Back to the negotiating table

For years negotiators acting on a software procurement (or on any other contract for that matter) have engaged in a battle for...

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
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.

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