Category: Legislation

The Contracts (Rights of Third Parties) Act [1999]

In the previous two posts’ we have examined the Doctrine of Privity and a consequence of 3rd Party Rights in relation to Collateral Warranties. We should now examine the legislation which effectively replaced the doctrine and that also led to the decision reached in Parkwood Leisure Limited v Laing O’Rourke Wales and West.

The Contracts (Rights of Third Parties) Act 1999 significantly reformed the common law, Doctrine of Privity and removed the second rule of the Doctrine that a third party could not enforce a contract for which he had not provided consideration.

The Act allows third parties to enforce terms of contracts that benefit them or which the contract allows them to enforce as well as allowing access to a range of remedies if the terms of the contract are breached. The ways a contract can be changed without the permission of an involved third party is also dealt with by the legislation. It further provides protection for the promisor and promisee where there is a dispute with the third party, and allows parties to a contract to specifically exclude the protection afforded by the Act if they want to limit the involvement of third parties.

 Scope and implementation

As Scots Law has its own rules on privity and third party rights, the legislation applies only in England, Wales and Northern Ireland and came into law on 11 November 1999 although the act did not fully come into force until May 2000. During this period contracts negotiated after the acts passage but before its implementation fell under its provisions if they included language saying that they had been made under the terms of the act.

This legislation had a number of consequences, including allowing third parties to enforce terms. There were also exceptions, such as claiming on behalf of another party, (Jackson v Horizon Holidays Ltd) although the legislation did not repeal or abolish these exceptions and this effectively allows the courts to accept cases based on the old common law exceptions as well as this legislation. It is fundamental to the legislation that allows parties to exempt an agreement from the Acts provisions.

However, despite a largely supportive reception from the judiciary, legal profession and academia; the legislation was criticised by the construction industry for its refusal to make an exception for complex construction contracts and the vagueness of the term “purports to confer a benefit”. Although on balance it was deemed unfair to exempt a particular industry and case law has clarified the meaning of “purports to confer a benefit”.

The legislation is divided into 9 sections and we will now examine each of these.

Section 1: Right of third party to enforce contractual term

The old common law rule that a third party could not enforce the terms of a contract (Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd) or that a third party could not act against a promisor (Tweddle v Atkinson) and allows a third party to enforce terms of a contract in one of two situations:

  • if the third party is specifically mentioned in the contract as someone authorised to
  • if the contract “purports to confer a benefit” on him

An exception to the second rule involves contracts that include language barring third parties from applying the rule. A further exception applies to contracts between solicitors and their clients to draft wills.

Where a third party can enforce terms that “purport to confer a benefit on him” have been described as too broad and it was the view that it would be “un-workable” in situations such as complex construction contracts involving dozens of sub-contractors with chains of contracts among them. The phrase “purport to confer a benefit” was originally found in the 1937 Law Commission paper on reform of the doctrine of privity and was used in the New Zealand Contracts (Privity) Act 1982 before being adopted in the English legislation.

The third party must be identified by name or a member of a group even if that party does not exist when the contract is formed. This can cause issues however where for example, Party A enters a contract to have Party B construct a building. Party A later sells the building to Party C who finds that it has structural problems; Party C has no cause of action against Party B because he was not named in the original contract.

If a third party chooses to enforce the terms of a contract, he can do so against the promisor and has the right to any remedy that would be available if he was party to the contract, such as specific performance. The only exception is the ability to terminate the contract and have it rendered void as this may be contrary to the promisee’s wishes or interests”.

Section 2: Variation and rescission of contract

This section governs changes to and rescission of contracts whereby it prevents the parties rescinding or altering to remove or modify the terms that affect a third party where the third party has told the promisor that he “assents” to the term, or that has relied on the contract (and the promisor knows this, or could be expected to have known this).

However, this is the default position and the parties may insert clauses into the contract allowing them to rescind or alter the contract without the consent of the third party. The courts can ignore the consent of the third party and allow the promisor and promisee to change the contract if the third party is mentally incapable, unfindable or if it is impossible to tell if the third party has truly consented, although the courts may add conditions to that decision, such as requiring the promisor or promisee to pay compensation to the third party.

Assenting is considered complete when the third party “communicates” his assent to the promisor, which can be done in a variety of ways, although the contract may specify the communication method(s). If a communication method is specified then no other method is valid.

The third party does not have to have suffered a detriment from his “reliance”; it is enough that he has relied on the contract. If the third party has relied on the terms of the contract, which are breached, he can claim damages for any loss suffered from relying on the contract as well as “standard” damages, such as loss of profit.

Section 3: Defences available to promisor

This section deals with the defences available to the promisor if the third party brings an action against him. In a dispute between the promisor and the third party over a term, the promisor can rely on any defence he would have if the dispute was with the promisee, as long as the defence is applicable to the term under dispute. And has been modelled on the similar section of the New Zealand Contracts (Privity) Act 1982.

The legislation further allows the promisor to list additional defences that are able to be used against the third party in the contract. During the drafting stage the Law Commission rejected a suggestion the promisor should have every defence in a dispute with a third party that he would have in a dispute with the promise, irrespective of whether or not it could be applied to the disputed term. By allowing additional defences this can be used to circumnavigate this decision to not give the promisor equal defences against both the third party and promisee by listing those additional defences the promisor would like access to.

However, the legislation does take a different stance in relation to defences available to the third party in counterclaims. Here the Law Commission’s view was that to apply the same rules would be “misleading and unnecessarily complex” as the counterclaim could be more valuable than the original claim. This which would impose an obligation on the third party to pay the promisor money. This is inappropriate under the Doctrine of Privity where it prohibits the placing of a burden or obligation on a third party.

However the parties are able to the contract can insert a clause overriding this.

Section 4: Enforcement of contract by promisee

This section preserves the right of the promisee to enforce any term of the contract which allows the promisee to sue for losses to themselves, but not for losses of the third party.

Section 5: Protection of promisor from double liability

This section protects the promisor from double liability, having to damages for the same breach to both the third party and the promisee if the promisor breaches the contract.

However this is limited as the promisor is only protected if he has first paid damages to the promisee, and the third party’s claim comes after that. Payment has been made. Further the legislation only limits damages paid in this situation and do not eliminate them. If the promisee brings action against the promisor and wins, any damages paid to the third party in a subsequent action must take the previous damages paid to the promisee into account.

If the third party brings action and the promisee does so following this then the promisee cannot claim any damages as it was determined during the drafting stage that the promisee would have no interest in the dispute any more.

This does not take into account situations where the promisee has suffered personal loss from the breach of contract. If the promisee brings an action first then the third party is prohibited from doing so, unless the promisee’s action fails at which time the third party is free to pursue his own claim.

Section 6: Exceptions

This section defines exceptions to the scope of the Act.

Where the Act applies to standard contracts and contracts made by deeds, it does not apply to contracts made as a part of negotiable instruments, bills of exchange or promissory notes, or contracts governed by the Companies Act 1985, such as the articles of association.

transport of goods across national boundaries is also exempt as this is governed under international trade laws.

Further, terms in employment contract which allow a third party to sue an employee are exempt. This for two distinct reasons:

  • Either the position of third parties in those types of contract are too well established to be easily changed, or
  • For reasons of public policy the involvement of third parties is not a good idea

Section 7: Supplementary provisions relating to third party

This section includes supplementary provisions relating to the rights of third parties.

It prevents third parties from using the definition of “third party” in this Act when applying any other Act of Parliament, and excludes the section of the Unfair Contract Terms Act 1977 that covers negligence from applying to actions against a third party.

Further, Section 7(1) ensures any exceptions to the rule of privity which existed prior to this legislation remain valid.

Section 8: Arbitration provisions

The legislation allows for arbitration clauses, which require the parties to submit to specific arbitration procedures in the event of disputes to be inserted into contracts.

Although initially The Law Commission excluded arbitration clauses in the draft bill, this was later amended to allow third parties to take advantage of arbitration proceedings.

Section 9: Northern Ireland

This section recognises and takes into account differences between English and Northern Irish law. It further modifies how to interpret the legislation in Northern Ireland.

The use of “Companies Act 1985” in Part VI is substituted with the Northern Irish equivalent, the Companies (Northern Ireland) Order 1986 and Part IX also repeals sections 5 and 6 of the Law Reform (Husband and Wife) (Northern Ireland) Act 1964.

 

The consequences of this legislation is that while a blot on the legal landscape has been removed with the Contract (Right of Third Parties Act [1999], it has at the same time made drafting of contracts with third party rights more onerous in order to take advantage of the situations that exist in the legislation to insert overriding clauses.

The Doctrine of Privity

The Doctrine of Privity is an area of English contract law covering the relationship between parties to a contract and other parties or agents (3rd parties). At a basic level, the rule is that a contract can neither give rights to, nor impose obligations on, anyone who is not a party to the original agreement, the 3rd party.

Historically, 3rd parties were able to enforce the terms of a contract, as evidenced in Provender verses Wood in 1630. A series of further cases during the 19th and early 20th century changed how this was interpreted, the most well-known cases Tweddle verses Atkinson in 1831 and Dunlop Pneumatic Tyre verses Selfridge and Co Limited in 1915.

For various reasons the Doctrine of Privity was seen as unfair as it made no exception for cases where the parties to a contract obviously intended for it to be enforced by a third party, and it was inconsistently applied and provided no solid rule. It was seen as “bad” law. The doctrine attracted criticism from numerous figures and as early as 1937 the Law Revision Committee recommended that significant alterations should be made.

With the ascent of the Contract (Right of Third Parties) Act [1999] on 11th November 1999, the Doctrine was significantly altered, 3rd Parties can now enforce the terms of a contract where the 3rd party is specifically authorised to do so by the Contract or if the contractual terms “purport to confer a benefit” to such 3rd party.

Original doctrine

The original Doctrine of Privity consisted of two rules

  • A 3rd Party may not have obligations imposed by the terms of a contract
  • A 3rd Party may not benefit from the terms of a contract

The first rule was not contested, however the second rule was universally criticised and disliked.

This second rule was not originally held to be valid, and during the 17th Century 3rd Parties were allowed to enforce terms of a contract that benefited them, such as in Provender verses Wood where the judgement stated that “the party to whom the benefit of a promise accrues, may bring his action.”

The first reversal was in 1669 in Bourne verses Mason where it was found that a 3rd Party had no rights to enforce a contract that benefited him. However this case was quickly reversed, and decisions immediately after Bourne verses Mason took the view 3rd Parties could enforce contracts that benefited them.

Judicial decisions then differed over the next 200 years as to whether or not a 3rd Party could enforce a contract that benefitted them before the issue was finally settled in 1861. This was in the case of Tweddle verses Atkinson which confirmed a 3rd Party could not enforce a contract that benefited him. This decision was affirmed by the House of Lords in 1915 in Dunlop Pneumatic Tyre verses Selfridge and Co Limited where Lord Haldane stated only a person who was party to a contract could sue on it.

This version of the doctrine is commonly known as the original or basic doctrine.

Views of the original doctrine

Supporters of the original Doctrine of Privity argued it was reasonable not to allow third parties to enforce contracts as this would harm the rights of the original parties to amend or terminate Contracts. A further argument put forward was the doctrine was deliberately retained by judges to protect consumers from exclusion clauses designed to protect third party manufacturers from liability.

The second rule that a 3rd Party could not claim benefits from a contract, was widely criticised by the judiciary, legal professionals and academics, particularly as the rule made no exceptions for cases where it was obviously intended for the third party to claim a benefit.

In Beswick verses Beswick in 1968, an uncle gave his nephew a business, on the condition his nephew would pay his uncle a certain amount per week. In the event of his uncle’s death, a similar amount would be given to his widow. Clearly in this instance it was intended that 3rd Parties benefit.

A further argument used was the large number of exceptions to the rule that various Acts of Parliament passed. This indicated parliament had issues with the Doctrine of Privity and it is clear that the large number of inconsistencies and exceptions made the Doctrine of Privity “bad” law as there were no reliable rule in how law worked in theory to how it was enforced by the courts.

Loopholes

As the Doctrine of Privity was extremely unpopular, several ways of circumnavigating it were developed which were at times both complex and extremely artificial. These exceptions were extremely limited in how they could be used however.

 Estates

In Beswick verses Beswick as described above, when the Uncle passed away his nephew refused to pay the widow the money required, arguing that as she was not party to the original agreement she could not benefit from it.

Lord Denning in the Court of Appeal tried to use this as an opportunity to claim that the Doctrine of Privity was invalid. However this was rejected by the House of Lords although they agreed Mrs Beswick could sue, not as a 3rd Party to the contract but as Executrix of her husband’s estate. The consequence of this was she was acting as a representative of Mr Beswick, and the Doctrine of Privity would not apply.

Trusts

Trusts (an arrangement where the owner of property gives it to a second party (The Trustee) to manage on behalf of a 3rd Party (The Beneficiary) have been a method of circumnavigating the Doctrine of Privity. In Les Affreteurs verses Walford in 1919 the House of Lords determined that that the trustee’s ability to sue the owner of the property is to be exercised on behalf of the beneficiary, a 3rd Party. This is known as a “trust of the promise.” While an artificial measure, it bypassed the Doctrine of Privity. The trust exception has been heavily undermined by the decision in 1944 in the Court of Appeal (Re Schebsman) which required a court to find evidence of an intent to create a trust of the promise rather than simply using the requirement as an intention as a fiction to allow the courts to enact the trust exception.

Insurance contracts

As parliament is not bound by the common law several acts of parliament unwittingly created valid exceptions to the Doctrine of Privity.

The Road Traffic Act [1988] obliges motorists to take out third party liability insurance which allows victims of car accidents to can claim monies from the insurer of the driver at fault, even though they are not part of the original contract. Under the Married Woman’s Property Act [1882] a husband can take out insurance in his own name, but make it enforceable by his wife and children despite the Doctrine of Privity.

 Claiming on behalf of another

In 1975 in Jackson verses Horizon Holidays Limited a second exception was created where a party could sue on behalf of another, if the other party would have benefited from the contract.

In this case, Mr Jackson booked a holiday in his own name with Horizon Holidays Limited which did not match the particulars as laid down in the contract. Mr Jackson sued with the company accepting liability but claimed no damages were due to the family as under the Doctrine of Privity they could not sue. The Court of Appeal found that the loss of enjoyment suffered by the family was also a loss to Mr Jackson as he had paid for a family holiday but not received it. As such damages were awarded.

Collateral Contracts

A Collateral Contract exists side by side with the Main Contract where this contract is a consideration into another subordinate contract. As normally this involves parties who are not parties to the Main Contract it was able to circumnavigate the Doctrine of Privity, which co-exists side by side with the main contract. Because this normally involves parties who are not part of the main contract, it has been used as a way around the doctrine of privity. The courts allowed an injured party to sue under this Collateral Contract despite it being artificial. The Contracts (Right of Third Parties) Act [1999] has now limited this significantly.

In the 1951 case of Shanklin Pier Limited verses Detel Products Limited, Shanklin were having their pier refurbished and contracted with a painting contractor where they were required to use Detel products. This was as Detel had provided assurances their paint would last for 7 years. However after 3 months the paint was already flaking. While Shanklin had no contractual relationship with Detel the Court of Appeal found like there was a collateral contract they could use to sue.

The use of Collateral Contracts as a loophole are however limited as the courts must first find evidence to imply some kind of Collateral Contract, as well as consideration. Attempts by the courts to do this have added to the perception of this as an artificial device, such as in Charnock verses Liverpool Corporation in 1968 where the Collateral Contracts used were described as “invented” consideration, and “fictitious”.

In certain commercial contracts, such as goods sold to consumers by a dealer, there is automatically a collateral contract between the consumer and the manufacturer of the goods.

 Exceptions

There are several ways around the original doctrine which were not loopholes created by case law but situations which by their very nature must involve three parties. We will now look at the 3 most common examples.

 Negotiable instruments

A Negotiable Instrument is a type of contract that allows the transfer of money, such as a Credit Card which involves three parties.

  • The person who holds the credit card
  • The entity who the card is given to, to pay for a transaction
  • The entity who issues the holder of the credit card and promises to make payment to the entity who the holder of the credit card transacted with

Assignment

Assignment is covered by both Contract Law and Property Law that governs the transfer of rights from one party to another, including the right to enforce a debt. In this situation the party who is assigned the debt can sue the debtor despite any contractual agreement between them. This being permitted by the Law of Property Act [1925].

 Agency

Agency is a relationship between a Principal who authorises an Agent to make a contract on his behalf with a 3rd Party.

In agency, the agent can make a contract with a 3rd Party that is binding on the principal, even though he was not privy to the original contract. The Consumer Credit Act [1974] is an example as this allows a dealer for a financial company to set up credit agreements as a representative of that company, for example.

It could be argued this is not a genuine exception to the Doctrine of Privity as once the contract is made the “agent” plays no further part and it is effectively an agreement between the two parties.

Although certain elements of the Doctrine of Privity are believed to clash Agency. An example would be where the principal could sue the 3rd Party even when the agent has not disclosed to the third party that he is acting as an agent to the principal. In this situation, the third party can be sued by somebody that he had no idea was involved in the contract.

 Privity and consideration

A general consensus is that privity is distinct from consideration although there is a strong relationship between the two. This causes problems with the idea that the Doctrine of Privity should be abolished, as the idea that third parties can claim benefits from promises that they gave nothing for clashes with the doctrine of consideration, which prevents parties who did not contribute something to the agreement from benefiting from it.

Consideration is a rule that there must be a “benefit or detriment” involved in any contract, and that this must initially come from the promisee. It is argued this rule and the Doctrine of Privity are two ways of saying the same thing, that someone not party to the contract is the same as saying that they gave no consideration in the initial agreement.

In Tweddle verses Atkinson the decision made was reached because the claimant had not provided consideration. In Dunlop Pneumatic Tyre verses Selfridge and Co Limited a similar conclusion was reached, although it should be noted that Lord Haldane noted that independent of consideration, it was a rule in English law that “only a person who is party to a contract can sue on it”.

As with most elements of law where rules and precedents have evolved over centuries the arguments are often complex and must be based on the facts presented, such as how well the contract documents have been drafted. At the same time this post over a centuries old legal rule shows that even attempts to reform the law can make it more complex by unintended consequences, such as Collateral Warranties being defined as “Construction Contracts” in accordance with the Housing Grants, Construction and Regeneration Act [1996].

However the Contracts (Right of Third Parties) Act 1999, which we will examine in the next post, has gone some way to clear up this anomaly.

Third Party Rights


Despite being regarded as a profession and an industry, construction can generally be extremely slow to react to innovation and new ways of thinking, often lagging years behind

The Contract (Right of Third Parties) Act 1999 significantly reformed the common law, Doctrine of Privity which covers the relationship between parties to a contract and other parties or agents. At its most basic level, the rule is that a contract can neither give rights to, nor impose obligations on, anyone who is not a party to the original agreement, i.e. a “third party”.

With the Royal Assent of the Contract (Right of Third Parties) Act 1999 on 11th November 1999 a long standing and universally disliked element of the doctrine was reformed. This reform being to the second rule; which previously had the effect that a third party could not enforce a contract for which they had not provided consideration.

At a basic level the changed law allows third parties to enforce contract terms that benefit them in some way or which the contract empowers them to enforce. At the same time the legislation grants these third parties access to a range of remedies if the terms are breached. Further the legislation limits the extent in which a contract can be changed without the permission of an involved third party, while at the same time providing protection for the promisor and promisee in dispute situations with the third party, and allows parties to a contract to specifically exclude the protection afforded by the Act if they want to limit the involvement of third parties.

