Part I
background
Introduction
1.1	This joint Report is concerned with unfair terms in contracts. As the law currently stands there are two major pieces of legislation dealing with unfair contract terms: the Unfair Contract Terms Act 1977 (“UCTA”) and the Unfair Terms in Consumer Contracts Regulations 1999 (“the UTCCR”). The former focuses primarily on exemption clauses; it applies to contracts between businesses and consumers, between one business and another and, to a limited extent, even to “private” contracts where neither party is acting in the course of a business. The majority of terms purporting to exclude or restrict liability are likely to be subject to it. The latter establish controls over a broad range of contract terms but apply only to consumer contracts.
1.2	When UCTA applies, it may have the effect that the exclusion or restriction of liability is automatically ineffective; or it may have the effect of invalidating the term unless it is shown to be fair or reasonable. Although the statutory definition of the terms caught by UCTA is wide, it does not apply to all types of term that are potentially unfair. In general, it catches only terms that exclude or restrict one party’s obligations or liability. Terms that increase the obligations or liability of the other party are outside UCTA.
1.3	If the term is in a consumer contract it will normally be subject to the UTCCR which implement Council Directive 93/13/EEC on Unfair Terms in Consumer Contracts (“the Directive”). The UTCCR can apply to almost any type of term that was not individually negotiated and will invalidate the term if it is unfair.
1.4	While the two regimes have separate scopes of application, to some extent they overlap. They also employ different concepts and terminology. The co-existence of two overlapping schemes gives rise to complexity and inconsistency that has been subject to severe criticism. There is considerable concern that, at a time when much is being done to make justice more accessible, the nature and scope of the combined protection afforded to consumers by these laws are wholly obscure to the inexpert reader. In this Report, our first task is to consider how to replace these two pieces of legislation with a single unified Act that will set out the law on unfair contract terms in a clear and accessible way.
1.5	Many people think that the protection afforded by the current regimes is too narrow. While some provisions protect businesses, many protect only consumers. Businesses, and in particular small businesses, are frequently faced with terms that are widely regarded as unfair but have no means of challenging them. This prompted complaints to the DTI who asked us to examine the issue. Accordingly, in this Report we look, secondly, at whether protections similar to those afforded by the UTCCR should be extended to businesses and, if so, what kinds of businesses should benefit from this increased protection.
Terms of reference
1.6	In January 2001 the Law Commission and the Scottish Law Commission received from the Parliamentary Under Secretary of State for Consumers and Corporate Affairs a joint reference in the following terms:
… to consider the desirability and feasibility of:
(1) Replacing the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999 with a unified regime which would be consistent with Council Directive 93/13/EEC on Unfair Terms in Consumer Contracts;
(2) Extending the scope of the Unfair Terms in Consumer Contracts Regulations (or the equivalent in any legislation recommended to replace those Regulations in accordance with (1) above) to protect businesses, in particular small enterprises; and
(3) Making any replacement legislation clearer and more accessible to the reader, so far as is possible without making the law significantly less certain, by using language which is non-technical with simple sentences, by setting out the law in a simple structure following a clear logic and by using presentation which is easy to follow.
Consultation Paper and responses
1.7	The joint Consultation Paper was published on 7 August 2002 and both Law Commissions received a substantial response. In all, 97 organisations and individuals provided comments. These proved extremely helpful. We would like to thank all those who expended their valuable time and resources in responding to the Consultation Paper. Below we give a brief summary of reactions to our provisional proposals concerning each of the three terms of reference.
Consumer contracts
1.8	The Consultation Paper recommended a unified regime for consumers. Fulfilling the first of our terms of reference has been primarily an exercise in simplification. Our proposals stipulated that in the consolidation process there should be no reduction in consumer rights. Nor did we propose any substantial extension of consumer protection.
1.9	In order to simplify and unify the two very distinct regimes, on individual issues we have had to adopt the approach taken by either one regime or the other. Thus, for example, the UTCCR apply only to terms that are not “individually negotiated”; UCTA applies to exclusion clauses in consumer contracts whether the clause was negotiated or not. We proposed that the unified regime should include both individually negotiated and non-negotiated terms. Similarly, the burden of showing that a term is fair and reasonable under UCTA is on the business; under the UTCCR the burden of showing that a term is unfair is on the consumer. We proposed that under the unified regime the burden should be on the business. A substantial majority of respondents supported both proposals. The net result of our work is that there would be a small increase in the protection provided for consumer contracts.
Business to business contracts
1.10	Our business to business proposals were that protections similar to those afforded to consumers by the UTCCR should be extended to all business contracts. The Consultation Paper concluded that, although there were situations where consumer and business contracts justified different treatment, “in general terms it is not desirable for the two sets of rules to differ without good reason”. 
1.11	Although there was some justification for offering small businesses greater protection than larger businesses, nevertheless we considered that it was preferable to treat all businesses alike. We therefore proposed that the provisions of the UTCCR should be extended to cover all businesses.
1.12	These proposals received a mixed response. What was evident, however, was resistance to interference with contracts between businesses in general but widespread support for greater protection for small businesses.
1.13	We have been persuaded that the regime governing contracts between larger businesses should be left substantially as it stands, preserving the existing position under UCTA. In light of the support for small business protection, we raised several options for a small business regime, culminating in a seminar held in conjunction with the Society for Advanced Legal Studies in July 2003. These discussions confirmed that there is widespread (though not universal) support for a specific regime for small businesses; and that the preferred route is to open to review all contract terms with the exception of those that are “core” terms or which were individually negotiated. We therefore recommend a separate scheme to protect small businesses which will apply to non-negotiated, “non-core” terms.
Making the new legislation “clearer and more accessible to the reader”
1.14	UCTA is a complex statute. As we know from our own experience, it is difficult to understand fully without very careful reading. Given the complexity of its subject matter, UCTA is structured in a way that is very economical, but that structure is not easy to grasp. Frequently, a single provision will apply to a number of different types of contract and to a variety of different situations: this makes it difficult to see the effect of the statute, particularly for a reader without legal training. 
1.15	For the most part the UTCCR are in a much simpler style. In this they reflect the Directive that they implement and which they follow very closely. However, parts of the UTCCR have implications that are not obvious to the reader. The “indicative and non-exhaustive list of the terms which may be regarded as unfair” contained in Schedule 2 (the “Indicative List”) uses terminology that is alien to English and Scots readers, lawyers and non-lawyers alike.
1.16	Clarity and accessibility in legislation, particularly consumer legislation, is a key objective underpinning this project. In order to provide consultees with a sample of our approach to clear and accessible drafting, we took the step, unusual for the Law Commissions, of including in our Consultation Paper draft clauses prepared by Parliamentary Counsel. They form the basis of the Draft Bill now included in this Report. 
1.17	All those respondents who addressed the issue were in favour of our proposals to simplify the language in the way we stated in the Consultation Paper.
1.18	The legislation should be accessible to non-lawyers though we are also conscious that simplicity of language should not compromise legal certainty. Many respondents suggested that as much as possible of the content of the legislation should be contained in the body of the Draft Bill so that it was not necessary to search the text and then pursue endless cross-references to schedules. We agree. There was also support for the use of examples within the legislation. Nevertheless, we have been persuaded that it would be more appropriate for examples to be in the Explanatory Notes which accompany the Draft Bill rather than in the Draft Bill itself.
Scotland: legislative competence
1.19	In looking ahead to the implementation of our recommendations, we realise that, as far as the Scottish Executive is concerned, this will stimulate a debate as to legislative competence. It appears to us that our recommendations encompass both reserved and devolved matters, although there may be doubt as to the exact division of competence. It may be that some provisions apply equally to reserved and devolved matters.
1.20	The provisions relating to the regulation of consumer contracts appear to us to be reserved to the competence of the Westminster Parliament in terms of section C7 of Part II of Schedule 5 to the Scotland Act 1998. On the other hand, the provisions regulating business contracts and those regulating private contracts appear to us to be devolved to the Scottish Parliament as relating to Scots private law.
1.21	In relation to the provisions on business liability for negligence, we consider that the main thrust of this Part of the Draft Bill relates to the Scots private law of obligations and is therefore devolved. However, some doubt may arise in relation to clause 2(1) which provides an exemption from clause 1 for employees excluding or restricting liability for negligence to an employer. If this were to be construed as a provision regulating what an employee may do by contractual arrangement with his employer, it may be seen as relating to the reserved area of employment rights and duties in section H1 of Part II of Schedule 5 to the 1998 Act.
1.22	In relation to clause 12 (employment contracts) we consider that it could be argued that the purpose of this provision is concerned with the regulation of employment rights and duties. If so, this would fall within the reservation of section H1 of Part II of Schedule 5 to the 1998 Act.
1.23	We would also point out that there are certain consequential amendments and repeals of Scottish statutory provisions.
Acknowledgements
The DTI Report by Dr Simon Whittaker
1.24	An initial research project on the first two parts of the project was carried out for the Department of Trade and Industry by Dr Simon Whittaker of St John’s College, Oxford. Dr Whittaker’s report demonstrated that while consolidation was feasible, it would not be straightforward. It highlighted a number of issues that would need detailed consideration. The matter was then referred to the Law Commissions. The Consultation Paper drew on Dr Whittaker’s report and we would like to acknowledge the considerable help that we derived from it.
Further assistance
1.25	We are also extremely grateful to the many people who commented on our proposals and discussed possible solutions with us. We are unable to name all the individuals who helped us, but particular thanks must go to Professor Michael Bridge of University College London; Professor Nick Gaskell of Southampton University; Professor Stephen Weatherill of Oxford University and Kate Gibbons of Clifford Chance. 
1.26	We would also like to acknowledge the help that has been given to us by many organisations and public bodies. These include: the Enterprise Team at the Treasury, the FSA, the Insolvency Service, the OFT, the Financial Markets Law Committee, OFGEM, OFTEL, Fujitsu Services and the Society of Advanced Legal Studies.
The structure of the report
1.27	In Part 2 of this Report we provide an overview of our recommendations and describe the general scope of each part of the project in greater detail. In Part 3 we set out our recommendations for a unified regime to apply to consumer contracts. In Part 4 we explain our recommendations for business contracts in general and in Part 5 we consider extending the wider controls of the UTCCR to contracts with small businesses. Some particular issues, including employment contracts, private sales and non-contractual notices, are addressed in Part 6. In Part 7 we discuss international contracts and choice of law. Finally, Part 8 sets out a full list of recommendations. 
1.28	The Draft Bill itself, along with its Explanatory Notes, forms Appendix A. To help the reader, the text of UCTA is reproduced in Appendix B, that of the UTCCR in Appendix C, and the Directive in Appendix D. We conclude, in Appendix E, with a list of those who responded to our provisional proposals.