In employment law, when parties are engaged in a dispute and have reached a verbal settlement, an issue may arise about whether the agreement is legally binding. In this respect, the High Court (Masters v Cameron) has stated that agreements fall into one of three categories:

1. Binding agreement: The parties intend to be immediately bound by the agreement, but the obligation does not arise until the document is executed.
2. Binding agreement: The parties may have reached a concluded bargain and intend to be bound by the agreement immediately, regardless of whether a formal document comes into existence.
3. Non-binding agreement: The parties have come to an agreement but do not intend to be bound by it unless a document is executed.

The recent Federal Court case of Farrell v Super Retail Group Limited (2024) considered these categories in an in-principle agreement reached between parties to a workplace dispute after long and complex settlement negotiations.

On 6 May 2024, the respondents made a settlement offer to the applicant to which the applicant’s lawyer replied, “We are instructed to accept your offer subject to a Deed. Please provide us with a draft of the proposed Deed”. Shortly after, the applicant’s lawyer sent a follow-up text message to the respondent’s lawyers stating, “our clients have now accepted the offer subject to deed”.

Following this, the parties continued to exchange their versions of a settlement deed and negotiate over substantial terms. The parties continued to disagree on key terms, and negotiations reached a point in which the respondents provided their final deed and would not accept any further changes. The applicant did not accept the terms in the final deed, but sought to enforce a binding agreement.

The Court found that the applicant’s argument that an oral contract had been created could not be accepted when considering the complexity of the negotiations and the fact that the parties had previously stated that a formal deed was required. The Court found it difficult to understand why a reasonable person would not have understood that the parties and their legal representatives expected that any settlement was subject to a formal deed, considering that the applicant’s lawyer had stated that the applicant had “accepted the offer subject to deed”. In addition, after the 6 May exchange, the parties continued to negotiate, which indicated a binding agreement had not been reached.

An oral in-principle agreement can be binding when the parties have reached a final agreement and intend for those terms to be set out in a formal document at a later date. However, if the settlement is subject to a formal agreement being signed, this agreement is not binding until the agreement is signed.