Unfair Contract Terms
By Hailey, Last updated: 2022-08-03 (originally published on 2022-05-17)
With a wealth of commercial transactions taking place every day, the fairness of contract terms can often be overlooked. This leaves parties vulnerable to consequences after it’s too late.
The practice of determining whether a contract contains unfair terms varies greatly. It requires a detailed look at the nuances of the transaction taking place, and the context of the contract as a whole. One term can be fair in one contract but unfair in another.
Here are fives examples of terms to look out for when negotiating an upcoming contract. These could potentially indicate unfavorable clauses that are unfair to your business.
Setting Prices After Contract is Signed
Most commercial contracts will explicitly stipulate the value of compensation owed by one party to another in the transaction. It is potentially an unfair contract term if one party is asked to sign a legally binding contract when they are not aware of the price they will be paying.
Typically, a price will be decided by the seller or negotiated and agreed upon by both parties. This then encourages the buyer to enter into the contract. By the same token, if the parties enter into the contract without first agreeing on a purchase price to be paid by the buyer, the seller is essentially given the discretion to charge a much higher price than initially anticipated.
In such cases, the high price point may even have meant that the buyer would not have entered into the contract in the first place had they known about the price upfront.
Unfair Indemnity Clauses
Typically, indemnity clauses within a contract dictate that one party is to compensate the other should an event occur whereby harm or loss is suffered. However, within commercial contracts these days, indemnity clauses may potentially be unfair if it holds customers or other businesses responsible for losses out of their control.
To mitigate unfair losses, each party should ensure that the indemnity clause contained within the contract is restricted to instances of loss that are directly caused by the actions of the other party as opposed to, for example, force majeure events.
It is also important to make sure your indemnity clause is not vague so as to provide the other party with too large a scope of protection. One example of this would be an indemnity against any negligence caused.
Unilateral Price Increases
Unilateral price increases occur when one party raises prices without considering the rights of the weaker party. This could easily be an unfair contract term. It is also one of the most common unfair contract terms seen in practice within commercial contracts.
For example, when a service provider chooses to increase the price of their service without informing the buyer of this change before entering into the contract. Under these circumstances, the customer is then unable to terminate the contract without incurring relevant penalty fees, and will still have to pay the new, increased price.
Automatic Renewal Clause
Not all automatic renewal clauses are deemed unfair. But, it is important that if the parties are to include this clause, a reasonable renewal period is defined within it.
Typically short-term contracts will include an automatic renewal clause. This will be fair as the term of the initial contract will be brief enough to reasonably foresee an agreement of renewal by the parties. Conversely, if the automatic renewal period is excessively long, it may be construed as unfair.
This is because businesses with less cash flow such as start-up companies may be disadvantaged by the longer renewal period.
As a general rule, the longer the period of renewal, the more likely the clause will be construed as unfair. Further, an automatic renewal term may be deemed unfair if it is particularly arduous or impossible for one party to cancel the contract after the renewal.
Restricting Commentary About a Business
A term of a contract may be unfair if the contract attempts to restrict any form of commentary about the business and holds the party responsible for any losses and damages from the public.
Typically, in commercial contracts, this clause will seek to prevent customers from posting public reviews against a service provider. In general, a standard form contract will not prevent or restrict customers from providing a fair and accurate review of a business’s products or services and a restriction clause cannot control how customers are able to review and comment on a company’s services.
Thoroughly reviewing all contract terms and conditions is extremely important. It is especially true for startups and small businesses, as they are most susceptible to signing contracts containing unfair terms. What is deemed fair and unfair will differ greatly between each contract. It will also largely depend upon the context of the contract, the service provided, and the party’s position in relation to each other.
Ensure that your business is protected from unfair contract terms by consulting Zegal’s team of experts who will assist in disseminating potentially unfair contract terms.
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