When negotiations for a deal or transaction fail, and formal documents are not yet executed, the question arises whether the preliminary agreements are binding on the parties.

According to the Western Australian Supreme Court of Appeal in the recent decision of Vantage Systems Pty Ltd (Vantage) v Priolo Corporation Pty Ltd (Priolo) ^[1], a binding agreement can be inferred from an exchange of emails, in the absence of a signed contract and while certain terms of the lease are still being negotiated.

What happened?

Priolo was the owner of property over which Vantage had a lease for office space and a licence for car parks (Original Lease), which was due to expire on 30 June 2009. In May 2009, discussions began regarding the possibility of a new lease and licence and several emails and proposals were exchanged in order to agree upon the terms of this new lease and licence.

On 4 June, a revised proposal (Proposal) was sent from Priolo to Vantage and was signed off with the following:

• 'Can you please confirm in writing that the above proposal is acceptable to Vantage such that we can then proceed to instruct Priolo’s solicitors to prepare the draft lease and licence documents.'

On 10 June a response was sent by Vantage which read:

• 'Vantage is happy with the terms of the proposal. We have received the sub-tenant's approval of the terms as well. Please proceed with wrapping this up.'

All of the essential terms for an agreement for lease and licence were addressed in the Proposal. However, it contained an error relating to the licence fee for the car parks. The fee was recorded as '$375 per bay per annum', when it should have read '$375 per bay per month'.

Upon receiving acceptance of the Proposal, Priolo’s solicitors then prepared draft contracts and, on 2 July 2009, these documents were sent to Vantage for approval before execution. It wasn’t until 4 September 2009 that Vantage responded to the draft documents and disagreed with the 'make-good' provisions. Negotiations moved slowly, and the sub-tenant attempted to terminate its tenancy.

By letter in October 2009, Vantage informed Priolo that no concluded agreement to lease had been made, that Vantage was occupying the premises under the over-holding provisions in the Original Lease, and that it would vacate the premises on 30 November 2009. Priolo asserted that Vantage was bound by a concluded agreement to lease and licence with Priolo.

The key issue

According to the Court, the fundamental question was whether the parties intended that upon Vantage accepting the Proposal, they would be bound immediately and exclusively by its terms, while expecting to execute formal lease and licence agreements in substitution for the earlier agreement which would contain, by agreement and after negotiation, additional terms.

The Court held that relevant intention is the intention to contract, and not what was intended by the terms in the alleged agreement, even where it is agreed a formal contract is to be executed. This requires an objective assessment of the state of affairs between the parties, disregarding any uncommunicated reservation or intention a party may have.

The court considered factors such as the:

• subject matter of the agreement
• status of the parties
• relationship between the parties
• surrounding circumstances.

Application to the facts

The Court placed emphasis on the dealings and communications between the parties over a period of time leading up to the Proposal, which continued after acceptance of the Proposal. These interactions were assessed in light of the commercial circumstances surrounding the discussions, known to both parties.

The Court concluded an objective assessment suggested, upon Vantage accepting the Proposal, the parties intended that:

• there should be a binding agreement to lease and licence
• the parties would be bound immediately by the terms of the Proposal
• the agreement to lease and licence would be superseded by a formal agreement in due course.

This conclusion was based on a long list of circumstantial factors identified by the Court, focusing on the state of dealings at the time the Proposal was accepted. These factors can be summarised as follows:

• Vantage had been in occupation of the premises for six years and was therefore very familiar with the premises
• Priolo had been the owner of the property for two years therefore Vantage was in a position to make a decision based on experience as to whether Priolo was reliable
• the original lease was due to expire in under two weeks and Vantage had not identified any other office premises and was not attempting to locate other premises
• the sub-tenant had approved of the terms in the Proposal
• the Proposal contained all terms legally necessary to form a contract
• the duration of the lease under the Proposal was three years, the same term as the old lease and a particularly short term for commercial leases
• the Proposal did not involve provisions that were materially more onerous or less advantageous to either party
• the failure of the parties to agree on the ‘make good’ provision in negotiating the formal meant the parties were bound by the express ‘make good’ provision in the Proposal
• the error in relation to the licence fee for the car parks was not inconsistent with a binding agreement as it could be rectified as a mistake
• no matters of legal or commercial significance were left to future negotiations.

These factors taken as a whole led the Court to determine both Priolo and Vantage were willing and did bind themselves to a new agreement to lease the premises and take a licence over the cark parks, based on the terms set out in the Proposal.

How can you avoid this result?

The reality of the technology-focussed nature of modern business is that negotiations can be conducted almost entirely via email. This convenient means of communication can lull users into a false sense of informality, which can result in unexpected consequences where one party seeks to withdraw from negotiations, and the other seeks to complete the agreement.

The decision in this case highlights that where parties do not intend to be bound until contracts are signed, this position should be expressly stated at the beginning of negotiations, and reiterated throughout. This will give parties greater certainty of their legal obligations and avoid ambiguity if completion of the agreement is compromised.

However, this does not render formal documentation irrelevant. The assessment of whether an objective intention to contract exists involves a thorough investigation of all the relevant circumstances, and the presence or absence of any number of circumstantial factors may result in a conclusion that parties did not intend to be bound, in the absence of a signed contract.

[1] Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd [2015] WASCA 21