How does this affect you?
If negotiations fail in a deal or formal documents aren’t signed, can there still be a binding enforceable agreement between the parties inferred by an exchange of emails? Today, where negotiations are most commonly conducted by email, the recent decision of the Western Australian Court of Appeal in Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd 1 emphasizes the need to take caution and be clear about the nature of communications made during negotiations.
The tenant leased office premises from the landlord. Part of the premises was also sublet to a subtenant. Prior to lease expiry, the parties entered into negotiations for a new lease. Several emails and proposals were exchanged with a view to agreeing terms. This ultimately led to the landlord’s agent sending the tenant by email a revised leasing proposal, and asking the tenant to ‘confirm in writing…that the revised proposal was acceptable…so the landlord’s solicitors could be instructed to prepare the draft documentation’.
The tenant replied to the agent by two emails. The first email said that the tenant was happy with the revised proposal, but it was waiting on its subtenant to accept the terms. In the second email, the tenant confirmed to the landlord’s agent that:
‘We have received the subtenant’s approval of the terms as well. Please proceed with wrapping this up.’
Subsequently, the landlord’s solicitors prepared and sent to the tenant draft lease documents which reflected the revised proposal. The tenant did not sign the documents and sought to renegotiate certain terms, in particular, the make good clause. The parties never finalised these negotiations. Following expiry of the existing lease, the tenant informed the landlord that it would not be signing the new lease given no concluded agreement to lease had been made, that it was occupying the premises under the holding over clause under the existing lease and that it would be vacating the premises shortly.
The landlord disagreed with the tenant’s right to vacate the premises and commenced legal proceedings against the tenant arguing that the tenant was bound by a concluded agreement to lease which arose from the exchange of emails between the parties.
The Court of Appeal upheld the decision of the trial judge finding that the tenant’s acceptance by email of the revised proposal created a binding agreement for lease. The Court of Appeal found that the parties’ intention was that their email agreement would be superseded in due course by signing formal lease documents which would incorporate all of the terms of the revised proposal (which the parties had already agreed to in the email correspondence). Lastly, the Court of Appeal found that the negotiations subsequent to the email agreement (including the failure to agree upon and enter into formal lease documents), did not have the effect of destroying the concluded and binding earlier agreement reached between them.
How can parties avoid this result?
Most negotiations are conducted almost entirely via email. This can lull parties into a false sense of informality, which can result in unexpected consequences where one party seeks to withdraw from negotiations, and the other seeks to enforce the agreement.
This decision highlights that where parties do not intend to be bound until contracts are signed, this position should be expressly stated at the beginning of negotiations, and reiterated throughout. This will give parties greater certainty of their legal obligations and avoid arguments if formal documents are not signed.
The fundamental question is ‘Did the parties intend to be bound by the exchange of emails which constituted all the essential terms of a bargain, agreement or deal?’