If your business involves selling to consumers or you are in the ‘retail’ financial services sector, you may be facing a double-pronged challenge to your normal terms of business.
So there is no time like the present to start reviewing your contracts and make sure they meet the new standards of fairness and clarity.
The rules requiring fairness in consumer contracts have been around for nearly 10 years (though it seems not all businesses know this!). Every written term of a consumer contract must be in plain, intelligible language (under the Unfair Terms in Consumer Contracts Regulations 1999). The Courts are inclined to take the view that if your terms are unintelligible or ambiguous then they are likely to be unfair to the consumer – and an unfair term is unenforceable against a consumer. You might also need to bear in mind that:
the rules aren’t limited to having an effect just on your standard terms of business – they can apply to any contractual documentation and even to explanatory documents (for example a product quotation) given to the consumer before the sale is made; and
if your terms are not in plain, easy-to-understand language, any doubt about the meaning is resolved in favour of the consumer.
For financial services businesses the stakes are even higher - the FSA can fine, publicly censure or even shutdown your company if it finds a failure to observe its requirements to “pay due regard to a clients’ information needs and communicate information in a way which is clear, fair and not misleading…” and “present information in a way that the average reader is likely to understand”. The banks have embraced these goals by assuring personal and small business customers that “written terms will be fair and set out your rights and responsibilities clearly, in plain language. We will only use legal or technical language if necessary”.
Our financial services team have already helped clients review their terms of business for possible issues of lack of clarity or over-complex language. Of course the language used in business terms and other materials is only part of the developing legal recognition of fairness in business dealings with consumers. But it’s fair to say it’s a hot topic for the government and authorities like the BERR, the OFT and the FSA, forming a major plank in the push to instil a business culture of “treating customers fairly”. And of course it’s something businesses can address immediately, with relatively less need for costly legal expertise if you can look at your contracts and other documents from the perspective of the consumer.
So what should you be looking for? What makes some standard terms truly confusing while others are models of clarity? As a rule of thumb keep in mind the “WEL-Reader” test, which refers to the Wording, Effects and Layout of your terms, taking into account who your Reader is.
Wording – the basic aim should be to use plain writing. Keep sentences short if possible and try not to use legal jargon like “force majeure”, “indemnity”, “lien”, “liquidated damages”, “risk in goods”, “pro rata”, “time of the essence”, “title to property” etc. And don’t forget good punctuation!
Effects – It’s not going to be enough just to get rid of complex vocabulary if the consumer may still not understand the effect of the terms. If you exclude your liability “so far as the law allows”, or use a wide exclusion clause that “does not affect your statutory rights” the words are clear but will most consumers appreciate the effect on them? Wouldn’t this be more helpful if it said “these terms do not affect your rights under law – you can contact a Citizens’ Advice Bureau if you need to know more about those rights”.
Layout – Let the planning and presentation of documents help, not hinder, their clarity. For example, consider using headings and bold print to break up text and signpost important clauses.
the Reader – your terms should be understandable to your typical consumer. has ruled that the average consumer “is reasonably well informed and reasonably observant” and, depending on the particular products or services, may actually be quite sophisticated.
Getting your terms of business to be clear and fair shouldn’t be seen as a one off exercise but something that will need regular monitoring. Smaller businesses can monitor the websites of the OFT, the BERR or the FSA for updates on what are – or aren’t – considered as “best practice” examples of clarity or fairness.
In case this seems like more unattractive red-tape, it is worth reflecting about the perspective of consumers. Companies who gain a reputation for having fair terms will almost certainly find over time that they benefit from increased levels of business and customer loyalty – which of themselves may be strong indicators of a business that really does treat its customers fairly.
This article was first published in NewsBrief, Autumn 2008.
For more information or advice on business terms and conditions, please contact Steven Janes.
