- Solicitors are receiving an increasing number of enquiries from parties wishing to terminate or exit once-favourable commercial contracts that have since turned sour.
- While all agreements come with an element of risk, a common denominator in unfavourable contracts can be that the agreement process was rushed, and this can be a costly error for all parties.
- Due diligence on all sides is imperative when considering the terms of an agreement.
The commonly used saying is of course ‘Act in haste, repent at leisure’. The dispute over Elon Musk’s proposed acquisition of Twitter has hit the headlines on an almost daily basis. It is perhaps just one very well-known and high-profile example of a party looking at the contract they entered into with fresh eyes after the event and finding issues.
In the heat of the moment and often due to quite legitimate and normal pressures, it is common for parties to enter into commercial agreements or arrangements that they later come to regret.
That may be because, with the best of intentions, one party finds that all is not what was expected, or, alternatively what once seemed a good deal is no longer the case.
We are also noticing an increase in clients coming to us to review their agreements and arrangements. This is for a variety of reasons. Either they or their counterparts have allowed the dust to settle from COVID-19 and/or the difficulties in supply chains. Alternatively, this could be due to market movements such as share prices, currency or commodity or fuel costs or other developments out of the parties’ control and expectation. As a result, they now wish to address matters. A review could either lead to a wish to renegotiate the terms or to exit a relationship or obligation.
Because of the various pressures to enter into agreements, parties themselves may not fully address issues that are or later become important, or tell their advisers, or put them under pressure not to address or fudge points.
I approach this from the viewpoint of a solicitor who specialises in disputes concerning contracts and agreements.
My colleagues who work on commercial transactions often tell me of clients who ‘want to keep the agreement short’ or face very tight deadlines. As a result, the work and thinking time for those entering into commitments and their advisers is very limited.
Readers are likely to know how important and helpful a written and comprehensive agreement can be. A judge (certainly in England) is likely to give a document more weight than a party’s recollection and a document may assist in dealing with situations in a quicker, more efficient way than otherwise.
There are of course other scenarios where it makes good sense to have written agreements rather than fall back on the applicable law. Such agreements can shortcut what might otherwise be a lengthy and costly exercise if parties’ viewpoints change.
In English law, certain kinds of agreements are not enforceable unless they are in writing, such as those relating to the transfer of property or guarantees.
Contracts checklist
All agreements and transactions carry risk. In my experience parties should consider the following to try and reduce the risk or at least put themselves in a better position.
- Actually have a written agreement—there are many situations where parties don’t do this, for example, because they trust each other due to family or social connections; or they have had a good and successful business relationship up until that point.
- Those entering into an agreement should not be rushed into it where they are uncertain or not happy taking the risk.
- Parties should not succumb to the temptation to enter into an agreement which is not fit for purpose or does not cover what they want or are advised to deal with on the basis ‘it will be all right’.
- People should read and understand agreements before signing. Yes, those entering into agreements are busy and under pressure and documents can be long. I recall sitting down with a leading hedge fund principal who had not read the agreement he had signed and under which he had been served with court proceedings. I explained the terms. He did not like the onerous provisions. He had read about mis-selling claims and thought we could set aside the agreement on that basis. I suggested that would be difficult, which he also did not like hearing.
- Consider carefully the carrying out of due diligence before entering into an agreement and, if so, how much. My view would be as much as possible in advance. It is reported that Elon Musk agreed to purchase Twitter with due diligence to be carried out, among other things, on the number of proper accounts after he had become contractually bound. The agreement is reported to have break clauses. Break clauses that allow for termination or clauses that provide for adjustment of consideration, like other clauses in agreements, can be subject to debate, as Twitter and Mr Musk are finding out. In common with others, I have dealt with a number of heated disputes over adjustments and other events that occurred after parties have entered into contracts. In one dispute about an acquisition, the parties and their advisers had an extended debate about the interpretation of accounting standards. To the non-expert they were clear. However, the technical experts of the leading accountancy firms involved on each side were of the view they were not. A parallel would be the use of the word ‘reasonable’, which would suggest a range of possible outcomes. I don't think I have met anyone who would say that their approach was not unreasonable. My view, if attainable, would be to leave as little to debate as possible.
- Due diligence would, in my opinion, include checking the ability and willingness of a counterpart to perform, which may have changed since discussions started.
- Check who the parties are to the agreement and that they are correct. This appears common sense, but it is surprising how often this does not happen, and it can be critical. I have come across an agreement that was meant to be entered into by a Jersey-registered company but there was an English-registered company by the same name against whom charges were then registered erroneously. In another case, the variance of name was a point taken by opponents as to validity of an agreement.
- Consider providing in the agreement what the parties might do where there is a change of circumstances. This could cover a number of reasons such as change of ownership or control of one of the parties or change in markets. In some cases, buyout clauses may be appropriate.
- Try to anticipate the unthinkable. Following COVID-19, a number of agreements provide for pandemic situations. Before, they did not or at least the effect of such clauses was the subject of debate. This created uncertainty and resulted in a number of cases involving policy coverage, resulting in the well-known Financial Conduct Authority’s test case about the same. Similarly look at other provisions. In one case I had, there was a fire at commercial premises in between exchange of contracts and completion of the sale which led to some debate. In that case the debate was settled quickly. I would think about inserting or refining force majeure clauses. For example, do they properly cover all scenarios? In one of my cases, on a crash in the markets, a client’s credit line was reduced by approximately 80%, which prevented them from completing on an acquisition, leaving them facing claims for the deposit and damages.
- Look at the power to vary the terms of the agreement, by whom and in what circumstances.
- Similarly, consider the ability to assign.
- Check the maths and the formulas for calculations. It happens from time to time that these go awry amid a desire to move forward quickly. While it may in theory be possible to enter into a supplemental agreement to put matters right or to apply to the court to rectify, the outcome is not always certain and this will involve delay, consequent interest and costs.
- Check which law is said to apply to agreements, whether any other law might apply notwithstanding that and seek appropriate advice. In one of my cases, an agreement for a large property development overseas was said to be subject to English law. The lead lawyers were well-known overseas law firms. The agreement provided for agreements to agree certain aspects. As many will know, in English law, with certain exceptions, an agreement to agree is not binding on the parties. This point was just one of a number of issues involved in the case.
- Verify the dispute resolution mechanisms. Quite often within an agreement they do not match or, if part of a suite of agreements, they can conflict. Also consider which method and location best suits the parties, taking account of availability and speed of judicial or tribunal assistance and enforceability of outcome.
- Check the execution clauses to make sure the agreement has been validly executed to save arguments about this point.
The above is of course not a complete list of aspects to think about.
In conclusion, it is far better for those entering into agreements and those advising them to consider carefully, rather than act in haste and repent at leisure, at length and at cost with an uncertain outcome.
Jeremy Lederman, partner, Harold Benjamin Solicitors Limited (www.haroldbenjamin.com).
