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“Subject to contract” – is there a binding agreement?
In pre-contractual negotiations parties often make offers and counter-offers as to price and other terms, and reach an agreement that is expressed to be “subject to contract” in the belief that they are not bound until a formal contract is signed by both parties.
However, this is not always correct!
In Stellard Pty Ltd v North Queensland Fuel Pty Ltd  QSC 119 there was a verbal offer to purchase a service station business and property for $1.6 million.
The offer was made by the buyer’s representative in the course of verbal negotiations, and then expanded upon in e-mail discussions. The offer was to buy the property subject to due diligence and other conditions.
The seller's agent had emailed the buyer, setting out the basis on which the seller would sign a contract. The email included some specific and essential terms such as 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". There was further negotiation as to the terms and conditions of contract but no formal contract was ever signed.
However, in the meantime the seller found another buyer for a higher price and denied that a binding contract existed.
The buyer sought to enforce what it asserted was a valid and binding agreement comprising the email communications and correspondence between the agents and solicitors.
This was a classic Masters v Cameron situation where the High Court set out the three possibilities as follows:
“Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the subject matter of their negotiation is to be dealt with by a formal contract, the case may belong to any of three classes.
(1) It may be one in which 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.
(2) It may be a case in which 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.
(3) The case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.”
A close examination of the wording in the emails between the agents strongly suggested that the parties were content to be bound immediately and exclusively by the terms they had agreed upon, and intended that they would sign a formal contract later.
Here, the Court found that the seller intended to be immediately bound by the initial offer, despite no formal contract being signed.
The Court said:
“The response from the defendant (sent within an hour of receiving the offer email) is consistent with the position that a contract had been formed. Although there is a reference to “subject to execution to of the contract ...” that should not, in the light of the document which preceded it, be seen as a qualification to the acceptance, rather it is more consistent with the parties having agreed on the essential terms with the intention that they would be formally recorded later. Indeed, the words “agreed amendments” is consistent with something already having been resolved and it being acknowledged that there may be amendments to that agreement.”
The test of intention
Courts assess the intention to enter into an immediately binding contract on an objective basis – what would a reasonable person believe the parties intended from their words and conduct?
Ascertaining intention is a process which involves a consideration of at least the following factors:
- What were the essential terms agreed upon?
- What remained to be agreed upon?
- What did the parties actually do and say after the agreement has been made?
- What was their express wording?
- Did they use terms such as “offer" and "acceptance"?
- Did they take any steps consistent with an agreement having been reached?
In the course of considering the e-mails and context, the Court also found here that in fact the seller was at the same time negotiating with another party and seeking to “play off” the buyer.
Be clear and consistent in negotiations by both wording and conduct.
If you don’t wish to be bound until a formal contract is signed, use express terms to that effect. Say: “there is no agreement unless and until a formal agreement is entered into”.
Be extra careful if you are negotiating with two parties at the same time!!
Each case turns on its own set of facts and circumstances, but this case illustrates the fact that parties who enter upon negotiations without the benefit of legal assistance can sometimes be caught up by their own lack of understanding of the law and be exposed to costly consequences.
For any further advice or assistance in relation to negotiating or enforcing a contract, please contact Michael Sing on 07 3009 8444.Michael Sing