Enterprises Built on Informal Oral Contracts Are Built on Sand

ComputerEnterprises built on oral contracts are built on sand and frequently give rise to bitter regret after the event that agreements were not put into writing by a lawyer. That was certainly so in one case concerning the ownership of a thriving computer equipment company that went from zero to a £13 million turnover in little more than a decade.

An American businessman claimed that, before the company was established, it was orally agreed that he would be appointed one of its three directors and that he would have 25.5 per cent of its shares. In the event, however, only two shares were issued and they were allocated to a former colleague – with whom he later fell out – and a British businessman. They were appointed the company’s two directors.

The businessman launched proceedings in order to give effect to what he alleged had been agreed. He sought, amongst other things, a declaration that he owned 25.5 per cent of the company and an inquiry as to the amount of dividends that he should have received. He valued his claim at about £633,000, plus interest. The waters were, however, greatly muddied by the absence of a written contract to the extent that even the identity of the parties to the agreement was disputed.

In dismissing the businessman’s claim, the High Court found on the evidence that he had previously disavowed any interest in the company and had not been a party to the contract. There had been no agreement that he would hold any of its shares or that he would be a director. What had in truth been agreed was that the British businessman would own 49 per cent of the company and that the remainder would be held by an American corporation that had subsequently been dissolved.