Summary of the major developments

1. European Contract Law Reform 

  • The European Commission is progressing its lengthy project to produce a new Common Frame of Reference (CFR) for EU contract law, and should authorise a final version by the end of 2008. 
  • The Commission says it does not intend to harmonise contract law between EUmember states, but the European Parliament appears to be pro-harmonisation. 
  • The UK is against harmonisation of European contract law and there is concern that the CFR may be a step along this road. 
  • There is little clarity on what formthe CFR will take, and how it will be used by legislators: however, the first changes of legal effect are likely to relate to contracts with consumers.

2. Rome I – choice of law in contracts 

  • The basic rule under the 1980 Rome Convention on choice of law is that parties to a contract may choose which law governs the contract and that, in the absence of choice, the contract shall be governed by the law of the country with which it ismost closely connected. 
  • The Rome Convention is to be replaced with an EU Regulation – Rome I. The published text includes a number of important departures fromthe Rome Convention; one is that crossborder consumer contracts will be governed by the law of theMember State in which the consumer has his habitual residence, irrespective of a contractual choice of law.
  • This could have a huge impact on international business as sellers would have no certainty which law will apply to their consumer contracts as well as discouraging cross-border trading, particularly by SMEs. Several parties have argued that this provision should bemademore flexible and revert to a position nearer to that of the Convention. 
  • The UK has currently opted out of Rome I (for a number of reasons, including the extent to whichmandatory rules of other jurisdictionsmay be overlaid on the law chosen by the parties) but is participating in ongoing discussions on the text and hopes to opt in if a satisfactory position can be reached: this goal appears to be coming nearer.

3. Rome II – applicable law in non-contractual disputes 

  • Subject to certain exclusions and special rules for particular types of obligations, under Rome II the applicable law for the resolution of non-contractual disputes will be determined on the basis of where the damage occurred rather than where the harmful act took place. 
  • The Regulation was adopted on 31 July 2007 and will apply in all EUmember states other than Denmark from11 January 2009. 
  • Commercial parties can, with certain exceptions, choose the applicable law.

4. Contractual exclusive jurisdiction clauses

Cases have highlighted practical problems with the operation of the Brussels Regulation on jurisdiction and the recognition of judgments in civil and commercialmatters, which show that: 

  • The inclusion of an exclusive jurisdiction clause in a contract does not guarantee that proceedings will actually be brought in the contractually agreed jurisdiction - if a counterparty acts quickly, it can ignore the jurisdiction provisions and bring proceedings elsewhere. 
  • Lenders and others involved in cross-border transactions need to be alert to this risk and react quickly when a dispute occurs. 
  • An experts' report commissioned by the European Commission recommends changing the Regulation so as to ensure that the apparently chosen court is always competent to deal with the case, unless it decides that it does not have jurisdiction.

Summary of other developments impacting dealings with consumers

1. Unfair Contract Terms Bill 

  • The Law Commission has proposed a new Unfair Contract Terms Bill to replace the Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR). 
  • The new bill will replace the two existing statutes, but retainmost of the current rules. 
  • Small businesses (fewer than nine employees) will be treatedmore like individual consumers and will be able to challenge unfair standard terms in contracts – unless the contract relates to a regulated financial service. 
  • The UCTBmay be affected by the outcome of the EU review of contract law reformand the consumer acquis. 
  • Government policy is to adopt the bill, but it has not been included in the 2007 Queen's speech.

2. Unfair Commercial Practices Directive

  • This Directive will introduce a general prohibition on unfair commercial practices that harm consumers' economic interests. It will be implemented in the UK by way of the Consumer Protection fromUnfair Trading Regulations, which will come into effect on 6th April 2008. 
  • The Directive harmonises EU law and aligns fair trading law with criminal law. 
  • The evidential threshold for some criminal offences will be raised fromstrict liability to proof of knowledge or recklessness. 
  • There are a number of exemptions including business-to-business and commercial practices, and contract law (rules on validity, formation and effect of a contract).

3. Distance Selling Directive

  •  The Distance Selling Directive gives extra rights to consumers buying over the internet, by phone, fax ormail order. (It is implemented in the UK by the Consumer Protection (Distance Selling) Regulations 2005.) 
  • The EU is looking into problems related to the Directive. 
  • A specific review of the Directive, and themore general review of the EU consumer acquis, are under way, but are working to different timetables. 
  • The EU will decide what changesmay be necessary once it has completed the ongoing review of the consumer acquis.

