The recent case of GHSP Incorporated v AB Electronics Ltd [2010] EWHC 1828 (Comm) (“GHSP”) has developed the rules on incorporation of contractual terms. It has highlighted the risks of an undisciplined “battle of the forms”, when both parties wishing to contract try to impose their own standard terms over a bargain. This article considers the battle of the forms generally as well as the potential developments brought about by GHSP. Christine Jackson then explains ways to avoid risk when incorporating standard terms into commercial contracts. Ian Skinner explains what you can do should you find yourself in a dispute with your former customer or supplier, when it is not agreed that your standard terms apply.
Background
One of the simplest rules in contract is the idea of offer and acceptance. A binding contract is formed when one party makes an offer to another party which is unequivocally accepted. Typically there is a commercial exchange before offer and acceptance occurs. Often, contracting parties will try to assert in this exchange that the contract will be concluded on their standard terms. This is often described by lawyers as the battle of the forms, and it is not unusual for the contracting parties to start performing the contract before this battle is fully resolved. Commercial pressure to close a deal often seems more important than fine detail.
This has always created practical problems for lawyers, but contracting parties are understandably keen to create goodwill at the start of their relationship. They hope that a dispute will never arise and that it will not matter whose standard terms apply. This was exactly what happened in GHSP. To quote the judge; “…both sides buttoned their lips, or fastened their seatbelts, and hoped that there would never be a problem, or that, if a problem arose, it would be a small enough one that, with goodwill, it could be settled ‘on a case by case basis’.”. This approach is common enough, but it leaves uncertainty and creates scope for litigation should a contract fail.
Whose standard terms apply?
If a dispute arises between contracting parties, and if the battle of the forms was not expressly resolved before those parties started to perform the contract, whose standard terms apply? Clearly this is an important question. The standard terms of a supplier will often seek to limit or exclude liability for things such as consequential loss whereas the standard terms of that supplier’s customer will likely state that the supplier’s liability for all loss, including consequential loss, is totally unlimited.
Under an old case called Butler Machine Tool Co Ltd v Ex-Cell-O Crpn (England) Ltd [1979] 1 ALL ER 965, it was thought that the party who fires the “last shot” in a pre-contractual exchange, attaching their standard terms to the last offer made before the parties commenced performance of the contract, would usually win the battle. The act of performance by the other party was seen as deemed acceptance of the offer. This gives certainty to the rules, but it is highly unsatisfactory from a practical viewpoint. It creates unintended consequences, but it does fit the simple model of offer and acceptance. The case of GHSP adds a further dimension. What if it is unclear who won the battle? What if each party has expressly rejected the others standard terms? Is it possible for the battle to be a draw, and if so, what terms (if any) apply?
This was exactly the situation before the court in GHSP. The Claimant had a contract with the Defendant to buy electronic automotive parts. From late 2004 onwards, the Claimant had placed orders with the Defendant for products which it then sold to the Ford Motor Company. The Claimant had made it clear from the start that it expected the Defendant to accept unlimited liability for any loss incurred from breach of contract. The Defendant had however made it clear that it would not accept liability for consequential losses. Both sides had put forward standard terms which provided for their views on liability. The Claimant attached its standard terms to each purchase order. The Defendant attached its standard terms to each order acknowledgment, delivery note and invoice. A classic battle of the forms occurred without express resolution before performance of the contract started.
In September 2006, the Defendant sold a batch of defective parts to the Claimant which it supplied to Ford who incurred substantial consequential losses. Ford claimed these losses from the Claimant who was seeking to recover the same from the Defendant as the supplier of the defective goods. The Claimant sought to rely on its standard terms, saying that they provided for unlimited liability. In its defence, the Defendant asserted that it had won the battle of the forms under the last shot doctrine and that its standard terms applied. The judge rejected both arguments and held that there had never been a possibility of the Claimant accepting the Defendant’s standard terms, but equally the Claimant’s standard terms had been said to be unacceptable to the Defendant.
