Unfair Contract Terms Legislation in South Africa: The Need for Substantive Control, Schemes and Mind Maps of Private law

Download Unfair Contract Terms Legislation in South Africa: The Need for Substantive Control and more Schemes and Mind Maps Private law in PDF only on Docsity! UNFAIR CONTRACT TERMS LEGISLATION: THE IMPLICATIONS OF WHY WE NEED IT FOR ITS FORMULATION AND APPLICATION* Tjakie Naudé BA LLD 1 Introduction Legislative control over unfair contract terms is regarded in many countries as an essential tool in the law’s response to the abuses attendant upon the use of non-negotiated or standard contract terms.1 Some countries go further and extend statutory fairness control to negotiated terms.2 The need for unfair contract terms legislation has also repeatedly been pointed out in South Africa,3 including by a few judges4 and the * I am grateful to the Oxford Institute of European and Comparative Law, particularly its Director, Stefan Vogenauer, for hosting me as a visiting fellow in Oxford where this research was done. I also benefited from financial assistance by the National Research Foundation, the Harry Crossley Fund and the International Office of the University of Stellenbosch. 1 Such legislation has long been the norm in Europe. See, eg, the German Standard Contract Terms Act of 1978 (AGBG) now incorporated into the Civil Code (BGB) (} 305 et seq) and the Swedish Consumer Contract Terms Act of 1994, which replaced an Act from 1971 of the same title. See also the EC Directive on Unfair Terms in Consumer Contracts 93/13/EEC of 5 April 1993 (the Unfair Terms Directive), and reports on its implementation collated in 1995 European Review of Private Law. Other countries with such legislation include Zimbabwe, many South American countries, Asian countries like Japan, Hong Kong and Thailand, Israel, and provinces in Australia and Canada (many of these are mentioned in the South African Law Commission’s Report on Unreasonable Stipulations in Contracts and the Rectification of Contracts Project 47 April 1998). By standard terms I mean previously formulated terms intended for repeated and general use. Non-negotiated terms, as the term is used in Europe, is a wider concept between standard terms and individually negotiated terms. It refers, in the words of the Directive, to a term drafted in advance, where the consumer has not been able to influence the substance of the term, particularly in the context of a pre-formulated standard contract. Non- negotiated terms therefore includes terms pre-formulated for a specific contract, but the Directive excludes a review of the core terms as to price and subject matter insofar as these are transparent. See also, eg, Micklitz German Unfair Contract Terms Act and the EC Directive 93/13 in Lonbay (ed) Enhancing the Legal Position of the European Consumer (1996) 173 180. 2 The Nordic countries provide examples (see Wilhelmsson Standard Form Conditions in Hartkamp et al Towards a European Civil Code (2004) 431 441). See also the English Unfair Contract Terms Act 1977 which is not limited to standard terms, although its scope is more limited than the title suggests. 3 See, eg, Turpin ‘‘Contract and Imposed Terms’’ 1956 SALJ 144; Aronstam Consumer Protection, Freedom of Contract and the Law (1979); Kötz ‘‘Controlling Unfair Contract Terms: Options for Legislative Reform’’ 1986 SALJ 405; Van der Walt ‘‘Die Huidige Posisie van die Suid-Afrikaanse Reg met betrekking tot Onbillike Kontraksbedinge’’ 1986 SALJ 647; Eiselen ‘‘Die Standaardbedingpro- bleem: Ekonomiese Magsmisbruik, Verbruikersvraagstuk of Probleem in Eie Reg?’’ 1988 De Jure 251, 1989 De Jure 44; Eiselen Die Beheer oor Standaardbedinge: ’n Regsvergelykende OndersoekUnpublished LLD dissertation, University of Potchefstroom (1988); Van der Walt ‘‘Kontrakte en Beheer oor Kontrakvryheid in ’n Nuwe Suid-Afrika’’ 1991 THRHR 367; Van der Walt ‘‘Aangepaste Voorstelle vir ’n Stelsel van Voorkomende Beheer oor Kontrakteervryheid in die Suid-Afrikaanse Reg’’ 1993 THRHR 65; Lewis ‘‘Fairness in South African Contract Law’’ 2003 SALJ 330; cf Kerr The Principles of the Law of Contract 6 ed (2002) 661. 4 Western Bank Ltd v Sparta Construction Co 1975 1 SA 839 (W) 840 and Linstom v Venter 1957 1 SA 125 (SWA), cited by Aronstam Consumer Protection 16 24. 361 Law Commission in their 1998 Report on Unreasonable Stipulations of Contracts and the Rectification of Contracts.5 Subsequent to that Report, some South African writers have still suggested that common law mechanisms for controlling one-sided terms (such as interpretation and the requirement of legality)6 may be flexible enough to deal sufficiently with the problem.7 In addition, some writers commenting on the Supreme Court of Appeal’s subsequent failure to strike down a clearly unfair exemption clause in a private hospital admission form,8 have tended to plead only for a greater role for constitutional values and common law principles and control mechan- isms, without calling for general unfair terms legislation.9 This may perhaps suggest some confidence in the common law and the Bill of Rights on their own.10 In my view, common law mechanisms and judicial control cannot sufficiently address the problems in this area, regardless of how wide judges would be prepared to interpret their powers under the Constitu- tion or the common law.11 Legislative control in the form of unfair contract terms legislation (which inter alia gives a general power to courts to strike out or amend unfair terms) is necessary. South Africa already has some sector-specific legislation that imposes a measure of control over the contents of certain contract types, such as the National Credit Act12 and the Rental Housing Act,13 but these are insufficient to address the problem of unfair contract terms, which is more pervasive.14 The South African Department of Trade and Industry (DTI) has therefore taken a step in the right direction by including provisions on unfair terms control in their proposed Consumer Protection legislation (which has not yet been finalised).15 Thus South Africa will probably 5 See n 1 supra. This report was effectively shelved after publication. 