short lines

Contracts with consumers: Are your terms fair and encorceable?

November 2004

The recent ruling in France in the case of Union Federale des Consommateurs v AOL France [i] serves as a firm reminder of the need for businesses to ensure their standard contracts with consumers comply with EU and national laws. In the AOLcase, 31 clauses in AOL France's standard subscriber contract were found to be illegal and unenforceable. Although a French decision, the case could be followed in the UK, as the same EU legislation [ii] underpinning the decision in France has been implemented in the UK through the Unfair Terms in Consumer Contracts Regulations 1999 [iii] ("Regulations").

The Regulations do not supersede the UK 's own unfair terms legislation contained in UCTA [iv] but supplement it (although there is considerable overlap in the context of business to consumer contracts). Schedule 2 of the Regulations lists a number of terms that are potentially unfair. In this Short Lines we look at the key terms found to be unfair in the AOLcase which correspond with the terms listed in Schedule 2 of the Regulations. We also look at the OFT's view [v] on the enforceability of such clauses.

Exclusions, limitations and liability

(a) Exclusion of liability for poor service
In the AOL case a term which provided that "if you are not satisfied with AOL or with the service provided by AOL , your only remedy is to terminate your subscription", was found to be unlawful. This is because it had the effect of waiving the consumer's right to enforce the contract in court.

A similar term in the UK carries a significant risk of being unenforceable. Schedule 2 of the Regulations states that terms may be unfair if they have the object or affect of "inappropriately excluding or limiting legal rights of the consumer vis-à-vis the seller or supplier. in the event of total or partial non-performance or inadequate performance.of any of the contractual obligations". In its guidance (which, it should be noted, is not legally binding), the OFT has suggested that where a term has the effect of relieving a supplier of its obligation to take reasonable care in any of its contracts with consumers, it is particularly liable to be considered unfair. However, terms which disclaim liability for loss or damage where the consumer is at fault are more likely to be acceptable, although even in those circumstances (in the OFT's view) such a term is unlikely to be acceptable if it would deprive the consumer of redress in the event of a technical breach or where the supplier may be partly at fault for the harm suffered.

(b) General limitations on consumers' remedies and supplier's liability
Another provision found to be unlawful and unenforceable in the AOL case was one which placed the burden of proof on the consumer by excluding AOL 's liability for damages unless the consumer could demonstrate that the damages were due to AOL 's intentional behaviour. Additionally, a term which amounted to a total waiver of liability, covering both AOL and third party content providers was also deemed unfair. This was because, first, under French law it is not generally possible to create rights or obligations for third parties under a contract and second, the clause created an imbalance between AOL and the consumer to the consumer's detriment. Although the UK does recognise the rights of third parties under contract in limited circumstances [vi] there is a significant risk that such a clause would be struck out in the UK , given the imbalance it provides between the company and consumer.

The OFT has stated that disclaimers covering problems caused by a trader's suppliers or sub-contractors is regarded in the same way as one covering loss and damage caused directly by the trader itself. Given the consumer has no choice as to who these sub-contractors are and has no contractual rights against them, it is, in the OFT's opinion, unfair for the trader to seek to disclaim responsibility for their defaults.

Unequal cancellation rights

A term which permitted AOL to terminate the contract at any time without providing any reasons to the consumer was also deemed unfair in the AOL case. The French court held that termination clauses must favour the consumer, and consumers should be entitled to cancel the contract at any time, without reason, subject to a reasonable notice period or minimum contract duration. The court was of the view that a supplier should not have the same rights as the consumer.

Schedule 2 of the Regulations states that terms may be unfair if they have the object or affect of "authorising a supplier to dissolve the contract on a discretionary basis where the same facility is not granted to the customer". Generally, the OFT regards terms which allow suppliers the unilateral right to cancel at will without a valid reason (such as a serious fault of the customer), and terms which undermine the consumer's legitimate cancellation rights, as unfair. A right to cancel the contract where the consumer is not at fault may be acceptable if it is non-discretionary, i.e. where the right to cancel operates exclusively where circumstances make it impossible or impractical for the supplier to complete the contract. Additionally, other factors will need to be considered such as, whether the risk of cancellation is a real possibility, whether the circumstances permitting termination are clearly and specifically disclosed to the consumer, and whether the reasons for cancellation are within the supplier's control.

Unilateral variation to service/payment terms

In the AOL case certain clauses which permitted AOL to modify the service and the payment terms were found to be unenforceable. By comparison, Schedule 2 of the Regulations states that terms may be unfair if they have the object or effect of "enabling the seller or supplier to alter the terms of a contract unilaterally without a valid reason which is specified in the contract". In its guidance, the OFT states that a right for the supplier to alter the terms of a contract it has agreed with consumers is a strong indication of unfairness. However, such a term may be found to be fair if it is narrow in effect e.g. it only allows variations to reflect changes in law; it can only be exercised for clear and specific reasons that are stated in the contract (and which do not permit the supplier to vary the contract at will to suit the supplier's own interests); and there is a duty on the supplier to give notice of any variation and a right for the consumer to cancel before being affected by the change without any penalty.

The OFT has stated that a clause allowing the supplier to increase the price has a clear potential for unfairness. In the OFT's view, a price variation clause will not necessarily be fair just because it is not discretionary, for example, a right to increase prices to cover increased costs experienced by the supplier. It is thought that, as suppliers are better placed to control changes in their own costs than consumers, these clauses are particularly open to abuse. A degree of flexibility in pricing may, however, be achieved by ensuring the level and timing of any price increase are specified and that they are clearly and adequately drawn to the customer's attention. Terms which permit increases linked to a published pricing index such as RPI are more likely to be acceptable, as long as the details are clearly and adequately provided to the customer.

Data Protection

The Court in the AOL case also struck out a term which stated that subscribers' personal data would be transferred outside the EU and communicated to third party marketers. This was in contravention of EU Data Protection legislation [vii]. Under UK law, where personal data is transferred outside the EEA, it must be afforded "adequate data protection" otherwise the explicit prior consent of the data subject is normally necessary. Obtaining express prior consent is generally also necessary before details are passed on to third party direct marketers. Consent must be freely given and informed.

Conclusion

Although it is ultimately for a court to decide whether or not a term is unfair, the AOL case and the OFT guidance do provide a strong indication of the types of terms that risk being found to be unfair in contracts with consumers. In particular, it is important that consumer contracts avoid creating a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer. It is also important that terms are drafted in clear and unambiguous language as any ambiguity will be construed in favour of the consumer.

Useful URLs

http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi !prod!CELEXnumdoc&lg=EN&numdoc=31993L0013&model=guichett
Directive 93/13/EEC on Unfair terms in Consumer Contracts

http://www.oft.gov.uk/Business/Legal+Powers/Unfair+ Terms+in+Consumer+Contracts/unfair+guidance.htm
OFT guidance on unfair terms in consumer contracts

Nooreen Ajmal and Paul O'Hare

[1] June 2004, decided by a French district court.

[2] Directive 93/13/ EEC on Unfair Terms in Consumer Contracts

[3] Which supersede the Unfair Terms in Consumer Contracts Regulations 1994

[4] Unfair Contract Terms Act 1977

[5] Contained in its guidance - see Useful URL's for a link to the guidance.

[6] See e.g. the Contracts (Rights of Third Parties) Act 1999.

[7] See Directive 95/46/EC (Data Protection Directive) and Directive 2002/58/EC (Directive on privacy and electronic communications)