The battle of the forms in GHSP had failed to produce a victor. A contract existed but it was not on either parties’ standard terms. The only terms that applied were those which were implied by law under the Sale of Goods Act 1979 (e.g. that the goods supplied were of satisfactory quality). This is not what either party wanted when the contract was formed, but insufficient care had been taken to agree terms and conditions. This may yet have unfortunate consequences for the Defendant. Liability and quantum are yet to be ruled upon, but if GHSP is good law and if it is not overturned, and if the Defendant is found to be at fault, there is nothing to limit or exclude the consequential losses that are being claimed by the Claimant. Had the Defendant realised this in 2004, it is unlikely to have accepted the Claimant’s first order.
How to avoid an uncertain battle of the forms: Introducing certainty into commercial contracts
The most effective and commercially advantageous way of introducing certainty into any contract is to obtain the express acceptance from the other party to your standard terms. If this is not possible, parties should attempt to negotiate whose terms will govern the contract and record any agreed variations in a side letter.
However, negotiations can be costly or lengthy and there are other steps you can take in an attempt to incorporate your terms into the contract:
Ensure that any discussions with the other party (including by telephone and email) are expressed to be on the basis of your standard terms, and include or refer to your standard terms in as many pre-contractual documents as possible. This will maximise your chances of “firing the last shot” before the contract is performed.
Include a clause in your standard terms advising that they will prevail over any terms issued by the other party. If the other party fails to accept your standard terms this will have no effect, however it can be a useful way of dissuading the other party from attempting to impose their own terms.
Ensure that your sales employees understand the contractual effects of any documents they send or receive. In particular, they should be aware that when they handle documentation purporting to exclude your own standard terms, these can still prevail and they should respond accordingly.
If you trade as a supplier, ensure that all pre-contractual documentation/correspondence (including quotations and brochures) are stated not to constitute offers, this will prevent customers bringing a contract into existence before you have submitted your standard terms. You should also insist that customers place an order by submitting a purchase order which you can accept with an acknowledgement that a contract has come into existence on your own standard terms. If the customer does nothing more and accepts delivery, your terms will usually be held to prevail.
What to do if you find yourself in a dispute involving a battle of the forms: Managing litigation risk
Despite the recent ruling in GHSP, it seems probable that the battle of the forms will continue to produce a victor most of the time. It is not always obvious which party fired the last shot in a battle of the forms, and it can take time and analysis to establish whose standard terms apply. The first preventative step, and something that should always be done, is to ensure that all contractual documentation has been preserved. Commercial contracts are often made on a relatively informal basis. In addition to standard terms the contractual documentation will often include letters and emails, purchase orders, purchase acknowledgements, delivery notes and invoices. This documentation will have been produced by both parties during the pre-contractual exchange and sometimes thereafter. Contracts can also be made on an oral unrecorded basis, but this ought to be avoided as it creates a great deal of uncertainty.
It will usually be clear on the face of the contractual documentation whether one or both parties have purported to incorporate their standard terms. If both parties have sought to impose standard terms, or if your former supplier or customer is intimating a claim against you based on its standard terms, take early legal advice. Until such time as you are fully advised you should reserve your position, possibly by saying nothing more than that you are looking into the matter. Your opponent, who may already have taken legal advice, may try to push you into making unhelpful statements about the contract. Pointed questions and requests for detrimental confirmations are quite common. It can be tempting to respond in detail to such queries; you will no doubt be trying your best to repair a fraught commercial relationship. While there is no harm in talking generally, if you do not take legal advice on your responses, you may make concessions that you later regret.
Dispute resolution lawyers understand this, but they also understand that litigation is not why people go into business. If recourse to early advice is taken we can however help you manage litigation risk when it is present. Sometimes we can help you to settle the dispute before either party entrenches itself into a hostile position. Negotiated settlement is often the best solution.
For more help or advice on contracts please contact
Christine Jackson on 01926 880774 or
Ian Skinner on 01926 880729.
