28 Mar 2013

I didn't think I had a binding agreement!

by Narelle Smythe, Kristina Skamvougeras

A key question in determining whether a binding agreement exists is whether the parties have shown an objective intention to be bound.

Lawyers and commercial managers in a highly competitive market are often faced with immense pressure to get things moving on a project, leaving minimal time for negotiation of the terms of agreement between the parties. This situation can often lead to disputes as to whether a binding agreement has formed and, if so, the terms of the agreement.

This article outlines some general principles to assist in identifying whether a contract is binding and identifies some potential extra-contractual claims that may be available where a binding agreement has not been formed.

The Principles

One key question to be considered in determining whether a binding agreement exists is whether the parties have shown an objective intention to be bound.

Principle 1: Conduct is critical

The conduct of the parties is a critical factor in ascertaining whether the parties intended to be bound. It is not limited to the conduct of the parties' legal representatives. The overall conduct of the parties as a whole both prior and subsequent to the alleged agreement is a key factor in establishing the parties' intentions. Matters such as performance of the proposed terms of a contract can be a strong indicator that the parties intended to be bound by them.

Principle 2: Language is important (but not always determinative)

The language used to record the agreement is important in reflecting the parties' intention. Some issues to bear in mind are:

  • whether words indicating that the parties have reached an agreement have been used (eg."offer" and/or "acceptance");
  • the tense that has been used. Use of the present tense tends to be indicative that an agreement already exists whilst the future tense tends to be indicative that an agreement has not yet been reached;
  • use of legal terminology, in particular the word "agree" which has a legal meaning indicating a meeting of the minds.

Principle 3: Not all the terms have to be agreed for there to be a binding agreement

An agreement can be binding even though not all terms relating to the subject matter have been agreed provided that the agreement is capable of enforcement and that it has a sufficient degree of clarity. Generally, the more complex the subject matter and the bigger the gaps, the less likely an agreement has been formed (although, again, that general principle is subject to the conduct of the parties).

Principle 4: It does not have to be signed

Signing can be a strong indicator of an intention to be bound. In circumstances where a signed document is not intended to constitute a binding agreement, using appropriate language to reflect this is critical. However, a document need not be signed for a binding agreement to have arisen. Conduct may constitute acceptance (such as accepting material or services).

Cases where there is no binding agreement - where does it leave us?

Where no binding agreement is established, a party may bring an extra-contractual claim to recover any loss suffered for example arising out of failed negotiations or the preparation of tender documentation. Examples of such claims that may be brought include:

  • misleading and deceptive conduct;
  • negligent misstatement;
  • the tort of deceit;
  • estoppel;
  • breach of process contract; or
  • restitution/quantum meruit.

This article is based on a CLE presentation by Narelle Smythe at our Sydney CLE Intensive.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.