Legal Briefing

Better the devil you know: the incorporation of standard terms

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Corporate and commercial | 01 October 2012

A vast number of transactions are entered into whereby a company’s standard terms will be incorporated into the terms of the agreement. This may take place regardless of whether a party is actually aware of those specific terms.

In the recent case of Allen Fabrications Ltd v ASD Ltd [2012], the High Court considered the incorporation of standard terms and conditions into a contract between two parties. In doing so, it examined the circumstances in which standard terms will form part of the agreement, particularly where they include an overly onerous term.


SUMMARY OF THE LAW

In Allen, Mr Waksman QC, presiding, offered a summary of the law governing incorporation of standard terms. He set out the two principal ways in which a party’s standard terms and conditions may be incorporated into a contract between 
two parties:

  1. they may be on or referred to in a document that is provided to the other party prior to or at the time when the contract is made; or
  2. they may be on or referred to in a document that is post-contractual (for example advice notes or invoices). In this instance they will be considered to have been incorporated where there is a prior course of dealing between the parties using those documents, such that it can be inferred that the parties must have intended to contract on those terms.

He explained that, where the court cannot find evidence of there being a signed document (which either contains the terms or incorporates them by reference to another document), the terms will only be considered to have been successfully incorporated if the party seeking to rely on them can demonstrate that it took reasonably sufficient steps to bring them 
to the attention of the other party.

Further, if one or more of the terms is onerous or unusual, the greater the burden there will be on the party seeking to rely on it. In Spurling v Bradshaw [1956], Lord Justice Denning famously indicated that some clauses:

‘… would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.’

Denning’s ‘red hand’ example, while expressed in a rather exaggerated fashion, remains a useful and unequivocal indicator of the courts’ approach. The more onerous a term, the greater the lengths the party seeking to rely upon it will have to go in order for the court to consider it to have been successfully incorporated.

ALLEN FABRICATIONS V ASD


Allen was contracted to supply the constituent elements of a rigid steel platform, which was to be fixed at the first-floor level of a workshop owned by Bembridge Marine Ltd. Allen subcontracted the supply of grating and clips for the construction of the platform to ASD. Shortly after the workshop had been constructed, one of Bembridge’s employees fell through the platform while working because a section of grating gave way. The employee sustained extremely serious head injuries, which left him severely incapacitated.

The employee successfully sued Bembridge, and damages were subsequently agreed in the region of £7m. Bembridge alleged negligence and/or a right of contribution against Allen. Allen in turn issued proceedings against ASD alleging that ASD had failed to deliver a sufficient number of fixings required to secure the grating properly, and/or to warn Allen that additional fixings were needed. ASD argued that its standard terms, which limited its liability to the price of the goods supplied, were printed on the back of the invoices issued to Allen and were therefore incorporated into ASD’s supply agreement with Allen. The question facing the court was whether these terms had been incorporated into the contract.

THE DECISION OF THE HIGH COURT

The High Court held that ASD’s standard terms had been expressly incorporated into the contract because Allen must have signed a document (specifically an application form in order to acquire goods on credit) accepting them. Although ASD was unable to produce the signed application form itself, Mr Waksman QC was satisfied on the basis of the evidence before him that there must have been such a document.

ADDITIONAL COMMENTS MADE BY THE HIGH COURT

Mr Waksman QC took the opportunity to consider what the Court’s view would have been if there had not been any signed document. In these circumstances, ASD would have had to rely on incorporation by a previous course of dealing. The Court would also have examined whether or not the exclusion clauses in ASD’s standard terms and conditions were onerous, and if so, if ASD had gone to sufficient lengths to bring them to the attention of Allen.

Mr Waksman QC commented that it is not always clear what amounts to an ‘onerous’ clause, as much will depend on context. However, he set out certain principles that are instructive:

  • The mere fact that the clause is a limitation or exclusion clause does not necessarily render it onerous, unless there is something more.
  • If a clause is very commonly used in the type of contract in question then it is less likely to be considered onerous, especially in circumstances where the contract is between two commercial parties, since that is the business in which they knowingly operate.
  • The assessment of fairness and reasonableness is fact sensitive and regard must be had in particular to:
    1. the nature of the clause;
    2. what actual steps were taken to draw it to the other party’s attention;
    3. the character of the parties; and
    4. their particular dealings.

