UNIT 4 (2014)Apunte Inglés
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UNIT 4: STANDARD FORM CONTRACTS
Standard form contracts
Standard form contracts contain terms which are not negotiated, but proposed by one
party (usually the professional) to the other party (usually the consumer) often on a
‘take it or leave it’ basis. (B2C contracts: business to consumer).
They are used commonly not only in everyday transactions (e.g. public transport, utilities, mobile phone contracts, car renting services, parking tickets, dry-cleaners, gyms) but also in more complex situations (e.g. mortgage loans; insurance contracts, financial services).
They are used not only in business-to-consumer (‘B2C’), but also for business-tobusiness (‘B2B’) transactions.
People do not generally read these standard form contracts and this is a rational response: reading them involves time and people do not want to lose it meaninglessly. If they read the small print or boilerplate, they would probably not understand them (e.g.: condiciones al bajar una app, las aceptas sin leerlas, si las leer no las entiendes). And if they understood them, they would not have a possibility to amend or modify their content (e.g.: no puedes cambiar las condiciones de una app). The addressee of such contracts cannot do anything but adhere to them if he or she wishes to have access to the goods or services.
Taking into account that they cannot be modified, the person who reads them would have access to the goods or services in the same conditions than others who decide not to read them.
Therefore, the most rational strategy is to ignore standard form contracts and pay attention to the elements that are relevant or fundamental in the agreement, basically the price and the features of goods and services (object, causa-consideration).
Moreover, in practice, the standard form contracts used in the market by different competitors are very similar (e.g.: Vodafone-Movistar). And they are very similar in their low quality (they know consumers don’t understand it, and they try to reduce quality in elements that are not relevant for the consumers). As authors of standard form contracts –specially professionals and firms- can anticipate that customers would not pay attention to them will try to focus on elements that may be of interest for customers (e.g.: use the bargains, the good prices to attract people and then introduce elements not relevant in the contract, elements that in reality are used to cover the costs of these low prices, such as less quality). Therefore, their efforts would be addressed to make price and features more attractive for customers. It is with these elements that firms compete in the market.
Better prices or better features of products and services involve costs for the firms. Firms will try to offset these costs by reducing other expenditures. A way to reduce such costs is by lowering the quality of standard form contracts, for instance, by way of offering worse ancillary (auxiliars) services. Firms do not compete with standard form contracts.
This problem involves an information asymmetry, a market failure which cannot be solved by market competition alone. As in other market failures, legal intervention is required. Since the 70s, legal systems have provided mechanisms to solve this problem, by basically offering tools that can be used to control the content of agreements concluded through standard form contracts. These mechanisms allow judges to decide that some provisions or obligations included in a standard form contract are not effective and not to be enforced against adherents.
Potential imbalance (desequilibri) between parties The party using a standard form contract has certain advantages over the other party, such as: - - Information advantage – the standard form contract user knows exactly what is in the contract, whilst the other party must analyze the standard form contract to identify potential pitfalls (trampas) (the person who has done the contract knows exactly what is in it).
Transaction costs advantage – the standard form contract user pays only once (e.g. to a lawyer) to draft (redactor) the standard form contract which it will use for multiple transactions, whereas the other party must analyze such a pre-formulated contract on a one-off basis (the other part has to spend a lot of time on discovering what is in the contract).
Traditional lawyers [but also the European Court of Justice and the Spanish Supreme Court] have highlighted that these two advantages lead to an imbalance between the standard form contract user and the other contracting party. This imbalance may also coincide with a general imbalance of bargaining (negociació) power between the parties, especially if: - The standard form contract user is a trader (comerciant) and the other party is a consumer, or The standard form contract user is a large enterprise (empresa) and the other party is an SME (empresa mitjana).
Imposition of unfair terms There is also a risk that the standard form contract user will impose disadvantageous, unfair terms on the other party which will often accept them, because of lack of: - Awareness (consciència) (many consumers do not think of the risk at the time of buying a good or service); Time (consumers do not wish to spend time reading the standard form contract); Knowledge (‘small print’ terms are too difficult to understand without specialist expertise); Bargaining power (even if the consumer wants to negotiate, the trader will refuse); Choice (all traders offering a given good or service use similar terms in their contracts).
Positive elements of standard form contracts Despite the risk of unfairness (injustícia), standard form contracts entail several advantages: - - - Reduction of transactions costs that would otherwise arise from negotiating and drafting contracts.
