Unfairness in Contracts

Whether terms in a contract are likely to be deemed to be unfair depends on the applicable regulations. It is in the first instance important to distinguish between business to consumer, and business to business contracts.

Business to Business

Contracts between businesses are governed by the Unfair Contract Terms Act 1977, or UCTA for short. Guidance relating to consumer contracts can be found in the Unfair Terms in Consumer Contracts Regulations 1999. Businesses are in effect free to enter into commercial agreements with other businesses on whatever terms they see fit, so it is vital to ensure that you understand what you are agreeing to before you sign!

Notwithstanding this freedom, there are certain standards laid down by the UCTA. Exclusions of certain types of liability are prohibited, such as excluding liability for death or injury, as is anything that is deemed not to be ‘reasonable.’ Unfortunately there are no specific definitions in the Act as to ‘reasonableness’, but guidance can be sought from case law.

If a dispute over a contract arises and results in litigation, the courts will look at a number of factors when considering whether or not terms in a contract are reasonable. These include:

• the intention of the parties at the time
• the information available to both parties at the time the contract was drafted
• whether or not the complainant party had any ability to negotiate better terms or bargaining power
• whether any of the clauses were negotiated or the contract was supplied as a standard template

In effect it is not unlawful to include a term in a contract that may be unfair or unreasonable, but the issue arises if the validity of the contract is challenged. If the court finds that a particular clause is unreasonable, it could mean that the party to which it relates has no obligation under that clause, or in certain circumstances could mean that the whole of the contract is void. This is obviously undesirable.

Examples of Unfair Terms

Because businesses have less protection than consumers in terms of contractual unfairness it is always advisable to seek legal advice on whether or not your contract is enforceable. This is particularly the case if you are habitually selling goods or providing services as a business.

One such example could be a restrictive covenant in a franchise agreement. Often franchisors seek to prevent franchisees from competing with them once the franchise agreement has expired or has been terminated. They do this by including a clause in the franchise agreement that prohibits the franchisee from carrying on business for a period of time after the end of the agreement. In the event of a dispute, the court may find that the clause is unreasonable in which case it would not be enforceable.

The unfortunate outcome of this could be that the franchisor has no means of preventing or reducing the ex-franchisee’s ability directly to compete with the franchise business. What is more, the ex-franchisee has all the benefit of the franchisor’s trade secrets which he can use in competing with the franchisor.

Consumer Contracts

There are more stringent rules in relation to contracts between a business and a consumer. As has been demonstrated in the recent case brought by the Office of Fair Trading in relation to bank charges, a contract cannot have any clauses that ‘cause a significant imbalance in the parties rights and obligations’.

Of particular note in this case were the issues relating to penalties for late payments or going over overdraft limits. Banks were charging customers up to £30 for sending out a letter, which was not commensurate with the actual loss suffered to them as a result of the consumer’s actions.

Importantly, terms that are not covered by the unfair terms regulations are those that have been individually negotiated, contracts between private individuals, and contracts made by individuals who are not acting as consumers, for example in relation to employment or setting up in business.