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The recent Federal Court judgment Lucas v Zomay Holdings Pty Ltd is a reminder to all contracting parties that a preliminary agreement is immediately binding, even when you are expecting to enter a further ‘formal’ contract.
While this has been established Australian law since the High Court decision of Masters v Cameron in 1954, Lucas demonstrates the principle’s continuing relevance in the current era where email negotiations reign supreme.
Mr Lucas, the Purchaser, commenced proceedings seeking specific performance of the terms of a document headed ‘Offer to Purchase’, which dealt with the proposed sale of a pharmacy business owned and operated by Zomay Holdings Pty Ltd, the Vendor.
The factual events can be summarised as follows:
The Purchaser submitted that the Offer to Purchase, as altered by him and accepted by the Vendor’s agent, was a binding agreement because it contained the three essential elements of a concluded agreement: the parties, the subject matter and the price. When the Vendor’s agent told the Purchaser that everything was agreed (see point #4 above), the parties were bound immediately by the terms which they had agreed upon, even whilst expecting to make a further contract in substitution for the agreed terms contained in the Offer to Purchase.
The Court agreed with the Purchaser, rejecting the numerous propositions which the Vendor submitted to the contrary. In considering each of the Vendor’s contentions, the Court held:
Justice O’Callaghan made reference to the recent case Damcevski v Demetriou where Justice Sackar explained ““[i]f the terms of such a document indicate that the parties intended to be bound immediately, effect must be given to it. Construction of a document may make it sufficiently clear that the parties were content to be bound immediately by the terms to which they had agreed, notwithstanding they contemplated further documentation”.
The Vendor also argued that even if the Offer to Purchase agreement was found to be binding, the Purchaser’s proffer of the draft contract of sale, which contained a due diligence clause significantly different to what had been previously agreed, was so unreasonable or inconsistent with the terms of the Offer to Purchase that it constituted a repudiation of it.
The Court rejected this submission, saying that “[i]t is, with respect, difficult to posit a case that less resembles repudiation.” As the evidence demonstrated that the Purchaser’s solicitor made clear, in multiple ways, that the proposed contract of sale was only a draft and subject to negotiation, then it could not be considered that any intention to no longer be bound by the Offer to Purchase was demonstrated.
In circumstances where damages were not an adequate remedy, due to the “special and singular attraction” of the business being the sole pharmacy in the largest shopping centre in Tasmania, the Court concluded that the Purchaser was entitled to orders for specific performance of the Offer to Purchase.
This case serves as an excellent illustration of some simple but important lessons for anyone involved in negotiating agreements:
  FCA 830
 (1954) 91 CLR 353
  NSWSC 988 at 
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