Round 2: Victory for Consumers - The Office of Fair Trading v Foxtons Limited

A case brought by the Office of Fair Trading against the real estate powerhouse, Foxtons Limited, has wide reaching implications with respect to what is and what isn't fair in letting agreements between landlords and real estate agencies and, more significantly, as a result of a decision in a recent Court of Appeal hearing in the case, the scope of relief that may be granted in proceedings governing unfairness of standard consumer contract terms

Background

Late February last year, the Office of Fair Trading (the "OFT") issued High Court proceedings against Foxtons Limited ("Foxtons") regarding the validity of certain standard terms in Foxtons' letting agreements with landlords. The action was brought under the Unfair Terms in Consumer Contract Regulations 1999 (the "UTCCR") in response to a large number of consumer complaints received by the OFT, with the OFT seeking a declaration that the relevant provisions of the terms are unfair as well as seeking an injunction to prevent continued use of those terms. [Nicholas Green QC and Helen Davies QC have been instructed by the OFT with Michael Kent QC and Andrew Davis instructed by Mischon de Reya on behalf of Foxtons.]

The OFT is seeking an enforcement order (in this case, an injunction) under the UTCCR against Foxtons to prevent it from using terms to which the OFT objects – the OFT's long term intention being (where it is successful) to then enforce compliance throughout the letting industry wherever similar terms to those objected to are being used. This could have implications for very many people; the OFT estimates that, at the beginning of last year, there were at least 15,000 letting agency businesses in the UK alone.

Regulatory bodies such as the OFT can take legal action to enforce compliance with the UTCCR as, ultimately, only a court can decide if a term is unfair. Factors such as the nature of the goods or services to which the contract relates, the circumstances surrounding the conclusion of the contract at the time it was entered into and all other terms of the contract will be taken into account by a court in making its decision.

The Law Surrounding Unfair Terms: The UTCCR 1999 and UCTA 1977

The UTCCR seeks to protect consumers in commercial transactions and, in essence, renders ineffective terms that benefit sellers or suppliers, in favour of consumers. In short, a consumer will not be bound by a standard term in a contract with a trader if that term is unfair. Regulation 5(1) of the UTCCR defines these "unfair terms" as those that have not been individually negotiated, cause significant imbalance in the parties' rights and obligations and are contrary to the requirement of good faith.

In England, unfair terms are governed by both the UTCCR and the Unfair Contract Terms Act 1977 ("UCTA" or the "Act"). The UTCCR were implemented as a result of Council Directive 93/13/EEC on Unfair Terms in Consumer Contracts (the "Directive") which sought to harmonise laws on protecting consumers from unfair contract terms across Member States, providing a minimum level of protection across the EU. Some Member States already had laws (such as UCTA in England) governing the use of such terms and there are therefore many areas of overlap between UCTA and the UTCCR. It is important to note that the terms of the Directive are considered to be helpful when considering the UTCCR (given that the UTCCR implement the Directive) and it is to the Directive that courts will normally refer as opposed to the UTCCR itself when deciding upon matters relating to unfair terms.

Although UCTA applies to clauses that seek to restrict, exclude or avoid liability, it does not apply to some contracts; for instance, any contract relating to the creation, transfer or termination of an interest in land is specifically excluded from the protections afforded under the Act. The exclusion of contracts relating to interests in land under UCTA means that claims regarding unfair terms in that context may only be brought under the UTCCR, which more generally applies to unfair terms in contracts between a consumer and a seller of goods or a supplier of services. Amongst other considerations, it would seem that it is for this reason that the OFT brought its action against Foxtons under the UTCCR as opposed to UCTA.

The Offending Terms

The terms subject to the dispute relate to wording in Foxtons' letting agreements which purport to entitle Foxtons: (a) to charge a renewal commission if a tenant introduced by Foxtons renews or extends his tenancy, even where Foxtons have not negotiated the renewal or extension, have not otherwise played a part in persuading the tenant to stay and no longer collect rent or manage the property on behalf of the landlord; (b) to charge a sales commission where a landlord sells to a tenant introduced by Foxtons, even though Foxtons neither negotiate nor assist in the sale; and (c) to recover a commission from a landlord where that landlord has transferred the property to another and it is the other landlord that has renewed again, without any intervention from Foxtons. The OFT objects to these terms and argues that they are unfair.

Foxtons have to date contended that their letting agreements and the relevant terms are not unfair and, as far as we are aware, continue to use these terms. The High Court has yet to consider the fairness of the terms objected to by the OFT, and the substantive case (on this point and other substantive issues) will be heard and considered at the High Court on 27 April 2009.

