Law and the consumer - Business Environment

Economic theory tends to suggest that laws to protect the consumer are unnecessary. If individuals are behaving rationally when consuming goods and services, they would arrange their consumption to maximize their satisfaction (or ‘utility’), in the words of an economist. Products which because of poor quality or some other factor reduced a consumer’s utility would be rejected in favour of those which proved a better alternative and this would act as an incentive to producers (and retailers) to provide the best products. In effect, market forces would ensure that the interest of the consumer was safeguarded as suppliers in a competitive market arranged their production to meet the needs and wants of rational consumers.

The ‘ideal’ view of how markets work is not always borne out in practice. Apart from the fact that consumers do not always act rationally, they often do not have access to information which might influence their choice of products; in some cases they may not even have a choice of products (e.g. where a monopoly exists) although this situation can change over time (e.g. through privatization of state monopolies). Also, given the respective resources of producers and consumers, the balance of power in the trading relationship tends to favour producers who can influence consumer choices using a range of persuasive techniques, including advertising.

Taken together, these and other factors call into question the assumption that the consumer is ‘sovereign’ and hence the extent to which individuals have inherent protection in the marketplace from powerful (and, in some cases, unscrupulous) suppliers. It is in this context that the law is seen to be an important counterbalance in a contractual relationship where the consumer is, or may be, at a disadvantage, and this can be said to provide the basis of legal intervention in this area.

Existing laws to protect consumers are both civil and criminal and the relevant rights, duties and liabilities have been created or imposed by common law (especially contract and tort) or by statute. Significantly, as the examples below illustrate, a large element of current consumer law has resulted from statutory intervention, much of it in the last 30 years. Indeed, a size able quality of consumer protection law comes from the EU by way of directives. These laws covering areas as diverse as trade descriptions, the sale of goods and services, and consumer credit and product liability indicate a growing willingness on the part of governments to respond to the complaints of consumers and their representative organisations and to use legislation to regulate the relationship between business organisations and their customers. Europe is keen to encourage consumers to take advantage of cross-border EU markets by harmonizing consumer protection. As suggested elsewhere, such intervention could reasonably be construed as a political response to some of the socially unacceptable characteristics of a capitalist economy.

Trade Descriptions Act 1968
The main aim of the Trade Descriptions Act is to protect consumers from traders who deliberately mis describe goods or give a false description of services in the process of trade. Under the Act which imposes an obligation on local authorities to enforce its provisions (via Trading Standards Officers) a trader can be convicted of a criminal offence in three main areas:

  1. Making a false trade description of goods.
  2. Making a false statement of price.
  3. Making a false trade description of services.

The penalty for such offences can be a fine on summary conviction and/or imprisonment following conviction on indictment.

With regard to goods, the Act applies both to goods which have been sold and to those which are offered for sale and to which a false description, or one which is misleading to a material degree, has been applied. It can also apply to advertisements which are ‘economical with the truth’, such as claims regarding a used car for sale by a local dealer. Similarly, with services it is an offence to make false or misleading statements as to the services offered to consumers and it is possible for an offence to be committed even if the intention to mislead is not deliberate.

In the case of price, the Act outlaws certain false or misleading indications as to the price of goods, such as claims that prices have been reduced from previously higher levels (sham sales). For this claim to be within the law, a trader needs to show that the goods have been on sale at the higher price for a period of 28 consecutive days during the preceding six months. If not, this must be made quite clear to the consumer when a price reduction is indicated.

The Consumer Credit Act 1974
The Consumer Credit Act, which became fully operational in May 1985, controls transactions between the credit industry and private individuals (including sole traders and business partnerships) up to a limit of £15 000. Under the legislation consumer credit agreement is defined as a personal credit providing the debtor with credit up to the accepted limit. This credit may be in the form of a cash loan or some other type of financial accommodation (e.g. through the use of a credit card). The Act also covers hire purchase agreements (i.e. a contract of hire which gives the hirer the option to purchase the goods), conditional sale agreements for the sale of goods or land, and credit sale agreements, where the property passes to the buyer when the sale is effected.

The main aim of this consumer protection measure is to safeguard the public from trading malpractices where some form of credit is involved. To this end the Act provides, among other things, for a system of licensing controlled by the Office of Fair Trading which must be satisfied that the person seeking a licence is a fit person and the name under which he or she intends to be licensed is neither misleading nor undesirable. Providing credit or acting as a credit broker without a licence is a criminal offence, as is supplying a minor with any document inviting them to borrow money or obtain goods on credit. (Note that the ConsumerCredit Bill has been re-introduced in 2005 and so the above rules may change.)

