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Formation of Contract in Scots Law: Applying the Governing Principles

by Laura Macgregor, Professor of Scots Law, University of Edinburgh.

Many types of contracts do not require to be entered into in writing in Scots law (see Requirements of Writing (Scotland) Act 1995, s1). Where this is the case, it can be difficult to identify whether the parties have reached binding consensus or something short of that. It is possible for parties to reach consensus on all essential terms, and yet agree that they will not be contractually bound until such time as a written contract is signed (Karoulias SA v The Drambuie Liqueur Company Ltd 2005 SLT 813). In Supaseal Glass Ltd v Inverclyde Windows Manufacturing Ltd ([2022] CSOH 49), a recent case decided in the Outer House of the Court of Session, Lord Braid provides a useful summary of the governing principles of formation of contract in Scots law. His objective analysis nicely illustrates Lord President Dunedin’s famous statement that “[c]ommercial contracts cannot be arranged by what people think in their inmost minds. Commercial contracts are made according to what people say” (Muirhead and Turnbull v Dickson (1905) 7F 686 at 694).

Facts

As with many contract disputes, an outline of the facts is required in order to understand the legal points at issue. The pursuer, Supaseal Glass Ltd, manufactures and supplies sealed double glazing window units, and the defender, Inverclyde Windows Manufacturing Ltd, supplies and installs replacement windows, glazed doors and conservatories. The parties had a long history of contracting with one another. The essence of their dispute was whether they had agreed a binding contract in terms of which the defender agreed to purchase all of its glass from the pursuer from the date of formation until 31 December 2020, at prices agreed on an annotated price list signed by the parties. Whilst the pursuer argued that a binding contract had been entered into, the defender argued that they had reached only an agreement in principle.

Negotiations between the parties had been conducted by Mr Gray, the pursuer’s managing director, and Mr Gorman, his counterpart at the defender. Mr Gorman held a majority shareholding (86%) in Inverclyde and Mr Gray a minority shareholding (14%). Though not a director of Inverclyde, Mr Gray provided strategic advice to it. For some years, Inverclyde had purchased products from Supaseal at “mates rates”. Relations between Mr Gorman and Mr Gray broke down, and it was agreed that Mr Gorman would buy Mr Gray’s shareholding in Inverclyde.

The parties met one another on 8 December at Inverclyde’s premises. A price of £57,000 was agreed for the shares. The parties discussed the terms upon which Inverclyde would, in the future, buy glass products from Supaseal. After a phone call, Mr Gray obtained a price list of glass products supplied to Inverclyde. New prices for the three products most commonly sold to Inverclyde were agreed. Those prices were handwritten on to the price list, and both men signed the price list. At the end of the meeting, each man sent an individual email to Lynn Rayner, the solicitor acting for Inverclyde. These emails confirmed the terms that had been agreed, including the terms relating to the purchase of glass. They also confirmed their intention to sign a document relinquishing any claims against each other. Although Mr Gray’s email referred to the signed price list as an attachment, it was established in evidence that the price list was not sent to Ms Rayner.

When Ms Rayner responded by email to Mr Gray a week later (copied to Mr Gorman), she referred to a need to complete Stock Transfer Forms for the shares. She referred to the sale of glass and, in that context, asked for any documents signed by them to be copied to her. She referred to the need to prepare a document governing the relinquishing of claims between the parties. In a separate email to Mr Gorman that same day she asked when payment would be made “…so I can prepare the necessary paperwork”. On 15 December Mr Gray sent Ms Rayner the signed price list, and, presumably referring to the possibility of drawing up documentation, he asked “…is this along with our respective emails of last week not sufficient? If not, will you be drafting something more appropriate?” That question appears to have received no response.

Ms Rayner subsequently drew up a Share Purchase Agreement and it was signed by both men. No documentation relating to the discharge of claims was ever drawn up, nor was any document prepared which would govern the purchase of glass by Inverclyde from Supaseal. Before the Share Purchase Agreement was signed, Mr Gorman began making payment for the shares.