4. Insurance Contract Law

Major themes of the review to date are: 

  • Whether to differentiate between consumer and business insurance. 
  • The approach of the Financial Ombudsman Service in relation to consumer insurance. 
  • Reforming the law tomake the Londonmarketmore attractive to insureds.

The major developments

1.European Contract Law Reform

a) Issues and concerns

CFRmay be a short cut to harmonisation of EU contract law

English lawyers are concerned that theCFR could lead to some degree of harmonisation of EU contract law. The UK is against harmonising contract law. English lawis the international lawof choice formany contracting parties, in particular for its commercial and flexible approach. It is feared that harmonisationwouldmake English lawless attractive to international business,whichwould damage the prosperity of the UK.

While theCommission is not currently aiming for harmonisation, the European Parliamentmaywell be in favour of this goal.

Proposed contents and usage of CFRare unclear

TheCommission has suggested that theCFRwould be a “toolbox” of agreed terms and principles to help legislators give greater coherence to EU legislation, andwould set out: 

  • Common fundamental principles of contract law (and exceptions). 
  • Definitions of key legal terms. 
  • Model rules applicable to business and/or consumer contracts.

Beyond these rather vague notions, however, it remains unclearwhat formtheCFRwill take and howitwill be used by legislators.

A related consumer code,whichmight be chosen instead of a national systemof law, is also under consideration.

b) The situation

2003 Action Plan focused on sharpening up ECacquis Proposals to reformEuropean contract lawhave been brewing for some time. TheCommission launched a consultation in July 2001 that invited views on "problems for the functioning of the InternalMarket resulting fromthe divergence of national contract laws".

TheCommission presented its conclusions as an "Action Plan" in February 2003. Themainmeasure suggested in the Action Planwas to increase the coherence of the ECacquis in the area of contract law, by simplifying and clarifying existing legislation and avoiding unnecessary inconsistencies in newlegislation.

Proposal forCommon Frame of Reference

The Action Plan stated that theCommission sawa "Common Frame of Reference" (orCFR) as an important step towards improving the contract lawacquis. It described theCFR as a publicly accessible document establishing common principles and terminology.

The Action Plan also proposed further reflection on the possibility of an "optional instrument",whichwould aimto provide amodern body of rules particularly adapted to crossborder contracts, andwhich could be adopted by reference as the applicable lawof a contract.

Processmight lead to European civil code on contract law

In aCommunication inOctober 2004, theCommission emphasised that it did not intend to propose a "European civil code"whichwould harmonise the contract laws ofMember States.However, the European Parliament appears to take a different view. In a resolution dated 23March 2006, the Parliament reiterated its conviction that “a uniforminternal market cannot be fully functionalwithout further steps towards the harmonisation of civil law".

TheCommission's Second Progress Report on theCFR dated 25 July 2007 stated that theCommission considers the CFR a "better regulation instrument". It is not a large scale harmonisation of private lawor a European civil code. Fromthe Report's summary of discussions on theCFR to date, it is clear that the academicsworking on theCFR project are seeking to agreemodel rules, rather thanmerely conducting a comparative lawexercise. There is arguably a fine line between a set ofmodel rules and an "optional instrument",which is seen as a step along the road to harmonisation.

Reviewof consumer acquis incorporated intoCFR TheCommission has also launched a reviewof the consumer acquiswith the publication of aGreen Paper on 8 February 2007. This sets out various options for reforming the eight key Directives in relation to consumer contracts.

The Second Progress Report stated that theCFRwork on issues related to consumer contracts had been prioritised in order to ensure timely input into the reviewof the consumer acquis, and that the researchers' findings on these issues had served as input for theGreen Paper. It indicated that the relevantCFR findingswould be incorporatedwhere appropriate into the consumer acquis review.

c)Next steps

‘AcademicCFR’ due end of 2007

TheCommission has funded research by academics from around the EU,which it envisageswill provide all the elements needed for theCommission to produce aCFR

The academics’ report (nowcalled the "academicCFR") should be submitted to theCommission by the end of 2007.

Proposed to adopt finalCFRby end of 2008

TheCommissionwill extract relevant parts of the academic CFR into a finalCFR. TheCommission has said therewill be "extensive consultation" about this process. AWhite Paper is anticipated inmid 2008 to include proposals for a finalCFR. TheCommission has proposed adopting the finalCFR by the end of 2008.

2.Rome I – choice of lawin contracts

a) Background

Currently, the basic rule under the 1980 RomeConvention on choice of lawis that parties to a contractmay choosewhich lawgoverns the contract and that, in the absence of choice, the contract shall be governed by the lawof the countrywith which it ismost closely connected.

