15 October, 2016
Prior to the execution of a formal contract, parties to commercial transactions commonly sign a “term sheet” to record the key terms of the transaction and to serve as a guide toward the crystallisation of a formal contract. Such a document may also be referred to as a “letter of intent” or “memorandum of understanding.” When a party to the transaction declines to go through with the execution of the formal contract, disputes often arise as to whether the term sheet constituted a binding and enforceable agreement, entitling the other party to claim damages for breach of contract.
Duane Morris & Selvam recently acted for the respondent in a Singapore International Arbitration Centre arbitration in such a claim. The following will examine the legal principles applicable in Singapore when determining the issue of whether a term sheet is a binding agreement through the Arbitral Tribunal’s decision in that case.
Background
The claimants in the arbitration were a shipping company and an investment holding company, respectively. The claimants and the respondent discussed entering into a joint venture agreement, whereby they would jointly invest in a joint venture company to own two vessels. The parties signed a “joint venture term sheet,” which set out, amongst other things, two scenarios on how parties’ shareholding in the joint venture company was to be determined, depending on the amount of financing procured by the parties for their respective investments in the joint venture company.
The term sheet also provided that it “shall be legally binding” and that a joint venture agreement would be executed upon the fulfillment of several conditions precedent, including the parties’ securing financing and any necessary approvals from their respective boards of directors and/or shareholders.
Subsequently, the respondent terminated the term sheet on the basis that the claimants had not obtained suitable
financing from banks for their portion of the investment. The claimants took the position that the term sheet constituted a legally binding and enforceable joint venture agreement, and they commenced the arbitration proceedings against the respondent to claim for loss and damages arising out of this alleged breach.
Principles of Contract Law Applied
The pivotal issue before the Tribunal was whether, notwithstanding the express provision that the term sheet was legally binding, parties intended for the term sheet to be a binding joint venture agreement.
The Tribunal first considered the principle espoused by the Singapore Court of Appeal in Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design Construction Pte LTd [2008] 3 SLR(R) 1029 that the question of whether parties intended to create legal relations should be determined objectively in light of the evidence, and should not take into account the parties’ subjective intentions. In this regard, the Singapore High Court in Jewellery Industries (S) Pte Ltd v Sintat Rent-a-Car Pte Ltd [1993] 1 SLR(R) 744 and Cendekia Candranegara Tjiang v Yin Kum Choy and others [2002] 2 SLR(R) 283 had found that where the material terms of a purported agreement are to be agreed upon at a later date, it may be a mere agreement to agree and not a binding agreement, unless the mechanism for ascertaining the material terms has been agreed upon.
The Tribunal was also guided by the decisions of the Singapore Courts in Climax Manufacturing Co. Ltd v Colles Paragon Converters (S) Pte Ltd [1998] 3 SLR(R) 540 and The “Rainbow Spring” [2003] 3 SLR(R) 362. The law as stated in these cases is that there may be a binding agreement even though some terms have yet to be agreed upon, as long as agreement has been reached for the necessary terms.
Outcome
The Tribunal found that the term sheet in this case was not a binding joint venture agreement, per se, but was instead a binding agreement to enter into a joint venture agreement provided that the parties were able to procure the required financing for the vessels and the other conditions precedent were met. This was because notwithstanding there were terms yet to be agreed upon, parties had agreed on the scenarios in which the joint venture company would be incorporated.
Ultimately, the Tribunal found that the respondent had not breached the term sheet, as the claimants would not have been able to obtain the necessary financing for its portion of the investment, and the decline in the offshore industry as well as the delays to the delivery of the vessels entitled the respondent to terminate the term sheet.
Conclusion
Whether a term sheet amounts to a binding agreement and, if so, what the agreement is, depends very much on the extent of parties’ agreement. In every case, the court or tribunal will look to the evidence to ascertain, through an objective lens, the parties’ intentions. To this end, an express provision in the term sheet as to its binding nature may not, in and of itself, amount to conclusive evidence that parties intended to be bound. Evidence that the court or tribunal will take into account as pointing toward a concluded agreement includes whether parties had agreed on the material terms of the transaction.
For further information, please contact:
Joan Xue, Duane Morris & Selvam
jxue@selvam.com.sg
