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In a world where consumers seem to have an awful lot of rights and businesses have few, where do firms stand when they buy in products and services – for use rather than sale – that then fail to live up to the promises made?
The law is less protective to businesses than it is to consumers, but even so – and to some surprisingly – businesses are not left high and dry, and they do have rights.
The starting point for any debate on the topic is to understand that, while consumers have a wide range of rights granted that protect them from misleading or unfair contracts or sales with traders, business protections are very different.
The laws offering protection from misleading prices and misleading or aggressive marketing techniques, sub-standard goods or services, unfair trading practices and unfair terms and conditions in contracts, doorstep selling, distance selling and e-commerce simply don’t apply to business purchases.
The legal system works on the basis that businesses are assumed to be free to enter into any contractual terms that they agree among themselves.
So how are businesses protected?
Unfair Contract Terms
The Act regulates the use of exclusion clauses, and whether terms are enforceable depends on those terms being reasonable.
Breach of statutory implied terms
Anything that expressly, or by implication, excludes or restricts the liability for ownership of whatever is being sold will have no legal effect. The same applies to correspondence involving description of the item, satisfactory quality and fitness for purpose.
Breach of Contract
A term where a seller excludes or restricts liability for breach of contract, allows the seller to claim they can contractually deliver something other than that which was reasonably expected of them, or which suggests that they do not have to complete the contract is only enforceable if it satisfies the reasonableness test.
A contractual term which excludes or restricts liability for misrepresentation resulting in death, personal injury or fraud caused by negligence cannot be enforced. Other loss or damage terms must pass the reasonableness test.
Death or personal injury caused by negligence
Any contract term restricting liability for death or personal injury caused by negligence won’t apply. Negligence is defined in the Act as a breach of a contractual duty of care.
This applies if, for example, a term in a contract for a supply of a machine excludes the seller’s liability following his negligence in maintaining a machine which went on to kill or injure someone.
If we’re looking at negligence other than injuries – say physical damage to property – any term excluding or restricting liability would only be enforceable if it’s reasonable.
Consider the supply of a machine where a fault leads to damage and financial losses – the question of liability restriction would have to pass a reasonableness test.
What is the reasonableness test?
The Act states that to pass the reasonableness test a term must be “fair and reasonable”, bearing in mind what both parties knew when making the contract.
The courts look to a number of guidelines when deciding, including the strength of the bargaining positions of the parties relative to each other; whether anything was given to the customer to agree the term or whether the customer had an opportunity of entering into a similar contract with others without having to accept a similar term; and whether the customer knew or ought reasonably to have known of the existence of the term.
The courts also look at if a term excludes or restricts liability if some condition is not complied with; whether it was reasonable at the time of the contract to expect that compliance with that condition would be practical; and whether the goods were manufactured, processed or adapted to the special order of the customer.
The Business Protection from Misleading Marketing Regulations 2008
Unfair terms aside, businesses also have protection from misleading advertising through The Business Protection from Misleading Marketing Regulations 2008. These implement a European Union (EU) Directive and ban any advertising that is misleading. They also set out what is acceptable in relation to comparative advertising.
A trader is guilty of an offence if they engage in advertising which is misleading. The law defines this as misleading if it “in any way deceives, or is likely to deceive, the businesses to whom it is addressed, where because of its deceptive nature it is likely to affect those businesses buying behaviour, or if it injures a competitor.”
The courts will take into account matters including the characteristics of the product advertised such as availability, quantity and specification, nature, method and date of manufacture, fitness for purpose, uses and results expected from its use; the price or the manner in which the price is calculated; and the conditions on which the product is supplied or provided.
The courts will also look at the nature, attributes and rights of the advertiser including identity, assets, qualifications, ownership of industrial, commercial or intellectual property (IP) rights and awards and distinctions.
A claim for misleading advertising can be brought under the regulations either within three years after the offence or one year after the discovery of the offence by a prosecutor.
Comparative advertising, on the other hand, is advertising which “in any way, either explicitly or by implication, identifies a competitor or a product offered by a competitor”.
