Deal or no deal? It’s all in the execution

Introduction

On 6 October 2015, the New South Wales Supreme Court of Appeal overturned a trial judge’s decision and held that:

  • where the parties agree to sign a deed but it is not in fact executed, the parties have not necessarily entered into a binding agreement; and
  • generally speaking, solicitors do not have the authority to bind their clients to the terms of a deed, unless the deed is being entered into in the context of litigation proceedings.

Facts

In or around 2005, Mr Stephen Pavlovic (Pavlovic) and Universal Music Australia Pty Limited (Universal) entered into a joint venture arrangement in relation to a music recording label business, Modular Recordings Pty Limited (Modular Recordings). For a number of years, Modular Recordings was a successful venture, having released music of well-known artists including Tame Impala, Eskimo Joe and The Presets. By September 2014, however, the relationship between the parties became “untenable” and the parties indicated to one another that they wished to terminate the joint venture.

The parties’ solicitors commenced negotiations regarding the terms of the mutual release. A deed of release and settlement was drafted, with amendments being made to it throughout the course of negotiations.

On 23 December 2014, Universal’s solicitor emailed a draft deed in “final form for execution” (proposed deed) to Pavlovic’s solicitor. In the afternoon of 24 December 2014, Pavlovic’s solicitor replied stating that Pavlovic “will sign” the proposed deed. This was then followed up with a further email stating that the proposed deed would be signed by Pavlovic and scanned back on Boxing Day. The final correspondence between the parties was an email from Universal’s solicitors, allowing Pavlovic “a further 48 hours to sign the documents and forward copies to us.”

The parties and their lawyers broke for the Christmas period. An executed copy of the proposed deed was never exchanged, and a cheque for payment of $100 for the transfer of shares in Modular Recordings to Mr Pavlovic (as stipulated under the proposed deed) never materialised.

Pavlovic later informed Universal that he had signed the proposed deed and was planning on sending them scanned copies. Further, Pavlovic took steps which “reasonably indicated” that he was performing some of his obligations under the deed.

In the weeks following, however, Pavlovic attempted to resile from the deed and argued that the agreement was never binding because he never signed it. Universal argued that an agreement had already been reached – and that the substance and terms of the deed were final and agreed – on 24 December 2014. They took the matter to court.

At first instance, the trial judge held that the parties had entered into a legally binding agreement on 24 December 2014 on the terms of the proposed deed. His Honour found that the proffering of the proposed deed constituted an offer, which was accepted by Pavlovic’s solicitor by his email stating that his client “will sign” the proposed deed. Pavlovic appealed.

Court of Appeal decision

The Court of Appeal allowed the appeal and held there was no binding agreement. In doing so, the Court of Appeal held the following:

  • the parties were not immediately bound to the deed on 24 December 2014, as they intended to be bound at a later date only once a formal deed had been executed; and
  • other than in the context of litigation proceedings, solicitors do not have the authority (unless expressly given by their clients supported by “clear and cogent evidence”) to bind their client to an agreement. What the law requires is for the parties themselves to agree, rather than their solicitors.

These issues are explored in further detail below.

Does agreeing to sign a deed mean that the parties are bound by the terms of the deed?

In determining whether the parties agreed to be bound by the proposed deed the Court of Appeal considered the “outward manifestations” of the intentions of the parties including:

  • the context of the parties’ dealings;
  • the terms of the proposed deed;
  • the terms of the email correspondence between the solicitors in relation to the proposed deed; and
  • the subsequent conduct of the parties.

For example, the Court considered the history of the parties’ dealings and found that in the past, the parties had dealt with each other in a formal context and with formal documentation. On that basis, the Court found that the parties had intended to maintain this formal relationship and only intended to be bound once the deed had been executed.

Also, the Court considered the fact that both parties had sophisticated lawyers representing them and found that if the parties had intended to be immediately bound by the terms of the deed (without the execution of the deed) there would have been an express statement about this and it would not have been left uncertain.

Further, the Court found that many of the terms and obligations contained in the proposed deed hinged on the execution date, which indicated that the parties only intended to be bound once the deed had been signed.

Do solicitors have the authority to bind their clients to agreements?

When considering this issue, the Court clarified the legal principle that solicitors have actual authority to negotiate on behalf of their clients. However, there must be “clear and cogent evidence” for this authority to extend to a solicitor’s authority to bind his or her client to the terms of a contract.

So, as a general proposition, a solicitor does not have authority to bind his or her client to a contract. However, an exception lies in the context of litigation where solicitors can bind their clients to contracts that related to that litigation.

In this case, the Court of Appeal found that there was not any “clear and cogent evidence” that Pavolvic’s lawyer had authority to bind his client to the terms of the proposed deed. Further, the Court found that although the dispute may have been potentially litigious, this was not enough to fall within the litigation exception.

Some key take-homes

  • During the course of negotiations, solicitors need to be clear regarding the basis upon which any deed, contract or agreement is to be finalised – for example, by identifying that there will only be a binding agreement upon execution of a formal document.
  • If a deed has not been formally executed, but one party asserts that agreement has already been reached, a court will consider the commercial context and surrounding circumstances of the parties’ dealings to determine the parties’ intentions. This includes subsequent conduct. Where a client’s position is that no agreement has been reached, they should be advised to avoid any conduct which could be construed as performing obligations under the deed.