Vitiating elements - Unfair contract terms

Learning Outcomes

This article outlines how unfair contract terms are regulated in England and Wales, including:

• the scope, structure and interaction of the Consumer Rights Act 2015 (CRA 2015) and the Unfair Contract Terms Act 1977 (UCTA 1977) in consumer and business contexts
• the statutory definition of an unfair term, focusing on significant imbalance, detriment and good faith, and how courts apply these criteria in practice
• the role of transparency, prominence and contra proferentem in interpreting exclusion and limitation clauses and core terms
• the operation of the CRA regime for consumer notices and the core terms exemption, including how price and subject‑matter terms are identified
• the UCTA reasonableness test, its statutory factors, and which clauses and notices are subject to it in B2B and mixed transactions
• analysis of typical unfair or unreasonable terms, such as unilateral variation, hidden fees, disproportionate charges and broad exclusion clauses
• the legal consequences where terms fail the fairness or reasonableness tests, and how severance affects the remainder of the contract
• regulatory enforcement tools available to bodies such as the CMA and Trading Standards, and how these influence contractual drafting
• exam-focused techniques for spotting whether CRA or UCTA applies on SQE1, structuring multiple-choice answers, and avoiding common traps on core terms, negligence exclusions and standard‑terms dealings

SQE1 Syllabus

For SQE1, you are required to understand the regulation of unfair contract terms and their effect on contract validity and enforceability, with a focus on the following syllabus points:

• the statutory controls on unfair terms in consumer and business contracts (CRA 2015 and UCTA 1977)
• the definition and assessment of unfair terms, including significant imbalance and good faith
• the reasonableness test for exclusion and limitation clauses in business contracts
• the effect of transparency and prominence requirements
• the legal consequences of an unfair or unreasonable term
• how to apply these principles to practical scenarios and MCQs
• the “core terms” exemption from the fairness assessment (CRA s 64) and the concept of consumer notices (CRA s 61)
• UCTA triggers including dealings on written standard terms (s 3), implied terms in goods contracts (ss 6–7), and negligence (s 2), plus reasonableness factors (s 11 and Sch 2)

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the statutory test for an unfair term in a consumer contract under the Consumer Rights Act 2015?
2. Which types of contract terms are excluded from the fairness assessment under the CRA 2015?
3. What is the effect of section 2 of the Unfair Contract Terms Act 1977 on exclusion clauses for negligence?
4. Name one key factor the court considers when applying the reasonableness test to an exclusion clause in a business-to-business contract.

Introduction

Unfair contract terms are provisions that cause a significant imbalance in the parties’ rights and obligations, to the detriment of one party, and are contrary to the requirement of good faith. English law regulates such terms to protect consumers and, in some cases, businesses from unfairness or abuse of bargaining power. The main statutory controls are found in the Consumer Rights Act 2015 (CRA 2015) for consumer contracts and the Unfair Contract Terms Act 1977 (UCTA 1977) for business contracts. Understanding these rules is essential for the SQE1 exam.

Statutory Regulation of Unfair Terms

The Consumer Rights Act 2015 (CRA 2015)

The CRA 2015 applies to contracts between traders and consumers, and also regulates consumer notices that purport to exclude or restrict a trader’s liability or otherwise relate to trader–consumer rights and obligations.

Key Term: Consumer
An individual acting for purposes wholly or mainly outside their trade, business, craft, or profession.

Key Term: Trader
A person acting for purposes relating to their trade, business, craft, or profession (personally or through another acting on their behalf).

Key Term: Unfair term
A contract term that, contrary to the requirement of good faith, causes a significant imbalance in the parties’ rights and obligations to the detriment of the consumer.

Section 62 CRA 2015 provides that a term is unfair if it causes a significant imbalance in the parties’ rights and obligations, to the detriment of the consumer, and is contrary to good faith. The assessment is made by reference to the subject matter of the contract, all circumstances existing when the term was agreed, and all other terms of the contract (CRA s 62(5)).

Key Term: Good faith
Honest, fair, and open dealing, requiring that terms are not hidden or imposed in a way that would surprise or disadvantage the consumer. It focuses on fair, transparent drafting and fair presentation as well as substance.

Section 61 extends the regime to consumer notices (e.g., signs or website banners) intended to be seen by consumers, including notices purporting to exclude or restrict liability. Sections 68–69 impose transparency and pro-consumer interpretation duties.

Section 64 CRA 2015 excludes certain terms from the fairness test—specifically, terms that specify the main subject matter of the contract or set the price (appropriateness of the price by comparison with what is supplied), provided they are transparent and prominent.

Key Term: Transparent and prominent
Transparent: expressed in plain, intelligible language and legible. Prominent: brought to the consumer’s attention so an average consumer would be aware of it.

If a core term is not transparent and prominent, it can be assessed for fairness. The Supreme Court in OFT v Abbey National plc emphasised that price terms may be core and exempt from fairness assessment, though under the CRA the added “prominence” requirement is a tighter test.