6 The requirement of legality implies that contracts may not be enforced insofar as they are contrary to public policy. The most important case is Sasfin v Beukes 1989 1 SA 1 (A). 7 Hefer ‘‘Billikheid in die Kontraktereg volgens die Suid-Afrikaanse Regskommissie’’ 2000 TSAR 142; Hopkins ‘‘Standard-form Contracts and the Evolving Idea of Private Law Justice: A Case of Democratic Capitalist Justice Versus Natural Justice’’ 2003 TSAR 150; Hefer ‘‘Billikheid in die Kontraktereg’’ 2004 Tydskrif vir Regswetenskap 1. Cf Jamneck ‘‘Die Konsepwetsontwerp op die Beheer van Kontraksbedinge’’ 1997 TSAR 637. 8 Afrox Healthcare Bpk v Strydom 2002 6 SA 21 (SCA). The clause excluding liability for bodily injury caused by negligence was held to be neither surprising nor contrary to public policy. 9 Eg, Tladi ‘‘Breathing Constitutional Values into the Law of Contract: Freedom of Contract and the Constitution’’ 2002 De Jure 306; Hawthorne ‘‘Closing of the Open Norms in the Law of Contract’’ 2004 THRHR 294; but cf Hawthorne ‘‘Distribution of Wealth, the Dependency Theory and the Law of Contract’’ 2006 THRHR 48. Cf Bhana & Pieterse ‘‘Towards a Reconciliation of Contract Law and Constitutional Values: Brisley and Afrox Revisited’’ 2005 SALJ 865 who, in criticising the Afrox case, argue in depth for a greater role for constitutional values in applying common law rules such as those on illegality, but mention in a footnote that they do not wish to state a preference for legislative enactment or judicial reform to facilitate constitutional compliance of contract law. 10 Such writers may, however, have simply focused on common law and constitutional arguments because these are already available. 11 As will be explained further below. 12 34 of 2005. 13 50 of 1999. 14 Such legislation is bound to have lacunae in respect of unfair terms control (Kötz 1986 SALJ 405 409). 15 Draft Consumer Protection Bill, 2006, published for comment in GN 418 in GG 28629 of 2006-03-15. 362 STELL LR 2006 3 well as formalities requirements, such as the new provisions proposed by the DTI which require express agreement on exemption and limitation of liability clauses, evidenced by signature next to such terms.22 I will only make some remarks on possible dangers of the last mentioned legislative technique. Secondly, rules of interpretation, especially the contra profer- entem rule, play a role. Thirdly, othermandatory legislationmust be kept in mind. This type of control may consist of ‘‘adding’’ mandatory implied terms to a contract type. If this is not relevant to a particular term, the content control of the unfair contract terms legislation comes into play. The first step in this part of the adjudication process would typically be considering any prohibited list of terms, and thereafter the general clause together with the provisions which seek to give guidance on its application. There is some link between incorporation control and content control in general unfair terms legislation, however. The suspicion that there is typically not enough justification for incorporation of unfair non- negotiated terms other than core terms, justifies overt content control.23 This is because an examination of what typically happens in the context of non-negotiated terms (attempted below), suggests that the average consumer often creates no reasonable reliance that he would agree to unfair terms in the fine print. Instead, the user of the terms more likely creates a reasonable reliance by the signals it sends out through marketing etcetera that contracting with it would be a pleasurable experience, that the customer will be treated fairly and that the business would not seek to avoid liability.24 As the proposed Consumer Protection legislation is far from finalised at the time of writing (and hopefully will still be subject to thorough debate and improvement for some time), no overview of the proposals thus far will be provided, but some of the draft provisions will be referred to to illustrate certain arguments. 2 The justification for intervention, and the resultant need for ‘‘content control’’, including ‘‘substantive unfairness control’’ 2 1 The reasons and justification for intervention The non-negotiated or standard terms of a B2C contract can often not be regarded as ‘‘the proper expression of the self-determination of both parties’’, which ultimately is the justification for enforcement of 22 S 50. 23 TheUKLawCommissions state in theirConsultationPaper that onemustaccept that defects in theprocess of conclusion of such contracts are inevitable so that the substance of such contracts must be controlled overtly (Law Commission & Scottish Law Commission Unfair Contract Terms — a Joint Consultation Paper 7, Law Commission Consultation Paper No 166, Scottish Law Commission Discussion Paper No 119) (hereafter UK Law Commissions Consultation Paper). 24 Willett Good Faith and Consumer Contract Terms in Brownsword, Hird & Howells (eds) Good Faith in Contract: Concept and Context (1999) 67 76-77. Cf also Aronstam Consumer Protection 16; Eiselen 1988 De Jure 255. UNFAIR CONTRACT TERMS LEGISLATION 365 agreements, under the banner of ‘‘party autonomy’’ and ‘‘freedom of contract’’.25 To use a phrase of Reinhard Zimmermann,26 the reality is that, for whatever reason, a ‘‘proper evaluation and balancing of [all] the consequences of the transaction does not normally occur’’ on the side of one of the parties to a standard term contract. The typical absence of this basic justification for enforcement of contracts in itself demands the exercise of control over the contract’s contents in the interests of party autonomy and social responsibility.27 These goals of contract law are furthermore bolstered by the fundamental constitutional values of freedom, equality and dignity.28 Autonomy (and thus ‘‘freedom’’) is in fact not guaranteed where one party effectively claims freedom of contract for it alone, whereas there is only freedom of contract for the other party in a very formalistic, hollow and practically meaningless sense.29 It has therefore quite rightly been said that statutory intervention is necessary to protect freedom of contract.30 A proper understanding of the reasonswhy the autonomyof the customer is impaired is important to ensure the effectiveness of any intervention. It appears that the most important reason why the customer has no chance of influencing the non-negotiated terms is the ‘‘prohibitively high transaction costs involved, rather than the superiority of the entrepre- neur’’.31 Indeed, very often the main reason why consumers and 25 The first quoted phrase is that of Zimmermann The New German Law of Obligations (2005) 206. See also Eiselen 1988 De Jure 257-258; Wilhelmsson Standard Form Conditions 432. 