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Prudence in pre-contract negotiations

In all the excitement of the chase, the friendly interchanges with the potential customer, not to mention the encouraging signs which inspire increasing confidence of a successful sale, it is easy to get carried away. Gradually as well as a lot of your time, you find that cash is being spent, commitments entered into with suppliers or partners and a heap of commercial and technical information is ending up in the hands of the potential customer.  And then – it all goes quiet, or you get the email thanking you for your time but ‘we have decided to give the contract to x’ or ‘we have reassessed our strategic direction and no longer have a need for...’ (or similar). It is unfortunately relatively common for customers to lead potential suppliers on and for one to be ultimately jilted at the altar.  This can be intentional – ‘sharp’ commercial practice – or just due to bumbling inefficiency on the part of the potential customer.

If this happens, whether the discussions have reached the point where legally there is a binding contract is vitally important, as “the law does not favour the recovery of expenditure made merely in the hope or expectation of agreement being entered into or of a stated intention being fulfilled.”

Unless there has been some other factor involved such as actual fraudulent misrepresentation, parties engaged in contractual discussions are taken to know that until the point where there is a legally binding contract in place, there can be no liability for any costs or commitments entered into; and businesspeople are taken to know what the requirements are for a binding contract so that they can recognise when the point is reached.

Put another way:-

1. There are strict criteria for what is a binding contract;

2. If you are in business you are expected to know what these are; and

3. If they are not met and meanwhile you have spent money or entered into binding commitments with others, that is just tough - you will have no claim on the potential customer.

The other aspect of such situations is your valuable information which might have been provided. During the pre-contract negotiations and in the course of answering requests for additional information, be wary of a potential customer who is pumping you for information but hasn’t yet clearly created a binding contract between you. Be particularly wary of giving out proprietary or commercially sensitive information if you have no Confidentiality Agreement in place.

Nothing in this awareness article is intended as legal advice. If you have a specific legal requirement or query you should consult a solicitor directly.