Comprehensive Study Notes on Unfair Terms in Consumer Contracts (Consumer Rights Act 2015) week 10 part 1

Scope and Context of the Consumer Rights Act $2015$

The Consumer Rights Act $2015$ (CRA) provides the primary legislative framework for governing unfair terms in business-to-consumer ($B2C$) contracts. This legislation implemented the European Union Directive $1993/13/EC$ on unfair terms and is heavily influenced by the case law of the Court of Justice of the European Union ($CJEU$). The Competition and Markets Authority ($CMA$) also provides significant guidance, specifically the 'Unfair contract terms guidance' published in July $2015$. The CRA serves as the successor to previous controls found in the Unfair Contract Terms Act ($UCTA$) $1977$, though $UCTA$ remains relevant primarily for business-to-business ($B2B$) contracts.

The scope of the CRA is defined by the status of the parties involved. Under section $2(3)$, a ‘Consumer’ is defined as an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft, or profession. Conversely, section $2(2)$ defines a ‘Trader’ as a person acting for purposes relating to that person’s trade, business, craft, or profession. Importantly, section $2(4)$ establishes that the burden of proof lies with the trader: if a trader claims an individual was not acting as a consumer, the trader must prove it. While Part $2$ of the CRA applies to both standard and individually negotiated terms, it specifically does not apply to contracts of employment or apprenticeship per section $61(2)$.

Categorization of Contractual Terms: Wholly Ineffective vs. Test of Fairness

The CRA employs two primary methods of control over contractual terms. The first category consists of 'wholly ineffective' terms, which are blacklisted and considered legally void regardless of their perceived fairness. These are terms that seek to exclude or limit liability for fundamental obligations. The second category includes terms that are theoretically effective but are subject to a 'test of fairness.' If such a term is found to be unfair under the statutory criteria, it will not be binding on the consumer.

Wholly Ineffective Terms (The 'Blacklist')

Certain categories of terms are strictly prohibited and rendered wholly ineffective by the CRA. Section $65(1)$ explicitly states that a trader cannot use a term in a consumer contract or a consumer notice to exclude or restrict liability for death or personal injury resulting from negligence. General disclaimers suggesting customers use equipment or premises 'at their own risk' are only acceptable if they are qualified such that liability is only restricted where the trader is not at fault, as noted in the CMA Guide (paragraphs $5.3.2.$ and $5.3.3.$).

In contracts for the sale of goods, section $31$ provides that terms are not binding to the extent they seek to restrict or exclude liability under several key provisions: section $9$ (goods to be of satisfactory quality), section $10$ (fitness for particular purpose), section $11$ (description), section $12$ (pre-contract information), section $13$ (sample matching), section $14$ (model matching), section $15$ (installation), section $16$ (digital content conformity), section $17$ (right to supply), section $28$ (delivery), and section $29$ (passing of risk). Furthermore, section $9(1)$ mandates that every contract for the supply of goods is treated as including a term regarding satisfactory quality.

Similar protections exist for digital content and services. Section $47$ renders terms ineffective if they exclude liability for digital content quality (section $34$), fitness (section $35$), description (section $36$), pre-contract information (section $37$), or the right to supply (section $41$). For services, section $57$ prevents the exclusion of liability regarding section $49$, which requires services to be performed with reasonable care and skill.

The Test of Fairness under s. 62(4) CRA

All terms not falling into the wholly ineffective category are subject to the test of fairness. According to section $62(4)$, a term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer. As established in $DGFT$ v First National Bank plc ($2001$), a challenger must demonstrate that the term violates both the 'good faith' and 'significant imbalance' limbs of this test. The CRA remains silent on which party bears the burden of proof for this assessment.

Detailed Analysis of 'Good Faith' and 'Significant Imbalance'

Lord Bingham in $DGFT$ v First National Bank plc ($2001$) defined 'good faith' as relating to 'fair and open dealing.' This requires that the trader does not take advantage of the consumer's necessity, indigence, lack of experience, unfamiliarity with the subject matter, or weak bargaining position. Lord Steyn further clarified that good faith covers both 'procedural' and 'substantive' unfairness, emphasizing that the transparency of terms is vital. A term may violate good faith if it causes serious substantive imbalance or if it lacks transparency despite causing only a moderate degree of imbalance.

'Significant imbalance' focuses primarily on substantive fairness. Lord Bingham described this as occurring when a term is so weighted in favor of the supplier that it tilts the parties' rights and obligations significantly in the supplier's favor. The case of $C-415/11$ Aziz v Catalunyacaixa, confirmed in Parking Eye v Beavis ($2015$), provided a two-step inquiry: first, whether the consumer is deprived of an advantage they would enjoy under national law without the term; and second, whether the supplier, dealing fairly and equitably, could reasonably assume the consumer would have agreed to such a term in individual negotiations.

