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If you enter contracts on behalf of your business, it is integral that you can identify unfair terms. Contracts with unfair terms can risk your business breaching its statutory obligations. Furthermore, courts strike out unfair contract terms as being unenforceable, so it is essential that your business can recognise them. This article will explain what unfair contract terms are and provide five practical examples so you do not mistakenly rely on one.
What Are Unfair Contract Terms?
An unfair contract term is a term that disadvantages a party to a large extent. The rules on unfair contract terms vary depending on the nature of the contractual relationship. For instance, the rules may vary if the relationship is between a business and a consumer or between a business and a business.
A term can be unfair if:
- the term is made in bad faith; or
- the term causes a significant imbalance between each party’s rights.
The ‘bad faith’ aspect simply means you must design, negotiate, and agree to the contract fairly. This includes doing so with no undue pressure. In addition, you can assess certain terms for fairness, such as terms on the price of a contract.
Let us consider five examples of unfair contract terms below.
1. Automatically Invalid Negligence Clause
A good example would be a clause that seeks to limit your company’s liability for personal injury or death it causes. Our courts acknowledge that death or serious personal injury is uncommon. However, on those rare occasions, it is only fair that the relevant company is liable to pay compensation rather than relying on the small print.
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2. Unreasonable for Dishonesty or Fraud
Courts strike out clauses for being unreasonable where they have an unfair approach to the consequences of deception or fraud. For example, suppose a business states that it will not pay your company any compensation under the contract if you later discover they were untruthful about their ability to perform the work. Similarly, assume you are seeking a qualified HR professional from a recruitment company. However, your company later learns the individual is untrained and inexperienced. Both these circumstances reflect fraudulent and dishonest practices and it is unfair for a party to use a disclaimer to avoid repercussions for this behaviour.
3. Unreasonable Breach of Contract Clause
Clauses that unreasonably restrict your options when the other party breaches the obligations can also be unfair. For example, suppose a core term states that the other company is only liable for £1 damages upon any breach of contract. This will be completely unreasonable where the contract is worth £100,000 (or above) as it would unreasonably restrict your business’ rights to obtain compensation for breach of contract.
4. Unreasonable Negligence Clause
Similar to the previous example, an unreasonable negligence clause unfairly limits the amount a company will pay for an error. So, for example, your business orders ten pallets of materials from a company. Upon delivery, the driver drops the pallets onto an expensive piece of machinery and causes £200,000 worth of damage. The company attempts to rely on the term stating that any negligence, however severe, will only result in compensation of £100 and that the parties will ‘ignore’ the unfair contract terms regime. This clause is unlikely to be in good faith because it does not reflect the interests of the parties. Furthermore, any negligence is predictably known to cause damage far greater than the £100 cap.
5. Large Cancellation Fees
A term in a contract that allows you to charge a penalty fee from the consumer for cancellation might be unfair. Generally, you will only be able to claim for administration and marketing costs and loss of profit from the consumer, but if you have a term to penalise the other party, it may be unfair.
Key Takeaways
The above hypothetical clauses demonstrate how unreasonable a clause must be to be considered ‘unfair’. Generally, judges dislike finding clauses to be unfair unless absolutely necessary. This is because our courts try to respect an agreement two consenting parties reach. However, they retain the discretion to strike out unfair, absurd language. When unsure whether a clause in a commercial contract may be unfair to your business, it is worth obtaining some advice from a qualified commercial contract lawyer. Many people mistakenly believe that unfair contract terms only act to protect consumers within consumer contracts. However, they also exist to protect your business against absurd, unreasonable clauses that could significantly harm your company.
If you need help with contract terms, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
No. Our courts aim to respect the fact your business has willingly agreed to that form of wording with another company. Instead, they only aim to strike out specific terms that would result in a grossly unfair disadvantage to one of the parties.
Because a court can hold some clauses so unreasonable that they should not be enforceable by law. This test has a relatively high threshold, so not many contract terms fall foul of this test. Only clauses that cause absurd or completely unreasonable results tend to be labelled as ‘unfair’ by our courts.
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