The FSA states in the guidance that it is concerned at the number of unfair clauses it comes across in consumer contracts, such as rights to unilaterally alter or terminate a contract, rights to transfer obligations under a contract and contractual terms that are not in plain English. Whilst the FSA’s guidance is intended only for firms regulated by the FSA, it is a useful reminder to everyone involved in commerce as to what unfair terms are and how businesses can avoid imposing an unfair term on a consumer. The FSA can take action against businesses registered with it for unfair contractual terms, for example by obtaining a court injunction to prevent an unfair term being used any further by the business. The Office of Fair Trading (OFT) can also take action in the wider market place against offending practices.

The FSA sets out that, if a business can specify a valid reason within the contract itself as to why terms might be unilaterally altered, the right to unilaterally alter the contract is less likely to be considered unfair. A right of alteration is unlikely to be valid if it is, for example, in the business’s absolute discretion or to cover “unexpected” costs. In addition, stating that the contract can be altered “for any valid reason” will not be enough. If a business does alter a term that has a significant impact on the consumer’s obligations under a contract, such as varying charges payable by the consumer, the consumer should be informed of the change as soon as possible and given the chance to terminate the contract with immediate effect, without charge or other “practical” barriers put in place by the business to prevent the contract coming to an end.

Similarly, in relation to the transfer of obligations to third parties, the business should make sure that the guarantees provided to the consumer by the third party are the same as or better than those offered by the business itself – they key is stability and certainty for the consumer. The guidance states that consumers should be adequately informed of any transfer in good time for the consumer to fully understand the impact on the contractual relationship.

Simon Weinberg, a solicitor in the Commercial/IP/IT team at Matthew Arnold & Baldwin and assistant editor of Upload-Commercial/IP/IT, commented, “This guidance, whilst useful, does not necessarily tell us anything new. It is an important reminder for businesses of the requirement to have contractual terms that do not unfairly prejudice the consumer. It is not just the risk of an injunction to prevent the future use of those terms that should be taken into consideration – in addition, businesses should remember the bad press that can come with an injunction and the knock-on effect on consumer goodwill to an offending business. At a time when margins are tight and goodwill is essential to survival in the marketplace, getting contractual terms in order is an easy way to avoid the risk of an FSA or an OFT investigation, and all the reputation damage that can come with it.”

The High Court has agreed with the OFT that such a minimum term was unfair and designed to take advantage of the naivety and inexperience of the average consumer and were weighted in favour of the gym or health club causing a significant imbalance in the parties’ rights and obligations. Gym members would not anticipate all the events which might render the use of the gym impractical and the agreements did not address the tendency of users to overestimate the amount that they would want to use the gym when signing up. Accordingly, those provisions were unfair contrary to the Unfair Terms in Consumer Contracts Regulations 1999 and were unenforceable.

In addition, the practice of describing members who wanted to terminate their agreements as defaulters and registering or threatening to register that with credit reference agencies was an unfair commercial practice and harmed the collective interests of consumers, contrary to the Consumer Protection from Unfair Trading Regulations 2008.

The OFT investigation centred on concerns that consumers were being unfairly pressured into selling their gold. Payments for gold were sent to consumers with the requirement that consumers had to reject and return the payment within a restrictively short time period if they wanted their gold returned, failing which their gold would be melted down.

There was also concern in relation to the clarity of the pricing methods for any gold sent in and insurance arrangements for the time when the gold was in transit. It was also noted that consumers were being denied their legitimate cancellation rights and legal redress rights for loss or damage to goods when in transit, and that the terms and conditions of the companies were not in plain and intelligible English.

Whilst the companies denied any wrongdoing, the OFT was of the opinion that the trading practices of those companies under investigation were a breach of the Consumer Protection from Unfair Trading Regulations 2008 and the Unfair Terms in Consumer Contracts Regulation 1999.

In lieu of court action, the OFT obtained written promises from the three remaining trading companies to change their trading practices to ensure compliance with the law. The promises included:

• The provision of an option for consumers to receive either a quote requiring acceptance or payment for their gold.
• The provision of clearer pricing information.
• Explaining the risks.
• Making clear that the ‘top’ price for gold they were receiving was based on the scrap value of the gold rather than the marketable commercial value.
• Not claim to be the number one buyer when this was not the case.
• Have clearer information about consumers’ legitimate rights.

The ECJ has ruled that the Hungarian court should consider whether a term dealing with jurisdiction of disputes is fair for consumers. If it is a long way for the consumer to travel, it could have the effect of denying the consumer access to justice. Depending on the circumstances, this may not be fair. A national court should consider this issue of its own volition even if the point is not specifically argued by the consumer.

