Guidance

Unfair terms explained for businesses: full guide

Information to help small businesses understand more about unfair contract terms.

The information included in this guide is also available as individual guides and as short video guides

Introduction

If you’re a business that deals with consumers, then you need to make sure your terms are fair. The Consumer Rights Act 2015 aims to protect consumers against unfair contract terms and notices.

Below are some of the main things you need to know. For the purpose of this guide we often use the word ‘you’ to refer to the business and ‘customer’ to mean consumer.

  • Contracts help protect you – they build your relationship with your customer so they trust you to do business with them fairly.
  • Contracts can only protect you if your terms are fair. If a term is not fair, it won’t be legally binding on your customer.
  • Your customer should be able to easily understand what they are signing up to.
  • A term may be in a document that your customer signs or in a brochure, a poster, a sign by a cash register or even what a salesperson might say to a customer before they buy.

A consumer notice is wording that may not form part of any contract but which relates to the same kinds of issues that would be dealt with in a contract – for instance the rights or obligations between you and your customer. Notices are often used in shops and car parks as well as online. You need to be particularly careful if the wording could appear to exclude or restrict your liability.

An unfair term is not legally binding on your customer. Enforcers can also take action to stop you using it.

What is unfair?

Generally, contract terms and notices are unfair if they put the customer at an unfair disadvantage. The law applies a fairness test that starts by asking whether the wording used tilts the rights and responsibilities between the customer and the trader too much in favour of the trader.

The test is applied by looking at the words and how they could be used. It takes into consideration what is being sold, how a term relates to other terms in the contract and all the circumstances at the time the term was agreed.

Some of your terms may be exempt from the fairness test – namely, those describing the main subject matter and setting the price, provided these are clear and prominent. There is also an exemption for wording covered by law or rules, for example words that legally have to be used.

Certain terms and notices are blacklisted by legislation as unsuitable for use with consumers in any circumstances. These terms can be challenged on that basis, without needing to prove that they fail the fairness test.

The sections below provide a starting point for understanding some of the common types of terms where unfairness can arise. They cover the following areas:

  • deposits, advance payments and cancellations
  • excessive charges and financial sanctions
  • cancelling a contract – when and how
  • responsibility if things go wrong
  • changing the terms of a contract
  • subscriptions and automatic rollover
  • other terms that may be unfair

Would you be able to spot a potentially unfair term? Take our short quiz to find out.

Plain and intelligible

All contract terms and notices must be transparent. Not only must you use easy-to-understand, legible and plain English but wording used must allow your customers to make informed choices.

Up-front and open

It’s important to be up-front about important terms that could have a significant impact on your customers. Take extra steps to bring these types of terms to their attention.

Common myths about contract terms

A contract term and notice has to be fair to be legally binding on your customer. If it isn’t, they can challenge it – including in court if necessary. Enforcers (such as the CMA and Trading Standards) can also bring cases to stop you using it.

“If I decide to cancel the contract, it’s ok to include terms which allow my business to use advance payments to make up for all lost revenue”

A term which allows you to cancel the contract, whatever the circumstances, and states no refund is available is likely to be considered unfair. Where there is no fault by your customer and the contract is ended by you, the customer may well have a right to a refund.

“It’s ok to use terms that ‘penalise’ a customer for breaking a contract”

If your customer cancels and it’s not your fault, you’ve got the right to protect yourself, but what you keep must take into account what your business is actually losing as a result. It must not be excessive.

“I can use contract terms to limit my liability for some things – I can’t be held responsible for everything”

Any terms limiting your liability must be fair and you can’t use your terms to take away or limit your customer’s statutory rights.

“I’ve copied this contract from a bigger business, we’ve used it for years so it must be ok”

You can’t assume that terms in a contract you’ve borrowed and adapted are fair. In any event, what applies to one business won’t necessarily be appropriate for yours – so you must check and update your terms, seeking legal advice if necessary.

