Case: Masters v Cameron [1954] HCA 72 ; (1954) 91 CLR 353
Outcome: applied
The classic statement from Masters v Cameron [1954] HCA 72 ; (1954) 91 CLR 353 at 360 per Dixon CJ, McTiernan and Kitto JJ, is well known: 'Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract. In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution. Of these two cases the first is the more common ...' 130 Such a view is said to have its origin in the High Court's decision in Sinclair Scott &amp; Co Ltd v Naughton [1929] HCA 34 ; (1929) 43 CLR 310 at 317, and has found support in a number of more recent cases. There has been some academic debate on whether a fourth category of case may exist: see, for example, Elisabeth Peden, JW Carter and GJ Tolhurst, When Three Just Isn't Enough: the Fourth Category of the "Subject to Contract" Cases (2004) 20 JCL 156; DW McLauchlan, In Defence of the Fourth Category of Preliminary Agreements: Or Are There Only Two? (2005) 21 JCL 286. It is unnecessary to get involved in that debate. Whether the first heads of agreement falls within the first category of case in Masters v Cameron , or the so-called fourth category of case described in [129] above, it will, in my view, for the reasons outlined below, constitute a binding agreement. 133 Qualification under the first category of cases in Masters v Cameron is predicated on the terms of the instrument being sufficiently complete and certain to evince the requisite intention to contract. In the present case, there was no suggestion that there were terms which one would expect to find in the first heads of agreement which were not there, nor that some of the terms were uncertain. Qualification under the fourth category of cases, if it exists, is predicated on the terms of the instrument being essential to the bargain that the parties wish to conclude, in the expectation that at a later date a further contract will be arrived at containing additional terms that would facilitate and clarify the initial contract. Here, there was no suggestion that the first heads of agreement did not contain those terms essential to the bargain that APIR and the executive directors wished to conclude, nor could there be. 134 In the present case, the following circumstances, which are relevant by reference to the authorities referred to above, point to a conclusion that the parties, APIR on the one hand and the executive directors on the other, intended to be legally bound by the first and second heads of agreement: (1) The context in which these heads of agreement were negotiated and concluded. Both were negotiated and concluded in the context of efforts by APIR to obtain further capital to deal with its difficult financial position: see [115] above. The first heads of agreement was preceded by the engagement of Newport Capital to provide services directed to raising funds for APIR through various financing strategies (see [9] above) and the resolution offering the executive directors agreements for the on-going provision of their services in accordance with the first heads of agreement, specifically provided that the commencement date of the agreements will be that of the receipt of at least $1,000,000 from new investors. Indeed, further increments in the 'cost of employment' set out in the first heads of agreement were staged by reference to further capital injections; without those, the 'cost of employment' increments could not be met. The negotiations which took place with Mr Gibbon over executive remuneration (see [16] [24] above) were also in the context of Mr Gibbon's proposal to invest in APIR by a subscription for convertible notes and Mr Hutchings Broso's proposed amended resolution 'to the original board Resolution on Exec Remuneration' provided: 'The Commencement Date of the Agreements will be the signing of the Convertible Note Deed with new investors sourced by Newport Capital, probably Charles Gibbon and associates.' (see [19] and [20] above.) The second heads of agreement also comes into existence in the context of APIR raising capital, this time from DFE through Mr Sharp. Indeed, the nexus between the heads of agreement and the raising of capital is exemplified in Mr Hennock's first comment on Mr Hutchings Broso's amended proposal on executive remuneration set out in [19] above: 'I assume this timing for the commencement of the agreements is so that there is money in the bank to fund them [the executive directors' remuneration packages] rather than the capital raising being a specific milestone which you personally have to achieve.' (see [66] above.) Ultimately, the second heads of agreement was expressed to commence on 1 February 2004, a date by which, it was anticipated as at 14 January 2004, DFE's investment would be on board. (2) The terms of the resolution as recorded in the minutes of the meeting of directors of APIR held on 7 March 2003 (see [10] above), namely: '... RESOLVED by separately executed Resolution last date 4 May 2003 that the two Executive Directors each be offered an Agreement for the on-going provision of their services in accordance with the Heads of Agreement now attached. The commencement date of the Agreements