Does the OFT’s Unfair Terms Hub really make unfair contract terms easy?

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In July 2013, the Office of Fair Trading (the OFT) announced the launch of its new ‘Unfair Terms Hub’.  The Hub aims to provide guidance to businesses on the regulations that affect contract terms in business-to-consumer agreements.

Why do we have to be wary of unfair terms?

Whilst any entity that deals with consumers must have regard to the Unfair Contract Terms Act 1977 when preparing consumer product terms and conditions, the Act focuses on terms that exclude or restrict liability.  The Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations) however, regulate unfair terms more generally.  They have wide-scale application, applying:

  • across all areas of business, including financial services
  • to all standard form contracts entered into since 1 July 1995.

The Regulations are of particular importance for businesses within the financial services sector, as the Financial Services Authority (FSA)/Financial Conduct Authority (FCA) makes it clear that compliance with the Regulations is a key element in its ‘Treating Customers Fairly’ policy.  Compliance is a visible indicator that a firm is treating customers fairly and the FSA/FCA expects that firms will have all the necessary systems and controls in place to achieve this.

The FCA is responsible for acting against unfair terms disadvantageous to the consumer.  Where consumer contracts contain unfair terms and fall foul of the Regulations, an organisation will find:

  • any unfair terms will be unenforceable against the consumer
  • it will be exposed to unexpected costs
  • wasted time and resources will be incurred redrafting terms and providing new contracts and
  • reputational damage may result.

What is the Hub?

In developing the Hub, the OFT has therefore recognised the need to help businesses with different requirements, understand and apply the Regulations effectively.  The Hub features ready-to-use, quick guides on what the Regulations are and when they apply, along with practical tips on reviewing and drafting contractual terms.  In addition, previous OFT guidance and examples have been drawn together in one accessible place and made easier to search via the varying ‘index’ options available.   Separation of information into three layers according to the level and depth of the materials (be it ‘Quick’, ‘Detailed’ or ‘Guidance’), has similarly improved accessibility and ease of use.  The ‘Top tips for checking terms’ and ‘Checklist – reviewing your terms’ features are particularly useful resources.  Similarly, the guidance provided for individual business sectors offers a unique and invaluable tool.  Health and fitness clubs, care homes, and credit card providers amongst others have been provided with information:

  • explaining why the OFT considers some standard terms to be potentially unfair and
  • the basis on which the OFT is likely to take enforcement action.

Is the Hub useful for our business?

The Regulations do not apply in relation to:

  • the ‘core’ terms of a contract (that is terms setting the price or describing the main subject matter) provided they are written in plain, intelligible language
  • contracts between businesses
  • contracts between private individuals
  • contracts that individuals have not entered into as consumers
  • terms reflecting provisions required by law and
  • individually-negotiated terms.

The Hub contains a useful flow-chart to help determine whether the Regulations apply in any particular situation.  A contractual term that has not been individually negotiated will be deemed unfair if, contrary to the principle of good faith, it causes a significant imbalance in the parties’ rights and obligations to the detriment of the consumer.  A term will always be regarded as not ‘individually-negotiated’ where it has been drafted in advance and the consumer has no opportunity to negotiate the content.  Most importantly, even where one term or certain aspects have been individually negotiated, the Regulations still apply to the remainder if an overall assessment of the contract indicates that it is – in essence – a standard-form contract.  The onus would be on you as a business to argue and provide evidence that a contract was individually-negotiated.

Particular points of interest on the Hub

Severe penalties

The guidance on the Hub provides a strong reminder that a contract will not be fair and balanced if:

  • it gives one party the power to impose disproportionately severe penalties on the other or
  • misleadingly threatens sanctions over and above those that can really be imposed.

An example given is a term purporting to give the right of entry without consent to private property, whether to repossess goods not paid for on time, to evict, or for any other purpose. The OFT suggests that such a term is trying to permit direct resort to a sanction that can normally and properly only be authorised by court order.

Further, the guidance states that terms purporting to exclude liability for causing property damage in the course of exercising such rights are even less justified. Such a term appears designed to permit wilful or even criminal damage and does not, in the OFT’s view, have any place in a consumer contract.

Financial penalties

The Hub reminds businesses that terms may be unfair if they have the object or effect of requiring a consumer who fails to fulfil his contractual obligations, to pay a disproportionately high sum in compensation.  Examples given indicate that any charge of default interest which is over the value of 3% is likely to be deemed unfair by the OFT.  Similarly, financial penalties should only be levied from the date of default until the consumer remedies the situation.  Any clause stating that goods will not be provided or services will be automatically terminated on the first instance of default by the consumer will be unfair.  The OFT seems to insist that such contractual terms are removed in their entirety from any contract, rather than simply being amended or redrafted to ensure compliance.

Perhaps most important to note, is that the inclusion of wording indicating the charge being made ‘is not a penalty’ does not automatically ensure a business is ‘safe’ from the Regulations.  Disguised penalty clauses will be viewed severely by the OFT.

Variation clauses

A term giving any business the right to change a previously agreed term to its own advantage is unlikely to be fair.  This will be the case if the clause could be used to force the consumer to accept increased costs, new requirements or reduced benefits. It may include terms that give the business the right to change elements of the agreement at its discretion, such as the description or price of the product / service.

A term which merely says that variations will only be ‘reasonable’ or will only be made ‘reasonably’, is unlikely to be any fairer than one which contains no such qualification – unless there can be little doubt in a reasonable consumer’s mind as to what sort of variation, broadly speaking, such wording allows and in what circumstances.  Correspondingly, any provision that states variations can be made in writing (and so attempting to ensure they are not automatically regarded as ‘unfair’) will – in itself – be potentially unfair.

The information provided on the Hub emphasises that a clause allowing the supplier to vary the contract is unfair if it allows changes without giving a valid reason.  If the intention is to permit changes that are more significant, the consumer needs to fully understand and agree to the changes in advance. The contract should clearly outline:

  • what the variation might be made
  • in what circumstances it can be made and
  • how far it can go.

Ultimately a reason will be considered ‘valid’ only if its inclusion in the contract offers real protection to the consumer against encountering unexpected and unacceptable changes. Vague or unclear reasons are unlikely to be valid.  If variation is unavoidable, a consumer should be given the chance to terminate a contract without penalty before they are affected by any new terms.  In any event, no statement of reasons justifies making consumers pay for a product or service substantially different from that initially agreed.

In practice

The Hub is certainly a welcome and much-needed tool for businesses dealing with consumers and entering into contracts with customers, bringing the relevant OFT guidance into one place and in an easy-to-use, readily-accessible format.  If your business deals with consumers, we recommend you make use of this ‘go to’ resource.  Where you have concerns about your standard terms for consumers, be it in existing or new contracts, the Regulatory Group at Walker Morris LLP will be able to advise on whether changes are needed to ensure compliance with the Regulations and associated guidance.