Legal terminology should be avoided. Terms must be clear and a customer must be able to understand them.

“You can hide things in the contractual small print”

You must make it easy for customers to read the important terms in a contract and highlight anything that could come as a surprise or may have a significant impact on them. Otherwise the term may be unfair and unenforceable.

Top tips when writing your contract terms

When writing your terms, put yourself in your customers’ shoes. Think about how they might read and access them.

Here are some of the main things to consider to help you communicate with your customers clearly and avoid unnecessary disputes:

  • Respect your customer’s interests – don’t use terms you wouldn’t like to sign up to yourself.
  • Avoid ambiguity – ensure that your terms are not open to a number of different interpretations.
  • Be open and fair – don’t hide important wording or use ‘small print’ that might surprise or mislead your customer. Wording that has a significant impact for customers should be particularly drawn to their attention.
  • Use ordinary words and avoid legal jargon or technical language. Put yourself in the shoes of your customer to make sure the effect of the term is likely to be understood by them.
  • Consider whether your written contract is reader-friendly (for example, are terms legible? Are short sentences and subheadings used?).
  • Consider whether terms describing the contract’s main subject matter and those setting the price (ie the essential obligations of the contract) are specifically brought to the customer’s attention as well as easy to understand.
  • Take particular care with terms that could potentially work against your customer, for example, terms that:
    • limit your liability if things go wrong
    • transfer risks to your customer that they can’t control
    • allow you to make changes to the contract
    • allow you to keep deposits and advance payments
    • impose financial sanctions on your customer (eg cancellation fees)
    • automatically renew your customer’s contract

Having clear and fair terms in your contract will:

  • save you time
  • help prevent disputes and reputational damage
  • protect your business if something goes wrong

Deposits, advance payment and cancellation charges

Deposits are a customer’s way of reserving your goods or services. Advance payments help you to pay your business’s actual costs during a contract.

If your customer cancels and it’s not your fault, you’ve got the right to protect yourself, but what you keep must take into account what your business is actually losing as a result. It must not be excessive.

A term saying no refund is available in any circumstances is likely to be unfair. Where there is no fault by your customer and the contract is ended by you, your customer may well have a right to a refund.

Tips for writing fair terms

For example, your terms are more likely to be fair if:

Deposits and advance payments

  • a deposit is just to reserve the goods/services and is no more than a small percentage of the total price
  • advance payments reflect your expenses in carrying out the contract, and leave customers with a reasonable amount to still pay on completion
  • you hold any advance payments in a secure scheme so they are safely held until any dispute with a customer is resolved

Customer cancellations

  • customers don’t lose large advance payments they’ve paid up-front if they cancel, in all circumstances
  • when you are not at fault, you only seek to recover losses that you have reasonably incurred
  • you set non-refundable payments or cancellation charges so they reflect a genuine estimate of what you will lose directly because of the customer cancellation

Be clear with customers up-front about your deposits, advance payments and cancellation charges. Provide details of when these are required and why.

Terms that may be unfair include:

  • Making any substantial advance payments or deposits non-refundable, regardless of the customer’s reason for cancelling.

Example: “If you cancel the event, we cannot provide a refund in any circumstances.”

  • Keeping payments to cover your costs and loss of profit when this could mean you get compensated for the same loss twice.

Example: “If you cancel this contract without justification, you must reimburse all of our expenses together with the anticipated gross profit had the contract been completed.”

  • Keeping all of a customer’s advance payments if they cancel when you are not at fault, even though you could reasonably reduce your losses (eg by re-selling what they have ordered and paid for).

Example: “If you cancel your trip, all advance payments are non-refundable regardless of the time of cancellation.”

Excessive charges and disproportionate sanctions

Terms that allow you to impose disproportionately high charges on your customers for breach of contract are likely to be unfair.

There is unlikely to be any objection to terms which, in plain language, make your customers pay for the financial losses that they have directly caused where they are at fault.

