For years negotiators acting on a software procurement (or on any
other contract for that matter) have engaged in a battle for
control of the pen.
If acting for a supplier, the negotiator wanted the contract to be
on the supplier's standard terms. If acting for the customer the
negotiator wanted the contract to be on the customer's standard
terms; in both cases with as few variations from the standard as
possible. What could be more natural and right? If the negotiator
won the battle he would be dealing with a known quantity (his
standard form) and would have the benefit of inertia on his side:
he only had to deal with the amendments that the other side could
be bothered to make.
Over the last few years this benign order of nature was disturbed.
In some circumstances it became better to use the other side's
standard terms. The roots of the disturbance lay in the Unfair
Contract Terms Act 1977 (or UCTA) which provides that exclusion
clauses contained in a contract may be rendered ineffective by the
courts if they are unreasonable.
When UCTA was passed it was intended primarily as a consumer
protection measure. It was aimed primarily at exclusion clauses in
contracts between businesses and consumers. However, the Law
Commission report which suggested its introduction also took pity
on commercial customers who were forced to negotiate a deal on a
"take it or leave it" basis - and it suggested that the test of
whether the negotiations were on a "take it or leave it" basis was
whether one party contracted on the other party's "written standard
terms of business".
With the benefit of hindsight, this was an
 | | "Lawyers generally took the view
that the real mischief lay where the customer was forced into a
'take it or leave' it position" | | | | | |
| | Iain Monaghan | | |
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odd test to apply. It isn't easy to see why a set of conditions
drafted by a supplier from scratch is inherently less oppressive
than a set which he took the trouble of drafting in advance. Or why
the existence of standard terms is relevant where there is a choice
of supplier.
Imagine three suppliers, each supplying the identical product. Two
insist on a price of £1m while the third asks for £500,000. They
all put forward their standard terms, but the two who insist on £1m
indicate that they would be prepared to negotiate on those terms
(and maybe even accept the customer's terms) while the third says
that, at a price of £500,000, it cannot take any risks and has to
contract on its standard terms. The customer considers the three
offers, takes legal advice on the standard contracts, and decides
that a saving of £500,000 is worth much more to him than any
additional risk he might be assuming by signing the third
supplier's standard contract.
In these circumstances, why should an exclusion clause put forward
by the third supplier be open to challenge while an exclusion
clause put forward by the other two suppliers would not have
been?
For all these reasons, lawyers generally took the view that the
real mischief lay where the customer was forced into a "take it or
leave it" position and that, even where the supplier supplied a set
of standard terms at the outset, if the parties genuinely
negotiated the terms, they ceased to be "standard". This
understanding lasted until 1996 and
ICL v St Albans in which
the court held that even prolonged negotiations and several
amendments didn't stop a contract being on standard terms. From
that point on, the only safe advice to give to most suppliers was
that if they put forward their standard terms (which they
invariably did) they ran the risk that the courts would consider
their exclusion clauses unreasonable.
This should not have been a problem in itself because while UCTA's
view of what constitutes a 'take it or leave it' negotiation seems
simplistic, its view of what is a 'reasonable' exclusion is much
more subtle. Various factors have to be taken into account, such as
the parties' strength of bargaining position, any inducement the
customer received to agree to the term and (where a limit of
liability is concerned) the availability of supplier's insurance.
Unfortunately, in a series of cases heard over the last few years,
the judges at the Technology & Construction Court showed a
marked disinclination to give due weight to all those factors. At
the risk of over-simplification, only one of the factors seemed to
be important to the court: if the supplier had (or could obtain)
insurance, any limitation on liability which represented less than
the customer's likely direct loss was treated by the court as
unreasonable.
In practice this led to the bizarre practice of customers' lawyers
advising their clients to accept the supplier's standard exclusion
clause as drafted on the basis that if it was left without
amendment they could be sure of its being thrown out by the
courts.
In
Watford v Sanderson, decided at the end of February this
year, the Court of Appeal attempted to put a halt to this line of
development. The elements of the judgement are complex (and the
guidance given as to the reasonableness of particular financial
limits seems to have been dictated by the particular facts of the
case), but it is the attitude of the court to commercial
negotiations that is particularly significant.
The court gave due weight to all the "reasonableness" factors,
including price, and concluded: "Where experienced businessmen
representing substantial companies of equal bargaining power
negotiate an agreement, they may be taken to be the best judge of
the commercial fairness of the agreement [and of] whether the terms
of the agreement are reasonable. The court should not assume that
either is likely to commit his company to an agreement which he
thinks is unfair, or which he thinks includes unreasonable terms.
Unless satisfied that one party has, in effect, taken unfair
advantage of the other - or that a term is so unreasonable that it
cannot properly have been understood or considered - the court
should not interfere".
This doesn't mean that unreasonable exclusion clauses will no
longer be struck down by the courts. It does mean that the courts
will be more likely to see the supplier's point of view and, in
particular, to acknowledge that there is a connection between price
and liability. From the negotiator's point of view it restores the
natural order. Negotiations are worth while again.
Iain Monaghan is a partner in Masons' Information and
Technology practice.