The use of standard terms is increasing each year and is currently experiencing its peak. Standard terms, general conditions of sale or general business terms are commonly used in domestic and international contracts. Standard terms are terms prepared by one of the parties in advance for repeated use in its contract.1 It is irrelevant whether the terms have been drafted unilaterally by one of the parties for the use of one of the parties or by an industrial organisation for general use in trading within an industry sector. This becomes of particular interest when discussing the possibility of solving disputes by arbitration based on an arbitration clause included in standard terms. The premise for the necessary consent to arbitrate is that the parties have agreed on such a method to resolve disputes and that the selected arbitration rules are known and agreed upon. In several contracts, the arbitration clause itself is not discussed but is only contained as part of the standard terms referred to in the contract.
A general characteristic for standard terms is that they do not become subject to individual discussion – at least, not in detail. This raises a number of questions that have led to controversial debate in domestic legal systems in relation to contract formation. The focus of this article will be on the possibility to agree to arbitration through standard terms, since such arbitration clauses seem to be regularly included as a part of standard terms. Recent Danish case law on the requirements for such an incorporation and the consequences will be discussed below.
Before being able to establish the possibility to agree to arbitration with the necessary consent, it is necessary to establish the specific requirements to be fulfilled in order to make the standard terms part of a contract in the first place.
Requirements to make standard terms part of the contract
Under Danish law, as under the Convention on Contracts for the International Sale of Goods (CISG), the requirements to make a contract are an offer and acceptance of that. There are no specific rules dealing with the incorporation of standard terms or arbitration clauses. In order to incorporate standard terms as part of a contract, the standard terms need to be part of the offer as understood by a reasonable offeree.2 It follows that the offeror must have intended to make the terms itself part of the contract and that this is clear for a reasonable offeree.
In case law, several different approaches have been developed to include standard terms as part of the contract. The relevant question is: is it sufficient to make a mere reference to the standard terms or must the terms be provided together with the offer?
Under both Danish law and the CISG, it is generally accepted that a reference in a contract to generally known standard terms suffices to make those terms part of the contract. Such terms may be general industry standards, agreed documents (a set of standard terms, where the content has been discussed, negotiated or drawn up by two opposite interest groups in relation to one particular trade), or previously used standard terms between those two contracting parties, for example, through an established practice.3 This can be illustrated by the reasoning expressed by the Austrian Supreme Court in the Propane case from 1996:
The general conditions of sale have to be part of the offer according to the offeror’s intent, where the offeree could not have been unaware of that intent in order to become a part of the contract (Art. 8(1) and (2) CISG). This inclusion into the offer can also be done implicitly or can be inferred from the negotiations between the parties or [from] a practice which has [been] developed between them.
When interpreting the Court’s reasoning strictly, it would suggest that if the offeror’s intent to include its standard terms is so clear that the offeree could not have been unaware of that, then those terms would be part of the agreement. Many scholars4 have justly criticised such strict interpretation as it places the burden on the offeree to inquire into the standard terms. To balance the situation, the shifted burden is only acknowledged in cases where the standard terms are easily accessible or generally known to the involved parties. This difference is clearly depicted in two Danish cases from the Supreme Court published in the Danish Weekly Law report (U): U.1995.856/2H, which concerned general industry standards; and U.2014.1424 H, which only concerned one of the parties’ own standard terms:
U.1995.856/2H concerned a professional storage facility in Denmark (F) and several both Danish and foreign insurance companies seeking recourse for disbursed insurance money. The Danish Supreme Court reasoned that (F) in all its documents and letters to Danish shipping agents and ware-owners had included a clause stating that contracts was subject to NSAB 85 (General Conditions of the Nordic Association of Freight Forwarders). Since all the Danish shipping agents and ware-owners were aware of NSAB 85 as an agreed document, those terms did become part of their agreement.
U.2014.1424 H concerned the Danish shipyard (F), which carried out repair work on a ship belonging to the international company (B). B brought charges against A with claims of compensation for wrongful repair work. F claimed dismissal of the case, as F had referred B to Danish Maritime’s general conditions for ship repair and conversions, which included an arbitration clause. F had prior to the repair work send an offer to B, in which the offer included the clause “all works are carried out according to general conditions drawn up by Danish Maritime”. F did not hand over the general conditions to B. The conditions had not been discussed between the parties’ and B had not prior to this contract had any dealings with F. Under those circumstances, and due to the fact that F could not reasonably expect that B was aware of those general conditions, the court concluded that the general conditions including the arbitration clause – regardless of the contract being between professional parties – did not form part of the contract.
Thus, a reference may suffice in situations where the offeror has presumed knowledge of the terms’ content or where those terms are easy accessible. But more generally speaking it is simply not enough for the offeror to refer to its standard terms in order for them to be incorporated and thereby establishing the necessary consent to arbitration.
