Does the Unfair Contract Terms Act apply to you?: Opinion
A recent court judgment may have far-reaching consequences on the certainty of a wide variety of commercial bargains.
Imagine you are a co-working operator who leases out large office spaces to sizeable businesses.
One of your members is a multi-national cybersecurity business. It has offices in Singapore, Bangkok, Geneva, Lausanne, Paris, London and New York City, with the financial muscle to sign a 2-year lease with a monthly rent of almost S$100,000.
It has just closed a funding round, raising US$12 million; surely, it would have the means to hire lawyers to tailor the lease agreement to its unique needs.
For example, it would have negotiated for a protected server room and a secure Internet connection.
However, a Black Swan event - the Covid-19 pandemic - hits. Despite your best efforts and due to factors completely out of your control, you were late in providing the space.
Attempting to back out of the contract, your member sues you. The court then rules that your member is dealing with you "as consumer" under Unfair Contract Terms Act (UCTA), or on your "standard terms of business", and finds that some of the contractual terms were unfair to it.
These "unfair" terms include your ability to substitute other premises in place of the designated location and the stipulation that, even if membership were terminated, the member has to pay the full 2 years' fees.
The court disallows you to enforce these terms, leaving you without recourse against the member on matters you had bargained for at the outset, on terms that reflect market practice among commercial landlords.
Why this ruling is surprising
Standard form contracts are widely used in modern business relationships, big and small, because they facilitate the conduct of trade most efficiently.
They are often needed in establishing consistency for parties, in particular for routine and repeated transactions, even where the counterparties are big boys who regularly enter into complex technical and legal transactions.
They are seen frequently in leasing, banking, construction, shipping and international trade contracts.
You would encounter one as a traveller when you buy a plane ticket from an airline, or as a chief financial officer when you sign a loan from a bank.
UCTA was established to protect consumers - typically individuals or small businesses - who have no choice but to enter into contracts on the standard terms of businesses with stronger bargaining positions, to protect them against contractual oppression of unreasonable terms.
In particular, UCTA allows courts to intervene by re-allocating contractual risks when such businesses try to insert unfair exclusion and liability clauses in their standard form contracts.
But if UCTA sounds like it protected only the man-on-the-street consumer, think again.
In the recent case of Dathena Science v Justco, where a cybersecurity firm member successfully invoked various UCTA arguments to prevent its co-working operator landlord from enforcing certain clauses in their contract, the Singapore High Court appeared to signal that UCTA does not only apply to business-to-consumer (B2C) contracts.
The upshot: business-to-business (B2B) contracts between sizeable companies that can, and do, take legal advice on their contracts could now fall within UCTA's remit.
If the penny has not dropped yet, this means that the Dathena case has far-reaching and unexpected consequences for the business world.
Dealing as a consumer or on standard terms of business
In general, UCTA applies when one party to the contract is either dealing on the other's "standard terms of business"; or "as consumer", which it is deemed to do when the other party enters into such transactions "in the course of business". This phrase was not defined in the Dathena judgment.
The current case law on UCTA is sparse. In 2015, the Court of Appeal (CA) heard a dispute over a loan, from the buyer of a barge to its seller, which was meant to defray the vessel's build costs.
The CA opined that "in the course of business" conveys the concept of some degree of regularity, where the transaction is a "clearly integral part" of, and not just incidental to, the company's business.
In that case, the CA found the buyer did not usually make loans and hence was not dealing with the seller "as consumer". UCTA thus did not apply.
Additionally, the CA clarified what are considered "standard terms of business". The gist: they are a pre-existing set of written terms intended to be automatically adopted for particular transactions, without opportunity for negotiations.
Because the said loan agreement was drawn up specifically to deal with a situation where the seller could not pay the entire cost of the barge and thus the buyer had to specially extend credit, it was not on the buyer's standard terms, and UCTA did not apply.
These two findings imply that the test is very wide. Neither the size nor the expertise of the contracting parties are relevant to whether one of the parties is dealing "as consumer" or on "standard terms of business" under UCTA. Whether any of the parties had taken legal advice did not matter either.
In the Dathena judgment, the court held that UCTA applied on both limbs: namely that Dathena was a consumer and that its contract with the co-working operator was on the latter's standard terms.
This is a shock to the business community. It appears that significant contracting parties can invoke UCTA protections relatively easily.
It implies that any contract that a business enters into regularly in its course of business (such as leasing office premises) would fall within its ambit.
Further, if the business does not negotiate much, then it could be deemed to be dealing on the other party's standard terms.
What it means for corporates
Responding to a 2018 parliamentary motion that addressed the bargaining position imbalance between SMEs (small and medium-sized enterprises) and bigger players, Minister Indranee Rajah expressed that free market principles should apply.
The freedom of parties to agree to contract terms should be upheld, with the authorities stepping in only when necessary - for example, to address systemic market failures.
Heavy-handed interventions could lead to distortion or other unintended consequences. This philosophy has ensured that businesses, regardless of size, can respond quickly to market signals and adjust their business strategies accordingly.
It had led to Singapore's strong economic growth and forms the basis on which the corporate world conducts business.
Absent more clarity on the limited circumstances in which UCTA would apply to business contracts, Dathena is a significant curve ball. This is especially so because, no matter how large the companies, one party will always have less bargaining power than the other.
UCTA's legislative intent has always been to protect individual consumers from harsh terms contained in standard forms.
For example, when an individual purchases a printer from a computer shop, or buys a car from a second-hand vehicle dealer, and later finds that the buyer has no recourse when he ends up with a lemon with defects that the seller had known about.
Individual consumers might be taken by "unfair surprise" because they do not understand how certain harsh terms impact them.
The same "David and Goliath" argument does not apply when a giant like Amazon deals with another behemoth like Google, for example.
But if courts send the normative signal that they will intervene to substantively alter the bargain struck in B2B contracts, this will cause market uncertainty, distortion and eventually inefficiency, to the detriment of all.
Landlords, for example, may factor in this additional risk by raising rentals. Companies may be forced to hire lawyers to negotiate even market-standard contracts to avoid UCTA's application. Business costs will go up, which is bad news for consumers.
The Dathena precedent is controversial for these reasons. It comes at a critical juncture, as Covid-19 support measures will soon end, potentially opening the floodgates for other businesses to annul contracts, citing the same arguments as Dathena.
It is hoped that more judicial light will be shed on the circumstances in which UCTA will apply, because clarity of terms and the integrity of a contract's conditions are the lifeblood of how the Singapore corporate world does business, and crucial for our continued development as an international legal hub.
- The writer is director, disputes practice, at TSMP Law Corporation
Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.