Corporate and M&A

Contact: Simon Stokes; Blake Morgan (Southampton, England)

The Consumer Rights Act 2015 is the most important piece of consumer law since the Unfair Contract Terms Act 1977. It comes into force on 1 October 2015. It affects all businesses whether you are providing goods or services, and whether these are tangible or intangible (e.g. digital content – software, Apps, etc), bricks and mortar or online.

Businesses will need to ensure their standard terms of business and marketing and sales practices comply with the new law to ensure their contract terms are enforceable, to avoid legal and regulatory risk and to the extent possible ensure that their liability to consumers is effectively managed.

Simon Stokes, a partner in Blake Morgan's Commercial team, explores the implications of the Act and provides some practical guidance for businesses.

Background

The Act is a mixed bag of consolidation (bringing into one statute a mass of existing and often confusing consumer rights legislation) but also new law. The Government has taken the opportunity to both consolidate and update the law protecting consumers when they contract with traders. The CRA only applies to B2C contracts (contracts between traders and consumers) but B2B (business to business) suppliers and purchasers can't ignore it either if the goods, digital content or services in question will eventually be supplied to consumers.

Note however that consumer rights law consolidation is not complete under the CRA – important provisions of the Sale of Goods Act 1979 remain and the complicated law which gives consumers cancellation rights in respect of "distance contracts" (among other things) remains in place under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 ("Consumer Contract Regulations 2013"). So consumer law remains complex.

The CRA addresses four main areas: digital content; goods; services and unfair terms.

The CRA will apply to contracts entered into on or after 1 October 2015 and to consumer notices provided from 1 October 2015. Existing contracts and notices are covered by the previous law however. Our view is that where on or after 1 October 2015 an existing contract is varied to such an extent it amounts to a new contract then the CRA will also apply.

Digital content

We have already highlighted the new law that will apply to those supplying digital content to consumers this this article. Consumers of digital content (software, apps, eBooks, music, videos, games etc) will have new statutory rights where they buy digital content or it is supplied along with other paid for goods or services in each case under a contract. In addition consumers who acquire digital content under a contract that causes damage to their device or other digital content will also potentially have rights against the trader whether the digital content was paid for or free – the trader is obliged to repair the damage or compensate the consumer. Key here is the existence of a contract – not all supplies of digital content will be under a contract – there is a debate for example about the legal status of "End User Licence Agreements" (EULAs) and "shrink-wrap" and "browse-wrap" licences – are they contracts or simply permissions to use the licensed digital content? However where digital content is paid for it is likely a court would find a contract in place and in any event traders will want to ensure there is a binding contract to protect themselves in such circumstances.

Nevertheless even if the supply of digital content is either not under contract or it is free, it is still possible for the EULA or other licences terms to be caught by the CRA as they are potentially "consumer notices" under the CRA as they typically relate to rights or obligations between a trader and a consumer (e.g. a right to use software subject to restrictions) or they purport to exclude or restrict a trader's liability to a consumer. An unfair consumer notice is not binding on the consumer – we look at what an unfair notice is below.

Goods

Under the CRA "goods" mean any tangible moveable items (including water, gas and electricity if and only if they are put up for supply in a limited volume or set quantity). All contracts for the supply of goods by a trader to a consumer are potentially caught by the Act (including sales, hire and hire-purchase contracts) with certain limited exceptions (eg chattel mortgages, sales of second hand goods sold at a public auction which individuals can attend in person, an official sale of a bankrupt's property and certain other limited exceptions). Most of the provisions on goods consolidate the existing law e.g. the statutory implied terms as to satisfactory quality, fitness for purpose, that goods will match their description, etc. However there are a number of new provisions including:

1. New statutory implied terms based on the requirements to provide pre-contract information under the Consumer Contract Regulations 2013 and also that goods must match a model seen or examined

2. Where goods are to be installed and are installed incorrectly then the consumer will have the same remedies as for defective/non-conforming goods (other than the "short-term" (30 day) right to reject – see below)

3. Consumers will have tiered/sequential remedies for goods which breach the statutory implied terms as to quality, fitness for purpose, description etc – these are the so called Five R's:

