- ADG United Pty Ltd v EG Enterprises Pty Ltd

Whether the Heads of Agreement is a binding and enforceable agreement

First, Ms Ross seeks a declaration that the Heads of Agreement is a binding and enforceable contract between Ms Ross and Mr Muir, MWPL as trustee for the John Muir Family Testamentary Trust and LMH for the settlement of the disputes in the proceedings on specified terms. For the reasons set out below, I accept that a binding agreement was formed between the parties, but that agreement is so uncertain, in essential respects, that it is not enforceable.
Not surprisingly, Counsel referred to Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 at 360-362, where the High Court identified three categories of case which may exist where parties which have been in negotiation reach agreement upon terms of a contractual nature. The first category of case is one where the parties have reached finality and intend to be immediately bound to the performance of the relevant terms, but propose to have the terms restated in a form which will be fuller or more precise, but not different in effect. A second case is where the parties have reached complete agreement, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. A third case is one in which the intention of the parties is not to make a concluded bargain unless and until they execute a formal contract. At first instance in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 628, McLelland J identified a fourth case, where the parties were content to be bound completely and exclusively by the terms they had agreed, while expecting to make a formal contract in substitution for the first contract, containing, by consent, additional terms.
Whether a contract has been formed in this situation depends on the objective intention of the parties ascertained from the terms of the relevant document, read in light of the surrounding circumstances, and, if the terms of that document indicate that the parties intended to be bound immediately, then effect must be given to that intention irrespective of the subject matter, magnitude or complexity of the transaction: G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 634, 636; Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548-9; Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149 at [66]. In Lahodiuk v Pace [2013] NSWSC 512 at [18], Sackar J similarly observed that: "If the terms of such a document indicate that the parties intended to be bound immediately, effect must be given to it. Construction of a document may make it sufficiently clear that the parties were content to be bound immediately by the terms to which they had agreed, notwithstanding they contemplated further documentation (Masters v Cameron (1954) 91 CLR 353 at 360; Anaconda Nickel Ltd v Tarmoola Pty Ltd (2000) 22 WAR 101 at 110 per Ipp J)."
In Pavlovic v Universal Music Australia Pty Limited [2015] NSWCA 313; (2015) 90 NSWLR 605, Beazley P (with whom Bathurst CJ generally agreed and Meagher JA agreed) observed (at [64]-[65]) that whether parties intend to be immediately bound, where they have reached agreement as to the terms of a contract but have also agreed that a further, formal agreement is to be executed, is to be determined objectively, having regard to the "outward manifestations" of their intentions. Her Honour also observed (at [65]) that the question was "what each party by words and conduct would have led a reasonable person in the position of the other party to believe". Beazley P also observed (at [69]) that the three classes of case in Masters v Cameron above no longer applied, if they ever were, as strict categories into which cases must fall. Her Honour noted (at [72]) that it was relevant to consider the commercial context and surrounding circumstances of the parties' dealings in determining whether a binding agreement had come into existence. The Court of Appeal also noted (per Bathurst CJ at [15] and per Beazley P at [118] (with whom Meagher JA agreed)), and consistently with the case law to which I referred above, that the Court may have regard to subsequent conduct of the parties in determining whether, at an earlier juncture, the parties intended to enter into a binding agreement.
In Nurisvan Investment Ltd v Anyoption Holdings Limited [2017] VSCA 141 at [106], the Court of Appeal of the Supreme Court of Victoria similarly observed that: "In determining whether the Heads of Agreement constituted a binding contract to enter into a Share Sale Agreement, the critical issue concerns the intention of the parties which must be ascertained objectively from the terms of the document, construed in the context of the surrounding circumstances. In that respect, it is relevant to take into account the commercial context and surrounding circumstances of the parties' dealings." [citations omitted]
The fact that the parties might negotiate further, additional terms, that were not included in the first agreement, is not necessarily inconsistent with a conclusion that the first agreement constituted a binding contract between them: Nurisvan Investment Ltd above at [107]. The Court may have regard to the conduct of the parties after the date of entry into the alleged contract to determine whether they entered a binding contract: Sagacious Procurement Pty Ltd above at [105]; Nurisvan Investment Ltd above at [77]ff, [82]-[83]. In setting out these principles, I have also drawn on my summary of them in The Owners - Strata Plan No 58087 v Matthews [2015] NSWSC 1906 and ADG United Pty Ltd v EG Enterprises Pty Ltd [2019] NSWSC 745.
