Watertight terms of business – Timing and communication are key

This article outlines two common mistakes in the use of standard terms and conditions which could make the contract with your customers legally ineffective.

Many businesses give scant regard to their standard terms and conditions until a dispute arises.

By then it may be too late to enforce them if correct procedures have not been followed to properly incorporate the terms and conditions into the contract to ensure that they are legally effective.

Avoiding problems

For terms and conditions to be properly incorporated into a contract between the parties there are two key requirements:

• Timing – the customer has to be made aware of the existence of terms and conditions before the contract has been concluded; and

• Communication – ‘reasonable steps’ have to be taken to bring those terms and conditions to the customer’s attention.

Timing of terms and conditions

The general rule is that after a contract has been formed by an offer and acceptance by the parties, new contractual terms cannot be introduced later unless both parties agree. Such additional terms, introduced after the contract is made, will not be properly incorporated into the original contract and will not form part of it.

This principle was established in the 1940’s when Mrs Olley’s fur coat was stolen from a London hotel. Mrs Olley checked into the Marlborough Court Hotel. A stranger gained access to her room and stole her mink coat. There was a notice on the back of her bedroom door stating ‘The proprietors will not hold themselves responsible for articles lost or stolen unless handed to the manageress for safe custody’. The hotel owners tried to rely on this notice to exclude their liability for the theft.

The House of Lords, including Lord Denning, decided that the notice was not properly incorporated into the contract between the hotel owners and Mrs Olley. The contract between them had actually been made when Mrs Olley checked in at the hotel’s reception desk. The proprietors could not then seek to apply extra terms into the contract later by placing a notice on Mrs Olley’s door which she had no opportunity to read before the contract was concluded. The notice excluding the hotel’s liability for the theft had not been properly incorporated into the contract because she was made aware of it after the contract was concluded and so it was ineffective.

Mrs Olley’s case illustrates how even well-drafted terms and conditions can be completely useless if they are used at the wrong time.

Too often, businesses seek to impose their terms and conditions by printing them on the back of their invoices. In general, as invoices are usually despatched after a contract has been made, those terms and conditions will not form part of that contract. Like Mrs Olley, customers will not have been made aware of them before the contract has been concluded.

Communication of terms and conditions

If a customer signs a contract, it will be considered binding even if one party has not read the terms.

This principle was established in the 1930’s case of Miss L’Estrange, who bought a cigarette machine for her cafe from travelling salesmen. She did not read the sales agreement and when the machine proved to be faulty she sought a refund. The sellers tried to rely on a clause in the contract excluding liability for the fault, which was upheld by the court as forming part of the contract.

It was irrelevant that Miss L’Estrange had not read the contract and the particular exclusion clause. The fact that she signed the contract meant she was bound by it. There could be no argument that she was unaware of the existence of the contract or that reasonable steps had not been taken to bring it to her attention.

Many sales processes do not require a contract to be signed. Instead, most businesses will rely on standard terms and conditions to govern their relationship with customers. In this context it is crucial to ensure that ‘reasonable steps’ are taken to bring those terms and conditions to the attention of the customer before the contract is made.

Reasonable steps

Examples of good practice include:

• bringing terms and conditions to the customer’s attention at the earliest opportunity, such as in brochures, catalogues, websites, quotation forms and proposals (including when dealing with a customer on a repeat basis);

• training staff on the importance of bringing the terms and conditions to every customer’s attention before the contract is concluded;

• if the customer is buying online, he should be required to click acceptance of terms and conditions before he is able to place an order and a hyperlink to those terms should be provided prior to that stage; and

• if a customer is buying in-store, by mail order or by telephone he needs to be made aware of any relevant contractual terms before the contract is made and how these can be accessed. Before the contract is concluded, details should be given of terms such as any right to return goods or to cancel the contract.

A key rule is that the more exceptional or unusual a term is, the more that must be done to bring it to the attention of the other party.

Providing that reasonable steps have been used to bring the relevant terms and conditions to the attention of the customer before the contract has been concluded, it is irrelevant if, like Miss L’Estrange, he or she does not bother to read them.

Doing business on your terms

The importance of properly incorporating terms and conditions at the right stage of the contractual process is as important to businesses now, whether they are trading online or in a bricks and mortar setting, as it was in the case of Mrs Olley and her fur coat many decades ago.

It is also important that the terms and conditions which are used by a business have been properly drafted by lawyer at the outset and would stand up to legal scrutiny in their own right.