A recent case provides some clarity over when and whether verbal agreements can be seen as binding contracts. Best practice is to get anything agreed in writing, says Rianda Markram
Can an informal conversation over dinner at a restaurant amount to a binding contract worth several million pounds? The answer is quite possibly yes, although where this does happen the court will closely scrutinise all the facts and surrounding circumstances, to determine whether the parties intended to enter into a legally binding agreement.
This is what happened in the recent case of MacInnes v Gross in 2017. MacInnes argued that he was entitled to €13.5 million pursuant to a verbal agreement that he reached with Gross over dinner in a London restaurant on 23 March 2011. Gross denied the existence of a binding agreement between him and MacInnes.
With reference to the alleged agreement, MacInnes stated that he would provide services to Gross and/or his company in relation to the sale of the business. In exchange for his personal services, he would then be remunerated by receiving a fee calculated on a formula roughly based on the difference between the target sale price and the actual sale price of the business.
Subsequent emails exchanged between the parties made reference to phrases such as ‘on headline terms’, and the court viewed this as evidence that details of a potential agreement remained to be finalised later. The court also referred to other emails, which in its opinion, showed neither party actually believed that an agreement had been reached.
In any event, the High Court ruled that the terms of the alleged contract were too vague and uncertain to establish legal relations, and therefore no enforceable contract existed.
So when is a contract legally binding? A contract is made up of four basic elements: offer, acceptance, consideration, and an intention to create legal relations. The terms must be specific, unambiguous and capable of acceptance, and made with the intention of being accepted. The word ‘contract’ could be, and is often, misunderstood. If you think about those elements, you’ll realise that we all enter into contracts daily. Basic examples include buying a coffee and a train ticket for your journey to work.
Generally speaking, contracts can be created in writing or verbally, and sometimes they’re even implied through conduct. There are exceptions for certain types of transactions. For example, a contract for the transfer of land must be in writing to be enforceable.
However, it’s always best to have a written document that sets out the terms and conditions of any agreement that you enter into. This means it can be used as evidence in court if disagreement arises.
On the FSB legal helpline we are often asked “but what about my automatic cooling-off rights?” This is a misconception. Generally, with a business-to-business contract there is no period of grace whereby either party can withdraw from a contract without penalty, unless the contract includes such a clause.
In consumer contracts, however, usually where an individual is acting for purposes outside his/her business, there may be a statutory right to cancel a contract within a certain period, for example regulated finance agreements or distance-selling contracts such as internet purchases, contracts entered into on the consumer’s doorstep, and contracts concluded away from the relevant company’s place of business.