Most people involved in commercial deals have seen a “battle of the forms”. This happens when a supplier and a customer each insists on using his/her own standard terms of business and rejects the other’s terms. For good measure, each party’s terms might state that the party will only deal on these terms and that any counterparty’s terms are rejected in advance.
Instead of stopping and deciding to negotiate the terms, or not to do the deal at all, the parties often carry on with it; each one expecting to prevail, and indeed each one usually thinking he/she has prevailed. This, of course, is a recipe for disputes that pop up a lot in construction projects.
So which party wins in this situation: whose terms govern the deal once it is done? Before we can answer that, we need to decide whether, in fact, a deal was done at all if the parties did not agree all the terms. That depends on the importance of the terms which were agreed.
Generally speaking, parties can reach a binding contract without having agreed on all terms which were tabled, so long as they agreed the essential items such as scope, specification, price and timing of delivery. Parties will usually have agreed these essentials at the start of their discussion so the “battle of the forms” is usually to decide the rest of the contract terms rather than its existence.
The conventional view is that the winner of the battle is the party who got “the last word”: that is, the party who sent their terms last before the deal was concluded. The thinking (Contract Law 101) is that formation of a contract requires unequivocal acceptance of terms. On this basis, the sending back of different terms by the second party is an implicit rejection of the first party’s terms; and if the first party doesn’t actively reject the second party’s terms before indicating that a contract is in place (often simply by performing it), then the second party wins.
However, that rule was not upheld by a court in a recent dispute. Here, a customer (TRW Ltd) bought some electronic components from a supplier – Panasonic Industry Europe GmbH. Both parties introduced their own standard terms: first Panasonic sent theirs with their commercial proposal for the sale and TRW responded with a purchase order, together with its own standard terms.
TRW later alleged that the components were defective and the parties fell into dispute. Differences between the parties’ respective standard terms were material to that dispute because they each had different governing law. TRW brought proceedings to the English Court and Panasonic applied for these proceedings to be stayed on the basis that the contract was governed by German law.
Panasonic’s application was successful even though TRW had been the last to send their standard terms and Panasonic had not expressly contested those terms before performing the contract. This is because the parties had done business together for some years and TRW had previously signed Panasonic’s “customer file” which expressly acknowledged Panasonic’s terms and excluded any customer’s terms which might subsequently be sent, even if Panasonic had “effected delivery or rendered services without reservation” on a purchase order which incorporated the customer’s terms.
The judge agreed that these “customer file” terms having been signed by TRW some years earlier, were effective and would not be overridden unless the parties actively agreed something else. It is perhaps understandable that TRW considered the sending of different terms to be an express repudiation of the earlier customer file terms – but, equally, those Panasonic terms did precisely anticipate the situation in which Panasonic “effected delivery or rendered services without reservation” following receipt of TRW’s terms but were not bound by them.
In conclusion, this was not a radical decision. It does not change anything about who usually wins a battle of the forms: it will still usually be the party who managed to get the last word in before the deal was done – because the last-sent terms, not expressly rejected by the receiving party, is still usually the best indication of assent at that moment in time. In this case, the court simply saw additional facts and found that other actions signified consent in a way which overrode the “last word” rule.
It is a good reminder for us not to rely on any “rule” but to try to reach a real agreement. Even if you think you are going to win a battle of the forms, you are accepting an inherently risky situation in which one party is going to contract on terms they don’t actually agree.
* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.