Heads of Agreement found not binding

For many in-house lawyers, one of the main bones of contention with the business is whether to proceed on the basis of a heads of agreement / memorandum of understanding / letter of intent document and begin supply whilst negotiating a formal contract. Businesses like these documents as it means they can offer the client a short lead-in timescale. The legal team, on the other hand, will inwardly groan as, no matter what snappy title these documents are given, the likelihood is that they are nothing more than an agreement to agree and, therefore, unenforceable. Our unease of such documents has been given additional credence recently by the courts in the case of CRS GT Limited v McLaren Automotive Ltd and others [2018] EWHC 3209 (Comm)

The case

The parties entered into some Heads of Agreement and work started on the project. The anticipated formal contract was never entered into. CRS argued that the Heads of Agreement was a binding contract or, alternatively, that a binding contract had been entered into by the subsequent conduct of the parties. The court disagreed and found that the Heads of Agreement was not a binding contract. Particularly, the Heads of Agreement did not address matters of considerable commercial significance such as the ownership of intellectual property rights in the designs. Further, the correspondence between the parties suggested that the Heads of Agreement was not understood to be legally binding and that the relationship between the parties meant they were prepared to proceed without a binding agreement on the assumption that one would be agreed or that the risk was worth taking.

Comment

Entering into a commercial relationship without a contract in place is nearly always a risky business. In this case, CRS’ claim was that it had the exclusive right to provide parts and after-sales support for the car that was the subject of the project. Failure to have a binding contract in place cost it a significant anticipated income stream.

Another crucial area that is unlikely to be resolved without a binding contract is allocation of liability and risk. If these areas are not specifically provided for in a binding contract then the general rules of law will apply, meaning that services are likely to be supplied on an unlimited liability basis with potential liability for some types of loss that would normally be excluded.

CRS GT Limited v McLaren Automotive Ltd and others [2018] EWHC 3209 (Comm)