Implementation and Interpretation of Directive 93/13/EEC in Ireland. Professor Donal Horgan, Dean of Holy Trinity College, Cork Law School.

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1 Implementation and Interpretation of Directive 93/13/EEC in Ireland. Professor Donal Horgan, Dean of Holy Trinity College, Cork Law School. INTRODUCTION. There is no Code of Contract Law, no Contract Act and no Standard Principles of Contract Law in the Irish Legal System. Ireland relies on the Common Law Rules, Doctrines and Policy based on the case law of the Common Law jurisdictions. Although Ireland is a Common Law State, there is a fundamental difference from the British legal system because Ireland has a written Constitution, Bunreacht na heireann, to which all Common Law rules, principles and doctrines must conform. Unlike the United Kingdom, there is no recognition of Parliamentary Sovereignty in the Bunreacht. All legislation enacted pre or post independence, similarly, may be tested by Judicial Review to ensure that it is valid, is not in breach of any of the provisions of the Constitution, meets the requirements of Constitutional Justice and upholds the express and unenumerated personal rights enshrined in the Constitution. Article 26 of the Bunreacht gives the President, as guardian of the Constitution, both the power and the duty to consult the Council of State and refer a Bill to the Supreme Court to decide whether the Bill is Constitutional. If the Supreme Court holds that it is valid, the Bill is signed by the President, as an Act of the Oireachtas (Parliament) and the Act cannot be challenged later. If repugnant, the President will not sign and the Bill fails. The principle of the Separation of Powers is enshrined in the Bunreacht Article 6. The Executive, Legislature (Oireachtas) and Judiciary are separate and independent. Articles 28.2 and confine Executive power to the Government, Article vests law making power in the Oireachtas, Articles 34.1 and 37 gives Judicial power to the Courts. The Supreme Court through Judicial Review ensures that the Government does not act as Legislator, nor as a Court in breach of the Bunreacht. These principles are subject to exceptions by law. For instance, a Minister may make delegated legislation under Article if the Primary Act expressly confers that power. Some quasi judicial functions may be given to a body which does not have the characteristics of a Court, Article The Common law rules dealing with pre contractual statements do not require good faith in the negotiations. Either party is free to seek information but there is no obligation to provide it. Freedom of Contract allows parties, who have legal capacity, to make a legal contract (in the absence of fraud, duress or undue influence), which may be unfair or unequal, provided consideration exists. The consideration must be sufficient to meet the common law definition but it need not be adequate. Common law provides no remedy for a freely negotiated bad bargain. Let the Buyer Beware (Caveat Emptor) is a principle of contract common law and this is supported by the rule that the Courts should allow the contract to stand even in the event of a mistake by both parties which is not operative. In Irish contract law, the parties may negotiate a contract for the sale of real property and insert the magic formula Subject to Contract which denies that a contract exists until the formal contract prepared by a Solicitor, is signed by both parties. The effect of the words is that the matter remains in negotiation until a formal contract is executed. The Statute of Frauds 1695, Section 2 requires that a contract for the sale of lands or any interest in lands must be evidenced in writing in a note or memorandum signed by the party to be charged therewith or his lawful agent in order to be enforceable and valid. The Supreme Court has held that the document containing the Subject to Contract denial may form part of the evidence in writing required to enforce the contract. The Principles of European Contract Law in Article and the Contract Code of the English Law Commission in Section 23 provide that in the offer 1

2 and acceptance stage of formulating the contract, the acceptance must be communicated to the offeror to be legally effective and the contract is made at the time and place that the communication reaches the offeror. This reflects the general rule of the common law, which, however, recognizes the exception known as the Postal Rule since Adams V Lindsell [1818]. This applies where the parties intend that the method of communication of acceptance is to be by post and neither stipulates that the acceptance will only be valid when the offeror receives the notice of acceptance. The exception states that when a letter of acceptance properly stamped and addressed to the offeror is put into the postal system by the offeree, the acceptance is effective and the contract is made at the time and place of posting. Even if the letter is delayed or is never delivered as happened in Household Fire Insurance Ltd. V Grant [1879] the contract is concluded at the time and place of posting. This exception, which has been subject to criticism because it leads to injustice, was recently considered by the Irish Supreme Court, in Kelly V Cruise Catering Ltd. [1994] 2 I.L.R.M A contract of employment was being negotiated between the employer in Oslo, Norway and the applicant for employment in Dublin, Ireland. An offer of employment was sent from Oslo by post. There was an express employee attestation at the end of the contract, which stated that there would be no contract until the form, duly signed by Kelly, was returned to Oslo and received by the offeror. However, the Supreme Court approved the well known rule enunciated by Lord Denning in Entores Ltd. V Miles Far East Corporation [1955] 2Q.B. 327 Where a contract is made by post it is clear law throughout the common law countries that the acceptance is complete as soon as the letter is put in the post box, and that is the place that the contract is made, and found the contract was made in Ireland. As a result, the party in a non common law country found that his intention was not met because of a rule of Common Law being applied by the Irish Supreme Court, when given the opportunity to reform the law in line with the common principles of European Contract Law. 2 Another area where the Irish legal system differs from the proposed Principles of European Contract Law and even from English Common Law is that of Non-Mandatory Rules or Implied Terms in Contracts. Common Law provides that the intention of the parties may require that the Court insert a term, which was not expressly stated by the parties, (1) If it is so obvious that it did not need to be said per Shirlaw V Southern Foundries 1926 Ltd. [1939] 2 K.B. 206 or (2) If it is necessary to give business effect to the contract per Tai Hing Cotton Mill Ltd. V Liu Chong Hing Bank Ltd. [1986] A.C. 80. Lord Denning attempted to have the test reduced to where it was reasonable to imply the term into the contract but he was over ruled by the House of Lords in Liverpool City Council V Irwin [1977A.C Many Statutes in the United Kingdom and Ireland imply terms into particular types of contracts. The most important and well known is the Sale of Goods Contract into which the Sale of Goods Act, 1893 inserts terms as to (1) the title of the seller, (2) the description of the goods, which are the subject matter of the contract, (3) a sale by sample and (4) the quality of the goods and their fitness for the purpose for which they are sold. However, Irish Contract Law has a further dimension because of our written Constitution (Bunreacht). The Supreme Court has held that inherent in the Constitutional guarantee of personal fundamental rights is a right not to have a personal right breached in a contract. This is especially in a contract of service or employment. The Irish law implies a term that an individual will not be discriminated against in their terms of employment on the grounds of their religion Art (Mulloy V Minister for Education [1975] I.R. 88) or trade union membership Art iii (Meskell V C.I.E. [1973] I.R. 121) or a lack of fair procedures where a breach of contract is alleged Art (Glover V B.L.N. Ltd. [1973] I.R These Common Law Contract Rules and Principles indicate that the Irish legal system has adopted very little reform either in common law or by Statute since Independence in 1922 or the enactment of the Bunreacht in 1937.

3 In fact, apart from two pieces of legislation dealing with Hire Purchase Contracts (Hire Purchase Act 1946, now the Consumer Credit Act 1995) and Sale of Goods Contracts (Sale of Goods and Supply of Services Act 1980), no contract law legislation, as such, has been enacted to date. Both dealt with consumer protection-in a hire purchase contract a term giving the owner the right to repossess the goods at any time following a breach by the hirer was controlled by the Act which requires a Court Order for repossession when one third of the total hire purchase price has been paid by the hirer. The 1980 Act incorporates the reforms introduced by the Unfair Contract Terms Act, 1977 in the United Kingdom. It amends Section 55 of the 1893 Act to give protection to consumers by inserting a new Section 22. Section 55(4) of the 1893 Act, as amended, renders void any attempt to contract out of the Statutory implied terms as to title, sales by description, sample, merchantability or quality and fitness for the purpose if the buyer deals as a consumer. In a non-consumer contract, the exemption clause will not be enforceable unless it can be shown that the term is fair and reasonable. Section 3.1 of the 1980 Act defines a consumer as a party who neither makes the contract in the course of a business nor holds himself out as doing so; and the other party does make the contract in the course of a business; and the goods or services supplies under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption. The definition of a consumer under the Act can apply to a natural or legal person. This Introductory Section will be relevant to different aspects of the following issues on the Application, Integration/Incorporation, Interpretation and Effects of the Directive into the legal system in Ireland. 