Consumer Rights Directive Proposed by the EU Commission

Chapter I

Development of Sale of Goods in UK

1.1 The Doctrine for Sale of Goods

Contracts for the sale of goods are amongst the most common types of contract encountered. To most common people, the experience of contracting is purchasing goods. However, it must be noted that such contracts have layered a distinct portion of contract law resulting the general principles of contract law to apply. The law for Sale of Goods was originally codified in 1893 and subsequently there were amendments made which were eventually consolidated in the Sale of Goods Act (SGA) 1979. [1] This Act has further been amended by the Sale and Supply of Goods Act 1994, the Sale of Goods (Amendment) Act 1994 and the Sale of Goods (Amendment) Act 1995. Recently, European Directives, in particular that on sale of consumer goods and associated guarantees, [2] [93/13/EC; 85/57/EC ????] and that on distance contracts, [3] have required further amendments to the Sale of Goods Act and subordinate legislation. Much of the law on this area is also produced by the case laws which are also relevant to the interpretation of the 1979 Act itself. Additionally, there are some decisions of the European Court of Justice interpreting the various Directives and Conventions in the field. It is viable for the jurisprudence to grow gradually with time. [4]

The Sale of Goods Act was made applicable to Scotland in 1893 as a result of pressure in some commercial and legal quarters for the creation of a more uniform law of sale in the United Kingdom. [5] This was achieved with the addition of few sections to the English statute as originally drafted. Hence, the Act is not a codification in any sense of the pre-existing Scots common law, but instead a very drastic change. Moreover, due to the English terms in the Act, difficulties were encountered by Scotland, however, most of which have been removed by the reforms of Sale and Supply of Goods Act 1994.

The three elements which can be extracted from the definition of the contract of sale of goods as provided by Section 2(1) of the Sale of Goods Act (SOGA) 1979 [6] are “property”, “goods” and “money consideration”. “Property” means ownership, and selling is the most common way in which ownership can be transferred from one person to another. “Goods” is defined by Section 61 [7] to include crops which are growing or to be grown – whether they mature within a year or not. Hence even selling crops can be a contract of sale of goods. Finally, the third element “money consideration” is satisfied where goods are exchanged for a combination of money and other goods. The sale can take various forms like: Sale and exchange; Sale and gift; Sale and Bailment; Sale and Hire-purchase; Sale and loan on security. All these forms fall under the same category of sale of goods. The Supply of Goods and Services Act – 1982 [8] simplify and clarifies the law governing contracts for the supply of services. It is necessary to distinguish between a contract of sale of goods and a contract for services because the provisions for sale of goods do not apply to supply of services. Although these two legislations may apply side by side to provide a logical outcome in a case, they cannot be formed into one piece of legislation. On the other hand, in the case of consumer transactions, the legal position with regard to goods to be manufactured or produced, or sold and installed, is now in principle affected by the sale of consumer goods and associated guarantees directive, [9] but implementation of these provisions is problematic which will be discussed in detail. [10]

An agreement between parties consists of terms which set out the rights and obligations of the parties. Terms can either be express or implied depending upon the statements made by the parties when forming the agreement. Express terms are the ones stated by the parties, hence it is the words which should be analysed in order to infer the intention to form the agreement. If the Court finds that the parties did not agree upon express terms then they may be prepared to accept that the terms must be implied into the contract. Such terms may be implied from one of three sources. The first is by way of custom. A custom will generally be implied into a contract where it can be shown that the custom was generally accepted by those doing business in the particular trade and in the particular place and whereby an outsider making inquiries could not fail to observe this; Kum v Wah Tat Bank Ltd [1971]. [11] A Custom which satisfies these requirements binds both parties, whether they actually knew it or not. The second source of implied terms is terms implied at common law. There are different sources of implied terms, firstly, in Terms implied in fact the parties must have intended to include the terms but have failed to do so because of inadvertence or failure of expression. This is known as terms implied in fact and it depends on the surrounding circumstances in a case in order to acquire the requisite intention of the parties. There are mainly two tests for identifying the intention of the parties. One is the “business efficacy” test and the other is “officious bystander” test.

