Out-Law Guide 5 min. read
02 Nov 2007, 8:31 am
DMA Financial Solutions Limited v (1) BaaN UK Limited, (2) BaaN International BV and (3) BaaN Company NV
The Court was asked to make a preliminary decision as to whether the parties had entered a binding contract for the provision by DMA of training services to customers of an accounting software program owned and licensed by BaaN.
In mid 1998 BaaN decided it would phase out the software in question, and decided ultimately to do this by mid 2003. In the meantime it wanted to discontinue the provision of support and training in relation to it (BaaN had sustained heavy losses and wanted to reduce costs). BaaN wished therefore to outsource these services and it began negotiations with DMA in relation to this. From the very beginning negotiations between the two companies went well and in November 1998 BaaN announced to a user group that DMA would be taking over product training from the beginning of 1999.
Subsequently, in December 1998, agreement was reached between the parties on all the main commercial issues of a contract and the matter was referred to BaaN’s legal department in the United States for a formal written contract to be drawn up. Pending such a written agreement BaaN closed down a number of its training facilities, DMA recruited additional staff and premises, BaaN provided DMA with the required training information and details of existing customers who needed to be approached and BaaN passed on enquiries it received from customers about training to DMA.
There was some delay in receiving a draft agreement from BaaN’s legal team, and BaaN’s legal department in the US eventually required that BaaN’s standard terms should apply. This was not accepted by DMA. It became obvious that BaaN had undergone a change of heart and in fact it did want to continue providing product training to customers, rather than allowing DMA to do so. Legal proceedings followed. The question to be determined was whether, despite there being no written agreement, the parties had entered binding contractual relations.
BaaN alleged that a binding contract had not been created.
Park J held that a binding contract had been created. On the facts the judge found that BaaN’s negotiator did have, if not actual authority, then ostensible authority to bind the company; the negotiations were never expressed to be “subject to contract” and no evidence had been established that in the IT industry it was generally understood that contracts were not binding until drawn up and signed by the parties.
All matters which were crucial to the existence of a contract were established. Park J. reviewed the matters that had been agreed such as:
All these matters were agreed and in such a definite form that they constituted a binding contract. The fact that the parties had not entered into a written form of agreement, even though they fully intended to do so, did not preclude the existence of a contract at the conclusion of the negotiations.
To paraphrase an old joke, when is a contract not a contract? Answer: when it’s a claim in restitution. The decision of Goff J. in Cleveland Bridge to the effect that there was no contract (because of lack of agreement on fundamentals such as price) but that there could be a claim in restitution for quantum meruit and quantum valebant illustrates well the battery of legal weapons a disappointed contractor now has.
Cases about when contracts are formed are relatively rare – the converse of lawyers in practice who are called on frequently to advise where parties have proceeded on the basis only of “heads” or a “memorandum” of agreement. Such cases as there are are the stuff of courses on contract law and will not be rehearsed here.
There are many possibilities (see e.g. the judgment of Lloyd LJ in Pagnan S.p.A v Feed Products Ltd  Ll LR 601, 619). For present purposes, there were 3 logical possibilities in law to explain what the parties had done:
The judge found situation 2 above to be the right interpretation here. We cannot of course know the detailed evidence, but the description of the items given in the judgment show that the parties had agreed the commercial terms at least. The judge did allow for the fact that the parties had not come to an agreement on every aspect usually found in a written agreement: the example given by the judge was of a proper law clause. The fact that BaaN included such a clause in the draft written agreement would not have meant that the earlier agreement was in some way defective, nor would it mean that DMA would have pulled out of the deal just because the written draft contained such a clause when it did not figure in the negotiations.
On that the learned judge is surely right. Commercial negotiations will inevitably focus on matters relating to the deal seen as such and will not include everything a lawyer would put in a draft.
The disquiet one feels on reading this decision is that the parties have a right to know when they have a concluded bargain. After all, it is at this point that one party walking away means not just the end of the negotiations, but a breach of contract. Lawyers have always rightly said that the advantage of a written agreement focuses the mind on the time of execution, the point when the parties know for certain exactly what their obligations are and when they start and finish.
In this case, it was certainly open to argument whether that stage had come. Certainly, the parties had negotiated, reached outline agreement, co-operated with each other in anticipation of a written draft (which did not materialise), but if you asked the question, did each party think it was bound to the other by a contract, the answer was obviously that they were not ad idem. True it is that BaaN had had a change of heart, but this is a fundamental part of English Law, that there is no duty to negotiate in good faith (compare the situation in France, for example).
The lesson is obvious and does not need to be stressed – that negotiations need to be expressed to be “subject to contract” if that is what the parties (or one of them) want to achieve. Failure to do so leads at the best to uncertainty and at the worst to finding yourself bound in a contract which you did not intend.