Entering into business transactions can be complex for some, while for others it is part of their daily responsibilities. Regardless of your experience level, having a clear understanding of contractual terms is crucial for ensuring certainty and binding agreements. This guide explores the significance of incorporating terms into contracts and how this impacts the rights and obligations of the parties involved. We use a scenario to illustrate important considerations.

Scenario

AutoTech Ltd, a car manufacturer, negotiates with PartsCo Ltd, a supplier, to provide 10,000 brake pads per month for their new line of vehicles at a fixed cost per brake pad. AutoTech requires the brake pads to meet its quality standards and to be delivered by the 5th of each month to ensure uninterrupted production. A three-year contract is entered into. Both have their own standard terms and conditions that they tend to use for business-to-business contracts. See further information below.

The importance of incorporating contractual terms

Having lost its recent supplier, AutoTech is keen to finalise the key terms quickly with PartsCo and pick up the detail later. However, PartsCo is more reserved.

It is crucial not to rush a contract and assume that details can be resolved later. In the realm of contract law, all obligations and rights intended to be part of a contract should be clearly set out from the beginning. This promotes legal certainty and ensures that all parties are aware of their commitments. The principle of incorporation plays a pivotal role in this process.

Incorporation by reference

AutoTech agrees to use PartsCo's order form, which outlines bespoke terms and refers to PartsCo's standard terms and conditions, which can be found on their website.

Modern technology has influenced how contracts are formed, and the courts have recognised that terms can be incorporated by reference, such as through reference to a website in a contract or even an email footer. AutoTech's own terms are therefore irrelevant.

Ensure you locate the standard terms and read them! The landmark case of L'Estrange v. F Graucob Ltd established that parties are generally bound by the terms of a contract upon signing, irrespective of whether they have read them. This principle remains relevant today, though it must be considered alongside additional rules.

Incorporation of onerous or burdensome terms

PartsCo's standard terms impose a fixed fee per brake pad which AutoTech ought to be purchasing in the three-year term, if AutoTech chooses to terminate the contract early.

AutoTech should have read the terms. However, onerous or burdensome terms may require special attention under Lord Denning's "Red Hand Rule", which mandates that the more unreasonable a clause, the greater the notice that must be given. The case of Blu-Sky Solutions Limited v. Be Caring Limited [2021] EWHC 2619 (Comm) illustrates this principle. It was held that an onerous term contained in the claimant's terms and conditions had not been fairly and reasonably brought to the defendant's attention despite the signed order form expressly stating that it was subject to and incorporated the claimant's terms and conditions. Further, that by signing the order form, the signatory agreed that they had logged onto the claimant's website and read, agreed and understood the terms and conditions.

Luckily, AutoTech did not terminate, but often parties concentrate on the bespoke terms, without much thought to the standard terms which are more likely to contain the onerous terms. Not all onerous terms are so onerous that they require additional notification. A party needs to identify what is onerous to them and negotiate something else, if necessary. The party seeking to rely on the onerous term should also ensure that this is adequately brought to the attention of the other party, particularly where this term is contained in a separate document which is incorporated by reference.

When reality kicks in

Shortly after entering the contract, PartsCo realises that due to a shortage of a key raw material, it will only be able to supply 7,000 brake pads per month and, due to a delay in production, to deliver on the 7^th of each month. During a call, AutoTech acknowledges the changes, without raising an issue.

Failure to document changes can be catastrophic (and costly). Review your contract and comply with any variation term to ensure the revision is now contractual. Whilst the relationship is going well there is unlikely to be an issue but, if things go sour, one of the first things to do is review a contract to see what terms are not being complied with.

Reserving future rights

After six months, PartsCo sends a delivery note to AutoTech for payment of 7,000 brake pads with an increased cost per item due to an increase in the cost of a raw material. AutoTech disputes this.

Unfortunately for PartsCo, timing is crucial. As demonstrated in Olley v. Marlborough Court Ltd, terms must be introduced before or at the time of contract formation. If PartsCo wanted to reserve the right to amend the cost, it needed to ensure a contractual term allowed them to do so. Equally, for AutoTech, it would be important to restrict such term to have an eye on the future costs.

Multiple contracts

A decade later, PartsCo and AutoTech have several supply contracts. A new contract refers to PartsCo's updated terms, which have a number of changes.

Caution is needed. Do not get complacent where you already know a party's standard terms, as they can change, and you may be bound despite not reading them. Second, ensure new contracts align with pre-existing ones and resolve any inconsistencies before entering into them. A common example is conflicting jurisdiction clauses, where disputes with the same party may need to be brought in different forums. This is costly and often unnecessary.

Conclusion

Understanding and incorporating contractual terms effectively is essential for any business transaction. By ensuring that all terms are clearly communicated and agreed upon, businesses can safeguard their interests and foster successful partnerships.

Dentons can provide expert assistance in negotiating contracts, no matter how complex, and in the unfortunate event of a contractual dispute. Please get in touch if you have any questions.