Conflict of interest

When a misunderstanding becomes a conflict within an agreement.Earlier this year, UK retailer Marks & Spencer (M&S) entered into a dispute with one of its technology providers.The company and Data Direct Technologies signed a common technology contract, but a basic misunderstanding landed them both in court with M&S paying for a service it never wanted. The parties signed a main agreement setting out the framework of the contract, which included the supply for various services such as IT support as agreed upon in the contract’s schedules. The aim of the contract once the main agreement had been signed, was so that parties could refer to the schedule and rely on the main agreement to fill in the gaps. While these types of agreements are useful and common, the risk is, parties don’t always take the care needed to ensure the terms of the main agreement and the details of the schedule work together, which can result in ambiguity.  The conflictIn this case the main agreement stated maintenance or support of the software was payable on an annual basis unless otherwise stated by M&S. This conflicted with clause 7 of the product schedule, which stated maintenance could be payable “at the customer’s option”. The issue came down to the true construction of the clause in the product schedule – namely the statement “at the customer’s option”. M&S said clause 7 indicated it only needed to pay for the maintenance services it actually wanted. The retailer said since it had not asked for additional software maintenance, they did not have to pay extra costs.But Data Direct argued “at the customer’s option” referred to a customer’s  right to cancel maintenance in accordance with clause 1(c) of the main agreement but within a notice period of 30 days. The parties found themselves at a stalemate and the issue went before the courts. Luckily for the software company, the judge in this case found the main agreement and the schedule were not in conflict and M&S had misunderstood the contract. The judge said “at the customer’s option” indicated M&S did have the option to cancel the maintenance agreement but had to let Data Direct know and give the software provider the full 30-day notice period. This meant M&S was obligated under the main agreement to pay maintenance costs because it had not cancelled the agreement. Technology was the winner that day.What does this mean for you?As this is a fairly common type of technology contract, the same situation could arise for companies in New Zealand. What was central to this case was the fact the parties did not communicate properly with each other and how the standard main agreement would work alongside the facts specified in the schedule. As a general approach the courts will endeavour to make sense of the contract on its facts where possible. In this case the court was able to satisfy that there wasn’t a conflict of interest between the main agreement and the schedule. How can you avoid a similiar situation?If there is likelihood two clauses could be seen as ambiguous, the safest option is to resolve the issues as part of the clause in the later agreement; in this case, in the schedule. For example, if the clause in the schedule is to override the main agreement, you could consider wording the statement along the lines of “notwithstanding clause”. Alternatively, if the main agreement overrides the schedule, then wording along the lines of “subject to clause” could be appropriate. Any main agreement should also set out, as it did in this case, whether in the event of conflict the main agreement or the schedule would override. 

FACTBOX Under agreement, Data Direct licensed software Shadow Direct to M&S.This main agreement indicated product schedules would be entered into each time some variation or extension of the license was agreed upon.Clause 1(c) of the main agreement said maintenance of the software was payable annually unless M&S gave notice of its intention to cancel maintenance.This potentially conflicted with clause 7 of the product schedule, which stated maintenance was payable “at the customer’s option”. The product schedule also stated the first year of maintenance was included in the price set out by Data Direct. For the second and subsequent years, maintenance would be charged at 17.5% of the prevailing list price of the product.