Law of Contracts – Part 16
In Part 1 (August 2014), I categorised risk into five categories, namely; 1. PEOPLE, 2. MONEY, 3. LAW, 4. SERVICE and 5. ECOLOGY. In this series, I deal with the risk profile of each, i.e. broadly speaking the areas of risk that any business is exposed to can been allocated under these five categories.
In Part 2, (September 2014), I covered the category of ‘People’ under four sub-categories: Staff (discussed in Part 1); Third party service providers (‘TPSP’); and Business Associates.
Part 3 (October 2014), continued with ‘PEOPLE’ as Customers.
Part 4 (November 2014), started the discussion on the 2nd category, namely ‘MONEY’ in terms of CASH and CHEQUES.
Part 5 (December 2014), looked at CREDIT and CREDIT CARDS.
Part 6 (January 2015), looked at LAW and CONTRACTS, with an introduction and Requisite #1: Offer & Acceptance.
Part 7 (February 2015), continued with Requisite #1 covering telephone enquiries, e-mails, websites and advertising.
Part 8 (March 2015), covered Requisites #2: Legally Binding Obligation, and #3: Consensus in contracts.
Part 9 (April 2015), covered Requisite #4: Performance Must Be Possible.
Part 10 (May 2015), covered Requisites #5 & 6: Performance Must Be Permissible, and Capacity of the Contracting Parties.
Part 11 (June 2015), continued with Requisites #6: Capacity of the Contracting Parties.
Part 12 (July 2015), covered Requisite #7” Negotiating a Contract.
Part 13 (Aug 2015), covered Requisite #8 Drafting a Contract.
Part 14 (Oct 2015), covered Requisite #9 Contract Management.
Part 15 (Nov 2015), covered Requisite #10 Enforcing Your Contract – Part 1.
Homework – What To Do Before You Go Ahead
2. Have The Requisites Been Met? (Continued)
To recap where we ended off in Part 15 last month; The first question is has there been a clear and definitive offer and acceptance? The second question is whether the ‘contract’ the parties have entered into constitutes a legally binding obligation.
The third question that I want to cover here, is whether there is consensus ad idem i.e. have the parties actually agreed to the same thing/is there or has there been a ‘meeting of the minds’?
Sometimes when you look closely at the document that purports to be the binding contract, you will find that the parties ‘where actually not on the same page’ and then a party may have to start the very tricky and expensive process of rectification relying on implied terms.
The way I prefer to draft agreements is based on the premise that (especially SME and SMME, of which there are many in the travel and tourism industry) not only do not have deep pockets but also don’t have the time or patience to wait for a lengthy process during which more often than not much time is consumed by meeting after meeting, ‘educating’ lawyers about the industry and ending up with 5, 6 or 7 draft agreements before actually arriving at wording that truly reflects the consensus of the parties!
So what I do is to say to the parties: “You both understand your respective businesses and each others’ better than I do (At least at the initial stage) so why don’t you do the following: each of you go away and independently write down your expectations and deliverables; then meet and ‘compare notes’, combine same into the final agreed consensual document and submit it to me to ensure all legal requirements are met?”
This process means the parties actually apply their minds and gives new meaning to the word ’N.E.E.D’, which I treat as an acronym i.e. the parties need to ensure that each others’ needs have been met and thus the acronym stands for: ‘The Net Effect of Expectation & Delivery’!
However even if the contracting parties agree to that process there still remains one challenge: more often than not entrepreneurs don’t have the patience and/or commercial reality may require that they (want to) start doing business immediately!
This is because by the time they arrive (in most instances) at the lawyer(s) (’Yes’ there can be two and thus the education process and fees double up very quickly!) with all their notes, they’ve been talking for weeks and sometimes months and can’t wait to start implementing their ‘agreement’!
On the other hand my process often leads to the parties agreeing not to engage a 2nd lawyer, especially as I am well versed in the travel and tourism industry (with over 33 years’ experience).
So, having said that, what they often do, despite having briefed an attorney(ies), is to start engaging in business based on one of the following: a handshake – a gentleman’s agreement – a memorandum of understanding (‘MOU’), heads of agreement (‘HOA’) or a letter of intent (‘LOI’).
Sadly, unless these documents are very meticulously drafted, they amount to no more than ‘an agreement to agree’ which is NOT enforceable!
So I have created a ‘bridging agreement’ known as a ‘Letter of Commitment’ (‘LOC’).
The LOC is a two page agreement which contains the (initial) consensus and essential (albeit abbreviated) clauses re e.g. shareholding, funding, intellectual property, breach, dispute resolution and confidentiality, which is 100% enforceable and means the parties can start doing business immediately knowing that the legal requirements have been met.
And the cost?
A fraction of a lengthy 3 month/50 page document and peace of mind!
Disclaimer: This article is intended to provide a brief overview of legal matters pertaining to the travel and tourism industry and is not intended as legal advice. © Adv Louis Nel, ‘Louis The Lawyer’, December 2015.