Hugh Beale Unfair Terms in Contracts: Proposals for Reform in the UK

ABSTRACT. The English and Scottish Law Commissions have made radical proposals for simplifying UK law on unfair terms in consumer contracts, combining the Regulations that implement the Directive and the earlier legislation into a single instrument that is to be written in language that would be clear and accessible to consumers and businesspeople. The article discusses some of the difficult policy choices involved in combining the different approaches of the two existing instruments, what is needed in order to make the legislation understandable to the lay person, and the extent to which the case of Commission v The Kingdom of the Netherlands requires Member States to use the language of the Directive when implementing it. The Law Commissions also proposed to extend the broader controls found in the Directive to business-to-business contracts, but the proposals did not find favour with the business community.

The Law Commission for England and Wales and the Scottish Law Commission published a joint Consultation Paper on Unfair Terms in Contracts in August 2002 (Law Commissions, 2002). The Consultation period closed on November 8, 2002. The author of this paper is a member of the Law Commission for England and Wales and therefore one of the authors of the commission paper. The origin of the project lies in the history of unfair terms legislation in the UK. This is described briefly in the Consultation Paper. In essence, the first wide-ranging legislation over unfair terms was the Unfair Contract Terms Act 1977 (UCTA). This followed an earlier Report of the Law Commissions but the legislation was to some extent different in substance to what the Law Commissions had recommended and had a different title. The title of UCTA is positively misleading: It applies only to exclusion and limitation of liability clauses,1 broadly defined, and to indemnity clauses in consumer contracts. Thus other types of term – for example clauses allowing the supplier to increase the price payable – were not subject to any statutory control under the Act.2 In addition, some types of contract, for example contracts of insurance, were altogether exempted from the operation of UCTA. When the Directive on Unfair Terms in Consumer Contracts3 was implemented, UCTA was not amended. Instead, Regulations were Journal of Consumer Policy 27: 289–316, 2004.
2004 Kluwer Academic Publishers. Printed in the Netherlands.

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made under powers given by European Communities Act 1972, section 2. The Unfair Terms in Consumer Contracts Regulations 1994,4 and the Unfair Terms in Consumer Contracts Regulations 19995 (UTCCR) that subsequently replaced them, are largely a word-for word ‘‘copy-out’’ of the Directive. The legislative approach of implementing the Directive via freestanding Regulations that ‘‘copy out’’ the Directive means that there are two overlapping pieces of legislation, as UTCCR apply to exclusion and limitation of liability clauses as much as to other terms. For example, some clauses which would appear to be valid under UTCCR provided they are ‘‘fair’’ are in fact of no effect at all as a consequence of UCTA; others are subject to the ‘‘reasonableness test’’ under UCTA, but will be valid only if they satisfy both that test and the test of ‘‘fairness’’ under UTCCR. Moreover, the way in which the two pieces of legislation operate and their concepts, definitions and terminology differ. This complexity caused considerable criticism from academics (e.g., Hondius, 1997; Reynolds, 1994). In addition the Department of Trade and Industry received complaints from businesses and consumer groups about the difficulties caused by the existence of the two regimes. After receiving a preliminary report from an outside consultant,6 the Department asked the Law Commissions to consider the desirability and feasibility of: (1) Replacing the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999 with a unified regime which would be consistent with Council Directive 93/13/EEC on Unfair Terms in Consumer Contracts; (2) Extending the scope of the Unfair Terms in Consumer Contracts Regulations (or the equivalent in any legislation recommended to replace those Regulations in accordance with (1) above) to protect businesses, in particular small enterprises; and (3) Making any replacement legislation clearer and more accessible to the reader, so far as is possible without making the law significantly less certain, by using language which is non-technical with simple sentences, by setting out the law in a simple structure following a clear logic and by using presentation which is easy to follow (Law Commissions, 2002, para 1.1).

The Consultation Paper explains the background to the legislation, including a ‘‘law and economics’’-type explanation of why unfair terms are such a problem;7 and it gives an account of the principal differences between UCTA and UTCCR.8 It then proposes a new model for consumer contracts, attempting to make the legislation clearer and more accessible to the reader. Unusually for a Law Commission Consultation Paper, it includes a partial draft of the legislation to show what we have in mind. It then discusses what

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controls should apply to business-to-business contracts and various other matters. In this paper I will say something about each limb of the project, but I will concentrate on the interaction of the first and third limbs. As we will see, there is a certain tension between the two. The impact of the decision of the European Court of Justice in Commission v The Kingdom of the Netherlands9 must also be taken into account. Certainly it seems difficult to defend having two separate and overlapping pieces of legislation. It might also seem that combining the two is largely a technical matter. In fact there are some quite difficult issues of policy. Some of these are questions of substance; others relate to the form of the new legislation. I will deal with consumer contracts and business-to-business (B2B) contracts separately.

CONSUMER CONTRACTS

Issues of Substance There are a number of issues of substance to be considered. The first is whether to preserve existing controls that go beyond the requirements of the Directive. UCTA applies to a narrower range of potentially unfair terms than do UTCCR, but in its effect is often much more draconian. For example, certain clauses in consumer contracts are simply of no effect in any circumstances. Thus in a consumer contract for the sale or supply of goods, the seller or supplier is simply unable to exclude or limits its liability for breach of the implied terms as to title, description, or fitness for purpose.10 In contrast, UTCCR merely applies a fairness test. A second example is the burden of proof. UCTA applies a similar test to those exclusion or limitation clauses that are not made automatically void – the terms will be of no effect unless they are ‘‘fair and reasonable’’11 – but then the burden is on the business to show that the term is reasonable.12 Under UTCCR (and the Directive) it appears that the burden remains on the complainant,13 though the ECJ has held that a court may strike down an obviously unfair term on its own motion.14 At an early stage, it was decided to make the provisional proposal that existing consumer protection should not be diluted in any significant way (Law Commissions, 2002, paras 4.21–4.29). Thus the new legislation would have to contain provisions simply invalidating

