The importance of terms and conditions in business contracts

Terms and conditions (T&Cs) form an important part of many business transactions, providing a legal framework governing the rights and obligations of the parties. They help ensure transparency and certainty and reduce the risk of disputes between the parties involved.

Recent research carried out by the University of Law found that 68 per cent of people either don’t read or don’t understand contracts they sign for, which is a frightening statistic. If you’re involved in any kind of business, you will appreciate how costly this can be.

Paul Matthews, a specialist in preparing contractual agreements and head of WHN Solicitors’ corporate and commercial team, looks at some key considerations when using T&Cs under English law. He also sheds light on their importance for businesses and highlights why T&Cs deserve greater attention than they are routinely given.

Do your T&Cs apply to the contracts you enter into?

Even the very best T&Cs will not apply if they do not form part of the business contract that you may be entering. For a contract to be formed, the following four requirements must be met:

• Offer
• Acceptance
• Consideration
• Intention to create legal relations.

In almost all cases where an order for goods or services is placed, these requirements are usually met. Whether T&Cs will form part of the contract will then depend on at what point during the transaction that the requirements were met.

If the four requirements are met (and therefore a legally binding contract is formed) before you put your T&Cs to the other party, your T&Cs will likely not apply to that contract.

A variation on this is where both parties have T&Cs they wish to introduce into contractual discussions. In this scenario, the point at which these requirements are met determines when the contract is actually formed. This may for example be at some point within a chain of emails or by one party performing its obligations, for example, delivering the goods or services. The process and timing of these events is critical in determining whose T&Cs apply and the final terms of the contract.

It is also therefore very important as part of a review of T&Cs to also review your procedures for entering into contracts and train your staff on those procedures. Doing so will greatly increase the chance of your T&Cs applying to the contracts you enter.

Different T&Cs for consumers and businesses

If you operate a business you must take extra precautions when contracting with a consumer, as they are protected under the Consumer Rights Act 2015. It is important to note that the protections afforded to consumers are different to those afforded to businesses. It is therefore recommended to have two sets of T&Cs in place.

Unfair contract terms and consumer protection

The Unfair Contract Terms Act 1977 needs to be considered in relation to both contracts with consumers and contracts with other businesses. Broadly speaking, this legislation will render certain provisions in contracts void and other provisions valid only if reasonable.

In relation to contracts with consumers, T&Cs must not contain unfair terms that significantly disadvantage consumers. Unfair terms may include unclear terminology, or terms that disproportionately restrict consumer rights, or attempt to exclude or limit liability for negligence.

With contracts between businesses, there is greater freedom to impose harsher obligations and restrictions on the other party. Some businesses may seek to use this freedom to their advantage; however, other businesses may see putting forward fair and balanced T&Cs as part of the positive image they wish to project as a business.

Whatever your desired approach, it is important to be aware of the laws surrounding unfair terms and conditions. You should avoid drafting anything that could be deemed unfair or unreasonable, while ensuring that terms are clear, unambiguous and not hidden or drafted intentionally to cause ambiguity (for example concealing important limitations within reams of small print).

Instructing an expert to draft or review and negotiate the T&Cs that you use, or that you receive from another party, is highly recommended.

The key terms to include in a contract

Although all terms of a contract are important, there are some key terms which carry additional weight due to their financial and other implications to businesses. These include:

Duration and termination

These explain the circumstances in which the contract will come to an end. This may be either by the expiry of a fixed term or a party giving notice to terminate. They should also outline the circumstances in which a party may suspend its obligation to supply goods or services. Note that there may be conditions attached to any termination rights and potentially other financial implications.

Price

This may appear obvious, but it is important to make sure that pricing provisions are clear in the T&Cs and that appropriate consideration is given to how you want to deal with extra costs such as delivery charges. You should also consider whether a mechanism for increasing prices is needed.

Security, privacy policy and data protection

Such terms will cover how organisations collect, use, and protect personal information. It may include details about data collection, storage, sharing, and the use of cookies or other tracking technologies. You should consider whether there are any specific requirements or restrictions, such as additional security measures, that you would like the other party to comply with.

Intellectual property rights

These provisions address the ownership and protection of intellectual property (IP), such as copyrights, trademarks, or patents. They will generally make clear that, by entering the contract, a party does not assign any of its IP rights to the other party and will set out limited purposes and the terms upon which the other party may use the IP rights.

IP rights are critical to many businesses and great care is needed when drafting T&Cs to ensure such rights are appropriately protected. A party receiving information, goods and/or services may wish to ensure that the party providing them has the required IP rights to do so.

Limitations of liability

These clauses seek to limit the liability of a party in relation to defects in, or damage caused, by goods or services supplied as well as other breaches of contract. Such clauses may, for example, specify that the party is not responsible for any indirect, incidental, or consequential damages.

Clauses which seek to exclude or limit the liability of a party are significantly restricted by law for example, the Unfair Contract Terms Act 1977, so it is key that you consider the value of the contract, the likely level of losses or damage the other party may suffer and the availability of insurance. Expert advice is particularly important if such clauses are to be effective.

Indemnities

An indemnity is an agreement between parties that states, in the event of specified circumstances occurring, the other party will bear on a pound for pound basis, specified losses, expenses or liabilities incurred by the innocent party. The specified circumstances triggering liability under the indemnity could be a breach of contract by the other party, or default on the part the other party. In practice, indemnities are often drafted in wide terms and there is a significant danger that they may (inadvertently or otherwise) cover circumstances for which a party may not expect to be liable. It is not, for example, unknown to see indemnities in which one party is asked to indemnify the other party against liability for that other party’s breach of contract.

Furthermore, unlike with other breach of contract claims, there is no question of the court assessing the level of financial loss incurred by the party bringing the indemnity claim or that party having to mitigate its loss i.e., take reasonable steps to keep its loss to a minimum.

With an indemnity, the party bringing the claim simply needs to show that circumstances triggering the indemnity have occurred and that the specified losses, expenses or liabilities covered by the indemnity have been incurred. If the party can demonstrate these, it is entitled to be reimbursed on a pound for pound basis.

That makes an indemnity a powerful tool for the party with the benefit of the indemnity but potentially dangerous for a party asked to give an indemnity and, as a result, it is essential that any indemnities are very carefully drafted. This is a very good illustration of the importance of getting professional advice on T&Cs which other businesses ask you to accept – do you know and understand the potential extent of your liability under any indemnities those T&Cs seek to impose on you?

Protecting the interests of businesses and consumers

Terms and conditions are a vital component of business operations in the UK, providing a legal framework that governs transactions and protects the interests of both businesses and consumers. By understanding the importance of T&Cs, incorporating essential elements, and complying with consumer protection regulations, businesses can establish a solid foundation for successful and transparent relationships with their customers.

Paul Matthews 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 a business contract and need some legal help regarding your terms and conditions, please contact Paul on 0161 761 4611 or email: [email protected]