The EC Directive on unfair terms as it affects insurance contracts — an English view




1. The EC Directive
The EC Directive on unfair terms in consumer contracts1 was implemented in the United Kingdom by The Unfair Terms in Consumer Contracts Regs. 1994.2 The Regulations are to be construed as far as possible to give effect to the Directive. All contracts, which come within the scope of the Directive and were concluded after 31 December 1994, are subject to the Directive regime. The Regulations, however, which do not adopt the Directive verbatim but purport to implement them in a way appropriate to the United Kingdom, apply only to contracts concluded after 1 July 1995. The form of the Directive, a substantial preamble followed by 11 articles and an Annex, is quite different from that of the regulations — 8 regulations followed by 3 schedules. Moreover, Member States have the option ”to afford consumers a higher level of protection through national provisions that are more stringent” than those of the Directive.3 Thus any rules of the Unfair Contract Terms Act 1977 that are more stringent than the regime are allowed in principle.4 Implementation must, however, be in the form of ”laws and regulations”; statements of practice will not suffice.5 The Regulations apply, of course, as part of English law. However, Art. 6.2 requires Member States to ”take the necessary measures to ensure that the consumer does not lose the protection granted by this Directive by virtue of the choice of the law of a nonMember country as the law applicable to the contract if the latter

1 Council Directive 93/13/EEC of 5 April 1993 (OJ 21 April 1993 L95/29). See Dean (1993) 56 MLR 581; Duffy [1993] JBL 67; Maitland-Walker [1993] 3 ICCLR 91. On the philosophy of the Directive and differences between that and the Unfair Contract Terms Act 1977, see Collins (1994) 14 OJLS 229; Beatson [1995] CLJ 235. 2 SI 1994 No 3159. 3 Preamble para. 12. 4 Note that overly stringent domestic law may infringe EU competition rules. See e. g. Case 120/79 Cassis de Dijon [1979] ECR 649. Cf Case 339/89 Alsthom Atlantique v. Sulzer [1991] ECR I-107. 5 Unusually, the draftsman has used the preamble to clarify (or qualify) the text of the Directive on the matter. This technique poses it own problems of interpretation: see Duffy p. 71.

150 Malcolm Clarke SvJT 1996 has a close connection with the territory of Member States”. To satisfy this requirement, Reg. 7 states that, ”notwithstanding any contract term which applies or purports to apply the law of a non member State”, the Regulations shall apply ”if the contract has a close connection with the territory of the member States”.
    When a complaint is brought under the Regulations concerning the term of a contract, the court must address the following questions, in two phases. (i) Is one party a consumer? If he is not a consumer, the Regulations do not apply. If, however, he is a consumer, is the contract individually negotiated ? If it is individually negotiated, the Regulations do not apply. If, however, it is not individually negotiated, the regime applies and its first main thrust against unfair terms is that, unless the term is plain and intelligible, it will be ”given the interpretation most favourable to the consumer”. (ii) If the regime applies (above (i)), does the term complained of concern core provisions, i. e. in the case of insurance contracts, the assumption of risk ? If it is a core provision about risk, the remaining rules of the regime do not apply. If, however, it does not concern risk, is the effect of the term to create a ”significant imbalance” ”contrary to the requirement of good faith”? If so, the second main thrust of the regime is that the term is condemned as unfair, and prohibition applies.


2. The Scope of the Directive
The Directive is intended to approximate laws ”relating to unfair terms in contracts concluded between a seller or supplier and a consumer” Art. 1.1.6 According to the implementing regulation, Reg. 3(1), the Regulations ”apply to any term in a contract concluded between a seller or supplier and a consumer7 where the said term has not been individually negotiated”8 i. e. where it has been drafted in advance and the consumer has not been able to influence the substance of the term: Reg. 3(3) and Art. 3.2.9


6 It can be inferred from clauses in the Annex that the Directive is to apply to suppliers of financial services. 7 Except certain kinds of contract listed in Schedule 1 and with which we are not here concerned. 8 Cf The Directive, which applies to ”unfair terms” (Art. 2(a)) but only terms which have ”not been individually negotiated” (Art. 3.1) can fall within the definition of ’unfair term’. 9 Art. 3.2 continues: ”... particularly in the context of a pre-formulated standard contract. — The fact that certain aspects of a term or one specific term have been individually negotiated shall not exclude the application of this Art. to the rest of the contract if an overall assessment of the contract indicates that it is nevertheless a preformulated standard contract. Where any [insurer] claims that a standard term has been individually negotiated, the burden of proof in this respect shall be incumbent on him.” — Compare the Unfair Contract Terms Act, 1977, whereby the court is


SvJT 1996 The EC Directive on unfair terms 151 According to Reg. 2(1), which closely follows Art. 2 of the Directive in this regard, a ”consumer” is a natural person who, in making a contract to which these Regulations apply, is acting for purposes which are ”outside his trade, business or profession”.10 A ”seller” is ”a person who sells goods and who, in making a contract to which these Regulations apply, is acting for purposes relating to his business.” And a ”supplier” is ”a person who supplies goods or services and who, in making a contract to which these Regulations apply, is acting for purposes relating to his business”. A ”business” includes a trade or profession and the activities of any government department or local or public authority”. Clearly, the business includes insurance business.


3. Plain and Intelligible Language
Although core terms such as terms about the scope of cover are not affected on grounds of unfairness, they can be affected if they are expressed in language that is not plain and intelligible.
    For example, terms about causation concern the range of loss recoverable and thus are about cover. The term of this kind found in some personal accident contracts, that the accident must ”independently of any other cause be the sole cause” of the loss, can be made to work most unfairly and, when it does, comes as an unpleasant surprise to the claimant.11 The concept of causation, however, is so obscure that it may well be that this clause, although it cannot be struck out on grounds of unfairness, can be attacked as unintelligible.


4. Unfairness
4(a) Core terms
The main feature of the regime is that certain terms can be struck out as unfair. Although the regime generally, including the requi Lü applies to ”any term” in a contract, when it comes to unfairness an important qualification, a ”tribute to the power of the insurance lobby”,12 affects insurance contracts: so-called ’core’ provisions are excluded. According to the Directive,13 core provisions are ”terms which describe the main subject matter of the contract [or] the quality/price ratio of the goods or services


instructed to look at certain terms only (exclusion and limitation clauses) and, apparently, to consider them in isolation: Dean (above n. 1) p 583. 10 Cf the phrase ”outside his trade or profession”, which is found in art. 13 of the Brussels Convention of 1968 and the art. 5 of the Rome Convention 1980. It is being assumed that the meaning is the same. 11 Insurance Ombudsman, Annual Report 1994, p. 35. 12 Beale in Beatson (ed.), Good Faith and Fault in Contract Law (Oxford 1995), p. 240. 13 Preamble (para 19).


152 Malcolm Clarke SvJT 1996 supplied”. For insurance contracts, the Directive also spells out the implication of all this: ”the terms which clearly define or circumscribe the insured risk and the insurer's liability shall not be subject to such assessment since these restrictions are taken into account in calculating the premium paid by the consumer”.
    The Directive also states that core provisions ”may nevertheless be taken into account in assessing the fairness of other terms”. Thus, a person who chooses to pay a lot for something cannot complain on that ground alone; also, if he gets a service at a lower rate than usual that may be because he has allowed the supplier to contract a limit on the amount of the supplier's liability; in this regard the English lawyer recognises a similarity with the 1977 Act.
    The corresponding regulation (Reg.3(2)) reads: ”In so far as it is in plain, intelligible language, no assessment shall be made of the fairness of any term which — (a) defines the main subject matter of the contract, or (b) concerns the adequacy of the price or remuneration, as against the goods or services sold or supplied.” Note that although exclusion (a) of ”subject matter” (Reg.3(2)) is usually understood to mean the person or thing insured, terms ”which clearly define or circumscribe the insured risk and the insurer’s liability” (Directive) include, first, not only the subject matter but also terms defining the peril covered as well as exceptions and warranties. Second, as the insurer’s liability and his promise of cover have a dimension in time, a cancellation clause also appears to be a core term. American courts have treated such clauses as bearing on the amount of consideration and as clauses for control under the doctrine of good faith,14 but this does not seem possible under the EC regime. Be that as it may, many of these clauses, notably exceptions, also come within exclusion (b) as terms which ”concern the adequacy of the price” i. e. the premium. So, if not excluded from assessment under (a) they are excluded under (b).


4(b) Unfairness: is it intelligible?
The second main thrust of the Directive is against unfairness. A term is unfair if, ”contrary to the requirement of good faith”, it ”causes a significant imbalance in the parties' rights and obligations” under the contract ”to the detriment of the consumer” Art. 3. Unfairness is to be assessed by taking into account (a) the nature of the services contracted for; (b) all the circumstances attending the conclusion of the contract; and (c) all other terms of the contract or of any other contract on which it is dependent: Art. 4.1.


14 Farnsworth, Farnsworth on Contracts (Boston 1990), sect. 2.14.


SvJT 1996 The EC Directive on unfair terms 153 The Directive has been criticised in England as vague and lacking in precision.15 In particular, opponents of the idea of ’good faith’ argue that to develop ”rules to the highest point of abstraction may well produce contemplative gains, but if this process occurs in a practical world, these gains are more than offset by the losses introduced by uncertainty and vagueness”;16 that it ”merely provides an opportunity for exercising judicial discretion with less intellectual rigour.”17 Good faith in commerce will lead to ”labyrinthine clauses” and to ”ever-longer contractual documents as draftspeople attempt to determine and define as precisely as possible” their legal position.18


