Beware the gentleman’s agreement

We’ve all made decisions under pressure, which later turn out to be poor.

In a commercial context, this may prove fatal as the court can still find that a binding contract has been created even when discussions are not recorded in writing.

We recently analysed the case of Corporate Oil and Gas Ltd v Marshall Aviation Services Ltd [2015] EWHC 3447 (Comm), [2015] All ER (D) 10 (Dec), in which the High Court upheld an informal agreement between two parties:

What was this case about?

The claimant owned a business jet aircraft (‘the aircraft’). The defendant company provided maintenance and repair services. The claimant delivered their aircraft to the defendant so that remedial works could be carried out.

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The parties met to discuss, amongst other things, a discount on the defendant’s charges. The defendant asserted that a “‘gentleman’s agreement”’ had been reached and a discount and settlement amount for the work carried out to that date was agreed between the parties. The claimant disputed this and submitted that the agreement had been subject to confirmation by the CEO.

After the meeting the defendant sent an email to the claimant confirming the discount agreed, which would be “‘deducted from the current statement balance”’. The claimant also confirmed that “‘work [would] continue on the post-flight defects, and the final invoice for this and fuelling will be payable by the claimant”’.

What did the court decide?

The court held that the “‘gentleman’s agreement”’ made between the parties was binding and the entire amount outstanding was payable by the claimant.

On the evidence, the court found that the discount agreed at the meeting in question was not simply a credit item to address a particular issue. It was to decide the overall amount of money that was due to the defendant (i.e. the account claimed, less the reduction).

The court noted that the claimant had not rejected the defendant’s summary provided in the email following the meeting, nor was there any request for clarification or continuation of negotiations in the weeks and months that followed. Justice Knowles found that the reference during the meeting to a “‘gentleman’s agreement”’ was not an indication of any lack of intention to create a bargain that was legally binding, but rather a reflection of the matter having been agreed between gentlemen.

The court was satisfied that the work charged for by the defendant was completed and carried out with reasonable care and skill. It also held that the sums invoiced for the period after 17 February were properly raised. The defendant was therefore correct in asserting a lien until its charges were agreed and paid and it was held that the claimant had no claim in damages for conversion.

So the message is clear: depending on the circumstances, courts are willing to uphold informal agreements that have not been recorded in the form of a written contract.

Practitioners should remain live to this potential black hole and advise their clients to approach any such negotiations with caution.

Do let us have your observations below; it would be great to hear them.

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