Mr Ashhurst refers to these principles and submits that the Defendants can only succeed in their primary case if they establish that the intention of the parties, objectively ascertained, was not to be immediately bound by the Heads of Agreement and for there to be no concluded bargain unless and until the Deed of Settlement was executed. He submits, and I accept, that the provision in the Heads of Agreement for Mr Muir to cause the LMH to pay Ms Ross or her nominee a substantial cash amount "on account" of the amount payable under the Heads of Agreement, was consistent with the Heads of Agreement having binding effect. That payment was due to be made, and was made, shortly after the conclusion of the mediation and the execution of the Heads of Agreement. He also submits, and I also accept, that the provision in the Heads of Agreement for a completion date for the settlement deed and transaction documents is also consistent with the Heads of Agreement having binding effect. Mr Ashhurst also emphasises and I accept that it is relevant that cl 3 of the Heads of Agreement does not use the terms "subject to" or "conditional upon" to expressly condition the contemplated transactions upon the execution of subsequent agreements. Mr Ashhurst also submits that the Defendants' contention that the Heads of Agreement was not binding would have the "uncommercial result" that the settlement agreement would terminate because one party was not satisfied with the taxation treatment of the share buyout for which it provided.
Mr Ashhurst submits that the Heads of Agreement falls most comfortably into the first category in Masters v Cameron above as one where the parties intended to be bound by its terms and to be required immediately to perform them, while also contemplating entering into a more formal deed of settlement, or alternatively falls in the fourth category identified in G R Securities, where the parties intended to be bound but expected to make a further contract in substitution for the first contract including additional terms. It should be noted, however, that the Heads of Agreement required the execution of a deed of settlement and transaction documents. That was not surprising, given the magnitude of the transaction and the value of the properties involved in it, and these matters tend against a finding that the parties intended that transaction could be effected without the execution of those further documents. It is not necessary to categorise the Heads of Agreement in this way given the other findings that I reach below.
In lengthy submissions in response, Mr Cook refers to the parties' expectation, reflected in their position papers, that only an "in principle" agreement would be formed at the mediation. Mr Cook also refers to a difference in the outcome for the parties, if LMH were wound up and its assets distributed to shareholders, and to a claim by Muir Burnside as trustee for the Marilyn Ross Family Testamentary Trust to a further payment of $3.7 million in respect of a shareholder loan, which (as I noted above) Mr Muir contends was included as part of Ms Ross' "40% interest" in the sale. Mr Cook relies on the description of the document executed at the mediation as a "Heads of Agreement" as consistent with an "in principle" rather than a binding resolution of the matters in dispute. He also notes that the Heads of Agreement was not executed by MWPL or LMH, although they were described by parties to it and several clauses impose obligations on them. Mr Cook points out that the Heads of Agreement also provides for dealings with the assets of Muirs Motors (Ashfield) Pty Ltd although it is not a party to the Heads of Agreement. It seems to me that the fact that companies controlled by Mr Muir are not party to the Heads of Agreement should be given little weight where, as I noted above, there is no suggestion that Mr Muir could not procure them to take steps contemplated by it.
Mr Cook submits that the reference to "having regard to that advice" in cl 3(b) of the Heads of Agreement requires that: "[T]he settlement deed had to be executed (and impliedly, drafted) having regard to what the joint advice provided. That conclusion gives weight to the fact that the contextual material makes it clear that the parties appreciated that giving effect to the terms of any agreement would have significant taxation consequences for them." Mr Cook relies on that proposition, at least in part, to submit that the Heads of Agreement was not binding upon the parties, prior to execution of more detailed documents which had regard to that advice. While I do not accept that submission, in terms, those matters are significant for whether the Heads of Agreement was sufficiently certain to be enforceable, which I address below. Mr Cook also submits that the provision for joint advice from Auswilds and Grant Thornton did not address the potential that Ms Ross and Mr Muir would have conflicting interests as buyer and seller or that there would be differences in professional opinions expressed by Auswilds and Grant Thornton, or provide any mechanism for a deadlock between the parties to be resolved, and submits that that would be expected in an agreement intended to be binding upon execution. Mr Cook also points to the significance of releases, within complex commercial litigation in which other parties have been joined, and to the absence of any specification of the extent of releases in the Heads of Agreement, or of warranties of the kind that would be expected in respect of a substantial transaction.
