ARC: “automatically renewable contract” or “another regulatory/regulation cock-up”?

Handcuffs Vector ImageOfcom is clearly unhappy about communications providers who seek to handcuff customers to existing service contracts by ensuring that these contracts automatically renew – so called automatically renewable contracts (ARCs).  They set out their proposals to address ARCs in a consultation paper in March 2011.  However, these contracts are not new, which begs the question, why is Ofcom only dealing with these contracts now?

By Ofcom’s own admission, they first considered ARCs in the context of their review of additional charges in December 2008.  A cynic mights suggest that if they identified a problem at the end of 2008, why did it take over 2 years to suggest a solution?  Have Ofcom failed to use their powers of enforcement under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs)?  Note the date of these regulations – 1999.  Were Ofcom negligent in failing to address ARCs even earlier than December 2008?  Is this a case of “another regulatory cock-up”?

To be fair to Ofcom, even if they had identified that ARCs were a problem at an early stage, then they would have needed the evidence and research to show that the automatic renewal of contracts was unfair, using the test at Regulation 6(1) of the UTCCRs:

“the unfairness of a contractual term shall be assessed, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent.”

The necessary preliminary work was clearly undertaken, as shown by the annexes to the March 2011 consultation paper.  However, a quick route to dealing with ARCs has proved impossible as a result of a difficulty in the UTCCRs and the originating European Union Directive.  This difficulty surrounds the scope of the regulation/directive.  Put simply, regulators cannot address terms in consumer contracts that deal with price, even indirectly, as a result of Regulation 6(2):

“In so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate–
(a) to the definition of the main subject matter of the contract, or
(b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.”

Ofcom have set out how they would address ARCs under the UTCCRs in their guidance on enforcement of UTCCRs (see paragraphs 97 – 103).  Although this suggests that there are plenty of grounds for Ofcom to intervene, the picture can easily be confused by the introduction of price discounts for consumers taking ARCs.  After the Supreme Court decision concerning the Office of Fair Trading and bank charges (Office of Fair Trading v Abbey National), these discounts put these ARCs outside of the reach of the UTCCRs.  This is the inevitable result of the wording of Regulation 6(2), from the 19th recital of Directive 93/13/EEC.

So, from a consumers point of view, this “price or remuneration” loophole is a significant gap in the consumer protection directive/regulation.  Shall we say “another regulation cock-up”?

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Terms and conditions: a Faustian pact?

Playbill of the first performance of "Faust, The tragedy of the first part" by Goethe in Weimar on 29 August 1829

The online computer games company Gamestation pulled a clever terms and conditions stunt for April Fools’ Day, which caught out over 7,500 customers.  What they did was amend their online terms and conditions by including the following:

By placing an order via this web site on the first day of the fourth month of the year 2010 Anno Domini, you agree to grant Us a non-transferable option to claim, for now and for ever more, your immortal soul.

Should We wish to exercise this option, you agree to surrender your immortal soul, and any claim you may have on it, within 5 (five) working days of receiving written notification from gamestation.co.uk or one of its duly authorised minions.

We reserve the right to serve such notice in 6 (six) foot high letters of fire, however we can accept no liability for any loss or damage caused by such an act.

If you:
(a)  do not believe you have an immortal soul;
(b)  have already given it to another party; or
(c)  do not wish to grant Us such a license,
please click the link below to nullify this sub-clause and proceed with your transaction.

Had any customers clicked on the link, they would have been led to a page notifying them that the clause was an April Fool and congratulating them on being “so vigilant” by offering them a £5 voucher.

Consumers who purchased games online at Gamestation on 1 April 2010 should perhaps not be too concerned about the appearance of 6 foot letters of fire demanding their immortal soul, as a result of consumer protection legislation that makes the careful reading of standard terms and conditions less important.

Consumers are substantially protected by the Unfair Terms in Consumer Contracts Regulations 1999 (as amended). These regulations provide that where a contractual term which has not been individually negotiated causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer, then it is an unfair term.

If a seller or supplier attempts to include an unfair term, the term is not binding on the consumer.  However, the Regulations do not apply to terms that relate to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.

So provided a court does not consider that the grant of an option of an immortal soul is part of the price paid for a computer game, this Faustian clause is not binding.

