How to establish, build and maintain a business relationship – Part 3

Business relationships are characterized by several aspects, some of which are basic to obtain a proper feedback.

The strategic importance of the written confirmation of the agreements and the good conduct of business.

Confirmation of the aspects dealt with by all actors and the search for confirmations by the relevant figures.

There is also the need to have "technicians" to check all aspects of business agreements and conduct business relationships.

It is important to consider the essential meaning of the following statement:

"Scripta manent, Verba volant"

The guide will be subdivided into 4 different sections, making it easy to read.

Topics third section

Make formal business agreements

Performance Criteria for this Element are:

A) Confirm agreements in writing using formal contracts where appropriate and in accordance with enterprise requirements

B) Check and gain appropriate approvals for all aspects of formal agreements in accordance with enterprise procedures

C) Identify the need for, and seek, specialist advice in the development of contracts where appropriate.

D) Summary – Element 3

A) Confirm agreements in writing using formal contracts where appropriate and in accordance with enterprise requirements

After negotiations, most agreements are ‘reduced to writing’:

Many arrangements remain purely verbal, and these verbal arrangements serve quite acceptable as the sole basis for future action and can be legally binding

Contracts or agreements in written form provide clarity as to what was agreed to and the obligations on all parties – written agreements also allow other personnel to interpret what was agreed to

A solicitor may be engaged to put the agreement into writing – this is time-consuming and costs money, but may well be the best course of action where a substantial sum of money is involved or where the arrangements are complicated. A solicitor will ensure all legalities are complied with and will protect business interests (as well as the interests of the other party): should things go awry, using a solicitor always provides better avenues of recourse to recover money and to protect the business. It should be noted the vast majority of business agreements never involve legal counsel

The venue can use a standard pro forma contract (form) as the basis for the agreement – with relevant details (time, dates, numbers, destinations, prices) entered into the appropriate places and the form signed by both parties.

Contracts:

A contract is an agreement enforceable at law

An essential feature of the relationship formed by a contract being a promise by one party to do (or refrain from doing) certain specified acts.

The vast majority of all contracts are known as simple contracts: this is not to indicate their composition or associated issues are simple in nature, but this term separates them from other types of contracts (such as Contracts under seal, and Contracts under record).

Simple contracts may be:

Formed orally

In writing

Implied (by courts, at a later date) from the actions of the parties.

Six elements of a valid contract:

Intention to create legal relations – both parties must intend to enter into legal contractual relations: the relationship cannot just 'happen'.

Agreement – there must be both an 'offer' and an 'acceptance'. One party must make an offer and the offer must be accepted by the other party. Not just having the price of an article on the shelf or on an article does not constitute 'offer' but is what is legally known as an 'invitation to treat'. The price is inviting the buyer to make an offer.

Consideration – there must be a promise of 'something for something'. Note the terminology used here ('consideration') does not refer to the mental activity of applying one's brain to reflect on, contemplate or consider the contract. Note also the law is not concerned with the amount (or value) of the consideration, hence 'peppercorn rentals' (very cheap prices for something which should/could be much more expensive) are quite legal

Capacity – the parties must be legally able to contract, not prevented by their status from entering into contractual arrangements. People who are drunk, for example, are not of legal capacity.

The certainty of terms – the contract must not be marred or confused by mistake, misrepresentation or fraud. There should be no confusion about what obligations, arise from entering into the contract. There should be clarity of intent.

Legality of objects – the purpose of the contract must not be illegal.

If one or more elements of a valid contract is missing, the contract may be:

Void – the contract will have no legal effect at all

Voidable – where only one of the parties may avoid the contract, or alternatively may compel the other party to perform their share

Unenforceable – here the contract is prima facie valid but no legal action can be brought because of (perhaps) some lack of procedural requirement requiring the contract to be in writing. In addition, there may be a statement to the effect that the written document was never intended to be a binding document due to, for example, lack of intention to create legal relations

Illegal – where the purpose of the contract is contrary to public policy or statute.

In relation to contracts:

Parties need to be certain about the contents of the contract

Parties must consent to the contents, terms, and conditions

The contract or negotiation must not involve:

Mistake

Misrepresentation

Duress

Undue influence.

There are four kinds of mistake:

Common Mistake

This refers to the situation where both parties make the same mistake. For example, where the parties are unaware the subject matter of their contract has been destroyed.

This type of mistake must relate to the subject matter of the contract (not to a peripheral issue) before the courts will hold no contract was made 

Where the common mistake refers to accidental qualities of the subject matter the courts are generally reluctant to hold that the contract is void ab initio (from the beginning).

