In Kriketos v Livschitz [2009] NSWCA 96, the New South Wales Court of Appeal recently reviewed the principles to be applied to determine the valid formation of a contract, in the absence of conventional offer and acceptance.

Background

Mark Eisman, Steve Matthews and Ivan Livschitz (together, EML), were all directors of Rehab Associates Pty Ltd (Rehab).

Christopher Kitas, Bill Kriketos, Eisman, Matthews and Livschitz all owned shares in Rehab in different proportions. The Rehab Shareholder’s Deed (the Shareholder’s Deed) provided that each class of share was subject to different transfer and disposal restrictions.

Rehab was the registered owner of land and improvements at Darlinghurst (Property), including a gymnasium. The Shareholder’s Deed provided that the gymnasium was to be leased to Golds Gym Pty Ltd (a franchise owned by EML) at $360,000 per annum. The rent was later varied by a Variation Deed to $465,000 per annum.

The directors of Rehab reduced the rent to $360,000 per annum. Kitas commenced proceedings against Rehab because the reduced rent was not acceptable to his interest.

On 29 October 2001, Kitas commenced proceedings in the Supreme Court of New South Wales, seeking an order that a receiver and manager be appointed to the Property or, alternatively, that a liquidator be appointed to Rehab (the First Proceedings).

EML defended Rehab in the First Proceedings. However, Kriketos did not want to get involved in the Court proceedings.

In or around March 2002, Kriketos’ solicitor orally notified EML’s solicitor that Kriketos was interested in purchasing Kitas’ shares in Rehab. EML’s solicitor informed Kriketos’ solicitor that some consideration must be given to EML by Kriketos for such a transfer to be unopposed by his clients, as:

  • EML had incurred significant legal expenses defending the First Proceedings, and
  • Kriketos would benefit from a reduction in value of Kitas’ shares that may arise from the result of a cross-claim that EML was contemplating bringing against Kitas.

EML insisted that it should receive any savings that Kriketos gained on the purchase of Kitas’ shares.

On 19 April 2002, EML’s solicitor sent Kriketos’ solicitor a “without prejudice” letter proffering a proposal to Kriketos to support the purchase of Kitas’ shares for an “agreed value”, which was subject to Kriketos filing an affidavit in the First Proceedings opposing the relief sought by Kitas (the First Letter).

On 2 May 2002, EML’s solicitor sent Kriketos’ solicitor a letter seeking to confirm the value of Kitas’ shares and the balance that would be paid to EML on purchase (the Second Letter).

On 6 May 2002, EML’s solicitor supplied dollar value calculations to Kriketos’ solicitor in respect of Kitas’ shares and confirmed the balance to be paid to EML (the Third Letter).

Kriketos’ solicitor did not respond to the Third Letter.

Kriketos did not take any step to support Kitas in the First Proceedings and supported EML in opposing the orders sought by Kitas by, amongst other things, filing an affidavit opposing the wind up application.

On 26 November 2004, Kitas transferred his shares to Kriketos in consideration for payment of $525,000. No sum of money was paid to EML for the “balance”.

Livschitz (individually) brought proceedings in the Supreme Court of New South Wales against Kriketos to enforce a legally binding agreement that he alleged had been formed on the basis of the exchange of the three letters (the Second Proceedings).

Livschitz relied on the lack of response from Kriketos’ solicitor to the Third Letter and the fact that Kriketos filed an affidavit in the First Proceedings opposing the winding up application, as conduct inconsistent with the proposition that Kriketos had accepted the agreement in the terms set out in the correspondence.

The primary judge found that the parties had made a legally binding agreement by the exchange of the three letters. Kriketos appealed.

Judgment

Allsop P, McColl JA and Macfarlan JA found that the primary judge erred in concluding that Livschitz had established that a contract had been formed and consequently the appeal was allowed.

In determining whether a valid contract was formed, the Court held that the following principles applied:

  • The essential question is whether the parties’ conduct reveals an understanding or agreement or a manifestation of mutual assent, which bespeaks an intention to be legally bound to the essential elements of a contract,
  • The question as to whether such mutual assent was communicated turns on whether, viewed as a whole and objectively from the point of view of reasonable persons on both sides, the dealings show a concluded bargain. The parties’ conduct must reveal that there was a consensus ad idem (where the parties to a contract both have the same understanding of the terms of the agreement),
  • Subsequent conduct can be examined to assist in the resolution of the question whether a contract was made at an earlier date,
  • Subsequent conduct is admissible on the question of whether a contract has been formed,
  • Acceptance of an offer can be inferred from the acts and conduct of the parties, including their silence. However, for acceptance of an offer to be inferred, the offeree’s conduct must be of such a character as necessarily to lead to the inference that the offer has been accepted.

The Court concluded that whether one assessed the three letters, or read the three letters in their context, or read the three letters in their context and considered all subsequent conduct of Kriketos, there was no contract formed between the parties.

McColl JA held that Kriketos’ subsequent conduct of filing an affidavit in the First Proceedings and purchasing Kitas’ shares would not lead a reasonable person to have thought that a consensus had been reached once the Third Letter had been sent. McColl JA considered that Kriketos’ subsequent conduct of filing an affidavit opposing Kitas’ efforts to wind up Rehab was consistent with his desire to purchase the shares and did not equivocally point to a consensus being reached with Livschitz.

The Court found that a reasonable person in the parties’ position would regard Kriketos’ silence, by not responding to the Third Letter, as consistent with Kriketos rejecting the EML proposal once it was laid out in its entirety.

Implications

This decision highlights the importance of parties concluding their contractual negotiations and ensuring that there is a consensus ad idem between the parties with respect to the terms of any agreement and that the terms of any agreement are finalised, preferably in writing.