Do You Know If You Have Entered Into An Agreement?

01/07/2019

Legal advice: Do you know if you have entered into an agreement?

Heads of Terms, Memoranda of Understanding, Letters of Intent, Heads of Agreement – the interchangeability of the names used is largely irrelevant. Brands and distributors and principals and agents sometimes agree Heads of Terms to formalise an intention to begin negotiation of a formal agreement and sometimes both parties proceed acting on those terms.

However, uncertainty can arise as to the terms that govern the relationship between the parties when the relationship breaks down before a formal agreement is put in place.

This issue was highlighted in a recent High Court judgment.

Heads of Terms had been drawn up to move the relationship of the two parties forward and away from an original Partnering Agreement. At trial, the agent sought to rely on these Heads of Terms as a new contract which governed the relationship with the principal. In contrast the principal argued that the Heads of Terms had no legal effect and that the relationship was still governed by the Partnering Agreement.

For many, the facts will not come as a surprise. The parties had entered into a Partnering Agreement which commenced in May 2015. Following the success of this agreement, the parties sought to create a new contract to carry the relationship forward.

In order to commence this process the principal sent the agent draft Heads of Terms. They set out a general outline of what would be included in the formal agreement. The Heads of Terms were then negotiated between the two parties. During this time both parties began to rely on the provisions contained in the Heads of Terms. For example, the agent started to invoice the principal in line with the new pricing structure which was then paid by the principal. The Heads of Terms were signed by both parties on the 29 June 2016 after which there was a celebratory party!

Importantly in this case the Heads of Terms set out:

1. that a formal contract would be agreed within 90 days of commencement of the Heads of Terms;

2. a commencement date. But 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. that the contract would be for a fixed term of three years with six monthly reviews;

4. that there would be standard termination rights for material breach by the agent or on remediable breach if the breach was not remedied in 10 days. Moreover, the principal was also able to terminate the agreement if after the six monthly reviews it notified the agent of a breach and that breach was not remedied in 14 days.

5. that the agent would exclusively provide its services to the principal for a set number of postcodes for which the agent would be remunerated on a weekly basis;

6. detailed performance targets which the agent would be required to meet; and

7. compliance standards that any agents working for the agent would need to meet.

The judge decided that the Heads of Terms took effect as a valid contract when signed on the 29 June 2016.

Also, that the Heads of Terms were relied on by the parties as the new terms governing their relationship. The judge went on to decide that whilst in the Heads of Terms not all the terms of a contract had been agreed, the matters that had been negotiated were capable of constituting a contract.

Finally the judge decided that 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.

The difficulties in which the parties found themselves highlights that principals and agents and brands and distributors will invariably be in a better position relying on the certainty of an agreement rather than on Heads of Terms.

Steve Sidkin