If you require more information or assistance regarding preliminary arrangements, please contact our legal team at The Quinn Group at (02) 9223 9166 or submit an online application form today. If the parties fail to agree on these additional terms, they will nevertheless remain bound by the terms of the preliminary agreement. If the parties do not intend a preliminary agreement to be binding, the following points should be taken into consideration: Pre-agreements1 come into play in the structuring and negotiation of a wide range of transactions and agreements. They are accepted by many market participants and, at best, tolerated by others. They have been the source of litigation and, in some cases, well-known litigation.2 A preliminary agreement manifests itself in several ways, ranging from a valuable and non-binding tool for designing a proposed transaction; on a set of principles agreed by counterparty representatives who ultimately do not structure or negotiate an agreement; an unintentional legally enforceable agreement with many ambiguous or missing terms; and finally, a deliberately enforceable agreement. What is certain is that the provisional agreement is a widely accepted way to advance many trade agreements. They often focus on a proposed transaction, identify conditions that may be disruptive factors, give a sense of commitment on the part of the parties, and set a timeline within which the parties intend to conclude a negotiation. On the other hand, preliminary agreements may prove to be additional costs, result in the binding of the parties by the potential terms and conditions set out in the pre-agreement and (in some jurisdictions) inadvertently create an obligation to negotiate in good faith. Preliminary contracts are frequently and successfully used for the sale of LNG, the acquisition or sale of shares or assets, the long-term sale of commodities (p.B natural gas), joint ventures and many others.
When common and often basic provisions are clearly documented and understood by the parties, a preliminary agreement serves as a useful framework for structuring and negotiating a transaction, as opposed to a document that thwarts a final agreement between the parties. Is it binding in whole or in part? Often, the trade terms (and some legal terms) of a preliminary agreement are not intended to be binding, but are intended to serve as a basis for future negotiations. However, in certain circumstances, the parties choose to make the agreement binding unless a final agreement is reached. There is rarely an agreement that is really not binding at all – the authors make it clear in the document that various provisions are binding. If the commercial terms of a preliminary contract are to form the basis for future negotiations or serve as principles for future negotiations, these provisions are usually expressly made non-binding in the preliminary contract. In such circumstances, provisions relating to the non-binding nature of the Agreement, applicable law, exclusivity (if any), duration, confidentiality, assignment, communications and certain other provisions are and should be obligations of the Parties. According to some laws, in addition to the concise wording in the main part of the preliminary agreement, it is important to also indicate at the top of the agreement that this is the « subject matter of the contract ». In some jurisdictions, the preliminary agreement will create a commitment to negotiate in « good faith. » If a preliminary agreement is to be binding, this should be explicitly stated in order to avoid future disputes over the nature of the agreement.
In this case, it is crucial that the agreement contains the main commercial conditions in sufficient detail so that they are not left to subsequent interpretation. It is also crucial that applicable law and sufficient non-commercial (legal) clauses are also included to ensure a certain degree of certainty in interpretation and applicability in the event of a future dispute. Is there an element of exclusivity? In certain circumstances, such as . B in the case of an acquisition and sale, a motivating factor for the conclusion of a preliminary agreement is to establish a period of exclusivity of negotiations. The seller and potential buyer are often highly motivated to « close the deal » during the exclusivity period. The seller has agreed to negotiate exclusively with the potential buyer, and the buyer has limited time to reach an agreement without competition. The exclusivity terms must be clearly stated in the agreement, and the exclusivity provision becomes an enforceable clause in the agreement. Due to the exchange of sensitive information, the associated costs and the discussion of terms and conditions, the parties often discuss and document the circumstances in which a period of exclusivity may be extended by one or both parties. Is the term clearly defined? If the preliminary contract is only partially enforceable (non-commercial conditions and exclusivity, if applicable), a clearly defined clause must be included. If the parties do not reach a final agreement by a certain date, the preliminary agreement usually ends.
It is important that a specific termination date be provided so that each party to the preliminary agreement knows when the agreement ends. What are the not-so-obvious pitfalls of design? Negotiate in « good faith »? Harmful trust? Some jurisdictions undertake to negotiate in « good faith » under a preliminary agreement. Despite an author`s efforts to make obligations non-binding under a preliminary agreement, seemingly harmless provisions that imply « good faith » may become procedural provisions. It is always preferable to explicitly waive the obligation to negotiate in good faith when drafting a prior agreement. The creation of specific steps to be achieved in a preliminary agreement has led to the obligation to achieve them on the basis of negotiations in good faith when certain conditions are met. If a party is required to perform certain actions under a preliminary agreement, check to see if a risk has arisen that could lead to a claim for unfavorable confidence or debt forgiveness. Again, it is important to understand the legal regime that applies to a particular provisional agreement. What are the financial terms? Separation fees? Costs and expenses? As a general rule, a provisional agreement does not create financial obligations between the parties. Each participant assumes responsibility for all costs and expenses incurred in connection with the matters set out in the preliminary contract. It is important to contractually bind the parties in this regard, as it minimizes the likelihood of a claim for an unfavorable trust or debt prevention if the agreement does not result in a final agreement. .