Unfair Terms in Consumer Contracts
The Maltese Perspective

Paul Edgar Micallef

A law on unfair terms – an overdue measure

The need to have a law dealing expressly with the use of unfair terms in trader – consumer contracts has been on the cards for quite some years. Government had, as we shall see, discussed the need for such a law in a White Paper published in 1991. The priority logically then was to have in place a functional administrative set-up to regulate consumer affairs. This indeed was the main focus of the Consumer Affairs Act enacted in 1994. Among other things the Act provided for the powers of the Director of Consumer Affairs, for the establishment of the Consumer Affairs Council and of the Consumer Claims Tribunal and for the regulation of the role of consumer associations. This Act also empowered the Minister responsible for consumer affairs, after consulting the Consumer Affairs Council, to make regulations to “…provide for the consequences, including the right to rescind sales and contracts for the provision of services, and the nullity of particular clauses in contracts of sale or hire…”.

In recent years the present administration in line with its policy of full membership within the European Union, has embarked upon a programme to enact the necessary laws to implement the various EU directives on consumer protection including the EU Council Directive on unfair terms. In doing so the legislator has not limited himself to simply implementing the directives, but has also tried to address certain consumer issues which even if not dealt with under any specific directives, are of concern in a local context. Two issues come to mind – consumer redress and the so-called pyramid or get-rich-quick schemes.

In enacting the necessary legislation to implement the unfair terms Directive the legislator had various options. In the first instance the legislator could do so either by primary legislation or by regulation in virtue of the powers granted to the Minister under article 7(2) of the Consumer Affairs Act. In implementing the Directive by primary legislation the legislator could do so by:

·     amending the Civil Code, or

·     enacting an ad hoc law on unfair terms, or

·     including specific provisions as part of comprehensive amendments to the Consumer Affairs Act.

The legislator chose the last option and last October Parliament approved various amendments to the Consumer Affairs Act, including a new Part entitled “Unfair Practices” which Part also regulates the use of unfair terms in consumer contracts. This approach makes sense on various counts. In the first instance that the legislator chose to regulate the use of unfair terms by primary legislation demonstrates the level of importance that this law has. The various articles regulating the use of unfair terms are not simply norms of technical detail, but must be considered as norms introducing novel principles in the Maltese legal system notably the assessment of the fairness of terms in trader-consumer transactions and the validity of such terms at law. It is only logical and appropriate that such principles should be enshrined as part of the principal law ensuring that if any change is contemplated this must be discussed and approved by Parliament.

That the legislator chose to incorporate these norms as part of a fairly comprehensive consumer code also makes sense. In the short history of consumer legislation in Malta one evident shortcoming was the disjointed fashion in which various consumer protection related laws were being enacted, with specific issues initially being addressed by ad hoc legislation. Conversely a consumer code which is periodically updated, has the merit of providing some uniformity with regard to the interpretation of the law and the measures used to curb malpractices, whilst providing a clear focal point for consumer legislation in the form of a main code of law.

It is pertinent to note that there is a general political consensus with regard to the amendments made last October to the Consumer Affairs Act of 1994. This abodes well for future measures in consumer affairs. If anything the criticism leveled at Government was that it should not limit itself to the enactment of laws simply to implement the various EU consumer policy directives, but should look beyond the minimum measures required by the EU with a view to introducing beneficial measures for consumers in Malta. The principal difference between the two main political parties would appear to focus more on the structure of the public agency responsible for regulating consumer affairs, with the present administration opting for a ‘normal’ government departmental set-up whereas the opposition would appear to prefer an autonomous agency.

Is the private sector preparing itself to deal with the use of unfair terms?

Even on a non-political front the overall reaction to the amendments to the Consumer Affairs Act introduced last October was positive, with the Consumer Affairs Council, the Consumer Association and the private sector welcoming these amendments as a step in the right direction. More specifically however the comments from the private sector with regard to the articles on unfair terms included with these amendments have been rather muted, with too much attention being focused on the legislative measures introduced on product liability and product safety. This is to me of some concern. Whilst there is no doubt that the new laws on product liability and product safety are important, the law on unfair terms is if not more important at least equally so.

