Unfair contract terms legislation has been around since 1977, but the Competition and Markets Authority (CMA) believes over half of business still don’t know the rules very well.

And no, the CMA’s sample wasn’t just filled with new businesses: 65% had been around for over 10 years.

  • only 46% of businesses said they knew unfair contract terms well
  • 18% didn’t even know what an unfair contract term was
  • the smaller and newer a business was, the less likely it understands the unfair terms regime.

This is a particular risk for the Fintech world, with its new entrants and bootstrappers with varying levels of legal experience.

Of the 46% who claimed to know what they were doing, only 15% were familiar with the Consumer Rights Act 2015 (CRA). Of course, many people may be aware of the consumer law that applies to them without knowing the source (though it helps).

The current rules

The CRA came into force in October 2015. It pulled together a patchwork of consumer protection legislation, including on unfair terms, and refreshed it in the process.

The CMA published very helpful and detailed guidance on unfair terms in July 2015 but, at 144 pages long, they can hardly be surprised that it’s not on everyone’s nightstand.

Still, unfair contract terms – whether you’re aware of the law or not – are completely unenforceable and could leave major dents in your business’ reputation.

What are 'unfair terms'?

Unfair contract terms fall into two broad categories – those in the 'black list' and those in the 'grey list'.

A blacklisted term is always unfair. There is a list of them on page 51 of the CMA's guidance, and includes examples like excluding liability for death caused by your negligence.

A greylisted term has the potential to be unfair, depending on the circumstances. There’s around 60 pages of guidance on these alone, but the CMA’s report summarised eight behaviours most likely to involve unfair terms:

  1. Taking deposits or advance payments.
  2. Limiting the extent you are liable if things go wrong.
  3. Making customers agree to privacy or data use.
  4. Making changes (e.g. to prices) once you have started dealing with customers.
  5. Customers filling out paperwork when changing arrangements.
  6. Where customers might have to pay cancellation charges.
  7. Rolling contracts with customers that auto-renew.
  8. Applying charges etc. if customers counter their agreement.

The CMA found the most common behaviours were taking deposits or advance payments (practiced by half of all businesses), limiting business liability (46%), and customers being asked to agree to privacy rules or data use (45%). On average, one in seven reported adopting five or more of these behaviours.

Fair terms mean less friction

The more potentially unfair behaviours a business is involved in, the more likely they are to experience disputes over their terms. Of particular note:

  • A third of businesses operating cancellation charges had disputes over them.
  • Businesses which don’t share any contract terms with customers are much more likely to have been taken to court to resolve a dispute.

In addition to private enforcement, unfair terms can also lead to regulatory enforcement. The FCA and PRA have the power to investigate businesses, inspect them without a warrant, or ask the public for their comments on particular matters. They can get injunctions and court orders to prevent businesses from using unfair terms, and implement measures to redress customers who have suffered loss or to reduce a business' risk of reoffending. After all that, they also publish their findings publically, along with details of any court orders.

Spotting unfair terms

The answer isn't just to avoid potentially unfair activities; it's to do the activities properly. With that in mind, here is a short checklist of issues to consider when preparing or reviewing your terms.

This isn’t a substitute for sitting down and getting your head around the legislation and CMA guidance. Hopefully it’s a useful starting point:

  • Is the contract clear? Use plain English, keep it simple without over-simplifying, and avoid jargon. Classic legal jargon might include ‘to the extent permitted by law’, ‘indemnify’, or ‘consequential loss’. You shouldn’t define something by reference to an external standard unless you also supply the customer with information on that standard. Obtaining a genuinely plain and clear set of terms can take a very long time – as Blaise Pascal apparently said: "If I had more time, I would have written a shorter letter."
  • Limit your discretion to what is necessary – especially for ending a contract. It’s unlikely to be fair if you can cancel with less notice than the customer; long notice periods are imposed or disproportionate fees are charged on termination. Discretion to change or withdraw an offer is also an area of focus.
  • Unilateral termination is dangerous ground – unilateral rights have the potential to be unfair because they can be abused, or the same right is not given to the consumer. Dealing with what happens after a consumer’s breach of terms is also potentially unfair because a business’s response may be disproportionate. Only significant breaches should warrant drastic action like termination.
  • Are any obligations imposed on the consumer reasonable? This includes procedural steps the consumer has to follow, time limits and being very clear on what costs a consumer has to pay (and when).
  • Think carefully about limiting your liability – it’s perfectly reasonable to do so, but are the terms clear, do they appropriately distribute risk and could a consumer claim they were disproportionate?