LAWS 203 - preliminary agreements

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What is a preliminary agreement?

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Preliminary agreements are when the parties are negotiating processes i reaching for the ultimate contract, but in that process, the parties reach a preliminary agreement. However, this preliminary agreement implies that the parties are intending for there to be a subsequent contract (the ultimate agreement).

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What was the traditional approach to preliminary agreements? Explain using case law.

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In the case of Carruthers, the court held that because there was clear language in the contract, indicating that the contract will not be binding until it is formally agreed to, anything short of the signing of a formal contract would not lead to a legally binding contract.

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How has the traditional approach to preliminary agreements been further accentuated by case law?

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In the case of Ecles, the court held that a contract only becomes binding on the parties, if and when, the method in which they intend to be bound, is executed. This manner may depend on the facts of each unique case or it may be the method that was in the minds of the parties, and their solicitors, from the beginning. That 'method' may have been the ordinary, customary or convenient means of exchange.

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How has this traditional approach to preliminary agreements been overulled?

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In the case of France the court held that preliminary agreements, can be legally enforceable, if it can be proved, after arguing for both sides, that there was an intention to be legally bound by the preliminary agreement.

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What were the arguments against the parties intentions to be legally bound by the preliminary agreement in the case of France?

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The fact that a term within the contract stated that the parties would only be bound if and when a formal, documented agreement had been reached/signed, and the fact that some terms in the contract were not agreed to and so were expressly reserved to be decided upon/ agreed to in future circumstances.

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What were the arguments in favor of the parties intentions to be legally bound by the preliminary agreement in the case of France?

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The fact that the letter referred to our agreement, not subsequent agreement, the fact that some of the terms in the contract, seemed to envisage the offeree acting immediately, the fact that the letter also conveyed that the preliminary agreement is already effective, the fact that the agreement seemed to be quite detailed, and the fact that the letter ended with the statement that by entering into this agreement, the offeree would have attained a massive financial benefit.

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What did the court ultimately hold in the case of France?

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The court ultimately held that the parties intended to be bound by the preliminary agreement.

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What were the arguments in favour of the parties intentions to be legally bound by the preliminary agreement (the heads of agreement) in the case of ECNZ?

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The preceding letter from the ceo's seemed to use phrases which indicate that the preliminary agreement would be binding.

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What were the arguments against the parties intentions to be legally bound by the preliminary agreement in the case of ECNZ?

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The fact that two terms were set out as 'not-agreed' and one term was set out as 'to be agreed' conveyed a lack of certainty and completeness in order for the preliminary agreement to be enforceable here. Moreover, because these terms were ultimately never resolved by an arbitrator, that indicated that the document was incomplete. Moreover, because the incomplete terms were essential to the heads of agreement, they could not be severed from the contract. Moreover, even after the signing of the heads of agreement, the parties still expressed their rights to freely renegotiate terms which had already been agreed to in the preliminary agreement.

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What did the court ultimately hold in the case of ECNZ?

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The court ultimately held that the parties were not intending to be bound by the preliminary agreement/heads of agreement document.