28 May 2015
"Subject to contract" negotiations can result in binding agreements!
What you thought were pre-contractual negotiations could amount to a binding contract regardless of your intentions, even where no formal contract has been signed. Two recent cases have found binding contracts to exist in relation to leases and sale contracts without the parties signing formal documents.
Email exchanges often result in the parties reaching agreement in an informal way about essential contractual terms. To avoid being bound by a contract which you thought you could still walk away from, you need to clearly and consistently communicate the intention not to be bound unless and until a formal agreement is entered into.
The cases outlined below send a warning to any contracting party that using phrases such as "subject to contract" may not be enough to overcome an intention to be immediately bound by the terms of an informal agreement.
Recent cases – different scenarios, same outcome
Vantage Systems v Priolo Corporation
In Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd  WASCA 21 the Western Australian Court of Appeal considered a landlord who emailed the tenant with a proposal for a new lease, "subject to formal lease documents being signed". Amendments to the proposed lease were negotiated by email and the essential terms were agreed upon. The tenant asked the landlord to prepare lease documents although some minor terms were not agreed. Ultimately though, the tenant refused to sign the lease.
The Court found that when the tenant accepted the revised proposal, the parties intended to be bound immediately by an agreement to lease, which would in due course be superseded by formal lease documents.
Stellard v North Queensland Fuel
In Stellard Pty Ltd v North Queensland Fuel Pty Ltd  QSC 119 the Supreme Court of Queensland examined a buyer who made a verbal offer to purchase a service station business and property for $1.6m, subject to due diligence and other conditions. The seller's agent emailed the buyer, setting out the basis on which the seller would sign a contract. The email included details of the price, deposit, settlement date and other conditions and attached a draft contract. There were further negotiations by phone and email.
The buyer confirmed its offer by email, "subject to contract and due diligence as previously discussed", and asked for the offer to be accepted immediately so that its investigations could commence. The offer was accepted by the seller by email, "subject to execution of the contract provided". The buyer sought further amendments to the form of contract but in the meantime the seller found another buyer for a higher price and denied that a binding contract existed.
The Court found that the seller intended to be immediately bound by the initial offer, despite no formal contract being signed. The broader context of the emails strongly suggested that the parties were content to be bound immediately and exclusively by the terms they had agreed upon, with the intention that they would be formally recorded later.
The test of your intention
Courts assess the intention to enter into an immediately binding contract on an objective basis – what each party by their words and conduct would lead a reasonable person in the position of the other party to believe. This involves looking at:
- whether there is agreement on the essential terms (not all the terms);
- what the parties do and say after the agreement has been made;
- use of the words "offer" and "acceptance;" and
- referring to the agreement in the present tense instead of the future tense.
For sale of land contracts in particular, an acceptance via email that identifies the sender satisfies statutory writing and signature requirements.
In both of these cases the agreements were found to be binding even though some of the terms had not been finally negotiated (in relation to the lease, the make good clause; in relation to the sale contract, the provision of guarantees and the duration of the due diligence period).
The cases serve as a reminder that you need to be clear and consistent in articulating your intention through your words and your conduct. If you do not want your negotiations to be binding before you sign a formal agreement, make it clear from the outset that pre-contractual arrangements are not binding unless and until a formal agreement is entered into, and repeat this message in every communication with the other party.
- sign a preliminary agreement without first seeking legal advice;
- unconditionally agree to terms and conditions in correspondence unless you are prepared to be bound by them; and
- ignore communications from the other party that do not reflect the agreement that you think you have or do not reflect what you would agree to. Seek legal advice, write back and set the other party straight.
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