Heads of Agreement
CRS v McLaren Automotive [2018]
Heads of Agreement (under whatever title or guise) are a commonly used mechanism to enable work to commence whilst more formal and comprehensive legal documentation catches up. However, there are dangers to such an approach as CRS and McLaren discovered to their cost
Facts:
CRS and the very well-known sports car manufacturer became involved in a joint project to develop a new sports car. The parties exchanged e-mails which emphasised the urgency ‘as the project has started’. “We can have an email confirming basic terms and continue with the project straight away. Lawyers can then work on a contract to cover all elements [of] the terms of the project."
Heads of Agreement were signed. Somewhat unusually the ‘Heads’ actually comprised just 25 Powerpoint slides. No express statement was contained in the Heads about their binding nature (or otherwise). It was said that the "Heads of Agreement covers all known project requirements at this point in time, the aim is for both parties to sign by the end of January to enable the development and engineering programme to start. Following the signing of the Heads a formal contract will be prepared for signature, the aim will be to have this complete by the end of March 2016."
Two draft contracts were prepared and discussed. One was explicitly marked "Subject to Contract/Contract Denied“ although it appears that the status of each was thought to be same. Negotiations on the drafts continued for at least a year. However, work on the project continued broadly as per the Heads and McLaren made some significant payments to CRS.
At various points the parties expressly acknowledged in emails that a contract was not yet in place (query whether that was wise?) and attempted to exert pressure to conclude negotiations.
The relationship broke down with McLaren not willing to continue the project. CRS argued that a binding contract was in force which entitled them to elements of exclusivity for an additional number of years into the future.
Decision:
The Court distinguished between:-
- An agreement in principle only; and
- A complete and therefore binding agreement despite a lack of certain detail.
In this case it was held that the Heads were not a legally binding contract; rather they were just an outline agreement in principle only. Amongst the reasons given for this finding were:-
- The parties were sophisticated;
- The language used in the Heads was casual, vague and “non-legal”;
- The Heads did not address matters of considerable commercial significance, for example, the ownership and use of tooling, limitations on liability and ownership of any intellectual property rights in the resulting designs;
- The correspondence suggested that the ‘agreement’ was not understood or intended to be legally binding.
On the question of whether a binding contract was to be inferred from the conduct of the parties after the Heads had been signed, the Court still held that no binding contract ever came into force. According to the Court the parties at no time reached agreement on a formal contract and at no time waived the requirement that such a written contract be entered. CRS were however entitled to remuneration for work done but this was to be limited to payments due in respect of formal purchase orders actually issued by McLaren and otherwise for a reasonable sum on a so called quantum meruit (‘the amount deserved’) basis.
Points to Note:
Our sense here is that McLaren were quite fortunate and CRS probably unlucky as, on the facts, the case could almost certainly have gone the other way. The final decision clearly favoured McLaren given their desire to pull the plug on the venture but the boot could quite easily have been on the other foot. Had they have wanted to claim ownership of important IPRs or enforce other important contractual provisions this would not have been possible given the lack of a binding written contract. From the CRS perspective whilst they eventually got paid what the Court regarded as reasonable, they clearly lost out on a lucrative future revenue stream and had no period of exclusivity. If one also compares the position of CRS to that of a supplier, with the lack of a binding contract they would presumably not have the benefit of any exclusions from or limitations upon liability which could be of concern.
Ultimately, whether a Heads of Agreement forms a binding contract or not (even on an interim basis) should be made crystal clear in the document itself as should the right of either party to terminate the arrangement. By their nature, Heads are much less detailed than a formal contract and this lack of detail can lead to uncertainty. If certainty is important it is vital that progress is made on concluding discussions on the envisaged formal documentation with the minimum of delay. Finally, one should always assume that negotiations may never progress beyond the Heads and therefore one has to assess whether the Heads themselves provide an adequate degree of protection and certainty should all else fail.