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Playing Fair - The EU Unfair Commercial Practices Directive

October 2005

Introduction

The EU Commission has recently adopted a further directive aimed at protecting consumers entering into commercial transactions with businesses.

In May 2005, the European Parliament and Council approved Directive 2005/29/EC on unfair business to consumer commercial practices. The Directive, which is due for implementation by EU Member States by June 2007, marks a further layer of regulation with which businesses will need to comply when selling to consumers in the EU.

Scope

The Directive applies to all business to consumer transactions, whether for goods or services, and is specifically aimed at practices which harm consumers’ “economic” interests. It does not cover health and safety, contract law or issues of taste and decency.

The Directive applies principally to pre-contract activities, and to misleading and aggressive marketing and advertising in particular; however, it applies also to any relationship which exists post-sale and which is founded on a commitment made pre-sale, and will cover, for example, after-sales services which a trader offers to make available to consumers.

The Directive marks a departure from previous attempts within the EU to regulate “unfair” practices in business to consumer transactions, in that it applies across all industry sectors. Previous legislation in this area has been aimed at specific industry sectors [i]; as a result, traders have been able to side-step the legislation with relative ease, by changing the products and services in question to bring them outside the scope of the legislation. This will not be possible under the Directive.

Duty not to trade unfairly [2]

The Directive introduces into UK law for the first time a general duty on businesses "not to trade unfairly" when dealing with consumers [ii]

A practice is “unfair” if two conditions are satisfied: the practice must (i) fail to meet a requirement of “professional diligence” (in the language of the Directive, this means falling short of the standard of special skill and care reasonably expected of a trader, commensurate with honest market practices in the trader’s relevant field) and (ii) materially distort consumer behaviour, causing the consumer to take a transactional decision he would not otherwise have taken.

In assessing whether the material distortion requirement has been met, it is generally the impact that the practice will have on an “average” consumer that is relevant; however, where the practice is targeted at particular groups of consumer (children for example), then it is the average consumer in that particular group that will be relevant in assessing this requirement.

The Directive identifies two broad categories of unfair commercial practices: those that are “misleading”, and those that are “aggressive”.

making false claims to be a signatory to a code of conduct.
bait advertising (i.e. advertising at a specified price without disclosing any reasonable grounds the trader may have for believing that he will not be able to make the products available at that price for a reasonable period and in reasonable quantities).
falsely stating that a product will only be available for a very limited time in order to elicit an immediate decision.
presenting rights given to consumers in law as a distinctive feature of the trader’s offer.
using advertorials (i.e. editorial content in the media to promote a product where the trader has paid for the promotion) without making that clear in the content.describing a product as “free” or “without charge” if the consumer has to pay anything other than the unavoidable cost of responding to the commercial practice and collecting or paying for delivery of the item.
creating the false impression that an after-sales service is available in a Member State other than the one in which it is sold.
requiring a consumer who wishes to claim on an insurance policy to produce documents which could not reasonably be considered relevant, and.
including in an advertisement a “direct exhortation” to children to buy (or persuade their parents, or other adults, to buy) advertised products

Impact

While some aspects of the Directive are currently reflected in UK law (notably, the Control of Misleading Advertising Regulations 1988), many are not. As such, the Directive marks a further layer of consumer protection legislation with which businesses in the UK and elsewhere in the EU will have to comply.

According to the Commission, the “only real losers from this Directive will be rogue traders and rip-off merchants who exploit the gaps and differences between national laws to cheat consumers”. While this is certainly correct in relation to many of the specific blacklisted practices which the Directive prohibits, there are aspects of the Directive which will, inevitably, create legal headaches, and increase costs and risk for legitimate businesses.

The information disclosure requirements imposed by Article 7, for example, are likely to create practical difficulties for traders advertising goods and services through media which impose limitations (time and space are the obvious ones) on the information which can be provided through that media. And although the Directive recognises that these limitations exist and need to be taken into account, the Article 7 requirements will, nevertheless, require traders advertising and selling via those media to take difficult decisions as to the amount and format of information that will need to be included in marketing and advertising material.

Likewise, particular care will need to be taken when advertising products and services which are likely to appeal to children to ensure that this does not fall within the blacklisted activity in paragraph 28 of Annex 1 to the Directive. While this does not impose an outright ban on advertising directed at children, it does prohibit including in an advertisement a “direct exhortation” to children to buy products or persuade their parents (or other adults) to buy products for them.

Finally, one of the stated aims of the Directive – the facilitation of cross border trade by the establishment of common EU-wide rules on unfair business to consumer commercial practices – has been somewhat undermined by the lack of a country of origin principle. Earlier drafts of the Directive had contained a country of origin principle under which traders dealing in a particular Member State would be required only to comply with the implementing legislation in that Member State, even when dealing with consumers located in other Member States. This country of origin principle was removed from the final version of the Directive, after opposition from several Member States, who argued that the principle would be unfair to those consumers in countries with higher consumer protection. The removal of this principle means that businesses may now have to comply with the national laws of all 25 Member States. Again, this will significantly increase costs and risk to businesses selling to EU consumers.

The UK government has said that it will issue guidance on the Directive before it is implemented in the UK . From a business standpoint, it is hoped that this guidance will address the difficulties faced by businesses in interpreting and complying with the more general requirements of the Directive and, in particular, the Article 7 information disclosure requirements.

Paul O’Hare

Useful URLs

http://europa.eu.int/rapid/pressReleasesAction.do?reference=MEMO/05/64&format=
HTML&aged=1&language=EN&guiLanguage=en:
EU Commission’s Questions and Answers on the Directive

[1] e.g. the Timeshare Directive and the Package Holiday Directive.

[2]It is, however, worth noting that UK common law already has specific doctrines (e.g. misrepresentation, duress and undue influence) which impose certain procedural and substantive standards of fairness. And UK legislation (in the form of the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contract Regulations 1999) imposes a requirement of “reasonableness” in relation to certain contract terms.