If the offeror fails to refer the offeree to its standard terms but still provides them in an appendix to the contract, another question arises: Can the standard terms be incorporated without a reference? The short answer to that question would be: Yes! If the offeror hands over the standard terms as an appendix to the contract it would clearly indicate the offeror’s intent to conclude the contract subject to those terms. This was expressed in the Golden Valley Grape Juice case from the Federal District Court of California from 2010. In that case, the offer was sent as an attachment to an e-mail. The e-mail included an attached file containing standard terms. The offer did not specifically refer to the standard terms, but the court held that it must have been clear for the offeree that the offeror intended that all of the attachments were relevant for the agreement. The buyer could not simply pick and choose between the documents. Consequently, if the attached terms are conspicuous, the offeree cannot simply ignore those terms. They will bind him regardless of his failure to read them. The result would naturally change should the terms be hidden, concealed or otherwise out of ‘plain sight’.
Arbitration clauses in standard terms
Standard terms can in principle contain all kind of clauses and conditions; however, the threshold for the incorporation of very burdensome or unexpected terms is not as easily reached as other terms. Burdensome terms are terms that change or shift the contract greatly in favour of one of the parties (eg, liability clauses, choice of law clauses, forum selection clauses or dispute resolution clauses including arbitration). Unexpected terms, on the other hand, may be regular terms, which, due to their character (eg, content, language or presentation), are in such a shape that the other party could not reasonably have expected them. These terms usually requires the other party’s express acceptance.5
The Danish courts seem to follow UNIDROIT Principle article 2.1.20 in their desire to find a commercially viable solution to the incorporation of standard terms. When the standard terms include burdensome or unusual terms, the offeror is required to highlight, negotiate or otherwise point out the particularities of the clauses. This specifically includes forum selection clauses, choice of law clauses (U.1998.728 S and U.2001.1559 H), but also arbitration clauses:
U.1998.728 S concerned 24 ruined generators, which the Danish buyer (K) had purchased from a Danish seller (S). K filed a lawsuit against S for the lack of conformity of the goods and S claimed dismissal due to S’s standard terms including both a choice of law and a forum selection clause entailing the contract to be governed by the law of Germany and with venue in Germany. The Commercial Court of Appeal ruled that both S’s choice of law and forum selection clause did not form part of the contract, since those clauses were unusual and burdensome in a contract between two Danish contracting parties. The fact that K had received S’s standard terms 4 times prior to the conclusion of the contract was thus not attached any importance. S should have pointed out the unusual and burdensome clauses in order for them to become part of the contract.
U.2001.1559 H concerned a German buyer’s (T) purchase of a machine for the production of aluminium plates from a Danish seller (D). It appeared from T’s offer that the contract should be governed by T’s standard terms appearing on the back page of the offer. Those terms included a choice of law clause, designating German law to be the governing law, and a forum selection clause, designating the place of venue to be in Dortmund in Germany. The Danish Supreme Court dismissed the case as they came to the conclusion that T’s standard terms, as a whole, had become part of the contract, since D accepted T’s offer without any objections.
Accordingly, in U.1998.728 S, the Commercial Court of Appeal came to the conclusion that in a contract between two Danish contracting parties, a choice of law clause and a forum selection clause in favour of German law and venue in Germany were unusual and burdensome for the offeree. Thus they did not form part of the contract, as the offeror had not pointed out the specifics of those terms to the offeree.
In U.2001.1559 H, the Supreme Court came to a different conclusion. It was neither unusual nor burdensome that a German contracting party, in a contract between international parties, had included both a choice of law clause and a forum selection clause in favour of that party’s own legal system. Thus, to ensure that burdensome or unusual terms do become part of an agreement, it must be recommended that the offeror highlight, negotiate or otherwise point out the particularities of the terms. In another case from 2013, the Western High Court came to the conclusion that the offeror’s reference to a set of standard terms that again referred to the General Conditions for the Provision of Works and supplies within Building and Construction of 10 December 1992, which contained an arbitration clause, was enough to validly agree upon arbitration. This may seem contradictory to the need to highlight or otherwise point out burdensome terms, however, it must be noted that the general conditions containing the arbitration clause are to be considered as an agreed document and that the parties concluding the contract were professionals in their field. Therefore, the requirement for incorporation was set lower.
A similar burden for the offeror to ensure that the offeree has obtained awareness of burdensome or unusual terms applies when using agreed documents, industry standards or otherwise easily accessible documents, if the contract is concluded between non-professional parties, including both consumers (U.1987.178V) and business entities unfamiliar with the specifics of a particular trade (U.2004.2421 H):
In U.1987.178 V, which involved an insurance company and the policyholder, the High Court held that a clause in the insurance policy detailing any dispute to be resolved by arbitration was not considered to be accepted by the policyholder by its mere payment of premium. Such clause had to be expressly accepted by the policyholder in order to take effect.
