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Wed, 1 Sep 2010

Contract Formation - Whose Standard Terms Apply?

The problems parties experience when they have not agreed which of their conflicting standard terms of business applies to their contract before they sign occurred in the case of GHSP Inc v AB Electronic Ltd [2010] EWHC 1828 (Comm).

Both parties traded on standard terms of business, the key difference between 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 claimant suffered substantial losses as a result of faulty goods provided by the defendant, 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 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 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 further held that the terms of the Sale of Goods Act 1979 governed the contract which sets out requisite standards for the quality of goods and so on.

The Court usefully distilled some of the key principles from previous cases where there is a ‘battle of the forms’, including the contract must be read objectively along side the factual matrix, 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, and, 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 lesson of this case is that in order to protect yourself you need to ensure that negotiations as to which standard terms apply to your contract, and what they say, are closed before signing the contract to avoid lengthy disputes about what your contract says. 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.

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