English Commercial Court judgment is a reminder not to bury onerous terms within standard Terms & Conditions even in B2B contracts

Background

The claim was brought by a supplier of mobile phones (Blu-Sky) who acted as an intermediary in the provision of telecom services. The defendant, a social care provider, agreed that Blu-Sky should provide connections for 800 mobile phones for a minimum period of 48 months for a monthly rental of £9,600. Blu-Sky had an agreement with EE to be the network provider for its mobile phones.

The defendant signed an order form which purported to incorporate, by reference, the STCs. The STCs contained a clause, numbered 4.6, which stated that if a customer sought to cancel before the connection of the telecom services with the network provider, the customer would be subject to a £225 ‘administration charge’ per connection. The defendant elected to cancel the order after the order form had been signed but before connection of the telecom services with EE. Blu-Sky claimed it was owed £180,000, being the £225 administration charge for each of the 800 connections. On the narrow facts of the case, the claim failed.

Should Clause 4.6 have been specifically pointed out to the Defendant?

Although the judge did accept that the STCs had been incorporated into the contract as they had been brought to the attention of the defendant in the email correspondence between the parties and it was relatively easy to find them on Blu-Sky’s website, the judge held that clause 4.6 of the STCs, as well as a number of others, should have been specifically brought to the defendant’s attention because of its onerous nature.

The judge reiterated the settled principle that a condition which is “particularly onerous or unusual” will not be incorporated into the contract, unless it has been fairly and reasonably brought to the other party’s attention[1]. In this case, the ‘administration charge’ bore no relation to any actual administration costs incurred by Blu-Sky, nor any actual loss. Furthermore, “the offending clause itself was … cunningly concealed in the middle of a dense thicket which none but the most dedicated could have been expected to discover and extricate”[2] with no attempt made by Blu-Sky to draw it to the defendant’s attention before the order form was signed. The judge stated that, to his mind, this case came “close to a misrepresentation case[3]” due to the clause’s concealment within a detailed set of terms and conditions which made it hard to distinguish important clauses from unimportant ones. He further found that that the way the STCs had been referred to in the email containing the order form gave the impression that the defendant was taking the first step to entering into a commercial relationship with EE rather than a fully-fledged contract with Blu-Sky. Therefore, the clause was not incorporated into the contract even though the STC’s were.

Was clause 4.6 void as it was a penalty?

The judge then looked at the operation of clause 4.6. Whilst acknowledging that it was not strictly necessary to decide the issue considering his finding that clause 4.6 had not been incorporated into the contract, he decided to deal with the point in case the judgment was subject to an appeal. Citing the test set out by the Supreme Court in Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67, the judge held that clause 4.6 was penal in nature and therefore, void. The clause was out of all proportion to Blu-Sky’s legitimate interest in the performance of the contract and its actual loss. In summary the judge said:

“The obligation to pay the administration charge, which is in reality no such thing but in fact a hugely inflated compensation for loss of profit, cannot in any meaningful way be described as a conditional primary obligation. It is payable in circumstances where, through the claimant’s refusal to enter into the EE contract and take up the connections thereby secured, the essential commercial purpose of being of the contract between the claimant and the defendant has disappeared ”.[4] The same thinking applied to another clause where the £225 charge would apply if ‘best endeavours’ were not used to obtain PAC codes, (a code obtained from a network provider so that a customer’s existing number may be ported to another network). This clause was also held to be void.

What the judgment means for you

While this decision does not create new law, it is a helpful reminder that unduly onerous terms, especially if contained within a set of STCs, must be pointed out to a counterparty prior to the signing of any agreement. It is worth checking contractual processes to ensure that this is taking place. The direction does not need to be complex, and it is sufficient to say that “Your attention is drawn in particular to clause X”. The case also illustrates the danger of excessive administration charges. When challenged a court may decide that these charges are penal in nature and therefore void.

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[1] Coulson LJ in Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371 at paragraphs 29 - 38

[2] Para 111 in Blu-Sky Solutions Limited v Be Caring Limited

[3]Para 112 ibid

[4] Para 123