The question is, did the parties intend to be bound by the "Heads of Agreement" or was a formal agreement to be drawn up and executed by the parties before there would be a binding Agreement.  This always depends on the facts of each case.  However it often happens that the "in principle" agreement, that is the "Heads of Agreement" is an agreement which falls within category 3 of the categories of contracts referred to by the High Court in Masters v Cameron (1954) 91 CLR 353.

In that case, the Court held that where parties have reached agreement, the agreement may fall within one of three categories:

• the parties may intend to be bound immediately, though expressing a desire to draw up their agreement in a formal document at a later stage; or
• they intend to be bound immediately but may wish the operation of a particular clause or term to be delayed pending the drawing up of a more formal document;
• they intend to postpone the creation of contractual relations until the formal contract is drawn up and executed.

In Masters v Cameron the Court, when referring to the third category of cases, stated inter alia:

"They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own ... the parties may have so provided either because they have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document as in Summergreen v Parker (1950) 80 CLR 304 or simply because they wish to reserve to themselves a right to withdraw at anytime until the formal document is signed".

It is well settled that a Court may have regard to the parties' communications, after the formation of an allegedly binding agreement in order to determine, objectively, whether or not the parties intended to a form a binding agreement (Australian Broadcasting Commission v 14th XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 547-8).

In Barrier Wharfs Ltd v W Scott Fell Co Ltd (1908) 5 CLR 647, the plaintiffs had been negotiating with the defendants, who were ship owners, for the use of the plaintiffs' wharf.  Negotiations by correspondence were entered into and after an exchange of letters the defendants wrote to the Plaintiffs saying that they were willing to conclude with the plaintiffs' wharfage on the basis of 6 pence per tone and "will be glad if you would make a contract for our approval and signature".  The plaintiffs replied that they noted with pleasure the defendants' decision to accept the wharfage rate and that they would "arrange a contract accordingly".

The High Court of Australia affirmed a decision of Higgins J which held that this correspondence did not constitute a binding contract between the parties.  Griffiths CJ at 666 said:

"There are a great number of details incidental to a contract of that sort, and it might be anticipated that the parties would come to some understanding about them before a formal agreement was entered into.  They are matters of detail as to which there would probably be little or no difficulty, but still they were matters to be settled, and not left at large to be determined from time to time as occasion might arise".

At page 668 Griffiths CJ considered it significant that the plaintiffs had prepared a draft agreement in which appeared various conditions which were not mentioned in the correspondence (which allegedly formed the basis of the original binding agreement) and some of which were indeed were consistent with the correspondence.  At page 669 Griffiths CJ concluded that the letters did not disclose a concluded agreement enforceable at law - "The subsequent correspondence revealed that it was not in the contemplation of the parties that they were to be bound to a legal agreement until all the essential preliminaries had been agreed to and a formal contract incorporating those terms drawn up".

Rosendorff Lawyers will advise on all matters relating to "Heads of Agreement" and in particular whether or not these "Heads of Agreement" are binding.

Please note that the information referred to above provides general comments only and may not be applicable to your specific requirements in respect of which you should obtain legal advice.

For further information please contact Trevor Rosenthal on This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .  (03) 8320 2954  www.rosendorff.com.au