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If you are a supplier of goods or services, your contract is vital to protect your business from risk. However, when you trade using your own standard terms or contracts, you must be careful when drafting the terms. Having onerous terms in a contract could put your business at risk. This article will explore some of the risks to be aware of regarding onerous contract terms when contracting with business customers.
Importance of Using a Contract
A contract is a vital legal document to protect your business from risk. A contract includes legal terms to govern the business relationship between commercial parties.
Despite the size or risk of your commercial project, a contract is a key tool that could help you in various circumstances. Drafting a contract is an important process requiring careful attention. You should tailor your contract to your business activities and prevent potential risks.
Examples of Onerous Terms
Some supplier contracts include heavily onerous terms. In this context, we refer to onerous terms as terms that are heavily in a supplier’s favour and could be risky for a customer to agree to.
For instance, onerous terms can look like the following:
- an extensive indemnity clause, where the customer must compensate the supplier for a range of wide losses on a pound-for-pound basis;
- excessive cancellation charges charged to a customer; or
- making the customer pay for sending back faulty products where the supplier is at fault.
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Risks of Drafting Onerous Contract Terms
Drafting onerous terms in your contract can give rise to several risks. We explore these risks below.
Increasing Negotiation Time and Costs
If your contractual terms are weighted too heavily in your favour, you will likely face more negotiations with customers. Customers could heavily negotiate your terms or seek to impose their own terms and conditions on you. This could lead to protracted negotiations and increase the time and legal costs you incur.
Protracted negotiations can require significant time and resources and slow your conversion of new business. They can also mean you make less profit from contracts if the negotiation costs need to be deducted from your contract turnover.
Stopping Customers From Working With You
In business, you need to have customer trust. Fair and reasonable contract terms, which also offer a customer some protection, could help you develop good working relationships.
If your terms are too onerous, they could give customers a negative impression of your business. Customers may decide that your terms could be more risky for them and, as such, walk away from doing business with you.
Consider the fact that having more balanced contractual terms may help you secure more business if customers believe you are a fair and reasonable supplier.
Risking Your Contract Being Deemed Unfair and Enforceable
Certain legal rules impact business-to-business contracts, for example, the Unfair Contract Terms Act 1977 (UCTA). Under UCTA, specific contractual terms are subject to a reasonableness test. For instance, in limitation of liability clauses, a supplier cannot limit their liability for death or personal injury caused by negligence.
If a court concludes your liability terms to fall foul of the UCTA rules, they could be void and unenforceable. This could put you in a riskier position than you would have been in if your terms were more balanced.
Further, terms that a court considered to be ‘penalty clauses’ are generally unenforceable under English law. Therefore, it is vital to ensure that you draft your terms carefully (in particular liability clauses). If your terms are overly one-sided, customers could challenge them, and in the worst case, they could be unenforceable by the courts.
Why Should You Be Cautious When Using Onerous Terms?
While protecting your business in your terms and conditions and contracts is essential, you should be very careful and take a cautious approach. Ensure that you bring any onerous terms to your customer’s attention. If a particular clause is burdensome, give very clear notice to customers. For example, consider marking such terms in bold or drawing them to a customer’s attention.
Importantly, there have been various litigation due to businesses getting this wrong, leading to disputes. If you hide away onerous terms in your contract’s small print, customers may challenge them. In the worst case, this could lead to a contract dispute with a court finding your business contract unenforceable. It is much better to take a cautious approach and ensure any onerous terms are clear and visible to avoid challenges and disputes.
Additionally, being open about onerous terms will allow customers to discuss any issues or questions with you openly. If you are unsure whether any specific terms are too onerous or whether a customer might challenge them, you should seek legal advice from an experienced commercial contracts lawyer.
Finally, while you should avoid including onerous terms in your contracts, if you decide to include some, you should correctly incorporate them into your agreement. Otherwise, you will not be able to rely on them.
Download this free Supplier Contracts Checklist to ensure your contracts will meet your business’ needs.
Key Takeaways
Although it might be tempting to draft commercial contracts heavily in your favour, you should note that this approach gives rise to legal and commercial risks. Your customers might challenge heavily onerous terms, and a court could deem them unfair and unreasonable. Further, they could increase negotiation time and deter customers from signing your terms.
If you need help preparing a contract, 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.
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