Battle of the Forms: Part 1

“Terms Agreed” – But whose terms?

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In a recent decision of the Technology & Construction Court, both sides lost out in a “battle of the forms” as to whose standard terms and conditions (T&Cs) applied. The case demonstrates again the dangers of assuming that your latest contract, or even a long-term business relationship is governed by your T&Cs.

FACTS

In Transformers & Rectifiers Ltd v Needs Ltd, the parties had been doing business for around 20 years on a weekly basis. The buyer, Transformers & Rectifiers Ltd regularly ordered nitrile gaskets from the supplier (Needs Ltd).

The buyer complained that two lots of gaskets were not fit for purpose and in breach of contract. There was a dispute to be decided as a preliminary issue as to whose terms applied and whether the supplier could rely on their exclusion clause to limit liability? The supplier contended that its liability was limited or excluded by its terms of sale.

The buyer gave orders by different methods, including by fax, email or post. Their standard T&Cs were printed on the reverse of their standard form purchase orders when sent by post. However, there was no reference to the terms on the face of the purchase order itself. When a fax or email order was sent, the back page wasn’t included.

The supplier acknowledged purchase orders by sending an acknowledgement of order that stated “The quoted prices and deliveries are subject to our normal terms and conditions of sale (copies available upon request)”. However, the supplier hadn’t ever sent their T&Cs to the buyer.

DECISION

The Judge, Edwards-Stuart J found that it was not obvious on reading the front page of the Order that the T&Cs were on the reverse. Also, because the buyer didn’t issue purchase orders in the same way each time, its standard T&Cs were frequently omitted as it usually sent only the front page of its purchase orders via fax or email.

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  1. The Judge found that neither parties’ standard T&Cs were incorporated into their contracts: neither side had done enough to draw the other’s attention to its standard terms. The commercial result was that the supplier could not rely on exclusion clauses within its standard terms, and the buyer couldn’t rely on their T&Cs either. He outlined the following broad principles:
  2. Where X makes an offer on its conditions and Y accepts that offer on its conditions and, performance follows (without more correspondence), on the assumption that each party’s conditions have been reasonably drawn to the attention of the other, there is a contract on Y’s conditions;
  3. Where there is reliance on a previous course of dealing it doesn’t have to be extensive. However, the course of dealing by the party contending that its conditions are incorporated has to be consistent and unequivocal;
  4. Where trade standard terms exist, it will usually be easier to persuade the court that they should be incorporated, provided that reasonable notice of those terms has been provided;
  5. A party’s standard terms will not be incorporated unless that party has given the other side reasonable notice of them;

COMMENT

Frequently, whose terms apply is a question of negotiation between the parties. A “battle of the forms” arises when two businesses are negotiating the terms of a contract and each party wants to contract on the basis of its own T&Cs. This often happens where e.g. a Buyer offers to buy goods from a Supplier on the Buyer’s standard terms and the Supplier purports to accept the offer on the basis of its own standard terms.

In this situation, the Court often decides that the battle is won by the side that fired the “last shot”, i.e., the last party to put forward T&Cs that were not explicitly rejected by the recipient.

If neither side’s T&Cs apply, as in this case, the contract is governed by the implied terms of the Sale of Goods Act 1979. Therefore the seller won’t be able to exclude or limit its liability for defective goods, which a seller can normally restrict by contract subject to the reasonableness test in the Unfair Contract Terms Act 1977.

The case provides a timely reminder that general words in purchase orders and other documents are insufficient to install a party’s T&Cs, unless a copy of the T&Cs are sent. Businesses should also note that e-mailing and faxing purchase orders or acknowledgements may result in T&Cs on the reverse not being included. 

ACTION POINTS

  • A business should ensure that its terms are incorporated into its contracts. To achieve this, terms and conditions should be provided with and/or referred to in pre contractual documentation, such as quotations and orders. A business that relies upon printing their terms on delivery notes or invoices (post contractual documentation) runs the risk that it will not be able to rely upon those terms should a dispute arise.
  • It is important to ensure that T&Cs are properly used in order to effectively incorporate them into the contract of sale so that the supplier is not exposed to increased liability. A well drafted set of terms and conditions will take into account the manner in which a business operates, and what it hopes to achieve.
  • Another post will explore additional steps that can be taken to gain the advantage in the Battle of the forms.