Section 65 CRA 2015 prohibits any attempt to exclude or restrict liability for death or personal injury resulting from negligence. Other negligence exclusions are subject to the fairness test and the transparency obligation.

Section 67 provides that, where a term is unfair, it is not binding on the consumer, and the rest of the contract continues where practicable. Section 69 requires any ambiguity to be interpreted in the way most favourable to the consumer. Courts must also consider the fairness of relevant terms of their own motion where they have sufficient information (under the CRA scheme).

Schedule 2 CRA 2015 contains a non-exhaustive “grey list” of terms that may be regarded as unfair, such as terms allowing unilateral variation by the trader without a valid reason; binding the consumer to terms they had no real chance to read; disproportionate termination or cancellation charges; unreasonably early opt-out deadlines for auto-renewals; and terms hindering the consumer’s right to take legal action.

The Unfair Contract Terms Act 1977 (UCTA 1977)

UCTA 1977 mainly applies to business-to-business contracts and, in limited situations, to business dealings with consumers not covered by the CRA 2015. UCTA restricts the extent to which liability for breach of contract, negligence, or statutory implied terms can be excluded or limited.

Section 1 UCTA defines “negligence” for the Act and confirms the Act’s focus on “business liability.” Section 2 makes any attempt to exclude or restrict liability for death or personal injury resulting from negligence void. For other loss or damage caused by negligence, exclusion is only permitted if the clause is reasonable.

Key Term: Reasonableness test
The requirement that a contract term must be fair and reasonable in all the circumstances at the time the contract was made (UCTA s 11 and Sch 2).

Sections 3–7 subject other exclusion and limitation clauses to the reasonableness test. Key triggers include:

• dealings on written standard terms of business (s 3): a party cannot exclude or restrict liability for breach, or substantially vary performance, unless the term is reasonable
• attempts to exclude implied terms as to title (void) or quality/fitness (only if reasonable) in sales or supply contracts (ss 6–7)
• reliance on “notices” excluding liability in tort or contract (captured by UCTA’s framework)

Section 11 and Schedule 2 set out the reasonableness factors, including bargaining power, inducements, knowledge of the term, industry practice, practicability of compliance, and insurance/resources to meet a potential liability (s 11(4)). The burden of proving reasonableness rests on the party seeking to rely on the term (s 11(5)).

Assessing Unfairness and Reasonableness

Significant Imbalance and Good Faith

A term is unfair if it creates a significant imbalance in the parties’ rights and obligations, to the detriment of the consumer, and is contrary to good faith. The assessment is objective and considers all the circumstances at the time the contract was made. Good faith includes both procedural and substantive elements: transparency, prominence, fair presentation and negotiation, and substantive fairness. OFT v First National Bank plc explains that “significant imbalance” is met if a term tilts rights and obligations markedly in favour of the trader; good faith requires fair and open dealing.

Transparency and Prominence

Terms must be clear and brought to the consumer’s attention. Hidden, technical, or confusing language, small print, or placing onerous terms where a reasonable consumer would not expect them can undermine transparency and prominence. Transparency under CRA s 68 requires plain, intelligible drafting and legibility; prominence requires adequate signposting and presentation so an average consumer would be aware. Even if the consumer signed, a lack of transparency or prominence can be relevant to unfairness.

Key Term: contra proferentem
A rule of construction: if a term can reasonably bear more than one meaning, the ambiguity is resolved against the party who seeks to rely on it.

Courts use the contra proferentem rule especially with exclusion/limitation clauses. In consumer contracts, CRA s 69 goes further: ambiguous terms are interpreted in the way most favourable to the consumer.

Excluded Terms

Terms specifying the main subject matter or the price are excluded from the fairness test only if they are transparent and prominent (CRA s 64). Without prominence, the exemption does not apply and the term may be assessed. The exemption focuses on the “appropriateness of the price by comparison with the goods, digital content or services supplied,” not on collateral fees that are not part of the core bargain.

Construction of Exclusion Clauses and Negligence

Before applying CRA or UCTA, a court asks whether, as a matter of construction, the clause covers the loss. Ambiguous exclusions are construed narrowly against the proferens. In negligence cases, older guidance explains that if a clause does not expressly mention negligence and could cover a non-negligent basis of liability, it may not exclude negligence. Clear words are needed to exclude negligence. This construction step is distinct from statutory controls; both may apply.

The Reasonableness Test (UCTA 1977)

For business contracts, the court considers factors such as:

• the parties’ relative bargaining power
• whether the customer received an inducement to agree to the term
• whether the customer knew or ought reasonably to have known of the term
• whether the term was common in the industry and the parties’ prior dealings
• whether it was practicable to comply with the term and allocate risk
• whether the clause fairly reflects risk with insurance or pricing (s 11(4))

Reasonableness is judged at the time of contracting, not with hindsight. The burden is on the party seeking to rely on the clause to prove it is reasonable.

