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Unfair contract terms: new guidance for businesses published

The Competition and Markets Authority publishes new guidance for businesses on unfair contract terms.

In October 2015, the Consumer Rights Act 2015 (the CRA) came into force which heralded a much needed change in UK consumer protection laws. Previously, consumer protection laws stemmed from a patchwork of legislation including the Unfair Terms in Consumer Contracts Regulations 1999, the Unfair Contract Terms Act 1977, the Sale of Goods Act 1979 and the Enterprise Act 2002.

The CRA consolidates this fragmented approach and makes it easier for consumers to understand their rights and businesses to understand the extent of their obligations. As part of the general reform of consumer protection laws, the responsibility of the Office of Fair Trading for enforcing consumer protection laws in relation to unfair contract terms was transferred to the Competition and Markets Authority (CMA) on 1 April 2014.

Where are we now?

A term in a consumer contract or notice is unfair if it creates a significant imbalance in the rights of the parties, to the detriment of the customer, and is contrary to a requirement of good faith. Under the CRA, certain terms are automatically deemed to be unfair (the “black list”) whilst a number of examples are given of other terms that are potentially unfair (the “grey list”).

The CMA has recently published a new series of short form guidance notes on unfair terms. These guides are aimed at small businesses and complement the guidance notes published last year. The guidance notes cover:

  • deposits, advance payments and cancellations;
  • excessive charges and disproportionate sanctions;
  • cancelling a contract – when and how;
  • responsibility if things go wrong;
  • changing the terms of a contract;
  • subscriptions and automatic rollover; and
  • other terms that may be unfair.

What is unfair? A brief overview of the CMA Guidance for Businesses

1. Deposits and advance payments

Deposits in themselves are not generally unfair, but how businesses deal with deposits when customers cancel could be unfair. Where a substantial deposit has been made, making that deposit non-refundable regardless of the reasons for cancelling is likely to be regarded as unfair.

2. Excessive charges and disproportionate sanctions

Any terms that impose excessive or disproportionately high charges for breach of contract or cancelling a contract are likely to be regarded as unfair. This does not mean that customers will not be liable for financial losses that businesses incur as a result of a customer’s breach but the amounts must be reasonable bearing in mind the actual losses. Businesses also need to be upfront about such charges, when they are paid and how they are determined.

3. Cancelling a contract – when and how

In long term contracts, preventing customers from cancelling or making their cancellation subject to long notice periods is likely to be unfair. Unfair terms relating to cancellation don’t just relate to a customer’s right to cancel but also relates to terms giving businesses the right to cancel. Businesses should consider what they are offering customers and the impact on the consumer of any cancellation is likely to be when reviewing their cancellation rights. If you have to cancel a contract due to a product recall issue then the right to cancel might be fair as long as your refund the customer but cancelling a contract without good reason is likely to be unfair especially where this could have a significant impact on the customer.

Please note that the right for consumers to cancel should be in addition to a customer’s statutory right to cancel a distance or off premises contract.

4. Responsibility if things go wrong

Under the CRA and as per the previous legislation, there are certain standards that are enshrined as statutory rights which consumers can rely on such as goods being of satisfactory quality and fit for purpose. Any term that seeks to exclude these rights from applying or any terms that tries to exclude liability for death or personal injury as a result of something that was the business’ fault will automatically be regarded as unenforceable. It is also common for businesses to try to exclude liability for things if they go wrong but a business’ right to do this will only be permitted as long as it is not unfair.  Unfair exclusions could include limiting statutory rights for goods which are on sale’ or excluding liability for delays.

5. Changing the terms of a contract

Blanket rights to change the terms of any contract are likely to be unfair. This could involve changing the terms regarding specific terms such as price, when/how delivery takes place or changing the description of the product but would also include a general permission to make changes to the terms and conditions at any time without the need to obtain permission from the customer.

6. Subscriptions and automatic rollover

If a business offers a subscription service or other long standing rolling type of agreement, for example, mobile phone contracts, insurance contracts, then businesses should make it clear how the subscription will be renewed, provide renewal reminders and allow customers to cancel without having to pay cancellation costs or give lengthy notice periods to cancel. Automatic renewals without sufficient reminders are likely to be regarded as unfair terms as are long notice periods or cancellation fees.

7. Other terms that may be unfair

The CMA has listed a number of potentially unfair clauses here including terms which give the business the right to determine disputes, any terms that seek to prevent customers from claim in the courts, terms which state that the business will not be liable for statements made by its sales representatives, terms that impose excessive burdens or requirements on customers

What does this mean for business owners?

The guidance notes make clear what the CMA will regard as being unfair terms. The guidance is not exhaustive and is not a substitute for the legislation and so it is imperative that businesses are mindful of these matters and review their contracts with customers to make sure that their terms and conditions do not contain such offending items. One of the main takeaways from the guidance is that all businesses should try to adopt an approach that is clear, simple and fair. This, rather than draconian terms, is likely to be a business’ greatest protection when faced with a dispute for the simple reason that offending terms may not be enforceable and could even result in enforcement action by the CMA, Trading Standards or other regulatory bodies.

Disclaimer: This article is produced for and on behalf of White & Black Limited, which is a limited liability company registered in England and Wales with registered number 06436665. It is authorised and regulated by the Solicitors Regulation Authority. The contents of this article should be viewed as opinion and general guidance, and should not be treated as legal advice.

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