Oil & Gas: Enforceability of Letters of Commitment


Transactions in the oil and gas sector regularly use letters of commitment, especially when dealing with the chartering of marine vessels, including drilling units. In Novus Aviation Limited v Alubaf Arab International Bank BSC [2016] EWHC 1575 (Comm) the Commercial Court considered the enforceability of a letter of commitment that was unsigned by one of the parties and sought to make the completion of the transaction “conditional upon satisfactory review and completion of documentation”.


Novus Aviation Limited (“Novus”) is a company that arranges finance for the acquisition and leasing of commercial aircraft. Alubaf Arab International Bank BSC(c) (“Alubaf”) is a bank incorporated in Bahrain.

In and around March 2013, Novus was in discussions to finance the purchasing of a number of aircraft for Malaysia Airlines (“MAS”). As is common with these transactions, Novus would purchase aircraft to be used by MAS and lease them to MAS on a 12 year lease. The rental would repay Novus’ costs and debt. At some point the aircraft would be sold, allowing the investment to be recouped with a profit.

Alubaf expressed an interest in joining this transaction. The structure discussed was that Alubaf would provide the vast majority of the equity funding for the aircraft transaction and Novus would arrange the debt funding element.

In accordance with its usual practice, following discussions, Novus sent Alubaf a letter of commitment for signature. The letter was signed and returned to Novus. However, subsequently, Alubaf’s board of directors decided to not proceed with the transaction for financial reasons. Novus claimed Alubaf had commited a repudiatory breach of the letter of commitment.

Novus was unable to establish that it had counter-signed the agreements. Alubaf argued that there was no agreement as:

  1. The commitment letter was not intended to be legally binding and/or was void for uncertainty;
  2. Although Mr Abdullah (Head of Risk and Compliance at Alubaf) signed the commitment letter, he did not have authority to bind Alubaf to provide funding for the transaction; and
  3. There was, in any event, no binding contract made because it was not counter-signed by Novus and returned to Alubaf before Alubaf withdrew from the transaction.


The Commercial Court decided that the commitment letter was enforceable.

The Intention to create legal relations test

The Commercial Court recounted that the leading case on the test of whether a binding contract is formed is the Supreme Court decision in RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14 where it was decided:

“Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations.”

The Commercial Court applied this test and found that it was plain from the terms of the commitment letter that it was intended to create legally binding relations and any possible doubt about that conclusion is dispelled by the provision headed “Governing Law”, which stated:

“This Commitment Letter Agreement (including the agreement constituted by your acceptance of its terms) and any non-contractual obligations arising out of or in connection with it (including any non-contractual obligations arising out of the negotiation of the Transaction) shall be governed by, and construed in accordance with, English law. The courts of England have non-exclusive jurisdiction to settle any dispute arising out of or in connection with this Commitment Letter Agreement.” (our emphasis added)

Faced with the clear implication of the governing law provision, counsel for Alubaf fell back on an argument that some parts of the commitment letter – in particular the provision dealing with confidentiality – were intended to create legally binding obligations but that other parts – and in particular the provisions headed “Equity” and “Time of the Essence” on which Novus specifically relied – were not.

However, the Commercial Court concluded that it was not realistic to discriminate among the substantive terms of the letter of commitment and to construe only some but not others as intended to be legally binding. If that had been the intention, the Court would have expected to have seen a clear distinction.


Alubaf also argued that the letter of commitment was too uncertain as to be legally binding. In particular, the completion of the transaction contemplated by the letter of commitment was “conditional upon satisfactory review and completion of documentation”. There was no objective standard by which the law could judge whether the documentation was “satisfactory” – therefore the alleged agreement in the letter of commitment must fail for want of certainty.

The Commercial Court reiterated that finding a document lacked sufficient certainty as to create legal relations, where the parties had intended to make a contract, was “one of last resort”.

The Commercial Court did not consider the letter of commitment lacked sufficient certainty. To the contrary, Alubaf’s right to reject documentation as not “satisfactory” was not devoid of objective standard of assessment. It is well established that contractual discretion must be exercised in good faith for the purpose for which it was conferred, and must not be exercised arbitrarily, capriciously or unreasonably.


