Binding terms: Novus Aviation Limited v Alubaf Arab International Bank BSC(c) [2016] EWHC 1575 (Comm)

Does a letter signed by one party but not the other constitute an enforceable contract?

The facts

Alubaf issued a commitment letter in an aircraft finance transaction, which required it to provide the agreed amount of funding, unless it decided in good faith that the documentation prepared for the transaction was not satisfactory or the projected return fell below 9.5%. Alubaf decided not to proceed because of balance sheet considerations. Novus claimed that this was a repudiatory breach of contract and that Alubaf was required to pay damages.

Alubaf argued that there was no binding agreement as: (1) Novus had not countersigned the letter; and (2) the letter was not intended to be legally binding. The letter had a space for Novus to countersign, but did not include a clause stating that the letter would only become contractually binding when both parties signed.

Alubaf also argued that the letter was void for uncertainty because the funding obligation was conditional upon satisfactory review and completion of the detailed documentation.

The decision

 The Court held that the commitment letter created a binding contract to provide finance. Novus was found to have accepted the offer by conduct by virtue of having instructed a law firm to prepare the documents and establish SPVs. Novus’ acceptance had also been communicated to Alubaf by email.

The obligation to provide funding was not void for uncertainty; as the wording simply created a contractual discretion. This discretion was subject to an implied term that it should be exercised in good faith for the purpose for which it was conferred and not arbitrarily, capriciously or irrationally.

Why is this important?

This is another example of a binding agreement being reached on the provision of a letter, instead of (as Alubaf seems to have assumed) on agreement of the detailed legal documentation. If a party wishes to withdraw from the transaction it must do so in accordance with the terms of the letter.

Any practical tips?

If a letter is not intended to be legally binding, it should expressly state this/be marked "subject to contract". If the letter is intended to be binding but subject to conditions, clearly define the conditions and the consequences of the conditions not being satisfied within the relevant timeframes.