The Contract Masterclass – Good Faith and Cancellation
The latest instalment of The Contract Masterclass from Beyond Corporate sees Bob and Tech It Easy Ltd run into two issues faced by many SMEs on a daily basis. Here, James Corlett and Molly Hackett break down the ‘Good faith’ clause, cancellation fees and what Tech It Easy can implement to protect themselves in the future.
An issue has cropped up with a long-standing trusted client, Style & Social. The parties have always had a great relationship but, the current economic climate means that Tech It Easy have taken on higher prices from its suppliers, and Tech It Easy are looking to pass these on to Style & Social who have been reluctant to accept the changes.
The contract says that both parties will review and re-negotiate prices in “good faith” which Bob would like to use to his advantage. But is this enough, and what does it actually mean?
In short, this means that Tech It Easy and Style & Social will co-operate, deal fairly and openly with each other to come to an agreement on pricing. The use of “good faith” is open to much interpretation and uncertainty, which is potentially disadvantageous to Tech It Easy. The wider the obligation, the less enforceable it is likely to be. Basically, Style & Social have not contractually agreed to take on higher prices and simply a clause stating both parties will act in “good faith” in agreeing pricing will not necessarily obligate them to agree and accept the higher prices. Bad news for Bob and Tech It Easy.
What could Tech It Easy implement in future contracts?
Price review clause – if Tech It Easy wants to implement an effective good faith obligation, it should specify the actions that are required to satisfy what is meant by “good faith”, such as a price review clause with a procedure to follow and factors that both parties will consider, such as general price increases. This will provide certainty in whether such a duty has been discharged later down the line in the case of a disagreement.
Price change clause – Tech It Easy could alternatively include a price change clause in its contracts, entitling it to adjust its prices and pass down any supplier price increases to the client. Any increase trigger could also be linked to an index, such as the Consumer Prices Index.
Tech It Easy are growing to be a successful and substantial software start-up, more than doubling its employee count within twelve months (!) To account for the growth, Tech It Easy have landed a swanky new office in the city and are sorting out utilities.
Bob has just been told that the IT team are wanting to cancel a contract they recently entered with Boutique Broadband Ltd due to finding a much better broadband deal with another provider. IT were aware that fees would apply if they wanted to cancel but didn’t know the amount, it can’t be that much considering the maximum amount owed to Boutique Broadband for its broadband services, right?
Bob was shocked to receive an email from the Managing Director of Boutique Broadband that terminating the contract will cost Tech It Easy £50,000 in cancellation fees! IT explained to Bob that at no point where they told such costs would apply, but they were sent the company’s terms and conditions before signing up.
Bob checked the terms…
…and there it was, £50,000 in cancellation fees. Panic.
Is this cancellation fee enforceable?
Thankfully for Tech It Easy, although Boutique Broadband had sent Tech It Easy its terms and conditions, they had clearly not highlighted the onerous cancellation fees which were buried in the lengthy document. This term would be seen as particularly unusual and onerous, as the maximum amounts payable under the contract for breach is £20,000. As Boutique Broadband took no steps to flag this term before Tech It Easy entered the contract, it will not be enforceable and Tech It Easy will not have to pay out.
Crisis averted! And Bob has learnt the handy tip that any onerous or unusual terms he is including in the business’ own contracts must be highlighted to the customer or other party in order for them to be valid.
By James Corlett and Molly Hackett