Price variation clauses in consumer contracts

A recent decision of the European Court of Justice (ECJ) has provided useful clarification of how certain provisions of the Unfair Contract Terms Directive (and by extension, the Unfair Contract Terms Regulations 1999) apply to clauses in consumer contracts which permit a supplier to unilaterally increase the price of a service. It was followed by the publication of the draft Consumer Rights Bill 2013, which consolidates and amends the regulations and attempts to clarify the position in relation to price variation clauses.

Significant imbalance

The regulations prohibit unfair terms in consumer contracts. A contract term that has not been individually negotiated is regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations, to the detriment of the consumer. Almost all consumer contracts are subject to the regulations given that they are invariably based on the supplier's standard terms, and therefore not individually negotiated. If a provision is held to be unfair, it will not be enforceable against the consumer and suppliers may be subject to regulatory action to prevent the continued use of the relevant provision.

Contract terms relating to the subject matter or price payable under a consumer contract may not be challenged under the regulations, provided they are drafted in plain intelligible language. In the annex to the directive (replicated in schedule 2 of the regulations), there is an indicative and non-exhaustive list of terms which may be regarded as unfair (the so-called "grey list"). These include terms which have the object or effect of:

1. irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract;

2. enabling the seller or supplier to alter the terms of the contract unilaterally without a valid reason which is specified in the contract;

3. permitting a supplier of services to increase its prices without giving the consumer the corresponding right to cancel the contract if the final price is too high in relation to the price agreed when the contract was concluded.

?However, as exceptions to the grey list, a supplier may reserve the right to alter unilaterally the conditions of a contract of indeterminate duration, provided that the customer is given reasonable notice and is free to dissolve the contract in response to the variation. Also, a supplier is entitled to include price indexation clauses, where lawful, provided that the method by which prices vary is explicitly described.

Four increases

A German gas supplier, RWE, entered into contracts with German consumers for the supply of natural gas. Under German legislation relating to regulated gas supply contracts, suppliers are permitted to vary gas prices unilaterally without stating the grounds, conditions or scope of the variation, provided that customers are informed of the variation and are free to terminate the contract. RWE's consumer contracts cross-referred to the relevant legislation in order to incorporate these statutory rights into the contract, but did not set out any details regarding price variations or termination rights in the contract itself.

Over a two year period, RWE increased its gas prices on four occasions in circumstances where it was not realistic for their customers to terminate the contract and change gas suppliers. A German consumer association brought an action against RWE on behalf of the affected consumers, claiming the additional amounts paid by the consumers as a result of the price increases.

The German Federal Court of Justice referred two questions to the ECJ, one of which was whether a price variation clause was fair under the directive if, although the grounds, conditions and scope of a change in price are not set out in the contract, the customers are nevertheless informed of each price increase in good time in advance, and have the right to terminate the contract by way of notice if they do not wish to accept the higher price.

The ECJ held that:

1. The obligation to make consumers aware of the reasons for potential price variations, the method of such variations, and the consumers' right to terminate the contracts following notification of the variations, is not satisfied by a mere reference in the contracts to legislation ?or regulation which determines the ?rights and obligations of the parties. It ?is essential that the consumer is informed of these matters specifically within ?the contract itself, so that their rights ?are clear.? A supplier cannot make up for the lack of information in the contracts by simply informing the consumers in good time of a variation to the price and of their right to terminate the contract if they do not wish to accept the variation.

2. It is of fundamental importance that the right of termination given to the consumer is not purely formal, but can actually be exercised. For various reasons, the right to terminate may be purely theoretical, e.g. due to lack of competitive conditions in the relevant market, costs associated with termination, the time period between notification of the price increase and the coming into force of the new price, or the time it would take to change supplier. In other words, the supplier's unilateral right to vary prices may be considered unfair and unenforceable if, in practice, consumers do not have a genuine ability to switch suppliers.

?Although the ECJ was considering this ?case from the perspective of both the Unfair Contract Terms Directive and also the transparency provisions in a specific EU Directive relating to the internal market ?for natural gas, the decision does provide useful guidance for suppliers who enter ?into long term service contracts with consumers, and helps to clarify the interplay between the three provisions in the grey list and the related caveats, in the context of ?price variation.

Firstly, if a unilateral price variation clause does not specifically set out valid reasons for potential price increases, the method by which the prices may be increased and the consumer's right to terminate the contract, the clause is likely to be unfair and unenforceable. This problem cannot be fixed simply by ensuring that, in practice, the consumers are informed of the price variations in good time and offered the right to terminate their contracts. Clear details regarding the potential price variations need to be set out in the contracts in plain, intelligible language, without cross-referencing to other sources.

Secondly, even if the contract terms have been properly drafted, if the reality is that consumers are unable to switch suppliers following a unilateral price variation, they may still be able to establish that the price variation clause is unfair and unenforceable against them.

The OFT's guidance on the regulations makes similar points, stating that price escalation is likely to be acceptable if the level and timing of price increases are ?clearly and adequately drawn to the consumer's attention (which the RWE case suggests would need to be in the contract itself, rather than by cross-reference) and consumers are genuinely free to cancel without suffering serious inconvenience or other adverse consequences.

Consumer rights bill

On 12 June 2013, the government published the draft Consumer Rights Bill. Part 2 consolidates and amends the existing UK legislation on unfair contract terms in relation to consumer contracts.

One aim is to clarify the scope of the ?rule that price or subject matter clauses ?may not be challenged as unfair. The bill makes clear that although some of the terms on the grey list are also price terms (e.g. price variation clauses), they are still open to challenge. However, price terms falling within the exceptions to the grey list may not be challenged insofar as they are transparent and "prominent", which would include price indexation terms if the method by which prices vary is explicitly described.

A term is transparent if it is expressed in plain and intelligible language and (if written) is legible. To meet the new requirement of prominence, the term must be brought to the consumer's attention in such a way that the average consumer would be aware of the terms: i.e. a term hidden in the "small print" will not be exempt from consideration for fairness.

The proposal in relation to price escalation (as opposed to indexation) clauses seems less clear, and is potentially worse for suppliers than under the existing regulations.

A supplier could argue that its price escalation clause is not open to assessment on the basis that, although there is a unilateral right to vary the price, customers must be given reasonable notice of the variation and have the right to terminate ?the contract.
As this is an exception under the grey list, then provided the clause is transparent and prominent, there should be no right ?to challenge the clause.

However, the restructured and amended grey list also contains a new term which ?may be regarded as unfair; a clause which permits suppliers to determine the price payable after the consumer has become bound by the contract.

There is an express statement that ?price indexation clauses are not caught by this, but no similar wording in relation to price escalation clauses. In other words, there are potential arguments both ways ?for whether a transparent and prominent ?price escalation clause, which provides ?for a right to terminate, could be challenged as unfair.

Aside from this point, the bill does not significantly simplify the interaction between the price exemption and the grey list and its exceptions in the context of price variation clauses, and arguably the "complexity" and "possible confusion" in this area which the Law Commission acknowledged in its March 2013 report has not been wholly resolved.