Is there a contract if the parties have been drinking?

While some of the details before the court were rather colourful, it was no surprise to see Mike Ashley successfully defeat Jeffrey Blue’s claim for a £15m “bonus” – payment of which Blue claimed was based on a verbal contract and triggered by the share price of Sports Direct doubling and reaching £8 per share.

It is trite law that there must be the necessary intention to create legal relations before the court will hold that a binding contract has come into force, and Mr Justice Leggatt held, on the facts of the case, that an alcohol-fuelled conversation in a pub didn’t hit the mark.

Was the fact the parties had been drinking the only reason the court held there was no intention to create legal relations and therefore no binding contract? No it wasn’t; the court held there was no intention to create legal relations for no less than eight key reasons.

The first reason given was “the setting” – they were in a pub and a fair amount of alcohol had been consumed. Leggatt J expressly said that, in itself, did not prevent a contract from being made, but an evening of drinking in a pub with three investment bankers was an unlikely setting in which to negotiate a contractual bonus arrangement with a consultant who was meeting the bankers on behalf of the company.

The second reason given was the “purpose of the occasion”. The group had not met to discuss Blue’s work for Sports Direct or his remuneration. While it was a business meeting, the purpose was for Ashley and Blue to represent Sports Direct with a potential new corporate broker.

Third was the “nature and tone of the conversation” – it was held to be a “jocular” conversation, part of “general banter” or “pub chat” about the share price.

Fourth was the “lack of commercial sense” – it was plain to see from the evidence about the numbers tossed around by the group in the pub that it was not a serious discussion about creating an incentive bonus scheme.

Fifth was the “incongruity with Mr Blue’s role”. The very idea that Blue could, through his skills and contacts in corporate finance, “get” the share price to double seemed fanciful.

The sixth reason given was the “vagueness of the offer”. Any serious discussion of a £15m payment to incentivise Blue would have required consideration of exactly what work Blue was going to do to earn the “bonanza” and how the effect of his work would be measured.

The seventh reason given by Leggatt J was the “perceptions of the witnesses”. Three witnesses were at the pub with Ashley and Blue. None of the brokers present thought Ashley was being serious.

Finally, Leggatt J relied upon “Mr Blue’s own perception”. He was satisfied, on the evidence, that even Blue did not understand there was an intention to form a binding contract either at the time or in the period of time immediately afterwards.

The court relied upon all eight factors when reaching the conclusion that there was no intention to create legal relations. Therefore, a “defence” of “but I had been drinking” will not suffice on its own to avoid a contract, but it can be considered to be a contributing factor, depending on the circumstances.

Overall, it was an expensive mistake for Blue, who, no doubt, will ensure in the future that any potential bonus arrangements are formally tied down.

Fiona Parry is a partner at Hill Dickinson

@HillDickinson www.hilldickinson.com