ARTICLES

The question posed by the title to this paper captures the dilemma which is often faced by legal practitioners in drafting Heads of Agreement or other similar preliminary agreements, or in advising clients who have already signed such a document prepared by the client in consultation with the other party to the transaction, or some other non-lawyer.

The dilemma derives from the fact that on some occasions lawyers and their clients intend the Heads of Agreement to create a legally enforceable agreement, but on other occasions they do not intend to be legally bound by the Heads of Agreement. At the drafting stage, there are clear legal principles to enable a lawyer to achieve either of these stated intentions.

In practice, however, problems can arise where the client comes to the lawyer having already signed a “home-made” form of Heads of Agreement drafted by the client in consultation with the other party to the agreement. Sometimes in these situations the position is uncertain, because there are gaps in what has been agreed, or there has not been any clear statement of the intention of the parties.  Sometimes, one of the parties intends to lock in the deal, whilst the other party is hoping to be able to get out of the deal, if required.

The considerations raised in this paper apply to other similar preliminary agreements such as a Memorandum of Understanding, Letter of Intent, Letter of Comfort, and Term Sheet. They also apply to informal preliminary agreements made by way of letters, emails and oral communications, where the parties agree to sign a formal agreement later.

Why use preliminary agreements?

There are a variety of situations in which parties may desire to enter into a preliminary agreement or understanding pending the signing of a formal contract which sets out the parties’ mutual rights and obligations in detail. Sometimes they wish to create a legally binding agreement then and there, without the further delay involved in drafting a more formal contract.  They want the deal to be done.  They intend that a more formal contract should be signed subsequently, but that it will merely set out what has already been agreed, but in more elaborate form, and that it may contain other usual, and non-contentious provisions, or even additional terms if the parties so agree.

In other situations they wish to set down matters that have been agreed upon, without legal enforceability, in recognition that “the devil is in the detail”, and that there will inevitably be other matters that will need to be negotiated, and then included in a final agreement which will then bind the parties upon execution.

Advantages of using Heads of Agreement

Advantages and benefits:

Records the key terms agreed on to date, and creates a framework for the parties to negotiate the final contract.

A sign of moral commitment by the parties to observe the terms agreed, and generates confidence that a final deal is probable, before the parties incur further expense, such as in drafting formal documents.

The process of drafting a document helps to focus and refine the negotiations, and to expose any misunderstandings, and to identify problems at an early stage, thereby preventing parties wasting money and time if those issues cannot be resolved.

Drafting a Heads of Agreement can help the parties to instruct their advisers, and enables advisers to ask the right questions, and possibly highlights issues and concerns which the parties had not previously considered.

A Heads of Agreement may be useful in dealings with parties not directly involved in the negotiations, such as a Board of Directors or lenders.

Enables the laying down of a timetable for the further progress of the transaction.

A Heads of Agreement enables introduction of binding commitments such as confidentiality obligations or exclusivity undertakings. This can be done even where the Heads of Agreement are not intended to be binding in relation to the primary transaction.

There may be situations where the parties nevertheless intend that one or more provisions in the document should be binding and enforceable.  For example, where a non-binding Heads of Agreement has been signed, and one of the parties agrees to disclose confidential business information to the other party, the parties may agree, in the Heads of Agreement, that any such information which is provided, is to be treated as confidential, and not to be disclosed to anyone else, apart from, for example, the receiving party’s accountant or legal advisor.  Similar exceptions could also be made in relation to exclusivity (for example, vendor not to negotiate with, or to sell to, anyone else for a defined period), costs, and governing law and jurisdiction.

If the parties intend that specific terms should be binding, they should provide for consideration.  For example, “…in consideration of the disclosure of X information…” or “…the provision of Y documents…” (for confidentiality); or “…in consideration for payment of $Z…” (for exclusivity).  Alternatively, confidentiality could be enforced if it is the subject of a deed poll, as in The Edge Development Group Pty Ltd v Jack Road Investments Pty Ltd [2018] VSC 326 (discussed below).

Payment of a provisional deposit – Where Heads of Agreement are non-binding, it is possible to provide for the payment of a deposit which is to be applied, upon signing the final contract, as payment of, or towards, the deposit payable under the final contract. The payment would merely be a sign of good faith or serious intent.  This is what occurred in Masters v Cameron.  The payment of the deposit did not render the preliminary memorandum binding, as it was subject to the signing of a formal contract of sale.  The deposit was refundable until such time as a formal contract of sale was signed.  This is unlike a deposit payable pursuant to a concluded contract, which is intended to secure performance of the contract by the paying party, and is non-refundable.  Indeed, a true deposit is liable to be forfeited if the paying party fails or refuses to proceed.

In the Nurisvan case discussed below, the fact that the Heads of Agreement provided for a deposit to be paid, and the fact that the deposit was indeed paid, did not render the Heads of Agreement binding, having regard to the intention of the parties as determined by the Court of Appeal.

Parties can stipulate whether they intend to be immediately bound, or only to become bound upon signing the proposed formal agreement. Thus eliminate or reduce risk of dispute.

Disadvantages of using Heads of Agreement

Disadvantages and risks:

If the process of drafting Heads of Agreement is going to take too long, and require too much careful drafting, this may be disproportionate to any benefit. You might as well simply draft the final agreement.

The fact that Heads of Agreement confirm a moral commitment on both sides could limit flexibility in subsequent negotiations, and a party’s negotiating position may be weakened if it seeks to depart from the agreed terms.

If the Heads of Agreement have an expiry date by which the final agreement must be executed, and if this does not eventuate because one party is “at fault”, there could be unresolved issues in relation to costs for work carried out in anticipation of the signing of the final contract.

If the Heads of Agreement is binding, it might accelerate a Capital Gains Tax liability, or some other revenue liability.

Potential liability for misleading and deceptive conduct, misrepresentation or negligent misstatement:

Regardless of whether the parties intend the Heads of Agreement to be binding, or non-binding, care must be taken in drafting the document so as to avoid possible liability for misleading and deceptive conduct, misrepresentation or negligent misstatement.  This could arise from representations and warranties given by one of the parties.

If appropriate, it may be desirable to include a disclaimer whereby the parties acknowledge that in signing the Heads of Agreement they have not relied on any representations made by any other party to the Heads of Agreement.  If a formal agreement is later signed, a disclaimer should be included whereby the parties acknowledge that in signing the agreement they have not relied on any representations made by any other party whether in the Heads of Agreement or in the formal agreement.

Enforceability – is there agreement on all essential terms?

The threshold question to be addressed when drafting Heads of Agreement, or when advising in relation to Heads of Agreement already signed, is whether the parties have expressed agreement on all the essential terms relevant to the type of contract in question. If not, it is nothing more than an agreement to agree, and thus, unenforceable.

The essential terms of most contracts would include: the identity of the parties; the nature of the transaction (eg. sale, lease, assignment); the subject matter; the price or other consideration to be provided by each of the parties; and the date for performance by each of the parties.

Likewise, a term is essential if the parties intend that in order to become binding, their agreement should include agreement on some point which has yet to be agreed upon. This is so even though there has been a mutual exchange of promises which would otherwise be sufficient for a contract.  See the discussion below in relation to the Nurisvan case, the Feldman case, the Queensland Phosphate case, and the Al Azhari

If the Heads of Agreement cannot be construed as a concluded and binding contract according to ordinary contractual principles, because essential terms are missing, including any term which the parties, in effect, agreed to be essential, then the enquiry does not need to go any further. Likewise if there is uncertainty as to the meaning of essential terms.  The question of whether the parties intend to be bound from the time of signing the Heads of Agreement, or only once a formal contract is signed, can only arise if there is, prima facie, a purportedly binding contract.

Thus, even if the Heads of Agreement were to contain a provision stating that the parties intend to be bound by that agreement, it could not be enforced if the agreement was lacking any essential terms, including any term which the parties agreed to be essential. See the Queensland Phosphate case discussed below, at paragraph [37] of the Judgment.  In contrast, it could be enforceable where it omits non-essential terms, even though such terms might normally be expected.

Negotiations and Heads of Agreement   stipulating “not binding” or “subject to contract”

Wherever possible, it is desirable to stipulate in negotiations, and in any preliminary agreement, that any offers and counter-offers, and the preliminary agreement, are subject to executing a final formal contract. Ideally, one should stipulate at the outset that the parties are not to be bound by any agreement reached, unless and until the parties sign a written agreement.

Note that where written offers are made by letter or email, merely adding the notation “Without Prejudice” does not imply that if the offer is accepted the parties will need to sign a written agreement. The offer or counter-offer needs to stipulate that the agreement is not to be binding unless and until the parties sign a written agreement.

There is a presumption that the use of words such as “subject to contract” or similar in a preliminary agreement has the effect that the preliminary agreement is not binding. (See: Masters v Cameron (1954) 91 CLR 353, at 364 where authority in support of this was cited with approval, as well as The Edge case at paragraphs [53]-[57] of the Judgment).

What about the phrase “agreed in principle”? It has been held that although no general rule can be stated about the phrase “agreed in principle”, it is a phrase often used by lawyers to indicate that although consensus on a matter has apparently been reached, there is not yet a final agreement:  Cacace v Bayside Operations Pty Ltd (2006) NSWSC 572.  If this phrase is used in conjunction with “subject to contract”, the two phrases would reinforce each other.  However, the phrase “agreement in principle” on its own may not contra-indicate the existence of a binding agreement if there is other wording, or there are other circumstances, which indicate that the parties intend to be bound without anything more.  GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 635.

In relation to the sale of land, it has been held in New South Wales that there is a presumption that where the parties are proposing to enter into a subsequent formal contract of sale, there is no intention to be bound until there has been a formal exchange of contracts. (See: GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 634;  Elgas Ltd v AJ Young Industries Pty Ltd (1987) NSW Conv R 55-329 at 57,016).

However, in Victoria the existence of such a presumption has been resisted with heavy qualification. In Seventh Shar Nominees Pty Ltd v Hortico Pty Ltd [2000] VSC 155, at [29], Mandie J said:

Without acceding to the proposition that there is any presumption involved, I do not think that it should be too readily concluded that parties intend to be bound in relation to transactions affecting title to real estate by the exchange either of correspondence or of both written and oral communications, at least when it is clear that they are both contemplating the execution and exchange of formal contracts.  It remains, however, a question of ascertaining the intention of the parties to be obtained from the whole of their dealings...

This passage was cited with approval by the Court of Appeal in Molonglo Group Australia Pty Ltd v Cahill [2018] VSCA 147, at [139]-[142], which case is discussed in detail below.

As with any presumption or tendency, the above presumption or tendency may be displaced if the parties express a contrary intention by their words, or by their conduct.

Intention of the parties should be expressed clearly in the preliminary agreement

As indicated above, even where negotiations have been expressly conducted on the basis that all offers and counter-offers are “subject to contract”, it is highly advisable to make that provision in the Heads of Agreement in order to avoid any argument.

Here is a precedent clause:

The terms in this heads of agreement are not exhaustive and are expressly “subject to contract” until a final written agreement has been entered into.  The terms are not intended to be legally binding between the parties [except where specifically stated]. (LegalVision)

Similarly, where the parties intend that the Heads of Agreement should become binding immediately upon signing, but that the agreement should be embodied in a formal document which may contain such amendments, if any, as the parties may subsequently agree upon, that should be expressly stated in the document.

Here is a precedent clause:

The terms in this heads of agreement are legally binding on the parties upon signing, and are not conditional upon the execution of the final agreement referred to in paragraph X herein which may contain such amendments, if any, as the parties may subsequently agree upon.

Such clauses will almost always be determinative, apart from very rare occurrences where the surrounding circumstances and subsequent conduct of the parties may establish a different intention.

In the absence of any clear expression of intention, the Court will approach the question of intention by undertaking the analysis which follows.

Three (or four) classes of intention

In Masters v Cameron (1954) 91 CLR 353 the High Court of Australia was dealing with a sale of land case in which the parties had signed a memorandum which expressly stated that the agreement was made subject to the preparation of a formal contract of sale which should be acceptable to the purchaser’s solicitors, on the stated terms and conditions. The purchaser paid the selling agent a deposit which was to be applied in payment of the deposit to become payable under the formal contract of sale to be subsequently signed.  The purchaser subsequently decided not to proceed.  The Court held that the memorandum was not binding, and either party could withdraw.

The Court explained (at pages 360 to 364) that where parties reach agreement upon terms of a contractual nature, and also agree that the subject matter should be dealt with by a formal contract, the case may belong to any of three classes (and later cases have suggested a fourth class):

The first class: Intention that the parties be bound-

The parties have reached finality in arranging all the terms of their bargain, and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated at a later stage, in a form which will be fuller or more precise but not different in effect.

There is a binding contract at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join, if so agreed, in settling and executing the formal document.

Remedy: Specific performance – Execution of formal agreement (if plaintiff requires), and/or specific performance or enforcement of the agreed terms or the formal agreement.

The second class: Intention that the parties be bound-

The parties have completely agreed upon all the terms of their bargain and intend no departure from, or addition to, that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the later execution of a formal document.

There is a binding contract requiring the parties to join in bringing the formal contract into existence and then to carry it into execution.

Remedy: Specific performance – Execution of formal agreement (if plaintiff requires), and/or specific performance or enforcement of the agreed terms or the formal agreement.

See: Niesmann v Collingridge (1921) 29 CLR 177.  Molonglo Group (Australia) Pty Ltd v Cahill [2018] VSCA 147 at paragraphs [137]-[138] and [166]

The third class: Intention that the parties not be bound-

The intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

That intention must be disclosed by the language used by the parties, and no special form of words is essential to be used.

The document does not have any binding effect, and the parties have so provided either because they have dealt only with major matters and contemplate that others may be required in the formal document, or because they simply wish to reserve to themselves a right to withdraw at any time until the formal document is signed.

Remedy if other party seeks to enforce: Defend the claim.  If possible, apply to strike out, dismiss, or permanently stay the proceeding.

See: Seventh Shar Nominees Pty Ltd v Hortico Pty Ltd [2000] VSC 155;  Molonglo Group (Australia) Pty Ltd v Cahill [2018] VSCA 147 at paragraphs [139]-[142].  See also the Al Azhari case discussed below, and Masters v Cameron.

The fourth class: Intention that the parties be bound-

Later cases have suggested a fourth category, namely, where the parties intend to be bound immediately by the terms which they have agreed upon, while expecting to make a further contract in substitution for the first contract containing, by consent, additional terms.

Remedy: Specific performance – Execution of formal agreement, with any necessary additional terms of a mechanical nature which are designed to implement the informal agreement (if plaintiff requires), and/or specific performance or enforcement of the agreed terms.

See:  Malago Pty Ltd v AW Ellis Engineering Pty Ltd [2012] NSWCA 227, which is discussed below.  Also:  Sinclair, Scott & Company v Naughton (1929) 43 CLR 310.  Molonglo Group (Australia) Pty Ltd v Cahill [2018] VSCA 147 at paragraphs [145]-[147]

See also: Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 628, where an agreement was made for the sale of a hospital by way of three letters, one of which described what had been agreed using the expression “legally binding agreement in principle”.

The Court held that the words “agreement in principle” did not detract from the clear meaning of the words “legally binding”. Those words merely indicated that there would be a formal agreement which would possibly have additional agreed terms.  This was specifically approved on appeal:  GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 635.

See also: Skilled Group Ltd v CSR Viridian Pty Ltd [2012] VSC 290 at [102]-[106].

How should Masters v Cameron be approached?

In the recent decision of the Court of Appeal of the Supreme Court of New South Wales in Feldman v GNM Australia Ltd [2017] NSWCA 107 (Decision: 25 May 2017), Beazley P. (with whom McColl JA and Macfarlan JA agreed) held at paragraph [68]:

“…the categories identified in Masters v Cameron are neither strict nor prescriptive. Nor are they exclusive nor necessarily exhaustive.  Rather, they describe circumstances in which a finally binding contract may or may not have come into existence.  McHugh JA pointed this out on the appeal in the Baulkham Hills case…

       “…the decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances: (citations omitted)”

See also Feldman case at paragraphs [69]-[71]. The Feldman case is discussed below.

In a subsequent decision, the Court of Appeal of the Supreme Court of Victoria in Nurisvan Investment Limited v Anyoption Holdings Ltd [2017] VSCA 141 (Decision: 16 June 2017) cited the Feldman case with approval (at para.103), in holding that the categories identified in Masters v Cameron were not intended to be, nor are they, exhaustive or strict. The Nurisvan case is discussed below.

In Casdar Pty Ltd v Joseph Fanous [2017] VSC 616, Croft J said, at paragraph [23]:

The process of determining the intention of the parties in these circumstances does not lend itself to formulaic prescriptive rules, though in general terms regard must be had to any written agreements between the parties and the pre and post-contractual conduct of the parties.

In Molonglo Group (Australia) Pty Ltd v Cahill [2018] VSCA 147 the Court of Appeal said (at paragraph [148]):

It is important to bear in mind that the four Masters v Cameron categories are not intended to be exhaustive or strict and that the issue of classification ought not be allowed to obscure the real task of ascertaining the intentions of the parties.

In the recent decision of the Supreme Court of Victoria in The Edge case, after setting out the four categories, Riordan J made pointed remarks rejecting the efficacy of rigidly adhering to those established categories. The Court said (at paragraph [42]):

The concept of a fourth category has also been the subject of some criticism; and ‘the … classifications are no longer, if they ever were, applied as strict categories into which such cases must fall’.  I adopt the approach of Giles JA in Tasman Capital Pty Ltd v Sinclair, who observed that ‘the categorisation does not greatly contribute to the decision in the particular case’, because the decisive issue is whether or not the parties intended to be contractually bound.

Construing Heads of Agreement

Whether or not the parties intend the agreement to be immediately binding is to be determined objectively having regard to the language contained in the Heads of Agreement. The High Court has repeatedly affirmed this proposition (Allen v Carbone (1975) 132 CLR 528; Taylor v Johnson (1983) 151 CLR 422; Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Byrnes & Anor v Kendle (2011) 243 CLR 253).  See also Michael Lahodiuk  v Vincent Place and Prid Pty Ltd [2013] NSWSC 512.

An oft cited passage is to be found in the decision of the High Court of Australia in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 in paragraphs [46] to [51]:

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. 

In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean.  That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. 

Ordinarily, this process of construction is possible by reference to the contract alone.  Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. 

However, sometimes, recourse to events, circumstances and things external to the contract is necessary.  It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”.  It may be necessary in determining the proper construction where there is a constructional choice… 

Each of the events, circumstances and things external to the contract to which recourse may be had is objective.  What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating.  What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.

Other principles are relevant in the construction of commercial contracts.  Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption “that the parties … intended to produce a commercial result”.  Put another way, a commercial contract should be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.

(Footnotes omitted)

See also:

Snapper Holdings Pty Ltd v Vita Lentini [2018] VSC 800; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656-657 [35] per French CJ, Hayne, Crennan and Kiefel JJ;  Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 343 ALR 58 at 63 [16]-[17] per Kiefel, Bell and Gordon JJ;  International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 160; Academy Cleaning & Security Pty Ltd v Deputy Commissioner of Taxation [2017] FCA 875 at para 64, (Rares J, 3 August 2017); Black Box Control Pty Ltd v Terravision Pty Ltd [2016] WASCA 219 [42].  See also Everest Project Developments Pty Ltd v Mendoza [2008] VSC 366 at [65-66].

In The Edge Development Group Pty Ltd v Jack Road Investments Pty Ltd [2018] VSC 326 at [43]-[47], Riordan J presented the following statement of the principles of construction:

43     The Court ascertains objectively whether there was an intention to create contractual relations by asking what each party, by words and conduct, would have led a reasonable person in the position of the other party to believe.  The circumstances that are properly taken into account ‘are so varied as to preclude the formation of any prescriptive rules’.  However, when the issue is whether parties intended to be bound by a single document, it is ‘to be determined, objectively, from the text of the document, construed in the context of the circumstances in which it came into being’.

44     In any event, when undertaking the determination as to intention:

(a)     what is considered is that which is ‘objectively … conveyed by what was said or done, having regard to the circumstances in which those statements and actions happened’; and

(b)     what is not considered are the uncommunicated subjective motives or intentions of the parties, which are irrelevant.

45     The utility of presumptions has been strongly doubted; but matters that have been considered relevant in undertaking this determination have included the following:

(a)     Where the disputed agreement is in writing, the words used by the parties must be the strongest indicator of whether the parties intended to be legally bound.  If, on proper construction of the document, it is sufficiently clear that the parties were content to be bound immediately, then the matter is resolved irrespective of the subject matter, magnitude or complexity of the transaction or whether the parties contemplated a further contract in substitution for the first contract.

(b)     Whether the informal agreement is expressed to be ‘subject to contract’ or the absence of such words.

(c)     The presence of the parties’ signatures on a document said to contain the terms of the agreement suggests an intention to form binding relations; though the effect of the signature cannot, of itself, give rise to a binding agreement if the terms of the signed document do not otherwise support the characterisation of the agreement as binding.

(d)     The detail of the terms, to which the parties descended in the informal agreement, may indicate whether the parties did or did not intend to be immediately bound.  As was stated by Powell JA in Liquorland (Australia) Pty Ltd v GYG Holdings Pty Ltd:

                In carrying out the task of determining … what was the relevant intention of the parties, a court may have regard, not only to the matters upon which the parties have reached their consensus, but also to the areas in respect of which they have failed to reach any consensus.

(e)     An informal agreement which deals with a transaction of great magnitude or complexity ‘may suggest that the informal agreement was not intended to constitute a binding contract’

(f)      The established or common practice with respect to agreements of the type in question may indicate that the parties did not intend to be finally bound until the completion of a formal contract.  An example of such a practice is with respect to the sale of real estate.

(g)     The fact that the parties did not use solicitors for the informal agreement but proposed to do so for the formal contract, may be a factor indicating that the parties did not intend to be bound by the informal agreement.

46     With respect to the effect of post agreement communications, the courts have considered that such communications may be relevant to the following:

(a)     Admissions by conduct of the existence or non-existence of a legally binding contract.

(b)     Throwing light upon the meaning of the language in the informal agreement for the purpose of determining whether the language expresses an intention to enter or not enter contractual relations.

(c)     Whether and to what extent there were uncompleted negotiations between the parties; and the significance of the uncompleted issues.

47     However, as observed above at [43], where a single document is alleged to constitute the contract between the parties (as opposed to a contract alleged to have arisen orally or from an exchange of correspondence) the relevant intention is to be determined objectively from the text of the document, construed in the context of the circumstances in which it came into being. The relevance of subsequent conduct, in such a case, may be limited to the questions of:

(a)     whether there were terms not included in the document that might be necessary for a concluded contract; and

(b)     admissions against interest.

(Citations in footnotes omitted)

See also Verrochi v Messinis [2016] VSC 490, at [32]-[35], per Riordan J., and Molonglo Group (Australia) Pty Ltd v Cahill [2018] VSCA 147 at paragraphs [130]-[149]

In Queensland Phosphate Pty Ltd and another v Mark Anthony Korda and Craig Peter Shepard (as joint and several liquidators of Legend International Holdings Inc (In Liq) [2017] VSCA 269 (Decided 26 September 2017) the Victorian Court of Appeal said (paragraph [37]):

If an essential term was not agreed, then the “agreement” is incomplete and did not give rise to an enforceable contract.  Moreover, the existence of matters of importance on which the parties have not reached consensus will render it less likely that they intended immediately to be bound before the execution of a formal document

The courts will not lend their aid to the enforcement of an incomplete agreement because it is no more than an agreement of the parties to agree at some time in the future: Factory 5 Pty Ltd (In LIq) v State of Victoria (No. 2) [2012] FCAFC 150 at [60], citing Booker Industries Pty Ltd v Wilson Parking (QLD) Pty Ltd (1982) 149 CLR 600 at 604 per Gibbs CJ, Murphy and Wilson JJ. and Masters 91 CLR 353 at 361; Feldman v GNM Australia Ltd [2017] NSWCA 107 at [60]-[61] (Decision 25 May 2017); Nurisvan Investment Limited v Anyoption Holdings Ltd [2017] VSCA 141 (Decision: 16 June 2017); Queensland Phosphate Pty Ltd and another v Mark Anthony Korda and Craig Peter Shepard (as joint and several liquidators of Legend International Holdings Inc (In Liq) [2017] VSCA 269 (Decision 26 September 2017)

Case illustration 1:

The Edge Development Group Pty Ltd v Jack Road Investments Pty Ltd [2018] VSC 326

(Riordan J.  Decision: 19 June 2018)

Sale of land – parties signed a letter – not binding – formal agreement not signed

The Edge Development Group Pty Ltd (“The Edge”) wished to purchase a commercial/industrial property from Jack Road Investments Pty Ltd (“Jack Road”). The vendor’s estate agent prepared a letter which set out the terms of a proposed sale. The letter was signed by both parties.  The preamble stated:  “The vendor’s standard contract of sale will be adopted and would incorporate the following details:  [thereafter a number of conditions were set out].  Condition 4 provided that: “The offer is subject to the contract being executed”.

Subsequently, the purported vendor informed the purported purchaser that it had received an unsolicited offer from a third party, offering to pay a higher price for the property. It invited the purchaser to put forward its best offer. The purchaser then lodged a caveat, and the vendor responded by lodging an application for removal of the caveat.  The purchaser then sued for specific performance of the alleged agreement constituted by the signed letter.

At trial, the plaintiff contended that the signed letter amounted to a binding and enforceable agreement for the sale of the property. It argued that the expression “the contract” in Condition 4 was ambiguous, and that it merely required the parties to sign the letter rather than the formal contract of sale, or alternatively it created an obligation on the parties to execute a formal contract, in accordance with the second category in Masters v Cameron.  The plaintiff further argued that the words “subject to the contract being executed” were not equivalent to the expression “subject to contract”.  Finally, it contended that the informal agreement included obligations and steps to be taken prior to exchange of formal contracts, and that this was inconsistent with the letter being non-binding prior to the execution of formal contracts.

Not surprisingly, the defendant relied on the preamble which stipulated that the vendor’s standard contract of sale would be adopted and would incorporate the terms specified, and that, as stipulated in Condition 4, the offer was subject to the contract being executed. It argued that this was inconsistent with an intention to be immediately bound.  Further arguments were that: (a) the sale involved substantial land at a significant price, and it would not be expected that the parties would be bound by a summary document; (b) the stipulated payment of 1% of the purchase price was not a deposit, and was not described as such, and indeed the deposit was not payable until execution of the formal contract of sale; (c) the signed letter left significant aspects of the sale to be negotiated; (d) the deposit, once paid, was not to be released until 30 days after exchange of contracts, and once released, a license agreement referred to therein could not be revoked; (e) and a confidentiality deed in the form of a deed poll would cease upon execution of the contract of sale.

In analysing the issues, the Court set out the principles regarding the four categories of intention identified in Masters v Cameron and the Baulkham Hills Having done so, the Court referred to criticism of the existence of the so-called fourth category, and cautioned against over emphasis on categories.  Instead, the Court emphasised that the decisive issue in such cases is whether the parties intended to be contractually bound by their preliminary agreement.

Further, the Court set out its detailed analysis of the principles for determining whether the parties have an intention to enter into binding legal relations. That analysis is set out above in an earlier section of this paper.

The Court held that upon applying the relevant principles, the parties did not intend to create binding relations until the formal contract of sale was executed. The signed letter fell within category three of Masters v Cameron.  It was held that Condition 4 was intended to protect the parties against being bound.  Moreover, the importance of applying a consistent meaning to the phrase “subject to contract” was a powerful factor, and in this case it revealed the intention of the parties not to be bound until a formal contract was executed, and that intention was consistent with the facts and circumstances of the case.

Case illustration 2:

Molonglo Group (Australia) Pty Ltd v Cahill [2018] VSCA 147

(Maxwell ACJ, Whelan and Kyrou JJA.  Decision: 7 June 2018)

Agreement to Purchase signed – formal Contract of Sale not signed – specific performance ordered

Kiversun Pty Ltd owned a property in Collingwood. On 15 July 2016 Kiversun signed an informal document entitled “Agreement to Purchase” recording terms of a sale to Mr Cahill.  The informal agreement provided that the parties would subsequently sign a formal contract of sale.  Shortly afterwards, and before signing a formal contract of sale with  Cahill, the vendor received a higher offer from Molonglo, and on 4 August 2016 Kiversun signed a formal contract of sale to Molonglo.  The contract of sale to Molonglo included disclosure of the prior informal Agreement to Purchase signed with Cahill, and made the sale to Molonglo conditional, with the vendor having a right to terminate the sale without liability, if prevented by Cahill from completing the sale to Molonglo.

Both Cahill and Molonglo lodged caveats. Kiversun withdrew from the sale to Cahill.  Cahill commenced an action against Kiversun for specific performance.  Molonglo commenced an action against Cahill for removal of his caveat, and Cahill counterclaimed for the removal of the Molonglo caveat.  Both proceedings were heard together, and the Court ordered that the evidence in one proceeding should stand as evidence in the other.

The Trial Judge held that the Cahill agreement was a binding and specifically enforceable contract. Molonglo sought leave to appeal against that decision.  The Court of Appeal, whilst holding that Molonglo had sufficient standing to appeal, refused leave to appeal, and upheld the decision below.

The Court of Appeal held that the parties intended the Cahill agreement to be immediately binding. In reaching this conclusion, the Court of Appeal set out the established principles of construction of contractual terms (at paragraphs [130] to [149]).  These are the principles set out earlier in this paper, and in other property contract cases discussed below.  The Court applied the relevant principles to the terms of the informal agreement, and had regard to the surrounding circumstances which supported the conclusion of a binding agreement.

The Court of Appeal concluded:

184        …As the Cahill Agreement is an immediately binding contract for the sale of the Property, it is specifically enforceable.

185        The Cahill order…is consistent with our conclusion that the Cahill Agreement falls within the fourth Masters v Cameron category. As Niesmann demonstrates, an order for specific performance of an agreement for the sale of land can provide that, as a first step, the parties execute a formal contract incorporating mutually agreed terms.

Case illustration 3:

Nurisvan Investment Limited v Anyoption Holdings Ltd [2017] VSCA 141

(Osborn, Santamaria and Kaye JJA.  Decision: 16 June 2017)

Heads of Agreement not binding – formal agreement not signed

In this case, Nurisvan was the sole shareholder of FIBO Australia Pty Ltd, and held negotiations with Anyoption with a view to Anyoption purchasing from Nurisvan, all of its shares in FIBO. A deed entitled “Binding Heads of Agreement” was signed by FIBO and Anyoption.  Nurisvan was named as a party to that document, but did not execute it.  The document specified a purchase price of $100,000, with a deposit of $10,000 to be paid to a solicitor as stakeholder, and provided for the parties subsequently to enter into a share sale agreement.  Anyoption subsequently paid the $10,000 deposit to the solicitor acting as stakeholder.  After lengthy negotiations concerning the content of the share sale agreement, Nurisvan advised Anyoption that it did not regard itself as being bound by any agreement, and that it was not obliged to comply with the Heads of Agreement.

Anyoption sued both Nurisvan and FIBO for specific performance of the Heads of Agreement. The Trial Judge in the County Court of Victoria held that Nurisvan was a party to, and bound by, the Heads of Agreement, as a contract rather than as a deed. Nurisvan had agreed to be bound by the document.  The Court held that the solicitor acting as stakeholder, was acting on behalf of Nurisvan.  Post-contract conduct was admissible to establish the identity of parties to the contract.

Further, the Judge held that the Heads of Agreement fell into the first category of preliminary contracts described by the High Court in Masters v Cameron, and constituted a concluded immediately enforceable agreement for the transfer of Nurisvan’s shares in FIBO, despite the fact that the share sale agreement was never finalised or signed. The express obligation to negotiate the terms of the share sale agreement in good faith, did not detract from that.

The Trial Judge ordered that Anyoption and Nurisvan execute a Share Sale Agreement on the terms set out in the Heads of Agreement and on any other terms as were reasonably necessary to give business efficacy to the agreement.

On appeal, the Court of Appeal (in a joint Judgment), partially agreed with the Trial Judge to the extent of holding that Nurisvan was bound as a party to an agreement. However, the Court upheld the appeal, holding that it was merely an agreement to negotiate in good faith.

As to the nature of the agreement, the appellants submitted that the judge ought to have concluded that it came within the third category of cases described by the High Court in Masters v Cameron, namely, an agreement to continue to negotiate towards a future share sale agreement in good faith, but not an immediately binding share sale agreement in its own right.

The appellants contended that the Heads of Agreement lacked a number of important terms, which were still to be concluded, in order to constitute an agreement for the sale of shares, including: the completion date; determination of vendor warranties; determination of conditions precedent to completion; and provision for a mechanism for adjusting the purchase price. Any breach of the obligation to negotiate in good faith would entitle the other party to damages for loss of the opportunity to enter into the concluded agreement, however, no such claim was made by the respondent.  Further, the Heads of Agreement was expressed in the future tense, indicating that it was an agreement to enter into a further agreement on the later date.  Finally, a review of the final draft which passed between the parties, demonstrated that matters remained for negotiation.

The Court of Appeal referenced the three categories of intention discussed in Masters v Cameron, and the fourth category discussed in GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd. The Court noted that in determining whether the Heads of Agreement constituted a binding contract to enter into a Share Sale Agreement, the critical issue concerned the intention of the parties which had to be ascertained objectively from the terms of the document, construed in the context of the surrounding circumstances.  It was relevant to take into account the commercial context and surrounding circumstances of the parties’ dealings.

The Court explained (at paragraphs 107-108):

107        Thus, the fact that after entering into such an agreement, the parties might negotiate further additional terms, that were not included in the first agreement, is not necessarily inconsistent with a conclusion that the first agreement constituted a binding contract between them.  Ordinarily, in cases falling within the first two categories described by the High Court in Masters v Cameron, it is clearly expected that further negotiations would take place with a view to including additional, and more comprehensive, provisions in the document ultimately to be formalised between the parties.

108        As a corollary to that proposition, the question whether the parties intended to reach a concluded agreement is not the same question as whether assuming such an intention they reached an agreement on sufficient terms to constitute a legally enforceable contract.

As to the ultimate determination of the Appeal, the Court held (at paragraph 113):

113        In our view, the language in which the Heads of Agreement is expressed, the nature of some of the clauses contained in it, and the nature and extent of the terms that were left for future negotiation, taken together, necessitate a conclusion that the Heads of Agreement constituted no more than a contract between the parties to negotiate, in good faith, with respect to entering into an agreement between Nurisvan and Anyoption for the sale of the FIBO shares.

The Court then undertook a detailed analysis of the provisions in the Heads of Agreement, observing that they left much to be negotiated, and contained clauses which would be otiose if it constituted a contract to enter into the Share Purchase Agreement, and concluded (in paragraph 130):

130        Taking those matters, that we have just discussed, together, in our view it is clear that the Heads of Agreement did not constitute a contract between the parties to enter into a Share Sale Agreement but, rather, as contended by the applicant, it was no more than an agreement between the parties to negotiate in good faith with respect to the conclusion of a Share Sale Agreement.  For those reasons, ground 2 of the application must succeed.

Case illustration 4:

Feldman v GNM Australia Ltd [2017] NSWCA 107 (Decision: 25 May 2017)

Exchange of emails not binding – formal agreement not signed

The context of this case was defamation. In February 2015, the first respondent published a number of articles on its website, The Guardian Australia online, concerning the applicant, Rabbi Y Feldman, and the evidence which he gave to the Royal Commission into Institutional Responses to Child Sexual Abuse.  The second respondent, Melissa Davey, was the journalist who wrote each of the articles.

On 27 March 2015, the applicant’s solicitors served on the respondents a concerns notice pursuant to the Defamation Act 2005 (NSW), s 14(2) in relation to two of the articles. On 2 April 2015, the respondents’ solicitors sent an email in which the respondent offered to remove the articles from its website and publish a statement made by the applicant, on the basis that the applicant released the respondents from all liability.  The email stated that “[a]n agreement reflecting the above would be documented in a Deed of Release which would also include obligations of confidentiality”.

Further correspondence followed which refined what should occur in relation to the statement to be published on the website. On 30 April 2015 the respondents’ solicitors confirmed that their clients accepted the terms detailed in the correspondence and forwarded a draft deed of release documenting what they described as “the parties’ agreed terms”.  The draft deed contained a confidentiality provision, the terms of which had not previously been discussed.  During May 2015 there were further communications between the solicitors regarding the effect of the confidentiality clause in the draft deed.

The draft deed was to be signed by Rabbi Feldman personally, but it was never executed by the parties.

On 7 July 2015, the applicant’s solicitors wrote to the respondents’ solicitors and informed them that their client “withdraws his offer to settle the matter”. The respondents’ solicitors responded, contending that as at 30 April 2015 the parties had a concluded settlement agreement.

On 30 December 2015, the applicant commenced defamation proceedings against the respondents with respect to three of the articles published in February 2015. By notice of motion, the respondents sought a permanent stay of the proceedings.  They submitted that a binding agreement had been reached which fell either within the first category of Masters v Cameron, or within the so-called fourth category recognised in Baulkham Hill Private Hospital Pty Ltd v GR Securities Pty Ltd.

The plaintiff/applicant submitted that, objectively construed, the communications between the parties did not indicate that the parties intended to bind themselves prior to the execution of the deed, which dealt with confidentiality, and was to be signed by Feldman himself.

At first instance, McCallum J was satisfied that the parties intended to be bound immediately upon the defendants’ solicitor’s acceptance of the matters negotiated in the correspondence referred to in their email dated 30 April 2015, even without the signing of the deed. Her Honour held that the confidentiality aspect was a subsidiary issue, and that the solicitors for Feldman had ostensible authority to bind him by their earlier communications.

The application for a permanent stay succeeded, and was granted by McCallum J on 30 June 2016. The applicant sought leave to appeal.

There were two primary issues on the appeal, one of which (insofar as is relevant to this paper) was whether the primary Judge erred in finding there was a binding agreement between the parties, and incorrectly applied the principles stated in Masters v Cameron (1954) 91 CLR 353.

The Court of Appeal granted leave to appeal, and upheld the appeal on both grounds. The Court of Appeal held that the parties did not intend to be contractually bound until a formal deed of release had been signed.  The appellant was entitled to go forward with his defamation proceeding.

In relation to the issue of whether there was a binding agreement, Beazley P (with McColl and Macfarlan JJA agreeing) held:

A contract will fail for incompleteness where some essential or important part is yet to be agreed. However, the terminology of ‘essentiality’ should be regarded with care as parties may agree to be immediately bound while deferring important matters to be agreed later.

Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600; Coal Cliff Collieries v Sijehama Pty Ltd (1991) 24 NSWLR 1; Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR 605; [2015] NSWCA 313; Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601; RTS Ltd v Molkerei Alois Müller GmbH & Co KG [2010] 1 WLR 753; [2010] UKSC 14.

J W Carter, Contract Law in Australia (6th ed, 2013, LexisNexis)

The categories of case recognised in Masters v Cameron describe circumstances in which a binding contract may or may not have come into existence. They are neither strict nor prescriptive.  The primary question remains whether there was, objectively assessed, an intention to form contractual relations.

Masters v Cameron (1954) 91 CLR 353; Sinclair, Scott & Co v Naughton (1929) 43 CLR 310; Love and Stewart (Limited) v S Instone and Co (Limited) 1917 33 TLR 475; Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622; GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631; Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; [2002] HCA 8; Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR 605; [2015] NSWCA 313.

The language used in the correspondence between the parties’ solicitors, objectively viewed, did not indicate that the applicant intended to be immediately bound, prior to the execution of the deed.

Objectively viewed, the correspondence between the parties’ solicitors indicated that confidentiality obligations were to be part of any binding agreement between the parties. The fact that the alleged agreement did not contain a term as to confidentiality indicated that there was no concluded agreement.  The significance of obligations as to confidentiality was further supported by consideration of the commercial context in which the parties were negotiating.

Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540

The respondents’ reliance on the first category of Masters v Cameron was inconsistent with its argument that a reasonable time would be implied for the performance of the steps contemplated by the contract for which it contended. The absence of any confidentiality obligations in the alleged agreement further supported this.  For essentially the same reasons, the case did not fall within the fourth category of Masters v Cameron

It is uncontroversial that conduct occurring after the date of an alleged agreement is admissible on the question as to whether a contract has been formed. Here, the communications between the parties’ solicitors and the failure of the respondents to take steps to implement the agreement were indicative that the parties did not believe they were already bound.

Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540; Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61; Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149; Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150

 

Case illustration 5:

Malago Pty Ltd v AW Ellis Engineering Pty Ltd [2012] NSWCA 227

Heads of Agreement binding – formal agreement not signed

In Malago Pty Ltd v AW Ellis Engineering Pty Ltd, the Court of Appeal was concerned with a dispute in relation to the sale of an interest in a super-yacht marina business. The parties had resolved their dispute at mediation by entering into a Heads of Agreement setting out the main terms on which the majority unit-holder/shareholder (Malago) would purchase the units and shares of the minority unit-holder/shareholder (Ellis).

The Heads of Agreement contained a clause stating as follows:

Without affecting the binding nature of these Heads of Agreement the parties within seven days [are] to execute a formal document or documents as agreed between their respective solicitors to carry out and express in more formal terms and additional terms as these Heads of Agreement…“

Significantly, this clause clearly expressed the intention of the parties both as to “the binding nature of these Heads of Agreement”, as well as to the possibly conflicting obligation “to execute a formal document or documents as agreed between their respective solicitors…[with] additional terms…”

Subsequently the further negotiations were unsuccessful, and were terminated by the purchaser. No further formal document or documents were agreed or signed.  The further negotiations included drafts of additional proposed clauses prepared by the vendor’s solicitor.

In these circumstances the vendor (plaintiff/respondent) contended that the Heads of Agreement was a binding and enforceable contract, whilst the purchaser (defendant/appellant) argued that the parties had intended that no binding legal relationship would arise until a formal contract had been drafted and signed.

The primary judge found that the language used in the Heads of Agreement indicated that the parties intended to be bound by the document. He considered that the words “Without affecting the binding nature of these Heads of Agreement” were “the clearest indication the parties intended immediately to be bound”.

His Honour also rejected the purchasers’ arguments that the Heads of Agreement were void for uncertainty or incompleteness.

The primary judge then determined the extent to which the proposed clauses in the later draft deed that had not been agreed were consistent with the Heads of Agreement and reasonable in their scope. He considered that those that met these criteria should have been agreed by the purchasers, and should therefore be included, along with the agreed clauses in the Heads of Agreement, in the draft deed that he proposed to order the parties to execute.

The trial Judge made a declaration that there was a binding and enforceable contract for the sale of the vendor’s shares and units, and that the contract should be specifically performed. He ordered that the parties execute a document in the form of the deed of settlement and release annexed to the Judgment, and that the purchasers specifically perform their obligations arising under the deed.  The deed annexed to the Judgment included terms which had been put forward in draft by the vendor’s solicitor in the course of negotiations following the mediation, but which had not been agreed to by the purchaser.

On appeal, the Court of Appeal held that whether the parties intended to make a binding contract must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances. The Court agreed with the primary Judge that the wording in the Heads of Agreement were decisive in revealing the parties’ intention to be bound by the Heads of Agreement.

The Court rejected the purchasers’ argument that the Heads of Agreement were void for uncertainty or incompleteness. The substance of those issues is not relevant to the discussion in this paper, however, it is worth pointing out that the Court held that even if there was doubt about the meaning of a clause in the Heads of Agreement, it would not thereby be rendered void for uncertainty.  As long as the clause was not completely devoid of meaning, an ambiguous provision is valid and bears such meaning as the Court attaches to it after due consideration

The Court of Appeal reviewed the order for specific performance made at first instance. The Court rejected the reasoning of the trial Judge that additional terms which had been negotiated as between the solicitors subsequent to the Heads of Agreement, but had never been formally signed by the parties, should be treated as binding on the parties.  They could not be binding in the absence of agreement by the parties.

Moreover, the Court held that there was no basis in the Heads of Agreement to order the parties to specifically perform additional terms which were reasonable and consistent with the Heads of Agreement. It was held that whilst the Court may make an order for specific performance requiring the parties to execute a contemplated formal agreement, it cannot require the inclusion in that document of terms simply upon the basis that, whilst not agreed, they are reasonable and consistent with the parties’ informal agreement.  It would be otherwise with terms that, whilst not agreed, are of a mechanical nature and are designed to implement the informal agreement.

Accordingly, the Court substituted a different order for specific performance to that made by the trial Judge, such that the form of formal contract to be executed by the parties and specifically performed was in accordance with the terms of the Heads of Agreement. The form of the formal contract was set out in Annexure A to the Judgment.

 

Case Illustration 6:

Gailey Projects Pty Ltd v McCartney [2017] QSC 185

(Flanagan J.  Decision 5 September 2017)

Settlement negotiations at Court – exchange of emails – settlement agreement was concluded, and was binding even though formal agreement was contemplated.

The case concerned a consultancy agreement regarding a property development venture. On the first day of a two week trial in the Supreme Court of Queensland, the parties requested the trial judge to stand the matter down.  Settlement negotiations ensued.  The issue for determination was whether the proceedings were compromised at about 5pm on that day.  The defendants contended that the proceedings were compromised, and issued applications seeking declarations that the proceedings had been resolved by a compromise agreement, and that the compromise was a defence to the plaintiff’s action.  The plaintiff resisted the application on the grounds that there was no concluded agreement to compromise, or alternatively, if there was an agreement to compromise, it was conditional upon the execution of a deed of settlement.  Further, and/or alternatively, the plaintiff contended that if there was a concluded agreement to compromise, it was unenforceable because of the operation of statutory provisions which required an agreement for the disposition of an interest in land to be in writing, and signed by the parties.

Evidence as to the course of the negotiations was given by senior counsel and the solicitor who represented the plaintiff, and the senior counsel and junior counsel, and solicitor, who represented the defendants. There was an exchange of emails at the end of the day setting out the points which had been agreed between the parties.  The Court reviewed and analysed this evidence in great detail.

The first issue to be determined by the Court was whether there was a concluded agreement to compromise. This issue raised three sub- issues:

Did the parties have an intention to create legal relations?

The Court held that, viewed objectively, there were a number of factors which supported the conclusion that the parties intended to create legal relations and enter into a concluded agreement.  The Court referred to the fact that the settlement negotiations involved senior counsel, and followed previous attempts to settle at mediation, and took place in the context of the first day of a lengthy trial where the parties sought and obtained an indulgence from the trial judge to stand the matter down. Those circumstances demonstrated that the parties were seeking to avoid the cost of a lengthy trial, which was the very result noted by senior counsel for the defendants at the conclusion of the negotiations.  Furthermore, the language used by senior counsel for the plaintiff, namely “we accept” or “we have a deal” and “you must have worked hard on your guy” was language consistent with an intention to create legal relations, and was the language of a concluded agreement. Moreover, some of the terms contemplated acts which would be carried out within 24 hours. These supported a finding that the parties intended to create legal relations.

Were there material terms which were yet to be agreed or which were uncertain?

The plaintiff raised a range of matters that the parties had not agreed upon, and as to which there was uncertainty.  The Court undertook a close analysis of the proper construction of the terms set out in the relevant emails, and held that the parties had not failed to agree on any matters such as to give rise to uncertainty.

Was any agreement to compromise intended to be conditional upon execution of a deed of settlement?

The plaintiff so contended.  However, the Court held that the parties did not make their agreement to compromise conditional upon the agreement first being reduced to writing and executed in a formal Deed of Settlement.  The Court found that the parties were negotiating an immediate compromise of the proceedings, and the purpose of the exchange of the emails was to set out what had already been agreed, with the intention to inform the trial judge on the following morning that the matter had settled.  The Court accepted the defendants’ submissions that time was “ticking”, and the adjournment was an indulgence, which required the parties either to resolve the dispute or to bring it back for hearing within the times allocated by the Court.

The Court cited, and applied, Masters v Cameron, and set out the three categories described therein, as well as citing and applying GR Securities v Baulkham Hills, and setting out the fourth category identified therein.  The Court held that the evidence did not support a conclusion that the matter fell within the third category in Masters v Cameron, where the parties do not intend to be bound by their agreement until a formal agreement is entered into.  The parties intended to be immediately bound.

The Court then disposed of the plaintiff’s contentions that the agreement to compromise had been repudiated, or alternatively was unenforceable under statute.

The Court found that the proceedings had been resolved by a compromise agreement between the parties.

Case illustration 7:

Queensland Phosphate Pty Ltd and another v Mark Anthony Korda and Craig PeterShepard (as joint and several liquidators of Legend International Holdings Inc (In Liq)

[2017] VSCA 269 (Tate, Beach JJA and Sifris AJA.  Decision 26 September 2017)

Settlement negotiations in existing proceedings – exchange of emails – settlement agreement not concluded.

In the weeks and days leading up to the trial of a proceeding in which the plaintiffs, as liquidators of a company (“Legend”), were seeking declarations as to the invalidity of two deeds made between Legend and Queensland Phosphate Pty Ltd, and the winding up of Paradise Phosphate Pty Ltd, there were settlement negotiations by way of emails passing between the legal representatives of the two sides.