Little attention seems to have been given to the fact that traders – and these includes public controlled or owned companies and public corporations – must review the fairness of the terms of the contracts they have with their customers in the light of the norms governing unfair terms. I trust that we will not suddenly be faced with a last minute panic stations scenario with many traders caught on a wrong footing and claiming that were not aware of the implications of the new law on unfair terms, possibly pressing Government for more time to adjust themselves. The purpose of this seminar is precisely to alert the business sector about this law. In this paper I will endeavour to give my contribution in this regard by highlighting the salient points of this new law.

The Proposals in 1991 White Paper

One of the proposals in the White Paper “Rights for the Consumer” published by the Maltese Government in 1991 was the need to tackle the use of unfair terms in contracts made with consumers. The White Paper suggested that this issue be dealt with at two different levels:

·     That the Civil Code be amended to stipulate that certain “unfair contract terms unduly detrimental to a consumer’s legitimate interest” be considered as null and without effect with the Code defining clearly the type of terms covered by such a provision.

·     That the Consumer Protection Council would be empowered to prohibit the use of standard contracts deemed unfair and unduly detrimental to the consumer’s legitimate interests.

Interestingly while Government did in the White Paper advocate the importance of having a consumer code, yet in the case of unfair terms, Government preferred that the measures (at least in part) relating to the regulation of such terms be included as amendments to the Civil Code. Such a measure would have led to certain practical difficulties. The legislator would have been confronted with the dilemma of introducing measures to protect only consumers in a law in where the concept of the consumer is unknown. Moreover it is not clear how the enforcement measures envisaged for the Consumer Protection Council would have been implemented. Logically these would have had to be included in the law setting up the Council which then would have meant some cross reference to the measures on unfair terms implemented under the Civil Code.

It is relevant to note that these proposals were made at a time when the EU itself had not as yet enacted the Directive on unfair terms. The legislative measures on unfair terms enacted last October had the advantage of being based on a directive which had been in place for seven years and of referring to the experience of member States which had after 1993 enacted laws to implement the Directive. Therefore the delay in enacting a law on unfair terms had at least the side benefit that the Maltese legislator could learn from the experience of other countries which had already implemented the Directive, thereby avoiding some pitfalls.

The 2000 Amendments to the Consumer Affairs Act

In Maltese law the provisions dealing with the regulation of unfair terms are not limited to Part VI of the Consumer Affairs Act. In addition to the articles introduced last October as a result of the amendments to the Consumer Affairs Act, there are isolated instances in other laws prohibiting the use of unfair terms. These latter provisions are intended to curb the use of unfair terms within a particular sector and go no further then that. Conversely the provisions under Part VI of the Consumer Affairs Act regulate the use of unfair terms generally, providing a definition as to what constitutes an unfair term and establishing the criteria to be taken into account in assessing whether a term is unfair or not. The only limitation as to the applicability of these provisions is that they apply only to terms or conditions in trader-consumer contracts.

The principal articles of Part VI of the Consumer Affairs Act dealing with unfair terms are articles 44 to 47. In addition however these are complimented by other provisions of the Act of direct relevance to the regulation of unfair terms namely:

·     the definitions of “consumer” and “trader” under the Act once articles 44 to 47 deal solely with consumer contracts offered by a trader to a consumer and therefore it is imperative that there is a clear understanding as to who are the “consumer” and the “trader” under the Consumer Affairs Act; and

·     Part IX on Compliance Orders establishing the main enforcement tools to curb the use of such terms.

Who are the “consumer” and the “trader” under the Consumer Affairs Act

The 2000 Amendments to the Consumer Affairs Act revised substantially the definitions of “consumer” and “trader”. The Consumer Affairs Act as enacted in 1994 defined a “consumer” as being “any individual who not in the course of a business, trade or profession, buys or hires goods from a trader or engages the services of a trader for a fee or reward”. This definition was criticized as being too narrow. On the one hand the business community argued that the definition of a “consumer” should be extended to all end users to include persons in business who buy or hire products or services for the needs of their business. On the other hand the consumer lobby advocated that the definition of a “consumer” be rephrased to cater for situations where the consumer needed to be protected even if he is not buying or hiring goods or services. Hence for example the former definition of “consumer” did not necessarily protect a consumer who during the pre-contractual stage was on the receiving end of hard sell techniques or similar malpractices. In this respect the former definition of a “consumer” was clearly deficient.

The definition of a “consumer” introduced under the 2000 Amendments rectifies the shortcomings of the former definition. The new definition considers as a “consumer” any individual who in transactions and other matters covered by consumer legislation “is acting for purposes which are not related to his trade, business, craft or profession”. The new definition is in part similar to that adopted in various European Union consumer policy directives. Rather than stating who the consumer is, thereby limiting the protection and remedies available to those consumers who buys or hires goods or services, the new definition states that a “consumer” is any individual who is not acting for purposes relating to his business, craft, trade or profession.