Despite this legislation being over 15 years old there are still parts of the industry that do not trust and want to limit third party rights. The Judgement in Parkwood Leisure Limited v Laing O’Rouke Wales and West in 2013 however tend to suggest that the industry should have been more sceptical of Collateral Warranties than 3rd Party rights per say. The judgement in this case tends to suggest the industry understanding of Collateral Warranties has been fundamentally flawed.

Background

The Defendant, Laing O’Rourke (The Contractor) was engaged by Orion Land and Leisure (Cardiff) Limited (The Employer) to carry out and complete the design and construction of a swimming pool and leisure centre under a standard Joint Contract Tribunal (JCT) Design and Build Contract

The Employer had entered into a lease with Parkwood Leisure Limited (A Third Party Facilities Management Company) to operate the pool on behalf of Orion Land and Leisure (Cardiff) Limited.

A key clause in the contract was that Laing O’Rourke were required to provide Collateral Warranties to a number of third parties, including Parkwood Leisure Limited. Before the works were completed Laing O’Rourke executed as a deed Collateral Warranties in favour of Parkwood Leisure Limited.

After the opening of the facility a number of defects occurred, mainly with the air handling units. Parkwood Leisure Limited claimed were construction and commissioning defects. Some of the alleged defects were subject to a Settlement Agreement, however issues continued to occur in relation to the air handing units. Parkwood Leisure Limited therefore believed they had no other effective remedy other than to claim against Laing O’Rourke’s Collateral Warranty.

Parkwood Leisure Limited therefore commenced under Civil Proceedings Rules (CPR) Part 8 an action to determine whether:

  • The Collateral Warranty amounted to a Construction Contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996, as if this was the case it would enable them to Adjudicate their claim
  • The claim being brought was compromised by the Settlement Agreement

The Collateral Warranty

The Collateral Warranty contained the following clause:

“The Contractor warrants, acknowledges and undertakes that:-

  1. It has carried out and shall carry out and complete the Works in accordance with the Contract;
  2. In the design of Works the Contractor has exercised and will continue to exercise all reasonable skill and care to be expected of an architect;
  3. It has complied and will continue to comply with the terms of regularly and diligently carry out its obligations under the Contract.”

The presiding Judge, Justice Akenhead after reviewing the definitions of “construction contract” and “construction operations” under Sections 104 and 105 of the Housing Grants, Construction & Regeneration Act 1996 and determined a Collateral Warranty is a construction contract. This was as the definitions were widely construed and the Act applies to all contracts related to the carrying out of “construction operations. It was specifically notes that the Collateral Warranty had the wording “carried out and shall complete the works” which gave an obligation to complete the construction works. It was further found that the Collateral Warranty was a subsidiary to the Building Contract.

However not all Collateral Warranties would be construed as a ”Construction Contract” and would be evaluated based on the specific wording of the Warranty. It was Justice Akenhead’s view that Collateral Warranties related to future performance could be construed as “Construction Contracts” in accordance with the Act.; whereas those against could be where the Contractor completes the works and provides a warranty post completion.

Therefore Adjudication was possible by Parkwood Leisure Limited as the Collateral Warranty amounted to a Construction Contract.

The Settlement Agreement

In relation to the Settlement Agreement is was found that there was scope to bring claims for matters that did not exist at the time the agreement. In effect this could have been avoided with clear and careful drafting and avoiding ambiguities.

 Is the Parkwood judgement correct?

In effect it was decided that a Collateral Warranty is a Construction Contract where:

  • There is an undertaking by the contractor to continue to comply with the underlying construction contract.
  • The Collateral Warranty is delivered before Practical Completion

However at law we don’t pick and choose what provisions apply and this judgement may yet have some non-considered consequences.

In effect then Section 108 (Adjudication) and Section 109 (Payment) should also be incorporated into Collateral Warranties.

Section 109 in particular could have severe consequences, although one would hope a common sense approach would be taken by the courts. This section provides that a party to a Construction Contract is entitled to periodic payment if the works last longer than 45 days. While it is true the parties are free to agree the amount due, frequency and circumstances to trigger these payments, crucially in their absence the Scheme for Construction Contracts (England and Wales) Regulations will apply.

Collateral Warranties do not have Construction Act compliant payment provisions. This is primarily because the beneficiary of a Collateral Warranty is not expected to make payment, except where they have exercised their Step In rights. If the Collateral Warranty is a construction contract, then Section 109 will import The Scheme for Construction Contracts payment provisions which provides for the Contractor to be paid for the value of works done, less monies already paid. This could lead to the ludicrous situation where becomes directly liable to pay the Contractor.

Where does the Parkwood judgement leave 3rd Party Rights?

Beneficiary’s 3rd Party Rights derive directly from the Construction Contract and Sections 108 and 109 are applicable only to “a party to a construction contract”. A 3rd Party is not a party to the contract and therefore Section 108 and 109 of the 1996 Act cannot apply.

There is however no bar to 3rd parties right to Adjudicate should the parties wish. It can even be argued that sub-section 1(5) of the Third Party Rights Act 1999 extends the right to Adjudication to the beneficiary.

Where this judgement could sound the death knell of Collateral Warranties is where the contracting parties can exclude or extend the 3rd parties rights, the judgment appears to infer that all sections of the 1996 Act apply to Collateral Warranties, despite the potential absurdity as the Third Party Rights Act 1999 can only be used to confer rights, and not obligations.

Conclusion

The court’s decision was unexpected and resulted in greater scrutiny of Collateral Warranties with both Contractors and Consultants being loath to provide and even then that their application is limited to be retrospective only and limited. This has resulted in further complications for the negotiation and drafting of Collateral Warranties resulting in protracted and costly negotiations.

The Scheme, “Part 2 – Payment”

In the previous post we looked at “Part 1 – Adjudication” of the The Scheme for Construction Contracts which gives a statutory right to the Alternative Dispute Resolution, Adjudication.

In this post we will look at “Part 2 – Payment.”

Entitlement to and amount of stage payments

  1.  Where the parties to a relevant construction contract fail to agree— (a) the amount of any instalment or stage or periodic payment for any work under the contract, or (b) the intervals at which, or circumstances in which, such payments become due under that contract, or

     (c) both of the matters mentioned in sub-paragraphs (a) and (b) above,

    the relevant provisions of paragraphs 2 to 4 below shall apply.

