Is it a Waste of Time to Have Standard Terms of Business?

Most substantial commercial businesses rely upon their own standard terms drafted for use when buying goods for their business or selling goods to customers.  However effectively these have been drafted, they will not become incorporated into the contracts with suppliers and customers unless appropriate steps are taken so as to ensure that this is the case. If the terms have not been incorporated into the contract it is a waste of time having them!

Methods of incorporation

Hopefully, the process by which the terms have been drafted will have included advice on how the terms might best be incorporated into any relevant contracts.  Typically, a printed set of the terms and conditions form part of the written contract form which has to be signed by the customer.  Alternatively, the terms may be endorsed on to the reverse of the quotation form, which is sent to the customer as part of the sales process, so that they become incorporated when that quotation is accepted by the customer.

The problems which arise

One of the real difficulties with a set of standard terms of business is that a business will often not appreciate the effectiveness of their terms of business until a major dispute arises.  At that point, even before examining the terms themselves, the lawyers get involved to advise on whether the terms have been incorporated into the contract.

Typically this gives rise to the following questions:

  1. How, if at all, were the terms made known to the other party?  In order for them to have been incorporated into the contract, they need to have been made known to, and have been accepted by, the other party prior to the formation of the contract.  Since terms of business often contain terms as to payment, one common mistake is to print them on to the reverse of an invoice.  However, it is clear that the invoice will only be rendered long after the contract has been concluded and usually after the contract has been performed.  By then it is far too late for the terms to be incorporated into that contract.

    In such situations, it would only be possible to argue that the terms have been incorporated if they have been used previously in a series of similar transactions.

    Better still is to provide a set of terms with the first quotation.  In a faster moving business the terms might be endorsed on to the reverse of the standard quotation forms.  It may also be helpful if they are endorsed on to the reverse of any acknowledgement of order form that is used.  However, whether reference to the terms on such a form alone will be an effective means of incorporating those terms will still depend upon other factors.

  2. What happens if other terms are proposed? The seller may still find that although he has given a quote based upon his own standard terms, the purchaser decides to accept the quotation on the basis that he wishes the purchaser’s own terms of business will apply. In those situations, the Court has to decide which terms prevail.  Generally speaking, the Court operates the “last shot” doctrine which provides that were the facts are no more complicated than that A makes an offer on A’s standard terms and B accepts that offer on B’s standard terms, and without more, performance follows what we will find is that there is a contract on B’s standard terms.

  3. What happens if our terms are not incorporated? In more complex situations it is difficult to lay down a general rule which will apply. In recent cases the Court has also shown that it is prepared to come to the conclusion that neither party can rely upon its own terms of business because it was clear that the other party had rejected them.  In those circumstances, the Court could conceivably find that there was no contract in place.  However, if the contract has already been performed, it is likely to wish to infer the terms of the contract from other factors.

What lessons can be learned?

  1. Do not rely on the fact that you have a set of standard terms and conditions to assume that this means that they apply to all of your contracts.

  2. Ensure that those who deal regularly with the formation of contracts, whether in Purchasing or Sales, are familiar with the general provisions of contract law and understand what they need to do to ensure that the company’s terms and conditions are properly incorporated into the contracts they are negotiating.

  3. Be particularly vigilant in circumstances where the other contracting party is seeking to incorporate their own terms of business.Do not assume that your own terms will apply unless the other party has made it clear that they accept this.