The RomeConvention is generally thought toworkwell but it is the onlyCommunity private international lawtreatywhich is still in treaty form. Therefore, the proposal to put it onto a Regulatory footingmay at first glance sound like a good idea. The problemis that there aremajor differences between the RomeConvention and the proposed Rome I Regulation and it is these differenceswhich have given rise tomuch concern.

Legal and commercial bodies have expressed concern that Rome Iwill createmore uncertainty for international trade than the RomeConvention and could result in ruleswhich do not uphold the parties' own choice of lawin contracts,whether business to business contracts or business to consumer contracts. Such legal uncertainty is bad news in itself, but wherever there is uncertainty there is, of course,more scope for litigation and cost.

The UK has currently opted out of Rome I but is participating in ongoing discussions on the text and hopes to opt in if a satisfactory position can be reached.

b) Issues and concerns

If Rome I is implemented as per the current text, these are the main issues and concerns: 

  • Cross-border consumer contractswould be governed by the lawof theMember State inwhich the consumer has his habitual residence, irrespective of a contractual choice of law(Article 5). This could have a huge impact on international business as the contracting business entity would have no certaintywhich lawwould apply to its consumer contracts. (There is an exceptionwhere the consumermakes a purchasewhen physically present in another country.) 
  • Newprovisions on contractswith agentswouldmean that, where no governing lawhas been chosen, the relationship between a principal and a third partywho contractswith his agentwould be governed by the lawof the agent's habitual residence (Article 7). The contracting partywould therefore need to ascertain the habitual residence of the agent and investigate the lawof that country to find outwhat contractual rights and obligations he has vis à vis the principal. This simply is not sensible orworkable. It is very much hoped that this provisionwill be dropped. 
  • There are newprovisions on the voluntary assignment of rights and contractual subrogation (Article 13). For example,whether an assignment of contractual rights is enforceable against a third partywould be determined by the lawof the assignor's habitual residence and not the governing lawof the assigned contract. These provisions are hotly debated and the final text is not yet clear, but the rulemay be restricted to caseswhere the assignment relates to factoring arrangements. 
  • Itmay result in an overlay on the lawchosen by the contractual parties (Article 8). This could arise if the court hearing the contractual dispute decides that the contract has a "close connection"with another jurisdiction and then imposes (as itwould be entitled to do under Rome I) the "mandatory rules" of that other jurisdiction on the contract. (Mandatory ruleswould be ruleswhich a country regards as crucial to its political, social or economic organisation.) The RomeConvention allows an "opt out" fromthis provision, which the UK has exercised, but the proposed Rome I Regulation has no such "opt out". It is hoped this provision will be severely limited in its application and thereby become acceptable to the UK (see note on Article 8 below). 
  • The rules on insurance contracts (currently in the Insurance Directives)may bemodified, although this is becoming less likely. 
  • It is to have retrospective effect, but it is not clearwhy.

c) The situation

The UK has refused to opt in

In July 2006, theGovernment stated that the UK had decided not to opt in to the proposal on Rome I, for the time being, due to concerns about: 

  • The proposals harming the prosperity of the UK and the EU, as they could introduce a significant degree of legal uncertainty into complex,multi-party international contracts.
  • The Rome I proposal providing less satisfactory solutions than those of the RomeConvention,which generally workswell. 
  • The potential economic impact of some of the provisions, especially Article 8(3)which gives discretion to a court hearing a contractual dispute to apply foreignmandatory rules. (Asmentioned above, the UK qualified its adherence to the RomeConvention to exclude this rule.) Due to these concerns, Article 8(3)was dropped fromthe Rome I proposal earlier this year, but it remains a hot issue for future negotiations. 
  • Non-compliancewith good governance rules. The Commission addedmajor provisions after the public consultation had closed and carried out no regulatory impact assessment. Thus the implementation and compliance costs to businesses are unknown.

Even though the UK has chosen not to opt in to Rome I for the time being, if andwhen otherMember States opt in, UK parties contractingwith others in theseMember Stateswill find themselves bound by these ruleswhenever the courts in otherMember States have jurisdiction or if a UKCourt is applying the lawof anotherMember State.Only Denmark has joined the UK in opting out.

Opposition toRome I

Both the FinancialMarkets LawCommittee (FMLC) and the City of London LawSociety Financial LawCommittee have said that a Rome I Regulation is unnecessary andwould createmore uncertainty than under the existing Rome Convention. The FMLChas, however,workedwith the Government to improve the text.

