Deposits, Letters of Intent and agreements to negotiate in good faith: Shaker v. Vistajet

Deposits are commonplace and a feature of all transactions.  However, there can often be uncertainty about who is entitled to the deposit if a deal does not go ahead writes SNR Denton’s Matthew Harvey and Sarah Dyke.

Deposits are commonplace and a feature of all transactions. However, there can often be uncertainty about who is entitled to the deposit if a deal does not go ahead.

In Shaker v. Vistajet [2012] EWHC 1329, Mr Shaker placed a deposit of $3.5million with a guarantor of Vistajet’s obligations under an anticipated aircraft sale, operation and repurchase transaction. The deposit was placed pursuant to the Letter of Intent (LOI) for that transaction.

The LOI purported to oblige the parties to negotiate in good faith and use reasonable endeavours to agree the terms of the transaction and close it by a specific date.  The LOI also said it was not to create binding obligations on the parties, except regarding the deposit arrangements and confidentiality.

The deal fell through and Mr Shaker wanted his deposit back, however, Vistajet wanted to keep it. Vistajet argued that while an obligation to negotiate in good faith and use reasonable endeavours to agree and close a transaction is not enforceable, the court should treat compliance with that obligation as a condition precedent to the return of the deposit.

Broadly, the courts will not enforce agreements to agree, to negotiate in good faith or to use reasonable endeavours to agree.  There are exceptions to this position which are mainly relevant when:

• The negotiation is to take place within a pre-existing contract that is otherwise working well which the courts are prepared to go to some lengths to make work
• The contract and circumstances provide clear and detailed criteria for judging whether the negotiation obligation has been breached.

Outside these circumstances, the courts take the view that they are unable to judge what is reasonable within a negotiation. Banging on the table, appearing to walk away or taking calls from other bidders, these may or may not be productive in any given case, but who is to say they are not legitimate negotiation tactics in free market economies.

So it was by no means certain that Vistajet’s argument that Mr Shaker should lose his deposit based on an implied condition precedent that he negotiate in good faith using reasonable endeavours would appeal to them judge. And it didn’t. The judge said that if there had been such a condition precedent, it would have been unenforceable.
In practice:

• Appoint an independent escrow agent to hold any deposit
• Agree clear and full escrow conditions, who gets the deposit and in what circumstances
• Bear in mind that an agreement to agree may be a useful non-binding framework for a negotiation, but will rarely be enforceable before the courts.