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Gentlemen's agreements: forming a contract with a handshake

View profile for Perdeep Grewal
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As a solicitor specialising in dispute resolution and construction law, I have come across various businesses who have relied on so-called “gentlemen’s agreements”. These are based on nothing more than a handshake. In the absence of any written terms, parties succumb to a time consuming and expensive task to determine what were the agreed terms of a deal.

Under English law, it is possible for parties to form a contract with a handshake or by word of mouth. However, whilst that may sound straightforward, without a written agreement, it will be difficult for a party to prove the existence and terms of a contract. A fundamental requirement for a binding contract is to have an intention to enter into legal relations. By not documenting terms in writing, it might suggest that there was never an intention after all.

The case of ACLBDD Holdings Ltd & Ors v Staechlin & Ors [2018] EWHC 44 (Ch) acts as an important reminder to write down the terms agreed between parties.

This case centred around Paul Gauguin’s painting Nafea faa ipoipo (meaning ‘When will you marry?’). It was sold by the defendants, the trustees of a Swiss-based family trust, to the Emir of Qatar for an eye-watering $210 million.

The sale was arranged by Simon de Pury and his wife, as agents of the trustees, who introduced the Qatari royal family as potential buyers. Mr and Mrs de Pury negotiated the deal under the impression that they would receive a commission of $10 million, but the sellers refused to pay the commission.

The issue: contract formation 

The essential issue for consideration was one of contract formation. In the absence of a written agreement of heads of terms, or even exchange of emails, the question for Mr Justice Morgan (‘Morgan J’) was whether there was a legally binding agreement about the payment of commission to Mr and Mrs de Pury.

Morgan J did not rely on either Mr or Mrs de Pury’s evidence and considered it to be ‘deliberately misleading’. Morgan J assessed what was said between the parties in numerous locations covering London restaurants to Zurich airport between 2012 and 2014.

However, surprisingly, Morgan J found in favour of Mr and Mrs de Pury and ordered them to be paid the $10 million commission. This was on the basis that a meeting took place on 26 June 2014 whereby the trustees agreed with Mr de Pury that he would receive commission of $10 million, if the painting was sold for $210 million. A handwritten note of the meeting with the words “Commission (Simon) $10m if $210m” was enough to amount to a legally binding contract.

Morgan J even went to the extent to say there was “nothing in the context or the expression of the agreement which would prevent the consensus reached from having contractual effect”.

What are the implications for businesses? 

This case acts as a reminder for any commercial enterprise to document the agreed terms of a deal in writing. The parties could have avoided a two-week trial had they concluded a contract before they proceeded with the sale. Whilst it may be tempting to agree a deal through mutual parties, or even over a handshake, in the absence of a written contract, parties will have to work backwards to find out the existence and terms of the deal.

Secondly, without a written agreement, a court will place heavy emphasis on the evidence to determine what was agreed between the parties. This is an expensive and unpredictable task for a court and could potentially lead to a party’s reputation being exposed in public. It is therefore imperative for parties to agree terms in writing!

If you have any questions about drafting an agreement or perhaps require assistance to review a set of terms, please do not hesitate to contact our Dispute Resolution team. I am based in our Chelmsford office and can be contacted on 01245 453804 or perdeep.grewal@birkettlong.co.uk.

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