STANDARD TERMS OF BUSINESS A BEGINNERS GUIDE

Why have them? One of the central issues for any business is to settle the terms upon which it wishes to contract with its suppliers and customers. Where a business is going to be entering into a large number of transactions with a range of parties, although legally desirable it will not be commercially practicable to negotiate and enter into a fresh written contract on every occasion. Consequently, most businesses endeavour to draw up a set of standard terms for these occasions. This is advisable for all commercial enterprises but particularly for a business supplying goods. Although convenient there are two problems with this approach to contract formation that immediately arise. First of all, in the absence of a formal written contract, the business must take steps to ensure that its standard terms are incorporated into any particular contract with a customer. The second problem, which exacerbates the first, is that the customer in question will, if another commercial enterprise, almost always have their own standard terms and will want the contract to be formed on the basis of those standard terms rather than those of the supplier. In fact, the purchaser may on occasion insist on the incorporation of its own Terms and Conditions. In the case of a new business, particularly if it is a small business, its customers may have considerably more bargaining power than it does, so it may have little choice but to agree to the others terms. Those terms are typically very one-sided in operation. The good news is that where a business is a supplier of goods or services it is likely to be in a stronger position. This is because the use of standard terms of purchase is far less wide spread that the use of standard terms of supply. As a result, the party that fills the role of supplier of goods or services may have the opportunity to incorporate its own standard terms of supply even where it is dealing with customers who have extensively more bargaining power. This is likely to be the case as long as there is a positive benefit to the customer in accepting the terms, for instance, where the supplying business is offering a new customer the opportunity to acquire goods on favourable credit terms provided that it accepts the suppliers standard terms. How do I make best use of them? Another way in which a business is able to gain an advantage is by exploiting some of the uncertainties which surround the process of incorporating standard terms into a contract. In other words, every effort should be made to win what is rather melodramatically referred to as the battle of the forms. Whilst it is preferable that a business expressly incorporates the terms upon which it wishes to do business into each and every contract and obtains signatures of all parties to this document, this is not commercially practicable in most situations. Therefore a very large number of commercial contracts are entered into in a reasonably informal fashion with the agreement being based on an exchange of standard form documentation. For example, a suppliers standard terms may be included on a

selection of business documents including price lists and quotation forms, catalogues, acknowledgement of order forms, invoices and delivery notes. On the other hand, a buyers standard terms are most likely to be contained on its standard official order form. By creating a contractual relationship using these documents the terms included on the face of the documents will form the basis of the contract. Whose terms will prevail? Whilst the flexibility of this system is very convenient, it can create a considerable amount of uncertainty as to the actual terms of the resulting contract, particularly where both sets of conditions (buyers and sellers) have been put into circulation. For example, where the supplying business receives an order form from a customer containing that customers own standard terms, this will usually constitute a contractual offer on those terms. Whether those terms will form the basis of any resulting contract depends upon what happens next. If the client simply delivers the goods in response to the buyers order, then the contract will usually be concluded on the buyers condition. The same is true if the supplier merely confirms the order without stipulating that the contract is on its own standard terms. If, on the other hand, the supplying business accepts the offer to buy by sending out a written confirmation incorporating its own standard terms then this acceptance will not be an acceptance at all as it is on different terms to the offer. It will instead be treated as a counter offer. The result of this is that if the other party then proceeds with the purchase without further qualification, it will be deemed to have agreed to the terms of the counter offer by conduct, and those terms will become binding. This is sometimes known as the last shot rule. In other words, whichever party is the last to get its conditions into the pre-contract negotiations without objection will usually succeed in establishing that its conditions form the basis of the resulting agreement. This is otherwise known as the battle of the forms. Sometimes parties will seek to win the battle of the forms by including a so called prevail clause in their standard terms. Prevail clauses typically state that the relevant standard terms are to apply to any resulting contract to the exclusion of any other terms and conditions, including any terms or conditions which the other side may seek to incorporate through their own documentation. A party may seek to reinforce this provision by further providing that the other side shall be deemed to accept the prevail clause by taking certain steps to perform the contract, for example, in the case of a seller, by dispatching or delivering the goods, or in the case of a buyer, accepting delivery. There are two problems with this approach. Firstly, where two contracting parties are seeking to apply their own standard terms, both of those sets of terms will almost invariably contain prevail clauses in similar terms. The second problem is that where one party responds to the other standard terms by submitting a counter offer on its own terms, this counter offer will destroy the terms of the original offer, including the prevail clause. This leads to the bizarre situation where the prevail clause will only work where the other party has accepted the first partys standard terms anyway. An unlikely scenario to say the least. Despite the likely lack of effect of prevail clauses, such a clause should always be included in standard terms if only to avoid the feeling

