The law of contract can be complex. In the recent court case, MacInnes v Gross (2017), the court held that an agreement made over dinner was not legally binding. However, the judge also stated that a legally enforceable contract could come into existence over a discussion. So when is a contract legally binding in the UK?
What Does a Legally Binding Contract Need?
To form a legally enforceable agreement (a legal contract) there must be:
- An intention to create legal relations
- Certainty of terms
- “Consideration” for the promise is usually an exchange of money for goods or services
- The parties must intend to be legally bound during the offer and acceptance
If any of the above factors are missing, the contract cannot be enforced in law.
How Can You Make a Contract
Following these requirements, you can form a contract very simply. It does not have to be written. Verbal contracts can be legally binding, although they are often contested.
In MacInnes v Gross (2017), the Claimant (M) sought a Court order for a € 13.5 Million payment.
The key meeting had occurred between the two businessmen over dinner in a restaurant. M said it was agreed at the meeting he would leave his employment with an investment bank and provide services to the Defendant, Gross (G), to maximise G’s return on the sale of his business. M also said he would receive a payment sum calculated by reference to the amount of the difference between the actual sale price of the business and the target price.
The following day, M e-mailed G saying what he considered to be their agreement, which he said was “on headline terms”.
After nine months, when a possible sale of G’s business began to materialise, M emailed saying they needed to make a “proper contract”.
The Court dismissed the claim. It said although a legally enforceable contract could come into existence over a discussion, the informality of the setting (evening dinner) required a careful examination of whether the parties had the intention to create legal relations.
The Claimant’s use of “on headline terms” strongly indicated that there was no such intention at the dinner. It demonstrated that the preparation of a formal written contract was anticipated.
Comment from John Cato
Often parties will produce pre-contract documents that they assume are not enforceable, including Letters of Intent, Memorandum of Understanding, Heads of Agreement and Heads of Terms. These documents are frequently used when negotiating commercial transactions such as outsourcing arrangements, mergers and acquisitions, joint ventures and project financing.
The parties commonly believe the heading of the document gives rise to such significant doubt about their intentions and that they are not enforceable.
It is not always so straightforward. For instance, a “letter of intent” might mean:
- I perhaps intend to do something; or
- I absolutely intend to do it.
These pre-contract documents may be subject to the Court’s interpretation. There is no absolute rule that the documents described above are framework documents and cannot be contractual, particularly if the parties sign them.
Solicitors often use the expression “subject to contract” to rebut any contractual intention. These words imply that the parties do not want to be bound, but the court may question whether they can effectively deny the party’s intention to create legal relations.
Parties also use phrases such as “subject to shareholder approval”, which are ambiguous in a Court of Law. It may indicate the parties do not intend to have a binding obligation until that happens, or, depending on the language used and subsequent performance, it may indicate a legally binding contract, which is subject to a condition.
In the event of a claim, the Courts will always assess the parties’ words and their conduct in the whole factual matrix to decide if a contract has been formed, so these phrases are not foolproof.
I advise parties to make their position completely clear and spell out their intention expressly.
I will often mark the document “Subject to Contract” but will also include a clause like: –
These [heads of terms] are not intended to be legally binding between the parties.
If you require assistance with your contracts and want a deeper understanding of when a contract is legally binding in the UK, contact our commercial contract solicitors. We are happy to offer advice and guidance in a free consultation.
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