Practical Law

In a series of blogs, Andrew Little of Hill Dickinson LLP looks at some practical guidance to avoid issues with rogue suppliers, bad contracting practices and fraud aimed at public sector bodies (PSBs). Andrew presented on this topic at the NDPB Lawyers’ Group training day in June 2015. In the second in the series, Andrew looks at issues around contract formation.

As I mentioned in my previous blog (see Blog, Cold call contracts: public sector beware), in recent years I have seen an increase in the number of disadvantageous contracts entered into between suppliers and PSBs. Many of these contracts end up in the courts, but identifying the problems early could save public bodies significant time and money.

One issue is around the dangers of commencing performance of a contract without the correct procedures having been followed and a written contract entered into.
When is a contract not a contract?

Those with experience of working in an in-house legal team will appreciate just how difficult (if not impossible) it can be on certain occasions to get a written contract in place before contractual performance starts. All parties are keen to start delivery on a project and the signature of the contract is not going to get in their way! What may be considered to be pre-contractual steps versus contractual performance has formed the basis of a significant amount of litigation.

A recent case (Reveille Independent LLC v Anotech International (UK) Ltd [2015] EWHC 726 (Comm) (19 March 2015)) reminds us of the dangers of proceeding without a signed contract. In this case, a contract was being negotiated for TV product placement in cookery shows and the marketing of branded cookware.

The parties began negotiations for a legally binding short form agreement (Deal Memorandum), which was intended to be replaced by a long form agreement at a later stage. Neither the Deal Memorandum nor the long form agreement were ever signed by the claimant, but the defendant signed the Deal Memorandum.

You all know what is coming next: a dispute as to whether a contract existed between the parties and the terms of that contract if one did exist. The claimant performed its side of the bargain and integrated the products into the show as required. The defendant also marketed cookware bearing the agreed logo. However, the defendant then argued that it was not liable to pay sums due under the contract as there was no signed contract and that the steps that had been taken were pre-contractual (i.e. preparations for the signature of the Deal Memorandum and the long form agreement). There was one key point: that the defendant’s managing director had acknowledged that the defendant was liable to pay for the product placement.

It was held at trial that:

1. Signature of the parties to a written contract is not a precondition to the existence of contractual relations as the contract can be accepted by conduct: a well-established principle.
2. The work envisaged by the Deal Memorandum had been carried out. Although this did not necessarily mean that there was acceptance by conduct, it went a long way towards establishing that on the present facts, the contract was accepted by the parties’ conduct.
3. Dealing with the pre-contractual work argument – the judge acknowledged that some work could be done without the parties entering into a contract but that the work had continued and intensified after the defendant signed the contract and the defendant had communicated to third parties that a deal had been done.

The case reinforces the fact that, as soon as a party starts to take action, and in particular acknowledges a responsibility to make any form of payment, it can be very difficult to distinguish pre-contractual steps from the performance of an agreement.

Protecting PSBs from bad contracts includes making parties aware of the ramifications of starting work before a contract is signed. There is never going to be any reduction in the number of unscrupulous suppliers targeting PSBs, but robust processes and training can reduce the number of bad contracts.

For more information on contract law and performance, see our Contract law toolkit.

Andrew Little is a member of Hill Dickinson LLP’s Commercial Litigation team. He regularly acts for public bodies.