Diversification in response to COVID-19: Are your new contracts valid?

The outbreak of COVID-19 has created and continues to create extreme levels of uncertainty for businesses and as a result some business owners have had no option but to diversify. Examples of this in the current climate include car manufacturers producing ventilators and fashion brands such as Ralph Lauren manufacturing medical clothing. Changing business focus and practices can help to overcome the practical restraints and financial implications some businesses are facing caused by the COVID-19 outbreak.

If your business is diversifying to provide products or services under pressured time scales, it is key that in such an uncertain economic climate there is a valid and enforceable contract in place to provide your business with protection. The existence of a valid and clear contract will be particularly important in the event of a party failing to perform and rights to payment. The contract should reflect and be specific to the parties’ agreement.

We have provided a brief summary of the fundamental elements of a contract which your business should always consider when contracting and even more so at this uncertain time. We appreciate that time may be of the essence but to ensure a contract is formed all contractual arrangements being entered into must contain the following key elements:

  1. Offer – this is a promise by one party to another to enter into a contract on agreed terms. An offer must be specific in nature and capable of being accepted by the other party.
  2. Acceptance – occurs when there is unqualified and final acceptance of all offered terms. Any acceptance must be communicated to the other party in order for it to be effective.
  3. Consideration – in order for the contractual promise to be enforceable something must be exchanged for such promise, this is known as ‘consideration’. There must therefore be an exchange of value between the parties for example, exchange of a product or service for a specific monetary value. Therefore, in any correspondence or the negotiation of any contract it should be ensured that consideration is to be given and this is reflected in contractual documentation.
  4. An intention to create legal relations – both parties must mutually intend to create a legally binding arrangement. If no intention can be attributed to both parties there is no contract. Such intention is often presumed to exist in commercial transactions but where possible this should be explicitly stated so as to leave no room for dispute.
  5. Certainty of terms – all material terms must be agreed by the parties for such terms to be binding. The agreement must be complete and certain for example the terms should not be ambiguous.

Whose terms and conditions apply; ‘Battle of the Forms’?
In practice, it is rare in commercial relations for there to be a formal offer and acceptance straight away and instead it is common for the parties to negotiate. The process of negotiation usually involves exchange of communication with a view to making a contract with each party seeking to incorporate its own terms into the contract. ‘Battle of the forms’ is the expression coined for this situation. The winner of the ‘battle’ will be the party whose standard terms have been incorporated into the contract. It is important during any negotiation for the parties to be aware of which terms will govern the contract and that they understand their obligations under such terms.

We have a verbal agreement; will this be valid and enforceable?
There is a common misconception that unwritten or verbal agreements are not legally binding under English law. A verbal agreement will be valid and enforceable so long as it contains the key elements detailed above (subject to exceptions such as guarantees, transactions involving land and assignments). However, parties to a verbal agreement will run an increased risk of dispute in the event that one party does not fulfil its obligations. In the absence of a written contract clearly setting out the terms the parties may disagree on their understanding of the terms. This can often lead to costly legal disputes as to what was agreed. Whilst we understand the heightened time pressures given the current climate, it is more important than ever to ensure there is a clear written and legally binding contract in place documenting the terms agreed between the parties so as to protect your business.

For more information contact commercialdept@woodfines.co.uk

-Lily Burton 

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