Significantly the new definition of “consumer” has also been extended to include any individual who though not the immediate purchaser or beneficiary, have been authorised by the consumer to use or benefit from the goods or services provided to the consumer by the trader. Furthermore the Minister responsible for consumer affairs after consulting the Consumer Affairs Council, is empowered to designate as “consumers” any other class or category of persons. This leaves the door open for the Minister to extend the definition of a “consumer” even to certain end-users who are not traditionally considered to be consumers such as traders who purchase products they need in the course of their business.

The definition of “trader” has also been substantially revised. Under the former definition “trader” included any person who in the course of a trade or business sold or hired, or offered to sell or hire goods or services to consumers. The former definition of “trader” however did not automatically include public owned or public controlled commercial entities. It was only the Prime Minister who could designate by notice in the Government Gazette, which government department, public corporation, authority or organisation providing goods or services for a fee, should be considered as a “trader” for the purposes of the Consumer Affairs Act. This meant that the Prime Minister had the discretion of deciding if and when the Consumer Affairs Act would apply to public owned commercial entities, giving such entities a substantial advantage over their rivals in the private commercial sector.

The new definition of a “trader” makes no exception for public owned or public controlled entities. A “trader” is defined as being “any person, including any body corporate or incorporate who in relation to any transactions or other matters covered by this Act or regulations made thereunder is acting for purposes relating to his trade, business, craft or profession”. One other notable difference with the former definition is that “trader” now includes also the professions and therefore claims can now also be filed against members of the different professions such as lawyers or architects with regard to any services rendered in the exercise of their profession.

The measures available if an unfair term is used

The Consumer Affairs Act provides various measures to effectively curb the use of an unfair term in a consumer contract. These measures range from provisions nullifying the effect of any terms deemed to be unfair to tools by virtue of which the Director of Consumer Affairs may require the deletion or amendment of such terms.

Article 44(1) of the Act states that it is “…unlawful in consumer contracts to use unfair terms, or terms or combination of terms which are unfair in that they have as an object or effect any of the objects and effects referred to in subarticle (2) hereof and any term prohibited as aforesaid inserted in any consumer contract shall be deemed never to have been so inserted.”.

This means that if an unfair term is included in a consumer contract then that term will be considered as not having been inserted in the contract. In this context article 46 of the Act further states that if a consumer contract includes a prohibited or unfair term then the contract will not be binding on the consumer “unless the contract is capable of continuing in existence without the unfair term.” Effectively therefore a trader will not be able to enforce against the consumer a term or condition deemed to be unfair and the contract if it is able to stand without the unfair term, will continue to be operative.

The Act does not limit itself to rendering null and void, terms deemed to be unfair, but significantly also empowers the Director of Consumer Affairs to issue orders to curb the use of such terms. Article 94(1) of the Act provides that the Director may, of his own initiative or on a written application by a qualifying body, issue a compliance order

“(a)      on any person requiring:

(i) the deletion or alternation of terms in a consumer contract which the Director considers to be unfair to consumers in accordance with the provisions of Part VI of this Act; and

(ii) the incorporation of terms in a consumer contract which the Director considers to be necessary for the better information of consumers, or for preventing a significant imbalance between the rights and obligations of the parties, and this to the benefit of consumers;”.

The powers granted to the Director under this provision are quite substantial. The Director is empowered not only to require the deletion or alteration of an unfair term, but may also require the inclusion of a term if he considers this necessary “for the better information of consumers, or for preventing a significant imbalance between the rights and obligations of the parties”. The role of the Director therefore is a pro-active one in that he can actually require the inclusion of terms to rectify any significant imbalance that adversely effects consumers.

The Director when issuing a compliance order must serve a copy of the order on each person against whom the order is made, stating briefly the reasons for the issue of the order. A person against whom an order has been made, has 15 days from notification of the order on him, in which to contest the order by initiating proceedings for the revocation of the order before the Court of Magistrates in its civil jurisdiction. In such an instance the court may confirm, change or cancel the compliance order on any terms or conditions it considers appropriate. However such proceedings may only be commenced:

·     on a material point of law; or

·     if the making of the compliance order is grossly unreasonable or unjustified.

