High Court finds that gym membership contracts were unfair

Practical Law UK Legal Update 3-506-4863 (Approx. 7 pages)

High Court finds that gym membership contracts were unfair

by PLC Commercial

Background

The Unfair Terms in Consumer Contracts Regulations 1999

The Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) (UTCCRs) apply to unfair terms in contracts concluded between a consumer and a seller of goods or a supplier of services. Under the UTCCRs:

An unfair term is one which has not been significantly negotiated and which, contrary to the requirements of good faith, causes a significant imbalance in the parties' rights and obligations under the contract, in favour of the seller or supplier (regulations 3 and 5).
When a court is assessing whether a term is unfair, it has to take into account the type of goods or services being provided under the contract and consider all the circumstances around the conclusion of the contract (regulation 6(1)).
A court may not assess the fairness of a term that relates to the definition of the main subject matter of the contract, nor the adequacy of the price and remuneration for the services or goods in question, provided these terms are expressed in plain intelligible language (regulation 6(2)).

For more information, see Practice note, Consumer contracts.

Consumer Protection from Unfair Trading Regulations 2008

The Consumer Protection from Unfair Trading Regulations 2008 (SI 2008/1277) (CPRs) also prohibit businesses from treating consumers unfairly. They impose a general duty on businesses dealing with consumers not to trade unfairly, and prohibit misleading consumers by action or omission (regulations 3, 5 and 6). Further, they ban aggressive practices (regulation 7).

For more information, see Practice note, Consumer Protection from Unfair Trading Regulations 2008.

Facts

The OFT brought an action against Ashbourne Management Services Ltd and its directors (together, Ashbourne) for unfair trading practices which the OFT considered to contravene the UTCCRs and the CPRs.

Ashbourne acts for over 700 gyms in the UK, typically those at the lower end of the market. Services provided by Ashbourne include recruiting gym members, collecting membership fees on behalf of the gyms, and providing standard form membership agreements for use with gym members (Ashbourne contract).

The Ashbourne contract imposed a minimum membership period of between one and three years on members. Certain versions of the Ashbourne contract contained terms requiring that, if gym members terminated their membership before the end of the minimum period, they must immediately pay the gym all membership fees payable over the entirety of the minimum period. Other versions of the Ashbourne contract provided that, if a gym member committed even a minor breach of the agreement, the gym could terminate the agreement and claim all membership fees payable in respect of the entire minimum period.

If a gym member was late in paying membership fees, Ashbourne threatened to register a default report against them with credit reference agencies for all the membership fees payable over the minimum period, even where payment was late because the gym member disputed the payment. Ashbourne had in fact registered over 17,000 default reports with credit reference agencies.

The OFT brought proceedings against Ashbourne alleging that the above terms of the Ashbourne contract (and certain others) were unfair contract terms under the UTCCRs. It also alleged that Ashbourne's use of unfair contract terms and its credit reference agency reporting practices contravened the CPRs.

Lastly, the OFT noted that the Ashbourne contract offered prospective members seeking to join for a fixed term the option to pay the whole fee upfront and receive a discount, or to pay by monthly subscriptions. The OFT considered that members who decided to pay by monthly subscriptions were offered credit agreements within the meaning of the Consumer Credit Act 1974, and that, as the agreements had not been properly executed, they were only enforceable upon an order of the court.

Ashbourne contended that the terms complained of were fair, and that, in seeking an assessment of the fairness of the minimum membership period, the OFT was asking the court to make an assessment of fairness of a term which related to the definition of the main subject matter of the Ashbourne contract, which is prohibited under regulation 6(2)(a) of the UTCCRs.

Decision

The judge agreed with the majority of the OFT's complaints. He considered the drafting of certain terms in the Ashbourne contract and assessed each provision for fairness under the UTCCRs and compliance with the CPRs, where appropriate. Importantly, he held that the court could assess the fairness of the minimum membership period. The judge's reasoning is summarised below.

Whether the court was entitled to assess the fairness of a minimum membership period

The OFT contended that the term in the Ashbourne contract imposing a minimum membership period on members was not a core term of the contract, that is, it did not fall within regulation 6(2)(a) of the UTCCRs. The main subject matter of each agreement was membership of the gym club, and the right to use that club. The minimum membership period requirement was therefore an ancillary or subsidiary provision, and, as such, the court could assess its fairness. The OFT alternatively argued that, even if the minimum membership requirement was part of the main subject matter of the Ashbourne contract, it could still be assessed for fairness by reference to the consequences of earlier termination.

