Contracts

In this part of the site we want to give the reader an understanding of how contracts are made, and the importance of understanding what may be very complex contract conditions. It is not intended as an exhaustive study of contract law, but rather as a useful aid memoire for businesses which are contracting.

The first point to note is that under Scots law contracts can be concluded verbally. If you phone a supplier and order goods, the contract is concluded when the supplier accepts that order on the phone. The conditions which apply to a contract are those which apply at the time the contract is made.

Accordingly, at the moment the suppliers representative accepts the order whatever contractual conditions apply at that moment in time, will be those that apply to the contract. The reason it is important to establish what these are is that important issues of liability may arise.

If your business is dependent on the timeous supply of those goods to process an order for one of your own customers, and delivery is late, do you have any remedy against the supplier? Does that remedy include compensation for your own breach of contract to your customer if you have guaranteed timeous delivery to the customer? Conditions can be incorporated into a contract in a number of ways. They can be specifically agreed to by the parties.

This is probably unlikely in a telephone ordering situation. However, there may be a course of dealing between the parties which might imply that conditions which applied previously will apply to this contract also. For example, if you have always made it a condition of your dealings with this particular supplier that deliveries must be guaranteed then it is likely that condition would apply to this contract also even if it was not expressly stated in the telephone conversation. However, the danger with this approach is in being able to prove what that course of dealing was and whether or not it should apply in this situation.

Litigation is a costly and time consuming business and proving a course of dealing can be a protracted and therefore expensive exercise. For this reason, it is preferable to avoid, if at all possible, particularly if the contract is an important one for your business, relying on verbal arrangements. It is not necessary to enter into protracted legal documentation, or deal in legalees. As long as the essentials are covered, they need not take any particular form. The following are the essentials:-

• Precisely what is to be supplied. If this is to be in accordance with a particular specification, this should be specified.

• Price. Is this ex. VAT and does it include delivery charges?

• When is the price to be payable? If any credit period is to be allowed, this should be specified and provision should be made for charging interest for late payment.

• Liability for defective goods or services. If you are a supplier, you want to limit your liability to replacement of the defective product, and you certainly want to provide that under no circumstances will you be liable for consequential loss. If you are a customer, you want to ensure that all reasonably foreseeable consequences of the suppliers breach of contract will be covered.

• If intellectual property rights are an issue e.g. copyright, specify who owns the intellectual property rights.

They should be tailor made to your own particular circumstances, and you should be seeking to ensure that they apply to all contracts to which you are a party. However, bearing in mind that the seller and purchaser have competing interests, and each side will be trying to incorporate their own set of conditions into the contract, it is important to bear in mind that, as stated above, the contractual conditions which apply are those incorporated at the time the contract is made. Accordingly, it is important to establish precisely when that moment is reached. This can lead to what is commonly referred to as the "battle of the forms". This happens where each party is trying to incorporate their own conditions into the contract.

For example, if you are a seller, you should be referring to your pro forma Terms and Conditions of Business in your quotation. If that quotation is accepted by the purchaser without qualification, your Terms and Conditions apply. If, however, the purchaser issues an acceptance of order with his own Terms and Conditions of Purchase stated in it, and you accept that without qualification, then his Terms and Conditions apply. Since his terms may impose liability for consequential loss, that could be disastrous for your business. You would in turn have to issue a confirmation of order with your Terms and Conditions attached.

There is no one set of rules which apply to all businesses. All you can do is work out what is practicable for you and your personnel, make sure that all personnel who are involved in contracting understands the basic rules, and then try to put in place a sensible system to make sure that in all important situations, the correct rules are followed. We are happy to provide quotations for drafting Terms of Business.