Home' micenet eMag : micenet April 2018 Contents LEGAL ISSUES | MATT CROUCH
hose readers of a “certain vintage”
may recall the old TV ad for
Claytons – “the drink you have
when you’re not having a drink”.
Lately I have experienced a variety of
cases where the contractual position is
uncertain because of a growing tendency to
rely on what I describe as “Clayton’s
contracts” – documents that sit somewhere
in the limbo-land of “the contract you have
when you don’t have a contract”.
This is relevant to everyone in the
meetings, events and travel sectors – and I
would observe that the problem seems to be
somewhat more prevalent in those sectors
than in many others.
It’s all about contract formation – and as I
have said time and again, good business
requires good contracts. So, let’s get back to
The defining features of a contract are that
there is an offer that is accepted, mutual
promises, and that the parties intend to be
legally bound. The concepts of offer and
acceptance and of mutual promises are
(usually) relatively straightforward...
We need to focus on the third requirement
the intention to be legally bound. This is
what separates a binding contract from
other, everyday agreements, such as our
agreement to meet for lunch. If I sit and wait
at the restaurant and you don’t show up, I
might have good reason to be disappointed,
but I cannot sue you for breach of contract.
Why? Because it would be difficult or even
Good business requires good contracts, says Matt Crouch.
And there are a few tricks.
impossible to establish that we intended our lunch arrangement to give rise to legal consequences.
This same issue is very important when you are in the early stages of contract negotiation on
a deal that you do intend, ultimately, to have legal consequences.
We need to be careful to signal our intentions clearly, so that we don’t unwittingly enter into a
contract when we are not yet ready to be bound. Equally, we want to make it clear if we are
ready to be contractually bound.
The Memorandum of Understanding (“MOU”) and the Heads of Agreement (“HOA”) are prime
culprits here. So many times I have seen complex agreements where the work has already
commenced but the only document recording the deal is an MOU or HOA.
Some years ago, one client presented me with a “Heads of Agreement” in relation to a very
complex joint venture that had gone sour, wanting advice on how he could terminate the deal
for default by the other party. There were no termination provisions and no real expression of
what the other party was to do – so how could it be in default?
My rule of thumb is that MOUs or HOAs are pre-contract documents and are not intended to
be legally binding. While there are some reported cases where the courts have found them to
be legally binding, it is always a question of the parties’ intentions in the circumstances.
Usually, without express words to indicate that the parties expect to be legally bound, an
MOU and a HOA should be regarded as not giving rise to legal consequences.
Don’t get me wrong - MOUs and HOAs are very useful! They are a great way of outlining the
proposed deal in brief or summary form as a preliminary guide for the final binding agreement.
But they are only a summary.
I often use MOUs and HOAs, but I always include express words to say that the parties don’t
intend them to be legally binding.
Managing – and communicating - your intention to enter into legally binding agreements is
crucial to contract risk-management. It is important to remember that not all contracts are
written on separate pieces of paper (or on separate digital documents). A contract can easily be
formed by a chain of emails, for example.
There is nothing wrong with saying, at the end of your email to your customer: “This email
sets out a summary of our proposal and legal obligations will arise only when formal contracts
are signed and exchanged.” Or words to that effect.
Also, do resist the temptation to start work on a project for a client until the contract has been
fully and properly agreed.
Happy contracting! m
Matt Crouch is the principal of Matt Crouch Legal and can be contacted on email@example.com.
WHEN IS A
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