Consumer Protection Bill: public hearings

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Trade and Industry

03 September 2008
Chairperson: Mr B Martins (ANC)
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Meeting Summary

The Committee continued with public hearings on the Consumer Protection Bill.

Professor Naude of Stellenbosch University gave a presentation to the Committee on the Consumer Protection Bill, focusing on the need to include a “grey list” of contractual clauses, which would isolate a list of “standard-type clauses typically included in consumer contracts, that were presumed to be unfair unless otherwise proven by reference to the particular circumstances. This would force drafters, who were usually commercial enterprises, to pay more attention to their contracts, and they would be less likely to include such clauses, knowing that the onus of proving fairness would be shifted to them. She noted that foreign jurisdictions included such clauses and explained them in depth, also submitting a proposal. Members asked what impact this would have on various sectors of the economy, whether such a clause should be in the Bill or in regulation, and whether it was intended that it should apply to all contracts. 

Transnet expressed concern about four main areas of the Bill and the possible unintended consequences upon their operations as a State Owned Entity, and as both a supplier and consumer. The comments related to exclusion of organs of State, and the lack of clarity of Clause 5, to the threshold, which it recommended must be included in the Bill itself, to the tests for exemption under clause 5(2)(b), which Transnet suggested should be worded as two separate tests. Transnet also queried whether this was intended to apply to leases. The fourth comment related termination and automatic continuation of fixed term contracts, and the proposal was made that further attention must be given to clause 14(1), and the effects of termination of fixed term contracts. Members asked Transnet to make suggestions as to the threshold level.

Meeting report

Consumer Protection Bill (the Bill): Continuation of public hearings
University of Stellenbosch (Prof T Naude) Submission
Prof Tjakie Naude, Professor of Private Law, University of Stellenbosch, welcomed the advent of the Consumer Protection Bill but thought that it was insufficient to protect the consumer. She said that she did not have time to introduce all of her submissions to the Committee within the allotted time, but would focus on the most important parts and trusted that the Honourable Members would read the remainder of the written submission. 

Prof Naude’s main objection to the Bill centred on unfair contractual terms, particularly on the exclusion of a “grey list” in the Bill. She had spent a sabbatical in Europe, dedicated towards the examination of unfair contractual terms and the protective measures provided for the consumer in European countries, but had also examined measures outside the European Union such as Brazil. It was her belief that when the current bill was compared to these models, it did not provide effective protection.

Professor Naude noted that Clause 48, which dealt with “unfair, unreasonable or unjust contractual terms”, allowed for the consumer to approach a court to argue whether a particular term in a contract might be in breach of this Clause. She noted that a list of prohibited clauses was provided in Clause 51, but said that too few clauses were included.

Mr Naude argued for a proactive approach to unfair contractual clauses, and her primary submission was a tried and tested model from Europe, namely that a “grey list” should be drawn. This was a list of clauses which were primarily presumed to be unfair, but which might be permitted in certain cases. It was up to the person seeking to enforce such a clause to prove that it was not unfair in the circumstances. This would provide guidance to businesses, who would think carefully before including any of the “grey clauses” in their standard contracts,

Ms Naude pointed to the European Directive on Unfair Terms in Contracts, which provided a minimum level of protection to consumers throughout Europe. Section 6 was the core of the directive and section 6(3) included a list of 35 clauses that were presumed unfair unless proven otherwise. She noted that she had based her submission on this but had suggested only terms peculiar to South Africa.

She said that if a consumer saw such a term in a business contract, he might be more willing to insist on its removal and business might be more willing to do so, knowing that such terms were on the grey list and therefore able to be challenged, as they were less likely to want to bear the onus of proving why such a term was not unfair. At the moment a consumer who alleged that a term was unfair was required to prove this in court. Prof Naude further said that it should not be left to the courts to provide guidance on what was fair or not. Most consumer cases were heard at the Magistrate’s Courts, and most of the judgments would not set precedents nor be reported.

If there was further clarity, this would also be advantageous for business, as it would allow for “standard” contracts to be drawn as a one-off, without being constantly challenged as the court cases came up with decisions. Competitors would all then also be in the same position.

Prof Naude said that there might be objections to a grey list in that it could lead to clause 48 being interpreted too narrowly by our courts, but considered the greater danger to be the total exclusion of such a list. She felt that it was not appropriate that it be put in regulations, but that it should form part of the substantive text of the Bill. This was also attract greater legitimacy, with less chance of challenge on the basis of ultra vires (exceeding powers assigned by law).

She noted that the Department of Trade and Industry (dti) had based part of the Bill on the United Kingdom’s (UK’s) 1977 Unfair Terms in Contracts Act, but that more recent UK legislation in 1996 was not included. The UK Law Commission was currently drafting a new Bill. However, a grey list and the entire European Union directives in this regard had been accepted in principle by the UK government. 

Prof Naude then turned to the other parts of the Bill that were also problematic. She noted that clause 14 related to fixed term agreements, and allowed the consumer to cancel on 20 days notice. She pointed out that this could give rise to problems in lease agreements. For example, a landlord in Stellenbosch may lease a flat to students, but if they were to leave on 20 days notice in March, he would not find tenants for at least two months, due to the state of the market. This clause would only help the lessor if he received goods or a discount.

She further stated that Clause 54 actually gave the consumer fewer rights than he or she would have enjoyed under the common law. This clause said that the consumer had the right to demand quality service but if the supplier failed to perform, then the supplier had an election whether to remedy or refund the consumer. At common law, if the defect was serious, it is the consumer who could make the election, not the supplier. Professor Naude recommended that a clause be included that stated that the consumer would retain the common law rights in addition to those set out in the Bill.

