Coleman v Mundell

A written instrument may form only part of the parties’ overall agreement. Where the surrounding words and conduct objectively establish an oral collateral contract, the court may enforce it alongside the written instrument. This applies even where the collateral terms were not recorded in writing and qualify the apparent beneficial ownership transferred by the document.

Contractual intention and essential terms are assessed objectively, by reference to what was communicated and done. The court should strive to give effect to a sufficiently certain agreement where the parties intended to be bound and acted on it. A transfer of shares may therefore operate as security for an underlying loan, rather than as an outright sale, if that is what the parties objectively agreed.

The claimant sought specific performance of an alleged oral agreement concerning the transfer of shares in Ninurta S.L. He contended that the defendant had advanced £250,000 as an interest-free loan and that 50 per cent of the shares had been transferred only as security. The defendant maintained that he had purchased the shares outright.

The claimant’s original case based on a pledge was amended to rely on an oral collateral contract accompanying the notarised transfer deed. The central issue was whether, objectively assessed, the parties agreed that the transaction was a loan secured by the share transfer, with a right to repayment and re-transfer of the shares.

1. Collateral contract. The court accepted that a written document may contain only part of the parties’ overall agreement. An oral assurance intended to have contractual effect may constitute a collateral contract, notwithstanding that it is absent from the written deed. The relevant question was whether the parties had agreed that the transaction was, in substance, a loan and that the shares were transferred only as security.
2. Objective assessment. Contractual formation was assessed by reference to the parties’ words and conduct, objectively construed. The court considered whether the parties intended to create legal relations and had agreed the terms necessary for a binding arrangement. Difficulties of interpretation did not prevent enforcement where a sufficiently definite intention could be identified and the parties had acted on the agreement.
3. Application to the evidence. The transaction began as an interest-free loan. When a mortgage over the Spanish land could not be arranged in time, the parties agreed to transfer ownership of 50 per cent of the shares to the defendant as security. The surrounding discussions, the parties’ conduct and subsequent descriptions of the transaction established that the transfer was part of the wider loan arrangement rather than an outright sale.
4. The consideration for the collateral agreement was the transfer of ownership of the shares. The claimant was entitled to repay the loan without interest and require the shares to be transferred back. The defendant’s appointment as an administrator of Ninurta was solely protective; the court found that its purpose ended on repayment, although any order requiring resignation was a matter for the Spanish courts.
5. The court left the parties to discuss the terms of an appropriate order.