The High Court has once again grappled with the extent to which it should fi nd an objective agreement when, on the basis of confl icting standard terms, the parties are subjectively in confl ict.1 In a break from the traditional analysis, in which the ‘last shot’ in an exchange usually determines the applicable terms and conditions, the court found that neither party’s terms and conditions had been incorporated.
GHSP Inc manufactured brake pedals for use in Ford trucks. It engaged AB Electronic Limited to supply sensors for incorporation into the pedals. One batch of sensors was defectively manufactured. As a result, Ford incurred signifi cant costs in ascertaining how many trucks were affected. Ford claimed for the costs under its contract with GHSP, which sought to recover its losses from AB. AB argued that the contract with GHSP was governed by the former’s terms and conditions, which included a limitation of liability to the original purchase price and an exclusion of liability for consequential loss. GHSP argued that its terms and conditions, which contained no such exclusion, had been incorporated.
The parties had discussed pricing and engineering proposals, at both design and commercial levels, for a signifi cant period before the start of production. AB’s quotations and invoices and GHSP’s purchase orders all purported to incorporate the respective party’s terms and conditions. Although the issue was never formally confronted or resolved, GHSP went on to order and purchase the sensors that AB produced and supplied.
Justice Burton found that a sale and purchase contract arose on 3 December 2004 by virtue of AB’s acceptance of GHSP’s production schedule. The ‘last shot’ was a GHSP purchase order. However, the judge found that deadlock had been reached on the issue of terms and conditions. He held that (i) there was no possibility of GHSP accepting AB’s terms and conditions, and (ii) whenever GHSP had raised its terms and conditions, AB had responded that they were unacceptable and that a cap on liability would be needed.Therefore, rather than looking at the last shot, which had been a purchase order on GHSP’s terms and conditions, and deeming such terms to have been objectively accepted by virtue of AB’s confi rmation of the order, the judge was satisfi ed that “whenever and however” the contract had been made, it did not incorporate either party’s terms and conditions.
Therefore, subject to an outstanding issue (which related to whether GHSP was on notice of a potential defect in some of the sensors), there was no effective limitation or exclusion on AB’s potential liability, which was to be determined under the requirement in the Sale of Goods Act 1979 that goods be of satisfactory quality.
So-called ‘battles of the forms’ are problematic: the decisions are fact-specifi c and the policy considerations are controversial (for further details please see: “Contracting on standard terms: the battle for an agreement”).
The traditional approach has been that where an offer or counteroffer is made on one party’s conditions and the other party performs under the contract (without more), a contract arises on the terms and conditions of the offer. This analysis was summarised by Lord Justice Dyson in a recent Court of Appeal pronouncement on the issue:
“[W]here the facts are no more complicated than that A makes an offer on its conditions and B accepts that offer on its conditions and, without more, performance follows, it seems to me that the correct analysis is… that there is a contract on B’s conditions.”2
This contrasts with an earlier decision in Lidl UK Gmbh v Herford Foods Ltd,3 in which Lord Justice Chadwick found that:
“[K]nowing that [the parties] had not - and, in the circumstances, probably could not - reach agreement as to the applicability of either set of standard terms, the only inference that can be drawn is that their agreement was made on the basis that neither set of standard terms would be applicable.”
In the present case, the judge followed the Lidl analysis and held that the deadlock on terms and conditions was so strong that AB’s performance of the contract did not amount to acceptance of the terms and conditions purportedly incorporated by GHSP’s last shot. An analysis of the respective ‘shots’ was unnecessary because the judge was satisfi ed that, as in Lidl, the parties could not be taken to have reached an objective agreement at any point.
From a commercial perspective, the test is ultimately one of objective agreement. A party may be able to incorporate its terms and conditions by fi ring the last shot. However, if the parties are deadlocked, it will be diffi cult to maintain that a party’s performance of a contract constitutes acceptance of the other party’s terms and conditions.
The point at which parties reach deadlock is nebulous and unlikely to be clarifi ed by individual cases, which will inevitably turn on their facts. This uncertainty makes it imperative for parties to be clear about the terms and conditions that govern the contract. Commercial bargaining power will determine whether a contracting party can force a crunch meeting to settle the issue or is forced - in the judge’s metaphor – to button its lips and fasten its seatbelt. If reaching for the seatbelt is the only option in commercial terms, parties should be aware that critical terms and conditions, such as clauses excluding or limiting liability, may not have been incorporated into the contract, and that even the last shot will not necessarily kill the issue.