The Law Commission
and
The Scottish Law Commission
(LAW COM No 292)
(SCOT LAW COM No 199)

UNFAIR TERMS IN CONTRACTS
Report on a reference under section 3(1)(e) of the 
Law Commissions Act 1965

Presented to the Parliament of the United Kingdom by the Secretary of State
for Constitutional Affairs and Lord Chancellor by Command of Her Majesty
Laid before the Scottish Parliament by the Scottish Ministers
February 2005

Cm 6464
SE/2005/13								£xx.xx

The Law Commission and the Scottish Law Commission were set up by the Law Commissions Act 1965 for the purpose of promoting the reform of the law.
The Law Commissioners are:
	The Honourable Mr Justice Toulson, Chairman
	Professor Hugh Beale QC, FBA
	Mr Stuart Bridge
	Dr Jeremy Horder
	Professor Martin Partington CBE
The Chief Executive of the Law Commission is Mr Steve Humphreys and its offices are at Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ.
The Scottish Law Commissioners are:
	The Honourable Lord Eassie, Chairman
	Professor Gerard Maher QC
	Professor Kenneth G C Reid
	Professor Joseph M Thomson
	Mr Colin J Tyre QC
The Chief Executive of the Scottish Law Commission is Miss Jane L McLeod and its offices are at 140 Causewayside, Edinburgh EH9 1PR.
The terms of this report were agreed on 31 December 2004.
The text of this report is available on the Internet at:
	http://www.lawcom.gov.uk
	http://www.scotlawcom.gov.uk
CONTENTS

	Paragraph	
Abbreviations used in this Report		
PART 1: BACKGROUND	
Introduction	1.1	
Terms of Reference	1.6	
Consultation Paper and responses	1.7	
Consumer contracts	1.8	
Business to business contracts	1.10	
Making the new legislation “clearer and more accessible to the reader”	1.14	
Scotland: legislative competence	1.19	
Acknowledgements	1.24	
The DTI Report by Dr Simon Whittaker	1.24	
Further assistance	1.25	
The structure of the Report	1.27	
PART 2: AN OVERVIEW OF OUR RECOMMENDATIONS	
A unified regime for consumers (Part 3)		
Background	2.2	
The principal differences between UCTA and the UTCCR	2.5	
Our consultation proposals	2.8	
The response to our Consultation Paper	2.9	
Our recommendations	2.10	
Preserving the effect of UCTA in business contracts (Part 4)		
Background	2.23	
Our proposals	2.24	
Our recommendations	2.25	
Extending the scope of protection for small businesses (Part 5)		
Background	2.30	
Our recommendations	2.35	
Making the new legislation “clearer and more accessible to the reader”	2.44	
The Consultation Draft	2.47	
Defined terms	2.49	
The use of examples in legislation	2.53	
PART 3: A UNIFIED REGIME FOR CONSUMER CONTRACTS	
Background	3.1	
General policies	3.6	
Geographical scope of the Draft Legislation	3.6	
No reduction in protections	3.10	
Terms of no effect	3.14	
Other rules relating to “unfair” terms	3.16	
Specific issues	3.19	
Definitions	3.20	
Terms of no effect	3.41	
Terms not individually negotiated	3.50	
Terms not subject to control	3.56	
Excluded contracts	3.73	
The test to be applied	3.84	
Interpretation in favour of the consumer	3.106	
Indicative List	3.108	
The burden of showing unfairness	3.124	
The effect of an invalid term	3.131	
Attempted evasion	3.141	
Preventive powers	3.143	
Terms not replicated	3.164	
PART 4: PRESERVING THE PROTECTION AFFORDED BY UCTA IN BUSINESS CONTRACTS	
Introduction	4.1	
Summary of recommendations on business contracts	4.4	
The reaction on consultation	4.8	
Controls over non-negotiated clauses in general business contracts	4.8	
Clauses that there was no opportunity to negotiate	4.13	
Small businesses	4.17	
Business contracts in general: maintaining UCTA	4.18	
UCTA provisions that should not be replicated	4.25	
Business liability for other loss or damage caused by negligence	4.36	
Businesses “dealing as consumers”	4.41	
Fitting the controls over business contracts to the structure of the new legislation	4.45	
Other aspects of UCTA that will be replicated in the new legislation	4.72	
PART 5: EXTENDING THE PROTECTION AGAINST UNFAIR TERMS TO SMALL BUSINESSES	
Introduction	5.1	
Consultation responses	5.3	
The problems for small businesses revealed by the consultation exercises	5.5	
The case for extending the controls to protect small businesses	5.12	
Our recommendations	5.25	
Background: controls over business contracts in general	5.25	
The new general clause	5.27	
PART 6: PARTICULAR ISSUES	
Employment contracts	6.2	
Employees’ liability for negligence	6.3	
The employer’s terms of employment	6.6	
Sale or supply of goods not related to business	6.11	
Sales by a consumer to a business and between private individuals	6.14	
Hire purchase contracts under which a private individual supplies goods	6.20	
Other contracts under which a private individual supplies goods	6.23	
Non-contractual notices affecting liability in tort [delict]	6.28	
General provisions no longer required	6.36	
Effect of breach	6.37	
Sea passengers	6.39	
PART 7: INTERNATIONAL CONTRACTS AND CHOICE OF LAW	
Introduction	7.1	
Consumer contracts	7.4	
Cross-border contracts	7.4	
Choice of the law of a part of the UK in foreign contracts	7.7	
Evasion by choice of non-UK law	7.10	
Business contracts	7.27	
Choice of law of a part of the UK in a foreign contract	7.27	
Evasion by choice of non-UK law	7.30	
Cross-border contracts	7.35	
Small business contracts	7.59	
Cross-border contracts	7.59	
Choice of law of a part of the UK in a foreign contract	7.62	
Evasion by choice of non-UK law	7.64	
PART 8: SUMMARY OF RECOMMENDATIONS	
Consumer contracts	8.2	
Definitions	8.4	
Terms of no effect	8.12	
Negotiated terms	8.15	
Terms not subject to control	8.16	
Questions over whether some types of contract should be excluded	8.19	
The general test	8.21	
The Indicative List	8.28	
The burden of proof	8.32	
The effect of finding that a term is invalid	8.33	
Preventive powers	8.36	
Business contracts	8.43	
Small business contracts	8.55	
Employment contracts	8.70	
Private sales	8.72	
Non-contractual notices	8.75	
General provisions that are no longer required	8.78	
International contracts and choice of law	8.80	
Consumer contracts	8.80	
Business contracts	8.86	
Small business contracts	8.89	
Draft Unfair Contract Terms Bill and Explanatory Notes	APPENDIX A	
The Unfair Contract Terms Act 1977	APPENDIX B	
The Unfair Terms in Consumer Contracts Regulations 1999	APPENDIX C	
Council Directive 93/13/EEC on Unfair Terms in Consumer Contracts 	APPENDIX D	
List of persons and organisations who responded to consultation 	APPENDIX E	

ABBREVIATIONS USED IN this report
CBI	Confederation of British Industry	
Chitty	Chitty on Contracts (29th ed 2004)	
CISG	United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980)	
COMBAR	Commercial Bar Association	
Consultation Paper	The Law Commissions’ 2002 Joint Consultation Paper, Unfair Terms in Contracts (Law Commission Consultation Paper No 166, Scottish Law Commission Discussion Paper No 119)	
Directive	Directive 93/13/EEC of 5 April 1993 on Unfair Terms in Consumer Contracts, 1993 OJ L 95	
DTI	Department of Trade and Industry	
ECJ	European Court of Justice	
First Report	The Law Commissions’ 1969 Report: Exemption Clauses in Contracts, First Report: Amendments to the Sale of Goods Act 1893 (Law Com No 24; Scot Law Com No 12)	
FSA	Financial Services Authority	
Indicative List	Indicative and non-exhaustive list of terms which may be regarded as unfair, contained in the Annex to the Directive and in the UTCCR Schedule 2	
OFGEM	Office of Gas and Electricity Markets	
OFT	Office of Fair Trading	
OFTEL	Office of Telecommunications (now subsumed by OFCOM, the Office of Communications, pursuant to the Communications Act 2003)	
Rome Convention	The EC Convention on the Law Applicable to Contractual Obligations (Rome, 1980)	
SCGD	Directive 99/44/EC of 25 May 1999 on Certain Aspects of the Sale of Consumer Goods and Associated Guarantees, 1999 OJ L 171 12-16	
Second Report	The Law Commissions’ 1975 Report: Exemption Clauses: Second Report (Law Com No 69; Scot Law Com No 39)	
SMEs	Small and Medium-Sized Enterprises	
SPVs	Special Purpose Vehicles	
SSGCR	Sale and Supply of Goods to Consumers Regulations 2002, SI 2002 No 3045	
UCTA	Unfair Contract Terms Act 1977	
ULIS	Uniform Law on International Sales (The Hague, 1964)	
UTCCR	Unfair Terms in Consumer Contracts Regulations 1999, SI 1999 No 2083