News & Insights

It was with interest that I read in the AFR recently that Brisbane Fund Manager, Sentinel, was heading to Court to enforce its “deal” to buy the Airlie Beach Hotel for $41.5m. A quick read of the Court summary tells us that a contract was not signed but that “a heads of agreement” contract was exchanged.

So, when do you have a deal? A simple question lacking a straightforward answer. The obvious response is that a deal occurs when the terms are agreed, and the contract signed. Laws in most, if not all States, however, require that contracts for land must be in writing and signed – but of course, it is never as simple as that. Human nature means that if a better offer comes along, someone will seek to walk away from the “deal”.

are electronic agreements a deal?

We live in an electronic age (reinforced by Covid) where negotiations are likely to be by email, phone and text but, by using this form of media, it is easy not to be cautious or even be aware of the legally binding effects of what you are doing or saying.

So, when is a deal binding where no formal (written) contract has been executed? The Courts have considered these issues and have come up with what some may say were surprising answers.

Below are some principles the Courts apply to business dealings.

1. Is there an intention to be immediately bound by the terms, but at the same time, have the terms restated precisely in a more formal document?
2. Is there a complete agreement on the terms of the bargain, however performance is conditional upon execution of a formal document?
3. Is there no intention of the parties to make a concluded bargain at all, unless and until they execute a full contract?
4. Is there an intention to be immediately bound by the terms agreed or are they expecting to substitute a further or written contract containing additional terms?

sale of land

Stellard & Anor –v- North Queensland Fuel (2015)

In summary, the Seller and Buyer negotiated by email for the sale of a service station. The terms and price were agreed but the Seller’s email contained the words “subject to contract” and a requirement for immediate acceptance of offer. The Buyer accepted the offer.  Subsequently, the Seller argued that because a written contract had not been exchanged no contract had been formed.

The Court held that where the central terms are agreed, the emails, telephone conversations and conduct of the parties can be relied on to show the parties had formed a binding contract despite the Seller using the phrase “subject to contract”.

agreement to lease

Luxottica Retail –v- 136 Queen Street (2011)

Luxottica Retail was a sitting tenant but its lease had expired. Terms of a new lease including an increase in rental were agreed in email negotiations between the tenant and the Landlord’s agent. After acceptance, the Landlord (unknown to the agent) accepted what they considered to be a better offer.

The Court held:

Section 59 of the Property Law Act (Qld) requires a contract for land or interest in land (lease) and must be in writing and signed.

The requirement for writing and a signature were satisfied by electronic communications including the (signature) footer which contained the parties name and details.

intention to make deal imperative

The fourth principle applied by the Court to the business dealings being “an intention to be immediately bound by the terms agreed, while intending to finalise the written contract” is a dangerous threshold for negotiators in an age of short and often cryptic email messages.

If the conduct of the parties in its exchange of emails reflects an intention to be bound, then a party may be able to enforce that intention.

If, during negotiations, you do not wish to be immediately bound, then stating “subject to contract” is insufficient and you need to go further. This can be achieved by including the words to the effect of “we do not intend to be bound by any agreement until a formal written contract has been executed”.

As to the Sentinel case, I suspect one party will argue the emails and conduct is sufficient to form a contract while the other will say it was never more than a heads of agreement and no “deal “ had been made. We will just have to wait for the Court to decide.

application in nsw

It is not clear whether the Courts would have reached the same conclusion in the Stellard case had the same set of facts occurred in New South Wales. The Courts in NSW have traditionally enforced the formal conveyancing practice and consider the formal exchange of contracts to be paramount in establishing a binding contract.

In the 2018 case of Bobi Damcevski v Emilios Demetriou & Ors [2018] NSWSC 988, the Court had to consider whether a “heads of agreement”, which was drafted during the course of a mediation but contemplated the formal execution of a deed of settlement and release, was binding. The Plaintiff argued that the Heads of Agreement fell into the first category (i.e. that there was an intention to be immediately bound with terms to be restated in a formal document). In contrast, the Defendant argued that it was merely an agreement to agree and therefore not enforceable. The Court ruled in favour of Plaintiff.

As well as being a timely reminder for parties in a dispute to carefully consider whether they intend to be immediately bound by a settlement agreement, this case may also be an early example of the Courts in NSW changing their position when it comes to “informal” agreements – so it’s one to keep an eye on.

application in victoria

Victoria has traditionally taken a similar approach to NSW in dealing with informal contracts. In the 2017 case of The Edge Development Group Pty Ltd v Jack Road Investments Pty Ltd, the Court held that a “Letter of Offer” for the sale of property was not binding as it was expressed to be subject to the contract being executed. This was notwithstanding the fact that the salient terms of the sale had been agreed upon. A very different approach to the Queensland Courts in the Stellard case.

If you are looking for further insight into what constitutes a formal agreement, reach out to our Property team to steer you in the right direction.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.