No contract? Proceed with caution

Most businesses and entrepreneurs appreciate the importance of having a contract drawn up in writing. However, the commercial reality is there are cases where formalising the terms does not happen before one of the parties carries out their part of the bargain. But where does that leave the parties when things go wrong?

The implications of proceeding without a written contract have been highlighted by the High Court in a recent case where an alleged contract was agreed at a drinks reception1.  The claimant provides corporate finance advice; the defendant is a private equity firm and the European affiliate of a leading US global private equity firm (HIG).

In 2011, two entities affiliated with HIG acquired the shareholding in the subsidiaries of Bezier in a debt and equity transaction. The plaintiff claimed payment from HIG for providing valuable services provided to HIG in connection with that acquisition. It claimed there was an oral agreement reached, at a drinks reception, with HIG promising to pay it £1m if HIG or (a subsidiary or affiliate) acquired Bezier.

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 HIG.

HIG 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 a number of 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 HIG did not have substantial financial information on Bezier and was not in a position to make a sensible estimation of the business’s likely enterprise value.

Furthermore, 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 HIG had been enriched by the plaintiff’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 plaintiff’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 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.

How can we help?
We advise business organisations of all sizes on their contractual negotiations and obligations. For strategic advice and representation, please contact our commercial team as early as possible.

Mark Chapman
Partner, Commercial
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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