The benefit of foresight by Lisa Douglas

 

Picture this: It is a busy working day. You have recently arranged for some key equipment to be sent off for maintenance to a new service provider. Your PA brings in a trade account application form from the maintenance company to be signed, and on the second page are the fine print terms of trade. You don’t pay too much attention, sign the document and get on with the day.

The equipment is sent off for maintenance, is returned and put back into service. Soon after, a key component which had been the subject of the maintenance work breaks down. Work stops, losses are mounting and the maintenance company points to their terms of trade to say they have limited their liability and the losses are yours to bear.

Could this happen to you? It was the unfortunate result for Icelandic Drilling in a case considered by the High Court in March 2016: Jardboranir HF (t/as Iceland Drilling) v Summit Hydraulic Solutions Ltd [2016] NZHC 490.

Iceland Drilling owned and operated geothermal drilling rigs. Its largest rig, aptly named after the Norse God ‘Thor’, was sent to Summit for maintenance work. The rig subsequently broke down and Icelandic Drilling suffered losses estimated by it to be in the region of $1.3 million. It was claimed that Summit had caused those losses by performing substandard work on the rig’s main mast cylinder.

At the time Summit was engaged by Icelandic Drilling to carry out work on its rigs, it supplied Icelandic Drilling with an application for a credit account. At the bottom of the application was a declaration stating “I the undersigned, …, have read the Terms and Conditions of Trade set out over the page and agree that those terms and conditions form an Agreement between the customer and Summit …”. The document was signed underneath the declaration, but the reverse was not signed and the terms of trade printed on the document were not discussed between Icelandic Drilling and Summit. The signed document was returned to Summit, the rigs sent for maintenance and work completed.

The terms of trade limited Summit’s liability to the purchase price of the services in question. The sum charged by Summit was $46,444. A far cry from the losses alleged to have been suffered by Icelandic Drilling.

The issue was whether Summit’s terms and conditions of trade applied. Although the court considered a number of legal arguments, the issues essentially boiled down to whether oral discussions between the parties after the signing of the original document was a new contract, whether the fact that the page containing the terms of trade had not been signed by Icelandic meant they did not apply, or whether the term was ambiguous and should be interpreted in a way so that it did not apply to what had occurred. The court rejected all of those arguments and held that Icelandic Drilling was bound by the terms of trade because it had signed the declaration on the credit application form. Whether it had in fact read the terms of trade was irrelevant.

This may sound harsh or unfair, but is in line with the general principle that commercial parties are capable of looking after their own interests and allocating risk between themselves. The courts will be very slow to interfere with such agreements, no matter how unfair they seem with the benefit of hindsight.

This principle dates back at least as far as the 1930s, an example being a hapless train passenger who was injured when stepping off a train and sued the train carrier for injuries and losses suffered. The train ticket referred to terms and conditions listed in a timetable that could be purchased by the passenger. Those terms excluded liability for injuries. The passenger was illiterate (not uncommon at the time), and had clearly not read the conditions or had them explained to her. Even so, the court found that all passengers were deemed to have read the terms and conditions and were bound by them.

The law has moved on since the 1930s. There are now various protections in place to protect consumers from unfair contracts and from poor goods and services. This includes provisions in the Fair Trading Act, Consumer Guarantees Act and Sale of Goods Act.

The position is different when it comes to parties in trade. Such parties can contract out of a number of Fair Trading Act provisions and a specific contract will trump the Sale of Goods Act provisions. The courts, as seen in the Icelandic Drilling case, will generally uphold a contract that the parties have agreed to, unless there is evidence of misrepresentation or fraud. The benefit of this position is that there is certainty as to where the risks lie between trading parties. The downside is that there is a need to be vigilant when entering into any form of contract as the law will generally not assist when, with the benefit of hindsight, the terms are seemingly too restrictive.

Great losses can flow from what might initially seem to be a straightforward and even minor part of an operation or project overall, but if you are not protected either by contractual terms and/or insurance it might be too late when the importance is appreciated. Hand on heart, do you always read the terms of trade before signing a document? Or, on the flip-side, are your terms of trade robust? Ask yourself where the risk will be if things go wrong. The benefit of foresight can be a great saver.

 

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