Business Contracts Handbook

Charles Boundy

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317170617
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Verwaltung

If money is the lifeblood of business, contracts are the arteries that help carry it around the commercial body. Anyone in business is liable to have to deal with business contracts, but few are trained to do so. Even those that are trained may have experience in limited areas or in the distant past. But the right contract can make a vital difference, not just to recording and enforcing, if need be, the contract terms, but also in ensuring the agreement deals with the real issues and approaches them in a practical way. Finding help in this area is not easy, as the market tends to offer little between serious academic tomes on the one hand and student summaries geared to exams on the other. Business Contracts Handbook fills that gap, covering both the basics of contract law in an accessible style and using a thoroughly practical approach to understanding and negotiating the key terms in a business contract. If you have little prior knowledge, Charles Boundy's many years of experience in drafting and providing guidance on business agreements of all kinds will enable you to acquire a working background quickly. If you have years of experience you will still benefit from a checklist, a reminder of what is important and why, and an easy reference to up-to-date language and drafting - there is always more to learn.

PART I
CREATING AND WRITING CONTRACTS

CHAPTER 1
Contract Basics

Introduction – The elements of a contract – contract essentials – offer, acceptance and certainty – consideration – the need for writing – defective and incomplete contracts – ‘subject to contract’ and ‘without prejudice’ – gentleman’s agreements and business misunderstandings – some sample cases – summary and checklist

Introduction

If money is the lifeblood of business, contracts are the arteries that help carry that lifeblood around the commercial body. The connections between a business and its suppliers, customers, employees and service providers all rely on contracts. The medical analogy is also a reminder that, whilst contracts may be constructs of law, they are negotiated and acted upon by living people. Understanding and agreement is therefore challenged not just by changing events, but frequently by the hopes, fears and other emotions of those involved, which may also cause them to see contracts as they would wish them to be rather than as they really are.

THE FRAMEWORK OF CONTRACT LAW

Common law

English contract law has no overall statutory commercial code, but relies on a combination of judge-made ‘common law’ and statute law or regulations authorized by parliament. This common law is further adjusted and supplemented by acts of parliament or regulations (many derived from European Union directives), which are in turn reinterpreted by judges as cases come to be decided under the new laws. And so the wheel turns full circle.

English law in this book means the law of England and Wales. Chapter 17 on the international dimension explores the effect of contracting elsewhere.

What is a contract?

Sam Goldwyn’s quotation that ‘a verbal contract isn’t worth the paper it’s written on’ is famously misleading. Dictionaries suggest that a contract is an agreement, whether written or spoken, with a person or company to do something on agreed and binding terms. For the purposes of this book, a contract may be simply regarded as ‘an agreement which is legally enforceable’.

Consider the act of buying a newspaper from a shop – a basic purchase contract. There is no written agreement, but a contract is created between the time you walk in the shop and the time you walk out with the paper in your hand. You may well just pick up the paper and take it to the till with your payment without a word being spoken. In law there is an offer to buy and an acceptance of that offer backed by payment of the purchase price. By the time the money is paid and the paper is handed over, the contract has been made and completed, the only written evidence being the till receipt, if there is one.

Contract development

The emphasis in this book is to plan ahead and get the contract as right as possible from the start. Unlike our inherited genetic make-up, we do have the chance to build our own contract. But things don’t stand still. Contracts, like bodies, can suffer from inherent defects and from viruses carried by the wind of changed circumstances. Like evolution, the contract that may prove the best equipped for the longer term may be the one that can best adapt to change.

Contract Essentials

An effective contract requires all the following:

• offer and acceptance,

• certainty,

• consideration (something of value), and

• intention to enter into a legal commitment.

These are looked at it more detail below, but first there are two important preliminary points – the need for writing and the use of e-mail.

THE NEED FOR CONTRACTS TO BE IN WRITING

The general rule

The general rule is that contracts do not need to be in writing. This is not an absolute rule, because there are some exceptions (see below) and because the law accepts that there are some occasions where special protection is required, such as where there is a material imbalance in the negotiating position of the parties. Even so, a written contract is the best evidence of what the relevant parties actually agreed at the time.

