03 Apr 2014

Agreements make the world go round - except when they cause disputes!

by Owen Hayford, Betina Friedeberg

A clause in an agreement setting out that parties agree to be bound by the terms of the agreement is a wise business practice.

A binding agreement is characterised by evidence of:

  • an offer;
  • acceptance of that offer;
  • consideration (payment); and
  • an intention to be bound to the agreement.

This sounds simple but in practice these four concepts can be elusive. Offers are sometimes met by counteroffers, terms can be heavily negotiated over many months and agreements can be reached in the exchange of numerous emails. Further examples include agreements made "in principle", parties proceeding to do work urgently before formal documents are signed and people giving their word or shaking hands on agreements. At what point is a legally binding agreement reached?

What these examples have in common is that somewhere along the line communication can break down. The intention to be bound to the agreement – that meeting of the minds of the parties – falls into a grey area where one party thought they were bound and the other thought they were still negotiating.

A recent example of a grey area – an agreement reached in a meeting?

Geemaz Management Pty Ltd v Geelong Motors Pty Ltd [2013] VSC 571 was concerned with the sale of a Chrysler Jeep Dodge car franchise in Geelong. Geelong Motors was the seller and Geemaz was the purchaser.

On 4 June 2013 Geemaz and Geelong Motors met and went through a printout of terms which was cut and pasted from an email to another potential purchaser. At this meeting Geemaz and Geelong Motors read the terms on the printout line by line, discussed whether they agreed with the terms, amended the terms and then signed the printout. Other terms were agreed orally.

The parties then agreed that Geemaz would more formally document the agreed terms in a heads of agreement and shook hands. The parties did not discuss whether the agreement was subject to any further conditions but it was accepted that the sale of the franchise to Geemaz would obviously need to be approved by the franchisor, but that the franchisor's approval could not be unreasonably withheld due to the Franchising Code of Conduct. At the end of the 4 June meeting Geemaz thought it had concluded a legally binding agreement.

After this meeting Geemaz submitted the more detailed heads of agreement to Geelong Motors for presentation to the franchisor and it submitted a business marketing proposal to the franchisor. The heads of agreement contained new or different provisions to the printout and oral agreement.

In a further meeting on 13 June 2013 Geemaz provided a revised version of the heads of agreement and a deposit cheque which Geelong Motors accepted. At this meeting the parties congratulated each other on the deal.

After the 13 June meeting Geelong Motors advised that it was under pressure not to proceed; it did not sign the heads of agreement and it returned the deposit cheque on 22 July 2013.

Geemaz alleged that the failure of the parties to sign the more formal heads of agreement did not detract from the legally binding agreement which it had with Geelong Motors at the meeting on 4 June. Geelong Motors asserted that the agreement reached on 4 June was not legally binding as it was incomplete, subject to further review and negotiation and subject to the franchisor's approval.

The court decided that the parties did reach a legally binding and presently enforceable agreement at the 4 June meeting because:

  • the agreement reached at the 4 June meeting covered all essential terms – there were no gaps in the agreement;
  • no mention by Geelong Motors was made at the 4 June meeting about needing advice or imposing any other condition on the signed printout (such as being subject to the franchisor's approval);
  • it considered that when the parties shook hands at the 4 June meeting, they intended to be bound immediately by the agreement reached; and
  • the agreement to document the deal more formally was not inconsistent with the legally binding nature of the agreement reached at the 4 June meeting.

The lessons – what should you do?

First, make sure your agreement covers all necessary or essential terms. You may want to get legal advice on what your agreement needs to cover to avoid any gaps which would affect its enforceability.

Secondly, if you intend an agreement to be legally binding, then to reduce the risk of disputes regarding the existence of a binding agreement, include a clear statement such as: "The parties agree that this document is legally binding and presently enforceable."

Thirdly, if you want to subsequently record the agreement in a more detailed and formalised way, but without changing the agreement already reached, you should state this in the preliminary agreement.

Finally, keep file notes of meetings and/or agreements reached as these can sometimes be used to assist in establishing the existence of a disputed agreement.

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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.