Memorandum of Understanding Held to Be a Binding Contract Despite Absence of Formal Consortium Agreement

On 27 June 2024, His Honour Judge Hodge KC held that a signed memorandum of understanding, read with an offer letter and a letter of support, formed a binding contract although the contemplated consortium agreement was never signed. The decision did not change the law. It applied settled principles of contract formation to the facts. At paragraph 112, the judge observed that “there is little between counsel on the applicable law apart from differences of emphasis”.

The Facts

The facts began with a tender. The claimant, Sundorne Products (Llanidloes) Ltd, trades as Potters Waste Management. The dispute concerned refuse derived fuel from Anglesey, processed at Bootle and shipped to Gothenburg (at paragraph 2). On 7 September 2016, Geminor UK Ltd and Potters signed a memorandum of understanding (at paragraph 9). By clause 10.1, they undertook to negotiate “with the aim of entering into a consortium agreement” (at paragraph 16). On 9 September 2016, Geminor signed a letter of support (at paragraph 19).

The tender then went in. On 12 September 2016, Potters submitted its bid (at paragraph 123). In October 2016, the Isle of Anglesey County Council accepted it (at paragraph 22). At paragraph 24, the judge recorded that “no further contract was signed between Potters and Geminor”. After 28 September 2017, Geminor refused to collect further consignments from Bootle (at paragraph 153).

The Proceedings

That refusal led to litigation. On 27 January 2023, Potters issued its claim in the Business and Property Courts in Manchester (at paragraph 1). On 27 June 2024, after a trial of seven court days, the judge delivered an extemporary judgment (at paragraph 1).

The trial turned on four issues, set out at paragraph 40. They were whether Geminor had contracted to collect baled waste, what the terms were, whether Potters had committed a repudiatory breach, and the measure of damages.

The Judgment

On each issue, the judge found for Potters. At paragraph 122, His Honour Judge Hodge KC said: “I am entirely satisfied that the parties concluded a binding contractual agreement”. The contract arose from the memorandum of understanding, the offer letter and the letter of support. It required Geminor to collect 12,000 tonnes per annum at £70 per tonne, subject to currency fluctuations (at paragraph 122). Potters accepted by submitting its bid and communicating that to Geminor (at paragraph 126).

The decisive reasoning concerned the memorandum itself. At paragraph 131, His Honour Judge Hodge KC held that it was “not just a stepping stone on the way to a future contract” and that “it actually constituted a contract in and of itself”. At paragraph 127, the judge rejected Geminor’s “subject to contract” argument. It was not pleaded, and any such qualification “was effectively expunged by the entry into the memorandum of understanding”. At paragraph 133, the judge found “sufficient certainty as to the terms of the supply contract”, with further detail supplied by implied terms.

That reasoning was rooted in the evidence. At paragraph 132, the judge found the contract consistent with Geminor’s conduct. On 20 December 2016, Geminor’s Mr Maiden sent an email implicitly recognising an obligation to accept up to 12,000 tonnes at the original price (at paragraph 132).

The legal principle follows from those findings. A signed memorandum of understanding can itself be a binding contract, even though it looks forward to a fuller agreement that is never made. The question is answered objectively, from the documents and the conduct of the parties (at paragraph 113).

On repudiation, the outcome was equally clear. At paragraph 146, the judge said: “I find that there is no question of any repudiatory breach of contract.” Geminor’s refusal to collect was itself a repudiatory breach (at paragraph 156). At paragraph 169, the judge held that “Potters is entitled to recover damages on its primary, and hybrid, basis in the total sum of £801,041.20.” Interest was reserved (at paragraph 170).

Key Takeaways

The legal points can be shortly stated. A contemplated formal agreement does not of itself show that the parties lacked an intention to be bound. In this case it was common ground that the parties intended to create legal relations (at paragraph 115). A “subject to contract” argument which is not pleaded will not assist a defendant at trial (at paragraph 127). Gaps in the terms may be filled by implication where the essential terms are certain (at paragraph 133). The decision is a first instance, extemporary judgment which applies the objective test of formation (at paragraph 113). The unsigned consortium agreement did not displace a contract already made.

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