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certain types of clause. But it is not possible to apply this approach to clauses in general, so the provisions making certain clauses of no effect in any circumstances would have to run alongside a general fairness test for other types of clauses. The approach of preserving existing consumer rights is of course legitimate because the Directive is a ‘‘minimum harmonisation’’ directive.15 It can be argued that it is nonetheless undesirable to retain such rules because we should aim at harmonisation across the single market. I have argued elsewhere that absolute harmonisation of rules of contract law is unnecessary and undesirable. I did say, however, that we need to harmonise to remove legal ‘‘traps’’ for those attempting to do business across borders (Beale, 2002). I have sometimes used the analogy of driving a car across Europe. It is not necessary for every country to regulate every aspect of using a vehicle in the same way. However we need to be able to have some confidence that the traffic rules are sufficiently the same in each country that we do not need to consult the local legislation each time we cross a border. Might these additional protections for consumers not constitute a trap for businesses from other EU States trying to penetrate the UK market? To me, this is a question of ensuring publicity. A trap is dangerous because it is concealed. If the difference is made obvious, there is not the same risk to businesses or consumers. To pursue the motoring analogy, it is acceptable to have different speed limits in different countries – and even for a country to impose a speed limit on roads such as motorways where other countries have no limit – provided the limits are clearly publicised. And where better to publicise the more stringent provisions in favour of consumers than in the legislation governing unfair terms in general?16 Different Approaches: Negotiated Terms Difficult questions of policy can also be caused by the differing approaches of the two pieces of legislation. UTCCR apply only to those terms that were not individually negotiated. In contrast, for consumer contracts the controls imposed by UCTA apply whether or not the clause was negotiated. Which approach should the combined legislation take? Should all the controls over negotiated clauses be removed? Or should it replicate the present position, so that any term that is presently within UCTA should have to be fair whether or not it was

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negotiated, but those outside UCTA but within UTCCR only if they were not individually negotiated? Or should the legislation apply to all terms (except the ‘‘core’’ terms, i.e., the definition of the main subject matter and the adequacy of the price17) whether negotiated or not? The first option would go against the policy of not diluting existing consumer protection and may be discarded. The second would be consistent with that policy. The Consultation Paper’s provisional proposal, however, is for the third. This is for two reasons. Firstly, we think that there is a good case for controlling ‘‘non-core’’ terms in consumer contracts whether or not they were negotiated. Negotiation may ensure that the consumer knows the clause exists, but unless she has a reasonably full understanding of what the term means and the impact the term is likely to have on her, the negotiation will be pretty meaningless even if she is offered any choice. The number of cases in which consumers are able to negotiate in any meaningful way a term that is not a ‘‘core’’ term will, we think, be very small (Law Commissions, 2002, paras 4.42–4.54). Secondly, to have to reproduce the existing distinction between clauses which exclude or limit liability and other unfair terms would make the new legislation very complex to draft and apply (Law Commissions, 2002, para 4.43). The desire to keep the new legislation as simple as possible has also led us to propose abandoning various restrictions that apply to UCTA but that do not apply to UTCCR. For example, UCTA does not apply to ‘‘cross-border’’ contracts for the supply of goods. UTCCR apply whenever the contract is subject to the law of part of the UK (i.e., English or Scots law). Should the provisions that render certain clauses in supply of goods contracts of no effect at all apply to cross-border contracts too, or should they be limited? Some of these exclusions have had to be abandoned in any event in relation to contracts that fall within the Sale of Consumer Goods Directive (SCGD). As far as cross-border sales contracts are concerned, the controls must apply since these are covered by SCGD, and Article 7(1) requires Member States to prevent sellers from contracting out of their obligations as to conformity. It would be possible to exclude other cross-border contracts for the supply of goods from the application of the new legislation, but in our view this would be undesirably complex even if it were justifiable on the merits (Law Commissions, 2002, para 4.82). Subsequently the Government has taken a similar line by extending many of the amendments to existing legislation aimed at implementing the SCGD to contracts for the

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supply of goods other than sale, even though the Directive does not require this.18

Issues of Form The tension between the first and third limbs of the project comes with the question of form. It seems desirable that legislation, particularly legislation which applies to consumers and to small businesses, should be as accessible as possible to the lay reader (Law Commissions, 2002, para 4.12). As the Consultation Paper states: The Law Commissions are under a statutory duty to keep the law under review for a number of purposes, including its simplification. We believe that an important aspect of our duty is to try to make the law more accessible. This means accessible not only to lawyers but, particularly where the law has an impact on the day to day life of individuals or the day to day operation of businesses, to the individuals or businesses concerned. Legislation on unfair terms is an example. It is relevant to businesses and consumers when contracts are being made, not just when a dispute has arisen and litigation is contemplated. That the legislation should be comprehensible to the business people and to the consumers affected is almost certainly unattainable in practice. However, we think that the legislation should at least be capable of being understood by consumer advisers, many of whom are not legally qualified, and by any person in business who has some knowledge of contracting (Law Commissions, 2002, para 2.35).

This suggests that the paramount aim of the new legislation should be to be clear. It must also, of course, implement the Directive; but we think that it should not follow the wording of the Directive if some other form would be significantly clearer to the reader. This approach is not uncontroversial, and the following section assesses the competing arguments.

The Case For and Against ‘‘Copy-Out’’ Implementation The first objection to our preference not to follow the wording of the Directive if some other form would be significantly clearer is that it is better to follow the Directive as closely as possible to avoid any chance that the Directive is not implemented correctly. This was undoubtedly the reason for the ‘‘copy-out’’ approach of the 1994 and 1999 Regulations. It is perhaps not necessary to keep the implementation legislation separate from the rest, as is the case at present, but it would certainly suggest that any existing legislation should be amended to conform to the language of the Directive rather than a new model being adopted.

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I think there are a number of reasons for rejecting this approach. One is that it is unnecessary. I do not think that the Directive is so unclear that its meaning cannot be worked out (albeit with difficulty) and ‘‘translated’’ into other words that fit the desired model. If there is uncertainty in its meaning, any danger of non-implementation can be avoided by adopting the interpretation most favourable to the consumer and enacting that. Such an approach is entirely legitimate because the Directive is a minimum harmonisation measure. Another reason against the approach is that it is undesirable, because it would remove any possibility of clarifying the meaning of the Directive. If, for instance, the words of the Directive in effect impose certain requirements that are not stated and may not be obvious at first sight to the reader, it seems to me that we should spell these out in the implementing legislation to make the meaning accessible. Given the legislative ‘‘process’’ that produced it, the articles of the Directive are surprisingly clear. Nonetheless there are a number of concepts that could be expanded or that are far more complex than appear at first sight. Let me give two examples: the factors to be taken into account in deciding whether or not a term is fair, and the exemption for core terms. Lists of Factors What should be taken into account in deciding whether a term (in particular one that does feature on the Indicative List) is unfair? The test in the Directive and therefore UTCCR is quite brief. Regulation 6(1), mirroring article 4(1), provides simply: the unfairness of a contractual term shall be assessed, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent.

