Hong Kong – Battle Of The Forms To The Death!

In the English case of Transformers and Rectifiers Ltd v Needs Ltd [2015] EWHC 269 (TCC), the court had to decide, as a preliminary issue, what terms and conditions applied to two contracts for the sale of nitrile gaskets. The parties had a long commercial relationship of over twenty years, during which the Claimant (T&R) had placed many purchase orders for gaskets with the Defendant (Needs), almost on a weekly basis. A dispute arose in respect of two contracts, as T&R claimed that the gaskets supplied were unsuitable for their purpose and not in accordance with the contracts. This led to a “battle of the forms” as each party argued that their terms and conditions applied to the contracts. T&R argued that its terms and conditions applied because they were printed on the back of the purchase orders, although there was no reference to the existence of those terms and conditions on the face of the purchase orders. On the other hand, Needs argued that its terms and conditions applied because they were referred to on its acknowledgment of the purchase orders and that liability for breach of contract on its part was limited or excluded by those terms.

 

The court held that neither of the parties’ terms and conditions applied to the contracts. The Court set out the relevant legal principles regarding the incorporation of terms in a contract as follows:

 

Relevant Legal Principles

 

1. Where Party A makes an offer on its conditions and Party B accepts that offer on its (Party B’s) conditions and, without more, performance follows, the correct analysis, assuming that each party’s conditions have been reasonably drawn to the other’s attention , is that there is a contract on Party B’s conditions;
2. Reliance on a previous course of dealings does not have to be extensive. Three or four occasions over a relatively short period may suffice;
3. The course of dealing by the party contending that its terms and conditions are incorporated has to be consistent and unequivocal;
4. Where trade or industry standard terms exist for the type of transaction in question, it will usually be easier for a party contending for those terms to persuade the Court that they should be incorporated, provided that reasonable notice of the application of the terms has been given;
5. A party’s standard terms and conditions will not be incorporated unless that party has given the other party reasonable notice of them;
6. It is not always necessary for a party’s terms and conditions to be included or referred to in the documents forming the contract; it may be sufficient if they are clearly contained in or referred to in invoices sent subsequently; and
7. By contrast, an invoice following a concluded contract effected by a clear offer on standard terms which are accepted, even if only by delivery, will or may be too late.

 

The Court’s Ruling

 

The Court held that neither party’s terms and conditions were incorporated into the two contracts because:

 

1. A problem that T&R faced was that it had not placed its orders in the same way each time. Although some purchase orders had been sent by post,  meaning that Needs became aware of T&R’s terms and conditions on the back of the purchase orders, the majority of orders were made by fax or as a pdf attachment to an email when the terms and conditions were not sent. A purchaser who wished to incorporate its own standard terms and conditions when orders were sent by fax or email had to give the seller reasonable notice of them and had to make it clear that it intended to rely on them.  Here, that would mean faxing the terms and conditions from the back of the purchase order as a separate document together with the purchase order or, if being sent by email, ensuring that the pdf attachment included both sides of the purchase order. This was essential if the purchase order did not on its face refer to the terms and conditions on the back.
2. Viewed objectively, therefore, T&R had not made it clear to a reasonable person in Need’s position that it was seeking to rely on its terms and conditions. As T&R had not followed a consistent practice of enclosing its terms and conditions with every purchase order, particularly where the purchase order that was sent did not on its face refer to any terms and conditions, Needs was entitled to assume that T&R was not intending to rely on them. T&R had not done enough to incorporate its terms and conditions into the contracts.
3. Needs had also taken no steps to provide T&R with a copy of its terms and conditions, which were not the standard terms and conditions of some trade association and T&R had not requested them. A seller who wishes to incorporate its terms and conditions by referring to them in its acknowledgement of order – thus making it a counter offer – must at the very least refer to them on the face of the acknowledgement of order in terms that make it plain that they are to govern the contract. Having done that, if the conditions are not in a form that is in common use in the relevant industry, the seller must give the buyer reasonable notice of the conditions by printing them on the reverse of the acknowledgement of order accompanied by a statement on the face of the acknowledgment of order that it is subject to the conditions on the back. An alternative way to achieve this end (if the terms and conditions are not printed on the back of the order) is for the seller to send the buyer a copy of its terms and conditions, making it clear that they are the only ones upon which it is prepared to do business. The requirement for a party to give the other party reasonable notice of the terms and conditions on which it sought to rely is an important factor. Here, Need’s terms and conditions were not an industry standard and were not sent to T&R at all. Needs had not printed its terms and conditions on the reverse of the acknowledgement of order or provided T&R with a copy of them and had not done enough to bring them to T&R’s notice.

 

The facts in this case are very common in supply and installation transactions in construction projects. Whilst it is helpful that the judge set out the relevant legal principles in this judgment, the application of such is not without difficulty, as the particular facts in each case will be different. It is therefore best practice to insist on one written contract signed by both parties, although sometimes this may have to be overridden by commercial considerations.