Insurance · 12 February 2018

Are statements made during contract negotiations legally binding?

When do statements become legal conditions?

During contract negotiations, a salesman will say many things to try to seal the deal. Here, Grid Law founder David Walker helps readers understand when these statements are legally binding.

“I’ve just found out the agency lied to me during negotiations. What can I do about this?”

A client asked me this question after signing up to years’ contract with a digital marketing agency. From the way they sold the service to him, he had clear expectations about the results that were anticipated, but almost from the outset, the relationship started breaking down.

Two months in, he was becoming concerned that the agency wasn’t really doing anything on his account. After three months, there was still a complete lack of results and he was quite sure they would never hit their targets. After four difficult months, enough was enough and he came to see me to find out what his options were.

Understandably, my client was angry. He wanted to get out the contract as soon as possible and he wanted to get his money back. He had tried discussing the problems with the agency but they told him he was committed for the whole year and if he terminated early, he would be sued.

So, what could he do?

As with all situations like this, it’s important to take a step back and look at the facts and the evidence. As much as I have great sympathy for my clients, it’s important to have a clear and an unemotional view of what has happened. Only then can I provide them with the best advice and suggested course of action.

First, I needed to know exactly what was said and when. During negotiations, a salesman will say many things to try to seal the deal and the law treats these statements in different ways. These statements can effectively be split into three categories.

Three types of negotiation statements

  1. Sales puffs

First are “sales puffs”. It’s a strange term, which was first used in a legal dispute back in 1892, but basically a sales puff is an unspecific comment that has no legal effect. Something like “we offer a great service” or “you’ll love the results we will get for you”. It’s often an opinion or it could be an exaggeration.

Sales puffs should be easy to spot and you wouldn’t really expect them to have much influence on whether someone enters into a contract or not.

However, this doesn’t mean that salesmen have a free reign and can say what they like in adverts. All advertising must be legal, honest, decent and truthful and if it’s not, it could fall foul of the Advertising Standards Authority’s CAP Code.

__________________________________________________________________________________
contracts

 

Five essential business contracts every small company needs

David Walker examines the the business contracts you’d be a fool to live without as a small company owner.

__________________________________________________________________________________

  1. Representations

Next are representations. Representations can be opinions or factual statements, but they’re intended to be taken seriously. Representations don’t generally form part of the contract, but the customer will rely on their accuracy. The salesman will use them to induce the customer to enter into the contract so there are legal consequences if they aren’t true.

  1. Statements and facts

Finally, there are statements made and facts given that are terms of the contract. These are legally binding and if they aren’t true, or a party to the contract doesn’t abide by them, legal action can result.

The client’s perspective

The main reason he signed up to this service was the return on investment he said he was promised. He felt the expected results were ambitious, but the company seemed very confident they could achieve them.

So, it sounded like the statement was a representation. However, I needed to know exactly what was said so we could decide whether this was a misrepresentation. If it was, this was potentially our way out of the contract.

A misrepresentation happens when one party gives a false statement which induces the customer to enter into the contract.

My client couldn’t remember exactly what was said, but it was something along the lines of:

“Clients typically see a 400 per cent return on investment and I don’t see any reason why you shouldn’t either. At the very worst, you’ll at least double your money.”

Breaking this down, the representation about the 400 per cent ROI was clearly a factual statement. But was it false? We didn’t know. If this case had gone to court, I would have asked for evidence to prove that most of the agency’s clients had achieved this result. If they hadn’t, or the agency couldn’t prove they had, then this could be a misrepresentation.

I don’t see any reason why you shouldn’t either” is an opinion.

Generally, opinions which turn out to be wrong are not misrepresentations. However, they can be if you can prove that the person who gave it didn’t have that opinion, or couldn’t reasonably have held it.

In our case, it was arguable that during the sales process the agency didn’t know enough about my client’s business to give such an opinion. So, it could be a misrepresentation.

At the very worst, you’ll at least double your money”. This was a statement of fact and a clear inducement to for my client to enter into the contract. The trouble was, we didn’t know if this representation was false. With eight months of the contract left to run, it could still turn out to be true.

Based on his experience to date, my client had no faith what so ever in the agency’s chances of hitting their target. Quite rightly, he didn’t want to risk even more fees just to be proved right later on, so he wanted to terminate the contract straight away.

The trouble was, doing so could have put him in breach of contract so next we had to look at the terms of the contract.

__________________________________________________________________________________
Breach

 

How to value a claim for a breach of contract

It’s easy to make an emotional decision and fight a claim on a point of principle. However, it’s important to carefully consider what’s best for the business

__________________________________________________________________________________

Did the agency breach the contract?

My client had signed up to the agency’s standard terms and conditions and while reviewing them, I was looking for three things.

I wanted to see if the agency had failed to do anything they were contractually obliged to do. This would be a breach of contract and may have given us grounds to terminate.

Next, I was looking for an entire agreement clause. This is important because an entire agreement clause effectively says you cannot rely on any statements made in the course of negotiations unless they have been written into the contract.

Finally, I was looking for a limitation of liability clause. As the name suggests, this is a further level of protection for the agency which can be used to prevent clients from claiming compensation.

The agency’s terms and conditions had been well prepared and unfortunately for my client, they contained both the entire agreement clause and limitation of liability clause I was looking for.

This meant that any legal action would be very difficult, and even if we were successful we were unlikely to recover very much in the form of compensation.

So, what did we do?

We suspected that the agency wasn’t putting as much time and effort as we expected into my clients account, which was why there was a lack of result. However, the only results referred to in the contract were the end results. There were no milestones along the way.

Nevertheless, we made it very clear to the agency that their service didn’t live up to the standard we expected and based on the results to date, we had absolutely no faith that they would hit their target.

We were anticipating that they would breach their contract so told them that we were terminating the contract now. This was because our claim would be much higher if we were later proved right.

We also claimed that the statements made by the salesman were a clear misrepresentation and this also gave us the right to terminate the contract.

They replied, as was expected, saying that it takes time to generate results and the results were easily achievable. If we terminated the contract now, they threatened to sue my client for the remaining fees that were due for the rest of the contract.

My client stopped paying the fees, and the agency stopped work.

After some correspondence back and forth, we were in a stalemate. Both parties knew that they faced a potentially difficult legal battle and nobody was prepared to make the first move. They also couldn’t agree on the terms of a settlement so were left in limbo, which is never ideal.

Lessons to learn

If you’re signing up to any form of service and you’re expecting a particular result from it, make sure you’re clear about the status of what the salesman says.

Is it a “sales puff” or is it a representation that induces you to enter into the contract?

If it’s a representation, make sure it’s written into the contract so it’s legally binding.

If the supplier won’t guarantee the result, think about how else you can protect yourself. For example, try to negotiate a “break clause”, or perhaps there should be target results in stages in case the service isn’t working out.

If you have any questions about any contractual disputes you’re involved with, please feel free to email me at editors@businessadvice.co.uk and I’ll happily answer them for you.

Sign up to our newsletter to get the latest from Business Advice.


 
TAGS:

ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

Q&A

If you’ve found the article above useful, but have a more detailed and bespoke question, then please feel free to submit a query to our expert. We at Business Advice will get in contact with them on your behalf and arrange for a personalised response. These questions and answers will then be collated on the site for any other readers who have similar queries.

Ask a question

From the top