In April 2007, E-BusinessGroup (whose signatories include CBI, British RetailConsortiumand the Federation of Small Businesses) set up awebsite and issued a statement on Rome I saying itwould have a negative impact on consumer services and on-line service providers, particularly for small andmediumbusinesses, aswell as detrimental costs consequences. They are urgingMEPs and theCommission to rethink the proposal and urge theCommission to undertake a full regulatory impact assessment of all the markets that Rome Iwill affect.

Other bodies, such as theCBI and ISDA, have also expressed concern about Rome I.

d)Next steps

Despite the decision not to opt in, theGovernment intends to participate fully in the Rome I negotiations and toworkwith otherMember States and theCommission to improve the proposal to ensure that a future Regulation on choice of law provides benefits for consumers and businesses across the EU.

TheGovernment also said that if its concerns could bemet, the UK,with the agreement of theCommission,may seek to opt in to Rome I in the future.

3.Rome II – applicable lawin non-contractual disputes

a) Issues and concerns 

  • Under Rome II, the applicable lawfor the resolution of noncontractual disputeswill be determined on the basis of where the damage occurred rather thanwhere the harmful act took place. 
  • Rome II has given rise to less controversy than Rome I, as evidenced by the UK opting in to the Regulation. 
  • At present the question ofwhich substantive lawapplies to non-contractual obligations, notably tort claims, is not subject to European rules. Each country applies its own rules of private international lawto determine the applicable law, and in England those rules aremainly set out in the Private International Law(Miscellaneous Provisions) Act 1995. 
  • The newrules differ in a number of respects fromthe existing English rules and lawyers and clients alike should familiarise themselveswith the changes.

b) The situation

Key provisions of the law

The general rule under Article 4 of the Rome II Regulation is that the lawapplicable to a non-contractual obligation arising out of a tort/delictwill be the lawof the country inwhich the damage occurs (reversing the general rule currently applicable in England and indeedmostMember States). However,where the claimant and defendant both have their habitual residence in the same country at the timewhen the damage occurs, the lawof that country shall apply. There is an exception to these two provisions:where it is clear fromall the circumstances of the case that the tort/delict ismanifestly more closely connectedwith another country, the lawof that other countrywill apply. It expressly states that amanifestly closer connectionmight be based on a pre-existing relationship between the parties, such as a contract that is closely connectedwith the tort in question.

Commercial parties are also free to submit non-contractual obligations to the lawof their choice before or after the event, subject to certain exceptions (notably competition and IP claims). The choice needs to be expressed or demonstrated with reasonable certainty by the circumstances of the case and should not prejudice the rights of third parties. The agreement also needs to have been "freely negotiated".

The applicable lawwill govern not only substantivematters but also "the existence, the nature and the assessment of damage or the remedy claimed". This differs fromthe current position in Englandwhere these are generally considered proceduralmatters governed by the forum– seeHarding v Wealands [2006]4 All ER 1 (a cap on damageswas considered a proceduralmatter and therefore governed by English lawas the lawof the forum).

Specific rules

There are specific rules dealingwith a number ofmatters, including product liability, unfair competition, environmental damage and insurance.

Exclusions to theRegulation

There are a number of areas excluded fromthe scope of the Regulation. They include non-contractual obligations arising out of the liability for statutory audits, and relations between settlors, trustees and beneficiaries of trusts. Privacy and defamation are not covered butwill be considered further in the light of a study to be prepared by theCommission by December 2008.

c)Next steps

Commercial parties should considerwhether theywish to specify the lawapplicable to non-contractual obligations as well as contractual obligations in their contracts. The Regulationwill, however, only apply to events giving rise to damagewhich occur after its entry into force on 11 January 2009.Clients in sectorswhichmay be particularly affected by the newspecific rules should also consider the potential impact on their business. For example,manufacturers should consider the product liability rules and the concept of "reasonably foreseeing"where a productwill bemarketed.

4. Jurisdiction

a) Background

Cases over the last fewyears have highlighted the risk that due to an EUCouncil Regulation an exclusive jurisdiction clause does not guarantee that proceedingswill actually be brought in the contractually agreed jurisdiction.

Thismeans that if a contracting party brings proceedings in another EUMember State, in breach of the contractually agreed jurisdiction, the "non-defaulting" partymay suffer delays and extra costswhilst the question of jurisdiction is determined.

