Fundamental to all of us is the need to feel that we are being treated fairly. How often have we heard the cry of protest from the playground: “That’s not fair”? That deep-seated need extends into every part of our lives, including our working lives and business dealings, and financial services are no exception.
Apart from our own instincts of fairness, the FSA’s principles for Businesses include the requirement that a firm must “pay due regard to the interests of its customers and treat them fairly”. The law too has its requirement of fairness – at least as far as consumers are concerned.
The Unfair Terms in Consumer Contracts Regulations 1999 seek to give legal teeth to the concept of fairness in contracts based on standard terms and in which one of the parties is a consumer.
The regulations seek to do this in two main ways. The first is that a contractual term must be “expressed in plain and intelligible language” and if there is doubt about the meaning, the interpretation which is most favourable to the consumer is to prevail.
Second, certain terms of the contract must not be unfair. This requirement does not apply to the so-called “core” provisions. The classic core provisions are those setting the price and the description of what is being sold. The reason for those provisions being outside the rule against unfairness seems to be that the supplier must be allowed to define what is being provided and at what price.
Competition in the marketplace has to take care of those aspects. Thus, in insurance contracts, it is generally accepted that core provisions are those dealing with the extent of cover and premiums.
As regards the non-core provisions, a term is unfair if “contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer”. If a term is unfair, it is not binding on the consumer. The rest of the contract is enforceable.
In the case of Director General of Fair Trading v. First National Bank (2001) which concerned a clause about a default rate of interest payable by a borrower, Lord Bingham explained the concept of fairness in the course of giving judgment:
“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. This may be by the granting to the supplier of a beneficial option or discretion or power, or by the imposing on the consumer of a disadvantageous burden or risk or duty… But the imbalance must be to the detriment of the consumer… 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, weak bargaining position… Good faith in this context is not an artificial or technical concept… It looks to good standards of commercial morality and practice.”
A salutary illustration of the concept of fairness in operation is provided by the recent case in the High Court of Spreadex Limited v. Cochrane. It was an application for summary judgment and decided in May 2012 by Mr David Donaldson QC sitting as a Deputy High Court Judge. This is a summary procedure available to a claimant when he considers that the defendant has no real defence.
Spreadex Limited, a spread betting bookmaker, sued a Mr Colin Cochrane, who was one of its customers, for the shortfall on his account but failed.
The facts briefly were that Spreadex takes bets on the movements in the prices of, among other things, stocks, shares and commodities and their associated indices and is regulated by the FSA. It is possible to deal with Spreadex by phone or online.
In October 2010, Mr Cochrane opened an online account with Spreadex answering a list of questions asking for details of his job, income, savings, bank account, etc. The website then instructed him to “Click on ‘View’ to read our… customer agreement, [and other documents]. Once read and understood, please click on ‘Agree’ to signify your agreement to the terms.” This he did, and then pressed “Submit” and he was able to trade.
By the beginning of May 2011, he had built up a credit balance on his Spreadex account of about £60,000.
On 2 May 2011, he was at the house of his girlfriend. She had a young son. Mr Cochrane went online and began to trade. As he was doing so, he was explaining to the son what he was doing – as a kind of guessing game. After he made his last trade, he left and did not return for two days.
His computer remained at the house. He called Spreadex in response to a message and was told that his account was now almost £50,000 in debit. He instructed Spreadex to close out all his open positions. When he got to his girlfriend’s house, he discovered that the son had been using his computer and playing games on it.
Mr Cochrane explained to Spreadex what had happened and asked it to cancel the trades made after he had left his computer at his
girlfriend’s house. Spreadex refused, demanded immediate payment and started legal proceedings.
Mr Cochrane’s defence was that he did not make the trades and that they were not made by any person authorised by him. Spreadex relied on its customer agreement which included this sentence: “You will be deemed to have authorised all trading under your account number…”
One of the issues that the judge had to decide was whether that sentence was unfair under the regulations. He held that the sentence imposed liability for any trade, whether or not authorised by Mr Cochrane, and that therefore it clearly imposed a significant imbalance in the parties’ rights and obligations to the detriment of Mr Cochrane.
The remaining question was whether that imbalance was “contrary to the requirement of good faith”?
Taking all the circumstances into account, including the fact that the customer agreement ran to 49 pages containing closely printed and complex paragraphs online, the judge said that that sentence was unfair and therefore unenforceable.
The judge said: “It would have come close to a miracle if he had read the… sentence…, let alone appreciated its purport or implications, and it would have been quite irrational for the claimant to assume that he had. This was an entirely inadequate way to seek to make the customer liable for any potential trades which he did not authorise and is a further factor rendering the… sentence… an unfair term.”
This judgment is a warning to all firms trading online – beware of seeking to impose onerous conditions on your consumers and do not bury them in many pages of dense prose.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk