Many contracts will include ‘Boilerplate clauses’ (standard clauses which are familiar to many contracts) and often included in these is a ‘severance clause’.
These operate when a clause of a contract, or element of that clause, is found to be / becomes unlawful – it is then treated as removed or modified (subject to the wording of the severance clause) to protect the balance of the agreement.
These are obviously helpful clauses to include, particularly where a party does not review their terms and conditions regularly (say in the event the law has changed since it was first drafted), but can lead to uncertainty for a contracting party particularly if they are unaware that a clause is now unlawful / unenforceable and had been hoping to later rely on it.
Other forms of boilerplate clauses include ‘Choice of Law / Governing Law’ clauses (being what law applies to the contract) and ‘Jurisdiction’ clauses (being which courts have jurisdiction to hear any dispute). Before a party starts to argue a clause is unenforceable, it is important that they understand which law applies as what may be unlawful in one jurisdiction will not be in another.
If there is no governing law clause, then other tests will apply to give guidance on the applicable law; sometimes the answer will be obvious, and other times not.
There are very few areas in English law where damages could be argued as ‘punitive’ – they are designed to right a wrong and prevent an innocent party from suffering harm arising from a breach by a contract-breaker.
Where a contract provides for specific damages to be paid arising from a breach, reasonably a party may expect that they can rely on that clause and that is the end of the story. This may not be the case, and penalty clauses are one example of this.
The law surrounding penalty clauses has developed over many years, and the leading judgment from the Supreme Court, in Cavendish Square Holding BV v Talal el Makdessi; Parking Eye Limited v Beavis [2015] UKSC 67, held that whether a clause was a penalty clause would be:
“whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest the innocent party in the enforcement of the primary obligation …The innocent party can have no proper interest in simply punishing the defaulter….”
Contracts will still often include a ‘liquidated damages clause’ which are generally enforceable – but as to whether that clause could be argued to be a penalty clause (and not enforceable) will be fact sensitive, and subject to whether or not the damages sought are proportionate to any legitimate interest an innocent party may have.
As such, a defaulting party, or enforcing party may want to seek advice both on the enforceability of any such clause and the quantum of any damages sought, before entering into costly litigation.
Subject to the type of arrangement, and between which parties, there may be arguments that a contract term is ‘unfair’ and as such unenforceable.
Consumer contracts are subject to specific legislation, including rules around transparency and ensuring it is understandable to the individual.
For business-to-business contracts the rules are slightly different, and clauses which seek to limit or exclude liability remain subject to the Test of Reasonableness contained in the Unfair Contract Terms Act 1977.
A fundamental point for any party looking to rely on an argument of an unfair term however should always be to remember that just because a term is not commercially beneficial for them, it does not in itself mean that it is unfair for the purpose of being unenforceable.
Whether you are looking to recover money, goods, compel a party to comply with a contractual obligation, defend against allegations of breach of contract, or are seeking to extract yourself from a contract you now cannot comply with, Bishop & Sewell have a team of lawyers able to advise you on the options which are available to you.
Whether you are looking to recover money, goods, compel a party to comply with a contractual obligation, defend against allegations of breach of contract, or are seeking to extract yourself from a contract you now cannot comply with, Bishop & Sewell have a team of lawyers able to advise you on the options which are available to you.
