You have struck a ‘deal’, but have you entered a binding agreement?

This question has again been before the Queensland courts. In this edition of Fundamental, lawyer Sarah Sherman discusses two recent Queensland Supreme Court cases considering whether a legally binding agreement was reached during lease negotiations. 

These cases again highlight the importance of careful communications when engaging in any commercial negotiation (not just leases) and the objective approach taken by the courts in determining whether parties intend to be legally bound. Associate Matt Dolan outlines what you need to know.

What do you need to know?

• A legally binding agreement may be inadvertently created.
• Careful communication is critical when negotiating and preparing a heads of agreement (HOA), memorandum of understanding (MOU), letter of offer or similar document. 
• If you do not intend to be bound, include express wording to that effect in your communications and documents.
• Review all communications objectively – would a reasonable person think you intended to be bound?

Ask yourself: am I intending to be bound? 

Ultimately, if a dispute arises as to whether a binding agreement has been reached, the courts will examine each matter on a case-by-case basis to determine whether the parties intended to create a legally binding agreement. A party seeking a court order that an agreement is legally binding must prove the parties intended to be legally bound.

It is common for a lease, sale, or other commercial transaction to start out with informal discussions as the parties start to work out what they are each looking to achieve. As things progress, a HOA, MOU, letter of offer or similar document may be produced, then a more formal legal contract, deed, or agreement prepared.

Importantly, you do not need to have a signed document to have a legally binding agreement. Courts have held that email exchanges can amount to a legally binding agreement, despite no formal documentation ever being signed. Handshake deals and verbal agreements have also been held to be legally binding. The fact parties may expect formal documents will be prepared and signed at some later stage does not necessarily mean informal negotiations are not binding.

Whether you are intending to be bound, and at what stage of negotiations you intend to be bound, are important considerations that need to be thought about before starting any negotiations. For example, you may want to set out preliminary matters that have been agreed, without being bound, and then proceed to iron out more specific details of the deal and prepare formal and binding legal documentation for signing. In this case, you are not intending to be bound until all agreed terms are recorded in a formal written document and signed by all parties.

Alternatively, if certain elements like confidentiality or exclusive dealing are important, you may wish to agree that certain terms around such critical issues are binding, but the remainder of the initial negotiations are not. In this case, the HOA, MOU, letter of offer or similar document can expressly state that specifically identified terms are binding, but you otherwise do not intend to be bound until formal documentation containing all agreed and final terms is signed. Any terms that are intended to be binding should be drafted in as much detail as possible.

How do I make it clear I am not intending to be bound?

If you are not careful and clear in your communications, what you think may be informal discussions or documentation may in fact have the unintended consequence of being legally binding. This can even be the case if your discussions, negotiations or documents are stated to be ‘subject to contract’, ‘subject to formal documentation’ or similar.

So, care needs to be taken when communicating with other parties as the courts will take an objective approach and examine and consider all communications between the negotiating parties to determine whether there was an intention to be legally bound. If you do not want to be bound by your communications, this should be clearly stated from the outset and throughout your negotiations. 

Also, you should not engage in any conduct or make any promises or representations to the other party that depart from that position as this could result in compensation being ordered against you if the other party has relied on your conduct, promise or representation and has suffered loss as a result. Any initial offer and subsequent counter offers (written and verbal) need to clearly provide, unless expressly stated otherwise, you are not intending to be bound unless and until the parties execute and exchange formal written documentation.

Reach out to our lawyers who can help step you through negotiating and preparing a deal and binding agreement.