Court Underlines Duty of Candour in Contract Negotiations

A lack of candour in contractual negotiations can lead to grave financial consequences, as was shown when an event management company that lost its only customer four months after signing a new five-year deal won the right to substantial damages.

Company A had for 30 years provided management services to company B in respect of an annual trade show. Company B was company A’s sole client and the latter had sought to protect its position by signing a fresh five-year contract.

However, four months after the agreement was signed, company B sold its right to hold the show and sought to terminate the contract. That triggered a breach of contract claim by company A in which it sought more than £1 million in damages.

Company B pointed to a clause which had been inserted in the contract. This stated that the agreement would become unenforceable if ‘some unforeseen circumstance’ resulted in cancellation of the trade show. However, the High Court found that a possible sale of the company had been in prospect when the new contract was signed and that was the reason for the clause’s insertion. In those circumstances, it was ‘very clear’ that the sale and the cancellation of the trade show were not ‘unforeseen’.

The Court rejected company B’s arguments that the clause did not accurately reflect the oral agreement that had been reached, and that a term should be implied into the contract enabling it to terminate the contract on reasonable notice in the event of a sale of its business.

Had company B been ‘straightforward in its business dealings’, it would have proposed that such a provision be explicitly included in the contract. Such a proposal would have been ‘rejected out of hand’ by company A and it was therefore ‘absurd’ to suggest that such a clause should be implied into the contract. The argument was, in truth, ‘an attempt to truncate a fixed-term contract’.

Although company A’s alternative claim under the Misrepresentation Act 1967 was rejected, the Court emphasised the fundamental principle that ‘the reasonable expectations of honest men must be protected’. Company A was entitled to expect candour in the negotiations and company B was under a duty to disclose the truth: that it wanted to avoid compensating company A in the event of a sale.

Says Mary Kilner, “We can help you conduct your contractual negotiations in a way that protects your business interests and reduces the risk of legal challenge.”

Categorised in: Employment Law, Latest news

This post was written by Colemans Solicitors LLP