The recent High Court case of GHSP Inc v AB Electronic Ltd concerned a “battle of the forms” dispute. Such disputes arise when the contracting parties have commenced performance of the contract without formally agreeing whose contract terms apply (ie, the supplier issues the purchaser with a copy of its standard terms and conditions and vice versa). In this case, a dispute around liability ensued following supply of defective products which resulted in a third party incurring significant consequential losses. The third party claimed against the purchaser and the purchaser claimed against the supplier.

The significant fact in these circumstances was that it was not clear which party’s terms applied. If the purchaser’s terms applied, this meant that the supplier would have unlimited liability and if the supplier’s terms applied this meant that it would have almost no liability. As liability was potentially very high this was really important.

Following an examination of the parties’ behaviour and communications both, in the negotiation stage and following commencement of supply, the court held that neither parties’ standard conditions applied. Although most contract discussions referred to the purchaser’s terms, the supplier had made it clear that it did not accept the liability in them. It was therefore impossible for the court to determine the liability position. Rather, the court held that arrangements between the parties were governed by implied terms of the Sale of Goods Act 1979 and in particular, the requirement under that Act that goods supplied are of satisfactory quality. The significance of this is that the implied terms of the Act meant that the supplier’s liability under the contract was unlimited (subject to the common law rules on recovery of damages).

Whilst limitations and exclusions of liability are one of the most negotiated areas of all commercial contracts, parties should only commence performance of contractual obligations once liability is agreed and a contract is entered into. In this case, the parties proceeded without agreement assuming nothing would go wrong or if it did, they could reach agreement. But the stakes were too high. This decision by the High Court demonstrates the significant risks involved in not signing contracts before starting to perform them.