When an organisation hires an IT supplier to build a solution or provide a service, a legal contract is of course an essential requirement to articulate the responsibilities and liabilities of each party.
But as IT law expert Richard Stephens explained at a recent seminar hosted by Information Age, in the event of a legal dispute, the actions of each party hold more impact on liability than the precise wording of the contract.
To articulate his point, Stephens described some of the key cases that established the legal precedent. One important case concerns High Trees House, a block of flats in South London. During the war, the owner of the property informally allowed the leaseholder to pay half the rent they had originally agreed to. When a new owner took over the property after the war, they tried to sue the leaseholder for the back payments.
To great surprise, presiding judge Lord Denning decided that the leaseholder did not owe any back payment, despite having signed a deed agreeing to the full rent. Instead, he enforced the informal agreement between the leaseholder and the previous owner.
“This spawned a great trade in judges ignoring the written words in front of them and doing what they thought was just and proper based on the facts,” Stephens explained.
A matter of interpretation
A more recent case, Investors Compensation Scheme v. West Bromwich, established that what matters is not the precise wording of a contract, but the agreement that both parties thought they were entering into when it was written. Following that case, Stephens said, the important question is “what a reasonable person would have understood the parties to be using the language in the contract to mean”.
“In other words, the contract doesn’t necessarily mean what you think it says. You look at all the facts surrounding its making and then you use those to tell you what the contract really means,” he said. “That has huge ramifications for any industry, and the IT industry in particular because of its lengthy contracts.”
It is often assumed that a contract is only valid if it has been signed. However, if the parties have clearly entered into an agreement, this is not necessarily true.
An important case related to this matter was decided at the UK’s Supreme Court only last year. Müller, the yoghurt-maker, had selected manufacturing equipment vendor RTS Flexible Systems to develop a system for making yoghurt pots. RTS started work on the system, but the two parties’ lawyers continued to debate the finer details of the contract.
Before the contract had been signed, a dispute arose between the two companies, and they needed to establish who was at fault. It was not certain whether various liability exclusion clauses included in the contract could be upheld, or if there was even a contract to breach.
Eventually, after a number of appeals, the Supreme Court ruled that because RTS and Müller had worked on the system as though a contract was in place, then the contract was valid even though it had never been signed.
“The Supreme Court decided that it’s commercially unrealistic to say that the parties who have worked together for several months were not in a form of contract,” explained Stephens. Once again, the parties’ actions were found to be more important than the letter of the law.
The lesson for businesses, Stephens said, is that they cannot expect the terms and conditions of a contract to absolve them of any liability in the event of a dispute if their behaviour was not in the spirit of the agreement that that contract was supposed to enshrine.
“Projects don’t fail because of terms and conditions, they fail because of actions,” he said. “If your actions are not in accordance with the Ts and Cs, then they probably aren’t going to be much use to you at the end of the day.”
