BLACKS SOLICITORS: “Is there a contract?”
In English law there are three basic elements in the formation of a contract. Firstly, the parties must have reached an agreement - there must have been an offer by one party which has been accepted by the other; secondly, both parties must have provided valuable consideration; and thirdly, there must have been an intention by the parties to be legally bound by the contract. The case of Blue v Ashley, which has been widely reported in the national press, is a good example of the last element.
In that case, which was recently decided by the High Court, Mr Ashley was the founder and majority shareholder in Sports Direct. In November 2012 Mr Blue, a merchant banker, started working for Sports Direct under a management services agreement. Mr Blue claimed that whilst in a London pub in January 2013 (where it was acknowledged that copious amounts of alcohol were consumed by those attending) it was agreed by Mr Ashley that if Mr Blue could raise the share price of Sports Direct from £4 to £8 per share, Mr Ashley would pay him a bonus payment of £15m.
By February 2014 Sports Direct share price had risen to above £8 at which point Mr Blue asked Mr Ashley for his bonus payment. However, Mr Ashley only paid Mr Blue £1m. Mr Ashley denied that any agreement had been reached whereby he would pay Mr Blue £15m and instead he contended what had been discussed at the pub was merely “banter”. Mr Blue therefore sued Mr Ashley.
The Court had to decide whether an agreement had been made between Mr Blue and Mr Ashley in the pub. In determining whether any agreement has been made, what the terms of that agreement are and whether it was intended to be legally binding, English law applies an objective test. Whether there is a binding contract between the parties depends on not the subjective state of mind of the parties but the actual communications between them by their words or conduct and whether that would result objectively to a conclusion that the parties intended to create legal relations.
The Judge decided that although Mr Ashley had said that he would pay Mr Blue £15m if he increased share price of Sports Direct to £8 that could not reasonably have been understood as being a serious offer capable of creating a legally binding contract. The Judge found that the conduct of the parties following that conversation did not suggest that Mr Ashley believed he had promised to pay such a bonus to Mr Blue. The Judge said that “no reasonable person present… would have thought that the offer to pay Mr Blue £15m was serious or intended to create a contract, and no one who was actually present … including Mr Blue - did in fact think so at the time. They all thought it was a joke”.
Although it is perfectly possible for the parties to enter into an oral contract which is just as valid and binding as a written one, the problem with oral contracts (as demonstrated by this case) is proving the terms of that contract if they are disputed. It is always better for the parties to enter into a written contract so that there can be no such disputes and the matter does not end up being a case of “he said, she said”.
If you are involved in any contract dispute or require advice on the interpretation of a contract or the drafting of contractual terms then Blacks Solicitors can assist. Please contact Luke Patel on 0113 227 9316 or email him at “LPatel@LawBlacks.com”.