Contract Law is ever-evolving. Changes to contract law are many and it is difficult to keep up with the implications for your business. Every decision made in a case by a High Court, Court of Appeal and the Supreme Court, has the potential of changing the view on what constitutes legitimate contractual behaviour. Compounded over time, this means that programme leaders could be operating with serious misconceptions that can impact their contract negotiations and outcomes.
This blog post has been repurposed from our podcast episode ‘4 Misconceptions Programme Leaders have of Contract Law’ which can be found here.
Four Misconceptions Programme Leaders have of Contract Law
Below, I will explore the top four mistaken beliefs or misconceptions that programme leaders have about contract law and how that operates in the context of their programmes.
1) Restrictive Covenants are unenforceable
From my observations, quite often, many programmes are stacked with contractors who work via a number of agencies. For various reasons, a programme or the contract concerned, may not want to work with that agency any further. However, the programme needs the services of the contractor.
Many senior management professionals have very strong views about this kind of restriction. They call it “restraint of trade” and they say it’s automatically unenforceable. In my opinion, that’s a very old school view. Whilst this may have been true before, clever commercial lawyers build new clauses based upon what the Courts found objectionable in a certain type of clause that was tested over a trial. Any restrictive covenant certainly needs a level of legal analysis, before you can ascertain if it’s indeed unenforceable.
In my experience, 40-50% of clauses will be unenforceable, but there is an equal number of contract clauses that will be deemed enforceable.
Case Law Change
http://www.bailii.org/uk/cases/UKSC/2015/67.html
Parking Eye v Beavis
In the case of Parking Eye vs Beavis that focused on a parking ticket appeal, the Supreme Court ruled the clause was enforceable because it was there to protect the legitimate interest of the parking company. Although it was not strictly a restriction of trade or restraint of trade, the clause involved the parking company charging its user a fee that was out of proportion to the damage/loss incurred. The Supreme Court ruled that such a fee was not excessive in the circumstance.
The outcome means it is no longer advisable to deem any clause as unenforceable, based on a preconceived notion that a court would not give effect to the words in the contracts you sign with your suppliers.
2) A Contract Can Be Varied By The Conduct Of The Parties
There is a misconception whereby if some piece of work is undertaken by a supplier and such works are not specified in the original contract, then the buyer can sue the supplier in case of defective performance. This certainly used to be the case. In fact, I recall a time in the 2011-2013 period, when I was working as a Contracts Manager at an organisation and was advised by a lawyer during a training course I then attended, that a contract could be varied by its conduct. That might well have been the position then, but it’s certainly not the position now.
Change Control Procedure
Typically large IT outsourcing contracts will always have a change control procedure schedule within it. There is a level of formality that is prescribed within that schedule, setting out the respective obligations of the party when a change has to be effected to the contract. This is legally referred to as a “no oral modification clause” or “NOMS clause” and prohibits the contracting parties to give effect to any variation to the contract, other than in writing, and is required to be signed by the parties accordingly.
The intent behind the court deciding in this manner, was to give the effect of certainty to commercial contracts between parties.
Case Law
https://www.bailii.org/uk/cases/UKSC/2018/24.html
Rock Advertising v MWB Business Exchange Centres
The most authoritative case on this matter is Rock Advertising vs MWB Business Exchange that was decided by the Supreme Court in 2019. It might well have been the case previously that a contract is automatically varied because a party has acted differently, but it is certainly not that way now.
3) Work At Supplier’s Risk Has No Commercial Consequences For You
It is quite common for large suppliers to provide a level of consultancy support free of charge. Although this is branded as pre-sales investment, the motive for the supplier can also be to embed resources within the client’s organisation to create some level of dependence and a forward movement resulting in future paid work. Alternatively, the supplier tries to capitalise on the buyer’s need for urgency, by deploying resources at their own risk and bypassing the need for an organisation’s internal approval process. At a later point, the supplier asks for a contract, backdated to recompense for the work they did upfront.
It all sounds collaborative and supportive until something goes wrong.
If the situation occurs whereby another department within the organisation effectively disagrees with the arrangement (hint, hint, Commercial), and decides the work should be awarded elsewhere, you will be required to offboard the supplier. This can put you in a very tough position because you might have acted outside your authority in permitting the supplier to be working for you on the presumption there are no commercial consequences.
But in common law, there are commercial consequences for use of services of a third party with some kind of expectation that they will be paid for the services, should the supplier wish to pursue the organisation for its losses.
The court would very readily assume there was an implied contract between the parties if it established the following conditions:
Offer – in this case, it has to come from the supplier to deploy people on your programme with an expectation to be paid later
Acceptance – there should be an acceptance of the arrangement, which has essentially happened to you in your kind of capacity as a programme leader
Intention – creating legal relations such that in accepting the offer, relating to contracting in the future and to the supplier being recompensed for the work in the past
Authorisation – you should be a senior enough professional in your organisation able to authorise contracts, although the fact you didn’t have commercial backing in agreeing to that is a disputable point. But there are no guarantees that it could help you in this case.
Payment – this refers to consideration regarding fee expectation or agreement made between the two parties.
The real problem for you as a programme leader is that even if a court does not find that there was a properly executed contract or a fully implied contract, they still can award the supplier damages under the concept of ‘quantum meruit’.
This means that a reasonable sum of money should be paid for services rendered of work done, when the amount due is not stipulated in a legally enforceable contract. There are no free lunches as far as using services from third party suppliers at their risk or with some expectation for them to be paid later.
4) Your final word is the end of the dispute
It is quite commonplace to enter into correspondence with a supplier in the case of a dispute. The actual misconception occurs when Programme Leaders have made their allegations, supported by all the reasons why they believe the supplier to be wrong, then do not hear back from the supplier, and assume the matter is closed. They then move focus to other issues and risks.
Where the stakes are high, it rarely is the case that this will be the end of the matter.
Breach of contract claims, or many of the claims that are possible in the context of an IT outsourcing agreement, can be brought within six years of the incident first happening.
Claimants have the luxury of choosing the best time to bring a claim against you.
To mitigate this you certainly need to make sure you have recorded and created an evidence bundle that is relevant to the matter, which exists beyond the length of the actual programme. This should include interviews with all the relevant professionals on your side of the fence to capture their version of events at the time. These professionals may become witnesses in respect of the dispute in the future.
But what you can’t do is force a claim to come on the table. The claimant really has a choice in that respect and it would be foolhardy to believe that just because you’ve won a war of words with a supplier, you have effectively resolved a claim.
If you are a programme leader, and if any of these four misconceptions resonate with you, let us know if we have helped to correct your thinking. You can drop us an email at info@mindfulcontract.co.uk