26 New German Law of Obligations 206 208. See also Sandrock ‘‘The Standard Terms Act 1976 of West Germany’’ 1978 American Journal of Comparative Law 551; Maxeiner ‘‘Standard-Terms Contracting in the Global Electronic Age: European Alternatives’’ 2003 Yale Journal of International Law 109 174. 27 See the authorities in the previous footnote and Turpin 1956 SALJ 144 145. 28 Autonomy clearly equates with freedom and equality and dignity is endangered if the law allows the user of standard terms to pursue its own interests without a reasonable measure of concern for those of its contractual partner, especially where the latter’s apparent assent to unreasonably detrimental terms is not in fact an expression of his self-determination. 29 Rakoff ‘‘Contracts of Adhesion: An Essay in Reconstruction’’ 1983 Harvard Law Review 1173 1236; Bassenge et al Palandt Bürgerliches Gesetzbuch 63 ed (2004) Überblick v } 305 Rdn 8; Zimmermann New German Law of Obligations 207-208, Howells & Weatherill Consumer Protection Law 2 ed (2005) 18; Van der Walt 1993 THRHR 65 67; Eiselen 1988 De Jure 256; cf BVerfGE 89, 214 et seq. Lord Reid’s recognition of a lack of real freedom of contract in Suisse Atlantique v Rotterdamsche Kolen Centrale 1966 2 All ER 69 76 is often cited: ‘‘In the ordinary way, the customer has no time to read [the standard terms], and, if he did read them, he would probably not understand them. If he did understand and object to any of them, he would generally be told that he could take it or leave it. If he then went to another supplier, the result would be the same. Freedom to contract must surely imply some choice or room for bargaining.’’ 30 Hondius Standaardvoorwaarden (1978) 341; Maxeiner 2003 Yale Journal of International Law 109 174; WilhelmssonStandardFormConditions 432;Lewis 2003SALJ 330 348; and thewriters cited in n 29 supra. 31 Zweigert & Kötz Comparative Law 335; Zimmermann New German Law of Obligations 176; Rebmann, Säcker & Rixecker Münchener Kommentar zum Bürgerlichen Gesetzbuch Band 2a Schuldrecht Allgemeiner Teil 4 ed (2003) Vorbemerkum zum } 305 Rn 5. See also the writers cited in the following footnotes. For an example of a recent contrary argument that it is primarily a lack of bargaining power that justifies intervention, see Hopkins 2003 TSAR 150 154-155 and cf Bhana & Pieterse 2005 SALJ 865 884. It has been pointed out in the UK that ‘‘inequality of bargaining power’’ is an ambiguous concept anyway, which decreases its helpfulness in this area (Beale ‘‘Inequality of Bargaining Power’’ 1986 Oxford Journal of Legal Studies 123 125; The Law Commission of England and Wales and the Scottish Law Commission Unfair Terms in Contracts — Report on a Reference under Section 3(1)(e) of the Law Commissions Act 1965 (Law Commission Consultation Paper No 292, Scottish Law Commission Discussion Paper No 199) 43; UK Law Commissions’ Consultation Paper par 4.102. 366 STELL LR 2006 3 businesses resign themselves to accept standard terms is that it simply takes too much time and effort to read long, complex lists of standard terms every time one enters into a transaction, even for a relatively well- informed, sophisticated consumer in a competitive market.32 It takes even more time and effort to think through and find out the implications or meaning of the standard terms, as will finding someone in the counterparty-organisation who has the authority to negotiate an amendment, suggesting alternative terms and bargaining about them, or shopping around for more favourable standard terms.33 The transaction costs of doing any of the above are out of proportion to the dangers apparent to the average customer at conclusion of the contract.34 There is therefore no easy alternative for the reasonable person but to submit, even without reading, and to focus only on the core terms, that is, the terms of immediate concern.35 Without more, this probably justifies control, as the transaction costs in itself understandably inhibits a proper evaluation of the consequences of the transaction, which contradicts the assumption that the agreement resulted from self- determination by both parties.36 Even the customer who understands that it is important to read the fine print, will therefore often realise at the same time, or very soon thereafter, that it will require just too much effort to actually obtain standard terms which are fairer. Such a customer may therefore eventually stop his or her practice of reading all the fine print in every contract. Attempts to negotiate standard terms, even amongst businesses, are therefore said to be rare.37 (It has been said that any bargaining done by businesses in this area is usually aimed at acceptance of the whole of 32 Rakoff 1983 Harvard Law Review 1173 1226; Zweigert & Kötz Introduction to Comparative Law 3 ed (translated by Weir) (1998) 334-335; Howells & Weatherill Consumer Protection Law 19; Griggs ‘‘The [Ir]rational Consumer and Why We Need National Legislation Governing Unfair Contract Terms’’ 2005 Competition and Consumer Law Journal 1 16-17 27-28; Hillman ‘‘Online Boilerplate: Would Mandatory Website Disclosure of E-Standard Terms Backfire?’’ 2006 Michigan Law Review 837 839- 841. Hillman mentions his empirical study involving contracts students which tends to show that only about 4% of American shoppers on the internet read standard terms available to them (as opposed to core terms as to price etc) (839 841-842). Cf Lewis 2003 SALJ 330 339; Thornton v Shoe Land Parking Ltd 1971 2 QB 163 169. 33 See the authorities in n 32 supra and Zimmermann New German Law of Obligations 176. 