In a recent case successfully run by HopgoodGanim, the Queensland Court of Appeal has highlighted the circumstances in which verbal negotiations can create a binding agreement.

In this Alert, Partner Ian Hughes and Solicitor Jessica Carroll discuss the case and the decision on the subsequent appeal.  The full decision can be accessed here.

Key points on the decision

  • Verbal negotiations can create a binding agreement, even though essential terms have not been agreed and the parties had first expected to sign a document recording it.
  • The conduct of the parties – during the negotiations and afterwards – may be considered when deciding whether or not there is a binding agreement.
  • Difficulty in defining the extent of the parties’ rights and obligations under the agreement does not mean the agreement is uncertain.

Facts

Mr Chambers, a qualified veterinarian, alleged that he entered into a binding verbal agreement with Mr Brice - his accountant of almost 20 years and one of the founders of Wotif.com.

The agreement, said to be formed during three telephone conversations and varied during a meeting, was for Mr Brice to pay Mr Chambers $3.2 million for Wagyu cattle through a series of transactions including:

  • a loan to Mr Chambers on commercial terms for $1.5 million;
  • payment by Mr Brice of $1.5 million in three annual instalments of $500,000 to be treated as leasing payments for the Waygu cattle;
  • the transfer by Mr Chambers to Mr Brice of an intangible, described as “goodwill”, for $1 million;
  • $300,000 payable in three annual instalments to be treated as management fees;
  • the “swap” of semen straws (for Wagyu breeding purposes) associated with payment by Mr Brice to Mr Chambers of $300,000; and
  • a payment of $100,000 by Mr Brice to Mr Chambers for embryos (for Wagyu breeding purposes).

Mr Chambers said he relied on Mr Brice to decide the commerciality, structure and tax treatment of the agreement contract.  On Mr Brice’s advice, he did not seek independent accounting or legal advice.

The parties then allegedly undertook a number of acts consistent with the existence of a binding agreement including:

  • entry into a written loan agreement (Loan) under which Mr Brice advanced $1.5 million to Mr Chambers’ companies;
  • Mr Brice selecting Wagyu cattle and transporting them to his property; and
  • a series of payments made by Mr Brice to Mr Chambers for semen straws and embryos none of which were delivered or, apparently, intended to be delivered.

Mr Chambers claimed that the Loan was to be set off by payments to him for lease of the Wagyu cattle per his alleged agreement with Mr Brice.

Mr Brice denied there was any binding agreement and Mr Chambers responded that Mr Brice’s denial was a breach of the agreement.

They went to court and Mr Brice lost.

The appeal decision

The Court of Appeal was asked to decide:

  • whether Mr Chambers and Mr Brice intended to make a legally binding agreement for the sale and purchase of the Wagyu cattle; and if so
  • whether they succeeded in doing so.

The Court of Appeal held:

  • The terms of the alleged agreement were supported by the parties’ conduct and prior discussions.
  • The fact that not all terms were agreed or intelligible did not conclusively determine whether or not the parties intended to be contractually bound.
  • The conduct of the parties – both during negotiations and afterwards - can also be looked at when deciding whether or not they intended to be bound by verbal communications.

In coming to this conclusion, the Court of Appeal applied to verbal negotiations the following principle previously stated with respect to documents:

However, the decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances...  If the terms of a document indicate that the parties intended to be bound immediately, effect must be given to that intention irrespective of the subject matter, magnitude or complexity of the transaction.”

  • The Court took the view that the parties had engaged in a distinct pattern of behaviour which was consistent with the existence of the alleged agreement.
  • The Courts will strive to uphold commercial bargains wherever possible, even where they contain terms which might on their face appear to be uncertain.

Summary

The judgment shows how the Court will weigh up surrounding circumstances in deciding whether a binding agreement exists and, if so, what its terms are. 

It also demonstrates the risk parties face when entering into informal contract negotiations and how the subsequent conduct of the parties could point to an intention that those negotiations created a legally binding agreement.

Although the decision does not depart from established principles of contractual interpretation, it does provide a useful reminder for parties involved in negotiations (whether verbal or written) to:

  • make it clear from the outset that any negotiations are not binding until formal documents have been prepared; and
  • after negotiations have ceased, to look at whether or not any action they take could be considered part performance of the intended contract.