The European Commission is considering a new Directive on Consumer Rights. The Government asked businesses and consumers whether they agreed with an extension of laws concerning unfair contract terms to cover other elements of a particular transaction that may not be its core focus, such as holiday surcharges and luggage frees. The question posed by the Government was whether such charges needed to be justified as not being ‘unfair’ to the consumer.

It was not surprising that business responded negatively, arguing that market forces and competition already kept prices fair, and that additional regulation was not needed. Consumers argued that such ‘side-show’ charges were not necessarily paid attention to be consumers, and therefore they required protection in this area as well as the core charges.

The Government anticipates having the discretion to implement such regulations domestically if it chooses, rather than the issue being dealt with at EU level.

In this particular case, Caja de Madrid, a Spanish mortgage lender, had a contract term saying that interest would be rounded up to the nearest quarter of a percentage point. Ausbanc, a consumer group, argued that the term was unfair. The matter went to the highest Spanish court. Caja de Madrid said that it was a core term and so should not be assessed for fairness, but Ausbanc countered that the Spanish laws implementing the Directive had not made that proviso and so it could be assessed.

The question was whether Spanish laws could bring the Directive into law in a more consumer-beneficial way than was provided for under the Directive. The European Court of Justice said that it could. That Directive was one that ensured consumers had minimum rights, but there was nothing to stop each country from increasing the benefit for consumers by the way they implemented the laws. The UK implemented the Directive with the exemption, so the consumers would be unable to challenge it here. However, the case is interesting if the Government ever wants to change English law to give consumers more protection. A key reason for the banks winning their high-profile bank charges case a few months ago was that those terms were core to the bargain and so could not be challenged under English law.

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of www.Upload-IT.com, comments: ‘This case impacts on anyone who deals with consumers for long-term contracts. The impact is serious. The OFT has clearly taken the view here that three year terms without the right to cancel are too long. The business in question presumably thought it had a debt owing and sent the matter to debt collectors. However, since the OFT considered the clause to be unfair, its tactics in pressurising the consumers to pay up was deemed to be aggressive. Breach of the 1999 Regulations only mean that a term is unenforceable, whereas breaching the 2008 Regulations would amount to a criminal offence. For now, we don’t know what a court will decide – only that the OFT doesn’t like what AMS has done – so it will be worth watching the outcome from the courts.’

• did not exclude liability for faulty or mis-described goods;
• were consistent with consumer rights under the Distance Selling Regulations;
• were drafted in plain and intelligible language;
• did not allow changes to be made after agreements had been made.

The Office of Fair Trading wanted to bring a test case to see if banks’ current account charges were fair. In particular, it was concerned on behalf of consumer bodies that overdraft charges were excessive. Several banks co-operated and they fought a test case that eventually went to the Supreme Court (previously known as the House of Lords). Rather than fight the entire battle as to the issue of fairness of the actual terms, the initial skirmish looked to resolve whether the overdraft charges were excluded from an assessment of fairness. The issue was whether the charges were part of the price or remuneration and so should not be considered.

The High Court and Court of Appeal ruled that the terms were in plain, intelligible English, but  sided with the OFT on the fairness point. Now, in one of its first judgments since being formed, the Supreme Court has given its landmark judgment that affects millions of people. It has gone the other way and sided totally with the banks on this issue.

The Supreme Court said that the banks were correct in saying that the charges were part of the payment in exchange for a global package of services. The Court of Appeal had no basis for having said that some bits of the goods or services or price were ‘essential’ items and more important than others. Any monetary price or remuneration or goods or services provided would fall within the exemption. Banking services were part of a package of services and the price paid by consumers included the charges for going overdrawn. It is irrelevant that the charges are contingent or not incurred by the majority of customers. Even if some goods or services are ancillary to the overall banking service, if the charges for them are under the same contract then they are all part of the price for the purposes of the exemption.

The Supreme Court added that the OFT was wrong to argue that the admin charges were default charges – consumers were not in breach of contract by going overdrawn, but it was expected that they may go into overdraft from time to time and they would have to pay a charge for using that part of the service. Those charges were an important part of the banks’ revenue streams and were not intended to be seen as consumers defaulting on the contract.

As Lady Hale from the Supreme Court said, consumer law aims to give consumers informed choices rather than to protect them from making choices that may be unwise for them. Paul Gershlick, editor of www.Upload-IT.com and a Partner at Matthew Arnold & Baldwin LLP, says: ‘This is a great result for the banking sector and most banking customers – banks would otherwise have had to charge for their other services in other ways and a different result could have spelt the end of free retail banking. The judgment is also good, because there has been a lot of uncertainty in the business world about charging extra ‘admin’ costs. This ruling shows that as long as the charges are presented in a clear way with the contract terms, if they form part of the same overall contract for the goods or services, their amount cannot be challenged. The aim of the 1999 Regulations is to protect consumers from terms which they may not be aware of in the small print, but consumers should be taken to have given enough attention to what they have bought and what they are paying for that.’