Digital Communication and the Formation of Contracts

In the digital world we now live in it is prudent to give due consideration to the numerous emails that are sent everyday; could you be unwittingly entering into a binding contract?

Emails can now form a binding land contract between commercial entities

The use of digital communication methods such as email has changed the way commercial entities communicate with one another, and has given rise to a number of legal risks such as whether or not a binding agreement has been formed via email. This article will take a look at the recent decision in Stellard Pty Ltd v North Queensland Fuel Pty Ltd [2015] QSC 119 where a binding contract was formed, despite no formal contract having been signed between the parties, and a “subject to contract” condition attached during the various email exchanges between the parties.

The facts

The defendant through an agent sought expressions of interest for the purchase of a service station with the negotiations taking place between the parties through email, and via phone conversations. The defendant requested that the terms of the offer be put in writing, with the representatives of the plaintiff sending an email (the offer email) to the defendant’s agent confirming the offer of $1.6 million:

“This offer is of course subject to contract and due diligence as previously discussed. We are hopeful of effecting an exchange of contracts next Monday but need acceptance of our offer immediately so we are in a position to instruct the appropriate consultants to carry out the necessary investigations.

I look forward to receiving your client’s confirmation that our offer is accepted as clearly both parties are now going to start incurring significant expenses. (emphasis added)”

The defendant’s agent replied the next day accepting the plaintiff’s offer (the acceptance email):

“We accept the below offer which we understand will be subject to execution of the Contract provided (with agreed amendments) on Monday, minimal due diligence period and the provision of all information/reports etc that are obtained by the purchaser during the due diligence period.

We look forward to progressing the matter further on Monday. (emphasis added)”

A draft contract of sale was sent by the plaintiff’s lawyer to the defendant for completion and execution. Three days after the contract of sale had been sent by the legal representative of the plaintiff, the defendant’s agent emailed the plaintiff back announcing their desire to withdraw from the “negotiations”.

However, what transpired was the defendant was negotiating with another buyer at the same time unbeknownst to the plaintiff, and subsequently, the defendant entered into a contract with the other party. As a result, the plaintiff alleged that there was a valid binding contract, while the defendant denied that any contract was formed.

The issues

The main issues that Martin J had to consider were whether there was a contract of sale, and whether the defendants were legally bound by the email exchanges and whether the correspondence was enforceable under s 59 of the Property Law Act 1974 (QLD) (PLA):

59 Contracts for sale etc. of land to be in writing

No action may be brought upon any contract for the sale or other disposition of land or any interest in land unless the contract upon which such action is brought, or some memorandum or note of the contract, is in writing, and signed by the party to be charged, or by some person by the party lawfully authorised.

Martin J looked to the joint decision of Dixon CJ, McTiernan and Kitto JJ in Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 with the justices stating, (at 360) “

Here parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the subject matter of their negotiation is to be dealt with by a formal contract, the case may belong to any of three classes.

(1) It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect.

(2) It may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.

(3) The case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.”

A number of case law has suggested that the three categories may be too narrow, and that a fourth category should be recognised as was articulated by McLelland J in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622:

“[W]here the parties intend to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing by consent, additional terms.”

Looking at the bigger picture in relation to intention

The use of terms such as “subject to contract” or “subject to a formal contract” may point to lack of intention of being bound by an agreement until a formal contract is signed, however, it may not always guarantee such an outcome, as the High Court noted in Masters v Cameron (at 12):

“The question depends upon the intention disclosed by the language the parties have employed, and no special form of words is essential to be used in order that there shall be no contract binding upon the parties before the execution of their agreement in its ultimate shape… Nor is any formula, such as “subject to contract”, so intractable as always and necessarily to produce that result.”

