It is common practice to engage in pre-contractual negotiations via email, in doing so you run the risk that those emails are considered evidence of a valid and binding contract and a court may compel performance of the contract, even where parts of the agreement are not finally agreed.

Common phrases such as ‘subject to contract’ in an email may no longer be sufficient to disprove an intention of the parties to enter into a contractually binding agreement.

This has been shown most recently in the decision of the Supreme Court of Queensland in Stellard Pty Ltd & Anor v North Queensland Fuel Pty Ltd [2015] QSC 119, where the Court examined whether an offer to purchase a service station business and the associated land made via email and ‘subject to contract and due diligence’ constituted a binding agreement.

Expressions of interest and negotiations took place via email to sell  freehold land and the business of the service station.  The parties engaged in continued negotiation via email, eventually agreeing on the the essential terms of the contract such as price, settlement date, stock and conditions of sale.

The plaintiffs claimed that a contract for sale was effectively constituted by those emails.  The defendant’s position was that there was no intention of the parties to be legally bound as there was no memorandum sufficient to constitute an agreement for sale and the email stated that the offer was made ‘subject to contract’.

Principles applied by the court

In coming to a decision the court applied the principles set down in Masters v Cameron [1954] HCA 72 as summarized in Halsbury’s Laws of Australia:

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 the 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 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.

Whether or not a contract has been formed requires an objective determination of the intention of the parties. In Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8 the Court said:

It is of the essence of contract, regarded as a class of obligations, that there is a voluntary assumption of legally enforceable duty.

To be a legally enforceable duty there must be identifiable parties to the arrangement, the terms of the arrangement must be certain, and, unless recorded as a deed, there must generally be real consideration for the agreement.

Yet the circumstances may show that [the parties] did not intend, or cannot be regarded as having intended, to subject their agreement to the adjudication of the courts.

In Stellard the Court held that the parties had intended to enter into a contractual agreement and accordingly were immediately bound by its terms. The mere fact that the emails stated that the offer and acceptance was ‘subject to contract’ indicated that the agreed upon terms would be formally recorded at a later point in time.

Another recent decision on this topic is that of Pavlovic v Universal Music Australia [2015] NSWCA 313, where the New South Wales Court of Appeal came to a different conclusion to the Court in Stellard whilst still applying similar reasoning.

The Court of Appeal in Pavlovic stated that the three classes set out in Masters v Cameron are not to be applied as strict categories into which cases must fall.  Rather, the decisive issue is always the intention of the parties, ascertained objectively from the terms of agreement, read in light of the surrounding circumstances.

Their Honours held that:

Whether parties intend to bind themselves to a contract is determined objectively, having regard to the intention disclosed by the language the parties have employed. In cases which do not depend on the construction of a single document, what is involved is an objective determination of the question from the communications between the parties in their context and the parties’ dealings over the time leading up to the making of the alleged contract. This involves a consideration of the subject matter of the communications and what the parties said or wrote.

The facts in Pavlovic were similar to Stellard. Negotiations to terminate a joint venture took place via email with all correspondence being subject to a formal written agreement. The final piece of correspondence between the parties was an email on 24 December 2014 allowing for “a further 48 hours to sign the documents and forward copies to us”.

Bathurst CJ stated that the 48 hour window that was granted by the client for the signing of the agreement was inconsistent with a view that there was a contract already in place.  That very email indicates that there was no intention by either party to enter into a legally binding agreement up until such a time as a formal agreement was executed.

Where to from here?

Each of the two decisions came to opposite conclusions, however each turned largely on its own facts.  What is important to note from both decision is that:

  1. it is not the parties’ subjective intentions in entering into negotiations that are most relevant, but rather what can be objectively ascertained from the correspondence and surrounding circumstances as to what those intentions were.
  2. it cannot be assumed that including “subject to contract” in email negotiations will, of itself, show an intention by the parties not to become legally bound.  The court will require explicit and continued mention of the intention of the parties.
  3. In deciding whether the parties intend to be bound, an objective assessment of each parties’ intention and the surrounding circumstances giving rise to the dispute will need to be undertaken.
  4. It is essential that great care is taken when engaging in email correspondence concerning negotiations to avoid becoming legally bound where you or our client have no intention to do so.