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Ingredients for a binding contract

April 2018

Every law student learns the ingredients of a binding contract under English law. Offer, acceptance, consideration, intention to create legal relations, certainty and capacity. Nice and simple. But identifying these ingredients in the real world is not necessarily so straightforward. Did, for example, discussions over dinner in a smart restaurant, or during drinks in the pub, really make a multi-million pound, legally binding contract? How can we tell? How does a judge tell?

Dinner deal?
Let's start with the smart dinner in a Mayfair restaurant. An experienced investment banker claims that a final and binding remuneration agreement had been reached over dinner, but had it? What principles does the court apply to decide if they did?

The court may decide that there is no agreement because no definite meaning can be given to what was said. The more complicated the subject matter, the more likely the parties are to want to record their contract in a written document, so that they can review all the terms before being committed to any of them; and if there is a ‘trigger’ event (for instance, on which commission becomes payable) express identification of the event is essential.

In McInnes v Gross [2017] EWHC 127 (QB), the court said there was no intention to create legal relations and no binding contract had been made over dinner. A contract can be made anywhere, in any circumstances but the highly informal and relaxed setting for the discussion meant that the court should look closely at the claim that, despite that setting, there was an intention to create legal relations. The claimant had said, in a subsequent email, that there was an agreement "on headline terms", he was unaware of any similar remuneration agreements concluded over dinner in this way and business matters were not always to the fore at this dinner. Neither party had told anyone else they had reached a binding agreement and the claimant had not produced any written contract or draft, an omission that the court regarded as critical. Its absence was the final reason for the court's decision.

Pub deal?
Just a few months later, the same question resurfaced after Mike Ashley, of Sports Direct, three investment bankers and a consultant spent an evening drinking in a pub. Had Mr Ashley and the consultant made a binding agreement in the pub that, if the consultant could get the Sports Direct share price to £8 per share, Mr Ashley would pay him £15 million?

No contract, said the court in Ashley v Blue [2017] EWHC 1298 (Comm). The meeting was an unlikely setting to negotiate a bonus arrangement; its purpose was to enable Mr Ashley to meet the bankers. The nature and tone of the conversation was inconsistent with the consultant's claim; everyone was laughing throughout and no one could reasonably have understood it to be a serious business discussion. Mr Ashley had no commercial reason to offer to pay the consultant £15 million as an incentive to do work aimed at increasing the Sports Direct share price. A contract made on the terms discussed would have been inherently absurd. The"‘offer" was far too vague to have been seriously meant, none of the three bankers involved in the conversation thought that Mr Ashley was being serious and, at the time, nor did the consultant himself.

And, in the judge's view, it was improbable that a person with as much business experience as the consultant, had he truly believed the conversation, would have thought it unnecessary to make any written record of what had been agreed. It was even more improbable, indeed wholly incredible, that, if he had believed there to be a binding oral agreement, he would have waited nearly a year before mentioning what had been said in the pub to Mr Ashley.

Done deal?
So, if it is clearly understood that a binding agreement has been made, it is really important to confirm the agreement in writing without delay, ideally after taking legal advice.

Which is what a managing director did, in a case a while ago. He called his opposite number on a Friday afternoon, to resolve their respective companies' dispute, on the last day for acceptance of an offer. But by the following Monday the two parties disagreed as to whether a deal had been done. In the absence of other witnesses to the call the court looked at the evidence objectively, applying the conventional analysis of offer and acceptance. But what evidence? Where there is a disputed oral agreement, especially one not made face-to-face but in a telephone call, the court also looks at what was said and done after the discussion, to see whether it is consistent with there being an agreement. An email had been sent by one of the directors minutes after the phone call, confirming an agreement – acceptance of the offer on the table plus a procedure to deal with a possible increase. That email, sent so soon after the conversation, was, said the judge in Thameside Construction Co Ltd v Arthanella Ltd [2011] EWHC 2695 (TCC), consistent with the need to confirm a settlement agreement and "inherently more likely to record what happened". After reviewing all of the subsequent correspondence, the judge decided that agreement had been reached.

Postponing the deal?
The moment when a contract, that does have all the necessary ingredients, becomes binding can, of course, be postponed by, for example, using the magic words frequently deployed in real estate transactions: "subject to contract" or some other suitable protective drafting.

Alternatively, the moment of contract formation might be carefully managed, perhaps by specifying that an offer or counter-offer can only be accepted in writing and if signed by both parties. A counter-offer in the negotiation of a deal memo for product placement in the US Masterchef TV series, and for a licence to use the Masterchef brand, had just such a restriction. The deal memo was never signed by both parties but they still went ahead as if it had been. Had a contract been formed by conduct, despite the clear wording in the counter-offer?

There was, said the Court of Appeal, in Reveille Independent LLC v Anotech International (UK) Ltd [2016] EWCA Civ 443, clear evidence of acceptance by conduct by the party that did not sign, conduct in which the other party was closely involved. In not signing, the offeree was waiving a prescribed mode of acceptance, set out for its benefit. That was effective so long as there was no prejudice to the other party.

Deal by conduct?
Which reminds us that acceptance of an offer can be by conduct, just as it was by Mrs Carlill, all those years ago, in taking the Carbolic Smoke Ball three times daily for two weeks.

Much more recently, a subcontractor carried out works at the Dorchester Hotel. The main contractor made a number of payments but, in a subsequent dispute and proceedings about the sub-contractor's final account, the main contractor claimed that there was no concluded contract.

The court said in Purton Richwood Interiors v Kilker Projects Limited [2015] EWHC 2624 that, where works have in fact been carried out, it may readily find that there was an intention to create legal relations. Even if there was insufficient certainty about the agreement of a price or pricing mechanism, the court will readily infer that the person carrying out the works is entitled to be paid on a quantum meruit basis, rather than reaching the more drastic position of denying the existence of a contract altogether.

It seemed clear "beyond argument" to the judge that there was in fact a contract in place. There was substantial "performance" on both sides, with the sub-contractor carrying out the works and the main contractor making payments amounting to £654,000. While it is theoretically possible for parties to carry out works and to receive payments without having entered into a legally binding agreement, it was unrealistic to suggest that is what had happened, for a number of reasons, including a clear acknowledgement, by a key employee of the main contractor, that there was an agreed original scope of works with an agreed contract value, to be supplemented by subsequent variations.

Deal with the right party?
And obvious though it may seem, make sure you contract with the correct party. The court cannot always fix a case of mistaken identity, as was the case in Liberty Mercian Ltd v Cuddy Civil Engineering Ltd [2013] EWHC 2688 (TCC).

A tender, letter of intent and draft contract documents all identified the contractor as ‘Cuddy Group’, the trading name of Cuddy Demolition and Dismantling Ltd, but, after website searches, the employer's solicitors mistakenly identified a different and dormant Cuddy company, Cuddy Civil Engineering Ltd, as carrying out the works and requested that "CCEL" be substituted for "Cuddy Group" in the contract, which it was. After the contract was signed, could the mistake be corrected by the court (replacing CCEL with CDDL)?

No, said the court. For the court to correct a mistake, as a matter of interpretation, in identifying a party, there must be a clear mistake on the face of the document when it is read by reference to its background or context and it must be clear what correction should be made to cure the mistake.

On an objective analysis, the parties intended that the party acting as the contractor should change from "Cuddy Group" to CCEL, as requested by the employer, without discussion, no matter who was then carrying out the works. They had not intended to refer to CDDL, rather than CCEL, as the contracting party. The employer's claims that: (i) CCEL was a misnomer for CDDL; (ii) there was a common or unilateral mistake in respect of the contracting party; (iii) the contract should be rectified; and (iv) CDDL was estopped from denying that it was the contracting party, all failed.

Deal with the right documents?
And finally, do include the correct contract documents. Under a waste recycling contract a local authority was entitled to fixed and variable payments. An ‘Income Generating Payment Mechanism’ identified the annual fixed payment as £500,000 and recorded that it was indexed for inflation. When the contract documents were put together, however, an earlier and incomplete version of the IGPM, which did not refer to indexation and had gaps that made the contract inoperable, was included. The error was not identified before the contract was concluded and the council asked the court to rectify the contract by substituting the correct version of the IGPM.

The case law says that a party seeking rectification for common mistake must show that:

  • the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;
  • there was an outward expression of accord;
  • the intention continued at the time of the execution of the instrument sought to be rectified; and
  • by mistake the instrument did not reflect that common intention.

The court ruled in Milton Keynes BC v Viridor (Community Recycling MK) Ltd (No 2) [2017] EWHC 239 (TCC) that all of these ingredients were in place to permit rectification. The ingredients of unilateral mistake had also been shown, the defences put forward failed and the court ordered that the contract should be rectified by substituting the correct version of the IGPM.

The real deal
So where does all this leave us? Is there a moral to be drawn? How about: make sure to get the basics right? Where necessary, confirm the deal in writing, carefully. Check the contract documents and the other contract party. And then double-check. You know it makes sense.