A High Court case has provided another reminder that the purpose of a deposit is to secure the buyer’s performance. The court ordered the buyer of a ship to pay to the seller the full amount of an unpaid deposit (either as a debt or as damages), and not a lesser sum in damages for actual loss caused by the buyer’s breach.
A High Court case has provided another reminder that the purpose of a deposit is to secure the buyer’s performance. The court ordered the buyer of a ship to pay to the seller the full amount of an unpaid deposit (either as a debt or as damages), and not a lesser sum in damages for actual loss caused by the buyer’s breach. The buyer’s failure to pay the deposit by the time specified in the contract was a repudiatory breach (a breach so fundamental that the aggrieved party is able to terminate the contract, as well as claiming for damages), leading to termination of the contract by the seller. On a proper interpretation of the contract, the deposit was a deposit and not merely an advance payment. The full amount of the deposit was payable because the right to the deposit had accrued before termination, and had not been lost because of the termination.
The decision also highlights where the parties’ risks lie in the initial stages of contracts where deposits are a feature. A seller should ensure that the obligation on the buyer to pay the deposit should arise as soon as possible after the contract is concluded and to have a deadline by which the deposit is to be paid. This should reduce the seller’s risk of having a sale fall through leaving only a right to damages for loss of bargain and some expenses. If the parties do not intend the deposit to be forfeit if the buyer defaults, then the contract needs to be very clear that the parties intend that to happen.
This checklist highlights some of the other major pitfalls that a business needs to avoid during contract negotiations.
Contract negotiations – pitfalls to avoid: business briefing
This business briefing highlights some of the major pitfalls and issues that may arise during contract negotiations.
Who is negotiating for the other party?
Does the person representing the other party have the authority to negotiate for that other party?
Should negotiations be kept confidential?
If negotiations should be kept confidential, ensure that a confidentiality agreement is signed before starting negotiations. A confidentiality agreement (also known as a non-disclosure agreement or NDA) should be signed before giving away any business sensitive information. The agreement should stipulate that information disclosed during negotiations:
- Is confidential.
- Should only be used for a stated purpose.
- Should not be shown to anyone else.
- Should be returned or destroyed if the deal does not go ahead.
Is the company sharing business sensitive information?
- Take legal advice before handing over any business sensitive information. It can be unlawful to hand over certain types of information, such as personal data about customers or employees.
- A confidentiality agreement may give some protection, but it must be signed before anything is handed over.
- Consider whether the other party actually needs the information or whether they are simply on a fishing expedition.
Do not exaggerate or mislead the other party
If the business exaggerates or misleads the other party during negotiations, the contract may be undone and compensation may payable.
Do not offer or accept bribes or inducements
The Bribery Act 2010 sets out the following offences:
- Bribing another person.
- Being bribed.
- Bribing a foreign public official.
- Failing to prevent bribery.
The penalties for committing an offence can be very significant. For example, failing to prevent bribery can lead to an unlimited fine.
Might the other party try to poach employees or customers?
If the other party has access to the business’ customers or employees, consider asking them to sign a non-poaching (or non-solicitation) agreement. This stops one party from approaching, for example, the employees, customers or clients of the other party.
Take care before signing any pre-contractual agreements
- If a business is negotiating a big or complex deal, it may be asked to sign a summary of the main terms before the main contract is agreed. This document can be called heads of terms, a term sheet or a memorandum of understanding.
- Take legal advice before signing any pre-contractual agreement. Even if the agreement is not meant to be legally binding, it may create legal obligations. In any event, it can create strong moral obligations which can affect a business’ negotiating position.
Do not enter into a contract by mistake
- A contract does not need to be signed and in writing to be binding. For example, a business can enter into a binding contract over the phone or by e-mail. Starting to perform aspects of the contract may also indicate acceptance of the last terms offered.
- To help clarify that negotiations are still ongoing, mark all correspondence “subject to contract” or “not legally binding”.
If you have any queries about the content of this checklist, please contact Roger Wilkinson or James Chaplin.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.