How do you know you have a binding contract? The latest word on intention to create legal relations and sub-contracting

What you need to know

• The Full Federal Court in Cirrus Real Time Processing Systems Pty Ltd v Jet Aviation Australia Pty Ltd [2025] FCAFC 85 has reaffirmed the critical role of objective intention to create legal relations in contract formation, and the challenges in seeking to establish an intention to be bound in a commercial context, where ambiguous language is used and key terms remain to be agreed.
• The Court emphasised the need to closely analyse the commercial context, the words used by the parties and the extent to which key terms were agreed. Post-"contract" evidence can be relevant, including statements to third parties about whether a binding arrangement was entered.
• In the context of an alleged "teaming agreement" between a head contractor and potential subcontractor, courts will not lightly infer a binding contract arising from an agreement by the sub-contractor to participate in the tender process, when key terms are unresolved or language suggests there will be further negotiations.

What you need to do

• Think carefully about the language used in commercial discussions and whether and when to signal an intention to be bound (or not to be bound).
• Don't assume that where another party speaks of a "commitment", or indicates it is committed to a course of action, it is agreeing to be contractually bound – while that may sometimes be the case, if certainty is important the intention to be bound should be clearly agreed in writing.
• Remember that intention to create legal relations will less likely be inferred where essential terms remain to be agreed: if parties wish to be bound in that scenario, they will need to use clear language and/or mechanisms to enable the remaining terms to be settled (or adjusted where there are flow-downs from a head contract).
• Be mindful of communications to third parties about the nature of the commercial discussions: in some circumstances, those could be admissions against your interests. By contrast, internal emails are less likely to carry weight.

Love me tender…. but let me go?

Tenderers often require support and information from potential sub-contractors in order to tender for a head contract. This sometimes leads to commercial discussions about the terms and pricing of the potential sub-contract if the tender is successful.

A question can arise about whether a "teaming agreement" has been entered, which is a contract binding the head contractor and sub-contractor as to how they will contract on a successful tender, with the consideration being the agreement to participate together in the tender process. A "teaming agreement" may also bind the parties to exclusivity (not to tender with any competing bidder) or impose other obligations. An important issue is whether the parties intended, by agreeing terms or pricing for the sub-contracting arrangement and that the sub-contractor would provide information for and support the tender, to be contractually bound to enter into the sub-contract if the tender is successful. If not, no contract will arise and the parties are free to depart from the position reached at the tender stage.

The question is complicated because the tenderer may wish to ensure the sub-contractor is not available to competing tenderers or able to vary the price following a successful tender, and therefore to lock them into the arrangement.

More broadly, questions about intention to create legal relations can arise in a range of contexts, including where the parties negotiate high-level terms with the intention of preparing a more formal agreement. In Cirrus Real Time Processing Systems Pty Ltd v Jet Aviation Australia Pty Ltd, the Full Federal Court provided a careful analysis of the principles underlying intention to create legal relations, concluding that a tenderer was not bound to proceed with a sub-contract.

Key facts

The dispute centred on whether Cirrus and Hawker Pacific ('HP', now trading as Jet Aviation) objectively intended to be legally bound by an agreement formed during HP's tender process with the New Zealand Defence Force (NZDF). Cirrus claimed that there was an intention to contract that, if the tender was successful, they would enter a contract on terms set out in a document labelled "Version 4 Quotation" ('V4Q').

The primary judge (Kennett J) found that Cirrus and HP had agreed upon all essential terms of their bargain in the form of the V4Q document, but ultimately concluded that the parties did not intend to create legal relations.

Intention to create legal relations

Justice Derrington (with whom the other members of the Full Court generally agreed) recognised that commercial parties are self-interested and often wish to establish as solid a foundation as they can on which to pursue their own commercial opportunities, while remaining free of binding legal obligations. This can mean that objectively they lack the requisite intention to create legal relations.

