Sheriff Appeal Court sends dispute over whether pre-contractual agreement bound parties to basic terms of deal back to sheriff

About this case:

• Citation:
  [2024] SAC (Civ) 46
• Judgment:
  External link
• Court:
  Sheriff Appeal Court
• Judge:
  Sheriff Principal S F Murphy KC

Pursuer and appellant Edward Leishman sought payment of £19,000 from Alexander Noble in terms of a “heads of terms” agreement they had for the sale of the appellant’s shares in the company of which he was a director, to be followed by a formal contract later. The sheriff upheld a preliminary plea by the respondent to dismiss the action for irrelevancy.

The appeal was heard by Sheriff Principal Sean Murphy KC, with McAndrew, advocate, appearing for the appellant and Hankinson, solicitor, for the respondent.

Honest, sensible businessmen

In June 2022, the parties discussed concluding a business deal whereby the appellant would sell his shares in EVC, of which he was a director, to the defender for a payment of £20,000. Under a “heads of terms” document executed by the parties on 26 August 2022, the appellant agreed to resign as a director once he was paid for his shares. The document also proposed that a formal share purchase agreement would be drafted later under the terms set out in the document.

The appellant averred that on the same day as the document was executed the respondent intimated to him that payment of the £20,000 had been made. In reliance on that, he completed the requisite form to resign as a director of EVC. However, he later discovered that only £1,000 had been paid to him and raised a sheriff court action for payment of the balance.

In his decision, the sheriff interpreted the heads of terms as an agreement to draft a formal share purchase contract and found that no obligation to pay the value of the shares could arise until that formal agreement was executed. It followed that the appellant’s case was irrelevant as he had not pled on record details of any concluded bargain which could give rise to an obligation for payment.

It was submitted for the appellant that the sheriff erred in finding that the parties had not intended to be bound by the heads of terms document, which he ought to have held had immediate effect. Whether agreement was reached had to be assessed objectively through the lens of honest, sensible businessmen based on events before and after conclusion of the bargain.

Esto the intention to be bound was not established by the document, the appellant submitted that the sheriff erred by dismissing evidence of subsequent conduct as irrelevant to the issue of the parties’ prior intention to be bound by it. The respondent submitted that the grounds of appeal did not address the sheriff’s actual findings and noted the general rule that a contract could not be construed with reference to subsequent actions.

Agreement had been reached

In his judgment, Sheriff Principal Murphy said of the sheriff’s approach: “[The sheriff] found that parties had agreed to draft a formal share purchase agreement and that no obligation to pay the agreed value of the shares would or could arise until the formal agreement was executed. It followed that the appellant’s case was irrelevant as he had not pled on record details of any concluded bargain which could give rise to an obligation for payment. Support for that position may be found in the case of HT Van Laun and Co v Neilson (1904) which has similarities with the present one.”

However, he continued: “Despite the apparent similarities between this case and the present one in my view Van Laun may be distinguished on its facts for a number of reasons. In Van Laun the memorandum of understanding on which the appellants relied, which is the equivalent of the Heads of Terms document in the present case, was never signed, whereas in the present case there is no dispute that the Heads of Terms document was executed on 26 August and the issue is its significance.”

Drawing support from English authority, the Sheriff Principal noted: “In the Court of Appeal decision in Pretoria Energy Co (Chittering) Limited v Blankley Estates Ltd (2023) it was said [that] ‘a document labelled ‘heads of terms’ may be intended to be a non-binding record of the broad principle of an agreement to be made in formal written documents subsequently negotiated, or may be intended, in whole or in part, to be a binding contract governing the parties’ relations until a more detailed agreement is drawn up’.”

He concluded: “What is clear from their pleadings concerning their actions is that both parties obviously thought that an agreement had been reached at the meeting on 26 August: the respondent transferred funds to the appellant; and the appellant resigned as director of EVC. While these subsequent actings may not serve to identify the terms of the bargain in any detail, they clearly allow an inference that each party believed that agreement had been reached and one which was based on terms contained within the “Heads of Terms” document executed on that day.”

Sheriff Principal Murphy therefore allowed the appeal, recalled the judgment of the sheriff, and remitted the case with a direction to fix proof before answer.