4(c) Unfairness: is it New?
Most English lawyers seem to be bracing themselves for a conceptual culture shock. They should be reminded, however, that, quite part from the good faith in disclosure found in insurance law, a general rule of good faith can be traced at certain stages in the history of English law.19 Moreover, some heuristic comfort comes from para. 16 of the Preamble: ”in making an assessment of good faith, particular regard shall be had to the strength of the bargaining position of the parties, whether the consumer had an inducement to agree to the term and whether the [insurance cover was] to the special order of the consumer; [moreover] the requirement of good faith may be satisfied by the [insurer] where he deals fairly and equitably with the other party whose legitimate interests he has to take into account”.
    This language is already so familiar to English lawyers who have been concerned with the Unfair Contract Terms Act that an early DTI consultation paper went so far as to suggest that imbalance (contrary to good faith) means that the contract is unreasonable, in some significant respect;20 and that an English court could apply the Directive along the familar lines of the Act. In Sweden, perhaps, the Directive adds nothing to the protection already provided by Swedish law. In England, however, it is now recognised that there are differences between the Act and the Directive.21 The ’reasonable’ test in the Act is a loose test by comparison with that


15 But cf Macdonald [1994] JBL 441, 457. 16 Bridge (1984) 9 Can Bus LJ 385, 409. See also Staughton (1994) 7 JCL 193. 17 Yates (1995) 8 JCL 145. 18 Yates p 146. 19 Atiyah, The Rise and Fall of Freedom of Contract (Oxford 1979), pp. 168 ff.; Jerry, 72 Tex L Rev 1317 (1994). 20 Reported by Beale (above n. 12) p. 245. 21 See Collins (1994) 14 OJLS 229; and Beale (above n. 12) pp. 238 ff.


154 Malcolm Clarke SvJT 1996 of the Directive, which is more rigid and more conceptual.22 At the same time reasonableness may be no more than a part of fairness.23 Again, reasonableness under the Act is tested at the time of contracting; the Directive takes account of events later.24


4(d) Unfairness: Is it Procedural Unfairness?
One view is that the recent history of EC regulation of contract has been more concerned with consumer choice than with consumer rights.25 For example, an earlier version of the Directive contained a general rule against substantive unfairness26 but that was removed. This view finds the true tenor of the Directive in the requirement of plain language: clarity is essential for effective market competition between terms.27 Substantive unfairness has not been ruled out: Art. 3(1) speaks of imbalance and that, surely, suggests substantive unfairness, but imbalance that comes about through what is ”contrary to good faith”: procedural unfairness. In other words, a term is only unfair if it has a certain result (imbalance) and if it comes to be included in the contract in a certain way (contrary to good faith). So, for example, ’manoeuvres in drafting’ such as ”the use of small print in a standard form contract which deceptively takes away much of the substance of what has been promised”,28 can be seen as procedural, i. e. as a form of misrepresentation giving rise to estoppel.


4(e) Unfairness: is it substantive unfairness?
The procedural view appears to overlook Schedule 2 which, as we have just seen, directs attention to matters of substantive unfairness. Attempts to explain this within the framework of procedural bad faith alone are strained and unconvincing. A broader view of good faith is, it seems, the better view; this view is that the bad faith can be demonstrated either by procedural bad faith or by the (substantive) effect of the term on the rights of the consumer.29 This, says one writer, is the better interpretation because the rule ”does not state that the significant imbalance must be caused by actions contrary to the requirements of good faith, as one would


22 Collins (above n. 1) p. 246. 23 Dean (above n. 1) p. 585. Beale (above n.12) p. 245: they cannot be equated. 24 Yates (above n. 17) pp. 148 ff. 25 Generally, see Lockett and Egan, Unfair Terms in Consumer Agreements (Chichester 1995), ch. 1. 26 OJ C73, 24/3/1992,7. 27 Collins (above n. 1) 238. 28 Collins (above n. 1) 250. 29 This was more apparent in earlier drafts of the Directive, which are discussed by Beale (above n. 12) p. 242.


SvJT 1996 The EC Directive on unfair terms 155 expect if the requirement of good faith referred solely to procedural matters such as pressure and deception".30 At the very least, there is sufficient ambiguity to suggest that the Directive will be construed in favour of the consumer and thus of the broader view.
    So, imbalance may be found not only in the ’procedure’ leading to the conclusion of the contract but also in the substance of the terms. In any event, imbalance must be ”significant”; and the direction in Article 4, to consider the nature of the (goods or) services, and all other terms of the contract, indicates that a term must not be assessed in isolation but as part of an overall assessment of the contract.31


4(f) Good Faith
A striking feature of the regime (Reg. 4(1) and Art. 3) is the reference to good faith — striking because it is not good faith in the sense of ’honesty’,32 as it is understood in England, but something more general; and English law knows no general doctrine of good faith.33 Moreover, if someone has a right to do an act he can, in general, do it for any reason whatever: there is no rule against abuse of rights.34 One of the main reasons is that good faith ”is inherently repugnant to the adversarial position of the parties when involved in negotiations”.35 Clearly, this reason has no application to the present situation and no necessary application to the idea of good faith between parties once the contract has been concluded, such as performance or enforcement.36 The new regime requires English lawyers to think again. They must bring the idea of good faith into the conceptual context of their legal background.