It seems to me that the Heads of Agreement was a binding agreement, having regard to the matters to which I have referred in paragraph 33 above and the subsequent correspondence with Auswilds and Grant Thornton which was consistent with the existence of a binding settlement between the parties. That agreement plainly contemplated that further documents would be executed, and also required the parties to "have regard" to the joint advice of the accountants in executing the further documents contemplated by the agreement. It seems to me that the Heads of Agreement did not itself establish any obligation to transfer property, other than by the mechanism provided in it, which included the obtaining of the joint tax and structuring advice and the execution of the deed of settlement and transaction documents. I now turn to the question of whether the Heads of Agreement, including that mechanism, was sufficiently certain to be enforceable.
The case law requires that the language used in a contract be "certain in the sense that it provides a criterion by reference to which the rights of the parties may ultimately and logically be worked out, if not by the parties then by the courts": Thorby v Goldberg (1964) 112 CLR 597 at 607; Council of the Upper Hunter County District v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429 at 437; Braude v Kaye [2013] VSC 705 at [321]. A contract may be void for uncertainty where, inter alia, various meanings are open and it is impossible to say which one of them was intended: Brown v Gould [1972] Ch 53 at 61-2; Braude v Kaye above at [321]. On the other hand, in G Scammell & Nephew Ltd v Ouston [1941] AC 251 at 268, Lord Wright observed that: "the court will do its best, if satisfied that there was an ascertainable and determinate intention to contract, to give effect to that intention, looking at substance and not mere form. It will not be deterred by mere difficulties of interpretation. Difficulty is not synonymous with ambiguity so long as any definite meaning can be extracted. But the test of intention is to be found in the words used. If these words, considered however broadly and untechnically and with due regard to all the just implications, fail to evince any definite meaning on which the court can safely act, the court has no choice but to say that there is no contract."
A contractual provision will not be void for uncertainty merely because its language may admit more than one possible meaning or because, when construed, the application of the provision may produce more than one result, unless the Court is unable to attribute to the parties any particular contractual intention or to determine its meaning upon the proper application of the principles of construction: G Scammell & Nephew Ltd v Ouston above; Council of the Upper Hunter County District Council above at 436-7; Brown v Gould above at 61-2; Braude v Kaye above at [336]ff. The Court will endeavour to give effect to a contract reached between businesspeople, even if its terms are not fully or well stated, although whether the parties have expressed their agreement carefully is a matter relevant to whether they have entered into an agreement, and the Court should seek to put a fair meaning on a contractual provision unless it is impossible to do so: Council of the Upper Hunter County District above at 436; Hammond v Vam Ltd [1972] 2 NSWLR 16 at 18; Sagacious Procurement Pty Ltd above at [73]; Australian Goldfields NL (in liq) v North Australian Diamonds NL [2009] WASCA 98 at [143]. The omission of a term of a contract will also not render the contract incomplete and uncertain, and therefore void, unless the term is essential: Australian Goldfields NL (in liq) v North Australian Diamonds NL above at [140].
