(f) that the purchaser's financier might require a stage one assessment to be carried out on contamination of the property.
13 No reference was made in the correspondence between the solicitors to there being an existing agreement for the sale and purchase of the property. At that stage neither of the solicitors was aware of the existence of the letter dated 15 January 2003.
14 On 6 March 2003 Mr Johnson asked Mr Hardy-Smith about the request for a contamination report. Mr Hardy-Smith said to him:
" Our bank is insisting on a site audit and a full contamination report. That is going to take some time. Are you still prepared to sell? "
15 Mr Hardy-Smith denied saying "are you still prepared to sell?". However I prefer the evidence of Mr Johnson. There was no evident purpose in discussing the Bank's requirements with Mr Johnson except to seek his agreement to an extension of time for exchange.
16 The draft contract of sale included a clause in which the vendor disclosed that a fuel storage tank had been installed on the property and that petroleum products may have leaked or spilled upon the property. It provided that the purchasers would make no objection, requisition or claim for rescission because of any contamination or hazardous substances found on the property. There was further discussion between Mr Johnson and Mr Hardy-Smith about the contamination clause and the bank's requirements.
17 As will be seen from the conversation referred to in paragraph 7 above, Mr Johnson initially required contracts to be exchanged by 28 February 2003 and the deposit to be released to the vendor so that he could use the deposit to pay out a bill facility which was falling due on or shortly after that date. Mr Johnson checked his correspondence and ascertained that the rollover date was not until 14 March 2003. At some time shortly after 6 March 2003 he told Mr Hardy-Smith that he would have until Wednesday 12 March to make final arrangements for payment of his bill facility and that "I will go ahead and exchange provided the deposit is in my bank that night. If I have to find other funds I am not going ahead." Mr Hardy-Smith replied, "I will make sure it happens". Mr Hardy-Smith did not recall parts of this conversation and denied others. However, I accept Mr Johnson's version of the conversation which was not challenged in cross-examination.
18 On 10 March 2003 Colin Daley Quinn advised Hunt & Hunt that the vendor required contracts to be exchanged by Wednesday 12 March 2003. Again there was no reference to the letter of 15 January 2003. They asked for the purchaser's details and confirmed various amendments to the draft contract arising from the previous correspondence. They asked Hunt & Hunt to confirm their availability to exchange contracts.
19 On 11 March 2003 Colin Daley Quinn sent to Hunt & Hunt an updated Sewer Reference Sheet and again requested Hunt & Hunt to confirm their availability to exchange contracts.
20 On 12 March Mr Millgate of Colin Daley Quinn told Mr Johnson that contracts had not been exchanged. He said that the purchaser had advised him that there was a substantial encroachment in the vicinity of the cul-de-sac. Although the purchaser said it was not a problem for them Mr Millgate said that the vendor would need a clause saying that no requisition or claim for compensation could be made with respect to the encroachment, otherwise if the contracts were exchanged the purchaser might rescind and the deposit would have to be returned. Later that day Mr Johnson made arrangements with his bank for the bill to be partially paid from other funds and for the balance of the bill to be rolled over.
21 On 13 March 2003 Hunt & Hunt forwarded to Colin Daley Quinn a contract executed by Peter Warren Properties Pty Ltd and Mr Attwells as purchasers and a cheque payable to the defendant in the sum of $150,000. My Byers of Hunt & Hunt wrote to Colin Daley Quinn; "Please proceed to complete the exchange of contracts. We await receipt of the dated and signed counterpart contract."
22 Mr Millgate then told Mr Johnson that he had received the contract and a bank cheque for the deposit, but a clause still needed to be included in the contract saying that the purchaser would not make any claim for compensation for the encroachment. Mr Johnson said that he was tired of being mucked about, that he had had to pay the bill and that the purchaser should be told that he was not proceeding with the sale. Mr Millgate advised Mr Byers on 13 March that the vendor would not be proceeding with the sale. On 19 March the counterpart contract signed by the first and second plaintiffs was returned to Hunt & Hunt together with the deposit.
23 The third plaintiff did not pay stamp duty on the letter of 15 January 2003. It was not until 24 March that Messrs Hunt & Hunt asserted that there was already in existence a binding contract for the sale of land recorded in the letter of 15 January 2003 from Alliance Motor Auctions Pty Ltd. Mr Byers said that that letter had "recently been given to us". In that letter Hunt & Hunt asserted that there was a binding and enforceable contract for sale on the basis of the decision of this Court in Plastyne Products Pty Ltd v Gall Engineering Co Pty Ltd (1988) NSW ConvR 55-376. They also outlined a claim that the purchasers had acted on the assumption that there was a binding agreement with the vendor and had acted to their detriment in reliance on that assumption. However on the hearing before me the plaintiffs did not maintain any claim based on an estoppel.
24 In their letter of 24 March 2003 Messrs Hunt & Hunt said that their client required that contracts be exchanged by 5.00 pm 28 March 2003. They said that "in the circumstances we suggest that the form of contract previously agreed be the contract subject to the exchange." However the defendant refused to proceed and these proceedings were commenced.
