In this case the parties were negotiating the repayment of a loan made by the claimant to the defendant. They produced a document entitled "Heads of Agreement - subject to more complete documentation". This document required them to use best endeavours to agree repayment of the debt within 90 days.
Following this, negotiations broke down and the claimant started proceedings to recover the debt before the end of the 90 day period. The claimant argued that the heads of agreement were intended to be binding and obliged the parties to reach some sort of a settlement.
The High Court decided that the parties had intended parts of the document to be binding. However, although the parties were obliged to use their best endeavours to agree a settlement before expiry of 90 days, the document did not oblige them to reach a specific outcome, or any outcome at all. In this case, the claimant was in breach of the heads of agreement as it had started proceedings before the agreed period had expired. However, such breach did not cause the defendant any loss as the negotiations would have failed upon expiry of the period anyway.
This decision highlights that an obligation to reach settlement can be enforceable and reinforces some basic practical drafting points. If the heads of terms are not intended to be legally binding the author should:
- Clearly state on the face of the document that it is not intended to be legally binding and also perhaps mark the document "subject to contract";
- Ensure that the content of the document is not inconsistent with this intention; and
- If individual terms are intended to bind within a document which as a whole, is not intended to be legally binding, e.g. confidentiality provisions, then the document should expressly state that these terms only are to be binding.
For further details please contact David Roberts on 020 7367 3678 or at: david.roberts@cms-cmck.com or Alex Rutter on 020 7367 2503 or at: alex.rutter@cms-cmck.com
