Consumer Contracts - Fair Grounds for Complaint?

The Unfair Terms in Consumer Contract Regulations 1999 are designed to protect consumers against ‘unfair’ contractual clauses.

The Regulations apply where a contract has been concluded between a business seller or supplier, and a consumer. In this context, ‘consumer’ means any natural person (so it excludes, for example, a limited company or partnership) who is acting for purposes which are outside their trade, business or profession.

The Regulations apply where a contractual term has not been individually negotiated. A term is generally assumed not to have been individually negotiated where it has been drafted in advance and the consumer has been unable to influence the substance of the term. So the standard terms in your sale or supply contracts will usually be subject to the Regulations.

So what makes a contractual clause ‘unfair’?

A clause, contrary to a requirement of good faith, which causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer, will fall foul of the Regulations.

As regards the requirement of ‘good faith’ a court would look at things like the strength of the parties’ respective bargaining positions, and whether the consumer was given any inducement to agree to the term.

If a clause is found to be unfair then it is likely to be held to be void. The rest of the contract will continue to apply, provided that if it is capable of doing so without the unfair term. The effects of that may be something of a lottery, depending on how the rest of the contract works with the offending clause deleted. On the basis that the deleted clause was intended to benefit or protect your business, being committed to the rest of the contract, without that clause, could be the last thing you need.

So if the risk of having contractual clauses held void creates uncertainty and risk for your business, can any steps be taken to avoid it?

One measure, often used by businesses, is to require customers to sign a declaration confirming that they have read and understood the contract and that they agree to its terms. However, simple ‘read and understood’ declarations may not now be reliable. The Office of Fair Trading has expressed concern that including a declaration of this kind effectively requires consumers to confirm that the contractual conditions have been met by the business, whether they have or not.

Sign-off declarations should therefore go one step further than simply confirming that the consumer has read and understood the contract. The Office of Fair Trading says that the declaration must be clear and understandable, and the customer must be given a fair opportunity to read it.

In a recent decision involving a customer sign-off declaration, in the particular circumstances of that case the Financial Services Authority required a business to use a new term - “This is our standard client agreement upon which we intend to rely. For your own benefit and protection you should read these terms carefully before signing them. If you do not understand any point please ask for further information.”

So: consider reviewing your current customer declarations to reduce the risk of your not being able to rely on clauses because of the consumer arguing that they did not understand the contract.

As always, take professional advice if there is any doubt as to the effectiveness of a declaration – or, for that matter, about terms of business generally and their incorporation into your contracts.

This bulletin is not intended to be comprehensive or to provide specific legal advice. It should not be relied upon in the absence of specific advice given in relation to particular circumstances.


For further information on this or any related topic please contact Philip Cuerden or Carina Sparkes.