Formation of contract - general principles
87 Telstra/News submit that there was a concluded and legally binding contract in existence before 13 September 1996 giving FOXTEL exclusive rights to access Telstra Multimedia's broadcasting systems. They submit that such a contract arose by virtue of the 23 October letter incorporating the July 1995 BCA. They argue that the parties had agreed on the terms by which FOXTEL would be given access to the broadband network. Although no BCA was finally executed until 14 April 1997, this later BCA is said to be no more than a formal restatement of the October Letter Agreement.
88 Seven submits that the 23 October letter incorporating the July 1995 BCA does not create contractual obligations that establish the rights claimed by News and Telstra. It submits that the parties remained in a state of negotiation as at that date and had not reached agreement on essential terms of the arrangement.
89 A useful starting point in determining whether parties engaged in negotiations have concluded a contract is the statement of the Court in Masters v Cameron (1954) 91 CLR 353 at 360-361, where it said:
"Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. It may be one in which the parties have reached finality in arranging all the terms of the bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.
In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal agreement comes into existence or not, and to join (if they have so agreed) in settling and executing the formal documents; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution. Of these two cases the first is the more common. …
Cases of the third class are fundamentally different. They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own: … The parties may have so provided either because they have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document, … or simply because they wish to reserve to themselves right to withdraw at any time until the formal document is signed. These possibilities were both referred to in Rossiter v Miller . Lord O'Hagan said: 'Undoubtedly, if any prospective contract, involving the possibility of new terms, or the modification of those already discussed, remains to be adopted, matters must be taken to be still in a train of negotiation, and a dissatisfied party may refuse to proceed. But when an agreement embracing all the particulars essential for finality and completeness, even though it may be desired to reduce it to shape by a solicitor, is such that those particulars must remain unchanged, it is not, in my mind, less coercive because of the technical formality which remains to be made.'…" (Emphasis added)
90 It is useful to keep in mind the opening remarks of the Court in that case which make it clear that the above principles apply where the parties have in fact reached agreement upon terms of a contractual nature. For there to be a binding contract the references to reaching "finality in arranging all the terms of the bargain" and to the parties having "completely agreed upon all the terms of their bargain" are important.
91 In the present case, Telstra and News contend that the October Letter Agreement falls within the first class in Masters v Cameron . They submit that the parties reached finality in arranging the terms of their bargain, particularly with respect to exclusivity, and intended to be immediately bound to perform those terms, although both parties proposed to have their agreement restated in a long form BCA which might be fuller or more precise but not different in effect. In support of this submission, they emphasise that on the date of the letter, FOXTEL commenced operations and Telstra Multimedia was to commence performance of its services.
92 The relevant principles as to formation of contract were also considered in Australian Broadcasting Commission v XIVth Commonwealth Games (1988) 18 NSWLR 540 at 549-550 where Gleeson CJ (with whom Hope and Mahoney JJA agreed) said:
"This is not a case in which the parties have signed a single document which, because it contains some such expression as 'subject to contract', gives rise to the problem in question. … The case involves the objective determination of the intention of the parties from a consideration of a series of communications exchanged by them in the context of their dealings over a period of time. In those circumstances it is both appropriate and necessary to have regard to the commercial circumstances surrounding the exchange of communications and, in particular to the subject matter of those communications: … Furthermore, … it is proper to have regard to communications between the parties subsequent to the date of the alleged contract to the extent that those communications throw light upon the meaning of the language which is being considered for the purpose of determining whether it expresses an intention one way or the other upon the critical matter. At the least, such subsequent communications will often form part of the context in which the particular exchanges in question are to be evaluated." (Emphasis added)
93 His Honour said at 548:
"In a case where a court is required to make a judgment concerning the intention of the parties in relation to what might broadly be described as a Masters v Cameron … dispute, it will normally be of importance that the court have an understanding of the commercial context in which the dispute arises, and a most significant feature of that context will relate to the subject which the parties regard, or would ordinarily be expected to regard, as matters to be covered by their contract. In some cases, such as transactions involving the sale and purchase of land, or leases, courts may properly feel well equipped to form a view on such matters without the need for much evidence. In many cases, however, of which the present is a good example, there is a need for evidence in one form or another as to what subjects would be regarded as requiring agreement between the parties. In this case the best evidence on that subject is to be found in the actual communications between the parties and, in particular, in the issues which they in fact address when they set about drafting their detailed contract." (Emphasis added)
94 The question of whether it was the intention of the parties to make a concluded bargain is not the same as a question of whether the parties had reached agreement upon such terms as are, in the circumstances, legally necessary to constitute a contract: Australian Broadcasting Commission v XIVth Commonwealth Games at 548. See also Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 326, per Mahoney JA; and Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1980) 5 CLR 647 at 650, per Higgins J. Should a court be satisfied as to the intention of the parties to enter into a contract, the approach which a court will generally take in determining the existence of a binding contract, in the context of commercial circumstances and party communications, is conveniently summarised by Williams J in York Air Conditioning and Refrigeration (A/sia) Pty Ltd v The Commonwealth (1949) 80 CLR 11 at 26-27 as follows:
