In many respects the contract problems that the cultural sector finds itself involved in are the same as any other sector of the economy but in my 20+ years of advising the sector on contracts I have noticed some common themes.
Are we under contract?
Here are some common myths:
- Memoranda of Understanding (MOUs) are not enforceable;
- Letters of Intent (LOIs) are not enforceable;
- A contract has to be in writing;
- A contract has to be signed; and
- There is no such thing as a verbal contract.
Contracts arise if there has been a clear offer from one party that has been accepted by another, where there is an intention to create legal relationship, where there is some certainty of terms and where there is “consideration” – the secret sauce that differentiates a contract from a non-binding promise. If those elements are all present it doesn’t matter what you call the document and it doesn’t even matter if there is no document – you will have a binding contract. Confusion between parties as to when they are, or are not, under contract often causes problems.
What precisely have we just paid for?
Probably the most common area for dispute is where an institution is unhappy with the goods and services they have received under a contract. If you enter into a contract with the supplier of goods or services under the supplier’s standard terms you will often find that there are a lot of clauses about your obligation to pay them, a lot of clauses about what they are not liable for, but little clarity on what it is that the supplier will actually be giving you. If you have agreed to pay thousands of pounds for goods or services that are “TBC” or which are defined by reference to product names that can be changed on a whim by the supplier, then you are effectively promising to pay a supplier a fixed price for whatever it is that they decide they want to give you. Great care must be taken to sure that the obligations of both parties are pinned down with as much certainty as possible. If a supplier says “you’re just going to have to trust us on that” then loud alarm bills should be rung!
Charity or trading company?
Are you clear when a contract should be entered into by the charity or the trading company? Do you know what the risks are if you make the wrong call? Charities cannot trade and if they do: (a) any income from that trade is potentially taxable; and (b) the charitable status of the charity is jeopardised. That is why most significant charities have trading subsidiaries. However, if a contract is entered into by the trading subsidiary how do you ensure that the charity, its premises and its collection are protected? There are ways that these circles can be squared but it takes some care and a good understanding of contract law.
Warranty or indemnity? Direct or indirect loss?
As a lawyer, my primary concern when I look at a contract for a client is to maximise benefit and minimise liability. This involves a careful balance between “risk” and “reward”. On a basic level this means balancing the payment against the goods/services. However, hidden within the small print are often clauses that attempt to skew the risk/reward balance in favour of just one party. Indemnities are often used in contracts to allow one party to recover greater losses from the other party than would ordinarily be allowed by law. Sometimes that is appropriate but indemnities are often used unfairly to pass a disproportionate amount of risk onto just one party. Similarly, most contracts include exclusions or limits on liability and this is often a fair and appropriate thing to do. In contract law there is a distinction between direct losses (which you would expect to be recoverable) and indirect losses (which you would not expect to be recoverable). However, contracts often try to define indirect losses to include direct losses (or vice versa) in order to distort the risk/reward balance. Great care should therefore be taken to ensure that these important liability clauses are drafted proportionately.
On top of all of that, the cultural sector often needs to worry about intellectual property (IP), data protection (DP), freedom of information (FOI) and public sector information (PSI). In mid-2019 we also have to do what we can to minimise the impact of Brexit on our contractual relationships.
If only there was an organisation the cultural sector could turn to in order to help navigate these treacherous waters!
*Anthony Misquitta is the trainer for the forthcoming Association for Cultural Enterprises Masterclass – Drafting and Negotiating Contracts. Friday 12 July, Museum of the Order of St John, London.