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By Ben Brady, Associate, and Daniel Meyerowitz-Katz, Solicitor, Levitt Robinson*

A version of this article was published in the December 2015 edition of the Law Society of NSW Journal

Every lawyer spends a vast amount of time negotiating one sort of agreement or another on behalf of clients. The extent to which a lawyer is able to bind his or her client in contract is therefore an extremely important consideration for the profession as a whole.

The recent NSW Court of Appeal judgment in Pavlovic v Universal Music Australia [2015] NSWCA 313; (2015) 90 NSWLR 605 is arguably the most authoritative statement of the relevant principles since the High Court decision in Pianta v National Finance & Trustees [1964] HCA 61; (1964) 180 CLR 146. The judgment also contains an interesting consideration of the principles relating to how parties can bind themselves in contract.

Facts

Stephen Pavlovic founded Modular Recordings Pty Ltd (‘Modular’) in 1998 and since that time, Modular carried on the business of conducting a record label. In 2005, Mr Pavlovic sold half of Modular to Universal Music Australia Pty Ltd (‘Universal’) and the two entered into a Shareholders’ Agreement, whereby Mr Pavlovic was the Managing Director of Modular, and Universal provided administrative and financial support.

The relationship between Mr Pavlovic and Universal eventually broke down. In late 2014, the two began negotiating a termination of the joint venture in an attempt to resolve their differences without resort to litigation, which both parties had threatened to commence. The negotiations were conducted predominantly through each party’s solicitors, and a draft agreement was prepared by Gilbert + Tobin, who acted for Universal, in the form of a document entitled ‘Deed of Settlement and Release’ (‘Proposed Deed’).

The terms of the Proposed Deed were negotiated during October to December 2014. Eventually, on 23 December 2014, Gilbert + Tobin provided a copy of the Proposed Deed to Stephen Gorry of Henry Davis York, who acted for Mr Pavlovic, along with an email stating that Universal would sign the Proposed Deed and associated documentation, then provide to Mr Gorry a signed copy of the documents and a cheque for $100, being the consideration payable under the Proposed Deed for Mr Pavlovic’s shares in Modular. Although not expressed in the email, it was made clear that this was Universal’s ‘final offer’ to Mr Pavlovic.

The signed documents and the cheque were not provided by Universal as foreshadowed.

The following afternoon, Mr Gorry emailed Gilbert + Tobin saying, ‘[Mr Pavlovic] will sign’. A few more emails were exchanged, culminating in an email from Gilbert + Tobin agreeing to Mr Pavlovic providing the executed documents to them within 48 hours. Mr Pavlovic did not at any stage sign or exchange the Proposed Deed.

In early January 2015, Mr Pavlovic gave Universal some assets belonging to Modular which he was to transfer to Universal under the Proposed Deed, however no signed copy of the Proposed Deed was ever sent. Meanwhile, a payment of Mr Pavlovic’s annual leave entitlements, due to be made on 7 January 2015 under the Proposed Deed, was not made by Universal.

On 2 February 2015, Mr Pavlovic’s new solicitors, Levitt Robinson, wrote to Gilbert + Tobin advising that Mr Pavlovic declined to accept the terms of the Proposed Deed. On 23 February, Mr Pavlovic purported to terminate any agreement that was then in existence. In March 2015, Universal provided a signed copy of the Proposed Deed and cheques for $100 and for Mr Pavlovic’s annual leave entitlements, then commenced proceedings in the NSW Supreme Court to enforce what it claimed was an agreement reached on the terms of the Proposed Deed by the exchange of emails between solicitors on 23 and 24 December 2015.

First instance

The primary judge, Sackar J, found that an agreement on the terms of the Proposed Deed had been reached on 24 December 2014, when Mr Pavlovic had accepted Universal’s offer through Mr Gorry’s emails.

His Honour identified several factors as indicating that a binding agreement had been reached, including that: the parties were commercially sophisticated and had engaged sophisticated law firms; the agreement had been negotiated over weeks and months; and it was important for the agreement to be completed before the Christmas/New Year break as the parties’ commercial relationship had broken down and there was a need to finalise matters. His Honour also noted that the parties had not specifically expressed that there would be no binding agreement until execution and exchange had occurred.

His Honour further found that Mr Gorry had sent the emails of 24 December 2014 saying that Mr Pavlovic would sign based on instructions from Mr Pavlovic, and that Mr Gorry therefore had actual authority to bind Mr Pavlovic to the proposed agreement. His Honour also found that Mr Gorry had ostensible authority to bind Mr Pavlovic as the agreement came into existence in a ‘litigious or potentially litigious context’. This was on the basis that ‘the dispute had its genesis in the plaintiff threatening to take legal action against Mr Pavlovic’.