There is, first, a question of construction, and as to certainty, in respect of cl 1 of the Heads of Agreement. The Defendants contend that cl 1 of the Heads of Agreement is uncertain, and alternatively extends to the "sale" (or, strictly, assignment or novation) of the amounts owed by LMH to Muir Burnside as trustee of the Marilyn Ross Family Testamentary Trust (being 40% of the shareholder loans to LMH) to Mr Muir or his nominee, in part consideration for the substantial price to be paid by Mr Muir. Mr Cook submits that the reference to the transfer of Ms Ross' "40% interest in LMH" was not a reference to a simple transfer of her 40% shareholding, but would also need to extend to shares that she held in MWPL, together with Mr Muir, which in turn held 20% of the shares in LMH as trustee. Mr Cook submits that the Heads of Agreement is also uncertain because there is no definition of what Ms Ross' "40% interest in LMH" means. Mr Cook also points out that the Defendants' position paper for the mediation had referred to liabilities of LMH to companies outside the LMH Group, including to Muirs Burnside as trustee of the Marilyn Ross Family Testamentary Trust although, I should add, it did not address what should be done with them and Mr Ashhurst points out that there is no evidence whether that was discussed at the mediation.
Mr Ashhurst submits that that clause is certain and deals only with Ms Ross' shares in LMH, and that it does not address the liability of LMH to Muir Burnside as trustee of the Marilyn Ross Family Testamentary Trust. Mr Ashhurst submits that that is the preferable reading of that clause, because Muir Burnside as trustee of the Marilyn Ross Family Testamentary Trust is not party to the Heads of Agreement and was not party to the proceedings. The weight of that matter is reduced by the fact that there is no suggestion that Ms Ross does not have the ability to procure Muir Burnside as trustee of the Marilyn Ross Family Testamentary Trust to transfer or assign the amount owed to it to Mr Muir or his nominee and there was therefore no need for it to be party to the Heads of Agreement to allow it to be implemented. Mr Ashhurst also submits that the reference to Ms Ross' "40% interest" in LMH is plainly and unambiguously a reference to her holding 1,600 out of the 4,000 ordinary shares on issue in LMH, which are the subject of the sale and purchase agreed in cl 1 of the Heads of Agreement. That submission is to some extent circular, since the content of the obligation in cl 1 of the Heads of Agreement depends upon whether or not the reference to Ms Ross' "40% interest" in that clause is limited to her shares in LMH, or extends to her interest, through the Marilyn Ross Family Testamentary Trust, in shareholder loans owed by LMH.
It seems to me that cl 1 of the Heads of Agreement, which is an essential provision for the payment of money by Mr Muir to Ms Ross and the transfer of assets by Ms Ross to Mr Muir or their respective nominees, could potentially bear more than one meaning as to the content of Ms Ross' "40% interest in LMH", and I had been troubled in the course of the hearing that that ambiguity may not be capable of resolution by the Court. The term "interest" in that phrase is not defined, and, as is common ground between the parties, would at least include Ms Ross' shares or interest in shares in LMH. The possibility that term extends more widely is open since Ms Ross (or, more precisely, Muir Burnside as trustee of the Marilyn Ross Family Testamentary Trust) also has, in a sense, a 40% interest as a creditor in the shareholders loans owed by LMH and the straightforward terms "shares" or "interest in shares" are not used in that clause. That wider approach is plausible where, had Ms Ross been asked to identify her interest in LMH to, for example, her accountant, she might well have responded that she held a 40% interest as shareholder and, through the Marilyn Ross Family Testamentary Trust, as creditor in respect of shareholder loans.
On balance, although with hesitation, I have concluded that this ambiguity is capable of resolution by the Court and does not render the Heads of Agreement unenforceable. First, the clause refers to Ms Ross' 40% "interest" in LMH, and a creditor owed a debt by a company would not ordinarily be described as having an "interest" in a company by reason of that debt; second, although it would be commercially plausible for that debt to be repaid as part of a settlement, the contrary position is also plausible, and other debts owed by LMH were to be left in place; and, third, and importantly, the Court can have regard to subsequent conduct in construing that clause and I was not taken to any evidence indicating any significant focus by the parties on the novation or assignment of that debt in the period immediately after the Heads of Agreement was executed. It seems to me that the better view is that this clause, considered broadly and untechnically and with regard to the parties' subsequent conduct, has the meaning for which Ms Ross contends, and the availability of two possible interpretations does not rise to the level of a failure to evince any definite meaning on which the Court can safely act, adopting the language of Lord Wright in G Scammell & Nephew Ltd v Ouston above at 268. The proper construction of that clause can be, and now has been, determined by the Court. For this reason, it seems to me that cl 1 of the Heads of Agreement is not too uncertain to be enforceable and the Heads of Agreement does not fail for uncertainty with that clause.
