Commercial and technology contracts legal A-Z: U is for unfair contract terms

Businesses dealing with consumers should be aware of their obligations under the unfair contract terms provisions of the Consumer Rights Act 2015 (the act) which updated the law in this regard.

When will the unfair contract terms provisions of the act apply?

The act applies to terms in business to consumer contracts but consumer to consumer and business to business contracts are outside its scope. The act also applies to terms in consumer notices. These are notices which relate to the rights or obligations between a business and a consumer or excludes (or attempts to exclude or restrict) the business’ liability. Notices can include announcements, written or otherwise and any other communications which are intended to be seen or heard by a consumer.

Are there any exemptions?

There are two exemptions:

• The "mandatory statutory or regulatory exemption": Certain terms and notices covered by legal provisions are exempt, for example wording set by law for use in a particular kind of contract.
   
• Core terms: There is a partial exemption for core terms, i.e. provisions which specify the main subject matter of the contract or notice or which set the price. The act states that such terms are not subject to the "fairness test" (see below) if they are both transparent and prominent. A term is "transparent" if it is legible and written in plain and intelligible language. A term will be "prominent" if it is drawn to the consumer’s attention in a way which means a reasonably well informed, observant and circumspect consumer would be aware of the term. This means that key terms cannot be hidden in small print.

What is required by the unfair contract terms provisions of the act?

The act requires that contractual wording in business to consumer contract terms and consumer notices should be fair and transparent:

• Fairness: A term will be unfair if, “contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations, to the detriment of the consumer”. The requirement for good faith is based on the general principle of fair and open dealing and that terms are expressed fully, clearly and legibly, and with due respect for the consumer’s interests. A "significant imbalance" will arise where a term is so weighted in favour of a business that it tilts the balance significantly in the business’ favour. The term does not need to have actually caused harm to be unfair, and may be challenged if it could be used to cause consumer detriment.
   
• Transparency: A written term is required to be expressed in plain and intelligible language and to be legible so that consumers can make an informed choice as to whether or not to enter into a contract.

What is an unfair term?

The act requires fairness to be assessed taking into account the following factors:

• The nature of the subject matter of the contract
• All the circumstances existing when the relevant term was agreed
• All the other terms of the contract
• All the terms of any other contract on which the contract depends

The act illustrates what may amount to an "unfair" term, by listing some examples. The list is non-exhaustive and a term will not be "unfair" simply because it is on the list. These are known as "grey list"  terms and include, in general, terms that may cause or allow one or more of the following issues:

• Consumers being denied full redress if things go wrong
• Consumers being tied into the contract beyond what they would normally expect
• The business not having to perform its obligations
• Consumers unreasonably losing prepayments if the contract is ended
• The business arbitrarily varying terms after they have been agreed, for instance so as to supply a different product, raise the price or reduce the consumer’s rights
• The business determining the price or subject matter of the contract after the consumer has become bound by it
• Consumers being subject to disproportionate financial sanctions

Any provision which has the object or effect of a grey listed term cannot benefit from the exemption granted to core terms.

The act also "blacklists" certain terms and notices, making them automatically unenforceable in all circumstances, without any need to assess whether or not they meet the fairness requirements. Examples include:

• Wording which seeks to exclude or restrict liability for death or personal injury resulting from negligence
• Any terms which aim to relieve businesses from their ordinary obligations under the act, for example to ensure that their products are of satisfactory quality and that their services are provided with reasonable care and skill

What are the consequences if a term is unfair? 

Terms in business to consumer contracts and consumer notices which do not meet the above requirements may not be enforceable or binding on a consumer and the business could face enforcement action.

For more information or advice on how the unfair contract terms legislation may affect your business, please contact Nicola Broadhurst or any member of the commercial contracts team.