To stay inside the law, an advert must not:
• Be misleading;
• Be a misleading action or misleading omission under the Consumer Protection from Unfair Trading Regulations 2008;
• Create confusion among traders between the advertiser and a competitor and between the trademarks, trade names, other distinguishing marks or products of the advertiser and those of a competitor;
• Discredit or denigrate the trademarks, trade names, other distinguishing marks, products, activities or circumstances of a competitor;
• Take unfair advantage of the reputation of a trade mark, trade name or other distinguishing marks of a competitor or of the designation of origin of competing products;
• Present products as imitations or replicas of products bearing a protected trade mark or trade name.
• Compare products that meet the same needs or are intended for the same purpose;
• Objectively compare one or more material, relevant, verifiable and representative features of those products which may include price;
• Relate to products with the same designation when comparing products with designations of origin.
The Consumer Credit Act 1974
Buying goods with the use of a credit card gives consumer cardholders added protection – something banks endure.
Under section 75 of the Consumer Credit Act 1974, credit card companies are jointly and severally liable for any breach of contract or misrepresentation by the supplier of the goods or services. Any claim is not limited to the amount of the transaction and it may be possible to claim for other losses.
Consumers (cardholders) can choose to claim from either the supplier or the credit card company, or simultaneously, so long as they do not recover the same loss twice.
The protection afforded by the section is particularly helpful where the supplier no longer exists or refuses to co-operate. It is useful to note that it also covers transactions made abroad.
Generally, a claim may be made under section 75 when:
• The goods or services (or part of) were purchased on a credit card by the main cardholder (transactions by additional cardholders are usually not covered unless it can be shown that the main cardholder benefited from the purchase);
• The single value of the item is between £100 to £30,000;
• No third party is involved. Where goods and services are not bought directly from the supplier (i.e. a third party such as PayPal collects the payment) or the person supplying the goods/services is different from the entity that receives the payment and is not associated (such as Amazon marketplace), section 75 may not afford protection;
• The cause of action (i.e. the breach of contract) occurred less than six years ago.
The burden is on the cardholder to show that there has been a breach of contract and/or misrepresentation. As such, it is important that evidence is retained. The cardholder is also required to show that any loss has been mitigated.
Crucially – and this is where businesses benefit – there is no requirement that the purchase must be for individual or non-business related use. The cardholder under a credit agreement does not necessarily have to be an individual person and instead may be a partnership or an unincorporated body of persons (although there are some restrictions).
However, if the credit agreement (the credit card agreement itself) is entered into wholly or mainly for business purposes or the amount loaned exceeds £25,000, then section 75 will not apply.
Where a borrower has entered into a credit agreement to fund the purchase of specific goods/services – such as a vehicle – and either seller used the supplier to make the credit agreement or the specific goods/services are expressly stated in the credit agreement, then – providing the transaction is for between £30,000 and £60,260 – the borrower may claim against the seller under s75A of the Consumer Credit Act.
Various restrictions apply and so the ability to claim under this provision may be limited. Importantly, there is no protection under this provision if the credit agreement has been entered into for wholly or mainly business purposes – but there is if there’s a good proportion of private use.
Finally, even if a borrower cannot show a valid claim under s75 or s75A of the Consumer Credit Act, they may still be able to seek help by asking a court to determine that the relationship between the debtor and the creditor was unfair.
Consumer rights may still apply
Consumer rights apply to all consumers. According to the Consumer Rights Act 2015, a consumer is defined as an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession. So the purchaser may find help in consumer law if they can show the item is more for personal than business use.
The government is aware that small firms are often in the same boat as consumers when making purchases for use in their businesses. Clearly thinking of making changes, it ran a consultation and a call for evidence, called the Protection of small businesses when purchasing goods and services, which closed at the end of June 2015.
Responses that came from a number of organisations, including the British Independent Retailers Association, were published at the start of February 2016.
Comments noted that very small businesses operate effectively on the scale of a consumer, but have little protection because of their business structure; that many issues revolve around telecoms and broadband (especially with increased reliance on these services); and that small businesses are likely to be time-poor and time spent studying a contract is time not spent earning.
The government intends to consult on whether further protections are needed for micro businesses in non-regulated sectors.
Matthew Gough is a partner at Eversheds and specialises in commercial law.