Whose terms prevail?

The battle of the forms rages on unabated. Buyer and seller each rely on their contradictory standard forms; neither reads the other's forms, nor even, it seems, their own. Eventually a dispute arises, and thence the familiar question: whose terms prevail? These issues have been explored yet again in two very recent cases of commercial and legal interest. Both cases also give important rulings on the validity or otherwise of exclusion clauses.

Balmoral Group

The sequence of events in Balmoral Group Ltd v Borealis (UK) Ltd [2006] 2 Lloyds Rep 629 began with Borealis' '“ the seller's '“ written quotation. This said very shortly that sales were 'subject to normal terms and current conditions of sale'. Balmoral placed its order without querying what such terms might be. This was potentially a big mistake on its part, since the provision in question specifically excluded 'to the fullest extent permitted by law' all statutory implied terms as to quality, fitness, and conformity with description.

In due course Borealis sent its invoices, which stated its exclusion clauses in full. Again the buyer's director did not read them but simply initialled them for payment '“ which was made without comment or objection.

Several months later, Balmoral put in another order; but this time with a stamped reference to its own terms which, predictably, required Borealis' compliance with all Sale of Goods Act conditions of quality and fitness.

Butler

A serious dispute arose over the quality of the very highly specialised goods in question, and so battle was joined. The possible resolutions of such conflicts were famously reviewed by Lord Denning in Butler v Ex-Cell-O [1979] 1 All ER 965, one of the best-known cases on the subject: 'In most cases where there is a battle of the forms there is a contract as soon as the last of the forms is sent and received without objection'¦ In some cases the battle is won by the man who fires the last shot '¦ In some cases, however, the battle is won by the man who gets the blow in first'¦ There are yet other cases where the battle depends on the shots fired on both sides.' Unfortunately, we are little the wiser as to when or why any of these various answers might be given.

In practice, however, the usual answer given by our courts, as in Butler, is that the last shot '“ the last form in time '“ prevails. This may well be a convenient or realistic solution, although the curious result is to nullify the common 'first shot' salvo whereby one party states clearly and categorically at the outset that no terms to the contrary shall be of any effect at all. That party nonetheless fails to respond to the other's contradictory terms at his own peril '“ and there is usually no duty to draw his attention to the subsequent changes: Butler; Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA Civ386.

These various vexed questions in the context of Balmoral were firmly but still to some extent inconclusively dealt with by Clarke J. He noted that Balmoral had never said anything about any changes in the terms, and had never produced a copy of their own conditions in full. 'In those circumstances,' said his Lordship, 'I do not regard the reference in poor typescript at the bottom of Balmoral's purchase orders as reasonable notice that [it] proposed to contract only on [its] terms in place of those of Borealis. A supplier in Borealis' position would be entitled to expect that, if Balmoral was seeking to reverse the previous position, it would make explicit reference to that fact.'

On the facts, his Lordship was able to reject the last in time argument. Even when it might apply, it could still be inappropriate. The difficulties of applying it can be illustrated by supposing that the buyer in this case had brought its requirements fully and clearly to the seller's attention. Because of the passage of time, the new terms could not then be regarded as completing the existing agreement. They might be seen as a variation or, in view of their importance, more probably as an offer of a new contract. In either event, the seller would presumably have to make some express response to protect its position, or otherwise be held to have acquiesced.

Interfoto

Or would they? A party seeking to rely on agreement by default should bear in mind the view of the Court of Appeal in Interfoto v Stiletto Programmes [1988] 1 All ER 348 that since most people, even business people, do not trouble to read printed contract forms, they cannot always be considered bound by them. This acceptance of business laxity makes the outcome of such cases even more uncertain.

Sterling Hydraulics Ltd

The whole problem area was discussed yet again in Sterling Hydraulics Ltd v Dichtomatick Ltd [2007] 1 Lloyds Rep 8. The buyer's order form requested supply 'subject to the terms and conditions set out below and overleaf', as indeed they were. The seller's faxed acknowledgement of order was printed by computer on two blank sheets, one containing its letterhead and conditions of payment and the other nothing more than 'delivery based on our General Terms of Sale'. Subsequent deliveries carried the same cryptic message. Most of the invoices were equally uninformative, but a few stated the seller's terms on the reverse side. In the eventual dispute, the seller denied liability on the basis of these standard terms.

