In 2001, the Department of Trade and Industry asked the Law Commission and Scottish Law Commission to rewrite the law of unfair contract terms in a single regime and in a clearer and more accessible style. On
Current law
There are two major pieces of legislation that deal with unfair contract terms, namely the Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999. The Bill rewrites both laws for the whole of the
For business contracts, UCTA only covers exclusion clauses where one party attempts to exclude or limit its liability for negligence or breach of contract or claims to be entitled to ‘render a contractual performance substantially different from that, which was reasonably expected’. Some terms are automatically ineffective, for example, an attempt to limit or exclude liability for death or personal injury caused by a party’s negligence. Other clauses may be valid only if they are fair and reasonable, for example, a clause limiting a party’s liability for loss of profits resulting from a breach of contract, which is very common in IT supply and maintenance contracts.
Protection for small businesses under the Bill
The most fundamental change suggested by the Bill is the introduction of special protection for ‘micro businesses’, which are defined as businesses with nine or fewer staff. At present those businesses can only challenge unfair exclusion clauses in the other party’s standard terms. The Law Commission recommended this additional protection as they found that small businesses were frequently signing contracts or ordering goods and services on standard T&Cs containing unfair terms, which the law did not allow them to challenge. IT suppliers routinely require their customers to accept their standard T&Cs. Such T&Cs often contain clauses that give protection or rights to the supplier without the buyer having similar rights. For example, standard T&Cs often require the buyer to accept variations of price after the contract has been agreed; give the supplier the right to terminate a maintenance agreement at will or for only a minor default; prevent the buyer from setting off any claims it may have against monies due for the goods or services; require the buyer to indemnify the supplier for any losses caused by incidents outside of its control or specify that the buyer is deemed to accept the software or hardware after a short period of time unless it is rejected.
The Law Commissions said that the law should not interfere with business contracts that are genuinely negotiated between the parties but a small business can need protection when contracting with a larger business that imposes its standard terms as the small business may not understand the terms or their consequences and, even if it does, may lack the bargaining power to change them.
Under the Bill, micro businesses would be able to challenge any standard term that has not been altered through negotiation and is not the main subject matter of the contract or the price. If the micro business can show that the term is unfair, it will not be enforceable. The burden of proof is on the small business to show that a term is unfair. If a term is found to be unfair, the remaining terms of the contract will continue in existence insofar as that is possible.
“Fair and reasonable” test
The Bill provides that any terms which are challengeable but not automatically unenforceable should be subject to a ‘fair and reasonable’ test. The test does not include any reference to ‘good faith’. Whether a term is fair and reasonable will be assessed according to (a) whether it is transparent, (b) its substance and effect, and (c) the circumstances in existence at the time the contract was made. Factors such as legibility and presentation will also be taken into account and it will be possible for a contract term to be considered unfair principally or solely because it was not transparent (eg if it is hidden away in small print).
Exclusions
The protections will not apply in the following circumstances.
1. If an apparently micro business is associated with other businesses so that overall the group has more than nine employees, there will be no such protection.
2. If a contract has a value of more than £500,000 or, if there is a series of transactions, the aggregated value of the contracts is more than £500,000, the whole series of contracts will be exempt.
3. Where terms have been genuinely negotiated and altered in favour of the micro business as a result of negotiation, there will be no such protection.
4. Terms relating to intellectual property are exempt. IT standard T&Cs will always contain some provisions relating to the supplier’s IP rights but that does not mean that the whole of the T&Cs will be excluded, only those specific terms that relate to the supplier’s IP rights will be excluded.
Other business to business contracts
The present position under UCTA is largely unchanged in the Bill so that clauses which purport to exclude liability for death or personal injury caused by negligence will be void and a seller or supplier cannot exclude or restrict the implied undertaking that it is entitled to sell or transfer property in the goods. However, the Law Commissions did recommend relaxing other restrictions on negotiated contracts between businesses. Under UCTA the courts can review any term that limits or excludes the implied undertakings in the Sale of Goods Act 1979 that goods must match their description or sample, be of satisfactory quality and fit for their purpose, even in freely negotiated contracts. As the Law Commissions thought it would be very unlikely for a court to find such a clause unfair when it has been genuinely negotiated between two businesses, they propose that businesses should be allowed to negotiate limited contractual liability and the controls under the Bill will apply only to standard terms.
When IT suppliers are genuinely negotiating the terms of a supply agreement, they will therefore be able to exclude the implied undertakings of fitness for purpose and satisfactory quality without fear of the courts finding such a clause unreasonable.
Under the Bill the burden of proving that an exclusion clause is fair and reasonable continues to rest on the party seeking to rely on it. The new ‘fair and reasonable’ test explained above, including assessing whether the term is transparent, replaces the current test of reasonableness under UCTA.
International contracts and choice of law
Business to business contracts
The Report recommends retaining the current provision for business contracts made by s 27(1) of UCTA (which states that where the law of a part of the UK is chosen by the parties as the governing law but, were it not for that choice, the law of some other country would be the proper law, the provisions of UCTA will not apply). The justification for this is that foreign international parties choose English law to govern their relationship on the understanding that it is a law where freedom of contract prevails.
The Law Commissions recommended a toughening up of the current s 27(2)(a), which states that the protective provisions of UCTA will apply notwithstanding any choice of foreign law where the choice of foreign law appears to have been imposed wholly or mainly for the purposes of enabling one party to evade the protections of the Act. That can be a difficult test to satisfy. In the Bill, clauses relating to business contracts apply notwithstanding a choice of foreign law where the contract is otherwise wholly connected to the
The Bill will not apply to business contracts under which goods are exported overseas.
Micro business contracts
Micro business contracts under which goods are supplied abroad are also exempt from the Bill. If English law is chosen in a foreign contract, the provisions explained above in relation to business contracts will apply.
The Law Commissions said that the whole point of the restrictions is to give micro businesses protection against larger businesses who are able to impose their standard terms on the contract. The very point and purpose of those protections would be undermined if the protections under the Bill could be avoided by choosing a foreign law. The protection offered to micro businesses is therefore more generous than that given to other businesses to enable them to claim protection in a wider range of circumstances. Small businesses are put in much the same position as a consumer. The restrictions will apply despite a choice of foreign law if, when the contract was made, the micro business had a place of business in the UK and the making of the contract was preceded by an invitation addressed specifically to the small business, or by advertising, about the main subject matter of the contract and all the steps necessary for the conclusion of the contract were taken in the UK by the micro business or the small business’s order was received by or on behalf of the other business in the UK.
Conclusion
The Bill is unlikely to become law for at least another year and, when and if enacted, will not apply to contracts entered into before the Act comes into force. However, the Bill would represent a fundamental change in the principle of freedom of contract in the
Victoria Ford is a lawyer at City law firm Field Fisher Waterhouse. She can be contacted at victoria.ford@ffw.com.