34 Rebmann et al Münchener Kommentar Vorbemerkung zum } 305 Rn 5; Coester, Coester-Waltjen & Schlosser in Martinek (ed) J von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen — AGBG 13 ed (1998) Einl zum AGBG } 3 ff Rn 4; Maxeiner 2003 Yale Journal of International Law 109 114; Hillman 2006 Michigan Law Review 837 840-841. 35 Maxeiner 2003 Yale Journal of International Law 109 114; Rakoff 1983 Harvard Law Review 1173 1226. See Macneil ‘‘Bureaucracy and Contracts of Adhesion’’ 1984 Osgoode Hall Law Journal 5 6: ‘‘[N]o one can honestly say that consumers ought to read long documents of this kind. The many courts which over the years have casually or not so casually said that ignore the fact that if consumers actually did such a foolish thing the modern economy would come to a screeching halt.’’ This may be overstating the case somewhat. Core terms would concern, for example, the price and any warranty period. 36 See the quotations from Zimmermann New German Law of Obligations 206. 37 Coester et al Staudinger Einl zum AGBG } 3 ff Rn 4. UNFAIR CONTRACT TERMS LEGISLATION 367 Perhaps it is not too surprising that it has been questioned whether there is any justification at all for enforcing such standard terms insofar as they conflict with the background or residual rules of contract law.50 Clearly, however, the use of standard terms per se is an inevitable phenomenon in modern business life, particularly in this age of complex organisational structures and mass marketing.51 It is required, for example, by the efficient use of expensive managerial and legal talent so that more lowly-paid, less highly-trained personnel can contract with clients on a controlled basis.52 The background rules also do not always provide sufficiently detailed rules for the complexities of modern business transactions. It has therefore been suggested that it is only the public interest in economic efficiency created by the standard terms that justifies the enforcement of non-negotiated standard terms (and not consensus or reasonable reliance thereof).53 By implication, only standard terms which are necessary in the public interest should be enforced, and clearly not unjustifiably onerous and one-sided terms.54 Rakoff argues that ‘‘invisible terms’’ should not be presumptively enforceable. Instead, the user should prove justification of deviation from the background law on the basis that enforcement contributes significantly to the maintenance of civic freedom, as this is ultimately why a firm should be allowed to organise itself by means of standard terms.55 Thus he is in favour of a more ‘‘positive’’ approach which requires a business to prove that its non-core non-negotiated terms are fair and reasonable (whenever they conflict with background law).56 2 2 The resultant case for content control The first conclusion to be drawn is that content control is justified, at the very least in negative form by striking out (or amending) unfair terms. This is unquestioningly true in respect of non-negotiated terms, due to the 50 Wilhelmsson mentions (but does not advocate) the radical notion that businesses should only be allowed to supplement non-mandatory or residual rules, and not to change them in their favour in standard terms (Standard Form Conditions 443). Cf Rakoff 1983 Harvard Law Review 1173 1238. 51 Rakoff 1983 Harvard Law Review 1173 1220-1223. For other claims on the usefulness of standard terms see, eg, Eiselen 1988 De Jure 254; Hopkins 2003 TSAR 150 153-154; Zweigert & Kötz Comparative Law 333; Maxeiner 2003 Yale Journal of International Law 109 113; Howells & Weatherill Consumer Protection Law 19. 52 Rakoff 1983 Harvard Law Review 1173 1223; Beale Legislative Control of Fairness 231-232. 53 Burgess ‘‘Consumer Adhesion Contracts and Unfair Terms: A Critique of Current Theory and a Suggestion’’ 1986 Anglo-American Law Review 255 271-274. Cf Pretorius ‘‘The Basis of Contractual Liability (4): Towards a Composite Theory of Contract’’ 2006 THRHR 97: ‘‘The reliance principle has much to do with ascription of contractual responsibility in circumstances where it is fair and reasonable to do so.’’ 54 Burgess 1986 Anglo-American Law Review 255 271-274. 55 Rakoff 1983 Harvard Law Review 1173 1240-1242. For a recent defence by Rakoff of his views, see Rakoff ‘‘The Law and Sociology of Boilerplate’’ 2006 Michigan Law Review 1235. See also Wilhelmsson Standard Form Conditions 443. 56 The UK Law Commissions’ proposed Unfair Contract Terms Bill of 2005 also places the onus on the business contracting with a consumer (a natural person acting outside his trade or profession) to prove its non-core terms are reasonable when the issue is raised, whether by the consumer or mero motu by the court. In South Africa, by contrast, a negative striking-out approach is proposed. 370 STELL LR 2006 3 inherent structural inequality caused by the use of such terms and the typical and understandable absence of proper evaluation of the con- sequences of submitting to such terms,57 which inhibit the autonomy of normal people confronted with standard terms58 and make them vulnerable to abuse. This justifies control without more, but such control is furthermore also in the public interest in a more general sense. Ultimately, the costs incurred by society are higher if the risks andobligations involved are not shouldered by the party best able to prevent risks or to bear themmost efficiently from an economic point of view.59 To shift risks and obligations onto the structurally weaker party as a matter of course, without an offer of an alternative deal at a higher price, andmostly without his or her knowledge, is not necessarily efficient from an economic point of view.60 More speculative, but perhaps true, are claims that the removal of unfair terms may increase consumer confidence and trust and therefore economic activity, and that grievance procedure costs will ultimately be reduced.61 2 3 The possibility of control on the basis of substantive unfairness alone It should always be possible to impugn non-negotiated terms, which may be fair if specifically pointed out or agreed to, on the basis of the particular customer’s lack of bargaining strength and other problems with the bargaining process itself, such as a lack of alternative terms in the marketplace and a lack of knowledge of the term. The converse is also true: a term which would appear to be excessively one-sided and unfair generally may be justified if the customer consciously decided to contract on that basis after having considered alternatives. Procedural factors to do with the manner in which the particular contract was concluded may indeed be relevant to the question of fairness. However, the reality that the prohibitively high transaction costs involved understandably discourage contracting parties to read all the small print, and the fact that it would be an inefficient use of time and resources anyway,62 justifies the possibility of regarding terms as unfair per se, regardless of the circumstances surrounding the manner in which the agreement was reached (‘‘the procedural factors’’).63 57 See n 26 supra. 