A recent decision of the Supreme Court of Victoria - Court of Appeal provides guidance on when a deed may be binding even when not executed by a party, and how the subsequent conduct of the party may be taken as evidence that it was in fact a party. The case also illustrates when a heads of agreement in relation to the sale of shares will merely be an ‘agreement to agree’ the terms of the sale rather than an immediately enforceable agreement for the sale of the shares.
The case concerned a document entitled “Binding Heads of Agreement” (HOA) which set out the parties’ intention to enter into a share sale agreement for the purchase by Anyoption Holdings Limited (Anyoption) from Nurisvan Investment Ltd (Nurisvan) of the shares in FIBO Australia Pty Ltd (FIBO). The HOA, which was in the form of a deed, was executed by Anyoption and FIBO. Nurisvan was named as a party to the HOA but did not execute it (and there was no execution clause for it).
After lengthy negotiations about the terms of the share sale agreement, Nurisvan advised that it did not regard itself as bound by any agreement with Anyoption, and did not accept that there was any obligation to comply with the HOA.
Was the HOA a binding deed or contract?
In finding that the HOA was a binding contract despite not being executed by Nurisvan, the Court held that:
- in an appropriate commercial context, a deed which is intended to be executed but is not executed by each party, can operate as a binding contract if the non-executing party otherwise binds itself to it; and
- a deposit paid by Nurisvan for the obligations assumed under the HOA constituted adequate consideration.
In considering whether Nurisvan was a party to the HOA (and was the therefore bound by it) even though it did not execute it, the Court held that the question must be determined objectively by an evaluation of the contractual document and the circumstances in which it was executed (specifically whether it might be implied from the terms of the HOA that Nurisvan intended to be a party and to be bound by it). In this regard, the Court affirmed that evidence of post-contractual conduct is admissible in determining whether a contract was in fact formed (but not in construing a contract), but found no settled view on whether post-contractual conduct may be relied on to found or support an inference as to the identity of a party. However, the Court pointed to examples in previous cases where post-contractual conduct by an alleged party to a contract was regarded as an admission by it that it was a party, and ultimately found that the trial judge was correct to take into account the post-contractual conduct of the parties to determine whether Nurisvan was in fact a party to the HOA.
The Court then pointed to the following to support a finding that Nurisvan was a party to the HOA:
- Nurisvan was plainly a necessary party to any contract to sell its shares in FIBO;
- the HOA noted Nurisvan as the vendor and set out the rights and obligations of Anyoption as purchaser and Nurisvan as vendor (and it was necessary for Nurisvan to be a party to give the HOA any business efficacy at all);
- the fact that no sale of the shares in FIBO could possibly take place without Nurisvan’s agreement gave rise to a ‘strong inference’ that Nurisvan agreed to be bound by the HOA; and
- email correspondence between Nurisvan and Anyoption during negotiation of the share sale agreement made it plain that Nurisvan accepted that it was a party to the HOA.
Was the HOA an enforceable contract for the sale of shares?
Despite the Court’s finding that the HOA was a binding contract (notwithstanding not being executed by Nurisvan), the Court ultimately found for Nurisvan that the HOA was merely a contract to negotiate in good faith with respect to entering into a share sale agreement (i.e an ‘agreement to agree’ within the third category of cases in Masters v Cameron) and was not an immediately binding contract for the sale of the shares.
In so finding, the Court considered:
- the language of the HOA (e.g. references to the parties wishing to ‘manifest their intention’ (rather than their ‘agreement’) to sell the shares and the parties’ ‘respective bona fide intention’ to enter into a share sale agreement);
- that some of the clauses in the HOA would be unnecessary if the HOA constituted a contract to enter into a share sale agreement (e.g. clause 4 which prevented the parties from negotiating with third parties while the sale agreement was being negotiated); and
- the extent of the terms that were left for future negotiation (which was very apparent when the HOA was compared with the ninth draft of the share sale agreement).