Legal Consequences of Unfair or Unreasonable Terms

If a term is found to be unfair under the CRA 2015, it is not binding on the consumer, but the rest of the contract continues if possible (CRA s 67). Courts will not re‑write the term to make it fair; they treat it as severed. If a term is unreasonable under UCTA 1977, it is unenforceable to the extent it purports to exclude or limit liability. In both regimes, exclusions of liability for death or personal injury arising from negligence are always ineffective (CRA s 65; UCTA s 2(1)).

Examples of Unfair Terms

• Allowing the trader to change the contract unilaterally without a valid reason (or without consumer cancellation rights)
• Imposing disproportionate penalties for breach by the consumer (e.g., excessive cancellation or early termination fees)
• Binding the consumer to terms they had no real opportunity to read before concluding the contract
• Excluding or limiting liability for defective goods or services in a way that is not reasonable (B2B) or not fair (B2C)
• Automatically extending fixed-term contracts unless the consumer opts out by an unreasonably early date
• Allowing the trader to determine price payable after the consumer is bound, with no valid reason stated and no right to cancel

Enforcement and Practical Application

Regulators such as the Competition and Markets Authority (CMA), Trading Standards and sector regulators can take action to prevent the use of unfair terms. They can seek undertakings or injunctive relief to stop businesses using or recommending unfair terms. CRA Schedule 3 sets out enforcement roles and investigatory powers (with cross‑reference to general enforcement provisions). Courts may consider the fairness of a term on their own initiative where they have sufficient information. In practice, many terms are revised or withdrawn following regulatory engagement, and market-wide sector reviews (for example, leisure memberships, parking charges, auto-renewals, and price variation clauses) have shaped fair drafting expectations.

Worked Example 1.1

A consumer buys a gym membership. The contract allows the gym to increase fees at any time without notice and imposes a high cancellation fee. Is this term enforceable?

Answer:
The term is likely to be unfair under section 62 CRA 2015, as it creates a significant imbalance and is not transparent or prominent. The cancellation fee may also be a disproportionate penalty.

Worked Example 1.2

A business contract contains a clause excluding all liability for defective goods. The buyer is a small business with no bargaining power. Is the clause valid?

Answer:
The clause will be subject to the reasonableness test under UCTA 1977. If the exclusion is not fair and reasonable in the circumstances, it will be unenforceable.

Worked Example 1.3

A software supplier’s standard terms limit total liability to £25,000. The supplier has product liability insurance of £5 million and routinely supplies projects worth £500,000. Is the cap likely to be reasonable under UCTA?

Answer:
The cap is vulnerable. Under UCTA s 11(4), the court considers the supplier’s resources and the availability of insurance. A very low cap relative to contract value and insured limits may be unreasonable, especially where the buyer dealt on the supplier’s standard terms (s 3).

Worked Example 1.4

An online retailer’s checkout shows “Total: £399” in large font. A link below (same page) states “A £40 handling fee applies” in small text. The retailer argues the £40 is a “core price term” immune from fairness assessment. Is that correct?

Answer:
Not necessarily. Even if the fee relates to price, it will be exempt only if the term is transparent and prominent (CRA s 64(2)). A hidden or insufficiently signposted fee is unlikely to be “prominent” and can therefore be assessed for fairness.

Exam Warning

The fairness and reasonableness of a term are assessed at the time the contract was made, not when a dispute arises. Always consider the context and the parties’ knowledge at that time.

Revision Tip

When answering SQE1 questions, always check whether the contract is a consumer or business contract to determine which statute applies. Remember CRA also covers consumer notices; UCTA can apply to notices as well as terms.

Key Point Checklist

This article has covered the following key knowledge points:

• Statutory controls on unfair contract terms are found in the CRA 2015 (for consumers) and UCTA 1977 (mainly for businesses).
• An unfair term is one that causes a significant imbalance to the detriment of the consumer and is contrary to good faith.
• Terms specifying the main subject matter or price are excluded from the fairness test only if they are transparent and prominent (CRA s 64).
• CRA also regulates consumer notices and requires transparency and pro‑consumer interpretation (ss 68–69).
• Under UCTA, negligence liability causing death or personal injury cannot be excluded; other negligence exclusions must be reasonable (s 2).
• The reasonableness test considers bargaining power, inducement, knowledge, industry practice, practicability, and insurance/resources (s 11 and Sch 2). The burden of proof is on the party relying on the term (s 11(5)).
• Construction matters: exclusion clauses are construed narrowly and ambiguities resolved against the proferens (contra proferentem); in consumer contracts ambiguous terms favour the consumer (CRA s 69).
• Unfair or unreasonable terms are not binding; the rest of the contract may continue (CRA s 67; UCTA).
• Regulators (e.g., CMA) can enforce against unfair terms and obtain undertakings or injunctions; courts may consider fairness on their own initiative.

Key Terms and Concepts

• Consumer
• Trader
• Unfair term
• Good faith
• Transparent and prominent
• Reasonableness test
• contra proferentem