Business to consumer contracts must be written a certain way for them to be binding and enforceable. A written term of a consumer contract or consumer notice must be transparent. Transparency means that the term should be comprehensible and understandable to the consumer. A term or notice that is unfair is not legally binding on consumers. However, this does not prevent the consumer from relying on it if they wish.
The Competitions and Markets Authority and other bodies can take action to stop the use of certain terms or consumer notices which they consider are unfair, breach transparency requirements, or are blacklisted. This article will look at the fairness test in more detail whilst another article will discuss the transparency test.
Part 2 of the Consumer Rights Act 2015 works alongside the Consumer Protection from Unfair Trading Regulations 2008 and other consumer legislation to ensure fairness. This is done by applying fairness and transparency tests to all the terms in consumer contracts used by traders in transactions with consumers. These tests also apply to consumer notices. If the consumer thinks that the wording that the trader wishes to rely on is unfair, they are entitled to challenge the trader. A term is more likely to be deemed fair when it is transparent.
Section 62 of the Consumer Rights Act 2015 states that a term is unfair ‘if, contrary to the requirements of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer’.
There are three elements to the fairness test. These are significant imbalance, consumer detriment and good faith.
Significant imbalance refers to the parties’ rights and obligations under the contract. If a term is so in favour of the business that it tilts the rights and obligations under the contract considerably in its favour it will then be significantly imbalanced. A consumer contract may be considered balanced when both parties have equal rights. However, significant imbalance cannot easily be avoided simply by a mechanical/formal equivalence in rights and obligations. For example, imposing the same financial penalty for cancelling a consumer contract is unlikely to be acceptable as the trader often has no interest in cancelling.
Significant imbalance is not restricted to cases involving a financial burden or cost on the consumer as imbalance refers to the consumers rights and obligations generally. For example, a term that allows the trader to pass on the consumers personal data more widely than is allowed under the Data Protection Act 2018, would be imbalanced as it would take away the consumers legal rights.
A reduced price will not necessarily remove or reduce the effect of an unfavourable imbalance in a contract. For example, a term that allows the trader to keep all pre-payments if the consumer cancels, regardless of the circumstances, is unlikely to be defensible based on the overall service provided being good value for money. In other words, unfair terms do not become fair because the business believes the service is low cost.
Terms that restrict or exclude the consumers normal legal rights will be significantly imbalanced. Along with constraining the consumer from seeking legal remedies to which their rights give rise such as, compelling the consumer to take a dispute to arbitration. Imposing additional obligations or risks on the consumer not seen by law or unreasonably go beyond anything needed to protect the traders’ legitimate interests. For example, imposing extreme financial sanctions on the consumer for breaching the contract.
A term will most likely be consider unfair if it places the consumer in a legal position less favourable than what the law would usually provide if left alone.
A term is unfair if it causes an imbalance as described ‘contrary to the requirement of good faith’. The purpose of the good faith requirement is that the fairness assessment includes ‘an overall evaluation of the different interests involved’.
Good faith represents the principle of ‘fair and open dealing’. Good faith is associated with how contracts are negotiated, drafted, presented, and carried out. Contracts should be drawn up in a way that respects consumers legitimate interests.
To achieve the openness required by good faith, terms should be ‘expressed fully, clearly and legibly, containing no concealed pitfalls or traps.’ Terms which might be disadvantageous to the consumer should be prominent. It should not be assumed that consumers will be able to identify important terms or terms that put them at a disadvantage themselves, especially in long contracts.
Fair dealing has been asserted to require that, in drafting and using contract terms, a trader ‘should not, whether deliberately or unconsciously, take advantage’ of the consumers circumstances to their detriment. This could include, for example, the consumers lack of financial resources, their need for the service or product, their lack of negotiating experience, and their unfamiliarity with the subject matter of the contract.
The requirement not to take advantage of the consumer may be regarded as minimum importance in the significance of good faith.
The Consumer Rights Act requires fairness of a term to be assessed considering, the nature of the subject matter of the contract. All the circumstances existing when the term was agreed. All the other terms of the contract and all the terms of another contract that it depends on.
Exemptions from the fairness test:
The core exemption:
Terms that deal with the main subject matter of the contract or the adequacy of the price, provided they are transparent and prominent. This exemption does not extend to consumer notices. The main subject matter is terms that apply to the core of the contractual relationship.
Terms that have the effect of those on the Grey List (terms that may be unfair) cannot fall within the exemption.
The mandatory statutory or regulatory exemption:
Section 73 of the Consumer Rights Act 2015 provides an exemption from both the fairness and transparency test, for contract terms and notices that reflect mandatory statutory or regulatory provisions and the provisions or principles of international conventions.
It covers wording that is included in contracts and notices in line with the requirements of parliament, or the authorities which regulate them under the powers granted by parliament, or under international obligations.
The exemption needs to take into account the main purpose of the Council Directive 93/13/EEC on unfair terms in consumer contracts, which is to protect consumers as the weaker party from one sided contracts. It is not the intention of this exemption to permit unfairness or lack of transparency.
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