4(f)(i) Good Faith as an Exception
In the past, some English lawyers have argued that, although English law has no general rule of good faith as such, it does have a notion of good faith as an exception37 made up of specific rules by


30 Collins (above n. 1) p. 250. 31 E.g. Lockett and Egan (above n. 25) p. 23. 32 Lockett and Egan (above n. 25) pp. 22 ff. 33 Walford v. Miles [1992] 2 AC 128. In this sense: Bridge op. cit. (above n. 16); Cartwright, Unequal Bargaining (Oxford, 1991) pp. 224-5; O’Connor, Good Faith in
English Law (Aldershot 1990); Steyn [1991] Denning L J 131; Carter and Furmston (1995) 8 JCL 93, 112 ff. Cf, however, Queensland EGB v New Hope Collieries Pty Ltd [1989] 1 Lloyd’s Rep. 205, 210 per Sir Robin Cooke (PC). 34 Weinberger v Inglis [1919] AC 606. 35 Walford (above n. 33) p. 138 per Lord Ackner. 36 Brownsword (1994) 7 JCL 197, 199. 37 Description used by Brownsword which he relates (p. 201 ) to Summers’ ’excluder’ analysis: below at n. 39.


156 Malcolm Clarke SvJT 1996 way of exception which, in substance but not in name, are concerned with good faith. ”A real ’duck’ differs from the simple ’duck’ only in that it is used to exclude various ways of not being a real duck — but a dummy, a toy, a picture, a decoy etc. [The] attempt to find a characteristic common to all things that are or could be called ’real’ is doomed to failure; the function of ’real’ is not to contribute positively to the characterization of anything, but to exclude possible ways of being not real.”38 This passage from J. L. Austen has been taken by Summers39 as the common lawyer’s key to good faith. Good faith becomes accessible to the common law tradition: the tradition of law reform by incremental movement and progress step-by-step, a tradition that prefers the pragmatic and particular to sweeping generality, a tradition of liberty which allows a general freedom to pursue selfinterest but subject to some exceptions. Just as English journalism shows more interest in vices than virtues, the common law has been concerned less with good faith than with bad faith40 and, although the common lawyer may hesitate to say what good faith is, he is prepared to say what it is not; although there is no general rule of good faith, there is useful combination of rules against bad faith.41 These ”serve to restrain the otherwise generally permissible pursuit of economic self-interest in contract”.42 Now that the new regime requires good faith, these rules can be grouped and presented as a team doctrine of good faith, by way of exception, to assist the application of the EC regime.
    The team includes the rules of estoppel,43 non-disclosure, and misrepresentation.44 It has been suggested,45 however, that, as the Regulations do not allow the complainant direct access to the courts (see below), he may prefer to ignore the Regulations and ground his complaint in these same rules, not in their role as a


38 J. L. Austin, Sense and Sensibilia (Oxford, 1962) pp. 70-71. 39 54 Va L Rev 195 (1968); see also Summers, 67 Cornell L. Rev. 810 (1982). 40 Lücke in Finn (ed.), Essays on Contract (Sydney 1987) 155, 157. Renard Constructions (ME) Pty Ltd v Minister for Public Works(1992) 26 NSWLR 234, 266–267, quoting Summers (1968) (above). 41 Interfoto Picture Library v Stiletto Visual Programmes Ltd [1989] QB 433, 439 per Bingham L. J. (CA). Clarke (1993) 23 HKLJ 318, 340–341; Carter and Furmston op. cit. (above n. 32). 42 Brownsword (above n. 36) p. 199. 43 Carter and Furmston (above n. 32) p. 100. Nigel Watts Fashion Agencies Pty Ltd v GIO
General Ltd (1995) 8 ANZ Ins Cas 61-235 (CA NSW, 1994). 44 Kessler and Fine (1964) 77 Harv L. Rev. 401. 45 Brownsword (above n. 36) p. 242. Also fiduciary duties — but not as a general vehicle for extension and expansion: Sealy (1995) 8 JCL 142. A more positive but particular case of ’good faith’ is the implication of ’fair and reasonable’ terms: Waddams (1995) 9 JCL 55.


SvJT 1996 The EC Directive on unfair terms 157 scratch team or a cobbled doctrine of good faith, but simply as established rules of English law. If that were to happen, that would still not make the regime redundant.
    First, the regime does offer more because in some instances the complainant can choose to take less. A problem about the established rules is that they lead mostly to rescission and that is an allor-nothing remedy. Under the regime, the term causing imbalance can be discarded leaving the rest of the contract enforceable by the consumer. Second, as regards misleading presentation of contract terms that do not correspond to the reasonable expectations of the consumer, it can indeed be argued that the consumer is protected by common law but, if that argument fails, it might be reframed successfully on the Regulations.46 Third, the Regulations remedy substantive unfairness in cases, such as that of the insurance complainant whose notice is late, in which common law does not: see below 4(g)(ii).


