This session will focus on the legally binding nature of informal agreements, arrangements or understandings including:

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1 1 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

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3 2 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 It is dangerous and outdated, however, to make an assumption that heads of agreement are usually binding (or partly binding) and letters of comfort are usually non-binding, when considered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

4 3 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

5 4 10. In summary the following elements are required (or often said to be required - an important distinction) for there to be a binding contract: capacity; intention to contract; sufficient consideration; offer and acceptance; certainty and ascertainability of terms; the satisfaction of any condition precedent to a contract coming into effect; and 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: 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

6 5 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 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]

7 6 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: Tanya Tadrous v Michael Tadrous [2010] NSWSC 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 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 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 This decision went on appeal but the appeal was dismissed: see Tadrous v Tadrous [2012] NSWCA 16 7 Overturned 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

8 7 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 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 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, 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.

9 8 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 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

10 9 guide 8 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 to the effect that Masters v Cameron does not define the universe and that these categories are a guide only and are not fixed

11 10 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 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, Id.,

12 11 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.

13 12 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 exfactory, 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

14 13 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 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: at [13] contrary to the defendant s assertions the parties had agreed on a price for the works; at [14] the reservation in the plaintiff s general conditions precluded the plaintiff s quote from being an offer capable of immediate acceptance; at [16] the reference in the 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 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

15 14 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 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 14 Ibid., Chs 25 to 27

16 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 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.

17 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 nonbinding. 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.

18 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 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

19 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]

20 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 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 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]

21 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 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] 21 Ibid., at [17.10] 22 See ibid., at [17.15], [17.20] and [17.25]

22 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: quantum meruit/restitution; estoppel and the remedy of an equitable charge; unconscionability (general law and under The Australian Consumer Law); and 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];