As a result of the new European Council Directive 93/13/EEC on unfair terms in consumer contracts, a number of British businesses may find that in the new year their standard form contracts come under more rigorous assessments from the courts and fresh scrutiny from the Office of Fair Trading.The Directive, which is to come into force in the UK on 1 July 1995, will stand as a parallel regime to the Unfair Contract Terms Act 1977 (UCTA).

The Department of Trade and Industry has drafted, in response to two periods of consultation with interested parties, regulations to give effect to the Directive.The main effect of these regulations is to introduce a general concept of fairness into UK contract law for the first time.

The regulations will therefore prohibit the inclusion of unfair terms in standard form contracts between a supplier (of goods or services) and a consumer.Currently, a business in the UK which deals with consumers on its written standard terms must satisfy inter alia the criteria of the Unfair Contract Terms Act 1977.

The 1977 Act operates in a number of ways which are markedly different from the putative provisions of the Directive.Most importantly, the 1977 Act (notwithstanding its title) applies a criteria of reasonableness to certain specified contract terms and a complete injunction on the use of other specified terms.

This means that a consumer wishing to invoke the protection of the 1977 Act must first see whether the term in question is a specified one - for instance, a term which, contrary to s.2(1), ousts liability for death or personal injury arising from negligence.

If the term is specified in the 1977 Act as attracting scrutiny, then the next step is the application of either the reasonableness test or a complete ban, which would be the case for a clause ousting liability for death or personal injury.The Directive does not follow the Unfair Contract Terms Act's two-tiered approach, subjecting certain terms to a reasonable-ness test and others to a ban.

The Directive's question is always: 'Is this term unfair?' If the answer is yes, then it becomes voidable.To a great extent the coverage of the Directive will be the same as the 1977 Act, and art 2(b) covers much of the same ground as the definition of consumer in s.12(1) of the Unfair Contract Terms Act, apart from the Directive's stated requirement that the consumer be a natural person.There is not, therefore, the opportunity for businesses to take advantage of the new regime, which they potentially enjoy under the 1977 Act (see R & B Customs Brokers Ltd v United Dominions Trust Ltd [1988] 1 WLR 321, where s.12 of the UCTA was held to apply to businesses where the transaction was not a regular one for the business).The Directive provides that an unfair term consists of three elements.

First, that it is contrary to the requirements of good faith; this is the subject of a schedule to the Directive, under which regard is to be had to:-- the strength of the bargaining positions of the parties;-- whether the consumer had an inducement to agree to the term;-- whether the goods or services were sold or supplied to the special order of the consumer; and-- the extent to which the seller or supplier has dealt fairly and equitably with the consumer.These provisions largely reflect the ingredients in the reasonableness test to be applied under the 1977 Act.

The second element is that of causing significant imbalance in the parties' rights and obligations, and the final element is that it must be to the detriment of the consumer.To ease this new concept into English law the Directive contains an indicative but non-exhaustive list of terms in art 3(3), which may prima facie be regarded as unfair.

It will be to this that a party dealing on standard terms must look first in deciding whether the Directive will have effect, and several of these represent a substantial new territory for consumer rights.A general theme within these terms, in keeping with the title of the Directive, is the need for reciprocity in standard form contracts.

For instance, a term will be viewed prima facie as unfair if it allows the seller to keep any sums paid over by a consumer if the consumer cancels his or her contract, without a corresponding provision that the consumer receive like sums if the seller cancels.In practice there will probably be little difference between the test of fairness and that of reasonableness.

Certainly there is only one striking difference between the schedule defining reasonableness in the 1977 Act and that defining good faith in the Directive.

The latter provides that a court should examine the extent to which the seller or supplier has dealt 'fairly and equitably' with the consumer.

It will most probably be within the ambit of this provision that English courts (when faced with someone relying on this provision) will develop a new jurisprudence under the Directive.The present English case law, generated in the wake of the 1977 Act, states that proper contract terms are not those which are 'imposed by the strong on the weak', and this gives clear indication that it is not simply a subjective test involved under the 1977 Act (ie that a term imposed by the strong party, acting in a reasonable way given its strength, on the weak party, will not be viewed by a court as acceptable).

The addition in the Directive of specific reference to fair and equitable dealing will therefore perhaps take matters further, and for the present the DTI is of the opinion that while there is a significant overlap, the two tests are certainly not the same.Art 3(1) contains a presumption that, where contrary to the requirement of good faith, the contract: (i) has not been individually negotiated; and (ii) creates a significant imbalance in the parties' rights to the detriment of the consumer, it shall be regarded as unfair.In any given situation one's first port of call should therefore be the art 3(3) list, and if it is not included there one should look to art 3(1).While there is at the moment uncertainty as to the extent of overlap between the two regimes, the scope of the Directive is clearly wider in two important respects: its purpose is to vet all contractual terms in written pre-formulated contracts concluded after 31 December 1994, not merely exclusion clauses; and, secondly, it applies to insurance contracts and contracts creating rights in intellectual property (although not to contracts of employment).

The absence of an exception for insurance contracts will mean that the insurance industry may feel the most impact from this legislation.

The Association of British Insurers reports in the second DTI consultation documents that the average legal expenses per insurance company, in order to comply with the provisions of the forthcoming regulations, could be over £1 million.Where there is an overlap between the two regimes, the DTI offers the unsatisfactory - although the only sensible option given the continued existence of both regimes - advice that one should draft the clause in question with the highest common denominator in mind.

If UCTA imposes a test of reasonableness and the Directive makes a complete ban, it is advisable to exclude the clause.One important new development is the right given to consumer bodies to bring to the attention of the director-general of fair trading businesses which use unfair terms in their standard forms.

Art 7(1) of the Directive provides the director-general of fair trading with a right to consider complaints made to him by interested parties, and this will be an important factor in compliance since contracts obviously will be under the scrutiny of persons with whom the seller may not necessarily come into contact.So seriously were the duties imposed by the Directive viewed, by both the Commission and the DTI, that criminal sanctions were mooted.

The regulations take a more pragmatic stance and provide for the director-general to have the power to apply to the court for an injunction in relation to the continued use of the term.The compliance cost for businesses may be large.

They will need to examine their terms (most probably employing a solicitor to do so); possibly redraft and recirculate the new contracts; face dealing with an increasing number of complaints; and pay an increased insurance fee against the potentially wider set of claims.The DTI initially proposed (when the implementation date was set for 31 December 1994) to include a transitional provision in any legislation implementing the Directive, providing that where a written pre-formulated standard contract has been concluded before 30 June 1995 the terms in the contract will not be assessed for fairness, so long as identical terms have previously been offered to consumers after 1 July 1994 and before 31 December 1994.

A seller who had terms which had been established prior to the latter date would have been able to enjoy the six-month grace period, and consider re-drafting during this period.

It is unclear, given the new implementation date, whether a transitional period will be included at all.