Australia: Collateral contracts, weak warranties and the risk of a handshake on the side

Last Updated: 21 July 2017
Article by Darren Pereira and Georgia Milne

Most Read Contributor in Australia, July 2017

In a recent decision, the NSW Supreme Court has adopted a narrow interpretation of a relatively standard warranty that is often included in share and asset sale and purchase agreements, on the basis that a strict interpretation of the wording of the warranty was inconsistent with an intention to warrant the accuracy of information disclosed. The case also concerned the use of 'side agreements' in commercial transactions.

This judgement is a timely reminder of the risks associated with side deals and 'quick-fix' variations, as well as the importance of constructional care when it comes to drafting your warranties.


ACN 151 368 124 v Pro-Pac Packaging (Aust) Pty Ltd [2017] NSWSC 913, handed down on 30 June 2017, focused on a sale of business by ACN 151 368 124 (formerly Eco Food Pack Australia Pty Ltd) (Plaintiff, Seller) to Pro-Pac Packaging (Aust) Pty Ltd (Defendant, Buyer). The parties entered into a sale agreement in June 2013, along with a number of ancillary agreements including a "side letter". The purchase price structure included The sale agreement contemplated a total consideration of approximately $6 million, payable by way of a completion payment, earnings incentives, stock and a "deferred payment" of $250,000 spread across four half-yearly instalments.

The Plaintiff commenced proceedings to recover the balance of the deferred payment together with the stock sum. While the Defendant conceded partial liability for the stock sum, it denied any exposure to the Deferred Payment and sought to set off any liability against damages claimed against the Plaintiff for breach of warranty, breach of collateral contract and/or misleading or deceptive conduct.

Interpretation of warranty

In seeking to set-off its liability for the deferred payment and stock sum, the Defendant claimed that the Plaintiff was in breach of, amongst other things, the warranties to the sale agreement. In particular, the Defendant relied on warranty 3.1(a) which stated:

All copies of documents and information provided by or on behalf of the Seller to the Buyer are complete, accurate and true copies in all material respects and are not false, misleading or deceptive.

The claim centred on a representation regarding rebate thresholds which was made by an agent of the Plaintiff to the Defendant prior to entry into the agreement. The court accepted that the representation had been made and was indeed false. Notwithstanding this, McDougall J was compelled to conclude that, based on close textual and syntactical analysis of 3.1(a), there was no breach of warranty.

While the Buyer believed the provision warranted both the completeness and accuracy of the documents, as well as the accuracy of the information, the Seller argued that where properly construed, warranty 3.1(a) gave no assurances as to the accuracy of information provided. Instead, its application was limited to warranting the accuracy of the copies only insofar as they were 'copies'.

McDougall J conceded that the warranty was 'difficult to construe'. If the Buyer's approach was adopted, the warranty should have been be read as if it stated 'all copies of documents, and all information, provided...are complete, accurate and true copies', providing two separate warranties. However, his Honour considered that such a reading did 'not sit comfortably with the repetition of the word 'copies'' or the use of the plural verb 'are'. Had the word 'copies' not appeared a second time, it would have been a simple and straightforward exercise in purposive construction to interpret the warranty as confirming the completeness and accuracy of both the copies and the information itself.

Ultimately, it was this double reference to the word 'copies' which persuaded McDougall J that the warranty was 'concerned only with the accuracy of copies' and that it would be inconsistent with that approach to interpret as 'containing an independent warranty of the accuracy (etc) of information in its character as information'.

The result was that clause 3.1(a) gave no undertakings as to the accuracy of information disclosed, and as such there was no breach and no relief for the Buyer. In acknowledging the feebleness of the resulting warranty, McDougall J noted it nevertheless represented a 'syntactically harmonious construction of the paragraph' as drafted by the parties and as such, it was the court's role to give effect to it, regardless of commerciality. While not explicitly cited, the decision did note that the agreement was drafted by the Defendant's solicitors, consistent with the principle of contra proferentum (whereby a contract may be construed against the drafting party).

Validity of Side Agreement

In denying its liability for the deferred sum, the Defendant also sought to rely on the side letter. The letter provided, amongst other things, that (a) 'in consideration of the Seller granting the Buyer a licence to occupy Premises...under the [sale agreement], the Buyer will pay the Seller the Deferred Payment...' but (b) if the Premises were sublet, assigned or otherwise disposed of before a certain date, the Seller would make a pro-rata refund the deferred payment and waive all future instalments by the Buyer.

The Plaintiff contended that the side letter was without contractual effect, either because:

  • as a collateral contract, it was inconsistent with the sale agreement, which already granted a licence to occupy the Premises and in consideration of which the letter was entered into; or
  • that it was without consideration and therefore unenforceable.

In holding the side deed invalid, McDougall J considered that its promise 'to grant that same licence' as given under the sale agreement could not be good consideration and that the resulting lack of consideration was fatal. For these reasons, and noting the inconsistency between the collateral contract and the sale agreement, his Honour held that the side letter was unenforceable and of itself offered no relief from liability for the deferred payment.


The case is a cautionary tale against complacency in the legal documentation for business transactions, especially when it comes to side deals and warranties. When drafting an agreement, parties should remember that a key function of the document is to offer certainty in the event of a dispute. It is a timely reminder that a failure to accurately express the parties' intentions, particularly when it comes to the scope of warranties, can have significant and unintended consequences. Commercial parties should resist the urge to plug the gaps in contractual arrangements with informal or ill-considered variations, and practitioners should revisit their standard warranties to consider the objective outcome of a text-based construction.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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

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

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 Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.