Over a period of three months, two law firms negotiated the terms of a deed to be entered into by their clients. Late on Christmas Eve, one solicitor emailed the other to say that his client “will sign” the deed and then followed that up with a further email to say that it will be signed and scanned back on Boxing Day.
The solicitors and the parties then broke for Christmas, but the signed deed and cheque for payment never materialised.
The other side insisted that an agreement had been reached and took the matter to court. The New South Wales Supreme Court agreed and found that the parties were, in fact, immediately bound and that the lawyers, via their email sent on Christmas Eve, had authority to bind their clients to terms of the deed. Later, the Court of Appeal rejected that finding, and instead declared that the parties were not bound nor could solicitors bind their clients without express authority to do so.
In Pavlovic v Universal Music Australia Pty Limited  NSWCA 791, three judges of the New South Wales Court of Appeal found that Mr Pavlovic was not bound by the actions of his solicitor, as:
- the words “he will sign” were a statement of future conduct that Mr Pavlovic will enter into a deed at a later date, and were not an indication that he was accepting the terms of the offer put by Universal Music Australia;
- the negotiations between the solicitors for the three months leading up to Christmas indicated through the various emails and telephone calls that the parties’ relationship would be embodied in a deed to be executed and that the parties would not be bound until the deed was signed;
- a later email on Christmas Eve from Universal Music Australia’s solicitors, indicating that Mr Pavlovic had 48 hours to sign and return the deed, is clear evidence that Universal Music Australia did not think that Mr Pavlovic was yet bound and is inconsistent with the argument that any agreement had immediately been entered into; and
- the solicitors did not have authority to bind Mr Pavlovic. Solicitors have an implied authority to bind parties in the context of litigation proceedings, but that authority does not extend to negotiations which may or may not end up in litigation.
For the above reasons, the court found that the parties were not immediately bound, but intended to be bound at a later date only once the formal deed had been executed, and further, that solicitors (other than in the context of litigation proceedings) do not have authority, unless expressly given, to bind their clients to agreement. The law requires the parties themselves to finally agree rather than their solicitors.
The above case is a classic example and a good reminder when negotiating contract terms, to consider as to what point you consider yourself to be bound. Generally there are four positions, either:
- the parties consider themselves to be immediately bound, with a formal agreement (with no changes to the terms agreed) to be entered into at a later date;
- the parties consider themselves to be bound, but that is conditional upon a formal agreement being documented;
- the parties do not consider themselves to be bound until such time as a formal agreement has been entered into and signed; or
- the parties are bound immediately but expect to enter into a formal document that may add some additional terms at a later date.
There is often a great deal of contention over the issue of whether or not parties have finalised an agreement and are now bound to perform that agreement. Carefully articulating as to when negotiations will have finished and an agreement has been entered into will save parties a lot of difficulty and uncertainty.