Contract Risks Series Part 1: handshake deals & COVID-19 don’t mix

A broker, a businessman and a couple of investment bankers walked into a bar… sounds like the start of a very bad joke. Even more so, given the current COVID-19 crisis with bars closed and social distancing in force.

Now more than ever, it’s important for businesses not to get unwittingly caught out by a handshake deal made during the crisis that may have unexpected consequences moving forward when the crisis is over. Handshake deals often arise due to parties being too busy to document the agreement in writing, relying too heavily on their current relationship with each other (‘we have always worked well together!’ or ‘we have known each other for years!’) or simply thinking the deal is too complicated to put in writing (‘let’s just agree do this until the crisis is over’). There is no doubt that verbal agreements can be enforceable, but should you rely on this? If you are one of many who prefer having a contract in front of you to close a deal, consider getting one provided by a Supreme Court Printing service

So,returning to the bankers in the bar:

Blue v Ashley*

The question arose whether a verbal gentlemen’s agreement over a few (actually quite a few) drinks at a London pub amounted to a legally binding contract. Decided by the United Kingdom’s High Court in 2017, Blue v Ashley is a timely reminder of the importance of recording commercial agreements in writing and the risks associated with legally binding contracts being created verbally. Whilst the case is yet to be considered by Australian courts, the principles are the same.

Background – the short & sweet version

Mr Ashley was the owner of Sports Direct, UK’s largest retailer of sporting goods and the owner of Newcastle United, an English Premier League football club. Mr Blue was an independent consultant who worked for Sports Direct in investor relations. In 2013, they (along with other investment brokers) met for drinks at the Horse and Groom pub, London.

MrBlue alleged that in the course of this discussion over quite a few pints ofbeer that he and Mr Ashley struck a verbal agreement whereby Mr Ashley wouldpay Mr Blue a £15 million bonus if Mr Blue could ‘get’ the share price ofSports Direct to double from £4 per share to £8 per share. The evidence attrial was that Mr Blue shook Mr Ashley’s hand and said words to the effect of,‘I’ll hold you to that’. On 25 February 2014, the share price of Sports Directreached £8 per share and Mr Blue claimed that Mr Ashley was obliged to pay him the£15 million.

Was there a legally binding contract? The Decision

In considering whether a legally binding contract had been formed, the High Court went back to basics, of what makes an agreement a legally binding contract. A valid contract must satisfy the following elements:

1. Offer and Acceptance

Whenone party makes an offer that is unconditionally accepted by the other party.   

 2. Consideration

Something of value is exchanged betweenthe parties, usually the exchange of money.

3. Intention to create legal relations

Intention by parties to create legalrelations and to make a binding contract. 

The court was satisfied the first two grounds had been satisfied in the circumstances but not the third. Interestingly, this was not the determining factor in the decision but rather whether an ordinary person would have considered the parties to have intended the arrangement to be of legal effect. According to Hon. Mr Justice Leggat: ‘no reasonable person present in the Horse & Groom on 24 January 2013 would have thought that the offer to pay Mr Blue £15 million was serious and was intended to create a contract, and no one who was actually present in the Horse & Groom that evening – including Mr Blue – did in fact think so at the time. They all thought it was a joke.’

Ifthe arrangement had been in a commercial setting, it might have been acompletely different (and lucrative!) outcome for Mr Blue. 

Are verbal variations of a written contract enforceable?

Unfortunately,it’s a common occurrence for parties to pop the completed written contract intoa drawer to gather dust and to plug gaps or vary that agreement with informaland often verbal arrangements. In the current COVID-19 crisis, the temptationto do so is even greater as businesses try to seek ways to remain viable. Butwhat happens when the crisis is over? As is often the case with these verbal arrangements,things become unstuck when a dispute arises.

Commonlyfound in written contracts is a clause providing the agreement may only beamended in writing signed by both parties.

Australiancourts have taken the view that such clauses do not prevent verbal variations**and provided the party wishing to rely on the variation can prove it, will belegally binding.   

Howto prove a verbal contract exists

Theburden of proof lies with the party wishing to rely on the verbal agreement.It’s not an easy task and can be very difficult to prove. 

Proof can take many forms including letters, emails, text messages, receipts or third-party statements. The court will scrutinise closely that evidence to decide if a legally binding contract exists. The court may also consider other factors (as it did in Blue v Ashley) such as the setting and purpose of any meeting between the parties and even the commerciality of the arrangement.

Takeaways

Handshake deals ultimately boil down to a question of risk. The impact of COVID-19 on your business is yet another layer to that risk. Without a written contract, you are at risk of being forced into an arrangement that may be on unfavourable terms and without pre-defined dispute resolution arrangements your options are limited when things go awry. Minimise that risk by taking measures to put your agreement in writing.

 * [2017] EWHC 1928

**NSW Supreme court decision of Cenric Group v TWT Property Group [2018] NSWSC 1570.

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The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.