58 See par 2 1 supra; cf Vickers ‘‘Economics for Consumer Policy’’ 2004 125 Proceedings of the British Academy 287 302. 59 Willett Good Faith and Consumer Contract Terms 67. 60 Willett Good Faith and Consumer Contract Terms 67. 61 Griggs 2005 Competition and Consumer Law Journal 1 49-50 and authorities there cited. 62 Howells & Weatherill Consumer Protection Law 261-262; cf Burgess 1986 Anglo-American Law Review 255 270. 63 Eiselen 1989 De Jure 44 45; UK Law Commissions Consultation Paper 7 15 40; Wilhelmsson Standard Form Conditions 432-433; Griggs 2005 Competition and Consumer Law Journal 1 21; Maxeiner 2003 Yale Journal of International Law 109 119; Atiyah Essays on Contract (1986) 346: ‘‘it is no longer possible to accept without serious qualification the idea that the law is today solely concerned with the bargaining process and not with the result’’. UNFAIR CONTRACT TERMS LEGISLATION 371 Legislation should therefore make it possible, in appropriate cases, to strike out non-negotiated terms simply because they are unfair in content (‘‘substantively unfair’’), whether or not there were theoretical opportu- nities to become acquainted with the terms; whether or not the customer was theoretically free to explore the possibility of negotiation, but did not do so; whether or not the product could theoretically have been obtained elsewhere on better standard terms; and whether or not the consumer’s ‘‘bargaining position’’ (an ambiguous term) and ‘‘sophistication’’ was lower than that of the user of the standard terms.64 That is, ‘‘substantive unfairness’’ control should be possible, particularly in the case of non- negotiated terms, which may make an investigation into the procedural unfairness of the specific case irrelevant.65 For example, courts should be able to declare a term that unreasonably goes beyond protection of the legitimate interests of its user and that unreasonably prejudices the consumer, to be unfair, despite the fact that a competitor happened to include a fairer term on that point in its standard terms. For this reason, to include practically only procedural factors in the five factors to which courts ‘‘must’’ have regard in particular in determining whether a term is unfair, as the DTI draft Bill does,66 is problematic and not very helpful.67 It may perhaps give the impression that mere substantive unfairness in itself is not sufficient. The reality is that consumers, regardless of how sophisticated they are, will often not read standard terms as a result of the high transaction costs involved and are effectively dissuaded from assessing whether there was in fact ‘‘an opportunity of acquiring the goods or services, or equivalent goods or services, from any source of supply under a contract that did not include that term’’,68 one of the few factors listed in the DTI’s draft Bill. A court which is not sufficiently conscious of the realities of standard form contracting may therefore consider the mere existence of other offerings in the marketplace which happen not to include the particular term, as unduly important in counting against the consumer. As I have shown, the reality that high transaction costs make even a reading of all the terms on offer unlikely, applies regardless of ‘‘the bargaining strength of the parties relative to each other, taking into account (i) the availability of equivalent goods or services and (ii) suitable alternative sources of supply’’ (thus economic inequality), one of the few factors which ‘‘must’’ be considered ‘‘in particular’’ according to the proposed legislation. 64 Cf Eiselen 1989 De Jure 44 45 generally. 65 I do not use ‘‘substantive fairness’’ control in the sense used by Collins ‘‘Good Faith in European Contract Law’’ 1994 Oxford Journal of Legal Studies 229 246 as an evaluation of whether the consumer received poor value for money. This article does not concern the legitimacy of price control, or ‘‘core terms’’ control. 66 S 58 on ‘‘unfair contract terms’’. I am counting s 58(1)(b) as encompassing two factors. The last factor is ‘‘in the case of supply of goods, whether the goods were manufactured, processed or adapted to the special order of the buyer’’. This is the only factor which can be described as substantive, but it is only relevant in a few cases. 67 See also Maxeiner 2003 Yale Journal of International Law 109 119. 68 S 58(1)(b). 372 STELL LR 2006 3 Commission’s substantive fairness factors seem to be more succinct than the ones mentioned from the SA Law Commission’s Bill, but nevertheless more attention should be given to at least both these sources of lists of factors. Regardless of what the list of factors ultimately looks like, courts should remember that they should be able to find a term unfair in content without having to find anything unreasonable in the way in which the term was included.79 Thus the sophistication of the consumer and the existence of a competitive market do not detract from the need to protect the consumer against unfair terms which are unduly onerous in the particular context taking into account factors such as insurability, reciprocity, and the interests of the business sought to be protected by the term. Even if other firms have a fairer standard term tucked away in its long list of terms, the normal consumer cannot realistically be expected to read and understand all the standard terms on offer and choose on this