Consumer credit update
Consumer credit law update:
‘It’s not fair!’
Amanda Wootton asks what is considered an ‘unfair’ term in a consumer contract?
About the author
Amanda Wootton is a Chartered Legal Executive at Gateley plc.
It is becoming a more frequently used/ pleaded statement, by consumers, that the terms of a contract into which they entered are ‘unfair’. By their very nature, a debtorcreditor relationship is often unequal in terms of the economic circumstances and financial sophistication of the parties.
A term will, in general, be considered unfair if, contrary to the requirement of good faith, it creates a material imbalance in the parties’ rights and obligations under the contract to the consumer’s detriment. Further clarity is set out in the Consumer Rights Act (CRA) 2015; the Consumer Credit Act (CCA) 1974; and the Financial Conduct Authority’s (FCA’s ) Consumer Credit sourcebook (CONC).1
The CCA sets out various protections for debtors, where a contract purports to deprive a party of the legal rights and protections it would otherwise enjoy. The legislation provides that if a term is inconsistent with the relevant protections under the CCA, the term is automatically void.
Sections 140A to 140D of the CCA give the court power to grant relief to debtors from unfair terms. If the court determines that a term is unfair under section 140, it has various powers to grant relief to the debtor under section 140B, including the power to alter the terms of the agreement.
However, in saying this, a court will only determine unfairness under section 140 if it decides that the relationship between the parties is also unfair having regard to all the circumstances relevant to the creditor and debtor. There is, therefore, some uncertainty as to whether the court will grant relief under section 140B, even where an individual term has been determined to be unfair.
In Plevin v Paragon Personal Finance Ltd [2014] UKSC 6, the Supreme Court stipulated that each case should be assessed on its individual merits, perhaps providing more uncertainty on what actions are likely to be considered as being unfair. Consumer credit firms would, therefore, be well advised to consult the CRA and CONC for further clarification on what may be considered an unfair term.
The CRA applies to contracts made on or after 1 October 2015 only. Before this, guidance can be found in the Unfair Terms in Consumer Contracts Regulations (UTCC Regs) 1999 SI No 2083. CRA Part 2 states:
… Whether a term is fair is to be determined …
(a) taking into account the nature of the subject matter of the contract, and
(b) by reference to all the circumstances existing when the term was agreed and to all of the other terms of the contract or of any other contract on which it depends.
Schedule 2, Part 1 of the CRA provides a non-exhaustive list of consumer contract terms that may be regarded as unfair. This does not, however, cover all eventualities and consideration should be given to recent case law. Example cases are Van Hove v CNP Assurances SA C-96 /14); Nemzeti Fogyasztóvédelmi Hatóság v Invitel Távközlési Zrt C-472 /10; Banco Primus SA v Jesús Gutiérrez García C-421 /14; and Cavendish Square Holding BV v El Makdessi; ParkingEye Ltd v Beavis [2015] UKSC 67.
In the ParkingEye case, the court held that a term stating that an £85 parking charge would be incurred for overstaying a two-hour period was not considered unfair. The Supreme Court’s decision in ParkingEye says: ‘the question whether there is a ‘significant imbalance in the parties’ rights’ depends mainly on whether the consumer is being deprived of an advantage which he would enjoy under national law in the absence of the contractual provisions’ (para 105). Lord Toulson, (dissenting in part on ParkingEye Ltd), felt that this watered down the test and made it less consumer friendly.
In the 2013 case, Aziz v Caixa d´Estalvis de Catalunya, Tarragona i Manresa (Catalunyacaixa) C-415 /11, the Court of Justice of the European Union (CJEU) stated: ‘it must in particular be considered what rules of national law would apply in the absence of an agreement by the parties in that regard.’ (para 68). In this case, the CJEU said that the test for deciding if the requirement of good faith has been breached is ‘whether the seller or supplier, dealing fairly and equitably with the consumer, could reasonably assume that the consumer would have agreed to such a term in individual contract negotiations’ (para 69).
Section 62(1) of the CRA states that an unfair term of a consumer contract is not binding on the consumer. However, a consumer can rely on the unfair term or notice if they choose to do so (CRA s62(3)).
Section 67 of the CRA further states that where an unfair term is not binding, the rest of the contract continues to have effect.
For a term to be deemed unfair, an imbalance must be significant, but there is no need for proof that a term has caused actual harm.
Historically, the FCA had provided guidance on unfair terms. This has now been removed, and CONC provides just two categories of terms that are, in general, considered to be unfair: these relate to variation clauses and default charges.
Radlinger and Radlingerová v Finway as C-377 /14 deals with default charges. The case concluded that when determining whether a term is unfair, the court must consider the cumulative effect of all default charges in a contract, even those that have not been applied by the creditor. So, even with the guidance in the CONC, it is still imperative for consumers to consider upcoming case law for further guidance.
The Competition and Markets Authority (CMA) has published guidance on unfair contract terms, which seeks to help businesses understand what makes terms and notices unfair and the risks of using the wrong wording.2 The CMA considers that the question is rather whether both parties enjoy rights of equal extent and value, particularly taking into account the nature of the goods, services or digital content provided under the contract.
What constitutes an unfair term will frequently depend on the facts of any given case. As such, there will often be a degree of uncertainty about whether a particular term is unfair, and all the guidance given above should be considered when drafting the terms of a contract. However, and somewhat more importantly, it is advisable to pay special attention to the ever-increasing case law testing the provisions of the legislation and guidance provided above.
1 Available at: www.handbook.fca.org.uk/handbook/CONC.pdf
2 Unfair contract terms guidance: Guidance on the unfair terms provisions in the Consumer Rights Act 2015, available at: http://tinyurl.com/pydcac8