Various Approaches to Unfair Terms and Their Background Philosophies

• Author: Thomas Wilhelmsson
• Position: Professor, University of Helsinki
• Pages: 51-57

Thomas Wilhelmsson

Professor, University of Helsinki

Various Approaches to Unfair Terms and Their Background Philosophies

The issue of regulating unfair terms has occupied an important position on the European contract law agenda ever since the agenda was formed in the late 1980s. The first piece of European secondary legislation stepping into the core areas of contract law was the Unfair Contract Terms Directive¹. The issue is, of course, dealt with both in the Principles of European Contract Law ² and in the recently published preliminary version of the Draft Common Frame of Reference³.

It is to be expected that this issue will be one of the most debated in the further discussion on the development of European contract law. The reasons are of both a practical and theoretical nature. How law should react to contract terms that appear one-sided, unbalanced, or unfair is certainly a practical problem both in general contract law and in consumer contract law specifically. However, the controversies also relate to the position of the fairness principle in the basic understanding of contract law as such. The approach to unfair terms is an important, perhaps even the most important, reflection of the various ideological-theoretical underpinnings of thought on contracts. Therefore, the issue attracts great interest, despite the fact that fairness rules even in the most fairness-friendly jurisdictions are applied relatively seldom.

Questions like the following are at the core of the debate on what the European fairness rules should look like in future:

- What scope should a fairness rule have? Should it include individual contract terms or only standard terms (or, as an intermediate position, terms that have not been individually negotiated ⁴ )? Should it be applied to the main subject matter of the contract and the price, and to what extent? Should it relate to consumer contracts only, or to business-to-business contracts as well?

- What kinds of arguments should primarily be used in assessing the unfairness of a contract? Should one mainly look at the possible one-sidedness of the procedure when the contract was made (procedural unfairness), or should one instead consider the outcome of the procedure - that is, the content of the contract (substantive unfairness) - or, rather, what interrelationship should the procedural and substantive arguments have in the assessment of fairness?

Various answers, in various combinations, can be given and have been given to these questions. I claim that those answers are not primarily legal-technical but relate to more general conceptions of justice as well as to our understandings of human beings, society, and law.

In this paper, I will present and discuss some of the background variables. My purpose is not to defend any particular solutions to the contract law issues mentioned above but, rather, to make explicit some fundamental reasons that in the debate often remain hidden behind more concrete surface-level reasoning.

2. Unfair terms and four conceptions of justice

The issue of how to guarantee or promote fairness of contracts is often described in terms of dichotomies like freedom of contract versus fairness or freedom versus paternalism. However, this easily oversimplifies the issue. For example, to position procedural fairness rules opposite freedom of contract can be misleading. Rules that require a party who uses standard terms to let the other party acquaint itself with the terms and even to particularly 'flag' onerous terms can equally well be understood as devices to make sure that the decision-making of the party receiving the terms is sufficiently informed and 'free'. The term 'paternalism' in a similar fashion has been combined even with libertarianism⁵. In addition, the term - often used to discredit regulation in this area - is misleading. It is intended to convey a picture of the state 'paternalistically' intervening in private relationships against the will of the parties. However, even if mandatory private law rules may prevent one party from relying in court on terms conflicting with those rules (that is, in fact, to use the state - the pater - to enforce those terms), the parties are free to do what they want as long as they agree and there is no dispute between them. Only administrative or criminal law's collective control of contract terms could be called paternalistic in the true sense of the word.

So, the issue of fairness is certainly more complex than is often appreciated. The rules to be found in this area have many possible purposes that reflect different forms of justice.

Firstly, in contract discourse, the problem of unfair contract terms is often raised in connection with regulation concerning standard-form conditions. The use of such conditions poses obvious problems for traditional contract thinking, which emphasises autonomy and the will or consent of the parties as basic legitimating factors behind the binding force of contracts. How can one, with such a starting point, accept that a party, who might not even have read the conditions and knows nothing about their content, can be bound by them? If this is the perceived problem, the purpose of regulation that attempts to remedy the problem is to safeguard the actual consent of the party or, in more general terms, the actual freedom of contract of that party. Rules that have this aim are focused less on the content of the outcome and more on the procedure for achieving a contract. They are based on a form of procedural justice. Procedures of negotiation and information are central in such an approach.

Secondly, the focus may be on the substance of the contract rather than on the procedure of making contracts. In contract law it is natural, as a starting point, to look at fairness with regard to the substantive relationship between the parties to a contract. Discussion often focuses on the balance between what the parties have promised to perform for each other. It is considered important that contracts be balanced, or, rather, that they not appear too unbalanced. To the extent that the purpose of the rules is the promotion of contractual balance with regard to the substance of contracts, the rules are based on the idea of commutative justice.

Thirdly, elements of distributive justice may occasionally become relevant in this context as well. Assessment of the fairness of the contractual obligation is then not primarily related to the balance between the parties. Rather, it is focused on enhancing the position of the weaker groups of citizens in comparison with other groups. A good example of such contractual social protection is the principle of social force majeure that has been used in the Nordic countries⁶. According to this principle, the legal consequences of delays in payment and other performance may be mitigated if the ultimate reasons for the delay are unfavourable changes in the health, work, housing, or family situation of the debtor.

Fourthly, fairness rules in contract law may be used to support other societal policies. A typical example is regulation concerning racism and gender equality: contracts not in compliance with such regulation may be considered unfair for this reason⁷. Environmental concerns and human rights issues may influence the assessment of fairness as well.

In other words, fairness rules rest on a complex web of purposes and conceptions of justice. Most national and international solutions contain both procedural and substantive elements. Obviously, up-to-date legislation on fairness and standard-form contracting needs both elements. Depending on where the emphasis is put, there are different approaches to the issue in different countries.

3. Four models for approaching the issue

Differing assessments of the need for regulating unfair contract terms and standard-form contracts connected with various understandings of the purposes and conceptions of justice of such regulation, as outlined above, have led to different approaches to the issue in different countries. Acknowledging that there are many variations on the regulatory themes that surface in this context, one may perhaps group the ways of dealing with the issue into a couple of larger categories or models. Four models are distinguished here: the 'no particular problem' model, the standard-form contract model, the consumer protection model, and the general fairness model.

As the purposes mentioned usually are intertwined in practice, the models cannot directly be tied to the particular conceptions of justice analysed in the previous section, even though there are some obvious connections. I will note some such connections below. In most models one can find at least traces of all the conceptions of justice mentioned, but some conceptions come more to the fore in some models than in others.

The 'no particular problem' model is based on the belief that the general rules on making contracts - based on certain safeguards of free will and consent of both parties, perhaps with additional rules related to the need to adjust the contract in the event of...