4(f)(ii) A Principle of Good Faith
If, in spite of what has just been said, ducks will not do, what then? As a general concept is found in continental legal systems, the English lawyer may well look there for guidance. If so, as the Directive itself was based on the German Standard Contract Law of 1976,47 he might expect the best approach to be the ’Swedish’ approach: to fashion a rule based on the German rule. But good faith is also a general and established concept in France and in community law.48 Are these modelled or to be modelled on German law too? Rather, it seems that good faith means different things in different legal systems;49 and that it is for this reason that the Directive does not define it.
    This being so, he will probably have to turn to the work of those who have sought to synthesise the civil law principles and to translate them into the language the common lawyer understands. Good faith, says one,50 stands for the principle pacta sunt servanda and, in particular, says another,51 it ”looks to the spirit or true intent of transactions” and ”the duty to fulfil expectations engendered by one’s contractual promise”. ”The first imperative of good faith and fair dealing is that contracts ought to be upheld. But


46 Clarke (above n. 41) p. 333. 47 Dean (above n. 1) p. 584. 48 McNeil (1995) 40 Iur Rev 147, 148. 49 Carter and Furmston (1994) 8 JCL 1, 3 ff. Cf the Uniform Commercial Code (sect. 1-201(19)): good faith is ”honesty in fact in the conduct or transaction concerned”. For the debate in the USA, see Farnsworth (above n. 14) sect. 7.17a. 50 O’Connor (above n. 33) p. 319; Lücke (above n. 40) p. 162. 51 Lücke p. 164 and p. 162.


158 Malcolm Clarke SvJT 1996 there is another theme [that] the reasonable expectations of honest men must be protected.”52 This is apparently consistent with a commitment to the consumer’s ”aims and objectives, provided these are or should be known and understood”.53 Finally, a thesis that merits further thought is that good faith is based on an ’ethic of cooperation’, which implies a requirement of ”co-operation on the part of one party to the contract so that another party will not be deprived of his reasonable expectations”.54 ”A party may thus be under a duty not only to refrain from hindering or preventing the occurrence of conditions of the party’s own duty or the performance of the other party's duty, but also to take some affirmative steps to cooperate in achieving these goals.”55 The ethic of cooperation requires that each contracting party ”respect the freedom and well-being” of the other.56 The ”function of contract is to improve the well-being of both parties by facilitating an exchange which operates to their mutual advantage. This does not mean that contracting agents must assist one another to get precisely the same amount of advantage from a particular transaction ... but it does mean that contract is not a vehicle for promoting one’s own advantage by knowingly subtracting from the pre-contractual state of well-being of the other side”.57 The ethic of cooperation has credentials for the present quest for good faith. First, it is authentically European insofar as a similar version of good faith can be found in France.58 Moreover, it is in the spirit of the preamble (para. 16) of the Directive, which states that ”the requirement of good faith may be satisfied by the seller or supplier where he deals fairly and equitably with the other party whose legitimate interests he has to take into account”. Second, common lawyers in the past have found the ethic something they can use. A version of the idea cooperation idea was a vehicle for the successful launch of good faith in the United States. Moreover, a limited version of that same idea is already part of English common law, where it has been found in two forms. The first is negative, and is less a positive duty of cooperation than a duty not


52 Steyn (above n. 33) p. 131. See also Waddams (1995) 9 JCL 55, 59.53 Hawke, (1994) 6 Ins L J 91, 95. 54 A summary of Farnsworth, 30 U Chi L Rev 666, 669 (1962-63) by Brownsword (above n. 36) p. 209. 55 Farnsworth (above n. 14) sect. 7.17. 56 Brownsword (above n. 36) pp. 239–240, adopting Gewirth’s Principle of Generic Consistency (PGC): Alan Gewirth, Reason and Morality (Chicago, 1978). 57 Brownsword p. 240. 58 Mestre, Rev. trim. dr. civ. 1986.101; Picod JCP 1988. II,3318; Starck, Obligations t. 2, Contrat nos 1144 ff.


SvJT 1996 The EC Directive on unfair terms 159 to obstruct.59 The second, however, is less cautious and less negative: if ”both parties have agreed that something shall be done, which cannot effectually be done unless both parties concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there be no express words to that effect”.60 For example, if the FOB buyer cannot get his ship a berth without the assistance of the FOB seller, in obtaining the necessary documents, the seller must oblige.61


4(f)(iii) Insurance: good faith cooperation
If, as it seems, the idea of good faith must be translated not only into the language of the common law but also adapted to the context of the case in issue, what does ’good faith as cooperation’ mean in the context of insurance contracts? The ethic of cooperation is not an end in itself but a means to an end, some greater purpose: the purpose of insurance. That purpose is both to minimise financial loss to the insured and to maximise financial gain to the insurer: to cover loss by spreading it when it occurs, as well as reducing it both before and after its occurrence. From this perspective some suggestions can be made.
    First, the parties must ”assist one another in rectifying known informational deficits”.62 Current English insurance law already requires ’good faith as disclosure’ whenever the other has to make a decision: not only on contract formation but also contract variation and at the time of any claim.63 Second, the insurer should offer not only cover but also advice to reduce the risk and promote the prevention of loss. Third, when the scope of cover is in issue and the contract is construed, cover should be extended to the

