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Contracts and the intention to Create Legal Relations

Under English law, a binding contract cannot arise unless the certain key elements coincide, namely (i) offer (ii) acceptance (iii) consideration (iv) intention to create legal relations and (v) certainty of terms.

In the recent decision of Blue v Ashley [2017] EWCH 1928, 26 July 2017, the High Court determined whether the fourth of these elements had arisen in the context of an informal meeting held at a public house.

The claimant, an investment banker, provided consultancy services to Sports Direct group. The Defendant was the founder and majority shareholder of Sports Direct International Plc.

The High Court considered a meeting between the Claimant, the Defendant and three representatives of a firm vying for the position of the Sports Direct’s new corporate broker, which began at a public house and moved to various other locations. One witness estimated that both the Claimant and Defendant consumed at least eight pints of beer during the evening.

The Defendant made a statement that the Claimant should be incentivised if he could procure the company’s share price moving to £8.00 per share. The Claimant asserted that a figure of £15 million was put forward in this regard

Three months later, a price of £8.00 per share was achieved. The Claimant paid £1 million to the Defendant’s bank account, later asserting to the Court that this comprised a bonus for other work. The Defendant construed this initial payment as a committal to agreement.

Decision

Mr Justice Legatt dismissed the claim for the balance of £14 million for eight main reasons:

  1. i) While noting that the informality of the pub setting did not preclude a contract arising, it was noted that “an evening of drinking in a pub with three investments 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”;
  2. ii) the meeting was an outward-facing meeting, at which both Claimant and Defendant represented the company in meeting the three representatives;

iii) the nature and tone of the share price conversation was ‘jocular’;

  1. iv) the proposal made no commercial sense;
  2. v) it was not in the Defendant’s sole power to achieve a doubling of the share price;
  3. vi) the offer was far too vague to be seriously meant;

vii) it was concluded, on the evidence, that the Defendant himself did not understand the offer to be a serious one at the time it was made, and only later attached significance to the offer as share prices climbed rapidly.

Conclusion

The case serves a reminder of the approach of the Courts with regard to the intention to create legal relations.

Even when a person makes a real offer, which is accepted, it does not necessarily follow that a legally binding contract is created. It is a further requirement of such a contract that the offer, and the agreement arising from its acceptance, must be intended to create obligations which are enforceable in the courts.

If you think you are entering into a contractual arrangement of any significance, it would be prudent to record the terms in a formal agreement, with the benefit of legal advice.

For assistance with commercial agreements, please contact our Business Team:

http://www.foskettmarr.co.uk/index.php/our-team/business-solicitor-essex/