Many companies refer to their standard Terms and Conditions when entering into a contract for the supply of goods or services with another party. But what happens when two parties disagree as to whose T&Cs should apply? In this article, Richard Suters from our Corporate and Commercial Team examines the dangers of failing to properly clarify which T&Cs apply in a supply contract, as well as some practical steps businesses can take at the negotiation phase to avoid a “battle of the forms” turning into an all-out war.
When the phrase “contract dispute” is mentioned, one generally imagines a situation where Party A has breached a term of a written agreement with Party B. But what if it is unclear what the terms of that contract actually are? What if, as is often the case in supply contexts, there is no “formal” written agreement, and the parties instead rely on their respective standard Terms & Conditions to frame up the rights and obligations of the parties?
What is a battle of the forms?
A “battle of the forms” commonly arises in circumstances where, for example, a supplier of goods or services issues a quote on the basis that its standard terms and conditions of supply will apply to the agreement between the parties, while the procuring party issues a purchase order noting that its own standard terms and conditions of purchase will apply. Or, perhaps the procuring party submits an order referring to its T&Cs, followed by the supplier responding with a confirmation note or invoice with a reference to its own T&Cs. As each party will have prepared standard T&Cs that are generally favourable to it, the two sets of T&Cs are likely to be fundamentally inconsistent in a number of ways.
Where different T&Cs are asserted by each party, there are two principal scenarios that may follow:
- the parties “have the battle” at the negotiation phase and reach agreement as to which terms apply (with or without modification); or
- the parties proceed without expressly agreeing on or accepting one or the other’s T&Cs, most often without turning their mind to it.
The latter scenario is an easy trap for businesses to fall into. It may be the case that all the “fundamental” aspects of the arrangement are already agreed (such as the goods or services to be supplied; the price; and the time for payment and delivery), while other less obvious, yet often crucial, terms remain unclarified due to a lack of express agreement. For example: When will title in goods transfer to the purchaser? Who carries the risk in the goods during the delivery phase? How long does the defects warranty last? What happens if delivery is delayed?
In many cases, all will run smoothly and the question of applicable T&Cs may never come to the fore. However, when an issue does arise, the fact that the terms of the contract are unclear may render the issue all the more difficult, time-consuming, and potentially costly to resolve.
Legal treatment of a battle of the forms
Under Australian contract law, the formation of a contract must involve an offer and an acceptance. Unless Party B accepts the exact terms offered to it by Party A, Party B’s response to the offer may in fact merely constitute a counter-offer at law. If the parties proceed with the supply in the absence of any express acceptance of either party’s T&Cs, acceptance may be found by conduct. In that case, the Courts will often find that that the applicable terms are those of the last offer made. Whilst some may seek to use this principle to their advantage by having the last word in negotiations, the answer is generally not that straightforward, for example, where parties’ T&Cs each expressly state it is their T&Cs that apply.
How to Avoid a Dispute Arising
- Make express reference to your T&Cs during negotiations and in all relevant documents that will form part of the contract (such as the quote or purchase order) and attach a copy of the T&Cs.
- If the other side makes reference to T&Cs, expressly state in writing that those T&Cs are not accepted. Remember that until express agreement is reached around the T&Cs, there is a risk the contract has not been formed.
- Consider the specific risk profile of the arrangement. If the other party is seeking that their T&Cs apply, consider having these reviewed to identify where the greatest exposure will lie. You can expect the other side’s T&Cs to favour them, but the terms may still be generally reasonable in the circumstances.
- Consider whether it may be appropriate to tailor one or other party’s standard T&Cs, rather than fighting over “mine versus yours”. This is often worthwhile if the parties are in an ongoing relationship, entering similar transactions on a regular basis. In those circumstances, the parties can agree an ‘umbrella’ set of negotiated T&Cs to apply to all transactions between them.
- Do not start performing any obligations (such as delivering the goods or paying the purchase price) if the T&Cs issue has not yet been resolved.
If you are a small business, consider whether any of the other party’s T&Cs may be unenforceable on the basis they are unfair under the Australian Consumer Law. Similarly, if you are contracting with small businesses, consider having your standard T&Cs reviewed to ensure all the terms will be enforceable. For more information about unfair contract terms in business to business contracts, see our previous articles on this topic here and here.
This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.