Australia: Why the long face? – factors affecting the enforceability of verbal contracts

Blue v Ashley [2017] EWHC 1928

On 24 January 2013, three investment bankers, a consultant and a football team owner walked into a bar – the Horse & Groom public house in London to be exact.

As a result of a conversation occurring that night, the High Court of the United Kingdom was last year asked to determine whether a legally binding contract was made between the claimant, Mr Jeffrey Blue and the defendant, Mr Michael Ashley, whereby Mr Ashley was obliged to pay Mr Blue £15 million.

Facts

Mr Ashley is the founder and 60% shareholder of Sports Direct International Plc (Sports Direct), the United Kingdom's largest sporting goods retailer. He also owns Newcastle United, an English Premier League football club. In late 2012, Mr Blue began working for Sports Direct as an independent consultant providing strategic corporate advisory services, which included investor relations. In early 2013, Mr Blue arranged a meeting between himself, Mr Ashley and three senior members of Espirito Santo Investment Bank (ESIB), an investment banking group interested in acting as the corporate broker for Sports Direct.

The plan for the evening was to meet briefly and discuss the potential business relationship between ESIB and Sports Direct. However, as Mr Justice Leggatt succinctly described, 'the occasion lasted much longer and turned into an evening of drinking'.1 At some point during the night, the discussion moved to the share price of Sports Direct and what level it might reach if the company continued to perform well. Mr Blue alleged that in the course of this discussion, he and Mr Ashley struck an oral agreement whereby Mr Ashley would pay Mr Blue £15 million if Mr Blue could 'get' the share price of Sports Direct to double from £4 per share to £8 per share. The evidence at trial was that Mr Blue shook Mr Ashley's hand and said words to the effect of, 'I'll hold you to that'. On 25 February 2014, the share price of Sports Direct reached £8 per share and Mr Blue claimed that Mr Ashley was obliged to pay him £15 million.

The key issue in the case was whether, on the basis of the conversation on 24 January 2013, 'this would reasonably been understood as a serious offer capable of creating a legally binding contract'.2 In support of his assertion that a legally enforceable contract had been struck between the pair, Mr Blue referred to several conversations following the 'meeting' on 24 January 2013 which he said evidenced Mr Ashley's recognition of the agreement. Mr Blue also says that Mr Ashley acknowledged their deal by making a payment of £1 million to him on 27 May 2014, which Mr Blue described as an 'interim payment'.

Mr Ashley, in response, said that he did not remember the conversation with Mr Blue, although he did not positively deny that it may have occurred. Mr Ashley said that even if it did take place, it was just 'pub banter', not intended to be taken seriously nor create a legally binding contract. Interestingly, no issue was raised as to the capacity of Mr Ashley to enter the contract, despite the fact that it was accepted that numerous alcoholic drinks had been consumed. Mr Ashley did, however, allege that even if an agreement had been reached between him and Mr Blue, the terms of the contract were not sufficiently certain to be binding and that Mr Blue would be required to show that his actions caused the share price to exceed £8 per share, which he could not do.

Oral contracts

In answering the question of whether an agreement had been struck between Mr Blue and Mr Ashley, the Court summarised the well known fundamental requirements for a legally binding contract as follows:

  • agreement between the parties – whether by signing agreed terms or by 'offer' and 'acceptance'
  • intention to make a legally binding contract
  • consideration, and
  • certainty and completeness of terms.

Mr Justice Leggatt reaffirmed the principle that it is possible to make a valid contract purely by word of mouth, but noted that the absence of a written record may render the existence of an agreement between the parties harder to prove. This is because 'anyone with business experience' 3 generally understands the value of a written record of a commercial agreement and therefore, depending on the circumstances, the absence of a written document tends to suggest that a legally binding agreement was not intended.

The Court also stressed the importance of perhaps the most fundamental aspect of the law of contract. When determining whether a legally binding agreement has been formed, an objective assessment of parties' intention is required. In the case of oral agreements, the relevant test becomes how a reasonable person would understand the words used in a particular conversation. Mr Ashley's argument was that a reasonable person in the Horse & Groom public house on 24 January 2013 would not have taken the conversation between Mr Blue and Mr Ashley seriously.

