A Pressing Commitment

A recent High Court decision illustrates the potential perils for parties entering into what might be assumed (or at least appear) to be documents that are not legally binding. In Novus Aviation Limited v. Alubaf Arab International Bank BSC(c) [2016] EWHC 1575 (Comm) it was held that a commitment letter signed by one party but not the other party was an enforceable contract such that the defendant's withdrawal from its terms constituted an anticipatory - and costly - breach of contract. This note summarises the facts of the case, the outcome and practical steps that can be taken to reduce the risk of documents expressed to be not legally binding being found to be so.

Facts

In March 2013, Alubaf Arab International Bank BSC(c) (the "Bank") contacted Novus Aviation Limited ("Novus"). Novus's business consists of arranging finance for the acquisition and subsequent leasing of commercial aircraft. Novus and the Bank entered discussions and the Bank expressed interest in an upcoming transaction for the purchase of new Airbus 330-300 aircraft to be delivered to Malaysia Airlines. The purchase was to be funded by way of equity and debt finance such that the Bank would provide the majority of the equity financing (approximately USD 40,000,000) and Novus would arrange the debt financing (approximately USD 70,000,000) (the "Transaction"). On 5 May 2013 the investment committee of the Bank approved the Bank's entry into the Transaction. Later the same day, Novus sent a draft commitment letter to the Bank. Following discussions between Novus and the Bank, some minor amendments were made to the letter and the Bank sent Novus a scanned copy of the executed commitment letter. Given the structure of the Transaction, further steps were taken, including the incorporation of various special purpose companies, the opening of bank accounts, nomination of directors and the like. By 19 May 2013, law firms had been instructed to produce draft Transaction documentation. By early June, however, the Bank became aware that the structure of the Transaction was likely to prove problematic. Under international accounting rules the accounts of the special purpose companies would be consolidated with the accounts of the Bank such that USD 70,000,000 of debt finance would be a liability of the Bank whilst the acquired aircraft would be regarded as an asset of the Bank. For various other reasons, from the Bank's perspective, this was an insuperable barrier. By 17 June 2013...