“Heads of Agreement” – binding contract or merely an agreement to agree?

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A document expressed as “subject to contract” will in some circumstances be binding on parties.

The 1954 High Court decision of Masters v Cameron[1] continues to offer guidance when determining whether a document that is stated to be “subject to contract” is in itself a binding contract, or is merely an agreement to agree which is not binding on the parties. The judgment sets out three categories of cases:

  1. where the parties intend to be bound immediately but propose to restate their terms in a form which is more precise or full but is not different in effect;
  2. where the parties intend to be bound immediately but have made performance of one or more terms conditional upon the execution of a formal document; and
  3. where the parties do not intend to be bound unless and until they execute a formal contract.[2]

In Nergl Developments Pty Ltd v Vella [2021] NSWCA 131, the New South Wales Court of Appeal considered whether a heads of agreement concluded following mediation was binding on the parties.

Facts

Nergl Developments and Mrs Vella entered into two agreements to develop adjoining properties. Nergl Developments was to undertake the major parts of the works and lodged caveats over its lots to secure performance of its payment obligations under the agreements. In 2018, Mrs Vella commenced proceedings in the Supreme Court to have the caveats withdrawn.[3]

Following mediation, Mrs Vella and Nergl Developments concluded a heads of agreement which intended to settle all disputes arising from the agreements between the parties and to terminate those agreements. However, the parties did not agree on whether the heads of agreement:

  1. required immediate entry into a formal deed of settlement; or
  2. set out preconditions for subsequent steps to be taken by the parties, upon the successful completion of which they would enter into a formal deed of settlement.[4]

Both Mrs Vella and Nergl Developments sought specific performance of the heads of agreement by the execution of various documents; each could not agree on the particular steps required to give effect to the heads of agreement.

The trial judge adopted the second construction of the heads of agreement.[5] Nergl Developments appealed this outcome to the New South Wales Court of Appeal.

Decision

Basten JA (Meagher JA and Leeming JA agreeing) rejected the appeal and held that the document fell within the second category of cases set out in Masters v Cameron. This meant that Mrs Vella and Nergl Developments were bound by the heads of agreement even though it required them to take further steps.

In reaching this conclusion, his Honour warned against “treating such descriptive language in a judgment as if it were a provision of a statute”.[6] Instead, the appropriate approach is to consider evidence of the objective intention of the parties in the terms of the document itself, as well as their surrounding conduct.

The title “Heads of Agreement” did not, in itself, indicate that the document was merely an agreement to agree. Viewed in light of the document as a whole, it was clear that the parties had paid careful attention to the terms of the existing planning consent and had provided the steps required by to terminate the existing agreement.[7] For these reasons, Basten JA held that the heads of agreement was intended as binding.

Basten JA also discussed the second category of cases in Masters v Cameron. His Honour explained that cases falling within this category need not necessarily contemplate the preparation of one single subsequent document which further elaborated the terms of the heads of agreement. Instead, as was the case here, parties may stipulate a range of further obligations and steps to be taken.[8]

Take home tips

If you are preparing a document such as a settlement agreement, you should consider whether you intend for it to be immediately binding and enforceable. Whether yes or no, this intent should be clear in the language and terms of the document.

If you contemplate the future preparation of a more formal document, it is even more important that it is clear whether the initial document is binding in its present form.

We can assist with the preparation of settlement agreements and enquiries as to whether they will be enforceable.

[1] (1954) 91 CLR 353.

[2] At 360 (Dixon CJ, McTiernan & Kitto JJ).

[3] Nergl Developments Pty Ltd v Vella [2021] NSWCA 131, [2]–[9] (Basten JA).

[4] At [11].

[5] At [11]–[12].

[6] At [22].

[7] At [23]–[29].

[8] At [22], [25].

The Owners – Strata Plan No 85561 v Omaya Holdings Pty Ltd [2021] NSWSC 918

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In a recent decision by the Supreme Court, The Owners – Strata Plan No 85561 v Omaya Holdings Pty Ltd [2021] NSWSC 918 (Omaya Holdings), the Court considered the effect of a settlement deed and a remedial contract agreed between parties to a Supreme Court defect claim.  The settlement deed required the Developer to provide a HBCF insurance policy and stated that if the rectification works were not complete by the due date or there was default under the settlement deed, the Owners Corporation was entitled to enter to judgment against the Builder and Developer.

Omaya Holdings shows the importance of drafting contracts, especially settlement deeds.  It is important for contracts to be clear as to exactly what is required, when it is required, and if there is to be any order of events.  Further, a contract should consider what happens if one of the events cannot be achieved.

The Owners Corporation refused to let the Developer carry out the rectification works until a HBCF Policy was in place.  As the Developer was unable to procure a HBCF policy, the time for carrying out the rectification works lapsed and the Developer was in default under the settlement deed.

As the settlement deed did not specify whether the HBCF policy was to be procured before the rectification works were completed, the Developer was in default of the settlement deed.  As a result, the Court found that judgment could be entered against the Developer for the agreed sum.

The Court considered whether the settlement deed or the remedial contract required the Developer to procure the HBCF policy before it commenced the rectification works.  The remedial contract included the Home Building Act 1999 (NSW) Checklist, which includes a check item requiring the contractor to provide a certificate of insurance before the commencement of works.  This was sufficient for the Court to find that the Developer was required to procure the HBCF policy before carrying out the works.

Somewhat in passing, Counsel for the Developer and the Builder submitted that the inability to obtain the HBCF policy made it impossible for the Developer to perform its obligations under the settlement agreement (otherwise known as frustrating the contract).  The Court considered that it was not the settlement deed, but the remedial contract, which was frustrated and unable to be performed by the Developer.  However, as there was an unqualified default under the settlement deed, the Owners Corporation was entitled to seek the remedy under that deed (being judgment entered against the Developer).

Omaya Holdings is a good example in how parties need to consider the drafting of the contracts they enter.  Contracts need to be clear as to the parties’ rights and obligations.  Thought should be given to what is needed to allow the parties to perform their obligations under the contract, what happens in the event of default, and what contractual mechanisms or provisions are available to the parties to resolve their dispute in a timely and cost-efficient manner. If you or anyone you know needs help with preparing or negotiating contracts, please contact Bradbury Legal.