Contracts: What to look for in the small print
What does it mean to sign a contract?
Hint - Just click on any complex legal terms to see their definitions!
It's pretty common for people when buying things online to tick a box acknowledging that they have read the terms and conditions, although they haven’t so much as glanced at them. In this article Leducate explains what it means to tick that box, or sign up to a contract of any kind, and what your rights and responsibilities are.
What is a contract?
A contract is an agreement between two parties who each make a set of promises to each other. A contract can be in any form, either verbally or written, but you have to be careful to consider how you might prove what was promised under the agreement if the parties later come to a disagreement. This is why all the most important contracts are written down and signed in front of witnesses.
Contract law allows individuals (or companies) to make any kind of agreement that they like (excluding ones that promise to do things which are illegal!). Contract law makes what otherwise would be simple promises legally binding. This is important as without the law to force people to keep their promises, people would not be able to do business. Shop owners would not be able to force people who promised to pay for items that they bought on credit to pay them back or customers wouldn’t be able to make sure that they could get their money back if they don’t receive items they ordered online. There are some very serious financial consequences that can come from breaking a legally binding promise, that will be explored below.
How important is it to read what you sign?
As a general rule, it is always a good idea to know what promises you are making and accepting, in as much detail as possible, before entering into a legally binding agreement with someone.
However, in some ways the law has got you covered. For those of you that don’t have time to read all the pages and pages of terms and conditions on every transaction you make, there is legislation (such as the Consumer Rights Act 2015) that exists to protect you against any ‘unfair’ promises or ‘terms’ that companies might try to sneak in there without you noticing.
What is an unfair term?
The law applies an open-ended test to judge whether a term that applies to a consumer is unfair or not. This is because a consumer is generally thought to be a weaker party (compared to online stores or physical shops - who might have millions of pounds to spend on drafting clever written contracts).
The “fairness test” asks whether the wording used in the wording of a particular legally binding promise, gives too much of an advantage to the trader rather than the consumer. It also questions whether the trader deals in “good faith”, which is a legal way of saying that they acted openly and fairly when negotiating with the consumer to agree on the promise. In considering the fairness of a term, factors such as the subject matter of the contract and the circumstances in which the term was agreed will also be taken into consideration.
For example if a company sells expensive mobile phones by knocking on people’s doors and offering them to sign up to contracts that promise to pay a lot of money every month for over two years and which give the customer no chance to change their minds, this could be considered to be an ‘unfair term’. However if a customer is offered an item in a shop at a significant discount because that item is on sale it might be considered fair for the shop to refuse the customer the usual option to get a refund (considering how cheaply they were offered the item) so long as the customer was told of this condition when they bought it.
If there is a term in an agreement between a consumer and a business that fails the ‘fairness test’ then that term will be unenforceable. That means that even though the consumer signed the contract they will not have to keep that promise, because the law has decided that it would be unfair for them to do so.
It’s important to note that this protection only applies where one party is a consumer and the other is a business. If both parties are operating as businesses (for example if you run an online business selling clothes and are negotiating with a clothing manufacturer) then the ‘fairness test’ is not applied. The law starts from the assumption that each business has an ‘equal bargaining position’ and don’t need any help from the courts in looking after their own interests. That’s why it’s always really important to make sure that you have done as much legal homework as you can (or get some advice if you can!) when starting your own business.
What happens if you break a legally binding promise?
Duration of a Contract
Contracts can last for as long as the two parties want it to. For this section we’ll use the example of a mobile phone contract.
Mobile phone contracts are typically signed for 24 months and come with an allowance of minutes, texts and data in exchange for a set price every month. Many of these contracts offer the customer a phone as part of the deal. Looking at it in simple terms: the mobile phone company promises to provide the customer a working mobile phone and a certain amount of usage while the customer promises to make the mobile phone company a monthly fee for 24 months. At the end of the agreement the customer can keep the phone and is free to end its arrangement with the company and the company is free to stop providing a service or change the usage it offers or even the price it would charge. However during the 24 months all the promises are frozen and binding on both parties.
If a customer decides that they want to end the agreement early they will have to check whether there is a ‘termination clause’ that allows them to leave early. Some mobile phone companies for example might allow a customer to leave as long as they pay them the cost of the mobile phone that was supplied and (for example) half of the contract price for the services that would have been provided. Other mobile phone companies do not allow early termination at all. In a situation where there is no ‘termination clause’ then the customer has no choice but to pay the mobile phone company all the money that it is owed until the end of the agreed 24 month period, as they promised when they entered into the contract.
Enforcement
In the example above, if the customer wants to leave the mobile phone contract (say 4 months into the agreement) and simply refuses to money for the 20 months left outstanding then the mobile phone company can sue them for the money they are owed. The mobile phone company will often write a series of letters to the customer demanding the money first, warning them that if they don’t pay up then they might end up in court. If the customer still refuses to pay then the mobile phone company will apply to the court using a claim form. The mobile phone company will have to provide proof that there is a contract and that the customer has failed to make their promised payments. The customer will be invited to go to a court hearing to explain themselves. If they do not show up, or the court agrees with the mobile phone company that the customer owes them money, then the judge will make a County Court Judgment against the customer giving them a short period of time to pay the money to the mobile phone company. If the customer still fails to pay the money that the court has ordered them to pay then the court will send bailiffs to their home address to seize goods (i.e. televisions, cars, computers etc) and sell them in order to recover the money that is owed.
Conclusion
We make legally-binding promises every single day; when buying coffee to using our mobile phones. It is important to know the consequences of breaking those promises but also to know the protections that you have if someone tries to force you into making promises that are unfair. If you ever find yourself facing a company trying to enforce a legally-binding promise that you think is unfair, its important to get legal advice as quickly as you can from a trust-worthy organisation.
Written by Janet Wong
What do the legal terms mean?
Parties - This just means the people that are included in the contract, for example when you buy a chocolate bar from a shop, the ‘parties’ in the contract are you and the shop.
Terms - This is the legal word for individual parts of the contract. Terms are the rules defined in the contract, such as ‘The chocolate bar costs £1’.
Consumer - This is just someone who is purchasing the product or item for personal use, like you!
Termination Clause - This is a ‘term’ that explains how the contract should end between the parties.
Seize - This is the term used when your items are taken from your possession, in this case to make up for the money you owe.