Question

Question 1( 25 marks)
Jeff owns a business which makes and sells a well-known brand of peach brandy (“the Business”). Jeff holds a business name, and a trademark for a logo, associated with the Business’s brand of peach brandy. The Business sources fruit from local producers. The Business is operated on land which is also owned by Jeff.
Jeff decides it is time to sell the Business and is introduced to Tina who is interested in buying the Business. Jeff and Tina enter into negotiations and agree on a deal. Both Jeff and Tina sign the following document which Jeff prepared.
Heads of Agreement between Jeff and Tina
1. Jeff agrees to sell, and Tina agrees to buy, Jeff’s peach brandy business and the land it is on.
2. Purchase Price: $2.5 million.
3. All existing supplier agreements to be transferred to Tina.
4. All fixtures and fittings, as inspected and agreed, are included in sale.
5. All employees to be transferred as per solicitor prepared agreement.
6. Parties to negotiate transfer of trademark and business name at a future date for a separately determined amount.
7. This agreement is subject to the preparation of a formal contract of sale based on these terms acceptable to the duly appointed solicitors for Jeff and Tina.
Jeff arranges for his solicitor to prepare a formal contract for sale and then sends the completed contract to Tina. When Tina receives the contract, she calls Jeff and says:
“Jeff, I have changed my mind. I don’t want to buy your business anymore”.
Jeff replies:
“ You have got to be joking Tina, it is way too late to change your mind, you have already signed the Heads of Agreement. You are legally bound to buy the business. Make this easy and buy it as we agreed for I will have to sue.”
Required:
Part A ( 20 marks)
You are Tina’s solicitor. Using the IRAC legal problem solving process give your conclusion on whether Tina is legally bound to buy the Business as a result of signing the Heads of Agreement.
Subject Code_Assessment Brief #_Assessemnt Type_Module Due Page 4 of 9
Part B ( 5 marks)
What would be your conclusion if Tina had included in the Heads of Agreement a term stating:
This agreement is subject to Tina obtaining suitable finance

Answer 1

Part A

The solution using the IRAC methodology explained as follows:

Issue :

Jeff and Tina have signed a Heads on agreement identifying the terms of negotiation in transfer of Jeff's peach brandy business.

On preparation of a formal contract, Tina wants to terminate the contract because she is not sure of buying the business. Jeff wants to sue Tina for non-fulfilment of term 1 of the heads on agreement, i. e. to buying the business

The issue involved is whether Tina can be legally bound to the Heads on agreement by Jeff.

Rule :

1. A heads on agreement is generally a non-binding agreement that outlines the basis of the terms of the proposed or tentative transaction

2. It is the first step on the path of a legally binding agreement or contract

3. The next step generally is to involve the attorneys and accountants and sign a binding contract

4. Whether a Heads on agreement is legally binding or not depends on the language of the terms of the contract.

Analysis :

The language of the contract (Term number 1) states that Tina will buy the business; (Term number 7) clearly states that the heads on agreement is subject to the preparation of a formal contact based on the terms acceptable by the solicitors of Tina and Jeff.

On plain reading of the term, it can be understood that the terms of agreement can further be negotiated on a formal contract between the respective attorneys. However the option to terminate the contract by either parties is not available.

Conclusion :

Since there is no specific term that allows option to Tina to terminate the contract, she is legally binding to the contract. Jeff can sue Tina for non fulfilment of terms of agreement.

Part B :

If the heads on agreement had a twrm stating that Tina shall buy the business only on obtaining financing, and had it been proved that Tina is unable to find financing arrangements, Tina would not be legally binding to buy the business.