Maybe your standard terms are ineffective. Here’s why

Maybe your standard terms are ineffective. Here’s why

Business entities often have their own standard terms and conditions at hand. These terms are often drafted carefully by legal professionals with the purpose of protecting the rights of issuer. However, over-protection of one party’s benefits may come at the expense of the other.

For example, a procurement manager told me that the legal manager in her company embedded a limit of liabilities into the standard terms. In this clause, the company shall only pay the supplier up to 50% of the damages caused by the company’s non-conformance. Of course, no suppliers liked this clause. They protested strongly against such unfair term.

When situations similar to above example arise, many countries (and model law) have legislation to deal with it, especially in case of business to consumer transactions or standard terms are being used between two businesses. The following are some of examples of such regulation:

Other countries (such as Botswana, Kenya, Malaysia, Nigeria, South Africa, etc) also have similar regulations on unfair contracts, but only limit the scope of these regulations to consumer scheme. 

According to these regulations, if a clause within the standard terms in use is considered as ‘unfair’, the clause will be ineffective (or the other party will be entitled to avoid the clause). At court, the clause that is deemed to be unfair will undergo a ‘reasonableness’ test or an ‘unfairness’ test. Though this type of test varies from country to country, there are still some common requirements among different legislations:

  • Is the contract term was written in clear, plain and intelligible language? If not, it can be considered as unfair and thus ineffective.
  • Does the party giving the terms gains an unjustifiably excessive advantages due to the contract terms? This question is the cornerstone of regulations on unfair contracts. The decision on excessive advantages depends on the specific wording of the contract. If the answer is yes, the term will be ineffective. The following clauses are often seemed as unfair:
    • The clause that enables a business to alter unilaterally without a valid reason any characteristics of the goods, other assets or services to be provided
    • The clause that requires the other party who fails to perform his or her obligations to pay a disproportionately high amount of damages
    • The clause that obliges the other party to fulfil all his or her obligations where the business fails to fulfil its own.

However, unfair terms can still be valid if they are based on provisions of applicable law. 

After all, you must always be careful about using your standard terms. Putting excessive burdens on your supplier/customer may backfire. On the other hand, knowing about unfair contract regulation may help you business deal with standard terms & conditions provided by powerful suppliers, banks or insurance companies. Promoting good faith and fair trade practice is a thing that procurement professionals should do.

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