It is not uncommon for parties to contract negotiations to agree to many of the terms while using the phrase 'subject to the execution of the contract'.

The purpose is to ensure that the intention is clear that the parties are not contractually bound until the formal execution occurs.

However, a recent decision of the Supreme Court of Queensland highlights that the mere use of this phrase (or something similar) will not of itself mean that a contract has not been formed, despite no formal execution.  The formation of a contract requires an analysis of the totality of the conduct of the parties to objectively determine the intention of the parties to be bound.

Accordingly, when negotiating a contract, it is essential to ensure that a party's intention of when, and under what circumstances, it is to be bound, is clearly communicated to the other party.

If the parties begin to act as if they are bound, a contract may be taken to be formed regardless of words to the contrary.

The recent case

In Stellard Pty Ltd & Anor v North Queensland Fuel Pty Ltd [2015] QSC 119, the Queensland Supreme Court was asked to find that a contract had been formed for the sale of a service station by exchange of emails.

The email exchange included:

  • the circulation of a draft contract and agreement between the parties that the contract would generally be on the terms of that draft;
  • an email 'offer' from the purchaser (and plaintiff) of $1,600,000 subject to contract and due diligence;
  • a reply email 'acceptance' subject to contract from the seller (and defendant); and
  • an email from the solicitors for the purchaser attaching an amended contract amending certain conditions.

Four days later the solicitors for the seller sent an email saying that the changes were not accepted and that the seller had entered into a contract with another purchaser.  It turns out they had been negotiating the entire time with another party.

In considering the use of the words 'subject to contract', the Court found that: 'The use of those words needs to be measured against the relevant context' , and that:

[t]he broader context of the two emails and the other expressions used in them strongly suggests that the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.

The Court considered the following factors in concluding that a contract had been formed:

  • it is not the subjective intention of the seller that is considered, but rather what an objective reasonable person in the position of the counterparty that is relevant; 
  • the 'acceptance' email was sent knowing that the parties would then commence the tasks necessary to complete the contract (such as engaging consultants etc.);
  • the use of 'subject to execution of the contract' in the 'acceptance' email:

... should not, in the light of the document which preceded it, be seen as a qualification to the acceptance, rather it is more consistent with the parties having agreed essential terms with the intention that they would be formally recorded later 

  • the amendments made to the draft contract by the purchaser after the acceptance were not material incidents of the proposed transaction.

Importantly, the finding of the existence of the contract also allowed the claimant to overcome the requirement of the Property Law Act 1974 (Qld) for a contract for sale of land to be in writing.