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UNFAIR TERMS IN CONSUMER CONTRACTS

UNFAIR TERMS IN CONSUMER CONTRACTS. Marko Baretić, Ph. D. Faculty of Law of the University of Zagreb. SOURCE. Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. PURPOSE OF THE DIRECTIVE.

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UNFAIR TERMS IN CONSUMER CONTRACTS

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  1. UNFAIR TERMS IN CONSUMER CONTRACTS Marko Baretić, Ph. D. Faculty of Law of the University of Zagreb

  2. SOURCE Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts

  3. PURPOSE OF THE DIRECTIVE Laws of the MS’s relating to unfair terms in consumer contracts show marked divergences, Generally, consumers do not know the rules of law which, in MS other than their own, govern contracts for the sale of goods or services, Which may deter consumers from direct transactions for the purchase in another MS Therefore, in order to facilitate the establishment of the internal market and to safeguard the citizen in his role as consumer, It is essential to remove unfair terms from consumer contracts It is essential to do that by adopting uniform rules on the Community level

  4. OVERVIEW Determining the criteria for assessing the unfairness of contract terms Determining the legal consequences of the unfairness of contract terms Determining the rules regarding the interpretation of the contract terms in consumer contracts Establishing procedural system which enables the prevention of continued use of unfair terms in consumer contracts

  5. MAIN CHARASTERISTICS Contract law issue B2C transactions Horizontal rules Mandatory rules Minimum harmonisation directive MS may adopt or retain the most stringent provisions compatible with the Treaty in the area covered by this Directive, to ensure a maximum degree of protection for the consumer. (art. 8)

  6. SCOPE OF APPLICATION Type of transaction B2C contracts? Form of contract Formal (in writing) and/or informal (oral) contracts? Type of contract Type of contract term Exclusion of certain contract terms from the scope of application

  7. SCOPE OF APPLICATIONTYPE OF TRANSACTION B2C Contracts The purpose of this Directive is to approximate the laws, regulations and administrative provisions of the MS relating to unfair terms in contracts concluded between a seller or supplier and a consumer(Art. 1/1) “consumer” means any natural person who, in contracts covered by this Directive, is acting for purposes which are outside his trade, business of profession (Art. 2/a) “seller or supplier” means any natural or legal person who, in contracts covered by this Directive, is acting for purposes relating to his trade, business or profession, whether publicly owned or privately owned (Art. 2/c)

  8. SCOPE OF APPLICATIONTYPE OF TRANSACTION Does the Directive 93/13/EEC cover also contracts concluded between traders (B2B contracts)? C-541/99 (Cape Snc) It is clear from the wording of Article 2 of the Directive that a person other than a natural person who concludes a contract with a seller or supplier cannot be regarded as a consumer within the meaning of that provision. Accordingly, the term consumer, as defined in Article 2(b) of the Directive, must be interpreted as referring solely to natural persons.

  9. SCOPE OF APPLICATIONFORM OF CONTRACT In the normative part of the Directive no express provision regarding the form Recital 9 of the Preamble: Whereas the consumer must receive equal protection under contracts concluded by word of mouth and written contracts regardless, in the latter case, of whether the terms of the contract are contained in one or more documents

  10. SCOPE OF APPLICATIONTYPE OF CONTRACTS Horizontal rules Whereas those rules should apply to all contracts concluded between sellers or suppliers and consumers (Recital 8 of the Preamble) Whereas as a result inter alia - contracts relating to employment, - contracts relating to succession rights, - contracts relating to rights under family law - contracts relating to companies or partnershipagreements must be excluded from this Directive (Recital 8 of the Directive)

  11. SCOPE OF APPLICATIONTYPE OF CONTRACT TERMS “A contractual term which has not beenindividually negotiated” (Art 3/1)

  12. SCOPE OF APPLICATIONEXCLUSIONS Not subject to the provisions of the Directive contractual terms which reflect mandatory statutory or regulatory provisions the provisions or principles of international conventions to which the MS or Community are party, particularly in the transport area Whereas the statutory or regulatory provisions of the MS which directly or indirectly determine the terms of consumer contracts are presumed not to contain unfair terms – therefore, it does not appear to be necessary to subject those terms to theprovisions of the Directive (Recital 11 of thePreamble)

  13. DEFINITION OF UNFAIRNESS General criteria for assessing the unfair character of contract terms coupled with non-exhaustive, indicative list of terms which may be regarded as unfair (s.c.gray list)

  14. DEFINITION OF UNFAIRNESS GENERAL CRITERIA A contractual term which has not been individually negotiated, 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

