Rilgar Nominees Pty Ltd v BHA Holdings Pty Ltd [2014] VSC 632 & [2015] VSC 6

Handshake agreement did not waive or vary requirement in Mediation Agreement for a signed settlement agreement

A mediation agreement contained a clause which provided that no settlement of the dispute will take place unless and until a settlement agreement has been signed. The mediation concerned a proceeding alleging oppression of a minority shareholder of BHA Holdings Pty Ltd (“BHA”) by reason of a proposed issue of shares in a company to existing shareholders. BHA was a party to the oppression proceeding but took no part in it, nor in the mediation. A director of BHA representing the minority shareholder company, and two other director/shareholders attended the mediation.

They reached agreement on certain terms which were written on a whiteboard. They stated that they agreed to the terms on the whiteboard and shook hands, took photographs of the whiteboard and agreed that formal documentation would be necessary.

A draft proposed agreement was subsequently prepared but rejected by BHA. The minority shareholder brought an application arguing that an agreement had been made at the mediation which settled the matters in dispute in the oppression proceeding. However Sifris J found that there was no such agreement reached at the mediation.

The case illustrates three important issues for mediators, parties and their representatives.

  1. Who must attend mediation and be a party to a settlement agreement?

The draft proposed agreement contained obligations on BHA including borrowing money, paying interest on the loan by way of increased directors fees, issuing of shares and granting an option of converting the loan into shares. However the Board of BHA was not represented at the mediation, and had not authorised the directors that attended to represent it. BHA was not a party to the agreement reached at the mediation. The Shareholders Deed relating to BHA provided that the Board must decide all matters relating to the affairs of the company that it does not specifically delegate to senior management of the company. By reason of this, Sifris J found that the principle of unanimous assent of shareholders as articulated in Duomatic[1] was of no application. The Board of BHA needed to consider the matter, and all directors were entitled to notice of a directors meeting and participate in discussions. The voting shareholders were not entitled to act unanimously, unilaterally and without regard to the board.

  1. “No settlement agreement unless signed” clause in Mediation Agreement

A handshake, verbal agreement will not settle the dispute where the Mediation Agreement signed by the parties contains a clause which states that there is no settlement of the dispute unless and until a settlement agreement has been signed.

Sifris J acknowledged that it is possible that parties could agree to waive such requirement or vary the Mediation Agreement orally or by conduct or be estopped from relying on such requirement. However, such inference was not proved by “clear and unequivocal conduct”, so full effect was given to the Mediation Agreement clause requiring a settlement agreement to be signed. Shaking hands and taking a photograph of the whiteboard was equivocal as it was also consistent with having reached an in principle agreement only.

  1. A Settlement Agreement must not be incomplete or void for uncertainty

The draft proposed agreement contained additional terms that, Sifris J found, had not been agreed to at the mediation, including definitions of terms used in the document, and a proposed share buy back transaction by BHA which the parties had not turned their minds to at the mediation, and which were matters of substance not form which required consideration and assent. This demonstrated that there had not been a complete and certain agreement reached at the mediation.

Lessons

Where a corporate entity is relevant to a dispute, regard should be had to whether it is a necessary party to a settlement agreement and if so, whether it is represented by a person with authority at the mediation.

Mediators, parties and their legal representatives should ensure that a Mediation Agreement contains a clause requiring any settlement agreement to be signed, as a safeguard against a dispute as to whether a settlement was reached. Such clause should be highlighted by the Mediator and observed by the parties at the mediation.

A settlement agreement drafted at mediation needs to include all necessary substantive provisions, including definitions and machinery provisions, for the agreement to be clear and complete and enforceable as a legally binding contract.