Legal Briefing

Do we have an agreement?

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Corporate & Commercial | 04 July 2011

An agreement will not be considered a legally binding contract unless the agreement is ‘complete’. However, an agreement will not always be deemed ‘incomplete’ simply because it is missing certain terms. In the recent decision of Karim Frederick Dhahani v Serge Crasnianski[2011], the High Court was asked to consider whether the parties had entered into a legally enforceable contract or an unenforceable ‘agreement to agree’.

AGREEMENTS TO AGREE

Agreements that lack important or fundamental components will generally be considered incomplete and will therefore only amount to ‘agreements in principle’. This will often occur where two parties enter into an agreement with a view to entering into a further, more detailed agreement, such agreements often being referred to as agreements to agree. These agreements tend to be classified as unenforceable because they lack fundamental detail, which remains to be determined by the parties. However, the courts have upheld contracts in the past where certain terms of the agreement, which would normally be considered fundamental, have not been agreed between the parties. For example, failure to agree a price for the sale of goods will not necessarily prevent a contract from being complete and thus enforceable. Therefore, it will often be a question of degree as to whether an omission of certain terms will prevent the agreement being enforceable.

When the courts are asked to consider whether a binding contract exists between two parties, they will need to ensure that, in so far as it is possible, effect is given to the intention of the parties to that agreement. The courts may construe any lack of certainty as an indication that the parties did not intend to be bound, but this will not always be the case.

The recent High Court decision of Dhahani provides a useful insight into how the courts find the balance between holding parties to those bargains into which they enter while not holding them to agreements that are too uncertain due to lack of certain terms.

FACTS OF DHAHANI

The claimant, Karim Dhahani, a private equity investor, first met the defendant, Serge Crasianski, in November 2006 and told him that he planned to set up his own private equity fund. Crasianski showed interest in investing and asked to be kept informed of any progress.

In January 2007 they met again with a view to Crasianski investing in Dhahani’s investment fund. Dhahani gave a presentation to Crasianski and produced a 16-page document that set out the plans for his fund.

In the following months, Dhahani prepared several draft letters and term sheets that were sent to Crasianski for his comments. It was envisaged that Dhahani would leave his current employment to create and manage the fund into which Crasianski would invest €50m of his personal wealth. A clause was added in the manuscript that stated that Crasianski would be entitled to recover any advance payment made to Dhahani in the event that the launch of the fund did not proceed. On 28 March 2007 Crasianski and Dhahani signed a letter and term sheet. Shortly thereafter, Dhahani requested an advance of one quarter of the annual fees provided for in the term sheet, €312,500, and this was paid by Crasianski on 6 April 2007. Subsequently, relations between the two parties became strained and on 27 June 2007 Crasianski informed Dhahani that the deal was off.

Dhahani claimed damages for breach of contract against Crasianski and argued that the signed letter and term sheet evidenced a binding agreement on each party to do his best to set up the fund. Dhahani pointed out that the term sheet defined many important characteristics of that fund including its scale, investment profile, fund manager, anchor investor, management fees and profit distribution, and that these characteristics meant that the obligations of each party were not so uncertain as to prohibit enforcement and that any outstanding details were capable of being agreed at a later date.

Crasianski counterclaimed for repayment of the €312,500 advance on the basis that, as the fund had not been launched, it had not been used for the purpose for which it had been advanced. Crasianski argued that the letter and term sheet amounted to no more than an agreement to agree and that any such agreement was not enforceable under English law on the basis that it lacked certainty. He also argued that it was both parties’ subjective intention that the letter and term sheet were not binding and the court should look at the subjective intentions of the parties rather than what the parties’ intentions appeared to be on an objective view.

DECISION

Teare J, finding in favour of Crasianski, held that the agreement was not sufficiently certain so as to be enforceable and so the agreement could not amount to a binding and enforceable contract. He allowed the counterclaim in part. The advance made by Crasianski was in principle repayable because the fund had not been launched. However, he held that payments made by Dhahani in attempting to launch the fund, eg solicitors fees, could be deducted from the repayment.

