Whether you are just starting up a new business, celebrating your 20th year in the industry, agreeing terms with a new business partner or dealing with a long-time known entity, it is important to ensure your standard terms and conditions (T&Cs) are in order and fit for purpose.
This is a task which rarely tops a business’s to-do list. However, neglecting to review business T&Cs can result in unforeseen and often adverse consequences; such as unlimited liability if something goes wrong, an inability to terminate the contract without penalty if you no longer wish it to continue and/or your being tied in to unfavourable obligations you were not aware applied. All of these factors become even more important if you are preparing to sell your business or obtain outside investment.
In this article, our Commercial Team highlight four important issues all businesses should consider when reviewing their standard T&Cs and discuss the potential pitfalls of dealing on unsuitable T&Cs.
Avoid a battle of the forms
Before getting to the nitty gritty, businesses should always try to ensure that their T&Cs actually apply in the first place and one should be careful not to assume that they will, particularly when dealing with repeat orders for goods or services or in cases where there is a longstanding commercial relationship.
In Transformers v Rectifiers Ltd v Needs Ltd, in February 2015, two parties to a contract lost out in a “battle of the forms” when each tried to assert in court that the contract was subject to its respective standard T&Cs. In a surprise judgment the court ruled that in fact neither party's’ T&Cs applied, despite the parties having done business with each other for some 20 years.
Why did this happen?
The purchaser’s standard T&Cs were printed on the reverse of its standard purchase orders when sent by post, but the court found that this was not obvious on reading the front page and that when sent by fax or email the reverse, including the T&Cs, was often not sent at all.
The supplier, on the other hand, whilst attempting to make a counter-offer on its own T&Cs, never provided a copy of its T&Cs at all. In summary, the court ruled that neither party had done enough to draw attention to its T&Cs.
TIPS: If sending a purchase order/invoice electronically, ensure you actually include your terms and conditions with every invoice/order and if they are on the reverse be careful you are not leaving off the back page.
If your T&Cs are on the back, clearly draw attention to them on the front of the purchase order/invoice.
Clearly state that your T&Cs are the only ones upon which you are content to do business. Be mindful of counter-offers on the other party’s standard terms.
Be wary of conflicting terms
When striking commercial deals, businesses should be careful not simply to “tack on” their standard T&Cs without considering how they might apply to the specific agreement that has been reached on that occasion, and whether some of the terms might conflict and result in uncertainty on what has actually been agreed.
To help reduce ambiguity, one can include a “priority of documents clause” which might provide, for instance, that the order form is to take priority over the provisions in the T&Cs.
However, although using a priority of documents clause is sensible, such provisions must be carefully worded and may even be overlooked by the courts, which will always rely first on common law principles of interpretation.
An example of the point in discussion can be found in the case of RWE Npower Renewables Ltd v JN Bentley Ltd, where the obligations of a supplier defendant when providing a piece of work were described slightly differently across several separate documents (the contract itself was in fact set out across 8 such documents). In court, Bentley argued that only the most limited description should be taken to apply.
The court ruled that the contract documents should as far as possible be read as complementing each other, and only in the case of a clear and irreconcilable discrepancy would it be necessary to resort to the contractual order of priority to resolve it. In the event of a potential discrepancy, the agreement should be considered as a whole, and if at all possible the reader should not be forced to choose between one clause and another.
TIPS: When intending to enter into a contract that includes several documents (ie, an order form/invoice and your standard terms and conditions), check that key terms, such as services to be provided, or timings, do not conflict.
Include a priority clause, but be aware of its limitations.
Where possible, group similar provisions together in one document, and avoid setting out the agreement over a large number of different documents.
Watch out for indemnities
Indemnities are a powerful form of contractual protection which should never be overlooked.
In summary, an indemnity is a promise to pay a particular amount should a particular liability arise. It is, in effect, an insurance policy for either you or the other party, as it constitutes an obligation to provide guaranteed compensation for a foreseen event.
An indemnity is a useful tool for the party who receives the benefit, as it may cover liabilities which it could otherwise prove difficult to recover through the courts, and (all being well) reduces the uncertainty of any after-the-event dispute, at least in relation to the specific commercial risk which is addressed in the indemnity in question.
However, for those very reasons, any party granting an indemnity should do so very cautiously.
TIPS: Resist giving indemnities if at all possible, but try to include them if there is a particular issue of which you are aware.
If an indemnity must be given, strive to cap it at a reasonable figure, or restrict it to a particular set of circumstances, so that any potential liability is clear and limited.
Escape to victory
Last but not least, businesses should always ensure they have a clear exit strategy and can get out of a contract if the commercial relationship between the parties deteriorates, or if they simply do not wish to do business any more.
A termination clause will provide a right to terminate.
If for breach of contract, businesses should be careful about the wording they use. For example, parties have a common law right to terminate a contract if the other party commits a particularly serious, or “repudiatory”, breach of its obligations under it; so any clause that permits termination for “repudiatory breach” adds no more protection than if the clause were simply not included. “Fundamental breach” means the exact same thing.
TIPS: If you want a right to terminate in certain circumstances, be clear in your T&Cs about what those circumstances are.
Give non-exhaustive examples, or include clauses permitting termination for certain specific events, such as late payment of an invoice beyond a certain period or breaches that are not remedied within a certain time.
If the worst happens, it is also important to follow any procedure set out in their agreement. Heed the recent cautionary tale in Ticket2Final v Wigan Athletic; Wigan Athletic purported to terminate their agreement with Ticket2Final because of outstanding payments, and gave notice to terminate by email. The court ruled that the termination was not valid because the contract required specific notices, including on termination, to be given by post or fax only.
TIP: Ensure your termination clauses are clear. If you think you are entitled to terminate in certain circumstances and get it wrong, then by sending a notice of termination you might be in breach of the contract yourself.
As can be seen, it is important to make sure your business’ T&Cs are tailored and do what you intend them to do.
This article only provides a brief overview of what is involved. If you are preparing standard terms for the first time, dusting old terms off for a timely review, or about to enter into an agreement and wish to avoid a battle of the forms, our Commercial Team at BWB can help you. Just contact a member of our Commercial Team for more details.
Posted on 28/07/2015 in Legal UpdatesBack to Knowledge