Certainty in an uncertain world?

Tuesday, October 29th, 2013

Businesses and public sector organisations want to work with buyers and suppliers with as little dispute as possible. A key requirement is clarity of terms used in discussions and documents relating to trading relationship and contractual agreements. Ultimately there needs to be sufficient clarity to enable a Judge to enforce their agreement – the worst case scenario!

Certainty in an uncertain world?

If you are interested in disputes over meaning and application of common commercial contract usages here is a good example from a case between Vogon International v Serious Fraud Office [2004] EWCA Civ.

In summary:

  • The two parties agreed a contract to set and populate an MS Exchange database (whatever one of those is!) at £1,500 per database
  • Vogon interpreted the word ‘database’ to mean a .pst file and so raised an invoice of £314,000
  • The SFO interpreted ‘database’ to mean each complete MS Exchange database and requested an invoice of £22,500
  • Regretfully the two parties went to court (by the way would you ever take the SFO to court?)
  • Subsequently the Court of Appeal agreed with SFO.

The take-away: Because Vogon and SFO failed to clarify a shared interpretation of one word – database – they went to court incurring all those costs and aggravation. Not recommended!

The following meanings and effects of typical words may be helpful in clarifying matters and more importantly raise the  awareness to clarify terms, trading relationships and contractual agreements:

Estimate This is a price submitted by the seller but who may word it as subject to confirmation. The buyer needs to establish if it is a price capable of acceptance and whether it is ‘firm’ or ‘fixed.’ The danger of placing a contract on this basis is that the seller requires an uplift when s/he is in possession of further information.

Quotation It must be established if the quotation is an offer to sell or an invitation to treat. Often the supplier will couch it in terms of ‘This quotation is not an offer.’ The buyer must read the quotation for any qualifying comments that seek to place risk with the buyer.

E&OE This means Errors and Omissions Excepted. This is a significant qualification and should not be accepted by the buyer. To accept the statement is leaving the door open to the seller to change any aspect of the quotation.

Agreement in Principle This is another qualifying comment. It means that it is not formally accepted, thus leaving the door open to the seller to withdraw the agreement in principle if something arises in discussions or negotiations that impact on the provisional agreement.

Reasonable Price There is no such thing as a reasonable price! The price will be set according to many things including the market conditions, seller’s pricing strategy, risk profile of the contract, liabilities, etc. This term is best avoided by the buyer – although strongly recommended to be promoted the seller!

At a Price to be Agreed This should not be accepted by the buyer. It leaves the buyer vulnerable to any price submitted by the seller. On the occasions when a price cannot be agreed prior to signing a contract an Instruction to Proceed may be placed with a financial cap attached to it, thus giving the buyer an opportunity to, later fix the price on a rational basis.

Without Prejudice This is a phrase used to enable parties to negotiate settlement of a claim without implying any admission of liability. Letters and other documents headed ‘without prejudice’ cannot be adduced as evidence in any court action without the consent of both parties.

Letter of Intent When properly written this does not create legal relationships, it merely gives comfort to the other party that they may win a contract. In the USA they are called ‘comfort letters.’ For it to be a letter of intent it must not instruct the seller to take any actions, otherwise it becomes an Instruction to Proceed which does create legal relationships.

Subject to Contract The use of these words is not a valid acceptance of a contract. An acceptance made subject to any variation is treated as a counter offer. The buyer must know the rules of offer and acceptance.

Subject to Negotiation This is a further qualification and cannot be treated as acceptance. Until the negotiations are complete and the outcomes documented and agreed by both sides there is not an offer that can be accepted by the buyer.

Food for thought? For support and guidance around trading relationships and contractual agreements, including tendering activities and ‘disputes’ please contact us.

What can we do for you?  We can probably help you achieve your objectives – through our consultancy, training and coaching services – let’s start a conversation.

If you can spend a few minutes on the phone with me, I can assess the potential ROI of working with us.

If this is interesting to you, please email me and I’ll set something up.

Or call me on 01744 20698



Certainty in an uncertain world: About Brian Farrington

Brian Farrington is one of the world’s longest established procurement and supply chain consultancy and executive training specialists. 33 of the current FTSE100 have retained our services, as well as leading organisations in the UK, North America, southern Africa and Asia.

Established in 1978, we have proven expertise and experience in strategic procurement, sustainability and risk management. Brian Farrington solutions and services are formed through consultancy, training & development, coaching, interim resource and recruitment.

Our four core areas of strategic procurement, sustainability and risk management capability are:

• Strategic review and commercial governance

• Performance delivery and transition

• Major project support including managing contractual risk

• Learning & development in support of organisational aims.