Is A Letter Of Intent Ever An Enforceable Agreement?

Author:Ms Christine O'Donovan
Profession:Mason Hayes & Curran
 
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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:

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. 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...

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