By Michael VaughanSenior Associate

Supaseal Glass Limited (“Supaseal”), a double-glazing manufacturer from Greenock, was the Pursuer. Inverclyde Windows Manufacturing Limited (“Inverclyde”), who purchased glass from Supaseal, was the Defender.

The basic requirements of a contract

The law on formation of contract is well-established in Scotland. However, as in this case, disputes do arise when one party believes that a contract has been created, and the other party does not. Before turning to the facts of the case, it is useful to consider the basic requirements of a contract.

Firstly, the “essential” points of the contract must be agreed. These will vary depending upon the particular contract in question, but will generally include who the parties are, the subject matter of the contract and any payment amounts.

Secondly, under the Requirements of Writing (Scotland) Act 1995, contracts are generally not required to be in writing. The only contracts required to be in writing are those which relate to real rights in land, or a “gratuitous unilateral obligation” – i.e. where one party makes a specific promise to do something for the benefit of another with nothing being done in return.

Thirdly, parties must intend to create a legally binding relationship. This “intention” will be judged on the actual words and actions used to form the agreement and not the thoughts or feelings of the parties.

Finally, if it is stipulated by both parties that a contract will only be finalised once in writing, they will not be bound until such a document has been put in place. However, the bare fact that parties intend to follow up with a written contract does not necessarily mean that a binding contract does not already exist. In such a case, the existence of a contract will depend upon the construction of the correspondence and will be judged according to the individual facts of each case.

The dispute

The directors of both Supaseal and Inverclyde met at Inverclyde’s offices on 8 December 2015. At that meeting, they reached a verbal agreement covering the sale of shares in Inverclyde, as well as an exclusivity agreement relating to the purchase of glass from Supaseal by Inverclyde. They agreed new prices for the glass which were annotated on a copy of Supaseal’s price list and initialled by both parties.

A few months later, Supaseal attempted to enforce the terms of the agreement made.

The essence of the dispute was simple: was the verbal agreement reached by the parties on 8 December 2015 a binding contract, or was it simply an “agreement to agree”?

Supaseal argued the former. Inverclyde, on the other hand, said that the terms agreed at the meeting were merely intended to form the basis of future written agreements.

The decision

Lord Braid agreed with Supaseal. He found that they had proved “…that a choate, binding and enforceable contract was concluded between the parties.”

Crucially, Lord Braid stated that it was irrelevant whether or not Inverclyde intended to conclude a binding agreement at the December meeting. He noted that it was the actions, not the intention of parties, that must be considered when judging whether a binding contract has been formed.

In assessing the evidence, Lord Braid concluded that neither party said at the meeting that there would require to be a written agreement before they were bound. As a result, Lord Braid found that the intention to create the contract was already present and a concluded contract formed at the December meeting – there was therefore no need for a later written agreement.

Uncertainty

Inverclyde also made an alternative argument, arguing that if there was in fact an agreement formed at the December meeting, then that agreement was void for uncertainty, as it did not specify the essential elements required for the formation of a contract.

Lord Braid disagreed.

He said that the verbal agreement made at the December meeting contained all the essential elements of a concluded contract. In his judgment on this point, Lord Braid went through each element of the deal:

“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 his view, all the essential components of the agreement were settled, and the contract could not be said to be uncertain.

Conclusion

This case acts as a helpful guide for businesses and individuals in determining at what point a binding contract has been formed.

Parties cannot get out of a verbal agreement by arguing that they did not “intend” to be bound by the terms they agreed. What is in each party’s mind at the time of the contract is not relevant. Rather, the Court will take an objective view and assess each party’s words and conduct in assessing whether a binding agreement was reached. Lord Braid did so here and decided that Supaseal had done enough to show that a contract had been formed.

MacRoberts acted for PBW Law and its client, the successful pursuer, Supaseal Glass Limited, in this case.

This article was co-written by Joe Macfarlane, Trainee Solicitor.