When lawyer and sage Frederick Sawyer defined a contract as an “agreement that is binding only on the weaker party”, he was happily unfamiliar with the Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR), both of which brought a measure of fairness, or interference depending on your point of view, to contractual relationships

But neither UCTA nor UTCCR brought simplicity or transparency and the Law Commission has set itself the welcome objective of achieving both in its recent Consultation Paper on Unfair Terms in Contracts.

The commission’s proposals are threefold: to consider the feasibility of a single, unified regime; to extend the scope of the legislation to cover the kinds of unfair terms in a business-to-business contract that are presently outside the scope of UCTA, but which, had they been in a consumer contract, would fall within UTCCR; and to provide clearer, more accessible legislation.

Recent cases have shown the court’s willingness to resist excessive judicial intervention in contracts entered into by commercial parties. In Watford Electronics Limited v Sanderson CFL Limited [2001], Lord Justice Chadwick made plain that where experienced businessmen of equal bargaining power negotiate an agreement, they should “be taken to be the best judge of the commercial fairness of the agreement”. The commission’s willingness to resist the temptation to seek to extend protection against “unfair terms” is welcome. The commission takes the general position that all contractual terms, other than those that continue to be of no effect in any circumstances, should be valid only if they are fair and reasonable.

In the Watford case, the Court of Appeal was of the view that the court should only interfere if the terms were so unreasonable that it could not have been properly understood. Developing the theme further, the commission recommends that not only should any new legislation provide detailed guidelines on the application of the ‘fair and reasonable’ test, but also guidance on whether a term is ‘transparent’, in the sense that, for example, it is reasonably easy to follow and read.

The commission is perhaps reflecting the concerns expressed by the House of Lords in Director General of Fair Trading v First National Bank Plc [2002], when it held that a term in a consumer contract would be unfair if the term causes significant imbalance in the parties’ rights and obligations to the detriment of the consumer, in a manner contrary to the requirement of good faith. The commission also invites comment on its proposal that the burden of proving that a term is fair in consumer contracts should always rest on the business – in-house counsel please note.

The commission strays from the Watford approach with its suggestion that business-to-business contracts should be subject to the same wide range of terms to which consumer contracts are subject under UTCCR. The commission argues that terms that make it hard for a business to cancel a long-term contract or commit to paying price increases, could be just as unfair as many of the clauses already covered by UCTA. And so they are, but where does that leave Watford?

Perhaps what really matters is the manner of negotiation of the contract, and the commission is on safer ground with its recommendation that individually-negotiated terms in business-to-business contracts, which under UCTA are subject to the requirement of reasonableness, should no longer be controlled. What should matter is whether the term has been ‘individually negotiated’ rather than whether it is ‘standard’. However, bearing in mind the case law that has been generated on whether negotiated amendments were sufficient to take a contract outside the ‘written standard terms of business’ test in UCTA, will the matters listed in the commission’s draft bill put the matter beyond doubt?

There should be universal support for the commission’s wish to unify and simplify the legislation. Its dual existence has attracted much criticism from lawyers and clients alike. Although the language of the UTCCR is simpler than UCTA, which is tortuously complex, it nevertheless reflects the formulaic directive from which it emanated. A bit of transparency in legislation, as well as in contracts, would be no bad thing.