Unfair Contractual Conditions

European Contract Law

General remarks

Standard contracts are the result of modern mass contracting. Standard contracts make individual contract negotiations superfluous, thereby reducing transaction costs. They frequently serve as a more convenient vehicle than the terms for which the law implicitly provides. But standard terms tend to be one-sided; one party (the stipulator), who is often the seller of goods or services, will impose his terms upon the other party (the adhering party) and let the latter carry as many of the risks involved in the transaction as possible. Such contracts may provide, for example, that the stipulator is not bound by promises and statements which he or his agents have made during the contract negotiations unless they have been put down in writing and signed by the stipulator. They may enable the stipulator to raise the price of his performance between the conclusion of the contract and the delivery of the goods or services in question or provide that the adhering party remains bound by the contract, while the stipulator may postpone his performance as he sees fit; they may also contain clauses exempting the stipulator for liability for breach or imposing severe penalties on the adhering party in the event of his non-performance.

Consumer protection

The consumer epitomises the weaker party. Many contemporary legal systems afford the weaker party special protection against unfair conditions in standard contracts. German law has played a leading role in the development of protective mechanisms. In the fifties, the German courts, invoking section 242 of the German Civil Code, began to deliver judgments invalidating unfair clauses in consumer contracts and in contracts relating to other business transactions. The General Conditions of Business Act 1976 (Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbedingungen) consolidated the case law that had developed in this domain. Section 9 of the Act introduced a general clause, laying down that clauses in standard contracts are null and void if they infringe the principle of good faith. Sections 10 and 11 of the Act then list clauses which are automatically null and void (the ‘black list’ in section 11) and those which courts may review (the ‘grey list’ in section 10). These catalogues of clauses are only applicable to consumer contracts; section 9, on the other hand, applies to all business transactions. The grey and black lists in sections 10 and 11 do, however, influence judicial interpretations of section 9 in cases concerning general business transactions. The Gesetz über Allgemeine Geschäftsbedingungen has been a source of inspiration for many other European legal systems.

European Community Law

The same applies to the 1993 EEC Directive on unfair terms in consumer contracts.[Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts (OJ L 95 of 21 April 1993, p. 29)] The Directive, however, protects only consumers. A consumer is defined in Article 2 as any natural person who, in contracts covered by the Directive, is acting for purposes which are outside his trade, business or profession. Consumers in this sense are individuals who buy goods or services for their personal or household needs. Contracts between private individuals and contracts between business enterprises and charities and other non-business organisations fall outside the scope of the Directive. Nor are contracts concluded by large and powerful enterprises with small and medium-sized traders, artisans, farmers and fishermen covered by the Directive, although their bargaining experience and skill and their position vis-à-vis the enterprise are not very different from those of the consumer. So no action has been taken yet in this domain to harmonise the European legal systems, which differ widely in their treatment of such ‘weak-party contracts’.

In the Principles of European Contract Law (PECL)

In the chapter on the validity of contracts and contract clauses of the Principles of European Contract Law, Article 4:110 sets out rules on unfair contract terms. The text reads as follows: “(1) A party may avoid a term which has not been individually negotiated if, contrary to the requirements of good faith and fair dealing, it causes a significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of that party, taking into account the nature of the performance to be rendered under the contract, all the other terms of the contract and the circumstances at the time the contract was concluded. (2) This article does not apply to: (a) a term which defines the main subject matter of the contract, provided the term is in plain and intelligible language; or to (b) the adequacy in value of one party’s obligations compared to the value of the obligations of the other party.”

These rules follow the Directive in several respects. Article 4:110(1) provides that a party may avoid a term which has not been individually negotiated if, contrary to the requirements of good faith and fair dealing, it causes a significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of that party, taking into account the nature of the performance to be made under the contract, all other terms of the contract and the circumstances at the time the contract was concluded. These rules are supplemented by a commentary, which sets out an indicative and non-exhaustive list of terms which may be regarded as unfair and which is reproduced in an Annex to the Directive. Unlike the Directive, however, the Principles of European Contract Law are not limited to contracts between the enterprise and the consumer. Article 4:110 applies to all weaker parties to a contract, such as owners of small businesses, farmers, fishermen, artisans, etc. Moreover, the protection afforded by the Principles of European Contract Law is not even confined to the archetypal weak party and may also be invoked by a large and powerful enterprise. Experience shows that such enterprises may also inadvertently subject themselves to unfair terms. Article 4:110 is, of course, mandatory; a party cannot waive its application when negotiating a contract. However, the party who is disadvantaged must take the initiative to have the clause set aside or modified.

Like Article 4(2) of the Directive, Article 4:110 of the Principles of European Contract Law does not permit a court or an arbitrator to assess whether the main performance or the price specified in the contract is unfair. However, the rules in chapter 4 on “procedural” unfairness may be applied to protect a disadvantaged party, notably the rules on mistake, misrepresentation, fraud, duress and excessive or grossly unfair advantage. These rules are mostly in accordance with the rules of the national legal systems of the Union. As the case law of the Member States shows, the courts tend to assume such “procedural” unfairness in cases where inequality of bargaining power between the contracting parties has resulted in gross disparity between performance and consideration.
Source: Ole Lando