Australia: Liability for conduct in pre-contractual negotiations

Introduction

Term sheets, offer letters, letters of intent, heads of agreement and preliminary agreements by any other name have become a staple part of modern M&A negotiations. However, recent developments in the law surrounding pre-contractual negotiations highlight the risk that the parties' conduct during pre-contractual negotiations can override the express provisions of a preliminary agreement.

This article will briefly examine how conduct impacts on whether preliminary agreements are legally binding, the types of liability that pre-contractual conduct can attract, and potential lessons to be learned from ongoing litigation between Archer Capital and The Sage Group plc in relation to the British technology company's withdrawal from the sale of MYOB in August 2011.

Binding contract or agreement to agree?

Preliminary agreements are often used as a starting position to provide a framework for the parties to negotiate a final contract or to record agreement on key commercial terms in order to reduce deal-risk before the parties incur any further expense. Preliminary agreements are generally expressed as being legally binding, non-binding or a mix of the two - where the parties intend certain ancillary provisions such as confidentiality, exclusivity and costs to be binding, but not the commercial terms of the transaction.

Where the parties intend the key terms of the sale contract to remain open for negotiation, it is common for preliminary agreements to be marked "subject to contract" and include a provision that the parties will negotiate to agree a definitive sale contract based on the terms in the preliminary agreement.

The High Court established in Masters v Cameron (1954) 91 CLR 353 that the words "subject to contract" in a preliminary agreement create a prima facie assumption that the parties intend that their agreement is subject to an overriding condition that the parties enter into a more substantial or formal contract based on the terms outlined in the preliminary agreement and that the preliminary agreement does not itself constitute a binding contract.

Where it can be shown that parties to a preliminary agreement intended additional terms to be included in a future contract by mutual consent, the courts have historically been reluctant to enforce such "agreements to agree" due to the inherent uncertainty of the agreed terms and the lack of a suitable remedy for breach of such agreement. However, it is now generally accepted that an agreement can be binding even though not all terms relating to the subject matter have been agreed, provided that:

  • there is a sufficient degree of clarity as to the key commercial terms such that the agreement is capable of enforcement1; and
  • it can objectively be shown from the surrounding circumstances that the parties intended to be immediately bound by the preliminary agreement2 rather than merely using it as a basis for further negotiations.

Where an intention to be bound can be demonstrated, courts have increasingly shown a willingness to "fill in the gaps" in preliminary agreements so that the agreement may be enforced provided that the missing terms are not so important or numerous as to make the agreement itself "incomplete"3.

Evidence of the intention of the parties is therefore a critical factor in determining whether a preliminary agreement is a binding contract or merely an "agreement to agree". Although the language used in drafting the preliminary agreement will be important in deciding this question, it is not determinative. Courts have been increasingly willing to examine the conduct of the parties as a whole both before and after the alleged agreement as a key factor in establishing the parties' intentions4.

Conduct may be considered

In deciding whether a preliminary agreement was legally binding in the recent case Factory 5 Pty Ltd (In Liq) v State of Victoria (No 2) [2012] FCAFC 150, the full bench of the Federal Court considered the conduct and correspondence of the parties before and after execution of the purported contract (including the drinking of champagne at signing!) despite the agreement expressly stating that it was "subject to reaching agreement on a legally binding long form agreement" and subject to one party obtaining board approval.

Although the court found that the preliminary agreement was not binding as the fundamental pricing was not agreed, the overall context of the negotiations in which the preliminary agreement was made was assessed by the court including; the expiry of an exclusivity period, agreed restrictions on public announcements and evidence as to the level of negotiation around (and hence importance of) certain commercial terms.

Non-contractual remedies

Even where no binding preliminary agreement can be established, an aggrieved party may still bring a claim to recover loss suffered from failed negotiations under non-contractual areas of law including misleading and deceptive conduct, negligent misstatement, the tort of deceit or the equitable remedies of restitution, quantum meruit and estoppel.

Remedies based in the law of equity may not always be available to aggrieved parties due to the requirements of the jurisdiction (for example, applicants must have "clean hands" when coming before the court). However, the statutory remedies and penalties for misleading or deceptive conduct found in the Competition and Consumer Act 2010 (Cth)and the Corporations Act 2001 (Cth) will generally be available in M&A transactions and importantly, parties cannot contract out of liability for such claims.

Liability for conduct in negotiations

The conduct of pre-contractual negotiations can now be as important as the wording of preliminary agreements when deciding on their enforceability and particularly when assessing whether an aggrieved party will have access to the non-contractual remedies outlined above.

