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Running a business involves creating and entering into legally binding contracts with other companies. When doing so, you and the other party will negotiate which contractual terms to include within the written agreement and which to avoid. However, in contract law, there are some clauses you will not want to have in your contracts. These are unfair contract terms which are labelled unfair by a court in UK law. Therefore, your contract might be declared void. Consequently, you may not have adequate protection for your business interests. To help, this article will explain what you need to know about unfair contract terms to ensure your business avoids them when creating commercial contracts.
What is an Unfair Contract Term?
An unfair contract term is an unfair exclusion clause. An exclusion clause tries to exclude one company from being liable to another in a specific situation. One example would include a clause trying to limit the compensation payable to your business from another company if they breach the written agreement.
While businesses like yours should be free to agree on whichever terms they choose in a contract, they must be fair. The Unfair Contract Terms Act is the primary legislation that defines and limits unfair contract terms. However, it does not cover consumer contracts or contracts of employment. When businesses agree to an unfair contract term, the law aims to step in to protect businesses from terms that are so severe or unfair and prevent the clause from having any legal enforceability.
Less severe exclusion clauses, however, are subject to a reasonableness test.
Clauses subject to a reasonableness test include those aiming to exclude liability for the consequences of:
- dishonesty or fraud;
- breach of contract; and
- negligence.
Courts will consider, amongst other things, whether the wording is standard within agreements of that nature. Judges value contract wording that includes plain, intelligible language. If the meaning of a clause is unclear, the judge is likely to strike it out due to a lack of detail or uncertainty.
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Reasonableness Test
Some examples of exclusion clauses that will involve applying the reasonable test to determine if they are unfair include:
- a clause stating that the other company will not pay your business any money if they have lied to you about their ability to comply with the contract;
- a term stating that your business agrees that ‘unfair contract terms protections under national law’ will not apply to the contract;
- a clause outlining how your business will only receive £1 in the event of any breach of contract, where the potential value of the contract is £100,000; and
- wording detailing how you can only contact the other company to report concerns through a premium rate number during non-business hours, not by email or letter.
The first three examples are likely to be held unreasonable by a court. This is because they try to limit business liability and obligations under the law to an unreasonable degree. The second example tries to exclude existing law. Likewise, the third example is unfair because it limits damages to 0.001% of the contract’s potential value. Notably, your business can use similar wording to limit its liability, but it must be reasonable and fair. For example, if the contract’s potential value were around £100, a clause limiting damages to £1 would stand a much better chance of being fair and reasonable.
Further, the fourth example makes it difficult to report breaches of contract or negligence. Indeed, very few business contracts will insist that your business only contact them through a telephone number that is closed during business hours, so this is likely to be an unfair term.
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Key Takeaways
While courts aim to protect business deals committed to writing and agreeing in good faith, they will step in to strike out unfair contract terms. Courts will apply a reasonable test to assess whether to remove them from a contract. This test involves deciding if the contract’s wording is standard or unusual. For example, standard exclusion clauses common to the agreed type of contract tend not to be labelled unfair, and courts aim to protect business deals committed to writing in good faith. However, some exclusion clauses can be so severe they are unfair and should not be part of the contract. Nevertheless, a good lawyer can assist you when drafting your business contracts.
If you need help understanding and avoiding unfair contract terms, our experienced commercial 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
Most judges will aim to respect that you and the other company have agreed to the exclusion clause. Therefore, they will only strike out terms if they are unreasonable or severely exclude a party’s liability.
An unfair contract term is an exclusion clause which is too unreasonable to include in the context of the contract.
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