In Al Azhari v 27 Scott Street Pty Ltd [2017] VSC 600, Almond J of the Supreme Court of Victoria has held that no contract arose from mediation terms providing for the transfer of real property which had been agreed at the conclusion of a court-ordered mediation as the objective intention of the parties was not to be bound unless and until a formal contract was executed.
The parties were in dispute over funding provided for a proposed retail development. The mediation terms were contained in a handwritten document signed on behalf of the parties by their respective legal representatives. The document stated as follows:
1. These terms of settlement are in summary form of terms to be more fully engrossed.
2. The parties agree to settle this proceeding on the following terms:
(a) The first defendant will transfer unencumbered the following properties in the development known as [name of property] situated at [street, suburb] (‘the land’):
(i) Retail 1(a) at value of $440,500;
(ii) Retail 1(b) at value of $597,500;
(iii) Retail 3 at value of $447,500 (‘the properties’).
(b) The properties will be transferred in fee simple after discharge of the construction funding facility.
(c) The first defendant will give to the second plaintiff a mortgage not to be registered but secured by a caveat over the land, which caveat will remain until such time as the titles are transferred into the second plaintiff’s name. If the defendants default under the terms, the plaintiff may register the mortgage.
(d) The second plaintiff will execute and provide the required documentation for the security of the land to be provided to financiers of construction funding.
(e) Upon execution of these terms and performance by the defendants of their obligations thereunder the parties hereby release each other from all claims, liabilities and obligations arising out of all and any claims the subject of this proceeding including but not limited to the agreement referred to in paragraph 3 in the Statement of Claim and the deed referred to in paragraph 7 of the Statement of Claim.
(f) In the event that the first defendant fails to transfer the properties when due, the defendants consent to orders for specific performance together with costs of entry of judgment. These terms are evidence of the defendants’ consent to such judgment.
(g) The proceeding be struck out with a right of reinstatement and the parties sign consent orders to this extent on signing the terms.
The defendants claimed that the parties intended to be bound immediately by the mediation terms while the plaintiff (there was originally two plaintiffs but one discontinued its claim) maintained that the parties intended to be bound only when they executed a formal contract.
Almond J stated that the following legal principles applied (at [8]-[11]):
- Masters v Cameron [1954] HCA 72 at [9]; (1954) 91 CLR 353 at 360 had identified three classes of case where parties in negotiation had reached agreement on terms of a contractual nature and had also agreed that the subject matter of their negotiation would be dealt with by a formal contract:
- first, the parties had reached finality in arranging all the terms of their bargain and intended to be immediately bound to the performance of those terms but at the same time proposed to have the terms restated in a form which would be fuller or more precise but not different in effect;
- secondly, the parties had completely agreed upon all the terms of their bargain and intended no departure from or addition to that which their agreed terms expressed or implied, but nevertheless had made performance of one or more of the terms conditional upon the execution of a formal document; and
- thirdly, the parties’ intention had not been to make a concluded bargain at all, unless and until they executed a formal contract.
- Sinclair, Scott & Co v Naughton [1929] HCA 34; (1929) 43 CLR 310 at 317 had identified a fourth class of case, namely, one in which the parties had been content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms.
- The construction of a contract was to be determined objectively, and in the case of a commercial contract, the question was what a reasonable business person would have understood the terms to mean. The approach to be taken to the construction of commercial contracts was that enunciated by the High Court in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 at [46]-[50].
- The Victorian Court of Appeal in Queensland Phosphate Pty Ltd v Korda [2017] VSCA 269 had dealt with the similar question of whether an exchange of emails between solicitors, one containing an offer to settle proceedings, the other containing an acceptance of the offer, constituted an immediately binding agreement, and had set out at [37] the legal principles to be applied which were as follows:
- First, the question of whether there was a binding agreement was one that fell to be determined objectively from the terms of the emails, read in the light of the surrounding circumstances and having regard to the commercial context in which they were exchanged. If an essential term was not agreed, then the ‘agreement’ was incomplete and did not give rise to an enforceable contract. Moreover, the existence of matters of importance on which the parties had not reached consensus would render it less likely that they intended immediately to be bound before the execution of a formal document.
- Secondly, in determining whether a binding contract was in fact formed, regard could be had to the parties’ subsequent communications: (1) in order to see what was important or essential to the transaction; (2) as admissions; and (3) as probative of the parties’ contractual intention.
