On good terms
All businesses should be made aware of how they can avoid potential criminal liability for breaches of consumer contract rules on fairness, says Rebecca de Lorenzo
Most businesses are aware that consumer contracts are heavily regulated; they may also know that unfair commercial practices are prohibited and attract criminal sanctions. What is less well known, however, is that unfair contract terms themselves can be unfair commercial practices.
An unfair contract term is defined in the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) as one which has not been individually negotiated and which causes a significant imbalance in the parties' rights and obligations to the detriment of the consumer (it does not cover the goods/services or the price). The UTCCR prohibit unfair terms in consumer contracts.
A business' ability to limit or exclude liability is limited by the Unfair Contract Terms Act 1997 (UCTA) which prohibits certain limitations altogether and permits others where they are reasonable.
A commercial practice is any commercial act, omission, course of conduct, representation or communication. It will be unfair if it doesn't meet the standards of professional diligence and if it is likely to, or does, materially distort the economic behaviour of an average consumer: in other words, a consumer makes a decision he/she would not have made had he/she been properly informed. Professional diligence requires a business to act in accordance with honest market practice or the general principle of good faith.
The Consumer Protection from Unfair Trading Regulations 2008 (CPRs) prohibit unfair commercial practices; this includes 31 specified activities, misleading, aggressive or otherwise unfair commercial practices.
Can an unfair term be an unfair practice?
Consider a contract term that unreasonably limits a business' liability (unfair under UCTA) or a term that incorrectly sets out the consumer's rights (unfair under the UTCCR). This term, as well as being unenforceable, could also be an unfair commercial practice. How?
1. A contract is a form of commercial communication and is therefore a 'commercial practice'.
2. It will be unfair if it doesn't meet the standards of professional diligence and distorts economic behaviour. It is possible that unfair limitations or inaccurately setting out consumers' rights would not be considered honest market practice or acting in good faith. A consumer may take such terms at face value and decide not to enter into that contract. If so, that would be a 'material distortion' of his economic behaviour.
3. Even if the requirements of (2) are not met, the term may be misleading and therefore automatically an unfair commercial practice. A commercial practice can be misleading by inclusion or omission. That is, if it contains false information and is untruthful or deceptive and causes the average consumer to take a transactional decision he would not otherwise have taken, or if it omits or hides material information, or provides such information in an unclear, unintelligible, ambiguous or untimely manner. 'Material information' is information which the average consumer needs to take an informed decision, or any information that must be included in a commercial communication by legislation of European origin (e.g. information about consumers' cancellation rights required for distant sales contracts).
Unenforceable terms
Unfair terms are not enforceable against consumers, although the rest of the contract will not be affected.
In most (but not all) cases, unfair commercial practices carry criminal sanctions. It is a criminal offence for a business to (i) knowingly or recklessly engage in a commercial practice which contravenes the requirements of professional diligence and which materially distorts (or is likely to) the economic behaviour of the average consumer, or (ii) undertake a commercial practice which involves misleading acts or omissions. These offences can carry fines of up to £5,000 fine and/or two years in prison.
By not providing information to consumers required by e.g. ecommerce or distance selling legislation, a business would be guilty of an unfair commercial practice and also commit a criminal offence. Perhaps not what is expected when drafting standard contracts?