Supply Contracts - Overview

Supply contracts: overview

The overview summarises the key considerations when drafting and using standard terms and conditions of sale or purchase of goods, including the effective incorporation of such terms, the effect of pre-contractual representations, the underlying statutory framework and the use of exclusion clauses to exclude or limit liability. The overview also considers provisions commonly found in supply contracts dealing with such matters as specification, delivery, acceptance, price, payment and retention of title.
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Standard terms and conditions of business are often given a low priority by companies and may only be given detailed consideration when a dispute arises, by which time it may be too late. In the meantime, the sales department may, without the knowledge of the legal department, be issuing quotations or processing orders using terms which are out of date, unsuited to the companys current business needs or simply copied from terms used by the companys competitors. If sales staff are not following proper contracting procedures, they may sometimes not even be contracting on the companys own terms, because better-trained purchasing departments have succeeded in substituting their own. This overview contains a review of the key areas which should be addressed when drafting or reviewing standard terms for the sale of goods (it does not extend to the supply of services).
Why use standard terms?

Benefits Standard terms of business offer certain advantages over bespoke agreements: They avoid the time and expense of drawing up specific terms for each individual transaction. They enable a company to introduce terms favourable to itself in a format that does not encourage heavy negotiation, for example, terms limiting the suppliers liability (in the case of terms of sale) or extending the suppliers liability (in the case of terms of purchase). They provide certainty that the company will be trading on broadly consistent terms that comply with the companys policies and procedures. They allow for standardisation of a companys contracting procedures, and for contracts to be handled and concluded by more junior staff. Limitations Although the benefits of using standard terms are substantial, their use is subject to certain legal and practical limitations: There are greater restrictions on the extent to which a company is allowed to exclude or limit its liability where trading on standard terms that have not been individually negotiated or where the company is contracting with a consumer). Certain terms may be unenforceable
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altogether and others may be enforceable only if they satisfy special tests of reasonableness or fairness (see Statutory controls on exclusion clauses). The standard terms must be incorporated into the contract between the supplier and the customer in order to be binding (see Effective incorporation of terms). There is a danger of staff using the standard terms for transactions for which they are not appropriate. As a safeguard against this, companies can, for example, establish procedures where proposed contracts over a certain value are sent to the legal department for review before they are issued. The use of standard terms cannot be relied on in place of commercial measures such as the maintenance of adequate credit or quality control procedures: they should be in addition to, rather than in substitution for, such measures. Standard terms require regular review in order to ensure that they take account of legislative changes or new case law and reflect any changes in the business activities of the company. A business may still need to have more than one set of standard terms if it provides a variety of significantly different goods (for example, off the shelf goods and bespoke goods). Preliminary review If a decision to draft new standard terms or substantially revise existing terms is taken, the legal adviser should ensure that, before beginning to draft, he has a clear understanding of the commercial needs and objectives of his company or client. The matters which should be the subject of a preliminary review are summarised in Checklist: Drafting terms and conditions for the supply of goods.
Effective incorporation of terms

Time spent in drawing up standard terms will be wasted unless proper procedures are put in place to ensure that the companys standard terms are effectively incorporated in its contracts with customers. Procedures need to be established in relation to three main areas: The formation of the companys contracts, which involves an analysis of the common law rules of offer and acceptance. The incorporation of the standard terms into the companys contracts. The need to ensure that the companys standard terms prevail over any competing standard terms which its customers may put forward: winning the so-called "battle of the forms" (see Battle of the forms). Offer and acceptance The common law rule is that new contract terms cannot be introduced after the contract has been formed by offer and acceptance between the parties. This means that the all too frequent practice whereby sellers seek to impose their standard terms by printing them on the back of an invoice will generally be ineffective to incorporate the terms in the contract, because the invoice will not usually be despatched until some time after the time when the contract will be held to have been made.
The contracting process is analysed for legal purposes in terms of offer and acceptance. From the sellers perspective, it is preferable that the offer should be made by the buyer and (if appropriate) be accepted by the seller. Standard terms should be drafted, and contracting procedures established, with this as an objective (see Standard document, Terms and conditions for the supply of goods (pro-supplier): clauses 2.2 and 2.3). The advantages to the seller are that it will then know whether and, if so, when a contract has been entered into (the rule that a valid contract can be made when acceptance of an offer is posted means that the party making the offer will not know immediately that he is contractually bound). Care must be taken to ensure that the buyers offer is actually made on the sellers, and not the buyers, terms, which the seller then inadvertently accepts. This will require monitoring any orders received that are not on the sellers standard order form. If the offer by the buyer is not on the sellers terms, then any purported acceptance by the seller stated to be on its own terms may in fact be a counter offer (see Battle of the forms). Therefore, the seller should ensure that: Any proposals put forward by the seller for a contract (whether in the form of a quotation or a brochure) are phrased so as not to constitute an offer, otherwise the buyers acceptance could form a contract before the sellers standard terms can be incorporated into it. The offer made by the buyer is on the sellers standard terms and conditions. This may be by way of providing the buyer with the sellers standard order form, which states that the order is an offer on the sellers standard terms and conditions. The standard terms contain a clause indicating that any purported acceptance by the buyer will take effect only as an offer (on the sellers standard terms) and that no contract will be created until the seller issues its acknowledgement or confirmation of order. It is not possible to guarantee the effectiveness of such a provision. The courts might, in such circumstances, find that the sellers and the buyers terms were not incorporated as there was no consensus. However, the provision will at the very least strengthen the sellers negotiating position if there is a dispute. As a contract can be formed orally, any discussions with the customer (whether over the telephone or face to face) are expressed to be on the basis of the sellers standard terms or are stated to be subject to contract (that is, will not be binding until a written contract is entered into). A buyer will seek to submit its standard purchase terms together with its purchase order so as to constitute an offer on those terms which will be accepted by the seller delivering the goods (see Standard document, Terms and conditions for the supply of goods (pro-customer): clause 2.3). Incorporation: practical steps In order to maximise the chances of successfully incorporating the sellers standard terms in its contracts with customers, sellers must ensure that standard terms are brought to the attention of customers at the earliest possible opportunity. The simplest way of doing this is expressly to state in pre-contract correspondence that the sellers standard terms will apply to the sale. However, this is likely to provoke customers into seeking to negotiate the terms. The sellers desire to avoid this must be balanced against the increase in risk that those terms will be considered not to have been incorporated if an express statement is not made in the pre-contractual correspondence. The next best option is for the seller to bring the terms to the attention of customers in as much pre-contract and contract documentation as possible. This would include setting out the standard terms:
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In the sellers brochures, catalogues or other publications. On the sellers quotation forms. On the acknowledgement or confirmation of order issued by the seller. On the sellers delivery notes. If the standard terms appear on the above documents, there is no harm in putting them on the sellers invoices as well, because if there is a course of dealing with that particular customer, this will assist the sellers argument that the terms had been brought to the attention of the customer over a period of time (see Course of dealing). A buyers standard purchase terms should be set out on: The purchase order of the buyer. The quotation acceptance of the buyer. All sales staff must be made fully aware of the companys procedures and adhere to them at all times. Staff should also be given guidance where the standard contract has blank spaces which need to be filled in. Any blanks completed in a way inconsistent with the printed terms, have the effect of adding provisions which override the standard terms. When introducing new standard terms, a copy should be sent to every customer stating that the new terms will apply in the future. This is also an ideal opportunity to enclose a slip for return by which the customer acknowledges receipt of the new terms. Such a confirmatory slip will not always be returned but, when it is, it can be invaluable evidence of acceptance of the new terms. The use of methods to prove receipt, such as recorded delivery, may be useful evidence, particularly if seeking to rely on a course of dealings (see Course of dealing). However, receipt does not necessarily show acceptance. The following drafting rules should be followed with a view to ensuring, so far as possible, that terms are properly incorporated: Where, as will usually be the case, terms are printed on the reverse of a document, the document should have a statement on the face of it clearly stating that the sale is made on the terms printed on the reverse and that they form part of the contract. If a term is unusual, particular attention should be drawn to it on the face of the document, since the courts require special notice to be given of any such terms (many exclusion clauses fall into this category). If a term governs or potentially varies something on the face of the document, for example, price or delivery date, it should be cross-referenced. Battle of the forms While standard terms of sale are more usual, it is becoming increasingly common to see standard terms of purchase, particularly from large national retailers. If both parties purport to impose their own standard terms, difficulties arise in determining which terms will prevail. The approach taken by the courts is that an acceptance which attempts to impose new terms is not an acceptance at all, but is a counter-offer which can be accepted by an unequivocal acceptance by the other
party, or by performance. This means in practice that the last set of terms despatched before acceptance or performance (the last shot fired in the battle of the forms) will prevail. There are several practical approaches which a seller may adopt when faced with a battle of the forms: To deal with the conflict of terms directly, by discussing the sale terms with the customer and, if possible, agreeing any variations in a side letter. The disadvantage is that this involves a negotiation of the standard terms, with the consequent incurring of time and expense, which the use of standard terms is designed to avoid. However, where the customer in question is seen as particularly important, and there is the possibility of significant repeat business, the extra time and expense involved in agreeing special terms, which could also be used for future transactions, might well be justified. To include the sellers terms in as many pre-contractual documents as possible. The seller should refrain from raising the standard terms as an issue with the customer and attempt to fire the last shot in the battle of the forms by ensuring as far as possible that the sellers terms appear on the last document passing between the parties before the delivery of the goods. The advantage of this is that no time is wasted in negotiating amendments to the sellers terms and that, assuming that the battle of the forms is won, the sellers terms will be incorporated without amendment. The disadvantage is that the risk that the customer might succeed in firing the last shot cannot be entirely eliminated, in which event the customers terms would be incorporated without amendment. This was illustrated in one case where the seller delivered a consignment of whisky to the buyers warehouse: the sellers employee handed over a delivery note containing the sellers standard terms and, instead of signing the note, the buyers warehouseman stamped it "Received on [the Buyers] conditions". It was held that the buyers terms prevailed (British Road Services Ltd v Arthur Crutchley & Co Ltd [1968] 1 All ER 811). To incorporate a clause which stipulates that (where the terms are issued by the seller) the sellers terms will prevail over any terms issued by the buyer (see Standard document, Terms and conditions for the supply of goods (pro-supplier): clause 2.1). This is unlikely to be effective, since the standard terms (and therefore the clause itself) will not form part of the contract because they will not have been accepted by the buyer where the buyer is itself seeking to impose its own standard terms by means of a counter-offer. However, parties continue to use clauses of this kind as they may bluff the operational staff of the other party into assuming that there is nothing to be gained from seeking to impose their own terms. Sales departments should be fully aware of this potential problem so that when they receive purchase terms containing such a provision, they are aware that the sellers terms can still prevail, and that they should therefore respond in the usual way with an acknowledgement of order bearing the sellers standard terms. Course of dealing A seller who has been unable to convince a customer (or a court) that its standard terms have been incorporated in the contract between the parties by any of the means outlined above, may be able to convince the customer (or the court) that they have been incorporated as part of a course of dealing between the parties. The courts have been prepared to hold that certain terms are incorporated where, as a result of their consistent use in previous transactions, the reasonable expectation of the parties is that those terms will apply to the particular transaction in question. A customer may be bound even if, for example, the standard terms of sale only appear on the
reverse of a post-contractual document such as the invoice (J Spurling Ltd v Bradshaw [1956] 2 All ER 121). The party seeking to establish the course of dealing must show that: There has been regular trading between the parties. Several transactions per month over a period of years would be sufficient for these purposes, but three or four transactions over a period of several years are unlikely to be enough. The trading has been consistent: previous trading must have been on the same terms and a consistent procedure must have been followed. Given the stringent and somewhat uncertain tests which must be satisfied before a court will hold that terms have been incorporated by a course of dealing, it is clear that this is an argument of last resort for the seller, to be used in negotiations and, if necessary, in court, if the customer has challenged the sellers terms: it is no substitute for proper contracting procedures as have been described above.
Pre-contractual representations
Representations in sales literature Companies may incur liabilities for statements or representations made in sales brochures or catalogues which they had not intended should form part of the contract. Liability may arise in a variety of ways: Although the parole evidence rule provides that statements not forming part of a written contract are not to be regarded as part of that contract, it is only a rule of presumed intention. Therefore, a court may, on the particular facts of a case, decide that the parties to a contract intended to incorporate statements from sales literature as terms of the contract. A statement made in sales literature may be held by a court to be binding on the issuer as a term of a collateral contract. Such statements may lead to liability for misrepresentation under the Misrepresentation Act 1967 or at common law. The case of Indigo International Holdings Ltd & another v The Owners and/or Demise Charterers of the vessel "Brave Challenger"; Ronastone Ltd & another v Indigo International Holdings Ltd & another [2003] EWHC 3154 confirms two points frequently overlooked by sellers of goods and services: for a buyer to claim damages for misrepresentation, the misrepresentation does not have to be the only factor that induced the buyer to enter into the contract; and it does not necessarily have to be reasonable for the buyer to rely on the misrepresentation, as long as the buyer can prove he did rely on it and the seller ought to have known he was likely to.
The remedies on the part of the buyer to which this may give rise are: In the case of a breach of contract or collateral contract: the buyer will be entitled to damages for breach of contract. Such damages are intended to put the buyer in the same position as it would have been in had the
contract been performed, so that the buyer is, in effect, compensated for the loss of its bargain; and the buyer may also be entitled to terminate the contract and (in a sale of goods) reject the goods if there is a breach of a condition of the contract or if there is a breach of an intermediate term of the contract which has particularly serious or damaging consequences.
In the case of a misrepresentation, the buyers remedies depend on the nature of the misrepresentation: fraudulent misrepresentation: the buyer is entitled to rescind the contract and claim damages; negligent misrepresentation: the buyer can rescind the contract and claim damages, subject in the case of rescission to the discretion of the court; or innocent misrepresentation: the buyer can either rescind the contract (subject to the discretion of the court) or claim damages.
Damages for misrepresentation are assessed on a tortious basis and are intended to put the buyer in the same position as he would have been had the representation not been made: unlike contractual damages, the buyer is not compensated for his loss of bargain. If the misrepresentation is negligent, the buyer may be entitled to damages in negligence on the basis of Hedley Byrne & Co v Heller & Partners [1964] AC 465. It is not possible to incorporate provisions in a contract which can be guaranteed to prevent a court from giving legal effect to statements or representations in sales literature (as described above). However, a seller should, in any event, include: An exclusion clause which refers expressly to liability for misrepresentation as well as for breach of contract. However, a term which excludes or restricts liability for misrepresentation will be subject to the test of reasonableness and a term which purports to exclude or limit liability for fraudulent misrepresentation will be void (see Exclusion or restriction of liability: other statutory controls). An "entire agreement" clause, stating that the written contract contains all the terms of the agreement between the parties. This will deter a buyer from seeking to raise the argument that a particular representation has legal effect in the first instance. However, such a statement will not exclude the sellers liability in misrepresentation and sellers generally include a statement in the entire agreement clause saying that neither party has relied on statements or representations made by the other, or a complete exclusion of non-contractual remedies for pre-contractual representations (Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573)., Note that such exclusions are subject to the reasonableness test See Standard document, Entire agreement and its accompanying drafting note. A buyers standard purchase terms may make it an express term that the buyer is placing reliance on pre-contractual representations of the seller.
In contracts with consumers, public statements about a product made by the seller, the manufacturer or the manufacturers representative (particularly in advertising or labelling) will be used in determining whether the product is of satisfactory quality (see box, Implied terms in sale of goods contracts). Oral representations A company may incur liabilities in circumstances where sales staff have made inaccurate or unsustainable statements about products. The courts may, as in the case of statements made in sales literature, find that such statements are contractually binding on the company, either as an additional term of the parties contract, or as a collateral contract. Alternatively, the company may be liable in misrepresentation for such statements. A seller may attempt to exclude or restrict liability in these circumstances by means of: A clause in its standard terms which restricts the authority of sales staff to make statements binding on the seller and which has the same effect as an exclusion clause (see Standard document, Terms and conditions for the supply of goods (pro-supplier): clause 2.4). As described above in the case of representations in sales literature, including in its standard terms: an exclusion clause which refers expressly to liability for misrepresentation; or an entire agreement clause.
Training of sales and marketing staff The likelihood of these problems occurring in practice may be reduced by giving clear instructions to sales staff as to what may or may not safely be said in relation to the products and the contract terms. Marketing staff should be appraised of the dangers of making unsustainable claims in sales literature and of the need to have all such literature approved by the companys legal department prior to distribution.
Statutory framework
Relevant statutes and regulations A significant number of statutes and regulations have an impact on contracts for the sale of goods (see box, Statutory framework). They may be divided into those which: Regulate the sale of goods or supply of goods and services and impose implied terms and conditions in contracts for the sale of goods or supply of goods and services. Limit the extent to which one party can exclude or restrict its liability to the other. Relate to other matters such as misrepresentation, consumer credit and product liability. Of these instruments, the Sale of Goods Act 1979 (SGA) and the Unfair Contract Terms Act 1977 (UCTA) are of particular importance, as they apply to all sale of goods contracts. The SGA implies a number of important terms into sale of goods contracts, particularly in relation to title and quality (see box, Implied terms in sale of goods contracts) and lays down a large number of presumptions, which, in the absence of express drafting to the contrary, apply to a sale of goods contract. UCTA regulates the use of exclusion clauses in sale of goods contracts.
In business-to-consumer transactions, the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) (Unfair Terms Regulations) impose additional restrictions on exclusions of liability. In addition, if the goods are sold online, by telephone or by mail order, The Consumer Protection (Distance Selling) Regulations 2000 and The Consumer Protection (Distance Selling) Regulations 2000 will need to be considered (a detailed consideration of these last two regulations is outside the scope of this note). Statutory controls on exclusion clauses Introduction to UCTA and Unfair Terms Regulations Prior to the Supply of Goods (Implied Terms) Act 1973 (1973 Act), the only controls on the use of exclusion clauses were the common law rules developed by the courts. These were considered insufficient and some statutory controls were introduced in the 1973 Act which were subsequently amended and incorporated UCTA together with new and more extensive controls. Further controls were introduced by the Unfair Terms in Consumer Contracts Regulations 1994 (SI 1994/3159) (1994 Regulations), which were introduced in order to implement Directive 93/13/EEC on unfair terms in consumer contracts (OJ 1993 L95/29) (the Directive). The 1994 Regulations have since been revoked and replaced by the Unfair Terms Regulations. The language used in the Unfair Terms Regulations follows that used in the Directive to a greater extent than in the 1994 Regulations. However, regard should still be had to the provisions of the Directive when interpreting the Regulations. The purpose of the Directive was to harmonise the laws of the member states relating to the protection of consumers against unfair contract terms. While this means that minimum levels of protection will apply to all consumer contracts throughout the EU, it cannot be assumed when drafting standard terms that the same levels of protection will apply in all member states, because member states are entitled to confer a greater degree of protection on consumers than that required by the Directive. In the UK, such additional protection is afforded by UCTA in some cases. The Directive was implemented by the Unfair Terms Regulations without any attempt to consolidate the regulations with UCTA. This has led to a considerable area of overlap between UCTA and the Regulations insofar as consumer contracts are concerned. However, in contracts between one business and another (business-to-business contracts), the draftsman need only consider UCTA, as the Unfair Terms Regulations apply only to consumers. In August 2002, the Law Commission issued a consultation paper proposing reform of the law on unfair contract terms, replacing UCTA and the Unfair Terms Regulations with a single piece of streamlined legislation (Law Commission, Consultation Paper 166). In 2005, the Law Commission published its final recommendations (Law Commission Report 292) which included recommendations to: Rewriting UCTA and the Unfair Terms Regulations so that there is a single piece of legislation covering the whole of the UK. Preserving the effect of UCTA for business contracts in general.
Removing some of the controls that UCTA presently imposes over exclusions and limitations of liability for breach of terms implied by statute, so that they apply only to non-negotiated terms. Subject to certain exceptions, extending to small businesses the protections against unfair terms given to consumers under the Unfair Terms Regulations. The final report included the text of a draft Unfair Contract Terms Bill. In July 2006 the government announced that it had in principle decided to accept the recommendations of the Law Commission for reform, including the recommended replacement of UCTA and the Unfair Terms Regulations with a single statute. However, following the European Commissions proposal for a new Consumer Rights Directive in October 2008, the Law Commission has confirmed informally to us that the Bill has been put on hold, as the new Directive contains provisions on unfair contract terms, which the Bill will need to reflect. In July 2009 the government announced that it intended to implement the Consumer Rights Directive (if adopted) through a new Consumer Rights Bill: it seems likely that this proposal has supplanted the plans for an Unfair Contract Terms Bill. For further details, see Legal update, Unfair contract terms: Law Commission final report. UCTA UCTA applies to clauses which seek to restrict or exclude business liability. However, there are some important exceptions: UCTA does not apply to international supply contracts (section 26, UCTA). The Court of Appeal has held that Section 26(1) refers to excluding and restricting liability by reference to contract terms in general (not only liability for breach of contract), and therefore it was capable of applying to liability for misrepresentation (see Legal update, Court of Appeal considers application of Misrepresentation Act 1967 to international supply contracts). Under Section 26(4)(a), an international supply contract includes where the goods in question are, at the time of conclusion of the contract, in the course of carriage, or will be carried, from the territory of one state to the territory of another. The Court of Appeal has clarified that if a person who carries on business abroad hires equipment from a supplier in the UK in circumstances where both parties knew the equipment was intended to be used abroad, such a contract was one where goods will be carried from the territory of one state to the territory of another and was an international supply contract under Section 26(4)(a) (see Legal update, Court of Appeal considers application of Misrepresentation Act 1967 to international supply contracts). Section 26(4)(c) provides that an international supply contract is a contract that provides for goods to be delivered to the territory of a state other than the state in which acts constituting offer and acceptance have been done. The Court of Appeal has clarified that the words "delivered to" require goods to be moved from one state to another (Amiri Flight Authority v BAE Systems Plc [2003] All ER (D) 306 (Oct)). When drafting terms for use in export trading, it should therefore be possible to assume that UCTA will not apply, but: it will be necessary to consider whether similar legislation in the country to which goods are being exported might apply; and if drafting a consumer contract, international supply contracts are not excluded from the scope of the Unfair Terms Regulations.
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If English law (or the law of any other part of the UK) is the governing law of the contract only by choice of the parties (and apart from that choice would be the law of some country outside the UK), the restrictions on exclusion clauses do not apply (section 27(1), UCTA). The restrictions in UCTA cannot, however, be evaded by choosing a law outside the UK as the governing law if: it appears that the choice of law was imposed wholly or mainly to enable the party imposing it to evade the operation of UCTA; or one of the parties dealt as a consumer and he was then habitually resident in the UK and the essential steps for the making of the contract were taken in the UK (section 27(2)(a) and (b), UCTA).
Certain contracts set out in Schedule 1 to UCTA are specifically excluded from some of its controls (see box, Unfair Contract Terms Act 1977: specific exclusions). Exclusion or restriction of liability: nature of UCTA controls Different controls apply according to the nature of the liability which the seller wishes to exclude or restrict. In all contracts for the sale of goods: Death or personal injury caused by negligence. A term excluding or restricting liability for death or personal injury caused by negligence is wholly ineffective (section 2(1), UCTA). This would make ineffective, for example, a term in a contract for the supply of machinery which excludes the sellers liability if, for instance, due to the sellers negligent failure to maintain the machine, a part of the machine breaks off and kills or injures one of the buyers employees. Negligence (other than where death or personal injury is caused). A term excluding or restricting liability for negligence is enforceable only to the extent that it satisfies the reasonableness test (see box, UCTA reasonableness test) (section 2(2), UCTA). This would apply the reasonableness test to, for example, a term in a contract for the supply of a machine which excludes the sellers liability in negligence for a fault in the machine which causes damage to the buyers property (such as a fire at its factory) and consequent financial losses (which may be brought about by a factory shutdown). Breach of statutory implied terms (see box, Implied terms in sale of goods contracts). Good title and no encumbrances. A term excluding or restricting liability for these implied terms is wholly ineffective (section 6(1), UCTA). Correspondence with description; satisfactory quality; fitness for purpose; correspondence with sample. A term excluding or restricting liability for any of these implied terms is: wholly ineffective as against a person dealing as a consumer; and enforceable only to the extent that it satisfies the reasonableness test as against persons other than consumers (section 6(2) and (3), UCTA). These controls would apply where a contract expressly excludes one or more of the implied terms or excludes one or more of them by implication, for example, by means of a term
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which states that goods supplied will only be fit for the purpose specifically stated by the seller or will only meet certain quality standards specified by the seller. In contracts with consumers or in contracts with another business which are on the sellers standard terms of business (see box, Written standard terms of business), there are additional controls: Breach of contract. A term by which the seller: excludes or restricts his liability for breach of contract; claims to be entitled to render a contractual performance substantially different from that which was reasonably expected of him; or claims to be entitled to render no performance at all,
is enforceable only to the extent that it satisfies the reasonableness test (section 3, UCTA). This would apply the reasonableness test to, for example, provisions in a contract for the sale of goods which either: Exclude the sellers liability for any failure of the goods to meet contract specifications. Reserve to the seller the right to deliver the goods six months after the estimated delivery date (contractual performance substantially different from that reasonably expected). Reserve to the seller the right in some circumstances not to deliver the goods (no performance at all). Indemnities A term in a contract with a consumer, by which the consumer is required to indemnify another person (whether a party to the contract or not) for liability incurred by the other person for negligence or breach of contract, is enforceable only to the extent that it satisfies the reasonableness test (section 4, UCTA). For example, this would apply the reasonableness test to a clause in a contract for the sale of a gas-fire heater which requires the consumer to indemnify either or both the retailer and the manufacturer against product liability claims brought by third parties injured by the heater. Indemnity provisions in business-to-business contracts are not specifically regulated by UCTA. However, the courts have held that a term which required the innocent party to indemnify the other party against claims arising from the default of that other party should be treated as an exclusion clause and subject to UCTA on that basis (Phillips Products Ltd v Hyland [1987] 2 All ER 620). Exclusions or restrictions in manufacturers guarantees. A term in a manufacturers guarantee which excludes or restricts liability for loss or damage caused by the goods proving defective while in consumer use as a result of the negligence of the manufacturer or distributor of the goods is wholly ineffective (section 5, UCTA). It should be noted that this relates only to the relationship between manufacturer and buyer and does not apply to the contract of sale between the seller and the buyer. Any guarantee offered to a consumer is now legally binding (regulation 15, Sale and Supply of Goods to Consumers Regulations 2002 (SI 2002/3045)).
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Exclusion or restriction of liability to third parties. A term which excludes liability as against a third party for negligently caused loss or damage (other then personal injury or death) is not subject to the reasonableness test under UCTA (section 7(2), Contracts (Rights of Third Parties) Act 1999). Exclusion or restriction of liability: other statutory controls There are other statutory controls on the exclusion or restriction of liability: Misrepresentation. A term which excludes or restricts liability for misrepresentation resulting in death or personal injury caused by negligence is wholly ineffective (section 2(1), UCTA). In the case of other loss or damage, a term which excludes or restricts liability for misrepresentation, or which excludes any remedy for misrepresentation, is enforceable only to the extent that it satisfies the reasonableness test (section 3, Misrepresentation Act 1967). The test is the same as the UCTA reasonableness test (see box, UCTA reasonableness test). It is unlikely that the exclusion of liability for fraudulent misrepresentation will ever be reasonable (see Total exclusion of liability or limitation of liability). Defective products under Consumer Protection Act 1987. A term which excludes or limits liability under the Consumer Protection Act 1987 to a person injured by a defective product is wholly ineffective. Sale and Supply of Goods to Consumers Regulations 2002. These provide statutory remedies for consumers who buy defective goods (see box, Statutory framework: Regulation of the sale of goods). Unfair Terms Regulations The Unfair Terms Regulations only apply to contracts with consumers (see above). The key elements are: The Unfair Terms Regulations apply to any term in a contract between a seller or supplier and a consumer which has not been individually negotiated and provide that any such term which is unfair is not binding on the consumer (the fact that a single term may have been individually negotiated does not mean that the remaining terms in a standard form contract will escape the fairness test). The Court of Appeal has recently confirmed that the Regulations apply to contracts relating to land (R (on application of Khatun) v Newham London Borough Council; R (on the application of Zeb) v Newham London Borough Council; R (on the application of Iqbal) v Newham London Borough Council [2004] EWCA Civ 55). A term is "unfair" if it causes a significant imbalance in the positions of the parties to the detriment of the consumer in a way which is contrary to the requirement of good faith. In assessing unfairness, regulation 6(1) requires the following to be taken into account: The nature of the goods or services to which the contract relates. All the circumstances surrounding the conclusion of the contract at the time of entering into it. All the other terms of the contract or of another contract on which it is dependent.
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The "core provisions" of a standard contract (defined as terms which define the main subject matter of the contract or concern the adequacy of price or remuneration for the goods or services sold) are excluded from the fairness test, but only so far as they are expressed in plain and intelligible language. What the Unfair Terms Regulations refer to as an "indicative and non-exhaustive list" of terms which may be considered unfair is set out in Schedule 2 of the Unfair Terms Regulations. Examples are set out in the box, Examples of potentially unfair terms. The Unfair Terms Regulations impose a general duty on the seller or supplier to ensure that any written term is expressed in plain and intelligible language. In addition to the sanction of an unfair term being held not to be binding on an individual consumer, the Office of Fair Trading (OFT) and other "qualifying bodies" are given powers, following the making of a complaint (which may even be made by a business competitor), to take action in relation to unfair terms, including by means of injunction to prevent a business from relying on an unfair term. "Qualifying bodies" include the Information Commissioner, the various utilities regulators, the Rail Regulator, weights and measures authorities (also known as Trading Standards), the Consumers Association and the Financial Services Authority (see Stop Now Orders (EC Directive) Regulations 2001 (SI 2001/1422), now replaced by Part 8, Enterprise Act 2002).
Common law controls on exclusion clauses