basis, and so the mere existence of alternatives on better standard terms should not penalise a consumer complaining about a substantively unfair term.80 Instead, the fact that other firms do not include a clause should perhaps sometimes count in favour of the consumer: this fact may suggest that the term is not essential for profitability of businesses in that sector or that opinion in that business sector regards the term as unreasonable or unethical.81 Of course, procedural aspects may always still be relevant in a particular case, as I have said. Control over unfair terms would, however, be less effective if courts do not fully grasp that any reason which typically and understandably cause customers not to bargain justifies intervention in appropriate cases. One could perhaps go so far as to say that the mere fact that the user uses a long list of non-negotiated terms already causes some ‘‘procedural unfairness’’, because this habit prevents the typical consumer from reading and comparing terms. If the DTI cannot be persuaded to change their list of factors in the way suggested, courts should recognise the legitimacy of finding in an appropriate case that ‘‘all the circumstances of the case’’ show that the clause in question is unfair in substance, despite ‘‘economic equality in bargaining power’’ and alternatives available to the consumer. They would also benefit from considering the UK Law Commissions’ explanations on the ‘‘bargaining strength’’ and ‘‘knowledge’’ factors. Such control on the basis of substantive unfairness alone should not only be used in more ‘‘abstract’’, ‘‘preventative’’ proceedings brought, for example, by a consumer association or the National Consumer Commission when they allege that a term or terms used by a particular 79 UK Law Commissions Consultation Paper 15. 80 Cf Griggs 2005 Competition and Consumer Law Journal 1 16-17; Vickers 2004 125 Proceedings of the British Academy 302. 81 Cf Rebmann et al Münchener Kommentar } 307 Rn 34 according to whom German law takes into account the opinions in the particular sector (Anschauungen der Verkehrskreise). UNFAIR CONTRACT TERMS LEGISLATION 375 firm or firms is always unfair. Substantive unfairness control should also be a possibility where a particular plaintiff as a consumer lodges a complaint or sues a firm with reference to the particular contract he has made, or raises the issue of an unfair term when he is sued by the firm involved. It is interesting to note that in Germany, particularly before implementation of the EC Unfair Terms Directive, courts have tended to use a generalising or abstract approach overtly focused on substantive fairness, which goes further than the approach advocated here.82 Under their so-called ‘‘supra-individual generalising approach’’,83 the courts generally focused on the substantive unfairness of clauses in the light of typical party interests and not on the particular circumstances of the particular consumer or business who complained. Writers who consider this approach of German law point out that there are some advantages to such overt ‘‘clause-oriented’’ control.84 Some writers have pointed out that it ‘‘facilitates universal application of the resulting control’’.85 In other words, it creates a clearer precedent for other firms with respect to particular types of terms, as it is not primarily concerned with the particular circumstances of the particular consumer complaining about the term. Such a clause-oriented approach is said to lead more quickly to generalised Fallgruppenbildung, which is the emergence of categories of cases with reference to types of terms, often more closely defined with regards to particular types of sectors.86 Bernitz87 is of the opinion that, by contrast, the individualised approach followed thus far in Swedish courts (focusing on all the circumstances of the particular consumer in every case) has resulted in ‘‘inadequate foreseeability and probably a certain lack of efficacy’’ in this area. However, what I am advocating for cases where a particular consumer is involved is not what German courts have been doing. Instead, I advocate an approach to such litigation which is concrete in the sense that it takes into account the particular interests of the parties and the particular circumstances of the case, but which is not overly obsessed 82 Maxeiner 2003 Yale Journal of International Law 109 160; Micklitz German Unfair Contract Terms Act 181-182; Howells & Wilhelmsson EC Consumer Law (1997) 100; Rebmann et al Münchener Kommentar } 310 Rn 20, 70-75, } 307 Rn 35; Niglia The Transformation of Contract in Europe (2003) 166 et seq. In response to the Directive, } 310(3) was inserted, which enjoins courts to take into account also the circumstances surrounding conclusion of the contract in the case of consumer contracts (that is, a contract with a natural person acting outside the scope of his business, trade or profession). In respect of unfair contract terms control over commercial contracts, the abstract, generalising approach is still used (Rebmann et al Münchener Kommentar } 307 Rn 35). 83 Überindividuell generalisierende Betrachtung (Rebmann et alMünchener Kommentar } 310 Rn 20; BGH NJW 1992, 2626). 84 The terminology is that of Bernitz European Law in Sweden — Its Implementation and Role in Market and Consumer Law (2002). 85 Maxeiner 2003 Yale Journal of International Law 109 172. 86 Bernitz Swedish Standard Contracts Law and the EEC Directive on Contract Terms in Lonbay (ed) Enhancing the Legal Position of the European Consumer (1996) 188. On Fallgruppen generally, see Beater ‘‘Generalklauseln und Fallgruppen’’ 1992 Archiv des Civilistische Praxis 82. 87 Swedish Standard Contracts Law 188. Cf Whitford ‘‘Contract Law and the Control of Standardised Terms in Consumer Contracts: An American Report’’ 1995 European Review of Private Law 193 204. 376 STELL LR 2006 3 with procedural factors and recognises that the control of substantive unfairness on its own is also legitimate in appropriate cases. In particular, it takes into account the realities of standard form contracting when considering procedural factors. 