English law recognises the concept of freedom of contract; that parties are free to agree the terms of a contract as long as those terms are not illegal. The justification for this is that freedom of contract promotes commercial flexibility and free trade. There are limits to this doctrine however and one of the most important limits in the context of commercial contract law is the Unfair Contract Terms act 1977 (‘UCTA’).
UCTA does not apply to all contractual terms: in a commercial context it will only apply to attempts to exclude or limit liability where parties contract on one party’s standard terms and conditions. Terms to which UCTA does apply are subject to a test of reasonableness.
When deciding whether a term is reasonable it is necessary to refer to section 11 and schedule 2 of the act which together constitute the reasonableness test. Section 11(1) states that a term must be reasonable in all the circumstances “which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”. S. 11(2) then refers the reader to schedule 2 which contains a series of further considerations to assist a court in determining whether a contract term is reasonable. These considerations include:
- The strength of the bargaining positions of the parties relative to each other;
- Whether the customer received an inducement;
- Whether the customer knew or ought reasonably to have known of the existence of the term;
- Where the term excludes or restricts any relevant liability;
- Whether the goods were manufactured, processed or adapted to the special order of the customer.
Which of these considerations are relevant will course depend on the nature of the contract. Further factors such as whether the parties received legal advice will also be relevant to any assessment. In Watford Electronics Ltd v Sanderson CFL Ltd  EWCA Civ 317, the Court of Appeal held that a court should be very reluctant to intervene and declare a term unreasonable (even where the term was prima facia unreasonable) where the parties had received legal advice on contract before the agreement was finalised.
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