When will a contract which has not been formally executed will be considered binding and concluded?

Take home points

1.     An agreement may considered formed and concluded, notwithstanding the fact that the formalities of execution have not yet been complied with, if the conduct of the parties indicate an intention to be bound to the agreement.

2.     Contractors need to take care where they only intend to be bound on the exchange of executed counterparts of a deed that they do not engage in conduct which indicates an intention to be bound prior to exchange.

The Queensland Court of Appeal has recently revisited the essential elements involved in forming a contract determine a dispute in the case of AJ Lucas Operations Pty Ltd v Gladstone Area Water Board & Anor [2015] QCA 287.

In summary, the Court has clarified that in some circumstances it may find that there is a valid and binding contract even in circumstances notwithstanding the fact that the formal requirements of execution have not yet been met. In order to resolve the appeal, the Court stepped through the essential elements required to prove a contract were in existence, which included:

1.     An offer (and acceptance of that offer);

2.     Intention to be bound to the offer;

3.     Consideration for the agreement; and

4.     Certainty of terms.

In the above case, a dispute arose between the parties about whether or not the parties had entered into an agreement to settle a dispute about the termination of a joint construction project. One party argued that it did not intended to be bound before the formal execution of an agreement, and that sending a draft document after negotiations was only an offer to settle.

The Court confirmed that the decisive issue in determining whether or not a party had intended to be bound to a contract was to determine if such intention “could in fact be objectively ascertained form the terms of the document when read in light of the surrounding circumstances.”[1]

Such surrounding circumstances may include the conduct of the parties as well as the correspondence and other words used. The surrounding circumstances must be considered not in isolation but in light of all other communications – parties may not be able to resolve the dispute as to whether or not there is a binding agreement by trying to draw out from oral or written exchanges a discrete offer and acceptance.[2]

Background Facts

On 12 September 2011, the respondents entered into a contract with the appellant, AJ Lucas Operations, in relation to a joint venture to provide water and sewerage pipeline infrastructure and access roads between Gladstone and Curtis Island.

On 7 or 8 June 2012, the parties entered into a Deed of Termination which brought to an end of the construction contract. The Deed of Termination provided that the appellant’s various claims for payment would be dealt with pursuant to a dispute resolution regime under the Deed of Termination (firstly negotiations and then reference to a panel for expert determination).

Between June and November 2012, the appellant and the respondents engaged in settlement discussions. Relevantly on 5 November 2012, a representative from the respondents emailed a representative from the appellant making a settlement offer of $25,074,918.62 for all of the appellant’s claims except for a number of identified exclusions which required more information or to be referred to an expert panel for determination. The email attached a draft deed containing the offer.

Between 7 November 2012 and 13 November 2012, there were a series of emails between the parties in relation to a break-up of the offer amount and how the offer amount had been composed. On 13 November 2012, the appellant sent an email saying “my suggestion is that we do this together…therefore there will be no misunderstanding…this would give us both the best chance of reaching a quick resolution.” When the respondents proposed a meeting on 16 November 2012, the appellant replied “[We] will be there…morning would be best – to give us time to do a deal and document it.”

On 16 November 2012, the parties met twice and engaged in discussions which lasted for more than three hours to negotiate the deed of settlement. A final deed was prepared following those meetings and faxed to the chairman of the appellant (who also attended the meeting) who signed it and faxed it back to the respondents’ lawyers.

At trial, there was disagreement as to whether or not the parties entered into a binding agreement to settle the appellant’s claims. The appellant argued that because the the deed of settlement was never formally executed as a deed or under section 127 of the Corporations Act 2001, it had resiled from the agreement as to the terms reached up to that time (by adding further terms). The respondents disagreed and claimed that an agreement had been reached based on the actions of the parties.

After hearing evidence from the parties as to what occurred during the discussions and making findings of fact, the trial judge, Justice Jackson, held that:

1.     the appropriate characterisation of the facts was that the final deed of settlement was sent to the appellant’s CEO (who had authority to execute it) to sign and return as confirmation of acceptance on behalf of the appellant of the agreement made that day.  The fact that the CEO would bind the appellant was the very reason that the respondent had required him to be present at the negotiations in the first place.  At the end of the first meeting, the expressed intentions of the parties was that they had reached an agreement which was then to be reduced to a final written form in the later meeting between the parties’ legal representatives;

2.     The CEO’s action in signing and returning the final deed of settlement was an acceptance of the respondents’ offer of contract on those terms.  There was nothing in the language that suggested that the signed final document was an offer by the appellants to the respondents for the purposes of acceptance;

3.     the history of prior contracts between the parties did not establish a course of dealing of contracts made only upon the exchange of counterparts or in the form of a deed.  The fact that the respondents had offered a draft deed to embody and reflect the offer did not mean that the offer was made on the footing that there would be no binding contract until there was an exchange of counterparts executed in the form of a deed; and

4.     there was nothing inconsistent with the parties making arrangements for formal exchange the following day and the respondents’ claim that a concluded contract was reached. The parties intended to make a contract by the CEO signing and returning the final deed of settlement, notwithstanding that it was also intended that the deed of settlement would be executed in counterparts as a deed and those counterparts exchanged.

The appellant appealed the decision to the Court of Appeal, arguing that the trial judge had incorrectly characterised the legal consequences of the factual findings made during the trial.

Court of Appeal Decision

The Court of Appeal unanimously held that notwithstanding the parties had not provided a countersigned deed or contract, there was a concluded agreement to settle a number of the appellants claims as agreed to during the meeting on 16 November 2012.

Writing for the Court, Justice Ann Lyons noted with the trial judges’ characterisations of the facts were correct and it was open to the trial judge to conclude from the documents and evidence before him that the parties understood that while they must go through the formality of getting the deed signed by all the parties, the very purpose of the meeting was so that a binding agreement could be reached between the authorised representatives (the CEOs) of the parties.

The effect of words said by the appellant that “there was a deal…to settle the arrangement” was powerful evidence of the binding nature of the agreement. There was no requirement in the previous correspondence that any agreement reached at the meeting on 16 November 2012 was subject to further documentation or explicitly approval of the various boards. As such, there was a clear intention to be bound by both parties.

Her Honour agreed with the trial judge that the fact that a subsequent meeting was required to prepare a document to send to the appellant’s CEO to sign meant that no concluded agreement was reached during the first meeting. However, the discussion by the parties at the first meeting was inconsistent with the proposition that the deed prepared at the second meeting was an offer to be signed by the appellant that could be accepted or rejected by the respondents.

The contract entered into by the parties at the second meeting was one within the second category of Masters v Cameron, namely one where the parties intended to make a contract by the appellant signing and returning the agreed final document but also intended that the deed of settlement would be executed in counterparts as a deed and those parts exchanged. The parties use of language such as “we accept” and “glad to have this sorted” in the context of their conduct objectively viewed meant the parties intended to be bound immediately.

The decision serves as a timely reminder that parties should be careful not to engage in conduct which indicates an intention to be bound prior to exchange or the formal execution of an agreement. As a suggestion, contacting parties should also preface any agreement in principle with a disclaimer to clarify that there is no intention to be bound to any agreement until the agreement has been properly executed.

[1] GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 per McHugh JA at 634

[2] Cannon Street Pty Ltd v Karedis [2004] QSC 104 per Muir J  at [108]