He added that courts will generally be reluctant to find that exclusion or limitation clauses commonly used in the industry should be treated as onerous. Instead courts are keen to retain a wide range of discretion in this area, and are prepared only to set out some of the elements that must be considered when exercising this discretion.

IMPACT, SIGNIFICANCE AND 
PRAGMATIC COMMERCIALISM

The decision in Allen serves as a reminder to both purchasers and suppliers of goods and services, that it is important to set up or maintain good procedures.

Purchasers

During cross-examination, it emerged that those responsible for negotiating and entering into contracts for Allen would often execute them without having seen or read the other party’s terms and conditions. It was also apparent that Allen would often be wilfully unaware of the terms upon which it was contracting and was generally unwilling to instruct lawyers to check or negotiate such terms.

This ‘pragmatic commercialism’ – a willingness to speculate when it comes to assuming risk – is probably representative of the approach taken by a substantial proportion of company executives. While it may seem unreasonable to expect commercial entities to trawl through 
every term of every contract, it is difficult to see how it is possible for a purchaser of goods or services to make a commercial decision regarding risk in circumstances where it is unaware of the key terms upon which it is contracting. A company that is prepared to sign agreements blindly in this way will inevitably find itself entering into disputes in respect of contracts, the terms of which it is unaware.

When contracting with a new supplier of goods or services, it is essential for purchasers to request a copy of suppliers’ standard terms and conditions during the course of negotiations. In addition, where it seems likely that the initial contract will develop into a long-standing relationship, it would be prudent to obtain a one-off legal analysis of the terms at the outset, and also to ensure that those terms will not be changed by the other party without it first giving detailed prior notice.

Equally important is for purchasers to ensure that they are aware of the terms governing their existing relationships, especially in circumstances where the 
other party’s standard terms and conditions have gone through several iterations since the relationship began, to the extent that the current relationship may in fact be substantially different from the first signed agreement.

Suppliers

The Court in this case found in favour of ASD on the facts of the case before it, despite ASD’s inability to produce the invoice containing the standard terms upon which it relied. However, it is clearly important for suppliers to ensure that standard terms are contained in or referred to on all relevant paperwork. Where standard terms are printed on the reverse of a document, suppliers should include a statement on the face of the document that the contract between the parties is made on the terms printed on the reverse.

As we have seen, in ideal circumstances, standard terms and conditions should simply be incorporated by a signed document (which either contains the terms or incorporates them by reference to another document). ASD might well have avoided the time and expense of litigation if it had simply retained the original signed application form.

Companies must put effective procedures in place to ensure that signed documents of this kind are retained. Documents that incorporate standard terms cannot assist in later disputes if they cannot be located.

COMMENT

Allen Fabrications v ASD is a reminder that displaying certain terms clearly is in the interest of both parties. It ensures that both parties are aware of the terms and reduces the uncertainty of whether the provider of those terms can rely on them. In addition, it makes it clear that, where both parties are commercial organisations with a history of dealing with each other, the courts will expect an awareness of the contents of the other’s standard terms and conditions.

In circumstances where it appears that commercial personnel are not reading the terms of the contracts they are signing, the court may require the counter-party to go further to ensure that onerous terms are brought to the attention of the other party. In addition, while the court’s retention of discretion is understandable, the stated importance of context inevitably creates uncertainty. This could partly be addressed by, for example, making it mandatory for all key or onerous terms to be summarised at the top of the page containing the standard terms. Listing onerous terms in a prominent position and orally drawing attention to them are clearly good practices.

Displaying certain terms clearly is in 
the interest of both parties. It ensures 
that both parties are aware of the 
terms and reduces the uncertainty of whether the provider of those terms can rely on them.