The Enforceability of Terms and Conditions

Some people do business without even using formal terms and conditions in the hope that problems never arise.

Others (often after a experiencing the difficulties and expense that a contractual dispute can present) once went to the effort of preparing terms and conditions, only to have developed their business without updating their terms.

In the recent case of Kingsway Hall Hotel Ltd v Red Sky IT (Hounslow) Limited a supplier faced unlimited liability and a pay out in excess of £100,000 after unsuccessfully trying to rely on inadequate and outdated terms and conditions.

In this case, software supplier, Red Sky provided a software package to Kingsway on its standard terms and conditions and sought to rely on exclusion and limitation of liability clauses to protect itself from proceedings brought by Kingsway for losses suffered by the hotel as a consequence of missed bookings caused by problems in the software.

The court ruled that even though the two parties were dealing with each other as businesses, there was a significant inequality of bargaining power.

The court took this view because the parties had bargained only on price, not over the standard terms and conditions of Red Sky. There had not been a long course of dealings between the parties and the claimant had relied on the advice of the defendant that the system was suitable for its needs.

Further, the standard terms and conditions of the defendant were drafted on the assumption that the customer would receive the operating manual and have the benefit of a demonstration before deciding whether to accept the product.

The Unfair Contract Terms Act 1977 (UCTA) requires that exclusion or limitation of liability clauses must be reasonable but the courts have traditionally been reluctant to apply UCTA to intervene in commercial bargains.

In the circumstances, however, the court held that the claimant had been entitled to reject the software, as it was not of satisfactory quality or fit for purpose. The limitations and exclusions of liability in the defendant's standard terms and conditions were not reasonable so were unenforceable.

The case is an important reminder that standard terms and conditions must be carefully drafted and regularly reviewed to ensure that they do not contain any irrelevant or inappropriate terms.

The contra proferentum rule provides that any ambiguity in a contract must be construed against the party seeking the benefit of the clause in question.

Further, if limitations and exclusions of liability are unreasonable then they will not be enforceable, even in commercial agreements.

Stephen Greenwood
Farleys Solicitors LLP