Decision

Lord Braid began by providing a useful summary of significant principles governing formation of contract in Scots law. He noted (at para [8]) that writing was not required for a contract for the sale of shares, nor for a contract for the exclusive purchase of goods (in terms of the Requirements of Writing (Scotland) Act 1995, s1(1)). He further noted that the question of whether a binding agreement had been reached between two parties should be judged objectively (para 8, relying on McBryde, The Law of Contract in Scotland, (2007) 3rd edn, para 5-04). “The judicial task is not to discover the actual intentions of each party; it is to decide what each was reasonably entitled to conclude from the attitude of the other (Gloag, Contract, (1929) 2nd edn, 7, approved at para [8]). Further, parties can validly agree that they will not be bound until a written agreement has been entered into, and agreement on that point will be given effect to (para [8], relying on Gordon’s Exrs v Gordon 1918 1 SLT 407). The bare fact that the parties have stipulated that there will be a written contract does not necessarily mean that they are still at the state of negotiation – consensus may have been reached on contract terms and yet the parties can agree to be bound only once a written contract is entered into (para [8] relying on Stobo Ltd v Morrison (Gowns) Ltd 1949 SC 184). Lord Braid ended his summary of the law by indicating that agreement must be reached on the essentials of a contract, although the essentials may vary according to the particular contract under consideration (para [8], relying on May & Butcher Ltd v R [1934] 2 KB 17, per Viscount Dunedin at 21).

One of the issues in dispute was whether a single agreement had been reached governing both the share purchase and the purchase of glass or whether these were separate issues which were governed by two different contracts. A complicating factor was, of course, that the parties to these agreements differed. The Share Purchase Agreement would have required to be entered into by Mr Gray and Mr Gorman as individuals. The contract for the sale of glass would have required to be entered into between the two companies: Inverclyde and Supaseal. Preferring Mr Gray’s evidence, Lord Braid held that there were two agreements which were interlinked, so that either both were immediately enforceable or neither was (para [41]).

The question whether the parties had agreed that they would not be bound until an agreement had been reduced to writing was tackled by Lord Braid in two stages: firstly before the meeting of 8 December, and secondly after that meeting. He found that, before the meeting, there was no objective evidence which supported Mr Gorman’s contention that both parties were aware that Ms Rayner would be asked to prepare the legal document they needed (para [42]). The evidence pointed the other way, particularly the fact that Ms Rayner was the solicitor for Inverclyde, and did not act for either of the men as individuals. This, Lord Braid suggested, indicated that the men thought that they did not need solicitors.

At the meeting, neither party said that written agreements would be required before they were bound. Lord Braid referred to the fact that Mr Gorman stated in evidence that he thought that the oral agreement he had reached would not be binding unless and until a written agreement had been entered into, and that he never intended to enter into such an agreement, although he did not communicate this ‘plan’ to Mr Gray (para [43]). Lord Braid characterised Mr Gorman’s commencement of payments before the Share Purchase Agreement had been signed as “the clearest indication that Mr Gray and Mr Gorman regarded themselves as immediately bound” (para [43]). Nor did Ms Rayner anticipate that a written agreement would be required, either in relation to the shares or the sale of glass. Lord Braid clearly considered her request for a copy of any agreement about the glass as an indication that she did not consider either that a written agreement was necessary or that the agreement reached was in principle only. She was not challenged by the parties on that. As the solicitor for Inverclyde, there was no reason why she would have prepared a Share Purchase Agreement.

Inverclyde relied on three factors to support their contention that the parties did not consider themselves as immediately bound. The first factor was the reference in emails to the defender “signing up” to buy all glass from the pursuer. Lord Braid considered that, read in its context, the term simply indicated that the parties had reached an agreement: “…in everyday language, “signing up” to something indicates a willingness to be bound without any necessary connotation that a written agreement will be required” (para [44]). The second factor was the fact that Ms Rayner did prepare a Share Purchase Agreement and Mr Gray accepted in evidence that he could have walked away at any time before that was signed. Although Mr Gray accepted revisals to it and executed it, this did not mean that there was no binding agreement until he did so. The third factor was the reference in emails of 8 December to signing a document renouncing claims against each other. The defender argued that this indicated that all agreements were to be in writing, and since no discharge was ever drawn up and signed, there was no binding discharge and the same reasoning applied to the agreement for the sale of glass. Lord Braid suggested that the difficulty with that argument was that the discharge would require to be entered into between the two men as individuals, and the absence of a written discharge did not prove to be an obstacle to concluding an agreement in relation to the shares. Additionally, he considered that the reference to signing a discharge “rather leads to the inference that no other agreement did require to be signed” (para [44]).

