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.

ive 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 wasnt 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 youll 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 wouldnt really expect them to have much influence on whether someone enters into a contract or not.

However, this doesnt 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.

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  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 arent 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 arent true, or a party to the contract doesnt 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 couldnt 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 shouldnt either. At the very worst, youll 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 didnt 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 hadnt, or the agency couldnt prove they had, then this could be a misrepresentation.

?I don’t see any reason why you shouldnt 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 didnt have that opinion, or couldnt reasonably have held it.

In our case, it was arguable that during the sales process the agency didnt know enough about my client’s business to give such an opinion. So, it could be a misrepresentation.

?At the very worst, youll 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 didnt 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 didnt 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.

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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.


 
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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.

Business Law & Compliance