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“DID THE PARTIES INTEND TO CREATE A LEGALLY BINDING CONTRACT?” – a summary of the legal principles in the case of Blue v Ashley, 26 July 2017

Written and published by Thomas Reuters Practical Law

Background

Under English law, a contract cannot be made without an intention to create a legally binding arrangement. The English courts apply an objective test when determining whether the parties intended to be bound. Lord Clarke explained the approach in RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14 (at paragraph 45):

"Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations."

Where the court is concerned with an alleged oral agreement, the test remains objective but evidence of the subjective understanding of the parties is admissible in so far as it tends to show whether, objectively, there was an intention to establish a binding agreement.

Facts

The claimant, Mr Jeffrey Blue, an investment banker, was engaged by the Sports Direct group to provide consultancy services. The defendant, Mr Mike Ashley, was the founder and majority shareholder of Sports Direct International plc, a listed UK retailer. Mr Blue arranged a meeting between himself, Mr Ashley and three representatives of a firm that was interested in being appointed as Sports Direct's new corporate broker.

The meeting began in a public house. Mr Blue left after around two and a half hours, having drunk two or three pints of lager. The group moved on to other locations with one of the witnesses estimating that both he and Mr Ashley consumed at least eight pints of beer during the evening.

The alleged agreement arose out of a discussion of Sports Direct's market capitalisation and share price that took place in the first public house. The witnesses said that they were discussing the value of Mr Ashley's shareholding should the company's share price double to £8 per share. Mr Ashley made a statement to the effect that he should incentivise Mr Blue if he could get the share price to move to £8 per share and a discussion followed as to what incentive would be appropriate. Mr Blue claimed the figure arrived at was £15 million.

Mr Blue did not seek to record the alleged agreement in writing. Mr Ashley's responses to Mr Blue's subsequent attempts to raise the subject, as the share price began to approach £8 per share, were non-committal.

Some three months after the share price reached £8 per share, Mr Ashley transferred £1 million to Mr Blue's bank account. Mr Blue understood this to be a sign of Mr Ashley's commitment to their agreement; Mr Ashley gave evidence that it was simply a bonus payment for other work performed by Mr Blue.

Mr Blue issued proceedings after failing to persuade Mr Ashley to pay the remaining £14 million.

Decision

The judge dismissed the claim. He set out eight reasons why he did so:

  • A contract could be made in an informal setting but, in the words of the judge, "an evening of drinking in a pub with three investment bankers is an unlikely setting in which to negotiate a contractual bonus arrangement with a consultant who was meeting them on behalf of the company". There was evidence that Mr Ashley liked to conduct business in informal settings where alcohol was consumed but there was no evidence that he negotiated or concluded contracts at such meetings.
  • The purpose of the meeting was to introduce Mr Ashley to potential new service providers not to discuss Mr Blue's remuneration.
  • The evidence showed that the conversation was jocular in nature and tone and that the suggestions as to Mr Blue's remuneration were mere "banter".
  • It would make no commercial sense for Mr Ashley to make the alleged offer and it would have been out of character for him to do so.
  • It was fanciful to suggest that it was within Mr Blue's power to move the share price to £8 per share.
  • The alleged offer was too vague for it to be taken as seriously meant. For example, there was no consideration of what work Mr Blue would do to earn the payment and how that work would be measured.
  • None of the witnesses, including the one witness who did not drink alcohol during the meeting, thought that Mr Ashley was being serious.
  • The evidence also showed that Mr Blue himself did not initially construe the offer as a serious one and that he only began to attach significance to it as the Sports Direct share price began to climb.

The judge was also satisfied that the payment of £1 million was unrelated to the agreement allegedly made at the public house.

Applying the objective test required of the court, no reasonable person present at the meeting would have concluded that Mr Ashley's offer was serious and intended to conclude a contract.

Comment

This case does not make any new law. It is, however, a useful reminder of the approach of the English courts to the issue of intention to create legal relations.

Case

Blue v Ashley [2017] EWHC 1928 (Comm), 26 July 2017, Leggatt J (Bailii).

Posted in: Litigation
Tagged: Company Law

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