The Indicative and Non-Exhaustive List of Terms (The 'Grey List')

Schedule $2$, Part $1$ of the CRA contains an indicative list of $20$ terms that may be regarded as unfair. This 'grey list' serves as a guide for courts and regulators. Notable examples include paragraph $2$, which covers terms limiting legal rights in the event of non-performance, and paragraph $3$, covering terms where the trader's performance depends solely on the trader's will. Paragraph $4$ addresses terms allowing the trader to retain consumer payments upon cancellation without providing equivalent compensation if the trader cancels.

Paragraph $5$ and $6$ target terms requiring consumers to pay disproportionately high compensation for breaking the contract or for services not yet supplied. Paragraph $9$ highlights terms that automatically extend contracts of fixed duration when the deadline for the consumer to opt out is unreasonably early. Furthermore, paragraph $20$ prohibits terms that hinder a consumer’s right to legal action, such as requiring exclusive arbitration or restricting evidence. The CMA Guide ($5.29.7$) notes that consumers should not be prevented from using their local courts.

Case Study: Office of Fair Trading v Ashbourne Management Services Ltd (2011)

In this case, Ashbourne Management represented around $700$ gyms and recruited approximately $300,000$ members on standard form contracts. The court examined $13$ different contracts and found several terms unfair under the requirements of good faith and significant imbalance. Specifically, minimum membership periods of $12$, $24$, or $36$ months were found to be 'traps.' These terms were designed to take advantage of the naivety of average consumers who overestimate their future attendance.

Other terms found unfair in this case included early termination payments, which required immediate payment of all future installments (sometimes with or without a discount), and the requirement for termination notices to be sent to the management company rather than the gym itself. The court held these terms were contrary to good faith because they failed to address the practicality or affordability of continued gym use for the average consumer.

The 'Core Terms' Exception and s. 64 CRA

Section $64(1)$ stipulates that a term may not be assessed for fairness if it specifies the 'main subject matter' of the contract or relates to the 'adequacy of the price' (the appropriateness of the price comparison with the goods/services supplied). These are known as 'core terms.' The justification, as seen in $OFT$ v Abbey National Plc ($2009$), is that these terms are the primary focus of the consumer's attention during the bargain.

However, the scope of this exclusion is interpreted differently in case law. In $C-26/13$ Kasler v $OTP$ Jelzalogbank Zrt, the $CJEU$ held that the 'main subject matter' only includes terms laying down essential obligations that characterize the contract. Regarding the 'adequacy of price,' the House of Lords in $DGFT$ v First National Bank ($2001$) suggested a restrictive interpretation, while the Supreme Court in $OFT$ v Abbey National ($2009$) interpreted it broadly to include any monetary consideration. It is important to note that while the court cannot judge if the price is 'too high,' it can still assess fairness regarding the timing, method, or right to vary that price.

Transparency and Prominence Requirements

Core terms are only excluded from the fairness assessment if they satisfy the requirements of being both 'transparent' and 'prominent' under section $64(2)$. Transparency, per section $68$, means terms must be in plain, intelligible language and must be legible. The $CJEU$ in Kasler emphasized that transparency must enable the consumer to evaluate the economic consequences of a term based on clear criteria. Section $69$ adds that if a term is ambiguous, the interpretation most favorable to the consumer must prevail.

Prominence, defined in section $64(4)$, requires that a term be brought to the consumer’s attention such that an average consumer would be aware of it. The CMA notes that consumers are not expected to read small print; thus, for a term to be prominent, it must be presented such that the consumer can understand the essential features of the bargain and compare it with other offerings before concluding the contract. This creates a tiered system of protection: from simple legibility to a deep understanding of economic effects.

Legal Effects and Judicial Obligations regarding Unfair Terms

If a term is found to be unfair, section $62(1)$ and $(2)$ dictate that it is not binding on the consumer. However, under section $67$, the rest of the contract remains in effect as far as is practicable without that term. A unique feature of the CRA, as stated in section $71(2)$ and $(3)$, is the 'ex officio' obligation of the court. This means the court must consider the fairness of terms even if the parties themselves have not raised the issue, provided there is enough factual material to do so.

Enforcement Mechanisms: Private Action and Regulatory Intervention

Enforcement occurs through two channels: individual (private) and collective (regulatory). Private enforcement involves individual consumers taking legal action when harmed. Collective enforcement, governed by section $70(1)$ and Schedule $3$, allows public authorities to take proactive, preventive action. This protects a large number of consumers and has historically resulted in the removal of tens of thousands of unfair terms.

Regulatory bodies empowered under Schedule $3$ include the CMA, the Financial Conduct Authority ($FCA$), the Information Commissioner, the Gas and Electricity Markets Authority, the Water Services Regulation Authority, and the Office of Rail Regulation. These authorities can consider complaints, seek court injunctions to stop the use of unfair terms, obtain undertakings from businesses, and publish advisory information. Common law remains relevant as a preliminary step to determine if a term was properly incorporated or to interpret its meaning before the CRA is applied.

