Out-Law Guide | 02 Nov 2007 | 8:31 am | 6 min. read
Spectra International PLC v Tiscali UK Limited (formerly World Online UK Limited) (1) and World Online Limited (2)
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:
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.
The judgment was broken down into sections which analysed the main legal points in dispute.
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.
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.
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.
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  2 Lloyds Rep 601,619):
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 ( 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.