Deal or no deal?: At what point during a commercial transaction does an agreement become binding?

When do negotiations end and agreements begin?

A recent NSW Court of Appeal decision about a prospective tenant withdrawing from negotiations of a proposed lease is a reminder of the need for parties to clearly communicate at the outset that they do not intend to be legally bound by any negotiations.

Whilst this is a case involving the negotiation of terms of a lease, it is equally applicable to all commercial negotiations.

Facts

BBB Constructions Pty Ltd (BBB) owned land that had been approved for residential and commercial development. In June 2006, Aldi Foods Pty Ltd (Aldi) sent BBB a proposal to lease a part of the commercial development from which it would operate a supermarket. Aldi's proposal clearly stated that '[the] offer was subject to Aldi Board approval'.

The area that Aldi proposed to lease included a second basement, which was not a part of the original plans of the development. If the parties agreed to a lease, BBB would be required to amend the plans to accommodate the new Aldi supermarket.

Negotiation of the terms of the proposed lease continued over the next 12 months. Aldi indicated to BBB on a number of occasions during this time that the agreement to lease would be signed imminently. BBB also incurred significant expense in commencing construction of the second basement.

In about May 2007 (possibly as a result of frustration with Aldi), BBB began negotiating with IGA in respect of a lease of the same premises. These negotiations were ultimately unsuccessful.

BBB issued final documents to Aldi in July 2007. Aldi's board did not approve the tenancy, and informed BBB that it would not proceed with the agreement to lease.

BBB commenced proceedings in the Supreme Court of New South Wales, alleging that it had incurred costs in reliance on Aldi's representations, and that Aldi acted unconscionably and/or had misled or deceived BBB.

The decision

The Supreme Court found in favour of Aldi and BBB appealed the decision to the NSW Court of Appeal. In dismissing the appeal, the Court held unanimously that:

1. BBB knew that the proposal was subject to Aldi board approval;
2. the approval of the Board was not a 'mere formality';
3. BBB's conduct (in particular its negotiations with IGA) was inconsistent with its claim that it relied on Aldi's representations. Accordingly BBB was not misled or deceived; and
4. Aldi's conduct was not unconscionable because BBB was a commercially sophisticated party which was able to safeguard its own interests. Any expense incurred in constructing the second basement was for BBB's own commercial advantage.

Conclusions

This case serves as a reminder to parties to negotiations that they must be very clear at the outset that they do not intend to be legally bound by any negotiations.

When negotiations commence, parties should state in writing at which point an agreement will be reached, for example 'we will not be legally bound by any agreement until final documents are executed by both parties and exchanged'.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.