• a short term Right to Reject within 30 days (as opposed to the current "reasonable period") (and claim a full refund), which if not exercised leads onto
• the Right to Repair or Replacement and if this isn't satisfactory then
• the Right to a Price Reduction or a final Right to Reject (and claim a refund) (after only one attempt at repair or replacement by the trader – one attempt is enough for the consumer to have this right) – where the goods are rejected after the first six months then the trader can reduce any refund by a "deduction for use"; during the first six months any deduction for use is limited to motor vehicles or other goods the Secretary of State may specify in the future.

Note: These rights are in addition to any other rights e.g. to claim damages but the consumer cannot recover twice for the same loss

4. Rules on delivery and transfer of risk on delivery e.g. unless otherwise agreed goods must be delivered to the consumer without undue delay and within 30 days, and in general the goods are at the trader's risk until they come into the physical possession of the consumer or a person identified by the consumer to take possession of the goods.

Services

Prior to the CRA consumers had no statutory remedies where services were of poor quality or defective although they had common law remedies (e.g. damages) where the services were in breach of any express or implied contract term that the supplier would use reasonable care and skill. Accordingly in respect of contracts where traders supply services to consumers (including financial services and telecommunications and with very limited exceptions e.g. employment contracts are not included) the CRA provides that:

• Every services contract includes a term that the trader must perform the service with reasonable care and skill – liability for breach of this term cannot be excluded - however as long as such an exclusion is fair then liability can be limited to the price paid by the consumer (but liability cannot be limited to less than the contract price) (section 49).
• Every services contract will include as a contractual term pre-contractual statements or information about the services if these are taken into account by the consumer when deciding to enter into the contract or are taken into account by the consumer when making any decision about the service after entering into the contract – however such statements or information can be qualified by the trader or changed (if agreed to by the consumer). Information provided under the Consumer Contracts Regulations 2013 will also be a term of the contract. Note that this provision (section 50) is new and section 50 gives consumers additional protection – traders are going to need to consider what information they provide to consumers to encourage them to contract for services and whether this needs to be qualified in any way – advertising, marketing materials etc will all need to be carefully reviewed. Where this provision is breached by the trader the same rules apply as to whether these terms can be limited or excluded as apply to section 49. (section 50).
• If the contract price has not been paid or is not fixed in the contract then the consumer has to pay a reasonable price and no more – a reasonable price is a question of fact. Where this provision is breached by the trader the same rules apply as to whether these terms can be limited or excluded as apply to section 49. (section 51).
• If the time for performance is not fixed by contract then the trader must perform the contract within a reasonable time. Where this provision is breached by the trader the same rules apply as to whether these terms can be limited or excluded as apply to section 49. (section 52).

Remedies for defective services

Where section 49 or section 50 (in so far as it relates to the services being provided) is breached then, in addition to any other remedies, the consumer is entitled to require repeat performance by the trader at the trader's cost (unless impossible). The consumer is also entitled to seek a price reduction (and this right also applies to a breach of section 52 and also section 50 where the term in section 50 does not relate to the service i.e. it relates to the trader) where:

repeat performance of the services is impossible or
the trader has failed to re-perform in conformity with the contract within a reasonable time and without significant inconvenience to the consumer.
The price reduction must be appropriate and can be the full amount and includes a refund.

The right to require the trader to re-perform at its cost and/or to require a price reduction are new statutory remedies. They currently apply to pretty much all services (other than a contract of employment or apprenticeship) and whilst the Secretary of State can limit the application of this part of the CRA this has to be done by order made by statutory instrument. It should be noted that consumer transport services (rail, air and sea/inland waterway transport) are not within the ambit of the services provisions of the CRA initially but will be from 6 April 2016.

In its Guidance the Government has noted that where there is more detailed sector-specific consumer legislation this will take precedence over the CRA.

