July 22, 2019
Parties must clearly express their intentions to be bound by informal agreements. In The Edge Development Groups Pty Ltd v Jack Road Investments Pty Ltd, the Victorian Court of Appeal found that a Letter of Offer (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 property.
The parties signed the Offer where terms were that the purchaser, Edge Group, would pay $6 million for the property. A 20% deposit would be paid on the execution of the contract with 1% payable on signing the Offer. The fourth condition of the Offer was “the offer is subject to the contract being executed”.
After Edge Group paid 1% of the purchase price to Jack Road Investments, Jack Road received a higher offer to purchase the property from a third party. Subsequently, Edge Road lodged a caveat over the property, therefore halting any potential sale to the interested third party. Edge Road also sought specific performance of the contract.
The Victorian Court of Appeal held the Offer was not a binding agreement with no intention by the parties to be bound until the execution of the formal contract.
That conclusion was based on the following:
- the offer was clearly expressed to be “subject to the contract being executed” which showed the parties’ intention the Offer was merely a bridge before the execution of the formal contract;
- there was still significant scope for negotiation between the parties before entering into a formal contract;
- the execution of the formal contract was intended to mark the point at which the transaction became legally binding and to confirm the balance payable of the deposit, grant of access to the property and the confidentiality between the parties; and
- the absence of key terms in the Offer provided no commercial basis to be agreed between the parties.
Parties to all commercial agreements should carefully consider whether they wish to immediately enter into a binding agreement, or if they would like to enter into a formal contract in the future.
Use of the words ‘subject to’ or ‘subject to contract’ may generally mean there is no intention on the parties to enter into a formal contract until a further agreement has been drafted.
If you have any questions about commercial agreements please contact Tim Smith, Senior Associate and Bobby Pallier, Solicitor.