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The recent case of Blu-Sky Solutions -v- Be Caring Limited [2021] highlighted the issue of onerous terms in a contract between commercial counter-parties. Richard Woodward, associate solicitor in Bray & Bray’s Dispute Resolution team unpicks the concept of onerous terms, describes the case, and explains what the outcome means for businesses.

The law has long recognised that consumers should be protected from particularly onerous terms hidden in the terms and conditions of businesses they contract with. Lord Denning famously introduced his ‘red hand’ rule in the case of J Spurling Ltd -v- Bradshaw [1956] EWCA Civ 3 when he said: “I quite agree that the more unreasonable a clause is, the greater the notice which must be given of it. Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.”

The reason for this is pretty simple. The bargaining power in such contracts sit with the business – the corporate body which can have more influence and financial backing than the consumer. As such, if they wish to exert that influence in contractual dealings, by insisting on terms and conditions that seem overly burdensome, they must do all they can to bring it to the attention of the consumer. As Lord Denning said, these clauses should be in red text with a red hand pointing at them.

However, what is the position where both parties are corporate bodies? Where it is not the ordinary consumer that has agreed to an onerous, hidden, term but rather a limited company? Such a question was looked at in Blu-Sky Solutions -v- Be Caring Limited [2021] EWHC 2619 (Comm).

The case

In Blu-Sky, the defendant company had agreed to purchase 800 mobile phones from the claimant company on 14 February 2020. Only 12 days later, the defendant elected to cancel the contract. The claimant argued that its terms and conditions had been incorporated and clause 4.6 stated the following:

In the event that a customer cancels an order prior to connection following a purchase order is sent … then Blu-Sky-Solutions Ltd shall be entitled to charge the customer an administration charge of £225 per connection … For the avoidance of doubt if you are a business customer there is no 14-day cooling off period unlike consumer regulations.”

Further, the claimant sought to rely on clause 4.8 which stated:

The customer will use their best endeavours to assist Blu-5ky-Solutions Ltd in obtaining PAC codes if necessary from their existing supplier/network. Should Blu-Sky-Solutions Ltd not receive the PAC codes to complete the porting process for whatever reason, including change of mind, the customer agrees to pay Blu-Sky-Solutions Ltd the sum of £225 per connection not completed.

A quick calculation confirms that the claimant, under its terms and conditions, would be entitled to £180,000, being the administrative charge of £225 multiped by the 800 ‘connections.’ Whilst the defendant made several contentions in its defence (including not believing the contract was a contract – rather heads of terms – and the fact the T&Cs were not incorporated – which was rejected), the defendant also argued that clauses 4.6 and 4.8 were unusual and onerous and amounted to penalty clauses.

The judge agreed that clauses 4.6 and 4.8 were penal in nature; the penalty for cancelling, as an example, was out of all proportion with the legitimate interests of the claimant. It did not compensate for the defendant’s losses – it essentially acted as a windfall.

Even if the clauses were not penal in nature, because they were unduly onerous, the judge felt that they should have been reasonably brought to the attention of the defendant. Accordingly, in summary, the judge found that:

  • the clauses relied upon were not incorporated into the contract, since they were unduly onerous clauses which were not fairly and reasonably drawn to the defendant’s attention;
  • even if they were incorporated, they are penal clauses and thus void; and
  • the claimant cannot succeed on any fallback claim to recover its – much more modest – actual loss on the cancellation.

The ‘red hand rule’

This goes to show the ‘red hand rule’ is not something confined to the protection of consumers and therefore parties should consider, when drafting their terms and conditions, that any clauses that could be seen as onerous should be highlighted and not hidden away. In this matter, the claimant believed it was entitled to £180,000. In the end, in all likelihood, it has now had to pay the defendant a sizeable sum in costs after losing at trial.

 

Whatever the size or type of dispute, the team at Bray & Bray is here for you when business transactions go wrong. Contact our dispute resolution experts for advice on the best way forward.