Do you have a legally binding contract?

In Volumatic Ltd v Ideas for Life Ltd (2019) EWHC 227 the court considered the test for intention to create legal relations. It’s interesting because it is a rare example of a party successfully arguing that an agreement is not enforceable on this basis.

Background to the case

Volumatic Ltd (Volumatic) produced a cash handling device. Within the device, notes were stored in a pouch, which was manufactured by Designs for Life Limited (DFL).

In 2004 Volumatic decided to improve the original pouch and entered into discussions with DFL.  Ideas for Life Ltd (IFL) was incorporated in 2004 expressly for the purpose of designing the new pouch, which DFL would then manufacture.

During 2004 various draft agreements passed between Volumatic, IFL and DFL and in 2005 the parties attended a meeting to discuss the way forward. Following the meeting, Volumatic and IFL (but not DFL) drafted and signed an agreement relating to the design and production of the pouch (the Agreement). The Agreement set out several stages for the design and production of the pouch and payment, which would form the basis of a subsequent formal legal document. The Agreement also included a requirement that the intellectual property rights in the pouch would be assigned by IFL/DFL to Volumatic. The parties proceeded to work together, with the pouch being designed and manufactured by IFL/DFL and purchased by Volumatic. However, they did not enter into the formal legal document envisaged at the meeting or do the things envisaged in the Agreement.

11 years later Volumatic sought to enforce the terms of the Agreement in relation to the parties’ intellectual property rights.

Was there a legally binding contract?

The court held that the parties had not intended the Agreement to be legally binding.

Specifically, the judge found that the Agreement was a document designed to record the consensus reached at the 2005 meeting, which was a meeting that the parties agreed had no legal effect. The judge went onto confirm that whilst the Agreement had been signed, this had been done not to create legal relations, but for the purpose of recording what they hoped to achieve.

The judge noted that Volumatic’s failure to rely on the Agreement for over 11 years was consistent with it not being legally binding.

In Volumatic Ltd v Ideas for Life Ltd, the judge referred to the case of RTS Flexible Systems v Molkerei Alois Muller (2010) which applied an objective test in relation to whether the parties had an intention to create legal relations:

“Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed.  It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations.  Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre-condition to a concluded and legally binding agreement.” (Paragraph 45)

Following the objective test, the judge was satisfied that the agreement between the parties was not intended to be legally binding, notwithstanding the detail contained in the signed document and the fact that there had been input from solicitors in drafting it.

Putting the final nail in the coffin, the Judge said that even had the Agreement been legally binding, he wouldn’t have allowed Volumatic to enforce it.  For 11 years the parties had acted contrary to the terms of the Agreement. This meant that Volumatic was now ‘estopped’ from relying on it.

Practical implications

This case provides a useful reminder that a signed agreement might not be all it seems. Greater certainty can be achieved by the use of ‘subject to contract’ where an underlying deal is still being negotiated. It is also a lesson not to excessively delay exercising a legal right, particularly if your actions in the meantime might imply that no such right exists.