Creating a legally binding contract: the human capacity for wishful thinking
In Jeffrey Ross Blue v Michael James Wallace Ashley  EWHC 1928 (Comm), the issue for the High Court to consider was whether a statement, made by wealthy businessman during pub ‘banter’, gave rise to a legally binding contract that would require him to pay a consultant £15m if the share prices of his company hit £8 per share.
The verbal ‘agreement’ reached by the parties was that if the consultant, Mr Blue, managed to get the share prices of Sports Direct up to £8 per share, Mike Ashley (the company’s owner) would pay Mr Blue £15m. The period in which Mr Blue had to increase the share price was not specified.
It was held by Mr Justice Leggatt that Mr Ashley’s offer was not an offer which, once accepted, created a legally binding contract. To create a legally binding contract there needs to be a clear offer, the terms of which are sufficiently certain, followed by an acceptance of that offer. In addition, there also needs to be some form of consideration between the parties (i.e. the exchange of something of value) and an intention by both parties to be legally bound by the agreement.
Why did it fail as a legally binding contract?
It was, in theory, possible that a legally binding contract could have been created between the parties in a pub over a few drinks. However, the decision outlined eight reasons for why the ‘agreement’ failed:
- The setting of the meeting meant this is was an ‘unlikely’ place for those concerned to be negotiating Mr Blue’s contractual bonus;
- The purpose of the occasion was not to discuss Mr Blue’s remuneration;
- The nature and tone of the conversation meant that nobody “could reasonably have understood this to be a serious business discussion”;
- The agreement did not make any commercial sense to Mr Ashley (or at least he had no reason to make such agreement);
- The ‘incongruity’ of Mr Blue’s role (i.e. it is questionable what he would do to change the share prices);
- Vagueness of the ‘offer’ (i.e. there was no consideration as to what Mr Blue would need to do in order to receive the payment or how his work would be measured – added to which there was no specified period in which the target price should be achieved);
- Perceptions of witnesses (nobody thought Mr Ashley was being serious when he made the offer);
- Mr Justice Leggatt also found that Mr Blue did not consider there to be an intention to create a legally binding contract at that point, otherwise he would made a written record.
Terms of an agreement
Mr Blue’s case may have been helped had he made a written note of the ‘agreement’ or even more so if he had confirmed it to Mr Ashley the next day in writing, with a clear timeframe in which he would need to increase the share prices. However, Mr Blue would still have had difficulties showing that his services and actions caused the change in share prices.
It is possible as a matter of law to create a legally binding contract that has not been reduced to writing, but problems arise when trying to enforce such an agreement. Unless an agreement is drawn up or a written record is created, evidence of the fact and terms of an agreement is reliant on eye witness testimony. This problem is even more difficult when those witnesses were consuming alcohol during the relevant period.
In this case Mr Justice Leggatt concluded that the “fact that Mr Blue has since convinced himself that the offer was a serious one, and that a legally binding agreement was made, shows only that the human capacity for wishful thinking knows few bounds.”
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Posted on Sep 26th, 2017 by Lyons Davidson