The courts have developed a number of rules for controlling the use of exclusion clauses: Contra proferentem. The most important of these is the rule that any ambiguity in a clause will be interpreted strictly contrary to the interests of the party seeking to rely on it (the so-called contra proferentem rule). For example: an exclusion of "implied warranties" will not exclude implied conditions or express warranties; an exclusion of "consequential loss" will not exclude direct loss; and if (insofar as UCTA allows it) it is intended to exclude liability for negligence, the words "any loss" or a reference to loss "howsoever caused" may not be sufficient: an express reference to "negligence" should be made, since the courts regard it as "... inherently improbable that one party to the contract should intend to absolve the other party from the consequences of the latters own negligence" (Gillespie Bros & Co Ltd v Roy Bowles (Transport) Limited [1973] 1 All ER 193).
Fundamental breach. Before the decision in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, a line of cases had suggested that there was a rule of law that an exclusion clause could not cover a fundamental breach of contract. This was rejected by the House of Lords in Photo Productions, who held that the question of whether, and to what extent, an exclusion clause is to be applied to a fundamental breach is a matter of construction of the contract in each case. Deliberate personal repudiatory breach. There is a rebuttable presumption that an exclusion clause should not apply to a deliberate personal repudiatory breach of contract. Very clear and strong drafting will be required to persuade a court that the parties intended
an exclusion clause to cover a deliberate personal repudiatory breach of contract: pointing to the literal meaning of the words of the clause (for instance, "neither party shall be liable") was not enough (Internet Broadcasting Corporation (t/a NetTV) v MAR LLC (t/a MARHedge) [2009] EWHC 844). For more information, see Article, Exclusion clauses after NetTV. Unusual terms. Unusual exclusion clauses (or any other unusual or unreasonable terms, even if not exclusion clauses) should be given sufficient prominence in the standard terms. The more unusual the clause, the more prominence it should be given, for example by printing the clause in larger type. Lord Dennings statement that "[s]ome clauses would need to be printed in red ink with a red hand pointing to it before the notice could be held to be sufficient" remains valid (J Spurling Ltd v Bradshaw [1956] 2 All ER 121).
Methods of excluding liability

A number of different methods may be used in order to exclude or restrict liability. The most commonly used devices are described in outline below. All the devices referred to would, in consumer contracts, be subject to the fairness test under the Unfair Terms Regulations. The applicability of the UCTA reasonableness test is dealt with separately in each case. Total exclusion of liability or limitation of liability This is the exclusion clause in its most familiar form; a simplified example is:
"The seller shall have no liability to the buyer under this contract except in respect of death or personal injury caused by the sellers negligence and for damage to the tangible property of the buyer caused by the sellers negligence not exceeding 100,000".
The drafting and commercial considerations relevant in formulating clauses of this type are discussed below (see What can we exclude?). Duty defining The straightforward exclusion clause operates by limiting the sellers liability for a breach which has occurred. A different approach is to draft the sellers obligations in such a way as to prevent the sellers acts or omissions from constituting any breach of contract at all, for example:
"Any delivery date of the seller is approximate only and no contractual commitment as to the time of delivery is undertaken".
However, this technique does not guarantee that the UCTA reasonableness test will not apply, since it is arguable that such a clause would be caught by section 3(2)(b) as the seller is claiming to be entitled to render "a contractual performance substantially different from that which was reasonably expected of him" or "no performance at all". Section 13 of UCTA provides that where the exclusion or restriction of liability is prevented, the exclusion or restriction of liability by reference to terms "which exclude or restrict the relevant obligation or duty" is also prevented, but it is expressed so as not to apply to clauses caught by section 3. In the absence of judicial authority on the point, it would be safest to assume that section 3 of UCTA will apply to duty-defining clauses of this kind. Exclusion or limitation of remedies The remedies which might otherwise be available to the buyer if the seller is in breach may be excluded. For example, the seller may provide that where goods are defective, the seller will
have the option of repairing or replacing the goods and that the buyer will accept such repair or replacement in satisfaction of all claims. The effect is to exclude the buyers rights to reject the goods and/or claim damages. This type of clause will be subject to the UCTA reasonableness test (section 3, UCTA), as UCTA specifically prevents, in relation to a partys liability, "excluding or restricting any right or remedy in respect of the liability" (section 13(1)(b)). In consumer contracts, consumers have the right to require that the seller repairs or replaces the goods (Part 5A, SGA). If this is impossible or disproportionate, or if the seller does not repair or replace the goods within a reasonable period, the consumer is entitled to have the price reduced or to rescind the contract. Any exclusion of these statutory remedies is void under UCTA and subject to the fairness test in the Unfair Terms Regulations. Procedural or evidential restrictions These restrictions may take a number of forms. The most common restriction limits the time within which the buyer can bring an action, for example, by providing that the buyer must give notice within seven days of delivery of any damage to the goods, failing which the seller is discharged from liability. The buyer may, in addition, be precluded from bringing claims after the end of a specified period of months following delivery. A different type of restriction may restrict the evidence which can be used in support of a claim, by providing that one matter is to be treated as conclusive evidence of another (for example, where a certificate of quality by an inspector is expressed to be conclusive evidence of the quality of goods delivered). Such clauses will be subject to the reasonableness test (section 3, UCTA). In relation to a partys liability, UCTA specifically prevents: Making the liability or its enforcement subject to restrictive or onerous conditions (section 13(1)(a)). Excluding or restricting rules of evidence or procedure (section 13(1)(c)).
What can we exclude?

