Unfair contract terms: when a term cannot be enforced

A term in a consumer contract is 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 consumer¹. That is the test set out in Part 2 of the Consumer Rights Act 2015, and the consequence is stark: an unfair term of a consumer contract is not binding on the consumer, and an unfair consumer notice is not binding either². The rest of the contract continues to bind both parties if it is capable of continuing in existence without the unfair term³.

The law applies to all consumer contracts, contracts between a trader and a consumer, whether written or not, and to consumer notices⁴. It does not apply to contracts of employment or apprenticeship, or to notices setting out rights and responsibilities between an employer and employee⁴. The Act also contains an indicative and non-exhaustive list of terms that may be regarded as unfair, which gives a practical sense of what traders cannot rely on⁵.

What makes a contract term unfair under the Consumer Rights Act

The unfairness test has three elements that must all be present. First, the term must cause a significant imbalance in the parties' rights and obligations under the contract. Second, that imbalance must be to the detriment of the consumer. Third, it must be contrary to the requirement of good faith¹. Good faith looks at whether the trader dealt fairly and openly with the consumer when the term was agreed, including whether the term is expressed in plain, intelligible language.

Unfairness is assessed by reference to all the circumstances at the time the contract was concluded, and by taking into account all the other terms of the contract, or of any contract on which it depends³. That matters in practice: a term that looks one-sided on its own may be fair when read against a discount or another benefit elsewhere in the same contract, and the reverse is also true. The assessment is not about whether the deal was good value, but about whether the balance of rights and obligations is tilted against the consumer in a way a fair trader would not accept.

The trader bears the burden where it matters. Under the Unfair Terms in Consumer Contracts Regulations 1999, it is for any seller or supplier who claims that a term was individually negotiated to show that it was³. So a business cannot simply assert that a clause was discussed and agreed; it has to prove it. Where a written term is ambiguous, the older Regulations required that it be given the interpretation most favourable to the consumer, a principle the Financial Ombudsman Service has applied to unclear mortgage terms⁹.

The law also reaches beyond the contract itself. A consumer notice, such as a sign, a website message or a policy statement, is covered by the same fairness rules, and an unfair notice is not binding on the consumer². This closes what would otherwise be an obvious gap: a business cannot do through a notice what it cannot do through a term.

Terms must be transparent and prominent

A trader must ensure that a written term of a consumer contract, or a consumer notice in writing, is transparent⁶. Transparency means the term must be in plain, intelligible language, so an ordinary consumer can understand what it means and what its effect will be. The 1999 Regulations put the same duty in those words: a seller or supplier shall ensure that any written term of a contract is expressed in plain, intelligible language³.

Transparency is not just a courtesy. It is the gateway to the fairness assessment itself: a term that is not transparent can be assessed for fairness even where a transparent term would be excluded, which is why the drafting of a term matters as much as its substance. The government's guidance for businesses is blunt about the consequence of getting this wrong: standard sales contracts must be 'fair' or the business will not be able to enforce them¹⁰.

The requirement has a long history. The Unfair Terms in Consumer Contracts Regulations 1994, which implemented Council Directive 93/13/EEC on unfair terms in consumer contracts, already required written terms in plain, intelligible language, with any doubt resolved in favour of the consumer¹¹. The Consumer Rights Act carried that principle into the current law. The Competition and Markets Authority has consulted on refreshing its guidance to make it easier for businesses to understand the law and comply with it, and has now updated its guidance on unfair contract terms, known as CMA37¹².

Price and main terms: can they be challenged?

There is an important limit on the fairness test. A term of a consumer contract may not be assessed for fairness to the extent that it specifies the main subject matter of the contract, or the appropriateness of the price payable, provided the term is transparent and prominent⁶. In plain words, the law generally leaves it to the market, and to the consumer's choice, whether the price is a good one. What the law polices is how the term is presented and everything else around it.