Ultimately, consideration of the document as a whole and the context of the surrounding circumstances will determine the outcome, as Stephen, Mason and Murphy JJ observed in Allen v Carbone (1975) 132 CLR 528 (at 7):

“No doubt it is right to say that the intention of the parties to a contract wholly in writing is to be gathered from the four corners of the instrument. The same may be said when parties have brought into existence a document intended to comprehensively record the terms of an agreement thus far reached, notwithstanding that it makes provision for the subsequent execution of a more formal contract which may contain terms not yet agreed. But even in these cases it is legitimate in the course of construing the document to have regard, when appropriate, to subject matter and surrounding circumstances.”

The decision

Martin J observed that the parties “were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms” in reference to the fourth category as outlined earlier. His Honour stated the following reasons for reaching the conclusion which were:

• the need for an immediate acceptance in the offer email, and the need to undertake due diligence investigations as both parties would incur significant costs;
• the acceptance email which pointed to a formal contract even in light of further terms which may be agreed upon;
• the response of the defendant within an hour was consistent with the position that a contract had been formed;
• that there was no point to any conversations or any stipulation in any communication that the provision of a guarantee was a condition precedent to the formation of a binding contract.

The defendant conceded that the representative had the authority to send the email and bind the defendant. However, it was argued instead that the email was not properly signed, thereby, not satisfying the requirements of s 14 of the Electronic Transactions (Queensland) Act 2001 (ETQ Act):

14 Requirement for signature

(1) If, under a State law, a person’s signature is required, the requirement is taken to have been met for an electronic communication if—

(a) a method is used to identify the person and to indicate the person’s intention in relation to the information communicated; and

(b) the method used was either—

(i) as reliable as appropriate for the purposes for which the electronic communication was generated or communicated, having regard to all the circumstances, including any relevant agreement; or

(ii) proven in fact to have fulfilled the functions described in paragraph (a), by itself or together with further evidence; and

(c) the person to whom the signature is required to be given consents to the requirement being met by using the method mentioned in paragraph (a).

(2) The reference in subsection (1) to a law that requires a signature includes a reference to a law that provides consequences for the absence of a signature.

The defendant argued that the acceptance email did not specifically identify on whose behalf the author was purportedly to represent, and that the plaintiffs did not consent to the requirement for a signature being met by method involved in the email.

In discussing the two arguments bought forward by the defendant, Martin J stated the following [at 66]:

“Section 14 provides that the requirement for a person’s signature is met for an electronic communication if a method is used to identify the person whose signature is required and to indicate that person’s intention in relation to the information communicated. In the acceptance email, there is no identification of any person as the acceptor of the earlier offer. That is not fatal.

And to the second argument of the defendant [at 68]:

“The other point raised by the defendant is that the plaintiff has not demonstrated that it consented to the requirement of the signature being met by using the method referred to above. In circumstances where parties have engaged in negotiation by email and, in particular, where an offer is made by email, then it is open to the court to infer that consent has been given by conduct of the other party.”

Ultimately, Martin J made declarations in the terms sought by the plaintiff.

Concluding remarks

The decision in Stellard Pty Ltd v North Queensland Fuel Pty Ltd demonstrates the importance of carefully drafting emails for lawyers – especially during the negotiation period. The acceptance by the Supreme Court of Queensland of typed names on emails as signatures creating a binding contractual relationship has highlighted the importance of being clear of when negotiations have been finalised, and that a binding contract has been created.

This article or the information contained therein does not purport to provide a full explanation of the law, give advice or any guidance to anyone in connection with the formation of contracts electronically or otherwise or any other issue and this article is not to be used by anyone to support their legal position or otherwise. For clarification purposes and further to the above this article does not purport to be advice in any regard. This firm cannot take responsibility for any action readers take based on this information. We would be happy to assist you with any contractual, commercial, construction and engineering, building, property, real estate, development or related legal issues you may have, please get in touch via [email protected] or telephone our Brisbane office on (07) 3087 3463, Sydney office on (02) 9293 2546 or Sunshine Coast office on (07) 5413 9270 and one of our experienced lawyers will respond to you.