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CHARLOTTE DAVIES ON RECENT CASES ON ORAL CONTRACTS - SAILING TO VICTORY VIA THE HORSE & GROOM

Charlotte Davies looks at two recent decisions of the Commercial Court that provide useful illustrations of the Court’s approach to cases involving alleged oral contracts and demonstrate some of the pitfalls in such claims.  

Blue v Ashley – the facts

Judgment in the much-publicised case of Jeffrey Ross Blue v Michael James Wallace Ashley [2017] EWHC 1928 (Comm) was handed down in July 2017.

The case concerned an oral agreement that Mr Blue, a financial consultant to Sports Direct plc, said had been made with its owner Mr Ashley. The agreement alleged was that if Mr Blue could get the Sports Direct share price to £8, Mr Ashley would pay him £15 million. Surprisingly, the location of this valuable agreement was not the boardroom but the Horse & Groom pub on Great Portland Street (although according to Mr Blue, this was not particularly unusual given Mr Ashley’s unorthodox approach to business meetings).  On Mr Blue’s own case, he had not raised the alleged agreement with Mr Ashley for nearly a year, nor did he have any contemporaneous note of their conversation.

In February 2014 the Sports Direct share price reached £8 per share. When Mr Ashley failed to honour the alleged agreement to pay him £15 million, Mr Blue issued a claim for breach of contract. Mr Ashley, whose evidence included memorable phrases such as “pints coming like machine guns”, accepted there may have been some discussion about share prices but denied there had been any intention to create legal relations and therefore that any legally binding agreement had been reached.

Wright v Rowland – the facts

The case of Wright v Rowland and another [2017] EWHC 2478 (Comm), in which judgment was handed down in October 2017, also concerned a financial consultant claiming breach of an oral agreement although this time the setting for that agreement was rather more glamorous.

Mr Wright provided consultancy services to various Rowland family businesses. He alleged that in 2008, he was responsible for the introduction of the Rowlands to the former Chairman of Kaupthing Luxembourg, and that he then worked as a as a senior member of their deal team to negotiate, structure and close an acquisition of the bank. The transaction involved the demerger of Kaupthing Luxembourg into a private bank called Banque Havilland S.A (“BH”) incorporated in Luxembourg as a public company limited by shares, and a special purpose vehicle. According to Mr Wright, at a party held on 20 July 2009 board the Rowlands’ yacht in the south of France, an oral agreement was reached between himself and the Rowlands that (amongst other things) granted him an option to purchase up to 5% of the shares in BH for the same proportionate price that the Rowlands had paid to acquire the entire issued share capital of BH, i.e. €50 million. The Rowlands subsequently denied that they had made any such agreement with him.

In June 2015, Mr Wright issued a claim form for damages for breach of contract, relying on the agreement he said had been reached on board the yacht (as well as an alternative claim for a quantum meruit). The Rowlands denied that any such discussion had taken place, but argued that even if it had, these were informal discussions with no intention to create legal relations, and which were too uncertain and incomplete to amount to a binding agreement.

The judgments

Both Mr Blue and Mr Wright failed in their claims of breach of contract.

In the first case of Blue v Ashley, Leggatt J found that whilst Mr Ashley had “agreed” on 24 January 2013 to pay Mr Blue £15 million if he could get the Sports Direct share price to £8 per share (within an unspecified time), he was quite sure that this could not reasonably have been understood as a serious offer capable of creating a legally binding contract.

In the second case of Wright v Rowland, Mr Christopher Butcher Q.C. found that whilst it was probable that there was some discussion of Mr Wright’s remuneration on board the yacht on 20 July 2009, there was no agreement on the terms alleged and in any event, it was objectively apparent that this discussion did not give rise to any legally binding relations between them.

There are a number of similarities in the approach taken in the two judgments:

  • Having set out the basic legal principles of contract formation (both citing RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14;  [2010] I WLR 753), both judges focused on the objective nature of the test they had to apply,  the governing criteria as to whether there was an agreement coupled with an intention to create legal relations being the reasonable expectations of honest and sensible businessmen (Blue paras 63 to 64, Wright para 23).
  • Both judges also referred with approval to the earlier decision of Leggatt J in the case of Gestmin SGPS S.A. v Credit Suisse (UK) Limited [2013] EWHC 3560 (Comm), which states that the best approach for a judge to adopt in the trial of a commercial case is to place little if any reliance on witnesses’ recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts (Blue para 67, Wright para 22). In Blue, this came within a fairly lengthy section dealing with the nature of human memory and its impact in litigation.
  • It is clear from the judgments in both cases that the lack of any document recording the alleged contract was a critical factor in the ultimate finding that there had been no intention to create legal relations. In Blue, it was noted that it is “rare in modern commercial litigation to encounter a claim, particularly a claim for millions of pounds, based on an agreement which is not only said to have been made purely by word of mouth but of which there is no contemporaneous documentary record of any kind” (para 65). In Wright, it was found that the issue of an option was one which both sides would have expected to have been the subject of written agreement and that had the Rowlands made a firm commitment as alleged, it would have been documented (para 73).
  • Taking account of the unsatisfactory nature of the evidence from the claimants in each case, the lack of any written record of agreement and the other factual circumstances in which the claimants alleged the contracts had been made, both judges were clear in their findings that on both an objective and a subjective basis, there had been no intention to create legal relations.

What should you draw from these cases?

Whilst every case will depend on its facts, these two judgments provide a useful reminder of the nature of the exercise the Court will undertake when faced with an alleged oral contract:

  • The documentary evidence – or lack of it – will be key. Despite the fact that an agreement is alleged to have been oral, judges may be suspicious of the fact that there is no contemporaneous record of that agreement. Clearly, the more sophisticated the parties and valuable the alleged agreement, the bigger a factor this will be.
  • Notwithstanding the objective nature of the test, the parties’ conduct before and more importantly after the alleged oral contract could be relevant and significant. If they have acted in a manner which is inconsistent with a belief that a binding contract has been agreed, this may well be significant.
  • When dealing with experienced business people, if the circumstances in which the agreement is said to have been reached mean that it seems unlikely the parties were intending to reach a formal agreement, this will usually be a powerful factor against the finding of a binding agreement.
  • Finally, these are the sorts of cases where both sides may come out of it badly, whoever ultimately prevails at trial. In Wright, whilst the judge expressed concerns about the scrupulousness of the claimant, the successful defendants were also said to have been “aggressive and argumentative” and to have given “misleading or evasive evidence” as well as having “invented certain matters which… assisted the Defendants’ case” (paras 19-21) With the stakes so high in respect of what was said and when, the temptation of witnesses to tweak their accounts to fit their case is perhaps even greater than usual. This could leave to less than favourable findings about their evidence.  
Posted: 08.11.2017 at 14:59
Tags:  Comments  Commercial Law
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