Heads of Terms as a binding contract
Green Deal Marketing v Economy Energy Trading (High Court) [2018]
Heads of Terms are routinely used as a basis for negotiating a substantive contract document but as this case illustrates, they can easily become the contract itself if the parties act on them and do not ultimately conclude a more formal document.
Facts:
GDM and EE had entered into a Partnering Agreement which commenced in May 2015. Following the success of this Agreement EE and GDM wanted to establish a new contract. EE sent GDM draft Heads of Terms in October 2015. They set out a general outline of what would be included in the formal agreement. The Heads of Terms were then the subject of negotiations between the two parties. Both parties began to give effect to the provisions contained in the Heads of Terms. GDM started to invoice EE in line with the new pricing structure which was then paid by EE. The Heads of Terms, a 4 page document, were eventually signed by both parties on the 29 June 2016.
The Heads of Terms:
1. set out that a formal contract would be agreed within 90 days of commencement of the Heads of Terms;
2. provided for a commencement date. In the final version this was left blank. The judge considered this was in order for the parties to insert a date on the day the Heads of Terms were signed;
3. stated that the contract would be for a fixed term of 3 years with 6 monthly reviews;
4. provided that there would be standard termination rights for material breach by GDM or on remediable breach if the breach was not remedied in 10 days. Moreover, EE was also able to terminate the agreement if after the 6 monthly reviews it notified GDM of a breach and that breach was not remedied in 14 days.
5. stated that GDM would exclusively provide its services to EE for a set number of postcodes for which GDM would be remunerated on a weekly basis;
6. included detailed performance targets which GDM would be required to meet; and
7. established compliance standards that any agents working for GDM would need to meet.
Decision:
The judge decided that the Heads of Terms took effect as a valid contract when signed on the 29 June 2016 and were relied on by the parties as the new terms governing their relationship. The formality of the document showed that it was more than merely a guide for the lawyers to use to draw up a formal agreement. Much of the document reads as a ‘present agreement’. Indeed, the parties did not instruct lawyers to draw up the final agreement within the timeframe (or at all), suggesting that the parties did not feel the need to seek a further agreement as what had already been agreed was sufficient for their purposes.
The judge decided that whilst not all the terms of a contract had been agreed, the matters that had been negotiated were capable of constituting a contract. The fact that the Heads made it clear that certain matters remained to be agreed does not mean that the matters which had been agreed were not to have immediate contractual effect. Sufficient matters had been agreed to be capable of constituting a contract. In particular, there was agreement as to the term of the contract, the services to be provided and the remuneration for those services.
Both parties had implemented the Heads of Terms from the date that they were signed. The parties’ actions showed they were working under the belief and understanding that from that point their relationship was governed by the Heads of Terms. Indeed the judge noted that GDM in correspondence with EE had relied on the on the termination provisions in the Heads of Terms and this reliance was not corrected by EE.
Questions also arose about the rights of a party to terminate a contract for breach. EE had argued that it had two distinct rights to terminate the Heads of Terms for breach of the KPIs: first, an express contractual right ("If the Supplier fails to achieve the KPIs and does not remedy such failure within a reasonable period of time, the Customer shall be entitled to terminate the agreement."); second, a right at common law to terminate for breach of condition.
In connection with the express contractual right, the court had to consider whether EE was obliged to serve notice on GDM notifying it of its failure to achieve the KPIs and requiring it to remedy that failure within a reasonable time. Despite the fact that the termination provision makes no mention of a requirement for notice and that there is no doubt that GDM at all times knew how it was performing in respect of the KPIs, the court decided that notification was required.
So far as common law rights to terminate were concerned, the court quoted the long established test for determining whether a breach is sufficiently serious “[has the party seeking to terminate] been deprived of substantially the whole of the benefit of the contract. The expression 'going to the root of the contract' conveys the same point: the failure must be compared with the whole of the consideration of the contract and not just a part of it”. Ultimately, the court decided that the various breaches complained of were not sufficiently serious to justify termination. The court also decided that EE would have been regarded as having affirmed the contract because of the fact that poor performance had been known about for some considerable time, had not significantly changed and EE had signalled that it was content to continue with the contract.
EE therefore wrongly purported to terminate the Agreement. GDM lawfully terminated the contract by its acceptance of EE's own repudiatory breach consisting of a renunciation of the contract. A renunciation of a contract occurs when one party by words or conduct demonstrates an intention not to perform, or expressly declares that he is or will be unable to perform, his obligations under the contract in some essential respect. The renunciation amounted to a repudiatory breach on the part of EE, that is, one that entitled GDM to terminate the contract. The text message sent to GDM was unambiguous and unequivocal that EE was purporting to terminate the contract. If EE had been entitled to terminate the contract on account of repudiatory breach by GDM, the text message would have been sufficient to effect termination. It is immaterial that a party gives no reason or a poor reason for terminating a contract, if indeed the facts were such that a good reason could have been relied on. However, as EE was not entitled to elect to terminate the contract, the text message constituted a very clear confirmation of renunciation of the contract. Therefore GDM had a choice whether to affirm or to terminate the contract. GDM validly terminated the contract on 27 February 2017 and it follows that, in principle, GDM was entitled to damages for breach of contract.
Points to Note:
- The test for whether a contract has been formed is an objective one. The outward appearance of a contract whether by offer and acceptance or by a signature on a document may be sufficient.
- Heads of Terms should specify clearly if there is no intention to create legal relations but even that may not be sufficient to prevent a contract coming into existence if the parties appear to act in accordance with the Heads;
- Having a commencement date in the Heads of Terms allows for the inference that the new contractual relationship begins the day the Heads of Terms are signed.
- If performance is to commence based on a Heads of Terms document, an assessment should be carried out to evaluate what risks this presents if nothing more is agreed. Does the Heads of Terms by itself provide adequate protection and, particularly make clear what rights either party has to terminate the relationship.
- Be extremely careful when purporting to terminate an agreement. As this case demonstrates, if you get it wrong and your purport to terminate where you do not have sufficient justification, your contracting counterparty may be able to terminate on you and claim damages for your breach and/ or escape liabilities they would otherwise have had for ongoing breaches.