What was the agreement?

Whilst the evidence of the relevant witnesses was treated with appropriate caution, there was no suggestion that any of the witnesses who gave evidence of the conversation on the night of 24 January 2013 were not stating their honest recollection. The Court ultimately found that the substance of any agreement was that if Mr Blue could 'get' the share price above £8 per share (within an unspecified time), Mr Ashley would be obliged to pay him £15 million. The relevant question then became whether this agreement was intended to be legally binding.

Did the parties intend a legally binding contract? – relevant factors

The Court rejected Mr Blue's claim, finding that the agreement between him and Mr Ashley in the Horse & Groom public house could not have reasonably been understood to be a legally binding contract. His Honour referred to eight main reasons, which are summarised below:

  • the setting – although the law recognises that a contract can be made anywhere in any circumstances, it was held that an evening of drinking in a pub is an unlikely place in which to negotiate a contractual bonus for a consultant. Interestingly, this finding was made despite evidence being led that Mr Ashley had in the past been, 'happy to combine discussion of business matters with the consumption of alcohol'. However, His Honour also made reference to the fact that the 'meeting' was an informal occasion, without any structure, agenda or specific business subject matter
  • the purpose of the meeting – whilst the meeting was not purely 'social', it had not been arranged to discuss Mr Blue's work or his remuneration. Rather, the purpose of the meeting was to develop a relationship between Sports Direct and a prospective service provider. On this basis, it was inherently unlikely that Mr Blue's personal financial incentives for performance would have been a serious topic of discussion
  • the nature and tone of the conversation – one of the strongest factors weighing against a finding of a legally binding contract was the general jocular character of the conversation. Throughout the conversation, the participants were laughing whilst pitching extravagant figures for Mr Blue's potential bonus payment. His Honour unequivocally concluded that no one could have reasonably understood this to be a serious business discussion
  • commerciality – in rejecting the existence of a legally binding contract, His Honour said that if a contract did exist between Mr Blue and Mr Ashley, it lacked commercial sense. Put simply, the agreement to pay Mr Blue £15 million was an unnecessary cost to Mr Ashley and was far greater than any amount required to incentivise Mr Blue
  • work performed by Mr Blue – a major flaw to Mr Blue's assertion that a binding agreement was struck was that it was difficult to see how Mr Blue's actions or work could 'get' the share price to rise. His Honour reasoned that 'No one would seriously suppose that any human being has such powers'. In answer to this, Mr Blue said that the agreement struck between himself and Mr Ashley did not require Mr Blue to show a causal connection between the work done and the increase in share price. His Honour reasoned that to cast the offer in this way was plainly 'absurd' and 'utterly unbusinesslike', given that on Mr Blue's interpretation of the agreement, the share price may have risen to £8 per share for reasons completely unconnected to any work done by Mr Blue
  • vagueness of the offer – another strong factor weighing against a legally binding agreement was that the agreement struck between Mr Blue and Mr Ashley did not specify what work Mr Blue had to perform or indeed a time period in which the share price was required to rise to £8 per share. On the basis that the agreement lacked certain defining and essential terms required for a conduct of this nature, His Honour found that a legally binding agreement could not have been contemplated by both Mr Blue and Mr Ashley
  • perceptions of others present – evidence of subjective understanding can be admissible to the extent that it shows whether, objectively speaking, a contract was formed. Here, there were three other participants in the conversation on 24 January 2013. All three gave evidence that they believed the discussion was no more than 'banter', and
  • Mr Blue's own perception – interestingly, His Honour found that even Mr Blue himself could not have thought the conversation on 24 January 2013 created a legally binding contract. Despite his extensive commercial experience, Mr Blue did not seek to get the agreement with Mr Ashley in writing nor did he speak with Mr Ashley about the agreement until nearly a year after the conversation at the Horse & Groom. Mr Blue simply stated that he thought the agreement was clear and trusted Mr Ashley to honour it. His Honour stated that this explanation, 'does not stand a moment's scrutiny' and that given the ambiguity in essential terms outlined above, the contract would have, 'cried out for clarification' by recording it in writing.

