Entrepreneurial families have an unfortunate tendency to dispense with professional contract drafting and make commercial arrangements orally between themselves. A judge's ruling provided a clear example of the intractable difficulties that can arise from such an informal approach.

The case concerned a businessman who was the sole shareholder and director of a company with interests in engineering and the pub trade. Despite the apparent clarity of the position on paper, two of his brothers asserted that it was a family business in which they had beneficial interests.

They claimed that, at a family meeting, the businessman had orally agreed to pay each of them £168,000 in return for them giving up their interests in the business. Having each received only £42,000, they took action against him to recover the balance of the sums that they argued were due to them.

In resisting his brothers' claims, the businessman insisted that the business was, and always had been, his alone. He said that the payments to them were to take the form of gifts which he was free to honour or not as he saw fit. He asserted that he had chosen not to complete the gifts after his brothers went back on promises not to open a rival business nearby.

Ruling on the matter, the judge preferred the brothers' account of what was said at the family meeting. They believed in good faith that they had beneficial interests in the business and had good grounds for doing so. By agreeing to give up any such interests and exit the business, they gave valuable consideration in return for the payments the businessman promised them.

The businessman contended that no binding agreement had been reached as there had been no intention to create legal relations. In rejecting that argument, however, the judge noted that the meeting was more than just a family gathering and had been called in a commercial context, specifically for the purpose of resolving family disputes concerning ownership of the business.

There had been no discussion at the meeting of any condition about not opening a competing business. The businessman's plea that the terms of any oral agreement were so lacking in certainty as to be legally unenforceable also fell on fallow ground. He was ordered to pay his brothers the balance of the sums due to them – £126,000 each – together with interest.

For advice on any contractual matter, please contact Roy Colaba r.colaba@sydneymitchell.co.uk on 08081668827.

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