One of the most frequent queries we receive relates to contractual disputes. Like all businesses, Academy Trusts regularly enter into contractual relationships with suppliers for a range of reasons – from IT to catering to sports. The terms and conditions which form part of the agreements between these parties are often taken as read, but Academy Trusts should be aware of some of the pitfalls so that they are not bound by unfavourable terms.
Standard terms and conditions, particularly from IT providers, are often not adapted to the education sector. Academy Trusts will need to establish whether any contractual indemnities (an indemnity is a contractual obligation to compensate another party for loss or damage by making a payment) are included in the terms and conditions.
Academy Trusts are required to obtain approval from the Education and Skills Funding Agency (“ESFA”) before entering into indemnities which go beyond the ‘delegated limits’ (this requirement is set out in the Academies Financial Handbook (“AFH”) 2018). The delegated limits, subject to a maximum of £250,000, are:
- 1% of total annual income or £45,000 (whichever is smaller) per single transaction;
- Cumulatively, 2.5% of total annual income in any financial year per category of transaction for any Academy Trusts that have not submitted timely, unqualified audited accounts for the previous two financial years. This category includes new Academy Trusts that have not had the opportunity to produce two years of audited accounts; or
- Cumulatively, 5% of total annual income in any financial year per category of transaction for any Academy Trusts that have submitted timely, unqualified audited accounts for the previous two financial years.
If an Academy Trust enters into a contract which contains an indemnity that goes beyond these delegated limits, and fails to obtain prior consent from the ESFA, the Academy Trust will be in breach of the AFH 2018.
Standard terms and conditions are subject to the Unfair Contract Terms Act 1977 which governs whether a contractual term is considered to be unfair, and therefore unenforceable. We have come across suppliers updating their standard terms and conditions and attempting to exercise a unilateral right to vary a contract so as to increase the term length. We have also come across contracts in which it has been attempted to restrict statutory rights. Academy Trusts should be aware that terms of a contract will not always be enforceable. If a term looks unfair or unreasonable, please contact us under the legal support retainer.
The terms and conditions will set out how to terminate the contract. If the procedure outlined in the terms and conditions is not followed, the notice to terminate shall be invalid. Understanding how to terminate a contract, whether in writing or otherwise, and how to provide sufficient notice is important so that contracts do not automatically renew. Our recommendation is to set reminders of the contract term length and notice provisions so that you are aware when action needs to be taken. If in doubt, consult us before entering into a contract or whenever a question of interpretation arises.
We recently reviewed some standard terms and conditions that an Academy Trust had signed, which included a right for the supplier to alter the terms at its discretion. The supplier then extended the contract unilaterally, increasing the value of the contract by 300%! This highlights the importance for Academy Trusts to be vigilant when entering into contracts to avoid being bound by unfavourable terms.