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Lloyds Banking : "Standard Terms & Conditions Apply" – A Salutary Lesson About Incorporation Into A Contract And Reasonableness Under UCTA 1977

08/30/2021 | 06:10am EDT

Mark Davison looks at the operation of T&Cs in business to business contracts as illustrated by the recent case of Phoenix Interior Design Ltd v Henley Homes Plc & Union Street Holdings Ltd.

The recent decision in Phoenix Interior Design Ltd v Henley Homes Plc & Union Street Holdings Ltd provides a useful example of where issues can arise about ensuring standard terms and conditions are incorporated into a contract and whether the terms are sufficiently reasonable.  Whilst it does not change the law in this area, it does provide a salutary lesson about taking care in how businesses operate their T&Cs in business to business agreements. 

The claimant was contracted to perform interior design services for the defendants' hotel.  The relationship deteriorated and the works were not completed and the defendants did not pay the total price due under the agreement.  The claimant issued invoices although the defendants' position was that the last 50 per cent of the amounts due under the agreement was payable on completion or alternatively the works were defective and they were therefore entitled to damages.  The claimant sought to rely on its T&Cs to refute this.

In order to decide the issue, the court needed to determine whether:

  1. the claimant's T&Cs were incorporated into the agreement; and if so
  2. whether the term the claimant relied upon satisfied the requirement of reasonableness under the Unfair Contract Terms Act 1977 ("UCTA 1977").   

Background to the dispute

In February 2015, the claimant presented its proposed designs to the defendants. The claimant maintains that printed copies of its T&Cs were made available to the defendants at the presentation.  There was then a delay in discussions regarding the project. But on 6 January 2016, the claimant sent a proposal by email stating that it showed "the breakdown for each apartment as requested along with our standard terms and conditions." The terms and conditions were not contained with the proposal but were instead attached as a separate document to the same email. 

On 5 February 2016, the claimant sent a revised proposal summary which stated that "Accepted purchase/rental contracts are subject to terms and conditions overleaf". However, no T&Cs were "overleaf" nor were they provided separately to the defendants.  The defendants proceeded to sign the revised proposal summary.

In June 2016, the agreement was amended further and the agreement stated again that it was "subject to terms and conditions overleaf".  The claimants again sent the amended agreement by email to the defendants with no T&Cs being "overleaf".

After the relationship broke down, the claimant issued an invoice and claimed the outstanding amounts it said was due under the agreement.  It sought to refute the defendants' arguments that it was not entitled to pay or was entitled to damages for defective works on the basis of an anti-set off clause contained in its T&Cs which provided that:

"the Seller shall be under no liability under the above warranty [as to condition of goods and certain works] (or any other warranty, condition or guarantee) if the total price of the Goods has not been paid by the due date for payment".

Incorporation of standard terms & conditions

The test of whether T&Cs are incorporated into an agreement or not is neatly summarised by Christopher Clarke J (as he then was) in Balmoral Group v Borealis:

"Whether or not one party's standard terms are incorporated depends on whether that which each party says and does is such as to lead a reasonable person in their position to believe that those terms were to govern their legal relations. The Court has to determine what each party was reasonably entitled to conclude from the acts and words of the other: ... The question is one of fact to which prior authority may form an uncertain guide."

The court accepted that whilst the T&Cs were not contained in the versions of the agreements signed by the defendants, it was clear that the reference to the T&Cs must have meant to those made available at the presentation in February 2015 and attached to the email in January 2016.  For example, there was no attempt on the part of the defendants to contract on their own terms such that a counter-offer could be interpreted as being a rejection of the terms of the claimant for the terms of the defendants (ie there was no "battle of the forms" argument being raised).  On the basis that nothing else in the signed agreements contradicted which T&Cs were being referred to, the court accepted that they had been incorporated into the agreement. 

Whilst the court accepted that the T&Cs had been incorporated in this case, it is a salutary lesson to parties that operate through T&Cs: if they are referenced as being in the same document which is then signed, ensure that they are indeed contained in that document.  Otherwise, you could end up in lengthy and costly proceedings trying to determine that they indeed were incorporated.

Reasonable terms

Notwithstanding that the T&Cs were incorporated, the court had to determine whether the anti-set off clause was reasonable by reference to UCTA 1977.   

The defendants argued that the claimant had a stronger bargaining position as it had a greater knowledge and expertise in the field and that the conditions purported to permit the claimant to render a contractual performance of a fundamentally different nature from the express purpose and requirements set out in the agreement.  The claimant refuted this and said that the Defendants were the much larger organisation and could dictate what they wanted which they had done with payment provisions. 

Anti-set off clauses are not in themselves unenforceable.  Popplewell J (as he then was) noted in F.G. Wilson (Engineering) Ltd v John Holt & Co that:

"I do not see anything essentially unfair or unreasonable in a seller in these circumstances requiring the buyer to pay in full, leaving any disputed cross-claim to be resolved by subsequent negotiation or determination rather than being used as a ground to withhold payment of the undisputed price of goods which the buyer has received many months previously."

However, in this case, the court found the term was unreasonable.  It said that the "apparently unusual clause is tucked away in the undergrowth of the Standard Terms and Conditions".  It noted it was not highlighted to the defendants nor did the clause highlight what the consequence of it was.  Accordingly, the defendants were not afforded the opportunity to reasonably have known of its existence or consequences.  Further, the court said that the clause is potentially exorbitant as even the slightest delay or deduction might bar all of a buyer's right to redress. 

Accordingly, the court found that the claimant had failed to satisfy section 11 and Schedule 2 of UCTA 1977 (namely establishing why the term is reasonable) and therefore the clause was unreasonable by reference to sections 3 (exclusion of liability clauses) and 6(1A) (exclusion of liability clauses in sale and hire purchase agreements) UCTA 1977.

Practice points

Whilst the case has not changed the law in this area regarding how courts will construe whether provisions in T&Cs are reasonable or not, it does provide a salutary lesson to businesses that use T&Cs to ensure that:

  1. the terms set out in the T&Cs are reasonable and therefore enforceable under UCTA 1977
  2. if there is doubt, ensure that the provision of concern is brought to the attention of the counterparty so they are afforded the opportunity to consider it - that may then provide you with a better argument if its reasonableness is disputed later on

Of course this case only concerns the operation of T&Cs in business to business contracts.  If you operate T&Cs in consumer contracts, you will need to take note of the Consumer Rights Act 2015 (see this blogpost and The Consumer Rights Act - an overview).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Mark Davison
Mills & Reeve
24 King William Street

© Mondaq Ltd, 2021 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com, source Business Briefing

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