Company Commercial Notepad - March 2010
1. Liability under Letters of Intent and Term Sheets
Letters of intent (also known as memoranda of intent or term sheets) are frequently used as a means of establishing the basis on which two parties wish to do business with each other. Their relative informality, as compared with formal contract documents, often disguises the extent to which they may impose legal obligations on the parties, as well as the effect that they may have on subsequent contract negotiations. A number of cases relevant to the contract negotiation process, and liability under term sheets and draft contracts in particular, reached the Court of Appeal last year.
In the 2009 case of Whittle Movers v Hollywood Express, Whittle submitted a tender to Hollywood Express for a distribution contract. The tender process was stated to be "subject to contract" and contemplated the parties entering into formal legal agreements.
Whittle was awarded the tender and negotiations over the legal contract proceeded. A letter of intent, stating to be non-binding and subject to "the negotiation and execution of mutually satisfactory and legally binding contractual documentation", was issued by Hollywood Express in November 2005 and signed by Whittle. That letter of intent anticipated a binding contract being agreed by January 2006.
In the interim, Whittle agreed to perform distribution services for Hollywood Services while negotiations continued. In 2007 Hollywood Services terminated those services and a dispute arose as to how much notice Whittle was entitled to and whether or not the long term contract had been entered into by conduct.
The Court of Appeal held that there was no legally binding contract. Whilst Whittle was entitled to be paid for the services it provided before the long term contract was entered into, the fact that it had been paid for such services did not of itself mean there was such a contract.
Also last year, in a case which must remind commercial parties of the dangers of beginning work before a contract has been finalised, the Court of Appeal heard the case of RTS Flexible Systems Ltd v Molkerei Alois Muller GmBH & Co KG. Molkerei was a producer of yoghurt and dairy products which entered into negotiations with RTS, a specialist automated machine supplier, with a view to automating some of Molkerei's processes.
RTS gave Molkerei a number of quotations and in response Molkerei issued a letter of intent which covered an initial period but which then lapsed. RTS began work before the terms of the draft contract had been agreed, negotiations progressed but the contract was never finalised and in the meantime a dispute arose between the parties.
The Court of Appeal, considering whether or not a contract existed between the parties, referred to a clause in the draft, unsigned, contract which provided that the contract would not become effective until each party had executed a counterpart and exchanged it with the other. It found that the existence of this clause meant that no contract had come into existence.
Finally, the 2009 case of Maple Leaf Macro Volatility Master Fund v Rouvray concerned the status of an unsigned agreement. Maple Leaf and Rouvroy both signed a version of an agreement between them relating to an investment by Maple Leaf in a company (Belvedere) owned by Rouvroy.
Rouvroy subsequently asked Maple Leaf to produce an amended version of the agreement to which a third party, Lion Capital, had been added as an additional investor. Maple Leaf signed this new version but it was not signed by either Lion Capital or Rouvray.
Maple Leaf duly invested money in Belvedere, but Rouvray did not perform its obligations under the agreement, on the ground that no binding agreement had been entered into. Both the High Court and the Court of Appeal held that the original agreement was binding and enforceable, the new version being merely an unsigned variation to it.
In particular it is worth noting that signatures on a document are evidence of what has been agreed, but signatures were not in this case conditions of the agreement (i.e. it was not essential to the existence of the agreement that the document was signed by all the parties). Even if a term sheet or contract circulated between the parties has not been signed, therefore, if there is other evidence to show that there was "mutual intention to create legal relations" (as there was in the case, in the form of the original version of the agreement and the dealings between the parties) that unsigned term sheet or contract will be binding.
Our recommendations
These cases show how easy it is for commercial parties to have a very different understanding of the basis of the arrangements between them. Good management of the contract process by sales and procurement teams who are aware of the implications of particular wording and behaviour is essential, but the following tips may be helpful:
1. Expressly state that your negotiations are "subject to contract".
2. Be aware that your conduct may indicate a binding contract unless you make it clear that is not the intention.
3. Be very wary of performing any obligations under a contract unless the contract document has been signed.
4. Be clear as to when draft contracts are approved and are in an agreed form and then have a clear procedure for both parties to enter into the contract.