The Issues
25 The plaintiffs submitted that the parties intended to be immediately bound by the letter of 15 January 2003. They submitted that the letter used the formal language of offer and acceptance and that the words "signed as an agreement" indicated that the parties intended to be bound by the terms which they had then agreed. The plaintiffs submitted that the case fell within the first category of cases discussed by the High Court in Masters v Cameron (1954) 91 CLR 353 at 360 and was indistinguishable from the contract considered by Bryson J (as his Honour then was) in Plastyne Products Pty Ltd v Gall Engineering Co Pty Ltd (1988) NSW ConvR 55-376. They submitted that if the parties intended there be no binding agreement for the sale of the property until formal contracts for the sale were exchanged, there was no point at all in the execution of the 15 January 2003 letter.
26 In Masters v Cameron the High Court (comprising Dixon CJ, McTiernan and Kitto JJ) identified three classes of case where parties have reached agreement upon terms of a contractual nature but intend to record their terms in a formal document yet to be prepared. The first class of case, into which the plaintiff submitted the present case falls, is one where the parties intend to be immediately bound to the performance of the terms upon which they have agreed whilst at the same time proposing to have the terms restated in a form which is fuller or more precise but not different in effect from those agreed on. The second class of case is one in which parties have completely agreed upon all of the terms of their bargain and intend no departure from those terms and intend not to add any new terms beyond those which are expressed or implied in their agreement, but have made performance of one or more of the terms conditional upon the execution of a formal document. The relief which the plaintiffs have sought in their further amended summons suggests that the plaintiffs contend the case is in the second category.
27 The third class is one where the parties do not intend to make a concluded bargain at all unless and until they execute a formal contract.
28 There may be a fourth category of case, where the parties intend to be immediately bound by the terms upon which they have agreed whilst expecting to make a further contract in substitution for the first contract containing, by consent, additional terms. (Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 at 628; but cf "When Three Just Isn't Enough: The Fourth Category of 'Subject to Contract' Cases", Peden, Carter and Tolhurst, (2004) 20 (2) JCL 156). It is unnecessary to consider the fourth category.
29 The first question is whether the parties should be taken to have intended to be bound by the terms of the letter of 15 January 2003 so that the letter can be enforced as an open contract of sale, or, by enforcing the implied promise by the defendant to execute and exchange the formal contract for sale. (Niesmann v Collingridge (1921) 29 CLR 177 at 184-5; Godecke v Kirwan (1973) 129 CLR 629 at 641, 644.) If that question is answered favourably to the plaintiffs, but the case falls in the second category, the second question which will then arise is what is the consequence of the parties not being in a position to exchange contracts on 28 February 2003? That is to say, if the case is in the second category, is the parties' intention to join in bringing a formal contract into existence and then performing it, nonetheless conditional upon such a formal contract coming into existence prior to 28 February 2003? It was not submitted that it was the defendant's fault that contracts were not exchanged by 28 February 2003.
Did the Parties Intend to be Bound by the Letter?
30 The first question is to be determined not by whether the parties subjectively considered that they were bound by the terms of the letter of 15 January 2003. The question rather is whether reasonable persons would regard them as bound by what they said and did having regard to the surrounding circumstances known to them, the subject matter of the contract, and the purpose and object of the transaction. Prima facie, the parties' intention as objectively ascertained is to be determined by the construction of the document which they signed. However it is legitimate and necessary to consider the terms of that document in the light of the exchanges which preceded and followed it and giving due regard to the fact that the parties contemplated an exchange of contracts, that being the usual method for the making of contracts for sale of land in New South Wales. (Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 at 40; Pacific Carriers Ltd v BNP Paribas (2004) 78 ALJR 1045 at 1050-1051 [22]; 208 ALR 213 at 221; Australian Broadcasting Corporation v XIVth Commonwealth Games (1988) 18 NSWLR 540 at 549-550; Allen v Carbone (1975) 132 CLR 528 at 531-532).
31 Moreover, in my view, the "known circumstances" to which regard can be had, include not only those circumstances which it is proved the parties had in mind, but also those which are notorious such that knowledge of them will be presumed. (Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 997; [1976] 3 All ER 570 at 575; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 351-352). Although those authorities concern the interpretation of a written contract, I see no reason to adopt a more restricted view of the surrounding circumstances to which regard may be had in ascertaining objectively whether the parties intended to be bound by what they had agreed. It would seriously weaken the objective theory of contract if a party could be heard to say that he did not know of a matter which the hypothetical reasonable person with whom the party was dealing was entitled to assume he did know. In Farmer v Honan (1919) 26 CLR 183 Barton J (at 192) pointed to the absence of usual terms normally to be expected in a contract for sale of land which a reasonable person would expect to find in such a contract, as indicating there not being an intention to contract. It was not suggested that it must be proved that the parties themselves knew that usual terms were omitted, or what they were.
