Summary
- An unfair contract term is one that creates a significant imbalance between the parties’ rights or is made in bad faith, and courts will strike out such terms as unenforceable regardless of whether both parties agreed to them.
- Common examples of unfair terms include clauses that exclude liability for death or personal injury, cap compensation at an unreasonably low amount, shield a party from consequences of fraud or dishonesty, or impose disproportionate cancellation penalties.
- Unfair contract term protections apply to both consumer and business-to-business contracts, meaning businesses cannot rely on small print to avoid liability for conduct that causes significant harm to the other party.
- This article explains what unfair contract terms are and how to identify them, for business owners entering into commercial contracts under the laws of England and Wales.
- LegalVision, a commercial law firm specialising in advising clients on contract law, outlines five practical examples of unfair terms and how courts approach them.
Tips for Businesses
Review limitation of liability, cancellation, and negligence clauses carefully before signing. If a clause would produce an absurd or grossly one-sided outcome, it may be unenforceable. Seek legal advice before relying on any clause that significantly restricts the other party’s right to compensation.
Unfair contract terms can expose your business to legal risk and leave you unable to enforce key protections. Knowing how to identify them is essential for any business that regularly enters into contracts. This article explains what unfair contract terms are and provides five practical examples to help you recognise them.
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.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form, and we will contact you within one business day.
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, LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced contract lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 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.
A term is unfair if it is made in bad faith or causes a significant imbalance between the parties’ rights. Courts assess fairness based on whether the term was negotiated fairly, without undue pressure, and whether it unreasonably disadvantages one party to a large extent.
No. While unfair contract term rules are commonly associated with consumer contracts, they also protect businesses against unreasonable clauses in commercial contracts that could cause significant harm or create a grossly unfair disadvantage to one party.
We appreciate your feedback! Request your free consultation now.
