Out-Law Analysis 2 min. read
07 Apr 2020, 11:21 am
The coronavirus outbreak has led to a breakdown in supply chains and a reduction in cash flow for many businesses, causing increased scrutiny of the terms and conditions set down in contracts.
When goods and services are being delivered, and invoices are being paid, there is often no reason why contracting parties would need to scrutinise the terms of their contract. However, when things start to go wrong; when products or services aren't delivered on time or at all, and when reduced cash flow means that payments are delayed, it is then that parties turn to their contracts.
For example, a contracting party might want to see what its rights and remedies are in relation to delayed performance, whether there are caps on liability, or under what circumstances it can terminate the contract.
The first question to consider is which contract applies. The question is often easy to answer when a contract has been individually negotiated and signed off by the parties, but it is more difficult to answer when each party has tried to contract on its own standard terms.
What will often happen is that the last set of standard terms sent before acceptance or performance will normally "win" the battle of the forms
This can happen when one party makes an offer on its standard terms, and the other party seeks to accept that offer, but imposes its own standard terms instead. This is known as "the battle of the forms". In these circumstances, which standard terms will apply?
In this situation the courts will go back to the basic contractual principles of formation, offer and acceptance – a contract is formed when there is an offer and unequivocal acceptance. For example, if Party A offers to contract on its standard terms, and in response Party B sends out its own standard terms, Party B is treated as having made a counter-offer.
What will often happen is that the last set of standard terms sent before acceptance or performance will normally "win" the battle of the forms; this is known as the "last shot" doctrine. If the customer sends out its standard terms with an order, and that order is then delivered, it is very likely the courts will hold that the customer's terms apply.
Although this is the courts usual approach, disputes of this nature are always fact-specific and there are a range of other outcomes. For example, the courts could decide that neither party wins, and that the parties’ conduct demonstrated that they considered themselves to be bound by some other terms, such as those agreed in correspondence.
Further, the court could hold that only some terms had been agreed, and other terms need to be implied by either the courts or by statute; or it may decide that there is no contract at all.
There are different tactics that a party can employ to try and ensure that their standard terms apply. For example, a supplier can send out its own standard terms before acting on a customer’s purchase order, and a customer's purchase order should express that it is an offer made on its standard terms.
In addition, both parties should refer to their standard terms in as many pre-contractual documents as possible to maximise the chances of firing the “last shot”.
However, there is no substitute for good contract management, and the best way to avoid a dispute is specifically agreeing which contract terms apply before performance of the contract begins.
13 Mar 2020