Events following 24 January 2013

Mr Blue sought to adduce evidence of several conversations with Mr Ashley occurring after 24 January 2013 which, he said, evidenced Mr Ashley's acknowledgement of a legally binding contract. Importantly, however, Mr Blue's claim was that a concluded agreement was reached on the night of 24 January 2013. His Honour pointed to the fact that there was a dearth of reliable contemporaneous documents which supported the content or occurrence of any conversations with Mr Ashley. Where such evidence existed, His Honour found that Mr Blue simply over-interpreted casual or ambiguous remarks by Mr Ashley which served only to reinforce Mr Blue's own misguided belief that a contract had been formed.

The £1 million payment to Mr Blue

Perhaps instinctively, the payment to Mr Blue of £1 million suggests that Mr Ashley acknowledged, at least to some extent, that a legally binding agreement had been reached on the night of 24 January 2013. Indeed, at trial, Mr Ashley 'struggled to explain' the reasons he paid Mr Blue. However, the Court found that this payment actually related to a separate arrangement whereby Mr Blue was to be appointed as the Group Financial Director of Sports Direct, and the payment was simply a financial commitment to this arrangement. Had such a finding not been made, the outcome in the case could have been different, and the £1 million payment may have provided grounds to infer that Mr Ashley and Mr Blue did contemplate a serious contractual agreement.

Uncertainty

If the terms of a contract are inherently uncertain, this will be a reason to conclude that the parties did not intend for an agreement to have legal effect. However, certainty and completeness of terms are also independent requirements of contracts. In other words, even if the parties intend for an agreement to be legally binding, a Court may conclude that it is of no legal effect because the terms of the agreement are too vague or uncertain to be given any sensible meaning.

Although the Court found that there was a substantial difficulty in giving effect to the agreement that had allegedly been struck between Mr Blue and Mr Ashley on the basis that it was not clear what work had to be performed for Mr Blue to qualify for the £15 million payout, His Honour affirmed the principle that where a formal written document has been agreed, the Court will generally do its 'utmost' to give a sensible meaning to what had been agreed in writing. However, it was noted that the lack of a time restriction on the agreement between Mr Blue and Mr Ashley was an omission that the Court could not rectify. His Honour noted that there was no objective standard which could be applied to give effect to such an agreement where a specific time for performance had not been agreed.

Take home message

In Australia, some contracts are required by statute to be in writing, including insurance contracts, credit contracts and agreements dealing with interests in land.4 Whilst the decision in Blue v Ashley highlights the importance of recording commercial agreements in writing, it is important to understand that verbal agreements (including party verbal, partly written agreements) can be upheld as legally binding contracts.

Despite the well-known maxim that a 'verbal agreement isn't worth the paper it's written on', verbal contracts can and have been given legal effect in numerous decisions in Australia. For example, in Yulema Pty Ltd & Anor v Simmons & Anor5, the Supreme Court of New South Wales gave effect to a verbal contract despite the fact that one of the parties to the agreement and one of the witnesses to the verbal negotiation had since passed away.

Although the decision in Blue v Ashley does not raise any new points of law, it serves as a timely reminder of fundamental contractual requirements. Here, the central issue was whether a discussion in a pub created legally binding and enforceable obligations. Whilst the fact the conversation occurred in a pub, after several drinks, was a factor weighing against the existence of a binding contract, it was by no means a determining factor.

Rather, the entire contextual circumstances were considered to determine whether an ordinary person would have considered the agreement to have been intended by the parties to have legal effect. Ultimately, the Court reasoned that if a 'reasonable person' was to have been present at the Horse & Groom public house on 24 January 2013, he or she would have determined that any agreement between Mr Blue and Mr Ashley was not intended to be legally binding, and therefore was of no legal effect.

Footnotes

1 [2017] EWHC 1928 at [10].

2 Ibid [80].

3 [2017] EWHC 1928 at[49].

4 Property Law Act 1974 (Qld); National Consumer Credit Protection Act 2009 (Cth).

5 Yulema Pty Ltd & Anor v Simmons & Anor [2015] NSWSC 640.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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