This blog post was written by Peter Fernando, a senior associate specialising in commercial contracts and information technology law.
A recent case decided in the Rotorua High Court has confirmed some interesting points about how terms can be incorporated into parties’ contacts and how liability limitations should be interpreted.
Jardboranir HF trading as Iceland Drilling v Summit Hydraulic Solutions Ltd  NZHC 490 concerned maintenance work undertaken by Summit on the main mast cylinder of Iceland Drilling’s large geothermal rig, named Týr (after a Norse god of war who was also involved in matters of law and justice).
When Iceland Drilling alleged that the work was substandard, two preliminary issues generated a lot of heat:
- Did Summit’s terms and conditions of trade apply to the work done (on the main mast cylinder)?
- If so, did clause 10.3 (contained in the terms of trade) limit Summit’s liability to the price of the work?
The price charged by Summit was $46,444 but Iceland Drilling’s alleged losses were $1.3 million, so the parties had plenty of reason to go full steam ahead to court.
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 signature block on 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, referred to herein this Application for Credit Account as ‘the Customer’, 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, herein this Agreement referred to as ‘the Company’ and ‘Summit’.
Drilling into the issues
Incorporation of contract terms is an issue arising 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 has no application when the document has been signed. So, Iceland Drilling was bound by the declaration made, even if the director had not in fact read the terms and conditions of trade. This interpretive approach makes commercial commonsense, allowing parties to rely on signatures to evidence agreement, in the absence of fraud or misrepresentation.
Having decided that the terms were incorporated into the contract, the other preliminary issue was whether or not to give effect to the limitation of liability in the terms. Iceland Drilling argued that the terms were ambiguous and should therefore not be enforced. The Court confirmed that exclusion and limitation clauses should be interpreted just like other clauses and, not finding genuine ambiguities, stated ‘strained or tortured constructions upon which to base ambiguities are not appropriate’.
Surface-level summary: Key legal points
This case confirms general principles that:
- A person who signs a document which is known by that person to contain contractual terms, and to affect legal relations, is bound by those terms.
- The general approach to the interpretation of exclusion and limitation clauses should be the same as that applying to the interpretation of contracts generally.
- The contra proferentem rule (to interpret the contract terms more strongly against the party who drafted the terms) is not activated unless there are genuine ambiguities in the terms.