Learning Outcomes
After studying this article, you will be able to identify and apply the legal rules governing unfair contract terms in England and Wales. You will understand the statutory controls under the Consumer Rights Act 2015 and the Unfair Contract Terms Act 1977, the concept of significant imbalance and good faith, the reasonableness test, and the practical consequences for contract enforceability. You will also be able to analyse and answer SQE1-style questions on this topic.
SQE1 Syllabus
For SQE1, you are required to understand the regulation of unfair contract terms and their effect on contract validity and enforceability. Focus your revision on:
- 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
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.
- What is the statutory test for an unfair term in a consumer contract under the Consumer Rights Act 2015?
- Which types of contract terms are excluded from the fairness assessment under the CRA 2015?
- What is the effect of section 2 of the Unfair Contract Terms Act 1977 on exclusion clauses for negligence?
- 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. It sets out when a term is unfair and the consequences if it is.
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.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.
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.
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, 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.
Section 65 CRA 2015 prohibits any attempt to exclude or restrict liability for death or personal injury resulting from negligence.
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 or imposing disproportionate penalties on the consumer.
The Unfair Contract Terms Act 1977 (UCTA 1977)
UCTA 1977 mainly applies to business-to-business contracts and certain business-to-consumer contracts 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 2 UCTA 1977 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.
Sections 3–7 UCTA 1977 subject other exclusion and limitation clauses to the reasonableness test, especially where one party deals on the other’s standard terms.
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.
Transparency and Prominence
Terms must be clear and brought to the consumer’s attention. Hidden or unclear terms may be unfair, even if the consumer signed the contract.
Excluded Terms
Terms specifying the main subject matter or price are excluded from the fairness test, but only if they are transparent and prominent. If not, they can be assessed for fairness.
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
- whether it was practicable to comply with the term
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. If a term is unreasonable under UCTA 1977, it is unenforceable.
Section 65 CRA 2015 and section 2 UCTA 1977 make any attempt to exclude liability for death or personal injury resulting from negligence void.
Examples of Unfair Terms
- Allowing the trader to change the contract unilaterally without a valid reason
- Imposing disproportionate penalties for breach by the consumer
- Excluding or limiting liability for defective goods or services in a way that is not reasonable
Enforcement and Practical Application
Regulators such as the Competition and Markets Authority (CMA) can take action to prevent the use of unfair terms. Courts may also consider the fairness of a term on their own initiative in disputes.
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.
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.
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.
- The reasonableness test under UCTA 1977 considers bargaining power, knowledge, and industry practice.
- Unfair or unreasonable terms are not binding or enforceable.
- Exclusion of liability for death or personal injury due to negligence is always void.
- The burden of proving reasonableness is on the party seeking to rely on the clause.
Key Terms and Concepts
- Consumer
- Trader
- Unfair term
- Good faith
- Transparent and prominent
- Reasonableness test
