A recent case reminds us of the problems parties experience when they have not agreed which of their conflicting standard terms of business applies to their contract before they sign - problems that should be ironed out at the drafting stage.
What happened?
The claimant, a Michigan company that made control systems for vehicles, placed orders with the defendant, an English company that supplied pedal sensors.
Both parties traded on standard terms of business, the key difference between the two being that the claimant's conditions sought to impose unlimited liability on the seller for certain breaches, while the defendant's conditions purported to exclude any liability for consequential loss or damage, and restricted any liability to works of rectification or repair.
The sensors were defective resulting in serious problems, including uncontrolled deceleration and loss of power. The claimant suffered substantial losses as a result, including the cost of inspections and replacement of parts. It sought to recover its losses from the defendant.
Each party argued that its own terms of business applied. The defendant said, for instance, that the claimant had agreed to use the defendant's terms by taking delivery of the sensors after receiving a document that referred to the defendant's terms.
The preliminary question before the Court was whether the defendant's terms applied, which would mean that its liability to the claimant was excluded or restricted.
The Court's view:
The Court decided that the contract did not include either set of standard terms because the parties had not reached agreement on their precise wording and there was no conduct that could be interpreted as accepting the other's terms. The Court held that the terms of the Sale of Goods Act governed the contract - an Act that sets out requisite standards for the quality of goods and so on.
The Court summarised some of the key principles from previous cases where there is a 'battle of the forms', including:
- the contract must be read objectively, save that the Court must
also take into account what, in fact, happened (the factual matrix)
- applying RTS Flexible v Müller (
click here for lawnow article).
- in most cases, a contract is formed once the last set of terms
is sent and received without the recipient objecting
- one party can be found to have accepted the other party's
terms by its conduct but it must be clear, looking at it
objectively, that it intended to accept those terms - simply taking
physical delivery of the goods, for example, may not be
enough
- where parties have not agreed which set of standard terms
applies, the only inference that can be drawn is that the contract
was made on the basis that neither set would apply
The moral of the story
Ensure negotiations as to which standard terms apply to your contract, and what they say, come to close before signing the contract to avoid lengthy disputes about what your contract says. A 'hold your breath and hope for the best' approach can be costly. Some parties include wording that expressly states that their standard terms will prevail over others that may be put on the table. Such clauses may not be effective, however, where it can be shown that the other party's standard terms formed the basis of the contract.
Reference: GHSP Inc v AB Electronic Ltd [2010] EWHC 1828 (Comm)
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 06/08/2010.