In April 2008, the High Court delivered the first judgment in the Office of Fair Trading’s (OFT) test case challenging the clarity of banks’ overdraft charges (for background, see News brief “Bank charges test case: fair play”, www. practicallaw.com/3-382-0127). In June 2008, the Financial Services Authority (FSA) published its report, “Fairness of terms in consumer contracts: a visible factor in firms treating their customers fairly.”
It is time for regulated businesses to review their standard terms and customer documents for language as well as content.
Every written term of a consumer contract must be in plain, intelligible language (regulation 7(1), Unfair Terms in Consumer Contracts Regulations 1999) (1999 Regulations). This rule and its predecessor have been in force for more than ten years (see box “Law Commission proposals”). They are not limited to standard terms. A “consumer” means any natural person acting outside their business, trade or profession (regulation 3(1), 1999 Regulations).
If a term is not in plain, intelligible language:
- Any doubt about its meaning is resolved in favour of the consumer (regulation 7(2), 1999 Regulations).
- It may be assessed for fairness (unless it was individually negotiated), even if it relates to a core issue such as price (regulations 5 and 6, 1999 Regulations).
- The OFT or the FSA can get an order under the Enterprise Act 2002 preventing its use.
The 1999 Regulations also say that terms must not be unfair. The OFT has warned that “it would clearly be difficult to maintain that unintelligible or ambiguous terms were not unfair if they had some potential for detriment to the consumer” (OFT 170). An unfair term is unenforceable against the consumer (regulation 8(1), 1999 Regulations) (see box “Plain language and fairness”).
Although these rules only govern contract terms, the High Court ruled in April 2008 that non-contractual documents are relevant if given to the consumer in time before making the contract (OFT v Abbey National PLC  EWHC 875 (Comm)). It held that explanatory documents may clarify a term that would not be intelligible if it stood alone. On the other hand, one contract term failed the “plain and intelligible” test because a note contradicted it (Abbey National, paragraphs 90-94 and 145-147).
A business that gives confusing pre-contract information may struggle to draft contract terms so their effect is clear.
Financial services requirements
The need for plain language goes beyond consumer contracts. FSA-regulated firms must:
- Pay due regard to all their clients’ information needs and communicate information to them in a way which is clear, fair and not misleading (Principle 7, FSA’s Principles for Businesses).
- Present information to retail clients in a way that their average reader is likely to understand (FSA’s Conduct of Business Sourcebook (COBS) 4.5.2, reflecting Article 19(2), Markets in Financial Instruments Directive (2004/39/EC) (MiFID) and Article 27(2), MiFID Implementing Directive (2006/73/EC)).
The FSA can fine, publicly censure or even ban any firm that breaches its Principles or other rules (see box “Who enforces these rules?”).
Financial institutions that choose to subscribe to the Banking Code and the Business Banking Code make a similar commitment to their personal and small business customers. They promise: “All written terms and conditions will be fair and will set out your rights and responsibilities clearly and in plain language. We will only use legal or technical language if necessary” (paragraph 6.2, Banking Code; paragraph 6.2, Business Banking Code).
Disciplinary action by the Banking Code Standards Board against a business that breaches the Banking Code can include cancelling or suspending its registration.
What is plain enough?
To put contracts or other information into plain language, a draftsperson needs to consider the wording, the effect, and the layout.
Wording. The principles of plain writing are well known, if not always applied to legal documents (for background, see Know-how article “Plain language: saving time and money”, www.practicallaw.com/2-382-2650).
A term may fail the plain and intelligible test by being obscure and difficult to understand, even if it bears only one meaning for anyone who manages to fathom it (Abbey National, at paragraph 87). But the standard is not as high as perhaps some consumer groups would like. One clause in the same case was held “plain and intelligible” although it began with a 76-word sentence (paragraphs 164 and 175). (At least it had punctuation marks.) The Plain English Campaign recommends an average of 15 to 20 words in a sentence.
The OFT’s Unfair Contract Terms Guidance suggests some offending expressions, such as “force majeure”, “indemnity”, “lien”, “liquidated damages”, “risk in goods”, “pro rata”, “time of the essence” and “title to property” (Group 19 and Annex A, OFT 311 www. oft.gov.uk/advice_and_resources/resource_ base/legal/unfair-terms/guidance# named1). Although bread and butter to lawyers, these expressions may mean nothing to consumers. On 25 July 2008, the FSA issued a similar warning to insurers about “consequential loss” (www.fsa.gov.uk/pubs/other/consequential_loss.pdf) (see “Consequential loss”, Bulletin, Commercial law, this issue).
