Businesses should be vigilant regarding the incorporation of standard terms into commercial contracts, particularly when they are another party’s terms. Commercial agreements are normally subject to one party’s standard terms irrespective of the other party’s true awareness of them.
In the recent case of Allen Fabrications Ltd v ASD Ltd [2012], the High Court concluded that ASD’s standard terms were incorporated and reasonable, limiting its potential damages of £7 million in a claim for negligence and breach of contract to £705.
How Incorporation of Standard Terms Can Occur
In Allen v ASD, the High Court summarised the general law as follows:
- They may be on or referred to in a document which is “contractual” that is to say provided to the other party prior to or at the time when the contract is made (leaving aside “battle of the forms” cases); or
- They may be on or referred to in a document not itself contractual but post contractual, like the advice notes and invoices [here], but which are nonetheless held to have been incorporated because of a prior course of dealing between the parties using those documents from which it can be inferred, objectively, that the parties must have intended to contract on those terms.
In Allen v ASD the High Court concluded that standard terms had been expressly incorporated by reference to them on an order form which must have been signed, despite the fact that a signed document could not be produced as evidence. It also determined that the clauses limiting ASD’s liability were reasonable.
Reasonableness Requirement when Incorporating Standard Terms
If the court cannot find evidence of a signed document that either incorporates the terms or references them, the party that is seeking to rely on those terms must show that reasonable steps were taken to make sure the other party were aware of them.
If standard terms contain a clause that is onerous or unusual, a greater burden in placed upon the party seeking to rely on it, to show that the other party had reasonable notice of its existence.
Whose Standard Terms Are Incorporated?
It’s not unusual for both parties to want to contract on their own standard terms, resulting in a “battle of the forms”. Although an enforceable contract might have been created, the parties can be divided as to whose terms govern the contract. Usually, the prevailing party is the last one to send the other party a document which references their standard terms, which are not expressly rejected by the recipient.
Conclusion
Difficulties regarding incorporation of standard terms can easily be avoided by employing a consistent approach to contracts. Purchasers should ensure that they are fully aware of suppliers’ terms and conditions and negotiate required amendments before they make orders. Suppliers should make it standard practice to ensure that any onerous terms are expressly communicated to the other party, and that their standard terms are clearly referred to on all communications. Needless to say, maintaining records of signed agreements is always best practice.
If you need help with your standard terms of business or more general contractual advice, Rollingsons has experienced lawyers who can assist you. For more information please contact James Crichton via e-mail jcrichton@rollingsons.co.uk or by telephone on 0207 611 4848.
