In this case the Victorian Court of Appeal found that a letter of offer signed by both parties but expressed to be “subject to the contract being executed” did not amount to a binding contract for the sale of the relevant property.
The decision provides another reminder that it is important for parties to express clearly whether they intend to be immediately bound by informal agreements (or parts of them such as confidentiality). The Court of Appeal indicates that the starting point is that ‘subject to contract’ means the parties do not intend to be bound and a party contending otherwise has the burden of persuading the court. Indicators that parties do not intend to be bound without formality include where an informal agreement is financially substantial, or where it concerns property. Conduct is also relevant but payment of money towards a deposit, or other conduct such as allowing the other party to occupy a property where such occupation does not relate to a particular agreement or terms between the parties (like in Masters v Cameron), may not be sufficient indicators of an intention to be bound.
The Edge Group Pty Ltd (as purchaser) and Jack Road Investments Pty Ltd (as vendor) signed a letter headed “offer of purchase” for the sale of property (Letter). The Letter provided that:
- the parties would adopt Jack Road’s standard contract of sale which would incorporate the details in the letter;
- the purchase price was $6 million, with 1% payable on the execution of the Letter (which The Edge Group paid) and 20% payable as a deposit on execution of the contract of sale;
- The Edge Group was entitled to immediate access to the property under a license upon payment of the deposit and execution of the contract of sale;
- The Edge Group was bound by a confidentiality agreement which ceased on execution of the contract of sale; and
- critically for the decision, the offer was “subject to the contract being executed”(clause 4).
Jack Road then sought to sell to another purchaser who had offered a higher price and The Edge Group lodged a caveat, which it refused to remove arguing it had purchased the property.
On appeal, The Edge Group argued that:
- the word “contract” in clause 4 was ambiguous, and should be construed to mean the Letter (which had been signed), not Jack Road’s standard form contract of sale; and
- alternatively, if “contract” did mean a formal contract of sale, execution of that contract was not a pre-requisite to the parties being bound by the Letter and the contract fell within the so-called 4th category of Masters v Cameron (i.e. where parties intend to be bound but intend to make a further contract containing, by consent, additional terms).
The Court of Appeal found that this was a clear case where ‘subject to contract’ had its ordinary meaning and upheld the trial judge’s decision that clause 4 of the Letter demonstrated the parties’ intention not to be bound at that stage (and therefore the Letter fell within the 3rd category of Masters v Cameron).
In doing so, the Court found that:
- the word “contract” in clause 4 was not ambiguous, because the Letter used the word “sign” when referring to the letter, but “execute” when referring to the contract for sale;
- aspects of the Letter would have no commercial purpose if it did not require the formal contract of sale to be executed before the parties were bound - what would be the purpose of providing for cessation of confidentiality obligations and payment of the overwhelming balance of the deposit upon later execution of the contract for sale, other than to reflect the fact that it was at that point that the parties intended to become bound?;
- the “natural meaning” of subject to contract was that the parties were not bound until a formal document was executed and it would require a clear basis for determining otherwise (which the evidence did not support);
- objectively the parties considered execution of a formal contract as marking a “significant transition in the relations between the parties” because it triggered significant obligations such as payment of a 20% deposit, cessation of confidentiality obligations and access to the property;
- while the 4th category in Masters v Cameron contemplates there being some outstanding matters, the importance and extent of those matters is relevant. There were significant matters not addressed in the Letter (e.g. no vendor’s statement under s 32 of the Sale of Land Act had been provided to The Edge and the terms of the licence to access the office and warehouse were not specified); and
- subsequent conduct of the parties did not provide clear evidence of any admission by any party that the letter was intended to be binding and therefore was irrelevant to the consideration.