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Getting It Wrong When Contracting

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By Alicia Hill, Principal, MST Lawyers

When businesses or individuals enter into agreements with each other to perform services or provide goods, most people feel reasonably confident that they understand what is required to enter into a valid contract.

The Courts are kept busy with cases where the parties have failed to satisfy the basic elements of a contract, leading to unhappy outcomes. This article looks at how commercial parties can fail to achieve what they were intending to be the outcome when contracting.

The basic elements of a contract are relatively well known. An offer is made by one party that is accepted by the other. Consideration is required to support the offer with the intention that this will create a binding legal arrangement between the parties

Despite the apparent simplicity of these requirements, a number of cases arising in 2017 document that entering into a binding contract it is not always as simple as it may seem.

In Queensland Phosphate Pty Ltd v Korda [2017] SCA 269, Liquidators were suing to set aside a security agreement and share sale agreement that had been entered into between Queensland Phosphate Pty Ltd and Legend International Holdings Incorporated.  Prior to it getting to trial, the matter settled.

The Terms of Settlement were contained in an exchange of emails between the parties’ solicitors. As a result of different interpretations, one party argued that the email exchange constituted a binding settlement agreement and the other argued that a formal Deed of Settlement needed to be produced and signed off by the parties in order for a binding settlement agreement to be found to have been reached.

The Terms of Settlement were contained in an exchange of emails between the parties’ solicitors. As a result of different interpretations, one party argued that the email exchange constituted a binding settlement agreement. The other party argued that a signed, formal Deed of Settlement was required for a binding Settlement Agreement to have been reached.

The Victorian Court of Appeal was asked to determine whether there was a binding agreement or not. It concluded that to determine whether a binding agreement exists you need to consider if all essential terms have been agreed between the parties. If not then the agreement is incomplete and cannot be enforced.

In this case, there were matters of importance on which the parties had not reached consensus. These included: who would be paying fees, whether indemnities would be provided for directors, whether one or other of the parties would pay delayed expenses and whether the parties were able to provide the Liquidator with releases in respect of the deal.

The Court determined that this lack of consensus on essential terms meant that it was unlikely that the parties had an immediately binding agreement and instead still needed to negotiate further, prepare and sign a formal agreement for there to be a binding contract.

In Al Azhari v 27 Scott Street Pty Ltd [2017] VCS 600, the Victorian Supreme Court was asked to consider whether a document signed at mediation was a binding contract capable of being forced by the parties immediately.

The Court looked at the terms that had been noted at the mediation purporting to be settlement terms and thus, giving rise to an enforceable contract and considered whether the parties reached finality of the terms.

In particular, the Court observed:

(a)          the terms included division of a property development but did not clearly identify what properties would be divided amongst the parties,

(b)          statutory requirements for dealings with land had not been met: in this instance, no proforma contract of sale or vendor’s statement including relevant statutory required material had been provided, also no proforma contract providing for what fixtures, fittings for each lot had been agreed;

(c)          whether a date of settlement had been set for the property transfers, which was not stated.

As such, the Court said that there was no contract capable of being enforced.

In the case Bullhead Pty Ltd v Brickmakers Place Pty Ltd [2017] VSC 206, the Court was asked to consider whether an agreement, called a Finalisation Agreement, which had been entered into between the parties was a binding contract capable of being enforced.

The Finalisation Agreement was alleged to be set out in two emails exchanged between the parties.  The first email set out an offer to agree to buy the interest of one of the parties out of the property development. The second email purported to accept that offer stating, “You can take down the sign”.

The emails exchanged would not appear to be sufficiently certain or clear enough to give rise to a binding contract. Arguably they were also not in compliance with statutes requiring any transactions to be in writing pursuant to the Instruments Act 1958 (Victoria) and Section 53 of the Property Law Act 1958 (Victoria).

However, the Court was willing to find based on the Electronic Transactions (Victoria) Act 2000 that the Finalisation Agreement was sufficiently, although not exclusively in writing, constituted by the emails exchanged.

These three cases in 2017 illustrate that it is not always clear-cut when a contract will be entered into that is capable of being enforced. There are also perils when attempting to enter into contracts without understanding the rules around contract formation.

We recommend parties seek assistance from qualified legal practitioners when documenting any agreement reached with another party; particularly where there is a risk that you may wish to enforce the terms agreed.

A contract does not have to be a lengthy, complex and unwieldy document. It can be a simple exchange of emails. However technical legal requirements need to be met for it to be valid and enforceable.

The best cure they say is prevention and the cost of a quick phone call, email or request to review the terms of an agreement to a qualified legal practitioner, is ultimately much more cost effective than being a party to litigation in a court seeking to enforce or denying the existence of a contract.

Please contact Alicia Hill by email or call +61 3 8540 0200, if you have any queries or would like to seek general guidance in respect of contracting in a commercial context.