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UNFAIR CONTRACT TERMS LEGISLATION: THE
IMPLICATIONS OF WHY WE NEED IT FOR ITS
FORMULATION AND APPLICATION
Tjakie Naude´ BA LLD
1 Introduction
Legislative control over unfair contract terms is regarded in many countries as an essential tool in the law’s response to the abuses attendant upon the use of non-negotiated or standard contract terms.^1 Some countries go further and extend statutory fairness control to negotiated terms.^2 The need for unfair contract terms legislation has also repeatedly been pointed out in South Africa, 3 including by a few judges 4 and the
- I am grateful to the Oxford Institute of European and Comparative Law, particularly its Director, Stefan Vogenauer, for hosting me as a visiting fellow in Oxford where this research was done. I also benefited from financial assistance by the National Research Foundation, the Harry Crossley Fund
1 and the International Office of the University of Stellenbosch. Such legislation has long been the norm in Europe. See, eg, the German Standard Contract Terms Act of 1978 (AGBG) now incorporated into the Civil Code (BGB) (} 305 et seq) and the Swedish Consumer Contract Terms Act of 1994, which replaced an Act from 1971 of the same title. See also the EC Directive on Unfair Terms in Consumer Contracts 93/13/EEC of 5 April 1993 (the Unfair Terms Directive), and reports on its implementation collated in 1995 European Review of Private Law. Other countries with such legislation include Zimbabwe, many South American countries, Asian countries like Japan, Hong Kong and Thailand, Israel, and provinces in Australia and Canada (many of these are mentioned in the South African Law Commission’s Report on Unreasonable Stipulations in Contracts and the Rectification of Contracts Project 47 April 1998). By standard terms I mean previously formulated terms intended for repeated and general use. Non-negotiated terms, as the term is used in Europe, is a wider concept between standard terms and individually negotiated terms. It refers, in the words of the Directive, to a term drafted in advance, where the consumer has not been able to influence the substance of the term, particularly in the context of a pre-formulated standard contract. Non- negotiated terms therefore includes terms pre-formulated for a specific contract, but the Directive excludes a review of the core terms as to price and subject matter insofar as these are transparent. See also, eg, Micklitz German Unfair Contract Terms Act and the EC Directive 93/13 in Lonbay (ed)
2 Enhancing the Legal Position of the European Consumer^ (1996) 173 180. The Nordic countries provide examples (see Wilhelmsson Standard Form Conditions in Hartkamp et al Towards a European Civil Code (2004) 431 441). See also the English Unfair Contract Terms Act 1977 3 which is not limited to standard terms, although its scope is more limited than the title suggests. See, eg, Turpin ‘‘Contract and Imposed Terms’’ 1956 SALJ 144; Aronstam Consumer Protection, Freedom of Contract and the Law (1979); Ko¨ tz ‘‘Controlling Unfair Contract Terms: Options for Legislative Reform’’ 1986 SALJ 405; Van der Walt ‘‘Die Huidige Posisie van die Suid-Afrikaanse Reg met betrekking tot Onbillike Kontraksbedinge’’ 1986 SALJ 647; Eiselen ‘‘Die Standaardbedingpro- bleem: Ekonomiese Magsmisbruik, Verbruikersvraagstuk of Probleem in Eie Reg?’’ 1988 De Jure 251, 1989 De Jure 44; Eiselen Die Beheer oor Standaardbedinge: ’n Regsvergelykende Ondersoek Unpublished LLD dissertation, University of Potchefstroom (1988); Van der Walt ‘‘Kontrakte en Beheer oor Kontrakvryheid in ’n Nuwe Suid-Afrika’’ 1991 THRHR 367; Van der Walt ‘‘Aangepaste Voorstelle vir ’n Stelsel van Voorkomende Beheer oor Kontrakteervryheid in die Suid-Afrikaanse Reg’’ 1993 THRHR 65; Lewis ‘‘Fairness in South African Contract Law’’ 2003 SALJ 330; cf Kerr The Principles of the Law of Contract 6 ed (2002) 661. (^4) Western Bank Ltd v Sparta Construction Co 1975 1 SA 839 (W) 840 and Linstom v Venter 1957 1 SA 125 (SWA), cited by Aronstam Consumer Protection 16 24.
