Michael Lahodiuk v Vincent Pace and Prid Pty Ltd

Factual background and parties' assertions 4The factual background surrounding the Heads of Agreement and the events following it are largely uncontroversial. In his affidavit dated 12 April 2013, the First Defendant describes that the mediation on 11 October 2012 which gave rise to the Heads of Agreement commenced at about 2:00pm and ended late in the afternoon when the First Defendant finally agreed to sell to the Plaintiff the factory, plant and equipment, business name, signage and telephone number of Straightline Auto Repairs for $245,000. 5The parties' legal representatives present at the mediation, who included the Plaintiff's solicitor and counsel, drafted and then showed to the parties the Heads of Agreement. The First Defendant alleges that the Heads of Agreement reflects what he understood the parties had agreed to. In his affidavit dated 1 May 2013, the Plaintiff "admit[s] that on 11 October 2012 [he] signed the [Heads of Agreement]" and does not assert that its terms do not reflect the agreement reached by the parties at the mediation. 6On 12 October 2012, Mr Studdert sent an email to the court and to counsel for each of the parties advising that the matter had settled, that formal consent orders would follow, and that he had vacated the listing for final hearing. 7It is clear from the terms of the Heads of Agreement and from the nature of the property to be conveyed to the Plaintiff that the parties contemplated further documentation would be necessary leading up to settlement to give effect to their agreement. Accordingly, from about 17 October 2012 to mid-December 2012, the parties' legal representatives drafted and negotiated a standard lease in respect of the business premises and a deed of release formalising the handwritten Heads of Agreement reached at the conclusion of the mediation. A list of inventory was also sent from the Defendants' solicitors to the Plaintiff's solicitors on 11 December 2012. 8There did not appear to me on the evidence to be any dispute between the parties as to the terms of the documentation prepared to give effect to the settlement. The Plaintiff's reluctance to settle appears to have first been communicated by his solicitors to the Defendants' solicitors by a letter dated 18 December 2012. In that letter, the Plaintiff asserted that he had inspected the factory that day and found the retractable air hoses and fans which were fixed to the wall and the loan cars to be missing. He also alleges that his inspection revealed that the "auto robots" had not been serviced and were therefore incapable of being used, that two of the three welders were not working and in need of repair, and that a utility vehicle owned by the Plaintiff had its tray removed and replaced with one of inferior quality. The Plaintiff also alleges that the factory was "generally in a dirty and untidy state" and was still occupied by the Defendants. 9On 21 December 2012, the Defendants responded generally addressing each of the concerns raised by the Plaintiff. They advised that the factory was no longer occupied and had been cleaned, that the retractable air hoses had not been working for four years and had been discarded three years ago, that there was only ever one fan fixed to the wall and two fans standing (all of which would be remaining in the factory), that the loan cars were privately owned and not registered in Straightline's name, that the auto robots were in working condition, that two welders had already not been working for a significant period of time, and that the utility tray was taken pursuant to a prior arrangement. 10The next item of correspondence appears to be a letter sent from the Plaintiff's solicitors to the Defendants' solicitors dated 22 January 2013, proposing to pay to the Defendants the sum of $200,000 instead of the initially agreed amount of $245,000 as a result of the allegedly poor condition of the business. The Defendants' solicitors rejected this proposal by correspondence dated 30 January 2013, and advised the Plaintiff in a further letter dated 1 March 2013, that their clients would be seeking to specifically enforce the Heads of Agreement. 11The Second Defendant alleges that following the mediation he took a number of steps in anticipation of settlement, including providing notice to the First Defendant's employees that their employment with the First Defendant would cease from the date of settlement, paying out the First Defendant's employees' annual leave entitlements, applying to the Australian Securities and Investments Commission to transfer the business name to the Plaintiff, preparing the relevant contract for the sale of the relevant plant and equipment, and preparing a transfer of lease and the relevant transfer of title documents. In doing so, the Second Defendant says he incurred preparation costs of about $4,072, and that the cost incurred for running the business from the date on which the settlement was to take place (i.e. 31 December 2012) to 25 March 2013 was $3,066 in January 2013, $3,922 in February 2013 and $3,739 in March 2013. He therefore alleges his total loss amounts to $14,799. 12In his affidavit, the Plaintiff says, in addition to his allegations about the run-down state of the business, that at the time he had entered into the Heads of Agreement, he was "feeling depressed and generally unwell" as a result of "the breakdown of [his] marriage and ongoing family law proceedings in respect of a property settlement" and that he was also affected by proceedings he was involved in against the State of New South Wales arising from a prior police arrest. The Plaintiff attached to his affidavit a letter from a psychologist, Helen Thompson, dated 31 March 2012, which indicated that as at January 2009, the Plaintiff "was suffering depression and significantly increased stress and anxiety with scores placing him in the severe range". The most recent reference to the Plaintiff's state in that letter appears to be 7 January 2010, where Ms Thompson says "Mr Lahodiuk has done well to rise above his circumstances to the point where he now functions more effectively on a day to day basis".

