A word to the wise: how the court will determine the contents of unrecorded oral conversations

Mansion Place Ltd v Fox Industrial Services Ltd [2021] EWHC 2972 (TCC)

Introduction

The TCC’s recent decision in Mansion Place Ltd v Fox Industrial Services Ltd [2021] EWHC 2972 (TCC) illustrates the approach which the court may take when determining the contents of an unrecorded oral conversation, and whether the contents of that conversation constituted a binding agreement.

Where parties differ on the contents of a conversation, which one party asserts amounted to a binding agreement, the court may consider whether a finding can be made as to the “gist of the conversation” on the balance of probabilities. If the court is satisfied that it can make this finding, and after making the finding, they can consider the effect of the conversation when viewed objectively.

The Facts

Mansion Place Ltd (“the Claimant”) was the developer for student accommodation in Nottingham. Fox Industrial Services Ltd (“the Defendant”) was the construction contractor engaged under an amended JCT Design and Build Contract (2016 Edition).

There were delays in the progress of the construction works, which the Defendants asserted was owing to Covid-19 and the Claimant’s failure to give timely possession of the site. The Claimant, in turn, alleged that the Defendants had failed to progress works and commit labour and resources to them.

When the Claimant served a Pay Less Notice and notices of intention to deduct liquidated damages, the Defendant disputed the deduction and referred the matter to adjudication.

Crucially, on 14th October 2020 there had been a phone conversation between a director of the Claimant’s company, Mr Ramanathan, and the Managing Director of the Defendant contractor, Mr Kite. The Defendant asserted that the conversation of 14th October resulted in a binding agreement that the Claimant would waive its entitlement to liquidated damages in return for the Defendant agreeing to forego any right to payment for loss and expense because of the delays in the works.

The Claimant asserted that there was no such agreement during the conversation, or alternatively, that any reference to liquidated damages in the conversation was a waiver which it was entitled to, and did, revoke.

The issues

The key issue was whether the conversation on 14th October resulted in a binding agreement, and if so, whether it was in terms which prevented the Claimant was seeking liquidated damages. The Claimant argued that there was no agreement in the conversation, or even any mention of dropping the liquidated damages claim. The Defendants argued that an agreement had taken place.

The Judge also considered briefly whether the Claimant was precluded from seeking liquidated damages for any other reason: for example, whether the liquidated damages clause was unenforceable as being a penalty. However, following his finding on the nature of the conversation, these points purely were academic.

The court’s approach to the oral agreement

Of interest to practitioners is the approach which the Judge took to determining the nature of the conversation. Notably, the Judge held that it was not necessary to make a finding as to the actual words used in the conversation between Mr Ramanathan and Mr Kite. Instead, the court’s process would be to consider whether a finding could be made as to the “gist of the conversation” on the balance of probabilities. If that was possible, the Judge would make the finding, and then consider the “effect of the gist of the conversation when viewed objectively”.

The Judge then considered the factors which supported the Claimant’s account of events. These included the conduct of the Claimant after the 14th October conversation, including the fact that none of their internal documentation made reference to such an agreement and the Claimant continued with its liquidated damages claim. Furthermore, the Judge examined the Defendant’s correspondence, including their references to a “gentleman’s agreement’ emerging from the conversation. The Judge found that the reference to a “gentleman’s agreement” indicates that Mr Kite believed he had indeed reached an agreement. The legal effect of that agreement was a matter to be assessed objectively, not by reference to what parties subjectively thought happened.

The factors in support of the Defendant’s case included the obvious understanding which Mr Kite had of the conversation, and his discussions of the alleged in the internal correspondence of the Defendant’s firm. Furthermore, Mr Kite’s distrust of Mr Ramanathan meant that he would be unlikely to have completely misinterpreted the conversation, and Mr Kite’s recollection of the conversation seemed more accurate.

Once the Judge had determined that Mr Ramanthan had said something which caused Mr Kite to believe that an agreement had taken place, he had to decide objectively whether an agreement was really reached. This test is an objective one, and the question in such uncertain circumstances is:

“Whether viewed objectively having regard to the surrounding circumstances but without reference to undisclosed subjective intentions or beliefs there was a correspondence of offer and acceptance in circumstances where the parties were intending to enter legal relations.”

The Judge placed significance on finding Mr Kite’s recollection accorded better with the truth than Mr Ramanathan’s. He was satisfied on this basis that there must have been an exchange in which the Claimant agreed to drop its potential claim for liquidated damages in return for the Defendant agreeing not to claim loss and expense. The Judge determined that this constituted an agreement when seen objectively. The fact that this was further than Mr Ramanthan subjectively believed he had gone, was not relevant.

Practical takeaways

Litigants who are hoping to persuade the court of the contents of an oral conversation for which there is contemporary record should consider a range of factors. The correspondence concerning the conversation from both parties will be examined, as will their recollection of events. Above all, the effect of the conversation will be considered objectively, and parties should be aware that the court may find that, objectively, the conversation did not accord with their own subjective intentions.

Practitioners and construction professionals who hope to avoid these situations should naturally seek clarification in writing for agreements of this kind.

Katie Lee appeared as sole counsel for the successful Defendant.