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07 March 2017
In MacInnes v Gross(1) the High Court rejected a €13.5 million claim brought by Mr MacInnes against Mr Gross for breach of contract, for the main reason that the parties had not manifested an intention to create legal relations, but also due to the absence of certainty in relation to other fundamental terms. The decision serves as a useful reminder of first principles in relation to contract formation and highlights the risks of taking a relaxed approach to documenting contractual arrangements, particularly when the subject matter is high in value (as in this case).
MacInnes was an experienced investment banker and first met Gross in 2008 when, for a brief period, MacInnes and Gross held discussions concerning Gross's business, RunningBall, and Gross's then intention to consolidate his ownership of the business by buying out certain minority shareholders. Nothing came of these discussions and there was no contact between the parties until MacInnes reached out to Gross some years later, in January 2011. There followed a series of exchanges concerning the future of RunningBall, culminating in a March 23 2011 meeting over dinner at a restaurant in London, which became the focus of the dispute.
MacInnes contended that the conversation which took place on the evening of March 23 2011 constituted an oral contract between him and Gross, whereby it was agreed that MacInnes would assist Gross to grow his business with a view to maximising any return on sale. In exchange for those services, MacInnes would be remunerated by being paid 15% of the difference between the sale price of RunningBall and the lower of Sfr100 million or eight times 2011 earnings before interest and taxes (EBIT). As the judge recognised, the two men left the dinner with very different views of what happened.
That same evening, MacInnes emailed Gross what was the only contemporaneous note of the discussions that had taken place over dinner. The cover email included a reference to the parties being "agreed on headline terms" and MacInnes's observation that:
"I think the role as CEO of HTG Holding is an excellent formula to kick things off, and I appreciate the suggestion that I would be able to elect a strike price for options for 15 per cent of RunningBall at the lower of SFr 100 million or eight times 2011 EBIT."
In the period that followed, MacInnes continued to do work on behalf of RunningBall – including arranging meetings with potential purchasers – but crucially, this was in MacInnes's capacity as an employee of Investec. MacInnes eventually left Investec to become chairman of RBHAG and RBAG (both RunningBall group companies), and chaired his first board meeting on August 8 2011.
RunningBall was eventually sold to Perform Group Limited (PGL) in 2012. At an advanced stage of the negotiations with PGL (which the judge accepted had been introduced to RunningBall by MacInnes – albeit in February 2011, while MacInnes was an employee of Investec), Gross emailed MacInnes stating: "I believe you can create great value in the transaction. Next time we see each other let's make a proper contract." However, MacInnes became increasingly sidelined as the deal progressed (it had been agreed that MacInnes should no longer be present at meetings with PGL to avoid him "scuppering" the transaction). After the deal closed in 2012, MacInnes demanded €31 million to €50 million from Gross, which according to MacInnes represented the "objective market value of his services" on the basis of the formula that he claimed had been agreed at the March 23 dinner.
In its judgment the court expressed the firm view that no binding contract had been made between MacInnes and Gross for want of evidence of the parties' intention to create legal relations, as well as the lack of certainty in relation to certain other fundamental terms concerning MacInnes's remuneration, the scope of the services that he was to provide to RunningBall and the identity of the parties to the agreement.
In reaching this conclusion, the court commenced its analysis from first principles, observing that the governing criteria in determining whether a binding contract has been formed are the reasonable expectations of honest and sensible businesspeople. Citing with approval Lord Clarke's formulation of the law in RTS Ltd v Molkerei Alois Muller GmbH and Co KG,(2) the court noted that what is relevant is not the subjective intention of the parties, but a consideration of what was communicated between them, by words or conduct, and whether that led objectively to a conclusion that they intended to create legal relations and had agreed on all terms which they regarded or the law requires as essential for the formation of legally binding relations. In particular:
Applying these principles, the court found that no binding contract had been made between the parties on March 23 2011. In particular, it found that:
The court considered that MacInnes's March 24 2011 email containing the reference to "headline terms" could not objectively be interpreted as evincing an intention to create legal relations; in fact, in the context it meant the opposite, with the court observing that the expression (similar to "subject to contract") is routinely deployed by businesspeople and lawyers to convey the bare bones of an agreement that requires the blanks to be filled in before it can become binding. Other aspects of the language used by MacInnes in his March 24 email did not have the required property of certainty – for example, in relation to remuneration, MacInnes stated that he "appreciated the suggestion" that he "would be able to elect a strike price for options", which the court regarded as far too tentative to be evidence of a binding and concluded agreement. Gross's December 7 2012 email referring to the need for a "proper contract" reinforced the view that Gross certainly did not consider that a binding contract existed at that time.
The court also referred to a number of other factors which, while not decisive, militated against a finding that there was an intention to create legal relations. First, while it is possible to conclude an agreement in the relaxed environment of a restaurant, the informality of the context meant that the court should exhibit greater scrutiny of any claim that an intention to create legal relations had manifested itself in relation to subject matter of the type in question. Second, English was not Gross's first language and while his proficiency in English could be described as "fluent", extra caution was necessary to allow for nuances in language, as certain words convey different shades of meaning in different languages. The court also considered it a critical omission that MacInnes had not sought to have the agreement reduced to writing, in particular as MacInnes himself had previously been critical of RunningBall's failure to acknowledge the importance of written contracts.
The decision neatly highlights the pitfalls of informality in contractual dealings, especially when the subject matter is of considerable value to one of the parties. MacInnes proceeded on the erroneous belief that he had the security of enforceable rights when none in fact existed, thus learning the hard way that courts will not imply contracts lightly unless they can conclude with confidence that the parties intended to create legal relations. In practice, this means that in the absence of a written agreement, there is a heavy burden of proof on the party seeking to assert the existence of a contractual relationship – it is better to seek advice and obtain the certainty of an agreement recorded in writing than to make potentially expensive assumptions about the other party's undocumented intentions.
For further information on this topic please contact Greg Pooler or Andy McGregor at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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