Court of Appeal Hearing

Although the substantive case has yet to be heard, the Court of Appeal sat earlier this month to consider the scope of the relief being sought under the claim form which was contentious as between the parties – namely, the extent of any injunction which may be granted by the Court in relation to the offending terms. The Court of Appeal panel included Lord Justice Waller, Lady Justice Arden and Lord Justice Moore-Bick.

In the High Court proceedings prior to the appeal, Foxtons was able to convince Mr Justice Morgan that any injunction granted in relation to the terms and under the UTCCR should only apply to future letting agreements rather than allow for the scope of the injunction to be widened to prevent the use or enforcement of such terms in existing contacts. On the other side, the OFT had contended that any injunction granted should cover Foxtons' existing contractual arrangements as well, and that there was no room or place for limiting this under the UTCCR.

On 17 July 2008, Mr Justice Morgan ruled in favour of Foxtons and struck out from the OFT's prayer for relief, words that would otherwise injunct Foxtons from enforcing those terms deemed to be unfair in current contracts. In coming to his decision, Mr Justice Morgan made a distinction between a general challenge (brought by a regulatory body such as the OFT as in this case) and an individual challenge brought by an individual consumer (for instance, a landlord which was a party to one of Foxtons' standard letting agreements) whom he referred to as possible a "shrewd consumer", holding (as summarised by Lord Justice Waller at the Court of Appeal) that, "Foxtons should not be prevented from enforcing individual contracts already entered into, since the circumstances of those individual contracts might establish that in that individual contract the term was fair, even if, on the general challenge, the term has been held unfair".

The OFT went on to appeal the decision to the Court of Appeal. Having considered Mr Justice Morgan's ruling in the High Court, the Court of Appeal ruled in favour of the OFT, over-ruling Mr Justice Morgan. The Court of Appeal accepted the OFT's argument that the provisions of the Directive and the UTCCR, "had intended to cover existing as well as future contracts" and that, further, "It would be quite inadequate protection to consumers if a court on a general challenge, having found a term as used in current contract to be unfair, had no power to prevent the supplier or seller from continuing to enforce that term in current contracts". Lord Justice Waller in particular found Lord Steyn's ruling in Director of Fair Trading v First National Bank plc [2002] 1 AC 481 to be helpful in this respect, quoting from that case that, "the system of pre-emptive challenges is a more effective way of preventing the continuing use of unfair terms…than ex casu actions".

In short, the Court of Appeal held, in favour of the OFT, that an injunction granted in a collective challenge can extend to the use of unfair terms in existing contracts, or in other words, a judge will have power to grant an interim or final injunction preventing the continued use of an unfair term in an existing contract even in an collective challenge. It is important to note that, subject to the terms of any injunction, nothing in the decision or in the Directive or the UTCCR will prevent a supplier or service provider from defending itself (and adducing evidence in that regard) with respect to a subsequent individual challenge as they will have the opportunity to show that the term is not unfair.

The Implications for Foxtons

The ruling by the Court of Appeal will have significant implications for Foxtons if the substantive case is adjudged against it and in favour of the OFT in respect of the terms. What, in Foxtons' mind, was initially a case to determine whether Foxtons could use its existing terms of contracting in respect of future contractual arrangements with landlords, could now put it into a unenviable position of having to consider potential financial liability and loss under existing arrangements. In an already uncertain climate, this is unlikely something that Foxtons will want to have to do especially in having to consider the potential loss of revenue streams which they had foreseen from their existing client landlords under existing contracts. The only thing which Foxtons may also find some consolation in is that at least 14,999 other letting agencies in the UK may be having to do the same thing. It is important to note that, under the UTCCR, even if the relevant terms of the Foxtons agreements are deemed unfair by the Court, this will not necessarily mean that the rest of the contract will also not be binding, and the remaining terms of the agreement will more likely than not continue to bind the contracting consumer.

Wider Commercial Implications

Although significant for the property sector, the ruling is also important in a wider context, applicable to all consumer contract arrangements whether property-related or not. Essentially, by its ruling in the Foxtons case, the Court of Appeal has said that an enforcement action to protect consumers under the UTCCR can be taken in relation to both existing and future contractual arrangements between the relevant parties and has widened the scope of relief that a court may grant in proceedings regarding unfair terms under the UTCCR.

It will be interesting to see what happens if the Court of Appeal's decision is appealed by Foxtons and, down the line, what impact, if any, the Court of Appeal's decision as well as the decision in the substantive case, will have on the form and content of standard term consumer contracts.