Contractual fundamentals: incorporating standard terms and conditions by reference, onerous clauses, and the principles of good drafting

This case from the High Court provides a number of useful practice points for when you are entering into a contract on standard terms and conditions incorporated by reference. How do you successfully incorporate them? What about unusual and/or onerous clauses? How bad is bad drafting?

In this case, Blu-Sky Solutions Limited (the Claimant), was a provider of package deals of mobile phones and network contracts (for example, with EE or O2). Be Caring Limited (the Defendant), was a social care provider. The parties entered into discussions about the provision of 800 phones and network connections for the Defendant’s staff. Following these discussions, the Claimant sent the Defendant an order form which detailed the package deal. The bottom of the form stated that all orders were subject to the Claimant’s standard terms and conditions. The form also stated that by signing the form, the Defendant agreed that it had read the terms and conditions on the Claimant’s website and would be bound by them.

Without having read these terms and conditions, the Defendant’s CEO signed and returned the order form. Yet, before the Claimant supplied any phones or network connections, the Defendant sought to cancel the order. The Claimant highlighted that clause 4.6 of its standard terms and conditions provided for a £225 cancellation fee per mobile phone connection – a total cancellation fee of £180,000 plus VAT. The Defendant refused to pay this fee and the Claimant commenced proceedings. 

The case turned on four issues:

1. Whether the signed order form had contractual force.
2. Whether the standard terms and conditions were incorporated into any contract.
3. Specifically, whether the cancellation fee clause was incorporated (as an unusual/onerous term).
4. If the clause was incorporated, whether it would be void as a penalty clause anyway.

On issue (1), Davies J found that the Defendant’s signing of the order form resulted in a binding contract with the Claimant.

On issue (2), the judge applied the principle that where terms and conditions are not contained within a signed contract, they must be sufficiently brought to the attention of the other party to be incorporated. In the case of online terms and conditions, reference to the website containing the relevant terms and conditions would suffice (as was the case here). Where a website contains multiple sets of terms and conditions, it must be made clear which set applies. It was immaterial that the Defendant’s CEO had not bothered to read these terms and conditions.  While the terms were incorporated, it was a close call, with Davies J noting that they had only just scraped past this threshold: the order form merely provided a link to the company’s website and customers would have to scroll to the bottom of the homepage to find the correct document. The fact that a number of different terms and conditions were set out on the Claimant’s website, each of which applied to different types of transaction, was also highlighted as not good practice. 

Issue (3) was a key point of contention. Davies J noted the rule from cases such as Interfoto Picture Library Limited v Stiletto Visual Programmes Limited [1989] 1 QB 433 and Bates v Post Office (No. 3) [2019] EWHC 606 (QB) which asserts that the more unusual and / or onerous a term is in a document which has been incorporated by reference, the more attention must be drawn to that particular term for it to be incorporated. The term cannot be “buried in the small print” (think back to Lord Denning’s "red hand" judgment from your law school days). Whilst it was not unusual to provide for cancellation fees, this particular term was deemed onerous because the exorbitant fee bore no relationship with any loss the Claimant could potentially incur. And because it was onerous, it needed to be sufficiently brought to the Defendant’s attention, something that had not happened. In fact, the judge found the Claimant had “positively obfuscated” this term in a number of ways. The order form provided no indication that the terms and conditions contained such a punitive cancellation policy. Within the actual terms and conditions, the cancellation fee had been “cunningly concealed in the middle of a dense thicket which none but the most dedicated could have been expected to discover and extricate”. Finally, it was noted that the Claimant had neglected its industry Code of Practice which obliged suppliers to inform customers about early cancellation fees.

Moreover, addressing issue (4), Davies J stated that even if the term had been incorporated, it would have been voided as a disproportionate penalty that served no purpose but to frighten the Defendant into remaining in the contract.

Practice points

There are several useful practice points which can be drawn from this case.

First, while external terms and conditions can be incorporated via notice, it is important that the other party to the contract is provided with a clear and accessible route to those terms and conditions. If your business has multiple sets of terms and conditions, you must label them so it is clear to customers which set will apply. If you do not wish to include the terms and conditions in the order form itself or send them directly to the customer (both good practice for avoiding protracted arguments about incorporation), then the best approach would be to provide a direct hyperlink to the relevant terms and conditions in the main order form.

Second, the onerous clause issue serves as a useful reminder of the importance of competent drafting. Even if you have taken sufficient steps to incorporate external terms and conditions by reference, if they include onerous and / or unusual clauses then you do need to bring them to the customer’s attention. In this case, the Claimant had done the opposite and deliberately obscured the (severe) cancellation fees policy. While there is no need for a customer to actually read your standard terms (and let’s admit that few do), the terms themselves should help and not hinder customers who do. Using clear clause headings, sub-clauses, and sensible distinctions between provisions, rather than lumping them together in ill-defined paragraphs, are all good practice. Identify any onerous or unusual clauses and (subject to the point below) make sure you take positive steps to draw them to a customer’s attention. For example, you could: mention it on the order form or at the top of the terms and conditions, use bold text for the clause itself or use explanatory boxes (“please read this section carefully because…”). It is also worth bearing in mind that this issue largely falls away where a contract is signed.

Third, do not forget the rule against penalties. Drawing sufficient attention to a clause will be of no use if it still amounts to a penalty clause. The reminder here is to try and exemplify a rationale for the sum to be paid – the more this can be done, the less likely it may be found to be an unenforceable penalty.

Fourth, companies should be aware of any industry codes of practice which provide guidance on drafting standard terms and conditions. In this case, the Claimant’s complete neglect of the Code of Practice for mobile service providers proved a relevant factor in the assessment of their inadequate conduct.

If you require further information about anything covered in this briefing, please contact Paul Jones and Ethan Ezra or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2021