Preliminary Agreements- Are They Legally Binding?

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Preliminary Agreements- Are They Legally Binding?

It is common that people reach some agreements, either formal or informal, in negotiation of a commercial transaction, mediation or conferences. These agreements may outline the commercial plan or framework of a complex transaction, a settlement for litigation or dispute, or any other arrangements between the parties. These arrangements are called preliminary agreements. However, they are not always binding.

Some argue that I make sure the preliminary agreements are in writing so they are binding. Not necessarily. For instance, preliminary agreement for building and construction, for contract of sale of lands or for a financial agreement pursuant to family law Act, must be in writing. Special rules apply to conveyancing, transaction and family law agreement. We can provide you detailed advice upon collecting all necessary information from you. We dealt with cases in which some of the preliminary agreements, even in writing, are not binding.

Then how can I make sure that the agreement reached between me and the other party are binding? This article provides you some insight of this often litigated topics.

In Masters v Cameron (1954) 91 CLR 353, the High Court set out the principle for determining whether a preliminary agreement is binding. The court stated that an agreement will be binding:

  • Where the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to their performance of those terms, but propose to have the terms restated in a form which will be fuller or more precise but not different in effect;
  • Where the parties have agreed upon all the terms of their bargain and intend no departure from the agreed terms whether express or imply, but nevertheless have made performance of the terms conditional upon the execution of a formal document.

The question becomes what is the intention of the parties? The intention is important because if the parties intend the preliminary agreement to be legally binding, either party can enforce the performance of the agreement. In determining the intention of the parties, the court will look at the objective intention of the parties, which is fact based and are found in all the circumstances, including by drawing inferences from the parties’ words and their conduct in the making of the preliminary agreement (Allen v Carbone (1975) 132 CLR 528 at 532). Also, in ascertaining the intention of the parties, whether from communications or from documents, regard can be had to the commercial circumstance. (Sagacious Procurement Pty Ltd v Symbion Health Ltd (formerly Mayne Group Ltd) [2008] NSWCA 149) The Court also makes it clear that it will not write a contract for parties who failed to reach an agreement. This failure includes any lack of clarity or completeness in the agreement. (Feldman v GNM Australia [2017] NSWCA 107 at [60]-[61]) 

Because the parties’ intention must be clearly and unambiguously stated in the agreement, it is of crucial importance that the solicitor who handles the case has the relevant experience in drafting the agreement. Also, if there is any dispute, the solicitor should have the experience and strategic approach to handle the matter for you. Di Lizio & Associates has been assisting clients with their contract/ agreement drafting, review and litigation for over 30 years. If there are any questions about contract or preliminary agreements, please feel free to contact us at any time. Di Lizio & Associates is a multicultural firm. We speak English, Indonesian, Mandarin and Cantonese. We are here to help.