Unintentionally Bound: the Case of Informal Agreements in Commercial Tenancy Ventures

It comes as a surprise to clients when, on occasion, they find themselves either subject to, or trying to enforce, “informal agreements”.  Informal agreements may come in the form of an exchange of discussions in respect to an arrangement, or a signed Lease Offer.  It may be that the informal agreement is a sword for a client (for example, the client wants to push the arrangement in the absence of a written contract signed by the parties), or a shield for a client (for example, the client wants to avoid the arrangement because there was no written contract signed by the parties – or the terms were not finally agreed).

Whether the arrangement relates to a supply of goods, services or a commercial leasing arrangement – a legally binding arrangement may be determined by way the conduct of the parties (such as one of the parties completing a condition agreed to start the arrangement (for example, supplying a service), or an exchange of emails about an arrangement), even in the absence of a formal contract – whether or not the contract is ultimately signed.

 

When are negotiations binding?

Courts look at the objective intention of the parties when determining whether there is a legally binding agreement.  That is, whether a reasonable person would consider the agreement to be legally binding, and not the parties’ subjective intention.

Courts have found a legally binding agreement in the following situations:-

  1. When a vendor and purchaser of commercial property agreed to the essential terms of the agreement over email, noting that the agreement was “subject to contract” and “subject to execution”.  A court found that this was essentially an “agreement to contract” and made judgement against the vendor (who attempted to withdraw from the transaction due having found a more favourable third party purchaser);
  1. Negotiations between a tenant and landlord whereby the essential terms of the lease were agreed upon were found to constitute an agreement to lease.  This was the case even though the negotiations began with “subject to formal lease documents being signed” and that not all (minor) terms were agreed.  The landlord was ordered to pay damages to the tenant for failing to countersign the formal lease document; and
  1. A tenant who, after negotiating and signing a letter of offer with a landlord, proceeded to obtain council approvals (with the landlord’s assistance) and took steps to fit-out premises without a formal lease in place was found to be bound by an agreement to lease.

When determining the intention of the parties, regard will be to the surrounding circumstances of the negotiations, the relationship of the parties, subject matter of the agreement and other relevant factors.

 

What can you do to ensure no binding agreement is in place until documents are signed?

Parties who do not wish to be bound by negotiations or pre-contract documents (e.g. heads of agreement) must ensure that they clearly and consistently reiterate to the other party in all correspondence that no legally binding agreement will be formed until formal and final documentation has been signed.  As the above cases reveal, merely stating “subject to contract” is not enough.

Further, prospective tenants should not enter into possession and pay rent until the lease is signed as this may constitute acceptance by conduct. Conversely, a landlord should not accept rent until they are in a position to be bound.  More generally, parties should not begin performing their obligations under the agreement before the documents are signed.

However, the risks of making an agreement conditional is as a sword which can be used against you – as the other party to a transaction may similarly withdraw from the arrangement if there is no legally binding agreement. This may mean that you could lose a commercially advantageous deal if it is not locked in.

In any negotiation, you should always seek legal advice before accepting the terms of an agreement (whether by email, orally or otherwise) and before signing any preliminary document.

Nautilus Law Group has a team of professionals experienced in commercial and property agreements.  It may be that our team can give you a “thumbs up” or recommendation for variations in a short meeting, or for more complex matters – the engagement may be extended.

Engaging a lawyer to advise on an agreement is an investment in certainty, as the costs of remedying a failed arrangement greatly outweigh the costs savings of avoiding advice.

We welcome you to contact our Property and Commercial Team to discuss your arrangements.  Please free to contact Marguerite, our department manager, on (07) 5574 3560 or by email to marguerite@nautiluslaw.com.au.

A complying self-managed superannuation fund may be settled by an instrument having the effect of a deed – allowing for execution by digital signature

A complying self-managed superannuation fund (SMSF) is a trust at law, which is subject to the requirements and restrictions of the Superannuation Industry (Supervision) Act (SISA), Superannuation Industry (Supervision) Regulations (SISR), Income Tax Act Assessment Act 1997 (ITAA97), Income Tax Act Assessment Act 1936 (ITAA36), and such further relevant Commonwealth and State based legislation applicable thereto.