Legal principles and application 13The legal principles relevant to determining whether or not the Heads of Agreement is binding are well established and have been summarised in a number of cases. Whether or not the parties here intended the agreement to be immediately binding is to be determined objectively having regard to the language contained in the Heads of Agreement. The High Court has repeatedly affirmed this proposition (Allen v Carbone (1975) 132 CLR 528; Taylor v Johnson (1983) 151 CLR 422; Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Byrnes & Anor v Kendle (2011) 243 CLR 253). 14The Heads of Agreement must of course be read in the light of the surrounding circumstances. The High Court in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 said (at 462): The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean. That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction. In Codelfa Constructions Pty Ltd v State Rail Authority of NSW, Mason J set out with evident approval the statement of Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen: "In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating." 15In International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151, the High Court remarked (at 160): In giving a commercial contract a businesslike interpretation, it is necessary to consider the language used by the parties, the circumstances addressed by the contract, and the objects which it is intended to secure. An appreciation of the commercial purpose of a contract calls for a understanding of the genesis of the transaction, the background, and the market. This is a case in which the Court's general understanding of background and purpose is supplemented by specific information as to the genesis of the transaction. The Agreement has a history; and that history is part of the context in which the contract takes its meaning. 16As the authors point out in Lewison and Hughes, The Interpretation of Contracts in Australia (2012) at p118: ...the relevant background consists of facts that were actually known to both (or all) parties to the contract, or that are sufficiently notorious that it can be presumed they were so known. Facts which were known to only one of them will not be relevant. Nor is it sufficient to prove that facts were reasonably available, without demonstrating that their availability should lead to an inference being drawn that they were in fact known by both parties. It is, of course, the case that facts which were not known to either party at the date of the contract are not relevant to the construction of the contract, for if the facts were unknown they cannot have played any part in forming the presumed intention which is embodied in the contract. However, where a fact is known to one party and not to the other, in theory it may well have played a part in forming the intention of the party who knew that fact. However, unless a fact is known to both parties, it will not be admitted in evidence, because the court is seeking not the actual intention of one party to the contract, but the presumed mutual intention of both of them. 17Story puts it as follows in A Treatise on the Law of Contracts Not Under Seal (at page 148): In as much as every contract derives its force from the mutual assent of the parties thereto, to certain terms, it becomes necessary, not only to interpret those terms, in order to ascertain the intention of the parties in entering into the agreement, but also, so to construe them, as to give a legal operation to such intention. The collection of such intention, by inferences from stated terms, or from actual circumstances, or both, is the office of interpretation. The adjustment of such intention to paramount law, is the office of construction. 18If 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). A relevant consideration in relation to the parties being immediately bound may be that the agreement was reached in the context of a mediation on relation to outstanding litigation (Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd (1995) 7 BPR 14,551 at 14,570-14,571). 19As McHugh JA said in G R Securities Pty Limited v Baulkham Hills Private Hospital Pty Limited (1986) 40 NSWLR 631 (at 634): However, the decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances: Godecke v Kirwan (1973) 129 CLR 629 at 638; Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 332-334, 337. If the terms of a document indicate that the parties intended to be bound immediately, effect must be given to that intention irrespective of the subject matter, magnitude or complexity of the transaction. Even when a document recording the terms of the parties' agreement specifically refers to the execution of a formal contract, the parties may be immediately bound. Upon the proper construction of the document, it may sufficiently appear that "the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms": Sinclair, Scott & Co Ltd v Naughton (at 317). 