Crossing and dotting makes for clear contracts

27 February 2018

Crossing and dotting makes for clear contracts

Tesla founder Elon Musk could become the richest man in the world if he succeeds in growing the company to $650bn, after agreeing to work for no pay for ten years, in return for what’s been estimated as a $55.8bn bonus if he hits target. One hopes he has put in place a very clear contract. It may seem surprising, but all too often such agreements are made on a so-called ‘gentleman’s agreement’ which is challenged later, leading to battles fought in court.

Earlier this month, art dealer Simon de Pury won his action in the High Court for payment of a $10million commission over the sale of a famous painting by Gaugin - money that he claimed he was owed under a gentleman’s agreement with the seller (ACLBDD Holdings Ltd & Ors v Staechelin & Ors [2018] EWHC 44 (Ch)).

But when a former investment banker, Jeffrey Blue, claimed that Mike Ashley, the chief executive of Sports Direct, had agreed to pay him a £15million bonus if the Sports Direct share price doubled within three years, a High Court judge ruled that the requirements for a binding contract had not been satisfied (Blue v Ashley [2017] EWHC 1298 (Comm)).

Blue was providing consultancy services to Ashley and had been asked to find a new corporate broker. As a result, he, Ashley and three representatives of a potential corporate broker got together in a pub.

Blue claimed that Ashley had agreed on that night to pay him a bonus of £15 million if he helped to raise Sports Direct shares from £4 to £8 over a three-year period. He claimed the conversation had formed a legally enforceable contract, but the circumstances that surrounded the conversation were a significant factor in Mr Blue losing his case, as it took place during a heavy-drinking session in a pub.

The Judge dismissed the claim, saying the agreement was "not a serious discussion...but was banter in which Mr Ashley was displaying his wealth and scale of ambitions", not a contract, and "that there was no one present in the Horse & Groom pub who thought that it was genuine...they all thought that it was a joke”. Justice Leggatt summed up his judgement by saying that "the fact that Mr Blue has since convinced himself that the offer was a serious one, and that a legally binding agreement was made, shows only that the human capacity for wishful thinking knows few bounds”.

The Judge highlighted how unusual it was to have a claim for millions of pounds based entirely on a word of mouth agreement, with no other record existing. As he said: “In the twenty-first century the prevalence of emails, text messages and other forms of electronic communication is such that most agreements or discussions which are of legal significance, even if not embodied in writing, leave some form of electronic footprint.”

This case had no such footprint, with the only source of evidence being what was said in the pub as recalled by the different people present, and with no later conversations recorded or referred to in any written exchange. This led the judge to conclude that Mr Blue did not take the offer to be a serious one at the time, saying: "I cannot believe that if Mr Blue had thought at the time he had made a contract with Mr Ashley under which he stood to potentially receive £15m he would have regarded it as unnecessary for months afterwards to ever check that Mr Ashley recalled what had been said."

By contrast, the legal action over the gentleman’s agreement concerning the sale of the Gaugin painting between former Sotheby’s executive Ruedi Staechelin and the husband and wife team of art dealer and auctioneer Simon and Michaela de Pury, although not written into a formal contract was covered by a series of emails and other communications.

The painting was owned by Mr Staechelin, who was approached by Mr de Pury to see if he might be interested in selling the work. Initially Staechelin said he would not accept less than $250 million for it, net of commission, but eventually the painting was sold to the emir of Qatar for $210 million.

When de Purys claimed the $10 million commission he said he was owed he was rebuffed, so took the matter to Court. The judge found in his favour, upholding the claim of a legally binding contract for commission to be paid.

Manzurul Islam

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Expert Commentary

Manzurul Islam, Senior Associate Solicitor and Head of Dispute Resolution at Mullis & Peake LLP Solicitors, said:

“Under English law it is possible to make a contract without any formality, simply by word of mouth, but if there is no written record the existence and terms of a contract may be harder to prove. In such a case an agreement may be unenforceable on the grounds of uncertainty.

"As a starting point, parties rely on their memory and recollection of a version of events or words used – something which can be easily distorted. Perhaps more importantly a Claimant must explain why an agreement with legal implications was not recorded in some way or reduced to writing in a society which is highly literate and technologically advanced. Such an omission can often suggest the discussions were not serious, as happened in the Blue v Ashley case. Indeed, one of the requirements for a binding contract is an intention to enter into legal relations and not recording an agreement in writing might of itself suggest that there was no such intention.

"Nowadays, there is little excuse for failing to record an important agreement in writing. That agreement need not be professionally drafted, as even a basic document can record simply matters of fact. If in doubt, spell it out! Otherwise, you could find yourself in the shoes of Mr Blue or Mr De Pury, having to spend thousands going to Court to prove an agreement, with no guarantee of succeeding.”

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