It is relevant to note that a compliance order comes into force with immediate effect unless the order is contested before the Court, in which case the order will be stayed pending the outcome of the court proceedings. This notwithstanding, the Director if he “considers it appropriate or necessary in the public interest” may request the Court to issue an “interim compliance order” ordering that the compliance order continue in force pending the final outcome of the court proceedings. In doing so the Court may order those modifications to the order as it may deem appropriate.

What is an unfair term?

Article 45(1) of the Act defines an unfair term as a term in a consumer contract which either on its own or in conjunction with one or more other terms:

·     Creates a significant imbalance between the rights and obligations of the parties to the contract (i.e. the trader and the consumer) to the detriment of the consumer; or

·     Causes the performance of the contract to be unduly detrimental to the consumer; or

·     Causes the performance of the contract to be significantly different from what the consumer could reasonably expect; or

·     Is incompatible with the requirements of good faith.

If one or more of these circumstances does arise, then the term in the consumer contract is considered as being unfair and therefore invalid. The raison d’etre of this provision is obvious – to provide a comprehensive definition to cater for all those possible instances whereby the legitimate interests of the consumer may be unfairly prejudiced as a result of the inclusion in the contract of an unfair term. To complement this definition the Act under article 44(2) establishes a black list of examples of terms considered unfair. Therefore in establishing what an unfair term is the Act provides both a general definition and a checklist of terms which the Act considers as unfair.

Furthermore in order to determine if a term is unfair, article 45(2) lists various factors which must be taken into account namely:

·     The nature of the goods or services being provided for under the contract;

·     The time when the contract was concluded;

·     All the circumstances attending the conclusion of the contract and all the other terms of the contract or of another contract on which the contract is dependent. These circumstances may include –

¨    The bargaining power of the parties;

¨    Whether a consumer was subjected to undue pressure; and

¨    Whether the lack of knowledge or skill of a consumer was improperly taken advantage of.

The use of Plain and Intelligible Language

Article 47(1) of the Act introduces a long overdue measure in Maltese law - the requirement that the terms in any consumer contract are “…. written in plain and intelligible language which can be understood by the consumer to whom the contract is directed.” It is important to emphasize the qualification in this provision. Not only must the terms in a consumer contract be written in plain and intelligible language, but the terms must be written in such a manner that they can be understood by the consumer to whom the contract is being directed. Article 47(2) further provides that if a term is ambivalent or there is any doubt as to its meaning, then the interpretation most favourable to the consumer shall prevail.

The use of plain language in consumer contracts – indeed in all types of contracts – has been an issue for quite some years. I have come across contracts that when read time and again still remain unintelligible. Some jurisdictions notably some of the Canadian provinces such as Alberta have over the years taken some interesting initiatives in promoting the use of plain language even going to the extent of drafting a law in plain language. In the UK there is even an organization – Clarity - that actively promotes the use of plain language.

Other points to bear in mind

There certain points that should be taken note of in the context of the provisions in the Consumer Affairs Act relating to the use of unfair terms in consumer contracts:

¨    An evident lacuna is that the provisions on unfair terms do not establish any norms with regard to the use of small print. Such factors as the size of the words, the colour background on which the words are written should be considered as relevant circumstances in assessing whether the trader is in good faith. I remember one particular instance where the consumer was handed a contract written in black type, in Italian and over a purple background with the evident result that he had considerable difficulty in reading (let alone understanding) the terms and conditions of the contract.

¨    Articles 44 to 47 apply only to those contracts concluded or executed after the coming into force of these articles. Therefore the articles will not apply to contracts which pre-date the coming into force of these articles.

¨    In contrast to the rest of the provisions under the Consumer Affairs Act, the term “goods” in Part VI – and therefore in relation to articles 44 to 47 – also includes immovable property.

The regulation of unfair terms other than under Part VI of the Consumer Affairs Act

Apart from the 2000 Amendments to the Consumer Affairs Act the Maltese legislator has introduced norms to curb the use of unfair terms within the context of specific areas, without however dealing with the issue in a comprehensive manner. The main thrust of these provisions is to protect the consumer as it were from himself, by ensuring that the consumer is not prejudiced by any contractual renunciation he may unwittingly make to his rights at law.

The Consumer Affairs Act of 1994 itself provides an example. Article 24(2) of the Act provides that it shall not be lawful for the trader and the consumer to agree to a term which effectively derogates from the right of the consumer to seek redress before the Consumer Claims Tribunal.

