Anyone involved in setting up, monitoring and managing a purchase agreement needs to have a grounding in contract law and know when and how to seek professional legal advice. Here we provide a guide to contract law, highlighting potential pitfalls and common problems
There are three essential elements to a binding contract: agreement; consideration; intent. In addition, the parties must have the legal capacity to enter into contracts and a contract must be for something that is legal.

The existence of agreement is usually established by the test of offer and acceptance. Agreement comprises the unconditional acceptance by one party of a valid offer made by the other party. In those circumstances the terms of the contract are those of the offer. However, take care to establish what is a valid offer.

The preliminary to the placing of a contract is usually the issue by the buying organisation of an invitation to tender (ITT), which incorporates detailed terms and conditions of contract. This is technically an invitation to treat, designed to evoke offers from those invited. The buyer must take care before accepting an offer to ensure that it was made in accordance with the ITT. If the offer qualifies or varies the terms and conditions in any way, those variations must be addressed and agreement reached between the parties on how they are to be reflected in the acceptance. If an acceptance is not an exact acceptance of the offer, it becomes a counter offer which has the immediate effect of invalidating the original offer, which is no longer open for acceptance.

An offer must be received by the offeree for it to become valid. An offer may be withdrawn at any time before it is accepted, but such withdrawal must also be received by the offeree for it to be valid. Withdrawal of an offer can be effected by simply declaring it to be withdrawn or by the submission of a revised offer. An offer may be made orally or in writing and may be communicated face-to-face, by telephone, post, telex, fax or email.

Accepting an offer
Acceptance may also be made orally or in writing and communicated by the same means as apply to offers. The acceptance does not, however, have to be made by the same medium as the offer to which it relates. Acceptance orally (including telephone) or by means of telex, fax or email generally becomes effective on receipt (or hearing) by the offeror. The situation regarding the receipt of email is not yet entirely clear and that is a factor that needs the input of professional advice in the event of any doubt or difficulty.

However, there is a vital difference in respect of acceptance by post, which becomes effective on that acceptance being put into the post properly addressed and stamped; it is not necessary for the offeror to receive the acceptance for a contract to be made. Adequate proof of posting must be available in the event of a dispute. This particular aspect of acceptance is vitally important in two respects:

  • an offer cannot be withdrawn or substituted with a revised offer after it has been accepted. A withdrawal or revision of an offer is therefore invalid if it is received after the offeree has posted the acceptance.

  • it is the usual rule that the contract is deemed to have been made where the offer has been accepted. So, if buyer and service provider are in different countries and the buyer accepts the offer other than by post, the contract will be deemed to have been made in the service provider's country, subject to the laws of that country and, probably, the jurisdiction of its courts. The safeguard against any problem of that nature is for the buyer to ensure that its contract conditions include a clause on applicable law. For example, such a clause could state that the contract shall be deemed to have been made in England and be subject to English law and the non-exclusive jurisdiction of the English courts. Non-exclusive meaning that means of dispute resolution other than litigation are not excluded.

    Consideration and intent
    The importance of consideration is that a gratuitous promise is not binding. A promise by one party to do something must therefore be matched by the other promising to do something in return. That, of course, puts an obligation on both parties to honour their respective promises. Consideration in commercial contracts is usually expressed as the payment of money, but that is not essential. The general rule is that consideration is the payment of money or 'money's worth'.

    There must be demonstrable intent on the part of both parties to enter into a legally binding relationship. In the case of organisations conducting business, this intent will usually be assumed by the courts to exist, unless it is expressly declared otherwise by either party.

    Capacity to contract
    Generally, a binding contract is not made if representatives of either or both the parties do not have the capacity or authority to commit their organisations to contract. A trap for the unwary, however, is the doctrine of implied authority. If a person representing an organisation is put forward as having authority to agree, even if that authority is not officially in place, and the other party acts in good faith on the assumption that such authority exists, any agreement between them could be deemed to be a valid and binding contract. Take for example DMA Financial Solutions Ltd v Baan UK Ltd (Chancery Division, 28 March 2000).

    DMA and Baan had negotiated an agreement for DMA to provide training in the use of a financial accounting software system to Baan's customers. Baan's US lawyers were instructed to draw up a formal contract and did so by use of a standard agreement that differed in many respects from the terms agreed in the course of negotiations. DMA argued that a binding contract had been formed in the negotiations. Baan countered that there was no binding agreement until everything had been enshrined in a formal document.

    Both positions were legally possible. Businesses do conduct negotiations on the basis that, even though every last thing has been agreed in negotiation, there is still no contract until the whole thing has been reduced to a formal written document. This can be expressly agreed or it can be an implicit understanding between parties. Alternatively, businesses can conduct negotiations on the basis that once everything has been agreed a contract is formed, even though a formal contract document will not be produced until later. The contract then becomes enshrined in the formal document.

    The judge in this case stated that if parties reach an agreement orally or by correspondence in the negotiating phase, but then fall out when they are trying to finalise a written agreement, the contract made in the course of negotiations remains in force.

    Baan's defence against this was that its representative never had the authority to commit the company to a contract. The judge disagreed, saying that if a body such as Baan holds out one of its people as ostensibly having the appropriate authority, then he/she will be deemed in law to have that authority even if he/she had not.

    The message is clear. If you are involved in any aspect of contract negotiation, make sure that you are not committing your organisation to something that is beyond your delegated authority. If you have any doubt at all, you can always make your discussion subject to contract.

    • Source

    The Facilities Business

    Postscript

    David Pearson is managing partner of DJP Consultancy, which advises on contract and purchashing management. He can be contacted on: djpconsultancy@btinternet.com