2 4 The role of procedural measures ‘‘Procedural’’ measures aimed at improving the conduct of the ‘‘potential bargaining process’’, such as ensuring greater transparency through requirements on legibility and simple, clear language,88 are very important.89 Consumers who do have the time to read standard terms, bargain and shop around would particularly be empowered by these measures, and more likely to bargain successfully to the ultimate advantage of less ideal consumers. Such measures may also drive businesses to use fairer terms, given that consumers (and the businesses themselves!) may be more likely to read and understand the standard terms than before. If terms are written in simple language instead of in incomprehensible, complex legalese, a small business may perhaps realise that the contract drafted by its lawyers or copied from elsewhere exceeds its requirements and that it does not wish to be associated with a particular term. Addressing the ‘‘information asymmetry’’ between business and consumer may sometimes also lead to a more effective allocation of risk: a consumer who knows of and understands an exemption clause well in advance may take out insurance against it or consciously decide to run a particular risk in order to obtain a product at a lower cost.90 Such ‘‘procedural’’ measures will, however, be insufficient in the absence of effective, independent content control.91 Lack of available information is not the only problem, but rather the inability of many consumers to benefit from that information before contracting, whether because of lack of understanding of complex information (such as the likelihood of risks materialising and the probable costs involved if they do), lack of time or lack of bargaining skill and power generally.92 ‘‘[M]erely knowing of a term does not necessary lead to rational decision- making by a consumer.’’93 The reality that even clear and legible terms pointed out to the customer may be unfairly sprung upon him at the very last moment, also 88 The DTI’s draft Bill contains a plain language requirement. 89 Other techniques may concern a requirement that a copy always be given to the other party and be shown at the user’s place of business, and that incorporation by reference be prohibited (see, eg, Hondius Standaardvoorwaarden 577). 90 Howells & Weatherill Consumer Protection Law 40. 91 Weatherill EU Consumer Law and Policy 2 ed (2005) 113; Aronstam Consumer Protection 46. 92 Griggs 2005 Competition and Consumer Law Journal 1 21; Aronstam Consumer Protection 46. See also Beale Legislative Control of Fairness 248 who gives the example of the consumer’s inability to assess risk (such as the chances of a fairground car leaving the tracks) as impacting upon her understanding of the exemption clause. See also Vickers 2004 125 Proceedings of the British Academy 125 287 302. 93 Griggs 2005 Competition and Consumer Law Journal 1 51. UNFAIR CONTRACT TERMS LEGISLATION 377 . Access to courts is limited.105 The effort, costs and risks of litigation, especially when compared with the small sums typically involved in consumer transactions, promotes an attitude of rather writing off the episode as a learning experience, with the business continuing its practice with impunity.106 Lack of knowledge about the law, particularly in a country with many vulnerable consumers, will also decrease the likelihood of cases on unfair terms coming to the courts.107 Perhaps consumers, who may not have heard about the consumer protection legislation, may not even always complain to consumer organisations or the National Consumer Commission. If judicial control is the only control paradigm, a business who suspects its terms may be declared unfair may rather prefer to settle an individual case with a particularly difficult consumer on the basis of waiver of its term, leaving the business free to use that term in all other contracts. . Court decisions have a limited effect.108 They only bind the particular business(es) involved, and may be limited to the particular circum- stances of the case. Because many cases in respect of B2C contracts will only reach the lower courts, whose decisions are unreported, other businesses are unlikely to take note in any event, even with legal advice.109 . Judicial control is reactive and comes too late, after the abuse has already taken place, often for years.110 . For some of these reasons combined, it will often be very difficult to predict with any certainty whether or not a court will provide relief in a particular case.111 German judge-made law before promulgation of the Standard Terms Act was criticised for an ‘‘absence of concrete provisions and for uneven application by lower courts’’.112 105 Hondius Standaardvoorwaarden 488. 106 Hondius Standaardvoorwaarden 488; Aronstam Consumer Protection 46; Griggs 2005 Competition and Consumer Law Journal 1 23; Maxeiner 2003 Yale Journal of International Law 109 144; Rebmann et al Münchener Kommentar Vorbemerkung zum } 305 Rn 10-11; Van der Walt 1993 THRHR 65 75. 107 Rebmann et al Münchener Kommentar Vorbemerkung zum } 305 Rn 10. 108 Hondius Standaardvoorwaarden 488; Maxeiner 2003 Yale Journal of International Law 109 144; Rebmann et al Münchener Kommentar Vorbemerkung zum } 305 Rn 11; Van der Walt 1993 THRHR 65 75. 109 S 109 of the DTI’s draft Bill provides that the National Consumer Commission is responsible for promoting public awareness of consumer protection matters, including publishing any orders and findings of the Tribunal or a court in respect of a breach of the Act. It is, however, rather unlikely that the National Consumer Commission will be able to publish every decision by every lower court in the country involving every breach of every provision of the entire Act. However, they should at least publish cases on unfair terms in which they themselves were involved, and cases before the Tribunal as well as details on undertakings given by businesses as a result of negotiations which did not eventually go to court (as the Law Commission provided for in its Bill). 110 Hondius Standaardvoorwaarden 488. 111 Cf Aronstam Consumer Protection 46 and generally chapter 2. 