Personal injury

This seminar is for general information only and is based on the law in September 1999. No action should be taken in reliance on the general information contained in this seminar. If you require advice on this area of the law contact Andrew Payne

Ladies and Gentlemen, trading on your terms is about ensuring you do business on terms that are to your advantage.

We all regularly meet terms and conditions, both in connection with our businesses and our private lives. Most people would rather sign a set of terms and conditions than read them and they are often accepted unread.

So what is the purpose of you or someone else trying to introduce a set of terms and conditions into a particular transaction?

In many transactions, the only matters that are negotiated are price and delivery. The incorporation of a set of terms and conditions means that you have in reality entered into a very detailed contract with minimal negotiation.

Despite the fact you may have only discussed price and delivery your terms and conditions have filled in all the gaps which you have failed to talk about. Your terms and conditions have created a contract which is more certain. Contractual certainty reduces considerably the scope for disagreement and costly litigation.

The obligations of the parties will be defined.

Hopefully it will always be your terms and conditions which are incorporated into a particular contract. These will have been drafted for your benefit and so a contract that is in your favour will have been made.

How will your standard terms of trading actually benefit you in your trading activities?

It is fair to say that in the vast majority of commercial transactions, the existence of a contract incorporating your terms confers no real benefit because the vast majority of commercial transactions are completed satisfactorily. It is only when there is a dispute between the parties or one of the parties is in financial difficulties that a set of terms and conditions will provide you with a definite benefit.

Whether you are a supplier or a purchaser, your terms and conditions should be drafted to minimise the likelihood of you being in breach of contract. For example, dates for delivery or performance. Do these have to be strictly observed or are they no more than an estimate? Your terms and conditions should adopt a position that assists you.

If you do end up in a breach of contract situation, your terms should endeavour to keep your liability to a minimum.

If the other party fails to perform, your terms should afford you some security the most obvious example being a retention of title clause entitling you to recover your goods.

Your terms should make life easy for you if the other party is in breach by setting out your remedies. A genuine pre-assessment of loss in the event of a breach of contract will be recoverable as liquidated damages without you actually having to prove that loss. Never use the word penalty because a penalty is not recoverable by law.

What should your terms and conditions of trading cover?

Obviously this depends very much on the nature of your business.

If you wish to confine your standard terms of trading to one side of A4, you may have to be selective in your choice but you should always include terms dealing with the passing of property and risk and the exclusion or limitation of your liability.

The general rule is that ownership of goods will pass to the buyer when the parties intend it to pass. The Sale of Goods Act 1979 contains a number of rules which, in the absence of any agreement to the contrary, will determine when the ownership of goods passes. One of those rules is that the ownership of goods, which are available for delivery, will pass when the contract is made, not when the buyer pays and not when the goods are delivered. If your business allows credit terms, you are vulnerable if your buyer gets into financial difficulties before payment is made, so retention of a title clause is essential, but remember whenever you attempt to enforce retention of a title clause, you are likely to be facing a receiver, a liquidator or an administrator who will be an expert in retention of title claims. Your claim will be thoroughly scrutinised. Was your retention of title clause effectively incorporated into your contract with the buyer? Was the wording of the clause effective and not so as to create a charge over your goods which is unenforceable for lack of registration? Do your goods remain identifiable? If they have been sold, your retention of title clause will not be effective. If your goods have been mixed with other goods, your retention of title clause will be ineffective unless your goods remain identifiable and can be recovered in their original form without causing substantial damage. As well as the retention of title clause itself, you should reserve ancillary rights of access to your goods, rights to inspect and rights to remove your goods. If you include a retention of title clause, make sure you expressly reserve the right to sue for the price. Under the Sale of Goods Act 1979, the passing of property is a pre-condition for suing for the price of your goods. Provided the price is due on a date certain, this statutory provision can and should always be varied.

When do you cease or when do you become liable for loss or damage to goods?

If no agreement is reached, the general rule is that risk will pass at the same time as ownership. If you have a retention of title clause, you will of course want risk to pass much earlier. As a buyer, the earliest time you will want to assume liability for goods is when they are actually delivered and accepted by you. Your terms and conditions should deal with risk in a way which minimises your exposure.

You should always attempt to set out the limits of your liability in the event of a breach of contract situation. If a breach of contract arises, the court will endeavour to put an innocent party as far as is possible in the position that they would have been had the contract been satisfactorily performed. Subject to a general duty to mitigate loss, all losses caused by a breach are recoverable provided they are not too remote. Your exclusion or limitation of liability clause is arguably the most important clause in your terms and conditions but is one which is frequently drafted with little thought.

The Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999, which come into force on 1 October 1999 and replace existing 1994 Regulations, seriously limit the effectiveness of exclusion clauses. You cannot exclude liability for death or personal injury resulting from negligence in any circumstances. If you are selling to someone who is a customer, you cannot exclude liability for breach of any of the implied terms that goods will be of satisfactory quality, fit for their purpose and conform to any description given. In fact if you try to exclude liability for these matters in a transaction involving a customer, you will commit a criminal offence under the Consumer Transactions (Restrictions on Statements) Order 1976. If you supply goods to non-business customers, make sure you include a statement that your terms and conditions do not affect customers' statutory rights to avoid breaching the 1976 Order.

The Unfair Contract Terms Act applies restrictions to clauses excluding or limiting liability where one party deals on the other party's written standard terms of business. So, if your terms and conditions include, as they should, an exclusion or limitation of liability clause, even when you are dealing with another business, your exclusion clause will only be enforceable if it passes the test of reasonableness. To be effective, your exclusion clause must have been a fair and reasonable one to include having regard to all the circumstances. The Act provides a number of guidelines for determining whether an exclusion clause is fair and reasonable. A blanket exclusion of liability clause for any reason is never going to pass the reasonableness test because it would mean a party who wilfully defaults would have no liability. Despite this such clauses still appear in countless terms and conditions. A clause excluding liability for loss of profits will in most cases pass the reasonableness test simply because the value of such a claim will be of unforeseen proportions and may substantially exceed the value of the contract.

What if you limit your liability to a specified sum; for example, in no circumstances shall your liability exceed £50,000. In these circumstances, whether that is reasonable will be judged against resources you could expect to be available to you for meeting the liability should it arise and the extent to which you could effect insurance. It is unlikely that limiting your liability to the contract price only will be sufficient. If there is a breach inevitably the other side will have incurred some costs and inconvenience. A limitation of liability to a sum that exceeds the contract value has a much better prospect of being successful. Make sure your exclusion or limitation of liability clause is drafted not as one long clause but as several so that if one element is judged unreasonable, the whole clause does not fail.

Your exclusion or limitation of liability clause should be tailored to your business and your circumstances. If you are using an exclusion clause that has not been drafted following a detailed consideration of your business or which was drafted some time ago; you ought to review its terms.

The recent case of St Albans City and District Council -v- International Computers Limited, which went to the Court of Appeal in 1996, is a good example of a clause limiting liability which failed. In that case, ICL supplied software to St Albans City and District Council to administer collection of the community charge. The software was defective and as a result St Albans failed to collect nearly £½m from charge payers and paid nearly £700,000 more than they should have done to the County Council. St Albans sued. The deal had been done on ICL's standard terms of trading which limited their liability to £100,000. The Court of Appeal held that this limitation of liability was unreasonable and thus of no effect. Factors which were relevant were that: -

• ICL could not justify how the figure of £100,000 had been arrived at
• ICL resources were huge
• ICL had insurance cover for £50m
• St Albans City and District Council and ICL were judged not to be of equal bargaining strength

It is also noteworthy that the fact that other computer suppliers would have imposed a limitation of liability in similar terms did not help to make the clause reasonable. Quite the contrary - it emphasised that St Albans were not of equal bargaining power with any of the computer suppliers.

Assuming that you have taken the trouble to prepare a tailor-made set of terms of trading to safeguard your interests, against the odd transaction that goes desperately wrong and which could make a serious dent in your profits, it is vital that those terms and conditions are actually incorporated into the contract.

Your terms of trading must appear on a contractual document so use paper of reasonable size and appearance and, where terms are printed on the reverse of a sales order or a purchase order, make sure that there is a specific reference to those terms and conditions on the front page.

It is essential that your terms and conditions are communicated before or when your contract is made. There are still countless businesses who print their terms and conditions on the back of their invoices. By the time you render an invoice, your contract has already been made and any attempt at that point to incorporate terms and conditions will be of no effect. Of course, a good deal of commerce takes place over the telephone by fax or e-mail. You need to have an effective system to ensure your employees communicate your terms and conditions before an order is confirmed. Ask you customer if they have your terms and conditions. If not, make the order conditional on sending a copy and receiving an acknowledgement that your terms and conditions are accepted. For regular customers, send your terms and conditions and state that all orders are accepted subject to those terms and conditions. Ensure that everyone in your organisation who is involved in negotiating business understands that if you agree to buy or sell goods or services without reference to your terms of trading, you will generally have lost the right to incorporate those terms.

