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Legally binding contract or just wishful thinking?

On 26 July 2017, Mr Justice Leggatt handed down his Judgment in Blue v Ashley [2017] EWHC 1928 (Comm). The question in this case was whether, as a result of a conversation between the Claimant, Mr Blue, and the Defendant, Mr Ashley, a contract was made under which Mr Ashley owed Mr Blue £14m.

Mr Blue, an investment banker who worked for Mr Ashley’s company, Sports Direct and Mr Ashley went for several drinks one evening and it was during this evening at which Mr Blue claims a binding legal agreement was made. Mr Blue claimed that Mr Ashley promised, by oral agreement, to pay him £15m if Mr Blue managed to get the Sports Direct share price above £8 per share within three years. Mr Blue further claimed that Mr Ashley acknowledged the agreement by making an interim payment of £1m.

Subsequently, the Sports Direct share price rose above £8 per share but Mr Ashley denied any agreement was made during that evening arguing that if anything was discussed it was not meant seriously and not capable of giving rise to a legally binding contract.

It is possible under English law to make a contract by word of mouth. However, as this case demonstrates, the absence of a written agreement makes the existence and terms difficult to prove.

Decision

Leggatt J, unsurprisingly, came to the conclusion that the agreement described was not one that gave rise to a legally binding contract. Leggatt J gave eight reasons for this finding. In particular, he found that an evening drinking in a pub was an unlikely setting in which to negotiate a contractual arrangement and that the agreement made no commercial sense. The offer of £15m was far too vague and incomplete to have been taken seriously. The agreement would need to have been supported by consideration of exactly what work Mr Blue was going to do to earn the £15m and specify the period in which the share price target would have to be achieved as it was not clear that any specific timescale was agreed.

Leggatt J, concluded by saying:

The fact that Mr Blue has since convinced himself that the offer was a serious one, and that a legally binding agreement was made, shows only that the human capacity for wishful thinking knows few bounds.”

Evidence based on memory

It was notable in this case that there was a lack of contemporaneous evidence of any kind and the only source of evidence are the recollections of witnesses which were not even recorded or referred to in contemporaneous documents.

Leggatt J made some interesting observations in relation to evidence based on memory. For obvious reasons evidence based on recollection of what was said in undocumented conversations several years ago is problematic.

Leggatt J commented that there is a powerful tendency for people to remember past events concerning themselves in a self-enhancing light and memory is especially unreliable when it comes to recalling past beliefs. In these circumstances the best approach for a judge to adopt is to place little, if any, reliance on witnesses’ recollections of what was said and base factual findings on inferences drawn from documentary evidence and known or probable facts.

Comment

Although the case does not produce any change to the law it is a useful reminder that contracts by word of mouth can be made and a party will face evidential difficulties when there is little or no written evidence of an agreement. This is certainly the case when the only available evidence is recollection.

It is also a reminder that where business is conducted in informal settings records of agreements reached should be documented.

If you would like to discuss any issues raised further please speak to Christopher Louth

 

This briefing was posted on 27 September 2017