Following a recent High Court decision Corporate Partner Sam Lyon highlights the advantages and disadvantages of using standard terms and sets out how standard terms can be incorporated effectively.
A recent High Court decision is a reminder that businesses should consistently follow their chosen methods of incorporating standard terms, such as printing terms on the back of documents and retaining copies of signed agreements. The case concerned a claim for a contribution to £7 million of liability for negligence or breach of contract. The court had to decide whether the defendant's standard terms, which limited its liability to the price of the goods supplied, were incorporated into the supply agreement.
The court held that the defendant’s standard terms were expressly incorporated into the contract because, on the evidence, the plaintiff must have signed an application form to get goods on credit which expressly incorporated the defendant’s standard terms (although that document could not be located). While the defendant succeeded in limiting its liability, it could have avoided dispute over incorporation had it been able to produce a copy of this form. During the course of the trial, the defendant was also unable to show that its standard terms were printed on the back of every invoice.
Businesses should therefore ensure that all relevant company paperwork bears the correct set of standard terms, that these are audited and updated regularly, and that they keep copies of key contracts.
Advantages of using standard terms
• Your business can introduce favourable terms in a format that does not favour heavy negotiation, for example, terms that:
o limit your liability (in the case of terms favouring a supplier); and
o extend the liability of a supplier (in the case of terms favouring a customer).
• Standard terms avoid the additional time and expense involved in drawing up specific terms for each individual transaction.
• Standard terms provide certainty that your business will be trading on broadly consistent terms in all cases where the terms are used.
• The resulting standardisation of your business’ contracting procedures will allow more junior staff to handle and conclude contracts.
Disadvantages of using standard terms
• There are greater restrictions on the extent to which a supplier may exclude or limit its liability when trading on standard terms that have been negotiated with the customer. Certain terms may be completely unenforceable and others may only be enforceable if they satisfy special tests of reasonableness or fairness.
• The standard terms must be incorporated into the contract between the supplier and the customer to be effective. This is likely to become a problem if the other party attempts to introduce its own terms and conditions.
• There is a danger that employees may use the standard terms for inappropriate transactions. Your business can help prevent this by establishing internal procedures, for example, where proposed contracts over a certain value using the standard terms are reviewed by a lawyer before they are issued.
• Standard terms need to be reviewed regularly to:
o ensure they take account of legislative and regulatory changes or new case law; and
o reflect any changes in your business’ activities.
• Your business may need more than one set of standard terms if you provide a variety of significantly different services (for example, providing hire of equipment as well as sale of equipment).
How to incorporate standard terms effectively
Standard terms will only be effective if they have been properly incorporated into the contract.
• If standard terms are set out or expressly referred to in a contract that both parties sign, it can be assumed that the standard terms have been incorporated. However, this will often not be the case and the owner of the standard terms will need to establish that the standard terms were put forward to the other party before the contract was made and that the other party accepted the incorporation.
• The simplest way to achieve this is by expressly stating in pre-contract correspondence that your business’ standard terms apply to the sale. Although this approach may cause the other party to attempt to negotiate the standard terms, in the absence of any statement, your terms are unlikely to have been incorporated.
• The next best option is for your business to bring the terms to the attention of the other party in as much pre-contract and contract documentation as possible.
If you are a supplier, this would include setting out or making an express reference to your standard terms:
• In brochures, catalogues or other publications.
• On quotation.
• On purchase order forms.
• On the acknowledgement or confirmation of purchase order forms.
• On delivery notes.
• On invoices.
For a customer, this would include setting out or making an express reference to its standard terms on:
• Purchase order forms.
• Quotation acceptances.
• Where standard terms are printed on the reverse of a document, the document should have a statement on the face of it clearly stating that the sale or purchase is made on the terms printed on the reverse and the standard terms from part of the contract between the parties.
• Particular attention should be drawn to unusual standard terms on the face of the documents as they require special notice.
• If a standard term governs or potentially varies something on the face of the document (for example, the delivery date) it should be cross-referenced.
If you have any queries about using terms and conditions, contact Sam Lyon on 01228 552222 or by email to email@example.com .