Australia: Winning the Battle of the Forms in the contract

Last Updated: 21 September 2016
Article by Scott Alden and Cyril Jankoff

Two parties in a business to business transaction or in a project often find themselves in a situation where one has quoted using its standard form terms and conditions and the order is made using a purchase order with conflicting terms and conditions. Work is then started, and there is ambiguity in relation to which terms and conditions govern the relationship, or even whether a contract has come into existence. This is called the "Battle of the Forms".

Case study

The procurement manager of an organisation emailed the potential supplier to send a quotation. The supplier emailed the quotation, with the supplier's terms on the back. The procurement manager emailed a purchase order with the buyer's terms on the back. Upon receipt of the purchase order the supplier did not acknowledge receipt and without notice commenced work. Unfortunately, the product supplied was not fit for purpose, causing the buyer considerable financial loss. The buyer sought to claim damages under the indemnity in its terms on the back of its purchase order. The supplier countered by seeking to rely on the limitation of liability in its terms on the back of its quotation. The issue is, whose terms and conditions are in place, if anyone's?

Irrespective of whether you are the buyer, the supplier, an adviser, or their insurance company you will have several key questions:

  1. Who will prevail in the above situation?
  2. What factors increase and decrease your prospects of "winning the battle"?

Who will prevail in the above situation?

In order to resolve this question, there are a number of factors to consider. These include (a) is there a contract and what are its terms; (b) have any terms been breached? (c) what is the remedy.

  1. Is there a contract and what are its terms?

In the case study scenario the quotation is an offer, as the supplier is prepared to be immediately bound by acceptance of it. The purchase order is not legal acceptance of the quotation, unless its terms are exactly the same as the quotation. As they are not the same the purchase order is a counter-offer. As we do not have offer and acceptance through written contract in the normal way, we need to determine the effect of the supplier starting work, without notice, upon receipt of the purchase order. It is likely that, in this case, the supplier would be seen to have accepted the counter offer by its conduct¹, and accordingly, at that time, the enforceable contract came into existence. If this is the case, the terms of this contract would be those terms last put forward, here being the purchase order.² This is the origin of the "last shot" principle.

  1. Have any of the terms been breached?

In the case study the contract has been breached because the goods and services provided by the suppler were not fit for purpose. Lack of fitness for purpose is breach of an express term of the purchase order (and is also implied into consumer contracts by federal and state consumer protection legislation).

  1. If one or more terms have been breached what is the remedy?

The breach has caused the buyer to suffer loss and, accordingly, the buyer can bring an action based on breach of contract, the aim of which is to put the affected party in the position they would have been in, but for the breach.

Factors to increase your chance of "winning the battle"

As is clear a "battle of the forms" scenario creates uncertainty which will inevitably lead to dispute and risk that your position will not prevail. To increase certainty and the likelihood that you will prevail you should (a) seek to create an underlying agreement containing your key terms, and (b) ensure your quotation or communications contain a clause clearly stating that subsequent clauses in trade documentation of either party will not have any effect on the agreement.

  1. Underlying Agreement

To enhance your prospects of creating an underlying agreement, or a course of dealing, such that your terms are more likely to prevail, you should:

  • Ensure each new and existing customer is sent a document "New Terms and Conditions of Trade" clearly spelling out the new terms. This then can constitute an 'underlying agreement' between the parties. If there is a dispute it will be of great assistance that a signed copy of this document is on file, with a note as to when, where, how and by whom it was sent.
  • This document should also be placed on the company's web site and the url referenced in sales documents and quotations (as well as the full terms where appropriate).
  • If it can be proved that this is the procedure, and that there have been prior transactions using this procedure and document, then these terms may be incorporated into the agreements through a regular course of dealing.
  1. Add Standard Clauses to Offer Documents and Pre-Contract Communications

Realistically, it is often not possible to have an underlying agreement, for example the case study does not give rise to an underlying agreement. In these cases, due to the inherent risk of commencing work on the basis of a purchase order inconsistent with your quotation (ie that commencement equates to acceptance) you should either ensure yours are the last submitted terms (thereby winning by "firing the last shot") or ensure your quotation document and pre contract communications contain risk mitigation clauses, statements and steps. These may include:

  • Stating terms on the suppliers standard contract or communications such as:
    • "We will start without finalising the contract but we reserve our right to discuss the terms...".
    • "Starting on this job without finalising the contract should not be seen as acceptance of the purchaser's terms...".
    • "Any commencement of the work ordered by you is done strictly in accordance with our terms and conditions and any terms and conditions supplied or communicated by you are expressly rejected".
  • The supplier's quotation should clearly state that only the supplier's terms will be those that will be used for the contract. This would then constitute the offer.
  • The quotation could go further and clearly state that the offer is made on the basis that any subsequent standard terms are excluded and that any acceptance or counter offer by the other party will be deemed to be an acceptance on the supplier's terms.
  • After a contrary purchase order is received from the buyer the supplier's order confirmation response to the purchase order should restate that the goods/services are being supplied using the original terms of the supplier.
  • If the contract is for the supply of goods, when those goods are sent the delivery advice should again reinforce this and the delivery person should get a signature on a copy of the delivery advice from the customer's representative receiving the goods.
  • Finally, the tax invoice should contain a similar statement regarding the fact that the seller's terms under which the goods or services were supplied.

Risks with electronic contracts

In the fast paced world of e-commerce where transactions are concluded in fractions of seconds over the internet care needs to be taken to ensure that the long held traditional rules of offer, acceptance, consideration and capacity to enter into legal relations are all followed. The sequence or a carefree approach to any of these steps could lead to fatal consequences including that the contract is not on the terms and conditions you expected, or worse still that there is no contract or a 'voidable' contract.

Tips and takeaways

It is easy to inadvertently find yourself in a "battle of the forms" situation, perhaps even without knowing it. This must be avoided at all costs as uncertain contracts lead to uncertain contract management, unexpected results, bad commercial relationships and expensive and protracted litigation. Ideally you will always properly negotiate your contract, and know precisely whose terms and conditions govern the relationship, and what those terms and conditions mean. In any event you should adopt some of the risk mitigation steps as part of your standard contracting procedures so as to maximise your chances of winning the battle of the forms.

Footnotes

1 Brogden v Metropolitan Railway Co (1877) 2 App Cases 666; Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523, 525; Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61.

2 Butler Machine Tool Co Ltd v Ex-cell-O Corp (England) Ltd [1979] 1 All ER 965; Orix Australia Group Corp Ltd v Peter Donnelly Automotive Pty Ltd [2007] NSWSC 977.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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Authors
Scott Alden
 
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