The importance of checking your contracts

12 June 2018

 

3 related articles here…

Whilst it’s nice to be able to put a written business contract away in a drawer once it’s been negotiated and signed, a few recent cases highlight the importance of making sure you carefully read and follow any procedures they may provide for.

Rating system (whole thing):
Reading time (1-10 minutes): 5
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A written contract can’t always just be changed by a handshake

A recent example of the importance of following procedures set out in your written contracts is a case which reached the Supreme Court on appeal in March which dealt with ‘no oral modification’ clauses (NOMs). In this case a licensee of serviced office space had a written contract with the owner. The licensee fell into arrears. It thought the owner (through its credit controller) had agreed verbally to reschedule the payments, and so it thought the contract had been changed to this effect. But the contract had a NOM clause.

Lots of written contracts have a NOM clause, which basically says that any variation the parties may agree in future to the contract will only be effective if set out in writing and signed by all parties. Should this kind of clause be effective? If the same parties who have signed a contract later speak to each other and clearly agree in a conversation (which could even be minuted or recorded) to vary an element of the contract then why shouldn’t this supersede what was set out in their earlier written agreement? This is the approach taken by many other jurisdictions such as the USA, Australia and Germany. The usual arguments against are that the NOM clauses help make things much clearer and certain. They require a clear paper trail; they prevent attempts to undermine written contracts by informal means; and they prevent possible arguments over what was said and whether and how what was said was intended to vary the written contract.

Until quite recently we lawyers all thought that the law was quite clear and that NOM clauses were effective. However, the Court of Appeal put a spoke in the wheels in this recent case by saying that an oral agreement to vary certain payments required by the written contract amounted to an effective agreement which overrode the NOM clause in the contract.

In light of the Court of Appeal’s decision, for a while we lawyers were no longer sure about the benefit of putting NOM clauses in a contract. But then the case went to the Supreme Court, and the Supreme Court reversed the decision, making it clearer than it has ever been that NOM clauses are effective. If you think you and the other party to a written contract with an NOM clause have subsequently verbally agreed something different from what you had set out in the written contract, you are now going to struggle even harder than before to get a court on your side, as you are going to have to rely on more difficult laws such as the laws of estoppel and unjust enrichment (which broadly say that someone shouldn’t be able to take unfair advantage of things) or of collateral contracts (ie somehow a new separate contract has been created).

Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24

 

Notice clauses – not just boilerplate to ignore

Once you have agreed a written contract you have to be careful to follow any procedures that the contract says you should follow. One example which has been highlighted in a recent case is the way in which a buyer of a company or business concern has to carefully follow any required procedures for giving notice of warranty or indemnity claims against the sellers.

In this case, the contract required the buyer of shares in a target company to notify the sellers of any post-completion breach of warranty claim within a set timeframe and to set out in the notice the “grounds” of the claim. This is a standard type of clause you would expect to see in any share purchase agreement. It is designed to give sellers the comfort that they won’t have to keep looking over their shoulders for years ahead wondering whether a claim might be brought against them.

The buyer gave what it thought was a good notice within the timeframe. But it didn’t have very full details about the nature of the claim, the likely amounts being claimed, or the particular warranties it related to.

Both the High Court and later the Court of Appeal said that the contract required the buyer to identify expressly in the notice the specific warranty or warranties which were said to have been breached and that the buyer’s failure to do so was fatal to its claim.

In another case (Zayo Group v Ainger and others), the court ruled that a requirement for the buyer to serve the sellers with a claim notice by a certain date if it wanted to continue to have the right to pursue a claim meant that each and every seller needed to be served and the failure to serve one invalidated the notices served upon the others.

So, whether you are selling or buying, be careful how you negotiate these clauses. Sellers will want to make it hard for buyers to bring claims. Buyers will want to make it easy. And then make sure you follow them when it comes to thinking of making or dealing with a claim.

So, for example, if there are several sellers a buyer might want to add a provision that one of them can be treated as the agent of all of them for the purpose of bringing notices.

And if there’s a notice clause that says clearly that notices must be delivered by hand or sent by recorded delivery, do what it says!

Case: Teoco v Aircom (Court of Appeal, December 2017)

 

Finally: a verbal contract isn’t worth the paper it’s written on?

Verbal contracts are generally perfectly valid. The main problems with them are that it’s harder to prove that they exist and what they actually say. One way or another, you don’t want any uncertainty as to the terms of a contract or whether the parties have actually agreed to enter into it. So it’s far better to have a written signed contract (carefully prepared so the terms are clear) or at least a clear paper trail eg a string of emails which makes things clear. If you are negotiating terms with someone and you don’t want to take the risk that a contract could come into existence before you’re absolutely sure you’re happy with it, you should ideally make clear in writing that all communications are to be treated as ‘subject to contract’ unless and until a final agreed written contract is produced and signed by all parties.