  15. NOT INDIVIDUALLY NEGOTIATED A term shall always be regarded as not individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term, particularly in the context of a pre-formulated standard contract Negotiations on certain aspects of the term or one specific term do not exclude the possibility of assessing the rest of the contract if an overall assessment indicates that it is a pre-formulated standard contract Where seller or supplier claims term has been individually negotiated, the burden of proof shall be incumbent on him

  16. NOT INDIVIDUALY NEGOTIATED TERM Elements of assessment: Position of the parties dependent on Abilities Knowledge Information Skills Dominant position on the market

  17. GOOD FAITH REQUIREMENT In making an assessment of good faith, particular regard shall be had to: strength of the bargaining positions of the parties whether the consumer had an inducement to agree to the term whether goods or services were sold or supplied to the special order of the consumer The requirement of good faith may be satisfied by the seller or supplier where he deals fairly and equitably with the other party whose legitimate interests he has to take into account (Recital 14 of the Preamble)

  18. SIGNIFICANT IMBALANCE REQUIREMENT Normative, not an economic criteria Formal aspect same rights and obligations for both parties Substantive aspect are the interests of both parties equally protected

  19. GRAY LIST Annex of the Directive contains a non-exhaustive, indicative list of 17 potentially unfair contract terms Annexed list can be of indicative value only A term appearing in the list need not necessarily be considered unfair and, conversely, a term that does not appear in the list may none the less be regarded as unfair (C-237/02, paragraph 20) Due to the minimum character of the Directive, the scope of these terms may be subject to amplification or more restrictive editing by MS in their national laws

  20. GRAY LIST excluding or limiting the liability of a seller or supplier in the event of the death of a consumer or personal injury to the latter resulting from an act or omission of that seller or supplier inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier or another party in the event of total or partial non-performance or inadequate performance by the seller or supplier making an agreement binding on the consumer whereas provision of services by the seller or supplier is subject to condition whose realisation depends on his own will alone requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation enabling the seller or supplier to terminate a contract of indeterminate duration without reasonable notice except where there are serious ground for doing so obliging the consumer to fulfil all his obligations where the seller or supplier does not perform his

  21. ADDITIONAL ELEMENTS FOR ASSESSMENT The unfairness of a contractual term shall be assessed taking into account the nature of the goods or services all the circumstances attending the conclusion of the contract all other terms of the contract or of another contract on which it is dependent Assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration however, price/quality ratio may be taken into account in assessing the fairness of other terms

  22. ASSESSMENT OF UNFAIRNESSEXAMPLE • C-237/02 (Reiburger Kommunalbauten) • B2C contract on sale of a parking space provided that the whole price should be paid in advance, upon delivery of a security by the contractor • The term is contrary to the fundamental principle of contemporous performance of mutual obligations (“equality of arms” rule) • According to the Directive, as unfair shall be regarded, among others, a contractual term which have object or effect of: • Inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier or another party in the event of total or partial non-performance or inadequate performance by the seller or supplier of any of the contractual obligations • Obliging the consumer to fulfil all his obligations where the seller or supplier does not perform his

  23. ASSESSMENT OF UNFAIRNESSEXAMPLE • The Annex to which the Article 3(3) of the Directive refers only contains an indicative and non-exhaustive list of terms which may be regarded as unfair. A term appearing in the list need not necessarily be considered unfair and, conversely, a term that does not appear in the list may non the less be regarded as unfair (paragraph 20 of C-237/02) • As to the question whether a particular term in a contract is, or is not, unfair, Article 4 of the Directive provides that the answer should be reached taking into account the nature of the goods or services for which the contract was concluded and by referring to all the circumstances attending the conclusion of the contract. It should be pointed out in that respect that the consequences of the term under the law applicable to the contract must also be taken into account. (paragraph 21 of C-237/02)

  24. ASSESSMENT OF UNFAIRNESSEXAMPLE • C-237/02 • Consumer is obliged to pay the whole price in advance, which is contrary to the fundamental principles of law • The disadvantages to which a consumer might be exposed as the result of the obligation to pay price before the performance of the contract are counterbalanced by the bank guarantee provided by the builder, as the bank guarantee guarantees repayment to the consumers of sums paid in cases of both non-performance and defective performance of the contract, even if the builder were to become insolvent. • Moreover, as the clause on advance payment reduces the need for the builder to finance the building work through use of borrowings, the price of that work may be reduced as a result. (paragraph 16 of the C-237/02)

  25. WHO SHOULD ASSESS THE UNFAIRNESS OF A TERM? C-240/98-C244/98 (Oceano) Where a jurisdiction clause is included, without being individually negotiated, in a contract between a consumer and a seller or supplier and where it confers exclusive jurisdiction on a court in the territorial jurisdiction of which the seller or supplier has his principal place of business, it must be regarded as unfair within the meaning of Article 3 of the Directive 93/13 on unfair terms in consumer contracts in so far as it causes, contrary to the requirement of good faith, a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.

  26. WHO SHOULD ASSESS THE UNFAIRNESS OF A TERM? • C-237/02 (FreiburgerKommunalbauten) • It is for the national court to decide whether a contractual term such as that at issue in the main proceedings satisfies the requirements for it to be regarded as unfair under Article 3(1) of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. • It is true that in Joined Cases C-240/98 to C-244/98 Oceano…, the Court held that a term, drafted in advance by the seller, the purpose of which is to confer jurisdiction in respect of all disputes arising under the contract on the court in the territorial jurisdiction of which the seller has his principal place of business, satisfies all the criteria necessary for it to be judged unfair for the purposes of the Directive. Nevertheless, that assessment was reached in relation to a term which was solely to the benefit of the seller and contained no benefit in return for the consumer. Whatever the nature of the contract, it thereby undermined the effectiveness of the legal protection of the rights which the Directive affords to the consumer. It was thus to hold that the term was unfair without having to consider all the circumstances in which the contract was concluded and without having to assess the advantages and disadvantages that that term would have under the national law applicable to the contract (paragraph 23)

  27. WHO SHOULD ASSESS THE UNFAIRNESS OF A TERM? • C-243/08 (Pannon) • It is for the national court to determine whether a contractual term, such as that which is the subject-matter of the dispute in the main proceedings, satisfies the criteria to be categorised as unfair within the meaning of Article 3(1) of Directive 93/13. In so doing, the national court must take account of the fact that a term, contained in a contract concluded between a consumer and a seller or supplier, which has been included without being individually negotiated and which confers exclusive jurisdiction on the court in the territorial jurisdiction of which the seller or supplier has his principal place of business may be considered to be unfair.

  28. LEGAL CONSEQUENCES OF UNFAIRNESS MS shall lay down that: unfair terms used in a contract concluded with a consumer by a seller or supplier shall not be binding on the consumer and that the contract shall continue to bind the parties upon those terms if it is capable of continuing in existence without the unfair terms

  29. LEGAL CONSEQUENCES OF UNFAIRNESS “shall not be binding” – what does it actually means? The protection provided for consumers by the Directive 93/13 on unfair terms in consumer contracts entails the court being able to determine of its own motion whether a term of a contract before it is unfair when making its preliminary assessment as to whether a claim should be allowed to proceed before the national courts. (C-240/98-C-244/98 Oceano) Article 6(1) of Council Directive 93/13 on unfair terms in consumer contracts must be interpreted as meaning that an unfair contract term is not binding on the consumer, and it is not necessary, in that regard, for the consumer to have successfully contested the validity of such a term beforehand. (C-243/08 – Pannon)

  30. CHOICE OF LAW REQUIREMENTS MS shall take the necessary measures to ensure that the consumer does not lose the protection granted by this Directive by virtue of the choice of law of a non-Member country as the law applicable to the contract

  31. INTERPRETATION OF CONTRACT Where there is doubt about the meaning of a term, the interpretation most favourable to the consumer shall prevail This rule on interpretation shall not apply in the context of the procedures for collective protection of consumers

  32. COLLECTIVE CONSUMER PROTECTION MS shall ensure that, in the interests of consumers and of competitors, adequate and effective means exist to prevent the continued use of unfair terms in contracts concluded with consumers by sellers or suppliers This means shall include provisions whereby persons or organizations, having a legitimate interest under national law in protecting consumers, may take action before the court of competent administrative bodies for a decision as to whether contractual terms drawn up for general use are unfair, so that they can apply appropriate and effective means to prevent the continued use of such terms This remedies may be directed separately or jointly against a number of sellers or suppliers from the same economic sector or their associations which use or recommend the use of the same or similar general contractual terms

  33. COLLECTIVE CONSUMER PROTECTION Court or administrative procedure Taken by certain organisations on behalf of the whole consumer population Directed against: particular seller or supplier separately or jointly against a number of sellers or suppliers from the same economic sector and/or their associations Injunctions – preventive protection aimed at seizure of the use of a certain contract term Protection of collective interests of all consumers and not of individual interests of consumers affected by certain unfair contract term

  34. INFORMATION TO THE PUBLIC When MS adopt measures necessary to comply with the Directive, they shall contain a reference to this Directive or shall be accompanied by such reference on the occasion of their official publication The methods of making such a reference shall be laid down by the MS

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