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Cancellation Fees in a contract: are they enforceable?

A recent High Court decision held that onerous and unfair terms within the suppliers standard terms could not be enforced against a commercial customer.

In Blu-Sky Solutions Ltd v Be Caring Ltd a supplier’s standard terms and conditions were referenced in an electronic order form. The court said that a cancellation administration charge within the terms was onerous and unfair and was unenforceable as it had not been drawn to the attention of the customer.

What happened?

The agreement was between a mobile connections supplier and a social care provider. The contract was for the supplier to supply the care group with connections for 800 mobile phones.

The supplier’s standard terms and conditions included a provision that in the event of cancellation before connection it was entitled an “administration charge”. The supplier argued that their standard terms and conditions had been incorporated into the contract by the care provider signing an order form which made reference to these terms and conditions.

After signing the order form, the customer informed the supplier that they wanted to cancel the order. This led to the supplier seeking a cancellation fee of £180,000 plus VAT. This equated to £225 for each of the 800 mobiles.

The customer argued that there was no binding contract as the terms which the supplier sought to rely on were too unusual and onerous to be enforceable. They contended that these terms ought to have been brought to their attention and that the suppliers had not experienced any loss from the cancellation.

What did the court decide?

The court held that because the cancellation fee had not been brought to the attention of the customer it had not been properly incorporated into the contract. Judge Davis ruled that for this term to be enforceable the supplier needed to highlight the term and bring it to the attention of the care provider.

Judge Davis stated, “If the principle is all about the incorporation and the adequacy of notice, then it is reasonably straightforward to understand why a term included in a signed contract will have been adequately brought to the signing party’s notice in all but extreme cases.” However, where terms are ‘unduly onerous’ the party supplying the contract must draw these terms to the attention of the other party in order to rely on them.

The court went on to say that even if the terms had been incorporated, they were penalty clauses and would have been void. This was in light of a case in 2015 where the court held that penalty clauses would be void where the clause is unconscionable, exorbitant or extravagantly disproportionate to the interest being protected. The terms in the supplier’s contract had clearly met the threshold of that test.

Judge Davis remarked that, “the obligation to pay the administration charge …is in reality no such thing but in fact a hugely inflated compensation for loss of profit”.

What lessons can be learned from this case?

Courts will not look favourably on unduly onerous terms buried within contracts and where they are not drawn to the attention of the customer whether that customer is a consumer or a commercial entity. This judgment is a reminder to companies wishing to incorporate onerous terms to be aware of the risks involved if such terms are incorporated such as the courts striking them down.

If you find yourself in a situation where you need advice on drafting your contracts or where your terms and conditions are being contested, our team of commercial lawyers and commercial litigators may be able to help. Contact one of our specialists to find out more.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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