This case serves as a reminder to negotiating parties to be clear about their intentions regarding the binding nature of their ‘subject to contract’ negotiations and to be aware that their conduct and language could result in them being bound prior to signing a formal contract.  If the intention is not to be bound until a formal contract is signed, this should be communicated very clearly and (where possible) in writing, ideally before negotiations commence.

North Queensland Fuel Pty Ltd (NQF) appointed agents to sell a service station on its behalf.  Stellard Pty Ltd (Stellard) made a verbal offer to purchase the service station, subject to due diligence and various other conditions.  At Stellard’s request, the agents then emailed a representative of Stellard setting out the terms on which NQF would sign a contract (including the price, deposit, completion date and various other terms but made no mention of due diligence) and attaching a draft contract of sale which also included a director and shareholder guarantee.

After further negotiations, Stellard sent an email in which it confirmed its offer which was expressed to be “subject to contract and due diligence as previously discussed” and sought immediate confirmation that its offer was accepted so that exchange of contracts could take place by the following Monday.  An authorised representative of NQF accepted the offer by email, noting that the offer was “subject to execution of the [C]ontract provided (with agreed amendments) on Monday”.

Stellard’s solicitor then sought amendments to the contract including a 40 day due diligence period and removal of the guarantee.  However, relying on the deletion of the guarantee, NQF’s agents advised Stellard that NQF was terminating negotiations.  In fact, NQF had at the same time been negotiating with another potential purchaser who had submitted a higher price.

In finding that there was a binding contract for sale, Martin J in the Supreme Court of Queensland found that:

  • whether or not a contract has been formed requires an objective determination of the intention of the parties, which requires determination not only of the text but also of the surrounding circumstances known to the parties and the purpose and object of the transaction;
  • although Stellard’s offer was expressed to be “subject to contract and due diligence as previously discussed”, such words needs to be measured against the relevant context;
  • the broader context of the emails (including telephone conversations between the parties) and the expressions used in the emails  strongly suggested that the parties “were content to be bound immediately and exclusively by the terms which they had agreed upon while expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms”; and
  • the parties had agreed on the essential terms of the contract.  By sending the email accepting Stellard’s offer, NQF was taken to have agreed to the due diligence period and there was no evidence to suggest that the execution of personal guarantees was a matter essential to entry into the contract.