General terms and conditions GTC benefits, dangers and strategies

1
General terms and conditions (GTC) benefits,
dangers and strategies

• Course on competition law and consumer protection
  San Jose, Costa Rica, March 13-15, 2007

Prof. Dr. Roger Zäch, Zürich Vice-president
Swiss competition commission

2
General terms and conditions (GTC)

• Overview
• Basics
• Law of the European Union
• Swiss law

3
I. What are general terms and conditions (GTC) ?

• Terms and conditions which become part of a
  plenty of contracts without being individually
  negotiated.
• The GTC are used by one contract party and have
  to be accepted by the other to become effective,
  thus GTC have not the quality of an act or
  regulation.
• Often GTC are formulated by a specific company
  (for example the GTC of Sony PLC) or an
  association (for example the GTC of a national
  insurance association).

4
I. History of GTC

• GTC are a consequence of the industrial
  revolution where mass products and mass services
  are provided there is also a need for mass
  contracts.
• Today GTC are found in every domain of economic
  life.

5
I. Functions of GTC

• Function of rationalisation (reduction of
  transaction costs)
• Function of specialisation (especially in fields
  where the law offers no or only fragmentary
  solutions like for example new types of
  contracts)
• Function of risk shifting (the user of GTC tries
  to exclude risks like for example liability risks
  which he would have to bear according to the law
  if the parties had no agreement)

6
I. Assessment of GTC

• How do we have to asses these functions?
• The function of rationalisation and
  specialisation are desirable because they lead to
  more efficiency.
• The function of risk shifting is problematic from
  the view of consumer protection.

7
I. Problems of GTC

• Low negotiating power of the single consumer
  concerning negotiation of GTC is a fact of live.
• Often the GTC in specific lines of business are
  very similar what leads to the situation of take
  it or leave it from the consumers view.
• The consumer normally is not able to find out
  which clauses serve risk shifting because he or
  she has not enough business experience.
• The same or similar GTC can also be a problem
  from the view of competition law because it means
  an adjustment of a competition parameter. What
  could a competitor do regarding GTC?
• ? GTC can lead to a serious erosion of the
  freedom of contract as a column of market economy.

8
I. Strategies to avoid negativ impacts of GTC

• Three fields of a possible interference by law or
  the judicary
• Validity control of GTC
• Interpretation control of GTC
• Content control of GTC

9
I. Validity control

• Control whether the GTC have become a valid part
  of the contract between the two parties.
• GTC are only valid if the consumer had a real
  possibility to notice the GTC The user of the
  GTC has the obligation to point at the GTC and
  they have to be in noticalbe form (especially
  readable).
• GTC with unusual content do not become a valid
  part of the contract if the user has not pointed
  at them and the contracting party is not business
  experienced (especially GTC which change the
  typical character of the contract).
• Weak point Unfair GTC become valid part of the
  contract if the user points at the GTC and they
  are in a noticable form.
• Individual agreements are of course valid and
  override contrary GTC.

10
I. Interpreation control of GTC

• Vague GTC should be interpretated in favor of the
  consumer (interpretatio contra proferentem).
• The power gap between user of GTC and consumers
  should be considered.
• Weak point Unfair GTC cannot be interpretated in
  favor of the consumer if the user phrases them
  clearly enough.

11
I. Content control of GTC

• Clauses which stipulate a disparity of
  contractual rights or duties have to be qualified
  as abusive and therefore have no force.
• Because of the weak points of validity and
  interpretation control the content control of GTC
  is a necessary tool of consumer protection!

12
II. Legislation in the European Union

• Council Directive 93/13/EEC concerning unfair
  terms in consumer contracts

13
II. Important terms of the Council Directive

• Definition of the GTC, Article 3
• A contractual term which has not been
  individually negotiated...a term shall always be
  regarded as not individually negotiated where it
  has been drafted in advance and the consumer has
  therefore not been able to influence the
  substance of the term, particularly in the
  context of a pre-formulated standard contract...
  The fact that certain aspects of a term or one
  specific term have been individually negotiated
  shall not exclude the application of this Article
  to the rest of a contract if an overall
  assessment of the contract indicates that it is
  nevertheless a pre-formulated standard contract.