Another kind of financial sanction that could be unfair includes imposing a disproportionate cancellation charge on your customer if they decide to pull out of the contract early.

Other kinds of over-severe sanctions may also be unfair. For example, terms that allow you to use an enforcement method which could lead to a violation of your customer’s privacy or property rights.

Tips for writing fair terms

For example, your terms are more likely to be fair if:

  • you clearly explain how charges, which are payable when your customer is at fault, are determined
  • the amounts you ask for are reasonable, for example, consider your actual losses
  • you avoid words like ‘indemnify’ and ‘indemnity’ – these are legal jargon and customers are unlikely to properly understand them

Be clear up-front about any charges your customer has to pay if they are at fault, and how these are determined.

Terms that may be unfair include:

  • Allowing the business to decide how much is charged when the customer is in breach of the contract.

Example: “Failure to comply with the terms of this agreement may incur a charge, which will be determined by the company.”

  • Making a customer pay in full if they cancel early, without taking into account any savings to you for not having to complete the contract or being able to sell to another customer.

Example: “If you cancel this contract early, you must still continue to make all outstanding payments to us as per our agreement.”

  • Threatening sanctions which cannot, in reality, be imposed in the way indicated.

Example: “In default of payment we may enter any premises at any time to repossess the goods.”

Cancelling a contract: when and how

You may want to include terms in your contract that allow both you and your customer legitimate reasons for bringing the contract to an end.

However, if you cancel a contract you could leave your customer with significant problems and potentially facing costs. If this is the case, then a term which allows you to cancel the contract whenever you like is likely to be considered unfair, even if you provide refunds of any advance payments.

Your terms should not give your business excessive rights to cancel a contract, and your customer should not be unduly restricted should they wish to do the same.

What is said in this guide assumes that there are no special statutory provisions which give consumers cancellation rights, for example, those which arise in ‘distance’ or ‘off premises’ contracts.

Tips for writing fair terms

For example, your terms are more likely to be fair if:

  • they explain any right for you to cancel, so cancellation will not come out of the blue
  • where you cancel and your customer is not at fault, they give your customer a refund of any advance payments they have made
  • where using your right to cancel could cause the customer significant problems, it applies only where circumstances genuinely beyond your control make it impossible to carry out the contract as agreed
  • you agree to give reasonable notice before cancelling, except where there are ‘serious grounds’ for immediate cancellation which are clearly set out
  • there is nothing to stop your customer cancelling if you break the contract

Terms that may be unfair include:

  • Allowing you to cancel the contract whenever you want or without offering your customer any refunds of prepayments.

Example: “We reserve the right to cancel this contract at our discretion and without refunds.”

  • Stopping your customer from cancelling the contract in any circumstances.

Example: “You cannot cancel this contract at any time.”

  • Terms giving you excessive rights to cancel.

Example: “This contract shall remain in force for a minimum period of 12 months, unless we cancel it sooner, which we may do at any time.”

Responsibility if things go wrong

Terms which allow you to remove or limit your liability to your customers when you are at fault and things go wrong are likely to be unfair. This includes terms that prevent or hinder your customer from seeking redress (eg compensation) when you are at fault.

The law singles out terms that take away or reduce your customer’s statutory rights. They can be described as being blacklisted because these terms are never enforceable against your customers.

What are statutory rights?

Statutory rights include that:

  • goods must match the description given to them
  • be of satisfactory quality and fit for a particular purpose
  • services must be carried out with ‘reasonable skill and care’

For more information about what your customer’s statutory rights are (including those relating to digital content) and detail on blacklisted terms see Part 4 of the CMA’s main guidance.

Tips for writing fair terms

For example, your terms are more likely to be fair if:

  • your liability for loss or harm is excluded or limited only where you are not at fault
  • you do not put in place barriers that stop customers seeking redress (eg compensation)

Make sure your terms respect your customer’s statutory rights. Don’t use terms that take them away or reduce them.

