11â Unfairness test

(a)â Extortionate credit bargains

One of the most controversial and ineffective means of consumer protection afforded by the CCA 1974 were the extortionate credit bargain provisions (subsequently repealed by the CCA 2006, see below).226 These provisions permitted a court to intervene in consumer credit agreements.227 However, this was not the first statutory provision that allowed the courts to perform such a function. For example, the Moneylenders Acts 1900–1927 provided that an interest rate above 48 per cent was ‘excessive and the credit transaction harsh and unconscionable’.228 The phrase ‘harsh and unconscionable’, according to Browne-Wilkinson J, meant that ‘the terms of the credit transaction [were] imposed in a morally reprehensible manner’.229 Scott and Black pointed out that interest ‘rate regulation has a long history deriving from the suspicion with which money lending has always been regarded’.230 Similarly, Brown noted that:

the question of an interest rate ceiling is one that has engaged law reformers for many years. Indeed it was the control of choice under the Usury Laws until their abolition in 1854. When reform of pawnbroking legislation and the establishment of the money-lending legislation were considered, interest rate controls were still seen as appropriate. It was only with the Crowther Committee Report and the passing of the CCA [1974] that interest rate controls were finally abandoned.231

224Ibid. s.36A, as inserted by CCA 2006, s.45.

225CCA 1974, s.39C(6), as inserted by CCA 2006, s.47.

226Brown, above n. 3, at 326.â 227â Lomnicka, above n. 74, at 137.

228National Association of Citizens Advice Bureau, Daylight Robbery: the CAB Case for Effective Regulation of Extortionate Credit (London, 2000) 6.

229Multiservice Bookbinding Ltd v. Marden [1979] Ch. 84, 110.

230 Scott and Black, above n. 7, at 254.â 231â Brown, above n. 3, at 326.

Under the ‘unfair relationship’ test, a court may make an order in connection with a credit agreement if it is of the opinion that the relationship between the creditor and the debtor arising out of the agreement is unfair.243 Under the terms of the provisions, a court may decide that the relationship between the parties is unfair because of one or more of the following:

(a)any of the terms of the credit agreement or a related agreement;244

(b)the way in which the lender has exercised or enforced its rights under the credit agreement or a related agreement;245 or

(c)any other thing done (or not done) by or on behalf of the lender either before or after the making of the credit agreement or a related agreement.246

According to the OFT conduct that would fall under the last category includes ‘pre-contract business practices (such as advertising) and postcontract actions not based on a right (such as demanding sums of money the consumer has not agreed to pay). Relevant omissions might include failure to provide key information in a clear and timely manner (or at all), or to disclose material facts. Category (c) would also encompass acts or omissions which are non-commercial.’247

It is provided that if the debtor (or a surety) asserts that the credit agreement breaches the unfair relationship test, the burden of proof is on the creditor to illustrate that the relationship was not unfair.248

If the court concludes that the agreement is unfair, it has a broad range of powers which include:

•requiring the creditor, or any associate or former associate of his, to repay (in whole or in part) any sum paid by the debtor or by a surety by virtue of the agreement or any related agreement (whether paid to the creditor, the associate or the former associate or to any other person);249

•requiring the creditor, or any associate or former associate of his, to do or not to do (or to cease doing) anything specified in the order in connection with the agreement or any related agreement;250

•reducing or discharging any sum payable by the debtor or by a surety by virtue of the agreement or any related agreement;251

•directing the return to a surety of any property provided by him for the purposes of a security;252

•otherwise setting aside (in whole or in part) any duty imposed on the debtor or on a surety by virtue of the agreement or any related agreement;253

246Ibid. s.140A(1)(c). For a more detailed discussion of these provisions see Harrison v. Black Horse Ltd [2010] EWHC 3152 (QB) and Shaw v. Nine Regions Ltd [2009] EWHC 3514 (QB).

247OFT, Unfair Relationships: Enforcement Action under Part 8 of the Enterprise Act 2002 (London, 2008) 12.

248CCA 1974, s.140B(9), as inserted by CCA 2006, s.20.

(c)â Enterprise Act 2002 powers

In addition to its powers under the CCA 1974, the OFT may take appropriate enforcement measures under the Enterprise Act 2002 where it believes that an unfair relationship harms the collective interests of consumers.256 The OFT has stated that these powers ‘cover situations where businesses infringe their legal obligations and as a result harm the collective interests of consumers’.257 However, the scope of these powers is limited because the OFT is prevented from dealing with individual grievances from consumers and its role is therefore strictly limited to regulatory issues. This means that the OFT is only entitled to act in the public interest or on the public’s general behalf.258 The CCA 1974 stipulates that the OFT is required to publish guidance on how it expects the operation of the unfair relationship test to interact with its enforcement provisions under Part 8 of the Enterprise Act 2002.259

In order for the OFT to exercise its powers under the Enterprise Act 2002 one of two types of infringement must occur: a domestic infringement or a community infringement. Under section 211(1) of the Act, a domestic infringement is an act or omission carried out by a person who acts in the course of a business,260 which falls within subsection (2)261 and harms the collective interests of consumers in the United Kingdom.262 An act or omission falls within the scope of subsection (2) if it is specified by the Secretary of State and consists of:

(a)a contravention of an enactment which imposes a duty, prohibition or restriction enforceable by criminal proceedings;263

(b)an act done or omission made in breach of contract;264

(c)an act done or omission made in breach of a non-contractual duty owed to a person by virtue of an enactment or rule of law and enforceable by civil proceedings;265

(d)an act or omission in respect of which an enactment provides for a remedy or sanction enforceable by civil proceedings;266

(e)an act done or omission made by a person supplying or seeking to supply goods or services as a result of which an agreement or security relating to the supply is void or unenforceable to any extent;267

(f)an act or omission by which a person supplying or seeking to supply goods or services purports or attempts to exercise a right or remedy relating to

254â Ibid. s.140B(1)(f).â 255â Ibid. s.140B(1)(g).â 256â Enterprise Act 2002, Part 8.