UCTA, in contrast, contains a number of guidelines that the courts apply regularly in deciding how to apply the reasonableness test.19 These guidelines are, I believe, widely thought by English lawyers to be a useful way of reducing the uncertainty involved in what amounts to a statutory discretion to declare exemption and limitation of liability clauses ineffective. Consistent with our approach of giving as much guidance to consumer advisors and businesses as possible, we

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provisionally proposed to include guidelines in the new legislation. We also proposed expanding the existing guidelines to make them clearer and more informative. The proposed list is contained in Schedule 1 of the draft Bill. Matters relating to the substance and effect of a term 1. The following are matters which relate to the substance and effect of a term – (a) the balance of the interests of the parties, (b) the risks to the party adversely affected by the term, (c) the possibility and likelihood of insurance, (d) any other way in which his interest might be protected, (e) the extent to which the term (whether alone or with other terms) differs from what would have applied in the absence of the term. Matters relating to the circumstances existing when a contract was made 2. The following are matters which relate to the circumstances existing when a contract was made – (a) the knowledge and understanding of the party adversely affected by the term, (b) the strength of the bargaining positions of the parties, (c) the nature of the goods or services for which the contract was concluded, (d) the other terms of the contract, (e) the terms of any other contract on which the contract is dependent. 3. (1) The following matters are relevant to the knowledge and understanding of the party adversely affected by the term – (a) any previous course of dealing between the parties, (b) whether the party adversely affected knew of the term, (c) whether he understood the meaning and implications of the term, (d) what other persons in a similar position to him would normally expect in the case of a similar transaction, (e) the complexity of the transaction, (f) the information given to him before or when the contract was made, (g) whether the contract was transparent, (h) the way that the contract was explained to him, (i) whether he had a reasonable opportunity to absorb any information given, (j) whether he took professional advice, or it was reasonable to expect that he should have taken such advice, (k) whether he had a realistic opportunity to cancel the contract without charge. (2) The matters mentioned in sub-paragraph (1)(f) to (k) are particularly relevant where the transaction is complex. 4. The following matters are relevant to the strength of the bargaining positions of the parties – (a) whether the transaction was an unusual one for either of the parties, (b) whether the party adversely affected by the term was offered a choice over the term, (c) whether he had an opportunity to seek a more favourable term, (d) whether he had an opportunity to enter into a similar contract with other persons, but without that term, (e) whether there were alternative means by which his requirements could have been met,

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(f) whether it was reasonable, given his abilities, for him to have taken advantage of any offer, opportunity or alternative mentioned in subparagraphs (b) to (e).

Reaction to this has been mixed. Some have welcomed the approach (though with possibly reservations about particular factors). Others have disagreed. Perhaps surprisingly, when before publication we spoke to the Office of Fair Trading, the principal body in the UK empowered to act to prevent the use of unfair terms, the OFT were not convinced of this approach; and it may be that they remain unconvinced. In essence they argue that to include a list of factors may make it too easy for a business to argue that its clause should not be banned because, although it may be harsh in substance, it was presented in a fair way (Law Commissions, 2002, para 4.97). I think this represents a tension between those dealing with individual cases and those dealing with prevention of the use of unfair terms. In an individual case the procedural fairness of the transaction is often very relevant – a term that in substance may well be fair provided that it is clearly explained to the consumer may be unfair if the consumer is not given a chance to find out about it. In preventive procedures, however, it is normally the substance of the terms that is in question. They are frequently concerned with terms that are unfair in substance whatever procedure is used to make the contract. Provided that the legislation makes it clear that a term may be unfair purely on grounds of substance, I do not think there should be a problem. In a sense, to include such a list of factors does not raise directly any danger of non-implementation; we are merely adding to the words of the Directive, not detracting from them. There may be an indirect danger, if the factors point in a different direction from that indicated by the words of the Directive. I do not believe that is the case, but even if it were, the formula is flexible: The court may take into account all the circumstances and its only obligation is to apply a general test that is intended to be closely modelled on that in the Directive.

‘‘Core’’ Terms My second and perhaps more telling example for the need to go beyond the words of the Directive relates to the exemption for the socalled ‘‘core’’ terms or, more accurately, the definition of the main subject-matter and the adequacy of the price. Taking first the main subject-matter, it seems that by definition the exemption does not

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apply to terms that do not define the subject-matter but that are procedural – for example, governing the manner or time in which claims must be made. We also think that it excludes clauses that come into play only in certain contingencies, such as when the consumer is in default. In the only case of the UTCCR to reach our highest courts, both the Court of Appeal and the House of Lords agreed with the argument advanced by the Director-General of Fair Trading that the exemption is limited to those terms ‘‘which define the parties’ rights and obligations in the due performance of the contract.’’20 However, whether a term merely defines the subject-matter of the bargain and is therefore exempt must also depend on how the term is presented to the consumer. Take an insurance policy that is to cover a traveller’s personal possessions. If the policy is presented as if it were one to cover theft of property taken on holiday generally, but there were a clause in the ‘‘small print’’ excluding liability in any case in which the property were left unattended in any place, we think it is inconceivable that the limiting clause should be taken as merely defining the main subject-matter. It might be otherwise, however, if the policy had been presented as one to cover ‘‘hand luggage kept in the traveller’s personal possession’’ (cf. Law Commissions, 2002, para 3.23). This is a generalisation of the view expressed by the OFT: In our view, it would be difficult to claim that any term was a core term unless it was central to how consumers perceived the bargain. A supplier would surely find it hard to sustain the argument that a contract’s main subject matter was defined by a term which a consumer had been given no real chance to see and read before signing (Office of Fair Trading, 1996, para 2.26, quoted in Law Commissions, 2002, para 3.23).

In effect, the position is actually rather similar to that which in some circumstances applies under UCTA. Section 3 of UCTA applies a wide approach to the type of clause it should control, aiming to include clauses that do not, in a technical sense, exclude or limit the supplier’s liability but that define the supplier’s obligation in a surprisingly broad way. Section 3(2)(b)(i) applies the reasonableness test to clauses that purport to allow the business to perform in a way which is ‘‘substantially different’’ from what was ‘‘reasonably expected.’’ We think that it is important to make clear in the legislation that the exemption for the main subject-matter is limited in a similar way, so that businesses know what they should do (Law Commissions, 2002, paras 3.21–3.26, 4.55–4.60). The draft Bill annexed to the Consultation Pa-

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per provides in clause 6(3) that the general test of fairness does not apply: to a term – (a) which is transparent, (b) which sets out the main subject matter of the contract, and (c) which is not substantially different from what the consumer reasonably expected.

Equally, we think that exemption for the ‘‘adequacy of the price’’ needs further clarification. The Directive does not require that the consumer should be able to challenge the adequacy of the price, but what is ‘‘the price’’? We think that it covers only the amount of the ‘‘main price,’’ not that in a subsidiary term. It does not necessarily include, for example, a higher rate of interest that is payable on default, nor a higher rate that will be payable only in certain circumstances, e.g., if the consumer seeks to repay early. But that may depend on how the ‘‘deal’’ was presented to the consumer in any documentation and any oral statements. If the term is presented ‘‘up front’’ – if, for example, the consumer is told explicitly that the deal is ‘‘x% for 2 years and then y% for 2 years; you can pay off early but then you must make your payments up to z%’’ – we do not think that the consumer is entitled under the Directive to challenge either having to make the payment or the amount. But if the rate increase were ‘‘hidden away’’ in the small print, we think the consumer is entitled to challenge both having to make the extra payment and the amount (Law Commissions, 2002, paras 3.27–3.33, 4.61–4.68). We have tried to capture this idea in the draft Bill. Clause 6 goes on to provide: (4) Nothing in this section enables the adequacy of the price or remuneration payable under a contract to be questioned in any legal proceedings if the price or remuneration – (a) is transparent, (b) is not payable under or because of a subsidiary term of the contract, (c) is not payable in circumstances which are substantially different from what the consumer reasonably expected, and (d) is not calculated in a way which is substantially different from that.

