Two men walk into a pub. Surprisingly, this is not the start of a bad joke, but the actual events that a recent case which re-affirmed the basics of contract formation was based on.

Mr Ashley is the owner of Newcastle United football club and the boss of the retail giant, Sports Direct. Mr Blue, an investment banker, was supplied to Sports Direct by Aspiring Capital Partners to provide consultancy services to Mr Ashley pursuant to a Management Services Agreement. On 24 January 2013, Mr Ashley and Mr Blue were happily drinking in the Horse and Groom public house near to the Oxford Street branch of Sports Direct with three other finance specialists. During the session, the conversation turned to how Mr Blue would be rewarded if the share price of Sports Direct rose from the then trading level of around £4 per share to above £8 per share.

Mr Blue alleged that Mr Ashley orally agreed that he would be paid £15 million if the share price rose to the magic £8. Sure enough, the share price did hit this level at 13.04 on 25 February 2014 and Mr Blue claimed that he was party to a legally binding contract and asked Mr Ashley for the pay-out.

In the Court proceedings, Mr Ashley’s case centred on the fact that a lot of alcohol was drunk that evening in the Horse and Groom and that he couldn’t remember making such a deal. He further stated that, even if he had spoken of a £15million figure, that this would obviously not have been serious.

A major argument in Mr Blue’s case was that Mr Ashley paid him £1 million in May 2014 and that this was a sign that Mr Ashley acknowledged the agreement and therefore should pay the remaining £14 million. It was Mr Ashley’s case that the £1 million was a general bonus for various transactions that Mr Blue had assisted with.

In making judgment, the Court considered what was required to form a legally binding contract.

Agreement

Firstly, there needs to be an agreement where one party makes an offer and the other accepts. As explained by Mr Justice Leggatt in his judgment, “There can be circumstances in which a person uses the language of offer without expressing a genuine willingness to be bound. For example, if someone says at a party, “I will give you a million pounds, if you can speak for a minute on [a random subject] without hesitation, deviation or repetition”, this is unlikely to be interpreted as an offer despite the literal words used.” Therefore, the intentions of the parties are paramount.

Intention to make a legally binding contract

There can be situations where someone makes a real offer which is accepted but that it does not necessarily follow that a legally enforceable contract is created. Mr Justice Leggatt stated, “For example, it two people agree to meet for a drink at an appointed place and time and one does not turn up, no one supposes that the other could sue to receive his wasted travel expenses.” There must be the intention for a legally binding contract to be created.

Consideration

Traditionally in English law, a promise to do something cannot be enforced if nothing is to be done in return. The something in return is known as consideration. Therefore, if Mr Ashley offered £15 million to Mr Blue if the share price reached £8, and Mr Blue did not do anything to make this happen, there would not be a legally binding contract.

However, as Mr Blue needed to at least do some work to make the price reach £8, it would seem that there was consideration in this case.

Mr Ashley argued that the work was already part of the agreement that he had with Mr Blue for his consultancy services and therefore there was no new consideration for the alleged oral agreement in the pub. This argument was not a strong one, as the duties under the consultancy agreement were owed by Aspiring Capital Partners (the company which supplied Mr Blue) to Sports Direct, rather than by Mr Blue personally. Therefore, any work specifically done by Mr Blue for the purposes of raising the share price to £8 after the meeting in the pub would arguably constitute valid consideration. Not surprisingly, this point was not pushed by Mr Ashley’s lawyer at trial.

Certainty and completeness of terms

If the terms of a contract are too vague this may be grounds for saying that the parties did not intend to form a legally binding agreement. Even if intention is found, the contract can still fail if the terms are too uncertain. The Courts are reluctant to try to decide what the parties wanted to include in any agreement, but will try to do so unless the terms make it so difficult as to render the task impossible. The case Durham Tees Valley Airport v bmibaby [2010] EWCA Civ 485 was cited by Mr Justice Leggatt in which Toulson LJ observed:

“Where parties intend to create a contractual obligation, the court will try and give it legal effect. The Court will only hold that the contract, or some part of it, is void for uncertainty if it is legally or practically impossible to give to the agreement (or that part of it) any sensible content” (citing Scammell v Cicker [2005] EWCW Civ 405, para 30, Rix LJ).”

Mr Ashley argued that the alleged oral agreement was so uncertain that it could not create a proper agreement. As there is no evidence that a Court can look at to substantiate an oral agreement (unless recorded), a good guide is the likely understanding of each party of the words used by the other party.

The only evidence available in this case was that of the people involved who were drinking in the bar. The point was made that in this day and age, to rely on the recollection of a conversation in a public house for a claim worth millions of pounds, is ‘rare’. In addition, any subsequent conversations that Mr Blue had with Mr Ashley were not recorded or committed to paper so no inferences could be drawn about the conversation in the bar from later activity.

After considering the witness evidence, the Judge accepted that it was likely that Mr Ashley had said something to the effect that it wouldn’t matter how much he paid Mr Blue if the share price got to £8, as Mr Ashley would be so wealthy. Although the recollection of any final figure was different from all of the witnesses, the Judge did accept from the evidence provided that the figure of £15 million was the substance of the alleged agreement but that there was no specified time frame for the share price to reach £8.

Conclusion – is there a legally binding contract?

Mr Justice Leggatt concluded that the conversation in the bar was conducted under the influence of a lot of alcohol and was jovial in nature. Even though it was likely that Mr Ashley said, or Mr Blue inferred that he could have £15 million if he could get the share price of Sports Direct to £8, when Mr Blue agreed, everyone present laughed. Even though 13 months later, the share price did reach £8, no reasonable person in the Horse & Groom that fateful night of 24 January 2013 would have thought that this was a serious offer.

As Mr Justice Leggatt put it:

“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 no bounds”.