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COURTS REINFORCE LAW ON INCORPORATION OF TERMS
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Two cases recently highlighted the importance of ensuring the terms and conditions you want are part of the contract you sign.

The first case, decided in the Rotorua High Court, confirmed some interesting points about how terms can be incorporated into parties’ contracts and how liability limitations should be interpreted. In the second case, the Court of Appeal determined that one company’s standard terms, including liability limitations, were not part of the deal. Read on to find out why.

Rigging the contract


The first case, Jardboranir HF trading as Iceland Drilling v Summit Hydraulic Solutions Ltd, concerned maintenance work undertaken by Summit on the main mast cylinder of Iceland Drilling’s large geothermal rig, Týr. Iceland Drilling claimed that the work was substandard, and suffered alleged losses of $1.3 million, so the parties had plenty of reason to head to court.

The first question to be resolved was: did Summit’s terms and conditions of trade apply to the work done on the main mast cylinder?
 
In short, yes. The underlying documentation consisted of a two-page document, with ‘Terms and Conditions of Trade’ attached to the ‘Application for Credit Account’. Although Iceland Drilling’s director had signed the Application for Credit Account, Iceland Drilling argued that the terms and conditions did not apply, despite a declaration above the signature block stating:

I the undersigned… have read the Terms and Conditions of Trade set out over page and agree that those terms and conditions form an Agreement between the Customer and Summit Hydraulic Solutions Ltd.

The incorporation of contract terms is an issue that arises time and again. Earlier cases have held that ‘…where a contract is contained in a railway ticket or other unsigned document, it is necessary to prove that an alleged party was aware, or ought to have been aware, of its terms or conditions.’ However, this rule does not apply when the document has been signed, and it makes commercial common sense to allow parties to rely on signatures to evidence their agreements. Iceland Drilling’s director had signed the declaration; therefore Iceland Drilling was bound by the terms and conditions (even if they had not actually read them).

Steel appeal


So when are standard terms not part of the deal?

Steel Co Ltd had been sourcing pipes from China and supplying them to Pipes NZ Ltd for several years. Pipes NZ then supplied the pipes for use in two hydroelectric schemes. The pipes were defective, and Pipes NZ suffered losses, including damages it agreed to pay to its customers.

Although Steel Co traded with Pipes NZ entities for several years, Steel Co was unable to demonstrate to the Court how their standard terms were ever brought to Pipes NZ’s attention. There was uncertainty about who sent which documents to whom and whether Steel Co could prove that Pipes NZ had agreed to those terms. For now Steel Co’s pipe dream is over, with its appeal dismissed and judgement of $416,580 standing.

Limited limitations?


Having established that the terms and conditions of trade did in fact apply to Iceland Drilling, the other issue to be determined was whether or not to give effect to the limitation of liability in the terms.

Iceland Drilling argued that the terms were ambiguous, so should not be enforced. However, the Court found that limitation clauses should be interpreted just like any other clause and, not finding genuine ambiguities, stated ‘strained or tortured constructions upon which to base ambiguities are not appropriate’.
 
From Iceland Drilling’s case we can establish that generally:

  1. If you sign a document, and you know that document contains contractual terms, you are bound by those terms.
  2. The approach to the interpretation of limitation clauses should be the same as the approach to the interpretation of other clauses.
  3. The contra proferentem rule (to interpret the contract terms more strongly against the party who drafted the terms) does not apply unless there are genuine ambiguities in the terms.

The lessons from both recent decisions is to make sure that the contract terms you want are part of the contract – and always read the terms and conditions.
 

This article was written by Peter Fernando, a Senior Associate in our Wellington Corporate and Commercial team. It first appeared in the July issue of the New Zealand Manufacturers and Exporters Association newsletter.

The contents of this article are for general information purposes only, and should not be acted upon without specific advice. Kensington Swan does not accept any liability other than to its clients, and then only in relation to specific

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