U.2004.2421 H In August 1995, an owners association E and an architect A entered into a contract whereafter A should provide technical advice and assistance in connection with the renovation of a property. The agreement referred to the “General Technical Consulting Services (ABR 89) and under the section ‘disputes’ stated: “Decision, see ABR 89 section 9”. E filed a lawsuit against A, wherein A asked for the case to be dismissed on the grounds that the parties had agreed to arbitration. The High Court found that the reference in the agreement to ARB 89, which had not been annexed to the agreement in conjunction with the fact that A had not otherwise made E familiar with the content of ARB 89, did not ensure that the parties had adequately agreed to the settlement of disputes by arbitration. On those grounds the case was not dismissed. With the addition that E had not received any advice from a lawyer or otherwise been in possession of professional expertise when entering into the contract with A, the Supreme Court upheld the High Court’s judgment.
Consequently, even if the terms are easily accessible to the offeree or enclosed in an appendix to the contract, they do not necessarily form part of the contract as a whole. That depends not only on the particular clauses included in those terms, but also on the other contracting party. Is the other person a consumer, a business entity unfamiliar with a particular trade or a professional party with origins in that trade? Are the clauses unusual or burdensome for the offeree? In these situations the threshold for their incorporation is higher than if they are not. Other variables also matter; if the contracting party is a consumer or a business entity unfamiliar to a particular trade, a clause must be made explicitly known to the other party, and in some situations such a clause cannot be agreed upon. The situations require and impose upon the offeror an obligation to make content of unusual or burdensome terms specifically known to the offeree in order for them to be included.
What can also be derived from the recent Danish Supreme Court decision (U.2014.1424.H, cited above) is that there is a distinction between a party’s own set of standard terms and more general standard terms used in a particular trade. If the standard terms are to be considered agreed documents, the threshold for their incorporation is much lower than the threshold for the incorporation of a party’s own set of terms. This view seems to be in line with international principles.
Another practical issue is the reference in a clause to an arbitration institution itself can give rise to problems. If a reference is to an institution that is non-existent, it can give rise to doubt whether this constitutes sufficient consent to arbitration. In a recent case (U. 2012.3001H) from the Danish Supreme Court, it had the opportunity to examine an arbitration clause that called for arbitration in accordance with the terms of the Copenhagen Maritime Arbitrators’ Association. Such an institution did not exist in Denmark and the Court found that the dispute therefore had to be settled by the courts. Under the circumstances, it was not possible to interpret the clause in order to substitute the missing institution with another arbitration institution. Therefore, arbitration clauses should be drafted carefully in order to ensure the implementation of a correct institution. Otherwise the parties may be referred to the courts for dispute resolution.
It is possible to agree to arbitration by incorporation of standard terms including an arbitration clause. The requirement is that the contract contains a reference to make the terms part of the contract itself or that the terms are an appendix to the offer or follow the offer. In both cases it is a requirement that the terms are made available in an appendix to the offer. If not, it is a risk that the terms including an arbitration agreement are found not to be part of the contract, regardless of the contract being entered into between professional parties. It is therefore generally a requirement under Danish Law that the standard terms are transmitted to the other parties. This rule is deviated from if the terms used are to be considered as an agreed document. In these cases the requirement is only for the offeror to make the offeree aware of its intent to include those terms in the contract. Failing such a reference the terms will still be considered to be part of the background law but an arbitration clause will not become part of the contract. In cases where arbitration is initiated on the basis of such a clause, it entails a large risk that an award will be unenforceable. In connection with establishing the tribunals jurisdiction it should be considered thoroughly whether there are any incorporation issues.
- See definition in Unidroit principles of commercial contracts 2010.
- For incorporation under the CISG see the Machinery case from the German Supreme Court.
- Eg, Ulrich Magnus: ‘Incorporation of Standard Contract Terms under the CISG’, Festschrift fro Albert H Kritzer on the Occasion of his Eightieth Birtday, Wildy Simmonds & Hill Publishing (2008): p. 320.
- Cf. article 9(1) CISG.
- Cf. UNIDROIT Principles article 2.1.20.
Kalvebod Brygge 39-41
1560 Copenhagen V
Tel: +45 33 300 200
Fax: +45 33 300 299
Morten Schwartz Nielsen
Lund Elmer Sandager LLP is a full-service law firm that can trace its roots back to the 1870s. Today, Lund Elmer Sandager is a modern law firm servicing private clients and commercial clients ranging from smaller family-run businesses to listed companies, with a primary focus on the commercial section. The firm is dedicated to advising clients on business issues and business-related legislation. Through our international network, we also offer competent legal counselling in major European countries. As a result of our specialisation in civil litigation and arbitration, we employ lawyers with the right of audience before all Danish courts.
Lund Elmer Sandager LLP has a strong litigation and arbitration department which has great individual and collective experience in both national and international disputes before all instances of court and arbitration tribunals.
Lund Elmer Sandager LLP strives to provide clients with clear and concise advice on a commercial level in order to provide every client with the best possible outcome of any assignment. This has led to Lund Elmer Sandager being a valued legal adviser for both national and international clients.
In additional to litigation, Lund Elmer Sandager LLP has equally strong departments advising on real estate, debt collection, transactions and M&A, tax and market law.