Pitts v Jones
Court of Appeal
Citations:  EWCA Civ 1301;  QB 706;  2 WLR 1289;  1 All ER 941;  1 All ER (Comm) 548;  Bus LR 1279;  1 BCLC 613.
The defendant was the managing director of a company. The claimants were employees of and minority shareholders in that company. The defendant told the claimants that he had reached a provisional agreement to sell his shares to a third-party. The third-party had also offered to buy the claimants’ shares at the same price. The claimants agreed, and waived their right under the company’s articles of association to veto the defendant’s sale.
The defendant later told the claimants that the third-party would not buy their shares immediately. Instead, they would acquire options to purchase the shares which the claimants could use to compel a purchase within six months. The claimants were reluctant to agree to this, since it would not provide them any security. However, they were convinced when the defendant orally promised that if the third-party would not pay for their shares, he would. The claimants signed options agreements. They then waived the notice period for an extraordinary general meeting so that the defendant could sell his shares.
The third-party did not pay for the shares, and the defendant denied he was under any obligation to pay for them. The claimants sued the defendant for breach of contract. The defendant argued that the claimants had not given consideration for his promise, so it was not binding. Alternatively, he argued that the agreement was void because it did not comply with the statutory formalities required of a guarantee.
- Had the claimants given good consideration for the defendant’s promise?
- Was the agreement a guarantee?
The Court held in favour of the defendant. The claimants’ agreement to waive the notice requirements and their right of preemption, and their agreement not to withdraw those waivers when the deal changed, was valid consideration. However, the agreement was a guarantee. As such, because the defendant’s promise was oral, it was void for non-compliance with statutory formalities.
This Case is Authority For…
Whether a party has given consideration is assessed objectively. There must be an objective link between one party’s promise or offer and the other party’s decision to act in a particular way. The consideration must objectively have been provided in return for that promise or offer.
Whether a contract is a guarantee or an indemnity depends on whether the promisor’s obligation to pay is the central object of the contract or not. If it is, the contract is a guarantee. If it is incidental to the central purpose of the contract, it is an indemnity.