On 18 March 2014, in Hill v Newth [2014] NSWSC 298, the court affirmed the position in NSW that when transacting a real property conveyance, no binding contract exists until the contracts are formally exchanged unless both parties show a very clear intention that they wish to enter into the contract in some other manner.

Background

The proceedings concern 3 lots that make up part of a rural property known as “Uralba”. The 3 lots have a total area of 200 acres.

The negotiations commenced on 21 September 2012, when the Defendant (the Registered Proprietor of the 3 lots) sent a letter to the Plaintiffs (who owned property adjoining the 3 lots) offering to sell the 3 lots for the sum of $1,800 per acre with a settlement date of 1 April 2014. At the same time, the Defendant sent letters to other persons interested in purchasing Uralba.

On 19 February 2013, the Plaintiffs replied to the Defendant’s letter of 21 September 2013, counter offering to purchase the land for the sum of $1,400.00 per acre with settlement of 4 to 6 weeks after entering into the agreement. 

The Defendant replied on 27 February 2013, accepting the Plaintiff’s counter-offer at $1,400.00 per acre for the 3 lots. Accordingly, the purchase price for the 3 lots totalled $280,000.00.

On 1 March 2013, the Plaintiffs sent a further letter to the Defendant, stating that if they were to proceed with the purchase of the 3 lots, they needed clarification regarding the realignment of the existing boundary among other issues.

On 27 March 2013, the solicitors for the Defendant sent a letter to the Plaintiffs’ solicitors enclosing the contract. The letter included the following paragraph:

“Neither the submission of this contract nor this correspondence is meant to be an agreement or offer to sell. No contractual agreement or obligation shall arise as a result of this letter or submission of the contract. No contractual obligation shall be created until a formal exchange of contracts has occurred."

After this point, the parties entered into normal correspondence in negotiating terms of a Contract in readiness for exchange in the usual way. 

On 14 May 2013, after the terms had been negotiated, the Defendant’s solicitor wrote to the Plaintiffs’ solicitor enclosing the contracts and requested the Plaintiff’s solicitor to confirm when they were in a position to exchange. Again the Defendant’s solicitor included a statement that no contractual obligations would arise until after exchange of contracts.

On 13 June 2013, the Plaintiff’s solicitor wrote to the Defendant’s solicitor enclosing the contracts “by way of exchange” and the cheque for the deposit.

There the matter rested until 27 August 2013, when the Defendant’s solicitor wrote back to the Plaintiff’s solicitor advising them that the Defendant was no longer proceeding with the sale and returned their cheque for the deposit.

The Question and Test

The Plaintiffs brought proceedings in the NSW Supreme Court for specific performance under the contract.

In this case, the question to be determined was whether the parties intended to be bound to the sale and purchase of the 3 lots once the Defendant sent her email of 27 February 2013.

In answering the question, Stevenson J noted that in NSW, “proceeding by exchange of contracts is so entrenched that a party contending for an intention to proceed other than in accordance with the established procedure will need clear evidence to support the contention.”1

The Court further stated that the test to determine the intention of the parties was an objective one, having regard to the communication between the parties.2

Did the parties intend to enter into a contractual relationship on 27 February 2013?

Based on the above chain of correspondence, the Court found that the parties clearly did not act as if a binding agreement existed after 27 February 2013. 

Whilst the Court accepted that the Defendant agreed in principal to sell to the Plaintiffs the 3 lots on 27 February 2013, the Plaintiff’s email of 1 March 2013 prefaced with the words “[if] we go ahead” revealed that he was not committed to the purchase. 

Further, what the Plaintiffs referred to as a “boilerplate” paragraph contained in the letters from the Defendant’s solicitors on 27 March 2013, and 14 May 2013 was clear evidence of the Defendant’s position that no contractual obligations would arise until contracts were formally exchanged.

In the end, when viewed objectively, the Court found that by enclosing the contracts “by way of exchange” on 13 June 2013, the Plaintiffs were “looking to perfect the agreement reached in principle”3 with the Defendant. It followed that the Plaintiffs assertion that events leading up to 27 February 2013 amounted to a binding contract did not succeed by reason of their own conduct between 27 February 2013 and 27 August 2013.