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Official Guidelines Published on Interpretation and Application of EU Law on Unfair Terms in Consumer Contracts

The European Commission has published its Guidance Notice on the interpretation and application of Council Directive 93/13/EEC on unfair terms in consumer contracts (“the UCTD”) which aims to protect consumers against unfair terms in all types of business-to-consumer contracts. The purpose of the Guidance Notice is to present the key concepts and provisions of the Directive in a coherent manner to all interested parties.

The primary aim of this Directive is to harmonise the laws of the Member States relating to unfair terms in business contracts, in particular to contractual terms which have not been individually negotiated. This means that the Directive is applicable to contracts and contractual terms that have been “drafted in advance and the consumer has therefore not been able to influence the substance of the term particularly in the context of a pre-formulated standard contract” and it will be regarded as unfair if “it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer”.

Hong Kong traders will want to note that the notion of “seller or supplier” is very broad. What constitutes a seller or supplier may be assessed on a case-by-case basis in relation to the specific contract at issue taking into account the nature and purpose of the contract in question and the fact that the UCTD aims at the protection of consumers as the typically weaker party.

Of particular relevance for Hong Kong traders is the application of the UCTD in relation to traders established in third countries. EU law provides that whenever a seller or supplier from a third country carries on an activity in a Member State or directs its activities to consumers who have their normal place of residence in a Member State, those consumers will benefit from the protection under the UCTD. This is the case even where parties choose the law of the third country as the law applicable to their contract. In addition to this, the Member States, if they so choose, may impose more stringent measures in the areas covered by the Directive, thus granting an even stronger protection to the consumer and making it necessary to consider both the provisions of the UCTD as well as any relevant national measures taken by the Member State in question.

Moreover, due to the broad scope of the UCTD, it also overlaps with other areas covered by EU legislation, in particular sector-specific legislation. In most cases, such legislation will apply in addition to the provisions of the UCTD unless explicitly excluded. And where there are potentially conflicting provisions, an interpretation will normally favour as far as possible the effectiveness of the UCTD

The UCTD imposes the requirement for a contractual term to be both fair and transparent. As per the Directive, terms which may be regarded, firstly, as unfair are those which (i) bind the consumer to terms with which he or she had no real opportunity of becoming acquainted before the conclusion of the contract; or (ii) enable the seller or supplier to alter the terms of the contract unilaterally without a valid reason which is specified in the contract. Secondly, a contractual term that is not drafted in plain, intelligible language lacks transparency and has to be interpreted in favour of the consumer. The transparency requirement is an element in the overall assessment of the unfairness of a given contract term but may also, even of itself, indicate unfairness.

Further to this, contract terms are to be regarded as unfair under the UCTD if they are contrary to the requirements of good faith, or they cause a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer. The requirement of “good faith” relates to the question of whether a seller or supplier deals fairly and equitably with a consumer and takes his legitimate interests into account, while the assessment of a significant imbalance requires an examination of how a contract term influences the rights and obligations of the parties.

The unfairness of a contract term has to be assessed taking into account (i) the nature of the goods or services to which the contract relates; (ii) all the other terms of the contract or of another contract on which it is dependent; and (iii) all the circumstances attending the conclusion of the contract. The Member States may only deviate from this general unfairness-test only for the benefit of consumers, i.e. only if such a deviation makes it easier to conclude that a contract term is unfair.

The Directive provides that “unfair terms used in a contract concluded with a consumer by a seller or supplier shall … not be binding on the consumer”. The non-binding character of unfair contract terms under the UCTD is a mandatory rule applicable throughout the EU that cannot, in principle, be deviated from. It is interpreted as meaning that such a term must be regarded, in principle, as never having existed, so that it cannot have any effect on the consumer. This means, in essence, that it has the consequence of restoring the consumer to the legal and factual situation that he would have been in if that term had not existed. However, while unfair contract terms are not binding on consumers, the remainder of the contract continues to bind the parties “if it is capable of continuing in existence without the unfair terms.” Whether the contract is capable of existing requires a “legal assessment under the applicable national law”. This assessment must be objective and not based on the interests of only one party; however, national courts have to take into account the interests and potential negative consequences of the consumer.

In short, Hong Kong traders will want to take note of several elements of the UCTD, which are clarified in the new Commission guidance. These include the following: firstly, the broad scope of the Directive, particularly the application of the UCTD in relation to traders established in third countries; secondly, the risk of contractual terms that appear to be ambiguous or unintelligible as they may be regarded as not being transparent, and, thus, unfair; and lastly, the possibility of parallel or stronger protections for consumers that may arise either from national law or from overlapping areas of EU law that would apply in addition to the provisions of the UCTD.

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