Appeal

Mr Pavlovic appealed the decision. The appeal was unanimously allowed by Bathurst CJ, Beazley P, and Meagher JA, on the basis that no binding agreement had been reached and Mr Gorry had not had authority to bind Mr Pavlovic in contract.

Whether an agreement had been reached

Beazley P, who delivered the leading judgment, identified that where parties have reached an agreement as to all the terms of a contract, but have also agreed that a further, formal agreement is to be executed, the question for determination is whether the parties intended to be immediately bound, which is to be determined objectively from the ‘outward manifestations’ of the parties’ intentions (at [64]).

Her Honour identified (at [67]) that the starting point for such analyses are the three categories identified by Dixon CJ, McTiernan and Kitto JJ in Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 at 360-362:

(1) where the parties have agreed on final terms and agreed to be bound but wish to have the terms expressed in a formal document;

(2) where the parties have agreed on all of the terms but made one or more of them subject to the execution of a formal document; and

(3) where the parties have not agreed to be bound unless a formal document is executed. However, her Honour stated that these are not strict categories into which all such cases must fall.

Applying that test, her Honour found that no binding agreement had been reached. It was relevant that the parties had always dealt with each other in a formal context and their relationship had been governed by complex formal agreements, including a series of deeds; and there had been no indication that they had intended to depart from those arrangements. Rather, ‘the reverse was the case’ – the parties had negotiated the terms of complex formal documents, within the confines of the existing formal relationship between them (at [79]). In particular, her Honour found that, in direct contradistinction to Sackar J’s findings, had the parties intended to dispense with the manner in which they had previously intended to be bound, there would have been an express statement to that effect (at [83]).

Her Honour also found that the emails that Universal contended constituted the making of an agreement appeared, on their face, to reflect no more than the making of arrangements for execution and exchange (at [111]). Her Honour further found that, contrary to Sackar J’s findings, there was nothing about the upcoming Christmas break that changed the manner in which the parties intended to be bound, and references in the Proposed Deed to the ‘Execution Date’ indicated that the agreement was only intended to come into effect upon execution (at [83], [102]). As to the parties’ post-contractual conduct, her Honour found that this was at best equivocal and could not have been interpreted as indicating the existence of a binding agreement (at [131]-[133]).

Authority to bind

In relation to whether Mr Gorry had authority to bind Mr Pavlovic in contract, Beazley P referred to the settled line of authority from Pianta that the ordinary rule is that solicitors have the authority to conduct negotiations on behalf of their clients as to the terms of a contract, and to make arrangements for execution, but not to bind their clients in contract – unless there is ‘clear and cogent evidence’ of such authority being conferred ([137]- [138]).

On that basis, her Honour found that there was no evidence that Mr Gorry had actual authority to bind Mr Pavlovic to the terms of the Proposed Deed. Her Honour emphasised that ‘a statement by a solicitor that a client “will sign” does not bear the “clear and cogent” meaning that the client has given instructions to the solicitor to immediately bind the client to the terms of the contract’ (at [148]).

As to whether Mr Gorry had ostensible authority to bind Mr Pavlovic, her Honour recognised the rule articulatedby Stanley J in Lucke v Cleary [2011] SASCFC 118; (2011) 111 SASR 134 (at [61]) that ‘in the context of litigation, a legal practitioner has ostensible authority to bind his or her client to a contract which relates to and, in particular, compromises that litigation’ (at [150]). However, her Honour rejected Sackar J’s finding that this extends to situations that are ‘potentially litigious’ (at [154]). As Bathurst CJ said in his judgment, the principle ‘does not extend to agreements resulting from negotiations, which if unsuccessful, may or may not end up in litigation’ (at [21]).

Interestingly, Beazley P also suggested in obiter that the phrase ‘without prejudice save as to costs’ too is ‘in most instances, without any relevant meaning absent litigation being on foot’ (at [155]).

Conclusion

Pavlovic stands for the general proposition that parties can be bound to an agreement only in the manner in which they agree to be bound. It also contains an important statement of the principles of when a lawyer can bind his or her client in contract. From a practical perspective, the decision makes it clear that, when negotiating the terms of an agreement on behalf of clients, lawyers should always expressly specify the manner in which the parties agree to be bound. This is especially important for lawyers negotiating a settlement of litigious proceedings, where the implied authority to settle the proceedings imposes a danger of inadvertently binding a client to an agreement without the client’s consent.

Pavlovic also contains lessons for determining when an agreement will be binding in the absence of an expressly- agreed mechanism. In particular, where a complex deed has been prepared and there has been discussion of arrangements for it to be signed and executed, it will generally be the case that the parties have agreed to be bound only upon signature and exchange. In such circumstances, a party indicating that they ‘will sign’ the agreement is not an indication that they agree to be bound by that agreement without having signed it.

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*Levitt Robinson acted for Mr Pavlovic in this case.