Tuesday, June 8, 2010

Contracts - Preliminary Agreements

Agreements Preliminary to Formal Contract

  • Preliminary agreement is one which anticipates execution of further formal contract.
  • Example I
    • Possession shall be given and taken on settlement upon signing and execution of a formal contract of sale within 28 days of acceptance of this offer. (cl 3) Godecke v Kirwan (See Uncertainty)
      • This it a typical example. Parties have largely agreed on the terms but still want to express agreement in a more formal fashion.

  • Example II
    • This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my solicitors on the above terms and conditions. Masters v Cameron
      • This was a contract for the sale and purchase for a farm and the vendor wanted to make sure that her solicitors had a chance to look over the contract first
      • Subject to: specific term with a specific legal outcome.

  • Example III
    • Jaylor hereby offers Helmos the opportunity to purchase its 50% interest in Kingsley’s Crab House for $1,100,000 by notice in writing no later than 15 April 2002…Upon receipt of the exercise of offer, contracts for the purchase of Jaylor’s 50% interest shall be sent to your office no later than five days from the exercise date.” Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235
    • Facts
    • Someone wanted to buy a half share in a restaurant business
    • But there were in fact two related businesses
    • The person who wanted to acquire one restaurant made it clear that he only wanted to do so as long as he could also acquire an interest in the other one.
    • So a letter on the above terms was sent.
      • i.e. once you’ve accepted the above terms we will send you the real contract of sale

Main Purpose

  • Commitment pending formal agreement
  • The parties may have finalised the main details of the contract and they definitely want to make a commitment to one another but at the same time they may want their solicitors to look over it and express the contract in a fuller or more complex form without necessarily changing the tenor of the agreement
  • They may also be afraid they have left something out so they provide for a solicitor to insert terms (Godecke v Kirwan)
    • The vendor wanted their solicitor to look over the agreement and if necessary add additional reasonable terms
    • This is not an unenforceable agreement to agree because it is always open to the parties to agree to leave the settling of terms to an independent third party
  • Also want to have some commitment abut leave some options open
  • Also used for pre-trial settlements, drawn up at court and finalised at a later stage.
    • You have to make it clear that you intend that agreement to be immediately binding otherwise there is no settlement of the dispute

Legal Issue I

  • Do parties intend preliminary agreement to be:
    • immediately binding pending execution of later agreement?
    • [Intention to create legal relations/condition of formation?]
  • SO, when do the parties intend to be legally bound?
  • A straightforward question of intention to create legal relations.
  • In the commercial environment there is a strong disposition to find that parties do intend any arrangement to be immediately binding.
  • The answer to this question is critical because what happens when a party to the preliminary agreement later refuses to sign the formal contract?
  • If there’s no preliminary agreement that’s binding, then either party can walk away. They can’t be forced to fulfil those obligations and there’s no duty of cooperation to sign the later agreement
  • BUT, if the preliminary agreement is found to be binding then it will govern the party’s relationship until such time as the formal contract is executed
  • At the stage that the formal contract is executed the preliminary agreement is a force discharged by consent

Legal Issue 2

  • What factors/evidence can court take into account to ascertain parties’ intentions? (to create legal relations...)
    • [Eg, language of agreement, factual matrix of contract]
  • Subject matter of contract
  • Terms of contract
  • How much detail is in the agreement
  • ALSO, the factual matrix
  • Only one contentious issue which is whether the court can take into account the subjective intentions

Legal Issue 3

  • If preliminary agreement is immediately binding, are some or all of parties’ obligations postponed pending execution of formal contract?
    • [Is execution of formal contract a contingent condition of performance?]
  • So the performance of some of our obligations are subject to the execution of formal contract
  • So in this situation where it is clear that the parties do intend to be bound but want to postpone some of their obligations until a more formal contract is signed then you arte dealing with a contingent condition of performance.

Three Categories of Preliminary Agreements

  • See Masters v Cameron (1954) 91 CLR 353.
    • HCA accepted that preliminary agreements fall into one of three categories
  • Categories 1 and 2 = binding agreement
  • Category 3 ≠ binding agreement (no contract at all)

Category 3

  • Parties do not intend to be bound unless and until formal contract is executed.
  • The best example of this is a preliminary agreement that contains the words ‘subject to contract’
  • This means that the parties did not intend to create legal relations.
    • Masters v Cameron; BP Seppelt; Allen v Carbone
  • Execution of formal contract is a condition of formation
  • No obligation to perform at all
  • No duty of co-operation, because no binding agreement
  • Only way you could enforce a contract of this kind would be to mount some kind of estoppel argument
  • BUT even where the preliminary agreement does not use the particular phrase, there may be other factors which militate against intention so the preliminary agreement will not be enforceable
    • So cases in this area will focus on the actual terms, the language used (did it bespeak the language of intention?), was it vague or complex

Category 1

  • Parties intend to be immediately bound, but want to express their agreement in fuller form but not different in effect. Baulkham Hills v GR Securities
    • Obligations under preliminary contract not deferred so can be enforced immediately.
    • Execution of formal contract thus not contingent condition of performance
    • Still duty to co-operate in executing formal contract.
  • SO no postponement so obligations created immediately so not contingent condition of performance
  • These are the most common agreements but most of the cases do not fall into this category.
  • SO
  • Immediately biding agreement
  • Obligations have to be performed immediately
  • And even though the execution of the agreement is not a contingent condition of performance, there is a duty of cooperation to execute that formal contract