Law Commission in their 1998 Report on Unreasonable Stipulations of Contracts and the Rectification of Contracts. 5 Subsequent to that Report, some South African writers have still suggested that common law mechanisms for controlling one-sided terms (such as interpretation and the requirement of legality) 6 may be flexible enough to deal sufficiently with the problem. 7 In addition, some writers commenting on the Supreme Court of Appeal’s subsequent failure to strike down a clearly unfair exemption clause in a private hospital admission form,^8 have tended to plead only for a greater role for constitutional values and common law principles and control mechan- isms, without calling for general unfair terms legislation. 9 This may perhaps suggest some confidence in the common law and the Bill of Rights on their own. 10 In my view, common law mechanisms and judicial control cannot sufficiently address the problems in this area, regardless of how wide judges would be prepared to interpret their powers under the Constitu- tion or the common law. 11 Legislative control in the form of unfair contract terms legislation (which inter alia gives a general power to courts to strike out or amend unfair terms) is necessary. South Africa already has some sector-specific legislation that imposes a measure of control over the contents of certain contract types, such as the National Credit Act 12 and the Rental Housing Act, 13 but these are insufficient to address the problem of unfair contract terms, which is more pervasive.^14 The South African Department of Trade and Industry (DTI) has therefore taken a step in the right direction by including provisions on unfair terms control in their proposed Consumer Protection legislation (which has not yet been finalised). 15 Thus South Africa will probably
(^5) See n 1 supra. This report was effectively shelved after publication. (^6) The requirement of legality implies that contracts may not be enforced insofar as they are contrary to public policy. The most important case is Sasfin v Beukes 1989 1 SA 1 (A). (^7) Hefer ‘‘Billikheid in die Kontraktereg volgens die Suid-Afrikaanse Regskommissie’’ 2000 TSAR 142; Hopkins ‘‘Standard-form Contracts and the Evolving Idea of Private Law Justice: A Case of Democratic Capitalist Justice Versus Natural Justice’’ 2003 TSAR 150; Hefer ‘‘Billikheid in die Kontraktereg’’ 2004 Tydskrif vir Regswetenskap 1. Cf Jamneck ‘‘Die Konsepwetsontwerp op die Beheer
8 van Kontraksbedinge’’ 1997 TSAR 637. Afrox Healthcare Bpk v Strydom 2002 6 SA 21 (SCA). The clause excluding liability for bodily injury
9 caused by negligence was held to be neither surprising nor contrary to public policy. Eg, Tladi ‘‘Breathing Constitutional Values into the Law of Contract: Freedom of Contract and the Constitution’’ 2002 De Jure 306; Hawthorne ‘‘Closing of the Open Norms in the Law of Contract’’ 2004 THRHR 294; but cf Hawthorne ‘‘Distribution of Wealth, the Dependency Theory and the Law of Contract’’ 2006 THRHR 48. Cf Bhana & Pieterse ‘‘Towards a Reconciliation of Contract Law and Constitutional Values: Brisley and Afrox Revisited’’ 2005 SALJ 865 who, in criticising the Afrox case, argue in depth for a greater role for constitutional values in applying common law rules such as those on illegality, but mention in a footnote that they do not wish to state a preference for legislative enactment or judicial reform to facilitate constitutional compliance of contract law. (^10) Such writers may, however, have simply focused on common law and constitutional arguments because these are already available. (^11) As will be explained further below. (^12) 34 of 2005. (^13) 50 of 1999. (^14) Such legislation is bound to have lacunae in respect of unfair terms control (Ko¨ tz 1986 SALJ 405 409). (^15) Draft Consumer Protection Bill, 2006, published for comment in GN 418 in GG 28629 of 2006-03-15.
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generally is insufficient to deal with the problem on its own. This analysis will be applied to reach conclusions on some other broad choices to be made in formulating and applying unfair terms legislation. I will illustrate the practical implications of these choices in respect of some particular legislative techniques. A full consideration of all the major methodological choices raised by the prospect of unfair terms legislation can obviously not be attempted in one article. An analysis of the abuses attendant upon the use of unfair contract terms, and what such legislation generally seeks to achieve in this regard, is not the only determinant of good policy. For example, although one reason why control is justified over non-negotiated terms is also often present in business-to-business contracts (B2B contracts), the appropriate scope and form of control over B2B contracts is a complex issue, due to various other policy considerations at play. It therefore rather deserves a separate comprehensive study. Another controversy which will not be addressed here is the degree to which unfair terms legislation should also allow the striking out of negotiated terms. There are certainly some policy reasons for extending legislative control to negotiated terms in business-to-consumer contracts (B2C contracts), 18 but this is a somewhat complex question which I cannot properly address here. 19 I therefore do not, in this article, attempt to draw comprehensive conclusions on the correct methodological or theoretical paradigm(s) for unfair terms legislation in order to comment on these and all other fundamental choices on the scope of such statutory control. Nevertheless, I consider that the few choices that are commented upon are important to evaluate and improve the formulation and eventual application of unfair terms legislation. I also realise that more comprehensive, comparative research on some particular practical techniques mentioned by me will be beneficial to a more detailed proposal on their use, especially insofar as they were not considered fully by the South African Law Commission. 20 This article focuses primarily on ‘‘content control’’ in general unfair terms legislative provisions. Usually there are more steps than that involved in the control of unfair terms.^21 The first step involves incorporation control. This entails, for example, the common law rule that surprising clauses should be pointed out before they could form part of the contract, as
(^18) I do not include business-to-small-business contracts where the small business deals within its normal contractual sphere of competence when I speak of consumer contracts. The DTI proposals make no differentiation between such contracts and consumer contracts in a more traditional sense. Small businesses are always regarded as consumers for purposes of the Act, except in the case of certain high-
19 value transactions. All the provisions in the SA Law Commission’s proposed Bill, as well as those of the DTI’s draft Bill apply without differentiation to negotiated and non-negotiated terms, with the obvious intention that
20 courts may draw the necessary differentiation on the facts of a particular case. The DTI’s new proposals deviate from the Law Commission’s proposed Bill of 1998 in a number of respects. No explanatory memorandum or similar document was published to explain the choices made in the DTI draft Bill. (^21) See also Bernitz European Law in Sweden — Its Implementation and Role in Market and Consumer Law (2002) 246.