Coordination of tasks and the division of labor is facilitated within business organizations.
o Example: employees at a firm may resort to standard form contracts to know how after-sale services are provided, the content of warranties for goods or the insurance (assegurança) coverage.
They allow companies to assess the expected liability costs that they may face against customers.
They increase legal certainty (the standard form contracts can be seen as soft law or a supplement to the law). This role is highly debated. Some scholars believe that they can be conceived as a sort of usage or custom (“soft law”) that supplements legal rules (“hard law”) or that provides a more complete and systematic regulation than hard law.
Discourage opportunistic behaviour by consumers (they include some restrictions).
B2B transactions Use of standard form contracts also takes place in relationships where none of the parties is a consumer.
In such cases, the positive externalities of standard form contracts are the same ones described above, but the problems that may arise in practice are not identical: a stronger commitment to the principle pacta sunt servanda involves that the possibilities of controlling the content of the agreements entered into by firms are virtually nonexistent and the problems are reduced to: - Assess whether the standard terms were clear and transparent and thus (per tant) are binding (vinculants).
Solve interpretation problems (e.g., battles of forms: a battle of the forms arises when two businesses are negotiating the terms of a contract and each party wants to contract on the basis of its own standard terms.).
Sources in Spanish Law: - - Act 7/1998 on Standard Form Contracts (Ley 7/1998, de 13 de abril, sobre condiciones generales de la contratación) (LCGC).
Consolidated Act for the protection of consumers and users approved by Royal Legislative-Decree 1/2007 (Real Decreto Legislativo 1/2007, de 16 de noviembre, por el que se aprueba el texto refundido de la Ley General para la Defensa de los Consumidores y Usuarios y otras leyes complementarias) (TRLGDCU).
Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts Concept of standard terms Article 1.1 LCGC: “Son condiciones generales de la contratación las cláusulas predispuestas cuya incorporación al contrato sea impuesta por una de las partes, con independencia de la autoría material de las mismas, de su apariencia externa, de su extensión y de cualesquiera otras circunstancias, habiendo sido redactadas con la finalidad de ser incorporadas a una pluralidad de contratos”.
This provision sets forth three characteristics: - Unilaterally drafted terms: one of the parties drafts the standard form contract and the other party can just accept them.
Non-individually negotiated terms: there is no possibility for the other party to negotiate the terms.
Generality: standard terms are intended to apply to a plurality of transactions.
Scope (alcance) of application - - The law applies to contracts containing terms and conditions entered into between a professional (user of standard terms) and any natural or legal person (consumers, professionals, businesses, and so on) B2B + B2C.
The Act does not apply to some special contracts: government contracts, employment contracts, agreement to create a company, family law agreements and contracts mortis causae.
When are standard terms enforceable (exigible) between the parties? (Article 5 LCGC) 1) Terms should be drafted in a transparent, clear, accurate, and understandable way.
If not, terms would not be included in the contract: according to article 7, non-readable (illegible), ambiguous, obscure or incomprehensible terms shall not be deemed (considerats) a part of the agreement.
In B2C contracts, moreover, article 80.1.b TRLGDCU: “En ningún caso se entenderá cumplido este requisito si el tamaño de la letra del contrato fuese inferior al milímetro y medio o el insuficiente contraste con el fondo hiciese dificultosa la lectura”.
2) Information provided to the other party and knowledge: Written contracts: User of standard terms shall inform the other party about the existence of standard terms and may provide him a copy when requested.
When the contract itself refers to standard terms, they are then deemed to be accepted by the other party if the contract is signed by both parties.
Non written contracts: User of standard terms shall inform the other party about the existence of standard terms, for instance by including a post in the store (e.g.: drycleaners).
In B2C contracts, moreover, article 80.1 TRLGDCU: consumers should be provided with access to standard forms in advance or simultaneously to the agreement text.
Usage in online transaction: “clicking anxiety” Question: Firm A informs in its contracts that some standard terms would apply to after-sale services, warranties and other issues and a QR code is included in the contracts.
Customer, Firm B, may use a smartphone to scan the QR code and convert it to a readable form through which it would be able to know the terms.
Are the standard terms legally incorporated in the contract between A and B? 3) Terms shall not be against mandatory norms or public policy If such were the case, the term shall be deemed null and void (anular).
