Preliminary Agreements in Tendering

1. Preliminary Agreements in Tendering Stanislav Roth www.sourcelegal.com.au

2. Focus for today • Overview of contract formation • Law on preliminary agreements • Pre-bid and early works agreements in tendering www.sourcelegal.com.au Innovative legaloutsourcing solutions

3. Contract formation www.sourcelegal.com.au

4. What is a preliminary agreement? • Memorandum of understanding • Heads of agreement • Letter of intent • Pre-bid agreement • Teaming agreement • Early works agreement www.sourcelegal.com.au

5. Law on preliminary agreements Three categories - Masters v Cameron (1954) 91 CLR 353 • Parties agree on all terms but propose to have them restated in more detail in a formal contract (binding) • Parties agree on all terms but have made performance of some of them conditional upon the execution of a formal contract (binding) • Parties do not intend to be bound unless and until they execute a formal contract (non-binding) www.sourcelegal.com.au

6. 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) www.sourcelegal.com.au

7. To bind or not to bind? • “Subject to contract” – not decisive but indicative of “non-binding” • Terminology (LOI, MOU, HOA…) - not decisive • Objective construction of the language and context (pre- and post-agreement communications are relevant) www.sourcelegal.com.au

8. Pre-bid agreements • Useful tool for early partnering • May enhance tendering capabilities/credibility • Typical issues: • Binding or non-binding • Exclusive or non-exclusive • Future contractual structure: • Subcontract (back-to-back terms with head contract?) • Joint venture/consortium (beware of the Competition and Consumer Act). If JV, “joint and several” liability to customer is likely - need to consider how liability is apportioned between JV partners • Exit provisions, division of scope, key terms of future contract (e.g. limitation of liability) www.sourcelegal.com.au

9. Early works agreements • Convenient for tight schedule projects – early engineering, long lead delivery equipment • May give contractor/supplier leverage • Typical issues: • Binding or non-binding • Scope of work under EWA • Payment for work under EWA • Applicable terms of contract • Timeframe for entering into future contract • Termination/exit and applicable payment www.sourcelegal.com.au

10. What’s the matter with preliminary agreements? • Often not clear whether binding or not • If binding: • often incomplete/poorly drafted • leave many important matters to future agreement • fail to have appropriate exit provisions • risk of parties failing to follow through with a proper agreement • If non-binding: • why do it? • work is performed without contract - unlimited liability, no contractual warranties etc • no certainty of recouping start-up or project cancellation costs www.sourcelegal.com.au

11. Checklist • 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. • Avoid templates. Every preliminary agreement is specific to the needs of the project. • Clearly define what the parties are to do in accordance with the preliminary agreement. • Provide for a framework and timetable for entering into a formal contract and cover any key terms. • Outline what should happen if such contract does not eventuate. www.sourcelegal.com.au