When is an “agreement” a legally binding contract?
The question of whether or not your contract is legally binding can be straightforward when considering conventional contracts, however, there are circumstances in which greater scrutiny may be required in order to determine the (potentially) binding nature of an agreement.
Blue v Ashley
A conversation took place in the Horse & Groom public house (after a number of drinks were consumed), where Mr Ashley stated that if Mr Blue could get the price of shares at Sports Direct from £4 to £8 he would pay him £15 million. Mr Blue accepted the deal and the group present laughed. Based on the facts at hand, the Court had to further examine whether or not the ‘agreement’ was indeed binding.
Mr Blue had a background in investment banking, having worked at Merrill Lynch for 6 years specialising in corporate finance, and then joined Sports Direct in 2012. Mr Ashley founded Sports Direct and remains the majority shareholder. They both met whilst working on the initial public offering (IPO), travelling together on a management “roadshow” to display the business to potential investors.
After examining the case, the Court reiterated the core principles of a contract and the key aspects required to make a contract binding:
“(i) the parties have reached an agreement which;
(ii) is intended to be legally binding;
(iii) is supported by consideration; and
(iv) is sufficiently certain and complete to be enforceable”.
Mr Blue was required to show that Mr Ashley intended the offer to be binding and not just a tongue-in-cheek statement. Aspects considered included the context of Mr Ashley’s language, and whether the statement was simply made in jest. If the offer was vague then it may suggest that it was not proposed to be legally binding.
The conversation took place around an hour after the group had started drinking, with Mr Tracey initiating a discussion about the company’s share price. The discussion concluded with, according to Mr Blue, Mr Ashley stating something along the lines of “I'll tell you what, let's split the difference and call it £15 million if the stock gets to £8 per share in the next three years." Mr Blue responded with the words "Yes, that sounds fair." Mr Ashley recalled this “hypothetical” conversation and stated it was clear that he was joking and that it was purely “banter” after four or five pints.
The Court found for Mr Ashley on the following grounds:
- The conversation didn’t support the suggestion that Mr Ashley intended payment upon the share price reaching £8 to be a promise;
- Mr Blue did not believe he had the right to payment prior to his resignation;
- evidence suggested that at the time, neither party understood the bonus to be a legally binding offer; and
- other parties present did not believe the conversation to be serious at the time.
Things to consider if you do not wish your conversations to be legally binding
You may still come to an agreement in principle with another party without that agreement being considered legally binding, provided you are aware and cautious of the elements which will determine a contract to be binding (intended to create legal relations, supported by consideration and sufficiently certain). It is therefore important that you are aware of the context, as well as the environment, in which your initial discussions take place. Stating that discussions are subject to contract or further agreement will provide an element of protection as they highlight the fact that the discussions are not intended to be creating legal relations or sufficiently certain. Further, leaving the discussion of certain key, binding elements will also provide an element of protection.
If you are unsure of any of the issues discussed above, or would like to seek clarification on a contract matter that you are currently experiencing, you can contact Chris Burke on 0161 684 6941 at your earliest convenience.
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Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.
This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.