Business Law Legal Alert
BLLA – Spring 2017 (pdf version)
In the latest Business Law Legal Alert from Spencer Laymond, we have three interesting cases from the High Court:
- the failed €13.5 million commission agreement between an investment banker and millionaire, over dinner in a Mayfair restaurant;
- the £1 award for an employer winning its case for breach of confidence against employees setting up in competition, with a nasty sting in the tail on legal costs; and
- the option agreement to build oil tankers which was held to be unenforceable for lack of certainty.
The failed €13.5 million contract over dinner in Mayfair restaurant
It is classic law of contract that, whilst contracts do not have to be in writing, in order to be legally enforceable, they must be supported with an intention to create a legally binding arrangement. So, for example, it is perfectly possible over dinner in a restaurant, whether in Mayfair or Middlesex, to verbally create a contract. So why, on 23 March 2011, did an experienced investment banker and millionaire business entrepreneur fail to create a contract?
Following the dinner, when the claimant banker returned home and before bed, he emailed the defendant entrepreneur about the dinner and discussions. He included “I am delighted that we are agreed on headline terms” relating to the claimant leaving his existing job to personally advise the defendant on the sale of his company. He referred to his remuneration being based on the difference between the actual sale price and a target price. Then around nine months later when a sale began to materialise, the claimant banker reminded the defendant of the “headline terms”, and the response was that “…I believe you can create great value in the transaction. Next time we see each other let’s make a proper contract…”.
Under scrutiny the court concluded references to “headline terms” was strongly indicative that at least at that point there was no intention to create legal relations. The court referred to a previous case on contract formation: “The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre-condition to a concluded and legally binding agreement.”
For a binding contract to exist and be enforced, the terms must be certain. Further whether over dinner, at the pub or more formal, agreements should be complete and not lack any essential term; and agreements should not be uncertain, vague or ambiguous.
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£1 awarded on £15m claim for breach of confidence
In this case two employees (one of whom was a founding partner) left their employment to set up a rival investment management business. It was held that they had breached their implied duty of confidence and the confidentiality obligations in their employment contracts, having copied certain files onto a USB stick. They were sued for £15m being the estimated value of the confidential information taken.
Employees are subject to implied terms to use information which is confidential to their employer solely for the employment relationship and not for any other purpose. The general rule is then that damages for breach of contract are intended to compensate an injured party for its loss, putting the claimant in the same position as if the contract has been performed. Where there has been a breach of a restriction such as a breach of confidence or restrictive covenant, the court will sometimes award damages on a hypothetical bargain basis. This means the sum that the defendant would have paid to the innocent party in order for the defendant to be released from the restriction. The amount of damages is often based on the profit made by the defendant.
So why, when the court found in favour of the employer, did the court only make an award of £1? The evidence at trial showed that the employees had made very little use of the confidential information and they had not made any benefit from the documents taken. Applying the damages test used by the court, it was said that damages should only be paid to the employer to reflect any gain made by the employees breaching the contract. Here, the employer had been unable to show that it had suffered any financial loss, or that the former employees had made a financial gain, and therefore there was no justification for awarding substantial damages.
Many people have mixed views on the enforceability and value of restrictive covenants. However, there is plenty of good case law to show examples of how reasonably prepared restrictive covenants have been enforced. It is a legal and commercial decision in preparing restrictive covenants and we recommend independent advice is taken on a case by case basis. This case highlights the challenge in claiming damages where a defendant has not made a gain and a claimant has not made a loss.
The sting in the tail for the employer was that it had previously rejected a pre-trial offer to settle for £1.5m. Ordinarily, a court will award legal costs to the successful party. However on the basis the employer rejected the offer to settle, the court refused to award their costs.
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Option Agreement to build Oil Tankers held to be unenforceable as it lacked certainty
A shipbuilder and shipping company entered into an option agreement for the shipbuilder to build several oil tankers. The option agreement specified that the delivery dates for the oil tankers would be mutually agreed between the parties, and that the shipbuilder would use “best efforts” to deliver. After the option was exercised the shipbuilder successfully argued the agreement was unenforceable.
In this case the court agreed with the shipping company that there was an intention for the option agreement to be binding. However, crucially, the shipping company was unable to show there was an implied term to agree delivery dates, if parties were unable to reach a mutual agreement. Further, the requirement for the shipbuilder to use “best efforts” to deliver was not an implied term to provide delivery dates, the delivery dates had to be mutually agreed.
This case is a reminder when entering into negotiations and agreements, to consider whether the negotiations and agreements, in whole or just part of, are intended to be binding or not. If an agreement provides for a future contract, then careful consideration is needed whether the agreement is capable of being valid. Courts will not imply terms to rescue contracts if the express terms are contradictory.
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