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well as formalities requirements, such as the new provisions proposed by the DTI which require express agreement on exemption and limitation of liability clauses, evidenced by signature next to such terms. 22 I will only make some remarks on possible dangers of the last mentioned legislative technique. Secondly, rules of interpretation, especially the contra profer- entem rule, play a role. Thirdly, other mandatory legislation must be kept in mind. This type of control may consist of ‘‘adding’’ mandatory implied terms to a contract type. If this is not relevant to a particular term, the content control of the unfair contract terms legislation comes into play. The first step in this part of the adjudication process would typically be considering any prohibited list of terms, and thereafter the general clause together with the provisions which seek to give guidance on its application. There is some link between incorporation control and content control in general unfair terms legislation, however. The suspicion that there is typically not enough justification for incorporation of unfair non- negotiated terms other than core terms, justifies overt content control. 23 This is because an examination of what typically happens in the context of non-negotiated terms (attempted below), suggests that the average consumer often creates no reasonable reliance that he would agree to unfair terms in the fine print. Instead, the user of the terms more likely creates a reasonable reliance by the signals it sends out through marketing etcetera that contracting with it would be a pleasurable experience, that the customer will be treated fairly and that the business would not seek to avoid liability. 24 As the proposed Consumer Protection legislation is far from finalised at the time of writing (and hopefully will still be subject to thorough debate and improvement for some time), no overview of the proposals thus far will be provided, but some of the draft provisions will be referred to to illustrate certain arguments.
2 The justification for intervention, and the resultant need for ‘‘content control’’, including ‘‘substantive unfairness control’’
2 1 The reasons and justification for intervention
The non-negotiated or standard terms of a B2C contract can often not be regarded as ‘‘the proper expression of the self-determination of both parties’’, which ultimately is the justification for enforcement of
(^22) S 50. (^23) The UK Law Commissions state in their Consultation Paper that one must accept that defects in the process of conclusion of such contracts are inevitable so that the substance of such contracts must be controlled overtly (Law Commission & Scottish Law Commission Unfair Contract Terms — a Joint Consultation Paper 7, Law Commission Consultation Paper No 166, Scottish Law Commission Discussion Paper No
- (hereafter UK Law Commissions Consultation Paper). (^24) Willett Good Faith and Consumer Contract Terms in Brownsword, Hird & Howells (eds) Good Faith in Contract: Concept and Context (1999) 67 76-77. Cf also Aronstam Consumer Protection 16; Eiselen 1988 De Jure 255.
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businesses resign themselves to accept standard terms is that it simply takes too much time and effort to read long, complex lists of standard terms every time one enters into a transaction, even for a relatively well- informed, sophisticated consumer in a competitive market.^32 It takes even more time and effort to think through and find out the implications or meaning of the standard terms, as will finding someone in the counterparty-organisation who has the authority to negotiate an amendment, suggesting alternative terms and bargaining about them, or shopping around for more favourable standard terms. 33 The transaction costs of doing any of the above are out of proportion to the dangers apparent to the average customer at conclusion of the contract. 34 There is therefore no easy alternative for the reasonable person but to submit, even without reading, and to focus only on the core terms, that is, the terms of immediate concern. 35 Without more, this probably justifies control, as the transaction costs in itself understandably inhibits a proper evaluation of the consequences of the transaction, which contradicts the assumption that the agreement resulted from self- determination by both parties. 36 Even the customer who understands that it is important to read the fine print, will therefore often realise at the same time, or very soon thereafter, that it will require just too much effort to actually obtain standard terms which are fairer. Such a customer may therefore eventually stop his or her practice of reading all the fine print in every contract. Attempts to negotiate standard terms, even amongst businesses, are therefore said to be rare. 37 (It has been said that any bargaining done by businesses in this area is usually aimed at acceptance of the whole of
(^32) Rakoff 1983 Harvard Law Review 1173 1226; Zweigert & Ko¨ tz Introduction to Comparative Law 3 ed (translated by Weir) (1998) 334-335; Howells & Weatherill Consumer Protection Law 19; Griggs ‘‘The [Ir]rational Consumer and Why We Need National Legislation Governing Unfair Contract Terms’’ 2005 Competition and Consumer Law Journal 1 16-17 27-28; Hillman ‘‘Online Boilerplate: Would Mandatory Website Disclosure of E-Standard Terms Backfire?’’ 2006 Michigan Law Review 837 839-
- Hillman mentions his empirical study involving contracts students which tends to show that only about 4% of American shoppers on the internet read standard terms available to them (as opposed to core terms as to price etc) (839 841-842). Cf Lewis 2003 SALJ 330 339; Thornton v Shoe Land Parking
33 Ltd^ 1971 2 QB 163 169. 34 See the authorities in n 32^ supra^ and Zimmermann^ New German Law of Obligations^ 176. Rebmann et al Mu¨nchener Kommentar Vorbemerkung zum } 305 Rn 5; Coester, Coester-Waltjen & Schlosser in Martinek (ed) J von Staudingers Kommentar zum Bu¨rgerlichen Gesetzbuch mit Einfu¨hrungsgesetz und Nebengesetzen — AGBG 13 ed (1998) Einl zum AGBG } 3 ff Rn 4; Maxeiner
35 2003 Yale Journal of International Law^ 109 114; Hillman 2006^ Michigan Law Review^ 837 840-841. Maxeiner 2003 Yale Journal of International Law 109 114; Rakoff 1983 Harvard Law Review 1173
- See Macneil ‘‘Bureaucracy and Contracts of Adhesion’’ 1984 Osgoode Hall Law Journal 5 6: ‘‘[N]o one can honestly say that consumers ought to read long documents of this kind. The many courts which over the years have casually or not so casually said that ignore the fact that if consumers actually did such a foolish thing the modern economy would come to a screeching halt.’’ This may be overstating the case somewhat. Core terms would concern, for example, the price and any warranty period. (^36) See the quotations from Zimmermann New German Law of Obligations 206. (^37) Coester et al Staudinger Einl zum AGBG } 3 ff Rn 4.