  2.  (1) The amount of any payment by way of instalments or stage or periodic payments in respect of a relevant period shall be the difference between the amount determined in accordance with sub-paragraph (2) and the amount determined in accordance with sub-paragraph (3).(2) The aggregate of the following amounts:

    (a) an amount equal to the value of any work performed in accordance with the relevant construction contract during the period from the commencement of the contract to the end of the relevant period (excluding any amount calculated in accordance with sub-paragraph (b)),

     (b) where the contract provides for payment for materials, an amount equal to the value of any materials manufactured on site or brought onto site for the purposes of the works during the period from the commencement of the contract to the end of the relevant period, and

     (c) any other amount or sum which the contract specifies shall be payable during or in respect of the period from the commencement of the contract to the end of the relevant period.

    (3) The aggregate of any sums which have been paid or are due for payment by way of instalments, stage or periodic payments during the period from the commencement of the contract to the end of the relevant period.

     (4)  An amount calculated in accordance with this paragraph shall not exceed the difference between:

     (a) the contract price, and

     (b) the aggregate of the instalments or stage or periodic payments which have become due.

     Dates for payment

  3. Where the parties to a construction contract fail to provide an adequate mechanism for determining either what payments become due under the contract, or when they become due  for payment, or both, the relevant provisions of paragraphs 4 to 7 shall apply.
  4. Any payment of a kind mentioned in paragraph 2 above shall become due on whichever of the following dates occurs later: (a) the expiry of 7 days following the relevant period mentioned in paragraph 2(1) above, or (b) the making of a claim by the payee.
  5. The final payment payable under a relevant construction contract, namely the payment of an amount equal to the difference (if any) between:(a) the contract price, and

     (b) the aggregate of any instalment or stage or periodic payments which have become due under the contract,

     shall become due on the expiry of:

     (a) 30 days following completion of the work, or

     (b) the making of a claim by the payee,

     whichever is the later.

  6. Payment of the contract price under a construction contract (not being a relevant construction contract) shall become due on (a) the expiry of 30 days following the completion of the work, or

     (b) the making of a claim by the payee,

     whichever is the later.

  7. Any other payment under a construction contract shall become due (a) on the expiry of 7 days following the completion of the work to which the payment relates, or (b) the making of a claim by the payee,

     whichever is the later.

     Final date for payment

  8. (1) Where the parties to a construction contract fail to provide a final date for payment in relation to any sum which becomes due under a construction contract, the provisions of this paragraph shall apply.(2) The final date for the making of any payment of a kind mentioned in paragraphs 2, 5, 6 or 7, shall be 17 days from the date that payment becomes due.Notice specifying amount of payment
  9. A party to a construction contract shall, not later than 5 days after the date on which any payment: (a) becomes due from him, or

     (b) would have become due, if:

    (i) the other party had carried out his obligations under the contract, and

    (ii)no set-off or abatement was permitted by reference to any sum claimed to be due under one or more other contracts,

     give notice to the other party to the contract specifying the amount (if any) of the payment he has made or proposes to make, specifying to what the payment relates and the basis on which that amount is calculated.

    Notice of intention to withhold payment

  10. Any notice of intention to withhold payment mentioned in section 111 of the Act shall be given not later than the prescribed period, which is to say not later than 7 days before the final date for payment determined either in accordance with the construction contract, or where no such provision is made in the contract, in accordance with paragraph 8 above.Prohibition of conditional payment provisions
  11. Where a provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective as mentioned in section 113 of the Act, and the parties have not agreed other terms for payment, the relevant provisions of:(a) paragraphs 2, 4, 5, 7, 8, 9 and 10 shall apply in the case of a relevant construction contract, and

     (b) paragraphs 6, 7, 8, 9 and 10 shall apply in the case of any other construction contract.

    Interpretation

  12. In this Part of the Scheme for Construction Contracts:

    “claim by the payee” means a written notice given by the party carrying out work under a construction contract to the other party specifying the amount of any payment or payments which he considers to be due and the basis on which it is, or they are calculated;

     “contract price” means the entire sum payable under the construction contract in respect of  the work;

     “relevant construction contract” means any construction contract other than one:

     (a) which specifies that the duration of the work is to be less than 45 days, or

     (b) in respect of which the parties agree that the duration of the work is estimated to be less than 45 days;

     “relevant period” means a period which is specified in, or is calculated by reference to the construction contract or where no such period is so specified or is so calculable, a period of 28 days;

     “value of work” means an amount determined in accordance with the construction contract under which the work is performed or where the contract contains no such provision, the cost of any work performed in accordance with that contract together with an amount equal to any overhead or profit included in the contract price;

     “work” means any of the work or services mentioned in section 104 of the Act.

 

The effect of “Part 1 – Adjudication” and “Part 2 – Payment”

Part II of the Housing Grants, Construction and Regeneration Act 1996 makes provision in relation to construction contracts where in Section 114 the Secretary of State is empowered to make the Scheme for Construction Contracts. Where a construction contract does not comply with the requirements of sections 108 to 111 (adjudication of disputes and payment provisions), and section 113 (prohibition of conditional payment provisions of the Housing Grants, Construction and Regeneration Act 1996), the relevant provisions of the Scheme for Construction Contracts have effect.

The Scheme in effect in Part I provides for the selection and appointment of an adjudicator, gives powers to the adjudicator to gather and consider information, and makes provisions in respect of his decisions and in Part II makes provision with respect to payments under a construction contract where either the contract fails to make provision or the parties fail to agree:

  • The method for calculating the amount of any instalment, stage or periodic payment
  • The due date and the final date for payments to be made
  • Prescribes the period within which a notice of intention to withhold payment must be given

The last two past are what the current regulatory framework (in February 2017) defines and requires. However we will return to this subject again later as this is a constantly moving as the courts interpret and have effect on how the legislation is to be interpreted.

The Scheme, “Part 1 – Adjudication”

In recent posts we have seen two pieces of Primary Legislation being referred to, these being The Housing Grants, Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009. Intrinsic to this legislation is The Scheme for Construction Contracts, a Statutory Instrument that has come into force following these acts to regulate key elements of the construction process. In this post we will examine The Scheme and its major points in Part 1 which gives a statutory right to the Alternative Dispute Resolution, Adjudication.

In effect if you read the wording of the Statutory Instrument it sets out the step by step process under which Adjudication is contested and the following text is the text of the Statutory Instrument.

Notice of Intention to seek Adjudication

  1. (1) Any party to a construction contract (the “referring party”) may give written notice (the “notice of adjudication”) of his intention to refer any dispute arising under the contract, to adjudication.

    (2) The notice of adjudication shall be given to every other party to the contract.

    (3) The notice of adjudication shall set out briefly—

           (a) the nature and a brief description of the dispute and of the parties involved,

           (b) details of where and when the dispute has arisen,

           (c) the nature of the redress which is sought, and

    (d) the names and addresses of the parties to the contract (including, where   appropriate, the  addresses which the parties have specified for the giving of notices).

