Pre-contract negotiations can result in binding agreements

Often people believe that pre-contractual negotiations cannot amount to a binding contract where no formal contract has been signed.

However, two recent cases have found binding contracts do exist in relation to leases and sale contracts, without the parties signing formal documents.

Email exchanges can 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.

In a Western Australian case, the Court considered a case where the landlord had emailed the tenant with a proposal for a new lease which was noted ‘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, 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revised proposal, the parties intended to be bound immediately by an agreement to lease which would in due course be superseded by formal lease documents.

In another case, a buyer made a verbal offer to purchase a service station business and property subject to various conditions. The seller’s agent emailed the buyer setting out the basis upon which the seller would sign a contract. The email included details of the price, deposit, settlement date and attached a draft contract. There were further negotiations by phone and email.

The buyer confirmed its offer by email and stated it was ‘subject to contract and due diligence as previously discussed’ and asked for the offer to be accepted immediately. The offer was accepted by the seller by email ‘subject to execution of the contract provided’. The buyer then sought further amendments to the form of contract. In the meantime, the seller found another buyer for a higher price and denied that a binding contract existed.

The Court found in this case that the seller intended to be immediately bound by the initial offer despite no formal contract being signed. The broader context of the email suggested that the parties were content to be bound immediately by the terms they had agreed upon, with the intention they would be formally recorded later in a subsequent contract.

The lesson to be learned from these cases is that the Courts assess the intention to enter into an immediately binding contract on an objective basis i.e. 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 necessarily all of the terms).
• What the parties do and say after the agreement has been made.
• Use of the words ‘offer’ and ‘acceptance’.
• Referring to the agreement in the present tense instead of the future tense.

Therefore, parties need to be clear and consistent in articulating their intentions through their words and conduct. If a person does not want negotiations to be binding before the signing of a formal agreement, they need to 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.

In summary a person should not:

• sign a preliminary agreement without first seeking legal advice.
• unconditionally agree to terms and conditions in correspondence unless they are prepared to be bound by them.
• ignore communications from the other party that do not reflect the agreement that the person thinks they have, or what they would agree to.

Seeking legal advice, writing back to the other party and setting the other party straight as to what a person’s understanding is, are important means of protecting their position so that they will not be bound at a point in time when they did not intend to be bound.

For further information, please contact our Commercial & Property Team.