Spotlight on terms of purchase

Most businesses are by now aware of the importance of having terms and conditions of sale.

What is more often overlooked is the value of having terms and conditions of purchase. For businesses which depend on purchasing products from other businesses, whether to resell the products or to incorporate them as components into their own products, having terms of purchase can help to give some very important protections.

Terms of purchase will typically address the same issues as are covered under terms of sale but the way in which they are addressed will be radically or subtly different and intended to favour the purchaser.

As an example, in a business-to-business context, a supplier's terms of sale will often look to minimise the supplier's contractual obligations relating to its products by excluding the terms which would otherwise be implied under the Sale of Goods Act. From the perspective of the purchaser however, it may be of critical importance that the contractual obligations on the supplier in relation to the products go beyond what would be implied, for example, in relation to quality, design, materials, durability, or fitness for purpose.

Terms of purchase can help to ensure that the contractual obligations on the supplier do reflect all the requirements of the purchaser and, importantly, protect it from claims and give it the necessary rights and remedies if the products do not meet those requirements.

Particularly now that economic conditions are becoming more challenging, it is important to ensure that, if things do go wrong with a supplier, a purchaser is, at the very least, able to exit its arrangements with the supplier without being in breach of, or trapped by, the supplier's unfavourable terms.

Of course, if a supplier does not have terms of sale, provided it has given notice of its terms of purchase, a purchaser will be in a very favourable contractual position.

Where a supplier is looking to sell on its terms of sale and a purchaser looks to buy on its terms of purchase, there is of course a big question mark as to which set of terms apply to their contract.

This is often referred to as the “battle of the forms” and, assuming that both parties have given the other party notice of the existence of their terms, a court will generally try to determine whose terms apply by reference to the law regarding contract formation which relates to offer and acceptance.

This will often mean deciding whose terms were the last to be referenced at the point the contract was formed or who “fired the last shot”. Often the supplier's order acknowledgment might tip the determination in the supplier's favour, but this is by no means always clear- cut and much may depend on the wording of the respective terms, the circumstances and perhaps the history of trading between the parties or other factors.

What this means is that it will sometimes be unclear which set of trading terms applies to a contract. This may be thought to be generally undesirable and it is certainly not ideal, but sometimes the parties will prefer not to confront their differences and take their chances. From the perspective of a purchaser, even if the odds might be weighed against them, there are at least two possible advantages in this scenario.

Firstly, even if a supplier believes that its terms are more likely to prevail, the element of uncertainty is likely to make it more circumspect about its position in negotiations regarding any dispute. Secondly, if the question does go to a court, it is possible that the court could conclude that there was no true accord between the parties which can be determined and therefore neither set of terms should apply.

If, as a result, the supplier's attempt to exclude the Sale of Goods Act implied terms fails, this may work in the favour of the purchaser.

This is not to say that purchasers, or suppliers for that matter, should not seek to ensure that their terms of trading are incorporated into their contracts. A way in which a purchaser can seek to ensure this is by including their terms in a purchase contract which is signed by both parties.

Aside from increased certainty that the terms are incorporated, this has a further advantage over standard terms in that the contract can specify details of the variables which arise in relation to the particular contract which in standard terms can only be referred to in general terms.

These details include the name of the supplier, the product, specification, quantity, price, shipping arrangements, payment terms and any other special conditions. Unless a bespoke contract is required, this can often be achieved by using a template contract with a cover sheet where these key provisions can be inserted. The template can be used, with any necessary adaptions, whenever products are ordered from a supplier.

Alternatively, if the supplier will not agree to the purchaser's terms, they can still be used as the basis of, or form a part of, the negotiations for more balanced contract terms to be agreed between the parties.

The article is provided for the purpose of giving general information only. It is not intended to provide, and should not be relied upon as providing, legal advice. If you would like advice in relation to terms of purchase or a template purchase contract for your business or in relation to any of the matters referred to in this article, please contact Julian Milan j.milan@sydneymitchell.co.uk on 08081668827.