To try and counter these problems, contracting parties should consider acting swiftly in bringing preliminary proceedings in the English courts to determine jurisdiction or consider giving themselves an option for arbitration in cross border contracts. We explain this inmore detail below.

b) The situation

Article 27 of EUCouncil Regulation 44/2001 on jurisdiction and the recognition of judgments in civil and commercial matters (the "Brussels Regulation") provides thatwhere proceedingswith the same cause of action are brought in differentMember States, the second court seisedmust stay the proceedings pending the first court’s determination of jurisdiction. This applies even if the contract between the parties includes an exclusive jurisdiction clause in favour of anotherMember State's court.

The Brussels Regulation applies to all 27Member States.

c) Issues and concerns

Risks, uncertainties and consequences of the BrusselsRegulation 

  • The Brussels Regulation creates a lack of certainty as to where a party to a contractmay be sued.
  • Unlike the UK,most civil lawjurisdictions do not have a procedurewhereby court jurisdiction can be heard as a preliminary issue before themain trial. Thus, the question of jurisdictionmay only be consideredwhen themain proceedings come before the courtmanymonths or years andmany legal bills later, and after the substance of the case has been pleaded in full. 
  • There is a risk that,where interlocutory relief is needed, the aggrieved party is forced to apply to the court first seised and that this is then treated as a submission to jurisdiction, ruling out the chosen court.

Recent case law

The cases of ErichGasserGmbHvMISAT Srl (CaseC- 116/02 [2003] All ER (D) 148 (Dec)) and JPMorgan Europe Limited v PrimacomAGand PrimacomManagementGmbH ([2005] EWHC508 (Comm)), highlighted this problem. In Primacom, aGerman borrowerwas party to an English law loan agreement containing a submission to the exclusive jurisdiction of the English courts. Despite that contractual submission, theGerman borrower issued proceedings against the lender inGermany on the basis that the agreementwas unenforceable as an immoral contract (and contrary toGerman public policy). Subsequently, the lender issued proceedings against the borrower in England. The English court held that under the Brussels Regulation, the second court seised (the English court in this case) had towait for the first (German in this case) court’s determination of jurisdiction.

Although the jurisdiction challenge could have been heard in theGerman courtswithin about 4months, there is an unrestricted right to appeal inGermanywhich resulted in considerable delays and it took 9months for theGerman court finally to determinewhether it had jurisdiction. In the end, theGerman court decided that the English court had exclusive jurisdiction. The case then settled. Possible options for contracting parties – act quickly in disputes and consider arbitration 

  • Act quickly to bring proceedings in English courts

Where there is an English jurisdiction clause, lenders (and others) should consider acting quickly in bringing proceedings in the English courts as soon as there is any hint of a dispute so that the English court is the court first seised. Theremay, however, be a costs risk in doing so as thismay not allow adherence to pre-action protocols. 

  • Consider an arbitration option

When negotiating cross-border contracts, parties should consider giving themselves an option to use arbitration as a means of resolving disputes, rather than the courts for the following reasons:

  • an overseas courtmay actmore quickly in sending the dispute to a contractually agreed arbitration body than it would if therewere competing claims before courts in different jurisdictions.Civil lawsystems often have preliminary procedures to halt court proceedingswhere arbitration has been selected even if, for historical reasons, there is no similar processwhere parties have issued proceedings in competing jurisdictions;
  • arbitration is outside the scope of the Brussels Regulation.However, there is some uncertainty as to the interplay between arbitration and the "first seised" rule. If proceedings are first begun in anotherMember State's court in breach of an arbitration clause, it is unclear whether or not the English court, even if it is the court of the forumof the arbitration, can issue an anti-suit injunction restricting the party fromcontinuing those proceedings on the basis that theywere brought in breach of the arbitration clause. This question is currently with the EuropeanCourt of Justice for determination and it is likely to be several years before there is certainty; 
  • an arbitration option can be drafted so that it is ‘one-way’ i.e. so that it is only for the benefit of one party e.g in a finance agreement it could be drafted for the benefit of the lenders only. Alternatively amutual option can be included such that either party can opt for arbitration if the other party brings proceedings in a non-agreed jurisdiction in breach of the exclusive jurisdiction clause.

d)Next steps

TheCommission is currently conducting a 5 year reviewof the operation of the Brussels Regulation. The governmentwrote to stakeholders earlier this year inviting suggestions for changes to the Regulation,which itwould then take into account in its discussionswith theCommission.

Herbert Smith responded to the government proposing that: 

  • The Regulation be amended to permit the courts of the parties' chosen forumto continue to hear the dispute, notwithstanding the prior commencement of proceedings in anotherMember State; and 
  • Civil procedure of theMember States be harmonised to the extent necessary to establish a uniformprocedure for disputing jurisdiction, including the prohibition of any procedural rule requiring a defendant to plead to the merits of a case prior to the court determining issues of jurisdiction.

