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Author: Chris Millar
The High Court has held that a discussion between business people in a pub did not create an oral contract as there was no intention to create a legal relationship.
The basic requirements of a contract are that an offer has been accepted which is intended to be legally binding, supported by consideration, and sufficiently certain and complete to be enforceable. There is no requirement that a contract has to be in writing.
The offer, and the agreement resulting from its acceptance, must be intended to create legal rights and obligations which are enforceable in the Courts, and not merely moral obligations. Factors which may show that an agreement was not intended to be legally binding include that it was made in a social context, expressed in vague language or made in anger or jest.
The key issue is how the words used in their context would be understood by a reasonable person. In the case of an oral agreement, a Court cannot know the exact words spoken, the tone or facial expressions and body language used by those involved. In these circumstances, the parties subjective understanding may be a good guide to how, in their context, the words used would reasonably have been understood.
In the case in question, A met B, a consultant to A’s company, and three employees of a bank, in a pub to discuss a potential relationship with the bank. During the course of the evening, B said that A had promised to pay B £15,000,000 if B should assist in procuring that the share price of A’s company doubled in price within the next 3 years. The shares did double in price. A paid B £1,000,000, but refused to pay any more. B sued. A argued that the discussion was informal, and that it was merely meant as a joke.
The Court held that there was no oral agreement to pay B £15,000,000 as no reasonable business person would have thought that a serious contractual offer was being made.
The purpose of the meeting in the pub was not to discuss B’s work or remuneration, but an opportunity for A to meet the representatives of the bank. The discussion of the share price was an opportunity for A to display his wealth and the scale of his ambitions for his company, and it was unlikely that he would have seriously discussed B’s remuneration at a meeting of that kind. The evidence from the three employees of the bank was that they thought that the discussion concerning the share price was informal, and that A’s offer of the £15,000,000 bonus was a joke.
This decision highlights the difficultly in evidencing an oral agreement where no written record was made at the time. It would be prudent to confirm any oral agreement in writing, for example, by e-mail or letter confirming the agreed terms.