59 Southern Foundries Ltd v. Shirlaw [1940] AC 701, 717 per Lord Atkin; Nissho Iwai
Petroleum Co. Inc. v Cargill Int. S.A. [1993] 1 Lloyd’s Rep. 80, 84 per Hobhouse J. 60 Mackay v. Dick (1881) 6 App. Cas. 251, 263 per Lord Blackburn. 61 The World Navigator [1991] 1 Lloyd’s Rep. 277, 282 per Phillips J; see also Nissho (above n. 59). The development of the principle has been traced by Patterson, 42 Colum. L. Rev. 903 (1942), Stoljar, (1953) 31 Can. B. Rev. 231, and Burrows (1968) 31 MLR 390. Patterson and Stoljar both saw the rule as one that promoted the ultimate purpose(s) of the transaction. Also, there are shipping cases in which a party has a discretion about the choice of port: Tillmanns & Co v S.S. Knutsford Ltd [1908] 2 KB 385, 406 per Farwell LJ; affirmed [1908] AC 406: the master must ’not disregard’ the interests of the charterers. Then, there are cases concerning the issue of certificates by architects: Sutcliffe v Thackrah [1974] AC 727; and cases concerning clauses restrictive of trading which are struck out unless reasonable in the interests of both parties to the contract: Treitel, The Law of Contract (9th ed., London 1995), pp. 412 ff. We might well include the established duty of the fiduciary to act in good faith, i. e. in the interests of all concerned, unless, as seems questionable, these are to be ’balkanised’: Beatson in Beatson (ed.), Good Faith and Fault in Contract Law (Oxford 1995), p. 269, who gives further examples. See also Farnsworth (above n. 14) sects. 2.13 and 2.15a. 62 Brownsword (above n. 36) p. 241. Cf, however, Bell v Lever Bros. Ltd. [1932] AC 161. 63 Clarke, The Law of Insurance Contracts (2nd ed., London 1994) sect. 27-1A.


160 Malcolm Clarke SvJT 1996 limits of reasonable interpretation: in legal terms, the established but essentially negative and confrontational rule of construction contra proferentem, which is justified in terms of ineffective selfinterest, becomes a slightly different and more positive rule in favour of cover.64 Fourth, the liability insurer, seeking a settlement with victims, looks for a settlement that will ”maximize the combined expected wealth of liability insurers and their insureds”.65 Fifth, when any insurer seeks to settle the claim of his insured, cooperation demands speed rather than sloth because the insured needs the money more than the insurer.
    All this does not require any great altruism of the insurer. Damage to the image of the insurance industry in England in the 1990s was caused by short term tactics, not only the selling of unsuitable cover but the cutting of costs by close and negative scrutiny of claims. These tactics, which are essentially noncooperative and subtractive, and which look for short term financial gains to insurers, have been at the expense of the longer term interests of insurers — which are promoted by longer term relationships of the kind that have helped to make German insurers so prosperous. English insurers have lost business and increased lapse rates, at cost to themselves. Usually it costs less to indulge an existing customer and keep him than to to win a skirmish over his claim but lose the customer and then have to spend more than the money thus saved attracting another customer — a customer perhaps on the rebound from parallel experience with another insurer and, thus embittered, more likely to cheat on his next claim.


4(g) Examples of Unfair Terms in Insurance Contracts
As the Directive is concerned only with imbalance that is outside the core terms of the contract, for insurance contracts attention must be concentrated on subsidiary terms, notably terms about remedies66 and associated issues of procedure. Subject to this, guidance comes from Schedule 3 of the Regulations, which take from the Annex to the Directive ”an indicative and non-exhaustive list of the terms which may be regarded as unfair” (Reg. 4(4) and Art. 3.3). The emphasis has been added to show why the list has been described as a list of unfair terms which is less a black list than a grey list.67 The list is long, and it is some way down that list that we first find a category that particularly affects insurance contracts.

64 See Clarke sect. 15-5B. 65 Logue, 72 Tex. L. Rev. 1375, 1377 (1994). 66 Collins (above n. 1) p. 249. 67 Dean (above n. 1) p. 587.


