In English law informal oral agreements can be binding between parties if there is an “intention to create legal relations”. This was the position in the case of Corporate Oil and Gas Limited -v- Marshall Aviation Services Limited which was decided by the High Court towards the end of last year.
The Claimant was the owner of a jet aircraft and it had engaged the Defendant to carry out maintenance and repair services in relation to it. The dispute arose as to whether the Defendant had adequately performed its obligations and whether the Claimant owed the Defendant any money for the work which had been carried out.
The Defendant claimed that a “gentleman’s agreement” had been reached at a meeting between the parties whereby a discount and a settlement amount for the work that had already been carried out by the Defendant was agreed by the parties. The Claimant disputed this and argued that the agreement was subject to confirmation by its Chief Executive Officer (CEO) who was not present at the meeting.
The Court held that the “gentleman’s agreement” made between the parties was binding and the entire amount outstanding was payable by the Claimant; the Judge found that the agreement had not required confirmation from the Claimant’s CEO nor was it relevant that it was not confirmed in writing.
In deciding whether an oral contract is binding the Court will look at how, amongst other things, the parties have conducted themselves after any alleged agreement has been reached. In this particular case, after the meeting the Defendant had sent an email to the Claimant confirming the discount agreed and the Claimant had not rejected this, nor was there any request by it for clarification or continuation of negotiations in the weeks and months that followed. Had the Claimant told the Defendant that the agreement was “subject to CEO approval” then the Court would probably have concluded that there was no binding agreement in place.
This case highlights the willingness of the Courts to uphold informal agreements between parties which have not been recorded in writing, particularly in a commercial context where there is a greater likelihood of there being an intention to create legal relations. If a party does not wish to be bound by any terms discussed during negotiations then it should make it clear that the negotiations are “subject to contract” or subject to any other condition.