Oral contracts and the intention to create legal relationships

September 22, 2017

It is a principle of common law that a contract cannot be made without an intention to create a legally binding arrangement. An objective test is applied by the courts to determine whether parties intended to be bound.  Consideration is given to what was communicated between the parties by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms.

In the recent case of Blue v Ashley [2017] EWHC 1928 (Comm) the court had to apply such an objective test and in its judgement provided a useful summary of the considerations given in determining whether an oral contract has been made.

Facts

Jeffrey Blue (the Claimant), an investment banker, was engaged by the Sports Direct group to provide consultancy services on behalf of Aspiring Capital Partners LLP. Mike Ashley (the Defendant), was the founder and majority shareholder of Sports Direct International plc.

A meeting was arranged between the Claimant, the Defendant and three representatives of a firm that was interested in being appointed as Sports Direct’s new corporate broker. The meeting began in Horse & Groom public house on the evening of 24 January 2013. Various witnesses mentioned that the attendees consumed large amounts of alcohol throughout the evening.

Discussions were entered into by the parties around Sports Direct’s market capitalisation and share price. At the time of the meeting, shares in Sports Direct were trading at around £4 per share. An incentive for the Claimant to double the share price to £8 per share was discussed. The Claimant noted that the appropriate figure arrived at as an incentive was £15 million.

The Claimant made no record of the alleged agreement in writing. He subsequently attempted to raise the subject to the Defendant when the share price approached £8 per share. The Defendant’s response at this stage was non-committal. The share price reached 801.0p on 25 February 2014. Three months later the Defendant transferred £1 million to the Claimant’s bank account. The Claimant viewed this action as indicative of the Defendant’s commitment to their agreement and merely an interim payment at this stage. The Defendant stated that the £1 million was simply a bonus payment for other work that the Claimant had performed. He did not view this as an acknowledgment to pay a further £14 million in due course.

Proceedings were then issued by the Claimant for payment of the remaining £14 million.

Decision

Mr Justice Leggatt dismissed the claim and based his judgement on the following eight reasons:

A contract can be made anywhere in any circumstances. However, an evening of drinking in a pub with three investment bankers is an unlikely setting in which to negotiate a contractual bonus arrangement with a consultant who was meeting them on behalf of the company.

  • The purpose of the meeting was for the Claimant and Defendant to represent Sports Direct in meeting the representatives of a prospective service provider. The intention was not to discuss the Claimant’s remuneration.
  • The tone of the conversation at the meeting was jocular in nature, and suggestions for the Claimant’s remuneration were merely viewed as “banter”.
  • It would make no commercial sense for the Defendant to make the alleged offer and it would have been out of character for him to do so.
  • It was fanciful to suggest that it was within the Claimant’s power to move the share price to £8 per share. There is no documentary evidence to suggest that the Claimant’s actions caused the increase in share value.
  • The alleged offer was too vague for it to be considered a serious offer. There was no consideration of what work the Claimant would do to earn the payment and how that work would be measured.
  • A cornerstone of contract law is what a reasonable person would take words to mean. In this instance, none of the witnesses, including the one witness who did not drink alcohol during the meeting, thought that the offer was serious.
  • The Claimant himself did not initially construe the offer as a serious one. He only began to attach significance to it as the Sports
  • Direct share price began to climb, and waited one year to raise the issue of the payment of the incentive.
  • The judge was also satisfied that the payment of £1 million was unrelated to the agreement allegedly made at the public house.

Conclusion

The above case does not create any new law. However, it is a useful reminder of the approach taken by the courts with regards to the issue of intention to create legal relations. Further, it highlights that a testimony based on memory does not constitute a reliable basis on which to make factual findings.

For further information or guidance please contact a member of the Corporate team at CFR.