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A Costly Misunderstanding!

A recent decision in the High Court has served as a timely reminder that an important ingredient to a binding contract is an intention to enter legal relations. 

The case in point arose out of what the claimant said was an oral contract made at a dinner in a Mayfair restaurant in March 2011 under which he was entitled to be paid €13.5 million for services provided to the defendant in maximising his return on the sale of a business.  The defendant denied that any contract existed; it was an informal dinner at the end of which no formal agreement was or could have been reached.

The Judge concluded that no binding contract was made.  Although the claimant followed up the meeting with an email, the Judge said that it demonstrated the absence of any intention to create legal relations; the Claimant had referred to an agreement, “on headline terms”.  The Judge said that, “such an expression is often used by businessmen (and lawyers) when at least one side considers there may be the bare bones of an agreement, which then needs to be taken forward and converted, once the blanks have been filled in, into a formal and binding contract.”  The Judge summarised several important principles relating to the intention of parties to create legal relations: -

(a)   If there is an express agreement in an ordinary commercial contract the burden of disproving an intention to create legal relations is a heavy one;

(b)   In the absence of an express agreement the onus is on the party claiming that a binding agreement has been made to prove that there was the intention to create legal relations;

(c)   a factor which may be relevant to the issue of contractual intention is the degree of precision with which the “agreement” is expressed; vagueness/uncertainty may show no agreement was made at all. 

The Judge said that the more complicated the subject matter, the more likely the parties will want to set out the contract in a written document enabling them to consider the terms before committing to them.  The identification of a “trigger” event such as commission becoming payable, is something which the law regards as essential for the formation of a legally binding contract.

Whilst the Judge thought that the fact that the “agreement” might have been made at a restaurant was not determinative, the fact that it was at an informal setting and the claimant himself said that he did not know of any other circumstance in which an investment banker’s remuneration had been fixed in such a setting was a factor.  Although the claimant had suggested a handshake at the end of the meal had sealed the deal, the judge disagreed. 

The case underlines the importance of getting terms agreed and confirming discussions clearly and concisely in writing if they are to be relied on later.

For further details please contact James Staton , Partner, Litigation.

About the Author

James Staton

Partner

James is a Partner and Head of the Dispute Resolution team and primarily handles commercial…

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