How to avoid unfair terms in business-to-business contracts

With business owners facing numerous competing time pressures, it can be very easy to give insufficient attention to the terms of contracts being entered into with other businesses.

Paul Matthews, head of WHN’s corporate and commercial team, provides a guideline to help business owners and commercial suppliers engage in fair and realistic terms of contracts.

Business-to-business (B2B) contracts can come in a variety of different forms. Some may be simple one-off orders for goods or services where standard terms and conditions of one party apply (often known as the ‘small print’).

Others may be in a form prepared specifically to govern the relationship the parties are seeking to establish and are likely to govern the relationship over a longer period. These may well be negotiated and almost certainly will be signed.

CREATING FAIR TERMS FOR BOTH PARTIES

It is all too common with B2B contracts to find terms which are unfairly weighted in favour of one party. An example would be a provision limiting the liability of a supplier to such an extent that it leaves the customer with no meaningful remedy should the supplier fail to comply with its obligations under the contract.

The reasons behind why unfair terms are included in contracts can vary, here are several examples:

• They may reflect an inequality of bargaining power.
• The party proposing the terms may have been ‘looking to see what they can get away with’.
• The party proposing the terms may have given little thought to what the terms say.
• Time pressures may mean the recipient of the terms may not have read them. Alternatively, they may not have fully understood their implications.

This is potentially a significant issue for both the party proposing the terms and the recipient.

Compared with the position in relation to business to consumer contracts, there are significantly fewer restrictions with B2B contracts on the freedom of the parties to reach such agreement as they choose.

There is certainly no overriding principle of law requiring terms to be objectively fair. Therefore, the recipient of a contract should take care to read it carefully and, if in any doubt, seek expert legal advice as to its nature and effect. It is better to ensure, by negotiation where practical, that the terms of the proposed contract are satisfactory before committing to them.

RULES THAT IMPACT B2B CONTRACTS

There are several very significant rules which impact on the terms of B2B contracts of which a party proposing the terms of a contract needs to be mindful. Failure to do so may lead to provisions being found to be void and the relevant party being worse off than they would have been had they taken a more balanced approach to the relevant provision.

For a party who has agreed to the relevant provision, whether by reason of inequality of bargaining power or failure to appreciate the nature and effect of the provision, these rules may provide some relief in the event of a dispute.

These rules include:

• If a provision of the contract seeks to exclude or limit the liability of a party, the Unfair Contract Terms Act 1977 may operate to make the relevant provision void or valid only if it passes a test of reasonableness.
   -  For example, provisions seeking to exclude or limit liability for breach of implied terms as to the quality of goods will only be valid if they are reasonable.
   -  Provisions seeking to exclude or limit liability for death or personal injury resulting from negligence or breach of a duty of care or skill are void and provisions seeking to exclude or limit liability for damage to property resulting from negligence or breach of a duty of care or skill will only be valid if reasonable.
   -  It is extremely important that provisions to which these rules apply are very carefully drafted – if a provision infringes these rules, it is likely to end up void – the courts will not generally alter a provision to make it enforceable
• Penalty clauses are not enforceable. A provision will fall foul of this rule if it imposes liability on a party for breach of an obligation which is out of all proportion to the innocent party’s legitimate interest in enforcing that obligation. Excessive default interest rates and unduly onerous liquidated damages clauses may be capable of being challenged on this basis.

It is also important to bear in mind that the way a court interprets a contract may impact the extent to which the relevant term is enforceable. For example, the court will generally work on the assumption that the parties did not intend to give up their legal rights without clear words. Therefore, general or ambiguous forms of words (e.g. referring simply to ‘any liability’) probably won’t have as wide-ranging effect as hoped by the party seeking to rely on them.

PREPARE AND READ CONTRACTS CAREFULLY

If you are seeking to prepare a contract or terms and conditions of trading, you should ensure that the terms are carefully considered and drafted. Expert legal advice will help minimise the pitfalls described above and reduce the likelihood of them being challenged.

If you receive a contract or terms and conditions of trading from another business, you should ensure you read them carefully and obtain expert legal advice if you do not understand their nature and effect or feel certain terms are unfair or otherwise wrong.

It will generally be far cheaper and easier to review and negotiate the terms before committing yourself to the contract than it will be to challenge a term once you have committed to it. Prevention is better than cure, particularly as there are no guarantees that a particular provision will be capable of successful challenge.

Finally, if you end up in a dispute regarding one of these provisions (whether you are the party seeking to challenge the provision or the party seeking to rely on it), seeking expert legal advice as to how to enforce the relevant provision is very important.

Paul Matthews is head of WHN Solicitors’ corporate and commercial team. He advises clients on a range of corporate and commercial transactions including company and business sales and acquisitions, management buyouts and general commercial contracts. If you are entering into or seeking to prepare B2B contracts and need some legal help, please contact Paul on 0161 761 4611 or email: [email protected]