  2.  (1) Following the giving of a notice of adjudication and subject to any agreement between the parties to the dispute as to who shall act as adjudicator: (a) the referring party shall request the person (if any) specified in the contract to act as adjudicator, or

     (b) if no person is named in the contract or the person named has already indicated that he is unwilling or unable to act, and the contract provides for a specified nominating body to select a person, the referring party shall request the nominating body named in the contract to select a person to act as adjudicator, or

     (c) where neither paragraph (a) nor (b) above applies, or where the person referred to in (a) has already indicated that he is unwilling or unable to act and (b) does not apply, the referring party shall request an adjudicator nominating body to select a person to act as adjudicator.

     (2) A person requested to act as adjudicator in accordance with the provisions of paragraph (1) shall indicate whether or not he is willing to act within two days of receiving the request.

    (3) In this paragraph, and in paragraphs 5 and 6 below, an “adjudicator nominating body” shall mean a body (not being a natural person and not being a party to the dispute) which holds itself out publicly as a body which will select an adjudicator when requested to do so by a referring party.

  3. The request referred to in paragraphs 2, 5 and 6 shall be accompanied by a copy of the notice of adjudication.
  4. Any person requested or selected to act as adjudicator in accordance with paragraphs 2, 5 or 6 shall be a natural person acting in his personal capacity. A person requested or selected to act as an adjudicator shall not be an employee of any of the parties to the dispute and shall declare any interest, financial or otherwise, in any matter relating to the dispute.
  5. (1) The nominating body referred to in paragraphs 2(1)(b) and 6(1)(b) or the adjudicator nominating body referred to in paragraphs 2(1)(c), 5(2)(b) and 6(1)(c) must communicate the selection of an adjudicator to the referring party within five days of receiving a request to do so.

    (2) Where the nominating body or the adjudicator nominating body fails to comply with paragraph (1), the referring party may:

     (a) agree with the other party to the dispute to request a specified person to act as adjudicator, or

     (b) request any other adjudicator nominating body to select a person to act as adjudicator.

     (3) The person requested to act as adjudicator in accordance with the provisions of paragraphs (1) or (2) shall indicate whether or not he is willing to act within two days of receiving the request.

  6. (1) Where an adjudicator who is named in the contract indicates to the parties that he is unable or unwilling to act, or where he fails to respond in accordance with paragraph 2(2), the referring party may:

    (a) request another person (if any) specified in the contract to act as adjudicator, or

     (b) request the nominating body (if any) referred to in the contract to select a person to act as adjudicator, or

    (c) request any other adjudicator nominating body to select a person to act as adjudicator.

     (2) The person requested to act in accordance with the provisions of paragraph (1) shall indicate whether or not he is willing to act within two days of receiving the request.

  7.  (1) Where an adjudicator has been selected in accordance with paragraphs 2, 5 or 6, the referring party shall, not later than seven days from the date of the notice of adjudication, refer the dispute in writing (the “referral notice”) to the adjudicator.(2) A referral notice shall be accompanied by copies of, or relevant extracts from, the construction contract and such other documents as the referring party intends to rely upon.

     (3) The referring party shall, at the same time as he sends to the adjudicator the documents referred to in paragraphs (1) and (2), send copies of those documents to every other party to the dispute.

  8. (1) The adjudicator may, with the consent of all the parties to those disputes, adjudicate at the same time on more than one dispute under the same contract.

    (2) The adjudicator may, with the consent of all the parties to those disputes, adjudicate at the same time on related disputes under different contracts, whether or not one or more of those parties is a party to those disputes.

     (3) All the parties in paragraphs (1) and (2) respectively may agree to extend the period within which the adjudicator may reach a decision in relation to all or any of these disputes.

     (4) Where an adjudicator ceases to act because a dispute is to be adjudicated on by another person in terms of this paragraph, that adjudicator’s fees and expenses shall be determined in accordance with paragraph 25.

  9. (1) An adjudicator may resign at any time on giving notice in writing to the parties to the dispute.

    (2) An adjudicator must resign where the dispute is the same or substantially the same as one which has previously been referred to adjudication, and a decision has been taken in that adjudication.

    (3) Where an adjudicator ceases to act under paragraph 9(1)—

     (a) the referring party may serve a fresh notice under paragraph 1 and shall request an adjudicator to act in accordance with paragraphs 2 to 7; and

    (b) if requested by the new adjudicator and insofar as it is reasonably practicable, the parties shall supply him with copies of all documents which they had made available to the previous adjudicator.

    (4) Where an adjudicator resigns in the circumstances referred to in paragraph (2), or where a dispute varies significantly from the dispute referred to him in the referral notice and for that reason he is not competent to decide it, the adjudicator shall be entitled to the payment of such reasonable amount as he may determine by way of fees and expenses reasonably incurred by him. The parties shall be jointly and severally liable for any sum which remains outstanding following the making of any determination on how the payment shall be apportioned.

  10. Where any party to the dispute objects to the appointment of a particular person as adjudicator, that objection shall not invalidate the adjudicator’s appointment nor any decision he may reach in accordance with paragraph 20.
  11. (1) The parties to a dispute may at any time agree to revoke the appointment of the adjudicator. The adjudicator shall be entitled to the payment of such reasonable amount as he may determine by way of fees and expenses incurred by him. The parties shall be jointly and severally liable for any sum which remains outstanding following the making of any determination on how the payment shall be apportioned.

     (2) Where the revocation of the appointment of the adjudicator is due to the default or misconduct of the adjudicator, the parties shall not be liable to pay the adjudicator’s fees and expenses.

     Powers of the adjudicator

  12. The adjudicator shall:

     (a) act impartially in carrying out his duties and shall do so in accordance with any relevant terms of the contract and shall reach his decision in accordance with the applicable law in relation to the contract; and

    (b) avoid incurring unnecessary expense.

  13. The adjudicator may take the initiative in ascertaining the facts and the law necessary to determine the dispute, and shall decide on the procedure to be followed in the adjudication. In particular he may:

     (a) request any party to the contract to supply him with such documents as he may reasonably require including, if he so directs, any written statement from any party to the contract supporting or supplementing the referral notice and any other documents given under paragraph 7(2),

     (b) decide the language or languages to be used in the adjudication and whether a translation of any document is to be provided and if so by whom,

    (c) meet and question any of the parties to the contract and their representatives,

    (d) subject to obtaining any necessary consent from a third party or parties, make such site visits and inspections as he considers appropriate, whether accompanied by the parties or not,

    (e) subject to obtaining any necessary consent from a third party or parties, carry out any tests or experiments,

    (f) obtain and consider such representations and submissions as he requires, and, provided he has notified the parties of his intention, appoint experts, assessors or legal advisers,

     (g) give directions as to the timetable for the adjudication, any deadlines, or limits as to the length of written documents or oral representations to be complied with, and

     (h) issue other directions relating to the conduct of the adjudication.

