A key question in determining whether a binding
agreement exists is whether the parties have shown an objective
intention to be bound.
Lawyers and commercial managers in a highly competitive market
are often faced with immense pressure to get things moving on a
project, leaving minimal time for negotiation of the terms of
agreement between the parties. This situation can often lead to
disputes as to whether a binding agreement has formed and, if so,
the terms of the agreement.
This article outlines some general principles to assist in
identifying whether a contract is binding and identifies some
potential extra-contractual claims that may be available where a
binding agreement has not been formed.
One key question to be considered in determining whether a
binding agreement exists is whether the parties have shown an
objective intention to be bound.
Principle 1: Conduct is critical
The conduct of the parties is a critical factor in ascertaining
whether the parties intended to be bound. It is not limited to the
conduct of the parties' legal representatives. The overall
conduct of the parties as a whole both prior and subsequent to the
alleged agreement is a key factor in establishing the parties'
intentions. Matters such as performance of the proposed terms of a
contract can be a strong indicator that the parties intended to be
bound by them.
Principle 2: Language is important (but not always
The language used to record the agreement is important in
reflecting the parties' intention. Some issues to bear in mind
whether words indicating that the parties have reached an
agreement have been used (eg."offer" and/or
the tense that has been used. Use of the present tense tends to
be indicative that an agreement already exists whilst the future
tense tends to be indicative that an agreement has not yet been
use of legal terminology, in particular the word
"agree" which has a legal meaning indicating a meeting of
Principle 3: Not all the terms have to be agreed for
there to be a binding agreement
An agreement can be binding even though not all terms relating
to the subject matter have been agreed provided that the agreement
is capable of enforcement and that it has a sufficient degree of
clarity. Generally, the more complex the subject matter and the
bigger the gaps, the less likely an agreement has been formed
(although, again, that general principle is subject to the conduct
of the parties).
Principle 4: It does not have to be
Signing can be a strong indicator of an intention to be bound.
In circumstances where a signed document is not intended to
constitute a binding agreement, using appropriate language to
reflect this is critical. However, a document need not be signed
for a binding agreement to have arisen. Conduct may constitute
acceptance (such as accepting material or services).
Cases where there is no binding agreement - where does
it leave us?
Where no binding agreement is established, a party may bring an
extra-contractual claim to recover any loss suffered for example
arising out of failed negotiations or the preparation of tender
documentation. Examples of such claims that may be brought
misleading and deceptive conduct;
the tort of deceit;
breach of process contract; or
This article is based on a CLE presentation by Narelle
Smythe at our Sydney CLE Intensive.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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