The point at which the parties to a negotiation for a deal or transaction are legally bound can be difficult to judge – particularly, if the parties intend to enter into a more formal agreement. When negotiations fail and formal documents are not entered into, the question arises whether preliminary agreements are binding on the parties.
In Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd  WASCA 21, the Western Australian Court of Appeal considered whether the parties intended to create a legally binding relationship by the exchange of emails and enter into a binding agreement for lease – notwithstanding that a formal lease and licence had yet to be agreed to.
Priolo Corporation Pty Ltd (Priolo) as lessor and Vantage Systems Pty Ltd (Vantage) as lessee were parties to a lease in respect of office premises in West Perth (Original Lease) which was due to expire on 30 June 2009. Vantage’s licence to use six car bays on the property was also due to expire on 30 June 2009 (Original Licence). Vantage sublet a portion of the premises to Deugro Projects (Australia) Pty Ltd (Deugro).
In May 2009, there were discussions between Priolo’s leasing agent and Mr Walker of Vantage, concerning a new lease at the expiration of the Original Lease. On 11 May 2009, the leasing agent prepared and emailed Mr Walker a proposal for a new lease (Original Proposal). However, the Original Proposal was not acceptable to Mr Walker.
The leasing agent then prepared and emailed Mr Walker a revised proposal (Revised Proposal). The email read:
Can you please confirm in writing that this proposal is acceptable to Vantage and we will arrange for [Priolo’s] solicitors to prepare the draft documentation.
The Revised Proposal provided that Priolo’s standard lease and licence agreement would be used to document any formal agreement (Documentation Clause). The Revised Proposal contained a material error. It wrongly stated that the licence fee for the six car bays was $375 per bay per annum instead of $375 per bay per month (Licence Fee Error).
On 10 June 2009, Mr Walker sent two emails to the leasing agent, stating:
Priolo sought to rely on the exchange of emails from 4 June 2009 through to 10 June 2009 as constituting the agreement for lease.
On 11 June 2009, the leasing agent instructed Priolo’s solicitors to prepare draft lease and licence agreements using a copy of the Revised Proposal. On receipt of the documents, the leasing agent noticed the Licence Fee Error and instructed Priolo’s solicitor to correct the error. On 2 July 2009, the leasing agent sent the draft lease and licence agreements to Mr Walker for review. However, Priolo did not hear back from Mr Walker until early September.
On 8 September 2009, Mr Walker emailed the leasing agent informing them that Deugro thought that the “make-good” clause was “way over the top”. Attached to the email was an alternative “make-good clause”. Shortly after, the leasing agent advised Mr Walker that Priolo was not willing to accept the alternative "make-good" clause. As there was no binding agreement between Vantage and Deugro in relation to the “proposed sublease”, Deugro purported to terminate its alleged “tenancy at will” by one month’s notice.
Shortly after, Vantage’s solicitors wrote to the leasing agent stating that no concluded agreement to lease had been made, that Vantage was occupying the premises pursuant to the holding over provision in the Original Lease, and Vantage intended giving one month’s notice to vacate the premises. Priolo’s solicitors disputed Vantage’s alleged right to vacate the premises and asserted that Vantage was bound by a concluded agreement to lease with Priolo.
The trial judge’s findings and reasoning
Priolo brought a claim for damages based upon (amongst other things) a breach of the alleged agreement for lease.
The central issue for the trial judge, was whether the parties intended to create a legally binding relationship by the exchange of emails ending on 10 June 2009, notwithstanding that a formal lease and licence had yet to be agreed to.
The trial judge concluded “on the balance of probabilities that [Priolo and Vantage] intended to enter into a binding agreement for lease by the acceptance of the [revised] proposal by Vantage” as there was “a sufficient meeting of minds for there to be a binding agreement for lease”.
The grounds of appeal
Vantage appealed against the decision and argued that, on an objective assessment, neither party intended to bind itself a new lease and licence on the terms set out in the Revised Proposal. Amongst other things, it argued that "there was no meeting of the minds" given:
the disconformity in relation to the fee for the car bays between the Revised Proposal on the one hand, and the draft licence agreement, on the other, and the necessity to rectify the Revised Proposal in relation the fee payable.
Priolo contended that the acceptance by Vantage of the Revised Proposal created a binding agreement for lease which fell within the fourth class of case (additional to the three classes identified in Masters v Cameron  HCA 72 (Masters v Cameron)), that is:
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.
Vantage contended that the Revised Proposal, as accepted by Vantage, fell within the third class of Masters v Cameron, namely:
The intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal agreement.
The fundamental question for the Court of Appeal was whether the parties intended that, upon Vantage accepting the Revised Proposal, there should be a concluding and binding agreement to lease and take a licence. In the present case, the relevant intention was “intention to contract” – not what the parties intended by the terms of the alleged agreement.
The Court set out the legal principles relating to the “intention to contract”:
In light of these legal principles, the Court of Appeal held that it should be inferred, on an objective assessment, that upon Vantage accepting the Revised Proposal the parties intended that:
Subsequent negotiations, dealings and communications did not destroy the earlier concluded and binding agreement between them.
The Court of Appeal came to this conclusion for the following reasons:
On a proper construction of the Revised Proposal, the parties did not agree that, upon Vantage accepting the Revised Proposal and absent any further agreement, the binding agreement would comprise the provisions in Priolo’s standard lease and licence agreements. The provisions in the standard agreements were to be merely a guide for the purpose of the parties’ negotiations.
Lavan Legal comment
This decision points out that parties in the negotiation phase of a transaction must be mindful of the possibility of being bound well before formal documentation is prepared or signed.
The decision highlights the need for parties to be clear about the nature of communications made during negotiations and other pre-contractual agreements.
If the parties do not intend to be bound until final agreement on all the terms or formalisation of the contract (Masters v Cameron, category 3), this should be expressly stated at the commencement of negotiations and in correspondence.