will not be until the receipt of at least $1,000,000.00 from new investors.' (3) The terms of the letter under cover of which the separate resolution and attached heads of agreement were sent to each of the non-executive directors by Mr Riley (see [13] above), in particular the passage: '... The Executive Directors have stated that they are willing to commit to the terms of the suggested Agreement. They have also pointed out that due to the uncertainty surrounding future direction and control of the company, that without an Agreement, they would be put in a position of having no sensible choice but to accept other offers of employment.' (4) The fact that the separate resolution and attached heads of agreement were signed by all five directors of APIR: see [11] and [12] above. (5) The comprehensiveness of the terms of the heads of agreement as to what would be included in the agreement with each of the executive directors and the specificity and certainty with which those terms are detailed: see [12] above. (6) The fact that these documents comprising the first heads of agreement were maintained by Mr Riley in a folder of documents to show to potential investors, which was kept up to date by Mr Riley, at least until 'we got into serious negotiations with Charles Gibbon'. Mr Riley did not remember putting anything into the folder after about September October 2003. (7) The fact that the first heads of agreement was used as the starting point by Mr Hutchings Broso in drafting a 'proposed amendment' to it which was emailed to Mr Gibbon on 6 November 2003: see [18] and [19] above. (8) The communications which took place between Mr Hutchings Broso on the one hand and Mr Gibbon on the other following Mr Gibbon's 'suggested changes' to Mr Hutchings Broso's 'proposed amendment' (see [20] above), in particular, Mr Hutchings Broso's email to Mr Gibbon of 2 December 2003 (see [23] above) where he wrote: '... Given the current state of discussions and the continuing divergence of views, the EDs consider it in their best interests that the framework for these discussions and minimum outcomes be agreed before they step away from the package offered by the existing Board Resolution ...' and Mr Gibbon's letter of 11 December 2003 to Mr Hutchings Broso (see [24] above) in which he wrote: 'It appears that there is further need for discussion regarding the legacy issue. For this reason I suggested to Andy (and had reflected in the last version of the Deed) that the remuneration package agreed mid year by the Board be accepted as basis for going forward ...' (9) The fact that the 'proposed amendment' to the first heads of agreement was used as a starting point for having Mr Hennock review and provide his comments on 'ED Remuneration' (see [66] above) and the fact Mr Hutchings Broso's re-write of that draft, incorporating Mr Hennock's comments, became the document circulated to the other directors of APIR on 14 January 2004 under cover of the 'squared away' email (see [69] above) and the second heads of agreement (see [70] above). (10) The fact that the terms of the second heads of agreement were comprehensively embodied, without any change, in the executive employment agreements between APIR on the one hand, and Mr Hutchings Broso and Mr Riley on the other (see [76] above), it being common ground that these latter agreements were binding on the parties to them. 135 The respondents placed some reliance on the following circumstances for the contrary view, that is, that the first and second heads of agreement were not intended to be binding as between APIR and the executive directors: (1) The circumstance that the executive directors were prepared to modify the first heads of agreement in an attempt to accommodate Mr Gibbon in their negotiations with him. At best for the respondents, this circumstance is totally neutral in the objective determination of whether the first heads of agreement was intended to be binding on the parties to it; at worst for the respondents, it carries the inference that the terms of the anterior instrument were binding on the parties. (2) The circumstance that the first and second heads of agreement are expressed to be: 'Subject to shareholder approval ...', and that shareholder approval was not obtained in respect of the first heads of agreement even if the second heads of agreement, in particular the completion payment aspects of it, was discussed and 'sold' to shareholders at the annual general meeting of APIR held on 27 February 2004. But in the case of both heads of agreement, the words: 'Subject to shareholder approval ...' are followed by the words: '... where required ...' and no such approval was required by APIR's constitution. Moreover, even if shareholder approval to the first and second heads of agreement was required by subs 208(1) of the Corporations Act 2001 , failure to obtain it would not invalidate an otherwise binding contract: see subs 209(1). (3) The circumstance that Duesburys Chartered Accountants, Canberra ('the auditors') omitted from the 2003 financial statements any reference to the May 2003 resolution and the first heads of agreement could be seen as an indicia