Documents entitled "Heads of Terms," or "Heads of Agreement" are frequently entered into by parties during negotiations, and disputes often arise over whether such documents are legally binding. In Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd,1 the court considered whether there was the necessary intention to create legal relations, ultimately determining that a document signed by the parties entitled "Heads of Terms of Proposed Agreement" was (for the most part) not a binding and enforceable contract.
The case is a salient reminder that the label “heads of terms” is not conclusive as to whether a document is intended to be legally binding or not. The decision highlights the importance of clear drafting to accurately reflect the intentions of the parties and ensure there is sufficient certainty of terms.
The claimant brought a GBP56.4 million breach of contract claim against the defendant, alleging that the document entitled “Heads of Terms of Proposed Agreement” signed by the parties in November 2013 was a binding contract.
The defendant had unused land in Lincolnshire (the Site) and was put in touch with the claimant who was looking for a suitable location for an anaerobic digestion plant. Following initial discussions, the claimant sent the defendant a draft document entitled “Heads of Terms of Proposed Agreement between Blankney Estates,Lincolnshire and Pretoria Energy Company Limited Subject to Full Planning Approval and appropriate consents and easements” (the Heads of Terms). Three additional drafts were exchanged prior to the final Heads of Terms being signed.
The signed Heads of Terms included a time-limited lockout arrangement (the Lockout Provision), pursuant to which the parties agreed not to enter negotiations with third parties until 31 July 2014. The parties failed to progress the transaction substantively by that date.
On 24 November 2014, the defendant informed the claimant that it had concluded arrangements with a third party for it to acquire the Site. Pre-action protocol letters followed in August and September 2015, and proceedings commenced on 2 September 2020.
The claimant accused the defendant of breach of contract, contending that the Heads of Terms was a binding agreement under which the defendant agreed to grant the claimant a twenty-five-year lease of the Site. The claimant argued that the defendant repudiated that contract in September 2014 and was therefore liable for damages.The defendant contended that there was never a binding contract for a lease and that the only enforceable contract between the parties in the Heads of Terms was the Lockout Provision.
The court’s decision
Referring to the Supreme Court’s judgment in RTS Ltd v Molkerei Alois Muller GmbH & Co KG2, the judge explained the relevance of contractual intention and contractual certainty in deciding whether a binding contract exists:
“It depends not upon (the parties’) subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.”
The judge further emphasised the need to look at the whole course of dealing between the parties, and that the onus of demonstrating that there was a lack of intention to create legal relations lies on the party asserting it. She also noted that there can be a binding contract even in circumstances where there are further terms to be agreed.
Focusing predominantly on the principle of contractual intention, the court rejected the claimant’s claim for breach of contract. In coming to its decision, the court highlighted three factors in particular:
- a previous draft of the Heads of Terms contained a requirement for the parties to adhere to the conditions of the Heads of Terms until the final agreement was accepted and signed. This had been removed in subsequent drafts, demonstrating that the intention of the parties was not to create a binding obligation;
- the essential terms of the lease had not been agreed by the parties and were therefore not reflected in the Heads of Terms; and
- if the provisions of the Heads of Terms and the whole of the dealings between the parties were considered in context, the absence of wording such as “subject to contract” did not matter.
The court determined that the Heads of Terms cannot have been intended to be, and were not, binding on the parties.
The exception to this was the Lockout Provision, which the court determined was intended to be, and was, legally binding. However, there was no breach of the Lockout Provision as, after 31 July 2014, the defendant was free to negotiate with third parties.