MacKinnon L.J. in Shirlaw v Southern Foundries Ltd [12] stated the ‘officious bystander’ test as,

“Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if while the parties were making their bargain’ an officious bystander were to suggest some express provision for it in the agreement, they would testily suppress him with a common ‘Oh, of course!’ “

The implication must be ’necessary to give the transaction such business efficacy as the parties must have intended’ (The Moorcock [13] ). These tests were summarised by Lord Simon in BP Refinery (Westernport) Pty Ltd v Shire of Hastings [14] in the following terms:

‘for a term to be implied, the following conditions (which may overlap) must be satisfied: 1) it must be reasonable and equitable; 2) it must be necessary to give business efficacy to the contract; so that no term will be implied if the contract is effective without it; 3) it must be so obvious that “it goes without saying”; 4) it must be capable of close expression; 5) it must not contradict any express term of the contract.’

Reasonableness of a term is a significant factor in order to imply a term into a contract. However, it must be borne in mind that the Court does not have the power to imply a term into a contract just on the basis of reasonableness. Thus a high standard of necessity must be satisfied by the Court to imply a term into a contract.

The final source of implied terms is ‘implied by statute’. There are many terms which are implied in law and have been put into statutory form. An ideal example to which are the terms implied into contracts for the sale of goods under the doctrine of Sale of Goods Act 1979. Similar terms are implied by statute into hire-purchase agreements, [15] other contracts for the supply of goods [16] and contracts for the supply of services. [17] The function of these implied terms is not to give effect to the intention of the parties but to provide some protection for the expectations of purchasers, particularly consumers. This element of ‘consumer protection’ is further evidenced by the fact that the Unfair Contract Terms Act 1977 [18] (UCTA) places severe restrictions upon the ability of sellers to exclude the operation of these implied terms and, indeed, as against a consumer, they cannot be excluded.

Breach of SOGA is a breach of implied terms of a contract which is one of the sources apart from ‘express terms’ of the obligations of the parties under the contract called “terms of a contract”.

1.2 Remedies

In cases where the buyer is a consumer, the remedy of repudiation of contract is available to the buyer but is only specified to circumstances whereby the breach of contract by the seller goes to the root of the agreement. This can either be because of a breach of condition or because of the nature and consequences of a breach of an innominate term. Nevertheless, it must be borne in mind that the right to repudiate the contract is separate from the right to reject since the right to reject does not necessarily end a contract. [19] A viable reasoning behind this is that the seller can usually, until the time of performance has expired, therefore, tender a conforming delivery. [20] However, changes were introduced by the SOGA 1994 but are only applicable to non-consumer sales, as S. 15A of the Act limits the right to reject for a breach of ss. 13 to 15, where the buyer does not deal as a consumer.

The restrictions against rejection of goods are only applicable to sales whereby the buyer is not a consumer. However, in a case where the breach is of S. 30, the new S. 30(2A) limits the buyer’s right to reject whereby the reason ‘is so slight that it would be unreasonable for him to do so’. A regrettable feature of the English provisions is that they only apply to breaches of the seller’s statutory duties. Hence, these do not apply to breaches of a stipulation as to time, or any other express term of the contract which is classifiable as a condition. Presentation of shipping documents on day late, the buyer’s failure to open a letter of credit by the stipulated date and similar breaches of contract continue to permits rejection by the buyer however reasonable or unreasonable it is.

Whether or not there is a right of rejection depends on the breach of one of the quality warranties and in order to sue for a breach of the fitness for purpose warranty the Act requires the buyer to have made known to the seller the particular purpose for which the goods are required in consequence, whether or not this situation arises will almost certainly depend whether there is a breach of the other quality warranties, and in particular the warranty that the goods are of satisfactory quality. [21] The right of rejection is further guided by S. 31(2) of the 1979 Act as it mentions that the in cases of sales by instalments, the question of rejection will depend on the case i.e terms and circumstances of the contract. Hence, if the contract is severable, but the defective instalment is sufficiently bad to justify the buyer in throwing up the whole contract under S. 31(2), the buyer does not have the right to reject the prior instalments. It does not necessarily exclude the possibility of the buyers’ right to reject but is dependable on the future i.e the buyer can refuse to perform outstanding obligations but the obligations for previous instalments cannot be undone.

