'Term Sheet' found legally binding
NEW MEDIA HOLDING COMPANY v KUZNETSOV [2016]
The Court held that a ‘Term Sheet’, which set out some terms in relation to the control of a company, was found to be legally binding.
Facts:
- Mr Kuznetsov (“K”) and Mr Gusinski (“G”) entered into a document called a ‘Term Sheet’ which related to a joint venture company in which they were investors. The Term Sheet was a short document prepared by lawyers, setting out certain terms governing the management and control of the company. Most of it concerned G's right to serve notice on K, requiring him to buy G's shares at the stipulated price; it also included a choice of law and jurisdiction clause.
- The parties signed the Term Sheet in 2010. Neither party did anything to draw up a detailed agreement after the Term Sheet was signed. In 2012 G served notice on K to buy the shares, but K failed to do so.
- K contended that the Term Sheet was not legally enforceable because it:
- was never intended to be legally binding, there being no intention to create legal relations; and/or
- was not supported by any or proper consideration on G’s part.
Decision:
- The Court rejected both of these arguments and decided that the Term Sheet was legally binding.
- It gave a useful reminder of the legal principles that apply when determining whether a binding contract exists:
- this depends on what is said or done by the parties, and whether that leads objectively to a conclusion that they intended to create legal relations and have agreed on all terms which they consider or the law requires as essential to create a binding contract; it does not depend on the parties’ subjective intentions. The governing criterion is the ‘reasonable expectations of honest sensible businessmen’;
- the burden is on the party asserting that there was no such intention to establish that that was the case. Where the parties are in a pre-existing contractual relationship (as was the case here), there is a strong presumption that they intend to create legal relations when they enter into a further agreement;
- subsequent conduct can be taken into account as objective evidence of whether or not the parties understood themselves to have concluded, and to have been bound by, a contract.
- Addressing K’s arguments, the Court commented as follows:
Intention to create legal relations
- The Court said that although the ‘term sheet’ reference is often adopted in a commercial context to describe a framework or template to be used to develop a more detailed legal document, there is no absolute rule that documents described as 'term sheets' cannot be contractual.
- The fact that the Term Sheet was prepared by lawyers seems to have been a relevant factor.
- The language used in the Term Sheet was consistent with a legally binding agreement and not merely a document that was ‘aspirational’ (indeed, in giving judgment, the Judge decided that another document, a so-called ‘Road Map’, was not legally binding precisely because it was said to be purely aspirational). The rights and obligations set out were expressed in unqualified terms.
- The introduction referred to the Term Sheet as “describing principal terms and conditions" so this perhaps suggested that further agreement on other matters might be required, but it did not mean that the Term Sheet itself was not contractual.
- It was difficult to see what purpose the law and jurisdiction clause was meant to serve in the absence of an intention to create a legally enforceable agreement.
- The parties had a pre-existing, legally binding contractual relationship so there was a strong presumption that the Term Sheet was also intended by them to be legally binding.
- The Court concluded that the terms of the document itself were workable and that the commercial context and circumstances demonstrated that the Term Sheet was, when viewed objectively, intended by both parties to be a legally enforceable contract.
Consideration
- Looking at the question of consideration (ie whether there is a benefit passing to each party which is one of the key elements when forming a contract), it was noted that the Term Sheet made no reference to any consideration moving from G in favour of K. However, the Court commented that there was no dispute that K understood that the quid pro quo for the signing of the Term Sheet, at least in G's mind, was the provision of financing. On his own evidence, K signed the Term Sheet in return for G's promise of further funding and the Court’s view was that this was undoubtedly valid consideration moving from G.
Points to note:
- The Courts will typically bend over backwards to try to give effect to what seems to be a contract particularly if the parties have appeared to conduct themselves as though an agreement was in force or if all the essential terms have been agreed. Care therefore needs to be taken to ensure that a contract is not created inadvertently. This can particularly be the case where the terms of a possible agreement are put into some informal ‘heads of terms’, ‘letter of intent’, ‘memorandum of understanding’ or the like or even an email and where the parties begin work or act without any formal documentation having been signed or agreed. The name or heading of a document will not on its own prevent it from being legally enforceable. However, whether or not there is a legally binding contract will depend on all the applicable circumstances.
- Stating that a document is ‘subject to contract’ and/or having an express provision that it is not intended to be binding may help prevent it being treated as an enforceable contract but this is not fool proof. It will depend on whether, measured objectively, the parties intended to be bound and acted as though they were.
- This case contrasts with another recent High Court decision, JAS Financial Products v ICAP [2016], in which it was found that no legally binding agreement was entered into following oral discussions relating to the supply of certain services. The Court found that it was clear to an objective observer that, although all points had been agreed in the sense that ‘no issues remained outstanding’, a legally binding contract had not been created by the agreed terms being set out in an email. Although some services had been provided and some payments made, one crucial point seems to have been the fact that one of the parties had made it clear at one of the negotiation meetings that any agreement would have to be approved by the company’s lawyers. At no point had the parties entered into an agreement in writing and neither had they seemingly contemplated that a legally binding agreement would be or had been agreed orally. What these contrasting cases demonstrate is the care that needs to be taken in this area.