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High Court clarifies the scope of “consumers” for the purpose of the Unfair Terms in Consumer Contracts Regulations 1999

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Sarah Hitchins

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03 May 2013

Alfred Overy v Paypal (Europe) Ltd [2012] EWHC 2659 (QB), 2 March 2012

The High Court has taken a relatively narrow approach when construing the definition of a "consumer" for the purposes of the Unfair Terms in Consumer Contracts Regulations 1999 (the UTCCR) and held that a private person was not entitled to the protection afforded by the UTCCR on the basis that they entered into a contract for both business and private purposes. Although obiter, some useful commentary was provided by HHJ Hegarty QC regarding the validity and enforceability of key terms which frequently appear in consumer contracts for the purposes of the UTCCR and the Unfair Contract Terms Act 1977 (UCTA).

Background
Alfred Overy (the claimant) decided to sell his house by offering it as a prize in a competition (the Competition). In order to advertise the Competition, the claimant set up a website. Individuals could enter the Competition via this website by paying the entrance fee into a Paypal account that belonged to the claimant (the Paypal Account). The claimant had entered into an agreement with Paypal to set up the Paypal Account (the Agreement) several months before the Competition opened. The claimant set up the Paypal Account not only to receive entrance fees in connection with the Competition but also so that he could receive payments relating to a photography business he ran. As a result, the claimant had applied for the Paypal Account to be classified as a Business Account and provided information relating to his photography business on the application forms for the Paypal Account.

During the course of the Competition, Paypal suspended and eventually terminated the Paypal Account. Paypal took this action principally because it suspected that the claimant had provided misleading information to Paypal regarding the nature of his business and that he had failed to obtain Paypal’s prior approval before using the Paypal Account to receive monies in connection with the Competition (as was required by Paypal’s Acceptable Use Policy).

The claimant claimed that by suspending and terminating the Paypal Account, Paypal had breached the Agreement and that as a result he had sustained substantial loss and damage. The claimant alleged that this loss and damage was attributable to the time it took him to set up alternative arrangements to receive entrance fees for the Competition as well as the negative publicity which accompanied Paypal’s suspension and termination of the Paypal Account. The claimant argued that these factors meant that the Competition was less successful than it would have otherwise been and he therefore claimed damages of just over GBP 1 million.

Claims brought
By the time this case reached the High Court, it had already been found that Paypal was entitled to suspend and terminate the claimant’s Paypal Account for the reasons outlined above and that Paypal’s actions had not amounted to a breach of the Agreement.

The remaining issue to be determined by HHJ Hegarty QC in the present case was whether the terms of the Agreement relied upon by Paypal when it suspended and terminated the Paypal Account (the Terms) were themselves permissible under the UTCCR and UCTA.

The claimant alleged that the Terms were invalid for the purposes of the UTCCR and the UCTA. The Terms fell within the following categories: those which; (i) allowed either party to the Agreement to terminate the Agreement at will and with immediate effect; (ii) imposed non-onerous positive obligations on the claimant which, if breached, would entitled Paypal to suspend or terminate the Agreement; (iii) permitted Paypal to suspend or terminate the Paypal Account for cause; and (iv) sought to limit Paypal’s liability.

The claimant claimed that some of the Terms were in breach of the:

  • UTCCR on the basis that the Terms listed at (i) to (iii) above caused a "significant" imbalance in the parties’ rights and obligations arising under the Agreement which were detrimental to the claimant’s interests; and/or
  • UCTA on the basis that the Term referred to at (iv) above constituted Paypal seeking to unreasonably exclude or restrict liability for negligence and to exclude or restrict liability in respect of a breach of a term of the Agreement.

High Court decision
Did the claimant enter into the Agreement as a consumer?
Before turning to the validity of the Terms under the UTCCR, the court first considered whether the claimant was eligible to the protection afforded by the UTCCR.
In order to fall within the scope of the UTCCR, the claimant would need to have entered into the Agreement as a "consumer". The term "consumer" is defined in the UTCCR (Regulation 3(1)) as a person who enters into a contract covered by the UTCCR and "is acting for purposes which are outside his trade, business or profession".
The court held that the claimant did not enter into the Agreement as a consumer and, as a result, he was not entitled to the protection afforded by the UTCCR. In coming to this decision, HHJ Hegarty QC referred to the claimant having opened the Paypal Account not only for the purpose of receiving payments in connection with the Competition but also so that he could receive payments relating to his photography business. HHJ Hegarty QC commented that this latter purpose for opening the Paypal Account "could not reasonably be regarded as one which was insignificant or negligible".

Were the Terms valid for the purposes of the UTCCR?
Since the court determined that the claimant was not entitled to the protection afforded by the UTCCR, comments made by the judge regarding the validity of the Terms for the purposes of the UTCCR were obiter.
HHJ Hegarty QC stated that he would have found the Terms that allowed either party to the Agreement to terminate the Agreement at will and with immediate effect to be unfair (and so invalid for the purposes of the UTCCR). The judge commented that he could see no reason why at least a short period of notice should be given by Paypal that it was going to terminate a customer’s Paypal account. He added that the power to immediately terminate a customer’s Paypal account created a significant imbalance in the rights and obligations of the parties to the customer’s detriment, especially given that immediate termination of a Paypal account could have a serious economic impact on the customer.
The judge did not, in principle, criticise the inclusion of the Terms which allowed Paypal to limit or exclude liability for lost profits which may be sustained by customers. However, he did state that he would have held that the cap Paypal had imposed on the amount recoverable by the claimant for any liability which was not otherwise excluded by the Agreement to be unfair and unenforceable. Furthermore, the judge did state that terms which sought to exclude indirect or consequential losses in consumer contracts may be unfair for the purposes of the UTCCR on the basis that such terminology would be unfamiliar to consumers and "could, in any event, cause hardship if the facts which might give rise to the loss in question had, in fact, been disclosed to the supplier [Paypal] at or before the time the contract was made".

Were the Terms valid for the purposes of UCTA?
For the purposes of deciding whether the Terms which sought to limit Paypal’s liability were valid for the purposes of UCTA, it was not necessary for the court to establish whether the claimant was a "consumer" for the purposes of UCTA.
The claimant alleged that the Terms which sought to limit Paypal’s liability to him breached the requirement in UCTA (s3(2)(a)) that a party "cannot by reference to any contract term… when himself in breach of contract, exclude or restrict any liability of his in respect of the breach… except in so far as… the contract term satisfies the requirement of reasonableness". The "requirement of reasonableness" for the purposes of UCTA requires that the term in question "should have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made" (s11(1)).

The court held that the Terms which sought to limit Paypal’s liability (including its liability for indirect or consequential losses) were reasonable for the purposes of UCTA. However, it was held that the cap imposed by Paypal on any liability which was not otherwise excluded by the Agreement was not reasonable and was therefore unenforceable by Paypal. This was because the level at which the liability cap was set by Paypal appeared "arbitrary" and there appeared to be "no obvious justification for seeking to limit [liability] in this way".

Comment: The decision of the High Court in this case has clarified that even if a private person enters into a contract for both business and private purposes, they are unlikely to fall within the definition of "consumer" for the purposes of the UTCCR. This is unless the private person in question can demonstrate that the business purposes for which they entered into the contract are "insignificant or negligible".

Although the judge’s commentary as to the validity of the Terms for the purposes of the UTCCR were obiter, his comments may nonetheless prove instructive as to the approach that a court may take in determining whether key terms which appear in many consumer contracts are valid (and therefore enforceable) for the purposes of the UTCCR and the UCTA.