that the first heads of agreement was not binding. The response to this is, of necessity, more convoluted. (i) First, when conducting the audit, Duesburys must have been told that the deal with Mr Gibbon had already gone ahead to the point of actually executing the first round of convertible notes, because otherwise the error would not have been made in Note 17 to the effect that the convertible notes to the value of $350,000 had been issued and were not just the subject of a term sheet. DFE submitted that this grossly inaccurate information, which survived to the signing of the accounts on or about 28 November 2003 and was not corrected until at least 23 December 2003, casts significant doubt on the accuracy and currency of information that was being supplied to Duesburys. I agree. (ii) Second, for reasons which it is not necessary to delve into, I agree with DFE's submission that it is reasonable to conclude that Duesburys never had the means or the cause to consider whether the May 2003 resolution and the first heads of agreement should have been included in the 2003 financial statements for APIR because they did not know of their existence. At the very least, it would be unsafe to conclude that the 2003 financial statements had omitted from them any reference to the May 2003 resolution and the first heads of agreement because of any considered decision by the auditors that they did not need to be disclosed. (iii) Third, DFE further submitted that had Duesburys been told about the May 2003 resolution and the first heads of agreement at any time up to and including the changes made to Note 17 on or about 23 December 2003, and especially if told about the 12 December 2003 termination of the then current negotiations with Mr Gibbon, that would very likely have resulted in the 2003 financial statements being amended to take this into account. I agree. This is especially so given that Note 17 in its final form included reference to Mr Gibbon's term sheet, despite the negotiations with Mr Gibbon in relation to the convertible notes from the term sheet having been terminated on 12 December 2003. (iv) Fourth, Mr Carter suggested, as a matter of 'speculation', that the Note 17 reference to Mr Gibbon's investment may have been promoted by a concern that APIR was not a going concern, noting that APIR had 'a substantial deficit of current assets vis-&agrave;-vis current liabilities but that the auditors' file was silent as to why that note was included'. DFE submitted that Mr Carter's speculation is sound, but that he was in error in suggesting this reason was not revealed in the Duesburys working papers. The auditors' 'going concern' review has a handwritten reference to 'negative working capital' and 'heavy losses' being offset by positive net assets and the $350,000 investment from Mr Gibbon. This was the source of the erroneous Note 17, but still explains the underlying reason for the final Note 17. The final version included not just the mere term sheet (in relation to which negotiations had been terminated) but also other mere negotiations, apparently because of the offsetting impact on 'going concern' worries. DFE submitted that, plainly, even a prospect of incoming investment was considered very important to the auditors in light of the precarious financial circumstances of APIR. It submitted that it is difficult to see why a mere prospect of $500,000 coming in to allay 'going concern' worries would not be at least matched (if not outweighed) by a board resolution and signed heads of agreement providing for $700,000 to be payable in two years if not sooner. Thus the 'going concern' test for inclusion suggested by Mr Carter strongly favours DFE's case as to the first heads of agreement being required to be referred to in the 2003 financial statements even if it was not binding (contrary to DFE's primary position). This also supports the inference that Duesburys did not know about it. I agree with those submissions. (v) Finally, in relation to this circumstance, it is necessary to say something of the note found in the auditors' working papers headed 'Minutes Review' under the further heading '07 March 03': 'Nothing of audit concern' and that Duesburys were '... later advised that [the meeting] included consideration of exec contracts put on hold pending negs with potential investor'. DFE submitted that the first heads of agreement was never 'on hold', but nevertheless made the following three observations: (a) No evidence has been led from the respondents as to the precise terms of the communication to the auditors which gave rise to this note. Presumably no evidence could be led by the respondents (or the auditors) that would have assisted the respondents. As to whether the first heads of agreement was in fact 'on hold' is an issue of law and fact to be determined by the Court. The opinion of the person who may have said the first heads of agreement was 'on hold' is not decisive. The evidence in this regard is unsatisfactory in view of there being no precise evidence as to what was actually said. Even if the auditors were expressly told the first heads of agreement was 'on hold', the basis upon