Whilst industry practice favours the establishment of a SMSF by “deed”, there is no obligation under Commonwealth or State legislation that a SMSF conform with the obligations of the common law characteristics of a deed.  Section 10(1) of the SISA defines a deed to include “an instrument having the effect of a deed”.

Whilst the term “instrument” is not defined under the SISA, nor defined under the Acts Interpretation Act 1901 (Cth), the reference to “governing rules” and “deed” are used interchangeably, with the term “governing rules” defined at Section 10(1) of the SISA to mean, in respect to a “fund, scheme or trust”…“(a) any rules contained in a trust instrument, other document or legislation, or a combination of them, or (b) any unwritten rules, governing the establishment or operation of the fund, scheme or trust”.

Accordingly, setting aside the debate as to whether electronic transactions and digital signatures are allowed in respect to the settlement of a “deed” – a SMSF may be settled by any instrument which has the effect of a deed.

What, therefore, is an “instrument which has the effect of a deed”?

Returning to the nature of a SMSF, we cannot overlook the simplicity of what constitutes a trust.  A trust has three necessary elements:  the trustee, the trust property and a beneficiary.  A trustee can also be the beneficiary, provided the trustee is not the only one (consider Section 17A of the SISA – with its restriction that a single member cannot act as a sole trustee).  Whilst a trust may be settled by deed, there is no obligation at common law or statutory law to settle a trust by deed.  In fact, a trust can be settled by common intention of parties, and to this end – the definition of “governing rules” at Section 10(1) allows for “unwritten rules.”

Whilst the writer does not suggest a SMSF may be settled on a resulting or implied trust, the writer does not agree with the proposition that the formalities of a deed are necessary for the establishment or maintenance of a “complying” SMSF under the SISA.  To the contrary, the SISA accommodates settlement by any instrument which is a deed, or has the effect of a deed.  The focus throughout the SISA is on the governing rules, to which there is no formality of implementation.

In particular, Section 8 of the Electronic Transactions Act 1999 (Cth) (ETAC) stipulates that a transaction is not invalid under the laws of the Commonwealth merely because it takes place wholly or partly by means of one or more electronic communications.  A “transaction” is defined at Part 1, Section 5 of the ETAC to be “any transaction in the nature of a contract, agreement, or other arrangement”, “any statement, declaration, demand, notice or request” and “any transaction of a non-commercial nature”.  Part 2, Section 10 of the ETAC provides that the signature of a person may be given electronically, provided consent is given to the execution and method.  Part 2A of the ETAC allows for the application of Parts 1 and 2 of the ETAC to contracts and transactions in the nature of a contract.  To the extent an “instrument having the effect of a deed” is in the nature of a contract, Part 2A makes allowances for electronic transactions and digital signatures in respect to such instruments, notwithstanding the exclusions at Item 142 of Schedule 1 of the Electronic Transactions Regulations 2000 (Cth).   To read the exclusions at Item 142 to broadly prohibit the applications of the ETAC to the SISA for such purposes is, the writer suggests, against legislative intent.

EXECUTION BY A CORPORATION

Section 127 of the Corporations Act 2001 (CA) does not limit the means by which a corporation can execute a deed.  The Electronic Transactions Act Regulations 2000 (Cth) (ETR) exclude the application of the ETAC from applying in respect to “company laws” – but the inclusive nature of Section 127 of the CA does not prevent the company from resolving a means of executing a deed by way of electronic signature.

Whilst parties referring to a deed executed by a corporation, other than a prescribed manner at Section 127 of the CA, may require additional evidence of the corporation’s execution of the deed – the provision of the evidence does not invalidate the execution made by the corporation in accordance with its own mechanisms.

EXECUTION BY AN INDIVIDUAL

The following States either allow for, or are likely to be deemed to allow for, the execution of a deed by electronic means by an individual:

The following States do not allow deeds to be executed by electronic means by an individual, and it is therefore in these States that consideration must be given to what constitutes the execution of an “instrument having the effect of a deed”:

Therefore, returning to the question of what is an “instrument having the effect of a deed”?  The formalities of the common law execution of a deed in respect to the signing and delivery on “parchment, vellum or paper” are not obligated by the SISA.  Notwithstanding, four of the Australian States allow deeds to be issued electronically.  It follows that an “instrument having the effect of a deed” is an instrument, transacted with consent of the parties, by way of electronic mechanisms suitably qualified in accordance with the relevant Electronic Transactions Acts of the Commonwealth and States.

