Incomplete heads of agreement found to be complete and enforceable

Delaney v Delaney [2022] VSCA 48

Executive summary

Delaney v Delaney concerned a situation where an incomplete heads of agreement was found to be complete and enforceable. The two parties to the heads of agreement settled on essential terms, but left a substantial amount of non-essential terms to be decided.

In finding the heads of agreement to be legally binding, the Court focussed on the wording of the agreement, which indicated the parties intended to be legally bound. The absence of non-essential did not indicate the heads of agreement was incomplete.

The case serves as an important reminder to exert caution when drafting preliminary agreements.

What happened?

The case of Delaney v Delaney [2022] VSCA 48 (Delaney v Delaney) involved two brothers, Sean and Patrick Delaney, who were co-owners of the Delplant group, consisting of a series of connected construction companies and trusts.

Following the deterioration of their relationship, Sean (managing director of the group) and Patrick (former operations manager) executed a heads of agreement in 2020. The heads of agreement, broadly, consisted of these key terms:

1. Sean to purchase Patrick’s interest in the group for $10 million;
2. provision for further negotiations to finalise a formal agreement including agreement of other issues, such as tax and accounting implications, which had not been agreed at the time; and
3. provision that the terms of the Heads of Agreement would prevail if a formal agreement could not be concluded by a long stop date (in this case 10 June 2020).

Negotiations were fruitless and no formal agreement was made. Patrick purported to terminate the heads of agreement. Sean brought a proceeding to enforce the heads of agreement.

Issue in dispute

The primary issue in dispute was whether or not the heads of agreement was a complete and enforceable agreement for the purchase of Patrick’s interest in the group.

At first instance, the trial judge found the heads of agreement was a complete and binding contract, and settlement of Sean’s purchase of Patrick’s interest was ordered to occur by August 2021.

Patrick, appealed the decision and sought to argue:

1. the trial judge mischaracterised the heads of agreement as complete, as important matters were left unresolved;
2. the absence of important (but non-essential) terms indicated that the parties did not intend to be legally bound; and
3. the heads of agreement was incapable of being specifically performed.

Decision

In coming to its decision, the Court considered whether the heads of agreement was enforceable. In this respect, the issues at hand, and relevant features of a contract, were whether the essential terms had been agreed by the parties and if there was an intention to be legally bound.

Patrick argued the heads of agreement was not complete as the essential terms had not been agreed. Conversely, Sean argued the heads of agreement was complete and the outstanding terms were not essential. Importantly, Sean argued the wording of the heads of agreement set out an intention for the parties to be legally bound.

The Court analysed the various nuances of the meaning of complete and incomplete. They considered and rejected the argument that important but inessential terms are required in addition to essential terms where the parties intended to be legally bound. The Court agreed that the absence of important but inessential terms could in certain circumstances indicate that the parties lacked the requisite intention to be legally bound, but found that was not the case in the present instance.

In considering whether the parties intended to be legally bound, the Court focussed on the language of the heads of agreement and the outstanding issues, or terms of the agreement, that needed to be further negotiated.

One key clause of the heads of agreement stated the parties had already agreed to the sale for the sum of $10 million. Most important of all was the express statement that the heads of agreement would legally bind the parties, and that if negotiations did not produce a further agreement, the terms of the “Heads of Agreement will prevail”¹.

Ultimately, the Court held that given the express wording of the agreement, the absence of non-essential items in the heads of agreement did not render the agreement incomplete. As the non-essential items were, indeed non-essential, the overall intention of the heads of agreement was the parties would be bound to complete the sale and purchase transaction. Further, the wording pointed to an agreement already being reached rather than an agreement to enter into a further agreement.

Why is this important?

In contract negotiations, it is common practice for parties to enter into a heads of agreement/preliminary agreement before a formal agreement is finalised, which can anticipate a further or subsequent agreement. It is sometimes ambiguous as to whether a heads of agreement/preliminary agreement is enforceable.

Therefore, it is important for the parties to consider and expressly state the extent to which a preliminary agreement is intended to be binding or not binding on the parties and what the result will be if the parties do not conclude the anticipated future agreement. Delaney v Delaney evidences a situation where the Court will hold parties accountable to the contract despite full terms not being agreed to.

HWL Ebsworth Lawyers has expertise in drafting and reviewing construction contracts, including with respect to binding and non-binding preliminary agreements such as heads of agreement. Please contact Leighton Moon of our Construction and Infrastructure team to discuss any aspects of the above.

This article was written by Leighton Moon, Partner, Kevin Lock, Special Counsel, and Chris Kipouridis, Solicitor.

¹[2022] VSCA 48, [75].