A recent High Court decision has considered the contractual status of a document described as a "term sheet" which related to an investment in a joint venture company.
Background
Two individuals, Mr Kuznetsov and Mr Gusinski, entered a document described as a "term sheet" which related to a Latvian company, SIA Energokom, a joint venture company in which they were investors.
The term sheet was a short document setting out "principal terms and conditions of the Company share management and control". Most of it concerned Mr Gusinski's right to serve notice of share redemption on Mr Kuznetsov requiring him to buy Mr Gusinki's shares at the stipulated price. The parties signed the term sheet in 2010. In 2012 Mr Gusinski served notice on Mr Kuznetsov to buy the shares, but Mr Kuznetsov failed to do so. He contended that the term sheet was not legally enforceable because it was never intended to be legally binding or, alternatively, that there was no consideration.
Decision
The court rejected both these arguments. On the issue of intention to create legal relations, the court noted that while the phrase "term sheet" may often describe a framework document, there is no absolute rule that "term sheets" are framework documents and cannot be contractual. Each case depends on its own particular wording and what the parties intended, viewed objectively. The court gave weight to the fact that the two men, both experienced businessmen, had asked their lawyers to draft the term sheet.
The court also found that the language in the term sheet was consistent with a legally binding agreement and not merely a document that was aspirational. It set out the rights and obligations in unqualified terms. The term sheet included detailed wording on the service of the notice of redemption and an express law and jurisdiction clause. In context, the reference in the preamble to the term sheet as "describing principal terms and conditions", i.e. suggesting the possibility of further agreement on other matters, did not mean that it was not contractual. An objective appraisal of the words and conduct of the two experienced men led to the conclusion that they did not intend agreement of any other terms to be a precondition to a legally binding agreement.
On the consideration issue, the fact the term sheet did not provide for Mr Kuznetsov to receive anything in return for granting Mr Gusinski his rights was not decisive. It was clear from the surrounding facts that the term sheet was Mr Gusinski's recompense for agreeing to arrange further funding for Energokom, and his agreement not to investigate Energokom's management.
Comment
This case shows that simply describing a document as a term sheet (or heads of terms or similar) is not enough to prevent it being legally enforceable. If a document is sufficiently certain and all the other elements necessary for a valid contract are present, it may be enforceable. A statement on the face of a document that it is subject to contract or non-binding is generally helpful to show that the parties do not intend a contract to come into being until they have signed the relevant agreement. But whether there is a binding contract before the parties sign a full, written agreement is ultimately a question of whether, objectively judged, the parties intended the agreement to bind them at an earlier stage.
New Media Holding LLC v. Kuznetsov [2016] EWHC 360
Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.
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.
