Bound by an unsigned written agreement

Commercial Disputes eBulletin - 29 January 2013

Summary

In the case of Wayne Edward John Street v Fantastic Holdings Limited, a landlord was found by the court to be bound by the terms of an unsigned lease. Although this particular case relates to a commercial lease agreement, the same principle applies to any unsigned contract and parties.

In this eBulletin we look at how you can avoid your company being held to be contractually bound to an unsigned agreement.


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The facts

A tenant of commercial premises, Fantastic Holdings Ltd sought to enforce an agreement for lease which it had signed and returned to the landlord, despite the agreement not having been signed by the landlord. The landlord later disputed that any binding contract existed because the agreement had not yet been formally signed by both parties. Fantastic Holdings sought an order for specific performance.

The landlord and Fantastic Holdings were negotiating a new lease agreement, as the existing lease agreement was due to expire on 2 April 2011. Negotiations between the parties progressed to a stage where all of the essential terms for a new agreement had been agreed.

On 20 December 2010, the landlord sent Fantastic Holdings a formal lease document containing all the agreed terms. The lease document was lost through no fault of either party. The landlord then re-sent the lease document on 20 January 2011, which Fantastic Holdings then signed and returned to the landlord on 1 March 2011.

Fantastic Holdings continued to occupy the premises after 2 April 2011 and, significantly, paid rent in accordance with the new lease agreement following receipt of invoices from the landlord in accordance with the new lease agreement.

The landlord argued that the intention of the parties (when looked at objectively) was that they would only become contractually bound by the agreement after final execution by both parties.

The decision

Justice Pembroke held that it was necessary to ascertain the objective intention of the parties based on their correspondence and communications.

After reviewing these, His Honour found that there was no evidence that the parties intended that the lease would only be binding when executed by both parties, and that, having completed the negotiation stage, the parties "were of one mind" as to the terms of the lease with nothing remaining outstanding other than formal execution.

In sending the tenant the lease document, the landlord was making a final offer in a form capable of acceptance, leaving nothing further for negotiation. Therefore, signing the agreement would, objectively, be regarded as a mere formality.
 

Protecting your interests during and after the negotiation of terms

Following are some steps that companies can take to avoid being contractually bound to an unsigned agreement:
  1. Documents drafted during and after the negotiation process should clearly state that the parties only intend to be bound when the formal contract has been signed by both parties, even if there has been an implied expectation that execution of the agreement is critical.
  2. Ensure that you clearly communicate to the other party, that the agreement in question will only be binding when both parties have signed, regardless of when agreement on the essential terms has been reached.
  3. If you send the final version of an agreement to the other party for execution, include a reminder notice that the agreement is not binding until both parties have signed.
  4. Do not perform any obligations under the agreement until it has been signed by both parties.
  5. If the other party begins performing their obligations under the agreement prior to dual execution, notify them immediately that you do not accept that their performance is pursuant to the negotiated agreement. It is important to be aware that engaging in sufficient acts of part performance of an (unexecuted) agreement may make that agreement binding. 

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Further information

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