Case: Transformers and Rectifiers Ltd v Needs Ltd [2015] EWHC 269 (TCC).

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8 Ways to avoid a Business Dispute

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Despite the best of intentions on all sides, disputes can arise when entering in to a new commercial contract or business relationship. According to Government figures, between April and June 2014 a total of 370,744 claims were issued in the Civil Courts (excluding Family Cases). This was a decrease on the previous quarter, but that saw the highest number of claims since 2009. A significant number  relate to business disputes.

From long experience, the following ground rules should help to reduce the risk of things going wrong in a business contract, or if they do, ensure you are in the best position to protect your interests:

1 Contractual Terms

These are key to many disputes, and the outcome of claims often turns on what the contract says. The terms and conditions should be read carefully. Ensure that your terms and conditions are drafted or approved by a specialist contract lawyer with experience of your sector. It is essential that these are regularly reviewed and kept up to date, and of course, that the terms represent your understanding of what has been agreed.

Be careful about negotiations and representations made during pre contractual discussions. Although many statements will be just sales talk, others might be construed as a term of the contract.

2 Entire Agreement

This should ensure that the contract between the parties is contained in a single document. The aim is to prevent extraneous documents or communications being relied on e.g. statements or representations made during pre contract discussions.

3 Exclusion clauses

Exclusion clauses may seek to exclude liability for consequential loss, or limit liability to a specified figure. Consideration should be given to whether these are enforceable:

  • do they apply to the areas of dispute most likely to arise?
  • are they as wide as might be assumed?
  • exclusions of “consequential” or “indirect” losses might not apply to claims for loss of profits or other loss amounting to reasonably foreseeable direct losses, within the reasonable contemplation of the parties when entering in to the contract

NB: Under the “contra preferentum” rule, any contractual term which is unclear is interpreted against the party that wants to rely on it.fun-and-games-until-204943-sfreeimages

4 Deadlines

Be realistic about fixing deadlines and be circumspect about specific dates if possible. If it seems as though a date under a contract might be missed, a revised timetable should be negotiated and recorded in writing, before time runs out. Any such variation of the contract terms should be signed by both sides.

5 Dispute Resolution Clauses

You can specifically set out means of settling disputes before they arise, e.g., good faith negotiations, Alternative Dispute Resolution, or mediation stand every chance of resolving a dispute, whilst preserving relations with the other side. This could be crucial where a valuable supplier or customer is involved. Serious consideration should be given as to whether Arbitration, as opposed to court proceedings should be specified. This may often be inserted, without considering the pros and cons, because Arbitration is not necessarily simpler or cheaper than the courts.

6 Internal Communications

Take care over written internal communications, including by email and on any company and employee’s devices. This applies pre contract, and after the contract has been agreed. If a dispute arises, under the Civil Procedure Pre Action Protocols and court rules, all relevant internal communications have to be disclosed (unless subject to legal advice privilege – where lawyers are already advising as to a dispute).

7 Negotiations

Clear communications with your supplier or customer is essential too. Being assertive but not confrontational and having clear lines of communication can help avoid misunderstandings in the first place that can otherwise lead to disputes. If it transpires that some contractual terms can’t be met, inform those affected as soon as possible.

 

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8 Identify Potential Issues Early

Early dialogue can often resolve problems, and prevent them turning in to a dispute. The party claiming breach of contract will have to prove that they acted reasonably to mitigate their loss. As such, the earlier a potential difficulty is addressed, the better chance of a satisfactory resolution being reached, or losses minimised.

Often a case that ends up in court is due to the potential problem not being identified early on, or not dealt with appropriately. In this way, seemingly innocuous molehills can turn in to mountains.

Whist not advocating full scale crisis management procedures for every teething problem, there should be a routine reporting system enabling potential litigious issues to be reviewed. Although businesses may be reluctant to involve solicitors at the start, in fact reporting at an early stage to in-house or external lawyers would be likely to make the communications privileged from production.
This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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