AMA Group Limited v ASSK Investments Pty Limited

The Binding Heads of Agreement

1. It is necessary to highlight some clauses of the HOA which are of particular relevance to the present appeal.
2. Clause 2 of the HOA, headed "Introduction", provided as follows: "(a) The Vendor owns all of the goodwill, plant and equipment, intellectual property, Material Contracts and all other assets (Assets) in relation to the business known as 'Northshore Classic Auto Body Centre', 'North Shore Classic Auto Body', 'NSC Collision Centre', 'NSC Collision Repairs' and 'NSC Smash Repairs' (the Business). (b) The parties agree to enter into Business Sale Agreements subject to the terms and conditions set out in this Heads of Agreement (HOA)." (emphasis in italics added). "Business Sale Agreements" was defined in cl 13 of the HOA as "the agreements between the Purchaser, the Vendor and the Covenantor [Mr Kalloghlian] in respect of the sale of the Businesses by the Vendor to the Purchaser". That is to say, the HOA contemplated that there would be separate sale agreements for each business.
3. As already referred to at [14] above, cl 3 of the HOA provided that the "parties intend to complete the sale 31 days after the Binding Heads of Agreement is executed by all parties (Completion Date), or such other date as the parties agree to". Clause 3 was not so much a definition as a statement of intention. The term "[c]ompletion" was in fact defined in cl 13 of the HOA as follows: "Completion means completion of the Business Sale Agreements pursuant to the terms of this HOA whereby all right, title and interest in the Assets and the Businesses transfers to the Purchaser". "Completion date" was similarly defined in cl 13 of the HOA as "the date of Completion of the Business Sale Agreements".
4. Clause 4 of the HOA provided for a purchase price comprised of $6 million payable on completion, together with a deferred settlement component of up to $3 million, depending on the EBIT achieved by the business in the 12-month period after completion. Certain adjustments to the purchase price were required to be made, in accordance with cl 4(c) of the HOA, with such adjustments to be calculated as at the completion date.
5. Clause 6 of the HOA, headed "Due Diligence and Documentation", provided as follows: "(a) The Vendor and Covenantor must make available to the Purchaser all things necessary for Purchaser to carry out a comprehensive due diligence on the Vendor, Business, Assets and the premises. (b) Subject to the above, the transaction will be recorded in a Business Sale Agreement". (emphasis added).
6. Clause 7 of the HOA was headed "Conditions Precedent". It was a lengthy clause, the full text of which can be seen in the Appendix to these reasons. Of central importance to the present appeal was cl 7(b) which simply provided: "all necessary third party consents, authorisations and approvals being obtained (including the Purchaser's Board approval)".
7. As the primary judge observed at PJ [6], there was no "chapeau" to cl 7, although each of the 11 sub-paragraphs to cl 7 were defined collectively as "the Conditions Precedent". That was a defined term in the HOA albeit the definition in cl 13 contained an obvious mistake (cf. HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296), in that it stated that "Conditions Precedent" was defined in cl 8. The reference to cl 8 should have been to cl 7. Also to be noted is that cl 7 concluded with the following: "For the avoidance of doubt, only the Purchaser may exercise its right to waive any of the Conditions Precedent". That was to emphasise that the Conditions Precedent were designed to benefit the Purchaser.
8. Clause 8(a) stated that "[t]he Vendor will transfer the Businesses and the Assets to the Purchaser free from all encumbrances on the Completion Date".
9. Clause 9, headed "Warranties", provided as follows: "The Warranties are set out in Schedule 1 of this HOA. (a) The Purchaser (at its discretion) may insert further Warranties in Schedule 1 which the Purchaser (acting reasonably) considers necessary by reason of its due diligence enquiries on the Vendor, the Businesses and the Assets prior to the Completion Date; (b) The Vendor and Coventantor [sic] jointly and severally indemnify the Purchaser for all loss and damage resulting from breach of any warranty or any breach of this HOA. (Warranty Claim) (c) Any Warranty Claim: (i) cannot be made after 36 months after Completion; and (ii) except for fraud, breach of Intellectual Property rights, confidentiality, restraint or wilful default shall not exceed the Purchase Price. (d) No Party relies on any warranty or representation unless specifically recorded in this HOA or any subsequent Business Sale Agreements".
10. Clause 1.1 of Sch 1 was in the following terms: "1.1 The Vendor and Coventantor [sic] and the Purchaser: (a) have full power, capacity and authority to enter into and perform their obligations under this Agreement and to carry out the transactions contemplated by this Agreement and to execute and deliver (and to perform all of its obligations under) all documents to which they are a party which are to be entered into pursuant to this Agreement in accordance with their terms; and (b) have taken all necessary action and obtained all necessary consents to authorise the execution, delivery and performance of this Agreement and all documents to which they are a party which are to be entered into pursuant to this Agreement in accordance with their terms". (emphasis added).
