A recent decision by Justice Sackar of the Supreme Court of NSW has attracted attention from record labels and music lovers alike. The case involved issues relevant to any commercial decision maker, as it deals with whether written agreements can be binding even if they’re never signed, and whether a lawyer can bind a client to an agreement.
Modular Recordings was a joint venture between Universal Records and Mr Pavlovic. From its inception in 2005, the label released music by hugely successful artists including Tame Impala, The Presets and The Avalanches. By 2014 however, the relationship between Universal and Pavlovic was “untenable” and discussions about the terms of a mutual release began in September 2014. The mutual release would see ownership of Modular transferred to Universal.
The case focused on communications between the parties and their legal counsel in late December 2014 and early January 2015, and actions by Pavlovic:
- after protracted negotiations, Universal sent Pavlovic’s lawyer a proposed deed of release in “final form for execution”;
- the terms of the deed provided that Universal would send certain documents, and a cheque for $100 to Pavlovic;
- Pavlovic’s lawyer forwarded the deed to his client, who responded that he “will sign” and to “send us the docs”;
- on receiving that email, Pavlovic’s lawyer told Universal’s lawyers that his client “would sign tomorrow”; and
- Pavlovic also represented to Universal that:
- he had signed the deed;
- that he would be returning the signed documents; and
- in the following weeks, Pavlovic took steps which “reasonably indicated” he was performing his obligations under the deed – he gave domain names, log-in credentials and equipment to Universal.
Universal stated that, in the weeks following this correspondence, Pavlovic decided that he no longer wanted to sign the deed, but deliberately mislead Universal to give the false appearance that he had done so. Universal discovered that Pavlovic had failed to sign when their repeated requests for a signed copy went unanswered.
Is an agreement binding if it’s never signed?
Pavlovic argued that the agreement was never binding because he never signed it.
Universal argued – and the Court agreed – that on 24 December 2014, the substance and terms of the deed were final and agreed. Pavlovic’s lawyer’s representation to Universal that his client would sign was a clear indication of the finality of the agreement – not that it was to be contingent on a signature. Sackar J looked at the correspondence between the parties, and found no evidence that the agreement would only be effective if Pavlovic signed.
The Court found that signing and then exchanging the signed document merely amounted to “completion of an administrative process”. Sackar J concluded that a reasonable person, in the position of both parties, would have understood that there was a binding agreement: “the essential matter, that was agreement on the terms and conditions, had been reached”.
A key consideration was that this matter involved two “sophisticated parties” with “sophisticated law firms” representing them.
Sackar J also considered whether Pavlovic’s lawyer had authority to bind Pavlovic to the agreement, given that he had said on three different occasions that Pavlovic would sign. The Court was satisfied that Pavlovic’s lawyer had either actual authority to bind his client to the deed, or “ostensible” authority (that is, authority that a reasonable person would understand the lawyer to have).
Sackar J also considered the “post-contractual” conduct (such as Pavlovic handing over materials and domain names, and Universal paying his annual leave entitlements) as evidence that the parties intended to be bound (or, in the case of Pavlovic, intended to give that impression).
In any event, was the deed terminated?
Pavlovic also argued that, even if the deed was binding, by February 2015 Universal had failed to comply with its terms because it had not returned the documents or the $100 cheque. Universal argued against this by saying that the deed didn’t specify a time for the payment, and that therefore any failure to pay on time could not be made out.
Sackar J once again agreed with Universal’s submission. He reiterated that he thought “it is a nonsense to characterise such terms as essential. In reality they could not be seen as essential terms” and that “it is clear both parties saw this as an administrative step”.
What the court found, and what can be learnt?
The Court found that a binding agreement came into existence on 24 December 2014 (the date Pavlovic’s lawyers told Universal’s lawyers that Pavlovic would sign).
The Court also found that the agreement was not terminated in February 2015, because the terms that Universal were supposed to have breached were “not essential terms”.
So – if the court found that the agreement didn’t need to be signed to be binding – what incentive do parties have to sign?
Precisely to avoid circumstances like those before the court in this matter: a signature provides clarity and unarguably demonstrates that the parties intend to be bound. Not having a signed document can complicate any litigation – as in this case.
If you represent to someone else that you will sign a document, then be aware that a Court may very well hold you to that, with or without a signature. Instead, if you are not happy with the terms of an agreement, then it is important that you keep negotiating, and not do anything that deliberately misleads other parties.