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the one or the other party’s terms, which is a less costly alternative to studying and haggling over individual terms). 38 Additional psychological factors are likely to dissuade customers, particularly unsophisticated consumers, from bargaining. 39 The standard form may appear official and invariable, for example. 40 Companies also generally send out signals in advertising and the like that contracting with them would only be a positive experience, and a customer is therefore lulled into a sense of security that he will always be treated fairly. 41 Even the sophisticated, more suspicious customer with time to read and bargain will often not wish to be seen as the one eccentric and difficult individual who haggles over terms which apparently only apply in exceptional circumstances and which all other customers are prepared to ‘‘accept’’ without more. This applies especially to consumer contracting which often takes place in a public space. In addition, such an eccentric customer is unlikely to find better alternatives or a different attitude to the normal ‘‘take-it-or-leave-it’’ one elsewhere. Even a marketplace which is competitive on the core terms does not usually ensure that fair standard terms or ‘‘fine print’’ are also on offer.^42 In fact, it may cause the eccentric consumer to have even less time to read and shop around for small print, given that more time has to be spent in comparing the core aspects of the many products on offer. The incentive for business to offer fair standard terms is therefore not increased at all. The increased need to remain competitive may perhaps even encourage businesses to shift more risks onto customers in the small print in an attempt to drive prices down. 43 Moreover, standard term contracts are often sprung on businesses and consumers at the very last moment when they have already decided to contract on the basis of the core terms which were disclosed to them from the start. Sometimes they have already made all sorts of arrangements which would be difficult to pull out from when confronted with the standard terms. This is an additional factor which would keep a consumer from bargaining about these terms. The situation in Afrox Healthcare Ltd v Strydom^44 provides an example. As has already been pointed out, 45 when a patient such as Strydom is confronted with the
(^38) Coester et al Staudinger Einl zum AGBG } 3 ff Rn 4. (^39) Eiselen 1989 De Jure 44 49. Of course, many consumers in South Africa are very vulnerable and not
40 well-informed about contractual matters at all. Eiselen 1989 De Jure 44 49. Consumers are intimidated from bargaining by all these realities (Howells
41 & Weatherill^ Consumer Protection Law^ 20). 42 Willett^ Good Faith and Consumer Contract Terms^ 76-77. Griggs 2005 Competition and Consumer Law Journal 1 23; UK Law Commissions Consultation Paper 8. (^43) Rakoff 1983 Harvard Law Review 1173 1227; UK Law Commissions Consultation Paper 9; Eiselen 1989 De Jure 44 50; Beale Legislative Control of Fairness: The Directive on Unfair Terms in Consumer Contracts in Beatson & Friedmann (eds) Good Faith and Fault in Contract Law (1995) 231; Beale ‘‘Inequality of Bargaining Power’’ 1986 Oxford Journal of Legal Studies 123 131; cf Howells Good
44 Faith in Consumer Contracting^ in Brownsword et al (eds)^ Good Faith in Contract^ 91 95. 2002 6 SA 21 (SCA). (^45) Naude´ & Lubbe ‘‘Exemption Clauses — A Rethink Occasioned by Afrox Healthcare Bpk v Strydom 2002 (6) SA 21 (SCA)’’ 2005 SALJ 441 461.