The judge found that the minimum membership requirement was a core term of the Ashbourne contract, because it defined the period during which the member was entitled to use the gym's facilities and, in return, had to pay a set monthly subscription. However, the judge then went on to hold that regulation 6(2)(a) only precluded the assessment of the fairness of a term by reference to the definition of the main subject matter of the contract; it did not preclude the assessment of the fairness of the term on other grounds. The judge based this distinction on his interpretation of the Supreme Court's judgment in respect of regulation 6(2)(b) of the UTCCRs in Office of Fair Trading v Abbey National plc and others [2009] UKSC 6 and the House of Lords' explanation in Director General of Fair Trading v. First National Bank [2001] UKHL 52 that this regulation should be given no wider an interpretation than necessary.

Kitchin J found that, in the circumstances, the assessment of the fairness of the minimum membership period did not relate to the definition of the main subject matter of the contract. The assessment did not relate to the meaning or description of the length of the minimum period, the facilities to which the gym member gains access, or the monthly subscription which they have to pay. It did not relate to the adequacy of the price as against the facilities provided. Instead it related to the obligation upon members to pay monthly subscriptions for the minimum period when they had overestimated the use they would make of their memberships, and failed to appreciate that unforeseen circumstances may make their continued use of a gym impractical or their memberships unaffordable. In other words, it related to the consequences to members of early termination in light of the minimum membership period. Accordingly, the assessment of the fairness of the minimum period was not precluded by regulation 6(2)(a) (or 6(2)(b)).

The fairness of the minimum membership period

The judge considered the behaviour of the average gym consumer, and noted that such a consumer tended to overestimate how often they will use the gym after they have joined, frequently stops using the gym altogether after the first two or three months of membership, and does not have regard for unforeseen circumstances that may make their continued use of the gym facilities impractical or unaffordable.

Evidence presented by the OFT showed that the average gym user would be better off joining a gym on a pay per month basis. By contrast, minimum membership periods were highly advantageous to the gyms at the lower end of the market that Ashbourne acted for, because such gyms are rarely so over-subscribed that they cannot take on new members. The minimum membership period was therefore weighted so that it caused an imbalance in the parties' rights and obligations.

The judge considered that the imbalance arose in a manner that was contrary to good faith. Ashbourne was fully aware of the average gym user's usage patterns, and had deliberately created a business model that was designed and calculated to take advantage of the naivety and inexperience of the average gym user at the lower end of the market, trapping them to commit to a minimum membership period, but without warning them of the associated risks and possibly more cost effective options such as pay per month schemes.

The terms' fairness therefore turned on whether the imbalance was sufficiently significant. The judge decided that all two and three year minimum membership periods in the Ashbourne contract created a significant imbalance between the parties rights and obligations and were unfair. Minimum membership periods of one year in the Ashbourne contract were unfair where the gym member could not terminate the agreement in certain circumstances (for example, illness, injury, loss of livelihood, change of principal place of work or home). One year agreements that gave the gym member these options to terminate did not create a significant imbalance and such periods were fair.

The judge suggested that a minimum membership period of two or three years might have been acceptable if the agreement had permitted the member to terminate their gym membership after 12 months, on, for instance, 30 days' notice, provided that the member paid the difference between the contractual subscription rate and the rate applicable to a rolling monthly membership for the period prior to the date of termination.

Early termination fees

The judge considered the versions of the Ashbourne contract which required that, if gym members terminated their membership before the end of the minimum period, they must immediately pay all membership fees payable over the entirety of the entire minimum period. He held that this requirement was unfair because it made no allowance for the fact that the gyms benefited from receiving accelerated payment of the membership fees. As such, the requirement was unfair and amounted to a penalty.

The judge then considered versions of the Ashbourne contract which contained provisions that, if a gym member committed even a minor breach of the agreement, the gym could terminate the agreement and claim all membership fees payable in respect of the entire minimum period. Some of these agreements provided for a 5% discount for accelerated payment to be made. The judge held that all such provisions were unfair and constituted penalties, because they allowed the gym to terminate the agreement and claim future membership fees for non-repudiatory breaches by the gym member.

Under common law principles, if a clause of a gym membership agreement permits a gym to terminate in the event of a non-repudiatory breach by a member then, upon termination pursuant to that clause, it may claim sums due and damages for losses suffered up to the date of termination but not beyond. A clause which provides for the payment of a larger sum will be void as a penalty: see, for example, Financings Ltd v Baldock [1963] 2 QB 104.

