Unfair terms - common law

The most common type of unfair terms are exclusion clauses whereby one party seeks to exclude their liability arising under the contract. Other examples of unfair terms include penalty clauses where a party specifies an amount payable on breach of contract which is out of proportion to the loss that the party would suffer. As unfair contract terms can operate oppressively, the law restricts the use of such terms. The protection comes from the common law, the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contract Regulations 1999. For statutory protection see here.

Protection at common law

Protection at common law comes in two forms. Firstly, the courts will consider if the term has been incorporated into the contract. Secondly, the courts will consider if the clause covers the loss in question.

1. Incorporation of unfair terms

The general rule is that the term must be brought to the attention of the contracting party before or at the time the contract was made. If the term was not brought to their attention it cannot be said that they had accepted the term. Therefore the term will not be part of the agreement between the parties:

Olley v Marlborough Court [1949] 1 K.B. 532 (Case summary)

Thornton v Shoe Lane Parking [1971] 2 WLR 585 (Case summary)

Where there is a written contract which is signed, a party is bound by all the terms in the contract irrespective of whether they were aware of the terms it contained:

L'Estange v Graucob [1934] 2 KB 394 (Case summary)

If there has been a misrepresentation of the terms, the clause is not effective:

Curtis v Chemical Cleaning [1951] 1 KB 805 (Case summary)

Reasonable notice of unfair terms

A party seeking to rely on an unfair term must demonstrate that they gave reasonable notice. ie they took reasonable steps to bring the term to the attention of a reasonable person:

Thompson v LMS Railway [1930] 1 KB 41 (Case summary)

If a clause is particularly onerous then more steps are required to bring it to the notice of a reasonable person:

Interfoto Picture Library v Stilletto [1989] QB 433 (Case summary)

Incorporation through previous dealings

If the parties have dealt with each other before then the term may be incorporated through these dealings even where the term was not brought to the attention of the other party on this occasion:

Spurling v Bradshaw [1956] 1 WLR 461 (Case summary)

The previous dealings must have been consistent; the parties must always have contracted on the same terms:

McCutcheon v MacBrayn [1964] 1 WLR 165 (Case summary)

A term will only be incorporated where there is a sufficient number of transactions to amount to a course of dealings:

Hollier v Rambler Motors [1972] 2 WLR 401 (Case summary)

Incorporation through trade custom

A term may be incorporated where the use of such terms is prevalent in a particular trade and both parties operate in that trade:

British Crane Hire v Ipswitch Plant Hire [1975] QB 303 (Case summary)

2. Does the clause cover the loss in question?

The second question the courts ask is whether the clause covers the loss in question. This is a matter of interpretation. The contra proferentem rule applies. This means that where there is any ambiguity in the wording of the clause, the courts will interpret the clause against the party seeking to rely on it.

Andrews Bros ltd v Singer Cars [1934] 1 KB 17 (Case summary)

Where the clause is a limitation clause as oppose to an exclusion clause the courts will apply the natural meaning and not seek to find ambiguity where none exists:

Ailsa Craig Fishing v Malvern [1983] 1 WLR 964 (Case summary)

Penalty clauses

Some contracts may contain a clause specifying an amount which is payable in the event of a breach of contract. This can be helpful to both parties in that each will know exactly what their position is in advance and can prepare for such eventualities. However, if such a clause specifies an excessive sum is payable this can operate harshly on the breaching party and as such the law provides some protection. English law draws a distinction between liquidated damages clauses (which are valid) and penalty clauses (which are invalid).

To amount to a liquidated damages clause the sum specified must be a genuine pre-estimate of loss. A penalty clause is where the sum specified acts in terrorem (to punish, or to deter a breach). It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach:

Dunlop v New Garage [1915] AC 79    (Case summary)

Cine Bes Filmcilik v United International Pictures [2003] EWCA Civ 1669

Murray v Leisureplay Plc [2005] EWCA Civ 963    (Case summary)

Euro London Appointments Ltd. v Claessens [2006] EWCA Civ 385    (case sumary)

Further reading:

Law Commission Report - Unfair Terms in Contracts 2005

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