In New Media Holding Company LLC v Kuznetsov  EWHC 360 the High Court concluded that a term sheet, governed by English law, was legally binding and a notice of redemption of shares served pursuant to that term sheet was therefore valid and enforceable.
In summary, the term sheet was entered into by two individuals, Mr Gusinski (“G”) and Mr Kuznetsov (“K”) who were, either directly or through corporate vehicles, investors in a joint venture company which had already been in operation for a few years. No specific reference to a joint venture agreement is made in the judgment although the judgment notes that there are “contemporaneous contractual and other documents setting out the parties’ agreements”. The term sheet allowed G to serve a notice of redemption on K requiring him to purchase G’s shares and two years later G served such a notice. K failed to ‘redeem’ the shares contending that the term sheet was not legally enforceable and in any event the notice was invalid.
The judge dismissed K’s claim that the term sheet was not legally enforceable because it was never intended to be legally binding and it was not supported by consideration. He found that the language used was consistent with a legally binding agreement and the rights and obligations set out were expressed in unqualified terms. The fact that the term sheet suggested that a further agreement might be entered into did not mean that the term sheet itself was not contractually binding. Also, although the term sheet made no reference to consideration it was clear that the “quid pro quo for the signing of the Term Sheet…was the provision of financing” and therefore consideration had been given.
The judge also dismissed K’s claim that the notice of redemption, served under the term sheet was invalid. K argued that:
- the notice failed to identify the shares K was required to purchase in terms of the proposed owners/sellers. The judge held that it was not necessary that the notice identify the precise vehicle or shareholder of the shares to be sold (the shares were defined as “16.6% of the Company in the possession of Mr Gusinski or affiliated person”); and
- the notice brought about a transfer of shares whose validity could be challenged by the other shareholders, because it was not in compliance with Latvian law. The joint venture company was a Latvian registered company and Latvian law affords statutory pre-emption rights to shareholders in Latvian companies. The judge roundly dismissed the proposition that a notice of redemption that was otherwise valid and enforceable in English law, could become invalid as a result of subsequent events and, in any event, found that whilst potential claims existed under Latvian law, any claim to invalidate a share transfer could only be pursued under public policy grounds (there was no evidence any of the shareholders wanted to take up their pre-emption rights).
Impact – it is of course advisable that documents make clear on their face whether they are intended to be binding, and where that is the intention that they meet the necessary contractual requirements. In this case the term sheet contained a governing law and jurisdiction clause but did not specifically deal with whether the parties intended all or any of the provisions to be legally binding. The decision reflects the willingness of courts to find an intention to create legal relations where, as in this case, legal advisers have prepared the document. In part this decision echoes the Court of Appeal’s decision in Barbudev v Eurocom Cable Management Bulgaria Eood & Ors  EWCA Civ where the court concluded that a side letter evidenced an intention to create legal relations, although in Barbudev the court concluded that the side letter was not binding as its provisions were not considered to be sufficiently certain; it was held to be only “an agreement to agree”.
- The recent Court of Appeal decision in Karim & Anor v Wemyss  EWCA Civ 27 sets out a succinct summary of the difference between bringing a claim in contract (breach of warranty) and a claim in tort (misrepresentation) under a sale and purchase agreement (paras 23-28 of the judgment). In Karim v Wemyss, which related to the transfer of a business, the claimant was found to have a claim both in contract and tort and could therefore choose the one “which produces the better result”.
- Companies House has announced that it aims to become as close as possible to a 100% digital organisation by the end of 2018/19.