Some consultees have expressed opposition to these provisions on ‘‘core’’ terms but it appears that their opposition is based on a misapprehension, namely that we are extending the reach of UTCCR. In fact this is not a matter of reform but one of clarifying the existing position. I am glad to say the majority of consultees have welcomed the idea.

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The Risks of Not Copying Out Of course there is a risk in not copying out the Directive word-forword. It is possible that we will misinterpret it and fail to implement it. That might leave us open to, first, a Francovich-type action21 by the consumer who has lost out and secondly, to an infringement procedure initiated by the Commission pursuant to Article 226 EC. It would also mean that we might have to amend the legislation to accord with the correct interpretation. Are these risks worth taking? As to the Francovich-type action, I think the chances are minimal. First, it will be seldom that the consumer cannot be safeguarded by an interpretation of the legislation in the light of what the Directive is now thought to require; and secondly the small sums that are usually involved makes this type of action unlikely. Infringement procedures and a need to revise the legislation are more real threats, particularly if the case of Commission v Kingdom of the Netherlands22 applies. The European Court of Justice agreed with the view of the Advocate-General that it is not sufficient for the Member State to rely on a ‘‘schematic’’ interpretation of its legislation in order to fulfil the Directive. I am not quite sure how the reasoning of the Court applies to English law in this context; this is an argument to which I will return later. But if it does apply, we cannot rely on the courts interpreting our new legislation in a way that conforms to the requirements of the Directive; if a mistake were made, we would have to amend the legislation. It is a real risk, but it must be evident that I think it is one worth taking if we can achieve significantly greater clarity. The legislation must also comply with any future interpretation of the Directive. I am fascinated by the prospect that the European Court of Justice might reach an interpretation of the Directive that is not evident from its wording – for example, an interpretation of what amounts to a ‘‘contract’’ that would not be evident to readers from many Member States (e.g., Whittaker, 1999, Ch. 15-020; 2000). I suppose the Directive would then have to amended, because otherwise it will fail to ‘‘achieve the clarity and precision needed to meet the requirement of legal certainty … particularly … in the field of consumer protection.’’23

The Language of the Directive One or two consultees have argued that, even though we do need to copy out the Directive, it would be wise to follow its wording. For example,

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they would argue that we should retain as the general test of fairness whether the term, ‘‘contrary to the requirements of good faith, causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’’ rather than use some equivalent test such as whether the clause is a fair and reasonable one. The principal reason given is that this will mean that any interpretation given by the European Court of Justice as to the meaning of the Directive will be directly applicable to the interpretation of our legislation. This argument certainly has weight and we will have to consider it carefully. However my own view is that it can be given too much weight. The legislation must of course comply with the Directive, and must be drafted accordingly. The Directive thus acts as a floor. If there is any doubt about what the Directive requires, we can give the consumer greater protection than the Directive; and we may wish to do so anyway. So that the question is then, what does the legislation mean: Does it go beyond what is required by the Directive, or give the consumer only what the Directive requires? Interpretation by Nationals of Other Member States In Commission v Netherlands the European Court of Justice states that it is particularly important that the legal position under national law should be sufficiently precise and clear, so that individuals are made fully aware of their rights, when the Directive in question is intended to accord rights to nationals of other Member States.24 I find this argument striking and I will return to it. It does not, however, bite here. We are doing our very best to ensure that the consumer will understand her rights, whatever her nationality. The fact that they are not stated in the terms of her own country’s law, or even of the Directive, may in fact help the consumer because it should make the rules easier to apply to the contract terms that she is likely to encounter in the UK. It should also make it easier for her to argue her case with the business if the business understands its obligations to her and her rights under the legislation. The Decision in Commission v Kingdom of The Netherlands If I may digress slightly, I would like to raise doubts about some possible implications of the decision in Commission v Netherlands. The European Court of Justice held that the Netherlands had not correctly

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implemented the Directive when it did not provide in its legislation provisions equivalent to Arts. 4(2) and 5. Art. 4(2), it will be recalled, requires that the exemption for ‘‘core’’ terms should apply only ‘‘in so far as these terms are in plain intelligible language.’’ Art. 5 requires that where there is doubt about the meaning of a term, the interpretation most favourable to the consumer shall prevail. I will not discuss whether or not the articles of the Dutch Civil Code do or do not provide this or better rights for the consumer, but concentrate on the last argument in the Court’s judgment. This is the one to which I referred earlier: It is not sufficient for the Member State to rely on a ‘‘schematic’’ interpretation of the legislation in order to fulfil the Directive. I am not sure what ‘‘schematic’’ means, but in its judgment the ECJ says that even if a ‘‘settled’’ case-law of the Member State interprets the provisions in a way that conforms, that is not sufficient. I do not know what status ‘‘settled’’ case-law would have in the Dutch legal system. If it means no more than what I understand by the French ‘‘jurisprudence constante’’ – that there is a tradition that a provision is interpreted in a particular way, but courts are in principle free to depart from that tradition – then I can see and accept the argument. If, however, it means that no ‘‘settled’’ case-law will suffice, then I am worried. The status of decisions interpreting a statute in England is very different – they are treated as binding to the same extent as other case law. Thus decisions interpreting legislation must be followed by lower courts or, in the case of a decision in the Court of Appeal, by the Court of Appeal itself. Will that satisfy the requirements of the Directive, or is the European Court suggesting that the rule must be put into statutory form if it is to meet the needs of legal certainty and to ensure that consumers are sufficiently aware of their rights? That would seem to have major implications for the common law system as a whole. Further, I am not entirely sure what it is that the Court considers should be incorporated into legislation. The judgment refers to the need ‘‘to safeguard the citizen in his role as consumer when acquiring goods and services under contracts which are governed by the laws of Member States other than his own.’’25 Why is the Court particularly concerned with the national from another Member State, as opposed to citizens of the State itself? If this means no more than that citizens of other States are likely to find it even harder to discover their rights than those supposedly familiar with ‘‘their own’’ law, and that this strengthens the case for making the legislation clear, I agree. But it may be read as implying that the legislation must show clearly that the

