From handshake to headache – why 'preliminary' agreements can make or break your deal

Ahead of the Deal - Australian M&A Briefing

In M&A transactions, commercial momentum often outpaces formal documentation. Parties exchange preliminary terms, sign heads of agreement, and may even begin performing aspects of a deal well before a definitive contract is executed. Recent Australian decisions highlight that the law may not always align with commercial expectations. Without precise drafting, clear statements of intention, and conduct consistent with those intentions, preliminary agreements can quickly become catalysts for disputes, transaction instability, and operational disruption.

In many M&A transactions, commercial relationships drive negotiations faster than legal formalities or drafting can keep pace. Sellers may begin transitioning responsibilities, investors may seek access to management, and parties may act on informal understandings. These pressures can create a dangerous gap between what the parties are doing and what the documents that they have entered into at the time actually say. As case law shows, this gap is often where disputes arise.

Commercial timing imperatives can further magnify risk. When a transaction is tied to financing windows, regulatory deadlines, or competitive pressures, there is a natural temptation to “start acting” before the paperwork is complete. While such behaviour may appear commercially efficient, it can be legally perilous. Courts do not reward commercial urgency that is unsupported by documentary clarity.

There is also a persistent misconception that informality buys flexibility. In practice, informality is rarely neutral: where conduct signals finality, it increases the likelihood that a court will find a binding agreement; where parties intend non-binding negotiation, informality may deprive them of the legal scaffolding needed to protect their position. Informality often creates the wrong kind of certainty.

Lessons from the courts: Liu v Miller-Kovacs and Bachour Enterprises

Two recent cases, Liu v Miller-Kovacs¹ and Bachour Enterprises Pty Ltd v Munzer², illustrate how preliminary agreements may be legally binding depending not only on drafting but also the parties' conduct and (as evident from that conduct) their intention.

Liu v Miller-Kovacs involved the sale of shares in a small Sydney-based company. The plaintiffs claimed a purchase price of AU$300,000, supported by cash payments and transfers, while the defendants argued that only AU$50,000 was agreed. No formal share sale agreement existed, no shareholders' agreement had been executed, and no legal advisers were involved.

The Federal Court found that, despite the absence of formal documentation, the parties had intended to be bound by a complete oral agreement. Attempts to reverse the transaction through ASIC filings were held to be oppressive under s 232 of the Corporations Act 2001 (Cth). The Court enforced the deal, rectified corporate records, and required payment.

Liu v Miller-Kovacs illustrates that even informal conduct and partial payments can create binding obligations when parties clearly intend to be bound. Legal enforceability does not always require a formal contract.

Bachour Enterprises Pty Ltd v Munzer concerned the sale of a “charcoal chicken” business. The Heads of Agreement entered into by the parties explicitly stated that it was a binding contract, even though the parties anticipated further formal documentation. The NSW Supreme Court examined both the express language of the Heads of Agreement and the conduct of the parties after signing, including the making and receipt of payments. It concluded that the Heads of Agreement was binding and enforceable and ordered specific performance, requiring the seller to complete the sale.

Bachour Enterprises demonstrates that when parties clearly intend to be bound and structure the agreement accordingly, courts will enforce preliminary documents even before formal contracts are executed.

These cases highlight that preliminary agreements must be interpreted in a broader evidentiary context. Courts examine not only the document itself but also communications (whether by email, text or WeChat), board minutes, conduct, and commercial realities.

Masters v Cameron: the doctrinal backbone

Masters v Cameron³, as developed in subsequent authorities, remains the foundation for understanding preliminary agreements. While heads of agreement can facilitate negotiation and manage risk, they are not automatically enforceable simply because they are executed; equally, as Liu v Miller-Kovacs demonstrates, the absence of a formal written agreement does not mean that there is no binding deal.

The Masters v Cameron framework categorises preliminary agreements into four types:

1. Category 1: Immediately binding contract. Parties intend to be bound immediately; later documentation formalises the agreement without changing the effect of the original terms.
2. Category 2: No binding contract until formal execution. Parties agree on terms but intend no enforceable obligations until a formal contract is executed.
3. Category 3: Immediately binding contract, but further terms to come. Parties intend to be bound immediately but anticipate negotiating or adding additional terms in the final contract.
4. Category 4: No intention to be bound until formalisation, but some terms may operate in the meantime. Parties do not intend to be fully bound until execution of formal documentation but do intend that certain obligations (such as confidentiality and exclusivity) apply in the interim.

Understanding these categories is not just of academic interest: they determine enforceability, risk allocation, and commercial outcomes. Courts assess the wording of the document, the parties’ conduct, communications, and the surrounding commercial context. A “subject to contract” clause, without conduct consistent with non-binding intention, may not shield parties from legal consequences.

Preliminary agreements also do not operate in a vacuum. Where they relate to share transfers, board composition, or governance arrangements, the Corporations Act overlays additional legal risk. Invalid share movements, premature director appointments, or inconsistent ASIC filings can expose parties — and directors personally — to statutory liability, regardless of whether a binding contract ultimately existed.

Key lessons

From these cases, several practical principles emerge:

• Clarify binding intention: Explicitly state whether the agreement is intended to be binding. Courts evaluate both wording and conduct.
• Avoid premature action: Filing ASIC forms, transferring shares, issuing announcements, or appointing directors before execution of formal transaction documents can inadvertently create binding obligations.
• Maintain governance integrity: Ensure compliance with statutory and constitutional requirements. Acting on a non-binding agreement can expose directors to liability, including oppression claims.
• Use heads of agreement strategically: Heads of agreement and term sheets should serve as risk-management instruments, defining interim authority and responsibilities, conditions precedent, access to information, and procedural steps towards execution.
• Align documentation and conduct: Legal risk is highest when conduct suggests a binding agreement despite non-binding language. Consistency between behaviour and drafting is critical.

The power and risks of preliminary agreements

Cases such as Liu v Miller-Kovacs and Bachour Enterprises, together with the enduring authority of Masters v Cameron, illustrate that preliminary agreements are not mere formalities — they are legally consequential.

• Liu demonstrates that conduct alone can crystallise binding obligations, even absent formal documentation.
• Bachour Enterprises shows that a clearly drafted and intentionally binding heads of agreement will be enforced, even if a formal contract is expected later.

A handshake or draft document may begin a commercial relationship, but only precise drafting, disciplined conduct, and alignment between intention and behaviour provide legal certainty. Preliminary agreements operate at the intersection of contract law, corporate governance, and commercial pragmatism. The lessons are clear: the enforceability of a preliminary agreement is ultimately a question of intention, precision and behaviour, and in determining whether a binding deal exists (and if so, its terms), courts will look and not only the words agreed between the parties but also their actions.

The Masters v Cameron categories provide the doctrinal structure, but it is the alignment between documentation and conduct that determines how a court will characterise the deal — and whether the parties end up with certainty or dispute.

More M&A Insights

• Before the ink dries – lessons from 'pre-contractual' pitfalls and earnout entanglements
• Power plays: plugging into data centre deals
• Public and private markets: ASIC’s roadmap for Australia’s capital markets
• Carrots and sticks: the next wave of Australia's foreign investment reform
• Spotlight on Ratha Nabanidham – good as gold in Brisbane

View our Ahead of the Deal page for more articles