The New South Wales Court of Appeal’s recent decision in Malago v AW Ellis Engineering has highlighted the need for parties to carefully consider the drafting of agreements they reach in the course of mediations.

A dispute arose between the Applicants and the Respondents in relation to a super yacht marina business at Rozelle Bay in Sydney. The Applicants held a 56% share of Sydney Super Yacht Marina Pty Ltd (SSM) and the Respondents held the remaining percentage.

In June 2010, SSM had agreed to purchase the marina business from the New South Wales Maritime Authority.

The Applicants and Respondents fell into dispute and ultimately held a mediation before Mr R J Ellicott QC. At the conclusion of the mediation, a Heads of Agreement was prepared by Mr Ellicott that provided for the Applicants to purchase the shares and units of the Respondents in SSM. Some attempt was made following the mediation by the parties to agree to terms of a more formal document giving effect to the Heads of Agreement but before agreement could be reached, the Applicants withdrew from the negotiations. Proceedings were then commenced by the Respondents seeking a declaration that a binding Agreement for Sale existed, an order for specific performance of the Heads of Agreement and damages.

At first instance, Justice Sackar found the Heads of Agreement were binding and ordered, by way of specific performance, that the parties enter into a Deed which contained terms, including terms contained in various drafts of the Deed which passed between the solicitors for the parties.

It was contended by the Applicants in the Court of Appeal that the Heads of Agreement had not intended to be legally binding or alternatively, were void for uncertainty or incompleteness.

One of the terms of the Heads of Agreement contained the following words:

“Without affecting the binding nature of these Heads of Agreement, the parties within seven days to execute a formal document or documents as agreed between their respective solicitors to carry out and express in more formal terms and additional terms as these Heads of Agreement”.

The primary Judge and the Court of Appeal each agreed that those words were decisive in revealing the parties’ intent to be bound by the Heads of Agreement. The Court of Appeal noted that the Heads of Agreement did not use the words “in principle” in relation to the agreement and therefore, upon proper construction of the Heads of Agreement, the parties were bound immediately by the terms.

It was also contended by the Applicants that the Heads of Agreement were void because SSM and a related trustee company and the New South Wales Maritime Authority were not parties to them. The Court of Appeal dismissed that contention because it was not necessary for those parties to be a party to the Heads of Agreement, as shares in SSM and its related company were able to be sold without their involvement and the absence of the New South Wales Maritime Authorities’ consent did not render void the agreement to transfer the shares.

The Applicants also attacked a number of clauses in the Heads of Agreement as being void for uncertainty. The Court of Appeal noted that as long as the terms were not completely devoid of meaning, ambiguous provisions are valid and bear such meaning as the Court attaches to them after due consideration. As the Court was able to resolve ambiguity, the terms were not void for uncertainty.

There was then a question as to whether the orders made by the Trial Judge for specific performance of a Deed containing terms included in post Heads of Agreement negotiations as reflected in further drafts of Deed was appropriate.

MacFarlan JA in the Court of Appeal considered that the post-Heads of Agreement negotiations did not result in any binding agreements concerning particular clauses which were to be included in the Deed. His Honour considered that in the absence of agreement between the parties on the drafts of the formal Deed, an order should be made that the parties enter into a formal agreement containing terms to the same effect as those in the Heads of Agreement and provisions of a mechanical nature implementing that agreement. The Court then ordered that the parties execute a formal agreement in the form set out in an attachment to the Judgment.

The decision serves as a useful warning to parties when entering into Heads of Agreement at mediations or other settlement conferences to be precise with the language that is used in any agreement. If only an ‘in principle’ agreement has been reached, the Heads of Agreement must properly reflect that by careful drafting. If the Heads of Agreement are intended to be binding, that must be explicit.