The intention to create legal relations is determined by an objective assessment of what a reasonable person in the position of the parties would have understood, given their words and conduct in the surrounding circumstances. Private or undisclosed intentions are generally irrelevant. The intention must exist at the time of entry of the alleged contract – albeit post-"contract" conduct may be relevant, as explained below.

There are some potential exceptions to this objective approach, which Jackman J discussed in his judgment, including cases of mistake, misrepresentation and undue influence, and unilateral contracts. However, most cases will be assessed objectively.

The court will have regard to a number of factors in making the assessment

Justice Derrington outlined a non-exhaustive list of key indicia frequently considered in assessing whether the requisite intention to create binding contractual relations existed.

Nature and extent of consensus

The absence of consensus on important matters is adverse to finding an intention to be legally bound. The more significant the unresolved issues, the less likely it is that the parties intended to be bound immediately; in complex transactions, a higher degree of consensus is generally required.

Clarity and certainty of terms

Agreement on the essential terms of the contract is therefore a critical indicator of agreement. While the parties can agree to bind themselves contractually while deferring important matters, it will be a rare circumstance where a party binds itself contractually in the absence of such agreement. However, Derrington J emphasised that the agreement on all terms is not sufficient to demonstrate an intention to contract.

Mutuality

The existence of expressly mutual promises is an indicator of an intention to create legal relations.

Commerciality of the agreement

If the agreement is commercially unbalanced or exposes one party to significant risk without clear benefit, this may indicate a lack of intention to be legally bound. The court may consider whether the arrangement is objectively commercial and sensible in the circumstances.

Involvement of legal representatives

Where parties expect to involve legal representatives and prepare a formal contract, especially in complex matters, it is less likely they intended to be bound by informal or preliminary agreements. The absence of legal involvement in such contexts can suggest negotiations were not final.

Formalisation

The fact that the parties have recorded their arrangement in writing is an indicator that they understand the obligations to be performed are legally binding, subject to considering the formality and nature of the language used (promises, contract, covenant vs arrangement or understanding). Signing the record will provide a stronger indication of an intention to be bound.

The parties' relationship

In commercial relationships it is generally easier to infer an intent to be legally bound (compared to personal relationships), although this is not a presumption and will depend on the circumstances. The history of the particular relationship may be relevant: for example, if the parties have a history of executing formal contracts when agreement has been reached, an informal exchange of emails may be less likely to evidence intention to create legal relations.

What is not said

In commercial contexts involving experienced business-people, the court would generally expect to see some words indicating agreement to be said when the parties had concluded a contract, but that is not necessarily essential having regard to all the circumstances.

Industry practice

Practice in a particular industry as how to contracts will be concluded may be relevant in assessing intention to create legal relations – for example, the sale of real estate typically involves standardised contracts and the undertaking of regulated steps.

Post-"contractual" conduct

While the question is whether there was an intention to create legal relations, the Full Court accepted that post-"contractual" conduct can shed light on that intention and is admissible. For example, evidence that the parties continued to negotiate terms after the alleged contract date could suggest that there was no intention to create legal relations at that date.

In the Court's view, that evidence is not limited to evidence assisting the court to interpret or understand pre-"contractual" conduct. However, the Court emphasised that the evidence must go to the objective intention of the parties: evidence of private subjective understandings by a party is not admissible. The Court suggested that a communication to a third party containing an admission of facts would be relevant and admissible, whereas the same content in an internal memo would not be.

That said, the weight to be attached to post-"contract" conduct may be limited where it is high level and/or is effectively a legal opinion on whether there was a contract by a person unqualified to give it.

Masters v Cameron

The Full Court reiterated the classic distinction, from Masters v Cameron and subsequent cases, between the following scenarios:

• A final agreement where the parties intend to be immediately bound but to restate the agreement in a fuller or more precise form.
• Agreement on all terms but performance of one or more terms is conditional upon execution of a formal contract – such that the obligation to enter the contract can be specifically enforced.
• There is no intention to make a concluded bargain unless and until a final agreement is executed.
• The parties intend to be immediately bound but to make a further contract in substitution for the original contract, and containing additional terms.

