Indices, unfair terms and the OFT

The Consumer Prices Index (eg inflation) is currently sitting at a relatively low 2.0%.

That said, this figure seems pretty academic for many people. Many staples of daily life seem to be going up at more than this amount. In true tabloid-speak, consumers are seeing 'inflation-busting price hikes' in many of the basics of life from utility bills to train fares.

So how legal are such 'price hikes' in consumer contracts?

Let's have a look at the Unfair Terms in Consumer Contract Regulations 1999.

In essence, consumer terms must be fair and reasonable. Unfair terms may be unlawful and not binding on the consumer. A term will be unfair if, contrary to the requirement of good faith, it gives rise to a significant imbalance in the commercial relationship and the imbalance is to the consumer's detriment.

So far, so good; but what about when a business wants to set the price for a product or service? What about when it wants to increase it at a later date?

Under these regulations, terms in consumer contracts which set the initial price are 'core terms' of the contract and are exempt from the test of fairness as long as they meet the plain language requirement.

Therefore this would be allowed:

The price of the services is £100 (plus VAT at the applicable rate)

This wouldn't:

Notwithstanding the generality of the foregoing, the price for the Deliverables shall be (GBP)£100 (one hundred pounds sterling) or, at the absolute discretion of the vendor, at a price determined in accordance with its standard scale of charges in force on the Effective Date exclusive of any VAT and other taxes, levies, contributions, duties or imposts similar to, replaced by or replacing any of it and them and all penalties, charges, fines and interest included in or relating to any tax assessment therefor, regardless of to whom any such taxes, penalties, charges and fines are, and any interest is, directly or indirectly chargeable or attributable or primarily chargeable or attributable

Now this does not mean that you can charge whatever you want at all times. Businesses do have a large room for manoeuvre under the regulations but other laws may apply to restrict how they set prices (such as the laws on price-fixing).

As for increasing prices this is where things get interesting under the regulations. Price variation clauses may not fall within the 'core terms' of the agreement, which means that they must be in plain English and be fair and reasonable.

I'd highly recommend looking at OFT guidance in this respect.

Take this term:

All prices are subject to alteration without notice and the price applicable shall be that ruling the date of despatch the buyer is responsible for all carriage charges on orders. Carriage charges are subject to change without notice.

So what did the OFT do? Look away now. This may upset some businesses: they deleted the clause in its entirety.

How about this seemingly innocuous term:

Membership subscription rates may be changed from time to time in accordance with the rules of the relevant Pinnacle Club and the member agrees to pay any increased subscriptions which may be due during the continuance of this contract.

The OFT replaced it with this:

Members who do not wish to accept … an increase in subscription may cancel their membership by giving written notice … the member giving notice must continue to pay subscriptions at the rate current immediately prior to any proposed increase until the end of such notice period. The company will refund any subscriptions that have been paid by a member for any period after the expiry of the notice.

Quite a different clause altogether!

Some lawyers think that the OFT has ‘gone too far’ in its interpretation of the regulations in many cases. They query whether the OFT always gets it right. In the end, the courts provide the ultimate guidance whether something is written plainly and intelligibly.

It is also worth noting that the OFT would only get involved if there has been a complaint. If no consumers complain about a price rise, it is likely to fall outside of OFT’s radar.

So here are twelve things to consider when drafting terms initial price and payment terms:

  1. the amount of the fees or price payable (is it inclusive or exclusive of VAT?)
  2. the payment structure, for example: early payment; payment periods or dates; changes in the price or fees
  3. liability for tax, duty or VAT
  4. the liability for costs and expenses
  5. whether fees are to be paid in advance or arrears and how they are to be invoiced
  6. whether non-payment gives rise to a right to terminate the contract
  7. whether non-payment gives rise to a right to suspend performance
  8. a survivorship clause ensuring that payment obligations survive termination of the contract
  9. a dispute mechanism
  10. whether interest for late payments is to be contractual or statutory
  11. whether set-off is to be allowed or prohibited, and
  12. whether provision should be made for retention of title and whether to extend such provision to include all monies or benefit of sales proceeds

As for terms which vary the price that is paid, this is likely in many cases not to be a 'core team'. Think about how you do this and take advice on whether it is legal or not. Price variations can be legal, they just need to be drafted very carefully indeed to ensure that they are legal.

Area of Interest