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2.3.3 Certainty & Intention to Create Legal Relations Lecture - Hands on Example

The following scenario seeks to assess your understanding of the concepts of “contractual certainty” and “intention to create legal relations” on a practical standpoint.

In answering the issues, you should apply the theory and principles, alongside the cases discussed above. While referring back to the notes may be helpful, not all of the content will be relevant here.  Hence, you should be able to identify the applicable heads and related case law.  Further, given that the notes do not (and cannot possibly) capture all decided cases until date, you should be able to research on, review and understand other relevant cases on the subject, and apply them to the scenario.  This however should be done once you have obtained a thorough conceptual understanding, for which the notes should help. 

While the solutions may be quite subjective and case-specific, probable answers are provided at the bottom of the page.  Start by identifying the legal issues involved in each problem.

Scenario

The facts concern the following two transactions between Anthony and Xylem Ltd, a UK registered company:

1.Anthony paid £20,000 to Xylem Ltd in anticipation of entering into a share subscription agreement towards investing and issuance of shares of the company.  The monies were advanced against a term sheet executed between Anthony and Xylem Ltd, which contained a clause-

“9.1     This term sheet will have no binding effect on the parties, except the provisions relating to dispute resolution, exclusivity, and severability, provided in clauses… “

Further, as regards the number of shares to be issued, valuation, transfer restrictions, pre-emption rights, and dividend rights, the term sheet referred to the future subscription agreement to be executed between the parties.

Later, Xylem Ltd, owing to change in business plans, did not issue the shares to Anthony, who brought a claim for breach of contract against Xylem Ltd.  Can Anthony succeed in his claim?

2.Anthony and Xylem Ltd were shareholders in Trident Ltd, a London based company, operating in the consumer sector.  Prior to its demerger, Anthony and Xylem Ltd orally agreed to apportion certain proceeds from the demerger amongst themselves in 1:2 ratio, without elaborating further upon the mechanism of such payment.  Following this, the demerger was undertaken pursuant to a written contract, which however did not mention the apportionment at all.       

After the demerger, Anthony sought to recover his share of proceeds, failing which he brought an action of breach against Xylem Ltd.  Does Xylem Ltd have a binding obligation to abide by the apportionment (1:2) of the proceeds?

Answers

1.The issue is whether the term sheet in anticipation of the investment and share subscription agreement constitutes a binding contract.  The issue needs to be appraised in two stages: (i) whether the clauses in the term sheet are clear and certain as regards the essential aspects of the transaction, and (ii) only if so, whether the parties contemplated the term sheet to have legal effect and consequences. 

Considering that the term sheet was of the nature of an “agreement to agree” in future upon the most vital terms of the share issuance (including the number of shares and valuation, aside to other related matters of transfer, pre-emption, dividend- normally decided at the stage of share subscription itself), it cannot be reckoned as clear and certain enough so as to constitute a valid and binding contract.  An agreement cannot be implemented or enforced if it lacks certainty as regards the essential and vital terms, left to be agreed in future.  This position is well-established through cases like Barbudev v Eurocom Cable Management Bulgaria, [2011] EWHC 1560, and Dhanani v Crasnianski, [2011] EWHC 926, (discussed in the notes). 

This is more so, as the term sheet contains an express non-binding clause, hinting at the intention of the parties to not effectuate any legal consequences out of it.  This is notwithstanding that the term sheet was a document of commercial character, and carried a presumption of being intended to have legal effect.  Nonetheless, Anthony may seek restitution and recover £20,000 already being paid to Xylem Ltd, owing to the failed share issuance and subscription. The conclusion can be traced to the recent case of Kowalishin v Roberts, [2015] EWHC 1333.

2.The issue is whether an oral agreement, not confirmed in a subsequent written one executed between the parties, can be enforced as a valid and binding contract.  Again, the issue needs to be appraised in two stages: (i) whether the oral agreement can be reckoned to be so certain and clear on the essential attributes so as to be enforced as on a stand-alone basis, and (ii) only if so, whether the parties contemplated such oral agreement on the apportionment to have legal effect and consequences.

Firstly, as regards certainty, the oral agreement only provided a sketch of the proposed apportionment without detailing the payment mechanism- a vital requirement for the apportionment to be implemented.  Thus, the agreement was incomplete and uncertain.

Moreover, given that the parties did not incorporate the apportionment in the final documented and executed demerger agreement, it is clear that they never intended to legally effectuate it, regardless of any presumption in favour of it being so as a commercial arrangement.  This finds support from the recent ruling in Barnsley v Noble, [2014] EWHC 2657, in which the court held that it is not enough for the parties to merely agree on some matter. Rather, it must be proved (or disproved in commercial agreements) that they intended their agreement to have the status of a legally binding and enforceable contract. Considering that neither party intended so, and there was no express agreement following the oral one (which was abstract and incomplete on essential aspects), the presumption and the contractual claim must fail.


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