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Supply agreement ruled worthless

11 October 2019

Law: How many businesses have agreements in place with suppliers that they believe have contractual force – but actually are not legally binding? 

This was the outcome in the Intellectual Property Enterprise Court, says Liz Fletcher, senior associate at Bevan Brittan, when cash-counting machine maker Volumatic brought a claim against Ideas for Life (IFL) for damages relating to a 2005 contract that Volumatic said the parties entered into.

Volumatic’s CounterCache required a bespoke pouch for bank notes. Agreement was reached that the pouches would be designed and manufactured via IFL. The parties signed a document relating to design and production, including stages of work and payment, and said a formal legal document would be drafted in due course.

In 2016, Volumatic sought to enforce terms, including the transfer of intellectual property rights. IFL resisted and Volumatic’s claim was dismissed. Of a number of legal issues, particularly important was whether the parties had the “intention to create legal relations”. 

The judge found that the document was signed only to record the consensus, and said the parties’ failure to rely on terms for over 11 years was consistent with a non-binding agreement. He also ruled that IFL doesn’t hold the intellectual property in the pouch on trust for Volumatic, which is not entitled to exclusive rights to use any know-how in respect of the pouch.

This highlights the risks of trading and/or accepting services in advance of a formal agreement, says Fletcher, and of delaying enforcement under a contract. The importance of concluding contracts quickly, and tying up legal loose ends, rather than letting them drift, is an important lesson for businesses, she says.

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