  14. The parties shall comply with any request or direction of the adjudicator in relation to the adjudication.
  15. If, without showing sufficient cause, a party fails to comply with any request, direction or timetable of the adjudicator made in accordance with his powers, fails to produce any document or written statement requested by the adjudicator, or in any other way fails to comply with a requirement under these provisions relating to the adjudication, the adjudicator may:

     (a )continue the adjudication in the absence of that party or of the document or written statement requested,

    (b) draw such inferences from that failure to comply as circumstances may, in the adjudicator’s opinion, be justified, and

     (c )make a decision on the basis of the information before him attaching such weight as he thinks fit to any evidence submitted to him outside any period he may have requested or directed.

  16. (1) Subject to any agreement between the parties to the contrary, and to the terms of paragraph (2) below, any party to the dispute may be assisted by, or represented by, such advisers or representatives (whether legally qualified or not) as he considers appropriate.

     (2) Where the adjudicator is considering oral evidence or representations, a party to the dispute may not be represented by more than one person, unless the adjudicator gives directions to the contrary.

  17. The adjudicator shall consider any relevant information submitted to him by any of the parties to the dispute and shall make available to them any information to be taken into account in reaching his decision.
  18. The adjudicator and any party to the dispute shall not disclose to any other person any information or document provided to him in connection with the adjudication which the party supplying it has indicated is to be treated as confidential, except to the extent that it is necessary for the purposes of, or in connection with, the adjudication.
  19. (1) The adjudicator shall reach his decision not later than:

     (a) twenty eight days after the date of the referral notice mentioned in paragraph 7(1), or

     (b) forty two days after the date of the referral notice if the referring party so consents, or

    (c) such period exceeding twenty eight days after the referral notice as the parties to the dispute may, after the giving of that notice, agree.

     (2) Where the adjudicator fails, for any reason, to reach his decision in accordance with paragraph (1)

     (a) any of the parties to the dispute may serve a fresh notice under paragraph 1 and shall request an adjudicator to act in accordance with paragraphs 2 to 7; and

    (b) if requested by the new adjudicator and insofar as it is reasonably practicable, the parties shall supply him with copies of all documents which they had made available to the previous adjudicator.

    3) As soon as possible after he has reached a decision, the adjudicator shall deliver a copy of that decision to each of the parties to the contract.

     Adjudicator’s decision

  20. The adjudicator shall decide the matters in dispute. He may take into account any other matters which the parties to the dispute agree should be within the scope of the adjudication or which are matters under the contract which he considers are necessarily connected with the dispute. In particular, he may:

    (a) open up, revise and review any decision taken or any certificate given by any person referred to in the contract unless the contract states that the decision or certificate is final and conclusive,

     (b) decide that any of the parties to the dispute is liable to make a payment under the contract (whether in sterling or some other currency) and, subject to section 111(4) of the Act, when that payment is due and the final date for payment,

     (c) having regard to any term of the contract relating to the payment of interest decide the circumstances in which, and the rates at which, and the periods for which simple or compound rates of interest shall be paid.

  21. In the absence of any directions by the adjudicator relating to the time for performance of his decision, the parties shall be required to comply with any decision of the adjudicator immediately on delivery of the decision to the parties in accordance with this paragraph.
  22. If requested by one of the parties to the dispute, the adjudicator shall provide reasons for his decision.

    Effects of the decision

  23. (1) In his decision, the adjudicator may, if he thinks fit, order any of the parties to comply peremptorily with his decision or any part of it.

     (2) The decision of the adjudicator shall be binding on the parties, and they shall comply with it until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement between the parties.

  24. Section 42 of the Arbitration Act 1996 shall apply to this Scheme subject to the following modifications:

    (a) in subsection (2) for the word “tribunal” wherever it appears there shall be substituted the word “adjudicator”,

     (b) in subparagraph (b) of subsection (2) for the words “arbitral proceedings” there shall be substituted the word “adjudication”,

    (c) subparagraph (c) of subsection (2) shall be deleted, and

    (d) subsection (3) shall be deleted.

  25. The adjudicator shall be entitled to the payment of such reasonable amount as he may determine by way of fees and expenses reasonably incurred by him. The parties shall be jointly and severally liable for any sum which remains outstanding following the making of any determination on how the payment shall be apportioned.
  26. The adjudicator shall not be liable for anything done or omitted in the discharge or purported discharge of his functions as adjudicator unless the act or omission is in bad faith, and any employee or agent of the adjudicator shall be similarly protected from liability.

 

In effect these 26 clauses define the process of Adjudication and are relatively unambiguous, although this does not translate into Adjudication being a simple and straight forward process. We will return to this subject and look at the 4 stages that the Statutory Instrument defines.

The reality is the process is complex and requires a specialist to be employed in order to obtain the successful outcome sought by a referring party. Ansell Murray Limited have represented as both referring and responding parties and are well placed to provide strategic advice on whether or not Adjudication should be undertaken as well as representation.

The Scheme for Construction Contracts

In recent posts we have seen two pieces of Primary Legislation being referred to, these being The Housing Grants, Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009. Intrinsic to this legislation is The Scheme for Construction Contracts, a Statutory Instrument that has come into force following these acts to regulate key elements of the construction process. In this post we will examine The Scheme and its major points.

We must first remember that this legislation refers to “construction activities” as defined in the legislation. While it is not prescriptive and allows some legal interpretation, broadly a construction contract is defined as “all design and construction contracts, including professional appointments, are likely to be construction contracts as long as they relate to construction operations”.

Which leads to the further question of, “What are “construction operations?””

Again this has been left to some interpretation but includes a wide range of construction operations and most common forms of engineering operation, such as civil engineering projects.

Some engineering projects such as mining, nuclear and power generation as well as contracts with residential occupiers are expressly excluded.

Let’s now consider The Scheme for Construction Contracts. Firstly we must remember that there are a different set of regulations in place in England & Wales to those in place in Scotland. In this post we will consider the regulations as they apply in England & Wales.

The Scheme for Construction Contracts

The Scheme for Construction Contracts (England and Wales) Regulations to give them their full title apply when construction contracts do not comply with the primary legislation and either supplements the provisions of the contract where it has deficiencies relative to the requirements of the Act or replaces the contract where it is non-compliant. The purpose is to allow the contract capable of being performed (reducing the likelihood of frustration) whilst allowing regulatory control over its provisions.

