Legal issues in supply contracts Speaker: Dr Alan Ma

Legal issues in supply contracts Speaker: Dr Alan Ma CE Global – legal essentials 27 May 2010, London Maxwell Alves Solicitors

Types of Supplies Public sectors – highly regulated • central government departments and agencies; • the NHS and it is local trusts; • the Ministry of Defence; • local authorities; • universities; and colleges. Private sectors Maxwell Alves Solicitors

The process • Advertisement – Official Journal EU, web site, trade press or local newspapers, government web site Supply2.gov • The qualification • Invitation to tender (ITT) – scope of work, specifications, proposed terms and conditions, • Evaluation and refining tender Maxwell Alves Solicitors

The re-occurring legal issues • Formation of contracts • Contractual clauses • Breach of terms • Remedies – causation and remoteness of damages Maxwell Alves Solicitors

Formation of contract • The pitfalls of undertaking work in anticipation of a contract • Unread but signed written terms failing to reflect pre-contractual discussions: who wins? • Failure to agree key terms: when could there be a binding contract? • No written contract • Battle of the forms Maxwell Alves Solicitors

Undertaking work in anticipation of a contract RTS Flexible Systems Ltd v MolkereiAlois Muller GMBH Supreme Court 10 March 2010 Maxwell Alves Solicitors

Undertaking work in anticipation of a contract • RTS supplying and installing automated packaging machinery for Muller. • Work started based on a letter of intent that sets the whole agreed contract price and that the full contract terms would be based on “MF/1” terms. • 5 July 2005, draft final contract was provided but it was never executed. • 25 August, substantial works were carried out. There was a variation. Maxwell Alves Solicitors

Undertaking work in anticipation of a contract The issue: Had RTS and Muller entered into a contract, and, if so, on what terms? High Court – There was a contract Court of Appeal – No contract Supreme Court – There was a contract. We learn: The case illustrates the perils of beginning work without agreeing the precise basis upon which it was to be done. The moral is to reach agreement before work begins. Maxwell Alves Solicitors

Pre-contract discussions When a contract does not reflect the intention of the parties, to what extend, if any, can pre-contract negotiations be used in its interpretation? Chartbrook Limited v Persimmon Homes Limited - House of Lords [2009] Maxwell Alves Solicitors

Pre-contract discussions • After months of negotiation, a contract is finally drawn up and executed by both supplier and buyer. • There is a pricing provision in the contract and the payment is based on the supplier’s performance. • A dispute arises as to the actual meaning of the pricing provision. • Based on its literal meaning, the supplier entitles a payment of £4.6m. But the buyer claims that, based on the actual intention of the parties, only a payment of £0.9m is due. Maxwell Alves Solicitors

Pre-contract discussions ARP = 23.4% of (P – MGRUV – C&I)£0.9m payment – actual intention ARP = (23.4% of (P – C&I)) – MGRUV£4.6m payment – literal meaning Maxwell Alves Solicitors

Pre-contract discussions • The test is objective. How would a reasonable person have understood the meaning of the provisions? • Pre-contract negotiations are inadmissible for the purpose of interpreting a contract. • The court decides to go beyond the literal meaning of a provision and examines the true intention of the parties when it is clear that there has been a misunderstanding with the language and that it should be clear what a reasonable person would have understood the parties to have meant. Maxwell Alves Solicitors

Do we have a deal? Contract / no contract dispute Brama Brown & Root & Marshall Aerospace v Aramark (March 2002). • A buyer invites tenders for the supply of goods, a tender is submitted and the parties start negotiating. The main terms are discussed and agreed, but the formal niceties are left to be concluded. • One side says the rates should be re-negotiated because there never was a contract. The other side considers otherwise and insists work should start without any delays. The classic contract/no contract dispute arises. Maxwell Alves Solicitors

Do we have a deal? The law about the formation of a contract is elementary and familiar. The necessary conditions are: • agreement (usually in the form of offer and acceptance), • consideration (payment or services) passing from both parties and • contractual intent. Maxwell Alves Solicitors

Do we have a deal? • The presence of consideration is not in doubt. • Nor is that of contractual intent. • That leaves the requirement of agreement, in particular the question of whether all essential terms have been settled so that a contract is concluded. Based on the facts, court said no contract. Maxwell Alves Solicitors

No Written Contract Bairde Textile Holdings Ltd v. Marks & Spencer plc [2001] Maxwell Alves Solicitors

Battle of the forms When A makes an offer on its (A’s) conditions and B accepts that offer on its (B’s) conditions and performance follows, based on the principle of offer and counter-offer, there is a contract on B’s conditions. Who fires the last shot wins the battle. An unsettled area is whether the traditional analysis of offer and acceptance should be displaced when the parties have had previous dealings. Maxwell Alves Solicitors

Battle of the forms Tekdata v Amphenol [2010] • Rolls Royce bought engine control systems from Goodrich, which itself bought cable assembly items from Tekdata. • Tekdata, in turn, bought connectors from Amphenol. • Despite doing business together for over 20 years, a dispute arose between Tekdata (the Buyer) and Amphenol (the Seller). Maxwell Alves Solicitors

Battle of the forms Tekdata v Amphenol [2010] • The Buyer sent purchase orders to the Seller according to the Buyer's own conditions. The Seller acknowledged the purchase orders by sending an acknowledgment, stating that the Seller's own conditions applied. • The judge held that the Buyer's terms applied as he found that that was the parties’ intention. He gave weight to a number of factors, including the long-term relationship and the parties’ respective contracts with Goodrich. Maxwell Alves Solicitors

Battle of the forms Tekdata v Amphenol [2010] • The Court of Appeal overturned the judge’s decision. • The last shot principle had to be adopted unless the documents passing between the parties and their conduct showed that their common intention was the motive for some other terms to prevail. Maxwell Alves Solicitors

Battle of the forms Tips on winning the battle: • Maintain an up-to-date set of standard terms and conditions that are ready for use. • Ensure that the standard form contains a clause making it clear that your terms prevail over any terms of the other party. • Ensure that your set of standard terms and conditions are included in all pre-contractual documents, such as invitation to tenders, quotations, acknowledgement forms, delivery notes and correspondence. Maxwell Alves Solicitors

Battle of the forms Tips on winning the battle: • Implement a policy of only contracting based on the firm's own set of conditions. • Confirm any oral agreement in writing, making it clear that the contract is entered into on your own terms, which override those of the other parties. • Do fire back the "last shot". This can be achieved by ensuring your document is the last document to pass between the parties immediately prior to the contract being concluded. Maxwell Alves Solicitors

Construction of contracts • Intention to be found from the contract itself. • Words to be given their ordinary or plain meaning. • Words to be construed to make a contract valid rather than invalid. • Words to be construed to make a contract valid rather than invalid. • The intention of the parties to be derived by construing a contract as a whole. Maxwell Alves Solicitors

Construction of contracts • Effect to be given to all terms. • Particular conditions prevail over standard conditions. • Express inclusion of a certain thing excludes others of a similar nature – expressiounius. • When there is ambiguity in a document the words are to be construed against the party will put forward a document – contra proferentem. Maxwell Alves Solicitors

Breach of terms Maxwell Alves Solicitors

Anticipated breach • X and Y have made a contract • Before the time for performance arrives, X declares that he no longer intends to perform • X repudiates the contract • Y has the option to terminate the contract and claim damages at that point. Maxwell Alves Solicitors

Remedy – remoteness of damages • Cause and effect Maxwell Alves Solicitors

Remedy – remoteness of damages • Losses cannot be recovered if it is too remote even though it is caused by a breach of contract. Maxwell Alves Solicitors

Remedy – remoteness of damages • Supershield was a contractor in the construction of an office building. • Supershield had to install a ball float and lever arm so that the water storage tank of a sprinkler system would be refilled whenever the water level dropped. The same mechanism applies in a domestic toilet cistern. • The nut and bolt did not connect with each other and the bolt fell out. • The valve was left open so that water flowed into the tank and the valve did not close as the tank filled up. The tank subsequently overflowed. Maxwell Alves Solicitors

Remedy – remoteness of damages • The valve was left open so that water flowed into the tank and the valve did not close as the tank filled up. The tank subsequently overflowed. • There were other fail-safe measures in place, including drains in the tank room and alarm systems in the building. As it was, all failed. • Water flooded from the tank room into the basement and caused substantial damage to electrical equipment. Maxwell Alves Solicitors

Remedy – remoteness of damages • Was the damage caused by the escape of water from the tank too remote? • Hadley v Baxendalein 1854. Loss is not too remote if either (a) it naturally flowed from the breach; or (b) it was within the reasonable contemplation of both parties at the time they made the contract. Maxwell Alves Solicitors

Remedy – remoteness of damages • The novelty of Supershieldis that there was a simultaneous failure of separate protection measures. • The purpose of the contract and the scope of the contractual obligation form the basis of deciding remoteness. • The ball valve was the first means of protection against water causing damage to other parts of the building and it failed. It follows that the loss was within the scope of the contractual obligation and it cannot be regarded as too remote. Maxwell Alves Solicitors

马兆融博士律师行 Lawyers for Entrepreneurs 28 Gray’s Inn Road, London WC1X 8HR United Kingdom T: +44(0)20 7632 6950 F: +44(0)20 7632 6959 E: london@maxwellalves.com www.maxwellalves.com Maxwell Alves Solicitors

Legal issues in supply contracts Speaker: Dr Alan Ma