Commercial Law: Standard Form Contracts and Unfair Terms

UK commercial practices have long used standard form contracts as a tool to efficiently carry out business transactions. These are pre-drafted contractual terms that cover the dealings a company uses in all interactions with their consumers and commercial counterparts. Such contracts are offered on a “take it or leave it” basis, meaning businesses reduce costs of negotiations as well as create a standard procedure for dealings and keep their transactions uniform.1 

Though they are a commercial standard for most businesses, standard form contracts have many legal issues, particularly regarding the potential for unfair terms within them. Traditionally, contract law is based on the freedom to bargain equally and enter a contract. However, this basis is increasingly inhibited in modern commercial contexts, particularly in contracts involving one significantly weaker party, dealing with an economically dominant party. This article aims to examine the concept of standard form contracts and to address the rising issue of unfair terms in commercial settings, judicial responses, statutory regulations, and the conflict between commercial certainty and contractual fairness. 

Standard form contracts: Meaning and Nature: 

Firstly, a standard form contract is one in which the terms are pre-drafted by one party, then presented to the other without much negotiation. The offeree is given two options: accept the whole contract, or reject the whole contract. These contracts are otherwise known as contracts of adhesion.2 

They are used commonly in the UK because of their efficiency and practicality within a commercial context as they significantly reduce negotiation costs, allowing for mass contracting and enhancement of predictability in dealing. Without such contracts, if a contract involved large transactions or big projects, individual negotiation would not be practical or feasible for large organisations. Although the advantages make commercial sense, it does create an imbalance of power, ultimately putting the weaker party at a disadvantage as it has little to no bargaining power, risking unfair contractual terms. 

What constitutes Unfair Terms in a Commercial Contract?: 

Unfair terms refer to the terms required from the other party which may create an imbalance or the inhibition on the rights of the other party, or that may oblige the other party to join the contract to its own detriment. There are two ways to interpret unfairness, the first being substantively. This means it relates to the content of the contract itself. The second is procedural; meaning the circumstances under which the contract formed. 

For substantively unfair terms, they include exclusion or limitation of liability clauses, excessive penalty clauses, unilateral variation provision, as well as restrictive jurisdiction clauses. Whereas for procedural unfairness, it occurs when a party is coerced or not given much choice to enter the contract or if they are not notified of onerous terms, or are not allowed to negotiate provisions.3 Standard form contracts that have unfair terms usually use those terms to shield the business from liability while still imposing unfair expectations on the party they are dealing with, making it hard to ensure fairness and integrity of the contract. 

The UK’s Judicial Approach: 

Historically, the English courts upheld the sanctity of contracts and highlighted the necessity for certainty in commercial contexts. However, with time their attitudes changed to recognise that freedom of contract does have a grey area when acknowledging the imbalance of bargaining power imposed by standard form contracts. 

One of the founding principles in English Contract law, is notice of onerous terms. A key case would be Thornton v Shoelane Parking Ltd, where the House of Lords required that any terms that may be to the offeree’s detriment be brought to their attention before the contract is formed.4 Reaffirmed in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, the Court of Appeal did not enforce onerous terms in this case as there was not enough notice of the terms.5 

Judicial control has also been exercised through statutory interpretation. The House of Lords in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd applied the statutory reasonableness test from the Unfair Contract Terms Act 1977 which refused to enforce an unfair exclusion clause.6 

Even so, the courts still distinguish between consumer to business contracts, and business to business contracts, giving more grace when it is dealings between two equal parties, and giving more autonomy to business dealing with other businesses. This is done to protect the smaller businesses from being taken advantage of when entering standard form contracts with large enterprises. 

Unfair Contract Terms Act 1977 and Statutory Regulation: 

The Unfair Contract Terms Act 1977 is a legislative way to regulate exclusion and limitation clauses, which include commercial contracts. Under UCTA, these clauses must undergo a reasonableness test to determine if there is fair bargaining power, if there are fairer alternatives than the ones presented by the offeror, and if the parties involved are aware of the terms.7 

This is further reinforced by the Consumer Rights Act 2015, which protects further against unfair terms, though it is mainly for consumer contracts. Though the Act did introduce a fairness and transparency requirement, there are still gaps with this act in terms of regulating just commercial agreements. 

Commercial Certainty vs Contractual Fairness: 

A point of contention in UK commercial law is the struggle to find a balance between ensuring commercial certainty, while also keeping contractual fairness. It is widely argued by businesses that it is key to have predictability in dealings in order to maximise the economic advantages of their contracts and reduce risks. Too much interference, either judicial or legislative, may disrupt the efficiency and practicality of commercial contracting. 

In contrast, if unfair terms persist, market fairness and the confidence in commercial relations may start to wither as the contracts become increasingly detrimental to the offerees. There may be a large spike in disputes due to the oppressive nature of unfair terms if they are not reduced, and viewing fairness as a blocker for commercial certainty may continue to hinder the commercial market. Instead, fairness should be viewed as a non-negotiable advantage for both the business and the consumer/business they are dealing with, which will protect them all from malpractice and ensure sustainable outcomes for both parties. 

Reform and Moving Forward: 

Moving forward, as the UK continues to rely on standard form contracts, there should be a more regulated approach to these contracts, and protection should be extended to all parties involved. There should be clearer statutory guidance on how to ensure fairness and remain 

transparent throughout the transactions, including greater emphasis on notice of onerous terms, while improving existing legislation to cover all aspects of commercial contracts and standard forms. 

Conclusion: 

To conclude, standard form contracts, while an essential part of UK commercial law which provide predictability, certainty, and maximise efficiency in contracts, have also sparked legal questions due to the existence of unfair terms which often lead to imbalance in bargaining powers. Though the courts and statutes such as the Unfair Contract Terms Act 1977 have made a large difference in the way such contracts are approached, many unfair terms and unprotected parties still remain. 

A framework designated to highlight these questions is needed to protect these unprotected parties, and to increase judicial scrutiny. The goal is to keep standard form contracts as tools to maximise efficiency rather than oppress involved parties, while still ensuring fairness and justice.

Reference(S):

1I R Macneil, ‘Review of The Law of Contract, by Hugh Collins’ (1987) 14(3) Journal of Law and Society 373–381

2 Friedrich Kessler, ‘Contracts of Adhesion—Some Thoughts About Freedom of Contract’ (1943) 43 Columbia Law Review 629. 

3PS Atiyah and Stephen A Smith, Atiyah’s Introduction to the Law of Contract (6th edn, Clarendon Press 2006)

4 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 (HL). 

5Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433 (CA).

6 George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 (HL).

7 Unfair Contract Terms Act 1977, ss 2–3, 11.