Facts
The Court was asked to make a preliminary decision as to whether
the parties had entered a binding contract for the provision by DMA
of training services to customers of an accounting software program
owned and licensed by BaaN.
In mid 1998 BaaN decided it would phase out the software in
question, and decided ultimately to do this by mid 2003. In
the meantime it wanted to discontinue the provision of support and
training in relation to it (BaaN had sustained heavy losses and
wanted to reduce costs). BaaN wished therefore to outsource
these services and it began negotiations with DMA in relation to
this. From the very beginning negotiations between the two
companies went well and in November 1998 BaaN announced to a user
group that DMA would be taking over product training from the
beginning of 1999.
Subsequently, in December 1998, agreement was reached between
the parties on all the main commercial issues of a contract and the
matter was referred to BaaN’s legal department in the United States
for a formal written contract to be drawn up. Pending such a
written agreement BaaN closed down a number of its training
facilities, DMA recruited additional staff and premises, BaaN
provided DMA with the required training information and details of
existing customers who needed to be approached and BaaN passed on
enquiries it received from customers about training to DMA.
There was some delay in receiving a draft agreement from BaaN’s
legal team, and BaaN’s legal department in the US eventually
required that BaaN’s standard terms should apply. This was
not accepted by DMA. It became obvious that BaaN had
undergone a change of heart and in fact it did want to continue
providing product training to customers, rather than allowing DMA
to do so. Legal proceedings followed. The question to
be determined was whether, despite there being no written
agreement, the parties had entered binding contractual
relations.
BaaN alleged that a binding contract had not been created.
Judgment
Park J held that a binding contract had been created. On
the facts the judge found that BaaN’s negotiator did have, if not
actual authority, then ostensible authority to bind the company;
the negotiations were never expressed to be “subject to contract”
and no evidence had been established that in the IT industry it was
generally understood that contracts were not binding until drawn up
and signed by the parties.
All matters which were crucial to the existence of a contract
were established. Park J. reviewed the matters that had been
agreed such as:
- The subject matter of the contract – the provision of the
training services
- DMA would have sole rights, so BaaN would stop provision of
training itself (which it in fact did)
- The territory - the UK and continental Europe
- Duration – the period until BaaN stopped support for the
software (mid 2003)
- Price and payment dates – all were finally agreed after
negotiations
- Use of BaaN materials was agreed as necessary and was actually
provided
- Access to and use of BaaN’s staff was agreed, and although no
price was settled for this, it could have been determined on a
quantum meruit basis
- Passing on customer enquiries was clearly necessary for DMA to
obtain the work, and this was agreed and BaaN actually had started
to do this
- Promotion and endorsement of DMA’s training courses by BaaN by
provision of access to BaaN’s proprietary database was also agreed,
and in fact done by BaaN
All these matters were agreed and in such a definite form that
they constituted a binding contract. The fact that the
parties had not entered into a written form of agreement, even
though they fully intended to do so, did not preclude the existence
of a contract at the conclusion of the negotiations.
Commentary
To paraphrase an old joke, when is a contract not a
contract? Answer: when it’s a claim in restitution. The
decision of Goff J. in Cleveland Bridge to the effect that
there was no contract (because of lack of agreement on fundamentals
such as price) but that there could be a claim in restitution for
quantum meruit and quantum valebant illustrates
well the battery of legal weapons a disappointed contractor now
has.
Cases about when contracts are formed are relatively rare – the
converse of lawyers in practice who are called on frequently to
advise where parties have proceeded on the basis only of “heads” or
a “memorandum” of agreement. Such cases as there are are the
stuff of courses on contract law and will not be rehearsed
here.
There are many possibilities (see e.g. the judgment of Lloyd LJ
in Pagnan S.p.A v Feed Products Ltd [1987] Ll LR 601,
619). For present purposes, there were 3 logical
possibilities in law to explain what the parties had done:
- the parties were negotiating on the basis that, even if full
agreement were reached, the parties would not be bound until a
written agreement was executed (such as is the case in a purchase
of land);
- the parties were negotiating on the basis that they could reach
binding agreement even in the absence of a written and properly
executed contract; or
- the parties were negotiating on the basis that they could reach
a binding agreement without writing, but that they failed to reach
a point of sufficient agreement.
The judge found situation 2 above to be the right interpretation
here. We cannot of course know the detailed evidence, but the
description of the items given in the judgment show that the
parties had agreed the commercial terms at least. The judge
did allow for the fact that the parties had not come to an
agreement on every aspect usually found in a written agreement: the
example given by the judge was of a proper law clause. The
fact that BaaN included such a clause in the draft written
agreement would not have meant that the earlier agreement was in
some way defective, nor would it mean that DMA would have pulled
out of the deal just because the written draft contained such a
clause when it did not figure in the negotiations.
On that the learned judge is surely right. Commercial
negotiations will inevitably focus on matters relating to the deal
seen as such and will not include everything a lawyer would put in
a draft.
The disquiet one feels on reading this decision is that the
parties have a right to know when they have a concluded
bargain. After all, it is at this point that one party
walking away means not just the end of the negotiations, but a
breach of contract. Lawyers have always rightly said that the
advantage of a written agreement focuses the mind on the time of
execution, the point when the parties know for certain exactly what
their obligations are and when they start and finish.
In this case, it was certainly open to argument whether that
stage had come. Certainly, the parties had negotiated,
reached outline agreement, co-operated with each other in
anticipation of a written draft (which did not materialise), but if
you asked the question, did each party think it was bound to the
other by a contract, the answer was obviously that they were not
ad idem. True it is that BaaN had had a change of
heart, but this is a fundamental part of English Law, that there is
no duty to negotiate in good faith (compare the situation in
France, for example).
The lesson is obvious and does not need to be stressed – that
negotiations need to be expressed to be “subject to contract” if
that is what the parties (or one of them) want to achieve.
Failure to do so leads at the best to uncertainty and at the worst
to finding yourself bound in a contract which you did not
intend.
