The Dangers Of Informality In Contractual Dealings

An essential element of contract formation is that the contracting parties make an agreement with the unequivocal intention to create a legally binding arrangement as opposed to a frivolous promise that is not intended to be kept. But just how interpretive can the actions of parties be when it comes to determining exactly what they were thinking at the time the agreement was made? It is clear from recent case law that the level of formality of the agreement and indeed the environment of such discussions play a leading role in how the courts interpret these situations.

RTS Flexible Systems Ltd v Molerei Alois Muller GmbH & Co KG [2010] highlights the principle that the court must objectively consider the words and conduct used by the parties to determine whether or not they intended to create legal relations. The onus to demonstrate a lack of intention lies on the party asserting it, which is a potentially heavy burden. Where there is no express agreement, the onus is on the party claiming that a binding agreement has been made to prove the intention was there.

Barbudev v Eurocom Cable Management Bulgaria EOOD and others [2012] goes one step further to state that even if a document demonstrates a clear intention to create legal relations, the language of the document can be fatal. In this case, the Court of Appeal concluded that while a side letter (drafted by solicitors) showed an intention to create legal relations, the language used regarding the offer of an opportunity to invest in good faith was considered to be no more than an "agreement to agree", which constituted an unenforceable agreement between the parties. The terms of the side letter had been considered too uncertain to be enforceable.

The High Court has recently had to consider and test these principles in two cases, the first being MacInnes ("C") v Gross ("D") [2017] EWHC 46 (QB).

Facts

C was an experienced investment banker at Investec, who met D in 2008. They had various discussions about D's business, RunningBall ("RB"), and D's intention to consolidate his ownership by buying out certain minority shareholders. Nothing came from these initial discussions, but the two subsequently met in 2011 for dinner.

C claimed that a conversation took place at the dinner whereby it was agreed that C would personally provide services to D to assist him to grow his business, with a view to eventually maximising a return on the sale of the company. In exchange for the services rendered, C...