5. Train sales and procurement teams to understand contract formation and the risks of particular wording and behaviour.
For further information on letters of intent, term sheets and contract drafting please contact our Corporate and Commercial group.
2. Intellectual Property Office makes changes to help small businesses protect their brands
The UK Intellectual Property Office - the official government body responsible for granting intellectual property rights in the UK - has recently made changes to assist small businesses in registering and protecting their brands.
The new features are:
(1) A ‘Right Start' service for trade marks - a business using the new ‘Right Start' service will be able to defer payment of half the usual £200 trade mark application fee until after it has seen the Intellectual Property Office's assessment of whether the mark can be registered. If there are any problems, the business will have an opportunity to discuss them informally with the trade mark examiner before deciding whether to proceed with the application and pay the balance of the fees.
The Intellectual Property Office has identified that many small business owners feel anxious about paying full fees upfront without any official early indication of whether the trade mark is considered registrable. Under the new Right Start scheme, the deferred element of the fee, the examination report, the indication of registrability and improved access to the examiner are incentives to small businesses needing a better idea of the prospects of registrability before committing to paying the whole fee.
(2) An Electronic filing initiative - this offers a 15% (£30) reduction in application fees for electronically-filed trade mark applications where the full discounted fee is paid at the time of filing.
Registering a trade mark gives the owner the exclusive right to use the mark for the goods and/or services that it covers in the UK. Making an early investment in obtaining a trade mark registration can have substantial positive commercial results in the future, including:
- acting as a deterrent to people using the registered trade mark without permission;
- allowing the owner to take legal action against anyone who uses the trade mark without permission;
- allowing Trading Standards Officers or the police to bring criminal charges against counterfeiters if they use the trade mark; and
- giving the owner the opportunity to exploit the trade mark through sale or licensing.
For further advice or more information please contact our Intellectual Property group.
3. Interpretation of a contract: meaning of subsidiary
A recent decision of the Court of Appeal in Enviroco Ltd v Farstad Supply A/S has called into question the definition of a "subsidiary" in circumstances where a holding company grants a legal mortgage over shares in its subsidiary.
The Court held that as a result of a holding company's pledge of shares (a form of Scottish security similar to a legal mortgage of shares in English law) in a subsidiary and the registration of the shares in the name of the bank's nominee by way of security, the subsidiary was no longer a subsidiary within the meaning as defined by statute (in the Companies Acts 1985 and 2006).
The decision could have far reaching implications for companies on a number of levels wherever the statutory definitions of subsidiaries are relied upon, including:
- Commercial contracts and financial agreements- where particular rights or obligations under the contract are linked to the existence of a subsidiary relationship. Examples include financial covenants, change of control provisions and limitations of liability extending to group companies.
- Tax implications- where any grouping for tax purposes is determined by reference to the Companies Acts definitions of a subsidiary.
- Regulatory- a number of regulatory provisions are only applicable where the statutory definition of the subsidiary/parent relationship exists. Examples include requirements for approval by members of holding companies for transactions between directors and subsidiaries
We recommend that any contract documents using the definitions of "group", "subsidiary", "affiliate", or "holding company" from the Companies Acts are reviewed and that amendment of such provisions is considered where appropriate. We also recommend that where possible alternative forms of security are offered (rather than over shares in a subsidiary).
For further advice on this topic and the risks and implications of granting security by way of a legal mortgage over shares please contact our Corporate and Commercial group.
Laytons cannot accept any responsibility for any liabilities of any kind incurred in reliance on this Notepad. For specific advice on these issues, please contact your client partner or one of the team at the addresses set out below:
London
Richard Kennett email richard.kennett@laytons.com
Guildford
Ben Crichton email ben.crichton@laytons.com
Manchester
David Sefton email david.sefton@laytons.com
This Notepad is offered on the basis that it is a general guide only and not a substitute for legal advice. If you wish to copy this Notepad please do so, but please acknowledge its source.
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