Contract law: the basics and practical tips


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David Quinlan from Pinsent Masons explains the basics of contract law for sport and recreation organisations – from the Sport and the Law Conference 2014.

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Contract law: the basics and practical tips

  1. 1. Contract law: the basics and practical tips David Quinlan – Solicitor Pinsent Masons
  2. 2. 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
  3. 3. 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
  4. 4. 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!
  5. 5. 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?
  6. 6. 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?
  7. 7. Contractual terms Contractual 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
  8. 8. 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”
  9. 9. 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?
  10. 10. Contractual concepts to discuss today • Warranties and Indemnities • Limitation of Liability • Force Majeure • Termination • Boilerplate • Alternative Dispute Resolution
  11. 11. Warranties and Indemnities Warranties 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?
  12. 12. 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 Clauses Any 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”
  13. 13. 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?
  14. 14. 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?
  15. 15. 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
  16. 16. 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?
  17. 17. 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
  18. 18. Part 2 – Practical Tips
  19. 19. 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
  20. 20. Warrants and Represents Warrants Represents A 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)
  21. 21. 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?
  22. 22. 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
  23. 23. …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!
  24. 24. Combining the experience, resources and international reach of McGrigors and Pinsent Masons Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority, and by the appropriate regulatory body in the other jurisdictions in which it operates. The word „partner‟, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm who is a lawyer with equivalent standing and qualifications. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP‟s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use „Pinsent Masons‟ to refer to Pinsent Masons LLP and affiliated entities that practise under the name „Pinsent Masons‟ or a name that incorporates those words. Reference to „Pinsent Masons‟ is to Pinsent Masons LLP and/or one or more of those affiliated entities as the context requires. © Pinsent Masons LLP 2012 For a full list of our locations around the globe please visit our websites: