Table of contents
It is a common misunderstanding in contract law that an agreement is only binding when a formal sale document is signed. In certain circumstances, however, legally binding obligations can arise in early stage negotiations and prior to signing anything.
The article focuses on how the risk of being bound before you intend to can arise when negotiating the sale or purchase of a business or equity. Even where no formal agreement has been signed, you can be compelled to proceed with a transaction on unintended terms. We aim to highlight the practical steps you can take to avoid being unintentionally bound by ‘in principle agreements’ so you can confidently navigate the early stages of a sale or purchase.
While we always recommend involving us as early as possible in a transaction (even a quick phone to let us know your plans!), we understand that this isn’t always commercially feasible, or that you may wait to hold off engaging advisors until you feel that a deal is sufficiently advanced. Adopting that approach can be costly or make it more difficult to change your mind as the transaction progresses.
When can negotiations become legally binding?
When you agree on high level transaction terms with another party, for example; in an email exchange, a terms sheet or even a handshake, you may (intentionally or not) limit your rights to change your mind and walk away or renegotiate the terms if circumstances change. Common scenarios that give rise to a need for renegotiation are if you find something problematic in due diligence, receive advice that the transaction structure has an unfavorable tax or liability outcome for you, or the target business changes.
In corporate transactions where negotiations are fast-moving to meet internal deadlines and/or where the parties trust each other and act as if the deal is done before seeking professional advice, conduct can show an intention to be bound by, for example:
- purchasers acting as if they are owners (by running the business from the premises or making decisions for the business);
- one or more parties making public statements about a finalised deal;
- part or full payment of the purchase price;
- taking steps to assign key contracts (including leases or supplier contracts); or
- the parties exchanging written terms that don’t contain any conditions of the sale.
Even if negotiations are facilitated by a broker or another professional advisor, it is dangerous to assume those advisors are aware of or protecting your legal position to walk away at this early stage if you change your mind. Remember it is in a brokers interest to get a deal done, not necessarily to look out for your interests.
What does it mean to be ‘bound’?
Being ‘bound’ means that you are obliged to carry out an agreement. if you change your mind and decide you no longer want to proceed or want to renegotiate, the other party could seek an order from the court compelling you to complete the transaction on the terms they say are agreed.
Whether a court would grant such an order will depend on the objective intention of the parties, assessed by reference to their words and conduct not the labels used. In other words, calling something a ‘draft’ or including ‘subject to contract’ wording is not determinative if the conduct of the parties suggests otherwise.1
What do the courts consider in their assessment?
When determining whether an agreement is binding a court will consider relevant facts, including:
- have all essential terms like price, structure and other essential terms been agreed? (i.e. do communications suggest the formal documents are intended only to record an agreed deal rather than negotiate outstanding terms of the deal);2
- was formal ‘offer’ and ‘acceptance’ language used (including in emails)?;3 and/or
- did the parties act consistently with the proposed transaction (for example part or full payment being made or the purchaser operating the business on a vendors behalf)?4
Practical tips
To mitigate the risk of being unintentionally bound, below are some suggested practical steps you can take when engaging in negotiations:
- Clearly state in writing to the other party, broker or advisor that you do not intend to be legally bound by any of the terms until formal sale documentation has been signed (i.e. your agreement to the terms is subject to contract);5
- Make sure your conduct supports those statements by not prematurely performing the agreed terms (no matter how much you trust the other party or want the deal to happen); and
- Expressly put in writing to the other party, broker or advisor that any agreement is subject to you obtaining legal advice.6
We recommend that you do not deploy the use of artificial intelligence (AI) in early-stage negotiations without carefully reviewing any terms it produces. AI often overlooks important nuances in the legal implications of deal terms and can be over-zealous in indicating agreement and trying to appease counter-parties.
Seeking legal advice early gives confidence to make informed decisions before agreeing to any terms (whether by way of an email exchange, a terms sheet or a handshake). If you haven’t followed these practical tips or you are concerned about your position, reach out to us and we can help.
Key takeaways
If you do not intend to be legally bound during early-stage negotiations (or you want to leave the door open to change your mind after seeking advice), your agreement to the terms of a sale or purchase should be subject to contract and obtaining legal advice, and most importantly those statements must be supported by your conduct.
By engaging with us early, we can help you develop a strategic approach and intentional language to achieve your goal, whether that is protecting you from being bound by the terms, or locking in the other party to be bound by the terms agreed. If you are negotiating a possible sale or purchase and would like to discuss how to protect your position, we are happy to help.
- Levy v Watts [2023] NSWCA 91 ↩︎
- Sully v Englisch [2022] VSCA 184 ↩︎
- Manny v Rose [2022] NSWSC 1671 and Sully v Englisch [2022] VSCA 184 ↩︎
- Rose v Manno Kingsway Pty Ltd [2025] NSWCA 23 ↩︎
- The Edge Development Group Pty Ltd v Jack Road Investments Pty Ltd [2019] VSCA 91 ↩︎
- Masters v Cameron [1954] 91 CLR 353. ↩︎