1.2.1 Consequences of Rejection

The existing UK law allows the buyer to decline to pay the price of goods bought and if already paid can recover it after repudiating a contract. Such extreme rights is likely to be altered if the proposed directive is approved, which will be discussed in detail chronologically. In addition to such right, a buyer under current law can maintain an action for damages, for if the buyer acts within his rights in rejecting the goods tendered, he can normally hold the seller liable for non-delivery. [22] Moreover, there may be circumstances in which, after rejection by the buyer, the seller can tender delivery of a new lot of goods if he still has time to do this within the period allowed by the contract, [23] but in general it seems that the buyer is entitled to treat a wrongful delivery as itself a breach of contract which justifies repudiation by him. [24] This thereby exemplifies the unrestrained rights to reject goods which the UK buyers clearly enjoy under the existing law.

Under the present law, the right of rejection must be exercised in a fairly short period, so that, in practice no question arises as to any use that the buyer may have had from the goods. The buyer’s right to fully recover the price after rejection is based on the assumption that he has received no consideration at all when he rejects; however, this may not be accurate in a case where the buyer has used the goods before rejecting them. Nevertheless, it is safe to assume that a total failure of consideration can amount to a valid rejection.

Apparently, when the goods are rejected it is not the responsibility of the buyer to return the goods to the seller, as stipulated by S. 36 of the 1979 Act. [25] Acceptance by the seller of the buyer’s rejection results the seller to drift back to possession of the goods. Accordingly, the buyer does not have any lien on the goods for the repayment of the purchase price. [26]

1.2.2 Loss of the Right to Reject

Although the buyers in UK have immense rights to reject goods which are not in conformity, there are situations when they lose the right to reject. S. 11(4) [27] stipulates one of the circumstances when this can happen. Furthermore, by virtue of Section 11(1)(c) of SOGA 1893 it can be stated that where the contract of sale is not severable or the sale is of specific goods and the buyer has accepted goods the property passes to the buyer resulting him to lose the right to reject. Writers have argued that this is difficult to read with S. 18 Rule 1 of the same Act which states that the property passes as soon as the contract is made when the sale is of specific goods. The European Commission certainly considered these complications before deciding to propose a directive with the intention to provide maximum harmonization. This will be discussed in detail in the following chapters.

In addition to this, buyers may lose the right to reject by way of acceptance. A buyer is held to have accepted the goods losing the right to reject simultaneously (as discussed above). This is viable even when the buyer did not know of the seller’s breach or of his rights. Thus termination for breach is in principle often possible long after the breach, because the facts may only then come to light; however acceptance takes place shortly after contract of sale. It is not usually possible to reject goods long after delivery because some hidden defect becomes visible months or years after the goods are delivered. [28]

The law Commission discussed the given question in their Report of 1987 [29] , but recommended against any change in the law which would confer a long-term right of rejection on the buyer. Despite the possibility of the defects coming into light years after being delivered, such guideline was not repealed by the law commission. The principal reason given was that such change would introduce new complications regarding the use and benefit when the buyer may have had from the goods. A reasonable explanation for this is that under the current law a full refund of price is available if the goods are rejected, however, if long term rejection is approved then such doctrine can face complications, including the fact that the buyer will retain the goods until the rejection.

