An informal agreement may be binding even where it anticipates the execution of a formal contract, if the parties make it sufficiently clear that they intend to be bound immediately, and the agreement is both complete and certain. Contracting parties should be quite clear about whether or not an informal document is going to be binding on them. 

The parties were shareholders of Sydney Superyacht Marina Pty Ltd (SSM). Following a dispute relating to the management of SSM, the parties entered into mediation. At the conclusion of the mediation, the parties reached a settlement and signed a Heads of Agreement, which provided that the defendants would purchase the plaintiff’s shares in SSM.

Clause 1(g) of the Heads of Agreement provided that “Without affecting the binding nature of these Heads of Agreement the parties within 7 days to execute a formal document or documents as agreed between their respective solicitors to carry out and express in more formal terms and additional terms as these Heads of Agreement.”

Before a formal contract was executed, the defendants withdrew from the negotiations, apparently due to a shortage of funds to effect the purchase. The plaintiffs then commenced proceedings seeking a declaration that a binding agreement existed and an order for specific performance.

Did the parties intend to be legally bound by the Heads of Agreement?

The Court affirmed that whether parties intend to make a binding contract must be objectively ascertained from the terms of the document in question, when read in the light of the surrounding circumstances.

In this case, the Court agreed with the primary judge’s findings that the words "Without affecting the binding nature of these Heads of Agreement" were decisive in revealing that the parties intended immediately to be bound by the Heads of Agreement. This was despite the fact that the Heads of Agreement specifically referred to the execution of a formal contract.

Were the Heads of Agreement void for incompleteness or uncertainty?

The defendants argued that the Heads of Agreement were incomplete because SSM was not a party to the agreement. However, the Court held that it was not necessary for SSM to be a party, as the plaintiff’s shares in SSM were able to be sold without SSM’s involvement.

The defendants also argued that the Heads of Agreement were uncertain because they provided that the defendants were to transfer 21.6% of the surface water area of the marina, but failed to identify the precise area to be transferred. However, the Court rejected this argument and noted the general rule that where a promise permits performance in a number of ways and does not state which party has the right to elect, the promisor has the right to elect which of the methods of performance he will choose.

Finally, the defendants argued that the expression "Gross Marina berth income" was not defined in the Heads of Agreement and was therefore devoid of meaning. The Court likewise rejected this argument and concluded that the expression ought to be construed in light of the surrounding circumstances known to the parties.

Accordingly, the Court held that the Heads of Agreement were not void for incompleteness or uncertainty.

See the case.