Most businesses have standard terms and conditions prepared, which they subsequently attempt to incorporate into every commercial contract entered.
In a business-to-business contract where one party has contracted on the other’s standard terms and conditions, the Unfair Contract Terms Act 1977 (‘the Act’) limits how civil liability for breach of contract, negligence, or other breach of duty, can be avoided by means of contract terms.
The Act applies to any clause within a business’ standard written terms which:
- Claims to exclude, restrict or limit any liability for breach of contract;
- Seeks to entitle the business to render performance substantially different from what was originally expected of it; or
- Seeks to entitle the business in respect of the whole or any part of its contractual obligation to render no performance at all.
Any clause attempting the above will only be enforceable to the extent that it satisfies the requirement of ‘reasonableness’ and must be “a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”.
What Determines ‘Reasonableness’?
When determining ‘reasonableness’, the courts will consider the following factors:
- the parties’ relative bargaining positions when the contract was formed;
- the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met;
- whether any inducement was given to the customer in return for accepting the particular term;
- whether the customer could have entered into a similar contract with another supplier without the term;
- whether the customer knew, or ought reasonably to have known, of the existence and extent of the term, particularly in view of any standard industry practice, or previous course of dealings between the parties;
- where the term excludes or restricts liability if some condition is not satisfied; and
- whether the goods were manufactured, processed or adapted to the special order of the customer.
Determining reasonableness is a fact-specific exercise requiring a detailed analysis of the factual background and negotiations that lead to the formation of the contract.