Alubaf raised a number of arguments at to Mr Abdullah’s lack of authority to execute the letter of commitment. These included, amongst other things, that the bank had specific signing procedures that were shared with Novus, and a single signature was not sufficient to satisfy these procedures.

The Commercial Court rejected this technical argument, on the basis that the procedures did not clearly exclude a single signature. Further, if Mr Abdullah considered that more than one signature were required he would have arranged it.

However, in any event, Novus was entitled to rely upon Mr Abdullah’s apparent authority – which made questions of actual authority “academic”. On the basis of communications between the parties Novus could reasonably assume that Mr Abdullah was duly authorised.


The third ground on which Alubaf contended that it was not bound by the commitment letter was that Novus allegedly failed to sign and return the documents. Alubaf argued that the presence on the signature block of the words “accepted” on its behalf meant that a signature was required.

The Commercial Court recounted that acceptance of an offer can be communicated by conduct. Although Novus had not counter-signed the letter of commitment, upon receiving a signed copy from Alubaf it proceeded to the next steps required to progress the transaction. It had, also, communicated with Alubaf that it had removed the aircraft from the market for the benefit of Alubaf given the commitment letter. Further, Alubaf did not question the absence of a counter-signed letter of commitment. On this basis, it had accepted the letter of commitment by conduct or communication. In the Commercial Court’s view there was nothing in the letter of commitment that prevented acceptance in this way.

It is perhaps of interest that a management agreement also considered by the Commercial Court, which had only been signed by Alubaf was not found to be binding because (i) it was expressed to only come into existence upon execution (ii) therefore (unlike the letter of comfort) this provision would need to have been waived by the parties – it was not simply a matter of acceptance in a different form and (iii) the facts suggested that whilst issues under the letter of commitment were progressed, there was no performance of the management agreement.


It followed from the above, that (i) the letter of commitment was legally binding (ii) Alubaf was bound by the terms of that letter (iii ) the decision of Alubaf’s board not to proceed with the transaction was not due to the documents not being “satisfactory” but financial reasons and (iv) Alubaf therefore committed a repudiatory breach of the letter of commitment.


Letters of commitment are common in the oil and gas industry. The decision of the Commercial Court raises a number of important issues:

1. The absence of a signature to a letter of commitment need not be fatal to its enforceability. Much will depend upon whether the letter expressly requires execution by both parties to come into existence. Absent an express requirement, the conduct of the parties or other communications between them may be sufficient for the agreement to come into existence. However, an express provision requiring “execution of this Agreement” (sometimes found in counter-party provisions) will mean that signature or waiver of the provision requiring execution will be needed.
2. Once an intention to be legally bound is demonstrated, it is difficult to argue that a letter of commitment lacks sufficient certainty to create legal relations.
3. Where a completion of the underlying obligation that is the subject matter of a letter of commitment is conditional upon a party agreeing subsequent documentation to be “satisfactory” to them, that party’s right to reject that documentation as unsatisfactory is circumscribed by a requirement to exercise that discretion in good faith for the purpose for which it was conferred, and such right must not be exercised arbitrarily, capriciously or unreasonably.
4. It follows, that if such words are used in a letter of commitment, in the event of a dispute, disclosure and other evidence will be required to ascertain a party’s decision making process concerning the exercise of its discretion not to proceed with the transaction due to the documentation not being “satisfactory”.
5. If it is found that the refusal to take the transaction forward is for purposes other than those contemplated by the clause, it will be a breach of contract.
6. Careful thought should therefore be given to the decision making processes (and its recording) and the reasons for deciding not to proceed with a transaction where the decision to do so is at the subjective discretion of that party.

Finally, the Commercial Court’s decision reiterated that, unlike other jurisdictions, it remains very difficult to attack an agreement by questioning the authority of the individual signing it. It is therefore important for companies to ensure that individual employees are aware of the consequences of their actions and scope of their authority.