Contract law: the basics and practical tips

David Quinlan – SolicitorPinsent Masons

Overview

• Part 1 – Contract law basics– Why do you need a contract?– Contract formation– Contractual provisions and concepts

• Part 2 – Practical tips– Issues to look out for

Part 1 – Why do you need a contract?

• To maximise the benefit to your business• To ensure certainty (i.e. legal terms, obligations of each

party, supply commitment etc.)• To protect you from unacceptable risk• To protect ownership of intellectual property and protect

your brands• To manage expectations

What is a contract?• An offer made by one party to another • Unconditionally accepted by the other

(without variation: otherwise a counter-offer!)• Supported by “consideration”

• With intention to create a legal relationship and enter into a binding contract

• Terms must be certain (note: it must also be clear which terms apply)

Warning - There is no need for agreement to be in writing and signed!

Scenario 1 – Is there a contract?• A sends an email to B, referring to B as its sole supplier • A and B discuss the agreement by telephone• B replies to A's email without reading it properly, saying

"That's fine, looking forward to the orders!"• B supplies through a third party, C

• Is there a contract between A and B?

Scenario 2 - Whose terms apply?“Battle of the Forms”

• A sends an email order to B, referring to its standard terms and conditions (attached to the order)

• B sends out an order acknowledgment to A, referring to B's standards terms and conditions (attached to the order acknowledgement)

• B starts to supply the goods• A accepts the goods and pays B's invoices

• Whose terms apply? Would your answer differ if B had not sent out an order acknowledgement and started to supply?

Contractual termsContractual terms can be:

• Expressly agreed – explicitly setting out the terms agreed by the parties

• Implied by operation of law - Sale of Goods Act 1979, Supply of Goods and Services Act 1982, Unfair Contract Terms Act 1977 (“UCTA”)

• Implied to give “business efficacy” – terms which are required for the contract to work

Heads of Terms– Purpose is to set out main commercial terms agreed in principle

before full negotiation– No difference between Heads of Terms, Letters of Intent, Term

Sheets, Memoranda of Understanding and Heads of Agreement– If no intention to create legal relations, this must be clear– Usually not legally binding except for:

(i) confidentiality; (ii) exclusivity; and (iii) governing law– Should be “subject to contract”

Main commercial terms• Term of the contract• Exclusive or non-exclusive?• Payment - How? When? Any contingency? Penalty for late

payment?• Are the rights and obligations of each party clearly set out?• Are any third party rights affected or required?• Consider what flexibilities will be required over the life cycle of the

contract (e.g. rights which may need to be substituted)• Manage the risk - warranties, liability caps, insurance, indemnities• IP - IP licences, permitted use of IP, ownership of new IP created• Termination rights - Event cancellation and rights delivery failure?

Contractual concepts to discuss today

• Warranties and Indemnities• Limitation of Liability• Force Majeure• Termination• Boilerplate• Alternative Dispute Resolution

Warranties and IndemnitiesWarranties Indemnities

Statement about a particular state of affairs “A contract by one party to keep the other harmless against loss”

Breach may give rise to a claim for damages Promise to reimburse beneficiary on pound-for-pound basis for all losses suffered

Onus on claimant to show breach and identifiable loss

An original, primary and independent obligation (i.e. entitled to compensation irrespective of the position of any other person)

Obligation to mitigate loss Usually where there is a specific risk identified

Example – in a sponsorship agreement, the sponsor may seek a warranty as to the ownership of commercial rights

No duty to mitigate loss

“Warrants and represents” Included in liability cap? Covered by insurance policy?

Limitation of Liability

•Exclusion of all liability unusual and may be void if dealing on standard terms• Cannot exclude liability for fraud• Statutory intervention i.e. Unfair Contract Terms Act 1977

Limitation ClausesAny clause which seeks to limit liability for breach:

1. Amount – “Our total liability for breach of this contract shall not exceed £[x] in aggregate”

2. Type – “Neither party shall be liable to the other for indirect, special or consequential loss or damage including any loss of profit, goodwill or business opportunities, whether direct or indirect”

Force Majeure• Covers circumstances beyond your control:

• War• Riot• Terrorism• Act of God• Weather?• Industrial action?

• Consequences?• Consider insurance provisions designed to cover events of force

majeure – who is responsible for procuring this?

Force Majeure – when it goes wrong“Fans set to miss out at Silverstone as rain leaves thousands

stranded” (The Telegraph, 17 July 2012)• Refunded tickets and asked fans to stay away – costing Silverstone hundreds

of thousands of pounds• Upset sponsors – importance of reputation and brand?• Difference between force majeure and cancellation?• Ties in with insurance – is the management of the process as important as the

contract?• Could this happen at one of your events?

What if there was a multi-car pile up and the main access road was closed? What would happen?

Termination • Limited to fundamental breaches (may not include

failure to pay)

• Commercial contracts often contain detailed termination provisions (e.g. morality clauses)

• What are the consequences of termination?– Contractual mechanism– Repudiatory breach

Boilerplate• Interpretation section – definitions and how to read the contract• Entire agreement clause – the contract sets out the whole deal• Good faith – no duty of good faith in English law but recent case law• Variation clause – designed to enable parties to make changes• Further assurances – consequential acts and ancillary documents• Severability – anything illegal or unenforceable can be changed or

deleted• Governing law and jurisdiction – laws of England and Wales?

Alternative Dispute Resolution Alternatives to litigation:• Arbitration:

– A private forum– An independent arbitrator makes an award, acting in a judicial fashion,

to finalise the dispute– The outcome is final and binding on the parties– An agreement to arbitrate is usually contractual: all parties must agree

to submit the dispute in question to arbitration• Mediation:

– The parties (with the assistance of an independent third person) identify the issues in dispute, explore the options for resolution and attempt to reach agreement

– A voluntary, non-binding and private form of dispute resolution

Part 2 – Practical Tips

Reasonable vs. best endeavours• Any obligation to use “endeavours” is less than an

unqualified absolute obligation• “Best endeavours”: objective test – may require you to

spend money• “Reasonable endeavours”: less burdensome – take

action to the extent that the party is not disadvantaged• “All reasonable endeavours”: in between or same as

best endeavours?• If the object of the endeavour is too uncertain or unclear,

the endeavours clause may be void

Warrants and RepresentsWarrants RepresentsA contractual statement of present (or often future) fact

An assertion as to a fact, true on the date made, that is given to induce another party to enter into a contract

If not true, the receiving party has a claim for breach of contract

Where false and the receiving party relies on it, the receiving party may have a claim for misrepresentation

No direct right to terminate unless fundamental to the contract (repudiatory) or parties have agreed (e.g. “material breach”)

Contract may be rescinded (fraudulent and negligent )

Contractual damages – aim to put party in the position they would have been in had the contract been performed correctly

Tortious damages – aim to put party back in the position they were in before the contract (as though it had never existed)

Brand Category

• Rights holder – draft as narrowly as possible

• Define further by territory or partnership tier

• Category need not reflect entire service offering (e.g. Samsung; Panasonic)

• What’s exclusive and what’s not?

Other

• Termination – be very careful before using termination as a remedy, as it could be a repudiatory breach

• Liability cap – amount paid or amount payable

…and finally

• Remember you don’t need to sign a written document to enter into a contract – watch out you don’t inadvertently enter into a binding arrangement!

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