UK: Oral Contracts: Deal Or No Deal?

Last Updated: 23 August 2012
Article by Tom Holroyd

Sadly for Noel Edmonds, it was no deal. Noel didn't record his contract with his developer friend in writing. The developments didn't go well and the house party ended in litigation.

Noel argued that various important terms had been said but never recorded. The Court's view? Noel's version of events didn't stack up. The Court preferred the written word. The developer friend won and Noel picked up the costs bill. His very own Gotcha.

Tom Holroyd takes a look at why this case serves as a poignant reminder to properly record deals in writing.

Background

Poor old Noel Edmonds. He just seems to attract disputes. You'd have thought the "Blobbygate" affair with Lancaster City Council in 2003 would have put him off. But alas, no. Here's what happened this time.  

Noel had a close friend; Mr Ulrik Larson. Ulrik was a property developer and Noel is the chap from the telly. Noel and Ulrik decided to go into the property business together. They became involved in two properties; "Wood House" and "St Serf".

Wood House

Wood House was a grand country estate, but it was in a bad way. Ulrik thought it could be refurbished, with other properties being built in the grounds. Ulrik and Noel smelt a profit and bought the place in Noel's name in 2006. It cost £2.1m.

To fund the purchase, Noel borrowed £1.6m from the banker. As usual, the banker took a first charge over Wood House to secure the loan. Noel then put in £300,000 of his own money.

Ulrik also put in £300,000, but borrowed from his banker. Ulrik's banker then took a second charge over Wood House to secure its loan. For the benefit of the two bankers, a priority deed recorded that Noel's banker's charge ranked ahead of Ulrik's banker's charge. 

One small problem though: Ulrik and Noel didn't bother to record any of the terms of the arrangement between themselves. Some form of "joint venture" was discussed but never formalised. It seems clear that Ulrik was supposed to try to get the planning consents needed to turn the Wood House estate into something profitable. That was about all that was agreed; none if it in writing.  

They probably would have worked something out if the development of Woodhouse had gone to plan. It didn't go to plan. The development was a non-starter commercially. The planners didn't like the idea of 25 houses being built in the Grade I listed gardens of the estate. Noel ended up selling Wood House at a loss. After he'd redeemed his £1.6m loan and paid Ulrik his £300,000, Noel only got back £52,000 of his £300,000. He'd also incurred a lot of cost just maintaining the place.

Inevitably, Noel and Ulrik fell out over who should bear the losses. Noel sued Ulrik. The main thrust of Noel's case was that, before the bankers' priority deed was signed, Ulrik had agreed that Noel would get his £300,000 back before Ulrik got his £300,000 back. Noel therefore sued for his £300,000 and a contribution to the maintenance costs.

No deal, said the Judge. The Judge couldn't agree with Noel's version of events. He found it inconceivable that Noel would have freely executed the bankers' priority deed if there truly had been some prior agreement that Noel would get his £300,000 before Ulrik. Noel had to bear all the losses on the sale price. As is so often the case, the Judge preferred the written word over a vague oral statement.

Gotcha, said Ulrik. Indeed, he got his £300,000 but he did have to make a further contribution to the maintenance costs Noel had incurred.

St Serf

Noel needed a new family home. In 2006 he bought a nice pad in Exeter called St Serf. St Serf was a bit run down so Noel got Ulrik on the case (they were still friends at this time).

It was agreed that Ulrik would undertake a full scheme of renovation. Noel didn't need to engage a main contractor and professional team himself as Ulrik was to manage all that. In essence, it was akin to a design and build arrangement, with Ulrik as the D&B contractor and Noel the employer.

One small but familiar problem: the chaps didn't bother to record anything in writing regarding this arrangement, including whether Ulrik was to charge any mark-up on cost for his services.

Things went smoothly enough at first. Ulrik simply submitted an invoice each month for payment. Noel then paid it without demur. However, when things got heated over Wood House, Noel started to question the St Serf invoices, particularly in relation to whether Ulrik was charging a mark up. The payments to Ulrik stopped. Ulrik continued the work nonetheless. 

When Noel sued Ulrik over Wood House, Ulrik counterclaimed for the costs of completing St Serf, including a mark up to cover his services. Noel argued that Ulrik had agreed to perform the services at no cost because "it was in the spirit" of their joint venture. Ulrik said this was nonsense and nothing like that had been agreed.

Noel had bet on the wrong box again; the Judge didn't agree with him. Although nothing specific was agreed in terms of Ulrik's fees, the Judge simply couldn't see why Ulrik, as a businessman, would have agreed to provide the services for free. It made no commercial sense and in the absence of any written agreement recording the alleged freebie, the Judge favoured the commercial approach.

Gotcha

Noel had lost on both the Wood House and St Serf claims. As usual in the English civil court system, the loser pays the winner's costs.

The costs were high. All that oral testimony and lawyers' argument over the terms of what was and wasn't agreed cost a fortune. Rumour has it that Noel must pay £175,000 towards Ulrik's legal costs. Oh, and Noel's own legal costs are thought to be around the £500,000 mark. A victim of his own Gotcha.     

Lessons learned

When the going is good, disputes are less common. Problems tend to get washed away in deals funded by the profits on the job. That's what Noel and Ulrik must have had in mind. They thought the Wood House development was a dead cert. They could afford to sort out the money later. They were wrong and sorting out the money turned into an expensive mess.

When the going isn't so good and the profit not so healthy, disputes are far more likely as those involved tend to look for excuses not to pay. It is in those instances that a good, robust written contract will come to your rescue. Having a robust contract increases certainty; the parties know what they are getting and when. It leaves less wiggle-room for the party looking for excuses. 

A sure-fire way to increase the likelihood of a dispute is to fail to properly record what has been agreed. This way, no one has certainty and the non-payer has the wiggle-room he needs.

Noel has also neatly demonstrated the Courts' view on oral terms. Unless you have robust and credible witness evidence to support an alleged oral term, don't expect it to prevail over any commercially sound written agreement. Oh, and if you do need to argue an oral term, you best grab a grand, quite a few grand in fact. Running a case based on oral terms is notoriously expensive, as Noel found out. Better to just take the time to record the agreement properly.

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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