On 9 May 2013, Sackar J of the New South Wales Supreme Court
restated the principles relating to when Heads of Agreement (HOA)
will be found to be legally enforceable and binding upon the
parties. In the present case, Sackar J found that the Heads of
Agreement were legally enforceable and binding because:
the document signed by the parties was described as a
"Heads of Agreement", which is itself an indication that
the parties purported to enter into an agreement;
the document was drafted under the supervision of legal
practitioners, following lengthy negotiations and
the specificity of the language used also suggested that the
parties intended to be bound;
the contemplation that further documents would be necessary did
not detract from the immediately binding effect of the Heads of
the various factual disputes between the parties concerning the
relevant business did not go to the existence of the contract. This
is because the parties could have made settlement conditional upon
such matters being resolved – this did not happen; and
the Plaintiff's emotional condition and state of mind at
the time of executing the Heads of Agreement did not go far enough
to vitiate the contract.
Sackar J also quoted various cases which focused on the
importance of the courts to consider the background within which a
written agreement had been reached.
The relevant facts of this case were as follows:
Proceedings were on foot and the matter was then referred to
mediation. At the conclusion of the mediation the parties executed
Heads of Agreement.
The correspondence exchanged for a few months following the
mediation supported the fact that a settlement had been reached and
there was no dispute about the terms of the Heads of
The Plaintiff's reluctance to settle first occurred after
inspecting property and chattels that were not in the condition he
was expecting. However, such a requirement was not part of the
Heads of Agreement. The Plaintiff then proceeded to offer to pay an
amount less than was agreed in the Heads of Agreement and asserted
that he was not of a sound mind when he entered into the deal.
Things to take away
One way to avoid such an argument over enforceability is to
include a specific term within the document stating that it is the
parties' intention for the Heads of Agreement to be legally
enforceable and binding from the date of execution.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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