The decision as to how much of the sellers potential liability it is possible (or desirable) to limit or exclude will depend on a number of legal and commercial factors, which differ according to whether the standard terms are being used for sales to other businesses or to consumers. Total exclusion of liability In business-to-business contracts One of the first questions which the draftsman of an exclusion clause is likely to be asked by commercial colleagues or clients is how much liability can be excluded and, in particular, whether it is possible simply to incorporate a blanket exclusion of all liability. The draftsman will need to be able to explain why a blanket exclusion cannot be achieved: Under UCTA, a business cannot exclude or restrict liability for death or personal injury caused by its negligence (see Exclusion or restriction of liability: nature of UCTA controls).
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Liability for breach of the statutory implied condition in section 12 of the SGA (good title and no encumbrances) cannot be excluded. Liability for death, personal injury or loss of or damage to property caused by defective products cannot be excluded (section 7 of the Consumer Protection Act 1987). Liability for fraud and fraudulent misrepresentation cannot be excluded. There is case law that suggests that an exclusion clause which fails to distinguish between fraudulent and non-fraudulent misrepresentation can never be reasonable, and is consequently wholly unenforceable (Thomas Witter Ltd v TBP Industries Ltd [1996] 2 AII ER 573). Exclusion of liability for: negligence (other than where death or personal injury is caused); breach of the statutory implied conditions in sections 13, 14 and 15 of the SGA; breach of contract; or misrepresentation, is subject to the reasonableness test (in the case of breach of contract, this is true only where the parties are dealing on standard written terms), which a blanket exclusion clause would have little prospect of satisfying. Note also that some authorities consider that a clause that purports to exclude liability for financial losses resulting from a partys breach of contract amounts to an effective blanket exclusion when applied to a companys losses, which are for the most part measured in financial terms (see Article, Exclusion clauses after NetTV: Meaningful remedy). A clause which purports to exclude one partys liability for breach of all its contractual obligations may be held by a court not to create a contract at all, but to take effect merely as a declaration of intent by the seller. There is a rebuttable presumption that an exclusion clause does not cover liability for deliberate personal repudiatory breaches (see above). Commercial colleagues and clients also need to understand that if an exclusion clause is found unreasonable, it will be wholly unenforceable, with the result that the seller would be liable for all of the buyers loss recoverable on ordinary principles. In consumer contracts A total exclusion of liability should under no circumstances be attempted: As described above, under UCTA a business cannot, as against a consumer, exclude or restrict liability for: death or personal injury caused by negligence; or breach of the statutory implied conditions in sections 13, 14 and 15 of SGA.
The exclusion of liability for: negligence (other than negligence causing death or personal injury);
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breach of contract; or misrepresentation, would be subject to the reasonableness test, which in the case of a blanket exclusion clause would have little prospect of satisfying (and, as mentioned above in the case of misrepresentation, the Thomas Witter case suggests that the exclusion of liability for fraudulent misrepresentation will never be reasonable).
The exclusion would not pass the fairness test under the Unfair Terms Regulations and would therefore: not be binding on the consumer; be the possible subject of injunction proceedings to restrain use by the OFT, or one of the qualifying bodies (see Unfair Terms Regulations).
It is an offence to supply standard terms containing a notice or term purporting to exclude liability which cannot be excluded under UCTA (Consumer Protection from Unfair Trading Practices Regulations 2008 (SI 2008/1277)). As in the case of business-to-business contracts, a contract which purports to exclude one partys liability for breach of all its contractual obligations in this way may not constitute a contract at all. The case of Feldarol Foundry Plc v Hermes Leasing (London) Ltd [2004] EWCA Civ 747 has confirmed the decision in R&B Customs Brokers Co Ltd v United Dominions Trust Ltd [1988] 1 WLR 321, that a company may act as a consumer where it buys goods or services which are not an integral part of its business. In this case a company bought a car for the use of its managing director under a hire-purchase agreement and was held to do so as a "person dealing as a consumer", so that the other party to the hire-purchase contract could not exclude liability for breach of certain terms implied by the SGA, under section 6(2) of UCTA. Limitation of liability Drafting to satisfy the tests of reasonableness or fairness It will generally be preferable for a seller to incorporate a clause which, while accepting liability for some losses, will nevertheless have a good chance of being reasonable and therefore valid, rather than a clause which, while excluding all liability, is likely to be unenforceable with the result that the seller will be liable for all losses. Case law has shown that the courts are less strict in applying the contra proferentem rule to limitations of liability than they are to exclusions of liability (Ailsa Craig Fishing v Malvern Fishing [1983] 1 All ER 101). If this is accepted, it is necessary to draft an exclusion clause which will satisfy the tests of reasonableness under UCTA and/or fairness under the Unfair Terms Regulations. The first drafting issue arises from the fact that different tests apply according to whether the customer is a business or a consumer. If the customer is: A business, the reasonableness test in UCTA will apply.
A consumer, both the fairness test in the Unfair Terms Regulations and the reasonableness test in UCTA will apply. Further, because the reasonableness test in UCTA requires the courts to have regard to the circumstances of the parties in determining reasonableness, what may be held reasonable in a business-to-business contract may well be unreasonable in a consumer contract, where the courts often apply a stricter test of what is reasonable. This presents a difficulty for businesses which deal both with other businesses and with consumers. One solution is to produce two different sets of standard terms (perhaps on different coloured paper) for separate use with businesses and with consumers. There are, however, obvious risks with this, given the difficulty in practice of determining whether any particular customer falls within the definition of consumer which, to complicate matters further, is defined differently under UCTA and the Unfair Terms Regulations. If the business deals predominantly with other businesses, but there is a possibility of occasional consumer sales, the best approach is to incorporate usual business-to-business exclusions, but to include a provision stating that, in the event of a transaction with a consumer, the consumers statutory rights are not adversely affected. Alternatively, where the majority of the customers of the business are consumers, it will clearly be necessary to include clauses which are designed to satisfy the fairness test under the Unfair Terms Regulations and the UCTA reasonableness test as applied to consumers, notwithstanding that it would be possible to justify harsher exclusions in the case of the relatively small number of business customers. Limiting liability to third parties If a third party brings proceedings to enforce a contractual term under the Contracts (Rights of Third Parties) Act 1999, the relevant contracting party may seek to rely on an exclusion clause in the contract as a defence to the third partys claim. The third party will not generally be able to rely on UCTA to: Challenge the exclusion or limitation clause. Strike down a clause that completely excludes his rights to sue on the contract. A term which excludes a contracting partys liability to a third party for negligently caused loss or damage (other than death or personal injury) does not have to satisfy the reasonableness test where the negligence consists of the breach of an obligation arising from a term of a contract (that is, not a claim in tort) and a third party is seeking to enforce that term under section 7(2) of the Contracts (Rights of Third Parties) Act 1999. Under UCTA, a party to a contract can only rely on an exclusion clause against another contracting party dealing as a consumer or on its written standard terms of business if the exclusion clause satisfies the reasonableness test (section 3, UCTA). If a written standard term excludes or limits a contracting partys liability to a third party for anything other than negligence, then the third party cannot use UCTA to attack the clause. A third party is not to be treated as a party to the contract for the purposes of any other enactment (section 7(4), Contracts (Rights of Third Parties) Act 1999). Section 3 of UCTA only applies "as between contracting parties" and therefore cannot be invoked in favour of a third party.
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Nevertheless, a third party can challenge an exclusion clause in favour of the relevant contracting party on the basis of: Section 2(1) of UCTA (no exclusion of liability for death or personal injury). Section 2(2) of UCTA, in relation to claims arising independently of the contract (for example, claims in tort). Reasonableness in business-to-business contracts What approach should be taken when drafting standard terms for use in standard business-to-business terms where (for the reasons given above) the objective is to incorporate an exclusion clause which will satisfy the reasonableness test in UCTA? There can be no guarantee, even with the best-drafted clause, that the reasonableness test will be satisfied, since the factors relevant to the issue of reasonableness are often specific to the circumstances surrounding each contract and may, for example, depend on the status or characteristics of the buyer. The following, however, are guidelines which, if followed, will mean that there is a good prospect of satisfying the test: A business cannot exclude liability for death or personal injury caused by its negligence (see above). A seller could reasonably be expected to accept liability in negligence for damage to tangible property up to a specified limit, as insurance should be easily obtainable in respect of this type of loss. There is a rebuttable presumption that an exclusion clause should not apply to a deliberate personal repudiatory breach of contract (see above). Any attempts to rebut the presumption when dealing on standard terms (for example, by express drafting excluding liability for such breaches) is unlikely to be considered reasonable. A total exclusion of liability for consequential, financial or indirect losses of the kind frequently used in standard terms is likely to be held unreasonable. A clause which places an upper limit on such liability will have a good chance of being held reasonable depending on the amount of such limit. Schedule 2 to UCTA contains a non-exhaustive list of guidelines to be used when deciding whether an exclusion or limitation of any of the implied conditions in sections 13, 14 or 15 of SGA is reasonable. These guidelines have also been used by courts when considering exclusion or limitation of other types of liability (see box, UCTA reasonableness test). A key provision in UCTA, which is illustrated in St Albans City and District Council v International Computers Ltd [1995] FSR 686, [1996] 4 AII ER 481 (see box, St Albans v ICL: unreasonable limitation clauses), is that if a party is seeking to limit its liability to a particular sum of money, the court will pay particular attention to: the resources available to that party to meet the liability should it arise; and the extent to which insurance cover is available (section 11(4), UCTA). Regarding the second of these factors, the mere fact that the sum available under a partys insurance to meet a particular claim against it is greater than the sum specified in the contract as the limit of its liability, does not necessarily mean that the court will find the
limit unreasonable. The terms of the insurance must also be considered. If, for example, the insurance is limited on an aggregate rather than a per-claims basis (so that it might also be needed for other claims), or if other claims outside the scope of the insurance might potentially arise under the contract, these factors will weigh in favour of the clause being upheld as reasonable (see Shepherd Homes Ltd v Encia Remediation Ltd [2007] EWHC 70). Before deciding on a particular upper limit on liability, the company should discuss with its insurers the type of loss in respect of which it may be possible to obtain insurance, and the level of such cover. The resources of the company itself will also be relevant in determining an appropriate upper limit, although in practice few companies, however large their resources, will wish to accept potential liability for losses which are not covered by insurance (see box, Insurance protections glossary). It is essential to check with the insurers that the provisions used in the standard terms (in particular the acceptance of potential liability for consequential losses subject to an upper limit) will not invalidate the insurance cover. There are a number of additional practical points which should be considered in relation to insurance cover (see box, Insurance: practical considerations). A buyer who objects to a sellers standard terms may argue that the seller should not subject its liability for consequential, financial or indirect losses to any upper limit at all. The seller may counter this by saying that the limit has been arrived at by reference to the availability of insurance to cover the sellers potential liability, and that the cost of the goods would have to be increased if it were to have to obtain additional insurance cover in order to back up a higher limit on liability. The reasonableness test takes into account such factors as: the relative bargaining positions of the parties; whether any inducement was given to agree to the term; and whether the term in question was a fair and reasonable one to be included in the circumstances when the contract was made. (Schedule 2, UCTA; see also box, UCTA reasonableness test.) For example, in Watford Electronics Ltd v Sanderson CFL Ltd, the Court of Appeal held that where experienced commercial parties agree on an allocation of risk, and the contract price reflects such allocation, and where there is no inequality of bargaining power, the courts should be very cautious before concluding that such an agreement is unreasonable. The term "consequential loss" has been judicially defined as such loss as can be proved over and above that which arises as a direct result of breaches which can be proved in accordance with the rules laid down in Hadley v Baxendale (1854) 9 Ex 341 (see British Sugar plc v NEI Power Projects Ltd [1997] CLC 622). The term "consequential loss" cannot therefore be relied on in an exclusion clause, as it sometimes is, to exclude all types of financial loss. For example, financial loss suffered as a result of a defect in a computer program designed to calculate tax liability may well be classified by a court as direct loss, since financial loss is
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likely to be the most direct loss resulting from a malfunction in the program, and therefore not covered by an exclusion of consequential loss. The use of the term "consequential loss" may lead to a further problem, since a court may find that it is so general and wide-ranging in its meaning that it does not satisfy the reasonableness test. To guard against this, it is advisable, where it is possible that different types of economic loss may be caused, to refer as far as possible to such heads specifically rather than by means of a general exclusion (see below). A clause excluding or limiting liability for consequential losses might, therefore, distinguish between consequential losses in the form of: personal injury (so far as not caused by the sellers negligence); damage to tangible property; loss of profits (see below); and other financial losses.
When seeking to exclude liability for loss of profits, it is important to note that these are not always classed as indirect losses but can also be direct losses, therefore careful drafting is needed (see Hotel Services Ltd v Hilton International Hotels (UK) Ltd [2000] BLR 235). In University of Keele v Price Waterhouse [2004] EWCA Civ 583, the Court of Appeal held that loss of anticipated savings fell within both limbs of direct and indirect losses. Care should be taken when drafting exclusions of financial losses. In the first instance decision in Regus (UK) Ltd v Epcot Solutions Ltd [2007] EWHC 938 (Comm), a case dealing with an exclusion clause in a business-to-business services agreement on the suppliers standard terms, the judge held that the list of excluded financial losses was so extensive that it effectively left the customer (a company) with no remedy at all for the suppliers breach of contract. As such, the entire exclusion clause was unreasonable and therefore ineffective. Similarly, in Internet Broadcasting Corporation (trading as NetTV) v MAR LLC (trading as MARHedge) [2009] EWHC 844, a case dealing with an exclusion clause in a bespoke business-to-business agreement, the first instance judge was significantly influenced by the fact that, by excluding a wide range of financial losses, the exclusion clause effectively deprived the innocent party of any realistic redress for the defaulting partys breach of contract. See further, Article, Exclusion clauses after NetTV: Meaningful remedy. Any clause that effectively excludes all liability for financial loss incurred by a company is more likely to be considered unreasonable by the courts, and as such to be more vulnerable to challenge (whether under UCTA or the common law rules of construction). A clause which places an upper limit on liability for financial losses will have a good chance of being held reasonable depending on the amount of such limit (see third bulletpoint in this list). However, note that the Court of Appeal subsequently reversed the first instance decision in Regus v Epcot in 2008, holding that the exclusion clause did not exclude the obvious and primary measure of loss for the breach, the "prima facie" measure of contract damages, which in this case was the diminution in value of the services promised, see Legal update, Unfair contract terms: Court of Appeal reverses first instance Regus v Epcot decision on exclusion clause.
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Some authorities consider an entire agreement clause that contains a non-reliance statement to be an exclusion of liability, and therefore to be subject to the reasonableness test (although other authorities disagree). Any express exclusion in the entire agreement clause of the sellers liability for misrepresentation or the buyers remedies will certainly be subject to the reasonableness. See further Entire agreement: drafting note. Exclusion clauses should, as far as possible, be drafted in the form of a series of clauses, sub-clauses and sub-paragraphs. Therefore, if one sub-clause is held unreasonable, it can be severed from the other provisions which will remain enforceable. The use of a short preamble or recital at the beginning of a clause explaining the reasons for, or background to, its insertion is likely to be helpful in convincing a court of its reasonableness. For example: "The seller has obtained insurance cover in respect of its own legal liability for individual claims not exceeding 100,000 per claim. The sellers liability is therefore limited to 100,000 and the buyer is responsible for making its own arrangements for the insurance of any excess loss." This assumes that the drafting objective is to produce a clause which will satisfy the reasonableness test. A different approach involves the deliberate incorporation of clauses which, while not amounting to a total exclusion of liability (and so manifestly unreasonable), are unlikely to be held reasonable if ever tested in court, in the hope that they will not in fact be challenged by the buyer or, if challenged, will lead the buyer to settle on more satisfactory terms from the point of view of the seller. Such an approach might work with a buyer who is not legally advised, but it is not recommended. It is generally better to accept a realistic upper limit on liability and to insure for it in the knowledge that the upper limit is likely to be enforceable. Reasonableness and fairness in consumer contracts The approach adopted by the courts, and the UCTA reasonableness guidelines themselves, mean that it is generally more difficult to satisfy the reasonableness test in consumer contracts. In addition, consumer contracts must satisfy the test of fairness in the Unfair Terms Regulations. In applying the test of fairness under the Unfair Terms Regulations the courts are likely to use considerations substantially similar to the reasonableness test under UCTA. Therefore, drafting which is intended to enhance the prospects of provisions satisfying the reasonableness test is also likely to improve their chances of meeting the fairness test. The following should be considered when drafting standard terms to which the Unfair Terms Regulations apply: Avoid provisions which allow the seller unilaterally to vary the contract (for example, a provision allowing the seller unilaterally to vary the price of the goods delivered). Such a provision is more likely to be considered fair if it is drafted so as to give the consumer the right to back out without penalty before any variation becomes effective. Cut out any restrictions or exclusions which are not absolutely necessary for the protection of the seller: they may make the contract as a whole appear to be balanced unduly in favour of the seller, and therefore unfair, without securing a real commercial benefit for the seller. Use plain and intelligible language.
As mentioned above, where appropriate give reasons for the inclusion of clauses in the form of a recital or preamble. Ensure that any dispute resolution procedures make it clear that the consumer will ultimately have the right to take the issue to the courts. Buyers perspective When drafting standard purchase terms, the objective from the buyers point of view is to protect the buyer so far as possible by extending the liability of the seller and maximising the extent of the losses recoverable by the buyer if the seller fails to perform. The draftsman will therefore consider including: Appropriate express warranties (see, for example, Standard document, Terms and conditions for the supply of goods (pro-customer): clause 3.1). These will supplement the implied SGA statutory conditions, which should be expressly restated in order to avoid any implication that they have been excluded by the express warranties. Remedies for the buyer if the seller fails to perform, such as the right to: require the seller to repair or replace faulty goods; or terminate the contract and reclaim the purchase price (see Standard document, Terms and conditions for the supply of goods (pro-customer): clause 5). An indemnity in favour of the buyer (for loss suffered by it as a result of breaches of warranty by the seller) and any other matters which the buyer may wish to cover, such as product liability or intellectual property infringement claims relating to the goods (see Standard document, Terms and conditions for the supply of goods (pro-customer): clause 5.4).
Warranties and indemnities

