After several months of negotiating a settlement agreement, and only a couple of days before Christmas, a lawyer sends an email to the lawyer on the other side of the settlement stating that his client “will sign”. The settlement agreement is never signed by the client. Did the lawyer’s email nevertheless bind his client to the agreement? 

This question was recently addressed by the NSW Court of Appeal in Pavlovic v Universal Music Australia Pty Limited [2015] NSWCA 313. In this case, Mr Pavlovic successfully appealed the trial judge’s ruling that his lawyer’s email had bound him to the terms of the written settlement agreement document which had been forwarded by Universal Music Australia Pty Ltd (Universal), even though Mr Pavlovic had never signed that document. 

In clarifying the scope of a lawyer’s authority to contract on behalf of their client, the NSW Court of Appeal held that: 

  1. Clear and cogent evidence will be required to establish that a lawyer has acted with actual authority to bind the client to a contract. 
  2. With the exception of in litigious matters, lawyers do not have ostensible authority to bind a client to an agreement which is the subject of negotiations. 
  3. The crucial email communications between the parties’ lawyers needed be considered in light of all the surrounding circumstances including the commercial context and relationship between the parties, the extent and complexity of the negotiations, the terms of the proposed contract, and the way in which the parties had dealt with each other and formalised binding agreements in the past. 
  4. If Pavlovic or Universal had instructed their lawyers that they intended to be bound by the terms of an agreement without executing the formal documents, their lawyers should have expressly stated this fact. 

BACKGROUND

In 2005, Mr Pavlovic and Universal entered into a joint venture in respect of the business of a music recording label founded by Mr Pavlovic, Modular Recordings Pty Limited (Modular). Under the agreement, Mr Pavlovic and Universal each held 50 per cent of the shares in Modular.

After a number of disputes in relation to the joint venture arose, in September 2014, the parties mutually agreed that their relationship was untenable and the joint venture should be terminated. They instructed their respective lawyers to negotiate the terms of settlement. 

After several amendments in the course of negotiations, Universal’s lawyers emailed the proposed Deed of Settlement and Release (Proposed Deed) to Mr Pavlovic’s lawyer on 23 December 2014. The Proposed Deed included a term that required Mr Pavlovic to cause the transfer of his 50 per cent shareholding in Modular for $100 by the Execution Date. 

One day later, Mr Pavlovic’s lawyer responded to the email from Universal’s lawyers confirming the instructions he had received from his client, including that “he will sign”. A follow up email, sent 10 minutes later, again confirmed that “Mr Pavlovic is prepared to sign the documents”. Further emails were exchanged between the parties over the course of the afternoon, with the final correspondence from Universal’s lawyers allowing “Mr Pavlovic a further 48 hours to sign the documents and forward copies to us.”

An executed copy of the Proposed Deed was never provided to Universal’s lawyers. Universal did not send an executed copy of the Proposed Deed or a cheque for $100 to Mr Pavlovic until after 23 February 2015, the date on which Mr Pavlovic purported to terminate the agreement (if any).

In these circumstances, Universal contended that a binding agreement had already been entered into by the parties on Christmas Eve, by virtue of the fact that Mr Pavlovic’s lawyer had accepted the offer from Universal to enter into an agreement on the terms of the Proposed Deed, by indicating that his client “will sign”

The trial judge, the Honourable Justice Sackar, concluded that Mr Pavlocvic’s lawyer had actual authority to bind Mr Pavlovic and that viewed objectively, both parties were content and clearly intended to be immediately bound to the terms of the Proposed Deed (whilst at the same time understanding that there were formalities/administrative requirements that still needed to be attended to).

APPEAL

President Beazley (with whose reasons Bathurst CJ and Meagher JA agreed) delivered the principal judgment, concluding that no contract had been formed between the parties. The following factors pointed towards this conclusion: 

  1. The formal context and manner in which the parties had conducted their negotiations in the period of months prior to 23/24 December 2014 indicated an objective intention that the termination of the relationship was to be concluded in a similar manner, that is, by execution and exchange of the Proposed Deed;
  2. The contention that the email exchange between the parties on Christmas Eve had given rise to a binding agreement was contrary to the terms of the Proposed Deed which contained multiple clauses where the parties’ obligations came into effect on and from the “Execution Date”. Further, the Proposed Deed contained an “entire agreement clause”;
  3. The email correspondence between the parties was silent on the issue of whether they intended to be immediately bound to the agreement, and “something more than mere silence would have been required to evince the intention to diverge from the parties’ past practice and the terms of the Proposed Deed”;
  4. The conduct of the parties after Christmas Eve did not support an understanding that the Proposed Deed was binding before signed documents were exchanged. For example, Universal had never sent Mr Pavlovic its counterpart copy of the Proposed Deed, and did not make the payment of $100 to Mr Pavlovich (in consideration for the share transfer as per the terms of the Proposed Deed) until around 2 months later. 

Another issue which the Court of Appeal addressed was whether Mr Pavlovic’s lawyer had actual or ostensible authority to immediately bind his client to terms of the agreement contained in the Proposed Deed.

Ostensible authority refers to a situation where a reasonable third party would understand that an agent (in this case, Mr Pavlovic’s lawyer) had authority to act on behalf of the principal (Mr Pavlovic). This means the principal is bound by the agent's actions even if the agent had no actual authority, express or implied, to act.

As to this issue, the Court of Appeal confirmed that: 

  1. The onus lies on the party submitting agency to demonstrate the terms and existence of the agency. Clear and cogent evidence of actual authority on the part of a solicitor to bind his or her client to a contract is required; “a statement by a solicitor that a client “will sign” does not bear the “clear and cogent” meaning that the client has given instructions to the solicitor to immediately bind the client.”
  2. While lawyers have ostensible authority to bind their client to a contract which relates to litigation conducted on the client’s behalf, this exception does not extend to the context of a “potentially litigious” dispute, including where (as here) the parties enter into negotiations so as to avoid litigation. 

TAKE AWAY POINTS

This case serves as an important reminder for lawyers that the means by which negotiating parties intend to bind themselves to a proposed contract should be clearly stated in the contract (i.e. there was no express clause in the Proposed Deed in the above case that the parties would not be bound until all aspects of a formal agreement and, in particular, execution, had been finalised). 

The case also emphasises that the question of whether parties intend to be immediately bound is to be determined objectively, and the court will take into consideration all the particular circumstances of the case, including but not limited to the history of dealing between the parties, the nature and terms of the purported contract and the subsequent behaviour of the parties in performing their obligations.