Unfair Contract Terms: Everything You Need To Know

When making any purchases of goods or services, consumers enter into a contract with businesses and agree to specific terms and conditions. While these terms are often non-negotiable, the problem arises when such contract terms are unfair to the consumer. The doctrine of unconscionability allows contracts to be declared invalid and struck down by courts if they are grossly unfair, oppressive, and one-sided.

Ordinarily, the courts do not inquire about the fairness of the contract and will not interfere with contractual agreements because the principle of freedom of contract is considered paramount. But if there is any dispute over whether a term of a contract is unfair, the court will generally consider these three factors before interfering in contractual agreements:

1. If it causes a significant imbalance in the party’s rights and obligations arising under the contract.
2. If it is necessary to protect the legitimate interests of the parties such terms would be disadvantageous.
3. The terms are likely to cause detrimental effects (financially or otherwise) to a party if they were to be applied to them.

Therefore, if any term in the contract falls under any of the above-stated criteria, then it could be considered “unfair” and struck down by the courts. Businesses should know what sort of contract terms could be considered unfair and hence, avoid any such practice:

• Unilateral variations: If there is a unilateral variation clause in the contract that gives one party in a contract the right to vary the terms of the other party in a contract without the other party being able to reject or negotiate the variation, then most likely such provisions will be considered unfair.
• Unfair payment terms: If the contract makes the customer liable to pay, irrespective of whether the business provides relevant goods and services then such clause is much likely to be found unfair.
• Extraneous Documents: If the contract imposes obligations on parties from any undisclosed documents, parties are not obligated to those terms since they might not be aware of them. This would likely render the contract unfair, as all terms and conditions should be readily discernible to signing parties.
• Unfair Termination Fees: If one party ends a contract and the other must pay a termination fee decided solely by the first party, it could be seen as unfair. This fee may not match the actual losses suffered, and in a fair contract, parties should be able to explain and justify the costs associated with any losses.
• Non-reciprocal provisions: A key element of contract fairness involves balance. When the obligations placed on one party are substantially different from those imposed on the other party, it results in an imbalance known as a non-reciprocal provision. Such contracts, characterized by this lack of symmetry, may be considered potentially unfair and subject to potential invalidation.
• Disproportionate Termination terms: When a contract permits one party to terminate it for minor breaches, while the other party lacks similar rights, it results in an imbalanced termination clause that favors one party. Such clauses may be deemed void, and a simple way to prevent this is to ensure a balanced termination clause that applies to both parties in the contract.

So, if you are in a business and use standard contracts while providing goods and services to your clients, you need to make sure the contractual terms are fair to prevent disputes with clients. Unfair contract terms aren’t legally binding and won’t protect your business even if a client has signed up for them and if in the worst-case scenario, it ends up in court, you could also be made to pay compensation much greater than the value of the product or service. Protect your business and client’s interests by making sure your terms are up-to-date, transparent and fair.

– Written by Kanika Meena.