Distinction A warranty is an assurance or promise in a contract, the breach of which may give rise to a claim for damages, but cannot (unlike a condition or, in certain circumstances, an intermediate term) give rise to a right to terminate the contract. It may, for example, constitute an assurance about past or present facts, a future state of affairs or the state of mind of the party giving the warranty. Its function is to give the recipient of the warranty the right to sue for damages for breach of contract if the assurance proves to have been untrue. Such damages, if awarded, are subject to the common law rules relating to the assessment of damages, and in particular the test of remoteness under Hadley v Baxendale and the duty to mitigate, which may result in the recipient of the warranty recovering significantly less than the entire losses actually suffered by it as a result of the breach. An indemnity is an undertaking by one person to meet a specific potential liability of another. Where the persons concerned are parties to a contract, the need for such an undertaking may be perceived by one party or the other as arising in a number of different situations, including the following: Transferring liability. One party may agree to indemnify the other against liability which would otherwise fall on the other (for example, where the seller of a patented machine
indemnifies the buyer against third party claims that the buyers use of the machine constitutes an infringement of patent). Reinforcing existing potential liability. Where a potential liability of one contracting party to the other is already the subject of a warranty, the recipient of the warranty may wish to reinforce it by means of an indemnity to cover losses which might not be covered by a claim for damages for breach of warranty. Reversing liability. One contracting party may require the other party to indemnify it against liability incurred by the first contracting party to the indemnifying party. This may operate as an exclusion clause and be subject to the UCTA reasonableness test (see Indemnities). Controls on indemnities At common law, indemnities are generally construed strictly and liability will not extend beyond what is expressly provided for in the language of the indemnity. As a result, the language used in indemnities will usually be very wide in scope, and will expressly include such items as interest and costs incurred, which might otherwise be held to be outside the scope of the indemnity. Indemnities contained: In business-to-business contracts are not specifically covered by UCTA, but may in certain circumstances be held subject to it. In consumer contracts will be subject to the fairness test under the Unfair Terms Regulations (which may be difficult to satisfy) and will be subject to UCTA in the case of any indemnity, to which section 4 of UCTA applies. (See Indemnities.)
Main terms
For detailed guidance on drafting, negotiating and using business-to-business terms and conditions for the supply of goods, see Practice note, Drafting standard terms and conditions for the supply of goods. This practice note considers both pro-supplier and pro-customer terms and conditions. Specification Practical significance The practical experience of many in-house legal departments indicates that disputes are more likely to arise over the wording of the specification in standard contracts than any other provision. Draftsmen should check carefully that the technical specifications supplied or incorporated in the contract by their technical colleagues or clients are accurate and will dovetail properly with the standard terms, as this is clearly an area where technical and legal personnel may each be tempted to assume that the other has performed that task. A buyers terms will provide: For the specification of the goods either to be prepared and submitted by the buyer itself or, if it is prepared by the seller, for it to be approved in writing by the buyer.
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That the goods will conform to the agreed specification (see Standard document, Terms and conditions for the supply of goods (pro-customer): clause 3.1). Quantity The contract will clearly need to provide expressly for the quantity of goods to be sold. Practical logistics may mean that the seller eventually delivers slightly more or less than the exact quantity specified in the contract, for example, because the goods ordered are difficult to count or weigh precisely. It is in the interests of the seller to cover this possibility by providing for tolerances to the contract quantity so that, for example, the seller is specifically entitled to deliver goods in quantities of up to (say) 5% more or less than the contract quantity (see Standard document, Terms and conditions for the supply of goods (pro-supplier): clause 3.8). Failure to include an express provision along these lines will mean that rules unfavourable to the seller under section 30 of SGA will apply. The effect of these, broadly, is that: Any variation from the agreed quantity is (subject to a narrowly construed de minimis provision) a breach of contract. The buyer may have the right to reject the goods in their entirety. The issue of whether payment should be adjusted to reflect the excess or shortfall of goods contracted for should also be addressed. If the contract allows for a tolerance of more than a very small amount, provision is likely to be made for pro rata adjustment to the price. Application of UCTA and Unfair Terms Regulations A provision allowing the seller to deliver different quantities of goods from those specified in the contract: In business-to-business contracts, if the tolerances allowed for are not within normal commercial limits, will probably be subject to the UCTA reasonableness test by virtue of section 3 on the basis that the seller is attempting to render a contractual performance substantially different from that reasonably expected. However, a provision is likely to be held unreasonable only if it requires the buyer to pay the full contract price for less than the contracted quantity of goods. In consumer contracts: will be subject to the UCTA reasonableness test for the same reasons; and will be subject to the fairness test under the Unfair Terms Regulations (the application of the regulations is discussed under Unfair Terms Regulations), and will generally be regarded as less appropriate (and so less likely to be reasonable) than in business-to-business contracts as consumers do not generally buy goods in bulk. Delivery Statutory rules The SGA contains detailed rules relating to the time and place of delivery. The drafting objective is to ensure that those statutory rules which are inappropriate to the sellers needs are replaced by provisions tailored to the sellers needs and that any additional provisions necessary to reflect the sellers commercial objectives are added.
Place of delivery Unless otherwise specified in the standard terms, delivery will be deemed to take place at the sellers premises (section 29(2), SGA). The point of delivery is often critical to the transfer of risk (see Risk and insurance). Time of delivery The parties will almost always wish to make specific provision as to the time for delivery since, in the absence of specific provision, the statutory rule merely provides that the seller is bound to deliver the goods within a reasonable time (section 29(2), SGA). The general common law rule is that the time for performance of obligations under a commercial contract is of the essence, so that late delivery would entitle the buyer to terminate the contract and claim damages. The seller should therefore provide specifically that the estimated date of delivery will not be made of the essence of the contract (see Standard document, Terms and conditions for the supply of goods (pro-supplier): clause 3.4). The standard terms should also ensure that if the buyer has to do something or supply certain information in advance of delivery, a failure to do so will release the seller from liability for delay (for example, see Standard document, Terms and conditions for the supply of goods (pro-supplier): clause 3.5). Failure to accept delivery If time is not of the essence then the buyers failure to take delivery of goods at the time agreed does not in itself justify the seller disposing of them to someone else. Section 48(3) of SGA enables the seller to resell perishable goods without notice to the buyer if the price is not paid when due. If the buyer will not take delivery of, or collect the goods, it is sensible to provide for the seller to be able to store the goods at the buyers cost (see Standard document, Terms and conditions for the supply of goods (pro-supplier): clause 3.6) or to make specific provision enabling the seller to dispose of the goods. The buyer, on the other hand, may incorporate in its purchase terms an obligation on the part of the seller to store the goods free of charge if the buyer cannot take delivery. The buyer will also wish to make clear to whom delivery can be made and who can sign for the goods. Damage in transit or non-delivery The seller cannot completely exclude its liability for delivering damaged goods or not delivering the goods at all. It may, however, specify that delivery to the carrier is to be treated as delivery to the buyer (such a term is implied where the seller is authorised or required to send the goods to the buyer (section 32(1), SGA), but not where the buyer is a consumer (section 32(4), SGA)). The seller may also have a claim against its carrier if the goods are damaged in transit before risk has passed to the buyer. The sellers standard terms should therefore tie in with any standard terms of its carrier. For example, if the carriers standard terms specify that notice of damage should be given within seven days of delivery, the seller should impose an obligation on its buyer to give notice within, say, three days of delivery. A notification of damage on a carriers delivery note should not be permitted as the seller may not in fact see this for some time. Instalments contracts The seller must specify if it wants to deliver by instalments (section 31(1), SGA; see Standard document, Terms and conditions for the supply of goods (pro-supplier): clause 3.9). Each
instalment should be specified to be a separate contract, so a defect in one instalment will not have a knock-on effect on the others by giving the buyer the right to reject all instalments. A buyer should reserve the right in its purchase terms to terminate the entire contract and reject all the goods if there is a defect in the goods in any one instalment. Application of UCTA and Unfair Terms Regulations A provision stating that time for delivery or performance is not of the essence: In business-to-business contracts may be subject to the reasonableness test by virtue of section 3 of UCTA (as it is depriving the buyer of the remedy of terminating the contract). However, it may be held reasonable if the buyers common law right to terminate after serving notice making time of the essence is not also excluded. In consumer contracts: will be subject to the UCTA reasonableness test for the same reasons; and it will be subject to the fairness test under the Unfair Terms Regulations and may be unfair.
A provision stating that the delivery date is estimated only: In business-to-business contracts may be subject to section 3 of UCTA (there are arguments either way) and therefore subject to the reasonableness test. If UCTA were held to apply, an indication in the text of the clause as to the reasons why a fixed delivery date cannot be given would be helpful (for example, dependence on availability of raw materials or possible late deliveries by sellers). In consumer contracts: the position under UCTA is the same (subject to possible differences in the application of the reasonableness test); will be subject to the fairness test under the Unfair Terms Regulations and may be unfair.
A provision limiting or restricting liability in damages for late delivery: In business-to-business contracts will be subject to the reasonableness test by virtue of section 3 of UCTA. A total exclusion of liability may well be unreasonable, however, an appropriate upper limit on liability may well be reasonable. In consumer contracts: the position under UCTA is the same (subject to possible differences in the application of the reasonableness test); and will be subject to the fairness test under the Unfair Terms Regulations and may be unfair.
Acceptance
Statutory and common law rules If the seller commits a breach of any condition of a contract, the buyer is entitled to reject the goods and terminate the contract. The buyers right to reject is, however, lost if the buyer has accepted the goods. Under section 35 of SGA, the buyer is deemed to have accepted the goods (and so loses the right to reject) in three situations: When the buyer intimates to the seller that it has accepted the goods. When the goods have been delivered to the buyer and it does any act in relation to them which is inconsistent with the sellers ownership. The buyer must, however, be given a reasonable opportunity of examining the goods in order to check that they comply with the requirements of the contract (although this right can be excluded in business-to-business contracts (section 35(2) and (3), SGA)). When, after the lapse of a reasonable time, the buyer retains the goods without intimating to the seller that it has rejected them. The Court of Appeal held that, when determining a "reasonable time" for deemed acceptance of goods under section 35(4) of SGA, the court must take into account the time taken to ascertain what would be required to modify or repair the goods (Clegg v Olle Andersson (T/A Nordic Marine) [2003] EWCA Civ 320). Drafting approach When drafting for the seller, the objective is to prevent the buyer from seeking to escape from the contract by claiming that the goods have not been accepted and rejecting them. The draftsman can approach this by: Expressly providing that it is the buyers basic contractual duty to accept the goods so as to highlight the implied common law term to that effect. Excluding or restricting the buyers right to reject the goods, for example by: entitling the seller to repair or replace any defective goods (which in effect excludes the buyers right to terminate the contract); specifying a time limit after which the right to reject will be lost; or providing that the goods cannot be rejected if the buyer has altered or damaged them.
In business-to-business contracts, specifying a point at which the buyer will be treated as having intimated acceptance of the goods. (A consumer cannot be deprived of the right to examine the goods.) A buyer will wish to protect the right to reject in its purchase terms (and may seek to extend it) by providing that, for example: The buyer may, following delivery, reject any goods which are not in accordance with the contract. Acceptance of the goods will not take place until the buyer has had a reasonable time to inspect the goods after delivery and, if there are goods with a latent defect, they will not have been accepted until a reasonable time after the defect becomes apparent.
Application of UCTA and Unfair Terms Regulations

A provision entitling the seller to repair or replace any defective goods: In business-to-business contracts will be subject to the reasonableness test by virtue of section 6(3) of UCTA, since it excludes the right to terminate which would normally be available on breach of the implied statutory condition. In consumer contracts will be void by virtue of section 6(2) of UCTA (the exclusion of the right to terminate for breach of the implied statutory condition is not permitted). A consumer does, however, have the right to require that the seller repairs or replaces the goods (see Exclusion or limitation of remedies). Price Even if the parties have not addressed any other term of the contract in detail, they will almost certainly have considered the price to be paid. If there is no express agreement as to price, there will be an implied term that the buyer should pay a reasonable price (section 8, SGA). However, a failure to agree a price in a contract for the sale of goods may well indicate that the parties have not yet reached a binding agreement. In Baird Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA Civ 274 failure to set out terms as to price or quantity in an express agreement was seen as evidencing lack of an intention to create legal relations. Baird Textile Holdings Ltd had supplied garments to Marks & Spencer plc (M&S) for 30 years. Without warning, M&S terminated all supply arrangements between them. The parties had deliberately not entered into an express contract, in order to preserve maximum flexibility in their trading arrangements. Baird claimed that there was an implied contract between the parties requiring M&S to acquire garments from Baird in quantities and at prices which in all the circumstances were reasonable. By terminating their arrangements, M&S had breached that implied contract. The crucial point for the court was whether the obligations arising from the alleged implied contract were sufficiently certain to be contractually enforceable. The court found the alleged obligation on M&S to acquire garments from Baird to be insufficiently certain because there were no objective criteria by which the court could assess what would be reasonable as to quantity or price. This lack of certainty confirmed the absence of any clear evidence of an intention to create legal relations. The fact that the parties had been trading on a regular basis for 30 years was not sufficient to imply a contract between the parties. Problems can occur where the parties agree an initial price but then "agree to agree" future price increase without any defined mechanism, such as tracking the Retail Price Index. Normally an "agreement to agree" is unenforceable as it is not sufficiently certain. However, the Court of Appeal in Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD [2001] All ER (D) 263 held that, in this particular case, such a clause could provide sufficient certainty because the parties had a long course of dealing and acted in the belief that they had a binding contract. Additionally, the agreement contained an arbitration clause that provided a commercial and contractual mechanism by which the parties, in the absence of agreement, could resolve any dispute over the price increases. The court implied a term for the determination of a reasonable price increase in the absence of agreement by the parties. Items included Clear provision should be made as to whether the following items are to be included in the price or are extra:
VAT, customs duties and other taxes and duties. Packaging. Delivery and off-loading costs. Insurance. VAT will be treated as included in the price unless the contract provides otherwise (section 19(2), Value Added Tax Act 1994). Therefore, it should be made clear in the standard terms that all prices are exclusive of VAT, assuming that the seller wishes to quote its prices on an exclusive basis. The buyers purchase terms will provide for the price to be inclusive of as many extra items as possible, although a buyer would generally accept that, subject to receipt of a VAT invoice, VAT should be paid in addition to the price. Prices quoted in sales literature A price which is quoted in sales literature can be withdrawn and changed at any time before acceptance. However, a busy sales department might forget. Therefore, such prices should be accompanied by a specific statement that they will only remain open for acceptance for, for example, 28 days from the date of the quotation. List price The contract may provide for goods to be supplied at the price given in the sellers price list. The list may change between acceptance of the order and delivery of the goods and this possibility should be addressed in the standard terms, for example by specifying that the price will be fixed by reference to the price for the goods as shown in the sellers price list in force on the date that the order is accepted. Price variation If the seller wishes to vary the price after the contract has been concluded, there must be an express provision entitling it to do so. The seller may wish to invoke such a clause where, through no fault of its own, its costs have increased, for example because its own seller has revised its prices, reducing or eliminating the sellers margin, or because of increased duties or exchange rates. A clause may, therefore, be incorporated enabling the seller to increase prices generally, or in line with increased costs, or perhaps by reference to a formula such as increases in the Retail Price Index. A buyer will seek in its purchase terms to maintain some degree of control over price increases, either by providing that any such increases require the buyers prior consent or by giving the buyer the right to cancel the contract following notification of a proposed price increase.