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Perhaps it is not too surprising that it has been questioned whether there is any justification at all for enforcing such standard terms insofar as they conflict with the background or residual rules of contract law. 50 Clearly, however, the use of standard terms per se is an inevitable phenomenon in modern business life, particularly in this age of complex organisational structures and mass marketing. 51 It is required, for example, by the efficient use of expensive managerial and legal talent so that more lowly-paid, less highly-trained personnel can contract with clients on a controlled basis.^52 The background rules also do not always provide sufficiently detailed rules for the complexities of modern business transactions. It has therefore been suggested that it is only the public interest in economic efficiency created by the standard terms that justifies the enforcement of non-negotiated standard terms (and not consensus or reasonable reliance thereof). 53 By implication, only standard terms which are necessary in the public interest should be enforced, and clearly not unjustifiably onerous and one-sided terms. 54 Rakoff argues that ‘‘invisible terms’’ should not be presumptively enforceable. Instead, the user should prove justification of deviation from the background law on the basis that enforcement contributes significantly to the maintenance of civic freedom, as this is ultimately why a firm should be allowed to organise itself by means of standard terms.^55 Thus he is in favour of a more ‘‘positive’’ approach which requires a business to prove that its non-core non-negotiated terms are fair and reasonable (whenever they conflict with background law). 56
2 2 The resultant case for content control
The first conclusion to be drawn is that content control is justified, at the very least in negative form by striking out (or amending) unfair terms. This is unquestioningly true in respect of non-negotiated terms, due to the
(^50) Wilhelmsson mentions (but does not advocate) the radical notion that businesses should only be allowed to supplement non-mandatory or residual rules, and not to change them in their favour in
51 standard terms (Standard Form Conditions^ 443).^ Cf^ Rakoff 1983^ Harvard Law Review^ 1173 1238. Rakoff 1983 Harvard Law Review 1173 1220-1223. For other claims on the usefulness of standard terms see, eg, Eiselen 1988 De Jure 254; Hopkins 2003 TSAR 150 153-154; Zweigert & Ko¨ tz Comparative Law 333; Maxeiner 2003 Yale Journal of International Law 109 113; Howells & Weatherill Consumer Protection Law 19. (^52) Rakoff 1983 Harvard Law Review 1173 1223; Beale Legislative Control of Fairness 231-232. (^53) Burgess ‘‘Consumer Adhesion Contracts and Unfair Terms: A Critique of Current Theory and a Suggestion’’ 1986 Anglo-American Law Review 255 271-274. Cf Pretorius ‘‘The Basis of Contractual Liability (4): Towards a Composite Theory of Contract’’ 2006 THRHR 97: ‘‘The reliance principle has much to do with ascription of contractual responsibility in circumstances where it is fair and reasonable to do so.’’ (^54) Burgess 1986 Anglo-American Law Review 255 271-274. (^55) Rakoff 1983 Harvard Law Review 1173 1240-1242. For a recent defence by Rakoff of his views, see Rakoff ‘‘The Law and Sociology of Boilerplate’’ 2006 Michigan Law Review 1235. See also 56 Wilhelmsson^ Standard Form Conditions^ 443. The UK Law Commissions’ proposed Unfair Contract Terms Bill of 2005 also places the onus on the business contracting with a consumer (a natural person acting outside his trade or profession) to prove its non-core terms are reasonable when the issue is raised, whether by the consumer or mero motu by the court. In South Africa, by contrast, a negative striking-out approach is proposed.
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inherent structural inequality caused by the use of such terms and the typical and understandable absence of proper evaluation of the con- sequences of submitting to such terms,^57 which inhibit the autonomy of normal people confronted with standard terms 58 and make them vulnerable to abuse. This justifies control without more, but such control is furthermore also in the public interest in a more general sense. Ultimately, the costs incurred by society are higher if the risks and obligations involved are not shouldered by the party best able to prevent risks or to bear them most efficiently from an economic point of view. 59 To shift risks and obligations onto the structurally weaker party as a matter of course, without an offer of an alternative deal at a higher price, and mostly without his or her knowledge, is not necessarily efficient from an economic point of view.^60 More speculative, but perhaps true, are claims that the removal of unfair terms may increase consumer confidence and trust and therefore economic activity, and that grievance procedure costs will ultimately be reduced. 61
2 3 The possibility of control on the basis of substantive unfairness alone
It should always be possible to impugn non-negotiated terms, which may be fair if specifically pointed out or agreed to, on the basis of the particular customer’s lack of bargaining strength and other problems with the bargaining process itself, such as a lack of alternative terms in the marketplace and a lack of knowledge of the term. The converse is also true: a term which would appear to be excessively one-sided and unfair generally may be justified if the customer consciously decided to contract on that basis after having considered alternatives. Procedural factors to do with the manner in which the particular contract was concluded may indeed be relevant to the question of fairness. However, the reality that the prohibitively high transaction costs involved understandably discourage contracting parties to read all the small print, and the fact that it would be an inefficient use of time and resources anyway, 62 justifies the possibility of regarding terms as unfair per se, regardless of the circumstances surrounding the manner in which the agreement was reached (‘‘the procedural factors’’). 63
(^57) See n 26 supra. (^58) See par 2 1 supra; cf Vickers ‘‘Economics for Consumer Policy’’ 2004 125 Proceedings of the British
59 Academy^ 287 302. 60 Willett^ Good Faith and Consumer Contract Terms^ 67. 61 Willett^ Good Faith and Consumer Contract Terms^ 67. 62 Griggs 2005^ Competition and Consumer Law Journal^ 1 49-50 and authorities there cited. Howells & Weatherill Consumer Protection Law 261-262; cf Burgess 1986 Anglo-American Law Review
63 255 270. Eiselen 1989 De Jure 44 45; UK Law Commissions Consultation Paper 7 15 40; Wilhelmsson Standard Form Conditions 432-433; Griggs 2005 Competition and Consumer Law Journal 1 21; Maxeiner 2003 Yale Journal of International Law 109 119; Atiyah Essays on Contract (1986) 346: ‘‘it is no longer possible to accept without serious qualification the idea that the law is today solely concerned with the bargaining process and not with the result’’.