In connectionwith the 5 year review, theCommission published a report on the application of the Brussels Regulation inMember States in September. The report recommended only very limited exceptions to the rule of strict priority under Article 27, in particular: 

  • A very narrowexceptionwhere the specific proceedings in the court first seisedwould be excessively long, such as to breach the parties' rights under Article 6 of the European Convention onHuman Rights (which guarantees effective remedies including the conclusion of proceedings in due time); 
  • A restricted exceptionwhere parties concluded an exclusive jurisdiction agreement byway of a short clear cut standard form, inwhich case the chosen courtwould be released fromthe "first seised" rule.

The report rejected suggestions of the sort supported by Herbert Smith in its response to the government. Further, the report is hostile to unilateral jurisdiction clauseswhich are common in cross-border loan transactions (allowing the lender to sue in its chosen jurisdiction but restricting the borrower to the agreed jurisdiction).

We have concerns regarding the proposal for a standard form exclusive jurisdiction agreement, particularly as this is likely to assist only thosewho are legally advised.However, if the Regulation is amended in linewith this proposal, partieswho use the standard formroutewould avoid the Primacom problembecause the court of the chosen jurisdiction specified in the standard formwould be able to continue to hear a claimevenwhen itwas not the court first seised. (It seems that no standard formwould be available to those wishing to agree a unilateral jurisdiction clause.) The proposal may, of course, not findwidespread support and, even if it does, any amendment to the Regulation is likely to take a significant amount of time to be agreed.

Other developments impacting dealings with consumers

1.UnfairContract TermsBill (UCTB)

a) Background

The LawCommission has proposed a newUnfairContract Terms Bill to replace the UnfairContract Terms Act 1977(UCTA) and the Unfair Terms inConsumerContracts Regulations 1999 (UTCCR). 

  • The newbillwill replace the two existing statutes, but retain most of the current rules.
  • Small businesses (fewer than nine employees)will be treatedmore like individual consumers andwill be able to challenge unfair standard terms in contracts . unless the contract relates to a regulated financial service. 
  • The UCTBmay be affected by the outcome of the EU reviewof the consumer acquis.

b) The situation

The UnfairContract Terms Act 1977 (UCTA) and the Unfair Terms inConsumerContracts Regulations 1999 (UTCCR) overlap yet apply different tests to contract terms.

UCTA - if the contract contains standard terms of business or it is a contractwith a consumer the limitation/exclusion of liability is not permitted unless it is "reasonable".

UTCCR . a non-negotiated termin a consumer contract is unenforceable if it is unfair (ie, if contrary to the requirements of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer).

A choice of lawclause cannot be used to artificially control the application of the current (or proposed) legislation.

c) Issues and concerns

The 2005 LawCommission Report includes an Unfair Contract Terms Bill. This includes: 

  • A newunified efair and reasonablef test. (See section 14 and the ExplanatoryNotes for the criteria that are relevant when applying the test.) 
  • Retention ofmost of the existing rules under UCTA and UTCCR (eg, prohibition under UCTA of terms that exclude/limit liability for death or personal injury due to negligence). 
  • All B2Ccontract termswill be subject to the newtest regardless ofwhether the termis individually negotiated. The burden of proof is on the seller to showit is fair and reasonable.
  • Additional protection for esmall businessesf (. 9 employees). Terms in a esmall business contractf (one party is a small business; the price payable under the contract, scheme or series < ’500,000) that are negotiated but not amendedmust be fair and reasonable. The burden of proof is on the person claiming the termfails the test. Small business provisions do not apply if a FSMA "regulated activity" is being carried out under the contract by an "authorised person" or an "exempt person".
  • Like the UTCCR, Schedule 2 of the Bill sets out a nonexhaustive list of unfair terms in consumer contracts. That list also applies to small business contracts.
  • The definition of consumer is narrower than in UCTA. Under the Bill it only covers individuals (under UCTA it includes a business acting outside its usual area of business).

d)Next steps

BERR's formal response on 24 July 2006 generally agreed with the LawCommission recommendations. BERR are also considering if the current regulation of exclusion/limitation of liability clauses in B2B contracts is stillwarranted.

In early 2007 BERR stated that theywere still considering the implications of implementing the LawCommission's recommendations andwere in the process of preparing an impact assessment.

They have no immediate plans for introducing the UnfairContract Terms Bill into Parliament.

