The case reinforces the principle that even in the presence of “subject to contract” language, the court will look at the common intention of the parties and the structure of the agreement.
Background
The dispute relates to the enforceability of certain obligations under a memorandum of understanding entered into between the disputing parties on 25 May 2022 ("MOU"). Pursuant to the MOU, the claimants agreed to provide an urgent cash injection of €3 million into RiverRock in connection with it being indebted to a third party. The investment would be converted to equity in RiverRock, or (at the request of the claimants), repaid if within a specified period RiverRock failed to reach agreement regarding the third party debt.
The MOU was marked "subject to contract", and stated that the parties agreed to execute "formal documentation" that reflected the principles of the MOU. However, it also expressly stated that it was "legally binding" and "intended to create contractual obligations on the parties", and the parties also chose to specify, "for the avoidance of doubt", that the "payment obligations set forth under Advance Payments" were legally binding. No further documentation was entered into between the parties.
The €3 million was paid in instalments by two companies associated with two of the three claimants; neither being party to the MOU. RiverRock failed to reach an agreement with the third party, and the claimants subsequently requested repayment of the investment.
RiverRock and Mr Péretié (RiverRock’s CEO) denied liability to repay the investment, raising three arguments:
- the repayment terms were not legally binding, because they were not intended to be so, because they are uncertain, or because they are contingent (having been labelled “subject to contract”);
- any repayment obligations were owed to the companies who transferred the money, not the three individual claimants; and
- the third claimant was not entitled to claim under the MOU because his father signed in his place.
Court decision
The Court held that the MOU’s repayment terms were legally binding. This determination was stated to be "based upon the MOU itself".
The “subject to contract” wording did not prevent legal enforceability of the repayment provisions. Such wording could be understood in the context of "final documentation" being required should the equity investment take place and in this respect only, the MOU contained principles that may not be legally binding. This did not prevent other terms from being legally binding.
The repayment terms were sufficiently certain, self-contained and intelligible to constitute an enforceable obligation, which was a "powerful indicator against it being subject to contract". This was placed "beyond doubt" by the inclusion of the "for the avoidance of doubt" wording within the MOU, which the Court held must also apply to the repayment obligations, dismissing the defendants' argument to the contrary. The Court's conclusion was reinforced by the fact that the MOU replaced a prior agreement that had provided for both payment and repayment on a legally binding basis. The Court found it to be unlikely that the parties intended to replace a binding repayment mechanism with a non‑binding one, and this did not reflect realistic commercial behaviour.
Turning to the further arguments raised by the defendants, the Court held that the claimants were the contracting parties, and had fulfilled their payment obligations despite using associated companies to pay the €3 million, therefore the debt was owed to them. The Court also found that the third claimant was still a party to the MOU as his father had signed as his agent, not in his own capacity, and there was no reason to doubt that he had actual authority to do so.
The Court granted a summary judgment for €3 million plus contractual interest.
Practical takeaways
- Parties should take great care when drafting MOUs. Where the parties do not intend to be legally bound by its terms, it is essential that clear and consistent language is used. To avoid future uncertainty, always expressly state in a MOU which areas are intended to be legally binding, and which are not.
- Parties should not rely on general headings such as "subject to contract", particularly where this is inconsistent with an express intention for certain provisions to be legally binding.