SvJT 1996 The EC Directive on unfair terms 161 (i) Terms limiting the supplier’s ”obligation to respect commitments undertaken by his agents” — category (n)
These include, for example, any term that states that, when completing the proposal, the agent insurer’s is acting not on behalf of the insurer, as most consumer applicants would reasonably expect, but on behalf of the applicant.68


(ii) Terms making the insurer’s commitments ”subject to compliance with a particular formality” — category (n)
This category suggests grounds for complaint about the insurer’s use of technical defences. One example might be a term requiring notice of loss in an unduly short time period. At common law these have been rigidly applied, even though the claimant was in no position to give notice because, for example, he was incapacitated in hospital. Whatever the term (e. g. ”7 days”), under the Directive it would be construed as if it said ’reasonable notice’, which requires attention to the position of both parties, including the insurer’s interest in prompt notice and any difficulty the claimant had to overcome to give notice. If, even so, the claimant consumer is in breach of a notice term and on that ground, although he has not been prejudiced by the breach, the insurer refuses to pay a claim that is otherwise valid, the term has the potential for imbalance contrary to good faith and might be disregarded. The effect, therefore, would differ from that current in English law.
    Another example might be a term requiring ’proof satisfactory to the insurer’, if it allows the insurer to make unfair demands on the claimant consumer, for example, the contents insurer who demanded receipts for all 147 CDs claimed to be stolen.69 For this there is precedent already in English law,70 however, it seems that any term, the effect of which is to give the insurer a discretion about remedies or procedure is potentially unfair.71 These examples under category (n) run into those of another category, category (m).


68 See also the Directive on Self-Employed Commercial Agents and their Obligations (OJ 1986 L382 at p. 17). Lockett and Egan (above n. 25) p. 47. 69 The Sunday Times, 3 April 1994. 70 Braunstein v Accidental Death Co (1861) 1 B & S 782. See also Ninarchos (London) Ltd v
Shell Tankers [1961] 2 Lloyd’s Rep. 496. For similar decisions in the USA, see Jerry, 18 Conn. L. Rev. 271, 280 ff. (1986). 71 Also in this sense Hawke (above n. 53) p 107. See also Fastframe Ltd v Lohiski (CA, 3 March 1993), discussed by Adams (1995) 8 JCL 126, 133, and which concerned the exercise of discretion by a franchisor.


162 Malcolm Clarke SvJT 1996 (iii) Terms giving the insurer ”the exclusive right to interpret any term of the contract” — category (m)
Category (m) includes any exercise of discretion by the insurer,72 the justification of which depends on a term of the contract and its interpretation. An example might be rescission by means of a basis clause. If, as one writer puts it, the insurer’s purpose is less ”the legitimate one of accommodating a variable which was contemplated by the parties at the time of making the contract” than ”the illegitimate one of attempting to recapture a foregone economic opportunity”, the exercise of discretion is contrary to good faith.73 In the language of insurance practice, the insurer who tries to underwrite at the claims stage will not be allowed to do so; this is something that English law has allowed him to do in the past but, quite apart from recent developments against that practice in the law of disclosure, an appeal to the Directive would now prevent it.
    Furthermore, the Consumers Association has indicated its intention74 of challenging the term which requires the insured to ”notify us immediately of any alterations in risk which immediately affect this insurance”. Indeed, the tradition of English insurance law, that the insurer must rate the risk at the beginning of the period of cover and English courts have construed hard against any clause that allows reassessment of the risk during the insurance period.75 In the words of a famous judge of 1859: ”A person who insures may light as many candles as he please in his house”.76 But this is not the position in other countries such as France, Germany and Sweden and, indeed, the Association’s objection is different; it is that, without guidance, the consumer has little idea about what ”affects” his insurance in this way, i. e., about what is material. The consumer is left in a situation of unfair imbalance, because he is left in a state of uncertainty — the uncertainty generated by his ignorance of the arcane rules of the game when faced with a powerful opponent, the insurer. The difficulty about this objection, of course, is that the purpose of the clause is the purpose of any warranty: to ensure that the risk has not changed; and that therefore the term is a core term, outside the scope of the Directive.


72 See The Vainqueur Jose [1979] 1 Lloyd’s Rep. 557, in which Mocatta J considered the power of a mutual insurer to ”reject the claim or to reduce the sum payable” to a claimant member, and found that the discretion had, as the law required, been exercised in good faith; however, it is not clear what that meant in that context. See also The Glacier Bay [1995] 1 Lloyd’s Rep. 560, 567 per Waller J. 73 Hawke (above n. 53) p. 97, with reference to Burton, 94 Harv L Rev 369 (1980). 74 Financial Times, 26 April 1995. 75 Clarke (above n. 63) sect. 20-5. 76 Baxendale v Harvey (1859) 4 H & N 445, 449 per Pollock C.B.


SvJT 1996 The EC Directive on unfair terms 163 (iv) Terms with which the consumer ”had no real opportunity of becoming acquainted before the conclusion of the contract” — category (i)
English common law expects a certain amount of energy and enterprise on the part of the applicant to seek out the terms; terms do not have to be instantly available or ’put under his nose’. He is bound by the insurer’s standard terms for standard risks on the basis of constructive knowledge.77 Hence it is likely that although the terms are ’available’ to the applicant under the common law rule, he has had no ’real opportunity of becoming acquainted’ with them as required by the Directive. Certainly, the anodyne summaries of cover offered by some insurance outlets (e. g. travel agencies selling travel insurance) will not suffice. Moreover, ’acquaintance’ interlocks with the requirement of intelligibility. The more complex the terms the less intelligible they become and the harder it will be for the insurer to establish that the consumer had a real opportunity of becoming acquainted with the terms.


