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Agreeing to agree? Be careful what you wish for!

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Whether you call it an MOU (or memorandum of understanding), a Heads of Agreement or something else, form can never be the victor over substance in the world of “Contract”.

Entering a Heads can give you comfort, but at what risk and with what effect? The answer lies in whether the Heads agreed records a deal that has been done or records the terms of a deal yet to be done.

The seminal case of Masters v Cameron classified three categories, where the Heads record:

1. all the fundamental terms of the bargain, with intent to be immediately bound to perform those terms – the subsequent document to be drawn is merely a more elaborate and precise expression;
2. all the fundamental terms of the bargain, with intent not to be bound until a more elaborate and precise expression is entered; and
3. aspects of the deal, but without any intention for the parties to be bound until a formal document is prepared.

Whether or not the facts of a situation cause a document to fall within any of these categories will be determined “objectively” from the facts and circumstances of each case. It will depend on the reasonable and objective meaning of the document itself, and also the surrounding conduct of the parties.

Unusually complex deals are best negotiated where the parties identify their common ground early. Heads are entered to secure key points and outline the commercial intent or framework for engagement; these might be expressed to be a “binding Heads”. Yet such a document might lead only to a commitment for the parties to “negotiate in good faith” towards completing a final document, but it might fall well short of being a contract that spans the scope of the intended project – worse yet, it might actually prove to be binding and reveal that you are exposed to commitments and risks that your accountants, consultants and lawyers subsequently identify.

To consider: Are you better off pausing while the formal, legally binding (and confidential) contract is drafted which has the capability to protect both parties versus the potential uncertainty of whether a Heads is binding, leaving your other advisers gasping? If you don’t intend to be bound, say so. If what you seek is an exclusive dealing period, then enter that document. If you are completely confident you have covered all the terms, structure, risk and issues your advisers are going to raise, then you will of course be secure.

Mark Love, Legal Director, Business Law 9th Floor, Canberra House, 40 Marcus Clarke Street, Canberra ACT 2601 E: [email protected] T: 02 6274 0810 | www.bradleyallenlove.com.au
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