A recent New South Wales Court of Appeal decision in Malago v AW Ellis Engineering has highlighted the need for parties to consider carefully the drafting of agreements that they reach in the course of mediation.
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 in 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 over the matter, which ultimately led to a mediation being held before Mr Ellicott QC. At the conclusion of the mediation, a heads of agreement document was prepared by Ellicott that provided for the applicants to purchase the shares and units that the respondents held 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 a consensus could be reached the applicants withdrew from negotiations. Proceedings were then commenced by the respondents seeking a declaration that a binding agreement for sale existed, requesting an order for specific performance of the heads of agreement and seeking damages.
At first instance, Justice Sackar found the heads of agreement to be binding and ordered, by way of specific performance, that the parties enter into a deed containing a number of terms, including those detailed in various drafts of the deed that had passed between the solicitors for the parties.
At the New South Wales Court of Appeal, the applicants argued that the heads of agreement had not been intended to be legally binding, or alternatively was 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 [must] 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 appellate court each agreed that these words were decisive in revealing the parties' intent to be bound by the heads of agreement. The appellate court noted that the heads of agreement did not use the words 'in principle' in relation to the agreement, and therefore, on proper construction of the heads of agreement, the parties were bound immediately by the terms.
The applicants further argued that the heads of agreement was void because SSM, a related trustee company and the New South Wales Maritime Authority were not parties to such agreement. The appellate court dismissed this 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 could be sold without their involvement and the absence of the New South Wales Maritime Authority's 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 appellate court 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 the ambiguity, the terms were not found to be void for uncertainty.
The question then arose as to whether the order 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 the deed) was appropriate.
In the appellate court, Justice MacFarlan considered that the post-heads of agreement negotiations did not result in any binding agreements concerning particular clauses that were to be included in the deed. The judge argued that in the absence of an 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 the parties to execute a formal agreement, in the form set out in an attachment to the judgment.
The decision serves as a useful warning to parties entering into heads of agreement at mediation or other settlement conferences - they must 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 this by careful drafting. If the heads of agreement is intended to be binding, this must be explicit.
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