The recent Federal Court judgment Lucas v Zomay Holdings Pty Ltd is a reminder to all contracting parties that a preliminary agreement is immediately binding, even when you are expecting to enter a further ‘formal’ contract.
While this has been established Australian law since the High Court decision of Masters v Cameron in 1954, Lucas demonstrates the principle’s continuing relevance in the current era where email negotiations reign supreme.
Mr Lucas, the Purchaser, commenced proceedings seeking specific performance of the terms of a document headed ‘Offer to Purchase’, which dealt with the proposed sale of a pharmacy business owned and operated by Zomay Holdings Pty Ltd, the Vendor.
The factual events can be summarised as follows:
- The Vendor’s agent sent the Purchaser a copy of the ‘Offer to Purchase’ document, signed by the Vendor.
- The Purchaser sent back a copy of the Offer to Purchase, signed by the Purchaser, but with marked alterations to the original version.
- The Vendor’s agent replied: “We will request an initial deposit from you in the middle of next week. It will be 1/3 of the total deposit payable”. The Purchaser replied to the agent (copying the Vendor) and said:
Before proceeding with a deposit can we please confirm that [the Vendor] is comfortable with our suggested amendments to the offer? In addition, our usual process is to pay 10% of the purchase price as a deposit, is this acceptable?
- The Vendor’s agent replied: “I have discussed things with [the Vendor] and he agrees with everything. The deposit of 10% can be paid into our trust account”.
- The Purchaser’s solicitor then sent an email to the Vendor asking “Is the vendor happy for me to prepare the formal contract of sale?”
- The Vendor responded immediately saying “Vendor is happy to prepare formal contract”.
- The Purchaser’s solicitor sent an email to the Vendor, copied to the Purchaser, attaching the signed and completed Offer of Purchase and a new document entitled “DRAFT Priceline Pharmacy Eastlands – Contract of Sale.pdf”.
- The Vendor did not respond for some time. The Purchaser sent two follow-up emails and paid the agreed deposit.
- After the second follow-up, the Vendor’s solicitor sent an email reneging on the proposed sale and outlining reasons why the Offer to Purchase was not binding. The parties exchanged further correspondence arguing the issue, resulting in the Purchaser commencing proceedings.
Was the Offer to Purchase binding on the parties?
The Purchaser submitted that the Offer to Purchase, as altered by him and accepted by the Vendor’s agent, was a binding agreement because it contained the three essential elements of a concluded agreement: the parties, the subject matter and the price. When the Vendor’s agent told the Purchaser that everything was agreed (see point #4 above), the parties were bound immediately by the terms which they had agreed upon, even whilst expecting to make a further contract in substitution for the agreed terms contained in the Offer to Purchase.
The Court agreed with the Purchaser, rejecting the numerous propositions which the Vendor submitted to the contrary. In considering each of the Vendor’s contentions, the Court held:
- A contract does not need to expressly say in terms that it is binding. Justice O’Callaghan noted that if that notion was to be accepted, it “would wreak havoc on the jurisprudence of the interpretation of contracts.”
- It was “as plain as a pike staff” that the statement that the Vendor “agrees with everything” was signifying agreement to the Offer to Purchase as amended. The Vendor’s argument that further context was required to explain exactly what was meant by that statement could not be accepted.
- While the contract allowed for a nominee to be nominated in the Purchaser’s place, this did not mean the parties to the document were uncertain.
- The fact that the document was as at all times headed “Offer to Purchase” could not possibly go to the question of what the parties objectively intended in the circumstances.
- The Vendor’s submission that he did not sign the “Offer to Purchase” in its amended form, which therefore may have led to “different consequences” than his execution of the original form, could not be accepted in circumstances where the Vendor did not indicate what those consequences might be.
- In circumstances where the Vendor later confirmed in subsequent emails that he agreed to the amendments, whether or not the Purchaser’s act of amending the Offer to Purchase was a counter-offer rather than an acceptance was irrelevant.
- The fact that the PDF of the Offer to Purchase was not attached to the “he agrees with everything” email is irrelevant to determining whether the parties were actually in agreement.
- Finally, the fact that there were further terms to be negotiated did not mean that the Offer to Purchase document was not intended to be legally binding. Justice O’Callaghan said this was “the point of the fourth category of Masters v Cameron.”
Justice O’Callaghan made reference to the recent case Damcevski v Demetriou where Justice Sackar explained ““[i]f the terms of such a document indicate that the parties intended to be bound immediately, effect must be given to it. Construction of a document may make it sufficiently clear that the parties were content to be bound immediately by the terms to which they had agreed, notwithstanding they contemplated further documentation”.
Did the Purchaser repudiate the Offer to Purchase by proposing a significantly different contract of sale?
The Vendor also argued that even if the Offer to Purchase agreement was found to be binding, the Purchaser’s proffer of the draft contract of sale, which contained a due diligence clause significantly different to what had been previously agreed, was so unreasonable or inconsistent with the terms of the Offer to Purchase that it constituted a repudiation of it.
The Court rejected this submission, saying that “[i]t is, with respect, difficult to posit a case that less resembles repudiation.” As the evidence demonstrated that the Purchaser’s solicitor made clear, in multiple ways, that the proposed contract of sale was only a draft and subject to negotiation, then it could not be considered that any intention to no longer be bound by the Offer to Purchase was demonstrated.
In circumstances where damages were not an adequate remedy, due to the “special and singular attraction” of the business being the sole pharmacy in the largest shopping centre in Tasmania, the Court concluded that the Purchaser was entitled to orders for specific performance of the Offer to Purchase.
This case serves as an excellent illustration of some simple but important lessons for anyone involved in negotiating agreements:
- Do not assume that an Offer to Purchase, Heads of Agreement, Term Sheet, or other preliminary agreement is any less binding than a later-stage contract if both parties have signed it or otherwise indicated their agreement to the terms, even where some terms are considered to be subject to further negotiation and potential modification in their effect.
- Aim for specificity during negotiations and think carefully about the words used in an email. For example, if you agree to all the proposed terms stated in an email, but don’t agree to all the terms in the email’s attachment, don’t just respond that you agree to “everything”.
- Be aware that even if you haven’t signed a particular version of a document, your other words or conduct may constitute agreement to its terms.
- Take every opportunity to ensure that draft and final versions of documents are marked as such. Including ‘DRAFT’ or ‘FINAL’ in the filename, watermark, email subject line, and/or body of a cover email are all obvious and easy steps to ensure your intentions are made clear.