"In Scammell and Nephew Ltd v Ouston Lord Wright said ' the object of the court is to do justice between the parties, and 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 …it is a necessary requirement that an agreement in order to be binding must be sufficiently definite to enable the court to give it a practical meaning. Its terms must be so definite, or capable of being made definite without further agreement of the parties, that the promises and performances to be rendered by each party are reasonably certain.' In Hillas & Co Ltd v Arcos Ltd Lord Tomlin, referring to the words 'of fair specification' said 'that is something which if the parties fail to agree can be ascertained just as much as the fair value of a property.'…. After all, the parties being businessmen ought to be left to decide what degree of precision it is essential to express in their contracts, if no legal principle is violated.' In the present case it is clear that the parties believed they had made a concluded and enforceable contract and the provisions of the standard conditions are in my opinion sufficiently definite to enable the Court to give them a practical meaning. There is no objection to the parties agreeing that the ascertainment of some fact in the performance of the contract shall be a matter of 'estimation, approximation and apportionment'. A contract which states that the price is to be a reasonable price is a valid and enforceable contract.…"(Emphasis added, footnotes excluded)
95 It is important to note the emphasis in the above statements on the necessity to have an agreement on terms which are sufficiently definite or capable of being defined so as to enable the court to spell out the rights and obligations of the parties with reasonable certainty. In Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429, the meaning of the clauses in issue was found to be capable of being ascertained by the Court. However, this situation was contrasted with one in which there was more than mere uncertainty of meaning of a term of the contract that could be resolved by the Court. In this regard it is worth noting that the number and significance of the areas in respect of which parties have failed to agree will be of relevance to both questions of intention and of whether the parties have reached an agreement which is capable of forming a binding contract: Australian Broadcasting Commission v XIVth Commonwealth Games at 548.
96 The formation of a contract, in my view, involves more than a serial accumulation of separate and discrete agreed clauses. Consensus on several particular terms of an overall agreement normally will not give rise to a contract until all essential terms have been formulated and agreed upon. A contract is more than the sum of its parts considered separately, just as a melody is different from the individual notes, to adopt the well known statement of Learned Hand J in Helvering v Gregory 69 F 2d 809 at 810 (1934). A concluded contract is an end result of negotiations and one provision of the overall concluded contract may interact with and affect the meaning and operation of other agreed provisions. One consequence of this process is that in order to properly understand the meaning and operation of a particular provision it is essential to consider such provision in the context of all the terms contained in the overall concluded contract.
97 When parties are negotiating in order to arrive at a contract to govern their legal relations the process is often complex, especially in cases of detailed and wide ranging agreements intended to endure over many years. In the course of negotiations there will generally be a constant and ongoing process of adjustment and readjustment of the positions adopted by the parties on particular clauses. This process sometimes involves a series of mutual "trade-offs" whereby a concession is made by one party in respect of one provision in exchange for the giving of a concession by the other party in respect of a different provision. It will also involve compromise and adjustment so that it is often difficult to determine whether at any particular point of time prior to execution of a final agreement the parties have entered into contractual relations. Before a final contract is made it is also difficult to detach any particular provision from its context and say that a final agreement has been reached on that particular clause as a discrete agreement. In the present case, for example, unresolved negotiations as to other provisions of the BCA which do not directly relate to exclusivity, may lead to reconsideration of the position of the other party with respect to the exclusivity provision. One particular example which comes to mind is the duration of the agreement. This can effect the extent and impact of an exclusivity clause. Therefore where the parties remained in negotiation on conditions other than, say, bundling and exclusivity, such negotiations must be taken into account because they may impact upon the final decision of the parties with respect to those subject matters. When speaking of a contractual right, there is, of course, no such right until a binding contract is made.
98 In the present case the observations of Kirby P (with whom Waddell AJA agreed) in Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 20 as to commercial commitment are apposite namely:
"Parties in large commercially risky enterprises (such as the development of a coal mining lease) quite frequently incur expense and waste months of executive time paying consultants and others in a project that comes to nothing. This is an inescapable aspect of commercial negotiation. As even the heads of agreement indicate (and the final draft joint venture agreement confirms) the contract between the parties for a joint venture in the exploration of a coal mining lease had many complex and detailed incidents. Courts are not well equipped, drawing on their own experience, to fill out the detail of such contracts where the parties leave gaps in their own agreement. The fact that this may result in wasted time and money is a risk which parties to negotiation must always weigh up. Courts cannot enforce such agreements because they are incapable of judging where the negotiation on particular points would have taken the parties, acting bona fide but legitimately in their own interests."
See also Vroon BV v Fosters's Brewing Group Ltd [1994] 2 VR 32 at 72-74.
99 Such commercial complexity was also considered by the New South Wales Court of Appeal in GR Securities Pty Ltd v Baulkam Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, in respect of ascertaining the intention of the parties:
"The magnitude, subject matter, or complexities of the transactions may indicate that the agreement … was not intended to have legal effect: Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310 at 316-317."
100 However his Honour observed that the decisive issue is always the intention of the parties objectively ascertained from the terms of the document read in light of the surrounding circumstances. If these considerations indicate an intention to be bound immediately, effect must be given to that irrespective of the complexity or magnitude of the subject matter. This observation as to intention must, of course, be separated from the relevance of such matters in determining actual enforceability for reasons of certainty of intended contractual agreements.