32 The plaintiff submitted that the parties regarded the letter as an important record of the terms of the agreement which they had reached. They submitted that there would be no point at all to the parties signing the 15 January 2003 letter, if no contract would come into existence until formal contracts were exchanged. As noted above, they relied upon the decision in Plastyne Products Pty Ltd v Gall Engineering Co Pty Ltd (1988) NSW Conv R 55-376.
33 In Plastyne Products the purchaser wrote a letter to the vendor which set out all the essential terms for a contract for the sale of land, and stated that it was prepared to accept the vendor's asking price. The vendor was asked to sign the copy of the letter to indicate its formal acceptance of the sale at that price, upon receipt of which the purchaser would instruct its solicitors to draw up a formal contract. The vendors signed a type written note on the letter stating "offer accepted at [the price]". The agreement recorded in the signed memorandum did not provide for the payment of a deposit. Bryson J held that although the parties contemplated that it would be useful to have a formal contract prepared, they did not consider that the drawing up of a formal contract or any later step after the letter would change their rights in any respect. His Honour found, (at 57,468), that the parties did not contemplate making a contract by exchange. His Honour held that unless the parties were recording a binding agreement the delivery of the letter, signing a copy of it and delivering back the signed copy would be meaningless. His Honour held, (at 57,467), that the parties would not have taken those steps unless they intended to be bound by what they signed.
34 Plastyne Products lays down no new principle of law. It is true that there are some parallels between the facts of the present case and those in Plastyne Products. The case thus provides an interesting illustration of the application of established principles. However each case turns on its own facts and nothing in the factual findings in Plastyne Products dictates what should be the finding in the present case.
35 I do not accept that the signing of the letter of 15 January 2003 would be meaningless if the parties did not thereby intend to be bound by the terms to which they had agreed. In answer to a similar submission made in Twynam Pastoral Company Pty Ltd v Anburn Pty Ltd (1989) NSW Conv R 55-498 Young J (as his Honour then was) pointed out (at 58,663) that in the ordinary course of events an acknowledged agreement on terms can be expected naturally to lead to a discussion of details and in due course to the exchange of formal documents. In other words, the execution of the letter can serve the useful purpose of formally recording the terms upon which the parties had agreed and from which they would thereafter not be expected to withdraw, even though legally free to do so.
36 What then of the terms of the letter which used the language of contract?
37 In Gay v Gooden (1989) NSW Conv R 55-445, McLelland J (as his Honour then was) said that the use of words in conversation such as "agree", "offer", "accept" and "deal" in respect of a contemplated sale of real estate do not establish an intention to enter a binding contract at that time unless there are unusual circumstances which lead to that conclusion (at 58,226). Similarly in Syd Mirror Pty Ltd v Humble Fishmonger Pty Ltd [2004] NSWSC 584 Barrett J said (at [29]) that:
" In commercial circles, the " acceptance " of an " offer " (particularly when it is expressed as an offer principally as to price) and the making of a " deal " (a word which, in this case, may or may not have been spoken at the crucial meeting) very often do not connote contractual conduct. This is especially so where exchange of contracts is expressly contemplated."
38 This was said in relation to words in conversations rather than in correspondence. However even in correspondence reference to an agreement having been reached does not necessarily indicate a presently binding contract. Nonetheless, the use of language showing present contractual intent in correspondence has often been an important indicium that the parties intended to be immediately bound. (Niesmann v Collingridge (1921) 29 CLR 177 at 182; Godecke v Kirwan (1973) 129 CLR 629 at 640-641; Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 at 628; 40 NSWLR 631 at 635; Souter v Shyamba Pty Ltd (2003) 11 BPR 20,369). However the language used must be considered in the context of the negotiations as a whole, and having regard to the parties' intention to exchange formal contracts. (Geebung Investments Pty Ltd v Varga Group Investments (No 8) Pty Ltd (1995) 7 BPR 14,551 at 14,570).
39 In G R Securities Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 McHugh JA, with whom Kirby P and Glass JA agreed, said that there was a presumption that no binding agreement exists until contracts are exchanged (at 634).
40 The reason that the usual method of selling real estate in New South Wales is by formal exchange of contracts is:
"…. that the form of contract ordinarily used contains important provisions for the protection of both parties, and a court would not lightly attribute to knowledgeable parties an intention to forego such protection ."
( Lezabar Pty Ltd & Or v Hogan & Ors (1989) NSW Conv R 55-468 at 58, 388; 4 BPR 9498 at 9501 per Gleeson CJ).
41 That consideration has greater force since s 52A of the Conveyancing Act 1919 and the Conveyancing (Sale of Land) Regulation 2000 came into force. One should not lightly attribute to the vendor the intention of foregoing the protection that the exchange of contracts to which the prescribed documents are attached, affords it.
42 Section 52A(2) of the Conveyancing Act 1919 (NSW) provides that:
"52A Contracts for sale of land
…..