- A recent Queensland Court of Appeal decision held that a deed was not ‘delivered’ due to a ‘subject to contract’ regime established in a heads of agreement document signed six months earlier.
- Parties negotiating heads of agreements or a ‘subject to contract’ agreement of commercial terms must be very clear about when they intend to become bound to a contractual relationship.
- Parties must also be careful that any change to a ‘subject to contract’ regime is expressly communicated by means other than the formal document itself.
The recent decision of the Queensland Court of Appeal in 400 George Street (Qld) Pty Limited v BG International Limited1 has highlighted the need for transactional parties to clearly determine when they will become bound to a contractual relationship, especially where negotiations have commenced with a ‘heads of agreement’ or other form of ‘subject to contract’ regime.
The appellants are the owners and developers of a commercial office building.
In April 2008, the appellants’ agents prepared, and both parties signed, a non-binding heads of agreement (HoA) containing the commercial terms by which the respondent was to lease four floors in the building. The HoA contained a special condition stipulating that no binding agreement is made by the HoA and all documentation was ‘subject to a mutually agreed legal document by both parties.
Negotiations between the parties and their solicitors ensued over the next six months to finalise the form of the agreement for lease (AFL). The finalised form of AFL was executed and returned by the respondent (without qualification).
Before the appellants had returned the counter-signed AFL to the respondent, the respondent sent a letter withdrawing its ‘offer’ to lease.
First instance – The AFL was not a deed.
The appellants commenced proceedings in the Supreme Court of Queensland seeking a declaration that the respondent was bound by the AFL on the basis that, inter alia, it was a deed (and therefore was immediately binding on the respondent upon it having been ‘signed, sealed and delivered’ by its execution on the signing clause headed ‘Executed as a deed’ and unqualified return).
The legal position is that once a deed has been signed, sealed and delivered by a party, and absent any conditions on the delivery of the deed, that party is bound by its deed (compared to a simple agreement). It would therefore have been irrelevant that the appellants had not yet returned the counter-signed document if the AFL was intended to operate as a deed.
The respondent argued that the AFL was not in fact a deed, relying heavily on the ‘subject to contract’ regime established by the HoA signed some six months earlier.
The trial judge accepted the respondent’s argument that the AFL was not a deed. In short, his Honour held that the non-binding HoA had put in place a ‘subject to contract’ regime whereby the parties would be bound only upon exchange of executed documents, and nothing in the intervening correspondence had altered that position.
Accordingly, his Honour held that the respondent was not bound by the AFL and was able to withdraw.
Court of Appeal – The AFL was a deed, but not delivered.
Justice Muir (Fraser and Mullins JJ agreeing) overturned Justice McMurdo’s finding that the Agreement for Lease was not intended to be a deed. The Court of Appeal held that the words ‘Executed as a deed’ and ‘By executing this deed’ were clear indications that the parties intended for the AFL to be a deed.
However, the Court of Appeal held that the document had not been ‘delivered’ by the respondent, because the April 2008 HoA ‘signified an understanding that the parties would not be bound until such time as a bargain was recorded in the formal document agreed by the parties…’. Accordingly, until the bargain was recorded in a document which was both signed and exchanged, there was no ‘delivery’ and neither party was bound.
As a result, the Court of Appeal dismissed the appeal and held that the respondent was not bound to the AFL.
Issues to note
This decision in our view creates some uncertainty in respect of the law of delivery of deeds and in particular casts doubt on a party’s ability to rely on the clear words of the signing clause itself to indicate a party’s intention upon execution.
The Court of Appeal finding that ‘delivery’ of the deed essentially would occur when the last of the parties became bound (which would be when the last of the appellants signed and returned the AFL) is surprising since it is hard to see how an action of the appellant could amount to ‘delivery’ by the respondent. However, that seems to be the practical effect of the Court of Appeal’s decision.
This case also outlines two key lessons of note regarding when a party is to be bound:
1.First, it is important to establish whether parties have entered into a heads of agreement or ‘subject to contract’ regime and particularly to be clear in that regime when a party intends to be bound.
In this case, the leasing agents of both parties (in discussion with parties themselves) negotiated the heads of agreement document. Although this document was subsequently superseded by the solicitors drafting the AFL, the Court was able to look to the HoA in order to establish the parties’ intention (in line with the decision of Toll (FGCT) Pty Limited v Alphapharm Pty Ltd (2004) 219 CLR 165).
2.Second, if there is any change to the HoA regime, it appears this change must be expressly communicated by means other than by the formal document itself.
In this case, the Court of Appeal and primary judge considered it relevant that there was no express communication by separate correspondence that the AFL was intended to be binding at the point of execution, despite that fact that all drafts of the AFL noted it was ‘executed as a deed’ and the document contained a ‘entire agreement’ clause. The practical lesson to be drawn from this case is to never assume that a counterparty is bound to any form of document until all parties have signed and exchanged the counterparts.