112 Maxeiner 2003 Yale Journal of International Law 109 144. Judicial control in Germany dates back to the first half of the 20th century and was based on s 138 of the Civil Code (BGB) which rendered contracts violating good morals void, and on the requirement of good faith in s 242. 380 STELL LR 2006 3 3 3 The implications for the substantive portions of unfair terms legislation The first, obvious conclusion to be drawn from this analysis is that statutory intervention is required. As I have said, this has been accepted worldwide, including in South Africa. It is important to note that legislation is more proactive, could lead to greater predictability if properly structured and has wider effect.113 Thus the shortcomings of judicial control also emphasise the desirable outcomes of legislation. There is clearly a need for a legislative paradigm of preventive or proactive and not only reactive control. Ideally, this should also permeate the substantive portions of the legislation, even more so as some of these limitations apply to action taken by administrative bodies as well, as I have already suggested. For example, action by the National Consumer Commission against a particular business would not automatically bind all other businesses that use similar terms (that may be unfair towards businesses which had no chance to make representations at the hearing or negotiations). One practical way in which the effectiveness of legislative control can be increased is to formulate the description of what is unfair in as detailed a manner as possible (without sacrificing the necessary flexibility supplied by broad provisions at all).114 Lists of prohibited and suspect terms hold particular promise in this regard. (These are commonly referred to as ‘‘black’’ and ‘‘grey’’ lists elsewhere). Whereas a list of prohibited terms is a self-explanatory concept, the term ‘‘grey list’’ has been used in different ways. It refers mostly to a list of terms which would usually be unfair, but may be justified by the particular circumstances (they are therefore ‘‘suspect’’). Such a grey list is usually clearly described as non-exhaustive and indicative only, so that application of the general clause could certainly allow other clauses to be unfair and the listed clauses to be fair in appropriate circumstances.115 Such detailed provisions increase the likelihood of unfair contract terms control having a fast, real and proactive effect. They decrease the need to wait upon courts and administrative authorities to take action. Businesses would more likely react spontaneously and without court action to more specific prohibitions in the legislation itself, such as a list of suspect terms which would usually be unfair, than to a very general criterion of unfairness which may take a long while to be worked out in detail on its own.116 In other words, greater particularity in the substantive provisions increases the chance of self-control.117 113 Maxeiner 2003 Yale Journal of International Law 109 146; Van der Walt 1993 THRHR 65 75. 114 Such as a general clause providing for an open standard such as ‘‘fairness’’ or ‘‘good faith’’. 115 Simpler language than this cryptic description (‘‘non-exhaustive and indicative’’) should be used. 116 Howells Good Faith 98. 117 Van der Walt 1993 THRHR 65 74 79. UNFAIR CONTRACT TERMS LEGISLATION 381 Moreover, it strengthens the hands of the administrative authority appointed to police unfair contract terms when negotiating with less conscientious businesses to stop using unfair terms.118 This is likely to decrease the need for the National Consumer Commission and consumer organisations to resort to court action. Another view in support of particularity (that is, a detailed dealing with issues) is that the clearer the rules, the greater the likelihood of action being taken against a business, and the more legal actions, the greater the likelihood of even clearer rules emerging as a result of litigation.119 Greater particularity also gives greater guidance to lower courts where cases on unfair terms may be heard, whereas their decisions are not reported.120 With good reason, lists of terms have therefore been described by leading international writers in this field as ‘‘of crucial importance’’121 and ‘‘the key element of any attempt to regulate unfair terms’’.122 It has also been argued that one of the reasons why unfair terms control has been more effective in Germany than in the USA, is that the US judges struggled with applying a single general clause, whereas German law ‘‘provided additional authoritative points for application of unfair terms control [such as lists of prohibited terms], while maintaining a general clause to respond to the need for flexibility’’.123 Of course, increased particularity in the legislation itself increases predictability, which is also fair to businesses. This also benefits consumers and consumer organisations in acting against businesses. It goes a little way towards addressing the typical complaint that unfair contract terms legislation creates ambiguity and uncertainty and triggers wasteful litigation.124 Unfair terms legislation should strike a balance between the interests of consumers and that of businesses, and this implies an optimum balance between fairness or flexibility and legal certainty.125 Accordingly, the South African Law Commission correctly rejected the Working Committee’s very general, short and non-detailed Bill in 1998. The latter simply proposed a wide power for courts to strike out unfair contract terms, with practically no guidance as to when a term would be 118 Cf Van der Walt 1993 THRHR 65 74 79 in respect of ‘‘guidelines’’. 119 Hondius Standaardvoorwaarden 489. 120 See, however, n 109 supra. 121 Hondius Unfair Terms in Consumer Contracts (1987) 183. 122 De Nova ‘‘Italian Contract Law and the European Directive on Unfair Terms in Consumer Contracts’’ 1995 European Review of Private Law 221 230. 123 Maxeiner 2003 Yale Journal of International Law 109 172. See also Whitford 1995 European Review of Private Law 193 200-201. Cf also Hondius Unfair Terms in Consumer Contracts 173 178 in respect of practical experience in Denmark and France, both of which had no list at the time of writing (1987). 124 Kötz 1986 SALJ 405 406. 125 UK Law Commissions Consultation Paper 15. 382 STELL LR 2006 3