Scottish Law Commission on hidden contract details

We, the Scottish and English Law Commissions, have just published advice to the UK government recommending reform of the law surrounding such unfair terms in consumer contracts. This will feed into the government’s wider plan for empowerment through a consumer bill of rights.

Current law is governed by two overlapping regimes, one from the 1970s, the other from the EU. In 2005, we recommended a harmonised regime but the government asked us to look at this area again following a high-profile case about bank charges.

In 2009, the UK Supreme Court ruled that hidden terms enabling banks to charge for unauthorised overdrafts were exempt from assessment for “fairness” by the courts. The exemption applied because, the court said, the charges formed part of the main price of the contract, not just an ancillary charge, and the law did not allow actual prices to be checked for fairness. The thinking in this case could potentially apply to hidden charges in other types of contract. This made it crucial to further clarify the law.

Our advice recommends that for price terms to be exempt from a fairness assessment, they must be “transparent” (clear) and “prominent”, (presented in such a way that the average consumer would be aware of them). This more liberal test should increase the types of term assessable for fairness by the courts.

The Office of Fair Trading (OFT) has powers to make businesses stop using unfair terms, and our changes should make their job easier.

We also hope that our recommendations will encourage businesses to be transparent when drafting consumer contracts, and therefore prevent unfair terms from appearing.

Where complaints are necessary, however, it is essential that regulators and the courts have access to guidance promoting the key aims of clarity and certainty. We recommend that the government should hold discussions with the OFT and other enforcement bodies to prepare such guidance. This will also benefit businesses, giving them greater clarity on how to make terms transparent and prominent, as well as informing them about the approach they can expect regulators and the courts to take. Overall, this should reduce consumers’ need to resort to litigation.

That this can work is shown by the OFT’s use of its existing enforcement powers for the benefit of gym members. This affected three well-known companies – Bannatyne’s, David Lloyd, and Fitness First. Lengthy membership contracts, which members could not cancel despite changes of circumstance such as suffering an injury or losing a job, were found unfair. The gyms have agreed to change their terms to make them more transparent and improve the cancellation rights of members.

But the law is still unclear on hidden charges and other common terms. Previous cases about gym contracts in the courts produced mixed results. It therefore remains vital that the progress being made by regulatory bodies is supported by our proposed legal changes.

Our recommendations also include more powers to remove legal jargon in end user licence agreements (EULAs). Online consumers are commonly faced with a “take it or leave it” choice of contract terms when downloading e-books or streaming music. Typically, a EULA gives a consumer only very limited rights in relation to what they are buying. As e-commerce expands, so does the variety and importance of EULAs in defining what can be done with them. The suppliers have argued that consumer legislation does not apply to EULAs because they are “licences” rather than “contracts”. Our recommendations close this supposed loophole.

At a time of reducing public expenditure, it is more important than ever that private enforcement in small claims cases should be facilitated by the law, and the courts provided with clear guidance. It is also important to reform the law so that fewer unfair terms are introduced in the first place and regulatory bodies are more easily able to deploy their protective powers. If implemented, our recommendations will benefit businesses and consumers by ensuring that the law is clear, fair and certain.

• The Scottish Law Commission consumer law team are Hector MacQueen, Gillian Swanson and Julie Davidson