According to the LCGC, one of such situations occurs in B2C transactions when a term is contrary to the regulation on unfair terms in consumer contracts.
Rules of interpretation - - According to Article 6 LCGC when there is conflict between the standard terms and the provisions included in the contract, the latter shall prevail except when the standard terms would be more beneficial for the party that accepted them.
In cases of ambiguity of standard terms, interpretative doubts should be decided against the user of the standard form contract (contra proferentem rule).
Other general rules of interpretation apply: articles 1281 to 1289 CC (see Unit 5).
The content control: assessment of fairness Only in B2C transactions, but not in B2B.
- Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts Article 3 “1. A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer”.
- Not individually negotiated term: not necessarily a term included in a standard form contract. That is, although a contract may have been written from scratch (de zero) between a firm and a consumer, some terms may be imposed to the latter (the consumer) on a take-or-leave-it basis which may be unfair.
- Where any seller or supplier (proveïdor) claims (reclamar) that a standard term has been individually negotiated, the burden of proof (carga de la prova) in this respect shall be incumbent on him.
- Significant imbalance in rights and obligations: legal concept, not involving a difference in the distribution of contractual surplus (superàvit). It cannot be limited to a quantitative economic valuation of the contract and the benefits obtained by each party therein.
Article 4 “1. Without prejudice to Article 7, the unfairness of a contractual term shall be assessed, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent.
2. Assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplies in exchange, on the other, in so far as these terms are in plain intelligible language.
Typical cases of unfairness in consumer contracts Both the Directive and the TRLGDCU establish a "blacklist" of terms that are presumed to be unfair in all cases.
Articles 85 to 90 TRLGDCU include a catalogue of such terms: - Terms that have the goal of making the contract binding dependent on the firm’s will (depenent de la voluntat de l’empresa).
Terms that limit the basic rights of users and consumers.
Terms that entail a lack of reciprocity between the contracting parties.
Terms that limit consumers’ guarantees by imposing disproportionate requirements or unduly (indegudament) shifting (canviar) the burden of proof.
Terms that affect conclusion and performance of contracts.
Terms affecting jurisdiction and applicable law.
Also the Annex to the Directive includes a blacklist of terms that are considered to be unfair to consumers: “Terms which have the object or effect of: (a) excluding or limiting the legal liability of a seller or supplier in the event of the death of a consumer or personal injury to the latter resulting from an act or omission of that seller or supplier; (b) inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier or another party in the event of total or partial non-performance or inadequate performance by the seller or supplier of any of the contractual obligations, including the option of offsetting a debt owed to the seller or supplier against any claim which the consumer may have against him; (c) making an agreement binding on the consumer whereas provision of services by the seller or supplier is subject to a condition whose realization depends on his own will alone; (d) permitting the seller or supplier to retain sums paid by the consumer where the latter decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the seller or supplier where the latter is the party cancelling the contract; (e) requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation; (f) authorizing the seller or supplier to dissolve the contract on a discretionary basis where the same facility is not granted to the consumer, or permitting the seller or supplier to retain the sums paid for services not yet supplied by him where it is the seller or supplier himself who dissolves the contract; (g) enabling the seller or supplier to terminate a contract of indeterminate duration without reasonable notice except where there are serious grounds for doing so; (h) automatically extending a contract of fixed duration where the consumer does not indicate otherwise, when the deadline fixed for the consumer to express this desire not to extend the contract is unreasonably early; (i) irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract; (j) enabling the seller or supplier to alter the terms of the contract unilaterally without a valid reason which is specified in the contract; (k) enabling the seller or supplier to alter unilaterally without a valid reason any characteristics of the product or service to be provided; (l) providing for the price of goods to be determined at the time of delivery or allowing a seller of goods or supplier of services to increase their price without in both cases giving the consumer the corresponding right to cancel the contract if the final price is too high in relation to the price agreed when the contract was concluded; (m) giving the seller or supplier the right to determine whether the goods or services supplied are in conformity with the contract, or giving him the exclusive right to interpret any term of the contract; (n) limiting the seller's or supplier's obligation to respect commitments undertaken by his agents or making his commitments subject to compliance with a particular formality; (o) obliging the consumer to fulfil all his obligations where the seller or supplier does not perform his; (p) giving the seller or supplier the possibility of transferring his rights and obligations under the contract, where this may serve to reduce the guarantees for the consumer, without the latter's agreement; (q) excluding or hindering the consumer's right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions, unduly restricting the evidence available to him or imposing on him a burden of proof which, according to the applicable law, should lie with another party to the contract.” The double control of standard form contracts - Assessment of incorporation: transparency, knowledge and acceptance.