In claiming that the parties had intended to be bound immediately at the mediation, the defendants relied on the case falling within the first class identified in Masters v Cameron or the fourth class identified in Sinclair, Scott & Co v Naughton. The plaintiff, on the other hand, submitted that the objective intention of the parties was not to be bound unless and until a formal contract was executed and, thus, said that the mediation terms fell within the third class in Masters v Cameron.
Almond J said (at [25]-[26]) that it was clear that the parties intended that the mediation terms would be elaborated upon but that, to determine within which class they fell, it was necessary to have recourse to the surrounding circumstances. After considering the surrounding circumstances, his Honour was not satisfied that the parties had ‘reached finality’ (first class in Masters v Cameron) or ‘were content to be bound immediately and exclusively’ by the terms agreed at mediation (fourth class in Sinclair, Scott & Co v Naughton) because there were too many matters of importance on which the parties had not reached a consensus (at [31]-[32]). His Honour’s reasons were, in summary, as follows (at [33]-[51]):
- The three retail properties which were the main subject matter of the mediation terms were described generally and without reference to a plan of subdivision or any other document which specified the measurements or their precise location within the development. This was an important consideration given that construction had not yet commenced on the development site.
- There were no pro forma terms of a contract of sale of the relevant retail premises or vendor’s statement with respect to the sale(s) accompanying or incorporated by reference in the mediation terms from which detailed terms of a contract of sale could be determined. This tended to suggest that the mediation terms were high level terms which were general in nature and not intended to be a concluded bargain.
- The mediation terms did not specify the date of settlement (and, hence, the date for occupation of the premises). Transfer of the retail properties was contingent upon discharge of an undefined ‘construction funding facility’ with no indication when such discharge might occur. This tended to suggest that the agreement was not finalised.
- The terms of the mortgage to be given by the first defendant to the second plaintiff were not specified. Nor was the principal sum secured specified and, as there was underlying conflict on the pleadings about the nature of the funding transaction, this could not be implied. Thus, the mediation term regarding the provision of the mortgage was vague and uncertain and further tended to indicate that the parties did not intend to conclude a binding agreement at the mediation. This view was fortified by the fact that, in post mediation negotiations, the parties’ legal representatives had put forward different proposals about how the debt should be defined for the purpose of the formal terms.
- Neither party’s legal representative was authorised in writing by their respective clients to sign a contract for the sale of an interest in land at the mediation so as to meet the requirements of s 126 of the Instruments Act 1958 (Vic) and s 54 of the Property Law Act 1958 (Vic). This was another objective indication that, at the time of the mediation, the parties did not intend to enter into a binding agreement to transfer real property.
- If the mediation terms were found to be immediately binding they would constitute a ‘contract for the sale of land’ entered into in breach of s 32 of the Sale of Land Act 1962 (Vic) because no vendor’s statement was provided to the purchaser, and of s 9AA(1A) of the same Act because there was no ‘conspicuous notice’ to the purchaser containing the mandatory requirements provided for in that section. These were not merely mechanical or procedural matters to be dealt with after the parties had reached a concluded agreement for the sale of land. Both parties were legally represented at the mediation and reasonable business people in the position of the parties would not have intended to enter into a binding agreement for the sale of land in contravention of these legislative provisions given the risk of prosecution for offences under the legislation as well as the risk of rescission of the contract of sale of land by the purchaser for failure to comply with the legislation.
Therefore, in his Honour’s opinion, it was more likely that the parties intended to address and resolve the above matters as part of a binding agreement to be arrived at in subsequent negotiation of formal terms and that, only on execution of these formal terms, would the parties be bound and give mutual releases (at [52]).
His Honour also said (at [58]) that subsequent to the mediation the parties had exchanged a draft deed of settlement which provided a clear indication of what the parties considered important to the transaction. The formal terms of that draft deed provided that the parties would execute ‘the standard contracts of sale for the settlement lots’ (which included a vendor’s statement, plan of subdivision, details of lot entitlement and lot liability and a list of fixtures and fittings) and a mortgage contained in a schedule which specified the principal sum in consideration for the advance as defined and the settlement date as defined. His Honour said that a binding contract could not have been formed without these important terms.
His Honour concluded (at [60]) that the mediation terms fell within the third class in Masters v Cameron, namely that the objective intention of the parties was not to be bound unless and until a formal contract was executed and that, accordingly, the mediation terms were not enforceable.