Terms that may be unfair include:

  • Excluding or limiting your liability for any injury caused to your customer (or their death) which is your fault.

Example: “…equipment is used entirely at customers’ own risk.”

  • Excluding or limiting your liability for failing to perform your obligations.

Example: “management reserves the right to suspend the service without liability.”

  • Excluding or limiting the amount or the availability of your customer’s legal remedies (including compensation).

Example: “If we [the business] are at fault, we accept liability up to the value of the goods only.”

  • Excluding your customer’s right of ‘set-off’. (These are terms that don’t allow your customer to withhold payment if they have an arguable claim against you under the contract).

Example: “Payment may not be withheld because of any alleged defect.”

  • Excluding or limiting a customer’s statutory rights for reduced price goods.

Example: “Claims will not be entertained for ‘sale’ goods.”

  • Excluding or limiting your liability for delays.

Example: “We accept no loss or liability for any failure to meet the times and dates quoted.”

  • Using guarantee rights that are narrower or weaker than your customer’s statutory rights.

Example: “We will repair or replace (at our option) any item found faulty within 3 months.”

  • Terms putting in place barriers to seeking legal remedies.

Example: “Complaints cannot be accepted unless notified in writing within 3 days.”

Changing the terms of a contract

If you have a term that gives you the right to change elements of a contract after it has been agreed with your customer, this is known as a variation clause. You might try to use this type of term to adapt a long-term contract if the circumstances around it change.

Variation clauses are likely to be unfair if they have the effect of a ‘blank cheque’, allowing you to adjust an agreed price at your discretion, or to change other important agreed aspects of the contract to suit yourself.

A term that gives you the right to make changes regardless of the consent of your customer may also be blacklisted in some circumstances by legislation. These terms may be challenged on that basis, without needing to prove that they have failed the fairness test.

Tips for writing fair terms

For example, your terms are more likely to be fair if:

  • you explain what, when and how a contract may change, so your customers can make an informed decision whether to enter the contract in the first place
  • you also give reasonable notice and a right to freely cancel, so your customer can go elsewhere if they are unhappy with the change, without being left worse off

Terms that may be unfair include:

  • Allowing the price of a product or service to be raised without seeking your customer’s agreement before doing so or being unclear as to what increases your customer can expect.

Example: “The price may be adjusted if costs relating to the order increase prior to delivery.“

  • Allowing the business to arbitrarily change the description or nature of the product from what was previously agreed.

Example: “All materials used may vary in colour and finish.”

  • Allowing the business to arbitrarily change the details about when/how a service will be delivered.

Example: “The company may make changes to the dates, times and content of its courses without prior warning.”

  • Allowing the business to change, at its discretion, any of its terms.

Example: “…the company may at any time vary or add to these conditions as it deems necessary.”

Subscriptions and automatic rollovers

Your customer needs to know how long their contract is due to run and how to cancel it (if they don’t want it renewed).

Terms that can be used to extend a contract beyond what your customer would normally expect may be unfair. The effect of these types of terms is to potentially tie customers into paying for something which they no longer want or need.

Tips for writing fair terms

For example, your terms are more likely to be fair if:

  • It is made clear to customers at the outset how their subscription or contract will be renewed and the contract requires that they are sent a reminder a reasonable time before it is due to be renewed. The reminder should include clear information about the terms of the proposed renewal of the contract and the reasonable steps customers need to take to stop the renewal, if they wish to.

  • They give your customers the right to cancel a contract once it has been renewed, without having to pay a cancellation fee, and any requirement to provide notice of cancellation is reasonable (ie it does not have the effect of tying the consumer into the contract unfairly).

Be clear with your customers up-front about how and when their contract will renew. Provide a reminder of what reasonable steps to take if they want to stop the renewal.

Terms that may be unfair include:

  • Automatically renewing your customer’s contract or subscription without requiring you to take sufficient steps to inform them before doing so.

