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Department of Trade and Industry

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The unfair terms in consumer contracts regulations 1994 (SI 1994 No 3159)

Guidance Notes

Annex 1

Comparison of test of fairness under the Directive with reasonableness under the Unfair Contract Terms Act 1977

Al.1     It may be helpful to compare in tabular form the tests that would be applied by a court required to consider the same term under both the provision of the Directive and the Act.

Act Directive
(1) Does the Act apply? (1) Does the Directive apply?
(a) Is the term a type of term within the Act? (a) Is the term one to which the Directive could apply?
(b) Is the term or contract excluded from the scope? (b) May the fairness of the term be assessed?
(2) Does it satisfy the requirements of reasonableness? (2) Does it
  (a) contrary to the requirement of good faith,
  (b) create a significant imbalance in the rights and obligations arising under the contract,
  (c) to the detriment of the consumer?
  (2)(a) + (b) + (c) = an unfair term
Factors applied at stage 2 reasonableness test under the Act Factors applied in assessing unfairness/good faith under the Directive
Was the term a fair and reasonable one to have included having regard to the circumstances which were or ought reasonably to have been known or in the contemplation of the parties when the contract was made? Section 11(1). Unfairness shall be assessed taking into account the nature of the goods or services referring at the time of conclusion of the contract or another contract on which it is dependent. (Article 4(1)). [The Article 4(1) factors apply to all three elements of fairness.]
Recent case-law suggest that whilst not specifically referred to, regard may be had to the provisions of Schedule 2 of the Act in assessing reasonableness of terms of consumer contracts. Regard may also be had to the further provisions of section 11. In making an assessment of "good faith" particular regard shall be had to
The Schedule 2 factors  
(i) Strength of bargaining positions the strength of the bargaining positions of the parties,
(ii) Did the 'customer' receive an inducement? whether the consumer had an inducement to agree to the term and
(iii) Did he know or reasonably know of the term?  
(iv) Was it reasonable that compliance with an excluded condition would be practicable?  
(v) Were the goods supplied to the special order of the customer? whether the goods or services were sold or supplied to the special order of the consumer;
  the extent to which the seller or supplier has dealt fairly with the other party whose legitimate interests he has to take into account.
Section 11(4) in case of restrictions or liability to a specific sum;  
(a) resources,  
(b) availability of insurance.  

Al.2     Reasonableness and good faith both perform a balancing function. They are not absolute standards or concepts but provide a balance according to the particular circumstances of the case. Each test contains a number of common factors. "Good faith" may be slightly broader in that it requires regard to be had to the extent to which the seller or supplier has dealt fairly…. However, s.11(1) of the Act includes the test, "was it fair"? Certain of the factors included in the assessment of reasonableness are not explicitly referred to as factors to be taken account of in assessing good faith but they could fall to be considered because of the Article 4(1) factors. However those factors must also be applied to the other two elements of the test of unfairness.

Al.3     It is possible to conclude that the requirements of "reasonableness" under the Act and good faith under the Directive, are similar and overlapping concepts. The application of each concept to a single set of facts appears unlikely to produce contradictory results, but it is not clear that in all cases the same result will be reached. Whilst the guidance in recital 16 gives a number of factors to be taken into account in assessing good faith, it does not place an absolute limit on the meaning that the term might otherwise have.

Al.4     The Department takes the view that the key element of the test of fairness is that of good faith and that where a seller or supplier has dealt fairly and equitably with a consumer, that requirement will be satisfied. It may be that certain terms which would be held to be unreasonable under the provisions of the Act, will be considered fair under the Directive, in so far as that requirement is satisfied.

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Last revised: Tuesday 16th March, 1999