Do We Agree?

The recent case of Sully v Englisch [2022] VSCA 184 (Sully) presents an interesting conundrum that often surrounds contracts and agreements more broadly; namely, does a binding contract exist between parties, and, if so, what are the terms of that agreement?

What is a contract?

A contract at common law is any agreement or promise that is legally binding.[1] Contrary to popular belief, it does not need to be in writing, save for certain exceptions, such as the transfer of land.[2] An agreement that is legally binding can be enforced by a Court.

However, the common law provides that there are several elements an agreement must possess for it to be considered a legally binding contract. These are:
        (1)         offer and acceptance;
        (2)         certainty;
        (3)         consideration; and
        (4)         intention to create legal relations.

In Sully, the main issue that arose was in relation to (4), and whether the parties had intended to create legal relations between them.

Whether two or more individuals intend to be legally bound is determined by the following principles:
1.     it is to be determined objectively, having regard to the presumed or inferred intention of the parties;
2.    the parties’ objective intention is fact-based and to be determined having regard to all of the surrounding circumstances, including ‘by drawing inferences from [the parties’] words and their conduct’[3] and from the terms of the parties’ correspondence. Such correspondence is to be read in light of the surrounding circumstances and having regard to the commercial context in which it were exchanged;[4] and
3.    the ultimate question to be answered is what each party, by its words or conduct, would have led a reasonable person in the position of the other party to believe.[5]

In addition, there are often circumstances where parties come to an agreement that a document is to be written, but it is not clear whether that written document is to be legally binding. In these circumstances, the High Court in Masters v Cameron[6] delineated the following categories into which such a document may fall:
1.    the parties intend to be bound immediately, though expressing a desire to draw up their agreement in a more formal document at a later stage;
2.    the parties intend to be bound immediately, but may wish the operation of a particular clause or term to be delayed pending the drawing up of a more formal document; or
3.    the parties intend to postpone the creation of contractual relations until a formal contract is drawn up and executed.

Since Masters v Cameron, there is debate as to whether a fourth category exists, being where the parties intend to be bound immediately by terms which they have agreed upon, whilst expecting to make a further contract in substitution of the first contract, the second contract containing, by consent, additional terms.[7]

Sully v Englisch

In Sully, the parties attended a mediation to resolve a dispute relating to the sale of land. At the mediation, the parties reached an agreement to settle the dispute, but did not prepare any written terms of settlement on the day of the mediation. Following the mediation, a multitude of letters and emails were exchanged between the parties to resolve the dispute, as per the terms discussed at the mediation. Due to a change in circumstances, one of the parties sought to resile from the terms agreed upon at the mediation.

In deciding that the parties did reach an agreement at mediation, the Court reasoned:
•    it was not in dispute that the parties had reached an oral agreement, and that the parties had agreed that it was to be reduced to writing by way of a deed;
•    the parties reached an agreement on the key terms of their settlement, leaving only the ‘machinery for implementation of those terms to be worked out.’ The judgment noted the principle that ‘where all or nearly all of the important matters are addressed, the conclusion that the parties intended to be immediately bound will be difficult to resist.’[8]
•    in regard to the test as to whether the parties’ words and conduct at the mediation would have led a reasonable person in the position of the other party to believe that they intended to be immediately bound, the Court found that the parties’ words and conduct did find an intention to be immediately bound, in particular, by using words such as ‘offer’ and ‘accept’, and the notes taken by each parties’ lawyer during the mediation;
•    it was not inconsistent with an intention to be bound that one party believed there was still the requirement to reduce the agreement to writing; and
•    the timing of each parties’ words and conduct throughout the mediation also carried significant weight. For example, the fact that one party conveyed their concern that further documentation was required at the beginning of the mediation, carried less weight than the fact that another party at the conclusion of the mediation was “pleased that they had settled” and wished to “put the matter to bed”;
•    the context in which the agreement took place, being a mediation, also carried weight, in that the Court acknowledged that parties attend mediation with an intention to resolve their dispute, and so reasonable people in the position of the parties would assume that they had reached a binding settlement at the mediation in consideration of the other factors.

Overall, Sully demonstrates that, regardless of whether an agreement is in writing, or whether there are still aspects of an agreement yet to be finalised, an agreement may nonetheless become binding and legally enforceable where each parties’ words and conduct support that finding; parties must be cautious of what they say and do in settlement negotiations, depending upon whether they intend to be bound or not. 

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If you would like to discuss the contents of this article please contact the team at FAL Lawyers.

Note: The information contained in this document is not legal advice. It sets out matters of general opinion and should not be applied to your particular circumstances without obtaining specific legal advice as to your position, rights and obligations.

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[1] Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847
[2] Instruments Act 1958 (Vic) s 126
[3] Sagacious Procurement Pty Ltd v Symbion Health Ltd (Formerly Mayne Group Ltd) [2008] NSWCA 149, [99] (‘Sagacious’) citing Allen v Carbone (1975) 132 CLR 528 at 532 (Stephen, Mason and Murphy JJ)
[4] Queensland Phosphate Pty Ltd v Korda (as joint and several liquidators of Legend International Holdings Inc (in liq) [2017] VSCA 269, [37] (‘Queensland Phosphate’)
[5] Pavlovic v Universal Music Australia Pty Ltd [2015] NSWCA 313 [65] (‘Pavlovic’) citing Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, [40]
[6] (1954) 91 CLR 353, 360
[7] Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622, 628
[8] Delaney v Delaney [2022] VSCA 48