Example: “This will be a rolling contract that will automatically renew unless you contact us 24 hours prior to renewal in order to cancel.”

  • Using excessively long notice periods to tie your customer in for another fixed term.

Example: “After expiry of the initial term, 3 months’ notice of cancellation is required…”

  • Imposing financial sanctions on your customer, which may prevent them from stopping a renewal.

Example: “If notice is given between 2 and 4 weeks before expiry, then 75% of the renewal fee for the subsequent year will become payable…”

  • Over-lengthy notice periods may also be unfair in a contract which lasts indefinitely. These can force customers to continue with a contract longer than they need or want to.

Example: “This agreement shall continue indefinitely. If you wish to cancel at any time, you must give us 6 months’ notice and continue your monthly payments up until the expiry of the notice period.”

Other terms that may be unfair

The sections above provide a starting point for understanding some of the commonly occurring terms that can potentially be unfair in business-to-consumer contracts, but this is not all that you should watch out for.

Other terms that may be unfair include:

  • Terms that bind your customer to hidden terms.

Your customer should have a real opportunity to see and understand all your contract terms before they sign up to them. If a term requires your customers to accept wording that they have not seen, the term could be challenged as unfair.

Example “…all orders are subject to our standard terms, which will be supplied with the goods.”

  • Terms that give you the ‘right of final decision’.

Your customers could be at a disadvantage when a term gives you the right to decide how the contract is interpreted or whether or not there has been a breach of it. These types of terms effectively allow you to change the way the contract works to suit yourself. They may also mean that your customer does not get the redress (eg compensation) to which they are entitled.

Example: “Any dispute or difference which may arise in regard to the interpretation of the rules shall be determined by the management, whose decision shall be final.”

  • Terms that restrict or prevent your customers from taking legal action.

Your customer should be able to seek redress (eg compensation), ultimately in the courts, when you are at fault. These types of terms may also be blacklisted by legislation as unsuitable for use with consumers in any circumstances.

Example: “Any dispute that cannot be resolved will be referred to arbitration.”

  • Terms that exclude or undermine special rights.

For example, rights relating to the confidentiality of a customer’s personal information or their rights when they enter ‘distance contracts’ such as buying online.

Example: “I hereby waive my rights under the Data Protection Act…”

  • Terms denying liability for statements made by agents or employees (entire agreement clauses). There is scope for abuse if a business can argue that it isn’t bound by oral promises made by its employees or sales agents. In some cases, a term that has this effect may also be blacklisted by legislation.

Example: “The company accepts no responsibility for any verbal claims or offers made by its distributors or agents in conjunction with this offer.”

  • Terms that reserve your right to transfer an agreement to someone else without getting permission from the customer first. This is particularly true if the third party could provide a poorer quality product or service.

Example: “We may at any time transfer this agreement to a third party.”

  • Terms that unduly restrict a customer from transferring their rights under the contract.

Example: “This guarantee is personal to the customer and may not be transferred to anyone else.”

  • Terms that try to make your customer bear inappropriate risks particularly when you can insure against these and your customer cannot (or at least not cheaply and easily).

Example: “The customer will pay for any damage caused to the company’s equipment caused by adverse weather conditions…”

  • Terms that allow you to impose excessive burdens or requirements on your customers. Especially wording that could allow excessive and unexpected financial burdens.

Example: “We may at any time require payment of such security deposit as is deemed necessary.”

  • Requiring a customer to make disadvantageous declarations.

Such as asking them to confirm they have ‘fully read and understood’ your terms and conditions. The purpose behind this is to bind customers to the terms of a contract regardless of whether they have any real awareness of them or not.

Example: “I confirm that I have read and understood the conditions of sale overleaf.”

For further information on these types of terms, see the CMA’s full guidance on unfair contract terms.

Please note, these materials are not a substitute for the legislation itself or for seeking independent legal advice. They provide an introduction to the CMA’s views, but it is ultimately for the courts to apply and interpret the legislation.

Published 23 March 2016