Assessment of content: fairness (equitat/justícia).
EXAMPLE: Company A (seller) Company B (buyer) If it was a B2B contract the jurisdiction say is not unfair.
Company A Consumer If it was a B2C contract that would be an unfair term. To change the jurisdiction and applicate law is unfair.
What happens is a term is declared unfair? - First solution: declare the term void (B2C transaction).
- Second solution: The judge exclude the provision of the agreement, but he construct a new term (reasonable solution) or apply the solution stablished in a default rule.
- Third solution: The judge decides that all the agreement is void (null agreement) - Forth solution: There’s a risk that the term may affect an essential element in the contract and the whole contract may be ineffective.
The Spanish law and the European law establish normally the first solution, instead of some cases: sometimes the judges need to apply a default rule. If the judge didn’t apply this default rule, the whole contract will become ineffective and this will be very harmful to the consumer.
It only happens if by excluding the term it affects an essential term and therefore the whole contract will be ineffective.
ECJ Judgment 14 June 2012, in Case C-618/10, Banco Español de Crédito SA v. Joaquín Calderón Camino On 28 May 2007, Mr Calderón Camino entered into a loan agreement for the sum of EUR 30 000 with Banesto in order to purchase a vehicle. The nominal interest rate was 7.950%, the APR (Annual Percentage Rate of Charge) 8.890% and the rate of interest on late payments 29%.
In September 2008, Banesto decided to ask for reimbursement of 7 monthly repayments that had not yet been made. In this regard, on 8 January 2009, it submitted, before the Juzgado de Primera Instancia No 2 de Sabadell (Court of First Instance, No 2, Sabadell), an application for an order for payment in the amount of EUR 29 381.95, corresponding to the unpaid monthly repayments plus contractual interest and costs.
The Court of First Instance understood that a 29% rate of interest on late payments was unfair.
In concluding that, it took into account, inter alia, the Euribor (‘Euro interbank offered rate’) and European Central Bank (ECB) rates of interest, and the fact that the rate of interest for late payment in the agreement was more than 20 points greater than that of the nominal interest rate.
Then, the Court fixed that rate at 19%, referring to the statutory rate of interest and to the rates of interest for late payment included in national budget laws from 1990 to 2008, and ordered Banesto to recalculate the amount of interest for the period at issue in the dispute before it. In reaching that conclusion, the Court applied article 83.2 TRLGDCU: “The part of the contract which has been deemed void shall be modified in accordance with the provisions of Article 1258 of the Civil Code and with the principle of good faith”.
The judgment was appealed and the Court of Appeals in Barcelona decided to stay the proceedings and submit a reference for a preliminary ruling to the ECJ. Among other questions, the Court of Appeals asked the ECJ whether such article was in accordance to the Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. To sum up, where the courts entitled to decide that a term was void and then use a default rule in the legal system to amend it.
The ECJ concluded that: “Directive 93/13 cannot be understood as allowing the national court, in the case where it finds that there is an unfair term in a contract concluded between a seller or supplier and a consumer, to revise the content of that term instead of merely setting aside its application to the consumer”.
Rationale: If such modification of the agreement were permitted, sellers or suppliers would have incentives to include unfair terms in their commercial practices. Whilst the seller or supplier possibly has grounds to fear that, by virtue of a finding that a term is not binding, he will continue to be bound by an agreement which may be less favourable for him, a modification along the lines described above ultimately results in the terms of the agreement being modified in accordance with the law and thus to a state which is acceptable to the seller or supplier.
CONSUMER loan agreement BANK Standard form contract: if the consumer don’t return the money in a period of time, he’ll have to return it with interests (29%).
The consumer considers this particular provision was unfair: - First judge: unfair, substitute it to a default rule (interest rate= 19%) - European court of justice: considered not reasonable solution, because the banks couldn’t include any rate of interests, as they knew that if their interest rate was unfair the judge will apply a beneficial rate for them too. So the ECJ exclude the term of interest rate from the standard form contract (void). (interest rate = 0%) Default rule: used only in B2B contracts if the bank said that interests applied should be the default rule’s one.
