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

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 In 2018, Mrs Vella commenced proceedings in the Supreme Court to have the caveats withdrawn.[3]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].