Letter of the law

The classic problem which faces inexperienced buyers and sellers usually arises from the exchange of correspondence between the parties on printed stationery (order forms, acknowledgements of orders, invoices, delivery notes, etc.) which incorporates the parties' terms and conditions of business.

Under offer and acceptance, the greatest care needs to be exercised to ensure that the parties are clearly aware of when the contract is made, so that the appropriate terms and conditions are incorporated.

If nothing is expressly done to ensure that this happens, the likelihood is that any contract will be subject to the terms and conditions of the offer that is 'on the table' at the point when the contract is made. That could prove to be disadvantageous to either party. My guidance is always check, double check and seek professional advice to make sure you are not accepting terms and conditions you do not want.

Letters of intent
In many cases an invitation to tender and a consequent offer are followed by a period of negotiations to resolve the exact terms and conditions under which any contract will be awarded. Such activity can push the parties closer to deadlines for contract commencement than is comfortable or feasible in terms of the necessary setting up. In such circumstances it is common for the potential contractor to ask the buyer to consider issuing a letter of intent.

Buyers and contract managers are often not aware of the dangers such letters can present. They vary widely in their content and their legal status is almost entirely unclear. Their effect depends on the precise terms they contain and the context in which they are issued. In most cases a letter of intent is likely to fall into one of the following categories:

• it amounts to a binding promise to award the contract, subject to some clearly defined condition, e.g. the receipt of a bank or parent company guarantee
• it creates no legal obligation of any kind and is simply an expression of goodwill and pious intentions. This is in practice the most common situation and the danger is that neither the issuer of the letter is bound (which is probably what it intended), nor is the other party (which in many cases is not what was intended)
• it does not amount to a binding promise to award the contract, but it does constitute a binding promise to pay for preliminary work.

Finally, although a letter of intent does not create a contract, it might encourage the other party to perform and leave the issuer liable to pay for work carried out as a result. Therefore, the important message is to ensure that proper professional advice is sought before any letter of intent is issued.

Agreements to agree
A contract must contain firm commitments; agreements to agree or to consider something are not enforceable. These can include 'lock-in' agreements, i.e. an agreement to negotiate an extension or renewal of contract.

Lockout agreements
A 'lockout' agreement is an agreement not to negotiate with someone else, which can be enforceable if there is consideration and if the agreement is for a fixed period of time.

Misrepresentations
A false, misleading or negligent statement, which persuades a party to enter into a contract, might be grounds for action at law, even if the statement was innocent and was made in good faith. This is often stated in respect of 'a customer' being misled, but it can work both ways.

Exclusions
Many contract conditions seek to exclude from the contract any documents or statements, which have not been expressly incorporated into the agreement.

For certainty, anything said or written, which has influenced the decision to enter into a contract, should be specified in the contract as an integral part of it.

Liability
Contracting parties often seek to limit their liabilities under contract through the use of exclusion clauses. It is worth noting that liability for death or personal injury as a result of negligence cannot be excluded or limited in any way.

Other exclusions and limitations of liability are subject under the Unfair Contract Terms Act (1977) to be judged in a test of 'reasonableness' to determine whether they are enforceable. Such a test will take into account a range of circumstances such as custom and practice in a particular trade or industry, or the relative bargaining power of the parties.

Any upper limit on the financial commitment of a party to a contract must be 'reasonable' in the context of such factors as the value of the contract or the time span and complexity of the project concerned.

Service level agreement
An SLA in the context of an internal trading arrangement between two departments of the same organisation cannot be enforced at law, because an organisation cannot contract with itself. It must be prepared, however, so as to be enforceable through management action, e.g. by contracting out or by changing the management.

Common misunderstandings

• contracts must be written – please note that contracts do not have to be in writing unless they are contracts for the sale of land. It obviously makes sense to put them in writing as evidence, but an oral contract is binding if proof is available of agreement, consideration and intent
• A has rights, B has obligations – both parties to a contract have rights and obligations
• the law protects against bad deals – the law is interested only in whether a contract exists; if you have made a bad deal in an otherwise legitimate contract, you are on your own and you have to resolve your own problems.