I am often asked if unsigned contracts are legally enforceable. The answer in many instances is yes!
This can sometimes be the case even if your document has the title “Memorandum of Understanding” (MOU) or “Letter of Intent”. The title that you give your document may not have any impact on whether or not a document will be enforceable.
And this can sometimes be the case even if your document specifically says that you do not intend to enter into a binding relationship until your management has signed off. This was the circumstance surrounding the case of PRA Electrical v Perseverance[1].
Perseverance owned a goldmine near Bendigo, which required electrical works. PRA was an electrical contracting company that responded to a tender for the electrical works. The tender documents included various contractual conditions, one of which was a condition that the contract would not come into effect until both parties executed a formal contract.
Following various discussions and negotiations between the parties, the contract was awarded to PRA, and PRA commenced work. However, the parties had never executed a “formal” contract.
During the period of work, a dispute arose between the parties, at which time the question emerged as to whether or not there was a binding contractual arrangement on foot.
The courts took the view that even though the original draft contract and tender documentation clearly stated that a binding contract would not come into effect until both parties executed a formal document, the actions of the parties (as though a contract was in place) was enough to override those written conditions.
So what’s the lesson for you?
Don’t assume that adding a clause into your tender documentation or other documents will be enough to prevent a legally enforceable contract from being created, if your actions suggest otherwise.
I have seen countless instances of contracts teams being approached at the last minute to prepare a contract for services that are about to commence, without being given enough time to negotiate a formal contract. Or of contracts teams being told that the organisation wants to start work with a particular contractor before there is time to get the internal approvals they require.
It is so often the case that in these situations there is pressure to get “a simple document” signed and in place between the parties while the “formal” contract is negotiated and executed, so work can commence in the meantime. Often it is suggested that using a document with a heading like “letter of intent” or “memorandum of understanding” will achieve the outcome of getting the work started without actually entering into “anything binding”.
However, if disputes occur before a formal contract is entered into (or indeed if the formal agreement is never even agreed and executed, which is often the case in these circumstances) you may be in a very exposed situation, potentially with a binding arrangement that is now lacking any detail other than what is contained in your one page letter of intent or MOU.
If you are in this kind of sticky situation – either feeling the pressure to get a quick “holding agreement” signed so works can start, or worse still if you have a dispute relating to a contract that hasn’t been finalised or hasn’t been signed – contact us for a confidential discussion about your options – [email protected] or call us on 02 8006 0830.
If this article was of interest you might also be interested in our contract drafting seminars. Our Contact Law for Non Lawyers seminar series provides practical, easy to use tips and tricks on how to minimise risks and make contracts work for you – aimed directly at managers, procurement officers, CFOs, sales people and anyone else involved in contracting.
We run regular introductory and advanced sessions throughout Australia through our sister business Aspect Educate. We also conduct inhouse sessions if you want something tailored to your organisation. For more details, just send an email to [email protected].
[1] PRA Electrical Pty Ltd v Perseverance Exploration Pty Ltd & Anor [2007] VSCA 310
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