Emails, texts and binding contractual relations

Marindi Metals Ltd (Marindi) commenced proceedings¹ against Kidman Resources Limited (Kidman) seeking specific performance of an alleged written agreement between Marindi and Kidman concerning the acquisition of various rights to explore for and mine pegmatite minerals within a basket of tenements in the Mt Holland gold field in Western Australia.

Marindi alleged that the written agreement was brought into existence through the exchange of various emails and text messages which passed between the Managing Directors of the two companies over the course of 2 hours and 21 minutes on 4 April 2016 (4 April Communications).

Kidman wholly refuted that any binding agreement was reached between the parties by reason of the 4 April Communications.

Legal position

Relevantly and importantly, the 4 April Communications contemplated a heads of agreement (HOA) being entered into by the parties.

It is established law² that where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the subject matter of their negotiation shall be dealt with by a formal contract (such as the HOA), the case may belong to one of four categories:

• Category 1: where the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect;
• Category 2: where the parties have completely agreed upon all the terms of their bargain and intend no departure from or in addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document;
• Category 3: where the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract; and
• Category 4: where the parties intend to be bound immediately by the terms which they have agreed upon, whilst expecting to make a further contract in substitution for the first contract containing, by consent, additional terms.  (There is a dispute about the existence of this category, which has not been conclusively determined by the High Court.)

Marindi argued that the 4 April Communications fell within Category 1 or 2 (and potentially 4) and, therefore, were binding upon the parties.  Kidman argued that the 4 April Communications fell within Category 3 and, therefore, did not have any binding effect of their own unless and until a formal document was executed.  

Whether a disputed binding written agreement exists is evaluated objectively, rather than subjectively, that is, what each of the respective parties subjectively thought as to whether an agreement had been reached is irrelevant.

Further, there can be no binding and enforceable agreement unless the terms of the bargain, or at least its essential and critical terms, have been agreed upon.  Accordingly, relevant to the court’s assessment in objectively determining whether the parties intended to immediately perfect a binding agreement (ie within Categories 1, 2 or 4) intersects with the legal question of contractual certainty.

A contract is void for uncertainty if:

• all of the essential and critical terms of the bargain have not been agreed upon;³ or
• the language used is so obscure and incapable of any precise definite meaning that the court is unable to attribute to the parties any particular contractual intention.⁴

Findings of the Court

The Honourable Justice Kenneth Martin found that no binding or concluded contractual agreement was reached between the parties on 4 April 2016 by reason of the exchange of communications that day.

His Honour reached this conclusion based on the following findings: 

• the 4 April Communications, objectively assessed, displayed a clear acceptance of a need for a binding HOA to be drafted, reviewed and signed off by the parties before the parties would become contractually bound to each other (ie the 4 April Communications fell within Category 3);
• prior to 4 April 2016, there was an observed method of commercial dealings between the parties, which had proceeded on the pre-requisite basis of recorded written agreements setting out full terms and conditions (as is usual and expected of ASX listed public entities); 
• following the 4 April Communications the parties did not conduct themselves as though a final binding agreement had been reached on 4 April 2016; and
• the 4 April Communications were insufficiently certain as to essential terms upon the fundamental mining rights the subject matter of the underlying transaction.

Lavan comment

Although the court did not find a binding agreement existed in this case, parties need to be mindful that an exchange of emails, text messages and other communications can constitute a binding contract.

Expressing an intention to enter into a formal written contract is not determinative of whether a binding contract exists.

If it is not your intention to be bound until a formal written contract is executed, then precise words need to be used that clearly and unambiguously state that no binding agreement is to be formed unless and until a formal contract has been executed.

If it is your intention to be bound, ensure that all essential terms are clear and have been agreed upon.