The use of e-mail

For most practical purposes the law treats an e-mail as ‘writing’ and a contract created or evidenced by e-mail as the equivalent of a written contract. E-mails are so extensively used in business that it is easy to forget that they can of themselves create or evidence a contract, and there will not be the same opportunity to deny what was said as with an unrecorded conversation.

OFFER AND ACCEPTANCE (HAVE WE AGREED?)

Offer and ‘invitation to treat’

When is an offer made? Going back to the example of buying a newspaper, there are two possible interpretations of what happens. The first view is that the shop is offering to sell the newspaper at a stated price and you accept the offer by picking the paper up and paying for it. The second is that the shop is merely displaying the newspaper, that you offer to buy it and the shop accepts the offer by selling it to you. Under English law the second analysis is correct – you offer to buy the paper and the newsagent accepts by taking your money. The display of goods is not, in normal cases, an offer capable of acceptance as such, but only ‘an invitation to treat’, meaning an invitation to a potential buyer to make an offer. As will become apparent, this distinction can be all-important in business.

Acceptance

Acceptance has to be ‘communicated’ to the person making the offer. This is often instantaneous, as with the newspaper purchase, or with an agreement made face-to-face or over the telephone. But what if the acceptance is sent by post? In the absence of other factors, English law treats posting in an official post box as due notification of acceptance (even if the letter goes astray). Whilst an offer can be withdrawn at any time before it is accepted (though obviously not afterwards), the revocation of an offer must actually be received by the other party before the offer is accepted. Mere posting of revocation does not suffice. To avoid some of these problems, an offer can specify exactly how it can be accepted, in which case the contract will come into existence as and when one of those specified means of acceptance occurs. Any other form of acceptance would then be a counter-offer.

Acceptance by conduct Acceptance can also be inferred from conduct, such as the handing over of the newspaper by the shop in return for payment.

Auctions Auctions are generally conducted on the basis that the bidder makes the offer to buy and the auctioneer accepts the best (or desired) bid. The offer is accepted once the auctioneer’s hammer goes down. Before then the sale items are merely displayed, but not offered for sale as such.

CERTAINTY (WHAT EXACTLY IS ON OFFER?)

Being precise

Agreements need to be certain to be enforceable. This means that both (or all) parties must agree on what exactly is being offered and accepted. For example, you will want to choose your preferred newspaper. Sun readers might not want to accept The Times and vice versa. Requesting ‘a newspaper’ would be too general to create any certainty. Selecting from a display gives certainty by presenting your choice. The same is true of a catalogue with prices. The buyer selects from the range shown and submits an order on the basis of the details set out in the catalogue. The collection or despatch of the goods is the acceptance of that offer.

Following through

If the offer and acceptance do match up, the contract will (in the absence of special factors) be binding. Even if the buyer forgets to mention a specific requirement, the buyer will (usually) have to accept what has been ordered. Conversely, a seller must ensure that all the terms that a buyer does stipulate are satisfied, since the seller will be in breach of contract if the wrong goods are supplied. The seller will then be liable to replace those goods with the goods actually ordered or to compensate the buyer for the failure to do so.

CONSIDERATION (WHAT WILL IT COST?)

‘Consideration’ means money, the promise to pay money or some other obligation, such as a promise to provide a service, which has some value. The existence of consideration (money, goods or services or the promise of them) must be given by the party seeking to enforce the contract and is the main difference between a legally enforceable contract and a gratuitous promise. There are, however, two main exceptions to this general rule. First, ‘negotiable instruments’, such as cheques and letters of credit, do not need consideration to be valid; effectively they are the consideration itself. Second, as seen below, a document signed as a deed is enforceable without consideration. The adequacy of the consideration is considered below.

INTENTION TO BE LEGALLY BOUND (DO I WANT TO BE COMMITTED?)

All the parties involved need to intend to create a legally binding agreement. This is in contrast to informal domestic obligations or arrangements with friends, which tend to be informal personal arrangements with no expectation of legal commitment. There might be a falling out, but not recourse to law. The bigger issue in a business context is often whether discussions which one party might regard as a commitment were never intended as such by the other. One way of avoiding this is always to make sure that any discussion of detail is made ‘subject to contract’ or words to that effect.