The defender also sought to argue that Mr Gray’s email to Ms Rayner showed that he did not consider that a binding agreement had been reached. On the contrary, Lord Braid concluded, “…the question “Is this not sufficient?” implies that the questioner thinks that it is sufficient” (para 45).

Underlining the objective nature of the approach to formation, Lord Braid stated that what was in Mr Gorman’s (or indeed Mr Gray’s) minds was irrelevant (para [46]). He found on the balance of probabilities that the parties reached a binding agreement for the sale of Mr Gray’s shares and that they did not intend that either agreement would require to be formalised in a written document before it became enforceable (para [46]). That intention was unaffected by the fact that a Share Purchase Agreement was subsequently entered into: “…it did not have to be” (para [46]).

The final issue considered by Lord Braid was what the terms of the contract were and whether the contract was void from uncertainty, questions which he saw as essentially counterparts of one another: “If the court is able to conclude what the terms of the contract were, and if they include the essentials of the contract, the contract is unlikely to be void from uncertainty” (para [48]). Lord Braid stated that the test as to whether a contract is sufficiently certain to be enforced is whether or not decree for specific implement could safely be pronounced (para [49], relying on Macarthur v Lawson (1877) 4R 1134, and Gloag, Contract, (1929), 2nd edn, 11). Gloag had stated: “It is a question of degree whether a particular obligation, taking the words used and the legal implications, is too vague for enforcement”. The defender argued that the parties had reached agreement merely on the heads of terms of a proposed contract that they both intended to be sent to a lawyer to initiate the process of preparing a binding and enforceable agreement by way of a written deed. In Lord Braid’s view, the evidence showed no such thing. The terms comprising the essentials of the contract were all clear (para [50]):

Who were the parties? Supaseal and Inverclyde. What was to be purchased by Inverclyde? All its glass. From whom? Supaseal. For how long? Until December 2020. For how much? At the prices shown on the price list, subject to the changes which were initialled. In the words of Viscount Dunedin in May & Butcher, quoted above, everything had been settled that it was necessary to settle and nothing remained to be settled. I accept the pursuers’ submission that the agreement was sufficiently specific that its terms could be enforced by a decree of specific implement.

In his view, this was not a case where the court was being asked to make an agreement for the parties, nor did the parties reach an agreement to agree.

Conclusions

The report of the case is useful on several levels. It is a practical example of a dispute which places flesh on the bones of the lectures for Contract Law students. On a conceptual level, it reminds us to separate in our own minds the issue of agreement of the terms from the intention to be legally bound. Clearly all terms can be agreed and yet the parties may not yet wish to be bound. It reminds solicitors and clients that parties who wish to defer entering into binding obligations to the point when a written agreement is entered into must make this absolutely clear. Many important contracts can be concluded orally, and parties may, like Mr Gorman, be found to have concluded a contract when they perhaps thought they had not done so. The court will judge questions of formation on the basis of the parties’ words and actions, not any secret intentions or plans.

The case illustrates the fact that courts will be slow to find that a contract is void for uncertainty, particularly in commercial cases. Lord Braid identified the essentials of this contract, it seemed, with relative ease.

Finally, it is worth noting the suggestion that specific implement can act as a ‘test’ which governs whether a contract is void for uncertainty. Presumably the suggestion is that the contract is not void if decree for specific implement could be granted, but void if it could not. This is a suggestion which, to the current author’s knowledge, has not been articulated in recently decided cases. A safer course for anyone looking for authority on this particular point might be to rely on the explanation provided by McBryde and the leading cases cited therein (paras 5-19 – 5-33).

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