Effect. Removing complex or obscure vocabulary is not enough. The consumer needs to understand not only the wording but also its effect, as the High Court confirmed in Abbey National (paragraph 103): “The wording cannot be said to be “intelligible” unless the consumer can understand from the contract both what the [clause] actually says and how it affects the parties’ rights and obligations”.
For example, a business may exclude its liability “so far as the law allows”, or use a wide exclusion clause that “does not affect your statutory rights”. The OFT and the FSA argue these terms are not plain and intelligible, because consumers are unlikely to know all their statutory rights, or what the law allows (page 17, FSA report and Group 19, OFT311). Another regulator, Ofcom, acting on a consumer complaint in October 2006, got UK Online to change terms including the clause: “These terms and conditions do not affect your statutory rights”. The clause now says the terms “do not affect your rights under law”, and prompts the consumer to contact a Citizens’ Advice Bureau if they want to know those rights.
But the 1999 Regulations do not require businesses to give consumers all the information they need to make an informed decision whether to enter the contract. Leaving information out only matters if it makes the term’s meaning or effect unclear (Abbey National, paragraphs 98-100).
Layout. The High Court has agreed with the OFT that a term’s form and structure can contribute to its clarity. Businesses should consider using headings and bold print to break up text and signpost important clauses (Group 19, OFT 311; Abbey National, paragraph 104).
Who is the target reader?
A term may be unintelligible even if its meaning is obvious to a lawyer. The 1999 Regulations require terms to be intelligible to the typical or average consumer, who should be able to understand the contract without seeking legal advice.
The average consumer “is reasonably well informed and reasonably observant and circumspect” (Lidl Belgium GmbH & Co KG v Etablissementen Franz Colruyt NV, Case C-356/04;  1 CMLR 9).
Some have suggested that the average consumer in some markets is more sophisticated; for example, in some financial services contracts (Chitty on Contracts (2004), Vol 1, paragraph 15-090). And, in principle, if the typical consumer has a history of dealings with the business, the court might take this background into account when deciding if the terms are plain.
To comply with the FSA’s rules, businesses must consider the average retail customer in the group to whom the product is addressed.
The regulatory dividend
The FSA says “firms with fair contract terms will find that they benefit from a regulatory dividend, as it may be one of a number of factors which evidences that a firm is treating its customers fairly” (paragraphs 3.13 and 3.16, FSA report).
The FSA advises businesses to monitor the regulators’ websites for examples of best practice (often another firm’s response to regulatory action), and to update their own terms to match. For example, a variation clause may well be unfair as well as unclear, and a target for regulatory action, if it does not say what sort of change might happen or in what circumstances.
Plain language is part of fairness in contract terms, which in turn may evidence a wider business culture of treating customers fairly. Businesses who embrace this transparency can expect to reap the benefits from the regulators as well as from their customers.
Law Commission proposals
The Law Commission has recommended expanding the Unfair Terms in Consumer Contracts Regulations 1999 to spell out that contract terms must be “transparent” (www.practicallaw.com/8-00-6628). That is, they must be:
- Expressed in plain language.
- Presented in a clear manner.
- Available to the consumer.
A term that is not transparent could be unfair on that ground alone, they suggest. In principle, the government accepted the Law Commission’s proposals on unfair contract terms in 2006. The Department for Business, Enterprise and Regulatory Reform is considering implementing them as part of its broader review of consumer law.
Plain language and fairness
A standard term is unfair (and unenforceable against the consumer) if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer (regulation 5(1), Unfair Terms in Consumer Contracts Regulations 1999) (1999 Regulations).
This goes beyond plain language: it includes “open dealing”. This means terms must contain no hidden pitfalls or traps and prominence should be given to burdensome terms (Director General of Fair Trading v First National Bank Plc ( UKHL 52,  1 A.C. 481 at 494). A clause binding the consumer to terms he had no real chance to read and consider before making the contract is typically unfair (Schedule 2, paragraph 1(i), 1999 Regulations).
Who enforces these rules?
The Financial Services Authority (FSA) and other regulatory bodies have agreed to coordinate their regulatory action:
• Concordat between the FSA and Office of Fair Trading (www.fsa.gov.uk/pubs/other/concordat_fsa_oft.pdf).
• Memorandum of Understanding between the FSA and the Banking Code Standards Board (www.bankingcode.org.uk/wpdocs/Finalised%20MoU%20from%20FSA%20190608.pdf).