Can my company challenge an unfair contract terms?

Signing a contract usually means that you are bound by its terms. But what if your company has entered into a contract with terms that are unfair or unreasonable? In this article we’ll explore potential courses of action, if you wish to get out of a contract with unfair term.

What is freedom of contract, and what does it mean for my company?

The law in England and Wales respects freedom of contract, especially when a contract is between two companies. This means that if a company has entered into a contract, the understanding is that it intends to be bound by the terms of that contract. 

Companies are assumed to be more capable of dealing with and negotiating contracts than, for instance, individual consumers. However, sometimes one company will have less bargaining power than the other and may enter into a contract that contains terms that are unfair, unreasonable, and very unfavourable to it. 

In most cases, the law’s respect for freedom of contract will see courts look to enforce the terms of a contract, even if those terms could be considered very unfair or unreasonable. But there are some circumstances in which you may be able to get out of the contract. Unfortunately, as with many aspects of the law, this is not straightforward, and it will depend on a combination of different factors.

What is the Unfair Contract Terms Act, and could it help my company?

The Unfair Contract Terms Act 1977  essentially requires certain terms that limit or exclude liability to pass a reasonableness test. A term may not clearly state that its purpose is to limit or exclude a liability, but the effect of the term may be that it does – helpfully, such terms may also be caught by this Act.

Is there any other way to avoid being bound by an unfair contract term?

Yes, there are some other possibilities to explore:

1. Whether the unfair contract term is a penalty clause. A penalty clause is, in summary, a term that applies a punishment to a party for doing a specific thing, where that punishment is out of proportion to the actual harm caused to the innocent party. Generally, penalty clauses are not enforceable.
2. The interpretation of the term. Ambiguous phrasing or language can result in a term having multiple possible meanings and consequences. Other factors may also be relevant or have an impact on how a term should be interpreted. We recommend seeking legal advice before accepting another party’s interpretation of a term.
3. Implied terms. Implied terms are terms that are not written into a contract but are so obviously a term of the agreement that they go without saying. Implied terms are enforceable and can have an impact on other terms within a contract. For instance, there may be an implied requirement for reasonableness in a term.
4. Whether the unfair contract terms are binding on your company. To be enforceable, terms must be brought to your attention prior to or at the time of entering into the contract. A party cannot introduce terms to a contract later without your company’s agreement. If your company is not bound by the terms, they cannot be enforced against it.

The above is not an exhaustive list of options, nor is it legal advice. We recommend that your company seeks legal advice before making any concessions (e.g. agreeing to the interpretation of a term, agreeing that the term is binding) in relation to an unfair or unreasonable contract term.

What can my company do to avoid an unfair contract term in future? 

To reduce the chances of being bound by an unfair contract term in the first place, we strongly recommend your company seek a contract review from a legal adviser before executing the contract. The initial time and costs spent in ensuring the contract is right for your company can save you significant time, stress and costs in the long run. A contract review can help your company to:

1. Better understand the terms that it is agreeing to, ensuring that the contract correctly reflects its intentions.
2. Identify the risks it faces in entering the contract, ensuring that it can properly assess the commerciality of the arrangement.
3. Obtain the information and support it needs to renegotiate terms that are problematic or could be problematic for it, reducing its liability.

Need advice on unfair contract terms? Contact us

The lawyers at Labrums have significant experience in litigation, dispute resolution and commercial law. We would be happy to assist your company should it have any queries or require any assistance in relation to an unfair or unreasonable contract term or contract review. Contact us on 01727 858807 to book a consultation with one of our business law specialists.