In the current economic environment there has been an increase
in legal disputes where one party seeks to avoid being bound under
a preliminary agreement and the other party seeks to enforce the
preliminary agreement as a binding agreement.
It has become increasingly important for parties that are
entering into commercial negotiations to make certain that any
letter of intent, heads of agreement or memorandum of understanding
clearly and unambiguously states whether the parties intend to be
legally bound to the transaction immediately, or whether they wish
to reserve their right to withdraw from the transaction later on
and continue to negotiate before formal documentation is prepared
It is also equally important for parties entering into
preliminary agreements to ensure that these agreements include all
of the important terms of their bargain, as should they fail to do
so, their agreement could be held to be void for uncertainty.
Generally, there are four requirements that a party will usually
need to establish before an enforceable preliminary agreement will
be found to exist by the courts. These requirements are:
The parties have intended that their agreement have legal
The parties have reached agreement on all of the important
terms of the transaction and these terms are sufficiently
Any condition precedents to the agreement have been satisfied;
The agreement is in the proper form.
It is not always an easy task to determine whether the parties
are bound by a preliminary agreement despite the documents being
signed, and there being an exchange of correspondence and
negotiations being concluded.
Many disputes regarding preliminary agreements have been argued
in the courts and it is clear from these cases that whilst the
court will often have regard to material outside the agreement such
as oral communications, the correspondence that has passed between
the parties and the negotiations, there are no general rules for
determining whether a letter of intent, heads of agreement or
memorandum of understanding is binding and enforceable on the
parties. Each case is determined on its own facts.
Careful drafting is vital to reduce the risk that a court will
find a preliminary agreement is not binding when the parties
intended to be bound, or alternatively, finding that the party is
bound to an agreement in circumstances where it did not think it
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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