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Contracts

If, as part of negotiating a contract, your lawyer states that you will sign a document, is this enough for you to be bound by the contract? This was the question before the NSW Court of Appeal in Pavlovic v Universal Music Australia Pty Limited.

Background

In 2005, Mr Pavlovic and Universal Music Australia Pty Limited (Universal) entered into a joint venture arrangement to run a recording label, Modular Recordings Pty Limited (Modular).

In September 2014, the parties, through their lawyers, started negotiations to end the joint venture through a Deed of Release and Settlement.

In December 2014, Universal's lawyers sent the draft Deed of Release (the Proposed Deed) to Mr Pavlovic's lawyer, who stated that Mr Pavlovic will sign the Proposed Deed. Universal's lawyers responded, allowing Mr Pavlovic "a further 48 hours to sign the documents and forward copies to us".

Neither party sent an executed copy of the Proposed Deed to the other, nor did Universal send a cheque for $100 for the transfer of the shares in Modular as required under the Proposed Deed.

Issues

The two key issues before the court were:

  • Did each party's lawyers have actual or ostensible authority to enter into an agreement on their behalf?
  • If so, did the parties—acting through their lawyers—enter into a binding agreement on the terms of the Proposed Deed?

Decision

Authority

The Court decided that the parties' lawyers did not have actual or ostensible authority to bind their clients to a contract.

The Court noted the case law draws a distinction between conducting negotiations on behalf of a client, which a lawyer has authority to do, and contracting on behalf of a client to bind them to contract obligations, which cannot be done without "clear and cogent evidence".

In this case, there was no evidence that Mr Pavlovic's lawyers had express actual authority to bind him to the contract.

Turning to ostensible authority, the Court noted that while the law provides for ostensible authority to bind a client in the context of litigation conducted on a client's behalf, this authority does not extend to negotiations of agreements arising out of disputes that may potentially end up in litigation.

Accordingly, Universal's argument that Mr Pavlovic was bound by his lawyer's statement that he "will sign" failed.

A binding agreement

The Court stated that the test of whether the parties were bound by the Proposed Deed where they have reached agreement about the terms of a contract, but have also agreed that a further formal agreement is to be executed, involves a determination of their intentions.

The Court noted the following factors as relevant in determining parties' intentions:

  • intentions are to be determined objectively and need to consider the "outward manifestations" of their intentions
  • they are to be ascertained objectively from the terms of the agreement, read in light of the surrounding circumstances
  • the commercial context and surrounding circumstances of the parties' previous dealings
  • the subsequent conduct of parties to determine whether, at an earlier point in time, the parties intended to enter into a binding agreement
  • the language the parties have employed, and
  • in cases not involving the construction of a single document,  objectively determining intentions based on the communications between the parties.

Applying these considerations, the Court held the parties had not entered into a binding contract in the form of the Proposed Deed because:

  • the formal nature of the previous relationship suggested that the Proposed Deed would also be subject to a formal execution
  • the complex negotiations conducted by emails to and fro between the parties do not support the argument that the parties intended to be bound by email exchange
  • there was no indication in the communications between the parties negotiating the draft document that, when the parties agreed to the terms in the Proposed Deed, they would be bound before it was executed
  • the terms of the Proposed Deed stated that it was to take effect upon execution
  • the language used in the emails did not indicate the parties considered themselves immediately bound, and
  • although the subsequent conduct of the parties indicated that the parties were proceeding on the basis that the arrangements would be terminated, it did not prove that the terms of the Proposed Deed had been accepted as binding and other evidence strongly refutes this suggestion.

What this means for agencies

This case highlights the uncertainty that can be created if negotiations are not formally recorded in an executed agreement. However, it also highlights the dangers of not explicitly stating your intentions about whether the agreed outcome is still subject to a formal agreement, as failing to do so carries a risk that you may be bound even if you did not intend to be.

We would like to acknowledge the contribution of Ashley Cahif to this article.
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