Moreover, a buyer who makes clear and unequivocal representations (whether by words or by way of conduct) that he will accept goods, or that he will not reject them on the grounds of late delivery or some other ground of that kind, may lose his right to reject under the common law doctrines of waiver and estoppel. Similarly, a buyer cannot accept goods if he has the intention of rejecting them, [30] nor to reject them whereby he wants to accept them. [31]

The remedies stipulated above apply to commercial and consumer sales. However, the Sale and Supply of Goods to Consumer Regulations [32] which was added to SOGA 1979 after S. 48, strengthens the consumer buyer’s remedies. However, these provisions apply when the buyer ‘deals as a consumer’ [33] Section 61(1) defines these terms by referring to equivalent terms under UCTA 1977. [34] Eventually, S.12 of UCTA was amended so that if a party is an individual, the requirement that the goods be of a type ordinarily supplied for private use or consumption is ignored. Otherwise, the description of ‘dealing as a consumer’ is broader than that contained in the Directive since the purchase in the course of a business of goods merely incidental to that business will not prevent the purchaser being held to deal as a consumer. [35] Consumer buyers under the present law have the right to demand repair or replacement of goods [36] within a reasonable time at the seller’s expense, price deduction or rescission of the contract. [37] However, if the buyer requires repair or replacement, the consumer buyer’s right to rescind the contract is suspended until the seller has had the opportunity to repair or replace. In other words, the consumer buyer must inform the seller of the fault in the goods within a reasonable time so that the seller can take initiatives for either a replacement or refund or any other agreed remedy. [38]

1.2.3 The Fundamental Problem with the current law

The underlying problem which the UK consumers and businesses face due to the present law is that they find it difficult to understand the law i.e the ‘reasonable time’ within which they are expected to initiate the claim against the seller. This results in unnecessary disputes and litigation. Since, government intervention is necessary for this, the European Commission believed that their inclusion of the “maximum harmonization” proposal will help the member states achieve such aim.

There are different established cases which give similar problems with the requirement to inform the seller within a ‘reasonable time’. [39] In Bernstein v Pamson Motors (Golden Green) Ltd [40] the buyer who had used the purchased vehicle for three weeks and driven 140 miles, had lost the right to reject it. The reason behind such conclusion was that the vehicle could not be resold. The Court in Millars of Falkirk v Turpie [41] denied the buyer’s right to reject shortly after the buyer had taken delivery of it. The Court denied on the ground that minor defects such as the leakage of oil in the steering box were not uncommon in new cars for it to be unsellable. On the similar facts, in Rogers v Parish (Scarborough) Ltd [42] the Court decided to entitle the buyer to reject because of minor defects in the purchased car. This difference in decision making continued despite the amendments made to the statutes which thereby produce uncertainties.

The aim of the Law Commission in this respect is to simplify the law relating to consumer remedies for faulty goods and to bring it in line with accepted good practice so that it gets easier for consumers and retailers to understand. It will enable consumers to know what their rights are, exercise them effectively and participate with confidence in the market place. Burdens on businesses will be reduced due to a decrease in the number of unnecessary disputes, and reduced staff training costs. Consumer advisers will find it easier to give clear advice. The Law Commission’s proposal shall be discussed in detail after the discussion of the proposed directive by the EC.

Chapter II

EC’s Harmonization Proposal

2.1 Purpose of the Directive

The idea of Centralization of Private Legal rules at a European level or in other words rationales for harmonization of the rules has faced various criticisms in different domains of law such as Environmental Law and Tort Liability. Despite such encounters from scholars and commentators, the tendency towards centralization seems to have been shifted towards the domain of consumer contract law. On 8 February 2007, the Commission adopted the Green Paper on the review of the consumer acquis, summarizing the Commission’s initial findings and initiating a public consultation process. [43] Commentators on the Green Paper argued that it had become clear that the European Commission envisaged the drafting of a European Code on consumer contractual rights. [44] The European Commission’s proposal for a directive on Consumer contractual rights is inter alia based on the responses of the Green Paper from a wide range of stakeholders. The main purpose of the proposal is to provide maximum harmonization within EU business to consumer contracts.