The exclusion is conditional, and the conditions do the work. If a price term or a main subject matter term is not transparent, or is not prominent, it loses the protection of the exclusion and can be assessed for fairness like any other term⁶. A price hidden in small print, or a core obligation described in language a consumer cannot be expected to understand, is therefore challengeable. The 1994 Regulations had the same structure: no assessment of fairness for terms defining the main subject matter or concerning the adequacy of price, if in plain, intelligible language¹¹.

Where a term is unfair, the consumer keeps the ordinary remedies for breach: claiming damages, seeking specific performance, relying on the breach against a claim by the trader for the price, and, for breach of an express term, exercising a right to treat the contract as at an end. These remedies are open in the circumstances, but not so as to recover twice for the same loss¹³.

Examples of terms a business cannot rely on

Schedule 2 to the Consumer Rights Act contains an indicative and non-exhaustive list of terms that may be regarded as unfair⁵. The list is not exhaustive, so a term can be unfair even if it appears nowhere on it, and inclusion on the list does not automatically make a term unfair in every case. But Welsh Trading Standards guidance identifies certain terms that are automatically unfair in all circumstances: a trader cannot rely on them and cannot enforce them against you⁴. Among the examples in the Schedule:

• Requiring a consumer who decides not to conclude or perform the contract to pay a disproportionately high sum in compensation, or for services not supplied⁵
• Permitting the trader to retain sums paid by the consumer who decides not to conclude or perform the contract, without giving equivalent compensation where the trader cancels⁵
• Making an agreement binding on the consumer where provision of services depends on the trader's will alone⁵
• Automatically extending a contract of fixed duration where the consumer does not indicate otherwise, and the deadline to opt out is unreasonably early⁵
• Irrevocably binding the consumer to terms with which the consumer has had no real opportunity of becoming acquainted before conclusion of the contract⁵
• Enabling the trader to alter the terms of the contract unilaterally without a valid reason specified in the contract⁵
• Permitting the trader to determine the characteristics of the subject matter after the consumer has become bound⁵
• Permitting a trader to increase the price without giving the consumer the right to cancel if the final price is too high in relation to the price agreed⁵
• Authorising the trader to dissolve the contract on a discretionary basis where the same facility is not granted to the consumer⁵
• Obliging the consumer to fulfil all of the consumer's obligations where the trader does not perform the trader's own⁵
• Limiting the trader's obligation to respect commitments undertaken by the trader's agents, or making such commitments subject to a particular formality⁵
• Allowing the trader to transfer rights and obligations under the contract without the consumer's agreement, where this may reduce the guarantees for the consumer⁵

Two further rules sit alongside the list. A term must be regarded as unfair if it makes the consumer bear the burden of proof regarding a distance supplier's or intermediary's compliance with the Distance Marketing Directive⁶. And under the Digital Markets, Competition and Consumers Act 2024, a contract affected by an unfair commercial practice is not automatically void or unenforceable, except as a result of the consumer's rights of redress¹⁴. That means the contract usually survives; it is the unfair term, or the consequence of the unfair practice, that falls away.

Unfair terms in financial products: loans, overdrafts and insurance

Financial contracts are consumer contracts, and the fairness rules apply to them. The FCA's rulebook states that its rules on charges exist to prevent a firm from imposing unfair and excessive charges¹⁵, and its guidance on home purchase plans says charges imposed on customers must be transparent, with unfair or excessive charges inconsistent with the FCA's principles and the Consumer Duty¹⁶.

The FCA has used these powers in practice. Its review of high-cost credit covered overdrafts, store cards and catalogue credit, home-collected loans and rent-to-own services¹⁷, and it wrote to the banks to seek clarification about how they determined new overdraft interest rates¹⁷. In one enforcement case the FCA took civil action to stop the activity and obtain compensation for victims, recovering about £380,000¹⁸.