11. The "transactions contemplated by this Agreement" were the sale of the various businesses pursuant to the contemplated Business Sale Agreements.

The primary judgment

1. The primary judge summarised the respective arguments of AMA and ASSK Investments at PJ [25]-[28], as follows: "25 The defendant's position, which is slightly different from that which it took in its 10 January 2020 letter, is that the HOA does not bind it to buy. It argues that the HOA is not a contract for the sale of the Business. It argues that the sale of the Business is to be effected by the Business Sale Agreements referred to in cl 2(b) and that the coming into effect of those Agreements was subject to the condition precedent in cl 7(b), which has not been fulfilled. 26 On this analysis, as the defendant put it, the HOA is no more than agreement under which the plaintiff would make available to the defendant information about the Business and the defendant would have an unfettered, unilateral option to determine whether or not to proceed with the acquisition. It argues that the HOA imposes no obligations on it, but gives it only rights. 27 The plaintiff argues that by the HOA, the parties, in binding fashion, agreed to sell and buy respectively, and that cl 7(b) is not a condition precedent to the sale of the Business. 28 It argues that if Board Approval was required, it was in any event given when 'by the authority of the Directors' the HOA was signed by a director and the company secretary." (footnote omitted).
2. The primary judge noted, consistently with conventional authority, that the HOA was a commercial contract which was to be given a business-like interpretation: at PJ [29].
3. The primary judge disagreed with AMA's characterisation of the HOA as his Honour had identified it at [26], stating (at PJ [31]-[32]) that: "31 …It is far more than an agreement for the provision of information coupled with an option in its favour. It is not an agreement under which the plaintiff bound itself to sell (at the defendant's whim) but the defendant did not bind itself to buy. The instrument records that the parties agree to enter into Business Sale Agreements. 32 The object which it intends to secure is the sale and purchase of the Business, not the gathering of information by the defendant to enable it to make a decision."
4. The primary judge's reference to "an unfettered, unilateral option" at PJ [26] and to "the defendant's whim" at PJ [31] referred, to a certain extent, to how Senior Counsel for AMA had advanced his construction argument before the primary judge. As will be explained below, that was not quite how the matter was put in AMA's written submissions at first instance nor on appeal.
5. The primary judge's dispositive reasoning at PJ [34]-[41] was succinct. It is set out below: "34 The instrument legislates comprehensively for the sale and purchase of the Business. It contains detailed machinery for the ascertainment of the purchase price (cl 4), including a mechanism for resolving disagreement on the value of work in progress (cl 5). It incorporates comprehensive warranties (cl 9 and Schedule 1) and a restraint (cl 10). It makes provision for the Purchaser, acting reasonably, to insert further warranties which it considers necessary by reason of its due diligence enquiries (cl 9(a)). It is plainly capable of operating as an effective sale without entry into any further agreement. 35 The HOA contemplates the entry into of subsequent Business Sale Agreements, but the execution of those agreements is not a precondition for a binding sale. As cl 9 records, the transaction will be 'recorded' in a Business Sale Agreement. Paragraph 1.2 in Schedule 1 records that: 1.2 This Agreement constitutes (and all instruments, documents and agreements to be executed and delivered in connection with this Agreement on execution will constitute) a legally valid and binding obligation of the Vendor and the Coventantor [sic] and the Purchaser and is enforceable in accordance with its terms. 36 Clause 7(b) is to be construed in the context of cl 7 and the HOA as a whole. Clause 7 seems to have no unifying, underpinning concept. Some conditions in it are plainly not of the nature of conditions precedent to a sale transaction because they envisage things happening much later than that. It is a collection of conditions of differing types. Some of them require the plaintiff to do things which the defendant will no doubt be entitled to have the plaintiff do as a condition of completion so that each party gets the benefit of the agreement: see Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596. 37 In my view, in so far as cl 7(b) is a condition precedent to anything, it is to the entry into of the further Business Sale Agreements, not the sale transaction which the HOA seeks to secure. The result of non-fulfilment is simply that there will be no further Business Sale Agreement and the sale transaction is governed by the HOA on its own. 38 To construe cl 7 as incorporating the defendant's own Board Approval as a condition precedent which, if not fulfilled, brings down the entire transaction has potentially capricious, unreasonable, inconvenient, and unjust consequences because other so-called conditions precedent require acts of performance by the plaintiff. Objectively viewed, I do not think that the parties intended this to be the case. 39 For example, cl 7(c) requires transfer of Business names and domain names . If this were a condition precedent to the sale, the plaintiff might transfer these to the defendant and, if the board did not approve the sale, the defendant would have the plaintiff's property but the plaintiff would have no agreement. The same consideration applies to cl 7(d), which requires names to be changed, and to cl 7(k), which requires Key Personnel to be transferred. 40 Clause 7(k) provides, as part of the conditions, that the covenantor is to continue employment with the Purchaser for a maximum of 12 months following the Completion Date. This condition cannot rationally be viewed as one precedent to the sale transaction which would have already been completed. Clause 7(f) incorporates as part of a condition precedent a Succession Plan being signed off one year after Completion. This condition also cannot rationally be viewed as one precedent to the sale transaction. 41 Moreover, cl 7(b) incorporates the word 'necessary'. Having committed itself to the transaction by a director and company secretary with the authority of the directors, further Board Approval was not 'necessary'."
