Not worth the ether it is written on Law Reporter

When is a contract not a contract?

It might seem trite for cases to still be going to the courts on whether a contract exists or not. But these days with so much commerce being done through e-mail, the fax, and other communications, it is important to remind oneself that contract law and its principles still require certain issues to be well and truly "finalised" before a contract exists.

Depending on whether one is buying or selling, where written agreement is required, oral agreements can be concluded if one gets an agreement on basic terms. In particular ensure that the parties do agree on what they are buying or selling (or what their arrangements are) and that the price is fixed.

A recent decision of Justice Einstein of the NSW Supreme Court in Rural Insurance (Australia) Pty Ltd v Reinsurance Australia Corp Limited (2002) 41 ACSR 30 illustrates the difficulties parties can find themselves in if they do not "square away" all of the critical issues.We take our description of the facts from Butterworths Law Report.

The plaintiff and defendant established a joint venture insurance underwriting agency business, Insure That Pty Ltd. By early 2000 the defendant was in financial difficulty and had ceased underwriting business as agent for Insure That. The defendant no longer had a reason to be involved with the company, and it conducted negotiations with the plaintiff between May and June 2000 over the sale of its shareholding in Insure That. The parties agreed to obtain a valuation of the shares.

The defendant advised on 1 June 2000 that it "would be happy to consider a valuation" . The plaintiff e-mailed the defendant on 12 July 2000 to advise that it would be prepared to buy the shares for the valuation amount of $22,556 and asked "can you please confirm whether this is acceptable to you?" In the absence of a reply from the defendant, the plaintiff asked "have you had a chance to consider the above?"

Following further e-mails and letters which drew no response, the plaintiff e-mailed the defendant in November 2000 saying "we consider that there has been an agreement to transfer the shares for a consideration of $22,556. Can you please confirm your acceptance of the valuation of the shares so that we can arrange payment and conclude the matter?" The defendant replied to say that it had no interest in selling the shares at that price.

The plaintiff issued proceedings seeking a declaration that it was entitled to acquire the defendant's shareholding for payment of $22,556.

Judge Einstein dismissed the application. He held that in considering what circumstances surrounded the formation of an agreement the objective intended the parties were paramount. "Whether any relevant individual party to the negotiations thought an agreement existed or did not exist is irrelevant to the exercise, unless there exists an argument concerning estoppel." (at para 34) (Estoppel means that one cannot deny that certain things have occurred.) In the Judge's view a fundamental question which had to be considered is whether the conduct of the parties when it is looked at in the surrounding circumstances indicates an agreement has come into an existence.

Referring to this as a specific issue that he had to address the Judge found there were a number of rather unusual or curious aspects of the environment involving the relevant communications. In his view while the e-mail of 12 July from the plaintiff amounted to a reaffirmation of its preparedness to purchase the shares and a request for the defendant to confirm that this was acceptable to it did not necessarily mean that both parties had reached a clear decision. The terminology, in the Judge's view, suggested that while the plaintiff had made up its mind it did so on the basis that it did not matter what the defendant really felt.

Einstein J concluded that no contract existed. Each of the relevant factors that had been argued by both parties suggest "that the objective intent had not been that the parties were already bound in the fashion for which the plaintiff contends. Had the plaintiff already been bound by the anterior communications to acquire the shares at the [relevant valuation], there would be no need for reaffirmation or confirmation from the plaintiff of its earlier preparedness to purchase. The terminology used by the plaintiff suggests that it was entitled, on its side of the exercise, to make up its mind as to whether or not it would be bound to acquire at the [relevant valuation]" (at para 51)

He further noted that the language used by the plaintiff, for example that it would be "happy to consider a valuation" amounted to a clear hurdle for the proposition put forward by the plaintiff. He added that these words "even in context and even read in the light of all the facts, matters and circumstances [discussed in this case] have a natural meaning of 'I would be happy to look seriously at a valuation" (at para 53)

He therefore concluded that there was substance in the defendant's submission "that in this context, and bearing in mind the content of all the communications, it would considerably strain the use of the words" to consider" to regard them as equivalent to a statement that the defendant was prepared to be bound by such valuation" (at para 54).

The case was dismissed. The judge recognised that this was a case in which different people could reach different views. But in these days when communications are so fluid it is vital that parties who wish to affirm a contractual relationship do so with clear words and do not allow uncertainty to cloud the issue.

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.