05 Oct 2017

Promise over a drink - did you mean it?

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Intention to create a legal relationship

In the recent case of Blue v Ashley, Mike Ashley, the well-known founder of Sports Direct, was sued by Jeffrey Blue for a £14 million bonus. Jeffrey Blue alleged that during an alcohol-fuelled night at the Horse and Groom, W1, Mike Ashley had agreed to pay him the bonus if the Sports Direct share price hit a certain level. The court decided that Mike Ashley didn't have to pay the bonus because there was no binding contract.

Legend has it that a lot of property deals are done over a drink. But what does that really mean? What do you need to have a binding contract and can you make a deal in the pub?

Contract

To have a binding contract you need four things:

1  an agreement;
2  consideration;
3  certainty; and
4  an intention to be legally bound. 

Agreement

Let's assume you have a good quality property, Stellargate, that you think is worth about £10 million. You are down the pub with an acquaintance and say to them after a few drinks: "if you can find me someone to pay £15 million for this property, I'll give you a million" – is that binding?

The simple answer is that it could be. It will all depend on the surrounding facts.

What is certain is that you have made an offer, and, if your acquaintance accepts the offer, then you have an "agreement" and the first of the 4 boxes for a contract is ticked.

Remember contracts (other than for the sale of land) don't have to be in writing. "Oral contracts" are permissible (though not advisable) and they can be made in social settings as well as formal ones.

Consideration

For there to be a binding contract, something must be given in return for the promise ("consideration"). In our example this isn't a problem – the £1 million would be the consideration for the agreement, so this second box can also easily be ticked.

Certainty

The courts try to enforce agreements between parties, but will only do so if it can be said with certainty what they mean. In our example, if the acquaintance was a property agent, it may be reasonably certain what the deal is; i.e. the property will be marketed in the usual way to try and sell it. But if the acquaintance wasn't an agent, there is uncertainty as to what they have to do to earn the money, so there may not be sufficient certainty.

So, assuming that the acquaintance was an agent and the terms can be identified with certainty, the third box can be ticked, but it's a bit trickier.

Intention to create legal relationship

So, three of the four requirements have been fulfilled. Now where does the madness end so that casual chats, posturing, speculation and/or banter doesn't always leave us up to our eyes in litigation?

Well, as well as an offer being made and accepted, there must be an intention to create a legal relationship. 

In our example, looked at objectively, did you and the acquaintance intend to create a legally binding relationship?  It may be that you did, and any case will always turn on its facts. But the fact that agreement was made in a social setting after several drinks, probably indicates that you weren't trying to create a binding deal, at least not at that point.

The surrounding facts are likely to point to the discussion being just "speculation" or "banter". If the offer was made in a joking way "for fun" it's unlikely that there was an intention to create a legal relationship. If the offer was made in a seemingly serious way the position is more precarious, but the expectation would be that a formal agreement would be drawn up to properly record the deal and until that had been done there is no binding agreement. The hurdle of showing that there was an intention to create a legal relationship is significant and can save the day.

"My people will talk to your people"

We can all rest easy after the sensible decision in the Ashley case. But the moral is – if you want to do a deal document it formally in writing. We'd be pleased to help!

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