Keeping contract terminology clear

26 November 2012
Businesses and public sector organisations want to work with buyers and suppliers with as little dispute as possible. A key requirement is clarity of terms used in discussions and documents relating to trading relationship and contractual agreements. Ultimately, there needs to be sufficient clarity to enable a judge to enforce their agreement  – in the worst case scenario.

Here is a good example from a classic court case from 2004 between Vogon International v Serious Fraud Office (SFO). In summary:

  • The two parties agreed a contract to set and populate an MS Exchange database at £1,500 per database.
  • Vogon interpreted the word ‘database’ to mean a .pst file and so raised an invoice of £314,000. The SFO interpreted ‘database’ to mean each complete MS Exchange database and requested an invoice of £22,500.
  • The two parties ended up in court, and subsequently the Court of Appeal agreed with SFO’s interpretation.
Because Vogon and SFO failed to clarify the shared interpretation of that one word ‘database’, they went to court incurring all those costs and associated aggravation – not a recommended course of action. The following price-related terminology and effects of typical words may be helpful to raise awareness and clarify terms in trading relationships and contractual agreements.
  • Estimate. This is a price submitted by the seller, who may word it as ‘subject to confirmation’. The buyer needs to establish if it is a price capable of acceptance and whether it is ‘firm’ or ‘fixed’. The danger of placing a contract on this basis is the seller requires an increase when they are in possession of further information.
  • Quotation. It must be established if the quotation is an offer to sell or an invitation to treat. Often the supplier will couch it in terms of “this quotation is not an offer”. The buyer must read the quotation for any qualifying comments that seek to place risk with the buyer.
  • Errors and omissions excepted (or commonly ‘E&OE’). This is a significant qualification and should not be accepted by the buyer. To accept this statement is leaving the door open to the seller to change any aspect of the quotation.
  • Reasonable price. There is no such thing as a reasonable price. The price will be set according to many things, including the market conditions, seller’s pricing strategy, risk profile of the contract, liabilities, and so on. This term is best avoided by the buyer.
Stephen Ashcroft is a procurement and tendering coach at Brian Farrington and a visiting lecturer at the University of Manchester. He is also on Twitter @ProcureChange.
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