All too often, technology companies enter into commercial relationships on the back of a short heads of agreement or even a telephone conversation. While there is not substitute for entering into a formal written agreement, the courts have again shown that oral agreements are enforceable.
Prior to its collapse earlier this year, investment bank Bear Stearns had a notable success in the High Court enforcing its oral agreement with investment fund Forum Global. In 2005 Forum Global held a series of negotiations with Bear Stearns for the sale of investments that Forum Global held in Parmalat. During a telephone conversation, the parties agreed on a price of €2.9 million for the investments. However, no specific date was agreed for settlement and the matter was passed to the parties’ lawyers to draw up the contracts.
Bear Stearns, believing it had a “done deal” with Forum Global, entered in to a further contract with JP Morgan whereby it would acquire the investments. Before this second trade was settled, Forum Global indicated it would not sell the investments to Bear Stearns. Unsurprisingly, Bear Stearns brought a claim for breach of contract.
Forum Global argued that:
(1) the agreement was merely an agreement to agree – the parties had deferred agreeing a settlement date and, thus, concluding a contract
(2) the agreement was too uncertain
(3) the parties did not intend to create legal relations
The court, in the absence of a written contract, considered the language the parties had used in the telephone conversation. It concluded that Bear Stearns had put forward a firm bid in language which indicated that, if the bid was accepted, a contract would be concluded, and when Forum accepted that bid it showed an intention to conclude a contract. That the parties had not agreed a settlement date was not important as the court may imply such a term.
As a neat aside, its worth noting Bear Stearns would have made a modest profit of €250,000 from its sale of the investments to JP Morgan. As it was, the court awarded it €1.3 million in compensation.
The lessons for technology companies from this case are plain:
- Take care when negotiating agreements – consider the language you use in negotiations and make sure the people doing the talking are authorised by the business
- Keep notes of all pre-contractual conversations
- Consider using “heads of terms” and the device “Subject to contract” – remember though, you can still form a contract by your conduct
- Capture the contract in writing at earliest opportunity