Contract killers

Adam Bernstein
Thursday, July 23, 2020

Deals are done every minute of the day and every day of the week; some informal, others by written contract. Most are carried out seamlessly, but there are occasions where agreements fall apart leading to acrimony. It’s at times like this that contracts take centre stage to check on exactly what was agreed.

It’s all elementary

With the breadth and reach of the law, it’s not very surprising that contract misunderstandings arise. Paul Herbert, technology and media partner at London law firm Goodman Derrick, makes plain that for a contract to be formed certain conditions must be met.

Herbert says: “English law requires a number of elements for a contract to be formed between parties. While there are a range of exceptions and caveats to the principles, there are the basic principles of contract law.”

In essence, he says there must be an offer where A has to make an offer to B; an acceptance where B needs to accept the offer. Thirdly, there must be a consideration which involves B needing to give A something (usually money) in return for what is offered. An intention to create legal relations that involves each side actually intending to create a contract. And lastly, there must be certainty of terms meaning that the material terms of the contract need to be clear.

You might think that the point at which a contract is formed is easy to establish. But, says James Crayton, head of commercial at Walker Morris, “some of these essential elements are common sources of dispute”.

He says one particular area of contention is whether a response to an offer constitutes an acceptance or a counter-offer – “this can be crucial because it can determine on whose terms a business deal proceeds, or on what terms a dispute is settled. Going back to legal basics, if a supposed acceptance does not match the terms of the offer, then no contract is formed and, instead, a counter-offer has been made.” A common upshot in the commercial context is the so-called battle of the forms – but more on this later.

Friction points

Another element of friction is where a party thinks there’s a contract in place when in reality there isn’t. As Crayton has seen, “a party may have invested significant time and money in a project on the understanding that its opposite number was contractually bound to the same, only to find that no binding obligations are actually in effect and that its opponent can walk away scot-free. Similarly, a party may be operating under the assumption that key terms are still to be agreed, only to find that their conduct, or something they said, has committed them contractually to what is now an unfavourable deal”.

How can this happen? Possibly because the parties signed a preliminary document not realising it would be binding on them, or because of the language they used during negotiations – Herbert says email correspondence and negotiations are a frequent source of issues. But he points to another factor – conduct. “How businesses act can also create a contract if it evidences an intention to be bound by a contract – for example, if they start providing goods or services before a contract is finalised.”

The problem for Crayton is that “the nature of today’s business world means that variations (say price, delivery, payment etc.) are sometimes discussed and agreed orally only. As well as the potential for misunderstanding and evidential issues, parties may inadvertently end up in breach of express ‘no oral modification’ provisions”.

Do not forget the office junior

Firms should also be alive to the fact that it’s entirely possible that an office junior can accidentally bind a business. Companies can be forced to honour the actions of employees if those individuals appear to a third party to have apparent authority and the third party enters into the contract in good faith. It’s for this reason that Herbert advises businesses to “keep a written list of individuals authorised to bind the company… and ensure that employees know what they can and cannot do when it comes to negotiating on behalf of the company and committing it to contractual obligations”.

The problem, as Crayton sees it, “is whether or not the parties actually intend to be legally bound”. In a commercial context, he says that there is a “rebuttable presumption” of an intention to create legal relations.

So, by extension, and for absolute certainty, before entering into a contract, parties should check that the person they are dealing with has the authority they claim to have. This can be through checking Companies House to see if the relevant signatory is an officer of the company or by asking to see the specific grant of authority – normally a board resolution or a power of attorney – given by the company to that individual.

The digital age

It doesn’t take a neurosurgeon to realise that the digital age has not left contract law untouched by change. Remarkably, it still surprises some that contracts do not have to be in writing. As Herbert outlines, a face-to-face agreement or a verbal contract that includes the characteristics mentioned earlier will still make a valid contract – “and barring limited exceptions, contracts can also be made over social media, via email, fax or even made in the behaviour or course of dealings by the parties”.

He adds it is also worth noting that ‘written’ contracts do not have to be on paper, they can be created and signed electronically, as is the case with online purchases.

The battle of the forms

In any situation when two businesses negotiate the terms of a contract and each wants to contract on its own, more favourable, standard terms, there will always be a desire from one side to win over the other.

Crayton explains that this process where one side trumps the other, that uses the last set of terms despatched before performance, the ‘last shot’ approach, will prevail.

And Herbert agrees. He gives the example of Company A offering to buy goods from Company B, but on A’s standard terms. However, Company B attempts to accept Company A’s offer but on the basis of their own standard terms as they are more favourable to them. So, who wins? The answer, says Herbert, is simple: the last party to put forward terms and conditions – in this example, Company B – that were not explicitly rejected by the recipient.

The only solution to avoid any uncertainties as to which terms apply is for the parties to expressly agree whose terms apply before they start work. Building on this, Herbert says that either side can “incorporate a ‘conflict clause’ into the terms which stipulates that their terms will prevail over any terms issued by the other party; this would further assist in establishing a ‘last shot’ argument.”

Crayton, however, warns to look for terms that aren’t always obvious. He says “to take particular care if terms appear elsewhere, whether that be on the reverse of a form; on a website; in an attachment to an e-mail; in a separate draft contract or other form of document; or elsewhere within promotional material or pre-contractual correspondence.” As they say, ignorance is no excuse.

Locking the door

Of course, there are steps that firms can take to stop contracts from accidentally being formed, but before detailing them it’s important, according to Herbert, to note that “disputes in this area normally revolve around the intent of the parties. Courts will not lightly infer the existence of a contract unless they can firmly conclude that the parties intended there to be one.”

Even so, he advises parties to make their intentions as clear as possible. “If entering into preliminary documentation, such as a heads of terms or letters of intent – being documents which set out the essential terms of a contract which may be entered in the future, parties should make it clear whether such document is intended to be binding or not so as to avoid any confusion.” Herbert says that making the document ‘subject to contract’ assists here.

Similarly, he says that if negotiating via email, businesses should be careful when using certain terms such as ‘I accept’ and ‘I agree’. He also says to consider inserting ‘subject to contract’ at the very top of each new email “so as to make it clear that the content of the email is not intended to be binding and that the intention is to enter into a specific written contract at a later date”.

And Crayton advises even stronger disclaimer language, for example “we have no intention to enter into a binding agreement until both parties sign an agreement in writing… A court will look at all of the parties’ words – and conduct – when deciding whether or not a contract has been formed in any particular case”.

Lastly, large organisations have other problems to contend with that often revolve around coordination; Crayton thinks it important to ensure that internal teams are aligned to the same position – so that, for example, operations behave consistently with procurement if a contract is not yet meant to be binding.

Summary

Contract law is a quagmire ready and waiting to swallow up all who enter into it. That’s not to say that every contract will lead to catastrophe, but good advice, common sense and forward planning can minimise the risk of a commercial falling out. Remember, a contract does not need to be written or indeed in any particular form, provided the key elements are present. It is therefore possible to accept another’s terms simply by failing to object to them or to assert your own.

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