20McHugh J A also said (at 635-636): Under the agreement each party was obliged to do all that was necessary on his part to enable the other party to have the benefit of the agreement concluded by the correspondence: Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607. This included doing everything necessary to enable contracts to be exchanged by 18 April 1986: Godecke v Kirwan (at 641). If the parties agreed on additional terms, they would be added to the formal contract. If they did not, the formal contract would give effect only to the agreed terms and conditions of the correspondence. The case, therefore, is one where the parties were bound by the informal agreement but expected to make a further contract which by consent might contain additional terms: Sinclair, Scott & Co Ltd v Naughton (at 317). 21As Walsh J (with whom Mason J agreed) had earlier pointed out in Godecke v Kirwan (1973) 129 CLR 629 (at 639), an agreement which obliges a subsequent agreement to be entered into may contain covenants for example in the new agreement not included in the original contract. In expressing his agreement with the South Australian decision of Bray CJ in Powell v Jones [1968] SASR 394, Walsh J accepted that there was no reason in principle for holding that there cannot be a binding contract even if some matter is left to be determined by one of the contracting parties. His Honour took the view that because he was there looking at a clause which permitted the insertion of covenants and conditions (not inconsistent with those contained in the offer), he thought any new terms should also be limited by reference to the reasonableness of requiring the inclusion of those covenants and conditions. He thought that the clause meant that what was required must be reasonable in an objective sense and in the event that there was a dispute it was always a matter for a court to decide. 22The document signed by the parties was described as a "Heads of Agreement", which is itself an indication that the parties purported to enter into an agreement (A W Ellis Engineering Pty Limited and Ors v Malago Pty Limited and Ors [2012] NSWSC 55 at [116]). The language used in the Heads of Agreement was drafted by or under the supervision of legal practitioners acting for both sides after lengthy negotiations and consideration. The specificity of the language used also suggests the parties intended to be bound. For example, the Plaintiff is obliged to pay a certain sum ($245,000), by a specific date (31 December 2012), for a specified acquisition (plant and equipment and office equipment "used in the business", the telephone number, the business name and the remaining interest in the factory). The final clause above the parties' signatures is significant, and provides that the Heads of Agreement is in "complete settlement" of the proceedings inclusive of costs. The proceedings are identified by a court-provided case number at the top of the page. 23It is true that the parties clearly contemplated that further documents would be necessary to effect completion. However, as noted in the authorities, this of itself does not detract from the immediately binding effect of the Heads of Agreement. This is this not a case where entry into the contract is said to be as a result of any oral or written misrepresentation made at the mediation (Phiga Pty Ltd and Others v Roche and Others (2011) 278 ALR 209). 24There is clearly a factual dispute between the parties as to the state of the business and its equipment as sold, but again, this does not go to the existence of the contract. The Plaintiff's decision not to inspect the premises or to obtain an inventory list prior to entering into the agreement was perhaps a deficiency in the due diligence process that would normally be undertaken prior to entry into an agreement to acquire a business. Alternatively, the Plaintiff could have managed that risk by including a term in the Heads of Agreement making the settlement conditional on a satisfactory outcome of its due diligence process to be conducted after entry into the agreement. The factual dispute as to the state of the equipment used in the business does not of itself affect the validity of the agreement. The factual dispute may, depending on the evidence, ultimately be one which gives rise to other remedies for the Plaintiff, but I am obviously not in a position to comment on this, nor again is it relevant to the issue before me. 25The Plaintiff's emotional condition or state of mind, as described in the psychologist report attached to his affidavit, certainly does not go as far as to vitiate the contract, and in any event, the relevance of the report is doubtful as it mainly relates to a period of time well before the Plaintiff signed the Heads of Agreement. 26Having reviewed the Heads of Agreement and the relevant authorities it seems to me to be clear that Heads of Agreement is indeed binding on the Plaintiff and the Defendants. 27Accordingly, I would grant order for specific performance of the Heads of Agreement. I order that the Plaintiff pay the Defendants' costs of the notice of motion and separate determination. 28I would invite the parties to provide short minutes to give effect to this judgment.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 May 2013