In the recent case of New Media Holding Company LLC v Kuznetsov [2016] EWHC 360, the High Court held that a term sheet signed between Mr Gusinski (Mr G) and Mr Kuznetsov (Mr K) was legally binding.  Even though the document referred to itself as being a “Term Sheet describing principal terms and conditions of Company share management and control” and, on the face of the document, made no reference to consideration, the judge found it to be contractually enforceable.

Mr G and Mr K were the ultimate beneficial holders of interests in Energokom LLC, a Latvian company which was part of a group providing atomic energy services in the Ukraine.  The term sheet at the centre of the dispute was signed in January 2010 and provided that Mr G had the right at any time after the date of the term sheet to require Energokom to acquire Mr G’s shares in Energokom for an amount of US$333,333 (plus a 9% interest coupon).  In October 2012, Mr G requested that his shares be “redeemed” in accordance with the term sheet.  Mr K contented (amongst other things) that Mr G had no right to rely on the term sheet as it was not legally enforceable.

The High Court judgement provides a neat summary of the elements required for a binding agreement (intention to form legal relations plus consideration), as well as the weight which may be placed on evidential factors in order to conclude whether or not a contract can be said to be binding.  A number of helpful criteria can be pulled from the judgement:

• the condition that there must be an intention to create legal relations does not depend on the parties’ subjective intentions, rather the “reasonable expectations of honest sensible businessmen” (see RTS Ltd v Molkerei Alois Muller GmbH & Co [2010] UKSC 14);
• the party asserting that there was no such intention has the burden of establishing it (see Attrill v Dresdner Kleinwort Ltd [2013] EWCA Civ 394);
• where the parties are in a pre-existing contractual relationship, there will be a strong presumption that they intend to create legal relations when they subsequently enter into further agreements;
• subsequent conduct can be taken into account as objective evidence of whether or not the parties understand that they had formed a binding agreement; and
• contracts which do not contain consideration from both parties in and of themselves may be enforceable if part of a “package agreement” where mutual consideration is provided as part of the overall package.

The judge found that although the phrase “term sheet” is often used in a commercial context to describe a framework used to develop a more comprehensive legal document, there is no rule that a document called a “term sheet” cannot be binding on the parties signing it.  Despite Mr K arguing that the term sheet was a “casual and informal” document, the Court was swayed by the fact that it had been drafted by lawyers and the rights granted to Mr G were expressed in unqualified legal terms. It even contained an express governing law and jurisdiction clause, the purpose of which the court found difficult to understand “absent an intention to create a legally binding agreement”. The term sheet was therefore deemed to be legally binding and not “merely a document that was aspirational”.

Although the term sheet itself provided no benefit to Mr K, the court found that on the facts it represented a “clear and logical quid pro quo” for Mr G’s agreement to provide further funding to Energokom (agreed separately outside the confines of the term sheet).  On that basis, consideration could be established and the term sheet was legally enforceable.

To avoid such disputes, it is important to be clear on the face of any term sheet whether it is intended to bind the signatories (the simple addition of the words “subject to contract” is a good start, but even this has been successfully challenged in cases where the parties act as the term sheet intended).  Conversely, if the term sheet is intended to be legally binding, care should be taken to make sure it meets the necessary contractual requirements to be enforceable.

For further information, please contact Andy Moseby.

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