Arbitration in consumer contracts comes under threat

A recent case demonstrates that including an arbitration clause in a consumer contract is a risky business, especially where the contract is a standard form. The clause faces being struck down by the courts.

Laws protecting consumers from unfair contracts aim to right the presumed imbalance in the bargaining power of the parties. There are specific consumer laws dealing with arbitration agreements.

• Where a consumer contract contains an arbitration agreement and the amount claimed is relatively small (less than £5,000), section 91 of the Arbitration Act 1996 deems the clause to be unfair, and therefore unenforceable for the purposes of the Unfair Terms in Consumer Contracts Regulations 1999 (the “UTCCR”).
• Where £5,000 or more is in issue, the arbitration agreement is not deemed to be unfair, but it may be struck down if it operates unfairly as against the consumer.
• The UTCCR defines as “unfair” any term of a consumer contract which has not been individually negotiated by the parties and which, contrary to good faith, causes a significant imbalance in the parties’ rights and obligations under the contract, to the detriment of the consumer.

The recent case before the Technology and Construction Court (“TCC”) concerned an arbitration clause in a building contract. The contract was a standard form, and was not individually negotiated. A dispute (concerning just over £5,000) arose between the builder and the consumer. The builder referred it to arbitration. The consumer played no role in the arbitration, and an award was made against the consumer. The builder tried to enforce the award in the TCC, but the court refused to do so. One of the reasons for this was that the arbitration clause operated unfairly against the consumer, thus contravening the UTCCR.

Arbitration is widely used in the commercial world, where it is generally regarded as a fair way of resolving disputes. What can make it unfair in the consumer world? There may be a number of reasons. In the TCC case the court said the arbitration agreement was unfair against the consumer because:

• First and foremost it prevented the consumer from accessing the courts, i.e. by requiring that all disputes be arbitrated. By doing so it caused a significant imbalance of the parties’ rights in favour of the builder.
• The fees the consumer must pay for an arbitral tribunal may be significant (the arbitrator’s total fees were over £2,000 in this case).
• The arbitration agreement and its effect were not set out clearly or prominently enough.
• The consumer did not have professional advice on the drafting of the contract with the builder.
• Although the builder had not deliberately taken advantage of the consumer, it had subconsciously taken advantage by including the arbitration clause in its standard terms.

Commercial parties and contract drafting bodies should think twice, if they do not already, before including arbitration clauses in contracts that are or may be concluded with consumers. Where more than £5,000 is at stake, a reference to arbitration and a signature on the dotted line still won’t be enough to bind a consumer to arbitration – suppliers need to take real care to signpost the arbitration clause and its effect. In the construction world, the NHBC has apparently recognised this and sought to deal with the problem by making arbitration optional. Others may follow suit.

Reference: Mylcrist Builders Limited v Mrs G Buck [2008] EWHC 2171 (TCC)