Australian ruling a reminder of best practice in claims settlement processes

The core issue in the case, Melissa Sully v Paul Englisch (trading as Alpine Property), was whether the parties had reached a binding agreement to settle their dispute at a mediation.

While this particular case arose in the context of a mediation, it has broader application and serves as a reminder to all parties negotiating the settlement of any claims, whether in a mediation context or otherwise, that an agreement will be binding if the substance of the dispute is irrevocably resolved, with only procedural or non-essential matters outstanding.

If parties wish to avoid this, they should make it clear, ideally in writing, at the outset of any negotiations or when an ‘in principle’ agreement is reached that there is no agreement until it is in writing. For added certainty, the parties may wish to specify that not only must the agreement be in writing but that it must be properly executed or signed by all parties.

In a mediation context, parties should, where possible, prepare a draft agreement ahead of the mediation in case a settlement is reached. If the parties reach an ‘in principle’ agreement, the mediator should leave the mediation open and set a time for the parties to come back and confirm that they have finalised the written agreement.

When is a binding settlement reached?

In September 2020, Sully and Englisch attended mediation to settle a dispute regarding misleading and deceptive conduct in relation to a contract for the sale of land. The two reached an agreement to settle but did not prepare any written terms of settlement on the day of the mediation. The mediation was left open by the mediator.

After the mediation, Sully argued that the parties had reached a binding settlement agreement at the mediation. Englisch claimed that they had not. The trial judge found in favour of Englisch.

Sully sought leave to appeal that decision on the grounds that the trial judge erred in finding that there was insufficient evidence that the parties intended that the alleged terms were legally binding.

The Victorian Court of Appeal unanimously held that a reasonable person observing the mediation would have concluded that the parties had made a binding agreement by the end of the mediation. For these reasons, the court considered that Sully had proven that the parties intended to be immediately bound by the agreement they reached on the day of the mediation, and the trial judge had erred in concluding otherwise. 

The court allowed the appeal.

There was no dispute between the two as to the relevant legal principles to be applied in determining whether parties have agreed to be immediately bound by an agreement they have reached. These include:

• whether an agreement reached is meant to be immediately binding should be determined objectively, taking into account the presumed or inferred intent of the parties. The ultimate question to answer is what each party, by its words or conduct, would have led a reasonable person in the position of the other party to believe;
• a party’s subjective intention or belief is not determinative although it may be relevant;
• for an agreement to be immediately binding, the original oral agreement must be complete, certain and enforceable on its terms. A written agreement may be executed later.

Parties may, however, leave certain aspects of the agreement to be decided later in the negotiations, while agreeing to be bound immediately by the other agreed terms. In one of Australia’s leading contract cases, Masters v Cameron, the High Court of Australia set out three potential categories of contract:

• where the parties intend to be bound immediately, although express a desire to draft their agreement in a more formal document at a later stage;
• where the parties intend to be bound immediately but wish to delay the operation of a particular clause or term until a more formal document has been drafted; and
• where the parties intend to postpone the creation of contractual relations until a formal contract is drafted and executed.

Since Masters v Cameron was decided, courts have recognised a fourth category — where the parties intend to be bound immediately by terms which they have agreed, while expecting to make a further contract in substitution for the first contract containing additional terms by consent.

In Sully and Englisch’s case, the judge found that, by the end of the mediation, both parties had obtained that which was of most concern to them. That the settlement appeared to have achieved a favourable outcome for both sides supported the contention that whatever further steps or documentation were contemplated, they were only procedural or facultative in nature. That the parties subsequently found things to argue about did not change what had already occurred.

Co-written by Pat Hart of Pinsent Masons.