Can an oral collateral contract alter a deed?
Published 12 November 2020
The High Court of Justice found that a deed which transferred ownership of shares in a company was subject to an oral collateral contract in a recent decision of Coleman v Mondell  EWHC 2852 (QB).
The background of the case involved two parties, Mr Coleman and Mr Mondell, who discussed over the telephone certain matters. The facts as to what was said during the telephone call and the subsequent meeting were in dispute. However, Mr Coleman contended that Mr Mondell offered to lend him £250,000 and Mr Coleman would transfer 50% of the issued share capital in a Spanish company to Mr Mondell as security for the repayment of the interest-free loan. Mr Mondell paid £250,000 to Mr Coleman and the parties subsequently entered into a deed for the sale of the shares to Mr Mondell.
Mr Coleman stated that Mr Mondell agreed to this because Mr Mondell was primarily motivated to assist his friend. Mr Coleman’s evidence was that Mr Mondell did not want to sign a written loan agreement and did not want to either fix a definitive date for repayment or agree a level of interest.
The Court decided that there was an oral collateral contract for an interest-free loan. The consideration for the oral contract was the transfer of the ownership of the shares. In effect, the deed purporting to be in relation to the sale of the shares was only part of the overall agreement between the parties.
This case provides a useful reminder that there must be a consideration for a collateral contract. It also shows that specific performance can be a very effective remedy in cases involving the transfer of shares where a party needs to compel another to perform its positive contractual obligations.
It can be difficult however to treat oral statements made between the parties in the course of negotiations as a term of contract. There is a useful tool that legal professionals involved in a commercial deal usually use which is heads of terms. When advising clients on commercial contracts, depending on the nature and size of the transaction, it is sometimes important to document oral discussions and negotiations between the parties by way of a heads of terms whilst allowing the parties to a proposed contract to still iron out the finer points of the contracts. Heads of terms are a set of documented broadly agreed commercial principles that typically precede substantive contract negotiations and the ultimate agreement signed by the parties.
This case shows that it is therefore possible, in certain circumstances, for an informal and oral collateral contract to supplement and alter the apparent terms of a deed.
Should you require any further information on any of the points discussed above, please contact the Corporate Law team at MKB Law.
This article is for general guidance only and should not be regarded as a substitute for professional legal advice. Source: LexisNexis