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Creating an intention to be bound

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25/05/2016

In a recent High Court case, New Media Holding LLC v Kuznetsov [1], the Court was confronted with two issues which frequently trouble the courts in this country – whether an agreement apparently entered into between two commercial parties was intended to create a binding contractual obligation and whether a notice purportedly served under that agreement was effective.

In this case, an investor had signed a document (the Term Sheet) pursuant to which he claimed to have been granted a redemption right in respect of shares in a company controlled by the defendant. He sought to exercise that right by a notice (the Notice) that the defendant purchase the relevant shares. The defendant failed to do so. The investor assigned the right to a company he controlled, the claimant in this case, which then pursued the claim as assignee of the cause of action.

The first issue concerned whether the Term Sheet was legally enforceable, the defendant submitting that it had never been the parties’ intention that it should have legal effect and that it had not been supported by any consideration from the investor. The Court was unimpressed by this argument finding that, on an objective assessment, each party had intended that the Term Sheet should have legal effect.

The second issue was whether the Notice constituted a valid exercise of the redemption right. The defendant argued that the Notice failed to identify which shares the defendant was required to purchase and that it was seeking to bring about a transfer of shares whose validity could be challenged by the other shareholders. Again, the Court was unpersuaded. The parties were experienced, sophisticated businessmen who understand fully the mechanics of the transaction they were entering into and the Notice in no way departed from the requirements of the Term Sheet. It was not necessary to give business efficacy to the Term Sheet to imply additional requirements beyond those expressly agreed. As such, the Notice was valid and enforceable.

WM comment

This case creates no new law but is a useful reminder to stipulate precisely the format and contents of a notice exercising rights, such as pursuant to an option agreement. Also, that it if is intended that an “agreement” should not have legal effect, to make this clear by the use of words such as “subject to contract”. The use of words like this is not definitive as to an agreement not being binding but it does create a presumption that this is the case which the party seeking to show the existence of a binding contract will need to overcome.

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[1] [2016] EWHC 360 (QB)

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