These categories are relevant to the analysis of objective intention, but ultimately how that is analysed will turn on the facts of the particular case.

Why Cirrus's appeal failed: No binding agreement existed

Cirrus alleged that there was a binding agreement that, if HP was the successful tenderer, it would enter into a subcontract with it on terms set out in V4Q. Cirrus was not bound to proceed with the sub-contract and was not bound to sub-contract only to HP.

The alleged agreement was contained in an email from HP seeking permission to use information provided by Cirrus in the tender, and containing the following key statement: 

"Should Hawker Pacific .. be selected by NZ MoD to enter into contract negotiations and subsequently enter into a contract for the ACTC capability as stated at Reference A (i.e. inclusive or [sic] AWO Training Capability), the engagement between Hawker Pacific and Cirrus will be on the basis set out in [V4Q]"

The Full Court found that the parties did not objectively intend to enter a binding contract on those terms. There were a number of relevant factors, including:

• The absence of express language used between the parties indicating a binding contract in their preceding negotiations – while there was reference to a "commitment" the court considered that to be deliberately vague and short of indicating an intention to create legal relations.
• While the key email contained terms capable of suggesting contractual obligations, the language of the sub-contract being "on the basis" set out in V4Q suggested a looser relationship than an agreement to enter into a sub-contract on the terms in V4Q.
• Critical terms in V4Q such as the scope of work, KPIs and penalties were left open, with a proposal for future negotiation over key price terms, which was framed as setting expectations for future negotiation. Further, the framing of V4Q overall was as a proposal rather than an immediately binding deal.
• The commercial unlikelihood of HP agreeing to be bound to a relatively unbalanced commercial arrangement, and of the parties agreeing to be bound in circumstances where the terms of the head contract remained to be settled and would necessarily influence the terms of the sub-contract, as had been acknowledged in the parties' dealings – although the Court noted that this could only be taken so far, as objectively the parties might have decided to contract notwithstanding those commercial considerations.

An email HP sent to the principal after the tender was submitted, stating that it had "committed" to Cirrus and it would be "difficult commercially" to change to another sub-contractor was not an admission that a contract had been entered – it spoke rather of a commercial commitment. In any event, it carried limited weight as an unqualified opinion on a legal issue. Internal emails referring to an agreement or undertaking to sub-contract with Cirrus similarly carried little weight and/or were inadmissible.

Practical lessons

Overall, it was clear to the Full Court that the parties did not intend to create legal relations, despite the language of mutual promises or commitment used in some of their exchanges. This highlights the challenge parties will face in establishing an intention to create legal relations around pre-tender sub-contracting arrangements, given the competing explanation that the parties were making commercial commitments subject to refinement as the terms of the head contract were settled. Where there is an intention to contract, the parties will need to use clear language and/or formalise the terms of the agreement carefully, and ensure that essential terms are agreed or there is a clear mechanism to address this.

In some other contexts, the courts may be more willing to infer an intention to create legal relations, but close attention will be paid to the language the parties used, the commercial context, and the extent to which essential terms have been finalised.

Accordingly, when engaging in discussions about a potential or future contract, you should:

• Think carefully about the language used in commercial discussions and whether and when to signal an intention to be bound (or not to be bound) as part of commercial discussions.
• Not assume that where another party speaks of a "commitment", or indicates it is committed to a course of action, it is agreeing to be contractually bound – while that may sometimes be the case, if certainty is important the intention to be bound should be clearly agreed in writing.
• Remember that intention to create legal relations will less likely be inferred where essential terms remain to be agreed: if parties wish to be bound in that scenario, they will need to use clear language and/or mechanisms to enable the remaining terms to be settled (or adjusted where there are flow-downs from a head contract).
• Be mindful of communications to third parties about the nature of the commercial discussions: in some circumstances, those could be admissions against your interests. By contrast, internal emails are less likely to carry weight (but care should still be taken as those communications will often emerge if there is a dispute and the other side may still seek to deploy them).