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rights enshrined in the Directive are also part of the law of each Member State, and that in turn might be taken to imply that the language of the Directive must be used. For a number of reasons I very much hope that this is not the case. I would argue, first, that in the particular context of unfair terms, to require the law to incorporate a more or less faithful version of the Directive seems pointless. Terms are judged unfair against the background of the provisions that would apply in the absence of the unfair term. Save for limited provisions in the case of sales, there is no Directive requiring Member States to give the consumer any positive rights. It would make little sense to require Member States to incorporate the negative – the controls over terms that alter the consumer’s rights – without having also to incorporate the positive – what those rights are. Secondly, such an approach is undesirable, because it limits the Member State to implementing the Directive more-or-less in a copyout fashion, which may make it very hard for the citizens of the Member State to understand. Thirdly, I would argue that the approach would be misguided, because it is the law of the Member State with which the non-citizen has to deal. What is important is that the operation of the Directive’s requirements in the law of that State are clear to the non-citizen as well as to the citizens of the State. Lastly, I think it is not necessary that individual consumers know exactly what their rights are. I think it is enough that they can be confident that, in whichever Member State they shop, they will have at least the rights assured by the Directive. What exactly those rights are will need to be determined only in a very small percentage of cases. If and when the need arises, this will be discovered for the consumer by a lawyer or consumer advisor, who can be expected to interpret the national legislation correctly provided it is clear. It does not need to include the words of the Directive to achieve that. I do not think the European Court in Commission v Netherlands in fact meant that the national legislation must use the language of the Directive, or even directly incorporate its conceptual structure. But I hope I have given good reasons for not interpreting its decision in that way. The Indicative List In Commission v Kingdom of Sweden,26 the European Court of Justice decided that there was no need for Sweden to incorporate the Indicative

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List into its legislation. It sufficed that it was part of the travaux pre´paratoires and that these were normally considered when legislation is interpreted. Following this reasoning, the UK legislation may have to incorporate the list because it is only in certain circumstances that the courts will look at a limited range of material beyond the legislation. If the legislation is ambiguous or unclear, they will consider ministerial statements to Parliament when the legislation was being considered. Otherwise, at least according to the traditional position, travaux pre´paratoires may be considered only to discover the general purpose of the legislation – the ‘‘mischief ’’ aimed at (Zweigert & Ko¨tz, 1998, p. 267). Whatever the UK is required to do, we think that it is a very good idea to include some such list of clauses in the legislation in order to give guidance to consumers, to the various bodies empowered to begin preventive proceedings,27 and, in particular, to businesses. However, we propose to depart from the Directive in four ways. First, we propose to add to the list various clauses that the OFT has said frequently give rise to problems and that it has acted against (Law Commissions, 2002, para 4.113). I do not think this is controversial in itself although there may be some argument as to what should or should not be included. Second, we find the descriptions in the list hard to apply to the actual clauses found in the UK because the language used is obscure – probably it is a rather literal translation. For example, paragraph 1(c) of the Annex lists terms which have the object or effect of making an agreement binding on the consumer whereas provision of services by the seller or supplier is subject to a condition whose realisation depends on his own will alone.

I am sure that continental lawyers will recognise this as referring to the potestative condition, a concept well known to them but which an English lawyer, let alone an English business person, would have difficulty in recognising even though we have terms of similar effect. So we would substitute: Terms which have the object or effect of imposing obligations on the consumer in circumstances where the obligations on the part of the business are dependent on the satisfaction of conditions which are wholly within the control of the business.28

Third, we think that it will help the reader if the legislation include examples of what is meant. Thus the above would be followed by:

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For example: a term of a loan agreement which obliges the consumer to take the loan in circumstances where the other party is under an obligation to make the loan only with the approval of one of its managers.

This has received mixed a reception, some people arguing that readers may be misled into thinking that only the example clauses are ‘‘suspect.’’ I do not see myself that this either would be justified or is likely. Lastly the Annex refers to clauses that simply are not found in the UK or to legal requirements that we do not find in our legal tradition. Thus paragraph 1(d) of the annex refers to terms: permitting the seller or supplier to retain sums paid by the consumer where the latter decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the seller or supplier where the latter is the party cancelling the contract.

This seems to refer in part to the concept of arra, which was found in medieval English law but disappeared in practice many years ago; and in part to a tradition that a deposit paid by the consumer and forfeitable if he defaults must be matched by a penalty payable by the business if it withdraws. This is not something that features as part of our law and we see no reason to object to a loss of deposit by the consumer that is not matched by a penalty against the business, provided that the deposit is reasonable. Thus we proposed to replace 1(d) by Terms which entitle the business – (a) when the consumer exercises a right to withdraw from the contract, or (b) when the contract is terminated because of the consumer’s breach, to retain any payment made by way of deposit or otherwise if the payment is not reasonable in amount. For example: a term of a contract for the sale of a house by a developer to a consumer which requires the consumer to pay a 25 per cent deposit to the developer in circumstances where there is no reasonable justification for the deposit being larger than the customary 10 per cent deposit.

This is straying further from the Directive, but the fact that a term is not on the list does not, of course, prevent the court from finding it to be unfair. Lastly, we propose that the burden of showing that a term is fair should be placed on the business, at least where the term is one that is on the list.29

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The Proposed Model for Consumers Earlier I stated that I hope that the European Court’s decision in Commission v Netherlands did not imply that we have to follow too closely the words of the Directive. This is my position as a matter of principle. In fact I think the model we are proposing would in most major respects follow the model of the Directive sufficiently closely to be ‘‘recognisable’’ to the national of another Member State ‘‘searching’’ English law to identify her rights under the Directive. The key clause of the draft Bill is clause 6, which reads as follows: 6 Other terms detrimental to consumer of no effect unless fair and reasonable (1) Where a term of a consumer contract is detrimental to the consumer, the business cannot rely on the term unless the term is fair and reasonable. (2) Where part of a term of a consumer contract is detrimental to the consumer but the rest of the term is not, this section is to apply only to the part of the term which is detrimental. (3) This section does not apply to a term – (a) which is transparent, (b) which sets out the main subject matter of the contract, and (c) which is not substantially different from what the consumer reasonably expected. (4) Nothing in this section enables the adequacy of the price or remuneration payable under a contract to be questioned in any legal proceedings if the price or remuneration – (a) is transparent, (b) is not payable under or because of a subsidiary term of the contract, (c) is not payable in circumstances which are substantially different from what the consumer reasonably expected, and (d) is not calculated in a way which is substantially different from that. (5) This section does not apply to a term – (a) which is transparent, and (b) which is the same as, or not substantially different from, what would apply as a matter of law in the absence of the term. (6) ‘‘Transparent’’ means – (a) expressed in plain language, (b) presented in a clear manner, and (c) accessible to the consumer.

It seems to me that most of this is very close to the Directive in form, and rather closer to what the Directive actually means than are the literal words of the Directive itself!

