Sophie Martyn, Solicitor at BPE shares her tips on creating effective pre-contract negotiations.
Pre-contract commercial negotiations are key to achieving an effective contract.
Although representations made prior to signing an agreement usually do not form part of the contract itself, they can be powerful enough to determine whether a party enters into the contract.
Pre-contract terms and representations can be oral or written, in letters and emails, known as “memoranda of understanding” (MoU).
MoUs can often prove valuable in demonstrating a commitment to agreeing a contract.
Courts can allow evidence of pre-contractual negotiations to be admissible when rectifying a contract, if the contract does not give effect to the parties’ true intentions.
It is not worth throwing “caution to the wind”; acceptable conduct is essential to healthy pre-contract commercial negotiations and a successful ensuing commercial agreement.
When it comes to agreeing the contractual terms, usually, if a contract is written, all the statements within that contract are its terms, and no extrinsic evidence can be admitted to add, vary, contradict on interpret by any other means, the written terms, in the event of a dispute.
Tips for pre-contract commercial negotiations:
- Be careful to ensure not to misrepresent the nature of the commercial opportunity.
- Give careful consideration to what needs to be disclosed to the other party/parties.
- Be careful to distinguish between factual statements and expressions of opinion.
- Use clear language and provide definitions where necessary.
- Do not rely on exclusions of liability for misrepresentations.
This is “the exclusionary rule”. To provide certainty, commercial agreements will often be drafted to include an entire agreement clause. These are designed to preclude the use of extrinsic evidence.
The clause may also, if appropriately drafted, exclude claims for misrepresentation, by excluding reliance on misrepresentations made by the parties or their representatives, which might have induced the other party to enter into the contract.
Despite this, the courts are very clear that an entire agreement clause, however drafted, will not exclude remedies for pre-contractual misrepresentations.
If during pre-contractual negotiations, a party has made a false statement of fact which the other party has relied on, to enter into the contract; there is potential liability