Insurance raises its own unfairness questions. The Financial Ombudsman Service's guidance on underinsurance in home insurance explains that where an insurer's questions or guidance were unclear, actions such as reducing the claim payment (known as 'applying average'), voiding the policy, or adjusting the claim in other ways may not be considered fair¹⁹. The unfairness here lies not in a written term but in how the insurer used an unclear process to the customer's disadvantage.

There are limits worth knowing. Following a Supreme Court ruling, unauthorised overdraft charges could not be assessed for fairness under the Unfair Terms in Consumer Contracts Regulations 1999²⁰. And the older law contained a financial services carve-out: the 1994 Regulations permitted financial services suppliers to terminate unilaterally without notice for a valid reason with immediate information, and to alter interest rates or charges without notice for a valid reason, provided consumers were informed at the earliest opportunity and were free to dissolve the contract immediately¹¹.

The FCA's motor finance work shows how unfairness findings translate into redress. Where commission was very high, at 50% of the total cost of credit and 22.5% of the loan, and another relevant factor of unfairness existed, consumers receive the commission paid²¹. Where people disagree with their firm's decision under the compensation scheme, the Financial Ombudsman will be able to assess whether the scheme rules have been followed²¹.

How to challenge a term you think is unfair

You have the right to challenge part of a contract if you don't think it's fair, and a court can decide a term is unfair²². If the court decides that a term is unfair, you may be able to ignore the term or even cancel your contract without having to pay a cancellation fee²². You are not legally bound by an unfair contract term or consumer notice, and you have the right to challenge it, in court if necessary⁴.

For a financial product, the process starts with the firm itself. Financial businesses should look into a complaint and reply within 8 weeks⁸. If the firm does not reply in time, or its final response does not satisfy you, the complaint can go to the Financial Ombudsman Service, which can look at complaints across mortgages, insurance, credit and pensions²⁴. The ombudsman decides what is fair and reasonable in all the circumstances, and its decisions are binding on the firm if you accept them.

For other consumer contracts, the route runs through the trader, then through alternative dispute resolution or a small claims court. A court can decide a term is unfair and, where it does, the rest of the contract continues if it is capable of continuing without the unfair term³. Gathering evidence matters: keep the contract, the notices, the correspondence and anything showing what was said at the point of sale²⁵.

Who enforces unfair terms law: the CMA and the FCA

Enforcement is shared. Schedule 3 to the Consumer Rights Act confers enforcement functions on the Competition and Markets Authority and other regulators in relation to the enforcement of the unfair terms provisions². The CMA is a domestic enforcer, a Schedule 13 enforcer and an unfair contract terms enforcer²⁶, and it has updated its guidance on unfair contract terms (CMA37)¹². Complaints about unfair terms may be considered by the CMA and by a qualifying body, which includes local authority Trading Standards services³.

The FCA enforces the same law within financial services. The FCA regulates financial services in the UK²⁷, and one of its responsibilities is ensuring fair practice in consumer credit²⁸. Under section 137S of the Financial Services and Markets Act 2000, the FCA is able to intervene in respect of breaches²⁹. But there is a limit consumers should understand: the FCA, as a regulator and an unfair contract terms enforcer, does not have the power to grant redress to consumers who have suffered loss because a term or notice is unfair or insufficiently transparent³⁰. Where the use of an unfair and/or insufficiently transparent term also amounts to a rule breach causing loss to consumers, the FCA can apply to court for restitution or require restitution³⁰. The FCA also has broader tools: rules and guidance on complaints, statutory powers against individual firms, the power to order an industry-wide consumer redress scheme, and voluntary schemes³¹.

The CMA's recent casework shows the law being used against familiar names. It has taken action to improve the experience of UK drivers dealing with private parking operators, to help ensure they are treated fairly when they receive and challenge parking charges³². It has investigated Microsoft over the marketing of subscription plans⁷, and investigated Trainline, Virgin Atlantic and RED Driving School over drip pricing³³.

