Digital, Commerce & Creative 101: All’s ‘fair’ in love and contracts – a brief look at the Unfair Contract Terms Act 1977

However, there is legislation that governs what is deemed ‘unfair’ in a B2B context, including the Unfair Contract Terms Act 1977 (“UCTA”). Here, we provide a summary of how to achieve fairness under UCTA and what it means if your terms are not fair! 

Does UCTA apply?

UCTA is primarily concerned with liability as between businesses in certain types of contracts and in respect of specific types of liability. It doesn’t apply on a universal basis and so, the first question is to ask is, does UCTA apply? 

Type of contract

UCTA does not apply to:

• consumer contracts; and
• international supply contracts (UCTA provides more detail on this). 

Aso, certain parts of UCTA do not apply to certain contracts, including in relation to contracts:

• of insurance;
• of employment;
• that relate to the creation, transfer or termination of an interest in land; and
• that relate to the formation or dissolution of a company. 

Type of liability

Negligence liability

A party cannot exclude or restrict their liability for death or personal injury resulting from negligence. ‘Personal injury’ includes any disease and any impairment of physical or mental condition.

In respect of any other type of loss or damage resulting from negligence, a party cannot exclude or restrict their liability, except to the extent the term satisfies the requirement of reasonableness. This applies not just to standard terms, a point that is often forgotten by lawyers.  

For the purposes of UCTA, ‘negligence’ is defined as the breach of any obligation arising from the express or implied terms of a contract, or any common law duty, to take reasonable care or exercise reasonable skill in the performance of the contract. 

Liability arising in contract 

When dealing on written standard terms of business, a party cannot exclude or restrict liability in respect of its own breach of contract or claim to be entitled to:

• render a contractual performance substantially different from that which was reasonably expected of them; or
• render no performance at all (in respect of the whole or any part of their contractual obligations),
• except to the extent that the contract term is deemed to be ‘reasonable’.

UCTA doesn’t include a definition of ‘standard terms of business’ and this has been the subject of case law. Ultimately, it boils down to the facts in each case, but case law has established some factors that the courts will consider when deciding if a party has contracted on the other party’s standard terms. These include:

• the extent to which the standard terms are considered by the other party as part of the process of agreeing the terms of the contract; 
• the extent and duration of the negotiations; and
• the relative bargaining power of the parties.

Implied terms for sale and supply of goods

Some legislation implies terms into sale of goods contracts. While these implied terms sit outside of UCTA, UCTA provides that in respect of these implied terms liability either:

• cannot be limited or excluded at all (i.e. in respect of implied terms relating to title); or
• can only be limited or excluded subject to the test of reasonableness (i.e. in respect of implied terms relating to conformity with description or sample, being of satisfactory quality and fit for purpose, and rights to transfer ownership of goods). 

In addition to being subject to the test of reasonableness, a party wishing to exclude or limit liability with respect to an implied term must do so expressly. Again, this has been the subject of much judicial debate and parties should be alive to this. 

Reasonableness 

In some instances, the impact of UCTA is that an exclusion or limitation of liability can be permitted on the basis that it is ‘reasonable’: essentially, the term must have been fair and reasonable in all relevant circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties at the time the contract was made. 

UCTA includes a non-exhaustive list of guidelines for the application of the reasonableness test which includes factors such as:

• the strength of the parties’ bargaining positions;
• whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties); and
• whether the goods were manufactured, processed or adapted to the special order of the customer.

Financial caps

Often, commercial contracts seek to limit liability to a financial figure (a liability cap). Where a term of a contract limits a party’s liability to a specified sum of money, in considering if the limit is reasonable the courts will consider:

• the resources available to that party for the purpose of meeting the liability should it arise; and
• the availability to that party of insurance.

When considering the reasonableness of a specified sum of money, the court may take into account whether different types of breaches are treated as subject to a single limitation of liability (as opposed to distinctions being drawn between different types of breach).

It is worth bearing in mind the general principle that if a remedy of some sort (even if limited) remains available to the other party, the limitation is more likely to be reasonable for the purposes of UCTA. 

Effect of unreasonableness 

If a contract term that is required to be reasonable under UCTA fails the reasonableness test, the term is deemed ineffective and so liability for the relevant loss or breach is uncapped (subject of course to common law rules relating to quantification and remoteness of liability). 

Some businesses (especially US-based businesses) like to adopt an aggressive position on liability to help deter claims. However, beware as this is a risky game. UCTA has the ability to dilute or reverse the intended impact of an exclusion or limitation of liability, meaning businesses should consider the risk allocation very carefully.