When it's too late to renege on the deal
If we pause to think about it, we are negotiating many times a day in our everyday business lives. It is therefore unsurprising that we are often asked by our clients in business “can I pull out of the deal?” or “But we had a deal! Can I force them to complete the deal?” The answer depends on whether there is a binding contract according to law.
For a contract to be binding in Australia, there needs to be (1) an offer; (2) acceptance of the offer; (3) consideration (most commonly the supply of money); (4) capacity (sober adult with mental capacity); (5) an intention to enter legal relations; and (6) certainty as to the term. Except in some circumstances (eg. sale of land), the entire contract can be formed by oral communication without any need for writing or a document.
Applying the above ‘elements’ to a scenario to a scenario can be a complex exercise and often leaves the issue of whether there was a binding contract open to argument either way. Many cases have been decided by the superior Courts in Australia on the topic, one of the more famous being Masters v Cameron (1954) 91 CLR 353. That case identified 3 categories of common scenarios to assist in determining whether or not there is a binding contract. They are:
1. The parties have completely agreed all the terms of the deal and intend to be immediately legally bound to the performance of those terms, but at the same time propose to have the terms documented more precisely but not differently in effect (eg. where it is agreed the two parties solicitors will record the terms in a deed or written agreement);
2. The parties have completely agreed all the terms of the deal and intend no changes to those terms, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document (eg. “payment of the purchase price will be made within 28 days of execution of a deed recording these terms”); and
3. Where the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract (eg: “these terms will not be binding on the parties until a deed is prepared and executed containing such provisions as each party sees fit”).
The first 2 categories are legally binding contracts and the 3rd is not. Determining which category the transaction falls into requires an objective interpretation of the conduct of the parties to the negotiation.
We encourage our clients to ensure that, where they want to have a ‘deal’ reviewed by their lawyer before being legally bound to it, they make that intention clear to the other party and say (preferably in writing) that it is not intended that the terms be legally binding until an agreement is prepared and signed by the parties.