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Back to first principles: contractual intention

10 May 2017

The High Court has denied a claim that €13.5m was due on the basis of an oral contract because there was no evidence of the parties' intention to create legal relations as well as a lack of certainty in relation to certain other fundamental terms which militated against the existence of a binding contract.

Summary

In MacInnes v Gross [2017] EWHC 46 (QB) the High Court rejected a €13.5m claim brought by Mr MacInnes against Mr Gross for breach of contract for the main reason that the parties had not manifested an intention to create legal relations but also the absence of certainty in relation to other fundamental terms.  The decision serves as a useful reminder of first principles in relation to contract formation as well as highlighting the risks of taking a relaxed approach to documenting contractual arrangements, particularly when the subject matter is high value (as in this case). 

Facts

Mr MacInnes was an experienced investment banker and first met Mr Gross in 2008 when, for a brief period, Mr MacInnes and Mr Gross held discussions concerning Mr Gross's business, "RunningBall" and Mr Gross's then intention to consolidate his ownership of the business by buying out certain minority shareholders.  Nothing came of these discussions and there was no contact between the parties until Mr MacInnes reached out to Mr Gross some years later, in January 2011.  There followed a series of exchanges concerning the future of RunningBall which culminated in a meeting over dinner at a restaurant in Knightsbridge, London on 23 March 2011 which became the focus of the dispute.

The conversation which took place on the evening of 23 March 2011 is said by Mr MacInnes to constitute an oral contract between him and Mr Gross whereby it was agreed that Mr MacInnes would assist Mr Gross to grow his business with a view to maximising any return on sale.  In exchange for those services, Mr MacInnes would be remunerated by being paid 15% of the difference between the sale price of RunningBall and the lower of SFr 100 million or eight times 2011 EBIT.  As the judge recognised, the two men left the dinner with very different views of what happened. 

That same evening Mr MacInnes emailed Mr Gross what was the only contemporaneous note of the discussions which had taken place over dinner.  The cover email included, amongst other things, a reference to the parties being "agreed on headline terms" and Mr MacInnes's observation that "I think the role as CEO of HTG Holding is an excellent formula to kick things off, and I appreciate the suggestion that I would be able to elect a strike price for options for 15 per cent of RunningBall at the lower of SFr 100 million or eight times 2011 EBIT".   

In the period that followed, Mr MacInnes continued to do work on behalf of RunningBall including arranging meetings with potential purchasers, but crucially this was in Mr MacInnes's capacity as an employee of Investec. Mr MacInnes eventually left Investec to become chairman of RBHAG and RBAG (both RunningBall group companies) and chaired his first board meeting on 8 August 2011.  

RunningBall was eventually sold to Perform Group Limited (PGL) in 2012. At an advanced stage of the negotiations with PGL (which the judge accepted had been introduced to RunningBall by Mr MacInnes, albeit in February 2011 while Mr MacInnes was an employee of Investec), Mr Gross had emailed Mr MacInnes stating that "I believe you can create great value in the transaction.  Next time we see each other let's make a proper contract." However in the event Mr MacInnes was increasingly sidelined as the deal progressed (indeed it had been agreed that Mr MacInnes should no longer be present at meetings with PGL to avoid him "scuppering" the transaction).  After the deal had closed in 2012 Mr MacInnes demanded €31m-€50m from Mr Gross which Mr MacInnes stated represented the "objective market value of his services" on the basis of the formula he claimed had been agreed at the 23 March dinner.

Judgment

In his judgment Mr Justice Coulson expressed the firm view that no binding contract had been made between Mr MacInnes and Mr Gross for want of evidence of the parties' intention to create legal relations as well as the lack of certainty in relation to certain other certain fundamental terms concerning Mr MacInnes' remuneration, the scope of the services he was to provide to RunningBall and the identity of the parties to the agreement. 

In reaching this conclusion, Mr Justice Coulson commenced his analysis from first principles, observing that the governing criteria in determining whether or not a binding contract had been formed was the reasonable expectations of honest and sensible businessmen.  Citing with approval Lord Clarke's formulation of the law in RTS Ltd v Molkerei Alois Muller GmbH and Co KG, what was relevant was not the subjective intention of the parties but a consideration of what was communicated between them, by words or conduct, and whether that led objectively to a conclusion that they intended to create legal relations and had agreed upon all terms which they regarded or the law requires as essential for the formation of legally binding relations.    In particular:

  1. Where there is an express agreement, in an ordinary commercial context, the burden of disproving an intention to create legal relations is a heavy one;
  2. Absent an express agreement, the onus is on the party claiming that a binding agreement had been made to prove that there was an intention to create legal relations; and
  3. One relevant factor may be the degree of precision with which the alleged agreement is expressed. Vagueness and uncertainty may be a ground for concluding that the parties did not reach any agreement.  The more complex the subject matter, the more likely the parties are to want to enshrine their contract in a written document. 

Applying these principles Mr Justice Coulson found that there was no binding contract made between the parties on 23 March 2011. He found that: there was no intention to create legal relations, no agreement had been reached on the "critical issue" as to the nature of Mr MacInnes's remuneration, the terms of the contract were too complex and too uncertain to be enforceable and there was no binding agreement on the identity of the parties or the scope of work Mr MacInnes was to undertake on behalf of Mr Gross/RunningBall.

Mr Justice Coulson considered that Mr MacInnes's email of 24 March 2011 containing the reference to "headline terms" could not objectively be interpreted as evincing an intention to create legal relations and in fact in the context meant the opposite, observing that the expression (similar to "subject to contract") was routinely deployed by businessmen and lawyers to convey the bare bones of an agreement that required the blanks to be filled in before it became binding.  Other aspects of the language used by Mr MacInnes in his email of 24th March did not have the required property of certainty; for example in relation to remuneration, Mr MacInnes stated that he "appreciated the suggestion" that he "would be able to elect a strike price for options" which Mr Justice Coulson regarded as far too tentative to be evidence of a binding and concluded agreement.  Mr Gross's email of 7 December 2012 referring to the need for a "proper contract" reinforced the view that Mr Gross certainly didn't consider there was a binding contract in existence at that time. 

Mr Justice Coulson also referred to a number of other factors which, while not decisive, he considered militated against a finding that there was an intention to create legal relations. First, while it was possible to conclude an agreement in the relaxed environment of a restaurant, the informality of the context meant that the court should exhibit greater scrutiny of any claim that an intention to create legal relations had manifested itself in relation to subject matter of the type in question. Secondly, English was not Mr Gross's first language and while his proficiency in English could be described as "fluent", extra caution was necessary to allow for nuances in language as certain words convey different shades of meaning in different languages. Mr Justice Coulson also considered it was a critical omission that Mr MacInnes had not sought to have the agreement reduced to writing, in particular as Mr MacInnes himself had previously been critical of RunningBall's failure to acknowledge the importance of written contracts.

Comment

The decision neatly highlights the pitfalls of informality in contractual dealings especially when the subject matter is of considerable value to one of the parties.  Mr MacInnes proceeded on the erroneous belief that he had the security of enforceable rights when none in fact existed having learnt the hard way that courts will not imply contracts lightly unless they can conclude with confidence that the parties intended to create legal relations.  In practice this means that absent a written agreement, there is a heavy burden of proof on the party seeking to assert the existence of a contractual relationship - better to seek advice and obtain the certainty of an agreement recorded in writing than make potentially expensive assumptions about the other party's undocumented intentions.