04 September 2019

Binding joint venture agreement or an agreement to agree?

This article was written by Scott Watson and Aisling Scott.

The recent decision in Bacchus Resources Pty Ltd v Talisman Mining Limited [2019] NSWSC 1044 revisited the question of whether an agreement to negotiate in good faith so as to enter into certain future agreements could create immediately binding legal relations. 

The decision comes as a reminder to carefully consider whether the execution of a short form term sheet, memorandum of understanding or heads of agreement is intended to be immediately binding and enforceable.  Perhaps not surprisingly, whether the short form agreement is binding will depend on the language used in that document, and the context in which that document is negotiated.  It is important to note that a reference to the negotiation of a long form agreement in the future is not of itself determinative.

The following factors appear to have been relevant to the Court’s findings:

  • where the subsequent execution of a formal document is expressed to be a condition, then that is telling of the parties’ intention to not be immediately bound;
  • where the terms of the original document are capable of immediate enforcement without further agreement, then that disclose an intention to be immediately bound;
  • payment provisions which did not provide for refunds or a return of capital, could be indicative of an intention to be immediately bound;
  • if the totality of the term sheet or short form agreement is ‘workable’ without further terms, then the parties are likely to have intended to create binding legal relations.

Background

Bacchus and Talisman were parties to:

  • a ‘Farm-in Agreement’ which provided for future entry into a joint venture agreement on terms contained in an attached draft joint venture agreement (“Attachment A”).  Attachment A included, among other terms, a provision by which either party could terminate the joint venture with 30 days’ written notice; and
  • an ‘Alliance Deed’ under which the parties agreed to consider other prospective projects in New South Wales. The Alliance Deed provided a mechanism whereby a party could identify an “Opportunity” and give the other party of an “Opportunity Notice” to join or decline the Opportunity.  

On 14 August 2018, Talisman gave Bacchus an Opportunity Notice which Bacchus accepted on 22 August 2018. The parties negotiated and then, on 27 September 2018, executed a “Proposal”.  The Proposal set out the terms of the Opportunity and acknowledged that the parties had negotiated such terms in good faith.  Relevantly, the terms of the Proposal included:

  • that Talisman would submit an application to the NSW Department of Energy and Resources and that Bacchus would pay an initial amount in relation to the cost of that application (Initial Payment)
  • when the Initial Payment is made, the parties shall form a separate joint venture in relation to the Opportunity, with the terms of the joint venture to be based on Attachment A to the Farm-in Agreement
  • that Talisman would draft and circulate a formal agreement, and that the parties would negotiate in good faith with a view to executing that agreement.

No formal joint venture agreement was circulated or executed, and, after Bacchus had made the Initial Payment, Talisman sent two letters to Bacchus:

  • by the first letter, Talisman sought to deny the existence of any binding joint venture agreement in relation to the Opportunity.
  • by the second letter, Talisman sought to refer to the first letter as discharging its obligation to provide 30 days’ written notice bringing the joint venture to an end.

Bacchus sought a declaration that the execution of the Proposal brought into existence a binding joint venture between Bacchus and Talisman.

Decision

Hammerschlag J determined that:

  • upon the Initial Payment being made by Talisman, a binding joint venture agreement came into effect and stayed on foot, notwithstanding the failure of the parties to agree and execute a further agreement.
  • the letters sent by Talisman did not bring that joint venture to an end.

His Honour referred to Masters v Cameron (1954) 91 CLR 353 and the proposition that an agreement which contemplates a future contract may immediately bind the parties.  The central question being whether the parties intend to be bound immediately as evidenced by the language of the agreement.

In finding that the parties did intend to be bound to a joint venture agreement immediately, his Honour considered it relevant that:

  • a non‑refundable payment was made by Bacchus, giving effect to the formation of the joint venture;
  • the structure of the joint venture was provided for in the Proposal, more terms were not needed to make the joint venture workable;
  • if the parties could not agree a more fulsome agreement, they could simply use the terms of the Proposal, which incorporated Attachment A to the Farm-In Agreement;
  • the parties had negotiated the terms set out in the Proposal, such that no further agreement was necessary;
  • the letters sent by Talisman were inconsistent, and not effective to bring the joint venture to an end as neither of the letters gave the required notice, nor did they evince an unequivocal election to terminate.


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