Exchanging contracts in a digital (and COVID) world: getting it right

This article is the first in our property law series, reporting on the latest issues for property law practitioners.

Michael Parasyn, an experienced sole practitioner and property law practitioner and former auctioneer, reminding practitioners of the importance of understanding the precise requirements for an exchange of contracts – particularly where the importance of digital has been highlighted by the COVID-19 pandemic.

Getting the basics right: exchange of contracts

Open houses are back on and your client has finally found their perfect home. After being locked down for months, they now want to get things moving fast and are already imagining living the rest of their lives in this dream house. “Hold on a moment,” you think. As lawyers or conveyancers, we know that a contract does not come into effect and is not binding on the parties until there is an exchange of contracts.

However, do you know the precise requirements for an exchange? To understand how things should work in the digital world, it is important to first understand how the courts have traditionally viewed the requirements for an exchange of contracts.

The traditional requirements for exchange

For an exchange to occur and a contract to come into existence, a contract signed and dated by the vendor or purchaser (noting that the purchaser is usually – but not always - the first to sign) must be physically “exchanged” for an identical copy of the contract signed and dated by the other party to the sale. The exchange is usually carried out by the real estate agent or by the parties’ solicitors or conveyancers.

This was established in the English case of Eccles v Bryant and Pollock [1948] Ch 93 and later confirmed by the NSW courts (Brien v Dwyer (1978) 22 ALR 485).

In Eccles v Bryant, the Court said:

“… It was argued that exchange is a mere matter of machinery, having in itself no particular importance or significance. So far as significance is concerned, it appears to me that not only is it not right to say of exchange that it has no significance, but it is the crucial and vital fact which brings the contract into existence. When you are dealing with contracts for the sale of land, it is of the greatest importance to the vendor that he should have a document signed by the purchaser and to the purchaser that he should have a document signed by the vendor. It is of the greatest importance that there should be no dispute whether the contract has or has not been made, and that there should be no dispute as to the terms of it. This procedure of exchange ensures that none of those difficulties will arise”.

The later Australian case of Harris v Fuseoak Pty Ltd (1995) 7 BPR 14,511 demonstrates what happens when someone isn’t completely aware of the requirements for an exchange of contracts to occur. In this case, on the day of a failed auction, the agent picked up both signed contracts and, in front of the vendor and purchaser, crossed his arms and declared that the contracts were exchanged. The agent kept the contracts and the parties did not even touch a copy of the contract during the so-called exchange. The court noted the “pantomime performed” by the agent and held that, since there was no physical delivery, there was no contract formed on that date.

This case made it clear that the vendor must actually receive the copy of the contract signed and dated by the purchaser and vice versa.

But how are contracts exchanged in the digital world?

It is becoming more commonplace for solicitors and conveyancers to exchange contracts digitally, and the current pandemic has placed increased emphasis on the transition to digital.  So, it’s important to know what is the equivalent to a physical “exchange” of contracts in this digital world.

Michael Parasyn says that there must be a narrative to create the actuality of an exchange of contracts.

For an email exchange, for example, he says that the parties should agree on the parameters of how the email exchange is going to take place and the contract is going to come into existence. He says that he has completed a number of exchanges by email by adopting the following steps:

  1. Both parties agree to exchange contracts by email.
  2. The purchaser’s representative emails the copy of the contract signed by the purchaser to the vendor’s representative and the vendor’s representative emails the copy of the contract signed by the vendor to the purchaser’s representative.
  3. Each solicitor or conveyancer asks the other to compare each page and confirm that both copies of the contract are identical.
  4. Once confirmed, both representatives date the contracts (as each other’s agent) and confirm exchange.
  5. The solicitors or conveyancers can still send the original paper contracts to each other but exchange has already occurred.

As exchange moves further into the digital realm with electronic contracts and signatures, the question of exchange becomes more complex.

The Law Society of NSW Young Lawyers Property Committee recommends that that there should be a process to replace physical exchange which creates or forms a binding contract. The idea they propose is “a simple solution that removes some of the uncertainty in the contractual relationship” by having “the parties to the contract confirm they have exchanged contracts by ticking a box which appears after they electronically sign the contract. The text in the box should state that by clicking the box the vendor/purchaser agrees to be bound and recognises formal exchange has taken place. This is commonly referred to as a ‘Click-wrap’ Contract.”

Whatever process is adopted, removing the formal physical exchange of contracts by going digital should not remove the certainty by both parties that a binding contract has been created.

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