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Preliminary Agreements in
Tendering
Stanislav Roth
www.sourcelegal.com.au
Focus for today
• Overview of contract formation
• Pre-bid and early works agreements in tendering
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• Law on preliminary agreements
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Innovative legal outsourcing solutions
Contract formation
Offer /
Acceptance
Certainty /
Completeness
Acceptance must
“mirror” offer
Essential terms
must be certain and
complete
Consideration
Each party
gives something
of value
Intention
Determined
objectively from
text of contract
and parties’
conduct
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Contract
Formation
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What is a preliminary
agreement?
• Memorandum of understanding
• Letter of intent
• Pre-bid agreement
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• Heads of agreement
• Teaming agreement
• Early works agreement
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Law on preliminary agreements
Three categories - Masters v Cameron (1954) 91 CLR 353
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Parties agree on all terms but propose to have them restated in more
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Parties agree on all terms but have made performance of some of them
conditional upon the execution of a formal contract (binding)
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detail in a formal contract (binding)
Parties do not intend to be bound unless and until they execute a formal
contract (non-binding)
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Law on preliminary agreements
! But important fourth category:
Parties intend to be bound by the terms agreed while expecting a further
formal contract in substitution of the first and containing further terms
(binding)
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“Subject to contract” – not decisive but indicative of “non-binding”
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Terminology (LOI, MOU, HOA…) - not decisive
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Objective construction of the language and context (pre- and postagreement communications are relevant)
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To bind or not to bind?
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Useful tool for early partnering
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May enhance tendering capabilities/credibility
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Typical issues:
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Binding or non-binding
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Exclusive or non-exclusive
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Future contractual structure:
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Subcontract (back-to-back terms with head contract?)
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Joint venture/consortium (beware of the Competition and Consumer Act). If JV, “joint and
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Pre-bid agreements
several” liability to customer is likely - need to consider how liability is apportioned
between JV partners
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Exit provisions, division of scope, key terms of future contract (e.g. limitation of
liability)
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Early works agreements
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Convenient for tight schedule projects – early engineering, long lead
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May give contractor/supplier leverage
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Typical issues:
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Binding or non-binding
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Scope of work under EWA
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Payment for work under EWA
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Applicable terms of contract
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Timeframe for entering into future contract
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Termination/exit and applicable payment
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delivery equipment
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Often not clear whether binding or not
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If binding:
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often incomplete/poorly drafted
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leave many important matters to future agreement
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fail to have appropriate exit provisions
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risk of parties failing to follow through with a proper agreement
If non-binding:
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why do it?
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work is performed without contract - unlimited liability, no contractual warranties
etc
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no certainty of recouping start-up or project cancellation costs
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What’s the matter with preliminary
agreements?
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Checklist
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Use
preliminary
agreements
selectively.
Avoid
unnecessary
preliminary
agreements.
Use clear words to indicate whether a preliminary agreement should be binding or
non-binding. Draft the preliminary agreement accordingly.
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Avoid templates. Every preliminary agreement is specific to the needs of the project.
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Clearly define what the parties are to do in accordance with the preliminary
agreement.
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Provide for a framework and timetable for entering into a formal contract and cover
any key terms.
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Outline what should happen if such contract does not eventuate.
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