Formation of commercial contracts - modern guidance from the court

20 July 2011

In the past few years the judges in the commercial court of the Court of Session have had to address in a number of cases the issue of formation of contracts. In the recent case of Morgan Utilities Ltd v Scottish Water Solutions Ltd, [2011] CSOH 112, Lord Hodge produced a summary of the way in which the court should approach the issue.

The pursuer made a claim for payment of a sum in excess of £3.5 million. The basis for the pursuer's case was the allegation that its representatives made an oral agreement with representatives of the defender at a meeting in September 2003. This alleged agreement, it was said, gave the pursuer an entitlement to be paid by the defender. The defender denied that any such agreement had been made.

In reaching his decision, Lord Hodge had, of course, to determine whether there was an intention to enter into a contract at the relevant meeting. The task of the court, he said, can be summarised in four propositions. First, the court has to decide whether the parties had manifested an intention to be immediately bound, "there and then". Secondly, the court adopts an objective approach, having regard to what the parties did and said. It asks what would reasonable and honest men in the position of the parties and having their shared knowledge of the surrounding circumstances have understood by the discussion which they had or the communications which passed between them. In the context of a commercial transaction the court asks what would have been the reasonable expectations of sensible businessmen. Thirdly, while it is important to consider events as they unfolded in order to take an objective view of what reasonable people would have understood the position to be at the time the deal was allegedly concluded, it is also relevant to look at parties' behaviour after that time to the extent that that may cast light on what reasonable persons would have understood at that earlier time. Communications between the parties after an alleged agreement may help the court evaluate evidence about what occurred at the time of such an agreement. Fourthly, when the court is considering whether or not the parties intended to enter into a contract at a particular time, it adopts an entirely neutral approach. It is only once the court has decided that the parties did intend to contract that it will seek to give effect to that intention and uphold the contract if it can.

On the facts, Lord Hodge held that there was no intention to enter into a contract at the relevant meeting. As a result, the pursuer's claim failed and the defender was assoilzied.

Garry Borland of Axiom acted for the successful defender.

Lord Hodge's opinion can be accessed via the undernoted link:-

http://www.scotcourts.gov.uk/opinions/2011CSOH112.html