Contract law: the basics and
David Quinlan – Solicitor
• 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
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
• To manage expectations
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
• Terms must be certain
(note: it must also be clear which terms apply)
Warning - There is no need for agreement to be in writing
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?
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
• 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?
Contractual terms can be:
• Expressly agreed – explicitly setting out the terms agreed by
• Implied by operation of law - Sale of Goods Act 1979, Supply
of Goods and Services Act 1982, Unfair Contract Terms Act
• Implied to give “business efficacy” – terms which are required
for the contract to work
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”
Main commercial terms
• Term of the contract
• Exclusive or non-exclusive?
• Payment - How? When? Any contingency? Penalty for late
• 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?
Contractual concepts to discuss today
• Warranties and Indemnities
• Limitation of Liability
• Force Majeure
• Alternative Dispute Resolution
Warranties and 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
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
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
Any clause which seeks to limit liability for breach:
1. Amount – “Our total liability for breach of this contract shall not exceed £[x]
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”
• Covers circumstances beyond your control:
• Act of God
• Industrial action?
• Consider insurance provisions designed to cover events of force
majeure – who is responsible for procuring this?
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
• 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?
• 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
• 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
• Governing law and jurisdiction – laws of England and Wales?
Alternative Dispute Resolution
Alternatives to litigation:
– 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
– The parties (with the assistance of an independent third person) identify
the issues in dispute, explore the options for resolution and attempt to
– A voluntary, non-binding and private form of dispute resolution
Reasonable vs. best endeavours
• Any obligation to use “endeavours” is less than an
unqualified absolute obligation
• “Best endeavours”: objective test – may require you to
• “Reasonable endeavours”: less burdensome – take
action to the extent that the party is not disadvantaged
• “All reasonable endeavours”: in between or same as
• If the object of the endeavour is too uncertain or unclear,
the endeavours clause may be void
Warrants and Represents
A contractual statement of present (or often
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
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
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)
• 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?
• Termination – be very careful before using termination
as a remedy, as it could be a repudiatory breach
• Liability cap – amount paid or amount payable
• 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!