A provision entitling the seller to increase the price after the contract has been made: In business-to-business contracts may be subject to the UCTA reasonableness test, by virtue of section 3, as an attempt to render a contractual performance substantially different from that which was reasonably expected.
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In consumer contracts may be subject to UCTA for the same reasons and will be subject to the fairness test under the Unfair Terms Regulations. In both business-to-business and consumer contracts, the prospects of satisfying the reasonableness and fairness tests may be improved by adding language to the price increase clause indicating the circumstances (for example, increased costs) in which the right to increase the price may be exercised, although this will inevitably reduce the potential scope of the clause. In consumer contracts, a price increase provision is specifically included in the list of terms which are potentially unfair under the Unfair Terms Regulations, unless (as is stated in the list) the consumer is given the right to cancel the contract if the increase is too high. The contract might therefore provide that the seller should notify the buyer of any proposed price increase, with the buyer having the right to cancel the contract within a given period after receipt of the sellers notice. Payment Time for payment This is a question of the sellers actual working practices but should always be specified. The date on which payment must be made should be tied to a given number of days after the date of the sellers invoice or delivery of the goods, rather than the date of receipt of the invoice by the buyer. The time for payment of the price is not automatically of the essence of the contract and the standard terms will specifically need to make it so in order to give the seller the right to terminate the contract if the buyer fails to pay on time (this will only help if the goods are being delivered in instalments, or payment is required in advance). If deliveries are made by instalments it should be specified whether payment will be made by reference to each individual instalment or the delivery of the final one. A buyers terms should provide expressly that time for payment will not be of the essence of the contract. Encouraging prompt payment There are different ways in which the buyer can be given an incentive to make prompt payment: A provision that if payment is not made on the due date, the buyer must pay interest on the amount outstanding (see Standard document, Terms and conditions for the supply of goods (pro-supplier): clause 6.7). The rate of interest must not be excessive as it may otherwise be held invalid as a penalty. The recent case of Jeancharm Ltd (t/a Beaver International v Barnet Football Club Ltd [2003] All ER (D) 69 (Jan) (CA)) held that an interest rate of 5% per week (equivalent to 260% a year) was indeed an unenforceable penalty. The rate should reflect the estimated loss to the seller of being deprived of the use of the funds. Generally, the approach in standard terms is to add a small margin of say 2% to 4% over the base rate of one of the clearing banks. The seller may be able to rely on the statutory right to claim interest on overdue debts introduced by the Late Payment of Commercial Debts (Interest) Act 1998 (see box, Statutory right to interest on unpaid debts). A provision entitling the buyer to a discount if payment is made before a specified date. Where the buyer is paying the price by instalments, a provision stating that if any instalment is not paid on the due date, the remaining outstanding balance of the price will become due and payable.
Where the goods are being delivered in instalments, a provision allowing the seller to withhold further deliveries while any payments are overdue. Deductions The seller will wish to exclude the buyers rights to deduct or withhold any sums from the payments due to the seller (see Standard document, Terms and conditions for the supply of goods (pro-supplier): clause 6.8). The buyer may seek to withhold such sums: By way of set-off, which allows the buyer to deduct from the price of the goods sums due from the seller to the buyer. By way of abatement, which allows a buyer to withhold all or part of the price of the goods on account of the buyers claim for damages where the goods supplied are defective. Clear words are needed effectively to exclude whatever rights the buyer may have, with express reference to the exclusion of any "deduction, discount, set-off or abatement" from payments by the buyer. However, it should be noted that: Such a clause operates as an exclusion clause and may be difficult to enforce (see below). The rights of set-off conferred on insolvency by the Insolvency Act 1986 are mandatory and cannot be excluded. A buyer may wish to incorporate express set-off rights in its purchase terms, entitling it, for example, to set off against the price of the goods any sums owed to it by the seller or other claims which it may have against the seller (see Standard document, Terms and conditions for the supply of goods (pro-customer): clause 7.7).

In consumer contracts, a provision that the buyer must pay interest on late payments under the contract will be subject to the fairness test under the Unfair Terms Regulations and may be regarded as unfair if the rate of interest is excessive. A provision excluding the buyers right to make any deduction, discount, set-off or abatement from payments due: In business-to-business contracts, will be subject to the UCTA reasonableness test, either by virtue of section 3 or (insofar as the clause prevents the buyer exercising such rights where the goods are in breach of statutory implied conditions) section 6. In consumer contracts: will either be subject to the UCTA reasonableness test by virtue of section 3 or (insofar as the clause prevents the buyer exercising such rights where the goods are in breach of statutory implied conditions) will be wholly unenforceable by virtue of section 6; and will be subject to the fairness test under the Unfair Terms Regulations and is likely to be unfair.
Method of payment
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It is usually assumed that cleared funds will be expected to be with the seller by the specified date and it is up to the buyer how it pays. However, a term will often be implied that payment should be made by cheque and it is therefore advisable to use the term "cleared funds" when drafting the payment provision (see Standard document, Terms and conditions for the supply of goods (pro-supplier): clause 6.6). Security for payment The seller may anticipate a situation in which the buyer is unable to pay and there are a number of methods by which the seller may seek some degree of security for payment: Incorporating a retention of title clause in the standard terms (see Retention of title; risk and insurance). Requiring full payment in advance or a deposit. If payment is being made by instalments, care must be taken that this does not bring the transaction within the remit of the Consumer Credit Act 1974, for example, by making it a conditional sale. Requiring the buyer to provide a bank guarantee or performance bond (see Practice note, Bonds, guarantees and standby credits: overview). In certain circumstances the seller may be able to rely on a lien (see box, Lien). If available, obtaining credit insurance against the buyer. In international contracts, requiring a letter of credit. Incorporating provisions in the standard terms which, on the occurrence of specified events such as the presentation of a winding up petition or the levying of execution over the buyers goods, entitle the seller to: terminate the contract; suspend future deliveries of goods (including any instalments); and cancel any existing orders.
To cover situations where it is required to pay a deposit, the buyers terms should provide that all payments, including any deposit, are recoverable by the buyer if the seller fails to perform its obligations under the contract. The buyer may also, as a means of protection against the sellers insolvency, require that the seller places any such deposit in a separate trust account until the seller has fully performed its obligations. Packaging In appropriate cases, depending on the nature of the goods supplied, a provision should be included in standard terms preventing the buyer from reselling the goods in repackaged form or altering or damaging the packaging in which they have been sold to the buyer by the seller. There are several reasons why this might be necessary from the sellers point of view: The seller may be subject to statutory provisions governing packaging and labelling of goods.
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Goods sold without packaging containing appropriate instructions or warnings may be unsafe under the Consumer Protection Act 1987, exposing the seller to potential liability to injured third parties. Repackaging may contain inaccurate details as to the goods which may form part of the description of the goods and lead to the seller being liable for breach of the statutory implied condition as to description. The goods may be sold under a valuable trade mark or name, the reputation of which could be damaged or diluted by incorrect packaging or the removal of names or logos. Retention of title; risk and insurance Purpose The object of a retention of title clause (sometimes referred to as a Romalpa clause, after the first leading case on the subject, Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676) is to give the seller of goods priority over secured and unsecured creditors of the buyer if the buyer fails to pay for the goods because it is insolvent, or for some other reason which may be specified in the clause. The clause may be used in its basic form (supplemented by certain other standard clauses) or with one or more additional clauses, such as an all monies clause, a proceeds of sale clause or a mixed goods clause (see below). Basic form The basic clause provides that title to the goods is retained by the seller until it has received full payment for the goods (see Standard document, Terms and conditions for the supply of goods (pro-supplier): clause 5). When drafting, it is important to ensure that legal and beneficial title are retained: the reservation of equitable or beneficial title alone will not do (Re Bond Worth [1979] 3 All ER 919). The basic clause should be supplemented by standard clauses containing: A right for the seller to enter the buyers premises in order to repossess the goods (so that the seller will not commit a trespass when doing so). An obligation on the part of the buyer to: store the sellers goods separately from goods belonging to third parties; mark them as the sellers property; and allow the seller access to the buyers premises to verify that this has been done. This will enable the seller more easily to identify its own goods if a repossession of the goods becomes necessary. A list of insolvency-related events which will trigger the sellers right to demand payment for the goods (if not already due) and to repossess them. In addition, although not a standard clause, if the goods supplied might be attached to the buyers premises (for example, in the case of heavy plant or machinery), it is worth including a provision prohibiting the buyer from annexing them to such premises without the sellers consent. If goods do become annexed to the buyers premises, the consent of the owner of those premises will be necessary if the seller is to be entitled to repossess them in the event of non-payment by the buyer.
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A buyers purchase terms will, conversely, provide that title to the goods passes on delivery (see Standard document, Terms and conditions for the supply of goods (pro-customer): clause 6) or, if the buyer pays for the goods before delivery, that it passes once payment has been made and the goods have been appropriated to the contract. All monies clause Under an all monies clause, the seller reserves ownership of the goods supplied until the buyer has paid not only for those particular goods, but also for any other goods supplied by the seller to the buyer, and has repaid all other moneys owed to the seller, regardless of how such indebtedness arose (see Standard document, Terms and conditions for the supply of goods (pro-supplier): clause 5.2). A limitation on the practical effectiveness of the basic clause is that the seller retains title to goods only until those specific goods have been paid for. The buyer will therefore obtain title to those goods on paying for them even if other goods received from the seller have not been paid for. The effect of the all monies clause is that all of the goods supplied, whether paid for or not, belong to the seller until the buyer has settled all invoices. In practice, the clause avoids the need to relate specific goods at the buyers warehouse with specific unpaid invoices. It has been suggested that an all monies clause creates a charge by the buyer in favour of the seller, which would be void against a liquidator or administrator and any creditor of the buyer unless registered at Companies House in accordance with the Companies Act 2006. Although possible in theory, the registration by a seller of all its sales contracts at Companies House, in case they contain retention of title clauses which create charges is, for a number of practical reasons, unlikely to be a realistic option. The House of Lords, on appeal from a Scottish decision, has held that such a clause does not create a charge, but the decision, while of strong persuasive authority, is not binding on the English courts (Armour v Thyssen Edelstahlwerke AG [1990] 3 All ER 481). Therefore, it is advisable to incorporate the all monies clause in a separate sub-clause from the basic retention of title clauses so that it could be severed from them if it were ever held invalid by a court for lack of registration as a charge (see Severance: drafting note). Proceeds of sale clause Where the goods supplied are to be sold on by the buyer, the object of a proceeds of sale clause is to enable the seller to assert rights in the proceeds of sale in order to satisfy the purchase price of the goods. A clause giving the seller rights over the sale proceeds of goods resold by the buyer was held to be valid in the Romalpa case, on the basis that there was, on the facts before the court, a fiduciary relationship between the buyer and the seller, and the buyer, as a fiduciary, was under a duty to account for the sale proceeds to the seller as beneficiary. Since the Romalpa decision, the courts have distinguished the facts of the cases before them from the facts in the Romalpa case, and in a series of cases have held that clauses of this kind create a charge by the buyer in favour of the seller which will be void if not registered at Companies House.
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As a result, it is now extremely difficult, if not impossible, to draft a proceeds of sale clause without its being construed as a charge over the goods (and therefore unenforceable unless registered as such). One of the main difficulties in practice is that, in order to rely on the equitable remedy of tracing, the seller must create a fiduciary relationship with the buyer and, in order to achieve that, the buyer must resell the goods as the sellers agent. This would mean the buyers customers holding the seller directly liable for any defects in the goods, which is unlikely to be desirable from the sellers point of view. If, on the other hand, the authority of the buyer as agent is cut down, so that it cannot create privity of contract between the seller and the buyers customers, the result is that there is unlikely to be a true agency. The inclusion of a proceeds of sale clause in standard terms is inadvisable without specialist advice or a detailed review of the latest relevant case law, which is beyond the scope of this note. It has been argued that if a court were to hold that the proceeds of sale clause created a charge which was invalid for non-registration, it might also decide that the invalidity of the proceeds of sale clause extended to the basic retention of title and all monies provisions, with the result that they too would be rendered invalid for non-registration. It is considered more likely that, if the proceeds of sale clause is contained in a separate clause or sub-clause and the standard terms contain a severance provision, the court will sever the proceeds of sale clause leaving the remaining provisions unaffected, but the need for caution in this area is clear (see Severance: drafting note). Mixed goods clause Where the seller is selling goods for use in a manufacturing process (if, for example, it is a seller of components rather than finished products), and the goods supplied may be mixed or combined with other goods owned by the buyer or by third parties, the object of a mixed goods clause is to enable the seller to assert rights of ownership in any new product resulting from the manufacturing process. The case law distinguishes between: Goods which maintain their identity (and which, if attached to other goods, can be separated without causing damage). Such goods will continue to belong to the seller where there is a basic form of retention of title clause as described above, so no additional provisions are necessary. Goods which lose their identity in the manufacturing process (for example, the sale of resin which is used in the manufacture of chipboard). The resulting new product (the chipboard) will belong to the buyer and the courts have held that if a retention of title clause purports to reserve rights in the new goods to the seller, the clause will create a charge which will be ineffective if not registered (Borden (UK) Ltd v Scottish Timber Products [1979] 3 All ER 961). It is clear from the case law, therefore, that the use of a mixed goods clause will achieve nothing for the seller. On the contrary, it may do harm if (following the same argument as described above in the case of a proceeds of sale clause), its invalidity also rendered the basic and all monies clauses invalid for non-registration as charges. Sellers of products which are quickly consumed within a manufacturing process should therefore consider alternative means of securing their purchase price, such as credit insurance. Limitations on effectiveness
The following actual or potential limitations on the effectiveness of retention of title clauses should be borne in mind: If the buyer is a company in administration, no steps can be taken without the consent of the administrator or the permission of the court to repossess goods supplied pursuant to a retention of title clause (paragraph 43, Schedule B1, Insolvency Act 1986 (the Act)). This prohibition also applies during any interim moratorium in an administration. For example, if a notice of intention to appoint an administrator is filed by a holder of a qualifying floating charge under paragraph 14 of Schedule B1 of the Act, there will be an interim moratorium from the time when the notice of intention is filed until the appointment of an administrator takes effect (paragraph 44(2)(a), Schedule B1, the Act). For more information on interim moratoriums and administration generally, see Practice note, Administration. The retention of title clause must be properly incorporated in the contract between the seller and the buyer in order to be enforceable as a contract term (see Effective incorporation of terms). A retention of title clause is not, however, so unusual that special notice needs to be given of it (John Snow & Co Ltd v DBG Woodcroft & Co Ltd [1985] BCLC 54). Retention of title will be of little or no practical benefit where the goods supplied are perishable or have a low scrap value. Retention of title is an area which generates a rapidly changing body of case law. Particular clauses are liable to be rendered ineffective by a court decision at any time, so a review of retention of title clauses is a particularly important aspect of the overall review of standard terms which sellers should be carrying out on a regular basis (see Contract review). Conclusion and alternatives Decisions of the courts have severely restricted the effectiveness of complex mixed goods and proceeds of sale clauses. The most that a well-drafted retention of title clause is likely to achieve for a seller is: The right to enter the buyers premises without trespassing. The ability to recover goods stored at the buyers premises which can be identified as the sellers, possibly to the extent of all sums owed by the buyer to the seller. A possible action for damages for conversion against a receiver or liquidator personally who sells goods which were identifiably the sellers. A retention of title clause should be regarded as an adjunct to a proper credit control system, not as a substitute for it. Where the seller has doubts as to the financial standing of the buyer, the seller should consider: Reducing the period of credit allowed to the buyer, or the amount of credit, or both. Taking alternative forms of security, such as a bank guarantee or letter of credit (see Practice notes, Bonds, guarantees and standby credits: overview and Letters of credit: overview). Obtaining credit insurance. This has become more readily available in recent years, with a greater choice of tailor-made products on offer. The existence of a satisfactory set of standard terms of business is likely to be a precondition to obtaining such insurance.
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Risk and insurance The risk in the goods will pass at the same time as title to them passes unless otherwise agreed (section 20, SGA). In standard terms of sale, risk is usually stated to pass at the time of delivery of the goods (see Standard document, Terms and conditions for the supply of goods (pro-supplier): clause 5.1). This is on the basis that the seller will not wish to remain responsible for loss or damage to the goods up to the time when title passes, given that the effect of the basic retention of title clause is that title does not pass until the buyer has paid for the goods. The result is that if the goods are destroyed after delivery the buyer will remain liable for the price. To guard against the risk of the buyer being unable to pay, the seller should include a provision requiring the buyer, on delivery, to insure the goods with a reputable insurance company (the seller may reserve a right of pre-approval) and to ensure that the sellers interest in the goods is noted on the policy. The buyer may provide in its purchase terms for the passing of risk to be delayed until, for example, payment has been made (see Standard document, Terms and conditions for the supply of goods (pro-customer): clause 6).
Export contracts
Where a seller makes sales of goods overseas, it may decide either to: Draw up a separate set of standard terms for exclusive use in the case of export sales. Incorporate additional provisions in the sellers domestic standard terms which are expressed to apply only to export sales. The decision as to which course to adopt will depend on the size and frequency of the sellers exports. If they are significant in either respect, a set of tailor-made export terms will be desirable, since the law relating to export sales is complex and it will not be possible to deal with all the commercial and legal eventualities which the seller may wish to cover within the space of a few additional clauses in the sellers domestic standard terms. If, on the other hand, only the occasional overseas sale of relatively limited value is envisaged, the inclusion of additional clauses in the sellers domestic standard terms will give the seller some degree of protection. It is not within the scope of this note to cover the law and practice relating to export sales in any detail, but the main aspects which need to be considered in addition to the issues which arise in the case of domestic sales include the following main aspects of export sales. Choice of law and jurisdiction The seller will generally prefer the standard export terms to be governed by English law, given its familiarity and the fact that the choice of some other law would involve instructing overseas lawyers to review the terms in their entirety. The choice of English law must, therefore, be specified in the standard terms. If the terms are governed by English law, it follows that it is sensible for the English courts to have jurisdiction over any legal proceedings. It should be specified whether they are to have exclusive or non-exclusive jurisdiction: A choice of non-exclusive jurisdiction means that proceedings can be instituted in England, but that either party may institute proceedings in a foreign jurisdiction if it is considered
advantageous. In certain circumstances, a choice of non-exclusive jurisdiction will be rendered ineffective by virtue of the Civil Jurisdiction and Judgments Act 1982, so the clause must be drafted carefully in the light of the Acts provisions. In addition, a clause in a consumer contract that obliges the consumer to submit to the exclusive jurisdiction of a national court other than that of the consumers country of domicile will be treated as unfair and unreasonable (see further Governing law and jurisdiction: drafting note). A choice of the exclusive jurisdiction of the English courts has the effect of excluding both parties ability to institute proceedings in any jurisdiction other than England. The seller may be able to obtain the best of both worlds by providing that the choice of the English courts is non-exclusive so far as the seller is concerned, but exclusive for the buyer. Therefore, the buyer, unlike the seller, can only institute proceedings in the English courts. If, however, there is any negotiation on the export terms the buyer is likely to request a more even-handed approach. If you are drafting a standard form (non-negotiated) agreement or terms and conditions, the choice of governing law for non-contractual obligations may be ineffective. This is because this right of choice (provided by Article 14(1)(b) of Regulation (EC) No. 864/2007 on the Law Applicable to Non-Contractual Obligations (Rome II)) applies to agreements that are "freely negotiated". Although the term "freely negotiated" has not been defined in Rome II, its requirement creates uncertainty over whether a non-contractual obligation governing law clause in standard form agreements will be effective. For further information about Rome II, see Practice note, Rome II: an outline of the key provisions. Before making significant sales for the first time in any particular foreign country, it is advisable for the seller to take advice from a local lawyer on the effect of the sellers standard terms in that country, and in particular as to whether: The courts of that country would uphold the choice of English law and (if applicable) an exclusive jurisdiction clause. Any provisions of local law will be applied by the courts of that country despite the choice of English law. A judgment obtained in England would be enforceable in that country without undue difficulty. If the standard terms contain a retention of title clause, whether the clause requires registration in that country in order to be effective. Incorporation of uniform laws or terms In order to reduce time spent in negotiating unfamiliar terms with foreign buyers, exporters frequently (notwithstanding the choice of English law) incorporate standard internationally agreed terms in their contracts or stipulate that certain uniform laws should apply: "Incoterms" are a set of international rules for the interpretation of trade terms, the most recent edition of which was published in 2000 by the International Chamber of Commerce, and which may, if the seller wishes, be incorporated in whole or in part. They describe the parties duties under the most usual types of international sales, such as CIF (Cost, Insurance and Freight) contracts and DDU (Delivered Duty Unpaid) contracts.
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The Uniform Law on International Sale of Goods (ULIS) and The Uniform Law on the Formation of Contracts for the International Sale of Goods (ULFIS) contain uniform codes of law which the seller may incorporate, in whole or in part, for the purpose of its contract with the buyer. The ULFIS contains rules relating to offer and acceptance in international sales, while the ULIS deals with matters such as the sellers right to sell the goods, delivery obligations, the buyers obligations to accept and pay for the goods, insurance, transportation and passing of risk. Exclusion clauses As has been mentioned, UCTA does not apply to an international supply contract (section 26, UCTA). However, the Unfair Terms Regulations do apply and the common law controls on exclusion clauses will apply in the usual way where the governing law is English law (see Common law controls on exclusion clauses). However, many countries have legislation similar to UCTA and provisions similar to the Unfair Terms Regulations apply throughout the EU. The draftsman should therefore take account of any relevant legislation in the country of export. Export licences The parties will need specifically to address who is responsible for obtaining any export licence. This is usually the sellers responsibility. If Incoterms have been incorporated, it is the sellers responsibility under both DDU and CIF contracts to obtain the export licence, unless otherwise agreed. Method of payment Once the goods have been exported, securing payment from an overseas buyer may be difficult unless special methods are used. The usual methods of payment are either under: Collection arrangements. Bankers letters of credit (documentary credits). Both methods interpose a bank between the seller and the buyer with payment being made by the bank on proof of delivery by the seller. Under a collection arrangement, the bank acts as agent of the seller and receives its instructions from it. The exchange of documents of title and the payment of the price takes place at the buyers place of business. The reverse is the case under a letter of credit (see generally Practice note, Letters of credit: overview). Export Credits Guarantee Department (ECGD) Sellers may wish to consider making arrangements through the ECGD, a government department which: Provides insurance to exporters and banks against the risk of non-payment by overseas buyers. By supporting banks, allows exporters to raise funds at fixed and often advantageous rates of interest. Currency of payment Express provision will need to be made if: The seller wishes to be paid in sterling in order to avoid the risk of currency fluctuation.
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Payment is to be made in another hard currency.
Boilerplate terms
Boilerplate clauses are often added at the end of a contract without receiving a great deal of attention. However, as they often regulate and govern other clauses they are a very important part of the standard terms as a whole. The standard terms should certainly incorporate provisions covering the following areas and, when drafting, consideration should be given as to whether additional or more detailed boilerplate provisions may be appropriate: Force majeure. Notices. Severance and illegality. Waiver. Entire agreement. Third party rights. Choice of law and jurisdiction. Arbitration. Alternative dispute resolution. (See Boilerplate: drafting note, for a detailed discussion of boilerplate provisions generally.)
Long-term supply contracts

While standard terms meet the requirements of most one-off supply arrangements, additional considerations arise if long-term supply arrangements are being considered. A seller will be commercially keen to consider long-term arrangements in order to: Establish long-term business continuity. Assist forward planning of the use of product manufacturing lines. Keep out the competition. Cover high product start-up costs. Allow stockpiling in low seasonal demand periods in the knowledge of sure sales. A buyer will be motivated by: Bigger price discounts and rebates. Security of supply. Preferential ordering and delivery timescales. Exclusivity of supply.
Primary considerations Long-term supply contracts raise the following issues, which are not addressed in simple standard form terms. Price How the price will remain valid given the variables or commercial requirements that will inevitably arise, such as: Inflation. The seller will want to protect its margin but the buyer will not want to fund uncontrolled cost increases or seller inefficiency. Continuous improvement. The sellers processes may well improve, reducing its costs of manufacture. How will efficiencies be identified and shared between the seller and the buyer? Discounts. Forms of discount or rebate for volumes become more complex as they may vary not simply by reference to volume, but also by reference to the consistency of the buyers orders and purchases made outside any seasonal peak periods. Care must also be taken to ensure that the use of discounts does not amount to price discrimination, which could breach competition law by being abuse of a dominant position. Outside factors. Who will bear the risk of cost prices rising due to outside factors not in the immediate control of the contracting parties, for example, raw material costs or changes in statutory requirements affecting the products? Changes in product. What if the buyers requirements for the product change? How can a fair change in price be agreed or determined so as to maintain the long-term supply? Period How long will the contract last for? Is it a fixed term or will notice periods to terminate apply? A more sophisticated set of early termination provisions for breach, insolvency and force majeure will be required so that one party is not locked in if the other is performing badly or not at all. Consider new grounds for termination such as a change in control of the buyer (what if it is bought by a competitor of the seller?). Performance Given the dependency that will arise under a long-term supply arrangement between the seller and the customer, it may not be satisfactory (or possible in the short-term) to make the best of a bad lot, seek financial recompense and go elsewhere. Far more sophisticated product control and quality measures may therefore be necessary to identify problems before they become major issues. Even rights to use the sellers intellectual property and specifications and to obtain equivalent items elsewhere should be considered. To encourage correct performance and delivery, should a performance regime penalising late or poor manufacture and incentivising good performance be introduced? It certainly encourages active management of the relationship by both parties.
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Force majeure provisions become far more relevant as the risks of such events arising occur. How should strikes at the sellers or the buyers plants be categorised? Are they events of force majeure or breach? Volumes and exclusivity What commitments to exclusivity of supply right or minimum purchase volumes should be given? What restrictions may be placed on the sellers right to sell to the buyers competitors either at all or at the same or lower prices? Dispute resolution The likelihood of disputes arising increases substantially but so does the need to create a mechanism which addresses them quickly and quietly. The use of escalation and non-court-based resolution procedures must be considered (see International arbitration: drafting note, and the examples given in Alternative dispute resolution: drafting note). Application of EU competition law The application of EU competition law to long-term supply contracts is dealt with in outline below. For more detailed overview of the EU competition rules, see Practice note, Overview: EU competition law. Note that following the entry into force of the Lisbon Treaty on 1 December 2009, Article 81 and Article 82 of the EC Treaty have been renamed Article 101 and Article 102 of the Treaty on the Functioning of the European Union (TFEU)). This new terminology has been reflected throughout this note. For further information on the Lisbon Treaty see Practice note, The European Union after the Treaty of Lisbon. Article 101 Agreements between firms will be prohibited under Article 101 of the Treaty on the Functioning of the European Union (TFEU) (formerly Article 81 of the EC Treaty) if: They affect trade between member states. Their object or effect is the prevention, restriction or distortion of competition within the common market or a substantial part of it. (Article 101(1).) All such agreements are void and unenforceable unless they are capable of being exempted (Article 101(2)). Parties to them may be subject to substantial fines and/or sued for damages by affected third parties. Under certain circumstances, a party to a contract that infringes Article 101 of the TFEU may be able to sue his co-contractor for damages (Courage v Crehan (Case C-453/99), in relation to Article 81). In Courage v Crehan, it was held that the rule that a party may not benefit from his own illegality may not apply in the situation where the parties are of such unequal bargaining power that the illegal terms were effectively imposed on the weaker party, who is therefore innocent. Appreciable effect on competition
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The effect of an agreement on competition must be "appreciable" for EU competition law to apply. Any provisions that have the effect of restricting prices charged to third parties, or of allocating markets of customers between competitors, can always be deemed to have an appreciable effect. Where an agreement contains an element of exclusivity or volume commitments, the extent to which these may affect competition is determined by assessing the "foreclosure" effect of the contract, for example, the extent to which other sellers opportunities are limited by the contract. If a long-term supply agreement between X and Y to supply widgets specifies that X will supply Y with 100% of Ys requirements for the widgets for ten years, then other sellers are denied the opportunity to supply that part of the market which Ys total requirements represent throughout this period. If Ys requirements account for, for example, 20% of the overall widget market, this could amount to an appreciable restriction of competition. A contract to supply only a small proportion of Ys requirements, or a specified volume of goods, might not be regarded as having any significant foreclosure effect. Inter-state trade Long-term supply contracts will often be made between companies which are based in different member states. These will tend to have the requisite effect on inter-state trade. However, agreements between parties in the same member state may also affect inter-state trade, for example, if the agreement relates to the supply of a raw material and the finished product is sold in other EU member states. In April 2004, the Commission issued guidelines covering the circumstances when an appreciable effect on trade will occur (Notice on guidelines on the effect on trade concept (OJ 2004 C101/81)). The guidelines provide a detailed review of current case law on the subject and are intended to ensure consistency throughout the EU now that national competition authorities are required to apply Article 101 pursuant to Council Regulation (EC) No 1/2003 on the implementation of the rules on competition laid down in [Articles 101 and 102] of the Treaty (OJ 2003 L1/1). Examples of provisions caught The following are examples of the types of provisions in supply contracts that are likely to trigger the application of Article 101 of the TFEU: A provision that the buyer must buy its entire requirements (or a specified proportion of its requirements) for goods of a certain description from the seller. An undertaking by the seller to sell all its output of goods of a particular description to the buyer. Obligations to buy or supply minimum quantities of goods (where those quantities of goods are significant in the context of the market as a whole). Any restriction as to where, to whom and for what price a purchaser can sell products incorporating the contract goods. Exemptions under Article 101(3) An agreement that is caught by Article 101(1) may nevertheless escape prohibition (and therefore voidness) under Article 101(3). There are two kinds of exemption: Individual exemption. Individual exemptions relate to a specific agreement. Before 1 May 2004, the Commission was only able to grant an individual exemption for an agreement which had been notified to it (except for a limited category of agreements). Individual
exemptions were usually granted for a limited duration (typically ten years) and could be granted subject to conditions, for example, by requiring that both parties had access to the technology on termination of the agreement. From 1 May 2004, with entry into force of Regulation 1/2003, the system of advance notification and approval of agreements was abolished. Agreements that satisfy the Article 101(3) conditions for exemption are valid from the outset. The Commission, national courts and national competition authorities all have the right to apply the criteria set out in Article 101(3) when determining whether an agreement is prohibited under Article 101. In contrast to the old position, therefore, agreements caught by Article 101(1) are void and unenforceable only to the extent that Article 101(3) is found not to apply (Articles 1 and 2, Regulation 1/2003). The Commission has published Guidelines on the application of [Article 101(3) of the TFEU] (OJ 2004 C101/78). Block exemption. "Block exemptions" are contained in regulations issued by the Commission (or, in certain cases, by the Council). They have been introduced for certain types of agreement in order to reduce the burden on both companies and the Commission of making and dealing with separate applications for individual exemption. If an agreement meets the conditions set out in the relevant block exemption regulation, it is automatically exempt from Article 101(1) without (in most cases) the need to notify it to the Commission. The block exemption system was not affected by Regulation 1/2003. Supply agreements are likely to fall under the vertical block exemption (see below).
Individual exemption
To qualify for individual exemption, an agreement must satisfy each of the four conditions contained in Article 101(3), which are that: The agreement must contribute to improving production or distribution of goods or promote technical or economic progress. It must allow customers a fair share of the resulting benefits. The restrictions on competition contained in the agreement must be indispensable to obtaining the improvements in production or distribution which the agreement seeks to achieve. The agreement must not eliminate competition in respect of a substantial part of the market for the goods. Thanks to Regulation 1/2003, an agreement that satisfies the conditions of Article 101(3) is deemed to be exempted from Article 101(1), without the need for an exemption decision. Member state national competition authorities and courts are able to determine whether an agreement satisfies the conditions of Article 101(3) as well as the Commission. The Commissions Guidelines on the application of [Article 101(3) of the TFEU)] develop a methodology for the application of Article 101(3). They provide a detailed review of the case law at the time and practice relating to the application of Article 101(3) and are intended to facilitate the consistent application of Article 101(3). They are additional to (but do not replace) the guidance already provided in the Commissions Guidelines on Vertical Restraints and Horizontal Co-operation Agreements.
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Vertical agreements block exemption

