crown copyright 2012 ii
Page 6 and 7: CODE OF PRACTICE ON CONSULTATION Th
Page 8 and 9: TABLE OF ABBREVIATIONS ACL Australi
Page 10 and 11: 1.5 This paper, therefore, has two
Page 12 and 13: 1.14 Our main concern is the uncert
Page 14 and 15: (2) in particular to examine articl
Page 16 and 17: PART 2 OVERVIEW OF THE LAW AND THE
Page 18 and 19: Implementing the Unfair Terms Direc
Page 20 and 21: Terms must be fair 2.16 Under the U
Page 22 and 23: 2.28 In 2002, we noted that there h
Page 24 and 25: (3) For contracts between a busines
Page 28 and 29: None of you nowadays will remember
Page 30 and 31: 3.19 As a result of the investigati
Page 32 and 33: BEHAVIOURAL BIASES 3.27 In the last
Page 34 and 35: Behavioural biases and the UTCCR 3.
Page 36 and 37: 3.48 There is a clear difference, h
Page 38 and 39: PART 4 THE EXEMPTION: PREVIOUS RECO
Page 40 and 41: 4.10 The changes sought to reconcil
Page 42 and 43: Plain, intelligible language 4.19 W
Page 44 and 45: The definition of the main subject
Page 46 and 47: (1) Renewal commissions - terms whi
Page 48 and 49: Of course the theory is that the ty
Page 50 and 51: In my view those words involve no m
Page 52 and 53: 5.28 The Supreme Court overruled th
Page 54 and 55: the more closely related the paymen
Page 56 and 57: 5.50 Therefore, the Court concluded
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Page 68 and 69: Support for the decision 6.7 There
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6.41 However, when we met the OFT a
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6.48 The case of Bankers Insurance
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PART 7 THE EUROPEAN CASE LAW 7.1 Th
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Correcting an imbalance 7.12 The CJ
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According to settled case-law, it i
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7.28 The finding that the omission
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Directive 93/13, a particular metho
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7.44 The leading case on the averag
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7.52 The list of just three factors
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e aware of the approach taken by th
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(d) readily available to any party
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PART 8 PROPOSALS FOR REFORM A NEW A
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(7) Little attempt to distinguish b
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8.20 In some cases, where the consu
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8.31 In a general challenge, the co
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(1) Permit the trader to retain sum
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Terms which give the trader discret
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8.65 On balance, we think that our
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The grey list 8.74 Article 3(3) of
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Example 3 - Lightfinger Lender In t
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Example 7 - Mr Dodgy Door Seller In
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It is particularly important, in or
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9.17 Do consultees agree that the n
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9.30 Do consultees agree that: (1)
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9.42 We discussed this in some deta
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NOTICES 9.54 UCTA covers contract t
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9.68 The first two protections also
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PART 10 LIST OF CONSULTATION QUESTI
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(1) In proceedings brought by indiv
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