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Contract Ingredients

26 June 2006

Contract Ingredients

For a legally binding contract to exist, four key elements must be satisfied:

(1) Offer; (2) Acceptance; (3) Intention to create legal restrictions; and (4) Consideration.

You will be surprised at how businesses deal with one another and fail to have valid contracts

that govern the legal relationship between them!

A case in point is that of Co-operative Group Ltd v International Computers Ltd [2003), where

the

Technology and Construction Court held that Co-op's claim for breach of contract failed

because no

contract existed!

The background to the case is as follows: Co-op took over a grocery business which used ICUs

software to operate its customer loyalty scheme. As part of the takeover, the existing contract

with ICL for the software transferred to Co-op. Co-op and ICL then entered into negotiation for

ICL to develop further software so that the loyalty scheme could be rolled-out into all of Co-op's

stores.

At the same time ICL began negotiating with ICL new terms so as to enter into a new contract

to

replace the existing contract. The newly developed software was not successful. Co-op broughtproceedings for breach of contract claiming that, even though negotiations had not been

completed,

agreement had been reached between it and ICL so as to give rise to a new contract. ICL

counterclaimed for increased fees under the existing agreement which ICL claimed was

amended to

cover its further work.

The Court held that no new contract had been concluded.

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It was clear that negotiations between ICL and Co-op for a new contract had not resolved

issues

they regarded as fundamental, principally the issue of liquidated damages. Since certain

fundamental issues were not agreed by the parties, applying settled principles of law, no

contract

had come into existence. Co-op conceded that, on the facts, it was not possible to identify an

offer and an acceptance of that offer but argued that during the course of negotiations, various

matters which were essential for the conclusion of a binding contract were agreed in principle.

Co-op argued this meant that, even though other matters - such as liquidated damages - were

not

agreed, a contract had come into existence by conduct or implication at some point as a result

of

these ongoing negotiations.

The Court agreed that a contract could theoretically come into existence by conduct or

implication, but this was unusual. The Court also agreed that it might be possible to find that at

different times particular matters had been agreed which when aggregated gave rise to a

binding

contract. However, it was not for Court to determine what matters were important enough, once

agreed, to give rise to a binding contract. This was for the parties themselves to determine. In

this case, both parties clearly regarded the issues of liquidated damages as fundamental and,

without agreement on this point, no contract was concluded.

The Court did not agree that the existing contract had been varied to cover the additional work

carried by ICL. However, under the terms of the existing contract, Co-op was liable to pay ICL

increased if the existing contract did not run its ful l course (which it had not done). The Court

held that ICL was entitled to such increased sums (over 1 m).

The lesson to learn from this is that whilst commercial negotiations take place between parties,

legal advice should be sought to iron out and agree fundamental issues of the basics of

contracts

so as to ensure that a valid, legally binding agreement is concluded and that it exists.

Izaz Ali

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