feature – practice alert
Subject to contract
Alicia Hill
Principal,
McInnes Wilson Lawyers*
a lesson from Chan v Four C Realty
Pty Ltd (in liquidation)
Introduction
External Administrators need to remain wary
of the potentially binding nature of agreements
even in the absence of a formal contract. It
is a common misconception that a deal is
not binding until a contract is signed. Such
a misconception is largely born out of the
utilisation of ‘subject to contract’ clauses.
Caitlin Connole
Associate,
McInnes Wilson Lawyers*
The recent decision in Chan v Four C Realty 1
where the Liquidators were found to be bound
by an agreement despite a statement that
it was subject to a formal agreement being
signed is a cautionary reminder for all external
administrators and their advisors.
Relevant events
Four C Realty was an estate agent which
conducted a rent roll and acted as agent in the
sale of residential properties. It also acted as
the selling agent for a number of multi-story
apartment developers, facilitating off-the-plan
sales to Chinese purchasers.
On 25 July 2013, the Second and Third
Respondents (the Liquidators) were appointed
joint and several liquidators of Four C Realty.
Upon reviewing the company’s assets and
liabilities, the Liquidators determined that
Four C Realty was yet to receive commission
from approximately 58 development contracts
which, as at the date of the decision, had not
yet settled.
* The authors would like to
thank Elle McDermott and
Jordan English, Law Clerks,
for their contributions to this
article.
The significance of this lay in the fact that
Four C Realty typically received half of the
sales commission upon a purchaser entering
into a contract of sale and the balance when
the contract was settled. If, however, the sale
did not proceed and the contract of sale was
not settled then Four C Realty was liable to
repay the developers the commission previously
received. There was evidence that some
contracts were not due to settle until 2016 and
accordingly, there was a possibility that Four C
Realty would be required to refund commissions
up until that date.
On 7 August 2013, the Liquidators sent
Ms Chan, a director and shareholder of the
company, a letter announcing an Expression of
Interests (EOI) campaign for the sale of the Four
C Realty business. Attached to the letter was a
form setting out the various assets and liabilities
of the business.
On 9 August 2013, Ms Chan offered $510,000
to acquire the assets 2 and assume the liabilities
which had been set out in a form attached to the
letter. The same day, the Liquidators’ solicitors
wrote to Ms Chan’s solicitor – Corrs Chambers
Westgarth – asking whether Ms Chan was
prepared to provide security for the payment of
the sum and the nature of the security.
On 9 August 2013, Ms Chan’s solicitor
responded indicating that Ms Chan would
provide security over her property in respect of
her payment obligations. Ms Chan’s solicitors
sent another letter 30 minutes later indicating
that Ms Chan was willing to indemnify Four C
Realty in respect of commissions that it may be
required to refund in respect of the development
contracts that had not settled. The last two
letters from Ms Chan’s solicitors are collectively
referred to as the Corrs’ emails but importantly,
1 Chan v Four C Realty Pty Ltd (in liq), in the matter of Four C Realty Pty Ltd (in liq) [2013] FCA 928. 2 One of the assets (the domain name) was mistakenly omitted
from the offer. This mistake was corrected through subsequent correspondence between the parties’ solicitors.
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feature I Subject to contract – a lesson from Chan v Four C Realty Pty Ltd (in liquidation) > 2
the later Corr’s email did not refer to the earlier
Corrs’ email.
On 13 August 2013, after subsequent
correspondence between the parties’ solicitors,
the Liquidators wrote to Ms Chan purporting to
accept her offer. The letter reiterated the terms of
the agreement and relevantly stated:
‘You have agreed to provide security over your
property at 477 Waverley Road, Malvern East in
respect of your payment obligations.
…
The Liquidators acceptance of your offer constitutes
a binding and enforceable agreement. However, it is
intended that these terms be more fully engrossed
in a formal sale agreement.’
On that same day, Ms Chan paid $300,000 to
the liquidators. By 30 August 2013 Ms Chan had
deposited the remaining $210,000.
The Liquidators later contended that the term
requiring security ‘in respect of your payment
obligations’ extended to Ms Chan being required
to provide security for the indemnity in respect
of refunds that may be due in respect of
development contracts that are yet to settle.
Ms Chan sought to carry out the contract on
the express terms of the correspondence
of 13 August 2013, namely by only providing
security in respect of her payment obligations
and not in respect of ‘the indemnity’.