Discussion
Mr L Labuschagne (DA) asked whether he was correct in assuming that the “grey” list would largely eliminate the “small print” in contracts.

Prof Naude replied that this would help eliminate small print. Businesses could still use standard terms but the aim of such a list was to ensure they did not use any unfair terms.

Ms F Mahomed (ANC) complimented Prof Naude on her detailed research and asked whether she had analysed how the legislation was implemented, what was the result and whether there were any issues related to capacity. Secondly, she asked for further comment regarding the return of goods.

Prof Naude replied that if there was a capacity problem, then it was even more important to have a “grey” list, as it would be more likely that unfair terms would be removed voluntarily by businesses, meaning that there would be less implementation arguments.

She further stated that in the UK, there was an Office of Fair Trade, a body given authority to act against businesses who used unfair contractual terms. This was empowered to obtain interdicts from the court against such businesses, meaning that the individual who had been affected need not bring the case himself, nor be involved. An organisation of this nature would involve a huge amount of money, and this was another reason for a proactive approach to be prescribed in law.

Dr S Rasmeni (ANC) asked whether the grey list would be applicable to churches, trade unions, associations and similar organisations, or whether it was intended to apply only to business organisations.

Professor Naude replied that in the EU the grey list also applied to State agents.  She did not know whether trade unions would be covered, but she did have a problem with the “grey” list being applicable to all suppliers. Hopefully, the courts would make the distinction. For example, a school may arrange a field trip with parents volunteering to assist. They may be hesitant to volunteer if they were to incur full liability for any negligent actions.

Prof Naude explained that the “grey” list was something between a blacklist and free licence, in that the terms in that list were not completely prohibited, but may be permissible in certain circumstances. She said that some countries adopted stricter measures, but she was not in favour of a blacklisting of terms, as she did not know how it would work in the South African context.

Mr SNjikelana (ANC) enquired whether Prof Naude expected a business to have to seek clarification from a lawyer. He asked also if she was proposing that the Small, Medium and Micro Enterprises (SMMEs) should be covered. He wondered, if the list was to be included in the Act, how exhaustive it would be, pointing out that if it were to be dealt with by way of regulation, it would be far easier to alter it as the circumstances required.

Prof Naude replied that if an organisation was in doubt, it would be better advised to exclude the term from the contract. If the organisation was able to, and wished to seek legal guidance, then a lawyer would be able to provide an opinion as to whether the inclusion of a particular term would be advisable.

In response to the second question, she said that the grey list she had suggested consisted of 25 clauses, and was based on the EU Directive, with modifications and additions for the local context. She said that the UK Law Commission had put the grey list in a Schedule to their legislation, and had given their Minister the power to amend only that schedule, but not any other part of the legislation.

Transnet submission
Ms Sue Lund, General Manager: Policy and Research, Transnet, noted that Transnet was a State Owned Enterprise (SOE) required to run as a self-sustaining company. with the purpose of integrading South Africa’s freight system, which included ports and rail. She said that Transnet supported the Bill and its intention of consumer protection. However, there were four main points on which it wished to comment.

The first related to the exclusion of organs of State. Ms Lund stated that it was unclear clause 5 of the Bill intended to exclude all organs of state from the operation of the Bill. She noted that Clause 5(2)(a) excluded the State insofar as it was a consumer. However, she pointed out that Transnet was both a supplier and a consumer. For example, Transnet would enter into contracts as a consumer with stevedore companies, for security contracts and major construction contracts for large investments. On the other hand it would be a supplier in cargo handling services, tug services and lighthouse services. She would have expected that Clause 5(2)(b)(ii), which excluded a part of a major supply chain, might apply, but that this position was not clear.

Secondly, Ms Lund indicated that the Bill was stated as not applying to anything over a certain threshold. That threshold amount would provide an indication as to the Bill’s objectives, and what activities would fall within its sphere of operation. She recommended that the threshold be included in the Bill itself, as had been done with the National Credit Act, and not in the regulations, as this would promote certainty.

The third query related to the tests for exemption. Clause 5(2)(b) stated that an entity must pass two tests to be exempt from the operation of the Act, namely that the value must be above the threshold and the entity must be part of the supply chain process. Ms Lund suggested that the two-stage test should be divided into two separate tests.

She added that it was not clear whether this was intended to apply to leases. Most leases would probably fall above the threshold value. She pointed out that Transnet entered into leases with terminal operators which required significant investment.

Ms Lund said that the fourth comment related to the termination and automatic continuation of fixed term contracts. Clause 14(1), could possibly lead to unintended consequences upon termination of fixed term contracts.. Ms Lund illustrated Transnet’s concern by referring to an example of Transnet contracting with a  stevedore supplier, who at a later stage might terminate the contract, giving statutory 20 days notice. She claimed it would not be possible for Transnet to engage another supplier in 20 days, and that this would affect Transnet’s ability to fulfil its other contracts, thus exposing the company to increased liability.

The second aspect of this related to the provision for automatic continuation of fixed term contracts. She cited the example of a mining company who might contract to transport extracted minerals. In this situation the mining company would be the consumer. When the contract came to an end, Transnet would have to continue to transport the extracted minerals until the mining company decided to terminate, even though the contract was the result of a complex negotiation.

Discussion
Ms Mahomed asked if Transnet wished to suggest what the threshold value should be.

Ms Lund replied that Transnet was willing to make suggestions to provide certainty.

The meeting was adjourned.

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