A constant problem in construction and procurement is parties arguing about whose terms apply when both have issued their standard terms. When a dispute arises, the courts are faced with what is known as a ‘battle of forms’ and must decide whose terms, if any, should be preferred.
A contract is formed at a particular moment in time and, in the absence of any way to separate purchase terms form supply terms, the Court must choose between them. You can imagine the problem this causes in terms of uncertain arguments and additional legal costs when a dispute arises.
Best to avoid the problem entirely and thankfully there is a simple way to do it.
So what happens?
It is the speed of contracting that usually causes this problem. Supply arrangements for building and construction sites tend to work like this:
- A party (the Contractor) issues a request for quotation (probably calls the supplier for prices);
- Supplier issues quotation, often including its terms of trade;
- Contractor settles further terms verbally, such as price, timing, availability, specifications or delivery requirements;
- Contractor then issues a purchase order containing its own terms and conditions, which might also restate some details in the supplier’s quotation;
- Neither party signs the other’s terms and the supplier commences manufacture and delivery;
- Supplier invoices for the supply. Contractor is not happy with some aspect and applies its terms to deduct an amount, and the dispute begins.
In this circumstance it is likely a court will accept that both sets of terms apply and where there is an ambiguity (i.e. a clash between respective terms), the Court will simply decide for itself the intention of the parties and which particular term applies or takes precedence – the classic ‘battle of forms’ argument begins.
Each party probably believes (or hopes) that their terms apply, and has its own understanding of what was agreed over discussions and emails. The result is that the dispute becomes highly complex, costly and difficult to resolve.
There is a simple solution
- Understanding the problem and basic principle of ‘battle of forms’ is a good start. It means you’ll not be lulled into a false sense of certainty just because your company has issued its standard terms of trade.
- Get a signature or at least an acknowledgement from the other party that they are bound to your terms.
- Insert an ‘order of precedence’ clause in all you contracts that ensures your terms sit above any terms to the contrary.
- Watch for a similar clause in the other party’s conditions – you may just find yourself on the receiving end of such a clause.
- If you suspect there might be a misalignment of expectation, say something. Although it could be a prickly upfront discussion, 99 times out of 100 it will be far easier and cheaper to resolve issues before delivery has occurred than once the goods or materials have been supplied and the project is in full swing.
- Use a proper supply agreement that both parties sign for all higher value supplies, and save ‘purchase order contracting’ for small, one-off and low risk supplies.
This is one of a series of articles about finding the balance between adequate contractual protection and unnecessary cost and delay in the procurement process.
The construction team at Nexus lawyers helps manufacturers, suppliers, contractors and owners get the procurement process right. Feel free to reach out to Simon (firstname.lastname@example.org) for an initial discussion about issues you have experienced in your procurement processes.