Ensuring your contract terms and conditions are tailored to your business is not only the most cost-effective means of avoiding disputes with customers and suppliers, it also allows disputes to be dealt with quicker and more efficiently where they do arise. Where such tailored terms and conditions have been drafted it is essential that steps are taken to ensure these terms actually apply to contracts, often achieved through negotiation. In many cases where it is not made clear whose terms apply, or where parties have failed to reach agreement, parties on both sides may be trying to rely on their own sets of terms.
The importance of agreeing terms before entering a contract is highlighted by the recent case of GHSP v A B Electronic. In this case, despite both parties arguing their terms applied to the contract between them, the court ruled that in actual fact neither sets of terms applied. AB Electronics agreed to supply electronic parts to US company GHSP which, in turn, used these parts to supply Ford. When negotiating the contract between the two companies, GHSP and AB rejected each others terms and insisted on using their own standard terms of business. This resulted in deadlock between the two companies.
Due to deadlines set by Ford, GHSP made an order for parts which AB started manufacturing before terms were agreed. Following delivery of the parts to Ford by GHSP, Ford claimed against GHSP for defects in the products. GHSP subsequently tried to claim against AB which led to both firms arguing that limitation of liability clauses in each of their standard sets of terms applied to the contract between them.
Unfortunately for AB, its failure to negotiate terms before entering the contract proved key. The Court held that neither party’s terms applied to the contract, instead arguing the Sale of Goods Act 1979 governed the relationship. This meant AB, as the manufacturer, was ultimately liable under S14(2) of the Act which states goods supplied should be “of satisfactory quality”. If AB had been able to rely on its standard set of business terms they could have restricted this liability.
As the above case demonstrates, it is essential businesses agree terms before entering a contract so as to limit liability and protect against possible claims. Further, where confronted with another company’s set of terms which include particularly unfavourable clauses, or indeed an “entire agreement” clause (stating their terms supersede all other contracts between the parties) the implications of these terms should be carefully considered before entering the agreement.
If you are unable to agree terms with a supplier or customer at the outset, does this bode well for an effective working relationship and is it worth taking a risk to find out?
Holmes & Hills Solicitors' team of corporate & commercial solicitors provide a wide range of commercial legal services to business owners and managers across Essex and Suffolk.
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