6. The primary judge ordered specific performance of the HOA, noting that "[t]he defendant does not rely on the non-fulfilment of any other supposed conditions precedent [other than cl 7(b)] and it does not suggest that any others (so far as they are conditions precedent) have not been, or will not be, fulfilled": at PJ [44]. His Honour stated at PJ [45]-[46] that: "45 The subject matter of the sale is unique and specific performance is available as a remedy in relation to a contract for the sale of a business. In my opinion, it is the appropriate remedy in this case. 46 If, however, I were to award damages, I would assess them at $2,225,435, plus pre-judgment interest."

Grounds of appeal

1. AMA has challenged the primary judgment on the following two grounds: "1 The primary judge erred in failing to find that the Binding Heads of Agreement executed between the parties on 31 October 2019 (HOA) had been validly terminated by the Appellant on or about 10 January 2020. Specifically, the primary judge: a. erred in finding that the object of the HOA was to secure the sale and purchase of the Respondents' business, when his Honour ought to have found that the sale of the business was to be secured by a business sale agreement, which had not been concluded between the parties; b. erred in finding that the requirement in cl 6(b) of the HOA for the parties to enter into a business sale agreement was not a condition precedent for a binding sale of the Respondent's business; c. erred in finding that the requirement in cl 7(b) of the HOA for the Appellant to obtain all necessary third party consents, authorisations and approvals being obtained (including the Appellant's Board approval) was not a condition precedent for a binding sale of the Respondent's business; d. erred in failing to construe cl 6(a) of the HOA as permitting the Appellant to terminate the HOA and not complete the sale if the Appellant was not satisfied with the outcome of its inquiries as part of the due diligence process; and e. erred in finding that the Appellant's signature of the HOA constituted approval by the Appellant's Board of the purchase of the Respondent's business. 2 Further or in the alternative to Ground 1, on the evidence before the Court it was not open to the Court to decree specific performance of the HOA, in circumstances where: a. the HOA had been validly terminated by the Appellant on or about 10 January 2020; b. in the alternative to (a), the HOA was not sufficiently certain to form the basis of a grant of specific performance; c. cl 6(b) of the HOA was a condition precedent to a binding sale of the Respondents' business to the Appellant. This clause had not been fulfilled, as the Appellant and Respondent had not entered into, or agreed upon the terms of, a business sale agreement; d. cl 7(b) of the HOA was a condition precedent to a binding sale of the Respondent's business to the Appellant. This clause was not fulfilled, as the Appellant's board had not approved the purchase of the Respondent's business; and e. given that: i. cl 4(f)(ii) of the HOA requires the current management of the Respondent's business to remain in place for one year after the sale of the business to the Appellant; and ii. cl 7(k) of the HOA requires Key Personnel (defined to include Avedis Avik Kallog[h]lian, the Respondents' director) to continue employment with the Appellant for a period of 12 months after completion, the HOA requires the performance of services by the Respondent's director in favour of the Appellant, or alternatively would require continual co-operation between the Respondent's director and the Appellant. Accordingly, specific performance could not be granted in respect of these terms of the HOA, and consequently specific performance could not be granted in respect of the HOA".

Applicable principles of contractual construction

1. There was no real dispute between the parties as to the basic principles of contractual construction that applied.
2. These principles are familiar and were identified by the primary judge by reference to Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 at 109; [1973] HCA 36 (Australian Broadcasting Commission); McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 at 589; [2000] HCA 65 at [22]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461-462; [2004] HCA 35 at [22]; Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 at 559; [2004] HCA 56 at [82]; Wilkie v Gordian Runoff Limited (2005) 221 CLR 522 at 528-529; [2005] HCA 17 at [15]; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656-657; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 at 117; [2015] HCA 37.