3 Scope of application of the Directive. As noted above, Ireland has not been very active in reform of the Contract Law area. Even though Ireland`s economy is essentially based on International Trade in Common Agricultural Policy Goods, Pharmaceuticals and Technology Products, Ireland is one of only three Member States of the European Union which has not ratified the C.I.S.G.- Convention on the International Sale of Goods, 1980-see page 4 footnote 1 of the European Review of Contract Law, Vol.1 (2005) No. 1. (Article by Ole Lando-The European Principles in an Integrated World). Ireland has ratified the CMR-Convention on the Contract for the International Carriage of Goods by Road by passing the International Carriage of Goods by Road Act, 1990 (No. 13). Ireland has had very little input into the consultation process begun by the European Commission over the past ten years. In July 2001, the Commission published the first consultation document on European Contract Law. The Commission received 181 responses and none came from Ireland, either Government, business, consumer organizations, Law Societies or Academics. The Commission then published A More Coherent European Contract Law-An Action Plan on and requested contributions to the debate by The reaction of the Government to the request was to give a one page, seven point reply. On the drawing up of a Common Frame of Reference, establishing common principles and terminology in the area of European Contract Law, Ireland submitted This would not be seen as a priority. It continued We would await the outcome of the research proposed by the Commission to provide evidence that would warrant this being prioritized. This contrasts with the reply of the European Consumer Centre Dublin. This is part of the Euroguichets, the European wide network of centers which provide free legal advice and information on European Consumer legislation and assist consumers in the resolution of cross border consumer disputes. The ECC Dublin submitted Urgent action is needed to ensure that the Internal Market objectives are achieved while guaranteeing consumer protection at the same time. The ECC Dublin welcomed the consultation process as it has first hand knowledge of the difficulties 4

4 consumers experience in cross border transactions. The Irish Government response was apparently not considered a contribution to the debate since it is not included in the Reaction to the Action Plan Document published after March 2004 by the Commission, although the E.C.C Dublin response is acknowledged. Again, in this document, the Irish Law Society, Bar Council, University and Business Sectors failed to contribute. So, Ireland has made little contribution to the development of a European Contract Law, or Principles of European Contract Law or the discussions on Standard Terms in European Contracts. This apparent lack of interest is reflected by the scope of application of the Directive and the manner it was applied in Ireland. The Government decided in 1994/1995 that the requirements of the Directive were so similar to the Sale of Goods and Supply of Services Act, 1980 legislation relating to Consumer Contracts that the Minister could apply the Directive by Statutory Instrument, S.I. No. 27 of 1995 rather than by requiring the Oireachtas (Parliament) to enact a Statute. This may reflect the approach of the date by which the Member States were required to give effect to the Directive, The Constitutional legality of this method is doubtful and will be discussed in the next section. The European Communities (Unfair Terms in Consumer Contracts) Regulations 1995, signed by the Minister on 31 st. January 1995, applies to contracts concluded after 31 st December 1994 where the contract is between a consumer defined as any natural person acting for any purpose outside his business or profession and a seller or supplier defined as any natural or legal person acting for purposes relating to his trade, business or profession whether publicly owned or privately owned. In the Regulations, Ireland has broadened the definition of business to include any Government Department, or local authorities or public authorities. The exemptions from the scope of the Directive are followed closely in the First Schedule to the Regulations, which apply to all consumer contracts unless the contract was individually negotiated or relates to employment, succession rights, family law, company or partnership formations. Mandatory, Statutory or Regulatory provisions of 5 Ireland or International Treaties or Conventions to which Ireland is a party are outside the scope of the Regulations as are terms, which define the main subject matter, or the adequacy of the price provided they are set out in plain, intelligible language. Regulations 3, 4 and 5 transpose Articles 3, 4, and 5 of the Directive into domestic law by following exactly the words of the Directive. Regulation 6 provides that an unfair term is not binding on the consumer and Regulation 7 allows a Court to apply the blue pencil rule to excise an unfair term and allow the remainder of the contract to continue if it does not contain an unfair term and the contract is not being rewritten. Schedule 2 of the Regulations deals with the concept of good faith and Schedule 3 repeats the indicative and non-exhaustive list of terms, which