Marino Law | Gold Coast Law Firm

When am I bound by contract?

Hands of two people signed the document in bank office

The quick paced environment that is the commercial and legal realm, has seen email rapidly surpass traditional hard copy letters and faxes in becoming the universally favoured communication method. As such, it is becoming increasingly more common for parties to reach an agreement in an informal manner about essential contractual terms. This situation can give rise to numerous potential disputes as to whether a legally binding agreement has formed and, if so, the actual terms of the agreement.

Recent case law demonstrates that Australian Courts are increasingly finding that email negotiations can in fact create a binding agreement prior to any documentation being actually drafted and executed.

The Case of Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd [2015] WASCA 21

The Western Australian Court of Appeal recently considered a dispute that arose between a landlord and a tenant concerning a proposed lease. Essential terms of the proposed lease were negotiated, amended and agreed to via email. The landlord, at the tenant’s request, provided the written lease but the tenant did not agree to all the terms and ultimately refused to sign the lease. The tenant subsequently gave one month’s notice to vacate the premises but the landlord asserted that the tenant was in fact bound by their agreement to lease.

The principal issue of the case was whether the parties intended to create a legally binding agreement via their exchange of emails, notwithstanding that a formal lease had yet to be drafted and executed.

The Court held that when the tenant accepted the amended lease proposal via email it was then that the parties intended to be immediately bound by an agreement to lease despite that no formal lease documentation had been finalised.

The Case of Pavlovic v Universal Music Australia Pty Limited [2015] NSWCA 791

The Supreme Court of New South Wales was presented with facts relating to two law firms negotiating the essential terms of a deed that was to be drafted and entered into between their respective clients. One of the solicitors emailed the other advising that his client “will sign” the deed. However, the deed was never executed by his client. The other acting solicitor contended that an agreement had been reached despite that the deed was not executed.

Once again the central issue of the case was whether the parties intended to be bound by the terms of the deed prior to the deed being drafted and executed.

At first instance the New South Wales Supreme Court held that the content of emails exchanged between the solicitors bound their respective clients to the terms of the deed. However, the New South Wales Court of Appeal rejected that finding and instead found that there was no binding agreement. The Court held that the parties intended to be bound at a later date once the formal deed had been executed, and that other than in the context of litigation proceedings, solicitors do not have the authority (unless expressly given by their clients) to bind their client to an agreement.

At what point is one bound?

The abovementioned case law highlights just a few possible scenarios that can arise in pre-contractual disputes. Invariably, the Courts are required to determine whether it was the intention of the parties to be bound by an agreement. Ultimately it is the key element of intention that the Courts analyse in determining whether an agreement is binding prior to any formal documentation being executed. This objective assessment involves the following considerations:

  • Whether there is agreement on the essential terms (not necessarily all the terms);
  • The parties actions after the agreement has been made;
  • The use of the words “offer” and “acceptance”; and
  • Referring to the agreement in the present tense as opposed to future tense.

To avoid potentially expensive and protracted litigation, it is imperative that you ensure all negotiations and agreements are undertaken in circumstances where the intention of the parties as to when they are bound is clear.

Marino Law has extensive experience in facilitating contract negotiations and preparation and can also assist with any disputes that may arise regarding same.

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