Notice of cancellation

The judge agreed with the OFT that notice provisions in certain versions of the Ashbourne contract which required members to notify cancellations to Ashbourne instead of the gym were unfair, as the average consumer who wished to cancel was likely to give notice to their gym and therefore end up with an ineffective cancellation and remain liable to pay membership fees.

Parties to the contract

The judge found that certain versions of the Ashbourne contract did not clearly identify the supplier of the gym facilities in plain and intelligible language and therefore were unfair.

Unfair commercial practices and the Ashbourne contract

The judge found that, in recommending the use of agreements which were unfair or contained unfair terms, and in seeking payment of subscriptions which members were not bound to pay, Ashbourne had:

Failed to act in accordance with the standard commensurate with honest market practice.
Caused consumers to take transactional decisions they would not otherwise have taken, namely to enter into such agreements and to make payments under them.

The judge concluded that Ashbourne had carried on unfair business practices contrary to the CPRs.

Credit reference agency reporting

The judge agreed with the OFT that the following of Ashbourne's actions constituted unfair commercial practices under the CPRs:

Reporting and threatening to report information to credit reference agencies which was inaccurate because the relevant sums were claimed under an unfair term.
Reporting and threatening to report individuals to credit reference agencies for default when in reality the debt is no more than a claim for unliquidated damages or is not owed.

Consumer credit agreements

The judge considered that there were two important features of the Ashbourne contract; namely, the member agreeing to join the gym for a minimum period, and to pay a monthly membership charge at the beginning of each month (and an additional charge at the end of the month if they had used any facilities not included in their category of membership during that month). The judge held that, in these circumstances, the Ashbourne contract was not a credit agreement regulated by the Consumer Credit Act 1974, because the Ashbourne contract did not provide credit for a deferred debt, but rather required members to make monthly payments for continuing access to the gym’s facilities.

Comment

Standard form contracts are used in a wide variety of business-to-consumer transactions. Businesses who use such contracts should take the opportunity in light of this decision to review their standard terms and business practices for fairness and compliance with consumer protection legislation, including the UTCCRs and the CPRs, paying particular attention to:

Minimum contract terms. When a contract imposes minimum terms on consumers, businesses must consider their average consumer and review the contract to ensure it does not entrap their average consumer into committing to a minimum term that is excessive, without explaining to them the risks involved in such a commitment and the possibility of alternative and more beneficial options. Businesses must also communicate clearly to the consumer that they are entering into an agreement with a minimum term, both when speaking to the consumer and in any written information they provide.
In addition, consider whether there are circumstances where a consumer should be able to terminate the contract early without incurring financial consequences.
Automatic renewal terms. When contracts impose automatic renewal terms, businesses must provide reasonable means for their consumers to exit such automatic renewal terms fairly, and clearly communicate the exit options in plain and intelligible language.
Early termination charges. Businesses must ensure that charges for early termination include an appropriate discount for accelerated receipt of payment.
Notice provisions. Notice provisions should be drafted such that consumers are able to serve notice on the most obvious party. Providing that notice will only be valid if given to an agent is unlikely to be fair.
Parties. Contracts must clearly identify the contracting party, the supplier of services (if different from the contracting party) and any agent, in plain and intelligible language.
Credit collection methods. Businesses should not engage in aggressive and unfair trading practices when attempting to recover outstanding payments. Examples of such practices as featured in this case include:
- sending letters from litigation departments that do not exist;
- threatening legal proceedings when there is no intention to issue proceedings;
- threatening to report or reporting information of debts in dispute to credit reference agencies as a means to secure payment; and
- threatening to report or reporting information to credit reference agencies without informing individuals of their right to access records kept about them by such credit reference agencies and their ability to have incorrect entries corrected.

This case is also noteworthy for the judge's decision that the court could assess the fairness of a minimum membership period in a gym contract, as such provisions are sometimes exempt from fairness assessments. See, for example, the OFT's 2002 Guidance on unfair terms in health and fitness club agreements.

Case

Office of Fair Trading v Ashbourne Management Services Ltd and others [2011] EWHC 1237 (Ch), 27 May 2011, Kitchin J.

End of Document

Also Found In

Resource ID 3-506-4863

Published on 16-Jun-2011

Resource Type Legal update: archive

Jurisdictions

England
Wales