Comparison of the Consumer Rights Act 2015 and the Unfair Contract Terms Act 1977

There are several key distinctions between the two acts. $UCTA$ primarily covers $B2B$ contracts, whereas the CRA covers $B2C$ contracts. While $UCTA$ mainly applies to exemption clauses, the CRA applies to all terms except 'core' terms. $UCTA$ includes a small 'blacklist,' whereas the CRA includes a small blacklist and an extensive 'grey list.' In terms of review, $UCTA$ uses a 'reasonableness' test with the burden of proof on the party relying on the term. The CRA uses a 'fairness' test with a neutral assessment by the court.

Additionally, there is no duty for the court to consider reasonableness under $UCTA$ unless raised, but the CRA imposes an 'ex officio' duty to consider fairness. Enforcement under $UCTA$ is limited to the immediate parties of the contract, while the CRA allows for regulatory (collective) enforcement to prevent future use of unfair terms across the market. These differences reflect the CRA’s purpose as a robust consumer protection tool designed to rectify the power imbalance between traders and individuals.

Consumer Rights Act 2015 & Unfair Terms — Expanded Notes, Key Cases & Legal Principles (UK Contract Law)

Purpose of the Consumer Rights Act 2015

Consumer Rights Act 2015

(CRA)

The Consumer Rights Act 2015 is the main statute governing:

• unfair terms,

• consumer protections,

• and trader obligations

in business-to-consumer (B2C) contracts.

Background of the CRA

The CRA implemented:

• EU Directive 93/13/EEC on unfair terms.

It is heavily influenced by:

• Court of Justice of the European Union (CJEU) case law.

Relationship with UCTA

The CRA largely replaced:

• Unfair Contract Terms Act 1977

for consumer contracts.

Key Difference

Consumer Definition

Section 2(3) CRA

A consumer is:

an individual acting wholly or mainly outside their trade, business, craft, or profession.

Trader Definition

Section 2(2) CRA

A trader is:

a person acting for purposes relating to their trade, business, craft, or profession.

Burden of Proof

Section 2(4)

If a trader argues somebody is not a consumer:

the trader bears the burden of proving it.

Scope of Part 2 CRA

Part 2 regulates:

• unfair terms,

• consumer notices.

It applies to:

• standard terms,

• individually negotiated terms.

Excluded Contracts

Section 61(2)

The CRA does not apply to:

• employment contracts,

• apprenticeship contracts.

Two Main Controls Under the CRA

The CRA controls terms through:

1. wholly ineffective terms,

2. the fairness test.

Wholly Ineffective Terms (“Blacklist”)

Certain clauses are automatically void regardless of fairness.

Section 65(1): Death and Personal Injury

A trader cannot exclude liability for:

• death,

• or personal injury caused by negligence.

Negligence Under CRA

Negligence includes:

• lack of reasonable care,

• lack of reasonable skill.

Consumer Goods Protections

Section 31

A trader cannot exclude key statutory rights relating to:

• satisfactory quality,

• fitness for purpose,

• description,

• sample,

• installation,

• delivery,

• passing of risk.

Section 9: Satisfactory Quality

Goods supplied under consumer contracts must be:

of satisfactory quality.

This is a mandatory implied term.

Fitness for Purpose

Section 10

Goods must be reasonably fit for any purpose made known to the trader.

Description

Section 11

Goods must match their description.

Digital Content Protections

Section 47

Traders cannot exclude liability regarding:

• digital quality,

• fitness,

• description,

• right to supply digital content.

Services Protections

Section 57

Traders cannot exclude liability under:

• section 49.

Section 49: Reasonable Care and Skill

Services must be performed:

with reasonable care and skill.

The Fairness Test

All non-blacklisted terms are subject to the fairness test.

Section 62(4)

A term is unfair if:

contrary to good faith, it causes a significant imbalance in the parties’ rights and obligations to the detriment of the consumer.

Two Requirements of Unfairness

The claimant must show:

1. lack of good faith,

2. significant imbalance.

Director General of Fair Trading v First National Bank plc

Facts

The case concerned a clause allowing continued interest after court judgment.

Decision

The House of Lords analysed the meaning of:

• good faith,

• significant imbalance.

Legal Principle

Both elements must be established for unfairness under the CRA framework.

Good Faith

Good faith means:

fair and open dealing.

Lord Bingham’s Definition

Good faith requires traders not to exploit:

• consumer ignorance,

• weak bargaining power,

• lack of experience,

• financial necessity.

Procedural and Substantive Fairness

Lord Steyn stated good faith includes:

1. procedural fairness,

2. substantive fairness.

