Facts
This action was originally brought by Akura Distribution Ltd
(“Akura”) against World Online UK Limited and World Online Limited
(together “World Online”). Akura subsequently assigned its
rights in respect of the claim to the Claimant.
Akura’s business was the wholesale of electrical goods including
televisions. In early 2000, a Turkish manufacturer told Akura
that it was developing an internet television and a set top box
which could be used for connecting to the internet and for sending
and receiving e-mails. Akura approached its largest retail
customer, Littlewoods, who was interested in the idea, particularly
because of the possibilities it would offer for internet home
shopping. However, access to the internet would require the
involvement of an Internet Service Provider (ISP).
Consequently, Akura approached World Online and a series of
meetings were held between the parties.
Akura alleged that an oral contract was made with World Online
at a meeting on 5 September 2000. The matters agreed at that
meeting were:
- World Online would act as the ISP for all of the internet
televisions and set top boxes sold by Akura;
- the price would be £100 per set top box;
- payment would be weekly;
- World Online’s homepage access telephone number and telephony
access code would be directly or indirectly “hard-coded” into the
products;
- Akura would promote World Online’s telephony in the products;
and
- the homepage would be the World Online homepage with a facility
for a link button to retailers.
If no contract was concluded at that meeting, it was Akura’s
secondary case that a contract was concluded at a meeting on 27
September 2000. At that meeting there was no discussion or
re-negotiation of the financial terms previously agreed but the
parties agreed additional terms concerning duration of the
relationship and the initial quantity of set top boxes to be
produced.
World Online denied that a contract was concluded at either
meeting and claimed that the parties were in negotiation with one
another but were some distance from reaching agreement on all the
necessary financial and technical matters. It said that it
had been understood between the parties throughout their
negotiations that any binding agreement had to be in writing.
World Online argued, in the alternative, that if there had been
a contract between the parties, it was a condition precedent
implicit from the parties’ discussions, that Littlewoods would be a
retailer of the products. That condition precedent was never
fulfilled because Littlewoods never entered into an agreement with
Akura to buy the products, and never placed any orders with
Akura.
World Online also alleged that Akura had represented that it had
a legally binding agreement with Littlewoods under which
Littlewoods would be the retailer of Akura’s internet televisions
and set boxes. No such agreement existed. Thus, any
agreement which may have been made between the parties was induced
by this misrepresentation.
Judgment
The judgment was broken down into sections which analysed the
main legal points in dispute.
The contract
In deciding whether there had been a formation of a contract,
the controlling factor was the intention of the parties. In
this case, there was no express intention evinced that the
agreement should be legally binding. In such cases where
there is no clear intent evinced by the parties, the Court will
examine the background circumstances, the nature of the alleged
contract and negotiations between the parties. The Court will
seek to infer what a reasonable person would have taken the
parties’ common intent to be.
Two factors were decisive in persuading Toulson J. that an
intention for the agreement to be legally binding should not be
inferred. The first was that this was not a simple agreement for a
transaction of an everyday kind. It was inherently improbable
that the parties would enter into a joint venture agreement without
a written contract defining their respective rights and
obligations, the duration of the agreement and their remedies in
the event of default by the other party. If, however, the
parties wished to have an interim binding agreement, it would be
expected that they would acknowledge this expressly and would set
out heads of agreement. The second factor was the extent of
the matters agreed. Although the principal commercial issues
had been resolved there were a number of outstanding issues,
particularly on the technical side, that had not been resolved on 5
or 27 September.
Toulson J. held that the agreements of the 5 and 27 September
were not legally binding and therefore no contract was
formed. Although, in light of that conclusion, the issues of
condition precedent and misrepresentation fell away, Toulson J.
went on to consider those issues in case he was wrong on the first
point.
Condition precedent
Even if there had been a condition precedent as alleged, World
Online would not have been justified in repudiating the contract at
a time when Akura still had a real prospect of fulfilling the
condition precedent. Otherwise, World Online would be
entitled to rely on the non-fulfilment of a condition precedent
caused or contributed to by its own conduct. It was therefore
immaterial whether the alleged contract was subject to the
suggested condition precedent. If it were material, such a
condition precedent was neither obviously implied nor necessary for
commercial efficacy. If there were no sales, nothing would be
payable by World Online to Akura. If there were only a small
number of sales, only a small amount would be payable.
Misrepresentation
If a contract had been formed on 5 or 27 September, the judge
would have rejected the defence based on misrepresentation prior to
5 September and would have held that, although there was
misrepresentation between 5 and 27 September, it had no effect in
inducing a contract.
Commentary
Cases about when contracts are formed can be categorised into
three scenarios (see the judgment of Lloyd LJ in Pagnan S.p.A v
Feed Products Limited [1987] 2 Lloyds Rep 601,619):
- the parties may intend that, even if all the terms of the
proposed contract are agreed, nevertheless, the contract shall not
become binding until a written agreement is executed. This is
the ordinary “subject to contract” case;
- the parties may intend to be bound forthwith in the absence of
a written agreement, whether or not some further terms are still to
be agreed;
- the parties may intend that they could reach a binding
agreement in the absence of a written agreement, but that they have
failed to reach a point of sufficient agreement.
According to these principles, the controlling factor is the
intention of the parties, which means their intention as evinced by
them or as may be reasonably inferred. The cases which come
to trial are invariably ones where there is no clear evincement of
common intention. In these cases the Court examines the
circumstances and seeks to infer what a reasonable person would
have taken their common intention to be if they had been asked to
express it. The test is the objective one, it is not the same
as determining as a pure question of fact the actual state of mind
of the negotiators – evidence which is no more than the assertion
of one party’s subjective intention, unexpressed to the other, is
inadmissible.
In DMA Financial Solutions Ltd v Baan UK Limited
([2000] MCLR 40), Park J. held that a binding contract had been
created where all the commercial terms had been agreed. The
fact that the parties had not entered into a written form of
contract, even though they fully intended to do so, did not
preclude the existence of a contract at the conclusion of the
negotiations notwithstanding the fact that the parties had not come
to an agreement on every aspect usually found in a written
agreement.
In neither DMA nor this case were the negotiations
expressed to be “subject to contract” and so the Court was left to
infer the parties’ intentions on the particular facts. It is
arguable that the key factors that led Toulson J. to decide, in
this case, that there was no binding contract, were also present in
DMA. The DMA contract, being for the outsourcing of
support and training services cannot easily be described as a
simple agreement of an everyday kind and, although all the
commercial issues had been agreed, not all matters had been
finalised. The difference in the judgments between the two
similar cases serves to highlight the uncertainty that can arise as
to whether a contract exists and the importance of the parties
agreeing the basis on which negotiations are to proceed. If
the parties intend the negotiations to be subject to contract, then
they should be clearly and unequivocally expressed to be so.