That is not, however, the end of the uncertainties that potentially render the Heads of Agreement unenforceable. As I noted above, paragraph 1(b) of the Heads of Agreement contemplates the transfer of LMH's "beneficial interest" in Lot 41 to Ms Ross or her nominee, either by transfer of the land or LMH's shares in BLPL, "having regard to" the advice specified in cl 2 of the Heads of Agreement. Clause 3(b) of the Heads of Agreement requires a deed of settlement to be executed "having regard to" that tax and structuring advice.
Mr Cook submits that the Heads of Agreement is uncertain because it did not make clear how any deed of settlement was to have regard to the joint advice, or what was the scope of the joint advice which would inform any transaction documents. In submissions in reply, Mr Ashhurst responds that the absence of a mechanism for resolving a "deadlock" in the tax and structuring advice is not an uncertainty affecting the agreement, where a joint engagement is not an adversarial process. It remains that the joint engagement was capable of demonstrating that the parties were differently impacted by the transaction, and the Heads of Agreement did not address how that was to be resolved.
In a further document headed "Plaintiffs' Summary of Issues", provided on the date of the hearing, which had something of the character of further submissions in reply, Mr Ashhurst submitted that the reference to "structuring advice" in cl 2 of the Heads of Agreement should be understood as limited to whether Mr Muir or a nominee would purchase Ms Ross' 40% interest in LMH and whether the Yamba land or shares in the company that owned that land would be transferred to Ms Ross. I do not accept that submission, which is not consistent with the width of language used in the Heads of Agreement; is not consistent with the complexity of the tax and commercial issues raised by the transaction; and is radically inconsistent with the subsequent conduct of the parties, in seeking advice from MinterEllison (on the part of Mr Muir) and Grant Thornton (whether jointly or on behalf of Ms Ross) that extended to substantially wider structuring issues. Mr Ashhurst also there submitted that: "The expression 'having regard to' means what it says, that is that the two variables [as to the purchase of Ms Ross' 40% interest in LMH and the structure for sale of the Yamba land or shares in the company that owned it] should be determined by having regard to the joint advice." As I noted above, I do not accept that the relevant advice was so narrowly confined and that submission does not assist as to how those matters are to be determined having regard to that advice.
It seems to me cll 1(b) and 3(b) of the Heads of Agreement are too uncertain to be enforceable, because they provide no criteria by which the parties are to give effect to such advice, in whole, in part, or not at all, after they have had "regard to" it. There was an obvious potential in this transaction that one or other party would be advantaged or disadvantaged by a structure for the settlement and relevant transactions that adopted a particular form, for example, when it emerged (as was the case) that a sale of Ms Ross' interest in LMH was less advantageous than, for example, a winding up of LMH. The requirement for the parties to have "regard to" that advice provides no basis to determine what should be included in a deed of settlement in addressing their potentially different interests as to the structure of the transaction once such an advantage or disadvantage was identified by that advice. A similar difficulty arises with cl 3(c) of the Heads of Agreement. That clause does not expressly refer to the taxation and structuring advice, although Mr Ashhurst characterised that as a drafting error, and it also provides no criteria to determine the content of the transaction documents if a dispute arose between the parties, as it did. It may be possible that a requirement to have "regard to" the joint advice could be read into that clause as a matter of construction rather than by rectification. However, even if that were the case, that clause would still provide no criteria and no mechanism as to how that advice, or the parties' differing interests or particular issues arising from that advice, should be reflected in the content of the transaction documents.
