What is a heads of agreement?
On 9 May 2013, Sackar J of the New South Wales Supreme Court restated the principles relating to when Heads of Agreement (HOA) will be found to be legally enforceable and binding upon the parties. In the present case, Sackar J found that the Heads of Agreement was legally enforceable and binding because:
- the document signed by the parties was described as a “Heads of Agreement”, which is itself an indication that the parties purported to enter into an agreement
- the document was drafted under the supervision of legal practitioners, following lengthy negotiations and consideration
- the specificity of the language used also suggested that the parties intended to be bound
- the contemplation that further documents would be necessary did not detract from the immediately binding effect of the Heads of Agreement
- the various factual disputes between the parties concerning the relevant business did not go to the existence of the contract. This is because the parties could have made settlement conditional upon such matters being resolved – this did not happen
- the Plaintiff’s emotional condition and state of mind at the time of executing the Heads of Agreement did not go far enough to vitiate the contract
Sackar J also quoted various cases which focused on the importance of the courts to consider the background within which a written agreement had been reached.
The relevant facts of this case were as follows:
- Proceedings were on foot and the matter was then referred to mediation. At the conclusion of the mediation the parties executed Heads of Agreement
- The correspondence exchanged for a few months following the mediation supported the fact that a settlement had been reached and there was no dispute about the terms of the Heads of Agreement
- The Plaintiff’s reluctance to settle first occurred after inspecting property and chattels that were not in the condition he was expecting. However, such a requirement was not part of the Heads of Agreement. The Plaintiff then proceeded to offer to pay an amount less than was agreed in the Heads of Agreement and asserted that he was not of a sound mind when he entered into the deal
One way to avoid such an argument over enforceability is to include a specific term within the document stating that it is the parties’ intention for the Heads of Agreement to be legally enforceable and binding from the date of execution.
The decision may be viewed here: Michael Lahodiuk v Vincent Pace and Prid Pty Ltd  NSWSC 512