By Lauren Weier, Senior Associate
It is common practice for parties to negotiate the commercial terms of a contract on the basis that no contract is to be formed until formal contracts have been signed. Usually this is expressed by using the words such as ‘subject to a formal contract being executed by the parties’.
Often this is due to lawyers not being involved in the negotiation process and the parties wish to have some comfort that if anything crucial has been missed from a legal perspective, they are not bound to the document they have signed.
However, the recent Queensland Supreme Court decision of Stallard Pty Ltd & Anor v North Queensland Fuel Pty Ltd  has turned this concept on its head and stated that despite the fact that correspondence may have included the ‘subject to formal contracts’ phrase, the parties were bound by the agreement.
What the case said
In this case, the parties were negotiating a contract for the sale and purchase of a service station business and the land. They had agreed on certain commercial terms, such as the purchase price, deposit, how stock would be valued, the necessity of a due diligence period and the timing for settlement.
A draft contact had also been prepared based on those terms, with the intention that further negotiation would occur. The negotiations and the draft contract were exchanged by email. When providing the draft contact, the buyer requested that seller confirm its acceptance of the term sheet, subject to the execution of the draft contract provided. The seller did accept the offer.
While negotiating the final terms of the contract, the parties did make note that that the agreement was subject to a formal contract. Essentially, an agreement to agree. Unfortunately, there was a deadlock in negotiations on two points: the provision of director’s guarantees by the buyer and the timing of the due diligence period.
On this basis, the seller sought to end negotiations and subsequently entered into a contact with another purchaser.
The Court held that despite the parties stating that the negotiations were subject to entering into a formal contract, the parties intended to be bound upon the initial acceptance of the draft terms.
When making this determination, the Court put a lot of emphasis on the previous conduct and the overall intention of the parties. It held that it was clear from the correspondence between the parties that they intended to be bound by the negotiated terms, regardless of the fact that they maintained it was subject to a formal contract. This was because the seller has accepted, in principle, the draft terms and contract provided by the buyer and had agreed to negotiate the final outstanding terms further.
Ways to limit your chances of being bound to a document unintentionally
Following this case, it may be difficult to avoid being bound when negotiating the terms of a contract, however, using the following methods may assist:
- using the words such as ‘offer’ and ‘acceptance’;
- responding to correspondence which contains terms which you are not prepared to agree to; and
- making unconditional agreements where you are not comfortable with the whole term.
- Ensure all communication between the parties makes reference to the negotiations being subject to certain conditions which are still to be agreed; and
- Try to communicate to the other parties as clearly as possible that it is not your intention to be bound by any agreed terms until the contract has been executed.
If it can be seen that it was clear that the parties did not intend to be bound by the terms they were negotiating until a formal contract was executed, then it is less likely that the Courts will consider that a contract has been formed and the parties may be able to walk away if required.
 2015 QSC 119
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