Souter v Shyamba Pty Ltd

1 The Plaintiff ("Mr Souter") seeks specific performance of what he says is an informal but binding contract with the Defendant ("Shyamba") made on 1 May 2002 for the sale of land at 1 Market Street, Merimbula, and the hotel and motel business conducted thereon by Shyamba under the name "Lakeview Hotel Motel". I will refer to the land and the business compendiously as "the Hotel". Shyamba says that there is no legally binding contract for sale in existence. 2 The issues may be summarised thus:

• whether, as the Plaintiff contends, the parties intended that the document dated 1 May 2002 would constitute a presently binding contract for sale, although they expected and intended that a further formal contract would come into existence which, by agreement, might contain additional terms (i.e. whether the contract is an informal contract within the so-called fourth class in Masters v Cameron : see Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310, at 217), or whether, as Shyamba contends, the parties agreed only to the price of the Hotel, intending that no binding contract would come into existence until the exchange of formal contracts which had been prepared and approved by their solicitors;

• whether, as Shyamba submits, the terms of the document of 1 May 2002 were left so incomplete that even if there was a common intention to create a presently binding contract, that intention miscarried. The facts

3 The essential facts leading up to the execution of the document of 1 May 2002 are not in dispute and may be summarised thus. 4 On 8 October 2001, Mr Souter wrote to Shyamba enquiring whether the Hotel was for sale. Shortly afterwards, Mr Bennett, one of Shyamba's two directors, phoned Mr Souter and told him that Shyamba would sell the Hotel for $3M. 5 Negotiations continued until 18 November 2001, when Mr Souter met Mr and Mrs Bennett and the other director of Shyamba, Mr Morabito, in Merimbula. The parties shook hands on an agreement to sell the Hotel to Mr Souter. Shortly afterwards, it appeared that there had been a misunderstanding as to the price. Shyamba thought that the price was $2.5M, whereas Mr Souter thought that the price was $2.4M. 6 The parties resumed negotiations. On 23 November 2001, Mr Souter offered $2.45M, "subject to contract" . The parties then discussed other terms and matters, such as the Council's consent to certain proposed improvements and building inspections. On 5 December 2001 Mr Morabito, on behalf of Shyamba, wrote to Mr Souter saying that Shyamba would not proceed with the sale. On the same day, Mr Souter wrote urging Messrs Bennett and Morabito to change their minds. 7 On 6 December 2001, Mr Morabito wrote to Mr Souter giving his account of what had happened so far. He suggested that the handshake agreement made between the parties on 18 November had not gone off because Shyamba had changed its mind, as Mr Souter seemed to suggest, but rather because Mr Souter had misunderstood what was agreed. He then offered, on behalf of Shyamba, to sell the Hotel for $2.5M. 8 On 5 December, Mr Souter wrote to Shyamba offering $2.45M. As to the contract being conditional on obtaining a development approval from the Council, Mr Souter said that he was prepared to forego that condition. There were further proposals in the letter concerning transitional matters and staff arrangements. The letter concluded: "Finally, forget a heads of agreement, as we effectively have one, and proceed directly to contract of sale with settlement on 1 March 2002 …". 9 On or about 7 December, Mr Souter wrote again, amplifying the terms outlined in his letter of 5 December and setting out fifteen conditions to which the sale would be subject. Amongst those conditions were that there be approved finance to complete the sale, that the liquor licence for the Hotel be transferred, and that the stock in trade be offered "for selective sale at cost …" . The letter concluded: "Hopefully we are now at the end of negotiations, if you wish to discuss any points please give me a call otherwise I think it is now time to hand over to the solicitors to sort it out". 10 By letter dated 9 December, Mr Bennett objected to a number of the conditions sought by Mr Souter, in particular the "subject to finance" condition. Mr Souter responded by letter dated 10 December, making some further suggestions. 11 On 11 December, Mr Bennett wrote complaining about Mr Souter's indecision and his attitude to conditions such as the "subject to finance" clause. He concluded: "In light of all the above and the sparring that's now emerging, we'll call it all off and remain friends" . Mr Souter responded immediately asking Shyamba to change its mind. 12 On 13 March 2002, the parties had a meeting at Lakes Entrance. The price for sale of the Hotel was agreed at $2.5M, with a settlement date set for 1 July 2002. A brief note of the agreement was made and signed by Mr Souter and by Mr Bennett on behalf of Shyamba. 13 On 19 March 2002, Mr Bennett sent a fax to Mr Souter enclosing a copy fax which he had sent to Shyamba's solicitors informing them that Shyamba was uncertain about proceeding with the sale and asking them to put all dealings "on hold until further contact" . 14 On 29 April 2002, Mr Souter telephoned Mr Bennett and re-opened negotiations. Mr Bennett said that the price for the Hotel was now $3M and was not negotiable. Mr Souter agreed to the price and asked for a document to be signed by the parties to record the agreement. 15 Mr Bennett then wrote out a document and faxed it to Mr Souter. The document was dated 1 May 2002 and it was signed by Mr Souter, Mr Bennett and Mr Morabito. The document is in the following terms: "Yinnar 3869 May 1st 2002 To Whom It May Concern