which this opinion was expressed is unknown. It all turns upon the intention of the parties. It is the intention of both parties viewed on an objective view of the facts. It is not based upon the subjective view of one of the parties (or an officer of one of the parties). (b) The critical issue is whether the parties intended for the first heads of agreement to be binding. It is the respondent's primary position that there was never any such intention. If the auditors were literally informed that the first heads of agreement was 'on hold', at the very least that would mean in all likelihood, contrary to the principal way in which the respondents put their case, there had been a previous intention for the first heads of agreement to be binding. Otherwise, there would be no need for the agreement to be noted as being 'on hold'. (c) An unexplained notation of the first heads of agreement being 'on hold' does not (especially if unexplained) impel the conclusion that the parties never intended for it to be binding; nor, viewed in isolation, does it negate the various reasons referred to above as compels a finding that the parties intended for the first heads of agreement to be binding. I agree with these observations. 136 Finally, even if not as importantly as the circumstances referred to in [125] and [126] above, in cross-examination Mr Hutchings Broso in response to a question that he '... understood from the outset when the heads of agreement were first entered into that that was a binding agreement. Correct?' answered: 'Correct'; and Mr Riley, in response to a question: 'That had the first heads of agreement not been rescinded as you assert, it would have been part of your obligation to reveal to Mr Sharp, as part of the current state of affairs of the company, the first heads of agreement?' answered: 'That's correct.' 137 During the course of cross-examination, Mr Riley gave evidence to the effect that while the first head of agreement was 'valid' (which, for present purposes, I take as synonymous with 'binding') at the time it was concluded (4 May 2003 at the latest), '... it had been tossed out in the course of the negotiation' with Mr Gibbon. A relevant passage from the transcript is instructive: 'Now, is it the fact that you say that it would have been removed, the May resolution and the heads of agreement, because why would it be removed? What was it that would cause it to be in the due diligence folder to begin with and then removed later on?---Because in early November the discussions with Charles Gibbon had been such that the and it had been agreed at a director's meeting, that the heads of agreement was no longer valid. All right, now, firstly, in the event of their being a resolution by the board that the heads of agreement were no longer valid, there would be a resolution to that effect in writing, wouldn't there? You would agree with that, wouldn't you?---I said it had been agreed by the board. There would be a written minute of the heads of agreement being invalid?---I think in the minutes it says that a new one would have to be drawn up. Yes, well, you were still in the course of negotiating with Mr Gibbon in that regard, weren't you?---Yes, we were. Right, see I would suggest to you that at the very least when you first prepared the due diligence folder, you were of the view that the heads of agreement was binding and valid, that's the reason it was in the folder, that's right, isn't it?---It was there for information for potential investors, yes. And to pick up the language that you've used just a little while ago that at the time you included the heads of agreement and the resolution in the due diligence folder, when you first put it together, you believed, to pick up your words, that it was valid at that time, that's right, isn't it?---That's what I said, yes. Yes and you don't want to change that evidence, do you, because what you told the court was true?---I said it was valid, yes. Yes and I would suggest to you that during the Gibbon negotiation there were proposals to change that valid agreement, wasn't there, the way of melding proposals that you understood had been put by Mr Gibbon?---There was a continuing discussing with Mr Gibbon about executive remuneration and agreements, yes. Yes and that no final agreement was reached between you and Mr Gibbon in respect of a new remuneration agreement, was it?---No, nothing had been finalised, no. And I would suggest to you that you're fully aware that at the time the Gibbon during the course of the Gibbon negotiation, I would suggest to you that your view was that until a new agreement was reached the existing heads of agreement continued to be valid, that's right, isn't it?---I think it had been tossed out in the course of the negotiation. And I would suggest to you that the reason that you had a folder in your possession in November that you say you offered to Mr Sharp which contained, at that time, the heads of agreement, was because at that time, during the course of the Gibbon's negotiation, you knew that those heads of agreement continued to be a relevant, valid document in respect of executive remuneration, didn't it?---No.'