Make sure your standard terms and conditions are enforceable

Many companies produce general terms and conditions (T&Cs) which appear on standard form transaction documents such as quotations, invoices or order forms.  It is intended, and often assumed, that the T&Cs will regulate the supply agreements which follow.  But this is not a safe assumption, particularly if the other party to the transaction has included its own T&Cs on a similar standard form document.  In this instance, it might turn out that one set of T&Cs applies to the agreement and not the other, or that neither T&Cs apply.

To have certainty as to the terms governing your contractual relationships in these circumstances, it is important then to take positive steps during negotiations before agreement is reached.  Suggested steps are set out below.

Competing terms and conditions

Consider the situation of a supply agreement where the supplier emails a written quote to a builder in relation to the supply of building materials.  The quote includes the supplier’s T&Cs which include a provision specifying that the T&Cs will apply to any following transaction between the parties.

The builder then issues a purchase order for the materials.  The order includes the builder’s standard T&Cs which also include a term that the builder’s T&Cs will apply to any following agreement between the parties.

The builder’s and supplier’s T&Cs conflict on key terms such as defects warranties and liability limitations, amongst others. The parties proceed to perform without specifically agreeing to, or accepting, either of the T&Cs.

If the transaction had run smoothly, the parties might never have referred to their respective T&Cs.  A dispute arises however, when the builder realises later that the materials are defective, and the builder suffers loss as a consequence of the defects.

It is then necessary to determine the parties’ precise rights and obligations under the agreement, particularly in relation to warranties and liability limitations.  The parties discover there are two sets of T&Cs in play, and that the T&Cs are inconsistent in respect of warranties and liability limitations.

The question then becomes: which set of T&Cs, if any, prevails?  Lawyers call this situation a ‘battle of the forms’.

Resolving the “battle of the forms”

Generally speaking, for contract formation to occur there must be consensus or agreement between the parties on at least the essential terms of the agreement.  Typically, consensus arises where a party makes an offer and then the other party accepts that offer in full.  The terms of the offer must be accepted in their entirety with no additional terms introduced.

If a party communicates to an offeror it is prepared to accept certain terms of the offer, but rejects other terms and/or includes additional terms, this is not acceptance but rather a counter-offer.   If the original offeror then communicates its acceptance in full of the terms of the counter-offer, an agreement in terms of the counter-offer will be formed.  Acceptance can also happen by conduct.

In the above example, the supplier’s original quote including T&Cs is an offer.  The builder’s purchase order is a counter-offer since it included additional and conflicting terms, namely its own T&Cs.  The supplier then supplied the materials, which would likely be treated as acceptance by conduct of the builder’s counter-offer.

If nothing goes wrong, there is no problem.  In this case, the materials are defective and the builder suffers loss.  The parties and ultimately the courts are then left to determine which terms govern the relationship.

The courts have a number of methods for resolving this question.  Here, for example, the courts:

  • might apply the terms of the most recent offer, which was unequivocally accepted.  This was the builder’s counter-offer (purchase order) including its own T&Cs, which the supplier accepted by conduct in supplying the materials after receiving the purchase order; and
  • could also imply other terms into the agreement on the basis of the parties’ prior course of dealings, because their history of dealings demonstrates a mutual understanding that certain T&Cs apply to their contractual relationships.

The facts and circumstances of the case ultimately determine the outcome.  This creates considerable uncertainty where the party has simply included its T&Cs in standard form documents without doing more.

Avoiding the conflict

What then can a company do to avoid a “battle of the forms” situation arising and increase certainty as to which terms apply to the agreement?  Ideally, the parties would enter into a written agreement for each transaction, containing an “entire agreement” clause, which says the document as executed constitutes the parties’ entire agreement.  This however, is often not practicable for each individual agreement.  The following then are some practical suggestions:

  1. Educate relevant personnel (particularly those involved in negotiations) on the risks of simply including T&Cs in standard form transaction documents and then assuming those T&Cs will be incorporated into agreements.
  2. When you receive a transaction document from another party which includes T&Cs, if you do not intend to accept these other T&Cs as part of the agreement you should clearly communicate this to the other party leaving no room for doubt as to your company’s intention.
  3. Make clear and specific reference to the company’s T&Cs in all transaction documents including covering letters and emails.
  4. Require that the other party sign an acknowledgement that it has received, and agrees to be bound by, your T&Cs.
  5. Do not start performing under the agreement and do not accept the other party’s performance, if the parties have not resolved the issue of T&Cs.
  6. Alternatively, if the parties are in an ongoing relationship, consider negotiating an ‘umbrella’ set of T&Cs which applies to each transaction going forward.

If you have any queries or would like further information regarding this article, please contact:

David Palser
Partner
M: 0447 606 059
E: dpalser@pageseager.com.au

Owen Davis
Associate
M: 0422 323 281
E: odavis@pageseager.com.au

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