A supply agreement is a typical example of a "vertical" agreement, that is, one that is entered into between parties operating at different levels of the production or distribution chain. Commission Regulation 330/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices (OJ 2010 L102/1), which replaced Regulation 2790/1999 (OJ 1999 L336/21), from 1 June 2010, is capable of applying to all so-called vertical agreements. (There is a transitional period from 1 June 2010 to 31 May 2011 for agreements already in force on 31 May 2010, which do not satisfy the conditions for exemption in Regulation 330/2010 but which, as at 31 May 2010, did satisfy the conditions for exemption in Regulation 2790/1999.). A vertical agreement that is caught by Article 101(1) may meet the criteria for exemption by falling within the vertical agreements block exemption. Accompanying guidelines (OJ 2010 C130/1) give guidance on interpretation of the block exemption and as to how agreements falling outside the block exemption are likely to be assessed. Many supply contracts may be able to benefit from the vertical agreements block exemption. The scope and application of the vertical agreements block exemption is considered below: Agreements between competitors. The block exemption does not apply to agreements between actual or potential competitors in the market of which the contract goods or services form part, except in the case of a non-reciprocal agreement where: the supplier is a manufacturer and distributor of goods, while the buyer is only a distributor and not also a manufacturer of goods which compete with the contract goods (a distributor who provides specifications to a manufacturer to produce particular goods under the distributors brand name is not to be considered a manufacturer of such own brand goods)or the supplier is a provider of services at several levels of trade, while the buyer does not provide competing services at the level of trade where it purchases the contract services.
Safe harbour. The principle underlying the block exemption is that vertical agreements will be presumed legal in the absence of market power (defined as 30% of a relevant market) and in the absence of certain "hardcore" restrictions detailed below. Market power. The vertical agreements block exemption imposes a market share cap of 30%. Under the old vertical agreements block exemption Regulation 2790/1999, it was generally only the market share of the supplier that was relevant to determine the application of the block exemption (except in the case of exclusive supply arrangements) . A major change introduced by Regulation 330/2010 is that the safe harbour threshold of 30% will now apply to both the market share of the supplier and the market share of the buyer. This market share is calculated for the relevant undertaking and any undertakings connected with it. Above the 30% threshold (subject to a small "buffer zone") the vertical agreements block exemption will not apply. There will be no presumption of illegality, but companies will have to make their own assessment to determine whether an agreement meets the criteria for individual exemption. The European Commission has issued a set of guidelines to assist
with this analysis (Guidelines on Vertical Restraints (OJ 2010 C130//1). These replace the 2000 version adopted after the old block exemption). Hardcore restrictions. The vertical agreements block exemption contains a "black list" of vertical restraints which, if included in a vertical agreement, mean that the block exemption cannot apply (despite the fact that the 30% market share threshold is not exceeded). The inclusion of a hardcore restriction will jeopardise the legality of the entire agreement, that is, it is not merely the enforceability of the hardcore restriction itself which is at risk. The hardcore restrictions include: resale price maintenance. Any form of price-fixing is prohibited. Recommended resale prices and maximum resale prices are allowed provided they do not amount to fixed or minimum resale prices as a result of pressure or incentives created by any of the parties; restrictions on resale. Attempts by a seller to restrict where or to whom the buyer sells are prohibited with a number of limited exceptions including: restricting active sales into an exclusive territory or an exclusive customer group reserved to the seller or allocated by the seller to another buyer (passive sales must however continue to be permitted); restricting buyers of goods that are supplied for the purposes of incorporation into another product from on-selling those goods to companies who manufacture the same type of goods as the seller; or restricting a buyer who is a wholesaler from reselling to end users. This allows a supplier to keep the wholesale and retail level of trade separate. independent repairers. A buyer of components may not restrict the component seller from supplying the components as spare parts to end-users or from selling those components to independent repairers or service providers.
Non-competition provisions. In addition to hardcore restrictions, the vertical agreements block exemption identifies a number of further obligations that fall outside the scope of the exemption. Although such clauses will not benefit from the vertical agreements block exemption if included, they will not prejudice the remainder of the agreement. These clauses are as follows: any non-compete obligation that either is indefinite or exceeds five years; and a post-termination non-compete obligation, unless such an obligation is essential to protect "substantial" know-how transferred by the seller to the buyer and is limited to a duration of one year, to goods competing with the contract goods and to the premises occupied by the buyer. To be substantial, the know-how must include information that is significant and useful to the buyer for the use, sale or resale of the contract goods or services.
Intellectual property rights. Provisions in a vertical agreement which relate to the assignment to or use by the buyer of intellectual property rights fall within the scope of the vertical agreements block exemption, provided that they are ancillary to the vertical agreement (that is, they are directly related and necessary to, but not the main object of, the
agreement). In some cases it may be difficult to decide if the agreement is truly a vertical agreement or an intellectual property agreement, for which the vertical agreements block exemption is not available. There is, however, a separate block exemption for technology transfer agreements which may be relevant (Commission Regulation (EC) No 772/2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements (OJ 2004 L123/18)). Withdrawal. The Commission can intervene to remove the benefit of the vertical agreements block exemption from any agreement which, though it complies with the block exemption, in fact produces effects which are incompatible with the normal conditions of exemption. A national competition authority (for example, the OFT in the UK) may also withdraw the benefit of the vertical agreements block exemption within its own jurisdiction if an agreement produces such effects on a distinct market in that member state.
Expiry of the vertical agreements block exemption

The new vertical agreements block exemption Regulation 330/2010 will expire on 31 May 2022. Article 102 Where a company has a dominant position in the market, certain types of contractual provision could constitute abuse of a dominant position, which is prohibited by Article 102 of the TFEU (formerly Article 82 of the EC Treaty). Examples would be long-term exclusivity, tying (making supply of one product conditional on the customer also taking another product) and unfair pricing, such as excessive or predatory pricing. A market share of 40% or more may indicate a dominant position and dominance can be presumed where a companys share of the market is over 50%. Application of UK competition rules Competition Act 1998 The Competition Act 1998 incorporates two prohibitions, which are closely based on the corresponding prohibitions under Articles 101 and 102 of the TFEU: The Chapter I prohibition, which prohibits agreements between undertakings which may affect trade within the UK and have as their object or effect the prevention, restriction or distortion of competition within the UK. The Chapter II prohibition, which prohibits the abuse of a dominant market position which has or is capable of having an effect on trade within the UK. The Chapter II prohibition will only apply to supply contracts to the extent that one of the parties has a dominant position and restrictions in the contract amount to an abuse of that position (see also Article 102, above). The Chapter I prohibition does apply to supply contracts. Until 1 May 2005, vertical agreements were excluded from the scope of the prohibition by statutory order and supply contracts, as a general rule, escaped scrutiny under the Competition Act 1998 (Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 (SI 2000/310)). However, on 1 May 2005, this exclusion was repealed so that now only the vertical agreements block exemption applies in the UK.
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An agreement which fits within the terms of an EU block exemption (even if it is not caught by Article 101) will have a so-called parallel exemption under the Competition Act 1998. Therefore, it may be appropriate to draft agreements in accordance with the vertical agreements block exemption to take advantage of this. Alternatively, individual exemption from the Chapter I Prohibition is also a possibility. The criteria are almost identical to the Article 101(3) criteria. Like the Commission, the OFT in the UK has power to impose fines for breaches of the Competition Act 1998, and agreements that breach the rules will be void. However, the risks go further than this in the UK. Under the Enterprise Act 2002, UK company directors can be disqualified where their company commits any breach of EU or UK competition law. The Enterprise Act 2002 also makes it a criminal offence for any individual "dishonestly" to engage in cartel activity, although it would be rare for a supply contract to amount to this.
Contract review
Once drafted, standard terms are not cast in stone, and they should be the subject of regular review: As case law develops and new legislation is introduced to reflect best practice and full compliance, for example in relation to: judicial decisions on what is "reasonable" under UCTA; retention of title provisions; the effect of the provisions of the Late Payment of Commercial Debts (Interest) Act 1998 on default interest provisions in sellers and buyers standard terms (see Encouraging prompt payment); the effect of the Contracts (Rights of Third Parties) Act 1999; and the effect of the Enterprise Act 2002.
As guidance is issued by trade associations to their members and by the OFT in relation to "fairness" under the Unfair Terms Regulations, and as case law develops in this area. As personal experience with disputes relating to the actual application of the sellers standard terms indicates changes for the better or weaknesses which should be addressed. As any relevant aspect of the nature of the sellers business develops or changes, for example in relation to: the number or type of third parties who may be deemed to have rights under a contract; the nature of the products being sold; the profile of its customers; and the geographic markets being sold into.
As the form of direct competitors standard terms varies so that the standard terms do not impede competitive advantage.
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At the very least a review every three years is advisable and legal advisers should keep their companies or clients informed of ongoing developments. Jonathan Guest is a partner in and head of the commercial services product group of Eversheds LLP . Anna Sweeney is an associate in the commercial services product group of Eversheds LLP.
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Boxes
Statutory framework
The following main statutory provisions have an impact on contracts for the sale of goods. Regulation of the sale of goods Sale of Goods Act 1979 The Sale of Goods Act 1893 effectively codified common law relating to the sale of goods. Following various amendments, the contents of the 1893 are now embodied in the SGA, as amended (in particular by the Sale and Supply of Goods Act 1994 and the Sale and Supply of Goods to Consumers Regulations 2002 (SI 2002/3045)). The SGA regulates sales of goods in various ways including the imposition of various implied terms and conditions into contracts for the sale of goods (see box, Implied terms in sale of goods contracts). Regulation of the exclusion or restriction of liability Unfair Contract Terms Act 1977 (UCTA) This Act restricts the ability of persons to exclude or limit liability in the following areas: Negligence. Contractual obligations. Statutory implied terms. Guarantees and indemnities. Misrepresentation. Unfair Terms in Consumer Contracts Regulations 1999 These prevent businesses which contract with consumers on non-negotiated terms from relying on those terms that are unfair. Other statutory provisions Misrepresentation Act 1967 The Misrepresentation Act 1967 regulates exclusions of liability for misrepresentations made in relation to sale of goods contracts. It also imposes statutory liability for pre-contractual misrepresentations. Consumer Credit Act 1974 The Consumer Credit Act 1974, as amended by the Consumer Credit Act 2006, may apply if the supplier accepts payment by instalments. For more information on the 1974 Act, in particular when it will apply to a supply arrangement, see PLC Financial Services, Practice note, Scope of the Consumer Credit Act 1974 as amended by the Consumer Credit Act 2006. Consumer Protection Act 1987 The Consumer Protection Act 1987 imposes strict liability on manufacturers, importers into the EU and "own branders" for injuries caused by goods which are unsafe and intended for consumer use. A supplier may not exclude its liability under this Act.
Contracts (Rights of Third Parties) Act 1999 This Act allows someone who is not a party to a contract to enforce or rely on a term of that contract if either: The contract expressly provides that he may. The term purports to confer a benefit on him (unless on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party). The Consumer Protection (Distance Selling) Regulations 2000 These apply to contracts where goods are sold at a distance (for example, by mail order, telephone and over the internet), without the seller and buyer being in each others physical presence. The Regulations only apply to contracts between businesses and consumers. For these purposes, a consumer is defined as "any natural person who, in contracts to which these Regulations apply, is acting for purposes which are outside his business". This reflects the wording in the Unfair Terms Regulations. The Regulations contain a requirement on the seller to provide the consumer with certain specified information. This includes information on the right to cancel the distance contract, the main characteristics of the goods or services, and delivery costs where appropriate. The Regulations provide a "cooling-off period", which enables a consumer to cancel the contract by providing notice of cancellation to the seller. If the contract is cancelled then it is treated as if it had not been made. This right of cancellation does not apply to certain contracts, for example, where the goods are made to the consumers specification. Effective from 6 April 2005, changes to the Regulations mean that: Businesses selling services by phone, mail order or the internet will be able to deliver key written details, which the Regulations oblige them to provide, to consumers at any time from when an order is placed until the service finishes. If the information to be provided is not made available until after provision of the service has started, consumers will be able to cancel the agreement for up to seven days after the information is received (The Consumer Protection (Distance Selling) (Amendment) Regulations 2005 (SI 2005/689)). The Regulations do not apply to contracts concluded for the construction and sale of property. Other regulations (The Financial Services (Distance Marketing) Regulations 2004 (SI 2004/2095)) apply to the marketing of banking, credit, insurance, personal pensions, investment and other such products exclusively by distance means. They contain similar provisions to the Consumer Protection (Distance Selling) Regulations 2000 in that certain specified information must be given to the consumer before the conclusion of the contract and they also provide for a "cooling off" period. The Electronic Commerce (EC Directive) Regulations 2002 These apply to businesses selling goods to other businesses or consumers on the internet or by e-mail. A detailed consideration of these Regulations is outside the scope of this note but in essence they require a seller to:
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Make specific information available to customers, for example, the sellers name and address. Inform customers how the contract is to be concluded. Ensure customers are able to print off and store a copy of the terms and conditions. Allow the customer to identify and correct input errors before an order is placed. Acknowledge receipt of an order. Comply with any consumer contract laws in place in their home state when dealing with consumers in other EEA countries. For more information, see Practice note, Information provision obligations on UK website operators. Equality Act 2006 This Act protects individuals from discrimination in the provision of goods and services on the grounds or religion or belief, or on the grounds of sexual orientation. Consumer Protection from Unfair Trading Regulations 2008 These regulate the sale or supply of products to consumers. The Regulations require businesses not to mislead consumers through acts or omissions or subject them to aggressive commercial practices, whether before, during or after the sale. For more information, see Practice note, Consumer Protection from Unfair Trading Regulations 2008. The Business Protection from Misleading Marketing Regulations 2008 These prohibit suppliers from advertising goods to traders in a misleading way. The Regulations define advertising as any form of representation that is made in connection with a trade, business, craft or profession in order to promote the supply or transfer of a product, which includes pre-sales representations made to the customer by the suppliers sales team, and other marketing and promotional activities such as the provision of information of products in catalogues or on websites, and descriptions on packaging. The Regulations do not give traders or competitors a direct right of action but are enforced by the designated enforcement authorities. For more information, see Practice note, Business Protection from Misleading Marketing Regulations 2008. The Cancellation of Contracts made in a Consumers Home or Place of Work Etc. Regulations 2008 These allow consumers who enter into a contract for goods or services during a visit by a trader to a consumers home or place of work or on an excursion organised by the trader, to cancel that contract within seven days of the consumer being given notice of his cancellation rights, whether the visit was solicited by the consumer or not. For more information, see Practice note, Doorstep selling: overview.
Implied terms in sale of goods contracts
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The SGA imposes the following implied terms in contracts for the sale of goods (they are all conditions, except for the terms relating to encumbrances and quiet possession, which are warranties): Good title. That the seller has the right to sell the goods (section 12(1), SGA). No encumbrances and quiet possession. That the goods are free from undisclosed charges or encumbrances and that the buyer will enjoy quiet possession of the goods (section 12(2) and (3), SGA). Correspondence with description. Where goods are sold by description, that the goods will correspond with that description (section 13, SGA). In consumer contracts, and subject to exceptions, any lack of conformity of the goods with their description in the contract which becomes apparent within six months of delivery is presumed to have existed at the time of delivery (regulation 5, Sale and Supply of Goods to Consumers Regulations 2002). This reversed burden of proof makes it easier for consumers to bring claims in the first six months. Satisfactory quality. Where goods are sold in the course of a business, that the goods are of satisfactory quality (section 14(2), SGA). Goods are of satisfactory quality if they meet the standard which a reasonable person would regard as satisfactory, taking account of: any description of the goods; the price; and all other relevant circumstances. (Section 14(2A), SGA.) In addition, the quality of goods includes their state and condition and the following factors (among others) are to be taken into account in determining whether goods are of satisfactory quality: fitness for all the purposes for which goods of that kind are commonly supplied; appearance and finish; freedom from minor defects; safety; and durability. (Section 14(2B), SGA.) In consumer contracts, section 14(2D) of the SGA provides that public statements made by the seller, the manufacturer or the manufacturers representative about a product will be used in determining whether the product is of satisfactory quality. Although there are defences to this, a retailer could potentially be held liable for promises made by a manufacturer about product performance.
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Fitness for purpose. Where goods are sold in the course of a business and the buyer, expressly or by implication, makes known to the seller the purpose for which he wants the goods, that the goods will be reasonably fit for that purpose (section 14(3), SGA). The term does not apply if the buyer does not rely on the sellers skill or judgement or if it is unreasonable for him to rely on it. Correspondence with sample. Where goods are sold by sample: that the goods will correspond to the sample in quality; and that the goods will be free from any defect making their quality unsatisfactory which would not be apparent on a reasonable examination of the sample. (Section 15, SGA.) In consumer contracts: Section 5A of the SGA gives consumer buyers the following remedies where goods fail to conform to the contract of sale at the time of delivery: the right to require the seller to repair or replace the goods within a reasonable time and without causing significant inconvenience to the consumer; and the right to require the seller to reduce the purchase price of the goods by an appropriate amount or to rescind the contract. The consumer can only exercise this right if: repair or replacement is impossible or disproportionate, taking into account the value of the goods if they had not been faulty, the significance of the fault in the goods and the inconvenience to the consumer of other remedies; or the seller fails to repair or replace the goods within a reasonable time and without significant inconvenience to the consumer.
Goods are deemed not to conform to the contract of sale if there is a breach of an express term of the contract or a term implied by sections 13 (sale by description), 14 (satisfactory quality and fitness for purpose) or 15 (sale by sample) of the SGA. Goods which do not conform to the contract of sale at any time within the period of six months starting with the date on which the goods were delivered to the consumer must be taken not to have so conformed at that date. The burden is on the seller to establish that the goods did conform to the contract at the date of delivery, unless the application of the principle is incompatible with the nature of the goods (such as perishable foodstuffs) or the nature of the lack of conformity.
Unfair Contract Terms Act 1977: specific exclusions