In the interimin the UK theOFT released a consultation paper in April 2007 "Unfair contract terms guidance -Consultation on revised guidance for the Unfair Terms inConsumer Contracts Regulations 1999". This is not a consultation on the underlying lawbut ismerely revised guidance on theOFT's interpretation ofwhat amounts to an unfair term. The final version of theGuidance is due to be released by the end of 2007.

In a separate development, the EUCommissionGreen Paper on the Reviewof theConsumer Acquis (COM(2006) 744 final) was released in February 2007. It includes a reviewof the Unfair Terms InConsumerContracts Directive (93/13/EEC) uponwhich the UK's UTCCR is based. The consultation questions in theGreen Paper include:

  • Unfair contract terms . should the current prohibition on unfair terms in non-negotiated consumer contract terms be extended to negotiated terms? 
  • Blacklisted unfair terms . should the current indicative list be replacedwith a black list and/or a grey list of unfair terms? 
  • Scope of the unfair terms regime - should it be extended to cover subjectmatter and price?

TheGreen Paper consultation closed on 15May 2007. In September 2007 the European Parliament passed a Resolutionwhichwas broadly supportive of theGreen Paper. In relation to the above issues it stated that it is opposed to the application of the rules on unfair terms to individually negotiated terms or core terms of the contract. It is however in favour of having a black list and grey list of unfair terms. The reviewof the consumer acquis is however ongoing so itwill be some time before it is clearwhether changeswill actually be made to the Unfair Terms InConsumerContracts Directive (and in turn the UK regulations).

2.Unfair Commercial Practices Directive

a) Background

The UCPDwill introduce a general prohibition on unfair commercial practices that harmconsumers' economic interests. Itwas due to come into effect in the UK by 12 December 2007 and is a ‘maximumharmonisation’ Directive. Itwill be implemented in the UK byway of theConsumer Protection fromUnfair Trading Regulations,whichwill come into effect on 6th April 2008. 

  • The UCPD harmonises EU lawand aligns fair trading law with criminal law.
  • The evidential threshold for some criminal offenceswill be raised fromstrict liability to proof of knowledge or recklessness.
  • There are a number of exemptions including business-tobusiness and commercial practices, and contract law(rules on validity, formation and effect of a contract).

b) The situation

BERR's first consultation in December 2005 identified 28 pieces of existing legislationwhichmight be affected by the UCPD. In its formal response to BERR's consultation, the Government said that it intended to repeal 22 of the laws identified. Itwill extend criminal liability to almost all of the new UCPD provisions: 

  • Offences relating to breaches of the general prohibition not to trade unfairly,will require proof of knowledge or recklessness; 
  • Specific categories of (i)misleading actions and omissions, (ii) aggressive commercial practices and (iii) a "blacklist" of 31 specific unfair practiceswill be strict liability offences; 
  • TheOFTwould have the power to bring criminal prosecutions - although this does not automaticallymean the commencement of formal enforcement in respect of every infringement.

c) Issues and concerns

A safety net for consumers: rules and exemptions The regulations thatwill implement the UCPD have been described as forming "themainstay of fair trading legislation" in the UK. The UCPD should act as a catch-all to protect consumers fromunfair commercial practiceswhich are not already unlawful.

The UCPD also aims to harmonise unfair trading laws in EUMember States. It has been drafted as a 'maximum harmonisation' Directive, soMember States are not permitted to apply stricter provisions in the area inwhich the UCPD applies.

There are a number of exemptions in the UCPD. Themost significant are: 

  • Business-to-business commercial practices. 
  • Contract law, in particular rules on the validity, formation or effect of a contract. 
  • Intellectual property rights. 
  • Rules determining the jurisdiction of the courts. 
  • Licensing and authorisation regimes. 
  • The regulation of the professions.

There are also ‘maximumharmonisation' exemptions for financial services and immovable property.

Thismeans thatMember Statesmay retain or introduce rules that aremore restrictive or prescriptive than the Directive in these areas. TheCommissionwill reviewthese exemptions in 2011.

d)Next steps

Although the UCPDmust come into effect by 12 December 2007, the implementing Regulationswill not be in force until 6th April 2008.

TheGovernmentmay later considerwhether to adopt additional intermediate enforcement tools, such as administrative penalties, as provided for in the draft Regulatory Enforcement and Sanctions Billwhich is currently the subject of separate consultation.

3.Distance selling directive

a) Background

The EU is looking into problems related to the Distance Selling Directive,which gives extra rights to consumers buying over the internet, by phone, fax ormail order. 