Procedural Fairness

Focuses on:

• transparency,

• clarity,

• proper notice,

• ability to understand terms.

Substantive Fairness

Focuses on:

• whether the actual term is excessively one-sided.

Significant Imbalance

A significant imbalance exists where:

the contract heavily favours the trader at the consumer’s expense.

Aziz v Caixa d’Estalvis de Catalunya Tarragona i Manresa

Legal Principle

The court asks:

1. whether the consumer loses protections otherwise available under national law,

2. whether a fair trader could reasonably expect agreement to the term during individual negotiations.

ParkingEye Ltd v Beavis

Facts

A motorist challenged an £85 parking charge as unfair.

Decision

The Supreme Court held the charge was enforceable because:

• it served legitimate commercial interests,

• and was sufficiently transparent.

Legal Principle

A term is not automatically unfair simply because it disadvantages consumers financially.

The Grey List

Schedule 2 CRA

The CRA contains an indicative “grey list” of potentially unfair terms.

The list is:

• non-exhaustive,

• persuasive rather than automatic.

Examples of Grey List Terms

Potentially unfair terms include:

• excessive cancellation charges,

• automatic renewals,

• unilateral price changes,

• disproportionate penalties,

• restrictions on legal remedies.

Paragraph 2

Terms limiting legal remedies for breach may be unfair.

Paragraph 4

Terms allowing traders to retain payments when consumers cancel may be unfair.

Paragraphs 5 and 6

Disproportionate compensation clauses may be unfair.

Paragraph 9

Automatic renewal clauses may be unfair where cancellation deadlines are unreasonable.

Paragraph 20

Terms restricting access to courts or legal action may be unfair.

Competition and Markets Authority

Guidance

The CMA guidance states consumers should not be prevented from:

• accessing local courts,

• bringing legitimate legal claims.

Office of Fair Trading v Ashbourne Management Services Ltd

Facts

Gym membership contracts imposed:

• long minimum terms,

• harsh cancellation fees,

• restrictive termination procedures.

Decision

Many terms were held unfair.

Legal Principle

Consumer contracts exploiting unrealistic consumer expectations may breach:

• good faith,

• and create significant imbalance.

Core Terms Exception

Section 64 CRA

Certain “core terms” are exempt from fairness review.

These include:

1. main subject matter,

2. adequacy of price.

Reason for the Exception

Courts avoid interfering with:

• core commercial bargains,

• pricing decisions freely chosen by consumers.

Office of Fair Trading v Abbey National plc

Facts

The case concerned bank overdraft charges.

Decision

The Supreme Court interpreted “price” broadly.

Legal Principle

Core pricing terms may fall outside fairness review if sufficiently transparent and prominent.

Kásler v OTP Jelzálogbank Zrt

Legal Principle

The “main subject matter” exception only applies to terms defining the essential obligations of the contract.

Transparency Requirement

Section 68 CRA

Terms must be:

• plain,

• intelligible,

• legible.

Transparency and Economic Consequences

Kásler v OTP Jelzálogbank Zrt

Legal Principle

Consumers must be able to understand:

• the economic consequences,

• practical effects,

• and financial risks

of contractual terms.

Ambiguous Terms

Section 69 CRA

Ambiguous terms are interpreted:

in the way most favourable to the consumer.

This reflects the contra proferentem principle.

Prominence Requirement

Section 64(4)

Core terms are exempt only if:

sufficiently prominent.

Prominence

A term is prominent if:

an average consumer would be aware of it.

Small print hidden in lengthy contracts may fail this requirement.

Effect of Unfair Terms

Sections 62(1) and (2)

Unfair terms are:

not binding on the consumer.

Severance

Section 67

The remainder of the contract continues where possible without the unfair term.

Ex Officio Duty

Section 71

Courts must consider unfairness:

even if the parties themselves do not raise the issue.

This is called the:

ex officio obligation.

Importance of Ex Officio Review

This strengthens consumer protection because:

• consumers may lack legal knowledge,

• consumers may not realise terms are unfair.

Enforcement Mechanisms

The CRA allows:

1. private enforcement,

2. collective regulatory enforcement.

Private Enforcement

Individual consumers may:

• challenge unfair terms in court.

Collective Enforcement

Public bodies may:

• investigate businesses,

• seek injunctions,

• prevent widespread unfair practices.

Regulatory Bodies

Authorities include:

• Competition and Markets Authority,

• Financial Conduct Authority,

• Information Commissioner,

• Ofgem,

• Ofwat,

• Office of Rail Regulation.

Regulatory Powers

Authorities may:

• seek injunctions,

• obtain undertakings,

• publish guidance,

• investigate traders.

Continued Role of Common Law

Common law remains important because courts still examine:

1. incorporation,

2. interpretation,

3. contractual meaning

before applying statutory controls.

Comparison: CRA vs UCTA