The next section looks in more detail at the contract essentials just summarized.

Offer, Acceptance and Certainty

AN EXAMPLE OF SIMPLE OFFER AND ACCEPTANCE

Sidney Smith of Smith (Computer Supplies) Limited meets and offers to sell specified equipment to regular customer Ben Braby of Braby Business Machines Limited for £550; Braby accepts the offer by agreeing the goods and the price. A binding contract then exists, even with nothing in writing. Alternatively, Braby could offer Smith £550 for the equipment; if Smith accepts that offer without further conditions, a contract arises.

THE EFFECT OF ACCEPTANCE ON DIFFERENT TERMS

If and when the person to whom the offer is made accepts the offer, the terms are fixed. If the recipient of the offer agrees but specifies different terms, this cancels the original offer and creates a counter-offer on the revised terms proposed, open for the person making the original offer to accept or reject in turn. A counter-offer should be distinguished from a request for information, and, if you want to keep an offer open while seeking more details, it is important to use language consistent with this.

So, if Braby offers to buy the computer equipment, but only for £500, this would be a counter-offer which Smith could accept or refuse as he chose, but, once this counter-offer has been accepted, a contract would be created. If Braby just asks for clarification, Smith’s offer remains open unless and until revoked.

Just occasionally, offer and acceptance do not precisely match but the parties carry on as if they did. In those circumstances a court may (but very exceptionally) decide that a contract does exist.

UNCERTAINTY

Is there a match or mismatch?

What if Smith offers to sell Braby a piece of computer equipment and there is a fundamental mismatch between the actual equipment that Smith is offering to sell and what Braby thinks he is offering to buy?

A mismatch about the real subject matter of the contract is all too common in business, especially when the equipment is described by product names or code numbers that mean much to the seller but little to the buyer. The buyer may ask for something to perform certain functions, and a seller will offer to sell something described mainly by a product name or number. The buyer assumes that the product will match what he has asked for, and the seller assumes that the buyer is agreeing to purchase the specific equipment identified.

There are two main likely outcomes to the example above. First, if the evidence showed that Smith, the seller, had been clear about what was on offer and Braby, the buyer, had agreed but failed to check the details, there could be an enforceable contract for the product actually sold. Second, if there was a genuine misunderstanding on both sides about what was being bought and sold, there may be no contract at all, because offer and acceptance did not match.

Misrepresentation

Alternatively, if the evidence indicated this, a court might conclude from the evidence that Smith had misrepresented the position to Braby to induce Braby into buying something different from what he wanted. If a seller misrepresents his products, even innocently, and the buyer honestly relies on that representation, the buyer may be able to cancel the transaction and claim damages for misrepresentation.

Being clear

The message is that you must be clear from the outset what it is you are selling or buying. If you are not, you might either not have a deal at all or not have the deal you thought you had. Uncertainty causes distress, potential legal costs and a falling-out in relationships. There is therefore no substitute for getting the basics clear at the outset.

Evidence

These examples reinforce the benefit of putting things in writing. Without a written record, resolving this sort of issue will depend very much on the witness testimony of those involved. This also means that those involved may need to be cross-examined in court on what they said or did not say – an experience with an uncertain outcome and cost and not one to be undertaken lightly.

THE USE OF IMPLIED TERMS

In some circumstances the law will imply additional terms into a contract, either by legislation (such the Sale of Goods Act) or by common law from the circumstances. Typically, such an implication may arise when the term is so obvious that it did not need to be stated or where it is necessary to give the contract commercial effect. Terms may also be implied from a previous course of dealing or implied by custom and usage, as with some specialized trade markets. These situations are addressed in later sections as they arise, but implied terms should never be regarded as a reliable substitute for clear contract wording in the first place.

Consideration

CONSIDERATION AND VALUE

Consideration is necessary for a contract but it does not have to be market value. The law is generally more concerned with the fact that people deal openly – and, with consumers, fairly – than with value. After all, business might otherwise grind to a halt. So far as contract law is concerned, token consideration is usually sufficient, if clearly agreed.

SOMETHING FOR THE FUTURE

Consideration must be something to be paid or done in exchange, at the time the contract is made or in the future. A debt alread...