Emailed Dutch Auction Disaster!

A seller looking to conduct a Dutch auction may be bound before they think.

An email exchange involving an agent and seller negotiating the sale of a North Queensland service station with 2 different buyers was found to have bound the owners to a sale with one of the interested parties.

In the May 2015 case of Stellard Pty Ltd & Anor v North Queensland Fuel Pty Ltd, the Supreme Court of Queensland had to decide whether email negotiations were, in fact, a binding arrangement on the seller.

No doubt the circumstances would be familiar to selling agents with a “hot” property…

1. The Facts

The agent was authorised to represent the seller in an “expression of interest” process. A company associated with United Petroleum (“United”) was interested and authorised its employee to represent it in negotiations.

After some initial investigations, United indicated it would be a buyer but wanted separate contracts (with different entities as buyers) for the freehold and the business. The selling agent responded that the seller wanted a single contract. The United employee then told the agent he wanted to know the seller’s terms so that he could get authority to make a formal offer.

Later that day the agent sent an email to the United employee setting out the commercial terms the seller was prepared to accept and attaching a draft contract. The draft contract included a special condition that if the buyer was a company the buyer had to procure its directors to complete and sign the personal attached to the contract.

The next day there was a call where some of the proposed sale terms were refined. The United employee then sent an email to the agent confirming the offer price for the business and the freehold and the buying entity. The email stated “This offer is, of course, subject to contract and due diligence as previously discussed. We are hopeful of effecting an exchange of contracts next Monday but need the acceptance of our offer immediately so that we are in a position to instruct the appropriate consultants to carry out the necessary investigations.

I look forward receiving your client’s confirmation that our offer is accepted as clearly, both parties are now going to start incurring significant expenses.” (emphasis added)

A representative of the service station replied to United’s email 45 minutes later. That email response included the following crucial lines:

“… We accept the below offer which we understand will be subject to execution of the Contract provided (with agreed amendments) on Monday, minimal due diligence period and the provision of all information/reports etc that are obtained by the purchaser during the due diligence period…”

United’s lawyer sent a revised draft of the contract on the following Monday that had:

1. removed the original condition that required personal guarantees be provided by directors of any buying entity, and
2. inserted 2 new conditions for
   •    due diligence; and
   •    environmental issues.

Unknown to United, the seller was also negotiating directly with another interested buyer.

Four days later the seller’s agent sent United an email advising the seller was not happy with the proposed due diligence condition and the sellers had sold the property to a different buyer (not through the agent’s office).

2. The Argument

United took the matter to court claiming it had a binding agreement. The seller argued in its defence:

1. the alleged “offer’ from United was not capable of being binding as it was expressed as being “subject to contract”.
2. the “acceptance” by email was not an unqualified acceptance of the United “offer”.
3. there was no agreement reached on the important issues of personal guarantees by United’s directors nor the length of any due diligence period.
4. there was no intention to be legally bound to a contract and there was no contract actually signed as required by s.59 of the Property law Act.

3. The Decision

The judge applied principals from a 1954 High Court decision of Masters v Cameron dealing with the binding nature of negotiations that are subject to signing of a later formal document.

The judge found:

1. the seller had wanted to play United’s offer off against another interested buyer;
2. the seller had thought that use of the words “subject to contract” in the negotiating process and the fact it had not physically signed a contract with United meant that it was not bound to a deal with United;
3. although the seller may have intended to keep its options open to negotiating with other buyers when the email exchange was viewed objectively it appeared that the Seller and the Buyer had agreed on terms and intended to be bound to a contract to sell;
4. the length of the due diligence period could be worked out by looking at earlier emails in the negotiation process;
5. the provision of personal guarantees by the directors of United’s buying entity could have been supplied after the contract was formed;
6. there was no evidence to suggest that the issue of personal guarantees was essential to the seller’s entry into the contract;
7. there was enough evidence for s.14 of the Electronic Transactions (Queensland) Act to be found to apply so that the emails from United and the Seller’s representative were effectively authorised signatures of the parties to be bound by the contract; and
8. although there was no express agreement or consent that the parties could be bound by an electronic signature, the judge found that where the parties had negotiated by email, and particularly where the offer had been made by email, it was open to the court to infer that consent had been given by the conduct of the other party.

4. The Lessons

1. Emailed property negotiations can be binding despite lack of a signed contract.
2. Emails can be sufficient for a contract to be “…in writing, and signed by the party to be charged…”
3. Sharp buyers can improve their position during negotiations with well-constructed correspondence.
4. A careful review of negotiations by an experienced commercial lawyer is recommended where a seller is negotiating with a number of potential buyers at the same time.

If you would like further information please contact Tony Randall n our commercial property team on 07 4616 9898.

 

Prepared by Tony Randall

 

This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.