We the undersigned, Dennis Souter of 71 Camerons Road Queanbeyan, N.S.W. the purchaser; George Morabito and Barry John Bennett, of 2-4 Clarkes Road Lakes Entrance, Vic. and RMB 1130. Vaggs Road Yinnar, respectively, acting for the Vendor, Shyamba Pty Ltd of 2-4 Clarkes Rd Lakes Entrance Victoria, hereby agree as follows. -

The vendor agrees to sell and the purchaser agrees to buy the property situated at 1 Market Street Merimbula N.S.W. (the Lakeview Hotel Motel) together with the plant, equipment and furnishings etc. but excluding stock in hand, for the sum of three million dollars ($3.000.000.-)

This sale will become unconditional upon the purchaser paying the amount of one thousand dollars ($1,000.-) into the vendors bank account no. 06 3501 10202877, at the Commonwealth Bank in Bairnsdale Victoria.

The purchaser agrees to pay a further two hundred and ninety nine thousand dollars ($299.000.-) to the vendor's solicitor upon exchange of contracts, not later than June 16th 2002 and the balance two million, seven hundred thousand dollars. ($2.700.000.-) at settlement July 1st 2002 All payments are exclusive of G.S.T., if applicable.

Dennis Souter [signature] in the presence of [signature]

George Morabito [signature] in the presence of [signature]

Barry John Bennett [signature] in the presence of [signature] " 16 On 1 May 2002, Mr Souter paid $1,000 into the account specified in the document. Shyamba then contacted its solicitors to prepare formal contracts for exchange and discussions took place between the parties' solicitors as to various terms and conditions. 17 On 31 May 2002, Mr Bennett wrote to Mr Souter in these terms: "We've hit a hurdle in relation to this sale Dennis, a hurdle in the form of a huge "Gazzumpt". [sic]

I've spoken to my solicitors, both of them, and was genuinely hoping that they would advise me that we were bound by the agreement we all signed on May 1st. This wasn't the case, their advice being that the agreement didn't bind you and therefore cannot bind me. Their further advice is that the "Gazzumpt" is quite common in N.S.W., is within the law, and it would be stupid of me not to use it." Conclusions

18 The relevant principles of law are well settled and are not in dispute between the parties: they disagree only on the result which is to be arrived at when the principles are applied to the facts of the present case. 19 For present purposes, the relevant principles are contained in the following passage from the judgment of McHugh JA in G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, at 634: "An agreement for the sale of property at a specified price does not necessarily indicate a legally binding contract. The magnitude, subject matter, or complexities of the transaction may indicate that the agreement was a limited one not intended to have legal effect: Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310 at 316-317. In New South Wales, real estate is ordinarily sold by signing and exchanging contracts in the form approved by the Real Estate Institute and Law Society. Accordingly, even though the parties agree in writing that real estate is sold for a specified price, the presumption is that no binding contract exists until "contracts" are exchanged: Smith v Lush (1952) 52 SR (NSW) 207 at 212; 69 WN (NSW) 220 at 222; Allen v Carbone (1975) 132 CLR 528 at 533. The vendor contends that the proper conclusion to be drawn from the sale of land, buildings and equipment which constitute a hospital containing sixty-two beds is that the sale was to be the subject of a formal contract drawn up by lawyers.

