While lawyers will generally advise against it, it is a commercial reality that many arrangements involve a series of ongoing negotiations between parties. If these negotiations break down, a key question is whether a binding contract was ever achieved?
This was the issue before the Supreme Court of Western Australia in Absolute Analogue Inc v Sundance Resources Ltd.
Mr Porter, a geologist, who provided his services through the company Absolute Analogue Inc (Absolute), claimed that there was an agreement between Absolute and Sundance Resources Ltd (Sundance) for Absolute to provide the services of Mr Porter to Sundance for an agreed monthly retainer and share options to be issued directly to Mr Porter.
Sundance paid Absolute the retainer but denied that there was any contract to issue options to Mr Porter.
The key issues before the Court were:
- Had an agreement to issue the options been reached between the negotiating parties?
- Did the negotiating parties have the authority to bind Sundance?
Was an agreement reached?
Justice Le Miere noted that the task before the Court was to determine, from the dealing between the parties, whether they intended to "make a concluded agreement or not". This intention is to be determined objectively by reference to what a reasonable person would conclude.
His Honour stated the test as:
Noting that the alleged negotiations involved protracted informal discussions, his Honour stated that some of the factors relevant to determining the intentions of the parties include:
- the customary method of concluding a contract of the sort alleged
- whether an informal exchange would accord with the expectations of the parties in a contract of the kind that is in dispute, and
- where the intention of the parties is equivocal, conduct or correspondence subsequent to the time when the alleged agreement was made.
On the issue of what inferences can be drawn from subsequent conduct, his Honour stated that it is not sufficient that the conduct is consistent with the alleged contract, what is required is "a positive indication that the conduct is evidence of the contract alleged".
The matter was ultimately resolved based on an in-depth examination of the specific evidence of the case, with his Honour concluding that the discussions and negotiations over the protracted period never resulted in a concluded binding agreement.
Authority to bind?
Once his Honour found that no agreement had been made, it was not necessary to consider whether the person alleged to have represented Sundance, Mr Rankine-Wilson, had the authority to enter into an agreement on Sundance's behalf. However, his Honour found that Mr Rankine-Wilson:
- was a founding director and executive chairman of a corporate advisory services company, CIP, that was a corporate advisor of Sundance
- through his corporate shareholdings, was a substantial shareholder, option holder and convertible note holder in Sundance, and
- through the corporate advisory services company, had a leading role in identifying and progressing the opportunity for Sundance (including the negotiations) that required the contract for Mr Porter's services, through Absolute.
To determine whether Mr Rankine-Wilson had the authority to bind Sundance, his Honour first examined the scope of the CIP's engagement agreement. As the engagement agreement did not authorise Mr Rankine-Wilson to enter into an agreement on behalf of Sundance for the matters that Mr Porter alleged, Mr Rankine-Wilson was held not to have actual authority to bind Sundance in the manner alleged.
It is well established that a person who does not have actual authority to bind another person, may still be found to have entered into an agreement on that other person's behalf if they had ostensible or apparent authority to enter into the agreement.
The test for whether a person (the agent) has ostensible or apparent authority to enter into an agreement on another's behalf (the principal) is whether or not:
- the principal represented that the apparent agent was authorised to enter into the transaction in question
- the person making the representation had actual authority to enter into the transaction in question, and
- the third party reasonably relied upon the representation as to the apparent agent's authority.
Based on the evidence, Mr Porter could not establish that Sundance's Chairman of Directors had represented to Mr Porter that Mr Rankine-Wilson was authorised to enter into the alleged agreement. Accordingly, Mr Rankine-Wilson was held to not have the ostensible or apparent authority to bind Sundance.
What this means for agencies
This case highlights some of the legal risks associated with a contractor commencing work before agreeing on a final contract. In cases involving continuing negotiations, issues such as the certainty of the arrangement and authority of the negotiators to ultimately bind a party will always be present. If, due to commercial pressures, work does need to begin before a final contract is entered into, at the very least the key points of the arrangement should be agreed and documented, through instruments such as term sheets or early works contracts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.