When Terms and Conditions Collide: Making Sure Your Terms Apply

Most businesses have their own standard terms and conditions. Suppliers use them to govern sales, while customers often have their own purchasing terms.

Problems arise when both parties try to contract on their own terms.

Imagine a supplier sends a quotation referring to its terms and conditions. The customer then places a purchase order on its own terms. The supplier delivers the goods and submits an invoice. There is conflict between terms, but nobody minds until something goes wrong.

The goods may be defective and cause loss or damage. Additional charges may be disputed. A customer may believe a contract has ended, only to discover the supplier says it has automatically renewed.

When each party is relying on different terms and conditions, disputes can quickly arise. Lawyers refer to this as the “battle of the forms”.

Why does it matter?

A party’s terms and conditions can have a significant impact on the outcome of a dispute.

Standard terms are often used to:

· impose terms favourable to that party;

· extend the other party’s liability; and

· limit liability where things go wrong.

For example, discussions during negotiations may include statements about the quality or suitability of a product or service. However, an “entire agreement” clause may seek to exclude liability for statements made before the contract was entered into.

Similarly, a supplier may seek to limit its liability for financial losses arising from a defective product or service. While this may appear harsh from the customer’s perspective, it can sometimes be reasonable for a supplier of relatively low-value goods or services to avoid liability for claims that are significantly greater than the value of the contract itself.

The question therefore becomes: whose terms actually apply?

The importance of incorporating your terms

The starting point is ensuring the other party is aware of your terms and conditions before the contract is performed. The gold standard is therefore to require a signed acknowledgement from a director or other authorised representative of the other party. However this approach carries the risk that the other party will take a sudden interest in your standard terms and challenge them.

Instead, many businesses seek to “incorporate” their terms by referring to them throughout the contracting process, for example in:

· marketing materials;

· quotations;

· purchase orders;

· order acknowledgements; and

· other pre-contract documentation.

The aim is to ensure the other party is clearly on notice that the contract is intended to be governed by those terms.

The “last shot” problem

Businesses must be vigilant, or risk unintentionally finding themselves contracting on the other party’s terms.

In the case of British Road Services Ltd v Arthur Crutchley & Co Ltd, a supplier delivered whisky together with a delivery note containing its standard terms. Rather than signing the delivery note, the recipient stamped it as received on its own conditions.

The result was that the recipient’s terms prevailed because they were the last set of terms introduced before the contract was formed. Lawyers often refer to this as the “last shot” principle.

The case illustrates the importance of ensuring that procedures for issuing and accepting contractual documents are properly understood and followed throughout an organisation.

Typical disputes

Battle of the forms disputes often arise after a commercial relationship has already broken down.

A common example is where a customer refuses to pay an invoice and then brings a claim for losses allegedly caused by defective goods or services. The supplier may seek to rely on exclusion clauses in its terms and conditions, while the customer argues that its own terms apply instead.

Frequently, the party relying on the terms cannot point to a signed contract. Instead, it may argue that the terms were incorporated because:

· they appeared on previous invoices that were paid;

· invoices referred to terms available on a website; or

· delivery notes and other documents referred to the terms.

Whether those arguments succeed will depend on the circumstances. In the event of a dispute, businesses should look out for the other party trying to rely on new terms which were not the ones in place when the contract was entered into.

Resolving disputes

Where there is uncertainty over which terms apply, both parties will face risks and costs in pursuing litigation.

In such circumstances, alternative dispute resolution (ADR) may offer a sensible route to resolving the dispute without the expense and uncertainty of court proceedings.

There may also be arguments about whether particular exclusion clauses are enforceable under section 3 of the Unfair Contract Terms Act 1977. This involves a test of reasonableness and can add another layer of complexity to an already disputed contract.

Prevention is better than cure

Businesses often assume that their own terms and conditions automatically apply whenever they trade. In reality, that may not be the case.

Regularly reviewing contracting procedures, ensuring terms are brought to the attention of customers and suppliers at the appropriate stage, and training sales and purchasing teams to recognise potential battle of the forms issues can significantly reduce the risk of future disputes.

For a health check of your standard terms and conditions, contact Sarah Astley, Head of Corporate s.astley@gullands.com . For advice on a contractual dispute, contact Andrew Clarke in our Litigation Team a.clarke@gullands.com