‘To me a lawyer is basically the person that knows the rules of the country. We’re all throwing the dice, playing the game, moving our pieces around the board, but if there’s a problem, the lawyer is the only person that has actually read the inside of the top of the box.’ Jerry Seinfeld
This week, we’ve picked three phrases we come across in contracts, tried to explain what the courts have held that they mean and the importance of context.
What does “subject to contract” mean?
A recent judgment of the Court of Appeal in Joanne Properties Ltd -v- Moneything Capital Ltd and another has re-stated the position that once negotiations between the parties are commenced “subject to contract”, this condition applies to those negotiations up until either a formal agreement is reached between the parties, or it is agreed that the condition should be removed. The term itself has been defined in case law as meaning:
“that (a) neither party intends to be bound either in law or in equity unless and until a formal contract is made; and (b) that each party reserves the right to withdraw until such time as a binding contract is made.”
The key point here must be to make sure that where this is intended, that the drafting of correspondence is that contracts which are intended to be subject to agreement between the parties remain as such until such a time as the parties intend to enter into a formal agreement. If this is the case and set out to be, usually, there must be a formal contract, or a clear factual basis before a court will consider otherwise.
What does “The vendor represents…” mean?
This statement usually comes before a statement of fact by the party concerned. An easy example of this would be a representation that the accounts of a company are accurate. As a starting point, if a representation made then turns out to be untrue then the other party may have a claim for both a breach of contract but also for something called “misrepresentation”.
The trick here is knowing what statements doe count as representations, but the key difference between a claim for breach of contract and claim for misrepresentation is that the rules on how damages are assessed differently. In the case of a misrepresentation, it may also be possible to not only end the contract, but also restore the parties to it, so far as possible, to the position that they were in before they entered into the contract.
What does ‘Fair Value’ mean?
We’ve looked at this in the context of buying shares under a shareholder agreement.
In a recent case in this area, the question of how the phrase “fair value” in the articles of a company was to be interpreted. The court considered both the literal meaning of the words and the factual context but when interpreting a company’s articles association, the court did not take all of the factual background into account. A court will have regard only to any facts that any reader of the articles would reasonably be expected to know and will look at the natural meaning of the words, how they are used, any obvious facts about the company, and use commercial common sense.
The key points here on the phrase are:
- Shareholders in dispute over the question of value should avoid falling into the trap of re-visiting historic negotiations when trying to work out what a provision in a company’s articles means, as a court is very unlikely to take these into account;
- Any agreement based on the “value” of an asset must make it clear how that value is to be worked out. This could be achieved by reciting a commonly used definition in appropriate accounting or audit standards, such as the 2017 edition of the International Valuation Standards for example;
- Make it clear whether a discount or premium will be applied;
- Try also looking at phrases such as “market value”, “fair value” and “equitable value”. These can be easier for valuers to pin down, as they often focus on identifiable principles. Do not use non-technical phrases with no established meaning;
- Consider if a determination mechanism would help. A good one of these will state that the expert’s valuation will, in the absence of any gross or manifest error, be binding on the parties.
What does “The vendor undertakes…” mean?
In some areas (such as the practice of law for example), the term “undertaking” does have a specific meanings, such as an undertaking given by a solicitor to another solicitor. However unless there are other specific factors at play, the word “undertakes” has no particular significance. Such a term will fall to be assessed as either:
- an ordinary term of the contract, breach of which will then give the non-defaulting party the right to claim damages for loss suffered in the usual way, but not an automatic right to terminate the contract; or
- a more significant term of the contract, breach of which may give the non-defaulting party the right to either:
- Terminate the contract; or
- Treat the contract as continuing.
To the extent that a non-defaulting party suffers loss or damage, it can also claim damages here.
As you can see often the circumstances can impact on the some of the phrases set out above and the key take away is that the classification of terms within a contract can have a real impact on what your remedies might be.
Stay safe and well.