“Unjust” and “unfair” are terms being used more frequently in consumer protection laws. (see Section 70 Consumer Credit Code)
They are based on equitable principles regarding the conduct of a party to a transaction which uses its superior bargaining position to obtain a favourable result.
The UK Financial Services Authority recently obtained an undertaking from National Australia Bank Europe Limited (trading as Yorkshire Bank) to change its mortgage terms to comply with Regulation 5 of the UK Consumer Contracts Regulations which provide that a contract term shall be regarded as unfair ‘if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’.
In this case, the FSA took the view that some grounds for default in NAB mortgages were unfair, including default where a mortgagor had committed a minor breach in a facility with a NAB associated company.
NAB agreed to limit the scope for the Bank to exercise its powers to more serious defaults.
The FSA said:
“In drafting their consumer contracts, firms need to consider carefully whether reserving the ability to exercise a power is fair in each and every circumstance (as outlined in the contract). Specifically they should consider whether the ability to exercise those powers in each and every circumstance might create a significant imbalance in the contract, which is detrimental to consumers. “
the (Consumer Contracts) Regulations are intended to operate in a free-market economy and do not constrain a firm from managing its business prudently. When we exercise our powers under the Regulations we do not wish to impede the legitimate commercial judgements that firms make having regard to the overall well-being of their business and all of their consumers
The Regulations are not intended to prevent firms operating in a fair, sensible and commercial way; nor are they designed to impose an unreasonable burden on firms. Rather, their purpose is to achieve a balance between the rights and obligations of both parties to the contract and to ensure that consumers do not suffer detriment.