  • The Directive is unclear and newtechnologiesmake it difficult to give consumers themandatory information. 
  • A specific reviewof the Distance Selling Directive, and the more general reviewof the EU consumer acquiswill both affect the DSD, but areworking to different timetables. 
  • The EUwill decidewhat changesmay be necessary once it has completed the ongoing reviewof the consumer acquis.

b) The situation

The Directive provides consumerswith additional rightswhen buyingmost goods and serviceswhere there is no face-toface contactwith the seller (eg, via the internet, phone, fax or mail order). It is implemented in the UK by theConsumer Protection (Distance Selling) Regulations 2005.

The EU Commission issued aCommunication paper (COM/2006/0514 final) to gauge the need to update the Distance Selling Directive. The consultation closed in November 2006 and a summary of responses is now available on theCommission’swebsite.

EU consults on consumer acquis

In parallel, the EUCommissionGreen Paper on the Reviewof theConsumer Acquis (COM(2006) 744 final)was published in 2007. It is a broader consultation on eight EU consumer protection Directives, including the Distance Selling Directive. Consultation questions in theGreen Paper relevant to the Distance Selling Directive include: 

  • Provision of information -what should be the consequence of failing to provide the required information? 
  • Cooling off/Right to terminate atwill – shouldMember States harmonise the length of the period, themechanism, or the costs to the consumer? 
  • The reviewof the consumer acquismay also affect the proposedCommon Frame of Reference for contract law.

TheGreen Paper consultation on the consumer acquis closed on 15May 2007. In September 2007 the European Parliament passed a Resolutionwhichwas broadly supportive of theGreen Paper. Itwas in favour of a harmonisation of the cooling off rules by introducing an EUwide standard cancellation form. Itwas also in favour of the harmonisation of the exceptions to this right to terminate.

c) Issues and concerns

The EUCommission cited the following problemswith the Distance Selling Directive in its 2006Communication paper (COM/2006/0514 final): 

  • The reliance on newtechnologies, such as ‘mobile commerce’ through SMS (which has a limit of 160 characters or 224 characters if using a 5-bitmode), makes it logistically difficult to provide consumerswith all the required contract information. 
  • The effectiveness of the Directive is hampered as contracts concluded at auction are exempt, and its application to some other forms of online selling is not clear. 
  • As it is not amaximumharmonisation Directive, there are differences in implementation across the internalmarket. 
  • ‘Cooling off’ periods for contract cancellation vary between member states.

d)Next steps

It is unlikely that changeswill bemade to the Distance Selling Directive until the completion of the ongoing reviewof the consumer acquis.

4. Insurance contract law

a) Background

The LawCommissions of England and Scotland (LC) are carrying out awide reviewof insurance contract law. The LC published a firstConsultation Paper (CP) arising out of the reviewin July 2007. The paper contains recommendations for wide-ranging reformin the areas of:

(a) non-disclosure andmisrepresentation;

(b) breach ofwarranties; and

(c) the role of intermediaries in obtaining pre-contractual information.

b) The situation

Major themes of the reviewso far are: 

  • A different approach for consumer and business insureds. 
  • Following the approach of the FinancialOmbudsman Service (FOS) in relation to consumer insurance. 
  • Reforming the lawtomake the Londonmarketmore attractive to insureds. 
  • Towhat extent any proposed changes in the lawshould be mandatory orwhether the parties should be free to contract out. 

c) Issues and concerns

Insurance contract lawhas been reviewed in the past, but not reformed.However, there does appear to be a genuine drive behind this review, coupledwith a concern that the current lawmayweaken the UK's position if harmonisation of European insurance contract lawbecomes a reality.

The recommendations in theCP closely resemble tentative proposalsmade in earlier Issues Papers on each of these topics issued by the LC. The LChas concluded that the present lawis not fair, as is demonstrated by the need for FOS to decide caseswithout strict application of the law. It should therefore be changed to reflect, to a significant extent, principles applied by FOS to such cases.

Proposals contained in theCP alsomaintain and, in some respects, emphasise the distinction between consumer and business insurance. A key difference between the two is that, subject to a fewexceptions, it is proposed that the lawrelating to consumer insurancewill bemandatory but thatmuch of the lawrelating to business insurancewill represent the default position. So, parties in a business contextwill be free to agree a different set of contractual rules, failingwhich the default ruleswill apply.

d)Next steps

Although legislation is unlikely before 2012, if at all, the insurance and reinsurancemarkets have the opportunity to give their views nowon reforms thatmay be enormously significant in the future.

Going forward, the LCintends to publish a secondCP in 2008,whichwill cover post-contractual good faith, insurable interest and damages for the late payment of claims. Later on, itwill considerwhether there is a need to codify insurance law more generally.