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Upholding contracting standards

Using a bespoke contract to exclude liability will only work if the terms are fair, says Greg Brownlee

Making assumptions in business can be fatal, and nowhere is this more true than in a
contract.

When implementing a bespoke term to exclude liability, take care. You may not be protected.

Contractors should familiarise themselves with the Unfair Contract Terms Act. Created in 1977, the Act restricts the use of exclusion clauses in contracts and while it is limited to contracts based on one party’s standard written terms, the terms of the UCTA still apply to most construction contracts.

In its simplest form the UCTA dictates that all contract terms must satisfy the requirement of ‘reasonableness’ Đ especially if they are to exclude or restrict liability in respect of a breach. To assess reasonableness, consider three key areas:

  1. The relative strength of the parties’ bargaining positions;

  2. Whether the other party received an inducement to agree to the terms now relied upon;

  3. Whether the other party ought to have reasonably known of both the existence and extent of the term.

There are clear examples of how the act has been applied, both to the benefit and the detriment of those involved.

The case of Expo Fabrics and Naughty Clothing (2003) is an interesting example.

The court of appeal deemed the term, which stated that any claim based on defective goods must be notified in writing within 20 days from delivery to be acceptable.

This period was seen as sufficient notice to inspect the textiles and raise any concerns. In short, if your trading terms follow industry norms then you are OK, but if they’re wide of the mark, you could be at risk.

For small builders that work directly for consumers, further regulations apply. For example, the Unfair Terms in Consumer Contract Regulations 1999 adds to the requirements of the UCTA.

Foul play

While standard forms or clauses may pass the reasonable test as ‘industry norms’, under the UTCC they might fall foul of Regulation 5.1.

Regulation 5.1 states that a contractual term that has not been individually negotiated will be regarded as unfair if it causes a significant imbalance in the parties’ rights and obligations. This regulation has been used to strike out adjudication clauses in standard form contracts.

Put simply, a contractor doing work for a consumer cannot expect to exclude or restrict their own liability on a project. This successfully eliminates the possibility of a contractor breaching the contract or delivering a different level of work than that which was originally agreed.

The only way to protect yourself is to use effective contract management, making sure that the terms included in a contract pass the ‘reasonable’ test.

You should also work in a clear and open fashion so that all parties are fully aware of any contractual clauses.

In addition to this, if you are a small company and your work falls under the UTCC then the extent of your contract terms must be clarified to the party you are doing work for.

Greg Brownlee is managing director of commercial and contract management consultant Blake Newport Associates