Mr Ashhurst submitted that, if the Court reached that view as to the uncertainty and unenforceability of cl 3 of the Heads of Agreement, it could be severed from the Heads of Agreement and the parties made supplementary submissions, by leave, as to principles of severance. Mr Ashhurst referred to Malago Pty Ltd v AW Ellis Engineering Pty Ltd [2012] NSWCA 227 where Macfarlan JA (with whom Bathurst CJ and Meagher JA agreed) distinguished between the essential parts of a contract, and merely mechanical provisions designed to implement an existing agreement between the parties, in holding that the Court could make an order for specific performance where the parties had agreed the essential elements of the bargain. Mr Ashhurst also drew attention to one English decision, Pena v Dale [2004] 2 BCLC 508, where a provision that contemplated options or their equivalent would be issued in the "most tax-efficient manner" could be severed, with the agreement for the issue of the option remaining enforceable. That case is readily distinguishable from this case, given the complexity of the transactions contemplated here. Mr Ashhurst otherwise acknowledged that whether a term or part of a contract was severable for uncertainty would be a question of construction, depending on the intention of the parties to be gathered from the instrument as a whole, and referred to several cases which had formulated and given effect to that approach. Mr Ashhurst also submits that tax and structuring advice was not necessary in respect of the acquisition of Ms Ross' shares by Mr Muir or his nominee for cash and that the requirement to have regard to such advice could be severed in respect of the transfer of the Yamba land, leaving that transfer to be effected without regard to tax advice. That submission seems to me to be inconsistent with the express terms of the parties' agreement and radically inconsistent with the manner in which they had conducted themselves.
Mr Cook responds, by reference to the commentary on severance in J D Heydon, Heydon on Contract (Lawbook Co 2019) at [3.480], also recognising that severance depends on the intention of the parties to be gathered from the instrument as a whole. Mr Cook submits that cll 2 and 3 of the Heads of Agreement made clear that the parties intended to give effect to any agreement in cl 1 in the manner contemplated by cl 3, which required the performance of the obligations in cl 2 of the Heads of Agreement. Mr Cook submits, and I accept, that what would remain, if cll 2 and 3 were to be severed from the Heads of Agreement, would not be what the parties had agreed. Mr Cook also submits that cll 1-3 of the Heads of Agreement form an indivisible whole which cannot be taken to pieces without altering its nature, and that the parties' intention, emerging from the Heads of Agreement, was not to enter an agreement in respect of cl 1 without taking the steps contemplated by cll 2 and 3; and that cll 2 and 3 of the Heads of Agreement were not mere "machinery provisions", but were central to the process for Ms Ross' extracting her 40% interest in the LMH group, and could not be severed without giving rise to a different agreement to that reached by the parties.
It seems to me plain, both from the terms of the Heads of Agreement and the voluminous correspondence between the legal representatives and Grant Thornton, that the parties were far from indifferent to whether tax liabilities would arise from any particular means of implementing the transaction. I do not accept that severance of the clauses that I have found to be uncertain is possible in these circumstances.
For these reasons, the Heads of Agreement is too uncertain to be enforceable. That perhaps reflects the parties' attempts to achieve two potentially (and, in the event, actually) inconsistent objectives, both to achieve a binding agreement at the conclusion of the mediation and to leave open a means to address unknown tax and structuring issues in a complex transaction. There was likely good reason for the parties to take that course at the time, since the Heads of Agreement had the potential to bring the parties to a prompt and cost efficient resolution of the matter, had they been more cooperative in addressing the issues that arose from the subsequent tax advice, although it has ultimately failed to achieve an enforceable resolution of the dispute.
I should note that Mr Cook also advances further submissions as to the fact that, plainly, the parties did not conduct themselves in accordance with the timetable and aspects of the mechanism contemplated by the Heads of Agreement. It is not necessary to address those matters given the conclusions I have reached on other grounds. As an alternative submission, if the Heads of Agreement were held to be binding and enforceable, Mr Cook contended that the proper construction of the Heads of Agreement required, as a step in the specific performance of the Agreement, that there be an assignment of the loan account held by Muir Burnside, the trustee of the Marilyn Ross Family Testamentary Trust of which Ms Ross was beneficiary, to Mr Muir or his nominee. Mr Cook also contended that the transaction had been frustrated, because no joint advice had been procured and no deed of settlement had been prepared which had regard to that advice. It is also not necessary to address those submissions given the conclusions that I have reached on other grounds.

At a glance

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Judgment (12 paragraphs)

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Legislation Cited (1)

Cases Cited (18)

Cited By (6)