of being in a disadvantage in the event of a dispute with a supplier or customer whose standard terms do include one. How can I win the battle of the forms? The vagaries involved in the battle of the forms may seem unsatisfactory in that they provide no commercial certainty for either party. On the other hand, where one party to the contract is less influential than the other and is unable to negotiate any amendments to the standard terms, the uncertainties in this common law approach may be viewed as a positive benefit to be used to our advantage. It should always be noted that the winner of the battle of the forms is not necessarily the party with the greater bargaining power. Indeed, in many cases the ultimate victor will be the party who has instituted the tighter procedures. This is because it is easier to lose the battle of the forms than it is to win it. Thus, the prudent contracting party will take steps to reduce the possibility that it, or its staff, will make mistakes and accept the other sides terms without qualification. Part of this is a matter of documentary control. In other words, the business should undertake a rigorous review of its paperwork to ensure that every document which may find its way into the hands of the side is expressly stated to be on that partys own standard terms. The other part of the equation relates to staff training. A major problem for any business is that sales, particularly telephone sales, may often be concluded by junior members of staff who do not appreciate the potential contractual effect of what they are saying or the documents that they may be sending out to the other side. If you have not already done so you may wish to establish check lists which will form the basis of dealings with customers conducted by more junior members of staff and to reinforce these check lists by regular sessions to raise staff awareness of the issues involved. Although it is possible to take every precaution against accepting the other sides standard terms, it is usually impossible to guarantee that your own standard terms will prevail in any given situation. A party will however maximise its chance of winning the battle of the forms if it is able to take control of the contracting process from the start. The first stage of most purchase contracts is the order form, which will normally be construed as a contractual offer. If a supplier can persuade a buyer to submit orders on its own order form expressly subject to its own standard terms, then there is no reason why it should not be able to win the battle of the forms, as all it needs to do is accept the order on the same terms and those terms will prevail. Encouraging a purchaser to use the right order form is largely a matter of good design, ensuring that the order form is very quick and easy to use, coupled where appropriate with incentives, perhaps offering a discount or other incentive to those who use the form for a limited period until this becomes a habit. What should my terms of business do? Standard terms essentially have a two-fold function. First of all, they set up the contractual apparatus, that is, exactly how the contract is intended to operate and, in particular, who does what and when. As part of this, the terms should describe clearly the parties respective duties, including any limitation on those duties, together with any special promises those parties are making about their performance (warranties). In

other words, this part of the standard terms explains what will happen when all goes well. The second function of standard terms is to allocate risks between the parties when things go wrong. Where the problem is caused by a breach of contract by the party whose standard terms they are, typically the terms will provide some machinery for remedying the breach coupled with an attempt to restrict any further liability for the same. Where the other side is in default, it will also include provisions to make it easier for the innocent party to obtain a remedy. Where neither side is in breach, for example, where performances prevented by events beyond their control or by the act of a third party, the standard terms will usually specify which party bears the loss for insurance purposes. For example, where a seller supplies defective goods, its standard terms may state that the seller will supply a replacement subject to the buyer complying with certain procedures, but that the seller will not be liable for any further loss once the replacement has been made. At the same time, the sellers standard terms may include various remedies where the buyer is guilty of late payment, including the right to claim interest and, in serious cases, the right to terminate the agreement and recover the goods. What can my terms of business do? There are three chief restrictions when formulating standard terms. To start with, you will be restricted by what your clients are prepared to accept. This will, of course, depend largely upon your bargaining power relative to the other party to the contract. A second, related restriction is to do with your reputation in the market place. For instance, where a business sells high quality designer goods it may be damaging to the brand image if it becomes widely known that the business standard terms attempt to exclude all responsibility for the quality of the products sold. The third restriction on the drafting of standard terms is the Unfair Contract Terms Act 1977, which controls a wide range of exemption clauses, and other similar legislation. Under the statutory regime, there are certain liabilities which cannot be restricted or excluded at all. For example, the implied terms in Section 12 of the Sale of Goods Act 1979 relating to the sellers right to sell the goods cannot be excluded even in a commercial contract. In addition a party cannot exclude liability for breach of a duty to exercise reasonable care and skill if that breach causes personal injury or death. The Unfair Contract Terms Act 1977 also controls attempts to restrict or exclude the implied conditions in Sections 13 to 15 of the Sale of Goods Act 1979 which relate to description, quality and sample. Where the other party deals as a consumer, these liabilities cannot be restricted or excluded at all. In a commercial setting, the rules are less strict and such clauses will be valid in so far as they satisfy the reasonableness test. This test provides that a term will be reasonable if it is a fair and reasonable term to be included in the contract taking into account all the circumstances which the parties knew or ought to have known at the contract date. In other words, the contracts test is a reasonableness of incorporation test rather than a reasonableness of reliance test. The onus of proof will be on the party that seeks to rely on the term to show that it is reasonable.

Although more usually encountered in a consumer contract scenario, the reasonableness test is relevant to commercial contracts as a result of the operation of Part III of the Unfair Contract Terms Act 1977. That section provides that the act will apply not only to consumer situations but also to those cases where one of the parties (irrespective of whether they act as consumer or as a commercial enterprise) contracts on the others written standard terms of business. Where a clause is covered by this section, it will only be valid in so far as it satisfies the reasonableness test above. It is important to realise that this rule does not only apply to exemption clauses but the entirety of the standard terms. Conclusion