Unfair Contract Terms
Unfair contract terms refer to provisions in a contract that create a significant imbalance in the parties' rights and obligations, to the detriment of the consumer or weaker party. These terms are typically found in standard form contracts and may include terms that limit liability, impose disproportionate penalties, or allow one party to change the terms unilaterally. The law provides mechanisms to protect parties from unfair terms, ensuring that contracts are fair and equitable.
Legislation Governing Unfair Contract Terms
In the UK, the primary legislative frameworks addressing unfair contract terms are the Unfair Contract Terms Act 1977 (UCTA) and the Consumer Rights Act 2015 (CRA). These laws provide different protections depending on whether the contract involves a business or a consumer:
- ★ Unfair Contract Terms Act 1977 (UCTA): UCTA regulates unfair terms in contracts between businesses. It restricts the extent to which liability for breach of contract, negligence, or other breaches of duty can be excluded. Specifically, it prohibits clauses that exclude or limit liability for death or personal injury resulting from negligence and requires that other exclusion clauses be reasonable.
- ★ Consumer Rights Act 2015 (CRA): The CRA consolidates and updates consumer protection laws, including provisions on unfair terms. It applies to contracts between traders and consumers, providing that a term is unfair if it causes a significant imbalance in the parties' rights and obligations, to the detriment of the consumer. Unfair terms are not binding on the consumer.
Types of Unfair Terms
Unfair contract terms can take various forms, including:
- ★ Exclusion Clauses: Terms that attempt to exclude or limit a party's liability for breaches of contract, misrepresentation, or negligence. Under UCTA, these terms are subject to a reasonableness test, while the CRA deems such terms unfair if they disproportionately favor the trader.
- ★ Penalty Clauses: Provisions that impose disproportionately high penalties for breaches, such as excessive late payment charges. Under common law, penalty clauses are generally unenforceable if they do not represent a genuine pre-estimate of loss.
- ★ Unilateral Variation Clauses: Terms that allow one party to change the terms of the contract without the other party's consent. Under the CRA, such terms are likely to be considered unfair if they allow a trader to alter significant aspects of the contract unilaterally.
- ★ Binding Arbitration Clauses: Clauses that force parties into arbitration, potentially limiting their ability to pursue claims in court. The fairness of such clauses is scrutinized under both UCTA and the CRA.
Assessment of Fairness
The fairness of a contract term is assessed by considering various factors, including:
- ★ Transparency: Terms must be expressed in plain and intelligible language. If a term is not transparent, it is more likely to be deemed unfair.
- ★ Context: The overall context of the contract, including the nature of the goods or services and the circumstances surrounding the contract's formation, is considered in determining fairness.
- ★ Balancing of Rights: The extent to which the term creates an imbalance in the parties' rights and obligations is a key factor in the fairness assessment. The term must not disproportionately favor one party.
Case Law
Unfair Terms - Director General of Fair Trading v First National Bank (2001)
The court considered whether a term in a loan agreement that required borrowers to pay interest on arrears was unfair under the Unfair Terms in Consumer Contracts Regulations 1999 (predecessor to the CRA). The House of Lords held that the term was not unfair as it was clearly stated, transparent, and did not create a significant imbalance.
Reasonableness Test - Smith v Eric S Bush (1990)
In this case, a surveyor's disclaimer of liability for a house survey was challenged. The House of Lords held that the disclaimer was unreasonable under UCTA, as the surveyor was in a better position to bear the risk and the customer relied on the survey. The disclaimer failed the reasonableness test, making it unenforceable.
Examples
Example 1 - Unfair Exclusion Clause
Scenario:
A car rental agreement includes a clause stating that the rental company is not liable for any damage to the vehicle, regardless of the cause. Under the CRA, this exclusion clause may be deemed unfair and unenforceable, as it significantly limits the consumer's rights without justification.
Example 2 - Penalty Clause
Scenario:
A mobile phone contract includes a clause imposing a large fee for early termination, significantly higher than the actual cost to the provider. This clause may be considered a penalty and therefore unenforceable, as it does not represent a genuine pre-estimate of the provider's loss.
Conclusion
Unfair contract terms are closely scrutinized under UK law to ensure fairness and protect weaker parties, particularly consumers. The UCTA and CRA provide frameworks for assessing the fairness and reasonableness of contract terms. Unfair terms that create significant imbalances in rights and obligations, lack transparency, or disproportionately favor one party are likely to be deemed unenforceable. Awareness of these protections helps consumers and businesses alike to engage in fair and equitable contracting practices.