A further protection for the consumer comes from the requirements that the debtor be made fully aware of the nature and cost of the agreement and his or her rights and liabilities under it. The Act stipulates that prior to the contract being made the debtor must be supplied with certain information, including the full price of the credit agreement (i.e. the cost of the credit plus the capital sum), the annual rate of the total charge for credit expressed as a percentage (i.e. the annual percentage rate), and the amounts of payments due and to whom they are payable. In addition, the debtor must be informed of all the other terms of the agreement and of their right to cancel if this is applicable. In the case of the latter, this applies to credit agreements drawn up off business premises, and is designed to protect individuals from high pressure doorstep sellers who offer credit as an incentive to purchase. Some companies, aware of the rights of cancellation on cold calls at home, have adopted a practice of writing to potential customers, making specific claims such as discounts and inviting the customer to book an appointment. Thus any subsequent home visit is not technically a cold call. This practice has raised some concern and is almost certain to be outlawed, either by legislation or under a code of practice.

Sale of Goods Act 1979
Under both the Sale of Goods Act 1979 (as amended) and the Unfair Contract Terms Act 1977 consumers are essentially seen as individuals who purchase goods or services for their own personal use from other individuals or organisations selling them in the course of business. A computer sold, for example, to a student is a consumer sale, while the same machine sold to a secretarial agency is not, since it has been acquired for business purposes. This legal definition of a consumer is important in the context of laws designed specifically to provide consumer protection, as in the case of the Sale of Goods Act which governs those agreements whereby a seller agrees to transfer ownership in goods to a consumer in return for a monetary consideration, known as the ‘price’. Where such an agreement or contract is deemed to exist the legislation provides consumers with rights in respect of items which are faulty or which do not correspond with the description given to them, by identifying a number of implied conditions to the sale. In the case of contracts for the supply of services (e.g. repair work) or which involve the supply of goods and services (e.g. supplying units and fitting them in a bathroom or kitchen), almost identical rights are provided under the Supply of Goods and Services Act 1982 (as amended).

The three main implied conditions of the 1979 Act are relatively well known. Under section 13, goods which are sold by description must match the description given to them and it is of no significance that the goods are selected by the purchaser. This description may be on the article itself or on the packaging or provided in some other way, and will include the price and possibly other information (e.g. washing instructions) which the consumer believes to be true. A shirt described as 100 per cent cotton, for instance, must be just that, otherwise it fails to match the description given to it and the consumer is entitled to choose either a refund or an exchange.

The second condition relates to the quality of the goods provided. Under section 14(2) of the Act goods had to be of ‘merchantable quality’, except where any defects are drawn specifically to the attention of the purchaser before the contract is made or where the buyer has examined the goods before contracting and the examination ought to have revealed such defects. As ‘merchantable quality’ was a matter of some controversy the phrase was amended to ‘satisfactory quality’ and this is defined in section 1 of the Sale of Goods and Services Act 1994, but the general expectation is that a product should be fit for the purpose or purposes for which it is normally bought, bearing in mind questions of age, price and any other relevant factors (e.g. brand name). A new top-of-the-range car should have no significant defects on purchase, whereas a high-mileage used car sold for a few hundred pounds could not reasonably evoke such expectations in the mind of the consumer. Thus, while the implied condition of ‘satisfactory’ applies to sale goods and used goods as well as to full-price purchases of new goods, it needs to be judged in light of the contract description and all the circumstances of a particular case, including the consumer’s expectations.

The third implied condition derives from section 14(3) of the legislation, namely that goods are fit for a particular purpose (i.e. capable of performing the tasks indicated by the seller). Section 14(3) comes into its own when a use or range of uses is made known to the seller. Accordingly, if the seller, on request from the purchaser, confirms that goods are suitable for a particular purpose and this proves not to be the case, this would represent a breach of section 14(3). Equally, if the product is unsuitable for its normal purposes, then section 14(2) would also be breached and the consumer would be entitled to a refund of the price.

It is worth noting that ‘satisfactory’ and ‘fitness for a purpose’ are closely related and that a breach of one will often include a breach of the other. By the same token, failure in a claim for a breach of section 14(2) is likely to mean that a claim for a breach of section 14(3) will also fail. Moreover, if, on request, a seller disclaims any knowledge of a product’s suitability for a particular purpose and the consumer is willing to take a chance, any subsequent unsuitability cannot be regarded as a breach of section 14(3). The same applies if the buyer’s reliance on the skill or judgement of the seller is deemed ‘unreasonable’.

The remedies available for breach of these implied terms was rejection, or damages if the right to reject the goods had been lost, such as by the lapse of an unreasonable period of time. The only exception to this has traditionally been that of durability, that is, where the goods have failed before goods of that type could reasonably be expected to fail. Durability has always been treated as a damages only breach, so as to avoid overcompensating the buyer.

However, the Sale and Supply of Goods to Consumers Regulations 2002 has granted the consumer/buyer new remedies. The Regulations come from the European Consumer Guarantees Directive (1999/44/EC) and seek to continue the move towards harmonizing the cross-border sale of consumer goods. The DTI, keen not to reduce the pre-existing levels of consumer protection, added the new remedies to those already existing. The result is that the consumer still retains the short-term right to reject the goods for nonconformity. The period of time to exercise this option is quite short, normally a number of weeks at most. However, if this remedy is lost due to lapse of time, the consumer now has four new remedies in pairs: repair or replace, price reduction or rescission. It must be noted that the damages awarded for rescission, the last remedy, will include a sum knocked off for ‘beneficial use’, reflecting the amount of use the consumer managed to get out of the goods. Until these Regulations the consumer had no right to require a repair or a replacement, and could only sue for damages.

