When a contract begins…

The problem

Negotiation of services contracts, particularly through a tendering process, can often be an intricate dance. You might think it's in the client's and the caterer's interests to make sure they're both clear about how and when a legally binding contract is to be concluded. In reality, both are usually looking for flexibility, so it can be unclear when a contract becomes binding.

The client may want to keep the tendering process open, so negotiations with other potential suppliers can continue. The contractor will also want to retain the ability to change prices if conditions aren't met, or if there is any change in the data supplied by the client.

Problems arise where one side thinks a binding deal has been struck, but the other doesn't.

Expert advice

In the case of a tender for a five-year contract for cleaning and catering services, the company's invitation to tender stated that on acceptance of an offer, the successful contractor would conclude a formal contract. Until such a contract is signed, the contractor shouldn't proceed and the company wouldn't be liable for any of the contractor's costs.

The supplier submitted a tender, and sought to retain flexibility on price owing to TUPE (Transfer of Undertakings (Protection of Employment)) issues.

When the supplier then withdrew, the company sued for damages for the cost of servicing the contract at the higher rates quoted by the next cheapest tender.

The question arose as to whether a binding contract would have been created on acceptance of the tender and before the "formal" contract had been created. If the company could show that the contract was created on acceptance of the tender, then the supplier would be liable.

The company also sought to argue that the fact the supplier had begun mobilisation and preparatory work for taking over the performance of the contract, suggested a contract had been created.

In the event, the court came to the conclusion that there hadn't been any "meeting of minds" between the company and the supplier, and so no contract could have been created in any event.

This case highlights the fact that the mechanics by which a legally binding contract is to be concluded are a crucial element of the tendering/contracting process, and the use of clear language setting out how and when the contract is to be created will avoid these kind of problems.

Checklist
* An offer is an expression of willingness to enter a contract with the intention that it will become binding on the person making it as soon as it is accepted by the other party.
* Acceptance is a final and unqualified assent to the terms of the offer.
* An offer may be accepted by conduct. For example, an offer to buy food can be accepted by supplying product. An offer contained in a request for cleaning services can be accepted by beginning to provide those services.
* An invitation to tender is generally not an offer, it is simply an indication of a readiness to receive offers. Submission of a tender will normally amount to an offer, which must be accepted in order for a binding contract to be created.
* In the context of commercial contracts it is presumed that the parties had an intention to create legal relations and in practice it is difficult to show that no such intention existed.
* To have legal effect an agreement is generally supported by some form of "consideration".
* For example, payment by a buyer is consideration for the promise to supply by the supplier.
* A legally binding contract need not be in writing. A contract will be created where the requirements as set out above have been met, even if the communications by which the requirements have been satisfied were wholly or partly oral.
\* Finally, there needs to be a legally binding agreement to vary the original contract.

Beware! * Include wording in the Invitation to Tender to the effect that:
* No binding contract shall come into existence unless and until the successful tenderer has concluded the formal contract.
* Or, put wording in the Tender to the effect that:
* All negotiations prior to the conclusion of a formal contract shall have no binding effect on the parties and will be treated as subject to contract.
* State in the Tender that mobilisation or other preliminary or preparatory steps will not be taken as performance of any contract between the parties.

Jacques Smith can be contacted on 0118 951 6831 or e-mailJacques_Smith@Blandy.co.uk