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From the pub to the court room

19 December 2017

It is not uncommon for commercial deals to be agreed with a handshake in an informal setting (often a bar, restaurant or other social venue). If agreed, parties usually then move the matter on to their lawyers to document the terms. But what if terms are never documented? How much reliance can be placed on commercial terms that are agreed orally?

The issue outlined above was, to a degree, considered in the case of Blue v Ashley [2017] involving Mike Ashley, the Sports Direct boss, and Mr Blue, an investment banker who had been engaged under a management services agreement. During a conversation in a pub in 2013, it was suggested that Mr Blue would be rewarded if the share price of Sports Direct doubled within 3 years. Lo and behold, the share price did double and Mr Blue alleged that it was verbally agreed that the reward due to him as a result was to the sum of £15 million and that the pub conversation constituted a binding contract.

The High Court concluded that no reasonable person would have thought that in a conversation in a pub, that an offer to pay one party £15 million as a bonus for their services and performance was serious or was intended to create a legally binding contract. Mr Justice Leggatt concluded that the conversation was conducted under the influence of a lot of alcohol and was jovial in nature.

The basics of contract formation were re-affirmed by the court. There needs to be an agreement (which can be in writing or orally) where one party makes an offer and the other accepts. There can be situations where someone makes a real offer which is accepted but that it does not necessarily follow that a legally enforceable contract is created. The intentions of the parties are paramount.

Sellers, buyers, landlords, developers, investors and their advisors should be aware that whilst many commercial deals are orally agreed in a more convivial environment, until they are crystallised in writing, it would not be wise to rely on that agreement. If an oral agreement is made then the conduct or actions of the parties could amount to performance of the agreement and a court may determine it as binding and capable of enforcement. Ultimately, when taking a step back from the setting in which a commercial deal has been agreed, it would need to be considered whether the reasonable business person would conclude that the parties intended for a particular commercial term to be a legally binding one. But don’t leave it to the court to have to make that decision.

The case highlights how important it is for parties to clearly record and then document the key commercial terms to a transaction. In a property transaction, key commercial terms should be confirmed in writing; commonly referred to as the ‘heads of terms’. Whilst heads of terms, if expressed correctly, are not intended to be legally binding they will provide a ‘moral framework’ to the transaction which should then be placed in the hands of lawyers to formally document by way of a written binding agreement.

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