3. The primary judge isolated the following principles from these decisions: "The HOA is a commercial contract which is to be given a business-like interpretation. Interpreting it requires attention to the language used by the parties, the commercial circumstances which it addresses, and the objects which it is intended it secures. The meaning of the words chosen is determined objectively by reference to its text, context, and purpose, the question being what a reasonable person would have understood them to mean. Preference is given to a construction supplying a congruent operation to the various components of the whole and so as to avoid commercial inconvenience. Where language is open to more than one construction, the Court will prefer a construction which avoids consequences which are capricious, unreasonable, inconvenient or unjust".

Consideration

1. With great respect, I am unable to agree with the primary judge's construction of the HOA, and his Honour's consequent decision to order specific performance. In my view, the approval of the Board of AMA was a condition precedent to AMA's obligation to purchase the businesses of ASSK Investments, and the HOA itself did not effect a sale of those businesses.
2. I accept the Appellant's submission that: "The parties' objective intention, determined by construing the language of the HOA, as a whole, is that any sale of the business would not take place unless AMA's board approved the sale (HOA cl 7(b)), and that any sale of the business would not complete unless and until the parties entered into a business sale agreement (HOA cl 13, definitions of Completion and Completion Date)". (emphasis in original).
3. The starting point is, of course, the language of the HOA. The primary judge's statement in the final sentence of PJ [31] (see [36] above), namely that "[t]he instrument records that the parties agree to enter into Business Sale Agreements" is an incomplete statement of cl 2 of the HOA which makes it explicit that such an agreement was conditional upon the terms and conditions set out in the HOA. This is the ordinary and natural meaning of the phrase "subject to" as contained in cl 2(b) of the HOA.
4. The words contained in cl 2(b), namely "subject to the terms and conditions set out in this Heads of Agreement" immediately point to the other terms and conditions of the HOA. They necessarily included cl 7(b). That clause referred to "all necessary third party consents, authorisations and approvals being obtained (including the Purchaser's Board approval)".
5. A number of observations should be made about this sub-clause: (i) the reference to "third party" must be taken to govern "consents" and, possibly, authorisations. It cannot be taken to govern or apply to "approvals", given that the Purchaser was plainly not a third party, and the approval of the Purchaser's Board was stated to fall within the concept of "approvals". So much follows from the use of the word "including" in cl 7(b); (ii) it does not follow from the above that the opening phrase in cl 7(b), namely "all necessary", is not distributive. If it is, the approval of the Purchaser's Board must be taken to be a "necessary approval". In my view, "necessary" as used in cl 7(b) is distributive. This comports with cl 7(b) being a condition precedent. That the Board approval was also "necessary" as a precondition to the Business Sale Agreements being executed was supported by the fact that, as was inherent in cl 6, comprehensive due diligence had not been carried out at the time of entry into the HOA; (iii) clause 7(b) is in terms defined as a condition precedent. It is not a condition precedent to formation of an agreement in the Masters v Cameron (1954) 91 CLR 353; [1954] HCA 72 sense; rather, it is a condition precedent to the performance of the obligations contained in the HOA. The principal obligation is the entry into of the Business Sale Agreements: see cl 2(b); (iv) with respect to the primary judge, the fact that cl 7 of the HOA "seems to have no unifying, underpinning concept" (see PJ [36] reproduced at [38] above) does not mean that cl 7(b) is robbed of operation and effect as a condition precedent. It must be given meaning and work to do unless it is not possible to do so. In my view, it is not difficult to give it meaning, namely that AMA's promise to enter into Business Sale Agreements was conditional upon its Board approving of this. Mr Young SC, who appeared for ASSK Investments, could point to no work that cl 7(b) of the HOA could do insofar as it referred to AMA's Board approval if it were not a condition precedent to entry into the Business Sale Agreements. Orthodox principles of contractual construction require the Court to strive to give operation and meaning to all the words used by the parties in their written agreement; (v) this interpretation is reinforced by the fact that it is to be inferred from the terms of cl 6 of the HOA (see [27] above) that "comprehensive due diligence" was still to be undertaken at the time of entry into the HOA. A construction of the HOA which involved the board of a publicly listed company committing itself to a $6 million acquisition without the undertaking of comprehensive due diligence is one that might readily be thought to flout business common-sense: see Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201. The same might be said of a construction which contemplated comprehensive due diligence notwithstanding that AMA was, on the trial judge's construction, already committed to the acquisition; (vi) to the extent that the primary judge observed at PJ [39] that, if AMA's Board did not approve the sale, the transfer of business and domain names pursuant to cl 7(c) would result in AMA "hav[ing] the plaintiff's property but the plaintiff would have no agreement", there are two answers to this observation. First, that outcome would be a function of and depend on timing. More fundamentally, AMA would have no entitlement in equity to that property in circumstances where it was not intended to be transferred gratuitously: see ET-China.com International Holdings Ltd v Cheung [2021] NSWCA 24 at [221]; (vii) the primary judge's observation at PJ [40] that subcll 7(f) and (k) "cannot rationally be viewed as one[s] precedent to the sale transaction which would have already been completed" is no doubt correct. That observation does not, however, mean that subcl 7(b) was not, or should not, be construed as a condition precedent. Even if subcll 7(f) and (k) are not properly characterised or described as conditions precedent, they are not denuded of operation; their inclusion in the HOA records the parties' agreement that they will be terms of any Business Sale Agreements once entered into.
