In two cases, decided on the same day in late 2014, the Supreme Court clarified the rules relating to the incorporation of contractual terms in business-to-business contracts. In several respects the Supreme Court raised the bar, particularly where the clause is one which limits or excludes the liability of one party.
The cases in question, James Elliott Construction v Irish Asphalt and Noreside Construction v Irish Asphalt, arose from similar circumstances and involved similar issues. Perhaps the most important of the two is the James Elliot Construction case.
THE JAMES ELLIOTT CONSTRUCTION CASE
Irish Asphalt supplied infill to Elliott Construction for use in building works. When defects appeared in the building, Elliott Construction brought proceedings against Irish Asphalt, claiming that the infill caused the defects. During the proceedings, an issue arose as to whose terms and conditions the parties had contracted on. Why did this matter? Irish Asphalt's terms and conditions contained an exemption clause which significantly limited its liability for any loss arising from the supply of defective material. Its liability was limited to the cost of replacing the defective material.
Irish Asphalt said that its terms and conditions, including the exemption clause, had been incorporated into the contract in at least one of a number of ways:
- by signature: delivery dockets signed by Elliott Construction's site foreman referred to its terms and conditions.
- by actual notice: its terms and conditions were set out on three credit notes provided to Elliott Construction.
- by reasonable notice: Elliott Construction's site foreman had reasonable notice of its terms and conditions.
- by a consistent course of dealing between the parties.
- by reference to trade custom.
On each ground, Irish Asphalt failed.
INCORPORATION BY SIGNATURE
The Supreme Court said that to be a contractual document and to be contractually binding, a document must:
- be a document that generally contains contractual terms or a document which a reasonable person would expect contains contractual terms.
- set out the terms and conditions or refer to specific terms and conditions well-known in the particular industry. It is not sufficient to refer to unspecified terms and conditions and nor is it sufficient to state that the terms are available on request.
- be timely, i.e. be provided before the contract is concluded (subject to a limited range of exceptions).
The delivery dockets in this case were not contractual documents: delivery dockets do not generally contain contractual terms; they contained only a vague reference to the terms being available on request; and they were provided after the contract was formed.
It followed that the foreman's signature on the delivery dockets was not sufficient to incorporate Irish Asphalt's terms and conditions into the contract between the parties.
INCORPORATION BY ACTUAL NOTICE
Irish Asphalt had issued credit notes to Elliott Construction when they were working together on a previous project, three of which set out its terms and conditions. This, it said, meant that Elliott Construction had actual notice of its terms and conditions. The Court did not agree. The credit notes were provided to the accounts department to rectify payment errors: they could not be used to announce a limitation clause for all future contracts.
INCORPORATION BY REASONABLE NOTICE
Irish Asphalt's next argument was that Elliott Construction's site foreman had reasonable notice of its terms and conditions as he had signed some 1,190 delivery dockets, each of which cross-referred to Irish Asphalt's terms and conditions. However, the Court stated that notice to the site foreman was not reasonable notice. As senior personnel in each company had negotiated the contract, notice of the terms and conditions should have been given to senior personnel. In any event, the delivery dockets did not set out the terms and conditions, but simply stated they were available on request.
INCORPORATION BY A COURSE OF DEALING
Terms, even if unread, may be incorporated into a contract by a previous consistent course of dealing between the parties. Where the parties are operating in the same sector on terms standard in the trade, few interactions will be required.
Even though the parties in this case had several hundred interactions over the years, this was not enough to establish a course of dealing sufficient to lead to the incorporation of Irish Asphalt's terms and conditions into the contract. Only three credit notes set out the terms and conditions and the delivery dockets merely cross-referred to them.
INCORPORATION BY REFERENCE TO TRADE CUSTOM
Terms may be incorporated into a contract by reference to specific terms and conditions in use in that industry.
This was not discussed by the Court in the James Elliott case. In Noreside, the Court found that there was insufficient evidence of a custom well-known within the quarry industry that quarry owners or operators are entitled to limit their liability in the absence of the inclusion of an express contractual term.
One could be forgiven for thinking that the various tests for incorporation of exemption clauses, which limit one party's liability, now revolve around a reasonableness test. It is certainly true that considerations of procedural and substantive fairness and fair dealing are important factors and the Supreme Court has overtly worked these themes into the incorporation by signature test. What is striking about the Supreme Court decision, and indeed its decision in Noreside, is that the cases concerned business-to-business transactions that took place over significant periods of time on a recurring basis. The stand-out features, however, were the sweeping nature of the disclaimer of liability and the startling failure of Irish Asphalt to communicate actual notice to its customers.
The cases are highly fact sensitive, and all the more interesting for that.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.