The new Directive on Unfair Terms in Consumer Contracts is most definitely in the latter category. This law affects many businesses ranging from financial institutions such as banks and building societies to house builders, travel agents, to garages and retailers.

However, since the law applies to all contracts with consumers, it will also apply in FE, particular in the arrangements between institute and student.

Under the law, unfair terms which are used in contracts are not binding on consumers. Therefore, the legislation may have severe effects for those institutions that do not take adequate note.

The basic principle is that all contracts for the sale of goods or for the supply of services will be governed by the legislation. The law is designed to apply only where a person - the consumer - contracts with a business.

Further, the party providing the goods or services must be acting within his business. For these purposes, a business includes a trade or profession. As an example, an educational institute, or a lecturer who has a private tuition business which he or she runs from home, would be caught by the new law in dealings with students.

The law should have applied to all contracts made on or after January 1 this year, whether verbal or in writing. But inadequate enacting legislation means it will not come fully into force until July 1.

If a contract with a consumer contains an unfair term, then, with very few exceptions, the term will be unenforceable. For example, if an educational establishment fails to have a fair exam complaints system, it could find the court interfering with results. This could arise, for instance, in situations where sexual harassment was an issue.

Suppose an FE college includes in its student rule book a statement saying that all complaints must be brought within 90 days. Suppose, also, that many faults - for example, about bias in examination marking - are not likely to become apparent within 90 days. The fault actually becomes apparent a year later. Such a term is almost certainly unfair. In each of these examples, the education establishment will be unable to enforce the term of the contract. Provided that the remainder of the contract is “capable of continuing” without the unfair term, the remainder of the contract will continue.

A balancing of interest must be made between the consumer and the business. It is only if this balance is not fair and equitable that the contract will contain an unfair term.

The legislation contains a partial list of terms that will usually be regarded as unfair. These include: * A term that excludes or limits the liability of the seller or supplier in the case of death or personal injury of the consumer. Under existing legislation, the inclusion of such a term in a consumer contract is already a criminal offence.

* A provision that limits the rights of a consumer, where the supplier fails completely or partly to perform his part of the contract.

* A provision that enables the supplier to terminate a contract of indefinite duration is only acceptable if the supplier is limited in his right to terminate by having to give reasonable notice and having to rely on serious grounds. If a contract to teach a degree on a part-time basis was of indefinite duration, the college or university could not reserve the right to terminate at will with no notice. In practice, most courses will have a maximum period of study.

* A term that states that, for instance, only a director of the seller or supplier can alter the contract will be unfair and, therefore, not binding on the consumer.

* Far more wide-ranging is the statement that a contract term allowing the supplier to assign the contract will be considered unfair if it reduces the guarantees for the consumer. When companies are bought or taken over, this often reduces the guarantees for consumers.

Suppose, for example, that a student starts a course at a large, two-site FE college but, before he finishes the course, a management buy-out team takes over the site at which he studies - something which happens often in other industries, if not in education. The management buy-out team may not have anything like the same resources as the original college with whom the student began his course.

The contract with the college may well purport to allow assignment, from the old college to the new one led by the management buy-out team.

While the legislation is not clear on this point, it seems that the effect would be that the student could insist on his contract remaining with the old college. The old college may be unable to honour it, because it will have sold the relevant assets to the management buy-out team.

In these circumstances, the student could claim damages from the original vendor college. The student can presumably insist upon dealing with a college that is as large, and, therefore, that is as reliable, as the original college.

If, to do so, he has to pay more than in the original contract, he can sue for damages - that is, for the difference in price between the new contract that he enters into and the original contract.

The legislation also requires that contracts with consumers must be drafted in plain, intelligible language. The main penalty if he does not do so is that the interpretation most favourable to the consumer will prevail.

The best businesses periodically review their terms and conditions in any event. If an excuse for reviewing contract terms and conditions were needed, there is such an excuse now!

Dai Davis is a partner in the Leeds office of the national law firm Eversheds

Edited by Ian Nash