New Zealand: Heads of Agreement - Tread Carefully...

NZ Corporate Update
Last Updated: 19 April 2010
Article by Mark Williamson and Janet Abboud
'Heads of agreements (HoA)' or other similar 'pre-contract' documents are commonly signed in circumstances where parties wish to record that they have reached some form of agreement but do not wish to enter into a detailed contract. However the legal status and enforceability of such agreements needs to be carefully considered.

Is an HoA intended to be legally binding or simply a non-binding roadmap to reach agreement? If a binding HoA is contemplated, what is the nature of the parties' obligations? Is the HoA the substantive contract or merely an agreement to negotiate? These types of questions were recently considered by the Hamilton High Court in Ecowize Ltd v AFFCO New Zealand Ltd.

What was the case about?

Ecowize was engaged by AFFCO to clean a new meat processing plant operated by AFFCO near Hamilton, beginning at the start of 2006. The engagement required Ecowize to incur significant expenditure installing an open plant cleaning system (OPCS) to facilitate cleaning during construction. However, there was a need to defer agreement on the final pricing for cleaning system until the new plant was operational to allow the accurate assessment of the extent of work involved.

To deal with these matters, the parties entered into the HoA on or around October 2005. Among other things, the HoA stated that 'It is hereby agreed that the cleaning contract will be awarded to Ecowize Limited'.

It also provided that the relevant contract would have 'a contract period with a 48 month period from the commencement date' (which was left blank). The level of pricing was agreed in the HoA but with the proviso that 'Ecowize will review the current charge rates once the new plant is operational and a new charge rate will be submitted'. The HoA was silient on whether the new charge required the agreement of AFFCO or what was to occur if no agreement could be reached.

The HoA stated that 'the heads of agreement will remain binding and enforce [sic] until such time that the Service Agreement is signed by both parties'. Again, the HoA was silent on what would occur if a service agreement could not be agreed.

After the new plant became operational in January 2006, Ecowize submitted revised charges to AFFCO. Various discussions and revisions took place with the ultimate result that no agreement was reached in respect of the revised charges and AFFCO took over the cleaning itself from 3 July 2006. While a draft service agreement was prepared, it was never agreed to by the parties.

Ecowize alleged that the HoA was repudiated by AFFCO, entitling Ecowize to damages upon cancellation of the contract. AFFCO disputed this and counterclaimed over what it considered to be over-charging by Ecowize.

What did the High Court say ?

The main issues for the Court was whether a binding agreement between AFFCO and Ecowize existed and, if so, what were its terms.

In answering this question, the Court turned to the leading case of Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433, where the Court of Appeal stated:

A contract is formed where there is an intention to be immediately bound (at the point when the bargain is said to have been agreed) and whether there was an agreement, express or implied which was legally essential to the formation of such a bargain, and was regarded by the parties as essential to the bargain. If the agreement is incomplete, whether or not it is binding will depend on whether the court is able to fill the gap in the express terms. (Emphasis added)

AFFCO contended that the terms of the HoA had no binding effect as notions of commitment were all expressed prospectively and material terms needed for any agreement were not concluded.

The Court, in part, agreed with AFFCO in finding that the HoA was not a substantive contract for cleaning with a 48 month term. Rather, it was an agreement to review the level of charges once the contractor had some experience of what was involved after the plant became operational. Also, many other terms were not agreed to in the HoA, such as a mechanism for price revision and an indemnity or penalty for failure to return the plant on time and completely clean.

However, the Court did find that the HoA was a so called 'process contract', in that it was an agreement to agree on a longer term contract. To give the contract effect, the Court was willing to imply in the contract a requirement for the parties to use reasonable endeavours to agree revised pricing and a range of other terms. If agreement could not be reached the 48 month term would not apply but Ecowize would be compensated for prior commitments it had made on a longer term basis not being recoverable. AFFCO was also required to give reasonable notice before bringing the arrangement contemplated by the HoA to an end (in this case, three months).

The Court held that AFFCO breached the process contract and was required to pay compensation, including certain establishment and disestablishment costs. However, because the Court found no substantive contract existed, compensation did not extend to loss of net profits that Ecowize would otherwise have earned during the balance of the 48 month term.

Lessons from the case

The case highlights how important it is to consider the legal status of HoAs and the consequences if subsequent agreement on more detailed matters cannot be reached. Failure to adequately address these issues leaves the parties at the mercy of the Court in the event of a dispute. In these circumstances a Court will do its best to give effect to the commercial intent of the parties but ultimately neither party may leave the courtroom satisfied.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions