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Litigating Contract Disputes Do You Have a Contract You Can Sue On? This session will focus on the legally binding nature of informal agreements, arrangements or understandings including:
• Heads of Agreement • Memoranda of Understanding • Letters of Intent • Review of recent case law on when the parties have a binding contract -
overview of the remedies that may be available if there is no contract
Presented by Julie Soars, Barrister, Mediator and Arbitrator, Seven Wentworth Chambers
What's in a name? That which we call a rose By any other name would smell as sweet.
Juliet, William Shakespeare’s Romeo and Juliet Act II (ii, 1-2)
INTRODUCTION - A ROSE BY ANY OTHER NAME WOULD SMELL AS SWEET – WHAT’S IN A NAME?
1. Heads of agreement, memoranda or letters of understanding, memoranda or letters of
intent, commitment letters, protocol d’accord or protocol documents and letters of
comfort or support letters are all forms of what I will call “preliminary agreements”. There
is no magic in the use of any particular name or description. The name or description
used is not definitive or even indicative of whether the document is contractually binding
or not. Some commercial lawyers may use “letters of comfort” to describe a document
they intend to be non-binding, and “heads of agreement” for a document they intend to
© 2012. Copyright in this material is retained by the authors. A licence to publish in this format has been granted to Legalwise Seminars Pty Ltd. Apart from any fair dealing for the purposes of private study, research, criticism or review, as permitted under the Copyright Act 1968, no part of these materials may be reproduced by any process without written permission. Disclaimer The statements, analyses, opinions and conclusions in these materials are those of the author and not of Legalwise Seminars Pty Ltd which acts only in the capacity as convenor of educational courses. No part of any paper can be regarded as legal advice. Although all care has been taken in preparing all papers, readers must not alter their position or refrain from doing so in reliance on any paper. Neither the author nor Legalwise Seminars Pty Ltd accept or undertake any duty of care relating to any part of any paper. All enquiries should be directed to Legalwise Seminars Pty Ltd. Legalwise Seminars Pty Ltd (ABN 40 049 329 749) (ACN 102 742 843) Level 2 97 Grafton Street, Bondi Junction NSW 2022 PO Box 971 Bondi Junction 1355 DX 12072 Bondi Junction Ph: (02) 9387 8133 Fax: (02) 9387 8711 Website: www.legalwiseseminars.com.au
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be binding or partially binding. It is dangerous and outdated, however, to make an
assumption that heads of agreement are usually binding (or partly binding) and letters of
comfort are usually non-binding, when considered in the context of the reasoning in
recent cases. Each document needs to be considered on an individual basis by
reference to its terms and by the application of relevant legal principles which dictate
whether the preliminary agreement is contractually binding.
2. Preliminary agreements are commonly used in lease, joint venture and infrastructure
negotiations, tender processes, financing transactions and the settlement of legal
proceedings or disputes. Issues in relation to the enforceability of preliminary
agreements often arise in practice, evidenced by the number of recent cases in which
the issue of whether there is a binding preliminary agreement has arisen.
3. Preliminary agreements are often drafted by business people to record the outcome of
commercial negotiations without input or legal advice from external lawyers. They may
be drafted quickly and under time pressures and the clients may have very little time to
consider their positions or the issues that should be covered. The care and attention to
detail taken when drafting and negotiating a final agreement or deed is often not taken
with preliminary agreements.
4. The number of cases relating to preliminary agreements can possibly be explained by
the following: often the negotiations that the parties were working on fail either because
the parties are unable to reach further agreement and/or because one party wishes to
walk away from the negotiations, leaving the other party out of pocket. Sometimes a
preliminary agreement does not deal with all of the commercial issues between the
parties, may not have named all of the relevant parties in the agreement or does not deal
with something that the parties had not anticipated would arise. A party to a settlement
agreement upon re-consideration or some new information coming to light no longer
wishes to be bound by its terms and wishes to contend that it is not binding. Further,
whether a party would prefer for the preliminary agreement to be binding may be
affected by changing commodity prices or other prices or costs, or by a pending
insolvency of one of the parties or simply due to an attempt to obtain a negotiating
advantage in relation to a further or related transaction.
5. This often leads to a tension between the parties to a preliminary agreement – it may be
in the interests of one party for the preliminary agreement to be a binding and
enforceable agreement, whereas the other party would prefer it to be non-binding. This
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can arise at the drafting stage – if so the parties’ advisors may approach the drafting of
the preliminary agreement with these different objectives and the resulting agreement
may be a hybrid between these objectives often with some resulting doubt over its
enforceability. This tension can also arise later and after the preliminary agreement has
been signed or made for the reasons set out above. This is an area of law which is ripe
for disputes to arise.
6. The aim of this paper is to set out in basic outline the relevant legal principles that will
assist practitioners to determine whether there is a binding preliminary agreement in a
particular commercial context, and to consider recent cases in which these principles
have been applied.
7. The cases in this area usually turn on fine distinctions in factual findings, and are often
overturned on appeal. This makes advising in this area and predicting the outcome of
cases, difficult. This is also an area of the law that is continually developing and so new
cases need to be reviewed and pending cases need to be monitored to stay on top of the
developments (for example, the appeal in Forrest v ASIC and Fortescue Metals Group v
ASIC which is currently being heard by the High Court).
CONTRACT LAW 101 – WHAT DO YOU NEED FOR A BINDING CONTRACT?
8. The general comments of the plurality of the High Court in Ermogenous v Greek
Orthodox Community of SA Inc (2002) 209 CLR 95 at [24] should be borne in mind:
It is of the essence of contract, regarded as a class of obligations, that there is a voluntary assumption of a legally enforceable duty. To be a legally enforceable duty there must, of course, be identifiable parties to the arrangement, the terms of the arrangement must be certain, and, unless recorded as a deed, there must generally be real consideration for the agreement. Yet [t]he circumstances may show that [the parties] did not intend, or cannot be regarded as having intended, to subject their agreement to the adjudication of the courts [citations omitted]
9. It is trite but basic contract law that certain elements are needed for there to be a binding
contract. Since the writer attended law school, there have been developments in terms
of what is required for a binding contract. Contract law, the cornerstone of commerce,
cannot be assumed to be static and is constantly changing and subject to review.1
1 For example, the Federal Government announced on 22 March 2012 a wide ranging review of contract law in Australia with a view to reforming Australian contract law and is seeking submissions on the reforms that
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10. In summary the following elements are required (or often said to be required - an
important distinction) for there to be a binding contract:
10.1. capacity;
10.2. intention to contract;
10.3. sufficient consideration;
10.4. offer and acceptance;
10.5. certainty and ascertainability of terms;
10.6. the satisfaction of any condition precedent to a contract coming into effect; and
10.7. the meeting of any specific requirements for validity related to the subject matter of the contract and that it is not illegal or void for public policy.
11. The elements which arise most frequently in commercial cases will be considered in
detail, and others will be addressed on a more summary basis.
ELEMENT 1 - CAPACITY
12. This issue rarely comes up in a commercial context, as most contracting parties who are
individuals are usually not minors and do not have a mental disability (including
drunkenness) affecting his or her capacity.2 Likewise corporations or incorporated
associations have full capacity to contract.
13. Insolvency for a corporation and bankruptcy for an individual can affect that entity’s
capacity to contract and these issues can arise in a commercial context. It is therefore should be made – see the Australian Attorney General’s website at: http://www.ag.gov.au/Consultationsreformsandreviews/Pages/Review‐of‐Australian‐Contract‐Law.aspx 2 A full review of the principles relating to capacity is beyond the scope of this paper, and the reader is referred to a general text in this area such as JW Carter, Elisabeth Peden and GJ Tolhurst Contract Law in Australia Fifth Edition LexisNexis Butterworths 2007 Chapter 15
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important to ensure by appropriate searches that if one is contracting with a corporation
that it has not gone into liquidation or appointed an administrator or had a receiver
appointed (noting that where the company is in receivership the directors retain some
powers).3 When dealing with an individual, again it is important to ensure that the
individual is not an undischarged bankrupt.4
ELEMENT 2 – INTENTION TO CONTRACT – THE MOST IMPORTANT ELEMENT!? 14. A contest about the enforceability of a preliminary agreement, such as an heads of
agreement or memorandum of understanding, often turns on whether there was an
intention to contract and to create binding legal relations. In order to determine whether
the intention to contract element has been satisfied, the court will determine whether the
objective (not subjective) intention of the parties was to enter into a legally binding
arrangement.
The role (if any) of presumptions 15. It is often said that it can be presumed that an intention to contract exists in commercial
or business arrangements and must be rebutted by the other party, whereas in a family,
social or domestic situation, the presumption is that any such agreements are not
intended to be binding.5
16. In Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 the plurality
of the High Court at [26] warned of the danger of relying on presumptions which may
serve only to distract attention from the basic and important proposition that it was for the
party asserting a binding contract to satisfy the onus of proof of demonstrating that there
was a contract, including that the parties intended to create legal relations:
... For our part, we doubt the utility of using the language of presumptions in this context. At best, the use of that language does no more than invite attention to identifying the party who bears the onus of proof. In this case, where issue was joined about the existence of a legally binding contract
3 In the case of administration or liquidation, the directors’ powers are suspended and only the administrator has the power to bind the company (s437C (administration) and s471A (winding up) of the Corporations Act 2001 (C’th)) 4 An undischarged bankrupt does not have capacity to deal with his or her assets, such right is vested in the trustee in bankruptcy, and although a bankrupt can continue to incur contractual obligations once bankrupt, this is subject to the trustee’s right to intervene and disclaim – s126 of the Bankruptcy Act 1966 (C’th) 5 See JW Carter, Elisabeth Peden and GJ Tolhurst Contract Law in Australia Fifth Edition LexisNexis Butterworths 2007 at [13‐18]‐[13‐19]
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between the parties, there could be no doubt that it was for the appellant to demonstrate that there was such a contract. Reference to presumptions may serve only to distract attention from that more basic and important proposition (see Ermogenous at [26]).
17. In a number of recent decisions trial judges have eschewed the idea that mandatory
presumptions of fact arise, for example in family and social situations, and have adopted
the more flexible approach taken in Ermogenous. For example see:
17.1. Tanya Tadrous v Michael Tadrous [2010] NSWSC 13886 per Pembroke J at
[5]-[7], although on the facts of that case involving an arrangement between
two brothers where one provided substantial funds to another for property
development, there was an absence of the requisite intention to contract; and
17.2. Evans v Secretary, Department of Families, Housing, Community Services
and Indigenous Affairs (No 2) [2011] FCA 1207 per Cowdroy J at [37]:
The High Court’s observations in Ermogenous do no more than provide a salutary warning that the presumption is not necessarily determinative nor that its application is mandatory, and that it could be erroneous to afford it undue weight. However, the High Court did not indicate in Ermogenous that the presumption applied by the Tribunal is no longer good law.
Review of recent cases in which intention to contract was a central issue 18. Some useful general principles were set out by Hammerschlag J in Western Export
Services Inc v Jireh International Pty Ltd [2010] NSWSC 6227 at [195]-[199] (recently
followed in Lend Lease Real Estate Investments Ltd v Charter Hall Retail Management
Ltd [2011] NSWSC 1624 per Rein J at [25]).
19. The facts of Western Export Services Inc v Jireh were that the parties signed a Letter
Agreement whereby Western Export Services Inc (an American company) agreed to
assist Jireh (an Australian company) to become the Gloria Jean’s Master franchisee for
Australia. A dispute had arisen as to whether commission was payable on sales by Jireh
only, or was also payable on sales by two subsidiary companies of Jireh who were used
to supply Jireh’s stores after 2004.
6 This decision went on appeal but the appeal was dismissed: see Tadrous v Tadrous [2012] NSWCA 16 7Overturned in part by the Court of Appeal in relation to construction of the agreement issue, special leave to the High Court being refused, no appeal having been raised on the issue of whether there was a binding contract
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20. Hammerschlag J held at [195]-[199]:
195 For an agreement to be legally enforceable there must be an intention to contract, that is, an intention to create binding legal relations.
196 Whether parties have an intention to create contractual relations depends on an objective assessment of the state of affairs between them as distinct from the identification of any uncommunicated subjective reservation or intention that either may have harboured. Intention in this context means that which would be objectively conveyed by what is said or done in the circumstances in which the statements and actions happened: Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 at 105-6; Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548-549.
197 In ascertaining the intention of the parties, whether from a series of communications or from a single document, regard can be had to the commercial circumstances in which the parties exchanged their communications or arrived at the document and to the subject-matter of the putative contract. The objective intention of the parties is fact-based, found in all the circumstances. Regard can also be had to the conduct of the parties after the occasion of the putative contract, to cast light on the meaning of the communications in question and otherwise on whether they intended immediately to be contractually bound: Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149 at 69 per Giles JA; see generally Michael Furmston and GJ Tolhurst Contract Formation: Law and Practice (2010) Oxford University Press, Ch 10.
198 The existence of a contract is a consequence which the law imposes upon, or sees as a result of, what the parties have said and done. Actual subjective intention to contract is a factor which the law takes into account in determining whether a contract exists but it is not, or not always, the determining factor: Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 330 per Mahoney JA, 337 per McHugh JA.
199 It has been said that in commercial or business agreements an intention to create legal relations is presumed and must be rebutted by the party seeking to deny it: see Michael Furmston and GJ Tolhurst at 10.02, 10.33. However, in Ermogenous v Greek Orthodox Community of SA Inc the High Court expressed doubt (at least in the context of that case) about the utility of using the language of presumptions. The court reiterated that a party alleging a contract bears the onus of proving its existence. Undoubtedly, the commercial and business setting in which an alleged contract is concluded, including the presence of valuable consideration, is relevant in an assessment of whether there was an intention to contract."
21. Hammerschlag J at [240]-[241] identified the following matters that he had taken into
account in determining that the parties had intended to contract: that the parties dealings
up to and beyond the entry into the Letter Agreement reflected a clear and unequivocal
intention to contract, the form and contents of the Letter Agreement itself were clearly
contractual, there was no continuing negotiations afterwards and that subsequent
dealings repeated and sustained the recognition of a contractual relationship.
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22. The facts of Lend Lease v Charter Hall involved consideration of whether Charter Hall
had agreed to pay an origination fee of 1% in order that it could join a Lend Lease
bidding group to bid for a parcel of assets held by ING as Trustee in circumstances
where ING had agreed it would only allow the Lend Lease bidding group and one
another group to bid for these assets. Charter Hall at [26] relied on five factors when
submitting that there was no binding agreement: that there was a failure to set out all
express terms, a lack of formality, no reference to important matters such as GST and to
whom the fee would be payable, the commercial circumstances and the fact that none of
the parties were committed to one another to bid, and the subsequent conduct of the
parties. Rein J at [27] considered and rejected the five factors as not being of sufficient
weight to undermine the plaintiff’s case and the defendant was held liable to pay the
origination fee.
23. Whether the relevant parties had entered into a binding framework agreement (and
possibly how this is to be determined) is shaping up to be a central issue in the Forrest v
ASIC and Fortescue Metals Group Ltd v ASIC case recently heard by the High Court 29
February and 1 March 2012 and adjourned part heard for further hearing on 30 March
2012. A central issue in this case concerns whether statements made by Fortescue
Metals Group Ltd (FMG) and Andrew Forrest contravened s1041H of the Corporations
Act 2001 (C’th) (misleading or deceptive conduct in relation to a financial product or
service) by stating in a letter to the Australian Stock Exchange that “framework
agreements” entered into by FMG with Chinese companies were binding agreements
under which those entities had agreed to build, finance and transfer the infrastructure
referred to in them. Readers should be on the look-out for the High Court’s judgment in
this case when handed down as it may shed some further light on the applicable
principles to be applied to determine when a preliminary agreement is binding.
Where the preliminary agreement contemplates execution of a further or formal document – see Masters v Cameron (as expanded) may provide assistance 24. When parties who have been in negotiation reach agreement upon terms of a
contractual nature and also agree that the matter of their negotiation shall be dealt with
by a formal contract, the case of Masters v Cameron (1954) 91 CLR 353 provides a
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guide8 as which side of the enforceability “line” the agreement falls on when trying to
determine the objective intention of the parties.
25. The principles from Masters v Cameron (as expanded in subsequent cases) involve
placing the contract into one of the four categories in order to determine whether it was
intended to be immediately binding (the first 3 categories are from Masters v Cameron
per Dixon CJ, McTiernan and Kitto JJ at 360 and the fourth category is from Baulkham
Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 per
McLelland J at 628). The four categories are, in summary:
Category 1 – binding contract - 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 in a form which will be fuller or more precise but not different in effect;
Category 2 – binding contract - the parties may 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 execution of a formal document;
Category 3 – non-binding contract - the parties do not intend to make a concluded bargain at all, unless and until they execute a formal contract;
Category 4 – binding contract (a variation of category (1)) where the parties intend to be bound immediately by the terms which they have agreed upon, whilst expecting to make a further contract in substitution for the first contract containing, by consent, additional terms.
26. In Blazevic Holdings Pty Ltd v Warwick S Grave [2011] NSWSC 287 the issue for the
court was whether the plaintiff and defendant had entered into a binding settlement
agreement at mediation. Nicholas J found that the agreement in issue fell within
category 1 of Masters v Cameron and was binding, holding at [41] that when counsel
agreed that a deed of release be prepared by the defendant's solicitors, it was intended
to be the mechanism for the payment of the agreed amounts to the plaintiff, and for
mutual releases of all claims including those in the proceedings. All that remained was
for the preparation of a deed consistently with the agreement and this was done.
8 Note comments by Gummow J in the FMG v ASIC case part heard by the High Court on 29 March 2012 http://www.austlii.edu.au/au/other/HCATrans/2012/48.html to the effect that Masters v Cameron does not “define the universe” and that these categories are a guide only and are not fixed
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ELEMENT 3 - SUFFICIENT CONSIDERATION 27. The proposition that consideration is required for a legally binding promise is taught in
law school as a basic element of a binding contract. A way of understanding this
requirement in the context of the central and important element concerning the parties’
objective intentions, is to consider the rule as to consideration as assisting to supply the
answer as to whether the parties intended to enter into a legally binding bargain.9 There
may be circumstances where there is consideration, but in other ways the parties have
expressly or impliedly signified that they do not intend their arrangement to be legally
binding: for example where the background circumstances are that it is a dealing
between members of the same family or corporations within the same corporate group.10
28. Often the sufficiency of consideration is a non-issue because both parties accept that the
mutual promises contained in the preliminary agreement are sufficient consideration for
the contract. The issue as to consideration most frequently arises in the context of
letters of comfort or support which have a gratuitous element to them. The law is
developing in this area.
29. In the recent Victorian Court of Appeal decision of Atco Controls Pty Ltd (in liquidation) v
Newtronics Pty Ltd (Receivers and Managers appointed)(in liquidation) [2009] VSCA 238
(special leave to appeal to the High Court was sought but refused) the court held at [62]
that in order to establish the existence of good consideration, it must be made to appear
that the promise was really offered as the price or quid pro quo for the action taken. Atco
concerned the enforceability of a letter of support given to auditors in some financial
years by Atco, the holding company of Newtronics. The letter included a statement as
to the amount owing by Newtronics to Atco and that this amount would not be called
upon within the current period to the detriment of all other unsecured creditors and a
statement “That if necessary, funds or additional bank security will be provided to
Newtronics…or its debt financier to ensure that it can meet its current trading obligations
that have, or will be incurred.” Atco had obtained a registered debenture charge from
Newtronics to secure the debts owed by Newtronics to Atco, which the court found at
[89] was inconsistent with the binding agreement that Newtronics said should be
9 This was the view taken by the Victorian Court of Appeal in Atco Controls Pty Ltd (in liquidation) v Newtronics Pty Ltd (Receivers and Managers appointed)(in liquidation) [2009] VSCA 238 at [60] by reference to Prof KO Shatwell, The Doctrine of Consideration in Modern Law (1954) 1 Syd LR 289, 314 10 Id.,
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inferred. Where the rest of the evidence was equivocal, the debenture transaction was
strong evidence against such an inference.
30. The trial judge had found that there was a binding legal agreement for which the
consideration was that Newtronics continued to trade. The Victorian Court of Appeal
overturned this finding holding: at [69] and [73] that on the facts of the case it was not
open to be satisfied that critical terms as to the period and circumstances in which
Newtronics was bound to continue to trade had been agreed upon, or thus to conclude
that Atco’s undertaking to provide support was supported by valuable consideration; at
[71] that there was no evidence that Atco had requested Newtronics to continue to
trade; and at [79] that Gate Gourmet Australia Pty Limited v Gate Gourmet Holding AG
[2004] NSWSC 149 could be distinguished, inter alia, because in Gate Gourmet the
letter of support was said to be the contract, as opposed to confirming the essential
terms of the agreement already made (as was said to be the case in Atco), and also
because no argument that action in reliance upon a letter of support could not of itself
amount to good consideration was run in the Gate Gourmet case.
31. In Norman and Another v FEA Plantation Limited (2011) 195 FCR 97; 290 ALR 470; 85
ACSR 117; [2011] FCAFC 99 the Full Federal Court at [123] referred to Atco as
establishing that what was required to show good consideration was that the promisee
show that the parent company had requested (either an express or implied request) that
the subsidiary continue to trade in return for the undertaking of continued support and
the subsidiary was moved by that request. On the facts in Norman the Full Federal
Court referring to the letter of commitment in that case (which is set out at [72]) held that
consideration for the letter of commitment had been established. The Full Federal Court
held at [130] that it was open to infer that the holding company knew that without the
letter of commitment the subsidiary could not continue to act as the responsible entity for
the managed investment scheme relating to forestry operations and that it was the
holding company’s desire to avoid this result that prompted it to provide the letter of
commitment and it was open to infer that the holding company impliedly requested the
subsidiary to continue to act as responsible entity and that the subsidiary agreed to do
so.
32. Obviously, in order to avoid any issue as to the adequacy of consideration arising, this
can be avoided by recording the terms of the preliminary agreement in a deed, bearing in
mind any limitations that may arise from doing by using a deed format.
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ELEMENT 4 – OFFER AND ACCEPTANCE 33. Offer and acceptance has long been regarded as essential to the making of a binding
agreement and is part of classic theory of contract.
34. This is no longer a strict requirement and the courts now recognise that contractual
arrangements can arise where there is no formal offer and acceptance – see Hill End
Gold Ltd v First Tiffany Resource Corporation [2011] NSWCA 276 where on the facts
there was no contract, but useful principles were set out by Allsop P and Meagher JA in
the joint judgment at [61]:
It is undoubted that contractual arrangements do not only arise out of formal offer and acceptance. In some circumstances, it will be open to a court apprised of the commercial context and the acts, including words, of the parties to interpret the engagements of the parties to ascertain the existence and extent of a legal relationship. A relationship and a body of conduct may evince a clear mutual intention to be legally bound in a particular respect or a relationship or a document may be "instinct with an obligation", imperfectly expressed: Moran v Standard Oil Co 211 NY 187 at 198 per Cardozo J (Court of Appeals, 1914)
(see also Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Australia) Pty Ltd (1988) 5 BPR 11,110, at 11,117 per McHugh JA, Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; 53 NSWLR 153 at 179 [81] and Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; 117 FCR 424 at 525 [369]).
ELEMENT 5 - CERTAINTY AND ASCERTAINABILITY OF TERMS
35. This element can also be characterised as going to the parties’ intention to create a
binding agreement, and so on one view forms a sub-element of the intention
requirement.
36. Some recent cases in which arguments as to the certainty and ascertainability of terms
are referred to below.
37. In Western Export Services Inc v Jireh Hammerschlag J addressed at [238] an argument
that a lack of precision in the drafting the Letter of Agreement pointed to a lack of
intention to contract. It was said that there was a lack of definition of the terms “ex-
factory”, “associated entity”, “interest of Jireh International Pty Limited” and “the business
of the parties”. Hammerschlag J held at [238] that there was no need for these terms to
be defined as none of the terms were incapable of definite or precise meaning such that
the court would be unable to attribute to the parties a contractual intention: Upper Hunter
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County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8; (1968) 118
CLR 429 at 436-7; Trawl Industries of Australia Pty Ltd v Effem Food Pty Ltd trading as
“Uncle Bens of Australia” (1992) 27 NSWLR 326.
38. In ARA Electrical Engineering Services Pty Ltd t/as Bass Electrical [2011] NSWSC 1377
the defendant sent to the plaintiff a request for quotation. The plaintiff submitted a quote
which contained a “general condition” that the plaintiff required the opportunity to review
and mutually agree conditions of contract prior to an acceptance of any order for the
works. The defendant notified the plaintiff that it was the successful tenderer and
provided it with a draft sub-contract agreement (unsigned by the defendant) for “review”
and requested that it fill in the schedule of rates and nominate its representative on site.
The plaintiff filled out and returned the draft contract to the defendant using the price for
the items as per the quote. The plaintiff contended that provision of the draft contract
and announcement by the defendant that the plaintiff was the successful tenderer
comprised an offer capable of acceptance and that the plaintiff had accepted the offer by
filling in blanks and returning the document to defendant. Held by Brereton J:
38.1. at [13] contrary to the defendant’s assertions the parties had agreed on a price for the works;
38.2. at [14] the reservation in the plaintiff’s general conditions precluded the plaintiff’s quote from being an offer capable of immediate acceptance;
38.3. at [16] the reference in the email sending the draft contract to it being for “review” and the fact that it was unsigned by the defendant, indicated that the defendant was reserving to itself the right of last execution; and
38.4. at [17] it was improbable viewed objectively that the parties would have intended that the defendant be bound by a contract in which the blanks would be completed by the plaintiff and returned to the defendant without execution by the defendant and before the defendant had seen what the plaintiff had inserted in the blanks.
ELEMENT 6 – ANY CONDITION PRECEDENT TO A CONTRACT COMING INTO EFFECT HAS BEEN SATISFIED
39. Practitioners should be aware of the use of conditions precedent (and conditions
subsequent). A condition precedent is where either the existence of a contract or the
obligation of one party (or both parties) to perform is subject to the prior occurrence of a
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specified event. A detailed examination of conditions precedent (and subsequent) is
beyond the scope of this paper, and practitioners are referred to a general text.11
ELEMENT 7 – ANY SPECIFIC REQUIREMENTS FOR VALIDITY RELATED TO THE SUBJECT MATTER OF THE CONTRACT ARE MET AND IT IS NOT AN “ILLEGAL” CONTRACT OR VOID FOR PUBLIC POLICY
40. While it is trite law to note that there is no general rule requiring contracts to be in writing,
there are categories of contracts that require written evidence before they are valid,
including contracts for the sale of land in all jurisdictions in Australia (including NSW)12
and some contracts in relation to the sale of goods. Apart from recommending that
practitioners should be aware of these requirements, identifying these requirements (and
exceptions), including the variations in the requirements in the different States and
Territories of Australia, are beyond the scope of this paper and the reader is referred to a
general text.13
41. Likewise, the types of contracts which may be illegal for public policy or invalid are
beyond the scope of this paper and the reader is again referred to a general text.14 The
possibility of a contract being illegal and hence consequently void or voidable has arisen
in two recent cases in NSW relating to preliminary agreements which are considered
below.
42. In Lend Lease v Charter Hall the defendant argued that the plaintiff was barred from
recovering the origination fee sought by the operation of s9 of the Property Stock and
Business Agents Act 2002 (NSW) because it was an unlicensed real estate agent. Rein
J rejected this argument holding at [41]-[43] that this was a one off transaction and the
plaintiff was therefore not “carrying on the business” of a real estate agent.
43. A recent case in which the alleged illegality of a contract arose is Ashton v Pratt (No 2)
[2012] NSWSC 3 (which the writer understands has gone on appeal) – although the
writer prefers to describe it as “The cardboard box magnate, his mistress, the wife and
11 Such as JW Carter, Elisabeth Peden and GJ Tolhurst Contract Law in Australia, op cit., at [13.18]‐[13.19] 12 S54A(1) of the Conveyancing Act 1919 (NSW) requires some memorandum or note before action or proceedings may be brought upon any contract for the sale of land 13 Such as JW Carter, Elisabeth Peden and GJ Tolhurst Contract Law in Australia, op cit., Ch 9 14Ibid., Chs 25 to 27
15
the bodyguard lover (by reference to that well known film, “The cook, the thief, his wife
and her lover”).
44. It is not often that a dry contract case involving issues of certainty of terms and intention
to create legal relations causes such media interest, but due to the subject matter of the
contract, this case did. The plaintiff was Madison Ashton who, according to media
reports, had worked as an adult entertainer under the name Christine McQueen and is
alleged to have charged up to $3,000 for a 5 hour shift (note: cheaper than silk’s rates).
The case concerned whether Mr Pratt (who the judge described as a “man of exceptional
wealth”) had prior to his death, made promises to settle substantial monies in trust on Ms
Ashton, and to pay her an allowance, rental and travel expenses on an annual basis.
The case raised whether if the promises alleged to have been made were made, were
they sufficiently certain, whether there was an intention to create legal relations and
whether the alleged agreement was unenforceable for public policy reasons. An
estoppel argument was also raised by Ms Ashton. Mrs Pratt, the executrix of Mr Pratt’s
estate, defended the claims and ran a defence based on accord and satisfaction,
alternatively, a release in relation to a settlement payment alleged to have been made in
2005.
45. Brereton J found at [25] that Ms Ashton and Mr Pratt had had a conversation containing
the promises alleged. Brereton J said at [29] that he was unpersuaded that Mr Pratt and
Ms Ashton intended to make a contract, noting at [30] that Ms Ashton’s subjective
intentions were not relevant and that family, social and domestic arrangements do not
normally give rise to binding contracts because the parties lacked the necessary
intention. Further, notwithstanding that the defendant had not pleaded a defence on this
basis, Brereton J also found at [52] that the arrangements were contrary to public policy
and illegal involving “meretricious sexual services” (pertaining to prostitutes) and had the
arrangements otherwise constituted a contract, they would have been void as contrary to
public policy. Ms Ashton also failed on the estoppel ground and Brereton J found that
Ms Ashton had released her claims in 2005.
16
PRELIMINARY AGREEMENTS - DETERMINING WHETHER A CONTRACT EXISTS AT ALL IS AN EXCEPTION TO THE GENERAL RULE AGAINST ALLOWING POST CONTRACTUAL CONDUCT TO BE TAKEN INTO ACCOUNT
46. Where the intention of the parties is equivocal, conduct subsequent to the making of the
alleged agreement is admissible in evidence to show whether or not a contract was
concluded (Secola v McCann [No 2] [2011] WASC 342 at [18] (citing Howard Smith & Co
Ltd v Varawa [1907] HCA 38; (1907) 5 CLR 68; Australian Broadcasting Corporation v
XIVth Commonwealth Games Ltd; RJ Baker Nominees Pty Ltd v Parsons Management
Group Pty Ltd [2010] WASCA 128 [65]) and Ashton v Pratt per Brereton J at [35]).
LETTERS OF COMFORT/SUPPORT /COMMITMENT LETTERS AND LETTERS OF UNDERTAKING IN RELATION TO FINANCING ARRANGEMENTS – A SPECIAL CASE?
47. Traditionally letters of comfort or support were said to be “honour letters” and non-
binding.15 They are often given by a parent company in favour of a subsidiary in the
context of a financing transaction. They can reflect the tension that arises between
parties who may want different outcomes in terms of whether the letter of comfort or
support is binding or not. They are used where the parent company is unwilling to give a
guarantee or otherwise undertake an expressly binding obligation, and the lender or
other party such as an auditor, wishes to have something rather than nothing. The parent
company usually seeks to ensure that in the letter of comfort or support it does not
undertake contractual obligations, whereas the recipient tries to negotiate for the letter to
be as binding as possible.
48. In the light of recent case law which is reviewed in more detail below, the giver of such a
letter needs to take care that not only is the letter drafted in such terms such that it is not
binding, but that it does not engage in misleading conduct (or actionable negligent
misstatement) or by its conduct give rise to an estoppel or unconscionable conduct. In
contrast, the lender tries to extract as much in terms of obligation and representation
from the giver of the letter as it can.
15 Kleinwort Benson Ltd v Malaysia Mining Corp Bhd [1989] ANZ ConvR345; [1989] 1 All ER 785; [1989] 1 WLR 379 at 379 – being described as “a document under which [one party] would give comfort to [the other party] by assuming, not a legal liability to ensure repayment of the liabilities of its subsidiary, but a moral responsibility only.”
17
Recent cases in relation to letters of comfort/letters of undertaking
49. As noted above, even if the relevant letter of comfort is not contractually binding, legal
liability may arise for example for misleading and deceptive conduct if there was never
any intention to stand behind the letter (Gate Gourmet) or by reason of unconscionable
conduct (in breach of The Australian Consumer Law or at general law).
50. In Gate Gourmet Australia Pty Limited v Gate Gourmet Holding AG [2004] NSWSC 149
Einstein J considered a letter of comfort or support given by a Swiss holding company to
the Australian trading arm which confirmed that the foreign parent would provide the
financial support that might be necessary to enable its wholly owned Australian holding
company and its controlled entities to meet financial commitments as and when they fell
due and that it would not be withdrawn before the Australian holding company and its
controlled entities had sufficient means to meet their obligations without the support of
the parent entity. Einstein J held that the letter had legal effect and was binding on a
number of bases, in summary: (1) the commercial purpose of the letter discerned from
the circumstances indicated an intention to enter legal relations (at [199]-[214]); (2) the
language of the letter was promissory; (3) the matter is looked at objectively [173] and
[208]; (4) alternative methods of performance do not mean that the contract is void for
uncertainty or incompleteness (at [216]); and (5) construed against the objective
framework that produced it, the letter strongly indicated that the promisees were each of
the Australian holding company and its controlled entities. A construction of the letter
which excluded the plaintiff as a promisee of that support would have made little
commercial sense (at [222]-[243]). The promisor was also liable under the misleading
and deceptive conduct head.
51. In the case of Atco v Newtronics addressed in more detail above, similar arguments to
Gate Gourmet arose in relation to an agreement based on a letter of support, with the
Court of Appeal holding that there was no binding agreement. However, in Norman
(addressed in more detail above), the Full Federal Court distinguished Atco on the facts
and found the letter of commitment binding.
52. Commonwealth Bank of Australia v Carotino [2011] SASCFC 110 - this case concerned
a letter of undertaking given by a separate company in respect of two fuel companies
that had loan facilities with the Commonwealth Bank of Australia (CBA). The CBA’s
consent was required to the defendant becoming a majority shareholder of the
companies. The parties signed a letter in which CBA gave its consent to the transfer and
18
the defendant stated as follows: “Carotino..undertakes to execute and return a
Shareholders Guarantee, in a standard form to be provided by the bank within 7 days of
receipt…”. No guarantee was ever provided or executed. The two fuel companies went
into administration. CBA had pleaded that the letter of undertaking took effect as a
guarantee, alternatively, that the defendant was estopped from denying that it was
obliged to give the guarantee. The trial judge held the parties did not have an intention
to be immediately bound by a contract of guarantee constituted by the letter. CBA’s
case based on estoppel failed because the assumption by the CBA that a guarantee was
in existence was not based on the letter of undertaking or any conduct of Carotino (not
contested on appeal). CBA had sought at the hearing to amend to plead an alternative
agreement by Carotino to give a guarantee within 7 days and an order for specific
performance to give the guarantee. Leave to amend was refused. This case can
possibly be distinguished as being the result of a forensic error in drafting the pleading,
rather than as establishing any precedent that the undertaking in question was not
binding.
53. On appeal, the Full Court of the Supreme Court of South Australia held that the parties
did not intend to enter into an immediately binding guarantee. Any obligation on the
defendant to execute the guarantee was conditional upon the guarantee first being
provided by CBA (no guarantee was provided until 2009, after the two fuel companies
had gone into administration). The absence of various important terms was an important
factor.
Drafting tips
54. Where appropriate, the use of the following terms to show an intent for a letter of comfort
is intended to be of “comfort” only and not legally binding is recommended:16
Nothing in this letter is intended to create legal relations between us.
This letter is not intended to give rise to any enforceable agreement or undertaking
whatsoever, with or to any person or persons.
16 The Australian Encyclopaedia of Forms & Precedent, on‐line service, LexisNexis Butterworths at [2715]
19
55. Letters of comfort may contain statements of fact – as occurred in Gate Gourmet. To
avoid liability for misleading and deceptive conduct, it is important to ensure that these
statements are not misleading (including by omission).
56. Letters of comfort may contain statements of policy or current intention – some examples
are: It is our policy to ensure that the subsidiary in question is at all times able to meet its
financial obligations. It is our present practice to review the budgets of the members of
the group…17
57. To ensure that the statement of policy or intention is not taken to be a promise that the
policy will not be altered in the future, a disclaimer should be used, for eg. “This is a
statement of our current policy, which may be changed at any time without notice to
you”.18
58. Letters of comfort may contain undertakings in respect of future conduct – if so then as
undertakings are generally promissory they are likely to be enforceable. Some examples
of promissory undertakings are : [The parent] shall do everything possible/make best
efforts to ensure that [the subsidiary] fulfils its obligations to the lender. [The parent] will
provide the financial support that may be necessary to enable [the subsidiary] to meet its
financial commitments as and when they fall due).19 If the undertakings are binding,
there may be stamp duty issues – see a general text for further information.20
Other general comments on wording if the intention is to draft a non binding preliminary agreement
59. If the parties wish to make the preliminary agreement non-binding, it is suggested that
they expressly use terms such as “agree to agree” or “agree to negotiate” and “subject to
contract”, although there is still a possibility that the agreement may fall into the “wrong”
category of Masters v Cameron and be enforceable.
60. Alternatively, for example with a heads of agreement document that the parties only
intend to be partially binding, the parties could use the following: “The parties agree that
clauses # to # (inclusive) only are contractually binding no other clauses impose any
17 Id., 18 Id., 19 Id., 20 Ibid., at [2740]
20
legal liability on either party”21 and there are a range of precedent contractual negation
clauses, non representation clauses and clauses in relation to an agreement being
partially binding that a practitioner can have reference to.22
61. The following wording appears to have generally been accepted as indicating an
intention not to be immediately bound to a preliminary agreement and comes from the
case of Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104:
This document is not intended to be a binding contract or give rise to legal rights and obligations (except as set out in the document). The document has been prepared in order to provide instructions to lawyers, accountants and other advisers in relation to the preparation of formal documents to give effect to the transactions contemplated by this heads of agreement ('formal documents').
CONTRACT LAW 101 – GETTING THE RIGHT COUNTERPARTY/PRIVITY OF CONTRACT ISSUES
62. Sometimes there is uncertainty as to who is the correct contracting counterparty to a
preliminary agreement.
63. The principles to be applied as to the approach to be taken in determining the identity of
a contracting party are set out in Air Tahiti Nui Pty Ltd v McKenzie (2009) 77 NSWLR
299 at 304 (recently followed by Rein J in Lend Lease v Charter Hall at [27]) as follows:
The identity of the contracting party is to be determined looking at the matter objectively, examining and construing any relevant documents in the factual matrix in which they were created and ascertaining between whom the parties objectively intended to contract. This is, to a point, a process of construction similar to the task of identifying whether a clearly contractual document (such as a bill of lading) is made with one party or another (such as a shipowner or time charterer)….. Where the documents are silent or ambiguous, but there is undoubtedly a contract, the identity of the parties must be determined objectively from the surrounding circumstances….[citations omitted]
21Ibid., at [17.10] 22 See ibid., at [17.15], [17.20] and [17.25]
21
POSSIBLE ALTERNATIVE REMEDIES THAT MAY BE AVAILABLE IF THERE IS NO BINDING CONTRACT
64. The following are some alternative remedies that may be available to a party who wants
to say that a preliminary agreement is binding, but there is some doubt about it:
64.1. quantum meruit/restitution;
64.2. estoppel and the remedy of an equitable charge;
64.3. unconscionability (general law and under The Australian Consumer Law); and
64.4. misleading and deceptive conduct under The Australian Consumer Law and
negligent misstatement.
Quantum meruit/restitution 65. A claim on this basis frequently arises out of the failure by the parties to
reach a binding agreement in building or tender cases where the successful tenderer or
the proposed contractor carried out work and incurs cost and expense in anticipation of a
binding contract coming into force between the parties which never eventuates.
66. In summary, an entitlement to be paid on a quantum meruit (a reasonable
sum) may arise even though the parties never form a contractual relationship. Indeed,
this is a leading aspect of its function as a principle. In those circumstances, a contractor
may bring a broader restitutionary claim based on the principles in the High Court
decision of Pavey & Mathews Proprietary Limited v Paul (1987) 162 CLR 221, as
interpreted and followed in subsequent decisions – it is necessary to show the conferral
of a benefit and the acceptance of a benefit in circumstances in which it would be
unconscientious for the beneficiary not to make a payment (BBB Constructions v Aldi
Foods [2010] NSWSC 1352 per McDougall J at [389]).
67. Recent cases have emphasised that more is required than proof of a
retention of a benefit – there must be some additional factor rendering retention ‘unjust’
in the relevant sense (see In the matter of MSU Management Pty Ltd - Urusoglu v MSU
Management Pty Ltd & ors [2011] NSWSC 54 per Ward J at [374]).
68. More is required than that a request was made for the provision of the
goods or services in question (MSU Management per Ward J at [375] and see the cases
cited therein). The plaintiff needs to establish an ‘unjust’ factor (per Ward J at [378];
22
Farah Constructions v Say-Dee [2007] HCA 22; (2007) 230 CLR 89 per Gleeson CJ,
Gummow, Callinan, Heydon and Crennan JJ at [150]-[151]).
69. In terms of a wider restitutionary case by reference to Pavey & Matthews
and first instance decisions, McDougall J in BBB Constructions at [389] held that it would
be necessary to show at least the conferral of a benefit and the acceptance of that
benefit in circumstances in which it would be unconscientious for the beneficiary not to
make payment.
Sabemo-type claim
70. For the sake of completeness, it is necessary to note the somewhat
doubtful authority of Sabemo Pty Ltd v North Sydney Municipal Council [1977] 2 NSWLR
880 in which Sheppard J (speaking in relation to William Lacey (Hounslow) Ltd v Davis
[1957] 1 WLR 932; [1957] 1 All ER 712) held at 902:
…where two parties proceed upon the joint assumption that a contract will be entered into between them and one does work beneficial for the project, and thus in the interests of the two parties, which work he would not be expected, in other circumstances, to do gratuitously, he will be entitled to compensation or restitution, if the other party unilaterally decides to abandon the project, not for any reasons associated with bona fide disagreement concerning the terms of the contract to be entered into, but for reasons which, however valid, pertain only to his own position and do not relate at all to that of the other party.
71. Sabemo was decided prior to the High Court’s decision in Pavey &
Matthews and there is some doubt as to whether in the light of the approach taken in
Pavey & Mathews and the development of the law since Sabemo, there remains any
scope for the application of Sabemo under Australian law (in POS Media Online Ltd v
Queensland Investment Corporation [2001] FCA 809 Wilcox J declined to follow it). In
Fensom v Cootamundra Racecourse Reserve Trust [2000] NSWSC 1072 at [88] Bryson
J held that the continuing significance of Sabemo is for factual situations that are closely
analogous to the facts of that case, cited with approval by Bergin J in Leading
Edge Events Australia Pty Ltd v Kiri Te Kanawa (2007) Aust Contract Reports 90-250;
[2007] NSWSC 228 at [260] and referred to in BBB Constructions by McDougall J at
[335].
72. McDougall J in BBB Constructions at [340]-[341] preferred the explanation
of the principle in Sabemo given by Mason, Carter and Tollhurst, Restitution Law in
Australia (2nd edition, 2008) in which the authors said “In its dealings with Sabemo a
point was reached where the council was requesting work for which it knew Sabemo
23
expected payment, and the council then came under a duty to say that it would not pay.
In failing to advise Sabemo that it had no intention of paying, it accepted the benefit of
the work and came under an obligation, imposed by the law or restitution, to pay for the
work done”.
73. McDougall J in BBB Constructions at [341] (recently confirmed by
McDougall J in Vesuvius Australia Pty Limited v V&M Davidovic Pty Limited, Obnova
Concrete Pty Limited v Vesuvius Australia Pty Limited [2011] NSWSC 876 at [34]) held
that the following matters had to be considered:
73.1. whether, from the perspective of the recipient, a benefit was provided;
73.2. whether the benefit was provided on the basis that it should be paid for
directly; and
73.3. whether, in all of the circumstances of the case, it is unconscientious for
the recipient to take the benefit but not to pay the price.
74. McDougall J in BBB Constructions at [386] left open whether Sabemo
should be followed, finding that the principles were not satisfied on the facts of that case.
75. While an attempt can be made to identify particular facts which bring a
claim within the Sabemo principles, given the doubt over whether Sabemo will be
followed in Australian courts, formulating a plaintiff’s claim also on a broader
restitutionary basis would seem the best way forward.
Estoppel and the remedy of an equitable charge 76. Estoppel is often used to “come to the rescue” where an agreement is not binding, for
example due to a lack of contractual intention. The party seeking to make out the
estoppel needs to have acted to its detriment in some way based on the alleged
expectation that a binding agreement will be entered into.
77. Usually an action would be based on promissory or equitable estoppel
based on the principles in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387.
The key question is whether it would be unconscionable for the respondent to deny the
assumption that it would enter into the proposed agreement.
78. In Tadrous v Tadrous [2012] NSWCA 16 (23 February 2012) Meagher JA in the leading
judgment held as follows:
24
78.1. at [37] rejected the appellant’s argument that it followed from the fact that the trial judge had found that the arrangement was “founded on trust not on [an] enforceable contractual obligation” that there was not a sufficient expectation to give rise to an equitable estoppel;
78.2. at [38] One feature that distinguishes the equitable principle from the
enforcement of a contractual obligation is the absence of a legally binding promise. What attracts that principle is an assurance or encouragement which creates an expectation that a interest will be granted and conduct in reliance upon that expectation…;
78.3. at [39] An equitable estoppel can be established notwithstanding that the
expectation contains elements that would not be sufficiently certain to amount to a valid contract or is formed on the basis of vague assurances…This is particularly so in circumstances, such as the in the present case, where the estoppel arises in a domestic or family context;
78.4. at [53] the trial judge had not erred in ordering that the respondent have an
equitable charge over the property to secure the sum advanced on the basis that this would fulfil a significant part of the expectation which was acted upon.
79. DHJPM Pty Limited v Blackthorn Resources Limited (formerly called AIM
Resources Limited) [2011] NSWCA 348 (30 November 2011) concerned an appeal from
Curtis J of the District Court who had found there was no agreement by Aim to take a
sub-lease of premises from DHJPM and also dismissed claims for equitable
compensation based on an estoppel and for damages for misleading and deceptive
conduct. On appeal only the claim based on an estoppel was pressed by the appellant.
Meagher JA in the leading judgment held at [9] that AIM had not induced any belief or
expectation of DHJPM as to what AIM would do and that DHJPM’s expectation was
based on its belief that it had a binding contract with AIM, nor was it available on the
objective facts. Further it was not against good conscience or unjust for AIM to depart
from any expectation because DHJPM had not offered it a sub-lease and it was not
certain the landlord’s written consent to sub-lease would be given and this had not been
obtained. DHJPM was not entitled to equitable compensation and the appeal was
dismissed.
80. An alternative case might be available based on a common law estoppel
such as estoppel by representation or conduct, or conventional estoppel, given the
similarities between the factual bases necessary to establish a conventional estoppel
and equitable or promissory estoppel (while noting that common law estoppel including
conventional estoppel can only arise in relation to a statement of existing fact, not
representations about the future, and the potential for different remedies to flow
25
depending on the type of estoppel found) (see Hughes v St Barbara Mines Ltd [No 4]
[2010] WASC 160 per Kenneth-Martin J at [786]-[788]); following Owens J in The Bell
Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239; (2008) 225
FLR 1 at [3455]-[3553])(note that a judgment of the appellate court from Owens J’s
decision is pending).
81. Estoppel has been used recently in cases relating to negotiations to enter
into a lease where there was doubt as to whether a binding agreement had been entered
into, with different results.
82. In EK Nominees v Woolworths [2006] NSWSC 1172 White J (at [281])
concluded that in all the circumstances it would be unconscionable for Woolworths to
deny EK Nominees’ assumption that Woolworths would proceed to enter into an
agreement for lease, and thus that Woolworths was estopped from denying that
assumption.
83. White J held at [268]:
I conclude that notwithstanding that E K Nominees, through Mr Marcocci, did not believe that Woolworths was bound to enter into an agreement for lease, but was free to withdraw, it is nonetheless unconscionable for Woolworths to deny E K Nominees’ assumption that Woolworths would proceed to enter into the agreement for lease. The unconscionability arises from a combination of circumstances that:
(a) Woolworths knew of E K Nominees’ expenditure in reliance on that assumption and encouraged that expenditure;
(b) the expenditure would have been for the benefit of both parties had the contract proceeded;
(c) Woolworths insisted that if E K Nominees failed to perform in accordance with the agreement in principle which had been reached, that is, if it failed to take all the preliminary steps which were necessary before entering into the agreement for lease, Woolworths would be entitled to make a claim for its own costs and loss of profits;
(d) Woolworths represented that the approval which its board had given would be operative for a period of twelve months and that if the agreement for lease were not entered into by that time, Woolworths would regard itself as free to terminate the agreement in principle, free of any claim. That period had not expired when it withdrew from negotiations for the agreement for lease;
(e) E K Nominees had previously sought assurances that notwithstanding the possibility of a better site being available to Woolworths, Woolworths had a bona fide interest in locating a Woolworths supermarket on the Auburn Road site, and that assurance was given;
26
(f) Woolworths’ words and conduct conveyed that it would not pull out of negotiations with E K Nominees, after E K Nominees had expended substantial moneys on the Auburn Road site, in order to relocate its supermarket to an alternative site.
84. In contrast, in BBB Constructions McDougall J concluded at [240] that items (c) to (f) in
EK Nominees at [268] had no equivalent on the facts of that case and the claimed
estoppel was not made out.
Misleading and deceptive conduct in relation to the negotiations
85. It should always be considered whether a cause of action for misleading and deceptive
conduct in relation to the negotiations in contravention of the Australian Consumer Law
(ACL) (a schedule to the Competition and Consumer Act 2010 (C’th) which commenced
on 1 January 2011) or s52 of the Trade Practices Act 1974 (C’th) (TPA) and/or its State
or Territory equivalents in respect of conduct occurring before 1 January 2011, is
available.
86. In EK Nominees White J found at [123]-[139] that Woolworths had made two
representations (which White J found to be misleading), namely:
86.1. that it intended to enter into an agreement for lease and lease with EK
Nominees; and
86.2. that the likelihood that it would do so did not change materially.
87. In BBB Constructions at [250] McDougall J found that BBB had failed to make good its
allegations of misleading and deceptive conduct for many reasons, including at [274] that
it had not relied on the alleged representations because at an advanced stage of the
negotiations it asserted, inter alia, that both BBB and Aldi were free to withdraw and
would not be bound until the agreement for lease was negotiated.
88. As noted above, in Gate Gourmet Einstein J found that the holding company had
engaged in misleading and deceptive conduct in relation to a letter of
support/commitment.
Unconscionable conduct in relation to the negotiations – a potential remedy?
89. A potential cause of action based on unconscionable conduct in contravention of the
ACL (for conduct after 1 January 2011) or s51AA, s51AC of the TPA (or its State snf
Territory equivalents) in respect of conduct after 1 January 2011), and/or
27
unconscionability at general law should also be considered. It is not, however, an easy
claim to establish, in other than a very clear case.
90. In BBB Constructions McDougall J held at [278] that it could not have been misleading or
deceptive or unconscionable for Aldi to do one of the things that it was told by BBB it was
free to do (that is to withdraw). Also, at [280] Mc Dougall J held that where BBB had
indicated through its solicitors’ words and its own actions that it regarded itself as free to
withdraw, it might be argued: how could it be unconscionable for Aldi to do that which
BBB insisted it could do? Of course, what the party benefitting can do may be in
conscience more limited than that which the party conferring the benefits can do.
Practice tip 1 - plead alternative causes of action to avoid “falling between two stools”
91. It is obviously important that when pleading a case for a plaintiff based on an alleged
binding preliminary agreement that alternative causes of action are pleaded at the outset
to avoid a last minute scramble to re-plead at trial, with the risk that leave to amend will
be refused.
92. For example, in Commonwealth Bank of Australia v Carotino an application at trial to
plead in the alternative that it was an agreement to give a guarantee and to seek specific
performance of that agreement, was refused. In Atco at [24] the Victorian Court of
Appeal referred to a possible alternative argument being an estoppel argument that had
not been pleaded, noting that it had not been alleged that Atco was estopped from
resiling from its undertaking.
Practice tip 2 – use the available mechanisms to enforce a preliminary agreement for settlement of legal proceedings
93. There is now an express right conferred on parties to determine any question that might
arise about a compromise or settlement of proceedings by a preliminary agreement
which is governed by the Civil Procedure Act 2005 (NSW) (CPA) in the original
proceedings, resolving the conflicting views that had arisen as to whether this was
possible under the previously applicable rules: see s73 of the CPA. Section 22 of the
Federal Court of Australia Act 1976 (C’th) has been interpreted to confer a similar power
– see Bird v McComb (No 4) [2012] FCA 270 per Collier J at [22]-[25]. It is therefore
considered to be generally prudent not to discontinue the existing proceedings before all
outstanding steps under a settlement agreement have been taken, otherwise
enforcement proceedings would have to be taken in new proceedings.
28
Finally - possible remedies available if acting for a party who successfully takes the position that there is no binding or enforceable agreement
94. A party who has paid monies where the contract was unenforceable, incomplete, illegal
or void may be able to seek restitution and recovery of monies paid – see The Leasing
Centre (Aust) Pty Ltd v Rollpress Proplate Group Pty Ltd [2010] NSWSC 282 per Barrett
J.
95. That party may also seek to argue that the party made an operative mistake as to the
binding legal effect of the Letter Agreement (on the basis of the principle that unilateral
mistake may render a contract void or voidable, provided there is present an additional
factor, being the combination of knowledge on the part of the other party that the first is
mistaken and an element of responsibility for the mistake).23 This argument was,
however, rejected in the Western Export Services Inc v Jireh case by Hammerschlag J
at [249] on the basis that Western Export Services Inc never induced any mistake on the
part of Jireh and Jireh made no operative mistake as to the binding legal effect of the
Letter Agreement.
26 March 2012
Julie Soars Barrister, Mediator and Arbitrator Seven Wentworth Chambers © Julie Soars
Copyright © These materials are subject to copyright which is retained by the author. No part may be reproduced, adapted or communicated without consent except as permitted under applicable copyright law. Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice.
23 JW Carter, Elisabeth Peden and GJ Tolhurst Contract Law in Australia, op cit, at [20‐38] and [20.49] and following
