When does a letter of intent become a contract? How refundable
is a refundable deposit pre-contract signature? These are
re-occurring issues in cross border aircraft sale and purchase
agreements.
In Charles Shaker v .Vistajet Group Holding SA¹,
the claimant made an application for summary judgement for the
return of a deposit paid pursuant to a letter of intent
("LOI") in respect of a potential aircraft purchase
contract. The issues before the Court were:
Enforceability - Mr Justice Teare stated that an agreement to
proceed in good faith and use reasonable endeavours to agree
Transaction Documents and obtain confirmation of financing does not
give rise to an enforceable obligation at law.
Contractual Estoppel and the final issue related to allegations
of lack of good faith in pursuing reasonable endeavours.
Enforceability
The Cut-Off Date in the LOI was amended on 5 occasions
commencing which 1st amended on 26 August 2010 which was to
facilitate the Claimant seeking financing. Final amendment was
dated 10th December 2010. The claimant argued that he proceeded in
good faith and used reasonable endeavours to agree the Transaction
Documents and obtain written confirmation from the financing party.
The defendant disputed such arguments and counter argued that the
claimant could not satisfy the conditions on which the right to a
refund of the deposit depends. In response, the claimant argued
that such obligations are unenforceable in law.
Justice Teare stated that there can be no doubt that an LOI does
not give rise to an enforceable obligation at law. Firstly, the LOI
contained a provision that it did not constitute a binding
agreement to enter into the Transaction Documents; and secondly, an
agreement to negotiate or agree further agreements is unenforceable
in law. The reason for such unenforceability is that there are no
objective criteria by which the court can decide whether a party
has acted unreasonably and a duty to negotiate in good faith is
unworkable because it is inherently inconsistent with the position
of a negotiating party. Agreements to reach agreement with a 3rd
party (e.g. a financier) are unenforceable for the same reason.
The court also looked at the enforceability of the condition
precedent to the return of the deposit, which required that the
parties exercise good faith and reasonable endeavours to reach
agreement, execute and deliver the Transaction Documents. The Judge
found the suggested condition precedent to be unenforceable in
law.
Contractual Estoppel
Mr Justice Teare considered the question that if, contrary to
his order, the suggested condition precedent is enforceable,
whether or not the defendant is estopped from alleging that the
Claimant failed to exercise good faith and reasonable endeavours up
until the date of the last amendment to the LOI (i.e. 10 December
2010). Referring to authorities, it is clear that an
"acknowledgement" of a state of affairs can give rise to
a contractual estoppel and the commercial sense of the December
2010 amendment was clear. Both parties agreed to extend the cut-off
date and, as such, it is unrealistic to suppose that they would do
so unless both had up to such date exercised good faith and
reasonable endeavours.
Lack of Good Faith
The issue here was whether or not there was a triable issue so
as to defeat summary judgement application by the claimant on basis
of lack of good faith. The judge reasoned that there was no
substance to this allegation and refused to permit the matter to go
forward for trial.
Comment
In any contractual negotiations, amongst primary areas of
concern for the seller is the buyer's financial standing and
access to funding and the buyer's focus tends to be on the
asset, its condition and price/valuation. It was interesting that
in Shaker Case the core contractual terms of price and
property were agreed without express conditionality of the buyer
financing. Nonetheless, commercial "bargain" was held to
be unenforceable due to 2 clauses which relate to agreement on
"Closing Date" –following execution and
delivery of a sale agreement and the supremacy of
"Non-binding" clause.
Footnote
1. [2012] EWHC 1329 (Comm)
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.
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