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It appears that the source of inspiration for this list of factors in the DTI’s draft Bill was the United Kingdom’s Unfair Contract Terms Act of 1977 (the UCTA) 69 and perhaps the Preamble 70 of the EC Unfair Terms Directive of 1993, 71 which lists similar factors. This being the case, it is important also to take note of the new list of relevant factors proposed by the Law Commissions of England, Wales and Scotland in their Unfair Contract Terms Bill of 2005, which they recommend should replace the UCTA and the Unfair Terms in Consumer Contracts Regulations of 1999. 72 In the UK Law Commissions’ new list, the procedural factors are ‘‘balanced’’ by more factors relevant to substantive fairness, and some of the important procedural factors are explained in such a way as to invite sensitivity to the realities of standard form contracting. The substantive unfairness factors listed include ‘‘(c) the balance of the parties’ interests, (d) the risks to the party adversely affected by the term, (e) the possibility and probability of insurance and (g) the extent to which the term (whether alone or with others) differs from what would have been the case in its absence’’. 73 The United Kingdom allows publication of Explanatory Notes with a Bill, and the Law Commissions have used this technique to explain further what might be relevant when considering the procedural factors of a party’s ‘‘knowledge and understanding’’ and the ‘‘strength of the parties’ bargaining positions’’, two factors in their list. After having specifically warned that ‘‘inequality of bargaining power’’ is an ambiguous term which is often misunderstood, 74 the Law Commis- sions explain in the Notes to the Bill that ‘‘the strength of the parties’ bargaining positions’’ ‘‘may involve questions such as (a) whether the transaction was unusual for either or both of them, (b) whether the complaining party was offered a choice over a particular term, (c) whether that party had a reasonable opportunity to seek a more favourable term, (d) whether that party had a realistic opportunity to enter into a similar contract with other persons, but without that term, (e) whether that party’s requirements could have been met in other ways, (f) whether it was reasonable, given that party’s abilities, for him or her to have taken advantage of any choice offered under (b) or available under (e)’’. 75 In considering the ‘‘knowledge and understanding’’ of a party, it may be relevant ‘‘(c) whether the party understood [the term’s] meaning and implications, (d) what a person other than the party, but in a similar position, would usually expect in the case of a similar transaction, (e) the complexity of the transaction, (f) the information given to the party
(^69) Schedule 2. (^70) Or Recitals. (^71) For the Directive’s full title, see n 1 supra. (^72) Law Commissions’ Report 60 (s 14(4) of the Bill). The Regulations (UTCCR) were promulgated in
73 response to the Unfair Terms Directive. 74 S 14(4). 75 43. Par 45 of the Explanatory Notes.
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about the transaction before or when the contract was made, (g) whether the contract was transparent, (h) how the contract was explained to the party, (i) whether the party had a reasonable opportunity to absorb any information given, (j) whether the party took professional advice or it was reasonable to expect the party to have done so, and (k) whether the party had a realistic opportunity to cancel the contract without charge’’. 76 The South African Law Commission also included some factors to do with substantive fairness in their list of guidelines, and it is not clear why the DTI left these out.^77 Such factors include ‘‘(m) whether a term is unduly difficult to fulfil, or imposes obligations or liabilities on a party which are not reasonably necessary to protect the other party; (n) whether the contract or term excludes or limits the obligations or liabilities of a party to an extent that is not reasonably necessary to protect his or her interests; (o) whether there is a lack of reciprocity in an otherwise reciprocal contract; (w) whether, to the prejudice of the party against whom the term is proffered, the party proffering the term is otherwise placed in a position substantially better than that in which the party proffering the term would have been under the regulatory law, had it not been for the term in question; (x) the degree to which the contract requires a party to waive rights to which he or she would otherwise be entitled’’. A list of factors is in any event more helpful to guide courts, businesses, consumers and enforcement agencies if it also includes factors relevant to substantive fairness, which clearly is relevant along with procedural factors. Factors to do with substantive unfairness will be especially important in ‘‘abstract proceedings’’ in which an injunction is sought against a particular business to stop using or to amend a particular term, mostly at the behest of the National Consumer Commission or a consumer organisation. 78 One therefore hopes that the South African consumer protection legislation will benefit from the UK Law Commissions’ and SA Law Commission’s example in this regard, instead of substantially reverting to the factors initially formulated in the UK in 1977. The UK Law
(^76) Par 44 of the Explanatory Notes. (^77) S 2. As I will suggest later, some of the SA Law Commission’s ‘‘factors’’ are not so much open-ended factors likely to be relevant in many cases, but concern specific types of clauses, such as clauses on set- off, which should rather have been considered for inclusion in a ‘‘suspect list’’ or ‘‘grey list’’ of terms which would normally be unfair, unless the circumstances justify a contrary conclusion. It is understandable that the DTI did not include these in their list of factors, but neither did they make use of a ‘‘suspect list’’. See further par 3 3 infra. (^78) Unfair terms legislation should always empower an administrative body and consumers’ organisations to take action against businesses using unfair terms, that is, without a particular consumer as plaintiff being involved. Such action will often centre on substantive fairness ‘‘in the abstract’’, although the transparency of the term, which could be regarded as a procedural factor, should also be important. It should be possible for the court or tribunal to make an order with ‘‘procedural’’ components in such an action, such as ordering the business to introduce a certain practice, such as expressly pointing out a particular term or rewriting a term in clearer language or giving more information to consumers (cf s 55(1)(b) of the DTI’s draft Bill).
