Before the ink dries – lessons from 'pre-contractual' pitfalls and earnout entanglements

Ahead of the Deal - Australian M&A Briefing

Three judgments handed down this month illustrate the need to tread carefully when it comes to 'pre-contractual' engagement between parties and to the documentation of earnouts and similarly commercially important contractual terms – and how courts approach these issues when disputes arise.

Is a 'heads of agreement' actually a binding contract? White v Kohacek

White v Kohacek [2025] NSWSC 1042 concerned a dispute over a "Heads of Agreement" signed in September 2019 between Mr White and Ms Cassidy (the plaintiffs) and Mr Kohacek (the defendant), regarding the sale of a one-third interest in a rural property at Wilberforce, NSW. That document, drafted by Mr White, provided for the plaintiffs to pay $500,000 (primarily by extinguishing the defendant's legal debts and servicing a mortgage) in exchange for a one-third share in the property and an "irrevocable right of survivorship" to the remainder. The relationship between the parties later broke down and the arrangement was never formalised into a contract for sale. The plaintiffs sought (among other remedies) specific performance of the Heads of Agreement, while the defendant argued the agreement was not binding.

The Supreme Court of New South Wales (Williams J) found that the parties did not intend the Heads of Agreement to create legally binding contractual relations. In doing so, the judge observed that:

• although the Heads of Agreement used the terminology "this agreement", the substance of the document clearly indicated that the parties did not intend it to conclude a binding agreement for the sale of land, as:
  • it was expressly to be "converted to" a formal contract for sale prepared by the defendant's solicitors; and
  • the exchange of contracts was stated to be conditional on (among other things) the parties signing that (yet to be prepared) sale contract and on the plaintiffs discharging a debt owed by the defendant; and

• the parties' conduct after signing the Heads of Agreement – including that no stamp duty was paid on the document, and that the plaintiffs, having discharged the defendant's debt, did not then request that the formal sale contract be prepared – supported the view that they did not intend it to be a binding contract for sale, but rather had abandoned their intention to complete the contemplated transaction.

Key takeaways

While the facts of the case are somewhat removed from the kind of negotiations one would typically expect to occur between commercially sophisticated parties, it serves as a salutary reminder of the pitfalls that can arise for potential buyers and sellers – or indeed parties contemplating potential joint ventures or similar arrangements – when it comes to negotiating and documenting 'pre-contractual' plans and intentions.

Just because a document is described as an 'agreement' or 'contract' does not necessarily mean that a court will treat it as binding – rather, courts will look into the substance of the document, and also the parties' behaviour and communications related to the document. Equally, even if a party intends or assumes a 'heads of agreement' or term sheet not to be binding, the language of the document and conduct of the parties can result in it being interpreted and treated as enforceable. Clarity and consistency are therefore crucial.

Even if there is not found to be a binding agreement between parties, pre-contractual documents, representations and negotiations can potentially give rise to liabilities for misleading or deceptive conduct, obligations to repay the other party for money it may have expended in pursuit of the proposed arrangement, or even that there is evidence of 'mutual trust and confidence' between the parties that may result in them being regarded as joint venturers – with all of the attendant legal and fiduciary duties. Care in communication between potential contractual counterparties is vital in navigating these hazards.

Contingent consideration clashes and "commercial nonsense"

Copper (Qld) Investment Pte Ltd v Hallion

In Copper (Qld) Investment Pte Ltd v Hallion [2025] VSCA 221, the dispute centred on the interpretation of a 2018 Share Sale Agreement (SSA) relating to the sale of shares in Lighthouse Minerals Pty Ltd, which indirectly owned the Capricorn Copper mine, to Copper (Qld) Investment Pte Ltd (the Purchaser). Following the Purchaser's subsequent sale of its interest in the mine to 29Metals Ltd and the latter’s IPO, the original sellers claimed entitlement to an Earnout Payment, also arguing that the Purchaser was obliged to pay this amount into escrow as security, and that its failure to do so constituted a default that would have the effect of accelerating payment of the Earnout Payment.

At first instance, the judge found in favour of the sellers. The Victorian Court of Appeal allowed the Purchaser's appeal in part, holding that the Earnout Payment was only triggered if the financial performance of the Capricorn Copper mine, as originally sold, met the agreed threshold. The Court rejected the sellers’ broader interpretation of the scope of the Earnout Payment provisions, which would have included returns from additional assets owned by 29Metals, finding such a construction unsupported by the SSA’s drafting and commercial context. The Court further determined that the escrow obligation only arose if it was reasonably foreseeable that the Earnout Payment would become due, which was not established on the correct construction. Consequently, no default or acceleration event had occurred.

FX Group Holdings v Perpetual Trustee Co

FX Group Holdings Pty Ltd v Perpetual Trustee Co Ltd as trustee of the CPEC 8 Trust A (No 3) [2025] NSWSC 1055 also dealt with a dispute regarding the interpretation and application of a contingent consideration provision in a Share Sale Agreement, in this case relating to the sale of a controlling interest in the foreign exchange trading platform Pepperstone. FX Group Holdings Pty Ltd (the plaintiff), led by Ms Lock, purchased the shares from a group of private equity funds managed or advised by CPE Capital (formerly CHAMP Private Equity), with the purchase financed by the vendors through a vendor loan. The agreement included a profit-sharing arrangement, whereby after repayment of the vendor finance, the plaintiff would share with the vendors any "super returns" (profits above $25 million) for four years. The key issue was the proper construction of the Share Sale Agreement: the plaintiff argued that, due to a perceived drafting error, it was entitled to offset the entire amount of the vendor finance before sharing any super returns, while the vendors contended that only $25 million should be 'retained' before profit-sharing commenced.

Rees J of the Supreme Court of New South Wales found in favour of the vendors, holding that their proposed construction of the Share Sale Agreement was consistent with a pre-transaction heads of agreement and commercial purpose of the deal, and with the common intention of the parties at the time of their entry into the Share Sale Agreement. The plaintiff’s interpretation was rejected as "commercial nonsense" and amounting to "double counting". The Court determined that all amounts received by the plaintiff in connection with the company, including dividends, constituted equity proceeds for the purposes of the profit-sharing arrangement, and that the plaintiff’s calculations were incorrect.

Key takeaways

These cases underscore the need to ensure that, as far as possible, contingent consideration mechanisms are drafted with unambiguous language, that all reasonably possible scenarios are contemplated, and that the drafting is tested for consistency with the commercial purpose and intended practical operation of the arrangement. Reliance on prior negotiations, term sheets, and the commercial context may assist in resolving ambiguities, but are at best an imperfect substitute for clear, internally consistent, and carefully considered drafting.

The outcome of the Pepperstone dispute in particular highlights that seeking to rely on a perceived drafting error that was not raised at the time of negotiations and entry into the relevant agreement is unlikely to be successful – particularly where it would lead to an uncommercial outcome – and that the better approach is for parties to seek to ensure they have a mutually consistent understanding of how key clauses in a contract reflect their commercial bargain.

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