Judge Havelock-Allan QC, sitting as High Court judge, considered the situation in the light of Lord Denning's remarks in Butler, above. He agreed that an acknowledgement might constitute a counter-offer, nullifying the original offer, but only if the two documents were plainly incompatible. He accepted also that it was common practice to refer to and incorporate standard terms without producing them then and there, but even so 'adequate notice of the terms must be given if they are to prevent the acknowledgement'¦ from resulting in a binding contract'. (As Clarke J pointed out in Balmoral, however, where the parties have had previous dealings 'it may not be critical to the incorporation of standard terms that these terms be set out in a contractual document which has preceded the making of every contract'.) The courts may on occasion assume the parties' knowledge and acceptance of such terms: British Crane Hire v Ipswich Plant Hire [1974] 1 All ER 1059.

In Sterling, his Lordship had no doubt that although the buyer knew the seller had its own terms, it could not be supposed to have read or understood them, and still less to have agreed to them. It followed that this was 'not one of these cases where victory goes to the party who fires the last shot. The first shot is the only one which counted. The 'battle of the forms' was barely a skirmish'. Small consolation perhaps for those who wasted so much time and effort and money in the course of that encounter.

Exclusion clauses

These two cases give useful guidance as to how to win the battle or, at least, how not to lose it. They are most helpful also in another distinct but related issue '“ the validity of certain types of exclusion clauses. Section 3 of the Unfair Contract Terms Act 1977 protects businesses and consumers alike by subjecting written standard terms which exclude or restrict liability for breach, or entitle a party to render substantially different performance or not to perform the whole or a part of the contract at all, to a test of reasonableness.

In deciding what is reasonable under this section, Schedule 2 to the Act requires a court to consider in particular the parties' relative bargaining power, availability of other sources of supply, inducements such as lower prices in return for higher risks, whether such clauses are in common use, whether the aggrieved party had adequate notice of the clause, the practicability of compliance with it, and whether the goods were made to the claimant's own specifications. The burden of proving reasonableness is upon the party relying on the clause.

Although the courts, or more particularly the Office of Fair Trading, have often rejected exclusion clauses in contracts with consumers, the courts are understandably much more reluctant to strike out terms agreed '“ or at least notionally agreed '“ between businesses. But still, there are and must be limits.

In our first case, the arguments over Borealis' exclusion clause were more evenly balanced than one might at first have thought. Both parties were big and successful businesses. Balmoral used the same kind of clause in its own standard forms. The parties were on equal footing in negotiations over prices '“ but not as regards the goods themselves. Balmoral had a very strong position in a very highly specialised engineering market, but on the other hand it had to rely on Borealis' expertise, and Borealis had given it no choice but to accept its terms. If Borealis' components were defective, Balmoral would suffer very substantial losses '“ while Borealis had its own major resources and very extensive insurance cover.

Allocation of risk

In these circumstances, Clarke J held Borealis' total exclusion of any possible liability went too far. It was unreasonable and void. The supply of a product with a latent defect was 'not so remote a contingency that it ought to play no weight'. He was not persuaded that 'requiring Balmoral to bear the entire risk of a latent defect in Borealis' product is an appropriate allocation of risk'.

It is only fair to add that after disposing of all these issues and arguments his Lordship held Borealis in no way to blame. The fault in the goods lay in Balmoral's use of them.

In the Sterling case, the judge found the parties had equal bargaining power in all respects, and accordingly accepted all but one of the exclusion clauses as valid. The objectionable clause was one which imposed on the buyers a one-week time limit within which to report latent defects. As in the Scottish case of Knight v Rennie [1994] SC 338, this self-evidently absurd provision was declared unreasonable and void.

Avoiding litigation

It is clearly difficult, if not impossible, to resolve battles of the forms by any kind of formulaic approach. In the end, each case turns on its own facts and merits. That is not, of course, a very helpful piece of advice for business people seeking to avoid litigation or already involved and anxious to know their rights '“ but it seems unavoidable. The problems they face are essentially of their own making. If they do not trouble to study with the utmost care the contracts which are the lifeblood of their businesses and take all appropriate steps to protect their interests, there is not a great deal the law can do to help them. The most that can be hoped for, as in the cases we have examined, is an answer which is demonstrably fair and reasonable in the circumstances of the case.