Trading on Standard Terms
Updated May 2014
Standard Terms and Conditions of Business are frequently used by businesses to simplify their contracts with their customers. However, having properly drafted Standard Terms and Conditions of Business in itself is insufficient to adequately protect your business. Standard terms will only be effective if they have been properly incorporated into the contract between the parties. This note looks at the provisions governing effective incorporation of Standard Terms and Conditions of Business and sets out some tactics that can be employed by businesses in ensuring their Standard Terms are valid and enforceable.
This guide should not be relied upon as legal advice and you should contact us for advice on your specific circumstances.
Standard Terms and Conditions or bespoke contract?
Trading on standard terms offers certain key advantages over individually negotiated agreements. These include:
- They enable a business to introduce terms favourable to itself in a format that does not encourage heavy negotiation.
- They avoid the additional time and expense involved in drawing up specific terms for each individual transaction.
- They provide certainty that the business will be trading on broadly consistent terms in all cases where the terms are used.
- They allow for standardisation of a business’ contracting procedures, which will allow contracts to be handled and concluded by more junior staff.
However, sometimes a bespoke contract may be more suitable than standard terms of business, which can have certain legal and practical limitations. These include:
- There are greater restrictions on the extent to which a supplier is allowed to exclude or limit its liability when trading on standard terms.
- The standard terms must be incorporated into the contract between the supplier and the customer in order to be effective. Incorporation is likely to become an issue where the other party puts its own terms and conditions forward, creating a battle of the forms (see further below).
- There is a danger of staff using the standard terms for transactions where they are not appropriate.
- The use of standard terms cannot replace the need for proper credit and quality control procedures.
- Standard terms require regular review in order to ensure they take account of any changes to the law and reflect any changes in the business activities of the business.
- A business may still need to have more than one set of standard terms if it provides a number of differing services.
However, in either case, it is likely that your business will have the need for standard terms and conditions.
Effective incorporation of standard terms
Standard terms will only be effective if they have been properly incorporated into the contract between the two parties.
If standard terms are set out or expressly referred to in a contract that both parties sign, it can be assumed that the standard terms have been incorporated. However, this is often not the case and the owner of the standard terms must establish that the standard terms were put forward to the other party before the contract was made and that the other party accepted their incorporation into the contract.
The simplest way of doing this is to expressly state in pre-contract correspondence that the standard terms will apply to the transaction. Whilst this may provoke the other party into seeking to negotiate the standard terms, any desire to avoid this must be balanced against the increase in risk that, in the absence of such a statement, those terms will be considered not to have been incorporated.
The next best option is to bring the terms to the attention of the other party in as much pre-contract and contract documentation as possible. This will also help in the event of a battle of the forms (see further below).
For a supplier, this would include setting out or making reference to standard terms:
- In brochures, catalogues or other publications;
- On quotations;
- On purchase order forms;
- On acknowledgements or confirmation of order forms;
- On delivery notes;
- On invoices.
For a customer, this would include setting out or making reference to standard terms on:
- Purchase order forms;
- Acceptances of quotations.
Certain other specific rules relating to the interpretation of contracts must also be followed in order to ensure effective incorporation of standard terms:
- Where standard terms are printed on the reverse of a document, the document should have a statement on the face of it clearly stating that the sale or purchase is made on the terms printed on the reverse and they form part of the contract between the parties.
- If a standard term is unusual, particular attention should be drawn to it on the face of the document as the courts require special notice to be given of any such terms.
- If a standard term governs or potentially varies something on the face of the document, it should be cross-referenced.
The battle of the forms
An additional barrier to incorporation arises where each party purports to contract on the basis of its own standard terms. This gives rise to what is known as ‘a battle of the forms’. When a battle of the forms arises, a business can opt to deal with the conflict directly and agree with the other party what terms will apply to the contract. This does, however, incur additional time and expense, which the use of standard terms is designed to avoid. More often, businesses decide to proceed with the transaction without resolving the issue, relying on the courts deciding that its terms prevail if a formal dispute arises.
When faced with a battle of the forms, the courts apply an ‘offer and acceptance analysis’, which provides that a contract is formed between the parties when an offer is made by one party and is unequivocally accepted by the other. According to this analysis, if A offers to buy goods from B on A’s standard terms and B purports to accept the offer on the basis of its own standard terms, B has not accepted A’s offer but has introduced a counter offer. The courts will look at the parties’ communications to find an offer that has been unequivocally accepted. Usually, the last communication exchanged by the parties that was not explicitly rejected by the recipient will be held to constitute the offer (known as ‘the last shot doctrine’).
There are a number of drafting and procedural tactics a business can employ to help persuade the court that its standard terms should prevail. Although none are guaranteed to be successful, they should at least strengthen the business’ position.
Suppliers seeking to trade on standard terms should:
- Make sure all pre-contractual documentation and correspondence are stated not to constitute offers. This avoids the possibility of the customer bringing a contract into existence before the supplier has put its standard terms forward.
- Include reference to the standard terms in as many pre-contractual documents as possible. This increases the chances of ‘firing the last shot’ before the contract is formed.
- Include a statement in the standard terms that they will prevail over any terms issued by the other party. Whilst legally this is unlikely to affect matters as the clause will only be effective if the standard terms form part of the contract, this type of clause can often put the other party off seeking to impose its own terms.
- Make sure any discussions with the other party are expressed to be on the basis of standard terms or are stated to be subject to contract.
- Require customers to submit a written purchase order which can then be accepted by issuing an acknowledgement stating a contract has come into existence on the supplier’s standard terms. In these circumstances, if the customer does nothing more and accepts delivery of the goods/services, the suppliers terms will usually be held to prevail.
- Ensure adequate procedures are in place to ensure employees do not act on a customers purchase order without first sending an acknowledgement of order stating that the order is accepted on the supplier’s standard terms.
- Include a statement in the standard terms that any purported acceptance by the customer shall be deemed to be an offer.