More recently the 2000 Amendments to the Act introduced another specific provision aimed at safeguarding the rights of consumers. Article 85 of the Act states that any commercial guarantee granted to a consumer may not in any way exclude or limit the rights that the consumer has under the Act or any other law. Any clause providing for such an exclusion is considered as null and ineffective.

Article 30 of the Telecommunications (Regulation) Act provides that:

“A term or condition for the provision of a telecommunications service, even if agreed to by the subscriber or user, shall be null and without effect to the extent that it is inconsistent with any of provision of this Act or of any regulations made thereunder or with the terms and conditions of the authorisation on the strength of which the service is provided.” 

It is worth noting in this regard that the protection is extended not only to consumers but to all subscribers or users of the telecommunications services irrespective of whether the user is a domestic consumer or indeed a business user.

The Doorstep Contracts Act (Cap. 317) if anything provides even more extensive measures to safeguard the unwary. Article 11 of this Act provides that any clause in a private writing shall be void if the clause:

·     requires the consumer to pay any form of compensation if he exercises his right to cancel the doorstep contract, or

·     provides that any dispute arising therefrom be settled otherwise than by the competent court in Malta, or

·     purports to remove or reduce any of the rights given to the consumer by any of the provisions under the Act, or to limit or remove the competence of the Maltese courts or tribunals.

Similarly regulation 12.1. of the Time Sharing Regulations provides that any clause of a timeshare contract whereby the buyer renounces to his rights under the Timeshare Regulations or whereby the seller is freed from his responsibilities under the Regulations, shall not be binding on the buyer.

the regulation of unfair terms –  the way forward

It is of course premature to start discussing at this stage the effectiveness of the provisions regulating unfair terms. There are however some matters which should be taken into account.

Extending the definition of “consumers” to business

One issue brought up by the business community when this law was being prepared was that the definition of “consumer” should be extended to members of the business community, so that members of the business community could enjoy the same rights that consumers have. There is some validity in this argument and at least in the context of articles regulating the use of unfair terms one can consider extending the definition of a consumer to include other users. After all in some instances some businesses especially the small retailers, may be as vulnerable as consumers with confronted with certain types of standard contracts. One must however consider carefully the consequences of such a change in law, in particular whether the core articles defining what an unfair term is, would in such new circumstances remain valid.

What should we expect and how should we prepare for it?

It is difficult to predict what will happen once the provisions on unfair terms come into force. In the time that I have been involved with consumer affairs, one thing that I have noticed is that many traders look with alarm when they are confronted with new consumer laws fearing perhaps an avalanche of claims. This has time and again proved to be unfounded. Hence when the Consumer Claims Tribunal first started to operate there were some misgivings about this Tribunal. After five years from when it first started to function, the Tribunal is seen as a feasible alternative to the courts. The provisions on unfair terms should similarly be conducive towards a more healthy and equitable marketplace.

This does not mean however that the coming into force of the provisions on unfair terms should not be complimented by measures to ensure that these provisions are effective. It would appear that more effort for example should be made in alerting the business community as to the true import of these new provisions and what business has to do to ensure that it is in compliance with these new legal obligations. For example is anyone doing anything to ensure that contracts are written in plain and intelligible language? With all due respect I have strong doubts in this regard.

This in the first place should have been done ages ago. I have occasionally come across a few firms that decided to take the bold yet wise initiative of rephrasing their contracts in plain language which can be easily understood by all. Yet regrettably these initiatives have been few and far between. Perhaps the business community possibly in conjunction with the competent government agencies or the Maltese consumer association might consider offering members of the business community some assistance in this regard. After all is it not in the interest of a business to ensure that its client knows and understands what he is agreeing to?

Ancillary to this a person within the Consumer and Competition Division could be appointed specifically to monitor the use of unfair terms and if need be to activate remedial action. In the UK when the unfair terms regulations came into force, the Office of Fair Trading created a unit with the express task of monitoring the use of unfair terms. Deciding whether a term is unfair is no small task. The assessment of such terms may vary according to the nature and complexity of the contract and the parties to the contract. The applicability of the provisions know no boundaries in that they apply equally to terms in a contract made with a financial institution or with a travel agency or even with a small household retailer. The gravity too may vary from one case to another. There is therefore an onus both on the competent government agency and on the representatives of the business community to ensure the coming into force of these provisions takes no one by surprise.
 

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