You shall use ADR

Court of Justice, Luxembourg

There has been some reporting in the UK of a recent decision of the Court of Justice in Luxembourg on the legality of mandatory out-of-court settlement procedures for electronic communications disputes in the Joined Cases C-317/08, C-319/08 and C-320/08 Rosalba Alassini & Others.  The Court was asked to decide if a mandatory system made under national legislation (in Italy) implementing Art.34 of the Universal Services Directive 2002/22/EC was not precluded by other EU law, including Art.6 of the European Convention on Human Rights (right to fair hearing).  The short answer is that mandatory out-of-court alternative dispute resolution (ADR) is lawful.

Whilst this might change how consumer disputes are handled in other member states, this will not change practice in the UK.  We already have a system of compulsory ADR, as communications providers are required by the terms of the general authorisation to which they are all subject and made by Ofcom under the Communications Act 2003 to put in place complaints handling and dispute resolution procedures.  These procedures also require communications providers to refer consumer complaints to approved ADR providers.  Since 1 September 2009, such disputes can be referred by consumers after only 8 weeks of making a complaint.  There are still only 2 approved providers: OTELO and CISAS.  Ofcom publish a table to show which scheme each operator in the UK uses.

So for the UK, the Rosalba Alassini judgement is a cases of “Move along. Nothing to see here.”

"Life is not fair; get used to it."

Yesterday for the first time the handing down of a Supreme Court judgement was a major news event.  The outcome of OFT -v- Abbey National & ors was eagerly awaited.  Many bank customers had hoped for some good news and some cash back from their banks – always handy just before Christmas.  Sadly, the Supreme Court appears to have played Scrooge or the Grinch, and in today’s press the Court is given a rough ride for seeming to side with the banks.  This is slightly unfair, but as Bill Gates is often quoted as saying, “Life is not fair.  Get used to it.”

Fairness was not, as many reports wrongly assume, the central issue for the Supreme Court.  They did not rule that the banks’ charging mechanisms for unauthorised overdrafts were fair.  Instead, the Supreme Court decided that the banks charges for unauthorised overdrafts  (and other bank charges at issue) were part of the banks’ price and remuneration for providing retail banking services.  On that analysis, given that Regulation 6(2)(b) of the Unfair Terms in Consumer Contracts Regulations 1999 (the “Unfair Terms Regulations”) states that the assessment of the fairness of a term in a contract “shall not relate . . .to the adequacy of the price or remuneration, as against the goods or services supplied in exchange”, it was clear that the Office of Fair Trading did not have jurisdiction to assess whether the banks’ unauthorised overdraft charges are fair using its powers under the Unfair Terms Regulations.

So how did this case reach the Supreme Court?  A crude summary suggests that at High Court the overdraft charges were considered not to be “in exchange” for any service, so fell outside the scope of Regulation 6(2)(b).  In the Court of Appeal, the charges were considered to be part of an overall package of services provided by the banks, but were considered to be “incidental or ancillary” and not part of the “core or essential bargain” between the banks and their customers.  As “incidental or ancillary”, the charges were ruled not to be within the scope of Regulation 6(2)(b). This meant that the OFT had power to assess the fairness of the charges.  Clearly, the banks thought otherwise and have been vindicated in their appeal to the highest court.

So is this the end of the battle for repayment of unauthorised overdraft charges?  As the Supreme Court were at pains to make clear, they were only called upon to make a ruling upon a narrow point of law.  It remains open for the OFT to consider if the terms governing the banks’ overdraft charges are unfair “if, contrary to the requirement of good faith, [they cause] a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer” (Regulation 5(1)), as in almost all cases consumers accept banks’ standard terms and do not negotiate their retail banking services agreements.

Are bank charges fair?

This is the question the Office of Fair Trading (OFT) would like to ask, particularly in relation to unauthorised overdraft fees and associated charges imposed by leading banks on personal current accounts.   The OFT has jurisdiction to enforce the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs).  In a test case brought in July 2007 against a number of banks and one building society, the OFT sought a court declaration that it had jurisdiction under the UTCCRs to review the relevant bank charges. In both the High Court and Court of Appeal it was ruled that the OFT had the necessary jurisdiction.

The dispute concerns whether the unauthorised overdraft facilities and services provided by a bank are proper services for which the fees and charges are payment, or whether the fees and charges are punitive in nature and potentially unfair.

A great deal of the legal arguments surround the interpretation of Regulation 6(2) of the UTCCRs, which reads:

(2) In so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate-
(a) to the definition of the main subject matter of the contract, or
(b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.

The legal arguments are complex, requiring the courts to review the European Union directive that gave rise to the UTCCRs, including the directive’s drafts and associated opinions circulating between the European Union institutions before it was made (the so called “travaux préparatoires”). It is therefore no surprise that the case has now reached the House of Lords, who began hearing the arguments today.