This approach may raise the eyebrows of dealmakers across the country who routinely sign up to non-binding or conditional preliminary agreements in the course of negotiations, on the basis that all the terms remain open for renegotiation until signing of the final sale contract. It also spells danger for those who "sail close to the wind" when making pre-contractual representations on the basis that liability for such statements will be "closed over" by the warranties and limitations contained in the final sale contract.

These issues go to the heart of Archer Capital's much publicised case against The Sage Group plc in relation to Sage's withdrawn offer to acquire accounting software provider MYOB from Archer in 2011.

Archer v Sage

On 16 August 2011, representatives of Archer and Sage allegedly shook hands on what Archer claims was its acceptance of a binding written offer by Sage to acquire MYOB for AU$1.35 billion. The written offer was stated to be "subject to contract" and was conditional on, among other things, review of black box due diligence material and agreement by each party's lawyers on "a small number of technical points" outstanding in the draft share sale agreement.

Sage was subsequently provided with the blackbox materials which Archer had allegedly stated would not be released until a binding agreement was made, and critically, Archer informed other bidders that their offers for MYBO had been rejected and that Archer would cease negotiations with them.

On 18 August 2011, shortly after the lawyers had agreed final changes to the draft sale agreement, Sage informed Archer that it was reducing its offer for MYOB by AU$175 million. Archer claims that Sage thereby repudiated the binding offer of AU$1.35 billion accepted by Archer on 16 August 2011.

In very general terms, Archer is seeking damages for breach of an alleged contract, equitable damages arising from an alleged estoppel and damages arising from alleged misleading or deceptive conduct on the basis that Sage had made a final binding (albeit conditional) offer for MYOB and subsequently reneged on that offer. Archer subsequently agreed to sell MYOB to Bain Capital for AU$1.045 billion in cash (together with the assumption of liabilities of AU$11 million and the provision of vendor notes with a face of AU$150 million) and is suing Sage for the difference in consideration (reportedly somewhere between AU$144 million and AU$180 million).

As part of its submissions Archer has alleged that Sage and its advisers made repeated representations that Sage had board approval for the offered price and that subject only to certain conditions (a process for satisfaction of which was included in the offer) Sage would acquire MYOB for AU$1.35 billion. Archer claims that the making of these representations was misleading and deceptive and that by releasing the blackbox material and ceasing negotiations with other bidders, Archer relied on these representations to its detriment (which is the basis of the estoppel claim).

The parties have thus far been locked in a series of interlocutory disputes including Sage's attempted discovery of information relating to the tax treatment of the proceeds of Archer's sale to Bain and Archer's discovery of correspondence between Sage and its advisers. The substantive hearings began on 25 November 2013 and are scheduled to run until late December 2013.

In addition to the question of whether the parties' conduct indicated that Sage's conditional offer was intended to be final and binding, the case raises interesting questions in relation to when a vendor may feel comfortable in releasing its blackbox due diligence material and the impact and admissibility of correspondence between financial advisers in the formation of legal obligations between parties.

Regardless of the outcome of the case, the dispute is a reminder to all in the M&A industry that the context in which preliminary agreements are made and the conduct of negotiations, including representations made by advisers, may be examined by the courts when considering a claim for misleading and deceptive conduct or when considering whether a preliminary agreement is binding despite the parties' agreement that their negotiations are "subject to contract".

Practice Points

  • "Agreements to agree" may in fact be enforceable contracts depending on the materiality of outstanding points and the intentions of the parties (which will be objectively assessed).
  • Be careful in the conduct of negotiations. You can't contract out of liability for misleading and deceptive conduct.
  • If parties intend that all the commercial terms outlined in the preliminary agreement are not binding and remain open to re-negotiation until a formal sale contract is signed, then this should be expressly stated in the preliminary agreement.
  • If parties intend a preliminary agreement to be binding, it should be expressly stated in the document and if any additional terms will need to be agreed in the final form contract, the preliminary agreement should contain a clear mechanism for resolution of these points.

Footnotes

1Coal Cliff Collieries v Sijehama (1991) 24 NSWLR

2GR Securities P/L v Baulkham Hills Private Hospital P/L (1986) 40 NSWLR 631 at 634E cited in Bagot v Chameleon Mining NL [2012] NSWSC 1331 at [57]

3Factory 5 Pty Ltd (In Liq) v State of Victoria (No 2) [2012] FCAFC 150 at [60]

4Factory 5 Pty Ltd (In Liq) v State of Victoria (No 2) [2012] FCAFC 150

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions