CASE STUDIES

The two real life case studies below show how even very large businesses can come unstuck when they don't pay enough attention to contracts:

Baird Textiles
Some of the dangers of not having a formal, written contract are illustrated by a recent case involving a supplier of Marks & Spencer called Baird Textiles. Baird had been supplying M&S with clothing for 30 years. Sales to M&S were worth well over £100 million a year and accounted for 30-40% of Baird's total turnover. However, there was no formal, written contract between M&S and Baird. Towards the end of 1999, M&S suddenly announced that it was terminating the supply arrangement at the end of the current production season.

The courts ruled that there was no legally binding, long term agreement between Baird and M&S. As a result, M&S was entitled to terminate the arrangement without warning, despite the fact that Baird had invested heavily over the years in order to meet its customer's needs.This may seem very unfair to Baird. But as we have seen, the courts expect businessmen to be able to look out for themselves. Baird should have been aware of the risks it was running by not having a formal written contract with M&S.

What if there had been a proper contract ?
The contract would probably have contained a term saying how much warning M&S had to give before terminating the agreement. This would have given Baird time to start looking for other customers to replace M&S or to cut back on its investment programme.

If M&S had insisted on terminating immediately, then it would have been in breach of contract. Baird could have claimed damages for the period from that date until the end of the contract notice period. If the notice period had been 12 months, for example, Baird could have claimed the value of a year's worth of business from M&S.

Equitable Life
The well publicised case of Equitable Life shows how a bad contract can be just as bad as no contract at all, because you may be committing your business to something it cannot actually do. Equitable gave a commitment to certain policy holders that it would pay them guaranteed annual rates of interest. In the event, it didn't have enough money to do this.

Equitable tried to argue that it was not legally obliged to make the payments. The courts disagreed. They said that the Equitable had entered into a legally binding agreement with its customers when it made the promise about guaranteed rates. If the promise later proved to be unwise, that was entirely Equitable's problem - its customers had a legal right to claim the guaranteed rates. Although Equitable is technically still solvent, it has now been forced to close to new business as a direct result of the contract it made with some of its customers.

The Equitable case is an extreme example, but it shows the potentially disastrous consequences of failure to pay enough attention to contracts.

SUMMARY

- a contract is an agreement which creates legally binding rights and obligations and is enforceable through the courts

- having a well drafted, written contract will reduce your business' exposure to a wide range of commercial risks

- BUT - business people are expected to be able to look out for themselves when they make contracts, so it's vital to ensure that you don't commit your business to something it cannot actually do

- try to view contracts positively as a way of defining and managing the relationship between your business and its suppliers and customers - the best contracts are the ones which prevent you getting into a dispute in the first place, so you never need to go near a court

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