6. At PJ [37], the primary judge said: "In my view, in so far as cl 7(b) is a condition precedent to anything, it is to the entry into of the further Business Sale Agreements, not the sale transaction which the HOA seeks to secure. The result of non-fulfilment is simply that there will be no further Business Sale Agreement and the sale transaction is governed by the HOA on its own." (emphasis added). There is no question that the approval of the Board was a condition precedent to something. To conclude otherwise flies in the face of the text of the HOA, notwithstanding infelicities in its drafting and the fact that some of the sub-paragraphs of cl 7 could not be so described. That "something" was correctly identified by the primary judge at PJ [37] as the entry into the Business Sale Agreements, albeit qualified by his Honour's use of the words "in so far as".
7. The primary judge was driven to conclude that "the sale transaction is governed by the HOA on its own": PJ [37]. This conclusion, together with the statement at PJ [34] that the HOA "legislates comprehensively for the sale and purchase of the Business" cannot, in my view, be sustained.
8. There is a fundamental distinction between an agreement to sell and a sale. The distinction is even more pronounced when the agreement to sell is conditional, as it was in the present case, and as cl 2(b) made clear.
9. Moreover, the HOA did not "legislate comprehensively for the sale and purchase of the Business". For example, no Material Contracts had been identified, nor had any Key Personnel - these were to be identified in the writing in the Business Sale Agreement: see the definition of "Key Personnel" in cl 13 of the HOA. Additional warranties were also contemplated as a possibility: see cl 9(a) of the HOA.
10. If, by the expression used at PJ [37], namely that the "sale transaction is governed by the HOA on its own", the primary judge intended to convey that the sale would stand notwithstanding that no Business Sale Agreements of the kind contemplated by the HOA would eventuate, that would not seem to me to accord with commercial common-sense. It would mean that both parties understood that the sale of multiple businesses was being entered into without any comprehensive due diligence being undertaken, no Material Contracts or Key Personnel identified and no completion date agreed. This last proposition follows from the definition of "Completion Date" in cl 3 of the HOA. It also sits uncomfortably with the different definition of "Completion Date" in cl 13 of the HOA where that date is defined as the date of Completion of the Business Sale Agreements. The definitions of "Completion" and "Completion Date" in cl 13 of the HOA are defined by reference to, and presuppose execution of, the Business Sale Agreements. The Business Sale Agreements were quite separate from the HOA. Amongst other matters, there were to be Business Sale Agreements; there was only one HOA.
11. In this context, I accept AMA's submission that: "The fact that a number of critical terms of the HOA are left undefined or uncertain in the absence of a Business Sale Agreement also militates against the primary judge's conclusion. In particular, without a Business Sale Agreement, the definitions of Key Personnel and Material Contracts are unworkable, and therefore the clauses of the HOA that rely on those definitions are unworkable. It follows that any such sale would be incomplete in critical respects."
12. Furthermore, to treat the HOA as giving effect to a sale of the business for $6 million would be to denude the reference to AMA's Board approval in cl 7(b) of any meaning. That would be inconsistent with Australian Broadcasting Commission at 109. It would also be quite inconsistent with the expression "the transactions contemplated by this Agreement" used in the warranties contained in cl 1.1 of Sch 1 to the HOA: see [32] above.
13. In the course of argument, Mr Young submitted that the comprehensive due diligence expressly provided for in cl 6 of the HOA was so as to allow further negotiation of the terms of the warranties, as contemplated by cl 9 of the HOA, part of which has been set out at [31] above. Whilst this argument had some force, and a connection may be drawn between the due diligence contemplated by cl 6 and the subsequent amendment of warranties pursuant to cl 9, the fundamental purpose of due diligence was to ascertain whether the businesses were worth the amount of $6 million contained in the HOA. If AMA concluded that they were not, an amendment to warranties would not cure or accommodate this discovery. As AMA submitted: "…the primary judge's interpretation of the HOA amounts to a conclusion that by signing the HOA, AMA was obliged to buy the NSC business, regardless of how unprofitable, uncommercial or risky it was, and regardless of any defects that might be discovered during the due diligence process that was to continue pursuant to cl 6(a) of the HOA. Such an allocation of risk is entirely inconsistent with the plain language of the HOA."