Unfair Terms

English law has traditionally had the concept of freedom of contract – so if two people entered into a contract which was one sided or unfair there was little protection for the less favourably treated party. In recent years this position has substantially changed as regards consumer contracts. This has been driven both by the Unfair Contract Terms Act 1977 ("UCTA") which sought to protect consumers from certain types of unfair contract terms (including exclusion clauses) and by European law – most importantly the Unfair Terms Directive (1993/13/EC) implemented into English law by the Unfair Terms in Consumer Contracts Regulations 1999 ("UTCCRs"). Lawyers had long argued that UCTA and the UTCCRs were complex, inconsistent and confusing when taken together. What the CRA has done is to take consumer contracts outside of UCTA completely so UCTA now only applies to B2B (and if relevant C2C) contracts, and the UTCCRs are replaced by the CRA. So when looking at whether the terms in a consumer contract are "fair" (including any terms limited or restricting liability) lawyers now only need to look at the CRA as it has replaced both UCTA and the UTCCRs in relation to consumer (B2C) contracts. This is welcome.

Much of the section in the CRA dealing with unfair terms is consolidation so should not be new to businesses dealing with consumers. However there are some significant changes and also a restatement of existing "fairness" rules including:

1. The UCTA "reasonableness" test will be replaced by the UTCCRs "fairness" assessment. The fairness assessment itself has not changed however.

2. The fairness rules apply to both negotiated and non-negotiated (standard term) contracts (prior to the CRA the UTCCRs only applied to standard terms)

3. The fairness rules apply to consumer contracts (as currently) but will also apply to "consumer notices" – consumer notices are broadly defined and so potentially include website terms and conditions and other legal terms and conditions which are not contractual in nature such as software EULAs and shrink wrap licences noted earlier.

4. Unfair terms and notices are not binding on a consumer but they can choose to rely on them.

5. Terms which specify the main subject matter of the contract or the price are not subject to an assessment for fairness provided that:

• The term is transparent (in plain and intelligible language and if in writing legible); and
• Prominent (presented in such a way that an average consumer would be aware of the term). The average consumer is a consumer who is reasonably well-informed, observant and circumspect. So the price and any subject matter terms must not be hidden in any small print otherwise the price and the subject matter terms will be assessed for "fairness".

6. The CRA contains three additional "grey list" terms – terms which may be regarded as unfair:

• A term which has the object or effect of requiring that, where the consumer decides not to conclude or perform the contract, the consumer must pay the trader a disproportionately high sum in compensation or for services which have not been supplied.
• A term which has the object or effect of permitting the trader to determine the characteristics of the subject matter of the contract after the consumer has become bound by it.
• A term which has the object or effect of giving the trader the discretion to decide the price payable under the contract after the consumer has become bound by it, where no price or method of determining the price is agreed when the consumer becomes bound.

7. A trader must ensure that a written term of a consumer contract or a written consumer notice is transparent. To be transparent it must be expressed in plain and intelligible language and be legible. This reflects the UTCCRs.

8. Where a term in a consumer contract or consumer notice has different meanings, the one most favourable to the consumer will prevail. This reflects the UTCCRs.

9. The courts are under a duty to consider the fairness of a term in a consumer contract whether or not a party has raised the issue.

What businesses need to do

Whilst the CRA is largely consolidation it contains some highly significant changes that will affect pretty much every business whether you are supplying goods, services (including financial services) or digital content.

Businesses will need to:

• Review their consumer contracts and any consumer notices (including website terms) for compliance with the unfair terms provisions – this is particularly important as regards how the main terms describing the subject matter of the contract and the price are presented
• Carefully review advertising or other material or information provided in the run up to selling services as it is likely to have contractual force unless qualified
• If selling to consumers ensure sales staff are briefed on the 5 R's and the new 30 day short term right to reject and cancellation and returns policies will need to be reviewed and revised to reflect the CRA
• If you are a digital content provider to consumers address and reflect the new legal regime in your terms of business
• Review your terms of business generally even if B2B to check if you have any downstream B2C issues (this may be driven by your customers if they are retailers as they will want to back to back any new or additional rights consumers have under the CRA in their terms with suppliers – you in turn may find you also need to back to back any customer requirements with your suppliers)