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Report No. 199

The U.K. Law Commission: Final Report (No.292) (2004):

The issue of unfair terms in contract continues to engage the attention of law reform agencies, courts and of the legislature. In United Kingdom, the Law Commission and the Scottish Law Commission presented to the Parliament on February, 2004 its Report (Law Commission No.292) on Unfair Terms in Contract. The Report considered two major legislations dealing with Unfair Contract Terms, viz. The Unfair Contract Terms Act, 1977 and the Unfair Terms in Consumer Contracts Regulation, 1999.

The Unfair Contract Terms Act, 1977 extends to all contracts, i.e. consumer contracts, business contracts, employment contracts and private contracts. The Act, however, focuses primarily on exemption clauses. It strikes at clauses excluding or restricting liability in certain clauses of contract and also introduces the test of reasonableness. The reasonableness would depend upon the unfairness of the terms in the light of the circumstances, which ought to have been known, or in the contemplation of the party.

It puts the burden of proving that a term is reasonable on the party seeking to rely on the clause. The Unfair Terms in Consumer Contract Regulations, 1999 (which implements the European Council Directive on Unfair Terms in Consumer Contracts) apply to consumer contracts of all kinds in the whole of the United Kingdom and subjects the terms to a fairness test. It does not contain detailed guidelines as to how the test should be applied but contains a list of terms, which may be regarded as unfair.

Law Commission took up the task to consider as how to replace these two legislations with a single unified Act that will set out the law on unfair contract terms in a clear and accessible way. The Commission set out recommendations for a unified regime to apply to consumer contracts, for business contracts in general, and extending the wider controls of the Unfair Terms in Consumer Contracts Regulations to contracts with small business. The Report also addresses upon the issues relating to employment contracts, international contracts and choice of law. (Summary of Records are contained in paras 8.2 to 8.89. Appendix 1 thereof contains Draft Bill with Explanatory Notes in 35 sections and number of Schedules).

Part 1 deals with 'Business Liability for Negligence', Section 1. Section 2 deal with Exceptions and Section 3 with Voluntary Acceptance of Risk;

Part 2 deals with 'Consumer Contracts' - contracts in general. Section 4 refers to terms of which are of no effect unless fair and reasonable; section 5 to sale or supply to consumer, section 6 to sale or supply to business, section 7 to Regulations and enforcement, section 8 to ambiguity;

Part 3 deals with 'Non Consumer Contracts' i.e. Business Contracts. Section 9 deals with standard forms, section 10 to sale or supply of goods, section 11 to non-negotiated terms, section 12 to Written standard terms, section 13 to sale or supply of goods;

Part 4 deals with the 'Fair and Reasonable' Test. (section 16). Burden of proof is contained in section 15 in Consumers Liability for negligence; section 16 in Consumer Contracts; section 17 in business contracts;

Part 5 deals with Choice of Law. Section 18 deals with "Consumer Contracts, section 19 to business contacts, section 20 with small business contracts;

Part 6 is 'Miscellaneous & Supplementary'. Section 21 deals with unfairness issue raised by Court; section 22 with exceptions; section 23 with secondary contracts; section 24 with effect of unfair terms on contracts; section 25 deals with interpretation, i.e. definition of 'consumer contract' and business contract (section 26); section 27 defines 'small business; section 28 defines 'associated person'; section 29 defines 'small business contract' and section 30 with 'excluding or restricting liability'; section 31 defines 'hire purchase' or hire; section 32 refers to general interpretation of various terms. Sections 33 to 35 are general.

Consumer Contracts: The Commissions recommended legislation to allow a consumer to challenge any kind of term that is not a 'core' term, whether or not a term was negotiated. 'Core' terms are those terms in consumer contracts that set the price or define the product or service being supplied. The terms other than core term should be subject to the fair and reasonable test. Further, the burden of proving that a term is fair will be on the business.

Business Contracts: The Commission recommended a comprehensive regime for non-consumer contracts. It provides for the review of terms in business contracts where one party deals on the written standard terms of business of the other party. As regards small business contracts, the class of terms that can be challenged by small businesses is significantly narrower. The small businesses have further to bear the burden of proving that the term is not fair and reasonable.

Employment Contracts: Unfair Contract Terms Act, 1997 has been applied to employment contracts by the Courts either by treating the employee as a consumer or by treating the employment contract as the employer's written standard terms of business. The Commission recommended that the employee could challenge the relevant term of employment only where the relevant term is a part of the employer's written standard terms of business. In other words, where the employment is on the employers standard terms, a term that purports to exclude or restrict the employers liability or to allow the employer to render a performance substantially different from that reasonably expected will be subject to the fair and reasonable test.

Unfair (Procedural and Substantive) Terms in Contract Back

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