Bound by intention? Novus Aviation Limited v Alubaf Arab International Bank BSC (c)

Introduction A recent decision of the Commercial Court in England serves as a reminder to financial institutions and other transaction parties of the potential consequences of entering into documents which they may not have intended to be legally binding. In Novus Aviation Limited v. Alubaf Arab International Bank BSC(c) [2016] EWHC 1575 (Comm), it was held that a commitment letter was legally binding despite the letter stating that it was "conditional upon satisfactory review and completion of documentation" and that the subsequent withdrawal by the defendant from its terms constituted an anticipatory breach of contract.

This note summarises the facts of the case, the outcome and practical steps which can be taken to lessen the risk of documents which are expressed not to be legally binding on the contrary being found to be so.

Significantly, it should be noted that the case is subject to an application to appeal.

Facts of the Case Novus Aviation Limited (Novus) and Alubaf Arab International Bank BSC (c) (the Bank) entered into negotiations for the Bank to finance in part the purchase by Novus of a number of aircraft to be delivered to Malaysia Airlines Systems Berhad. Following negotiations regarding the terms of the financing, Novus sent a commitment letter and a management agreement to the Bank for signing. The Bank returned the commitment letter to Novus executed by one signatory and later sent Novus the signed management agreement. The parties then each subsequently undertook steps to progress the transaction, including setting up bank accounts, nominating directors, incorporating a special purpose company, KYC and engaging legal counsel to complete the documentation. Upon more detailed review of the transaction structure, the Bank decided that due to international accounting principles its participation in the transaction was not viable and the board of the Bank resolved not to continue the Bank's part in the transaction. Novus then sued for breach of contract claiming that the commitment letter and the management agreement were legally binding and repudiation of these documents by the Bank resulted in damages totalling over US$8 million. One of the questions for the court to consider was whether the commitment letter was intended to be legally binding. Importantly although the Bank had signed and returned the commitment letter, there was no evidence that Novus had signed the commitment letter. Bank's defence The Bank denied the...