Unfair contract terms

Unfair contract terms

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Contents

Sales to a business

The Unfair Contract Terms Act 1977 controls how far you can go in excluding your liability to a business buyer if you breach your sales contract. The Act covers limitation and exemption clauses, and indirect clauses that try to cut down liability. It also provides that certain exclusion clauses are completely invalid, and certain others are valid only if they're reasonable.

Main provisions in the Unfair Contract Terms Act

The Sale of Goods Act and the Supply of Goods and Services Act impose certain duties on a seller of goods. Sellers must ensure that they own the goods they're selling. They can't exclude their liability for selling goods they don't own. Goods must be as described, of satisfactory quality, and reasonably fit for the buyer's purpose (if one is specified). If goods are sold by sample, the goods must be the same as the sample. If you want to exclude these implied terms against a commercial buyer, refer to Sections 6 and 7 of the Unfair Contract Terms Act in England, Wales and Northern Ireland, and sections 20 and 21 in Scotland. These sections provide that you can only exclude this liability in a sale to another business if it's reasonable to do so.

If you're selling goods to another business using your own written standard terms and conditions, you can exclude other types of liability (e.g. liability for late delivery) only if it's reasonable to do so.

You can't exclude liability for negligence causing death or personal injury. You can only exclude liability for other types of loss caused by negligence where it's reasonable to do so.

Reasonableness

Whether it's fair and reasonable to put an exclusion clause into the contract is judged in light of the circumstances known to both parties at the time the contract was made. So, when you negotiate and enter into the contract with your buyer, you should assess how likely it is that a court would think it reasonable for you to have included the exclusion or limitation clause in your contract.

Certain circumstances would help to show that it was reasonable for you to exclude your liability for this risk. These circumstances can include charging a lower price if the buyer accepts the risk of late delivery, or agreeing that the buyer's own insurance would cover this risk.

If, on the other hand, you've excluded your liability for a risk that you could easily get insurance cover for, but the buyer couldn't, this might show that your exclusion clause wasn't reasonable. As the person trying to rely on the exclusion clause, it's up to you to show that the clause satisfies the reasonableness test in the Act. It's a good idea to state in your contract the circumstances that show your exclusion clauses are reasonable in case the buyer challenges them in the future.

The Act sets out various guidelines to determine how reasonable an exclusion clause is. However, the list doesn't cover every situation. If there's a dispute, the court may take into account any factors it thinks are relevant.

The first 2 guidelines aim to ensure that a buyer agrees to the terms freely and voluntarily. The court would consider:

  • The relative bargaining strengths of the parties (taking into account other ways the buyer could get what they require); and
  • Whether you gave the buyer an inducement to agree to the term and whether they could have entered into a similar contract with another seller without that term.

The next 2 guidelines aim to ensure that the buyer accepts the terms with their eyes open. The relevant considerations are:

  • Whether the buyer knew or should have known that the term existed and what it covered; and
  • Whether it was reasonable to expect the buyer to be able to comply if the term excludes or restricts liability unless a certain condition is fulfilled (e.g. telling the seller about a defect within a certain number of days).

The final guideline applies where the goods were manufactured, processed or adapted to the buyer's special order. If a buyer asks for the goods to be customised, it's usually reasonable for you to exclude or limit your liability if the goods don't work or aren't fit for their purpose. For example, you might not allow the buyer to return customised goods.

Sales to a consumer

Contracts with consumers are treated more strictly than contracts where the buyer is a business. The Consumer Rights Act 2015 (and the legislation it consolidated) controls attempts to limit or exclude liability to consumers and makes certain exclusion clauses invalid.

Main provisions on unfair terms in the Consumer Rights Act 2015

The Consumer Rights Act 2015 consolidates the provisions that applied to consumers under the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999.

It provides (in section 31) that in a consumer contract, the seller can't exclude or restrict their liability for the following obligations created by the Act:

  • Goods to be of satisfactory quality
  • Goods to be fit for particular purpose
  • Goods to match description, sample or model
  • Installation of goods to conform to contract
  • Goods not conforming if digital content doesn't conform
  • Seller must have right to supply the goods
  • Delivery of the goods
  • Passing of risk.

Any clauses in the contract that try to reduce or exclude these obligations in relation to a consumer will be invalid.

Also any clause that excludes or limits the liability of the seller for death of or personal injury to the consumer caused by the seller's negligence is invalid (section 65).

Contract terms should be in plain, intelligible language. If there's any doubt about the meaning of a clause, it'll be resolved in favour of the consumer.

The Act also provides that unfair terms in consumer contracts and consumer notices aren't binding on the consumer. Consumer notices are notices intended to be read by a consumer but which are not part of the contract.

Unfair terms

A term is unfair if:

  • It's contrary to good faith
  • It causes a significant imbalance in the rights and obligations of the parties to the detriment of the consumer.

A term is likely to meet this definition if it limits the consumer's rights or disproportionately increases the obligations of the consumer as compared to those of the seller. The Act gives examples of factors that would affect fairness, such as the nature of the goods and circumstances in which the contract was made.

Part 1 of Schedule 2 of the Act gives many examples of terms which might be considered unfair. These include terms that:

  • Make the consumer fulfil all their obligations where the supplier doesn't perform theirs
  • Make the consumer pay a disproportionately high sum if they don't fulfil an obligation under the contract
  • Allow a seller to end an indefinite contract without reasonable notice and without a serious reason
  • Automatically extend a fixed-term contract if the consumer doesn't object, when the deadline for the consumer to object is unreasonably early.

Essential terms of a contract (such as those specifying what is being sold and the price) can't be assessed for fairness, as long as they're expressed in plain, intelligible language, and are prominent. They should not, for example, be in very fine print that an ordinary consumer wouldn't notice.

Enforcement

If a term in a consumer contract is unfair, it's invalid and can't be enforced against the consumer. The consumer could have this determined by the courts, or could refer the matter to the Competition and Markets Authority (CMA). The CMA can investigate and take action to prevent sellers using certain terms. The CMA can issue guidance on unfair terms. Their current guidance is also available through the Trading Standards Institute's Business Companion website.