Unusual or onerous terms should be highlighted. This is known as the "red ink" principle and places on someone seeking to rely on an unusual or an onerous term an obligation to draw attention to the clause. If your terms of trading include an unusual or onerous term, make sure it is printed boldly and somewhere prominent.

The most difficult issue of incorporation is the battle of the forms. A supplier's terms and conditions will obviously be very different to a buyer's terms and conditions. Whose terms and conditions have been incorporated will be of crucial importance if the transaction goes wrong. Often the parties, or more often their staff, as part of their standard procedures, issue and receive bits of paper with no real understanding about their legal effect. Thus, a buyer may enquire about a particular product and seek a quotation. The supplier may provide a quotation which will be expressed to be subject to their terms printed overleaf which shall prevail over any terms in the buyer's order. The buyer may accept the quotation by placing a purchase order expressed to be subject to the buyer's terms. The supplier may acknowledge the order by an acknowledgement, which once again refers to the supplier's terms and conditions.

Whose terms will prevail? The two leading cases in this area are BRS -v- Arthur V Critchley Ltd and Butler Machine Tool Company Limited -v- Ex-cell-o Corporation Limited. The BRS case involved a consignment of whisky delivered to a bonded warehouse in Liverpool. BRS could not prove that the warehouse had ever been sent their terms and conditions and indeed the warehouse denied receiving them. On delivery of the consignment, BRS's lorry driver gave the warehouseman a delivery note for signature which said the goods were delivered on BRS's terms and conditions. The warehouseman took out his rubberstamp and stamped the delivery note that the goods were accepted subject to the defendant's terms and conditions. Neither the lorry driver nor the defendant's warehouseman were experts in contract law and little did they know that by their actions, they concluded a contract which incorporated the terms and conditions of the warehouse. Needless to say, the whisky was stolen and even though the warehouse was liable for the theft because of their negligence, BRS were unable to recover the full value of their loss because the terms and conditions of the warehouse limited their liability.

In the Butler case, the seller offered to manufacture a machine tool subject to their terms and conditions which included a right to increase the price. The buyer accepted subject to the buyer's terms and conditions which stated that the price quoted was fixed. The buyer's acceptance included a tear-off slip acknowledging the order on the buyer's terms. The seller returned the acknowledgement slip under cover of a letter which said that the buyer's order was being entered in accordance with their original quotation. The Court of Appeal held that the buyer's terms and conditions applied. The seller's original quotation was an offer. The buyer's order on different terms was a counter-offer. The return of the tear-off slip from the buyer's order was considered by the court to be an acceptance of that counter-offer. The covering letter did not make it sufficiently clear that the seller intended to contract on his own terms. So the seller's attempt to increase the price of the machine in accordance with their terms of trading not only failed but involved an expensive visit to the Court of Appeal.

The general view is that a person who sends the final bit of paper making reference to terms and conditions will actually prevail. In practice, it is important that everyone involved in processing orders understands the basics of how a contract is created when there are several bits of paper passing backwards and forwards.

In some circumstances, you may have no choice other than to accept someone else's terms and conditions in order to do business. If you are in that position, then at least take the time and trouble to read the terms and conditions you are being asked to accept and if there are any which you do not like, attempt to negotiate variations to the terms which concern you. If the other party refuses to negotiate over any of the terms they are putting forward, that may be an indication that there is an inequality of bargaining power which might render some of the clauses unreasonable.

There are numerous statutory limitations on your freedom to contract. There is a distinction between consumer contracts and non-consumer contracts with consumers receiving much greater protection.

I have listed some examples of legislation that impose statutory restrictions on the basis on which you can do business. If you have a set of terms and conditions already, you need to keep them under review. Come the 1 October when the Unfair Terms in Consumer Contracts Regulations 1999 come into force, it is likely that the Consumers Association and other authorised bodies who, by these regulations, are given power to challenge terms of trading considered to be unfair, will become very proactive in this area. So the message I deliver is to make sure that you have a properly drafted and up-to-date set of trading terms and put procedures in place to ensure that they are incorporated into all of your business transactions.