Heads of Agreement (HoA) and Memorandums of Understanding are just some of the terms used to describe important pre-contractual agreements that serve as a blueprint for many commercial ventures. They help guide negotiations while simultaneously documenting the intention of the parties to “commit” before a formal agreement has been drafted. However, many people share the same concern – are they legally binding?
Well, like many things involving the law, it depends. While Heads of Agreement are not necessarily considered “contracts” themselves, the way that they are drafted and the terms that they encompass may sometimes be construed by the courts as an intention to bind where one party is seeking enforceability of the document.
What is it?
A Heads of Agreement is a document that outlines the essential terms agreed upon by parties during the early stages of a transaction. It serves as a roadmap for a more detailed, formal contract to follow.
While many people do not intend for them to be binding, certain terms within them can be legally enforceable against the parties. For example, confidentiality clauses. These clauses have been drafted with the intent that the parties are bound by confidentiality, even within a HoA. More broadly, the manner in which a HoA itself is drafted may be interpreted by the courts that the parties intended to be bound and any terms within are enforceable.
Avoiding ambiguity
Like many legal documents, a HoA, Memorandum of Understanding or any other document which sets out the agreement between parties in a preliminarily manner, must be carefully drafted so as to avoid ambiguity and reinforce the agreement while simultaneously ensuring that parties are not yet bound by a contract that does not exist.
In Masters v Cameron [1954] HCA 72, the High Court of Australia found that parties may have reached a concluded bargain and intend to be bound immediately regardless of whether or not a formal document comes into existence. This was on the basis that the parties had drafted and agreed on a “subject to contract” agreement for the sale and purchase of land. Here, the court identified three scenarios: “Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three cases:
- it may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect; or
- it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document; or
- the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.” [at page 360].
With the court holding that the first two scenarios are immediately binding, it is prudent to ensure the intention of the parties has been explicitly stated.
To ensure that there is no future dispute about the terms of the agreement or enforceability of the document, ensure a HoA is drafted precisely and specifically. If you do not intend for something to be binding, stipulate it. Set out the terms. Set out the intention. Focus on clear, precise language and on the commercial terms rather than the minute details that can be addressed in a formal contract. Most importantly, do not include any terms in the HoA that you would not want to be bound to. After all, they do form the basis of any final contract.
From here…
When utilised correctly, a HoA can be a useful tool in outlining the commercial terms and parties to an agreement. They also serve as a time-and-money saving mechanism. However, when drafted ambiguously, they can create unintentional legal relations and a myriad of subsequent future legal disputes.
For additional information and assistance entering into one of these Agreements, contact our Property and Commercial team.