The Queensland Court of Appeal, in 400 George Street (Qld) Pty Ltd v BG International Ltd [2010] QCA 245, considered the question of what constitutes a deed, and in doing so considered 12 Halsbury’s Laws of England, 4th ed, para 1301, which defines a deed as “an instrument” which:

“…must express that the person or corporation so named makes, confirms, concurs in or consents to some assurance (otherwise than by way of testamentary disposition) of some interest in property or of some legal or equitable right, title, or claim, or undertakes or enters into some obligation, duty, or agreement enforceable at law or in equity, or does or concurs in some other act affecting the legal relations or positions of a party to the instrument or of some other people or corporation.”

The term “instrument” is not defined under the SISA or the Acts Interpretation Act 1901 (Cth) (AIA); however the Acts Interpretation Act 1954 (QLD) (AIA), Schedule 1 defines a “document” as “any paper or other material on which there is writing…and any disc, tape or other article or any material from which sounds, images, writings or messages are capable of being produced or reproduced (with or without the aid of the device)”.  An “instrument” is defined in the AIA as any “document.”

Section 44 of the Property Law Act 1974 (QLD) (PLA) entitled “Description and form of deeds”, does not require a deed to be on parchment, vellum or paper.  Notwithstanding, Part 2 of the Electronic Transactions Act (QLD) (ETAQ) allows for an electronic instrument to be effective, provided the execution standards are satisfied and the transaction is not excluded.

Specifically, an electronic instrument is taken to be effective by Sections 16 and 17, of Part 2 of ETAQ, where:  a) the electronic form of the document is provided by a reliable mechanism which maintains the integrity of the information contained in the document,  b) it is reasonable to expect the information contained in the electronic form will be readily accessible for subsequent reference and c) the parties to the communication consent to the provision of an electronic form.  Part 4 of the ETAQ reads Part 2, to apply to any “transaction” in the nature of a contract.

Therefore, deducing from 400 George Street, “an instrument which has the effect of a deed” is an instrument in which parties thereto express a consent, undertaking, obligation, duty or agreement which affects an interest in property, or some legal or equitable right, title or claim.  The formalities of execution are not necessarily dispositive, provided the intention of the parties  is demonstrated.

Is an “instrument having the effect of a deed” not, therefore, for purposes of establishing a complying SMSF, in the “nature of a contract”, such that Part 2 of the ETAQ allows for the execution of SMSF deeds (which are, notwithstanding the name, an “instrument having the effect of a deed”)?

There is no case law to answer this question; however, reading the statutory provisions above cited as inclusive, rather than exclusive, it would follow, the writer suggests, that a SMSF may be validly settled by a quasi-deed (for example, a self-managed superannuation fund deed of establishment, settled without compliance to the PLA and/or common law execution standards), electronically by not only corporations – but individual trustees.  Electronic transactions are not foreign to the SISA (see Section 11D) or CA (see Chapter 2P), and the modern business practice of electronic dealings would reasonably lead to a conclusion that it is unlikely that a SMSF would be found to be non-complying merely because a deed was executed electronically and by way of digital signatures of company officers and/or individuals and their respective witnesses – as a SMSF can be established by an “instrument having the effect of a deed” (Section 10(1) of the SISA).

It may be that third parties may require a company to execute more traditionally for their internal requirements; however, this requirement does not negate the effect of the “instrument having the effect of a deed,” given the consent and intentions of the parties to be bound therein.  Further, given the inflexibility of banks and other relevant institutions, it is best practice to adopt a means of execution by individuals likely to be universally accepted; however, given a SMSF does not have to be settled in common law deed form, there is no express prohibition to adopting digital signatures for the execution of a deed (notwithstanding in absence of the formality, it would be “an instrument having the effect of a deed) of the individual and his/her witness.