The risks of unsigned agreements

21 September, 2010

The recent High Court decision of GHSP Inc v AB Electronic Ltd1 demonstrates the risks associated with starting to perform a contract before it is signed. 

 

In this case, the customer ordered sensors from the supplier which the customer then incorporated into its own products and sold them on to the Ford Motor Company. The parties did not sign a contract in relation to the supply of the sensors. Instead, the customer issued purchase orders which referred to its standard conditions and at the same time the supplier continually referred to its own standard conditions on its quotations and invoices.

 

The supplier delivered a defective batch of sensors, which led to Ford claiming substantial losses from the customer and the customer in turn claimed against the supplier. The court had to decide whether the contract between the supplier and the customer for the sensors incorporated:

  • the customer’s standard conditions (under which the supplier would have unlimited liability); or
  • the supplier’s standard conditions (under which the supplier would have almost no liability); or
  • some other conditions.

 
The court held that neither party’s standard conditions governed the parties’ relationship and instead found that the parties had concluded a contract which was governed by the implied terms of the Sale of Goods Act 1979. This decision meant that the supplier’s liability under the contract was unlimited, subject to the common law rules on recovery of damages.

 

The judge in this case commented that the parties had failed to have a grown-up discussion about what the terms of the contract were actually going to be and instead had “hoped that there would never be a problem, or that, if a problem arose, it would be a small enough one that, with goodwill, it could be settled ‘on a case by case basis’”. While this approach is hardly uncommon, the case demonstrates that starting to perform a contract before there is signed agreement as to the terms which will govern the contract (particularly in relation to liability) is a risky strategy which should be avoided.

 

1 GHSP Inc v AB Electronic Ltd [2010] EWHC 1828 (Comm)

Reviewed in 2015