In the recent decision of Pavlovic v Universal Music Australia Pty Limited  NSWCA 313, the New South Wales Court of Appeal revisited the general principles regarding the intention of parties to create a binding contract and, more particularly, the circumstances in which a solicitor will have the requisite authority to bind their client to a contract.
The Appellant (Pavlovic) and Respondent (Universal) had a joint venture arrangement in respect of a music recording label business. They subsequently sought to terminate that venture. After some further negotiations as to its terms, Universal's lawyers sent a draft settlement deed to Pavlovic's lawyer. In response, Pavlovic's lawyer then informed Universal's lawyer that Pavlovic "will sign" the draft deed. However, an executed copy of the deed was never exchanged between the parties.
The trial judge held that the parties had entered into a binding contract, with the proffering of the deed constituting an offer that was accepted by the response from Pavlovic's lawyer.
The Court of Appeal allowed the appeal and found there was no binding contract. In doing so, the court held:
1. whether parties intend to be immediately bound to a contract (with a view to subsequently executing a formal agreement), or intend only to be bound upon execution of a formal agreement, is to be objectively determined having regard to the commercial context and surrounding circumstances of the parties' dealings. This can include consideration of the subsequent conduct of the parties to determine whether, at an earlier time, the parties had intended to be immediately bound. The intention of the parties in this case was to be bound upon execution of the deed;
2. while solicitors have authority to negotiate on behalf of their clients, there must be clear and cogent evidence of actual authority for them to be able to bind their client to a contract. There was no such evidence in this case; and
3. while solicitors do not have ostensibly authority to bind their clients to a contract, that is subject to a qualification in the context of litigation, where a solicitor does have ostensible authority to bind their client to a contract which relates to, and compromises, that litigation. However, in this case, there was no litigation on foot and to extend this qualification to a case where parties were negotiating so as to avoid litigation would be novel and extend the exception beyond previous legal authority.
The decision is a reminder for solicitors during negotiations to be clear as to (a) the basis on which any contract is to be finalised (for example, by identifying that there will only be a binding contract upon execution of a formal document); and (b) the actual authority of their opposing solicitor to bind their client to a contract.
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This is for general information purposes only. It is not intended to be legal advice and should not be relied on for that purpose. Formal legal advice should be obtained that is specific to your circumstances. To the extent permitted, Garland Hawthorn Brahe excludes all liability arising from reliance on this information.