Keen to get works underway, employers and contractors too often surge forward without a signed contract in place. I see countless contract formation issues in multi-million pound projects where parties have worked together for several years without formalising their relationship.
Common pitfalls
Two recent cases that I examine below highlight some common pitfalls for contracting parties. In both cases, the parties have suffered commercially and learned their lessons the hard way. Happily for us, they provide some clear and practical guidance on how to avoid the same problems.
Acceptance by conduct
In a decision handed down last month, A Ltd v B Ltd, a buyer failed to persuade the High Court that it had avoided having a contract with the supplier by not signing a draft contract that included the words “accepted [buyer]” on the signature page and required the parties to return signed copies of the contract as the prescribed mode of acceptance.
The court held that the buyer’s signature was not a condition of the formation of the contract. Even if the offeror sets out a prescribed mode of acceptance, it is open to him (but not the offeree) to waive that requirement. In addition, the court concluded that the buyer had unequivocally accepted the seller’s offer by his agent’s conduct in asking for prices to be set according to the mechanism in the contract. The buyer found himself liable for a bill of almost US$7 million, for a year’s supply of cotton he said he never intended to buy. Although the circumstances of this case were complicated by the involvement of agents, the lessons are clear.
Don’t assume your standard terms apply
In last month’s Technology and Construction Court decision in Transformers & Rectifiers Ltd v Needs Ltd, both parties lost out in the battle of the forms, which was a preliminary issue before the court in a contractual dispute.
Since at least the mid-1990s, Transformers & Rectifiers Ltd (the buyer) had ordered nitrile gaskets from Needs Ltd (the supplier) on a weekly basis. The buyer alleged that two particular supplies of the gaskets were not fit for purpose and not in accordance with its standard terms.
The buyer’s standard terms and conditions were printed on the back page of its standard form purchase orders when sent by post. However, Edwards-Stuart J found that it was not obvious on reading the front page that they were on the reverse. Moreover, the buyer did not submit its purchase orders in the same way each time, so that its standard terms (easily visible or otherwise) were often not sent at all. It usually submitted only the front page of its purchase orders via fax or email.
On the other hand, the supplier argued that it had counter-offered each purchase order with an acknowledgement of order, which stated that “the quoted prices and deliveries are subject to our normal terms and conditions of sale (copies available on request)”. The supplier claimed that the buyer accepted its counter-offers by taking delivery of the gaskets. However, it never provided a copy of its standard terms (and the buyer never requested one). Accordingly, Edwards-Stuart J held that the supplier had failed to turn its order acknowledgments into counter-offers.
In fact, Edwards-Stuart J held that neither parties’ standard terms were incorporated into their contracts because neither had done enough to draw the other’s attention to its standard terms. The commercial result was that the supplier could not rely on exclusion clauses within its standard terms. Although not clear from the judgment, there may well have been helpful terms for the buyer in its own standard terms that were also lost in the ongoing dispute.
Lessons learned the hard way
Together, A Ltd v B Ltd and Transformers & Rectifiers illustrate the commercial ramifications that can stem from a simple mistake or misunderstanding during contract negotiations. They also share the common lesson that parties must be clear about the terms on which they are doing business. More specifically:
- Don’t assume your standard terms apply. Even if you have been dealing with the other party for several years, don’t assume that a court will take it to be on notice of your standard terms and conditions. Every time you enter into a contract, ensure you include your terms and conditions. If you send a purchase order/invoice electronically, be careful that you are not leaving off the back page that contains your standard terms and conditions. Even better, include a copy of your standard terms as a separate attachment.
- Take steps to draw the other party’s attention to your standard terms. Alert the other party on the front page of your template purchase order/invoice to your terms and conditions. Make clear in writing that your terms are the only terms upon which you are prepared to do business.
- Avoid a battle of the forms. If the other party responds with its own standard terms and conditions, make clear by reply that (i) you do not accept its terms and (ii) your own terms are the only terms upon which you will do business.
- Be wary of counter-offers. If a response to your offer is inconsistent with your offer, it may be a counter-offer.
- Avoid unintentionally accepting terms by conduct. I often see contracts that were concluded when a party accepted the terms of a draft agreement before signing – for example, by taking delivery of goods, paying for services, or taking other steps in accordance with the terms of a draft contract.
Following these rules will help you avoid disputes and ensure you are on the same page as the other side.
