article

When Does A Contract Become Binding?

Emilee Clark

29 September 2021

The starting point to determine whether a contract is binding is to establish whether there is a
common consensus between the parties to create a binding contractual relationship.

However, the expression of an intent to create a legally binding relationship is not always found in
the form of a formal written contract or agreement, which may only become binding once each
party has signed on the dotted line.

Courts have frequently been required to determine whether a preliminary agreement is binding,
for example in the form of a letter of intent, heads of agreement or even email correspondence
(Pre-Contract Documents).
These types of Pre-Contract Documents commonly contemplate entry into a formal contract after
a further period of negotiation.

There are primarily four scenarios involving Pre-Contract Documents:

  1. The parties have reached agreement with finality regarding the subject matter of the bargain and intend to be immediately bound to the performance of those terms, and at the same
    time propose to have the terms restated in a fuller or more precise way, but that the effect
    of the agreement does not change;
  2. The parties have agreed on all of the terms of their bargain and do not intend any departure on addition to the agreed terms, but they have made performance of one or more of the terms
    conditional upon the execution of formal documentation (for example, the payment of a
    deposit from one party to another);
  3. The parties do not intend to make a concluded bargain unless they each execute a formal contract document; and
  4. The parties intend to be bound immediately and exclusively by the terms which are agreed while expecting to make a further contract to replace the first which will include additional terms by consent.

Whether or not a contract has been formed depends on the objective intention of the parties in
the circumstances, or “what each party by words and conduct would have led a reasonable person in the position of the other party to believe”. It is a common misconception that an agreement is not
binding until there is a signed contract unless, of course, that is expressed in the documentation.

Nurisvan Investments Limited v Anyoption Holdings Limited [2017] VSCA 141 (the Nurisvan Decision)

This Victorian Court of Appeal case provides an example of where a business deal can become
problematic. It involves Pre-Contract Documents which were not drafted appropriately to bind the
parties to their intended outcome.

Brief facts

  1. FIBO Australia Pty Limited (FIBO) was the wholly-owned subsidiary of Nurisvan.
  2. FIBO held an Australian Financial Services License (AFSL).
  3. Anyoption was interested in acquiring an AFSL.

In 2014, Anyoption and Nurisvan began negotiations with the view that Nurisvan would purchase
shares in FIBO.

On 24 December 2014, the parties entered a heads of agreement (HOA) which only allowed for
unilateral execution by FIBO and Anyoption, not Nurisvan, and which featured the following
recitals:

a) the Vendor wishes to sell to the Purchaser and the Purchaser wishes to buy from the Shares;
b) FIBO holds a valid AFSL;
c) the parties wish to manifest their intention for the Vendor to sell and the Purchaser to purchase all of the shares in this Deed;
d) the parties agree that this Deed is binding on the parties

Clause 5 of the HOA dealt with the “Terms of the Share Purchase Agreement” and provided:
5.0 The Parties acknowledge and agree that the following conditions, among others, will be included in the Share Purchase Agreement:

5.1 The Purchaser will acquire the Shares from the Vendor free from any encumbrance.
5.2 The Purchaser will pay the Purchase Price to the Vendor as consideration for the acquisition of the Shares and Assets which will be paid as follows…
5.3 Completion of the Share Purchase Agreement is conditional, amongst other matters, on….
5.4 The Vendor will provide reasonable warranties as agreed by the Purchaser concerning FIBO, ares and the AFSL (including but not limited to warranties to title and compliance with the terms of the license and the law).

By a letter in late 2015, Nurisvan attempted to terminate the HOA.

Anyoption sought a Court order for specific performance requiring Nurisvan to perform the terms
of the HOA.

The primary considerations were whether the HOA was legally binding on the parties having
regard to the fact that Nurisvan was not a signatory and if so, whether the HOA had sufficient
essential terms to be binding on the parties.

The primary judge ordered that the parties were to perform the HOA and execute a Share Sale
Agreement, on the basis that clause 5 was still operative on whatever other terms were reasonably
necessary to give business efficacy to the Share Sale Agreement.

Nurisvan appealed and the Court of Appeal held that the HOA was not legally binding for the
following reasons:

  1. Recital A expressed a wish that the Vendor sell and was not expressed in a form of agreement
    at the time the document was formed;
  2. Recital C was expressed in terms of a wish by the parties to manifest their intention, not to
    manifest their agreement;
  3. Clauses 5.1 and 5.2 were expressed in terms of an event in the future;
  4. Clause 5.3 identified a condition precedent to completion, by using the words “conditional,
    amongst other matters”.
  5. A comparison between the HOA and the ninth draft of the Share Sale Agreement showed
    matters which were unresolved between the parties.
MX v FSS Trustee Corporation as Trustee of the First State Superannuation Scheme [2020] NSWSC 961 (the MX Decision)

The Nuvisan Decision was recently considered by the New South Wales Supreme Court in the MX
Decision in which Robb J endorsed the approach of the Victorian Court of Appeal in the Nurisvan
Decision.

This case considered whether email correspondence between the parties’ solicitors regarding an
offer to settle the matter was intended, upon acceptance, to immediately bind the parties prior to
a formal settlement deed being entered into.

The Court considered:

  1. the precision and meaning of the terms expressed (objectively);
  2. whether there was sufficient certainty of the terms of acceptance; and
  3. the subsequent conduct of the parties, specifically the use of the words by the
    solicitor indicating that an “in principle” agreement had been reached.

His Honour therefore found that, in these circumstances, there was insufficient certainty to create
an intention be bound by the terms expressed in the email.

KEY TAKE-AWAYS

As can be seen from the above, whether you intend to immediately bind a party to a deal or
whether you only wish for matters to be binding once a contract is entered into depends on the
precise wording of the agreement.

[When Does A Contract Become Binding]

CONTACT US

If you need assistance with structuring Pre-Contractual Documents or binding contractual
documents, please contact Emilee Clark, Associate, on (02) 8239 6500 or
emilee.clark@kreisson.com.au.

This communication is sent by Kreisson Legal Pty Limited (ACN 113 986 824). This communication has been prepared for the general information of clients and professional associates of Kreisson Legal. You should not rely on the contents. It is not legal advice and should not be regarded as a substitute for legal advice. The contents may contain copyright.

Emilee Clark
About Emilee

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