may be regarded as unfair. Regulation 8 gives the enforcement of the Regulations to the Director of Consumer Affairs. Under this Regulation, the Director can apply to the High Court for an order prohibiting the use, or continued use, of an unfair term. Only the Court can decide that a term is unfair. The Director will attempt to resolve the matter with the seller or supplier concerned before taking the case to the Court. A term adjudged by the Court to be unfair is not binding on the consumer. Any consumer is entitled to rely on the Regulations in any case that the consumer is involved in before a Court. An unusual power is given to consumers by Regulation 8(3), which allows every natural person, who claims to have an interest in an application by the Director of Consumer Affairs to appear before the High Court at the hearing of the application. The Directive in Article 7(2) enables Member States to allow Consumer organizations to take action before a Court or administrative body to obtain a decision as to whether a contractual term drawn up for general use is unfair. The domestic legislation did not extend this power to initiate an action to Consumer representative bodies in Ireland. This omission was corrected in the European Communities (Unfair Terms in Consumer Contracts)(Amendment) Regulations 2000 (S.I. No. 307 of 2000) in which Regulation 8 is amended by Regulation 5 to extend enforcement powers to a consumer organization in relation to a contract concluded after 2 October The definition of consumer organization under Regulation 3 means (a) a company, the memorandum of association of which states the company`s main object or objects to be the protection of consumer interests, or

5 (b) a body corporate (other than a company) or an unincorporated body of persons in relation to which there exists a constitution or a deed of trust which states the body`s main object or objects to be the protection of consumer interests. Integration/Incorporation of the Directive into Irish Law. As stated in the Introduction above, the Irish Constitution (Bunreacht na heireann) in Article states that the sole and exclusive power of making laws for the State is vested in the Oireachtas (Parliament); no other legislative authority has powers to make laws for the State. Article allows for subordinate legislation provisions by law. This was interpreted in the leading case of City View Press Ltd. V AnC.O. [1980] I.R. 381 as meaning that the delegated legislation must do no more than give effect to principles and policies contained in the Statute. Article of the Bunreacht states No provision of this Constitution invalidates laws enacted, acts done or measures adopted by the State which are necessitated by the obligation of membership of the European Union or of the Communities. It continues or prevents laws enacted, acts done or measures adopted by the European Union or by the Communities or by institutions thereof, or by bodies competent under the Treaties establishing the Communities, from having the force of law in the State. The second clause protects any Community Law, which is directly effective or directly applicable in Member States from challenge under the Bunreacht. The first clause only protects State actions necessitated by the obligations of membership. The European Communities Act, 1972 was enacted to make provision for membership of the European Communities and Section 2 makes the Treaties of the European Communities and the existing and future acts adopted by the Institutions of those Communities binding on the State and part of the domestic law. Section 3 goes on to give a Minister the power to make Regulations to give effect to Directives. There is always the option of legislating by an Act of the Oireachtas and there are many occasions when this was the method used, e.g. Liability for Defective Products Act 1991, the Consumer Credit Act 1995 and the Package Holidays and Travel Trade Act , which implemented the relevant Directives into the national law. The European Communities (Confirmation of Regulations) Act 1973 was enacted to confirm Regulations made in 1972 before the date of membership. The European Communities (Amendment) Act, 1973 was then enacted to amend Section 4 of the 1972 Act as to the manner in which the Houses of the Oireachtas may annul Regulations made under the 1972 Act. The uncertainty evidenced by these actions was followed by a test of the lawfulness of Ministerial Regulations to transpose a Directive into domestic law. In Meagher V Minister for Agriculture [1994] I.R. 329, the Plaintiff was prosecuted for an offence under Regulations implementing Community Directives prohibiting the use of certain veterinary substances. The Supreme Court upheld the European Communities Act, 1972 Section 3 as the power to make Regulations was necessitated by Irish membership. However, the Supreme Court did not hold that the Regulations made under Section 3 of the European Communities Act, 1972 were immune from challenge. In appropriate circumstances, the Regulations could be repugnant to the Constitution or be Ultra Vires the Directive, if the measures were not necessitated by the Directive. This is similar to the principle in the City View