The High Court considered the contractual status of a document described as a "term sheet" and found that it was a binding contract
In contrast to the decision in JAS Financial Products (above), this High Court decision held that a term sheet (or heads of terms or similar) was binding on the parties.
Although a statement that a document is subject to contract is generally helpful to show that the parties do not intend to enter a binding contract before signing the relevant agreement, this case illustrates that whether a binding contract has in fact arisen before the parties sign will be judged objectively and depends on whether the parties intended the agreement to bind them at an earlier stage.
Two individuals, Mr Ivan Kuznetsov and Mr Vladimir 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.
The Court of Appeal 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.
As to whether or not the parties' agreement was supported by consideration, the fact that the term sheet did not provide for Mr Kuznetsov to receive anything in return for granting Mr Gusinski his rights was not decisive. This was because the surrounding facts pointed to the term sheet being Mr Gusinski's reward for agreeing to arrange further funding for Energokom, and his agreement not to investigate Energokom's management.