REASONING

Teare J considered two separate questions. First, he considered whether the parties had intended to create legal relations. Secondly, he considered whether the letter and term sheet were sufficiently certain, so as to allow the agreement to be enforced.

Intention to create legal relations

Teare J said that the parties’ intentions would be assessed objectively and depended on ‘how a reasonable man versed in business would have understood the exchanges between the parties’ (Andrew Smith J in Maple Leaf Macro Volatility Master Fund & anor v Rouvroy & anor [2009]). He said that there were several indications that the parties had intended to create legal relations:

  • they had signed the letter and term sheet;
  • relied on the terms of the letter before the court; and
  • had acted on the letter and term sheet shortly after signing those documents.

Therefore, on an objective view, the parties had intended to be legally bound by the agreement.

While Teare J accepted that the court was open to consider the parties’ subjective views, he pointed out that there was insufficient evidence to prove Crasianski’s subjective view. Teare J concluded that Crasianski had probably paid the advance on the basis that he had thought that he was legally bound to do so and that Dhahani had probably resigned from his job on the basis that he had thought that he was legally bound to do so. On that basis, Teare J held that an intention to create legal relations was present on an objective assessment and that he had not been convinced that the parties’ subjective views proved otherwise.

Certainty and enforceability of terms

Teare J acknowledged that many of the important characteristics of the fund had been agreed at the time of signing the term sheet. However, he also recognised that certain crucial terms remained outstanding. In particular, he considered that Crasianski would want to seek advice on the fiscal consequences of any agreement regarding the domicile and nature of the structure of the fund. Teare J rejected Dhahani’s argument that Crasianski had lost the opportunity to negotiate questions of domicile and structure by signing a term sheet that was silent on these matters.

While Teare J recognised that it was possible for parties to omit certain terms on the understanding that they would be agreed at a later date, he said that for the agreement in question to be enforceable it would require certain objective criteria to be put in place so as to direct future agreement on the omitted terms. Teare J remarked that if one party is to unilaterally determine important aspects of the agreement that had not already been agreed, the agreement would need to contain very clear words to that effect. It was insufficient that the agreement provided for Dhahani to dedicate his professional time to setting up the structure of the fund.

Teare J concluded that while many aspects of the fund had been agreed, the letter and term sheet did not contain all of the essential terms necessary for it to be enforced. It was to be regarded as no more than an agreement to agree and, following Walford v Miles [1992] and Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd [2006], such agreements were not enforceable under English law.

CONCLUSION

Dhahani provides clear guidance that the two issues to be considered when determining if an incomplete agreement is binding on the parties to it are:

  1. whether those parties intended to be legally bound by the agreement; and
  2. whether the lack of detail in the agreement results in uncertainty that prevents the agreement from being enforced.

To enforce an agreement lacking certain terms, a party will need to show that both intention and certainty is present.

COMMENT

There is no doubt that where parties enter into agreements with a view to committing to a binding agreement only at a later stage, they should not be held to the initial agreement. These agreements are usually in place to provide a protocol for the parties to follow in the course of reaching a final agreement and in many situations it would be impractical to hold parties to an agreement entered into at a stage where there is so much uncertainty.

However, we can see from the decision in Dhahani that even where the parties to an agreement intend to be bound by that agreement, the omission of certain key terms of the contract will prevent the agreement from being enforced. In this situation, a party that later realises it has entered into a bad bargain is able to use the lack of certainty as a means for exiting the arrangement.

Parties wishing to create legally enforceable agreements that are incomplete will therefore need to ensure that as many of the important terms as possible are agreed, and for those that are not, that there is a very clear mechanism in place providing how the remaining terms will come to be agreed in the future.

A further lesson that can be learnt from Dhahani is that a party not wishing to be bound by an agreement should ensure their intention not to be bound is well documented, so that this can be used to displace what might otherwise appear to be an intention to be bound on an objective view.