Press Ltd. case. The Supreme Court emphasized that in certain situations the enactment of legislation would be required. If the Directive left matters of principle or policy to the Member State, legislation by the Oireachtas was necessary. If the Regulations contain material exceeding the policies and principles of the Directive then they are not authorized by the Directive and not valid. As mentioned above, the Regulations were signed on 31 January 1995 but became effective on 31 December 1994 in breach of Article 15.5 of the Bunreacht, which prohibits the Oireachtas from enacting retrospective legislation. Obviously the Supreme Court would object to a Minister doing so. There was no principle or policy reason in the Directive, which necessitated this retrospection, making the validity of the Regulations doubtful. The Regulation extends the definition of business to all Departments of State and local authorities and public authorities, which appears to be a 7

6 policy making function by the Minister and again casting doubt on the Constitutional validity of the Regulations. The third doubt concerns the change in the definition of a consumer. Under existing Irish law, a consumer was defined in Section 3.1 of the Sale of Goods and Supply of Services Act 1980 quoted above. This was interpreted in R & B Customs Brokers Co. Ltd V U.D.T. Ltd [1988] 1 All E.R. 847 as including within the definition of consumer any legal person who was not acting in the course of their business when making the contract. The definition in the Regulation of a consumer is different and confined to an individual natural person, so the Regulations did involve a change in policy or law and as such did require enactment in Statute under the City View Press and Meagher cases. There is no indication that any challenge would be taken to the method of implementation and incorporation of the Directive into Irish Law. A consumer is not likely to object to what is greater protection and no public body is likely to challenge the powers of the Minister to include public bodies in the definition of a business. It is possible nonetheless, that a company could object that the Regulations failed to repeal the common law definition of a consumer. Interpretation of the General Standards of Fairness. The Directive and the Regulations in Article 3 provide that a contractual 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 under the contract to the detriment of the consumer, taking into account the nature of the goods or services for which the contract was concluded and all circumstances attending the conclusion of the contract and all other terms of 8 the contract or of another contract on which it is dependent. In Ireland, the standard of fairness in this context applies mainly to the negotiation, formation and conclusion of the contract. But, as stated in the Introduction, there is no common law requirement to bargain in good faith. As recently as 1992 the House of Lords denied that any term obliging a party to negotiate in good faith was enforceable. In Walford V Miles [1992] 2 A.C. 128, Ackner L.J. stated The concept of a duty to carry on negotiations in good faith is repugnant to the adversarial position of the parties when involved in negotiations. Each party is entitled to pursue his or her own interest, so long as he avoids making misrepresentations.a duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. The other four Law Lords concurred. McKendrick comments that this robust language in which Lord Ackner rejected the proposition that English law recognized a duty to negotiate in good faith suggests that he did not envisage any role for a doctrine of good faith in English law. Despite this decision, the Regulations have introduced the concept into English and Irish law in a significant number of consumer contracts. The leading case on the Directive is Director of Fair Trading V First National Bank [2002] 1 A.C. 481 where the House of Lords interpreted the concept of unfair under the Regulations. The Director sought to restrain the Bank from continuing to use a term in their standard terms of business setting out the interest that was payable if the customer defaulted on repayments to the Bank. Giving judgement that the term was not unfair Bingham L.J. held that there are two main elements to the test of unfairness-the term must be contrary to the requirement of good faith and it must cause a significant imbalance to the detriment of the consumer. He held that significant imbalance is concerned with substantive fairness and arises if a term is so weighted in favour of the supplier as to tilt the parties` rights and obligations under the contract significantly in his favour. Good faith relates to procedural fairness and the need for fair and open dealing. He interpreted openness as full information with no hidden traps and appropriate prominence being given to disadvantageous terms. No advantage should be taken of a consumers necessity, indigence, lack of experience or any factor listed in or analogous to those listed in Schedule 2 of the Regulations. He continued Good faith in this context is not an artificial concept. It looks to good standards of commercial morality and practice.