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The chief difference is in clause 6(1), where we have suggested that we should use the phrase ‘‘fair and reasonable’’ rather than referring to ‘‘fairness’’ and ‘‘the requirements of good faith.’’ We think that if the two tests are correctly understood, there is no substantial difference at all between them (Law Commissions, 2002, para 3.70–3.71). But we prefer the ‘‘fair and reasonable’’ test for two reasons. First, there is possibly some doubt, even after the House of Lords decision in DGFT v First National Bank,30 whether the requirement of good faith is not primarily procedural in nature.31 We do not think it is – in other words, we are convinced that some terms are unfair whatever procedure is used to secure the consumer’s agreement – but we wish to put the matter beyond doubt. Second, we think that readers in the UK will be more familiar with the ‘‘fair and reasonable’’ test that is already part of our law. But it is a marginal question and there would be no particular problem in switching the formula to one closer to the words of Article 3(1) of the Directive. As to the contra proferentem rule that was the subject of the actual decision in Commission v Kingdom of the Netherlands, we did not include it in the draft Bill (which was not intended to be complete); but in fact we provisionally proposed that it should be included in the final version (Law Commissions, 2002, para 4.111) even though we think it is a well-established rule of English case law.32 What is perhaps more questionable is whether the draft Bill as a whole is really clearer and more accessible to the reader. It has been compared unfavourably to the Codes of Practice negotiated by the Office of Fair Trading. However, I doubt if more can be achieved. Firstly, legislation will have to apply to a variety of different contracts – for example, to consumer contracts and business-to-business contracts. Secondly, the legislation has to deal with complex issues that cannot be explained in the unfair terms legislation itself. Thirdly, the tradition of legislation in the UK is to be precise. We found these to be very significant constraints and in the end we concluded that all we could hope to achieve was to make the legislation clearer and more accessible in three ways. First, we have structured the draft legislation in a less compressed way, so that there are separate parts for each broad type of contract affected.33 Secondly, we have tried to keep what might be termed the ‘‘principal’’ sections simple and free from ‘‘legal jargon.’’ Thirdly, as I have indicated already, we have tried to amplify the words of the current legislation to make it clearer what it actually requires or forbids (Law Commissions, 2002, para 8.7–8.13).

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It is a bit disappointing that we could not go further than this but I think it is inevitable. However I am glad to say that our efforts on the Bill as a whole have at least met with the approval of the Plain English Campaign.

BUSINESS-TO-BUSINESS CONTRACTS

UCTA also applies to many exclusion and limitation of liability clauses in B2B (business-to-business) contracts. A very few clauses are made of no effect in any circumstances.34 Some particular types of exclusions in listed types of contract are required to be ‘‘fair and reasonable’’ before they will be effective, and this second group of controls apply whether or not the clause was negotiated. Thus a seller or supplier of goods can exclude or limit its liability for breach of its obligations as to correspondence with description or fitness for purpose only if shows the clause to be a fair and reasonable one to have included in the contract.35 The broadest control, however, is under section 3. This applies to a B2B contract only when the clause forms part of the ‘‘written standard terms of business’’ of the party seeking to rely on the clause. Again it applies only to exclusion and limitation of liability clauses. As we noted in relation to consumer contracts, the notion of ‘‘exclusion clause’’ is treated broadly here so as to include any term which purports to allow the business to perform in a way that is substantially different to that which was reasonably expected of it.36 But clauses that do not affect the proponent’s obligations but rather what the other party has to do are outside section 3. Thus a clause giving the seller a right to change unilaterally the specifications of the product it has to deliver would be subject to section 3; a clause allowing it to raise its prices would not be caught (Law Commissions, 2002, paras 5.2–5.6). The Department of Trade and Industry had received complaints from a number of businesses about terms that were unfair but were not caught by UCTA. These seem to have come primarily from small businesses and related, for example, from contracts to lease photocopiers and involved, I believe, contracts for long periods at escalating prices. Had these been consumer contracts, they would have been caught by UTCCR. Hence the second limb of the project, to decide whether the legislation should be extended to apply to B2B contracts, particularly to protect small businesses.

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The logic of the extension seems almost self-evident. One type of clause may be just as unfair as the other (Law Commissions, 2002, para 5.19). What the Law Commissions found more difficult was whether the controls should be limited in some way. One possibility was to limit the extension to protect only small businesses. However, in the Consultation Paper we took the view that size was not the critical question. We suggested that it is not just small businesses that may need protection. Any business that makes a contract that is outside its regular course of business and its field of expertise – e.g., a manufacturing company that buys an one-off computer system – may also lack experience in what points to bargain over and be in a weak bargaining position. On the other hand we did not consider that the problem of unfair terms is confined to these ‘‘irregular’’ transactions. The supplier whose entire output is usually bought by a car manufacturer or a supermarket chain lacks any real bargaining power, and a farmer buying seed37 may face unfair terms, though all these are ‘‘routine’’ transactions for the weaker party. We therefore proposed that the extension should follow UCTA in not limiting the controls according to the size of the business or the regularity with which it makes the kind of contract in question. The clause should have to be reasonable in each case, though obviously size and regularity would be very relevant to whether the clause was or was not reasonable in the circumstances (Law Commissions, 2002, paras 5.35–5.40). We did however think that B2B contracts should be treated differently to consumer contracts in a number of ways. The most important was that, whereas we had proposed that for consumer contracts the controls should apply even to negotiated terms, in B2B contracts the controls should apply only to terms that had not been individually negotiated. This was because if there is negotiation over a clause, even if the complaining party’s bargaining position is such that it could not obtain any real improvement in the terms offered, the party will at least be alert to the fact that the clause is in the contract, and will have had the chance to consider the possible consequences of entering into a contract on that basis. We said It can be argued to be an unreasonable interference with freedom of contract to allow the business to object to the term when, with hindsight, it appears that it is not advantageous. In particular, it is important that a business should not be encouraged to embark on litigation, or to threaten to embark on litigation, to challenge the fairness of a term,

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when its primary reason for doing so is to delay having to implement the contractual obligations which it has undertaken.

We therefore provisionally proposed to extend the controls to apply to any type of unfair term in a B2B contract, but only where the term was what may be termed ‘‘a general condition.’’ We preferred the UTCCR test of whether the term had been individually negotiated to the UCTA test of whether it was a ‘‘written standard term of business,’’ principally because the former is easier to apply to ‘‘general conditions’’ that are produced by a word processor or are part of a wholly electronic contract. On the other hand, we also applied our reasoning – that, where a term has been negotiated, business parties can be expected not only to be aware of the term’s existence but to know of its consequences – to some of the existing controls under UCTA. As I said, several of these apply even if the exclusion or limitation clause has been negotiated. We asked for views but suggested that these controls are not needed and should be repealed. We said that we were aware of only one case in which a clause in a B2B contract that had been negotiated has been held to be unreasonable, and it was a case in which the proponent failed to give any evidence on the point (Law Commissions, 2002, paras 5.45–5.47). Thus with only very limited exceptions, the controls over unfair terms in B2B contracts would apply only to terms that had not been individually negotiated. The new regime would be subject to a number of exceptions in addition to those that apply to terms in consumer contracts, such as the exemption for ‘‘core’’ terms. Insurance contracts, for example, are exempted from UCTA and we provisionally proposed that they should be exempt from the new controls over B2B contracts. We invited views on whether there should continue to be exemptions, as in UCTA, for international contracts and contracts that are governed by English or Scots law only because the parties have chosen that law. Our provisional proposals have turned out to be very controversial. We have not yet completed our analysis but it is my impression that almost equal numbers of consultees are strongly in favour of our proposals and strongly against them. A closer look at some of the reasons given reveals some interesting points. The first is that many of the opponents to extension take the view that the existing controls under UCTA are causing significant difficulty. Let me repeat a scenario that was put to me.

