Preliminary agreements and the risk of litigation
BY EMMA GRIFFITH AND NATALIE POLOROTOFF – FEB 01, 2021 7:20 AM AEDT
Snapshot
- Preliminary agreements will only be binding in certain circumstances.
- Solicitors need to be clear on whether the parties intend that an informal agreement is to be immediately binding.
- To avoid litigation, ensure the wording of the agreement and subsequent conduct accord with the intention to be bound.
An agreement reached between parties through formal and informal mediations, settlement conferences, or the exchange and acceptance of offers may or may not create a binding and enforceable agreement. The enforceability of preliminary agreements including ‘heads of agreement’, ‘letters of intent’ or ‘memorandums of understanding’ is an ongoing source of litigation where it is unclear if the parties intend to be bound immediately.
Often the parties plan for a more formal and comprehensive document to follow, but intend the preliminary agreement to be binding. The steps a solicitor takes after an informal settlement is reached, and how that preliminary agreement is recorded, will determine whether the risk of subsequent litigation, initiated by a party’s withdrawal from the agreement, can be avoided. Ideally, the parties would execute a formal written agreement at the time of settlement. However, the reality can be very different.
In Masters v Cameron (1954) 91 CLR 353, the High Court considered classes of contract and determined they would only be binding in two sets of circumstances: (i) where the parties have agreed terms and intend to be immediately bound to their performance but propose to have the terms restated in a form which will be fuller or more precise but not different in effect; (ii) where the parties have agreed upon all the terms of the arrangement, but have made performance conditional upon execution of a formal document.
A third class recognised circumstances where the intention of the parties is not to make a concluded bargain unless and until they execute a formal contract. A now accepted fourth class first emerged in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 628, where the parties intend to be bound, but expect to make a formal contract containing additional terms in substitution for the first contract.
Judicial statement of relevant factors
Factors the court will consider when determining if an agreement is binding were recently revisited in Michael Kuehn & Jennifer Kuehn v Masterton Homes (NSW) Pty Ltd t/as Masterton Homes (NSW) Pty Ltd [2020] NSWSC 1049. The Court determined there was no binding compromise as the agreement lacked precision and further terms still had to be agreed. The Court also noted that despite being co-owner of the land and a party to the building contract, Jennifer Kuehn was not a party to the agreement and her agreement was to be achieved by execution of a deed.
In MX v FSS Trustee Corporation as Trustee of the First State Superannuation Scheme [2020] NSWSC 961, it was concluded that an agreement reached by accepting a Calderbank offer lacked certainty and was provisional. Referring to the parties’ in court statement that they had reached an in principle settlement, Robb J observed (at [111]): ‘[I]t is almost universal for experienced lawyers to understand that an in principle settlement is not immediately binding… the very use of those words is a definite indication that the settlement will only become binding when some other outstanding issue is resolved.’
In Thomas v Irwin [2020] ACTSC 47, the Court considered that notwithstanding the brevity of the handwritten document, the description of obligations was sufficiently specific to conclude the intention was for the agreement to be immediately binding.
If the intention is for an informal agreement to be immediately binding, solicitors should ensure:
- the parties’ intention to be bound is clearly stated, unambiguous and the time from when they are bound is set out (Lahodiuk v Pace [2013] NSWSC 512 (at [18]));
- relevant parties are included and properly identified;
- critical terms have been agreed and are incorporated (Australian Broadcasting Corp v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 548; Toyota Motor Corp Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106, 130);
- conduct of the parties, including after the agreement is reached, corresponds with the stated intention (Pavlovic v Universal Music Australia Pty Limited [2015] NSWCA 313 (at [13]; Cook v Taing [2014] VSC 428 (at [95])).
If the parties’ intention is unclear, the court will determine the objective intention by considering the terms of the document and the surrounding circumstances (GR Securities P/L v Baulkham Hills Private Hospital P/L (1986) 40 NSWLR 622, 631, 634).
This article originally appeared on lsj.com.au