CMA powers: fines of up to 10% of global turnover

The Digital Markets, Competition and Consumers Act 2024 transformed the CMA's consumer protection toolkit. It gives the CMA new powers in respect of infringements of certain consumer protection laws, breach of undertakings and non-compliance with CMA directions, including powers to impose monetary penalties³⁴. If a company infringes consumer protection law, the CMA can fine them up to 10% of their global turnover, or £300,000 where this is higher than the 10% figure⁷. The Act itself provides for penalties including fines of up to 10 per cent of a firm's global turnover for breaches²⁶, and the same 10% limit applies to designated undertakings under the digital markets regime³⁵.

The CMA can also order businesses to pay compensation to affected customers³³. That power sits alongside the fine, and it is the one that matters most to a consumer who has already lost money. The CMA may also enforce the provisions of the relevant chapter of the 2024 Act³⁶.

For consumers, the practical point is this: the CMA and the FCA act against businesses, not for individuals. A consumer who has suffered loss because of an unfair term uses the complaint routes in the previous section, while the regulators' powers drive industry-wide change.

Where the protection stops

The unfair terms rules have boundaries. They do not apply to contracts of employment or apprenticeship, or to notices setting out rights and responsibilities between an employer and employee⁴. The 1994 Regulations also excluded contracts relating to succession rights, rights under family law, and the incorporation and organisation of companies or partnerships, and terms reflecting mandatory statutory or regulatory provisions or international conventions¹¹. The 1999 Regulations similarly excluded terms that reflect mandatory statutory or regulatory provisions, or the provisions or principles of international conventions³.

Price and main subject matter terms are excluded from the fairness assessment where they are transparent and prominent⁶, so a challenge to the level of a price, as opposed to how it was presented, will generally fail. And the Supreme Court's ruling that unauthorised overdraft charges could not be assessed for fairness under the 1999 Regulations shows that whole product areas can sit outside the reach of the unfair terms law²⁰.

A further limit concerns the effect of unfair practices. Under the 2024 Act, a contract is not void or unenforceable by reason only of a breach of the prohibition on unfair practices, except as resulting from a consumer's rights of redress¹⁴. The consumer must act to get the benefit of the protection; the contract does not simply fall apart on its own.

Checking a firm before you sign

Prevention sits upstream of any dispute. Before signing a credit agreement, search the firm by name on the FCA's register, select 'Borrowing money, including credit card lending and credit information', and check the firm is 'Authorised' with permission to 'Lend you money on an unsecured basis'³⁷. The FCA is also the go-to contact if you want to check whether a firm is legitimate or report a possible scam²⁸.

The FSCS sets out the same steps for investments: first check your provider is authorised by the Financial Conduct Authority, then find out whether the particular activity the authorised firm is carrying out for you is regulated by the Prudential Regulation Authority or the FCA³⁸. Checking contact details against the register matters, because scammers sometimes pretend to be a real firm³⁹. Buy now pay later agreements now come with Section 75 of the Consumer Credit Act available, so you may be able to get a refund from the lender if something goes wrong with what you've bought³⁷.

Where to get free help

Free, impartial help exists at every stage. For consumer problems generally, Trading Standards services in each nation publish consumer advice, and complaints about unfair terms may be considered by the CMA and by a qualifying body³. In Scotland, mygov.scot sets out your consumer rights, including the right to challenge part of a contract if you don't think it's fair²². In Wales, Trading Standards guidance covers unfair terms in consumer contracts and notices, remedies and redress, and how to gather evidence to prove your claim⁴.

For financial products, the Financial Ombudsman Service is free to use and can consider complaints about mortgages, insurance, credit and pensions²⁴. The FCA produces free, easy-to-understand guides about pensions²⁷, and if you are unhappy with the conduct of a claims company you can complain to the FCA, though the FCA cannot pay compensation or order a claims management company to compensate you, even if you have received poor service³⁹. In Northern Ireland, nidirect signposts advice on avoiding losing your home, including free services providing advice, negotiation and court representation in certain circumstances⁴⁰.