Ms Chan applied to the Federal Court under
ss 471B, 477(2B) and 477(6) of the Corporations
Act 2001 (Cth) for a series of orders, including a
declaration that Four C Realty had entered into
a binding and enforceable contract for her to
purchase the business assets of the company.
The Liquidators argued that no binding contract
existed and alternatively, if it did exist, then it
was a term of the contract that Ms Chan was
required to provide security for ‘the indemnity’.
Decision
The Court was required to consider and
determine two questions:
1 was there a binding agreement between
Ms Chan and the Respondent Liquidators?
2 if so, what were the terms of the agreement?
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Reconstruction & Involvency.indd 1
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Was there a binding agreement
between Ms Chan and the
Respondent Liquidators?
The Court found that agreement was reached on
13 August 2013 noting the following reasons:
◗ the opening paragraph in the Liquidator’s letter
on 13 August noted that the Liquidators were
responding to the EOI lodged by Ms Chan and
the Corrs’ emails;
◗ Ms Chan’s EOI and the Corrs’ emails
constituted an offer capable of acceptance, as
evidenced by the Liquidators stating that the
offer constituted a ‘binding and enforceable
agreement’ but that the terms would be ‘more
fully engrossed in a formal sale agreement;’
◗ the Liquidators had confirmed acceptance of
the price offered of $510,000 on certain terms
and conditions as noted in the 13 August 2013
letter.
Furthermore, the Court noted that there was no
lack of any essential term which would see the
agreement fail for a lack of completeness.3
The Court found that, viewed objectively,4 the
case fell within the first class identified in the
High Court decision in Masters v Cameron.5 That
is, the parties intended to be immediately bound
to the performance of the terms of their bargain
but proposed to have the terms restated in a
form which would be fuller or more precise but
not different in effect. This constituted a contract
binding on the parties at once to perform the
agreed terms whether the contemplated formal
documents came into existence or not.
The Liquidators had argued that the 13 August
letter was a counter-offer, rejecting the original
offer and therefore preventing it from being
capable of acceptance. The Court rejected
that argument concluding that the existence,
timing and content of the emails (set out above)
were all inconsistent with that submission. The
13 August letter had described the Corrs’ emails
and the EOI as the ‘offer’ which the Liquidators
accepted.
The Liquidators had argued that no binding
contract existed on 13 August 2013 because
correspondence between the parties after this
date demonstrated that the parties ‘continued to
explore the breadth of the offer’. This argument
was similarly rejected, the Court finding that the
letters after this date did no more than indicate
that Ms Chan remained ready, willing and able to
comply with the terms of the ‘Contract.’
What were the terms of the
agreement?
The terms of the agreement were found to have
been clearly set out in the 13 August 2013 letter.
However the Liquidators referred to the following
two paragraphs in the letter to submit that a term
of the contract also extended to Ms Chan being
required to provide security for the indemnity
referred to in the Corrs’ emails:
‘You have agreed to provide security over your
property at 477 Waverley Road, Malvern East in
respect of your payment obligations.
Further, you have agreed to indemnify [Four C Realty]
in respect of any commission which [Four C Realty]
is required to refund in respect of development
contracts that are yet to settle.’
Justice Gordon rejected this submission finding
that it was contrary to the express words of the
13 August 2013 letter which was the acceptance
of the earlier offer recorded in the EOI and the
Corrs’ emails. Viewed objectively, the term of the
contract by which Ms Chan agreed to provide
security was separate, and independent, of the
term of the contract by which Ms Chan agreed
to provide the indemnity. The two Corrs’ emails
did not connect the two issues in the manner
contended by the Liquidators.
The Court concluded that there was a binding
and enforceable contract and that Ms Chan was
not required to provide security for the indemnity.
Subsequently, the Liquidators were ordered to
pay Ms Chan’s costs of the application, being
costs in the liquidation.6
Conclusion
External administrators should be aware that
they may be bound by negotiations with other
parties despite any initial agreements with
those parties being expressly subject to the
execution of a formal contract. If it is the external
administrator’s intention not to be bound by
negotiations until execution of a contract then an
expression of that intention should be stated in
an attempt to preserve this position.
3 Geebung Investments Pty Ltd v Varga Group Investments (No 8) Pty Ltd (1995) Aust Contract Reports 90-059 at 90,328. 4 As required by Godecke v Kirwan (1973)
129 CLR 629 at 638-639. 5 (1954) 91 CLR 353. 6 Chan v Four C Realty Pty Ltd (in liq), in the matter of Four C Realty Pty Ltd (in liq) (No 2) [2013] FCA 959.
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