The issue was whether the exchange of emails between the parties’ solicitors gave rise to a concluded an enforceable agreement to terminate the proceeding. The defendants contended they did, thus forcing the plaintiff to apply for a ruling that the proceeding was still on foot.  The Judge at first instance ruled that the exchange did not constitute such a settlement, and declared that the proceeding was not settled and remained extant.  The defendants in the original proceeding sought leave to appeal, and contended that the exchange effected a concluded and enforceable agreement to terminate the proceeding immediately.

In the crucial emails and letters, the applicants’ (defendants’) proposals expressly required a deed of settlement and releases to which the directors would be parties. However the counter offer from the respondents (plaintiffs) made no such stipulation.  The email from the applicants’ solicitor a few days later said: “We are instructed to accept your clients’ offer.  We will correspond with your firm tomorrow in respect to the agreed terms”.  In a subsequent telephone conversation between the respective solicitors, which was the subject of evidence given by the solicitors, there was a difference of recollections, with the respondents’ solicitor stating that their clients’ position was that a deed of settlement was necessary before a concluded and binding agreement came into existence, whilst the applicants’ position was that the exchange of emails produced a concluded and binding agreement.

The Judge at first instance held that having regard to the previous offer stipulating that there would be a deed with releases, and the need for the further elaboration of some of the terms, the parties clearly intended that a deed of settlement, with appropriate releases, would be signed before any concluded settlement agreement could be reached. They did not intend that, as a consequence of the mere exchange of emails, the proceedings were to be immediately terminated in the absence of a formal deed of settlement executed by all parties.

On the application for leave to appeal/appeal, the applicants/defendants argued that upon their acceptance of the plaintiff’s offer, nothing further remained to be agreed, and a concluded binding agreement arose then and there.

In opposition, the respondents/plaintiffs submitted that there were a wide range of issues, including many substantial issues, about which agreement was still required, so as to suggest that in fact no concluded agreement had been reached. Further, they submitted that the defendants’ email purporting to constitute the acceptance, stated that there would be further communication in relation to the terms of the agreement.

At paragraph [37] the Court of Appeal said:

First, the question of whether there was a binding agreement is one that falls to be determined objectively from the terms of the emails, read in the light of the surrounding circumstances and having regard to the commercial context in which they were exchanged. If an essential term was not agreed, then the “agreement” is incomplete and did not give rise to an enforceable contract.  Moreover, the existence of matters of importance on which the parties have not reached consensus will render it less likely that they intended immediately to be bound before the execution of a formal document.  Secondly, in determining whether a binding contract was in fact formed, regard may be had to the parties’ subsequent communications: (1) in order to see what was important or essential to the transaction; (2) as admissions; and (3) as probative of the parties’ contractual intention.

At paragraph 42 the Court set out its conclusion in the following terms:

In our view, it is ultimately the context and subsequent communications between the solicitors that demonstrates that the exchange of emails on 19 and 25 April did not give rise to a concluded binding agreement.  The subject of the litigation and dispute between the parties was complex and required a number of matters to be worked out.

The Court then set out all the matters requiring further agreement, and concluded, at paragraph [48]:

Although not free from difficulty, we consider that, in the final analysis, the nature of the proceeding, the proposed settlement, and the discussions, correspondence, and interlocutory steps are strongly suggestive of an expectation that, despite agreement as to the basic structure of the settlement, all matters would ultimately be “wrapped up” in a written document executed by all necessary parties (which included relevant non-parties) and that until this was done there was no binding settlement agreement.

The decision below was upheld by the Court of Appeal. The main proceeding remained on foot.

Case illustration 8:

Al Azhari v 27 Scott Street Pty Ltd & Others [2017] VSC 600

(Almond J.  Decision 5 October 2017)

Court ordered mediation – handwritten terms of settlement signed – agreement was not concluded and binding.

The proceeding concerned a dispute arising from a joint venture for the development of land. A court ordered mediation was held, which was attended by the parties and their legal practitioners.  Handwritten terms of settlement were drawn, and signed by the respective solicitors.  A dispute then arose as to whether the parties were bound.  The Court ordered that this issue be determined as a preliminary question.

Insofar as is relevant to this paper, the defendants contended that the parties intended to be bound immediately although expressing a desire to draw up a more formal document later, or alternatively intending to make a further contract in substitution for the first contract containing, by consent, additional terms.

The plaintiff submitted that the parties did not intend to make a concluded bargain unless and until they executed a formal contract. Accordingly, the mediation terms were not enforceable.

The Court cited the principles of construction set out by the High Court in the Mount Bruce Mining case (set out earlier in this paper), and by the Victorian Court of Appeal in the Queensland Phosphate case (see above), before dealing with the submissions of the parties.

The defendants submitted that the parties intended to be bound immediately, and they relied on either the first class of case identified in Masters v Cameron, or the fourth class of case identified in Sinclair, Scott & Co v Naughton (reiterated in the Baulkham Hills Hospital case).  They submitted that the essential terms of the agreement were contained in the terms of settlement, and that what was contemplated was a document which contained not only those terms, but possibly further terms which were merely mechanical or procedural to carry out the essential terms embodied in the agreement.

The plaintiff submitted that the objective intention of the parties was not to be bound unless and until a formal contract was executed, and that the terms of settlement fell within the third class of case identified in Masters v Cameron. The plaintiff argued that the terms of settlement were uncertain and did not address a range of critical matters.  Further arguments were advanced, which do not need to be canvassed in this paper.

In considering the disposition of the case the Court said, at paragraph [25]:

It is clear from the mediation terms that the parties intended that the matters agreed upon at the mediation were to be elaborated upon.  What is more difficult to discern is whether the mediation terms, viewed objectively, indicate that the parties had either “reached finality in arranging all the terms of their bargain” (first class identified in Masters v Cameron) or were “content to be bound immediately and exclusively by the terms which they had agreed upon” (fourth class identified in Sinclair, Scott & Co), alternatively, intended not to make a binding agreement unless and until they had executed formal terms (third class identified in Masters v Cameron).

The Court proceeded to analyse the events and surrounding circumstances to help identify the commercial purpose or objects.

The Court was not satisfied that the parties had “reached finality” or “were content to be bound immediately and exclusively by the terms agreed at mediation”, as there were too many matters of importance on which the parties had not reached a consensus. The Court proceeded to set out in all those matters, and considered that the mediation terms were high-level terms which were general in nature and not intended to be a concluded bargain.

The Court also upheld most of the other arguments advanced by the plaintiff, and, citing the Queensland Phosphate case, concluded in paragraph [52], that:

In my view it is more likely that the parties intended to address and resolve these matters as part of a binding agreement to be arrived at in subsequent negotiation of formal terms. Only on execution of these terms would they then be bound.  Only then would they give mutual releases.

Case illustration 9:

Casdar Pty Ltd v Joseph Fanous [2017] VSC 616

(Croft J.  Decision 20 October 2017)

Heads of Agreement signed by prospective lessor and lessee of retail premises – not binding.

This was an application for leave to appeal, and concurrently an appeal, from VCAT, in relation to the dismissal of a claim by a putative lessor to enforce Heads of Agreement as a binding and enforceable retail lease. The critical issue was whether the Heads of Agreement constituted an agreement for lease under which the parties intended to be immediately bound by its terms.

Following the execution of the Heads of Agreement, the parties entered into negotiations in relation to the preparation and execution of a formal retail lease document, but the negotiations ultimately failed, and no formal lease document was ever executed.

The Court referenced the three classes of intention elucidated in Masters v Cameron, and the fourth class identified in other cases.

The Court emphasised that it is the intention of the parties which will determine whether or not they are bound by an informal agreement. The Court said, in paragraph [23]:

The process of determining the intention of the parties in these circumstances does not lend itself to formulaic prescriptive rules, though in general terms regard must be had to any written agreements between the parties and the pre-and post-contractual conduct of the parties.

The Court cited the matters referred to by Riordan J in Verrochi v Messinis [2016] VSC 490 at [32]-[35] in considering the question of contractual intention. (Note that these matters were slightly revised and restated by Riordan J in The Edge Development Group Pty Ltd v Jack Road Investments Pty Ltd [2018] VSC 326 at [43]-[47], as set out earlier in this paper).

