Contract Law – We Have a Deal

“We have a deal”. “No, we don’t”.

Contract law, stripped down to its basics involves consideration of whether two or more parties have agreed on something and if so, what that something is.

The first aspect to consider is did the parties intend to be bound as a result of their discussions, emails, letters, verbal exchanges, or actions which may with hindsight be considered part performance.

The second aspect is what was the subject of the agreement? – the difference between what a party was to supply or obtain and how that differed from what the other party understood would be supplied or obtained.

The law will enforce agreements once a party can establish that there was in fact agreement whatever form that agreement may take. The exception is in relation to contracts for the sale and purchase of land, whereby under the Property Law Act, a contract for the disposition of land is not enforceable by action unless the contract is in writing, or its terms are recorded in writing and the contract or written record was signed by the party against whom the contract is sought to be enforced. Likewise, a contract or guarantee must be in writing and signed by the guarantor. A contract of guarantee means a contract under which a person agrees to answer to another person for the debt, default, or liability of a third person.

While it is possible to enforce a handshake agreement, the onus is on the party seeking to enforce the agreement to provide evidence to support the claim. Where such a claim fails, it will most probably be because of lack of evidence. What is more common is that now there is an exchange of emails. That becomes a point where one party says we have a deal but the other party denies things have got to that point. It is common for a party in negotiations to claim there is agreement because everything has been agreed apart from one small matter, such as agreement on a chattel to be sold as part of a contract for the sale and purchase of property. The contractual position is that until there is agreement on all points, including such a minor aspect, there is no meeting of the minds and no contract to enforce.

In considering contractual disputes, Courts consider carefully the complexity of the subject. In general terms the more complex the subject matter, the more likely it is that a Court will decide the parties would have intended not to be bound until a formal agreement was executed. Where the parties are commercial entities and they have engaged accountants and/or lawyers to advise on negotiations and assist with formal contractual terms, the Courts’ view is that the correct inference to be taken from the circumstances is that the parties did not intend to be bound until the agreement was executed by all parties.

The Court of Appeal has recently confirmed that position and reconfirmed the previous decision of the Court supporting the normal inference that commercial parties do not generally intend to be bound by a complex commercial agreement until it has been executed by all parties. The Court in the latest case concluded that until all three parties involved executed the relevant agreement and communicated their acceptance to the others, the formal document submitted and incompletely signed amounted to nothing more than a revocable offer. Evidence in the case as to negotiation, preparation of draft agreements and discussions about the contract terms were not sufficient to overcome the inference that the parties never intended to be bound until all three parties involved had signed the formal agreement.

In this particular case, the rights being granted were significant, the value was high, the licensing rights involved were complex, the terms were comprehensive and lawyers were involved in the preparation and presentation of the formal agreement which was the subject of dispute.

When parties embark on negotiations for a contract, the difficulty of deciding whether there is a point where they reached agreement and resolving disputes over that can be avoided from the outset by a party clearly specifying in initial email exchanges that, for the avoidance of any doubt, no party is to be bound by discussions, correspondence, emails and negotiations until a formal contract is signed by all parties.

The information contained in this paper is necessarily of a generalised nature and specific advice should be sought in relation to any particular situation.