14
II. Important terms of the Council Directive

• Definition of the consumer and supplier, Article
  2
• (b) 'consumer' means any natural person who, in
  contracts covered by this Directive, is acting
  for purposes which are outside his trade,
  business or profession
• (c) 'seller or supplier' means any natural or
  legal person who, in contracts covered by this
  Directive, is acting for purposes relating to his
  trade, business or profession, whether publicly
  owned or privately owned.

15
II. Important terms of the Council Directive

• Validity control there is no special regulation
  concerning the validity control in the Council
  Directive.

16
II. Important terms of the Council Directive

• Interpretation control, Art. 5
• In the case of contracts where all or certain
  terms offered to the consumer are in writing,
  these terms must always be drafted in plain,
  intelligible language. Where there is doubt about
  the meaning of a term, the interpretation most
  favourable to the consumer shall prevail.

17
II. Important terms of the Council Directive

• Content control, Art. 3
• A contractual term which has not been
  individually negotiated 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.
• According to Art. 3 (3) the annex of the Council
  Directive includes a non-exhaustive list of terms
  which may be regarded as unfair.

18
II. Important terms of the Council Directive

• Examples for unfair terms mentioned in the annex
  
• (a) excluding or limiting the legal liability of
  a seller or supplier in the event of the death of
  a consumer or personal injury to the latter
  resulting from an act or omission of that seller
  or supplier
• (f) authorizing the seller or supplier to
  dissolve the contract on a discretionary basis
  where the same facility is not granted to the
  consumer, or permitting the seller or supplier to
  retain the sums paid for services not yet
  supplied by him where it is the seller or
  supplier himself who dissolves the contract
• (e) requiring any consumer who fails to fulfil
  his obligation to pay a disproportionately high
  sum in compensation.

19
III. Swiss Law

• There is no special act concerning GTC in Swiss
  law.
• Until today there is no real content control in
  Swiss law!
• But the courts anyway achieved consumer
  protection through validity control,
  interpretation control and a hidden content
  control.

20
III. Swiss Law

• Validity control BGE 109 II 452 leading case
  from the year 1983
• (http//www.bger.ch)
• GTC which empower the architect to act as an
  representative for the house builder in financial
  aspects have an unusual content and therefore do
  not become a valid part of the contract under the
  condition the architect has not pointed at them
  and the house builder is not experienced.

21
III. Swiss Law

• Interpretation control
• is an accepted principle by the swiss courts for
  GTC (for example BGE 115 II 264 ff.)
• the principle is also fixed in Art. 33 VVG (swiss
  federal insurance act)
• Umfang der Gefahr
• Soweit dieses Gesetz nicht anders bestimmt,
  haftet der Versicherer für alle Ereignisse,
  welche die Merkmale der Gefahr, gegen deren
  Folgen Versicherung genommen wurde, an sich
  tragen, es sei denn, dass der Vertrag einzelne
  Ereignisse in bestimmter, unzweideutiger Fassung
  von der Versicherung ausschliesst.
• ?If the insurer wants to exclude a certain
  possible damage from a risk he insures he has do
  this in an unambigous way.

22
III. Swiss Law

• Content control
• There is no open content control of GTC in Swiss
  law.
• But hidden content control by the courts under
  the cloak of validity control by assuming the
  unusual content of GTC as soon as the GTC would
  lead to a disparity of contractual rights or
  duties.
• But covert tools are never reliable tools
  (Llewellyn 52 Harv.L.Rev. 700, 703 (1939)).

23
III. Swiss Law

• Content control according to Art. 8 Act against
  unfair competition (SR 241)?
• Art. 8 states
• Unlauter handelt insbesondere, wer
  vorformulierte allgemeine Geschäftsbedingungen
  verwendet, die in irreführender Weise (misleading
  way) zum Nachteil einer Vertragspartei
• a. von der unmittelbar oder sinngemäss
  anwendbaren gesetzlichen Ordnung erheblich
  abweichen oder b. eine der Vertragsnatur
  erheblich widersprechende Verteilung von Rechten
  und Pflichten vorsehen.
• By insertion of the requirement that the GTC have
  to lead in a misleading way to a disparity of
  contractual rights or duties the Swiss legislator
  missed the chance to create a real content
  control
• Because there is a cumulation of validity
  (misleading way) and content criteria (disparity
  of contractual rights or duties) necessary to
  prevent unfair GTC from becoming effective
  andbecause GTC are in written form there is no
  content control.
• As a result GTC which are not misleading, unusual
  and ambigous are valid although they lead to a
  disparity of contractual rights or duties!