The dangers of informality in contractual dealings

An essential element of contract formation is that the contracting parties make an agreement with the unequivocal intention to create a legally binding arrangement as opposed to a frivolous promise that is not intended to be kept. But just how interpretive can the actions of parties be when it comes to determining exactly what they were thinking at the time the agreement was made? It is clear from recent case law that the level of formality of the agreement and indeed the environment of such discussions play a leading role in how the courts interpret these situations.

RTS Flexible Systems Ltd v Molerei Alois Muller GmbH & Co KG [2010] highlights the principle that the court must objectively consider the words and conduct used by the parties to determine whether or not they intended to create legal relations. The onus to demonstrate a lack of intention lies on the party asserting it, which is a potentially heavy burden. Where there is no express agreement, the onus is on the party claiming that a binding agreement has been made to prove the intention was there.

Barbudev v Eurocom Cable Management Bulgaria EOOD and others [2012] goes one step further to state that even if a document demonstrates a clear intention to create legal relations, the language of the document can be fatal. In this case, the Court of Appeal concluded that while a side letter (drafted by solicitors) showed an intention to create legal relations, the language used regarding the offer of an opportunity to invest in good faith was considered to be no more than an “agreement to agree”, which constituted an unenforceable agreement between the parties. The terms of the side letter had been considered too uncertain to be enforceable.

The High Court has recently had to consider and test these principles in two cases, the first being MacInnes (“C”) v Gross (“D”) [2017] EWHC 46 (QB).

Facts

C was an experienced investment banker at Investec, who met D in 2008. They had various discussions about D’s business, RunningBall (“RB”), and D’s intention to consolidate his ownership by buying out certain minority shareholders. Nothing came from these initial discussions, but the two subsequently met in 2011 for dinner.

C claimed that a conversation took place at the dinner whereby it was agreed that C would personally provide services to D to assist him to grow his business, with a view to eventually maximising a return on the sale of the company. In exchange for the services rendered, C would be remunerated by being paid 15% of the difference between the target price and the actual sale price (if higher). The same evening, C emailed D stating the agreement “on headline terms”. The court later observed that the two individuals had left the dinner with very different opinions as to what had happened. During the following 9 months, C continued to carry out work on behalf of RB, including setting up meetings with possible buyers. However, this was in his capacity as an employee of Investec. C also, for a brief period between August 2011 and early 2012, became Chairman of the Board of two of the RB companies; however there was no documentation to indicate that he ever had a formal role. RB was sold in 2012 to Perform Group Limited (“PGL”), who had been introduced to RB by C in 2011, while C was still an employee of Investec. At a late stage of the negotiations, D had emailed C to say that a proper contract should be drawn up. However, C was side-lined from this point and it was agreed that he should no longer be present at meetings with PGL. After the deal closed, C demanded €13.5 million from D, which he stated was representative of the “objective market value” of his services based on a formula which he claimed had been agreed at the dinner meeting in 2011.

Judgment

Mr Justice Coulson dismissed C’s claim, concluding that no binding contract had been made on the basis that the intentions of the parties were not clear, and the lack of certainty surrounding the terms of the alleged agreement such as C’s remuneration structure and the scope of his services to be provided. Citing the RTS case, the judge reiterated that what was relevant was not the subjective intention of the parties, but a consideration of what was communicated between them by words or conduct, and whether that could objectively lead to a conclusion that they intended to create legal relations.

Ultimately, the judge found that there was no such intention and that the terms of the contract had been too complex and uncertain to be enforceable. Addressing C’s email to D on the evening of the dinner, the judge said that “headline terms” could not be objectively interpreted as demonstrating an intention to create legal relations. Contextually, the judge compared this as akin to a “subject to contract” letter, which is customarily used to convey the “bare bones” of an agreement, and not a binding contract. Coulson considered that the language used in the email could, at best, be construed as the basis of a future agreement, mirroring the opinion in Barbudev about “agreements to agree”.

Coulson also stated that “the mere fact that the discussion took place over dinner in a smart restaurant does not, of itself, preclude the coming into existence of a binding contract. A contract can be made anywhere, in any circumstances.” However, the particular environment of this agreement was considered to be highly informal and relaxed to the extent that C himself agreed that he was unaware of any remuneration agreements with investment bankers that had been concluded over dinner in the way in which he was trying to suggest. Also, in evidence, C also did expressly state that the email sent on the evening of the dinner was “the only contemporaneous evidence of what was discussed”. Coulson considered this objectively and concluded that the email itself demonstrated the absence of an intention to create legal relations.

Regarding the argument for a quantum meruit (i.e. “what one has earned”), Coulson said that the evidence did demonstrate that C performed services for the RB companies, and that in theory, he would therefore be entitled to be remunerated for the value of those services. However, Coulson did not consider that he performed those services for D personally, as he was at the time still an employee of Investec, so there could be no claim.

The latest development in this line of cases came in Blue v Ashley [2017] EWHC 1928 (Comm). In this case, the defendant owned the majority of shares in Sports Direct. The claimant was appointed to provide consultancy services to the company and became involved in investor relations. In January 2013, the claimant and defendant had an informal meeting in a pub with three representatives of a potential broker for the company, where much alcohol was consumed over several hours. During one conversation, the defendant allegedly agreed to pay the claimant £15 million if he was able to raise the company’s share price to £8. No record was kept of this, and the share price at the time was £4. In 2014, the share price hit £8, and in May the defendant paid the claimant £1 million. The claimant contended that this was a sign of the defendant’s commitment to the agreement made at the pub. The defendant claimed that he could not remember making the offer, and that the £1 million payment had been made for unconnected reasons, so he denied that any legally binding contract had arisen. Judgment was given for the defendant, the judge deciding that the statement that £15 million would be paid could not have reasonably been understood as a serious offer capable of creating a legally binding contract, and that the offer itself was far too vague and fanciful to be effective.

Comment

These recent decisions clearly demonstrate the difficulty potentially faced by contracting parties when trying to assert the existence of a legally binding contract. It is clear that the courts will not imply a contract lightly, and this also highlights the weight given to not only the environment of contractual dealings but also the level of detail which is discussed at the time and objective certainty of the terms set down. Practically, it would be prudent to write up a formal agreement shortly after having first discussed the arrangement, and for parties to seek advice and obtain the certainty that the written recording will set out the intentions of the parties in clear and unambiguous format. Absent a written contract, there is indeed a heavy burden of proof on the party seeking to assert that a contractual relationship exists, so care should be taken in this regard.

So can a drink in the pub or dinner conversation ever match up to a boardroom setting or another form of “formal” communication in commercial contractual dealings? With the developing and increasingly consistent attitude of the courts reflected by recent case law, we can probably say, no.

So, clients and lawyers alike, beware the pitfalls of informality in your contractual dealings. To fail to prove an intention to create legal relations is a heavy burden.

This article was written by Paul Herbert, Partner, Corporate, with assistance from Becky Minear, Trainee Solicitor.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.