Category 2

  • Parties intend to be bound immediately but make performance of one or more terms (e.g.-payment of balance of purchase price) dependent upon execution of formal contract. Godecke
    • Execution of formal contract is contingent condition of performance [as per Perri]
    • Duty to co-operate in execution of formal contract
    • Specific performance if party refuses to execute
  • To distinguish between cat. 1 & 2 look at the terms of the contract and distinguish whether one of the parties obligations are contingent upon the execution of the formal contract.
  • So the terms will distinguish whether it is a category 2 or not.
  • In Godecke, the obligation to settle was linked to the execution of a more formal contract within 28 days which made it clear that if that preliminary agreement was immediately binding, then the parties did not intend for the balance to be paid until the execution of the formal contract.
    • There is a duty to cooperate with signing the formal contract.
  • If one party refuses…
  • You can go to the court and ask for an order for specific performance of that obligation
    • Specific performance is an equitable remedy and a court will never order it for a conditional agreement. (Godecke, Booker Industries)
  • So it orders the partial specific performance i.e. the execution of the formal agreement, then if they are still recalcitrant it orders the specific performance of the terms.

Category 4

  • Parties intend to be bound “immediately and exclusively” but expect to make further contract in substitution for first containing additional terms by consent.
  • This is just like category 1 except the parties expect to expand on the terms of the original contract by consent.
  • So they may have reached agreement on all essential terms but they expect to expand and clarify the terms of the original arrangement.
  • BUT if they cannot reach agreement on those extra terms then they will be bound by the terms in the preliminary agreement.
  • Before a preliminary agreement can be binding only if they contain the essential terms.
    • “The above forms a heads of agreement which constitutes an agreement in itself intended to be replaced by a fuller agreement not different in substance or form.” Anaconda
  • Baulkham Hills Private Hospital v GR Securities
  • Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd
  • Helmos Enterprises Pty Ltd v Jaylor Pty Ltd
  • Highlight a pre-disposition to find that agreements will be binding.

Preliminary Agreements and Uncertainty

  • Preliminary agreements not “agreements to agree” just because propose further agreement
    • They’re not agreeing to agree, they are agreeing to recast their agreement in a more formal fashion.
  • Where preliminary agreement intended to be immediately binding, later formal contract will reflect in fuller or more formal form terms already agreed upon (GR Securities)
  • And parties can always add additional terms to formal contract by consent (GR Securities)
    • Not agreements to agree because the parties are not agreeing to agree, there is simply an expectation that they will continue to negotiate and by consent add any terms they have agreed upon.

In addition (and by way of revision)

  • Parties can also agree in preliminary agreement that third party (eg-solicitor) can settle terms of formal contract Godecke
  • Parties themselves can also agree to add further terms by agreement in future provided preliminary agreement contains dispute resolution clause. Booker Industries

Classification of Preliminary Agreement

  • Depends on intentions of parties ascertained from terms of contract in their internal context but also read in light of surrounding circumstances – determined objectively
    • GR Securities; Air Great Lakes

Relevant Criteria to figuring out whether Preliminary Agreement is binding.

  • Language
  • Detail of terms
  • Nature and magnitude of transaction
  • Surrounding circumstances

Language and Detail of Terms

  • Words which bespeak agreement or intention or negative intention
    • ‘Offer; Accept; agrees to purchase; this shall be a legally binding contract until such time as a formal contract is drawn up (GR Securities);
    • Subject to contract; language with an air of futurity such as ‘the proposed agreement’ or ‘the purchaser intends to acquire’ (Air Great Lakes)
    • BUT language is not always determinative of the issue of intention, particularly if there is evidence that the parties wanted to get signed up immediately.
    • Godecke
    • GR Securities [“legally binding acceptance”]
    • Masters v Cameron [“subject to contract”]
    • Air Great Lakes
  • Detail in Preliminary Agreement [as in Godecke] or lack thereof
  • The more detailed the terms the easier it is to draw the inference that the parties intended to be immediately bound and vice-versa

Nature and Magnitude of Transaction

  • Where it is a large complex commercial matter, may support inference of no intention (BP Seppelt)
  • A dispute over whether correspondence between the parties relating to the acquisition of a very large city building was enforceable – clearly an offer and acceptance but issue whether it was intended to be immediately binding
  • Court held it was unlikely that the parties would commit themselves to such a significant sale without a formal contract
    • although inference can be displaced by clear words GR Securities (1986) 40 NSWLR 631, 634
    • Facts: There was preliminary agreement for the sale and purchase of a hospital
    • This was found to be immediately binding because the parties had expressly agreed that the PA would be immediately binding pending the execution of a more formal contract.
  • But express words of intention will not save otherwise uncertain agreement
    • Coal Cliff; Air Great Lakes

Circumstances surrounding Execution of Preliminary Agreement

  • The old-fashioned approach is to infer intention to create legal relations from the terms of the contract itself.
  • BUT now Objective factual matrix Air Great Lakes (Also Toll v Alphapharm) NSW CA, evidence of surrounding circumstances can be used to support inferences that the parties did in fact intend to be immediately bound.
  • Air Great Lakes Involved preliminary agreement for the sale and purchase of a small aircraft company
  • It was poorly worded and there was some discussion over whether lawyers should be involved but it was Christmas and one of the parties was really keen to conclude the negotiations
  • HELD: that the evidence that he was pressing for completion and keen to conclude was used to show intention to be bound
    • pressing for completion Air Great Lakes
    • Appointment of lawyers BP Seppelt – If happy to proceed without lawyers probably militates against not a binding agreement.
    • But payment of deposit not determinative
  • Status of admissibility of mutual subjective intention unclear Air Great Lakes
    • NSW CA consider that this is a question for the HC
  • But probably does not really matter given broad scope of factual matrix

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