A good reason to think before you hit 'send'
The recent decision of the Queensland Supreme Court in Stellard Pty Ltd v North Queensland Fuel Pty Ltd found that a contract was formed between the parties negotiating the sale of a service station based on the email exchange between their employees and agents.
The seller, North Queensland Fuel (NQF), had been secretly negotiating with two potential purchasers at the same time. When NQF tried to get out of the deal with Stellard to go with the higher price offered by the other purchaser, Stellard successfully brought an application to have the Supreme Court declare that the contract formed by the email exchanges was valid and binding on the parties.
NQF argued two points:
- that there was no intention to be legally bound by mere emails and
- that the emails were not sufficient to satisfy the requirements of section 59 of the Property Law Act 1974 that contracts for the sale of land be in writing and signed.
NQF was unsuccessful on both counts and it was bound by the contract that it had formed with Stellard.
After an employee of Stellard inspected the service station and expressed interest in it, subject to several conditions, the real estate agent sent him an email advising that NQF would agree to sign a contract on certain terms and enclosing a draft contract for review.
The next day, the Stellard employee sent an email to the agent confirming the offered price and stating:
“This offer is of course subject to contract and due diligence as previously discussed. We are hopeful of effecting an exchange of contracts next Monday but need acceptance of our offer immediately so we are in a position to instruct the appropriate consultants to carry out the necessary investigations. I look forward to receiving your client’s confirmation that our offer is accepted as clearly both parties are now going to start incurring significant expenses.”
Approximately 45 minutes later, an employee of NQF sent an email in response as follows:
“We accept the below offer which we understand to be subject to execution of the Contract provided (with agreed amendments) on Monday.”
The solicitors for Stellard later sent an email with a draft contract attached for execution. The draft contract was different to the draft sent by the real estate agent because it had deleted a special condition about director’s guarantees and added conditions about a 40 day due diligence period and an environmental site assessment (conditions that the Stellard employee had mentioned at the inspection).
Four days later, the real estate agent told Stellard that NQF did not accept the changes to the contract and that it had signed a contract with another purchaser.
Was there a contract between Stellard and NQF?
The Supreme Court went back to basics to answer this question. The principles about parties who reach agreement about terms of a contractual nature after conducting negotiations and who also agree that there is to be a formal contract are found in the High Court decision Masters v Cameron.
In Masters, the High Court said that there are three categories of cases:
- The parties have agreed the terms of their bargain and intend to be immediately bound to the performance of those terms but at the same time, intend to restate the terms in a contract that will be fuller and more precise but not different in effect.
- The parties have agreed the terms of their bargain but have made performance of the terms conditional on the execution of a formal contract.
- The parties do not intend to make a concluded bargain unless and until they execute a formal contract.
In categories 1 and 2, there is a legally binding contract; in category 3 there is not.
Whether or not a contract has been formed is determined by an objective determination of the intentions of the parties.
What was the effect of the words ‘subject to contract’?
The Supreme Court said that the broader context of the negotiation suggested that the parties did intend to be bound immediately by the terms they had agreed on while expecting to make a further contract that would be substituted for the informal agreement containing such additional terms as the parties agreed on.
This conclusion was based on:
- emails making and accepting the offer
- the fact that NQF told Stellard that it would sign a contract on the terms set out in the email
- the email stating that Stellard needed immediate acceptance of its offer because the parties were going to start incurring significant expenses
- the response from NQF which, although it contained a reference to ‘subject to execution of the contract’, in light of the Stellard email that preceded it, was not seen as qualifying acceptance of the offer.
The Supreme Court thought that these communications showed that the parties intended to commence the tasks necessary to complete the contract and that use of the words ‘subject to contract’ were more consistent with the parties having agreed the essential terms with the intention that they would be formally recorded later.
That is, the intention of the parties fell into category 1 identified in Masters v Cameron.
Section 59 of the Property Law Act
The Supreme Court found that:
- emails were writing
- persons sending the emails had authority to represent the parties to the contract
- emails were signed in that they met the requirements of section 14(1)(b)(ii) of the Electronic Transactions Act 2001 because the emails sufficiently identified the persons and their intentions in making the communications
- parties have been negotiating by email and an offer is made by email, then it is open to the court to infer that consent has been given to the use of email as a mode of communication as required by the Electronic Transactions Act.
Points to note
- The fact that you agree that a formal contract will be executed subsequent to reaching an informal agreement does not mean that the informal agreement is not already binding.
- If you do not have authority to enter into an arrangement that you are negotiating, make sure that you expressly tell the other person that. That way, when you use words like ‘subject to contract’, it is more likely to mean that there is no contract unless and until a formal contract is signed because you are unable to commit your agency to contractual terms and the other party will know that.
- Do not use the language of offer and acceptance in your negotiations and make it clear that only a person with the requisite authority can bind the State.
- Emails are writing. Your signature block at the bottom of an email can be a signature. Don’t make the mistake of thinking that binding arrangements can’t arise from informal emails.
The information in this publication is provided for general purposes only. It is not to be relied on as a substitute for legal advice. Crown Law and the Department of Justice and Attorney-General accept no liability for losses caused by reliance on the material in this publication. Formal legal advice should be obtained for particular matters.
Published: 27 August 2015
Author: Melinda Pugh