Who: Competition and Markets Authority (the “CMA”)
When: 31 July 2015 and 1 October 2015
Law stated as at: 6 October 2015
In July 2015, the CMA published guidance (CMA37) (the “Guidance”) on the unfair contract terms provisions in the Consumer Rights Act 2015 (the “CRA”). The CRA took effect on 1 October 2015. Part 2 of the CRA consolidates the provisions in the Unfair Contract Terms Act 1977 (“UCTA”) and the Unfair Terms in Consumer Contracts Regulations 1999. The Guidance supersedes the previous guidance issued by the Office of Fair Trading but echoes much of its sentiment.
In summary, the Guidance: explains the fairness and transparency tests; explores blacklisted terms and the grey list; explains why the CMA considers certain terms or notices as unfair; considers exemptions from the assessment of fairness; discusses the possible consequences for businesses that do not comply; and provides a flow chart, example scenarios and a list of the new provisions in the legislation. The advice provided covers both terms and notices.
Highlights are detailed below.
Fairness and transparency
- The CRA uses a “fairness test” to assess whether wording balances the rights and responsibilities in a trader and consumer contract in favour of the trader. As a starting point, the Guidance recommends considering whether the terms place the consumer in a less favourable position than otherwise legally provided for.
- Alongside the fairness test, the Guidance places emphasis on the importance of transparency as the CRA requires written terms to be expressed in “plain and intelligible language” that is legible.
- The relevant factors when assessing fairness include: the nature and subject matter of the contract; “all the circumstances existing when the term was agreed“; all other terms in the contract; and all the terms of any other contract on which the contract depends.
- In terms of the meaning of “all the circumstances existing when the term was agreed,” the Guidance says this is not the time that the contract in question was formed between the consumer and the business but by reference to “a correctly defined hypothetical consumer for that case“. The Guidance advises businesses to take account of “the effects of contemplated or typical relationships between the contracting parties“.
- Practical tips provided include using a cooling-off period, supplying a summary of key terms and ensuring that headline terms are included in advertisements as early as possible.
The grey list
- The “grey list” lists some terms that may be unfair (as provided in Schedule 2 of the CRA). The Guidance covers the three new grey list items, which relate to exit fees, subject matter change and price change.
- In relation to exit fees, the CMA considers that there will always be a risk that termination fees and requirements for consumers to pay for services that are not supplied will not be enforceable.
- In terms of subject matter change, such grey list terms will include any “term which has the object or effect of permitting the trader to determine the characteristics of the subject matter of the contract after the consumer has become bound by it.”
- Grey list “price change” terms include “a term which has the object or effect of giving the trader the discretion to decide the price payable under the contract after the consumer has become bound by it, where no price or method of determining the price is agreed when the consumer becomes bound.”
- The Guidance also provides further comments on areas such as financial penalties, long notice periods for cancellation, the right of the trader to generally vary terms, entire agreement clauses and assignment without consent.
- A ‘blacklisted’ term is a term that cannot be used in consumer contracts. Such terms will be unenforceable per se and there will be no need to show that they fail any fairness test. These include the void terms in UCTA (such as excluding liability for death or personal injury caused by negligence) or provisions contrary to the terms implied by the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982 (such as breach of quality, performance and title of goods).
- Page 58 of the full Guidance provides a table summarising statutory rights, remedies and blacklisted wording, categorised between goods, services and digital content.
Exemptions from the assessment of fairness
There are two types of terms that are exempt from the fairness test.
- Firstly, terms covered by mandatory or statutory legal provisions. This covers all wording that is included in contracts and notices in line with requirements of Parliament, regulatory authorities or international obligations, provided that such provisions apply to that specific type of contract. For example, terms relating to performance of services in a contract for the supply of services will be exempt but terms relating to performance of services in a contract for the sale of goods may not be exempt.
- Secondly, there is a partial exemption for “core terms”. These are terms that cover the main subject matter of a contract or the price and are exempt because they are subject to competitive pressures. However, “only terms that are subject to and constrained by competition have a realistic chance” of falling within the exemption. The exemption will not apply if the effect of the term mirrors the effect of a grey list term. Additionally, the term must be both transparent and prominent (presented so that it will be brought to the attention of the average consumer who is “reasonably well-informed, observant and circumspect“).
There are also two data protection-related aspects to the Guidance:
- The CMA advises that if digital content (a new category of product) is “supplied in return for something other than money – for instance where a consumer gives the trader access to their personal data”, then this differs from when a consumer pays for the digital content either directly or indirectly, and so the consumer will only enjoy the remedies provided in part 1 of the CRA if the damage was caused by the digital content supplied.
Consequences of non-compliance
The Guidance details that: unfair terms will not be legally binding on a consumer; the business may be asked to stop using and relying on them; and a court injunction may be sought. Also the CMA, Trading Standards and other bodies may investigate and take action against the trader.
The shorter version of the Guidance provides top tips for businesses to ensure their terms remain fair. This serves as a helpful reminder of some of the basic principles, such as using plain language, and more practical advice, such as not using terms that you, as a consumer, would not want to sign up to.
The flowchart and annexes
The Guidance includes a helpful flowchart to assess terms and annexes which detail scenarios and the new additions to the CRA.
Availability of the Guidance
The Guidance is available as follows:
- Short guidance – Aimed at smaller businesses, this provides a simple overview of the unfair terms with top tips for setting out terms and notices to consumers
- Intermediate guidance – More detail on when the legislation will apply, the fairness test, the transparency test, blacklisted and ‘grey’ terms.
- Detailed guidance – A full explanation of the CMA’s view on Part 2 of the CRA with practical help on how to comply. This version comes with two annexes: Annex A shows historic examples of unfair terms according to the OFT; and Annex B is selective summary of the main new elements of the law.
The helpful flowchart to decide whether a term is unfair is available here.
Why this matters:
The Guidance is not ground-breaking but does provide valuable insight on the CMA’s interpretation of the CRA’s provisions on unfair terms, especially the new additions, which is helpful as e-commerce continues to evolve. In particular, the sections on fairness and transparency have been expanded, which should be of interest. Additionally, the new Guidance formats provide accessible advice to smaller businesses.