When neither side’s terms of business apply
Article date: 16.05.11
* Two businesses arguing about whose standard terms applied in a dispute found that neither of their standard terms applied, as the High Court decided that terms implied under general business law applied instead.
One of the requirements to form a contract is that one party must make an offer, and the other must accept it. But where one business makes an offer to contract on its standard terms, and another business purports to accept it, but on its standard terms, that is not a valid acceptance. Rather, it is a counter-offer that has to be accepted by the other before there is a valid contract. It is often a matter of chance whose terms apply, dependent on who made the last offer before the parties started performing the contract – when the other party will often be treated as having accepted that last offer by conduct. However, which terms apply can be extremely important if, as is usual, one of the sets of standard terms includes a ‘limitation clause’ excluding or limiting the party’s liability to pay compensation if things go wrong.
In a recent case, one of the parties (the ‘supplier’) tried to rely on a limitation clause in its standard terms after it had supplied a faulty batch of sensors to a customer and this had caused significant ‘consequential loss’ – losses further down the line - for the customer. The supplier’s standard terms excluded liability for consequential loss.
However, it was not clear whether there had been a valid offer and acceptance of those terms during the negotiation of the contract. The customer therefore claimed that the supplier’s standard terms – and therefore the limitation clause – were not part of the contract, and it could therefore recover its consequential losses from the supplier.
The High Court found that neither of them had expressly agreed to the other’s terms of business, and agreement could not be implied from their conduct either. As often happens in business, they had simply ignored the problem and hoped that all would be fine. The Court therefore ruled that neither side’s standard terms applied. Instead, since the parties had agreed during negotiations that perhaps the terms implied into contracts under the Sale of Goods Act 1979 might apply (which did not protect the supplier from liability for consequential losses as its standard terms would have done), the Court decided that those implied terms formed part of the contract instead.
Recommendation
Suppliers wishing to rely on their standard terms to protect them if things go wrong must ensure that those terms apply to contracts they enter into, by making sure they can demonstrate offer and acceptance of those terms, particularly they wish to rely on clauses limiting liability, or risk having to rely on the weaker protection offered by the general law.
Case ref: GHSP Inc v AB Electronic Ltd [2010] EWHC 1828
* This is not legal advice; it is intended to provide information of general interest about current legal issues.
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