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A manufacturer wants to obtain a machine tool from a supplier on credit terms. The finance will be provided by a finance house and the transactions will be structured as follows: the machine will be sold by the supplier to the finance company; the finance company will enter a conditional sale or hire-purchase agreement to sell or hire the machine to the manufacturer; and the supplier will give the manufacturer various warranties (‘‘commercial guarantees’’) about the machine’s quality, performance, and durability. In these circumstances the finance house is, in economic terms, merely providing a loan and the manufacturer is looking to the supplier, not the finance house, for responsibility for the quality, etc., of the machine. The form of the contract between finance house and manufacturer, however, means that there will be implied terms in that contract that the finance company will be liable. The protection of these implied terms is not needed by the manufacturer, but any attempt to exclude them will be subject to UCTA. A manufacturer in financial difficulties may be able to delay paying by alleging that the machine is defective, the clauses are unreasonable, and, therefore, the finance house is liable – so that it does not pay. Almost certainly the exclusion clauses would be upheld as fair and reasonable, but the manufacturer can delay things by ‘‘arguing the toss’’ each time. What my colleague wanted, therefore, was that these exclusions should not be subject to challenge. I pointed out that under our proposals they would in future be subject to challenge only if they had not been negotiated. This did not satisfy him because, he pointed out, at the time the contract is made the terms (which will almost certainly start life as standard, pre-formulated terms) may be accepted by the manufacturer without demur. It is only later that the manufacturer will seek to challenge them – and indeed it would have an incentive not to negotiate them at the outset, so that it could challenge them later. I can see that this is a real problem, and until it is solved I hesitate to recommend any further extension of the controls to unfair terms other than exemption clauses, as this would almost certainly make the problem worse. As yet however I cannot see a solution. In a sense we would like to be able to exempt any term that the party could have negotiated but chose not to. However I have great difficulty in seeing by what criterion we could distinguish the case where a party could have negotiated a term but chose not to do so from the case in which the party had no real possibility of negotiating. In theory, any term is a set of general conditions can be negotiated – but we all know that many of them are not, and therein lies much of the problem of with unfair terms.

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On the other side, it is interesting to note who is so much in favour of the extension. One group is primarily academic, another small businesses. But there also seem to be many voices in favour from the construction industry. My first – and possibly quite mistaken – impression is that this group is not concerned about terms that they did not know about or understand. They seem to be more concerned with terms that they think harsh and that, in the current state of the market, they do not have sufficient bargaining power to get removed from the contract. If this is correct, I now wonder whether this is a good reason for supporting the proposed reforms. Our idea was to prevent businesses being taken by unfair surprise, rather than to redress differences in bargaining power. Indeed I am not at all sure that it is susceptible to real control. American writers are fond of likening inequality of bargaining power to a bowl of jello – push it down in one place and up it pops in another. Thus what we said in the Consultation Paper about farmers’ buying seed38 may have missed the point. Thus personally I am very unsure of the way forward on B2B contracts. It may be that we should go back to study more carefully ways of limiting the reforms – for instance, whether the controls should only apply to small businesses, or the grounds of ‘‘unfairness’’ should be more limited than in consumer contracts. I have not said anything about the preventive controls required by Article 7 of the Directive. In relation to consumer contracts we do not envisage any very significant change in these powers, save those brought about by the changes I have mentioned as to which clauses will count as unfair. What about B2B contracts – should there be preventive controls there? We certainly thought that a case could be made for them – in relation to consumer contracts, the ‘‘policing work’’ done by the OFT has had a very much greater impact on the ‘‘market’’ in terms than any legislation on unfair terms that merely affected the individual contract. In Appendix A we looked at the controls over unfair terms in B2B contracts in a number of other countries and we noted that some have preventive controls over B2B contracts – we referred to Sweden and Germany. However, we were doubtful. The preventive controls over B2B contracts do not seem to be much used, though it is possible that they operate at an informal level. But perhaps our principal reason for doubt was that we did not know what body would be willing to take on the task of policing the vast market of B2B contracts. Therefore we merely asked for views (Law Commissions, 2002, para 5.111).

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There is one possibility that we did not canvass in the Consultation Paper, but which might avoid some of the difficulties I have mentioned with extending the controls over unfair terms in B2B contracts. This would be not to extend the courts’ power to invalidate terms that have actually been agreed, but instead only to give a body charged with the protection of small businesses powers to prevent the future use of unfair terms against small businesses. This approach should avoid causing uncertainty, or businesses seeking to challenge later a term they decided not to try to negotiate earlier, while it should produce fairer terms for small businesses. We would, I imagine, need to provide that any further use of the term would be invalid – but I suspect that this could apply only to the business concerned. The control would thus be of limited effectiveness. I would be interested to know whether colleagues think it would be of any real value. Lastly, an interesting comment for those like Ewoud Hondius and myself who are interested in the question: Should we have a single, European contract law? Some of the consultees told us that they have overseas clients who choose to use English law for their business-tobusiness exactly because they know that the terms cannot be reviewed for fairness. If this is so, it is an interesting example of the ‘‘market in legal systems’’ operating. What of course we do not know is whether we in England are ‘‘selling’’ them the chance to make predictable, fair contracts or selling them the chance to make predictable, unfair contracts. This is an issue that may need exploration.

NOTES 1

It affects both contractual clauses and notices excluding liability in tort for negligence. I will not deal with the latter in this paper. 2 There are of course other controls both by statute and common law, but these are usually of narrow application. 3 Council Directive 93/13/EEC on Unfair Terms in Consumer Contracts (OJ L95, 21.4.93, p. 29). 4 SI 1994 No. 3159. 5 SI 1999 No. 2083. UTCCR were amended by Unfair Terms in Consumer Contracts (Amendment) Regulations 2001 (SI 2001 No. 1186) to give the Financial Services Authority preventive powers: see Law Commissions (2002, para 3.121). 6 Dr Simon Whittaker of St John’s College, Oxford. 7 Law Commissions (2002, paras 2.1–2.9). 8 The main differences are summarised in Law Commissions (2002, paras 2.18–2.19). The details are set out in tabular form, alongside our provisional proposals, in Appendix F of the document.

