Smooth operator: the cost of getting commercial contracts wrong

Accurate, comprehensive, up to date contracts are critical if a business is to operate smoothly and within the law. Kim Klahn, head of law firm Lodders’ corporate and commercial practice in Stratford upon Avon, highlights some of the common oversights.

Precisely written, robust business contracts with suppliers, customers, business associates and employees are critical, and the golden rule for all commercial contracts is ‘the devil is in the detail’.

It’s impossible to name each type of contract, clause and sub-clause or agreement you should have in place to totally protect and professionalise a business, but two recent cases show what can go wrong if a contract isn’t in place and why it’s not good practice to rely on a handshake or word of honour.

Verbal agreements

Don’t rely on a verbal agreement for any commercial transaction or arrangement as it is difficult in a dispute to prove the terms of a verbal contract, as the case of Jeddi v Sotheby’s and others, illustrates.

This concerned competing claims to ownership of a £12 million early Islamic rock crystal jar. At the centre of this case were two conflicting accounts of the jar’s ownership history. Mr Jeddi claimed to have bought the jar in Dubai in 2010 and given it to Mr Pishvaie (the second defendant) as his agent to be consigned to Sotheby’s for auction in 2012. If sold, Mr Pishvaie was to receive commission on sale equivalent to 25% of the hammer price less costs of sale.

However, Mr Pishvaie claimed that the jar had been in his family collection since at least 1956, that it had been given to him by his father and brought to Europe in late 1968/early 1969 before being brought to London in 1981, which is where it remained. Mr Pishvaie maintained that he had sold the jar to Mr Jeddi in 2011 by way of part exchange for an antique bronze object, but that as they both considered the jar was worth more than the bronze object, he had kept a 25% ownership interest in the jar.

Each side accused the other of fabricating documents, deliberate deception, and lying to the Court. Mr Jeddi’s and Mr Pishvaie’s factual accounts directly contradicted each other and, ultimately, the credibility of the two protagonists was at issue.

The lack of documentation in this case ultimately meant the court’s decision rested on which party it found to be more credible, despite the court expressing concerns about the evidence provided by both parties.

Termination provisions within agreements

Consider the consequences if a contract doesn’t progress as hoped or well. Whilst this isn’t something anyone wants to consider, including a robustly drafted termination clause in the contract will make termination possible and easier if things don’t go to plan.

In the case of Redbourn Group Ltd v Fairgate Development Ltd, the Deputy High Court Judge in the Technology and Construction Court (TCC) held that the property consultancy was not entitled to claim his full fees for services that it had agreed and partly performed when its appointment was renounced by its client. Fairgate had engaged Redbourn as development and project manager for a proposed development in London, but wrongfully terminated the consultant’s appointment before a planning application was submitted.  

Redbourn’s fees of £400,000.00 were to be paid in two tranches, the first tranche of £200,000.00 was payable monthly during the planning and design stage and the second tranche of £200,000.00 was payable upon Redbourn achieving full planning consent.  

Redbourn disputed the wrongful termination of their consultancy and successfully obtained summary judgement for breach.

A further hearing was held where quantum was to be decided. At such hearing the client agreed to pay damages for services already performed and for the planning and initial design for the tender period, despite the project never reaching that stage. A fixed fee of £200,000.00 was therefore awarded to Redbourn.

However, the consultant also claimed £200,000 (2% of the estimated build cost) that would have been payable upon grant of full planning consent plus an additional £250,000 performance fee payable on project completion. The court rejected the consultant’s claim on the grounds of (a) the envisaged project being unrealistic and Fairgate should not have been obliged to continue with a project which was not commercially viable, in order for Redbourn to obtain their fees; and (b) the client would have lawfully terminated when the project’s non-viability became apparent so the consultant would never have performed the services for which it was claiming.

Evergreen contracts

A contract must set-out its duration, and should be terminable on notice or for a fixed period. This isn’t cut and dried when it comes to evergreen contracts, which is where an agreement is automatically renewed after the fixed term, so the contract effectively rolls over periodically until one of the parties defaults or gives notice to terminate the contract. It’s so important to specify a contract duration, such as a fixed term, which will expire automatically at the end of the term; or, a fixed term including an option to give notice to extend during the term (with precise details of the extension); or, specify an initial fixed term with the contract continuing until notice is given.

Devil in the detail

Remember there is always the chance that disputes may occur between the parties during the term of the contract, so it is important to ensure that a clause is included which spells out how disputes may be resolved and this could include adopting a less formal procedure such as mediation, before embarking on court proceedings, as well as:

• Having clear, simple, concise and accurate agreements and contracts as these ensure that the arrangements work efficiently – in particular clearly identify the parties to the contract to avoid disputes in court.
• Ensuring payment obligations are specified and clearly set-out, including the amount, how and the frequency of invoicing, to the method of payment and any instalments and interim payments.
• Dealing with the right individual at the company the contract is with, ideally the person with the greatest interest in making the contract fit for purpose and with the capacity to conclude it.
• Including a confidentiality clause to protect details of any transactions and agreements If the contract includes sensitive information. Remember GDPR that came into force in May this year, and introduced tougher rules on the collection and use of personal data.

For more information or advice please contact Kim Klahn, email: kim.klahn@lodders.co.uk Tel: 01789 206154, visit: www.lodders.co.uk.

Lodders’ team of corporate and commercial solicitors offers accurate, focused and solution-based legal advice to a wide range of clients, from long-established owner-managed businesses, family businesses, and SMEs, through to charities and not for profit organisations. Kim Klahn specialises in advising on all company and commercial law matters and is a specialist in non-contentious employment law.

Note: The opinions and views in this article are for information only and do not constitute legal advice.