Clients often ask us if the directors of terms or statements of intent that they have already agreed with another party are binding. At the end of the day, the question is what was agreed upon, what the intentions of the parties were and whether the conditions are sufficiently secure to be legally applicable. In the recent case of Nurisvan Investment Ltd- Anor v. Anyoption Holdings Limited  VSCA 141, the Supreme Court of Appeal in Victoria considered the objective intent of the parties when considering whether a heads of agreement was binding and enforceable. The Court of Justice found that the use of expressions such as “desire” and “intent” in the agreement is close to the intention of negotiating only in good faith the conclusion of a subsequent agreement. This was also supported by the extent of the conditions for future negotiations. Accordingly, the Court of Justice held that the heads of agreements did not effectively separate the parties. An agreement specifies both parties as part of a transaction or partnership as follows: The document must state which conditions are binding and which parties are not involved. On May 9, 2013, Sackar J of the NSW Supreme Court reaffirmed the principles of when heads of agreements (HOA) will be legally applicable and binding for the parties. In this case, Sackar J. found that heads of agreements were legally enforceable and binding because there may be binding intellectual property provisions, particularly where the parties intend to exchange valuable information or develop something new together. A duly drawn-up agreement is a non-binding document that sets out the main conditions for a proposed agreement between the parties. The parties may wonder whether such an obligation is worth the time and effort, but we believe that it should not be costly or tedious to make an agenda a legal “interim arrangement” or “procedural agreement” as noted above, to be an expensive or tedious task – especially when the parties have already negotiated and agreed on the main trading conditions.
In addition, it may have a number of essential benefits: second, an initial commitment to non-binding commitments can lead to more fluid negotiations overall. Inevitably, there is less friction in negotiating non-binding commitments than in negotiating binding commitments. If there is tension between the parties, a first interim agreement can reduce this situation by showing that both sides are always ready to continue. In addition, the application of non-binding commitments gives the parties greater flexibility (and potential leverage) in negotiating the final agreement. Terms (also known as declarations of intent) are usually entered when the parties are not yet able to sign a detailed contract. They can be used to define the parties` agreement in principle on key trade issues at an early stage of a transaction, and are not considered binding. However, they can also be used as a binding pre-agreement to cover all immediate work before a full contract is signed. Under binding commitments, the parties generally agree to negotiate exclusively with each other and to do their best to prepare and sign a formal contract within a specified time frame. This should encourage both sides to try to resolve the agreement quickly while giving them the freedom to leave if they do not. An agreement reached on the basis that the parties do not intend to be legally bound until they have entered into a more formal contract is not legally binding, but it may give rise to a strong moral commitment, from which it may be difficult to move away from thereafter.