Challenging unfair terms in business-to-business contracts

There are options available for businesses to challenge unfair terms in a contract with another, larger, organisation.

A smaller business may lack bargaining power and legal resources when contracting with a large company, meaning that it could feel pressured into entering a contract without appreciating the impact of certain clauses contained within it.

Our commercial contracting lawyers explore the possible avenues of claim that a smaller business may look to implement when arguing for the invalidity of potentially unfair terms, acting as guidance for both smaller and larger businesses in bringing and preventing such claims.

This article offers useful insights on what to look out for when in negotiation, as well as offering a possible exit route for companies that have signed up to a potentially unfair contract.

Please seek legal advice before taking any of the actions suggested in this article.

Avenues of claim against unfair contracts

There are a number of mechanisms under which an SME may build its claim against its counterparty, stemming from both statute and the common law, as summarised below:

Statutory claims

The main statutes an SME could rely upon when arguing the invalidity of a contractual term are:

• Unfair Contract Terms Act (UTCA) 1977: clauses are deemed to be unfair if they are unreasonable, taking into account certain factors including, but not limited to, the following:
  • The bargaining power of the parties: for example, a court may find that a term is unfair if the other party was larger and had greater resources at its disposal.
  • The remedies offered: for example, if all remedies for loss are entirely excluded, this may be seen as unreasonable.
  • Common terms within the trade: a clause may be held as unreasonable if it dramatically deviates from normal standards within the parties’ trade.
  • Whether legal advice was given prior to signing the contract.
• The Late Payment of Commercial Debts (Interest Act) 1998: This statute sets a statutory interest rate for late payments. Therefore, a clause may be seen as unfair if it stipulates an interest rate much higher (or much lower, depending on the parties’ level in the supply chain) than the statutory rate.
• Sale of Goods Act (SGA) 1979: if the contract does not cover certain terms around the quality, description and rights to the goods being sold, the SGA 1979 will imply these terms into the contract. This serves to improve the buyer’s contractual remedies should the goods supplied be below the buyer’s expected standards.
• The Supply of Goods and Services Act (SGSA) 1982: similarly to the SGA 1979, if a contract is silent on the standard of services supplied, the SGSA 1982 will imply a term that the services are to be supplied with reasonable skill and care.
• It should be noted, however, that both the SGA 1979 and SGSA 1982 can be excluded (to a certain extent) by the contract, however, such an exclusion is subject to whether it is reasonable under UCTA 1977, as discussed above.

Common law claims

The common law provides a number of avenues that an SME may rely upon when arguing that a term is unfair. These are briefly listed below:

• Penalty clauses: the law prevents a breaching party from penalties that are disproportionate in comparison to that party’s legitimate interests. For example, stipulating a high rate of liquidated (i.e., pre-agreed) damages may be seen as imposing a disproportionate burden on the breaching party and be held as ineffective.
• Rules of interpretation: there are several rules of interpretation that the courts may apply which could lessen the effect of an unfair term. For example, a party seeking to rely on ambiguity in a clause excluding liability may find that they cannot (subject to considerations by the court).
• Implied terms: as well as the express terms of the contract, there are a number of implied terms that will apply depending on the circumstances and context of the contract, which may serve to assist an SME in balancing the fairness of a contract with a larger entity. For example:
  • Terms implied as obvious or necessary: such terms are implied where it is so obvious that it should be included in the contract, it goes without saying. These terms will only be implied where they are necessary to achieve the parties’ objectives under the contract, and the courts will not imply a term simply to improve either party’s position.
  • Terms implied by custom or usage: such a term will be implied if it is a standard term within the industry to which the parties are contracting.
  • Terms implied through a previous course of dealing: if the parties to a contract have contracted on the same terms consistently over a period of time, then terms may be implied into the contract to reflect previous agreements. These terms will only be implied in a limited number of circumstances, however, and we suggest that each new course of dealing is reinforced with an up-to-date contract.
• Restrictive covenants: clauses which seek to restrict the activity of the other party (for example, preventing it from hiring the other party’s staff) will be void if they go further than reasonably necessary to protect the other party’s legitimate interests. For example, a clause which stops a customer from hiring any of the supplier’s staff for 50 years after termination of the contract will not likely be serving to protect the supplier’s legitimate interests, and would therefore be held as void.

Action to take – ending the contract

If you are an SME and are worried about your contract being unfair against you in light of the concepts covered above, there are a number of solutions you could seek to escape the contract:

• Termination: the termination clause will set the parameters of your ability to terminate the contract should you wish to do so.
• Force majeure: many contracts contain force majeure provisions, which will excuse your performance (and potentially entitle you to exit the contract), if an event beyond your reasonable control prevents you from performing your obligations under the contract.
• Change of circumstances: if a contract has become impossible, illegal, or significantly more difficult to perform, you may look to rely on the common law doctrine of frustration to excuse your performance and allow you to exit the contract.
• Undue influence/duress: you may have an argument that you were pressured into the contract, in which case you will be entitled to set the contract aside and claim damages.
• Misleading practices: if you were misled into the contract, you may have a claim for misrepresentation which will also entitle you to set the contract aside and claim damages.

Next steps

The concepts outlined above highlight the key principles in how the fairness of a contract may be challenged by an SME and provide possible escape routes. However, each concept has a plethora of intricacies which we would always recommend seeking legal advice to navigate.

Please note that this information is for general guidance only and should not substitute professional legal advice. If you have specific concerns, we recommend consulting one of our legal experts.