Even where large sums of money are at stake, businesspeople all too often choose to dispense with professional advice and seek to reach oral agreements the legal status of which is very often uncertain at best. A High Court case concerning a business sale underlined the hazards of such a course.
Five shareholders who sold their majority interest in a company were to receive an immediate cash sum plus further deferred consideration in the form of three earn-out payments. Payment of the latter was subject to conditions relating to the company’s performance. The first earn-out payment was remitted in full, but the purchaser declined to make any further payments on the basis that the conditions had not been met.
The vendors claimed that the purchaser was obliged to make the last two earn-out payments and launched proceedings, seeking over £1.2 million which they asserted was still due to them. Their case relied on the contention that an oral agreement had been reached at a meeting subsequent to the sale whereby the purchaser accepted that new conditions would apply to the payment of earn-out sums.
Ruling on the dispute, the Court noted that what a commercial person may consider to be an agreement will not necessarily constitute an enforceable legal contract. The parties may have emerged from the meeting feeling that they had formulated a clear way forward. However, what resulted was merely an understanding which was not, and was never intended to be, a binding agreement.
The vendors faced another significant hurdle in that, in common with many commercial agreements, the sale contract contained a provision requiring any amendment to its terms to be in writing and signed by all parties. Even had an otherwise enforceable agreement been reached at the meeting, the Court found that it would have fallen foul of that provision.
The Court expressed some sympathy for the position in which the vendors found themselves in that they clearly believed the purchaser was on board with a plan that would enable them to hit their full earn-out target. The lesson of the case, as in so many others, was that agreements which are intended to be binding should always be recorded clearly in writing. The vendors’ claim was dismissed in its entirety.