Most businesses appreciate the importance of having a contract drawn up in writing. However, the commercial reality is that sometimes there are cases where formalising terms simply does not happen before one of the parties carries out their part of the bargain. Where does that leave the parties when things go wrong?
An example of where not having a contract can go wrong
The High Court has recently considered the implications of proceeding without a written contract where an alleged contract was agreed at a drinks reception. The claimant provided corporate finance advice; the defendant was a private equity firm.
The claimant claimed payment from the defendant for providing services in connection with a share purchase arrangement. It claimed there was an oral agreement reached, at a drinks reception, with the defendant promising to pay it £1m if the defendant or (a subsidiary or affiliate) acquired the shares in question.
If that argument held no ground, it also claimed payment by way of quantum meruit on the grounds of unjust enrichment for the valuable services provided to defendant.
The defendant said there was no contract and disputed the contention that valuable services had been provided as claimed and for which payment was due.
What did the court say?
The court found there was no such agreement for many reasons, including:
- There was no contemporary evidence of the fees agreement although one would reasonably have expected such evidence to exist;
- A drinks reception was not the type of event where deals could be expected to be struck or contracts made;
- Regardless of the social occasion, the very agreement was implausible because at the relevant time the defendant did not have substantial financial information regarding the shares and was not able to make a sensible estimation of that business’s likely value.
Further, even if an oral agreement had been reached, the court commented that it would not readily have found the existence of the necessary intention to create legal relations in these circumstances.
Even though he defendant had been enriched by the claimant’s work and at its expense, the question then was whether there was any unjust enrichment. It therefore distinguished between a contractual obligation to pay a reasonable price – and unjust enrichment.
The judge made clear that “proper justification is required for conferring an entitlement to payment on a party who has not contracted to receive payment. It is not the role of the law of unjust enrichment to create for the parties’ contracts that they never made”.
The claimant’s claim therefore failed – the court held that it had taken the risk of providing unpaid services without a contract in place.
What does this mean?
Businesses are reminded of the need to ensure that agreements reached – and which they intend to be legally binding – are formalised in writing. Where the provision of services is involved, the party who starts to provide services should exercise extreme caution if there is no written contract in place.
This is necessary to minimise the risk of remaining unpaid – and an expensive dispute which they could lose.
While in some cases an oral agreement will be sufficient to show a contract is in place, the challenge lies in satisfying the court of that fact. If it cannot be proved that a contract exists, it could be very difficult to make a successful claim for payment on a quantum meruit basis.
To discuss any commercial contract issues you may be experiencing please contact a member of our team on 01204 377 600. Alternatively you can send an email with your name, contact information and brief details as to the nature of your issue to firstname.lastname@example.org and one of our team will be able to help you.