Three men walk into a bar…

A recent court case involving sports direct owner Mike Ashley was widely publicised. Mr Blues and Mr Ashley were in the pub together with a colleague. Mr Blues alleged that Mr Ashley agreed to pay £15m if the Sports direct share price rose to £8. They fell out and went to court. The claim ultimately failed, but the case did underline the fact that, in certain circumstances, very valuable contracts can be agreed verbally if you can prove that the core terms of the deal were struck and the people involved intended to make a deal.

We are often concerned with land deals for our clients, whether it is buying or selling land, or agreeing option contracts for a housing or a renewable energy development. The general rule in Scotland, as you might be aware, is that a contract involving land in Scotland is not legally binding until it has been set out in writing and signed by both parties.

However, it is worth bearing in mind that there is an exception to this general rule (as ever) that can easily catch people out.

The legal basis for this exception to the general rule is set out in Sections 1(3) and 1(4) of the Requirements of Writing (S) Act 1995.  These provisions say that for contract that should be, but is not, concluded in writing if:

  • one party to the arrangement acted (or refrained from acting) in reliance on a contract being in place and this was known about or acquiesced in by the other party; and
  • as a result of the acting or refraining, the position of the first party has been affected to a material extent and would be adversely affected to a material extent by any withdrawal from the (informal) contract by the other party

then the other party cannot withdraw from the contract or argue that it is invalid on the grounds of it not having been properly constituted. This is often referred to as “statutory personal bar.”

So what does this actually mean?

Basically, where a verbal agreement on the key elements on the deal has been reached and one person has incurred expense in reliance on the deal with the knowledge of the other, then the contract can become binding and enforceable. This is the case even if no written agreement has been signed.

Consider an example. Tom farms Blackacre farm. Jim asks Tom if he could buy a one acre plot for a house if he can get planning permission. Jim says he will pay for all the planning costs, surveys etc. and will pay Tom £50,000 for the plot when he gets planning. Tom agrees and the lawyers are to sort the detailed contract out and check the title deeds.  While the lawyers iron out the detailed wording in the contract, Jim says he will pay Tom a deposit of £5,000 to show his good faith and starts to pay for bat surveys and archaeological audits of the land. Tom accepts the deposit and allows access for the surveys.

While Jim’s planning application is going through the system, a renewable energy developer approaches Tom and says that his one acre field is ideally located for a battery storage plant and would he sell it to them for £500,000?  Tom’s lawyer confirms that the contract with Jim’s lawyer have not been concluded yet. Tom advises Jim that he has had a much better proposal. He offers to repay Jim’s deposit. Jim says that Tom cannot change his mind because their agreement is legally binding, even although the legal contract has not been concluded in writing. The trouble is, Jim may well be right and it may not be possible for Tom to back out at that stage.

You can see that a property owner who has been discussing a sale with someone, but has not yet tied up a formal contract, can in some circumstances be treated as if he had made a fully legally binding contract.

So how can you avoid stumbling into a binding contract without realising it?

We always advise clients to make clear that any verbal discussions or informal negotiations are not intended to be legally binding commitments. The best way to do this is to put disclaimers into any correspondence that you have with the other person. This would be wording that states that the correspondence or draft contract is not intended to be legally binding, but is only for the purpose of negotiation and discussion at this stage.

Ideally, do not let people start work or incur costs before any formal contract is put in place.

Please take care with any land negotiations an always seek advice from your solicitor at an early stage in the progress.