(v) Terms ”excluding or hindering the consumer’s right to take legal action or exercise any other legal remedy,” — category (q)
In particular, the draftsman pointed to terms ”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”. In the past, arbitration clauses have been enforced against the insured in England even though he was prejudiced by lack of resources, personal wealth or legal aid, to fight the claim in that forum. The clause must now be vulnerable to attack under the Directive. Also vulnerable is the ’reverse burden clause’, whereby the insurer has merely to allege that the loss claimed is excepted rather than covered to put upon the claimant the burden of proving otherwise. This clause, which was construed very restrictively in the past, can be simply struck out under the Directive.
    Last but far from least, here is a weapon against any term which the insurer might seek to use to justify slow payment. Significantly, unjustifiably slow payment has been targeted in the USA by a doctrine of ’bad faith’. Any term associated with such a stance must now, it is submitted, be open to attack in England under the Directive.



77 Clarke (above n. 63) sect. 11-1A3.


164 Malcolm Clarke SvJT 1996 5. The Enforcement of the Regulations
As regards enforcement, the Directive contains two striking features. First, Art. 7.1 provides that Member States shall ensure that ”adequate and effective means exist to prevent the continued use of unfair terms” in contracts, to which the Directive applies. What is envisaged is measures to prevent sellers and suppliers ignoring particular decisions against particular terms. The measures might even include measures of criminal law such as those for consumer sales, the Consumer Transactions (Restrictions of Statements) Order 1976.
    Second, Art. 7.2 provides that the means of prevention, referred to in Art. 7.1, ”shall include provisions whereby persons or organizations, having a legitimate interest under national law in protecting consumers” — the Insurance Ombudsman and the Consumers’ Association come to mind — ”may take action according to the national law concerned before the courts or before competent administrative bodies for a decision as to whether contractual terms drawn up for general use are unfair, so that they can apply appropriate and effective means to prevent the continued use of such terms”. Preemption is ruled out by the Preamble (para. 23), which states that this ”possibility does not, however, entail prior verification of the the general conditions obtaining in individual sectors”. Thus, insurers are not encouraged to imitate the tactic of some trade associations anxious about the Unfair Contract Terms Act, and to seek blessing of their terms before opposition, if any, in the consumer sector has taken stock. A proposal of the Economic and Social Committee, that decisions concerning the implementation of the Directive be reported to the Commission and thus become known throughout the EU, was not taken up. This is damaging to uniformity and thus to the creation of the internal market.78 The United Kingdom’s implementation of Art. 7(1) is Reg. 8. Reg. 8(1) makes it the duty of the Director General of Fair Trading ”to consider any complaint made to him that a term drawn up for general use is unfair, unless the complaint appears to the Director to be frivolous or vexatious”. Reg. 8(2) provides that, if he thinks the term unfair, he may bring proceedings for an injunction ”against any person appearing to him to be using or recommending use of such a term in contracts concluded with a consumer”. In reaching a decision he may ”have regard to any undertakings given to him on behalf of any person as to the continued use of

78 Lockett and Egan (above n. 25) pp. 29 ff.


SvJT 1996 The EC Directive on unfair terms 165 such a term” (Reg. 8(3)) and, in any case, he must give reasons (Reg. 8(4)). If the court grants an injunction it may ”relate not only to use of a particular contract term drawn up for general use but to any similar term, or a term having like effect, used or recommended for use by any party to the proceedings” Regs. 8(5) and 8(6). Reg. 8(7) empowers the Director to disseminate information and advice concerning the operation of the Regulations. Whereas the reference to any complaint suggests that the Director must consider complaints from organisations of consumers, as well as individual consumers, organisations cannot bypass the Director and bring a complaint directly to the courts.79 It seems that an individual is not inhibited in that way but, of course, he may well be deterred by the cost in time and resources of litigation. Does Reg. 8 meet the mandatory requirement of Art. 7? Arguably not.
    The Directive requires ”means ... whereby ... organisations ... may take action” (Art.7(2)). The Preamble (para 23) states that ”organisations ... must have facilities for initiating proceedings”. The European Parliament has stressed the need for this facility.80 Merely to have a right to have a complaint considered by the Director is not enough: he has a discretion whether to take matters further by taking proceedings; under no circumstance is he obliged to do so.81 Accordingly, the DTI position, that Reg. 8 carries out the Directive, is being challenged in the courts by the Consumers’ Association.82

79 Brownsword (above n. 36) p. 242 n. 133. Cf Collins (above n. 1) p. 244, who raises serious doubts about whether Reg. 8 is an adequate implementation of the Directive. 80 OJ 1991 C326/108. Lockett and Egan (above n. 25) p. 28. 81 Judicial review of the exercise of his discretion does not amount to proceedings in the sense of the Preamble. 82 Financial Times, 26 April 1995, p. 12.