When is a contract subject to contract?
Dec 2015 |
Most of us exchange many emails everyday in a casual manner. However, two recent decisions may cause you to re-think the contents of those emails. These two cases demonstrate that it is possible to form a contract through email communication without necessarily intending to be bound at the moment of despatch. Now is the time to review how you negotiate contracts and reconsider the language you use when doing so to ensure that you do not unknowingly enter into a binding contract.
In Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd [2015] WASCA 21, an appeal from the District Court of Western Australia, the court considered whether an emailed offer and acceptance of terms was enough to establish that the parties intended to enter into a binding agreement to lease. The appellant was the lessee who contended that the primary judge had made an error of both law and fact. The lessee contended that an agreement to lease had not been formed as there had not been the necessary ‘meeting of minds’ to infer there had been an agreement.
The Court of Appeal affirmed the trial judge’s finding that there had been a concluded and binding agreement and that there was a sufficient meeting of minds to form a binding agreement. The appeal was dismissed.
Similarly in Stellard Pty Ltd v North Queensland Fuel Pty Ltd [2015] QSC 119, the Supreme Court of Queensland considered whether parties negotiating by way of email had entered into a binding contract for the purchase of freehold land and a business from the defendant. The plaintiff was the proposed purchaser of freehold land and a roadhouse business situated on that land. The defendant was the seller of the land and business.
The purchaser pleaded that an email exchange constituted a valid and binding agreement as informed by the conversations between the parties and the terms emailed between the parties. The court agreed with the purchaser and found that there had been a concluded and binding agreement.
The effect of Vantage and Stellard
The case of Masters v Cameron1 was considered in both Vantage and Stellard. The principles of Masters v Cameron, as summarised in Halsbury’s Laws of Australia, illustrate that where parties have reached agreement upon terms of a contractual nature, and also agree that the subject matter of their negotiation will be dealt with by a formal contract, the case may belong to any of three classes:
- The parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time, propose to have the terms restated in a form which will be fuller or more precise but not different in effect.
- The parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.
- The intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.2
The court in Vantage also considered what is commonly known as the fourth class of case in addition to those set out in Masters v Cameron. However, after some brief comments on the prior recognition of, and contention as to the necessity of, the fourth class, at [94] Buss J found it unnecessary to enter into a debate over it.
In both cases the courts found it apparent that the circumstances fell into the second class as specified in Masters v Cameron. All keys terms of the agreement had been agreed upon but the parties wanted to record the agreement in writing.
The courts in both Vantage and Stellard considered the intention of the parties objectively in accordance with the rule in Ermogenous v Greek Orthodox Community of SA Inc.3 To that end, the courts considered the circumstantial evidence surrounding the negotiations in order to ascertain the objective intent of the parties.
In the case of Stellard, although subjectively it was clear that the seller was negotiating with other potential purchasers which evidences a clear lack of intent to be bound in contract to the purchaser, objectively, the language used by the seller to the purchaser and the apparent urgency4 to get the contract finalised would imply to an objective observer that the parties had the intent to be bound.
The meaning of the words ‘subject to contract’ included in the seller’s acceptance email on 31 October 2014 was considered by the court in Stellard.5 McHugh JA in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd,6 to which the court in Stellard referred, said that parties may still be immediately bound to an agreement even when the parties agree that a formal contract is to be signed. The court in Stellard found that the use of those words, ‘subject to contract’, needs to be measured against the relevant context and in this context, the court found that it strongly suggested that ‘the parties were content to be bound immediately and exclusively’.
In the case of Vantage, the court found 14 reasons as to why, objectively, there was a concluded agreement to lease. These reasons included the fact that the parties were already very familiar with each other commercially given that the lessor had been leasing the premises to the lessee for two years.8 In addition, the lessee was very familiar with the premises and knew of its suitability and capabilities since it had been leasing the property for six years.9 Furthermore, the proposal encapsulated all of the terms necessary to form a contract.10
A further issue considered in both cases was the nature of the terms that were the subject of negotiations after the agreement became binding (as they were both found).11 In both cases, the court considered that the specific terms that were to be negotiated after the agreement were not essential terms and continued negotiation on these terms is not inconsistent with an intention to the be bound. At [139] of Vantage, Buss JA stated:
‘the subsequent negotiations, dealing and communications did not operate to rescind or otherwise discharge the earlier agreement’.
Stellard also addressed the issue that legislation requires a transfer of land to be recorded in writing and signed by the person to be charged.12 The court determined that the email sign off, in light of the conversations and other email correspondence, was sufficient proof of execution to satisfy the legislative requirements.13 The application of the Electronic Transactions (Queensland) Act 2001 (Qld), s 14(1)(c), was addressed by Martin J at [68] of Stellard:
‘In circumstances where parties have engaged in negotiation by email and, in particular, where an offer is made by email, then it is open to the court to infer that consent has been given by conduct of the other party.’
Practical considerations
In light of these two recent decisions, it is essential to assess what aspects of negotiations are reduced to writing in the negotiation process. If it is a party’s intent to only become bound to contractual obligations that are contained in a formal contract, it would be prudent to limit the written negotiation of terms between the parties. Contract negotiations can take place by way of exchanging and amending formal contract documents rather than emails.
Furthermore, if parties are in or intend to be in negotiations with other potential co-parties, it would be prudent to either inform all tenderers that there are multiple tenderers or refrain from using terms such as ‘offer’ and ‘accept’ when in actual fact, you are simply ‘considering’.
The important message is that you do not need a physical, signed contract in order for there to be a binding agreement, even where legislation strictly requires the agreement to be recorded in writing, email communications may be sufficient. It is important to note that the determination of whether you intended to be bound by the emailed terms is an objective test. Therefore, regardless of what you may have intended at the time of sending an email, the objective assessment will be made on the basis of what is in the email and what an ordinary recipient may take the communication to mean. This objective assessment can also take into account any other communications you may have had with the other party.
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1 (1954) 91 CLR 353.
2 Lexis Nexis, Halsbury’s Laws of Australia [110-530].
3 (2002) 209 CLR 95.
4 Stellard Pty Ltd v North Queensland Fuel Pty Ltd [2015] QSC 119 [40] and [41].
5 Ibid [36].
6 (1986) 40 NSWLR 631at 634.
7 Stellard Pty Ltd v North Queensland Fuel Pty Ltd [2015] QSC 119 [39].
8 Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd [2015] WASCA 21 [120].
9 Ibid [119].
10 Ibid [123] and [136].
11 Stellard Pty Ltd v North Queensland Fuel Pty Ltd [2015] QSC 119 [43] and Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd [2015] WASCA 21 [136].
12 Property Law Act 1974 (Qld), s 59 and Electronic Transactions (Queensland) Act 2001 (Qld), s 14.
13 Stellard Pty Ltd v North Queensland Fuel Pty Ltd [2015] QSC 119 [67].
