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As commercial negotiations can take place over months, during which time one party may actually begin providing the requested goods or services as part of an interim arrangement, we lawyers are often asked the question – when is a contract formed?

In some cases, the answer will be obvious to everyone as parties have exchanged a signed agreement. However, the situation is more complicated when commercial negotiations take place via a combination of face-to-face conversations, phone conversations, text messages and emails that don’t necessarily culminate in a complete signed document.

3 Key Rules Around Forming a Contract

There are three rules to keep in mind when assessing whether/when parties have formed a contract:

  1. There must be an offer and acceptance of that offer. In other words, the acceptance must correspond to what was offered, and if there is some difference between the two, then there may not be an agreement at law. To that end, the acceptance must be unequivocal.
  2. Following on from the first rule, if an “acceptance” also proposes one or more additional or different terms, it will be regarded by the law as a counter-offer. The exception to this rule is a situation in which the additional or different terms proposed are clearly favouring the party that made the original offer, in which case the “acceptance” may be deemed to have created an agreement.
  3. The offer and acceptance must have incorporated all necessary terms for a binding and enforceable agreement to have been reached. The law will not permit a court to insert terms into a deficient agreement to make it enforceable.

Some Case Law

The first two principles mentioned above can be taken from the decision of the High Court of Australia in Mooney v Williams [1905] HCA 34. Here, an offer was made to sell a locomotive crane to the Government at the price of £235 “within one week after the receipt of the order” and a subsequent order was placed for a locomotive crane by the Government at the quoted price of £235 “within two days”.

The Court held in regards to the Government’s order:

“That was not an acceptance of… [the] offer. At that time, therefore, there was no contract between the parties. It may be regarded as a qualified acceptance of the offer, but if that is so, it was equivalent in law to a new offer for the crane…”

A court can, however, imply extra terms into a legally binding agreement to make it work in practice (see Australian and New Zealand Banking Group Ltd v Frost Holdings Pty Ltd [1989] VR 695 at 702).

Key Takeaways

As you can see, the best option is to document all contractual negotiations and conclude the negotiations with a signed document that embodies the agreement. For assistance with drafting/reviewing commercial contracts or with contractual disputes contact our specialist lawyers on 1300 544 755.

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