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Can a multi-million pound contract made in the pub ever be binding?

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The memory illusion

Virtually everyone has had occasions where good judgement has been clouded through excessive alcohol consumption, but rarely have the English courts been asked to adjudicate on a contractual dispute worth millions which hinged solely on the drunken recollections of those present three years after the meeting in question.

I am of course referring to the High Court case involving Mike Ashley, the billionaire owner of Sports Direct, and Jeffrey Blue, a former consultant to Sports Direct. The 2017 case of Blue v Ashley centred on a meeting in January 2013 in the Horse & Groom pub in Great Portland Street, London, between Ashley, Blue and representatives from Espirito Santo Investment Bank (ESIB). The meeting occurred just after Sports Direct’s listing on the FTSE following the resignation of Merrill Lynch, Sports Direct’s corporate brokers, in response to some well-publicised corporate governance issues.

Its purpose: Sports Direct was seeking a corporate broker to manage the company’s relationship with the financial markets. ESIB was approached by Blue to see if it was willing to step into the void left behind, and they agreed.

An informal meeting at the Horse & Groom was suggested by Peter Tracey, head of corporate broking at ESIB, with Sports Direct as a form of ‘bonding’ with their new clients. According to accounts of the evening put before the court, the meeting was a success, with drinks flowing for several hours. Talk turned to Sports Direct’s share price, which at the time was around £4, and what level it might reach should the company continue to perform well.

During this conversation, it was apparently suggested by the ESIB representatives that Mr Blue should be incentivised with some form of payment to help increase the share price up to £8. It was eventually agreed, it was argued, by the parties that Blue would recieve a figure of £15 million from Ashley if he could ‘get’ the share price up to the £8 target. Blue alleged that he was given a three-year period in which to do this.

On 25 February 2014, the Sports Direct share price reached the £8 target price, and the basis for the disputed ‘contract’ had been formed. Blue therefore claimed he was entitled to the £15 million incentive from Ashely, a claim which Ashely rejected by arguing that no legally enforceable contract had been created. In support of this argument, Ashley pointed out that, following the meeting, none of the terms allegedly agreed were ever documented in writing. This meant the only evidence of it were the recollections of those present, most of whom had been drinking large amounts of alcohol.

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The case has thrown up interesting questions relating to the fallibility of the human memory, and the evidential value of witness testimony in litigation where months or years have passed since the event at the heart of proceedings.

As Leggatt J stated in his judgment, there was no reason to think that any witnesses were doing anything other than stating their honest beliefs and best recollections of what was said during the evening in question. But evidence based on recollections of conversations which took place some time ago is problematic, as Leggatt had pointed out in Gestmin SGPS SA v Credit Suisse. At the heart of his observations in that case, he identified two common errors in relation to the human memory:

“(1) that the stronger and more vivid is our feeling or experience of recollection, the more likely the recollection is to be accurate; and (2) that the more confident another person is in their recollection, the more likely their recollection is to be accurate.”

In fact, he said: “Underlying both these errors is a faulty model of memory as a mental record which is fixed at the time of experience of an event and then fades (more or less slowly) over time. Psychological research has demonstrated that memories are fluid and malleable, being constantly rewritten whenever they are retrieved.”

Leggatt then goes on to describe the considerable potential for interference with memory in preparing for trial, as there are often lengthy periods of time between the event and the trial, and a witness’s memory can be “refreshed” by reading his earlier statement, which can further help mould memory of a particular event. The recent case of Cusack v Holdsworth highlights this perfectly:

“…the fallibility of the memory has to be taken into account when determining issues of fact. Memory is an active process, subject to individual interpretation or construction. Each witness will have produced their witness statements many months ago, will have been asked to read or re-read their statement and review documents before giving evidence in court. There is high-level commentary that reveals that this process reinforces a memory, even if the memory was false to begin with, and may cause a witness’s memory to be based not on the original experience of events but on the material which has been read and re-read.”

In such cases, Leggatt in his Gestmin judgment outlines the approach that judges should take. He said to place little, if any, reliance on witnesses recollections of conversations and meetings, and to concentrate on the inferences which can be drawn from the documentary evidence and known or probable facts.

Looking at the overall substance of the recollected conversation, Leggatt found that the substance of the supposed agreement between Ashley and Blue was that Ashley would pay Blue £15 million if he could get the Sports Direct share price up to £8 within an unspecified timeframe. In spite of this, Leggatt decided that there was no legally binding contract .

The setting, “five guys and a barman in a pub”, was certainly relevant to his decision. This informality demonstrated a lack of intention to create a legally binding agreement, in the view of Leggatt.

Leggatt went on to outline further reasons for his decision, such as: the purpose of the occasion (to engage ESIB as Sports Direct’s new corporate broker); the generally jovial nature and tone of conversation that evening; the lack of commercial sense behind the proposed arrangement; and the lack of evidence that Blue’s work actively influenced the rise in the share price. The vagueness of the offer was another critical factor, evidenced by the lack of consensus in the witness testimony about the arrangement, as each of the parties present found it difficult to agree on the sums offered, whether there was a time limit, and how long the share price should stay above the £8 target for.

This is a highly unusual case: it presents an insight into the corporate world which Ashley operates. It also demonstrates perfectly the fallibility of the human memory and how the same event can be perceived differently by different people,.

Ultimately, it is unsurprising that Blue failed in his claim; the lack of documentary evidence would make it impossible for any right-minded member of the judiciary to award such huge sums of money on the back of such flimsy evidence. Even though English law may still recognise a verbal contract, no reasonable person who looks at the evidence offered could conclude that Ashley was serious when he made the offer to pay Blue £15 million. After all, the evening was a jocular one, and the fact that all parties laughed when the ‘agreement’ was made further goes to show that offer could not be seen to serious. In Leggatt’s own concluding words in his judgment:

“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 few bounds.”

This goes to show that your word is still your bond, but only when you remember to write it down.

Mark O’Neill is graduate of the Open University. He hopes to work as a commercial solicitor in the City.

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7 Comments

Ellie

very obviously the right decision, who could argue with that??

KK

sek c

Anonymous

bak

Anonymous

Nice piece, but the conclusion doesn’t follow- English law recognises verbal contracts, as you yourself said earlier in the article. So you needn’t ‘remember to write it down’ at all.

Anonymous

It’s a practical point though…

Verbal contracts may very well be legitimate, but if one party disagrees it is incredibly difficult to evidence what the terms were, as evidenced here.

Nothing wrong with a verbal contract as long as everyone is on the same page, but when it goes tits up you’re pretty much screwed.

Anonymous

Yaaaaaawn. Very dull LC. Try harder.

Anonymous

Baltic International Bank v Segesta & ors [2017] indicates this is not always the case, certainly for shareholders, to the tune of £31m with interest and costs.

Although that was made at the Dorchester and Claridges.

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