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firm or firms is always unfair. Substantive unfairness control should also be a possibility where a particular plaintiff as a consumer lodges a complaint or sues a firm with reference to the particular contract he has made, or raises the issue of an unfair term when he is sued by the firm involved. It is interesting to note that in Germany, particularly before implementation of the EC Unfair Terms Directive, courts have tended to use a generalising or abstract approach overtly focused on substantive fairness, which goes further than the approach advocated here. 82 Under their so-called ‘‘supra-individual generalising approach’’,^83 the courts generally focused on the substantive unfairness of clauses in the light of typical party interests and not on the particular circumstances of the particular consumer or business who complained. Writers who consider this approach of German law point out that there are some advantages to such overt ‘‘clause-oriented’’ control. 84 Some writers have pointed out that it ‘‘facilitates universal application of the resulting control’’. 85 In other words, it creates a clearer precedent for other firms with respect to particular types of terms, as it is not primarily concerned with the particular circumstances of the particular consumer complaining about the term. Such a clause-oriented approach is said to lead more quickly to generalised Fallgruppenbildung, which is the emergence of categories of cases with reference to types of terms, often more closely defined with regards to particular types of sectors.^86 Bernitz 87 is of the opinion that, by contrast, the individualised approach followed thus far in Swedish courts (focusing on all the circumstances of the particular consumer in every case) has resulted in ‘‘inadequate foreseeability and probably a certain lack of efficacy’’ in this area. However, what I am advocating for cases where a particular consumer is involved is not what German courts have been doing. Instead, I advocate an approach to such litigation which is concrete in the sense that it takes into account the particular interests of the parties and the particular circumstances of the case, but which is not overly obsessed
(^82) Maxeiner 2003 Yale Journal of International Law 109 160; Micklitz German Unfair Contract Terms Act 181-182; Howells & Wilhelmsson EC Consumer Law (1997) 100; Rebmann et al Mu¨nchener Kommentar } 310 Rn 20, 70-75, } 307 Rn 35; Niglia The Transformation of Contract in Europe (2003) 166 et seq. In response to the Directive, } 310(3) was inserted, which enjoins courts to take into account also the circumstances surrounding conclusion of the contract in the case of consumer contracts (that is, a contract with a natural person acting outside the scope of his business, trade or profession). In respect of unfair contract terms control over commercial contracts, the abstract, generalising approach is still used (Rebmann et al Mu¨nchener Kommentar } 307 Rn 35). (^83) U¨ berindividuell generalisierende Betrachtung (Rebmann et al Mu¨nchener Kommentar } 310 Rn 20; BGH NJW 1992, 2626). (^84) The terminology is that of Bernitz European Law in Sweden — Its Implementation and Role in Market and Consumer Law (2002). (^85) Maxeiner 2003 Yale Journal of International Law 109 172. (^86) Bernitz Swedish Standard Contracts Law and the EEC Directive on Contract Terms in Lonbay (ed) Enhancing the Legal Position of the European Consumer (1996) 188. On Fallgruppen generally, see Beater ‘‘Generalklauseln und Fallgruppen’’ 1992 Archiv des Civilistische Praxis 82. (^87) Swedish Standard Contracts Law 188. Cf Whitford ‘‘Contract Law and the Control of Standardised Terms in Consumer Contracts: An American Report’’ 1995 European Review of Private Law 193 204.
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with procedural factors and recognises that the control of substantive unfairness on its own is also legitimate in appropriate cases. In particular, it takes into account the realities of standard form contracting when considering procedural factors.
2 4 The role of procedural measures
‘‘Procedural’’ measures aimed at improving the conduct of the ‘‘potential bargaining process’’, such as ensuring greater transparency through requirements on legibility and simple, clear language, 88 are very important. 89 Consumers who do have the time to read standard terms, bargain and shop around would particularly be empowered by these measures, and more likely to bargain successfully to the ultimate advantage of less ideal consumers. Such measures may also drive businesses to use fairer terms, given that consumers (and the businesses themselves!) may be more likely to read and understand the standard terms than before. If terms are written in simple language instead of in incomprehensible, complex legalese, a small business may perhaps realise that the contract drafted by its lawyers or copied from elsewhere exceeds its requirements and that it does not wish to be associated with a particular term. Addressing the ‘‘information asymmetry’’ between business and consumer may sometimes also lead to a more effective allocation of risk: a consumer who knows of and understands an exemption clause well in advance may take out insurance against it or consciously decide to run a particular risk in order to obtain a product at a lower cost. 90 Such ‘‘procedural’’ measures will, however, be insufficient in the absence of effective, independent content control. 91 Lack of available information is not the only problem, but rather the inability of many consumers to benefit from that information before contracting, whether because of lack of understanding of complex information (such as the likelihood of risks materialising and the probable costs involved if they do), lack of time or lack of bargaining skill and power generally. 92 ‘‘[M]erely knowing of a term does not necessary lead to rational decision- making by a consumer.’’ 93 The reality that even clear and legible terms pointed out to the customer may be unfairly sprung upon him at the very last moment, also
(^88) The DTI’s draft Bill contains a plain language requirement. (^89) Other techniques may concern a requirement that a copy always be given to the other party and be shown at the user’s place of business, and that incorporation by reference be prohibited (see, eg, 90 Hondius^ Standaardvoorwaarden^ 577). 91 Howells & Weatherill^ Consumer Protection Law^ 40. 92 Weatherill^ EU Consumer Law and Policy^ 2 ed (2005) 113; Aronstam^ Consumer Protection^ 46. Griggs 2005 Competition and Consumer Law Journal 1 21; Aronstam Consumer Protection 46. See also Beale Legislative Control of Fairness 248 who gives the example of the consumer’s inability to assess risk (such as the chances of a fairground car leaving the tracks) as impacting upon her understanding
93 of the exemption clause. See also Vickers 2004 125^ Proceedings of the British Academy^ 125 287 302. Griggs 2005 Competition and Consumer Law Journal 1 51.