In applying these considerations to the facts of the case, the Court relied on the number of factors. Primarily, the Court adopted the construction of the Heads of Agreement determined by the Tribunal below, and held that the express terms evinced an intention not to be bound. Moreover, the Heads of Agreement contemplated that the parties would enter into a retail premises lease, yet as at the date of signing the Heads of Agreement, the putative lessor had not complied with a number of the requirements of the Retail Leases Act  That failure, combined with other pre-contractual conduct, were held by the Court to support the defendant’s position that the parties did not intend to be bound by the Heads of Agreement.

In relation to post-contractual conduct, the plaintiff’s action in undertaking modification of the premises to suit the prospective lessee, was disposed of by the fact that the evidence showed that the works would have been carried out in any event. Similarly, the fact that the prospective tenant obtained finance and sought a permit from the Council were equivocal, and did not constitute an admission that the lessee considered he was bound by the Heads of Agreement.

In the result, the Court held that the Heads of Agreement was not immediately binding on the parties, and it rejected the submission by the plaintiff to the effect that the correct characterisation was that it was an agreement which was binding but subject to fulfilment of one or more preconditions before it would yield a binding agreement for lease.

Case illustration 10:

Snapper Holdings Pty Ltd v Vita Lentini [2018] VSC 800

(Derham AsJ.  Decision 20 December 2018)

Terms of Settlement signed by way of settlement of proceeding – dispute as to whether parties  intended it to be binding – held to be binding

A proceeding seeking the sale of properties, and the distribution of the proceeds between the co-owners, was commenced in VCAT. A mediation was held, and detailed Terms of Settlement were drawn by Senior Counsel for the defendant, and signed by the parties.

Under the Terms of Settlement there were to be transfers of part interests in the disputed properties, and the parties agreed to sign all necessary documents in order to give effect to the Terms of Settlement. However, there was no term which provided for the signing of a further or more formal document embodying the matters agreed upon.

Subsequently, the plaintiff’s (who were intended to be the transferors) declined to perform the Terms of Settlement, and commenced a proceeding in the Supreme Court of Victoria seeking a declaration that the Terms of Settlement were void and unenforceable, and seeking orders for the sale of the properties and division of the proceeds in accordance with the Property Law Act 1962 (being the original claim before VCAT). The plaintiffs’ primary contention was that the document was not intended to be a binding agreement.

The defendant (the transferee) contended that the Terms of Settlement were binding and enforceable, and made a counterclaim for specific performance.

The plaintiff raised a number of issues relevant to contracts for the sale of land, such as the capacity in which the defendant signed the document (she was an executor as to part of the properties), the absence of any mention of GST, and the absence of a vendors’ statement. These issues are not relevant to the topic of this paper.  The Court resolved all those issues in favour of the defendant (the transferee).

The Court found that there was no uncertainty in the Terms of Settlement, and the parties intended to be bound. The Court made orders for specific performance of the Terms of Settlement.

 

Case illustration 11:

PRA Electrical Pty Ltd v Perseverance Exploration Pty Ltd [2007] VSCA 310

Informal agreement enforceable – despite failure to sign formal agreement as agreed

PRA Electrical Pty Ltd v Perseverance Exploration Pty Ltd was a case in which the letter from the respondent which accepted the appellant’s tender to carry out Electrical Works, contained a clause explicitly drafted using category 3 terminology. Special Condition SC4 provided:

The Contract shall not come into effect until the formal instrument of agreement (Conformed Contract Document) is executed by the parties.

Subsequently, the parties never signed any formal contract, but nevertheless, immediately following the letter of acceptance they commenced carrying out their obligations under the preliminary agreement, and in various ways they conducted themselves as though the contract was on foot.

The Court of Appeal held that in these circumstances there was an implied agreement (or possibly an express agreement) which was binding, and which contained all of the terms which had been agreed excluding Special Condition SC4.

By way of obiter dictum, the Court held that, in the alternative, there was an equitable estoppel of the kind upheld in Walton’s Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, 428-9, whereby the contractor (appellant), having fostered the belief in the mind of the proprietor that a binding contract existed despite the failure to sign a formal contract, was estopped from resiling from the contract.

The decision in the PRA case demonstrates that a category 3 clause may be nullified where the conduct of the parties following the making of a preliminary agreement, discloses that they consider themselves to be bound to a contract. Such conduct could include beginning to perform their agreed obligations.

Case illustration 12:

Boardman v Boardman [2013] NSWSC 1257

Heads of Agreement binding even though agreement was subject to Court making orders with the consent of other parties

The case of Boardman v Boardman [2013] NSWSC 1257 concerned a claim for further provision by a beneficiary of an estate, as well as a related claim for a declaration that the defendant executor had misapplied assets of the deceased, and was liable to bring them to account as a constructive trustee for the estate.

The case went to mediation, at which the parties were present, together with their legal representatives. Settlement was reached, and the parties signed Heads of Agreement which set out the terms of the agreement, and included a provision that the agreement was subject to the making of orders by the Court to give effect to the Heads of Agreement.

The defendant’s solicitor prepared the Consent Orders, and they were signed by all the other beneficiaries as well as on behalf the defendant. At that point the plaintiff changed his mind, and refused to sign the Consent Orders.  He contended, amongst other things, that the Heads of Agreement were merely an “agreement in principle”, since they were subject to the making of Consent Orders by the Court, to which the other beneficiaries, who were not parties to the Court proceeding or the Heads of Agreement, would also need to consent.

The Court noted that it appeared that the plaintiff may have executed the Heads of Agreement with a mental reservation, and a subjective intention not to sign any copy of any form of Consent Orders prepared to give effect to the Heads of Agreement.

The Court disposed of this argument by saying that the plaintiff’s execution of the Heads of Agreement, in the context of a formal mediation at which he and the defendant were both represented by lawyers, must be taken, upon any objective assessment, as evidence of assent to the terms of the Heads of Agreement. The Court assesses contractual intent by the application of an objective standard (authorities in support of this were then cited).

Finally, the Judge held that it was not open to the plaintiff to frustrate the settlement agreement by withholding his consent to the Consent Orders prepared to give formal effect to the settlement or by declining to sign the Consent Orders on behalf of his brother until after the expiry of the time within which the Heads of Agreement contemplated that the plaintiff’s siblings would agree to the settlement. He could not take advantage of his breach of obligations to contend that the settlement agreement must be taken to have lapsed for the non-occurrence of a contingent condition to which it was subject and which he had impliedly promised to use his best endeavours to bring about.

Further, the plaintiff was under a contractual obligation to use his best endeavours to obtain his sibling’s consent and, himself, to sign the Consent Orders contemplated by the Heads of Agreement: Secured Income Real Estate (Australia) Ltd v St Martin’s Investments Pty Ltd (1979) 144 CLR 596 at 610 and 615.

The Court pointed out that the document expressly provided that, subject to the siblings agreeing to their terms, the Heads of Agreement were “intended… to be immediately binding upon [the plaintiff and the defendant]”, albeit that it was “nevertheless intended that they be replaced by Consent Orders recording in more detail, but without material variation, the agreement between [the plaintiff and the defendant]”.

The Court held that the case fell within the first class of cases contemplated in Masters v Cameron, in that the parties had reached finality in arranging all the terms of their bargain and they intended to be immediately bound to the performance of those terms, but at the same time they proposed to have the terms restated in a form which would be fuller or more precise but not different in effect.

Finally, the Court held that the fact that a settlement agreement such as the Heads of Agreement is, expressly or by implication, subject to the approval of the Court does not, of itself, mean that the parties’ agreement is not a contract. On the contrary, the parties may generally be regarded as having a contractual obligation, in good faith, to apply for the Court’s approval: Smallman v Smallman [1972] Fam 25 at 31-32.

 

Conclusion:

The enforceability or non-enforceability of Heads of Agreement and other similar preliminary agreements, is entirely dependent on the intention of the parties. That simple proposition can easily lead to a complex dispute if the parties have not expressed their intention clearly and unequivocally.  This frequently occurs where the parties have divergent intentions regarding enforceability, and use ambiguous or unclear terminology.  Wherever possible, legal practitioners should endeavour to undertake the drafting of such documents, rather than leaving it to the lay client.  This paper suggests the kind of terminology which can be employed.

If a dispute arises about enforceability, there are well-established rules of construction in relation to such documents, as set out in this paper. However, the application of those rules in particular situations will often be contentious.  The case illustrations referred to in this paper, demonstrate the complexity involved in determining such disputes.