14. The next point to be considered is that made at PJ [38], namely that: "To construe cl 7 as incorporating the defendant's own Board Approval as a condition precedent which, if not fulfilled, brings down the entire transaction has potentially capricious, unreasonable, inconvenient, and unjust consequences because other so-called conditions precedent require acts of performance by the plaintiff. Objectively viewed, I do not think that the parties intended this to be the case."
15. In his submissions on appeal, Mr Young contended that such a construction would also have the consequence that any consideration that moved from AMA to sustain the enforceability of the HOA was illusory. But this submission proves too much. Unless the HOA was supported by consideration, it would not be specifically enforceable and an order for specific performance ought not to have been made.
16. There would be force in the observation made by the primary judge at PJ [38] if cl 7(b) was required to be construed so as to permit the capricious or unreasonable withholding of approval. I do not, however, think that it should be so construed although, in fairness to the primary judge, it should be recorded that in the course of the hearing before his Honour, Senior Counsel for AMA moved away from what he had originally submitted in writing and appeared to embrace a proposition put to him by the primary judge to that effect, namely that Board approval could be withheld capriciously.
17. At first instance, AMA had submitted in writing, citing Meehan v Jones (1982) 149 CLR 571 at 591 and 598; [1982] HCA 52 (Meehan v Jones), that: "When a clause in a contract is for the benefit of one party, the party must show it acted reasonably in determining whether or not the condition precedent has been met or not. This may involve accepting an objective assessment as to the reasonableness of the actions undertaken by AMA". AMA also filed evidence which was ultimately unchallenged, detailing the steps which it had undertaken during the due diligence process and which anticipated any attack on the reasonableness of its stance in not proceeding with the transaction and any suggestion that its Board's failure to approve the transaction was capricious.
18. Contracts which afford to one party a discretion, or which are subject to a condition that one of the parties approves an element relevant to performance, are conventionally construed as being subject to an implied requirement of at least honesty or, sometimes, honesty and reasonableness. In this context, it has been observed (JD Heydon, Heydon on Contract (2019, Lawbook Co) at [21.430]) that: "The right accorded to one party to decline to proceed on grounds of unsatisfactoriness is not generally seen by the courts as an absolute or unfettered right, or as having being left in the sole determination of one party. It is not unfettered because it depends at least on good faith, and may call for more. The cases reveal a variety of answers, depending on the particular contract, concerning what precise standard applies in relation to satisfaction". (footnote omitted).
19. The learned author also draws attention to a line of cases which stands as authority for the proposition that where a contract for the sale of goods stipulates that delivery is subject to the buyer's approval, the buyer may disapprove so long as this is done honestly: see Repetto v Friary Steamship Co Ltd (1901) 17 TLR 265; Haegerstrand v Anne Thomas Steamship Co Ltd (1904) 10 Com Cas 67 at 70; affd Haegerstrand v Anne Thomas Steamship Co Ltd (1904) 10 Com Cas 71; Diggle v Ogston Motor Co Ltd [1915] WN 37; Canada Egg Products Ltd v Canadian Doughnut Co Ltd [1955] 3 DLR 1; Niarchos (London) Ltd v Shell Tankers Ltd [1961] 2 Lloyd's Rep 496 at 507-509.
20. In Meehan v Jones at 590, Mason J said: "It has often been held that, where under a contract the delivery of a ship or of goods is expressed to be subject to the buyer's approval, the buyer may disapprove so long as he acts honestly (Repetto v. Friary Steamship Co. Ltd; Haegerstrand v. Anne Thomas Steamship Co. Ltd). In the last case Vaughan Williams LJ. spoke of the relevant condition making 'the view of the purchaser final if honestly arrived at'. See also Diggle v. Ogston Motor Co. Ltd; and especially Niarchos (London) Ltd. v. Shell Tankers Ltd. In Canada Egg Products Ltd. v. Canadian Doughnut Co. Ltd the Supreme Court of Canada held that a provision in a contract which entitled the purchaser to return the goods if they were not 'satisfactory' was not uncertain and that his rejection of the goods was authorized by the provision if he honestly rejected them. There are cases in which it has been said that a capricious withholding of approval will not do (Dallman v. King; Repetto). Whether 'capricious' is there used in the sense of 'not honestly' is uncertain, though McNair J. in Niarchos thought that 'capriciously' was used by Tindal L.CJ. in Dallman in a different sense, perhaps signifying 'arbitrarily' or 'without reasonable cause' - see Secured Income Real Estate (Australia) Ltd. v. St. Martins Investments Pty. Ltd. There was no suggestion in any of the cases mentioned in this and the preceding paragraph that the buyer's right to withhold approval led to invalidity of the contract on the ground of uncertainty." (footnotes omitted).
21. At 597-598, Wilson J said: "The first observation relates to the general question whether a purchaser, in deciding whether finance is on satisfactory terms, is bound to act both honestly and reasonably. It is not necessary to decide the question for the purposes of this case because the finance was obtained. It seems to me that the weight of the authorities discussed by his Honour favours the conclusion that, subject always to the construction of the contract in the particular case, the court will imply no greater obligation on the purchaser than that he is obliged to act honestly in determining whether the available finance is satisfactory. I am inclined to think there is force in this view. The clause is there for the protection of the purchaser. Clearly he must make reasonable efforts to secure finance. But the question whether he is able and willing to assume the burden involved in accepting particular terms may well be answered by reference to subjective considerations which cannot readily be the subject of objective assessment as to their reasonableness. The requirement of an honest judgment may be thought to provide the vendor with the maximum protection which is available under the clause. However, it is sufficient for me, like Mason J., to refrain from expressing a concluded view".
22. As in Meehan v Jones, it is not necessary in the present case to reach a concluded view as to whether, in respect of the HOA, any withholding of Board approval as referred to in cl 7(b) had to be simply honest and bona fide, or objectively reasonable as well. It was not an issue in the present case at least on appeal that it was either not bona fide or not reasonable and, as has been noted, there was evidence that stood in the way of such a contention.
23. The key point is that, contrary to PJ [38], whilst I agree with the primary judge that the parties to the HOA should not be taken to have intended to permit the Board of AMA to act capriciously, such a construction of cl 7(b) is not required. Consistent with authorities such as Meehan v Jones and those referred to at [62] above, cl 7(b), insofar as it refers to Board approval as a condition precedent, can be construed in such a way not only so that the promise in cl 2(b) to enter into the Business Sale Agreements is not illusory (cf. Thorby v Goldberg (1964) 112 CLR 597 at 605; [1964] HCA 41), but in a way that allows it to operate as a condition precedent, consistent with the language of cl 7. This is also consistent with the principle that a construction should be favoured which preserves the validity of the transaction rather than rendering it void or ineffective (see P Herzfeld and T Prince, Interpretation (2nd ed, 2020, Thomson Reuters) at [25.60] and the cases there cited).
24. Some complaint was made as to the shift away by AMA as to what had been submitted, at least orally, to the primary judge. The shift was unfortunate and what AMA's Senior Counsel put orally to the primary judge may have led his Honour into error. This Court is required, however, to conduct a rehearing of the matter pursuant to s 75A of the Supreme Court Act 1970 (NSW), and no question of prejudice arises which could not be cured by an exercise of the costs discretion so as to preclude the argument and analysis set out above.
25. Finally, the primary judge's observation at PJ [41] that "[h]aving committed itself to the transaction by a director and company secretary with the authority of the directors, further Board Approval was not 'necessary'" with respect is in the face of the language of cl 7(b), on its proper construction. As AMA asked rhetorically in its written submissions: "If, by dint of signing the HOA, AMA's board had approved any future purchase of the business, then why were those words included in the HOA?"
26. Moreover, the statement that AMA had "committed itself to the transaction by a director and company secretary with the authority of the directors" begs the question. It may be accepted that Mr Hopkins and Ms Bakos who executed the HOA were authorised by the Board to do so, but what they were authorised to do was to agree to the entry into of the Business Sale Agreements subject to the terms and conditions of the HOA. The reasoning in PJ [41] is, with respect to the primary judge, somewhat circular.
27. For the above reasons, the contract was not specifically enforceable because a condition precedent, namely the approval of the AMA Board, had not been satisfied. In the absence of any suggestion that the withholding or non-granting of that approval was itself a breach of the contract, on its proper construction, AMA's principal but conditional obligations under the HOA were not engaged, and could not be enforced by an order for specific performance.
28. The appeal must be allowed and the orders of the primary judge set aside.
29. In lieu thereof, the proceedings at first instance should be dismissed with costs.
30. Because of the shift in argument at first instance which appears to have contributed significantly to the primary judge's reasoning (see [62]-[63] above), I would only be inclined to award AMA 50% of its costs on appeal but would give the parties 7 days to file submissions of no more than 3 pages if they oppose such an order.
31. LEEMING JA: I agree with Bell P.
32. EMMETT AJA: This appeal is concerned with heads of agreement signed on 31 October 2019 (the Heads of Agreement) by ASSK Investments Pty Limited (the Vendor), AMA Group Limited (the Purchaser) and Mr AA Kalloghlian (the Covenantor). The Heads of Agreement related to the sale of the Vendor's smash repairs businesses (the Business) to the Purchaser. On 18 December 2020, a judge of the Equity Division sitting in the Commercial List (the primary judge) made orders (the Orders) in proceedings brought in the Commercial List of the Equity Division by the Vendor.
33. By the Orders, the primary judge ordered that the Heads of Agreement be specifically performed and carried into execution, that the Vendor and the Purchaser complete the sale of "the businesses" and "assets" described in the Heads of Agreement at the price and on the terms set out in the Heads of Agreement and that the sale be completed by the Vendor and the Purchaser no later than 5 February 2021 or such other date as the parties agree to. His Honour also ordered that the Vendor and the Purchaser perform in a timely fashion all acts and execute all documents necessary to comply with those orders. By notice of appeal filed on 25 January 2021, the Purchaser appeals from the Orders.
34. It was not in dispute before the primary judge that the Heads of Agreement constituted a binding contract. The question was what it bound the parties to do. The Purchaser's position was that the Heads of Agreement did not bind it to buy and was not a contract for the sale of the Business. Rather, it argued, the sale of the Business was to be effected by the Business Sale Agreements referred to in the Heads of Agreement. The Purchaser contended that the coming into effect of the Business Sale Agreements was subject to certain conditions precedent, including a condition that all necessary third party consents, authorisations and approvals be obtained, including "the Purchaser's Board approval", as referred to in Item 7(b).
35. The primary judge considered that the Purchaser's characterisation of the Heads of Agreement was inaccurate and that it constituted far more than an agreement for the provision of information, coupled with an option in its favour, as the Purchaser contended. His Honour considered that the object that the Heads of Agreement was intended to secure was the sale and purchase of the Business, not the gathering of information by the Purchaser to enable it to make a decision. In any event, his Honour concluded, Item 7(b) incorporated the word "necessary" and further approval by the Purchaser's board of directors (the Board) was not "necessary", since the Purchaser had committed itself to the transaction by a director and company secretary with the authority of the directors.
36. In its notice of appeal, the Purchaser raises grounds that may be restated as follows: (i) The primary judge erred in finding that: ● the object of the Heads of Agreement was to secure the sale and purchase of the Business and ought to have found that the sale of the Business was to be secured by the Business Sale Agreements; ● the requirement for the parties to enter into the Business Sale Agreements was not a condition precedent for a binding sale of the Business; ● the requirement for the Purchaser to obtain its Board approval was not a condition precedent for a binding sale of the Business; ● the Purchaser was not permitted to terminate and not complete the sale if dissatisfied with the outcome of its inquiries as part of the due diligence process; and ● the Purchaser's signature of the Heads of Agreement constituted approval by its Board for the purchase of the Business; (ii) It was not open to the primary judge to decree specific performance in circumstances where: ● the Heads of Agreement had been validly terminated by the Purchaser on or about 10 January 2020; ● the Heads of Agreement was not sufficiently certain to form the basis of a grant of specific performance; ● entry into the Business Sale Agreement was a condition precedent to a binding sale of the Business; ● the Purchaser's Board's approval was a condition precedent into a binding sale of the Business; ● the Heads of Agreement requires the performance of services by the Vendor's director in favour of the Purchaser or alternatively would require continual co-operation between the Vendor's director and the Purchaser.
37. Clearly enough, the parties contemplated that further instruments would be brought into existence. On one view, it did no more than require them to enter into the "Business Sale Agreements". Since there were no such agreements in existence, it is at least arguable that the obligation imposed was to act reasonably in the formation of those agreements. In that case, it may be that any order for specific performance should be limited to requiring the parties to perform that obligation.
38. However, the Purchaser informed the Vendor that it did not propose to proceed further with the proposed transaction since the condition precedent, consisting of approval by its Board, would not be satisfied. The primary judge concluded that the condition precedent was in fact satisfied. However, his Honour's conclusion that any such condition precedent had been satisfied by the signature of the Heads of Agreement ignores the fact that the obligation of the parties to the Heads of Agreement was to enter into the proposed Business Sale Agreements. The approval of the Board was a condition precedent to the performance of that obligation.
39. I have had the advantage of reading in draft form the reasons of Bell P for concluding that the appeal should be allowed. I agree with the orders proposed by his Honour for the reasons given. AMA Group Limited v ASSK Investments Pty Limited - Appendix for judgment (1214980, pdf)

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