UK: Contract Terms: Beware Incorporation By Reference

Last Updated: 6 June 2012
Article by Michael Harvey

Parties to a commercial transaction will often take great trouble to draft their own standard terms and conditions which suit their own business, and their own attitude to, and acceptance of, risk. However, care is not always taken by those making the contracts, for example sales people, to ensure that the terms and conditions are properly communicated to the other party and are properly incorporated into the contract.

There is often what is commonly referred to as a 'battle of the forms', whereby both parties seek to contract on their own terms and conditions by attempting to ensure that they send them to the other party last in time, in the belief that this will mean that they will apply.

This is not necessarily the case and it will depend on exactly when the contract was formed and assessed using the usual criteria of offer and acceptance. This is a topic in itself, and is not the subject of this article.

Where a party sends a contractual document, such as a quotation or purchase order, which refers to, and attaches, a copy of that party's terms and conditions, the matter is relatively straightforward. The other party will be aware of those terms and conditions, can readily see them, and has the opportunity to object to them, negotiate the terms, and/or seek to ensure that its own terms and conditions apply to the contract instead.

However, very often it will be the case that one of the parties will send a contractual document which simply contains a reference to its terms and conditions. A common scenario is where company A sends company B a quotation with a copy of company A's terms and conditions. A purchase order is then faxed through from company B to company A, which refers somewhere on the document (often in small print) to company B's terms and conditions 'on the reverse', but because the document has been faxed the terms and conditions on the reverse are never in fact sent by company B, and never received by company A. Company A might understandably have not seen the reference to company's B terms and conditions and in any event might well assume that because the terms and conditions were not attached they cannot apply to the contract; so company A might be confident that its own terms and conditions apply. After all, in this scenario company A has never actually seen company B's terms and conditions.

In fact, in such a scenario it is likely that company B's terms and conditions will apply (although of course each case will turn on its own particular facts).

Recent Examples

Trebor Bassett Holdings & another v ADT Fire and Security [2011] EWHC 193 (TCC) provides a good illustration of this. ADT had sent a quotation to Trebor, which contained the words 'unless and until other terms and conditions have been agreed in writing ADT Fire and Security Standard Terms and Conditions as detailed in our Commercial Agreement shall apply'.

A copy of the terms and conditions was not attached to, or sent with, the quotation. Subsequently, Trebor sent to ADT a purchase order which stated on it that in the absence of other agreement '[Trebor's] conditions will apply'. Again, no copy of Trebor's terms and conditions were attached to, or sent with, the purchase order. A dispute arose between the parties, and each party sought to rely upon its own terms and conditions. The matter came before Mr Justice Coulson.

ADT argued that it never received notification of Trebor's terms and conditions and that although the purchase order referred to them, Trebor's terms and conditions were not provided, so ADT had never seen them. They therefore argued that the terms were not incorporated into the contract.

Coulson J noted that ADT was at the same time seeking to rely on its own terms and conditions which were themselves not sent to Trebor with ADT's initial quotation. He also noted that during the course of previous dealings between the parties Trebor had supplied ADT with a copy of its standard terms and conditions (although not in every case). That being so:

The words on the Purchase Order would not only have alerted [ADT] to the existence of [Trebor's] terms and conditions, but they would also have alerted them to at least the possibility, if not the probability, that they already had those terms and conditions ... the ball was therefore firmly in [ADT's] court if they did not have a copy (or challenged the applicability) of [Trebor's] terms and conditions.

Coulson J concluded that:

Notice within a contractual document identifying and relying on standard trading terms is sufficient to permit incorporation of those terms ... further, given that none of [Trebor's] terms and conditions were unduly onerous, they did not require specific or particular notice ... the fact that [Trebor's] terms and conditions were not enclosed with the purchase order does not prevent their incorporation into the contract between the parties.

Coulson J applied the principles set out in Circle Freight International Limited v Medast Gulf Exports Limited [1988] 2 Lloyds Rep 427 in which Lord Justice Taylor held that:

It is not necessary to the incorporation of trading terms into a contract that they are conditions in common form or usual terms in a relevant business. It is sufficient if adequate notice is given identifying and relying upon the conditions and they are available on request. Other considerations apply if the conditions or any of them are particularly onerous or unusual.

Lord Justice Bingham stated that, in this particular case:

There was no other contract document between these parties other than the invoice. Each invoice bore the legend – 'all businesses transacted by the Company under the current trading conditions of the Institute of Freight Forwarders, a copy of which is available on request'. That lettering was clear and legible. It was placed immediately below the price payable on the invoice where the eye would naturally light on it ... applying to this case the question 'has reasonable notice of the terms been given?' the only possible answer in my judgment is that it has ... the clear rule of English law is that clear words of reference suffice to incorporate the terms referred to.

Whether you are a business seeking to enter into contracts with other parties, or a solicitor or insurer seeking to assess a claim once a dispute has arisen and ascertain which party's terms and conditions apply, it is crucial to look carefully at the wording (including the small print) of all the contractual documentation to check whether it contains reference to a party's standard terms and conditions. It cannot be assumed that just because the terms and conditions referred to were not actually sent to the other party they do not apply.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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