18 February 2015

Agreement to buy shares was legally binding, despite failure to sign formal written document

Parties negotiating a contract should make it absolutely clear at all stages whether they have actually concluded their agreement, following a High Court decision.

Before he died, a shareholder had been negotiating a sale of his shares in a company to a close friend. A formal written agreement had been drafted, but not signed. After the shareholder's death his executor claimed that the parties had reached a legally binding oral agreement before he died, and the draft written agreement was simply a record of it. The close friend was therefore legally bound to buy the shares.

The friend claimed that there was an implied condition that negotiations had been conducted 'subject to contract', so there was no binding oral agreement.

The High Court ruled that the parties had reached a complete and binding agreement before the shareholder's death, despite not having signed a formal written document. Even at the point when the shareholder had still been alive and there were still outstanding issues (such as accountancy advice, which entity was actually going to buy the shares and the production of a formal written document recording their agreement), the terms of the agreement had been certain enough to be enforceable in court and either party could have obtained an order for specific performance - requiring the other to perform their contractual obligations.

By the time the shareholder died, even those outstanding issues had been sorted out and there were no further terms requiring negotiation - the written document was merely a record of what had already been agreed.

The fact that the friend had pressed for documentation of the agreement in a formal written document was not an unequivocal indication that he regarded it as legally binding only when the written document had been signed.

The Court made the point that its decision might have been different had the agreement been between unrelated parties: 'Whilst it might have been imprudent for both parties to enter into an informal binding agreement for the sale of the shares (and therefore not likely to be what was intended) if this had been an arms-length transaction between "strangers", this was not such a case. They were very good friends, who, no doubt, trusted each other entirely. There was no need for "due diligence" or any vendor's warranties.'

Recommendation

The case seems to turn on its particular facts, but parties negotiating a contract should ensure it is absolutely clear at all stages whether they have actually concluded an agreement, whether orally, in writing - or even partially.

Case ref:

Williams (as executor of the estate of Batters deceased) v Jones (25 February 2014)