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Charities - The Risk of Not Following the Contract

on Tuesday, 06 November 2018.

When things go wrong in commercial arrangements lawyers ask "what does the contract say?". But in the real world, commercial parties are usually looking for a solution not an argument.

This is particularly true of charities, where collaborative working is the norm. If the other side falls short of expectations - perhaps delivery is delayed or a service temporarily unavailable - charities generally opt for a cooperative approach that will get the problem fixed, rather than reaching for the contract and serving formal notice of a breach.

For some years now, the UK courts have also taken a very commercial and pragmatic approach to claims of breach of contract, placing considerable emphasis on the conduct of parties, even where this appears to be at odds with the wording of the contract. However, two cases have highlighted the risk of this approach and of not following the strict letter of the contract terms.

The Cases

In Rock Advertising Limited v MWB Business Exchange Centres Limited, MWB operated serviced offices in central London. Rock Advertising entered into a licence with MWB to occupy office space and a term of the licence was that any variation must be in writing and signed. Rock accumulated arrears under the licence of over £12,000, and the parties agreed to vary the payment schedule. However, the variation was not put into writing and signed by both parties. MWB subsequently rejected the revised payment schedule, locked Rock out of the premises, terminated the licence and sued Rock for the arrears. The High Court and the Court of Appeal both held that an oral agreement had been reached between Rock and MWB, and that the parties had waived the requirement for variations to be in writing. However, the Supreme Court overturned these decisions in a very clear ruling. Giving no weight to the behaviour of the parties, the Supreme Court held that the oral variation was invalid. Having reached an agreement in the licence as to their future conduct, that agreement set the boundaries of party autonomy.

This approach is also seen in the Scottish case MacBrayne v Atos IT Services. This case concerned an agreement for the supply of an IT system by Atos. The contract set out milestones that Atos must meet by specific dates. The project experienced severe delays, the milestone timetable was varied, and the parties agreed to suspend performance of obligations under the contract. Following this, MacBrayne terminated the contract due to breach of contract, arguing that Atos had failed to give written notice of the delays as required by the contract. Atos argued that it had not provided notice because it had adopted a 'co-operative and facilitative approach', rather than 'reaching for the contract'. As MacBrayne had not previously raised the need for formal notices, and both parties were working collaboratively to progress the project, Atos reasonably believed that notices were not required. The Scottish court, like the Supreme Court, disregarded the actual behaviour of the parties and rejected Atos' arguments, holding that its failure to give notice to MacBrayne of delays was a material breach of the contract.

A Lesson for Charities

This change in direction of the courts regarding the interpretation of contractual obligations is particularly pertinent for charities. It threatens the facilitative and pragmatic approach that charities might take in relation to their professional relationships, where this approach goes against the exact wording of the contract. Indeed, in an ongoing professional relationship with service providers, it often seems more sensible to adopt a commercial approach rather than 'reaching for the contract'. However, these cases highlight the risks of such an approach, and the importance of complying with the contract terms. If the contract says all variations must be evidenced in writing, then you must agree this in writing (not orally), and if the contract says you must give formal written notice, then you must give formal written notice.

For more information please contact Penny Bygrave in our Commercial Law team on 020 7665 0867.