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)." 20 In the present case, the terms of the document of 1 May 2002, seen in the light of the circumstances known to both parties in which the document came into existence, comfortably satisfy me that the document was intended by the parties to be an immediately binding contract for sale, although it was intended to be followed by a formal contract possibly containing further terms to be agreed. I am further satisfied that the terms of the document are capable of having contractual effect. My reasons for arriving at these conclusions are as follows. 21 First, the terms of the document themselves strongly indicate an intention that there be an immediately binding contract. The document is expressed in relatively formal and legalistic terms, although drawn by Mr Bennett who is, apparently, not a lawyer. The document carefully identifies the parties, describing them as "vendor" and "purchaser" ; it states that the parties "hereby agree as follows" ; it carefully identifies the subject matter of the sale being the Hotel land and the plant, equipment and furnishings - the addition "etc." is, in my opinion, a shorthand reference to other chattels ejusdem generis owned by the vendor and used in the conduct of the business; the document carefully excludes stock in hand, which was the subject of previous discussion; it states only one condition to "this sale" , namely, the payment of $1,000; it states a date for settlement; it is signed by all parties, provision is made for the signatures to be witnessed and all of the signatures are, in fact, witnessed. 22 It is clear, therefore, that both sides to the transaction have taken considerable care to ensure that the perceived formalities requisite for an important legal document have been observed. 23 Second, there is no reference in the document to the sale being "subject to contract" or "subject to finance" , although these conditions were previously discussed in negotiations between the parties. 24 Third, despite the natural presumption that parties to a transaction of this size would expect the transaction to become binding only upon exchange of formal contracts prepared by solicitors, the prior course of dealing between the parties, in my opinion, rebuts that presumption. That course of dealing indicates that on 1 May 2002 both sides to the transaction wished to put an end to the 'to-ing and fro-ing' which had been taking place since November 2001, and wished to secure a firm and binding commitment to the transaction on which neither party could renege. Impatience and frustration at the lack of finality can be seen on both sides of the transaction: Mr Souter thought that Shyamba had reneged on the handshake agreement of 18 November 2001, and he was clearly chagrined at Shyamba's changes of mind on 5 December 2001 and 19 March 2002. On the other hand, Mr Bennett was clearly impatient at what he saw as Mr Souter's changes of mind and his imposition of unnecessary conditions: see especially Mr Bennett's letter of 11 December 2001. 25 In my opinion, it is clear that each side wanted the 1 May document to put an end to the other side's perceived manoeuvring. However, that end could only be achieved if an agreement was made which was immediately legally binding. 26 Fourth, the parties had already had advice from their solicitors. They knew that there were additional matters which could be incorporated into a subsequent formal contract, if agreement on those matters were reached. But the 1 May document contains the essential terms of the transaction, namely, the parties, the property, the price and the promises. From those essential terms all other essential matters would necessarily follow by implication. What did not follow by necessary implication and could not be agreed later for incorporation into a formal contract would simply remain at the risk of the relevant party. 27 In arriving at this conclusion, I have given careful consideration to the cogent submissions of Mr Officer QC and Mr Hennessy of Counsel, who appear for Shyamba. I shall deal with those submissions as briefly as I may without disrespect to Counsel. 28 Mr Officer's fundamental point is that when one looks at the history of negotiations between the parties and sees that the 1 May document failed to deal with so many matters previously discussed between the parties but not decided, one must come to the conclusion that the parties intended to give each other only a firm commitment about price, but did not otherwise intend that there be any binding contract. He instances a number of matters with which I will now deal. 29 Mr Officer refers to the fact that no provision is made in the document for a transfer of a business name for a restaurant conducted in the Hotel. He conceded that this was not an essential matter to the sale, but said that it was one of a number of 'loose ends'. I do not think that this matter has any real significance. There is nothing in the evidence to suggest that if the transfer of the restaurant business name was not effected, Mr Souter would not have proceeded. 30 Mr Officer draws attention to the fact that the 1 May document does not apportion the price as between plant and equipment on the one hand and goodwill on the other. However, although lack of apportionment may have tax consequences for the parties, it does not prevent a sale from being implemented. 31 Mr Officer relies on the fact that the 1 May document does not provide for the transfer of the Hotel licence to Mr Souter or his nominee. He concedes, however, that the sale of a hotel business must carry with it a necessarily implied term that the vendor must do all things necessary to procure transfer of the relevant liquor licences to the purchaser. I do not think that this point has any substance. 32 Mr Officer draws attention to the absence of agreement in the document as to the sale of stock, particularly in light of the fact that the parties had previously discussed this matter. In my view, stock was expressly excluded from the sale in the 1 May document precisely because the parties did not wish absence of agreement upon that point to prevent a binding contract from coming into existence. 33 Mr Officer refers to a number of other matters raised by the parties' solicitors in their attempts to draft a formal contract after 1 May but before 31 May 2002. None of these matters is so important to the sale of the land and the business of the Hotel that one could conclude that neither party would wish to be bound until those matters had been agreed. 34 In short, I am unable to see anything in the 'loose ends' to which Mr Officer refers which detracts from my very clear impression, derived from the terms of the 1 May document and from the previous history of negotiations, that both sides to the transaction intended to conclude an immediately binding contract for sale and that all conditions other than price and the subject matter of the sale were regarded as non-essential, so that if they were not necessarily implied to give business efficacy to the contract and if they could not later be agreed and incorporated into a formal contract, then the consequences would lie where they fell. 35 Accordingly, I find that the 1 May 2002 document constituted a binding contract for sale of the Hotel and its plant, furnishings and equipment upon the terms set out in the document. I note that there is no issue as to Mr Souter's readiness, willingness and ability to complete the contract. The Plaintiff is, therefore, entitled to an order for specific performance of that contract. Orders

36 There will be orders in terms of paragraphs 1, 2, 4, 5 and 6 of the Plaintiff's proposed Short Minutes of Order. I will now hear argument as to costs.

Last Modified: 10/10/2002 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.