257OFT, above n. 247, at 1. See also Enterprise Act 2002, s.211(1)(c).

258OFT, above n. 247, at 10.â 259â CCA 1974, s.140D, as inserted by CCA 2006, s.22.

the supply in circumstances where the exercise of the right or remedy is restricted or excluded under or by virtue of an enactment;268

(g)or an act or omission by which a person supplying or seeking to supply goods or services purports or attempts to avoid (to any extent) liability relating to the supply in circumstances where such avoidance is restricted or prevented under an enactment.269

A community infringement is an act or omission that also harms the collective interests of consumers and which contravenes a listed Directive or breaches laws that provide additional protection for consumers.270

In determining whether or not to bring an action under Part 8 of the Enterprise Act 2002, the OFT will consider the contract terms of the agreement, the rates and charges, business practice, practices in breach of the law, the Consumer Protection from Unfair Trading Regulations 2008,271 practices not necessarily in breach of the law and other relevant matters.272

(d)â Meaning of ‘unfair’

CCA 1974, section 140A specifically refers to the credit agreement being ‘unfair’. How this phrase will be interpreted is extremely difficult to determine, although the phrase is well used in both primary and secondary legislation. The FSA noted that ‘the use of “fairness” in this way has a very long history in English law, going back centuries to principles of conscience and “equity”. Today, it is a concept which appears in one form or other in legislation, for example, in the Sale of Goods Act 1979, the Control of Misleading Advertising Regulations 1988, the Consumer Credit Act 1974 and the Unfair Contract Terms Act 1977.’273

Gerry Sutcliffe, MP, the then Consumer Affairs Minister, stated that it was ‘important that the test does not constrain or impede the courts’ ability to do justice in every case. That is why I will not try to define an unfair relationship. It is for the courts to determine such things according to the relevant facts of each case. Unfairness is not a new concept for the industry, and fair lenders have nothing to fear from its introduction.’274 Thus, ‘the government has repeatedly refused to define what is meant by “unfair relationship” and has adopted the position that it will be for the courts to decide’.275

268 Ibid. s.211(2)(f).â 269â Ibid. s.211(2)(g).â 270â Ibid. s.212(1)(a) and (b).

271SI 2008/1277. These Regulations implemented the Unfair Commercial Practices Directive 2005/29/EC. For a more detailed commentary on this Directive see G. Howells, ‘The end of an era: implementing the Unfair Commercial Practices Directive in the United Kingdom – punctual criminal law gives way to a general criminal/civil law standard’ (2009) 2 Journal of Business Law 183.

272OFT, above n. 247, at 16–32.

273FSA, Treating Customers Fairly after the Point of Sale, Discussion Paper (London, 2001) AnnexÂA3.

274Ibid. 313.â 275â Patient, above n. 207, at 312.

This stance has been criticised by several commentators. For example, Patient expressed the opinion that ‘avoiding a debate on the meaning of “unfair relationship” will leave many creditors in a position of uncertainty as to whether their agreements or standard practices will fall foul of the test. This has been recognised as a particular concern for those who securitise portfolios and may lead to requirements for additional credit enhancement where a ratings agency expresses concerns.’276

Parker took the view that ‘it may for instance be viewed as a question of good faith … [which] is certainly now a requirement that affects consumer credit agreements indirectly in that it is included’.277 The concept of ‘good faith’ has been incorporated into such agreements by the Unfair Terms in Consumer Contracts Regulations 1999,278 the Consumer Protection (Distance Selling) Regulations 2000279 and the Financial Services (Distance Marketing) Regulations 2004.280 Patient noted that ‘fairness is a relatively new concept in English law although in the consumer context the Unfair Terms in Consumer Contracts Regulations 1999 may prove a helpful guide. Even in this context there is little judicial guidance as again few cases have reached the courts.’281 The interpretation of ‘good faith’ has been considered in several cases. For example, in Director General of Fair Trading v. First National Bank,282 Lord Bingham stated that:

a term … is unfair if it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer in a manner or to an extent which is contrary to the requirement of good faith. The requirement of significant imbalance is met if a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour … the requirement of good faith in this context is one of fair and open dealing. Openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps. Appropriate prominence should be given to terms which might operate disadvantageously to the customer. Fair dealing requires that a supplier should not, whether deliberately or unconsciously, take advantage of the consumer’s necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, [or] weak bargaining position … Good faith … looks to good standards of commercial morality and practice.283

The concept of ‘fairness’ is also central to the regulation of the financial services sector by the FSA. Patient noted that ‘fairness is core to the principles of the FSA which stipulate that a firm must pay due regard to the interests of its

276â Ibid. 313.â 277â Ibid.â 278â SI 1999/2083. 279 SI 2000/2334.â 280â SI 2004/2095.

281Patient, above n. 207, at 313.

282[2002] 2 AC 481. For a more detailed discussion of this case see P. Nebbia, ‘Director General of Fair Trading v First National Bank Plc, House of Lords, [2001] 3 W.L.R. 1297’ (2003) 40(4)

Common Market Law Review 983.

283[2002] 1 AC 481, 494.