September 2015

UK: Consumer Rights Act 2015 - Goods, Services and Unfair Terms.

On 1 October 2015 the Consumer Rights Act 2015 comes into force. A key aim of the Act is to consolidate, rationalise and modernise consumer law on the sale and supply of goods and services, and unfair terms in consumer contracts. This briefing sets out an overview of the changes.

Background The Consumer Rights Act 2015 (the “CRA”) received Royal Assent in March 2015 and has recently been confirmed as coming into force on 1 October 2015. It is a significant overhaul of consumer protection legislation which responds to a perceived need to consolidate, clarify and, in some cases, enhance the law. There are three key areas affected by the CRA. First, the law on the sale and supply of goods and services in consumer contracts. Second, the law on unfair terms in consumer contracts. Finally, the CRA contains provisions to help facilitate collective actions by consumers in competition law private actions.

Contents Background....................... 1 Sale and supply of goods and services – Part 1 ........ 1 Unfair terms – Part 1 & Part 2 ........................................ 3 A “black list” of terms not permitted in consumer contracts ........................... 4 Part 2 CRA – General “fairness” requirement ...... 4 To what contracts and notices do the above changes apply?................. 6 Public enforcement of unfair terms legislation ................ 6

This briefing provides a general overview of the provisions of Part 1 and Part 2 CRA. These deal with the first two areas listed above.1 References to Parts, Chapters, Schedules, sections and paragraphs in this note are to such in the CRA, unless otherwise stated. Parts 1 and 2 generally apply when a business enters into a contract with an individual acting as a “consumer”. This is the case where an individual acts for purposes that are wholly or mainly outside that individual’s trade, business, craft, or profession (s.2(3),s.76(2)).

Sale and supply of goods and services – Part 1 Consistent with the CRA’s aim to consolidate matters of consumer law the CRA effects a major structural change by moving the law on these matters as applicable to business-to-consumer contracts into the CRA. 1

The third is dealt with in a separate Linklaters publication available on the Linklaters Client Knowledge Portal entitled “New CAT reforms come into force”.

UK: Consumer Rights Act 2015 - Goods, Services and Unfair Terms

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Accordingly, the provisions of, primarily, the Sale of Goods Act 1979 (“SGA”) and the Supply of Goods and Services Act 1982 which applied to consumer contracts (and, for example, implied terms into such contracts) will now be found in the CRA; with those Acts left to apply to business-tobusiness contracts.2 In relation to sales of goods, in addition to re-enacting the pre-existing rights consumers have (i.e. implied terms as to satisfactory quality (s.9), fitness for purpose (s.10), match their description (s.11) or a sample (s.13)) the CRA also introduces new requirements that goods must also match a model which was seen or examined (s.14), and must be installed correctly (s.15). Moreover, consumers now have the benefit of a “short-term right to reject”, which provides a 30-day period within which goods can be returned after delivery or installation (s.20). Currently, the right to reject goods must be exercised within a “reasonable period” which has caused uncertainty for both lawyers and consumers. Further, in an effort for the law to move with the times, the CRA will also contain provisions which specifically apply to digital content. At present, where software is part of tangible media (like a CD or DVD), it is treated as ‘goods’ for the purpose of the SGA. But the exact same digital content, if electronically purchased and downloaded, would not fall within that category. As such, a consumer who has purchased tangible digital content was much better protected than a consumer who had purchased digital content by downloading it. Under the CRA, paid for digital content which uses the CRA definition of “data produced and supplied in digital form” now must comply with standards that reflect (broadly) those for goods (Part 1, Chapter 3). As with goods, the CRA has also re-enacted much of the pre-existing law on the supply of services (e.g. the service must be supplied with reasonable care and skill (s.49), within a reasonable time (s.52) and for a reasonable price (s.51)), and added new provisions such that the service will now have to be performed in line with information provided about the service and information provided about the trader (s.50). Importantly, statutory remedies will now be available for services that do not meet the legally required standard. Remedies include a right to ask for repeat performance (s.55), or, where repeat performance is impossible or cannot be done in a reasonable time without inconvenience, the right to a reduction in the price of the service (s.56). These remedies can be pursued in lieu of the current breach of contract remedies which were previously the only possible course of action.

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See s. 60 and Schedule 1 for the changes to those Acts.

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Unfair terms – Part 1 & Part 2 The law specifically concerned with unfair terms in consumer contracts “pre-CRA” is principally derived from two statutes. The Unfair Contracts Terms Act 1977 (“UCTA”) and the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCRs”). In brief, UCTA deals with attempts by business to restrict or exclude certain types of liability. It deals with those attempts differently depending upon what liability is involved and depending upon whether the other party is a business or a consumer. In some cases this means that the attempt is prohibited altogether. In others it means the attempt is subject to a reasonableness test. By contrast the UTCCRs apply, in principle, to any terms in a business to consumer contract, and subject them to a general test of fairness; an “unfair” term not being binding on a consumer. The test to be applied to assess fairness is set out in the UTCCRs, which also contain a “grey list” of potentially unfair terms, with exceptions. Importantly “core” terms of a contract (being the definition of its main subject matter and the adequacy of the price) are, in so far as they are expressed in plain and intelligible language, excluded from the test of fairness, and the UTCCRs do not apply to individually negotiated terms. The two statutes therefore overlap to a degree, but provide different levels of protection. Turning to the CRA, it first effects a similar structural change to the provisions on goods and services by (i) moving the parts of UCTA applicable to business to consumer contracts out of that Act and into various places in Parts 1 and 2 and (ii) revoking the UTCCRs but reenacting them into Part 2 (with some modifications). The net result is, therefore, that the main legislation specifically concerned with unfair terms in consumer contracts will be found in the CRA.3 UCTA is left in force but containing its business to business provisions only.4 The Competition and Markets Authority (“CMA”) has also recently published revised Unfair Contract Terms Guidance (the “CMA Guidance”) to take into account the CRA regime.5 This replaces the (now defunct) OFT’s original guidance note (OFT 311). Other than this, broadly speaking, the CRA’s provisions on the matters previously covered by UCTA and the UTCCRs consist of the following.

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Note that this is not the same as saying that this will be the only legislation relevant to a case involving unfair terms in a consumer contract. Depending on the facts, other consumer protection legislation with broader scope may also be engaged. See paragraphs 6.21-6.36 of the CMA Guidance for examples. See s.75 and Schedule 4 for the amendments made to UCTA. https://www.gov.uk/government/publications/unfair-contract-terms-cma37

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A “black list” of terms not permitted in consumer contracts As alluded to above, these essentially follow those terms that, under the pre-CRA regime, would, in a business to consumer contract, have been prohibited by UCTA; but with relevant modifications for the updated CRA regime. So they, accordingly, prohibit any exclusion or restriction of liability for death or personal injury caused by negligence (Part 2, s.65) and for breach of certain statutory implied terms in the context of sales of goods contracts, including digital content (Part 1, s.31, s.47).6 Contracts to supply services are treated a little differently. Attempts, in business to consumer contracts, to exclude liability arising from certain statutory implied terms applying to them are prohibited. Limitations of such liability are possible in certain, tightly, defined circumstances (Part 1, s.57).

Part 2 CRA – General “fairness” requirement Although the UTCCRs are revoked (paragraph 34, Schedule 4), Part 2 substantially re-enacts their provisions. So the broad structure is retained; namely: an unfair term is not binding on the consumer (s.62(1)). A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations to the detriment of the consumer (s.62(4)) This is to be determined by taking into account the subject matter of the contract and by reference to all the circumstances when the term was agreed and to all the other terms of the contract or of another contract on which it is dependent (s 62(5)). Similarly, a “grey list” of terms which may be unfair is retained at Part 1 of Schedule 2, with exceptions at Part 2 of Schedule 2 (s.63(1)), as is the “core” terms exception (s.64).7 Although that is the case there are, however, some differences under Part 2 which stand to potentially widen the scope of the regime. Some of the key changes are as follows: First, the definition of “consumer” is somewhat wider than before by virtue of the addition of “wholly or mainly…” (emphasis added) to the definition. In a similar vein, the fairness requirement will now also be applicable to individually negotiated consumer contracts as, unlike the UTCCRs, Part 2 is not limited to consumer contracts which have not been negotiated.8 Both these changes potentially broaden the types of contracts the test of fairness may be applied to by a consumer. 6 7

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See part 4 of the CMA Guidance for detailed consideration of the “black list”. See paragraphs 2.10-2.41 and part 5 of the CMA Guidance for detailed consideration of “fairness” and the “grey list” (including comment on specific items therein). The “core” terms exception is considered at part 3 of the CMA Guidance. So, even heavily negotiated contracts with, say, legally represented high net worth individuals would, therefore, be susceptible to assessment for fairness under Part 2 provided such an individual acts in the capacity of a “consumer”. See paragraphs 2.30-2.32 of the CMA’s guidance for its observations on individually negotiated terms and when consumers act with legal advice.