 Mutual Mistake

             Here both parties understand each other but are at cross purposes.

             For example, A offers to sell a bottle of wine to B. B accepts the offer believing it to relate to A's 1960 Malbec. In fact, A was offering to sell his 2006 Chardonnay.

             There can be no real agreement because the parties are at cross-purpose

and so there is no correspondence between offer and acceptance.

 Unilateral Mistake

             This is where only one of the parties is mistaken, and the other party is (or ought to be) aware of this.

             For example, where A believes he is contracting with B, whereas he is, in fact, contracting with C, and C knows of this error but fails to inform An of this.

The contract is then void. 

 “Non est factum” ('it is not my deed or option') 

This is a mistake as to the nature of the transaction.

A signed document is not binding on the party signing it if she or he was induced to believe she or he was signing a document that was ‘fundamentally different’.

Misrepresentation can be:

Fraudulent misrepresentation:

This is a false representation of fact made with the knowledge it is false or is a statement or representation made carelessly or indifferently without any real regard to what may be the true facts.

Damages can result from the successful action.

All following seven factors must be present or occur for fraudulent misrepresentation to be proven:

1)  A false statement – the statement must be untrue

2)  And fraudulent – it must be intentionally designed to mislead and be deliberately know to be untrue

3)  Representation – the statement must be such that it relates to (represents) the issues being discussed or negotiated

4)  Of fact – the statement must be asserted as a fact, or relate to something that is a fact

5)  Made by one person to another – the statement must be communicated between parties

6)  With the object of inducing the other to alter his position to his prejudice – the intention of making the statement must have been to convince the other party in a way, they would not have been convinced.

7)  And which actually induces the other to alter his position to his prejudice – the final decision of the other party must have been made depending/relying on the statement

Innocent misrepresentation:

This misrepresentation is innocent in that the representor believes his assertion to be true and consequently has no intention of deception

The representee cannot obtain damages for an innocent misrepresentation.

Silence:

Silence cannot be taken to indicate agreement – meaning silence does not mean assent

Silence can amount to misrepresentation where a person makes a false statement believing it to be true, discovers later that he was mistaken but keeps silent about the initial innocent misrepresentation.

Duress

This consists of actual or threatened violence to the contracting party or their near family or close relatives, by or on behalf of the other contracting party

The contract is then voidable at the option of the threatened or injured party.

Undue influence:

Is the improper use of a position of power or influence over another in order to induce the other to act for his benefit – for example, if a business threatens the other party they will use their influence or power to adversely impact the business of the other party if they fail to agree to the terms or conditions of an agreement then this is ‘undue influence’

This involves things such as offering an inducement or bribe (money, favors, promotion) and the special relationships that are deemed to exist between parent and child, patient and doctor, solicitor and client, priest and devotee.

Topics discussed during negotiations can be distinguished as being either a ‘term of the contract’ or ‘mere representation’ related to the discussions:

A term is central to the contract – and breaching a term can give rise to the right to sue for breach of contract

Mere representation is information not central to the contract – and cannot be used as the basis for initiating ‘breach of contract action (unless the breach was deliberately fraudulent).

Courts will identify if things are ‘terms’ or ‘representations’ based on:

The stage at which the crucial statement was made during the course of the transaction – the greater the time between the making of the statement and the eventual contracting then the more likely the courts are to infer the statement was merely inducement to the contract and not intended as a term

The importance attached to the statement by the parties – the more important it is, the more central it is to the agreement, the more likely it will be treated as a term

The form of the statement – where an oral statement precedes and finally produces a written contract in which the intent of the verbal statement is not set out, it is less likely that the statement is a term

Knowledge of the person making the statement – where the statement was made by someone possessing some special knowledge or skill as compared to the other party then such statement is more likely to be seen as a term.

Is the ‘term’ a ‘condition’ or ‘warranty’?

This question relates to the intention of the parties – the reason for making such a distinction at law is because the remedies are different for each area

If the term that is breached is deemed by the courts to be only a ‘warranty’ then the injured party can only claim damages

If the term that is breached is seen to be a ‘condition’ then not only are damages recoverable but the injured party can treat the contract as being repudiated by the party who is in breach

A condition then is a term going to the very root of the contract such that failure to perform it would render the performance of the rest of the contract something different in substance from what the defendant intended.

When the courts assess a term to decide if it is a condition or warranty, they will take into account the context in which the contract was made and all the surrounding circumstances.

Exclusion clauses:

Where a party seeks to limit their liability or to exclude liability, a clause to this effect may be inserted in the contract – these are known as 'exemption clauses' or as 'exclusion terms’

Many are found in what is termed 'standard form' in many contracts – but courts are increasingly demonstrating they are more likely to determine a case in favour of the party to whom the exclusion clause was applied: for example, if a business inserts an exclusion clause and the other party ( a customer or client) contests it, courts are likely to find in favour of the customer or client

In the case of signed documents containing exclusion clauses, in the absence of fraud or misrepresentation, the party signing will be bound by these clauses whether they read the document or not.

Parties to a contract cannot confer rights, or impose liabilities, upon anyone but themselves:

A person cannot incur liabilities under a contract if she or he is not a party to the contract – that is, she or he cannot sue or be sued on the contract

A person has no rights bestowed on them under a contract to which they were not a party. Note, however, where a person has benefits conferred on them under a contract between other parties, courts are increasingly finding for these persons.

Discharging’ a contract can occur one of six ways:

Performance

Most common way of discharging a contract: it is simply the fulfillment by both parties of the obligations they both agreed to perform

To secure 'absolute discharge' payment (where the other party agrees to pay for a product or service as their part of the contract) must be legal tender for the full amount agreed.

'Conditional discharge' occurs when payment is made by cheque. When the cheque is honored, the discharge becomes absolute.

If, however, the contract stipulates payment is to be made by cheque and the debtor settles by cheque which is subsequently dishonored, the contract is still discharged: the creditor's only recourse is to sue on the cheque, not the contract.

Where only a slight difference is apparent between performance and the intent of the contract, the courts will deem the substantial performance to represent a valid defense to a claim: entire performance is thus not a condition precedent to recovery as any breach can be compensated in damages, not in the voiding of the contract. Slight variations from the contract, thus, will not prevent a valid claim for damages.

Tender or Attempted performance

In the case of 'tender', the one party has tendered the exact amount of the agreement in payment but the other party has rejected the money for some reason. The debt still stands but the debtor does not have to seek out the creditor again, and, if the debtor is sued, the creditor will not be entitled to recover costs arising out of such action.

Where one party attempts to execute or perform their part of the contract but is prevented from doing so by the other party, they will be released from the contract and can sue for damages. 

Agreement

Where both parties are still to fulfill their parts of the agreement, they may agree to end the contract by mutual consent.

The agreement by both parties to end the contract will be seen to be sufficient consideration for the agreement of the other, and rescission will be complete.

Frustration

Here the law recognizes circumstances may change so much a contract between parties may bear no relationship to what was originally agreed: a house which is at the center of a contract may burn down, or an industrial dispute may make it impossible to complete a task by a set date.

Frustration in this context is taken to embrace things that make the further performance of the contract impossible.

The result is both parties are excused from the contract and no further liabilities will accrue from that time onwards, however, obligations accrued prior to the event are still enforceable and action may be taken to recover from them.

Breach

When there is a breach of contract by one party it allows the other party to treat their obligations under the contract as being at an end. 

A breach occurs when one party directly or indirectly refuses to perform their obligations or promises, or when a party fails to fulfill any of the terms or conditions of the contract. 

The innocent party will be entitled to damages.

The operation of law

Merger – where the parties sign a deed which covers the same content as the contract, the contract ceases to be by virtue of the merger. In effect, a new contract is raised and there is a mutual agreement about both the original and revised contracts.

Material alteration to written document – where one party without the consent or knowledge of the other party changes the material content of the contract, this renders the contract, by law, invalid or voided. The intent of this is to protect the innocent party.

Death – means that contracts for personal services are at an end. Obligations already accrued are able to be claimed from the estate but no future liabilities can be incurred. Other contracts remain enforceable against the estate of the deceased.

Insolvency (Bankruptcy) – this results in the wiping off of all debts and the termination of all contracts. It should be noted that some people voluntarily go bankrupt as a means of escaping their debts and then start up again in business.

Losing of the contract – while this does not affect the rights and obligations of the party, the problem is often in proving what was contained in the contract. Where the contents of the contract cannot be definitely decided upon the courts may terminate the contract: for this reason, it is good business practice to keep a copy of all documents, especially contracts.

Remedies for breach of contract:

Sue for damages – money awarded so as to put the party whose rights have been violated in the same position (as far as money can do) as if those rights had not been violated. Only loss resulting from aspects relating to the breach per se will be assessed as being worthy: losses deemed not to be connected directly to the breach in question will be said to be 'too remote' and thus disallowed

‘Equitable remedy’ comprises:

'Specific performance' meaning if the court decides in your favor, they will force the other party to perform their part of the agreement;

or 'Injunction' where you seek, if the court finds for you, a court order preventing the other party from doing specific act(s). 

B) Check and gain appropriate approvals for all aspects of formal agreements in accordance with enterprise procedures

Before signing formal agreements they must be checked & approved by one (or more) of the following:

The owner or manager – of the business: whose focus will be operational matters relating to the contents of the contract as well as the financial arrangements

Finance and accounting department – who will approve financial matters with attention to deposits (how much and when they are to be paid), terms of trade, minimum numbers

The individual relevant department head – such as the Executive Chef, the Head Housekeeper or the Functions Manager: who will verify the items or services promises can, in fact, be delivered (when and as promised; for the price stated)

Sales and marketing department – who will need to update their database to reflect sales, identify the target market involved, revise (if necessary) their focus for marketing activities relating to the time identified in the agreement

The legal representative for the business – who will check the contract is legal, the interests of the business are protected.

If approval is not given for a formal agreement, options include:

Re-negotiation – to develop a new or revised contract or agreement

Withdrawing – not entering into re-negotiations.

C) Identify the need for, and seek, specialist advice in the development of contracts where appropriate.

From time-to-time specialist advice regarding contracts can be necessary for relation to:

Legal specialists – solicitors

Financial specialists – accountants, lenders

Industrial relations specialists

Specialist legal advice may be needed when:

Entering into a relationship with a new party – that is, a business or person with whom the business has never had a relationship before

Entering into an agreement that is a new area for your organization – that is, a contract involving provision of goods and or services you have never before contracted for

Legislation relevant to the agreement has changed – and (perhaps) there is confusion over new definitions, revised laws and emerging legal intentions and implications

The agreement involves a large sum of money – the exact definition of what is a large sum will vary between businesses

There is a degree of urgency associated with the agreement – for instance, where it is critical a service/product is delivered or provided by a set date/time

The agreement involves a very high level of risk – and or public exposure

We're entering into a contract about something that previously gave rise to legal problems – which may include the threat of legal action as well as actual legal proceedings

The project is a long or large one – that is, something likely to go on for a number of months, or for a year

The nature of the agreement (the actions at the root of the agreement) is such that it is contentious, risky or liable to be auctioned.

Specialist financial advice may be needed to:

Assist with determining the financial viability of a contract – by helping assess the revenues and costs associated and the final profit, return on investment and other financial indicators

Source funds to assist with discharging the obligations imposed by the contract – there can be a need for:

Short-term and or long-term loans

Overdrafts

Lines of credit

Determine alternatives for obtaining necessary equipment and materials to discharge a contract – such as:

Leasing

Renting

Extended terms of credit

Identify financial planning imperatives – related to:

Paying tax

 Investment of profits

 Business expansion (or contraction)

 Investment options.

Specialist IR advice may be needed in relation to:

Preparation of employment instruments and contracts – to support engagement of staff to perform work for a nominated contract

Determination of suitable remuneration and working conditions – as applicable and appropriate to the needs of individual contracts and or ‘unique’ working conditions or requirements

Establishment of dispute resolution protocols – for specific contracts/work

Resolution of IR issues and workplace disputes – relating to the contract and work undertaken as part of the contract

Staff recruitment, selection, training, and induction – for employees required to enable discharge of the agreement

Discipline – regarding the need to fairly but appropriately take action against staff who are failing to perform and or who have breached some internal operating requirements(such as a business policy or procedure, or failed to achieve a designated performance target)

Determination or clarification of employer and employee roles and responsibilities – under a specific contract

Compliance with local employment and IR obligations – as imposed by law.

D) Summary – Element 3

When making formal business agreements:

• Realise many industry contracts are not put in writing – a handshake or verbal agreement is often the only agreement
• Putting it ‘in writing’ is the preferred option as it reduces confusion and gives certainty about intentions
• Ensure the contract is valid from a legal perspective
• Never make false statements or misrepresentations when negotiating a contract or agreement
• Avoid applying duress or undue influence when contracting
• Strive to clarify ambiguities
• Be certain about all terms and conditions, warranties and guarantees
• Realise signing a document commits you to whatever is in the document or contract you have signed
• Understand the penalties for failing to discharge your obligations under the agreement
• Obtain approval and authorization before entering into any agreement
• Seek legal, financial and industrial advice when necessary.

Alessandro Borghi