19 December 2012

The Office of Fair Trading recently pursued Ashbourne Management Services Limited (“Ashbourne”), who operate membership services for more than 700 gyms throughout the UK, after receiving many complaints from gym members in OFT v Ashbourne Management Services Limited and others [2011] EWHC 1237.

They sought a ruling against Ashbourne that:

• their contract terms were unfair as members would be bound to a contract for between one and three years, 
• it was an unfair term that members could terminate their contract early if they paid the remainder of the contract in one lump sum, and 
• it was an unfair term that allowed Ashbourne to terminate the contract of members for minor breaches.

The High Court of Justice considered the case and held that not only were the above three contract terms unfair and, therefore, unenforceable, but the methods that Ashbourne used to collect the arrears were also unlawful notably threatening members that their credit ratings may be adversely affected. Mr Justice Kitchen stated that their business “… is designed and calculated to take advantage of the naivety and inexperience of the average consumer using gym clubs at the lower end of the market.”1  It was stated, however that contracts lasting twelve months would be reasonable if the customer could suspend or cancel their membership for health or financial reasons without incurring charges.  

There are evidently many implications for businesses that operate by way of fixed term contracts. These businesses ought to consider their contracts and determine whether their terms would be regarded by the Courts as unfair. Although each case is assessed on its own facts, when determining whether a contract term is unfair or not Courts shall take guidance from Regulation 5(1) of the Unfair Terms in Consumer Contracts Regulation 1999, (the “UTCCR”), and take into account three key elements:

•  the requirements of good faith,
• whether a significant imbalance is caused in the parties’ rights and obligations under the contract, and whether there is detriment to the consumer.

Regulation 6 of the UTCCR provides guidance on assessing unfairness. It provides that the following ought to be taken into consideration:

• whether the term was negotiated between the parties, 
• the type of goods and services that are to be provided to a party,
• the circumstances surrounding the execution of the contract, and
• all other terms of the contract.

Referring to minimum contract terms in particular, businesses must ensure that they do not set a “trap into which the average consumer is likely to fall"2  by ensuring that consumers entering into minimum term contracts have the risks explained to them before they enter into such a contract, and that alternatives are provided to them. Businesses should clearly notify consumers of the minimum term prior to execution of the contract, and ought to consider whether their contracts contain provisions which would enable consumers to terminate their contract early without incurring a financial penalty.

1 OFT v Ashbourne Management Services Limited and others [2001] EWHC 1237 at 173
2 Ibid