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3 The limits of judicial control and their implications, particularly for the substantive provisions of unfair terms legislation
3 1 The insufficiency of common law grounds for intervention
It should now be accepted that the common law grounds for control of the phenomenon of unfair terms are clearly insufficient. 100 In other words, the combined common law rules on incorporation, interpretation, voidable contracts and legality (the latter being the most promising) are of too limited scope to address the problem adequately. I will not repeat the arguments of the writers or those of the Law Commission who hold this view here, except to say that it is probably quite understandable that judges would typically only intervene on the basis of illegality in the clearest of cases in the absence of explicit legislative sanction to do more. The Scottish writer, Hector MacQueen, writing after the Afrox case, has stated that he has sympathy with this attitude of South African judges as the control of exclusion clauses is ‘‘peculiarly apt for legislative rather than judicial innovation.’’ 101 This has been the experience in other jurisdictions as well. 102
3 2 The inherent limits of judicial control
In any event, regardless of how radically a court may interpret its power to review unfair contract terms on a general basis, judicial control also has inherent limits. The reasons why judicial control is too limited not only points to the obvious truth that an administrative body should be empowered to deal with complaints from consumers, negotiate with and apply for injunctions against businesses (what I would call the enforcement parts of the legislation). 103 I will not deal any further with this, particularly as the Law Commission’s proposal on an Ombudsper- son was very admirable, and the DTI’s new proposed powers for the National Consumer Commission and the National Consumer Tribunal do provide the possibility of preventive and reactive control by administrative bodies. I will rather concentrate on the implications of the limits of judicial control for the substantive parts of ideal unfair terms legislation, namely those which describe or flesh out the concept of unfairness. The reasons why judicial control is too limited are the following: 104
(^100) See already Aronstam Consumer Protection as well as the South African Law Commission’s Report. (^101) MacQueen Good Faith in MacQueen & Zimmermann (eds) European Contract Law: Scots and South
102 African Perspectives^ (2006) 43 64. 103 See, eg, Maxeiner 2003^ Yale Journal of International Law^ 109 144. This is what Van der Walt 1993 THRHR 65 70 calls second generation control mechanisms. (^104) See especially Hondius Standaardvoorwaarden 488.
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. Access to courts is limited. 105 The effort, costs and risks of litigation, especially when compared with the small sums typically involved in consumer transactions, promotes an attitude of rather writing off the episode as a learning experience, with the business continuing its practice with impunity. 106 Lack of knowledge about the law, particularly in a country with many vulnerable consumers, will also decrease the likelihood of cases on unfair terms coming to the courts.^107 Perhaps consumers, who may not have heard about the consumer protection legislation, may not even always complain to consumer organisations or the National Consumer Commission. If judicial control is the only control paradigm, a business who suspects its terms may be declared unfair may rather prefer to settle an individual case with a particularly difficult consumer on the basis of waiver of its term, leaving the business free to use that term in all other contracts. . Court decisions have a limited effect. 108 They only bind the particular business(es) involved, and may be limited to the particular circum- stances of the case. Because many cases in respect of B2C contracts will only reach the lower courts, whose decisions are unreported, other businesses are unlikely to take note in any event, even with legal advice. 109 . Judicial control is reactive and comes too late, after the abuse has already taken place, often for years. 110 . For some of these reasons combined, it will often be very difficult to predict with any certainty whether or not a court will provide relief in a particular case. 111 German judge-made law before promulgation of the Standard Terms Act was criticised for an ‘‘absence of concrete provisions and for uneven application by lower courts’’. 112
(^105) Hondius Standaardvoorwaarden 488. (^106) Hondius Standaardvoorwaarden 488; Aronstam Consumer Protection 46; Griggs 2005 Competition and Consumer Law Journal 1 23; Maxeiner 2003 Yale Journal of International Law 109 144; Rebmann et al 107 Mu¨nchener Kommentar^ Vorbemerkung zum^ }^ 305 Rn 10-11; Van der Walt 1993^ THRHR^ 65 75. Rebmann et al Mu¨nchener Kommentar Vorbemerkung zum } 305 Rn 10. (^108) Hondius Standaardvoorwaarden 488; Maxeiner 2003 Yale Journal of International Law 109 144; Rebmann et al Mu¨nchener Kommentar Vorbemerkung zum } 305 Rn 11; Van der Walt 1993 THRHR
109 65 75. S 109 of the DTI’s draft Bill provides that the National Consumer Commission is responsible for promoting public awareness of consumer protection matters, including publishing any orders and findings of the Tribunal or a court in respect of a breach of the Act. It is, however, rather unlikely that the National Consumer Commission will be able to publish every decision by every lower court in the country involving every breach of every provision of the entire Act. However, they should at least publish cases on unfair terms in which they themselves were involved, and cases before the Tribunal as well as details on undertakings given by businesses as a result of negotiations which did not
110 eventually go to court (as the Law Commission provided for in its Bill). 111 Hondius^ Standaardvoorwaarden^ 488. Cf Aronstam Consumer Protection 46 and generally chapter 2. (^112) Maxeiner 2003 Yale Journal of International Law 109 144. Judicial control in Germany dates back to the first half of the 20th century and was based on s 138 of the Civil Code (BGB) which rendered contracts violating good morals void, and on the requirement of good faith in s 242.
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