Tuesday 1 March 2011

Terms & Conditions - a Sword & a Shield


Regardless of the main thrust of your business, it is always advisable to have in place contracts between yourself, your suppliers and customers. Even if you fail to write down the terms of your deal, it must not be assumed that there is no contract at all. Usually a binding contract will exist but the terms of it will be left open and be determined by a complex system of legal rules. And whilst you cannot avoid these statutory obligations altogether, it is crucial that you not only have your terms and conditions clearly set out but that they adequately define how you want the contract to be implemented. This can assist you in efficiently enforcing its terms with minimum cost, not to mention helping your business maintain a healthy cash flow, which is the life blood of any business.

However, all too often, Directors neglect to pay adequate attention to their company's terms and conditions of business. Many times this aspect of the business comes into focus only when a problem has arisen. What some business owners fail to realise is that a company's terms and conditons of business can be both a sword and a shield to weather these straitened economic conditions.

A LESSON TO US ALL

A recent court of appeal decision in Rooney and Anor v CSE Bournemouth Ltd (t/a CSE Citation Centre)1 highlights the importance of having clearly defined terms and conditions of business and of introducing them into negotiations as early as possible.

In the case the Appellant Company (C) appealed against a decision that its standard terms and conditions of engagement were not incorporated into its work order form.

The first respondent was the registered owner of an aircraft that had been leased to a third party company (E). The aircraft was maintained by C under a maintenance support contract. Under the contractual arrangements, C's practice was for the maintenance work to be defined on a work order form.

This work order form contained the statement: 'Terms and Conditions available on request'.

During a flight the aircraft suffered damage as a result of negligent work carried out by C. The first respondent argued in court that stating on a work order form 'Terms and Conditions available on request' was not sufficient for it to form a part of the contract. The judge held that C’s terms and conditions were not incorporated because they conveyed no more than that there were terms and conditions available, and they did not purport to incorporate any particular terms and conditions into a contract.

C subsequently appealed the decision; arguing that the judge failed to look at the commercial context and realities in which the work order form and the statement ('Terms and Conditions available on request') was made.

In the Court of Appeal it was found that the judge had erred in his finding that the words used could not be said to incorporate C's standard conditions of trading. It was held that the test was whether reasonable people would have understood the words used as referring to contractual terms upon which C had agreed to do the work on the aircraft. In a business context it would be odd if a contractually binding order such as a work order form contained no commercial terms. The work order form was a contractual document and as such activated the work and the nature of the work to be done.

Although C eventually obtained judgement it was at huge expense of time and money which may have been avoided. It is therefore pertinent that you ensure that your terms of business are in compliance with the law, clearly defined and that they are introduced at an early stage in negotiations (and not just at the invoice stage).

A SMALL PRICE TO PAY

Although the decision in this case may provide some comfort to businesses in that common sense will eventually prevail. It shows the enormous cost which could have been avoided by fully incorporating standard terms and conditions of business at the pre-contract stage of business negotiations.

The incorporation of standard terms and conditions of trading at the outset of the business transaction remains the surest way to ensure that it forms part of the contract. It is just as important to ensure that these terms and conditions are up to date and specifically tailored to your business operations. It is advisable that you have your company’s terms and conditions reviewed annually by a specialist commercial lawyer and certainly each time a new product or service is added to your current offering. Equally as important is to ensure that sales staff are properly trained and all other staff are alert to the importance of the businesses terms and conditions.

PREVENTION IS BETTER THAN THE CURE

Sound legal advise acted upon in a timely manner can save you and your business avoidable problems and exorbitant cost in the long run.

This article is not intended to be a full statement of the law and must not be relied upon in the place of specific legal advice.
1Facts of this case were taken from1 the Law Society Gazette 24.06.10 Practice Section.