7 Lord Steyn quoted with approval the explanation in the commentary to the 2000 Edition of the Principles of European Contract Law, prepared by the Commission of European Contract Law, that the purpose of the provision of good faith is to enforce community standards of fairness and reasonableness in commercial transactions; at 113; a fortiori, that is true of consumer transactions. The decision has been criticized on two grounds, first that it should have been referred to the European Court of Justice under Article 234 of the Treaty since Bingham L.J. acknowledged that there is no common concept of good faith among the Member States and also that the term was unfair in that a consumer, who paid off all the debt could find that a subsequent claim to unpaid interest had to be met. In Ireland, there is only one case on unfair terms. It dealt with some terms in the standard house purchase contract drawn up a number of years ago by the Law Society and the Construction Industry Federation. The Director considered that additional clauses allowing the builder to terminate the contract in some circumstances and other terms relating to excessive stage payments were unfair. The Director signaled her intention to seek a High Court Order preventing the use of the terms as unfair in the 1999 Annual Report, which the Director is required to make under the Regulations. The proceedings were entered in May 2001 and, on 5 th December 2001, the High Court ruled that the terms, and any like terms, were unfair and could not be used. Record No. 229SP/2001 refers. The Court gave no reasons but annexed a First Schedule to the Order setting out fifteen terms in building contracts, which it found unfair. Without prejudice to the issue of the propriety or impropriety of stage payments or interim payments, the Court ruled that no contract could provide for any stage payments, which exceeded those specified in the Second Schedule to the Order. Any term in breach of the Second Schedule is void as unfair. 9 The Effects of the List of Unfair Terms. The primary role, of enforcement of the Regulations, has not been played by the Courts, as is seen above, but by the Office of the Director of Consumer Affairs. Since 1995, the Director has continued to provide information and publicity about the Regulations to the consumers in Ireland. Leaflets, website and media have been used and the results of the work are apparent from the Annual Reports. In the 1995/1996 two year report caused by a new time limit set by the Consumer Credit Act, 1995, the Regulations are explained in some detail. The Director sets out the policy of the office to seek agreement to have terms deemed unfair by the Director deleted by the seller/supplier rather than use the power to seek a Court Order to do so. Reference is made to complaints about life insurance, public utilities and airline ticket contract terms considered unfair and progress was reported in dealing with the bodies concerned. In many companies the terms of the contract were more restrictive than the practice employed by the Company. In the 1997 report, the Director reviewed the position and showed that satisfactory outcomes had been achieved in each area raised as well as car hire and house alarm contracts. The review of Car Ferry standard form contracts had begun and had not been concluded at the time of the 1998 report. In the 1999 report the Director, for the first time, provided the information that 30 investigations were dealt with by the Office in the year under report. Builders and house purchase contracts had now become the main area for examination. The number of investigations decreased in 2000 to 22, with work on the Court case about the builders` contracts being advanced. Only 10 investigations were completed in 2001 and the report included an Appendix with the relevant Court Order detailed above. The Office of Fair Trading in London sought help about 19 issues in the terms of theatre tickets sold by an Irish company to customers in the United Kingdom. Agreement was established in 17 items and the remaining two referring to refunds and security searches remained unresolved. Cable contracts were next for review. In the 2002 report, 8 investigations were completed and the two issues in theatre ticket sales were resolved. The report appealed for information to support 10

8 complaints that some builders were trying to circumvent the High Court Order granted in December The number of investigations was 11 in the 2003 report, but no background was provided on the current areas of concern. CONCLUSION. It is clear that the Directive was introduced into Irish Law by Regulations, which were drafted on the basis that no changes would result in consumer contract law in Ireland from the transposing of the Directive into domestic legislation. No changes in principles or policy would be necessary, so a Statutory Instrument was an appropriate means of bringing the Directive into Irish Law. With respect, it is considered that Bunreacht na heireann principles would have been better served by enacting a Statute to give effect to the Directive. The lack of case law and judicial interpretation of the concepts of unfair and good faith thus far in the common law jurisdictions results in continuing uncertainty about the Interpretation of the General Standard of Fairness in Ireland and the legal effects of the List of Unfair Terms in Ireland. 11.