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Case C-144/99 [2001] ECR I-3541. UCTA ss. 6(2) and 7(2). A complete list of the terms that under UCTA are simply of no effect will be found in Law Commissions (2002, para 3.9). (For Scotland, the equivalent sections are ss 20(2), 21(1)(a)(i) and 21(3)(a). There are separate but almost exactly parallel provisions in UCTA for the two jurisdictions. This we propose to dispense with, see Law Commissions (2002, paras 4.15–4.17). I hope my Scottish colleagues will forgive me for referring to just the sections applying to England, Wales, and Northern Ireland.) 11 E.g., under UCTA s. 3, which requires that all terms by which the business purports to exclude it liability under a consumer contract be fair and reasonable. 12 S. 11(5) UCTA. 13 This seems to be the case even if the clause is on the Indicative List of terms that may be regarded as unfair, see Directive Art 3(3) and the Annex. This appears to be confirmed by the ECJ’s remark in Case C-478/99 Commission v Kingdom of Sweden [2002] ECR I-4147, para 13, that the indicative list ‘‘is not in itself intended to create rights and obligations for individuals.’’ 14 Case C-240/89 Oce´ano Grupo Editorial SA v Rocı´o´ Murciano Quintero [2000] ECR I4941. 15 Art. 8 Dir. 93/13. 16 This does suggest that there is a case for codifying consumer law so as to bring into a single piece of legislation all the controls over particular types of clause: see Law Commissions (2002, paras 4.30–4.32). 17 See below, p. 305. 18 Sale and Supply of Goods to Consumers Regulations 2002 (SI 2002 No. 3045, which came into force 31 March 2003), regs. 8–13 (amending Supply of Goods and Services Act 1982; this covers contracts for the supply of goods other than by way of sale or hirepurchase) and 14 (amending Supply of Goods (Implied Terms) Act 1973; this covers contracts of hire-purchase). The text of the Regulations is available at http:// www.hmso.gov.uk/si/si2002/20023045.htm. 19 See section 11 and Schedule 2 UCTA. In theory the guidelines in Schedule 2 apply only to cases falling within sections 6 and 7 but in practice they are applied in any type of case: see Law Commissions (2002, para 3.72). 20 DGFT v First National Bank plc [2000] QB 672, 685; [2001] UKHL 52, [2002] 1 AC 481 (HL), especially at [12], [34] and [43]. See Law Commissions (2002, para 3.25, note 61). 21 See Case C-6/90 Francovich v Italy [1991] ECR I-5357. 22 Case C-144/99 (Note 9 above). 23 Case C-144/99 (Note 9 above) at para 21. 24 Case C-144/99 (Note 9 above) at paras 17–18, citing Case C-365/93, Commission v Greece, [1995] ECR I-499, para 9. 25 Case C-144/99 (Note 9 above) para 18. 26 Case C-478/99 [2002] ECR I-4147. 27 The 1999 Regulations extended this to include a range of government agencies and industry regulators as well as the Consumers Association: see Schedule 1 (as amended by the 2001 Regulations, Note 5 above). 28 See Para (2) of Schedule 2 of the draft Bill in Law Commissions, 2002. 29 We also present an alternative proposal that any term that departs from the law that would apply in the absence of the term (the ‘default rule’) should be ineffective unless the business shows that the term is fair (Law Commissions, 2002, paras 4.146–4.150). About half the consultees thought that the onus should always be on the business. The OFT made the good point that, if the legislation were to determine who has the burden of 10

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showing whether the term was or was not fair according to whether the term were on the list, that would cause arguments about how closely the wording of the clause has to be to the wording of the list for the burden to change. 30 See Note 20 above. 31 See the discussion in Law Commissions (2002, paras 3.57, esp. note 125, and 3.63– 3.66). 32 Though since the paper was completed, Professor Ewan McKendrick has raised the question whether the rule has survived the decision of the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society (No. 1) [1998] 1 W.L.R. 896. The House held that the words of a contract should be interpreted as a reasonable person in the party’s position would understand them, which may not include reading them in the way that has usually been done under the contra proferentem rule. See McKendrick (2003, pp.148–152). 33 Thus Part I covers exclusions of liability for negligence (this part applies to all types on contract and also to exclusions of liability in tort); Part 2 covers consumer contracts; and Part 3 ‘‘private’’ contracts under which neither party acts in the course of a business (certain rules of UCTA affect even these contracts). A new Part 4 (not yet drafted) will cover B2B (business-to-business) contracts. 34 For example, if a seller tries to exclude or limit its liability for breach of its obligations as to title, and also if a business were to try to exclude its liability for death or personal injury caused by negligence. 35 Sections 6(3), 7(3) and 11 UCTA: see Law Commissions (2002, para 5.2). 36 Section 3(2)(b)(i) UCTA. 37 See George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803. 38 Above, text at Note 37.

REFERENCES Beale, H. (2002). Finding the remaining traps instead of unifying contract law. In: S. Grundmann & J. Stuyck (Eds.). An academic Green Paper on European Contract Law, pp. 67–72. The Hague: Kluwer. Hondius, E. (1997). Unfair contract terms: Towards a European law. Introduction. European Review of Private Law, 5, 121–134. Law Commissions (2002). Unfair Terms in Contracts. London: The Stationery Office. Law Commission Consultation Paper No. 166, Scottish Law Commission Discussion Document No. 119. Available on the internet at http://www.lawcom.gov.uk/ or http://www.scotlawcom.gov.uk/. McKendrick, E. (2003). The Interpretation of contracts: Lord Hoffmann’s re-statement. In: S. Worthington (Ed.). Commercial law and commercial practice, pp. 139–162. Oxford: Hart Publishing. Office of Fair Trading (1996). Unfair Contract Terms Bulletin, Issue No. 2. London: Office of Fair Trading. Reynolds, F.M.B. (1994). Unfair contract terms. Law Quarterly Review; 110, 1–3. Whittaker, S. (1999). Unfair terms in consumer contracts. In: H. Beale (Ed.), Chitty on Contracts, Ch. 15. 28th ed. London: Sweet and Maxwell. Whittaker, S. (2000). Unfair contract terms, public services and the construction of a European conception of contract. Law Quarterly Review; 116, 95–120. Zweigert, K., & Ko¨tz, H. (1998). Introduction to comparative law. 3rd ed. Oxford: Oxford University Press.

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THE AUTHOR Hugh Beale is a Law Commissioner for England and Wales, and Professor of Law, University of Warwick. Postal address: Law Commission, Conquest House, 37/38 John Street, London WC1N 2BQ, UK. Fax: +44 207 453 1297; e-mail: [email protected]. Any views expressed in this paper are purely personal.