The following types of contract are excluded from the controls in sections 2 (liability for negligence), 3 (liability for breach of contract) and 4 (indemnities) (Schedule 1, UCTA). Note that they remain subject to the controls in section 6 (liability for breach of statutory implied terms):
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Insurance contracts. Contracts relating to the creation or transfer of an interest in land. Contracts relating to the creation or transfer of rights or interests in intellectual property (including technical or commercial information). Contracts relating to: company formations or dissolutions; the constitution of a company or the rights and obligations of its members; and contracts relating to the creation or transfer of securities or any right or interest in securities.
UCTA reasonableness test

In order to pass the reasonableness test, a contract term must have been "... a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made." (section 11(1), UCTA). Schedule 2 to UCTA contains a non-exhaustive list of guidelines in assessing reasonableness, which strictly apply only in deciding whether the exclusion or limitation of any of the implied conditions contained in sections 13, 14 or 15 of SGA is reasonable. The guidelines have also been applied by the courts when considering the reasonableness test in relation to the exclusion of other types of liability, in particular for breach of contract under section 3 of UCTA. The guidelines are, in summary: The strength of the bargaining positions of the parties relative to each other (including alternatives open to customers, for example, ability to insure). Whether any inducement was given to the customer to agree the term, or whether the customer had an opportunity of entering into a similar contract with other persons without having to accept a similar term. Whether the customer knew, or ought reasonably to have known, of existence of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties). If a term excludes or restricts liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable. Whether the goods were manufactured, processed or adapted to the special order of the customer.
Written standard terms of business

Section 3 of UCTA provides that exclusions of liability for breach of contract in business-to-business contracts are only subject to the UCTA reasonableness test if the parties are dealing on one partys "written standard terms of business". If the contract is freely negotiated, exclusions of liability for breach of contract are not subject to the UCTA reasonableness test. UCTA provides no guidance on what the term "written standard terms of business" means. Accordingly, whether a contract is a freely negotiated contract or on a partys standard terms is a question of fact to be decided in each individual case. In general, most problems of classification arise in the situation where a supplier puts forward its standard terms and the customer attempts to negotiate them. It is clear from case law that at some point of the negotiations the standard terms will cease to be standard, but it is not clear when the change takes place. Case law suggests some factors that may be relevant when considering an individual contract: In Hadley Design Associates Ltd v Westminster London Borough Council [2003] EWHC 1617 (TCC), the High Court held that the concept of "written standard terms of business" was that there should exist a stock of written, usually printed, contract conditions that were simply drawn on as a matter of routine and intended to be adopted without negotiation to the specific case in which they were to be used. It was not enough for the purposes of section 3 of UCTA that a party had established terms of business which it preferred to adopt. The terms had to be in written form before the possibility of making the relevant agreement and they had to be intended to be adopted more or less automatically in all transactions of a particular type. "Dealing on written standard terms" does not mean that every single term must have been fixed in advance, nor does it preclude negotiations as to quality or price. Individual clauses in a contract can constitute "written standard terms", even if the contract as a whole is freely negotiated. Limitation clauses taken without amendment from one partys standard terms and conditions and inserted into a contract by that party have been held to be subject to the reasonableness test under section 3 of UCTA, even though the contract as a whole contained extracts taken from the terms and conditions of both parties and other parts of the contract had been negotiated extensively (South West Water Services Ltd v International Computers Ltd [1999] BLR 420). If parties deal on the standard terms of a third party, for example, a trade association, it seems probable that these would constitute "written standard terms of business" if the party who proffered them does so as a matter of practice. The mere fact that negotiations have taken place is not a relevant consideration (St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481; Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720). The extent to which amendments are made to the suppliers standard terms as a result of the parties negotiations. If only de minimis changes are made, the parties will still be regarded as dealing on standard written terms (St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481; Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720). The last factor is the most important. The more significant the changes to the standard terms, the more likely it is that the contract will be found not to be on standard written terms. If negotiations
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leave the terms of the standard contract "effectively untouched", the contract will still constitute "written standard terms of business" (Nourse LJ in St Albans).
Examples of potentially unfair terms

Text of term in Schedule 2, UCTA "(d) permitting the seller or supplier to retain sums paid by the consumer where the latter decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the seller or supplier where the latter is the party cancelling the contract;" "(h) automatically extending a contract of fixed duration where the consumer does not indicate otherwise, when the deadline fixed for the consumer to express this desire not to extend the contract is unreasonably early;" "(i) irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract;" "(k) enabling the seller or supplier to alter unilaterally without a valid reason any characteristics of the product or service to be provided;" "(o) obliging the consumer to fulfil all his obligations where the seller or supplier does not perform his;" Example A clause providing for a deposit or advance payment made by a consumer to be lost if the consumer cancels the contract, unless there is also a clause providing for the consumer to receive an equivalent amount if the contract is cancelled by the seller or supplier.
A clause in a yearly agreement which provides that the consumer must give not less than six months notice of termination, failing which the agreement will be automatically extended for another year at the end of the term. A clause providing that the consumer is deemed to agree to the sellers terms by signing a delivery note for goods, or opening their packaging. A clause allowing the seller to change (without a valid reason) features of the goods such as their size or colour. An agreement which contains a clause excluding the sellers liability in respect of late delivery while not allowing to the consumer, for example, the right to cancel the contract or to receive liquidated damages for each days delay.
St Albans v ICL: unreasonable limitation clauses

In St Albans City and District Council v International Computers Ltd [1995] FSR 686; [1996] 4 All ER 481, ICL provided a computer system to the St Albans local authority for use by the authority in collecting the "Community Charge". As a result of a fault in the software, the authority set the charge at too low a level. The authority sued ICL for over 1 million in damages for breach of contract. ICL sought to rely on a clause in its standard terms of business limiting its liability to 100,000. Both the High Court and the Court of Appeal held that the limit of 100,000 was unreasonable under UCTA (although the Court of Appeal, on grounds unrelated to UCTA, reduced the level of damages awarded by the High Court). The key points to emerge from the decision were:
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ICL was a large company with substantial assets and insurance cover of up to 50 million and so was in a better position to bear losses than St Albans, which would have to meet losses out of an increased Community Charge and/or reduced services. The limitation of 100,000 bore no relation to ICLs insurance cover of 50 million and ICL had not attempted to justify the difference. The judge at first instance considered it reasonable that the person making the profit should also carry the risk. ICL was in a strong bargaining position. Although St Albans had objected to the limitation clause during negotiations, they were persuaded to accept it when ICL indicated that any amendment would have to be referred back to its legal department. The resulting delay would mean that St Albans could not keep up with its Community Charge timetable and it therefore had no realistic option other than to accept ICLs terms. St Albans had not been offered any inducement, such as a reduction in price, to accept the limitation and they had no opportunity of getting better terms elsewhere because other sellers were offering similar terms (with the same cap on liability).
Insurance: practical considerations

The following practical points concerning insurance should be considered when drafting or amending standard terms: If a seller accepts liability in its standard terms, even if limited to a specified amount, its liability cover may be invalidated. A standard products liability policy is unlikely to extend to give products guarantee cover or protection against financial losses liability. It will usually only protect the seller against liability for injury to third parties and damage to their property. Although cover is available, products guarantee and financial loss insurance can be expensive and may carry a high deductible (uninsured excess). If a sellers business involves the provision of design services in addition to the manufacture of products, it should ensure that it is covered by products liability or products guarantee insurance and professional indemnity insurance. A product recall, which can be a very expensive exercise, will not generally be covered under standard product liability policies. It will usually constitute an extension to a products guarantee policy. If a seller amends its existing standard terms or agrees different terms for a specific contract or contracts, either act could be considered a material fact for the purposes of its insurance and therefore subject to disclosure under the relevant policy. A seller should check whether the terms give enforceable rights to third parties and, if so, whether it can obtain insurance to cover this. These points not only emphasise the importance of considering standard terms and insurance arrangements side by side but also provide a seller with arguments with which to resist a buyers contention that the sellers insurance should cover every eventuality.
The material in this box and in box, Insurance protections glossary are based on an article published in PLC magazine, November 1995, by Booth & Co with input from Sedgwick UK Limited (see Article, Business to business: Allocation of risk in supply contracts, PLC Magazine, 1995).
Insurance protections glossary

Policy type Public liability Protection afforded Legal liability for injury to third parties or damage to their property, arising out of and in the course of the business excluding injury or damage resulting from products supplied. Legal liability for injury to third parties or damage to their property arising out of products supplied by the business. The cost of recalling defective products. This is mainly arranged as an extension to a products guarantee policy. Legal liability arising from the product failing to perform its intended function. Liability may be for the cost of making the product good and consequential losses. Legal liability for pecuniary loss sustained by third parties where there has been no third party bodily injury or loss or damage to their property. This is normally arranged as an extension to a public or products liability policy. Legal liability for damage or compensation arising out of any neglect, error or omission committed or alleged to have been committed by or on behalf of the insured in connection with the business. Provides protection against non-payment due to insolvency or protected default of the insureds customer.
Products liability
Products recall
Products guarantee
Financial loss
Professional indemnity
Credit insurance
Statutory right to interest on unpaid debts

Right to claim interest The Late Payment of Commercial Debts (Interest) Act 1998 (the Act) gives businesses a statutory right to claim interest if another business fails to pay its bills on time. The agreements to which it applies include contracts for the sale and/or supply of goods or services, where both the buyer and the seller are acting in the course of a business. Amended late payment legislation came into force on 7 August 2002 (Late Payment of Commercial Debts Regulations 2002 (SI 2002/1674)), implementing Council Directive (EC) No 2000/35 on combating late payment in commercial transactions. Statutory rate of interest
The Act set the rate of interest that could be claimed as the Bank of England base rate (applicable at the close of business on the day on which the debt fell due) plus 8%. The Late Payment of Commercial Debts Regulations 2002 have simplified the calculation of the interest. At the start of every six-month period (that is, 31 December and 30 June) the Bank of England base rate will be made a fixed reference rate for the subsequent six months; interest is calculated by adding 8% to that reference rate that covers the period in which the debt became late. The statutory rate is therefore substantially higher than the highest rate which a seller would normally specify as a contractual rate of interest on late payments in order to avoid the risk of the provision being held invalid as a penalty. It may well be worth a seller not specifying a rate of interest for late payment and instead relying on the Act. When can interest be claimed and by which businesses? The Act was intended to come into force in stages, depending on the nature of the contracting parties. However, since the entry into force of the Late Payment of Commercial Debts Regulations 2002 on 7 August 2002, all businesses, irrespective of size, and public sector bodies can now claim statutory interest for the late payment of commercial debts. Businesses also have the right to claim reasonable debt recovery costs. Varying the right to statutory interest A buyer may wish to include a clause in its standard purchase terms (or, depending upon the strength of its negotiating position, by way of amendment to the sellers terms) which makes alternative provision for the sellers remedy in the event of late payment (for example, by specifying a rate of interest lower than the statutory rate). Such a provision will only be upheld by the courts if it is "substantial", which means that it has to be sufficient for compensating the seller for late payment or for deterring the buyer from paying late. It must also be fair and reasonable for the remedy to be relied on in place of the Act.
Lien
A lien is a right to retain anothers property until the payment of a debt. The right can be given by contract and exists from the time of contract, giving the person claiming it priority over parties whose rights accrue later on. It can be merely an extension of the unpaid sellers lien (section 41, SGA) permitting it to be exercised while the goods are in the possession of the sellers carrier. Alternatively, where there is mutual trade between the buyer and the seller, the seller may from time to time have goods of the buyer, whether for work to be carried out on them or for purchase, and the lien could be extended to those goods. In standard conditions a seller may want also to extend the lien to any goods which are owned by an "associated company" of the buyer. A lien is only a right to retain goods. Therefore the seller will want to incorporate in standard terms express rights: To put any goods over which it has a lien into a saleable state. To sell such goods upon such terms as the seller sees fit.
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To retain from the proceeds of sale sufficient to pay all monies due from the buyer to the seller (including any costs incurred in putting the goods into a saleable state and the expenses of the sale).
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Article Information
RESOURCE INFORMATION
The fulltext is available at http://www.practicallaw.com/0-107-3646

General
Article ID: 0-107-3646 Document Generated: 27-Sep-2010 09:32:41

Jurisdiction
United Kingdom http://www.practicallaw.com/topic1-103-0717

Subject
Building contracts and contractors http://www.practicallaw.com/topic1-381-2944 Substantive law http://www.practicallaw.com/topic6-204-9134 Trade finance http://www.practicallaw.com/topic0-103-1109 Supply of goods and services http://www.practicallaw.com/topic0-103-1128 commercial Cross-border: http://www.practicallaw.com/topic8-103-2044
References
and
international
trade
Allocation of risk in supply contracts (http://www.practicallaw.com/0-100-0202) Scope of the Consumer Credit Act 1974 as amended by the Consumer Credit Act 2006 (http://www.practicallaw.com/0-217-4965) Unfair contract terms: Court of Appeal reverses first instance Regus v Epcot decision on exclusion clause (http://www.practicallaw.com/0-381-3307) Overview: EC competition law (http://www.practicallaw.com/1-107-3698) Checklist: Drafting or revising standard terms (http://www.practicallaw.com/A10404) Overview of Bonds, guarantees and standby credits (http://www.practicallaw.com/A10421) Overview of Letters of credit (http://www.practicallaw.com/A10426) Boilerplate (http://www.practicallaw.com/A10431) Entire agreement (http://www.practicallaw.com/A16488) Entire agreement: drafting note (http://www.practicallaw.com/A16489) Severance: drafting note (http://www.practicallaw.com/A16495)
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Governing law and jurisdiction: drafting note (http://www.practicallaw.com/A16507) The European Union after the Treaty of Lisbon (http://www.practicallaw.com/2-381-1190) Consumer Protection from Unfair Trading Regulations 2008 (http://www.practicallaw.com/2-381-1492) Court of Appeal considers application of Misrepresentation Act 1967 to international supply contracts (http://www.practicallaw.com/2-385-7041) Alternative Dispute Resolution: drafting note (http://www.practicallaw.com/3-107-3862) Administration (http://www.practicallaw.com/3-107-3975) Arbitration (ad hoc): drafting note (http://www.practicallaw.com/5-107-3856) Drafting standard terms and conditions for the supply of goods (http://www.practicallaw.com/5-386-8420) Law Commission final report (http://www.practicallaw.com/6-200-3975) Rome II : an outline of the key provisions (http://www.practicallaw.com/6-382-5703) Terms and conditions for the supply of goods (pro-customer): 2. Basis of contract (http://www.practicallaw.com/7-100-9609) locator (http://www.practicallaw.com/7-201-5591) locator (http://www.practicallaw.com/8-383-6036) Terms and conditions for the supply of goods (pro-supplier): 2. Basis of contract (http://www.practicallaw.com/9-100-9608) locator (http://www.practicallaw.com/9-383-8073) Exclusion clauses after NetTV (http://www.practicallaw.com/9-386-1704)
Practical Law Publishing Limited, Practical Law Company 1990 - 2010. http://www.practicallaw.com. Subscription enquiries +44 (0)20 7202 1210 or email subscriptions@practicallaw.com Please read our Terms of Use (http://www.practicallaw.com/9-103-0884), and Privacy policy Trade Marks (http://www.practicallaw.com/9-265-9958) (http://www.practicallaw.com/jsp/privacy.jsp)
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Supply Contracts - Overview

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Supply contracts: overview