When does a letter of intent become a contract? How refundable is a refundable deposit pre-contract signature? These are re-occurring issues in cross border aircraft sale and purchase agreements

. In Charles Shaker v .Vistajet Group Holding SA¹, the claimant made an application for summary judgement for the return of a deposit paid pursuant to a letter of intent (“LOI”) in respect of a potential aircraft purchase contract. The issues before the Court were:

  1. Enforceability - Mr Justice Teare stated that an agreement to proceed in good faith and use reasonable endeavours to agree Transaction Documents and obtain confirmation of financing does not give rise to an enforceable obligation at law.
  2. Contractual Estoppel and the final issue related to allegations of lack of good faith in pursuing reasonable endeavours.  

Enforceability

The Cut-Off Date in the LOI was amended on 5 occasions commencing which 1st amended on 26 August 2010 which was to facilitate the Claimant seeking financing. Final amendment was dated 10th December 2010. The claimant argued that he proceeded in good faith and used reasonable endeavours to agree the Transaction Documents and obtain written confirmation from the financing party. The defendant disputed such arguments and counter argued that the claimant could not satisfy the conditions on which the right to a refund of the deposit depends. In response, the claimant argued that such obligations are unenforceable in law.  

Justice Teare stated that there can be no doubt that an LOI does not give rise to an enforceable obligation at law. Firstly, the LOI contained a provision that it did not constitute a binding agreement to enter into the Transaction Documents; and secondly, an agreement to negotiate or agree further agreements is unenforceable in law. The reason for such unenforceability is that there are no objective criteria by which the court can decide whether a party has acted unreasonably and a duty to negotiate in good faith is unworkable because it is inherently inconsistent with the position of a negotiating party. Agreements to reach agreement with a 3rd party (e.g. a financier) are unenforceable for the same reason.  

The court also looked at the enforceability of the condition precedent to the return of the deposit, which required that the parties exercise good faith and reasonable endeavours to reach agreement, execute and deliver the Transaction Documents. The Judge found the suggested condition precedent to be unenforceable in law.  

Contractual Estoppel

Mr Justice Teare considered the question that if, contrary to his order, the suggested condition precedent is enforceable, whether or not the defendant is estopped from alleging that the Claimant failed to exercise good faith and reasonable endeavours up until the date of the last amendment to the LOI (i.e. 10 December 2010). Referring to authorities, it is clear that an “acknowledgement” of a state of affairs can give rise to a contractual estoppel and the commercial sense of the December 2010 amendment was clear. Both parties agreed to extend the cut-off date and, as such, it is unrealistic to suppose that they would do so unless both had up to such date exercised good faith and reasonable endeavours.

Lack of Good Faith

The issue here was whether or not there was a triable issue so as to defeat summary judgement application by the claimant on basis of lack of good faith. The judge reasoned that there was no substance to this allegation and refused to permit the matter to go forward for trial.  

Comment

In any contractual negotiations, amongst primary areas of concern for the seller is the buyer’s financial standing and access to funding and the buyer’s focus tends to be on the asset, its condition and price/valuation. It was interesting that in Shaker Case the core contractual terms of price and property were agreed without express conditionality of the buyer financing. Nonetheless, commercial “bargain” was held to be unenforceable due to 2 clauses which relate to agreement on “Closing Date” –following execution and delivery of a sale agreement and the supremacy of “Non-binding” clause.