Contract – Terms of Business, Battle of the Forms and Letters of Intent

The buyer (a company that made control systems for vehicles) placed orders with the seller (a company that supplied pedal sensors). Both parties traded on their standard terms of business, the key difference between the two being, as it is usual to expect, the extent of the liability, if something went wrong under the contract. The buyer’s conditions sought to impose unlimited liability on the seller for certain breaches, while the seller’s conditions purported to exclude any liability for consequential loss or damage and restricted its business liability to repair.

The sensors were defective resulting in serious problems, including uncontrolled deceleration and loss of power. The buyer suffered substantial losses as a result, including the cost of inspections and replacement of parts. It sought to argue that the contract was formed on its business terms and sought to recover its losses from the seller. The seller argued that the contract was formed on its terms and that its liability was limited to repair, in accordance with its standard terms, which the buyer had accepted by taking delivery of the sensors; while the buyer argued that the seller’s liability was unlimited (in accordance with its standard terms).

So, the preliminary question before the Court was on which terms the contract between the parties was formed.

In an unexpected decision, the Court decided that, the contract did not include either set of standard terms, because the parties had not reached agreement on their precise wording and there was no conduct that could be interpreted as accepting the other’s terms. The Court, therefore, held that the contract terms were governed by the Sale of Goods Act.

The Court, in giving its decision, summarized some of the key principles from previous cases, where there was a “battle of the forms”:

• The contract must be read objectively;

• In most cases, a contract is formed once the last set of terms is sent and received, without the recipient objecting;

• One party can be found to have accepted the other party’s terms by its conduct, but such conduct must be clear (looking at it objectively) with the intention to accept those terms; simply taking physical delivery of the goods is not enough;

• Where parties have not agreed which set of standard terms applies, the only inference that can be drawn is that, the contract was made on the basis that neither set would apply.

In conclusion, terms must be agreed between the parties before the contract is signed or executed. Even expressed wording in contract terms stating that the standard terms will prevail over others may not be effective where it can be shown that no agreement was reached, whether expressly or by way of conduct.

Another recent decision of the Supreme Court addresses two key points. The first is the need to have agreed contract terms, before work starts under a contract and the second that, where a letter of intent is signed and work starts due to it, that a contract must be finalized as soon as possible after that. In this case, the parties entered into a contract formed by a letter of intent. When the letter of intent expired the work continued on, before the terms of the detailed written contract had been finalized.

The Court in its decision reiterated that in terms of letters of intent, it will not impose binding contracts where none existed and therefore each case will depend on its own facts, taking into consideration what is communicated between the parties by words or conduct. Where contracts are negotiated “subject to contract”, the Court noted that, it will not always infer that a contract has been agreed on those business terms that are “subject to contract”.

However, in this case, the Court decided that the parties had agreed a binding contract and that the binding contract was not subject to contract for the following reasons:

• Given the parties agreement over price, it was unrealistic to infer that the parties did not intend to create legal relations;

• All the essential terms had been agreed and variations were agreed without stating that they were “subject to contract”. The actions and communications of the parties indicated that they had accepted the contract terms and formed a legal contract, without the necessity to require a formal written contract; and

• The parties had negotiated in detail the clauses which comprised the terms as amended and as such the clauses had been essentially agreed and varied.

This case highlights the dangers inherent in starting work before a formal written contract is in place and such letters of intent should always be treated with caution.

However, if a letter of intent is inevitable, this should:

• Clearly specify those contract terms that have been agreed and those that remain outstanding, so that there is no uncertainty over what has or has not been agreed between the parties; and

• State that, no binding contract is to come into effect, except to the extent set out in the letter and that neither the letter nor any work done or payment made under the letter shall be deemed to be a waiver of the requirement to provide a binding contract.

Finally, every effort should be made to finalise the contract as soon as reasonably practicable after the letter of intent has been signed.

This article is for general purposes and guidance only and does not constitute legal or professional advice.

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