The Housing Grants, Construction and Regeneration Act applies  to all contracts for “construction operations” and sets out the requirements relating to Adjudication and payment, including:

  • The right to commence Adjudication
  • To be paid in interim, periodic or stage payments.
  • To be informed of the amount due, or any amounts to be withheld.
  • To suspend performance for non-payment.
  • Disallowing pay when paid clauses.

Part 1 of the Scheme makes provision for Adjudication where the contract does not comply with the requirement and Part 2 replaces those provisions in relation to payment that do not comply.

The 2011 amendments to The Housing Grants, Construction and Regeneration Act

The Housing Grants, Construction and Regeneration Act 1996 was amended in October 2011 by the Local Democracy, Economic Development and Construction Act 2009 to close loop holes within the original legislation and as a result The Scheme for Construction Contracts was also amended to reflect the amendments. These amendments and their implication have been outlined in previous posts but can be broadly summarised as follows:

  • The act now applies to all construction contracts, even those not evidenced in writing
  • Adjudication clauses must still be in writing
  • Who will bear the cost of Adjudication can no longer be defined in the contract
  • The Adjudicator has the right to correct errors in contracts within 5 days of delivering a Determination
  • Payment dates must be set out in the contract.
  • A Payment Notice must be issued five days of the date for payment, even if no amount is due, although alternatively, if the contract allows, the Contractor may make an application for payment, which is treated as if it is the Payment Notice
  • A Pay Less Notice (previously a Withholding Notice) must be issued where it is intended to pay less than the amount set out in the Payment Notice, including the basis of calculation of the amount being paid less
  • The notified sum is payable by the final date for payment
  • Where a Payment Notice is not issued, the Contractor (or Sub-Contractor) may issue a Default Payment Notice
  • Pay when certified clauses are no longer allowed and retention release cannot be prevented by conditions within another contract.
  • The provisions around the right to suspend for non-payment have been expanded to allow costs to be claimed as well as the right to an Extension of time as consequences of any statutory suspension

These amendments apply to construction contracts entered into on or after 1 October 2011 in England and Wales, and 1 November 2011 in Scotland.

In the next post we will look at Part 1 (Adjudication) of The Scheme for Construction Contracts and the legal requirements and in the post after that Part 2 (Payment).

Unfair contract terms in the Consumer Rights Act

In a recent post we outlined the changes that took effect in sales and services legislation with the passing of the Consumer Rights Act [2015]. We are going to examine unfair terms in this post and your rights.

When you enter into a contract; as a buyer, seller or for a service; both parties must follow the terms set out in that contract. Probably the best way to ensure you do not have unfair terms is to take the time to read and terms & conditions of a contract you are going to enter into, to avoid problems later. However there is statutory protection against unfair terms.

 What are your rights to challenge unfair terms

Generally companies are free to use whatever contractual terms and conditions they consider to be reasonable, provided they are not in themselves unfair or contradict statutory law and provisions.  As a result of this being a new item of legislation the existing rules operate alongside the rules for a time. In effect until all new contracts were entered into under the Consumer Rights Act [2015]. The rules in relation to which legislation covers your contract are as follows:

  • For contracts entered into after 1st October 2015, these are governed by the Consumer Rights Act [2015]
  • For contracts entered into before 1st October 2015, these are governed by the Unfair Terms in Consumer Contracts Regulations (1999).

While these are two different pieces of United Kingdom legislation in effect over the same or similar issues and where one supersedes the other. Both are premised by a clear legal view that you are not bound by a standard term in a contract, with a seller or supplier if that term is judged to be unfair.

As a consumer, if you think a standard contact term is unfair to local authority trading standards department or to the Competition and Markets Authority (CMA) which replaced the Office of Fair Trading (OFT) as the regulator in April 2014.The CMA is empowered to investigate and ultimately can force a company to change its terms.

As an individual or corporate entity you also have the right to challenge a contract term if you think it’s unfair. However in this instance only the courts can rule whether a term is fair or unfair.

 Terms you can challenge

The Consumer Rights Act [2015] allows you the statutory right to challenge hidden fees and charges as the basis of the legislation is that key terms of a contract, including price, may be assessed for fairness unless they are both prominent and transparent.

This is a significant departure from the previous Unfair Terms in Consumer Contracts Regulations [1999] were these type of terms were exempt from a fairness test if they were written in plain language. Of course what is plain language is in itself a leading and ambiguous terms

Terms may be ruled as unfair where:

  • They are contrary to the requirements of good faith, meaning they must be designed, negotiated and entered into with the consumer in a fair and open way
  • They cause a significant imbalance between the rights of the retailer and consumer to the detriment of the consumer

Terms you can’t challenge

All of the contract terms (including core terms) must be in intelligible and plain language or they are open to challenge as unfair. However you could not make a challenge to terms for the following reason under either the old Regulations or the new Act:

  • By finding the same product elsewhere at a cheaper price than you have agreed to pay
  • Claim that a contract for an extended warranty is unfair because it offers less cover than an extended warranty you could have bought for a similar price
  • Challenge terms that you have negotiated directly with the seller as these would have been agreed between the parties in good faith. In effect you can only challenge standard terms and conditions that you believe to be unfair

Terms deemed to be unfair

Some of the most common unfair terms that are sneaked into standard terms and conditions and that can be challenged are the following:

 Unbalanced rights

Contract terms that confer greater rights to the seller / trader than to you as the consumer enjoy, such as where in an on-going contract the trader can change a term and condition of your contract with one-week notice, but you must give six months’ notice to terminate a contract.

 Excessive cancellation fees

These are terms that allow the trader to take too much of your money if you end a contract before it has run to its term. If you choose to end a contract using a clause in the terms and conditions that allow you to do this, the trader can claim for administration and marketing costs and for any work they had started and loss of profit. They cannot charge for punitive damages, such as paying up what you would have expended until the end of the natural life of the contract.

 Changing goods or services

A trader cannot have a term that allows them to change significantly what you are buying without giving you the chance to withdraw from the contract. For example, if you order timber frame windows for your house and want matching doors, the trader cannot decide to give you PVC doors and timber frame windows, without giving you the chance to cancel your order and get a refund.

Changing the price

The seller’s terms and conditions may state your order is accepted only when it starts fulfilling the order from its shelves and you’ll be charged the price of the goods at that time. However, a contract term that states you must pay a higher price if prices rise after you’ve ordered could be considered unfair.

 

Of course companies will try new ways to circumnavigate the legislation and these are only ever struck down when challenged, so while these are current terms that are able to be challenged, there may be others and we may revisit this subject again.

However the basic rule of thing would be to view against the criteria detailed above, particularly against being balanced, because these are the easiest terms to try and marginally skewer to have that unfair advantage.