In this, the fourth of a series of articles which looks at some of the most common perils of contracts and how to avoid them, we look at perils of unreasonable contract terms.
There is what is called freedom of contract, so business people can agree whatever contract terms they want, within certain limits. Those limits depend on the type of contract terms and the types of contract in question, although certain liabilities can never be excluded.
- Liability for death or personal injury cannot be excluded under any contract, regardless of what type of contract.
- Where a contract term seeks to exclude or limit liability of a party under the contract, the clause may be subject to a test to see whether or not it is reasonable.
- Where the contract is with a consumer, a term which seeks to exclude or limit liability of a party under the contract will always be subject to a test to see whether or not it is reasonable.
- Similarly, where the contract is with another business on your standard terms or its standard terms, a term which seeks to exclude or limit liability of a party under the contract will always be subject to a test to see whether or not in it reasonable.
There are tough contract terms and there are unreasonable contract terms. It may seem counter intuitive, but it will not always be as beneficial as it seems to have terms that are very favourable to you. If those terms are so favourable to you that they are considered to be unreasonable, the terms may not be enforceable.
The stricter and therefore (potentially) unreasonable the clause, the more the party relying on the clause must do to draw it to the attention of the other party.
The stricter and therefore (potentially) unreasonable the clause, the clearer the wording of the clause must be.
Let’s consider reasons for the perils of unreasonable contact terms:
- Contract terms that exclude or restrict your liability to the other party can often be challenged as unreasonable under the Unfair Contract Terms Act 1977.
- A challenge can be made if the other party is a “dealing as a consumer” or, where the other party is dealing “as a business” if the contract is on your standard terms.
- Even if the challenge does not succeed, it will create uncertainty.
- If the challenge does succeed, the term excluding or restricting your liability will not be enforceable. Instead of having a less favourable but enforceable exclusion or restriction of liability, you will end up with unlimited liability.
Now let’s consider how to avoid these:
- You need to ensure that any standard terms that restrict or exclude your liability for breach or non-performance of the contract are “reasonable” if:
- You are dealing with consumers. Consumers are individuals and others who enter the contact in question “other than in the ordinary course of their business”; or
- You are dealing with other businesses and require them to contract with you on your standard terms of business.
- The court uses a series of tests to establish whether a clause is reasonable.
- If your contract is with a foreign company, and is to supply goods, you will not need to worry about whether clauses limiting or excluding liability are reasonable. This is because your contract will be an international supply contract and the Unfair Contract Terms Act does not apply.
- The guidelines that the Court may take into account when deciding whether an exclusion clause is reasonable include the relative strength of the parties bargaining position and whether the customer knew or ought to have known of the term. Other relevant factors may include the availability of insurance and whether the clause is reciprocal, so it applies equally to either party, or whether it is one sided.
- Ensure that your standard terms and conditions and any other contracts are professionally drafted.
- If you have very restrictive clauses, take extra steps to ensure that they are brought to the attention of the other party.
- Ensure that any of your terms which exclude or limit liability are clear, because any ambiguity will be interpreted against you.