A pharmacist looking to sell or buy a pharmacy business is commonly asked to sign a heads of agreement as a pre-cursor to signing a formal contract of sale of business.

A heads of agreement document is an example of a “preliminary agreement”, which may also be described by many other names including a “letter of intent”, “memorandum of understanding” or “agreed purchase terms”. Ultimately, whatever name is given to such document it is intended to act as a preliminary agreement to a subsequent more formal and detailed contract.

With the recent difficult economic conditions, more legal disputes are being seen where one party seeks to avoid being bound under a preliminary agreement while the other party is seeking to enforce the preliminary agreement as a binding agreement.

Whether a preliminary agreement is binding on the parties is not simply determined by the title given to such agreement. It is vital for parties entering into commercial negotiations that they ensure any heads of agreement, memorandum of understanding or letter of intent expressly states whether the parties intend to be legally bound to the transaction with immediate effect, or whether instead they wish to reserve a right to withdraw from the transaction later on and continue negotiating commercial terms before any formal agreement is prepared and signed.

As a word of warning, a preliminary agreement will not be legally binding just because it includes a clause saying that the parties intend to be legally bound by the preliminary agreement or similar words. That is, a preliminary agreement must include all the key or important terms of their bargain, failing which a Court may hold their preliminary agreement to be “void for uncertainty”.

Before an enforceable preliminary agreement will be found to exist by a Court, a party seeking to enforce the agreement will need to establish the following 4 requirements:

  1. the parties intended their agreement to have legal effect;
  2. the parties have both reached agreement on all important terms of the transaction as well as such terms being sufficiently certain;
  3. all conditions precedent to the agreement have been satisfied; and
  4. the agreement is in a proper form.

Each case is determined on its own facts and typically it is not an easy exercise to determine whether parties are bound by a preliminary agreement even though the document has been signed. To assist in a proper determination, a Court will often have regard to material outside the signed agreement such as oral communications, correspondence that has passed between the parties and the negotiations leading to the signed preliminary agreement.

Any seller or buyer of a pharmacy business should at the outset decide whether their preference is for any proposed preliminary written agreement between them to be binding or not.

Obviously, for any party seeking such preliminary agreement to be legally binding, it is recommended that they seek legal advice regarding its drafting from their lawyer to reduce the risk that a Court will subsequently find the preliminary agreement not to be binding.

Prepared by
Anthony Cannizzo
Partner
Robert James Lawyers
Level 22, 140 William Street
Melbourne 3000
Tel (03) 8628 2000
Fax (03) 8628 2050
Email: Anthony@robertjames.com.au
Website: www.robertjames.com.au