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Second, there are two significant changes to the workings of the “grey list”. The first is a clarification of the relationship between the items on the “grey list” and the “core” terms exception. One question was whether items on the “grey list” which went to matters in the “core” terms exception remained capable of assessment for fairness. The position is put beyond doubt by the CRA which makes it clear that the “grey list” items of Part 1, Schedule 2 cannot benefit from the “core” terms exception, whilst the items in Part 2, Schedule 2, in contrast, can (s.64(6), s.63(2)). The second change in relation to the “grey list” is that new items have been added to it – specifically items which relate to: exit fees, changes in subject matter and a wider drafted paragraph concerning price changes. (Paragraphs 5,12,14, Part 1, Schedule 2). Third, there are some changes in the requirements which apply to how terms in consumer contracts are expressed. S.68 imposes a general requirement that they must be transparent, where the previous requirement was that the term must be in plain and intelligible language. Transparent means that the term must be in plain and intelligible language and legible (s.64(3)). A failure to meet this requirement does not mean the term is unenforceable but any ambiguity in a dispute with a consumer will be resolved by application of the meaning most favourable to the consumer (s.69(1)).9 In the context of the “core” terms exception, however, it is important to be aware that it cannot apply to a term unless it is both transparent and prominent (s.64(2)-(5)). Finally, consumer notices are brought within the fairness regime of Part 2 CRA, albeit with some modifications to the regime as applicable to contract terms. Consumer notices are notices which relate to the rights or obligations between a trader and a consumer or which appear to exclude or restrict the former’s liability to the latter. Although they may not necessarily be part of the contract between the two, they therefore purport to modify the relationship between them.10 Previously, such notices were only subject to limited coverage under UCTA. Alongside the extension of the Part 2 fairness regime to consumer notices, that pre-existing UCTA coverage (essentially UCTA s.2(1)-2(3) in so far as those provisions apply to notices) is, for consumer notices, also swept up into the CRA regime11 (whilst, consistent with the overall CRA approach, is left to reside in UCTA for business to business relations).

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See Paragraphs 2.42-2.65 of the CMA Guidance for detailed consideration of the transparency requirement. The CMA Guidance notes that one area in which the consumer notice provisions are likely to be particularly significant is in relation to digital content (paragraph 1.22). See s.65(1),(2) which covers the same ground as UCTA s.2(1),(3). In so far as UCTA s.2(2) is concerned, such matters are subsumed within the application of the Part 2 fairness test to consumer notices.

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To what contracts and notices do the above changes apply?

Contacts

The changes made by Part 1 and Part 2 and discussed above will apply only to consumer contracts entered into (or consumer notices provided or communicated) on or after 1 October 2015.12 For such contracts entered into (or consumer notices provided or communicated) before that date, the previous regime will still apply.13

For further information please contact: Patrick Robinson Partner (+44) 20 7456 5879

Public enforcement of unfair terms legislation

[email protected]

Although the above changes brought about by the CRA will have a significant effect on the private law relationship between businesses and consumers, the CRA also effects a number of changes designed to bolster the ability of the UK regulators charged with public enforcement of unfair terms legislation. These measures, which are set out at Part 3 and Schedules 5-7, are beyond the scope of this note but include, in short, a new set of generic investigatory powers and new enforcement powers permitting regulators to grant enhanced forms of consumer redress for breaches of consumer law.14

Stephen Lacey Senior PSL (+44) 20 7456 5156 [email protected]

Charalampos Dimoulis Associate (+44) 20 7456 2630 [email protected]

Sadie Buls PSL (+44) 20 7456 4008 [email protected] Authors: Stephen Lacey, Charalampos Dimoulis, Sadie Buls This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. © Linklaters LLP. All Rights reserved 2015 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on www.linklaters.com and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to www.linklaters.com/regulation for important information on Linklaters LLP’s regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by emailing us at [email protected].

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Consumer Rights Act 2015 (Commencement No3) Order 2015, SI 2015/1630 Article 6(1) Ibid, Article 6(1). Although not apparent on the face of that Article, the pre-CRA versions of, for example, SGA and UCTA are preserved in relation to pre-1 October 2015 consumer contracts and, insofar as applicable, consumer notices as the amendments to such Acts appear in sections of the CRA which, by virtue of Article 6(1),ibid,, do not apply to such contracts and notices. Saving provision for the UTCCRs to continue to apply in such cases, where applicable, is made by Article 6(4), SI 2015/1630 as these are otherwise revoked. See paragraphs 6.1-6.20 of the CMA Guidance for more on public enforcement of unfair terms legislation.

UK: Consumer Rights Act 2015 - Goods, Services and Unfair Terms A30451440/0.7/24 Sep 2015

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