However, it is also noted in the Green Paper on the Review of Consumer acquis that, the European Commission proposed similar consumer protection rules. It stated that the directives in question allowed the Member States to adopt more stringent rules in their national laws and taking this opportunity many member states have used this to provide greater consumer protection to their consumers. [45]

2.1.1 Why is Maximum Harmonization necessary?

According to the new proposal for a Directive on consumer rights (COM 2008 614 def)

the overarching aim of the Review is to achieve a real business-to-consumer internal market striking the right balance between a high level of consumer protection and the competitiveness of enterprises, while ensuring respect of the principle of subsidiarity [46]

Hence the overall objective is to reduce business reluctance to trade cross-border. This overall objective is proposed to reduce fragmentation, to tighten up the regulatory framework and thereby provide consumers with a high common level of consumer protection and adequate information about their rights and how to exercise them. [47] Michael Faure in a similar vein stipulated in his article that the directives under review contain minimum harmonization clauses. The focus was then on the outcome of the directives, for which he referred to the memorandum of the proposal and stated that it was a ‘fragmented regulatory framework across the Community which causes significant compliance costs for businesses wishing to trade cross-border’. [48] The explanatory memorandum pays a lot of attention to the reactions of the Commission received to the Green Paper, noting that ‘the majority of respondents to the Green Paper called for the adoption of a horizontal legislative instrument applicable to domestic and cross-border transactions, based on full harmonization.’ [49]

The proposal for a brand new directive on Consumer Rights by the European Commission in October 2008 is intended to repeal four existing directives, namely, i) Doorstep Selling; ii) Distance Selling; iii) Unfair Terms in Consumer Contracts; iv) Consumer Remedies and Consumer Guarantees. A single glimpse at the proposal does not indicate any change to the existing law but its significance is more detailed on ‘maximum harmonization’ when observed carefully.

2.2 The Positive Changes which the Directive ought to introduce

The existing consumer protection directives are based on minimum harmonisation. This means that Member States can go beyond the degree of protection granted to consumers in EC law by introducing or maintaining stricter national consumer rules. As a consequence, differences exist in the level of protection given to the EU consumers and the exercising of those rights granted by the directives. The inherent intention of the EC to fully harmonize some key regulatory aspects will significantly augment ‘legal certainty’ for both consumers and business. If the directive is implemented then both consumers and businesses will be able to rely on a single regulatory framework based on clearly defined legal concepts regulating certain features of business-to-consumer contracts across the Community. The outcome is likely to eradicate the impediments stemming from the fragmentation of the rules. According to the EC, these intentions can only be fulfilled if there is a ‘single regulatory framework’. Furthermore the consumers are likely to benefit from a high level of protection across the Community. [50]

The Directive further focuses on cross-border selling indicating it to be easier for the consumers and businesses to interact more conveniently. The EC thereby compared with the drastic growth in the distance sales over the last few years, however, the growth in cross-border distance sales has been limited. Accordingly, this discrepancy was stated to particularly affect Internet sales since it has the potentiality to have higher cross border sales and having a uniform system would allow the buyers and seller to trade under the same regime. Since, the contracts are made away from business premises, cross-border contracts are generally constrained by various factors including the different national consumer protection rules. The EC’s survey on the growth of domestic direct selling over the last few years showed that the number of consumers using this channel for cross-border purchases has remained flat. If the cross-border selling is made easier then it will be much easier for the business enterprises to get engaged with additional business opportunities and more specifically agents of direct selling companies would be more inclined to seek business opportunities in other Member States, in particular in border regions. Therefore it was thought that the full harmonisation of consumer information and the right of withdrawal in distance and off-premises contracts will contribute to the better functioning of the business to consumer internal market. [51]

There are many other changes which are expected to be introduced via implementation of the Directive [52] which shall be elaborately discussed in chapter IV.

2.3 The Principles laid down in the Directive

The paper will not describe in detail all the principle given under the Directive. However, all the provisions which highlight the present law in UK and those which have been questioned by the Law Commission of England and Scotland will be identified and illustrated in an appropriate manner.

The most highlighting Article in the Directive proposal is Article 4