Briefing Note - Unfair Terms in B2B & B2C Terms of Business Contracts

A provision in a contract may determined to be unfair by three pieces of legislation. Firstly, under the Unfair Contract Terms Act 1977 (UK); Consumer Transactions Restrictions on Statements Order 1976; and the Unfair Terms in Consumer Contracts Regulations 1999, which applies solely to consumer contracts. In this article we consider the effect of the Unfair Contract Terms Act on contracts formed within the UK.

The Act applies in part to both business and consumer contracts.

Unlawful Exclusions and Limitations

Under the Unfair Contract Terms Act, liability cannot be excluded or restricted for:

1. death or personal injury resulting from a party’s own negligence;
2. negligence except in so far as the term or notice satisfies the requirement of reasonableness. Mere notice of the exclusion or restriction of liability is a not determinative indication that a person has accepted risk under a contract.

Liabilities arising under a Contract

Where standard terms are used in a contractual relationship, which is most the case in dealings with mass markets such as the Internet, businesses are not entitled exclude or limit liability arising from their own breach, or change the performance of the contract in the event of a breach of contract by the business, except in the case that the change of in performance obligations is satisfies the test of reasonableness.

Indemnity Clauses

The extent and scope of indemnity clauses are regulated by the Unfair Contract Terms Act. A consumer cannot be made to indemnify another party to the contract or a third party to the contract expect to the extent that term of the contract meets the requirements of the test of reasonableness.

Defective Goods

Liability for defective consumer goods (which are of a type ordinarily supplied for private use or consumption), cannot be limited or excluded, regardless of whether the defect arose during the manufacture of the goods or by the fault of the supplier or distributor themselves.

Terms Implied in Contracts Guaranteed

Implied Terms

The Unfair Contract Terms Act also prohibits the exclusion of the terms implied into contract by s 12: Sale of Goods Act 1979, and section 8 of s 12: Supply of Goods (Implied Terms) Act 1973. This provision applies equally to B2B and B2C contracts.

Consumer Contracts

In B2C contracts, the implied undertakings by the supplier as to conformity of goods with description or sample, and their quality or fitness for a particular purpose may not be excluded in contracts with consumers, and may only be excluded to the extent that it the provision satisfies the test of reasonableness.

Exemptions to Application

A number of exceptions apply to the application of the Unfair Contract Terms Act, which are:

1. contracts of insurance
2. contracts for the transfer of land
3. creation, transfer, or termination of a right in any patent, copyright, registered design, technical or commercial information, or other intellectual property
4. formation or dissolution of companies, and
5. creation or transfer of a right in a security.

Terms setting the price are core term of the contract, and are exempt from the test of fairness provided they meet the plain language requirement.

Test of Reasonableness

The Time of Assessment of Fairness

Contract terms are unfair where in the event that, at the time the contract was formed, the term would have been considered to be fair and reasonable having regard to the circumstances which were known or should have been known to the parties.

In some situations where a B2B contract has been called into question, court may take into account, amongst other factors:

1. the strength of the relative bargaining positions of the parties relative to each other
2. whether an inducement was offered to the customer
3. the opportunity for the customer to obtain a similar with other persons, but without having to accept the term of contract in question, and
4. whether the term was brought to the parties notice.

The test of reasonableness imports an element of good faith into the contract.

“Good faith” in the context of the Unfair Contract Terms act requires that customers are dealt with fairly and openly. When standard terms are drafted to protect commercial objectives, those standard terms may not go further than necessary to protect those legitimate commercial interests.

Interpretation of Contracts containing Ambiguity

The terms must be expressed in plain and intelligible language, if the consumer is placed at a disadvantage because the meaning is not clear, the meaning most favourable to the consumer will apply

Remedies

Office of Fair Trading may apply for an injunction preventing the clause from being used or being recommended for use. Qualifying bodies also have enforcement powers, notably including the Information Commissioner, the Consumers Association, Financial Services Authority, all trading standards services.