Sometimes, applying this rule (excluding the term), will turn all the contract ineffective. The consumer have the obligation to give back all the money borrowed by the bank and this will be harmful. The judge shall apply the default rule in order to avoid the harmful consequence.
ECJ Judgment 30 April 2014, in Case C-26/13, Árpád Kásler and Hajnalka Káslerné Rábai v OTP Jelzálogbank Zrt.
“On 29 May 2008, Mr Kásler and Ms Káslerné Rábai concluded a contract for a mortgage denominated in a foreign currency with a Hungarian bank. The bank granted the borrowers a loan of 14 400 000 Hungarian Forints (HUF) (approximately €46 867).
The contract stipulated that the fixing in Swiss francs of the amount of the loan was to be made on the basis of the buying rate of exchange of that currency applied by the bank on the day the funds were advanced. In accordance with that term, the amount of the loan was fixed at CHF 94 240.84. However, under the contract, the amount in Hungarian forints of each monthly instalment to be paid was to be determined, on the day before the due-date, on the basis of the rate of exchange applied by the bank to the sale of Swiss francs.
Mr and Mrs Kásler brought an action before the Hungarian court challenging the term, which authorises the bank to calculate the monthly instalments due on the basis of the selling rate of exchange of the Swiss franc. They rely on the unfairness of that term, in so far as it provides, for the purpose of repayment of the loan, for the application of a rate different from that used when the loan was made available.
The Kúria (Hungarian Supreme Court) hearing the case on appeal, asks the Court of Justice whether the term concerning the exchange rate applicable to a loan contract denominated in foreign currency concerns the main subject matter of the contract or the quality/price ratio of the goods or services supplied. It also wishes to know whether the contested term may be regarded as being in plain, intelligible language, so that it is not subject to an assessment of its fairness pursuant to the directive. Finally, the Hungarian court wishes to know whether, if the contract cannot continue in existence if the unfair term is deleted, the national court is authorised to amend or supplement the contract.
The Court recalls, first of all, that the prohibition on determining the unfairness of terms relating to the main subject-matter of the contract must be interpreted strictly and may be applied only to terms laying down the essential obligations of the contract. It is for the Kúria to determine whetherthe contested term constitutes an essential obligation of the contract concluded by Mr and Ms Kásler.
Furthermore, the Court notes that the examination of the unfairness of the term at issue cannot be avoided on the ground that that term relates to adequacy of the price and the remuneration on one hand as against the services or goods supplied on the other. That term merely determines the conversion rate between Hungarian florints and Swiss francs for the purpose of calculating the repayments, without the lender providing any foreign exchange service. In the absence of such a service, the financial costs resulting from the difference between the buying and selling rates of exchange, which must be borne by the borrower, cannot be regarded as remuneration due as consideration for a service.
Second, the Court states that a term defining the main subject matter of the contract is exempt from an assessment of its unfairness only if it is in plain, intelligible language. In that connection, the Court states that that requirement is not limited to clarity and intelligibility from a purely structural and grammatical point of view. To the contrary, the loan contract must set out in a transparent fashion the reason for and the particularities of the mechanism for converting the foreign currency. Thus, it is for the Kúria to determine whether the average consumer, who is reasonably well informed and reasonably observant and circumspect, on the basis of the promotional material and information provided by the lender in the course of negotiating the loan contract, would not only be aware of the existence of the difference between the selling rate of exchange and the buying rate of exchange of a foreign currency, but also be able to assess the consequences arising from the application of the selling rate of exchange for the calculation of the repayments and for the total cost of the sum borrowed.
Finally, the Court observes that, if the deletion of an unfair term renders the contract unenforceable, as in the present case, the directive does not preclude the national court from substituting the contested term with a supplementary provision of national law. Such an approach enables attainment of the aim of the directive, which consists in re-establishing a balance between the parties while preserving, as far as possible, the validity of the contract as a whole.
If such a substitution were not allowed and if the court were obliged to annul the contract, the dissuasive nature of the penalty of nullity and the objective seeking to protect consumers might be jeopardised. In the present case, such an annulment would have the consequence that the whole of the outstanding sum would become due. That is likely to be in excess of the consumer’s financial capacities and, as a result, to penalise him rather than the lender who, in the light of that consequence, might not be dissuaded from inserting such terms in its contracts” (Press Release issued by the ECJ).