Australia: When is a contract binding? Qld Court of Appeal considers whether a concluded contract had been reached - 18 January 2016

Last Updated: 19 January 2016
Article by Michelle Hall

The Queensland Court of Appeal delivered its decision on 18 December 2015 in the case of AJ Lucas Operations Pty Ltd v. Gladstone Area Water Board & Anor [2015] QCA 287 (AJ Lucas Appeal).

In the AJ Lucas Appeal the Court of Appeal had to determine whether or not the parties, in negotiating the settlement of a dispute involving the termination of a joint project for the construction of water and sewerage pipelines between Gladstone and Curtis Island, had entered into a binding arrangement. The Court found a binding contract had been agreed.

Factual background

AJ Lucas Operations Pty Ltd (AJ Lucas) and Gladstone Area Water Board and Gladstone Regional Council (Gladstone Parties) had entered into a contract to provide water and sewerage pipeline infrastructure and access roads between Gladstone and Curtis Island (Contract). The Contract was terminated by way of a Deed of Termination with the Deed providing that some of AJ Lucas' claims survived the termination of the Deed.

The parties had unsuccessfully attempted to negotiate the outstanding AJ Lucas claims. This culminated in two settlement meetings on 16 November 2012. The first was a meeting of CEOs and the second, on the same day, took place at a solicitor's office to document the agreement reached in a final written form. At the second meeting the parties (excluding the CEOs) agreed on an amended form of a Deed of Settlement (Final Deed). The Final Deed was then sent by facsimile to the CEO of AJ Lucas at the Brisbane Airport for his signature and return by facsimile and the parties to the second meeting waited for him to sign and return, which he did. Subsequently on 19 November 2012 AJ Lucas requested further changes to the deed, which the Gladstone Parties refused. AJ Lucas contended that no binding agreement had been reached.

When a contract is binding according to Australian law

The High Court case of Masters v. Cameron in 1954 established three categories regarding the negotiation of contract terms as follows:

  • The parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect;
  • The parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document; and
  • The intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

Contracts in the first two categories are legally binding whereas contracts in the third category are not. Since Masters v. Cameron, Australian case law has developed a fourth category where the parties are bound immediately but expect to enter into a formal document that may add some additional terms at a later date.

Decision

The Court of Appeal considered the history of the frustrated negotiations between the parties and the intention of the parties to be bound. In determining whether there is an intention to be bound the decisive issue is whether such an intention can in fact be "objectively" ascertained from the terms of the document when read in the light of the surrounding circumstances. Such surrounding circumstances include the conduct of the parties as well as the correspondence and other words used.

The Court of Appeal agreed with the primary judge that with respect to the first meeting on 16 November 2012 despite an intention by both parties to be bound as they entered into the meeting (as a result of the frustrated negotiations between the parties and the intention by the parties to "do a deal") if the parties did intend to be immediately bound then why was there a meeting to have the document done that day and send it to the CEO of AJ Lucas. At the first meeting on 16 November 2012 a consensus had been reached about the major terms of the "big ticket items" and that at the second there were discussions about a discrete issue of wording in relation to one aspect of the deal.

The Court of Appeal agreed with the primary judge's finding that a binding contract was entered into when the CEO of AJ Lucas signed the Final Deed following the second meeting on 16 November 2012 and returned it by facsimile. The Final Deed sent to the CEO of AJ Lucas was an offer which was then accepted forming a binding contract.

Further, it did not matter that AJ Lucas was the only party that signed the Final Deed on 16 November 2012 when the contract became binding. The arrangement to have the Final Deed exchanged by counterparts the following Monday, 19 November 2012 did not have the effect that the parties were not to be bound upon the CEO of AJ Lucas' signature and return of the Final Deed.

In making its decision the Queensland Court of Appeal found that the contract fell within the second category of Maters v. Cameron outlined above (the parties have agreed the terms but have made performance of one or more of the terms conditional upon the execution of a formal document).

Considerations to take away

As to when a binding contract is entered into will depend upon the factual scenario of each case and whether or not on the face of the contract drafted it is clear when the contract becomes binding. The outcome of this case may have been different if the surrounding circumstances did not support a finding that the parties intended to be bound.

When conducting negotiations parties should be clear about the basis on which the negotiations are being conducted and when any meeting concludes the basis on which such a meeting has concluded.

It is clear from AJ Lucas that at all stages of negotiation for the settlement of a dispute, parties should be clear as to their intentions and as to when a concluded agreement has been reached. The timing of any binding contract will depend upon when the parties intend to be bound by an agreement.

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