Heads Up! Does your heads of agreement commit you to more than you bargained for?

Recently, the New South Wales Court of Appeal1 unanimously overturned the New South Wales Supreme Court decision2 that AMA Group Limited (AMA) specifically perform the business sales contemplated by a binding heads of agreement (HOA).

While in the end a common-sense approach and wholistic construction of the HOA was applied by the Court of Appeal, this judgement is a timely reminder that, care should be taken in drafting heads of agreements to avoid complications and costly litigation.


In October 2019, AMA (as the prospective buyer) entered into a binding heads of agreement with ASSK Investments Pty Limited (ASSK) (as the prospective seller) to buy a number of vehicle repair businesses owned by ASSK (Assets).

After conducting due diligence on the Assets, AMA decided not to proceed with the deal on the basis that the HOA contained a condition precedent which had not been met – that condition precedent being obtaining the approval of AMA’s board. ASSK disagreed that such a condition precedent existed and submitted that by virtue of the binding HOA, AMA had already agreed to buy the Assets and that it was not necessary to enter into any further business sale agreements.

The Supreme Court’s view was that HOA was not well drafted and it was not clear whether or not obtaining board approval of AMA was a condition precedent and, even if it were a condition precedent, what it was a condition precedent to. Accordingly, the decisions of the Supreme Court and the Court of Appeal centred around the proper construction of the conditions precedent provision and the HOA.

Provisions of the HOA considered by the Courts

The clause in contention was titled “Conditions Precedent” (CP Clause) and contained, amongst other things, the following operative language: “all necessary third party consents, authorisations and approvals being obtained (including the Purchaser’s Board approval)” (Approval Condition). The Approval Condition did not stipulate a timeframe for obtaining such consents, authorisations or approvals and did not specify what subsequent action or obligation was contingent on the satisfaction of the condition.

The HOA also, relevantly, contained the following terms:

  • the parties were to enter into business sale agreements “subject to the terms and conditions set out in this Heads of Agreement”;
  • AMA was to carry out due diligence on ASSK and, subject to the due diligence, the transaction was to be recorded in business sale agreements;
  • the transfer of the Assets was to take place on the completion date, being the date of completion of the business sale agreements; and
  • AMA could insert further warranties which it considered necessary following its due diligence.

The Primary Judgment

The primary judge decided in favour of ASSK and ordered that AMA specifically perform the HOA. In making such a decision, the primary judge considered that:

  • the Approval Condition was not a condition precedent as:
    • the operative words could not be turned into conditions precedent by virtue of titling the CP Clause as “Conditions Precedent”;
    • objectively, the parties could not have considered the Approval Condition to be a condition precedent; and
    • the CP Clause also contained other requirements which would not generally be considered conditions precedent (i.e. standard completion deliverables such as the transfer of business names);
  • the Approval Condition was to be construed in the context of the CP Clause and the HOA as a whole and when viewing the CP Clause and the HOA as a whole:
    • the HOA already contained all of the necessary provisions to govern a sale and purchase of the Assets; and
    • the execution of subsequent business sale agreements was not a precondition for a binding sale of the Assets; and
  • if the Approval Condition were a condition precedent, it could only be a condition precedent to entry into subsequent business sale agreements (rather than to a binding sale of the Assets under the HOA itself), however, a subsequent business sale agreement wasn’t necessary for a binding sale to be effected.

Court of Appeal Judgement

The Court of Appeal disagreed with the primary judge’s construction of the HOA as a whole, ultimately deciding that the Approval Condition was a condition precedent to the purchase of the Assets and that the HOA did not itself effect such a sale.

The Court of Appeal considered that:

  • the Approval Condition had to be a condition precedent to something;
  • despite the drafting errors and otherwise improperly characterised conditions in the CP Clause, the Approval Condition was a condition precedent to performance of the obligations in the HOA as, if it were not, what other purpose would it serve; and
  • the HOA on its own could not effect a sale of the Assets as:
    • it would “flout business common-sense” to commit AMA to purchasing the Assets without having completed the due diligence on ASSK;
    • the HOA did not contain all of the necessary provisions to govern a sale and purchase of the Assets as key provisions (such as provisions dealing with the assignment of material contracts and transfer of key personnel) were not included and it was contemplated in the HOA that further warranties would be included following the due diligence conducted by AMA; and
    • this was inconsistent with the transfer of Assets taking place on completion of the business sale agreements.

Drafting Tips  

A heads of agreement, letter of intent or term sheet is almost always the first step in M&A transactions. The case has demonstrated the importance of getting these documents right to avoid later arguments and undesirable outcomes such as being forced into a transaction (as seen in the primary judgement) or losing out on a significant deal (as seen in the Court of Appeal judgement).

When drafting these documents, it is important to consider whether or not they should be binding or non-binding. As a buyer, it is usually preferable that the heads of agreement be non-binding or that it only include limited binding provisions such as with respect to exclusivity and confidentiality.

A non-binding heads of agreement, or heads of agreement with limited binding provisions, may provide greater flexibility to renegotiate the deal based on the findings of the due diligence.

When drafting conditions precedent in a binding heads of agreement, it is important that these are drafted carefully and clearly identify:

  • what event is contingent upon the condition precedent being satisfied (usually this would be the parties being required to proceed with the transaction by entering into a formal sale and purchase agreement);
  • what future action or circumstance must be taken or occur for the condition precedent to be satisfied (such as completing satisfactory due diligence or obtaining board approval);
  • which party has the benefit of the condition precedent and may therefore waive it in order for the contingent event to happen without the condition being satisfied; and
  • the timeframe within which the condition precedent must be met.

Both binding and non-binding heads of agreement, should clearly state that the deal is subject to and conditional upon the parties entering into a formal sale and purchase agreement.

1. AMA Group Limited v ASSK Investments Pty Limited [2021] NSWCA 45 (26 March 2021) (Bell P, Leeming JA and Emmett AJA).
2. ASSK Investments Pty Limited v AMA Group Limited [2020] NSWSC 1756 (7 December 2020) (Hammerschlag J).

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