Moreover, the Regulations now remove the problem of goods damaged in transit. Under the old law, the risk passed to the consumer/buyer once the goods had been handed over to a third-party carrier. The result being that the purchaser would find both the carrier and the seller blaming one another for the loss. Ultimately, the consumer would go uncompensated unless they decided to sue both parties. The Regulations now require that goods must actually be received by the consumer/buyer in conformity with the contract, so risk passes later. Lastly, the manufacturer must bear the return cost for any defective goods under a manufacturer’s guarantee.

These new remedies only apply to consumers/buyers of goods sold in the course of a business. Section 15A of the Sale of Goods Act applies to business-to-business sales where there is only a slight breach of an implied condition of description or quality. The provision seeks to prevent a business buyer from rejecting goods due to a technical breach, and imposes an award of damages only. As damages are based on loss, damages for a technical breach will probably be very low. As a result, business which find that they can get the goods cheaper elsewhere will no longer be encouraged to seek to reject goods for minor breaches. This also recognizes that rejections of goods is not the norm in business; normally a recalculation of the price takes place. Having theoretical rights is one thing, but in business one may need to trade with the other party again.

As a final comment, under the Sale and Supply of Goods and Services Act 1982, section 3, there is an implied condition that a supplier acting in the course of business must carry out the service with reasonable care and skill and within a reasonable time, where a specific deadline is not stated in the contract. Reasonable care and skill tends to be seen as that which might be expected of an ordinary competent person performing the particular task, though this will, of course, depend on the particular circumstances of the case and the nature of the trade or profession. As in the case of the Sale of Goods Act, any attempt to deprive the consumer of any of the implied conditions represents a breach both of the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999.

Exclusion or limitation clauses in consumer contracts are subject to the UnfairContract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999, which currently operate as a dual regime, giving the consumer the choice of actions. Under the former any clause seeking to exclude or limit liability for personal injury/death is void while all other clauses are subject to the test of reasonableness. Under the latter regulations a term that has not been individually negotiated will be unfair if it is contrary to good faith by causing a significant imbalance between the parties. The situation is a little different in business deals although personal injury/death still cannot be excluded. Thus, where a reference is made on a product or its container or in a related document to a consumer’s rights under sections 13 to 15 of the Sale of Goods Act, there must be a clear and accessible notice informing consumers that their statutory rights are not affected when returning an item deemed unsatisfactory. It is an offence under the Fair Trading Act 1974 to display notices stating ‘no refunds’ or ‘no refunds on sale goods’. The aim is to ensure that buyers are made fully aware of their legal rights and are not taken advantage of by unscrupulous traders who seek to deny them the protection afforded by the law.

The Consumer Protection Act 1987
The Consumer Protection Act 1987 came into force in March 1988 as a result of the government’s obligation to implement EC Directive 85/374 which concerned product liability. In essence the Act provides for a remedy in damages for any consumer who suffers personal injury or damage to property as a result of a defective product by imposing a ‘strict’ liability on the producers of defective goods (including substances, growing crops, ships, aircraft and vehicles). Naturally, the onus is on the complainant to prove that any loss was caused by the claimed defect and a claim can be made where damage to property, personal injury or death has occurred. In the case of the latter, for example, a relative or friend could pursue an action and, if American experience is anything to go by, could be awarded very substantial damages if liability can be proven. As far as property is concerned, damage must be to private rather than commercial goods and property and must exceed £275 for claims to be considered.

While the Act is intended to place liability on the producers of defective goods, this liability also extends to anyone putting a name or distinguishing mark on a product which holds that person out as being the producer (e.g. supermarkets’ own-brand labels). Similarly, importers of products from outside the EU are also liable for any defects in imported goods, as may be firms involved in supplying components or parts of the process of manufacture of a product. To prevent a firm escaping its liability as a supplier claiming it is unable to identify its own suppliers, the legislation provides a remedy: any supplier unable or unwilling to identify the importing firm or previous supplier becomes liable itself for damages under the Act.

Firms seeking to avoid liability for any claim have a number of defences under
section 4 of the Act. Specifically these are:
_ That the defendant did not supply the product in question.
_ That the product was not manufactured or supplied in the course of business.
_ That the defect did not exist at the time the product was distributed.
_ That where a product has a number of components, the defect is a defect of the finished product or due to compliance with any instructions issued by the manufacturer of the finished product.
_ That the defect is attributable to the requirement to comply with existing laws.
_ That the state of scientific and technical knowledge at the time the product was

supplied was not sufficiently advanced for the defect to be recognized Of these, the last the so-called development risks or ‘state of the art’ defence is the most contentious, given that it applies largely to products such as new drugs and new technology where the implications of their usage may not be apparent for some years. As recent cases have shown, manufacturers faced with damages from claimants who appear to have suffered from the use of certain products often decide to settle out of court without accepting liability for their actions.


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