CONFIDENTIAL and and COMMISSIONER OF TAXATION
[2013] AATA 76
•1 March 2013
Division TAXATION APPEALS DIVISION File Number
2011/4176
Re
CONFIDENTIAL
APPLICANT
And
COMMISSIONER OF TAXATION
RESPONDENT
DIRECTION
Tribunal Egon Fice, Senior Member
Date 1 March 2013 Place Melbourne The Tribunal made a Decision 15 February 2013. In accordance with s 43AA(1) of the Administrative Appeals Tribunal Act 1975, the Tribunal directs that the text in the reasons for decision be altered in the following way:
1.Inserting the following word on the cover page before the heading ‘DECISION’:
INTERLOCUTORY
2.Deleting the following words on the cover page at the end of the paragraph entitled ‘Decision’:
The Tribunal affirms the objection decision of the Commissioner of Taxation dated 13 May 2011.
....[sgd Egon Fice]....................................................................
Egon Fice, Senior Member
[2013] AATA 76
Division TAXATION APPEALS DIVISION File Number
2011/4176
Re
CONFIDENTIAL
APPLICANT
And
COMMISSIONER OF TAXATION
RESPONDENT
Decision
Tribunal Egon Fice, Senior Member
Date 15 February 2013 Place Melbourne The Tribunal decides that disposal of the applicant’s CGT asset comprising his interest in the business occurred on 7 August 2008. The Tribunal affirms the objection decision of the Commissioner of Taxation dated 13 May 2011.
....[sgd Egon Fice]....................................................................
Egon Fice, Senior Member
TAXATION – Capital Gains Tax – Small business exemptions – CGT event A1 – Disposal of a CGT asset – Heads of Agreement – Intention to create legal relations – Binding agreement – Condition precedent and condition subsequent – Formal Contract of Sale – Sale of a Business – Date of disposal of the CGT asset
Administrative Appeals Tribunal Act 1975 (Cth) s 33
Income Tax Assessment Act 1997 (Cth) ss 104-5, 104-10, 152-15, 995-1
Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101
Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622
Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153
Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales (1982) 149 CLR 337
G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631
Masters v Cameron (1954) 91 CLR 353
Tasman Capital Pty Ltd v Sinclair and Anor (2008) 75 NSWLR 1
Sinclair, Scott & Company Limited v Naughton (1929) 43 CLR 310
Smith v Wilson (1832) 110 ER 226
Byrne DM and Heydon JD, Cross on Evidence, (3rd Australian ed, Butterworths, 1986)
Seddon NC and Ellinghaus MP, Cheshire and Fifoot's Law of Contract (9th Australian ed, LexisNexis Butterworths, 2008)
REASONS FOR DECISION
Egon Fice, Senior Member
15 February 2013
The applicant had an interest in a business in Melbourne (the business). In 2008 he decided to sell his interest in that business.
In the Capital Gains Tax (CGT) schedule of his Income Tax Return for the year ended 30 June 2009, the applicant claimed the small business active asset exemption and the small business retirement exemption to reduce a net capital gain of $704,129 to $0.
By letter dated 23 September 2010 the Commissioner of Taxation (the Commissioner) notified the applicant that the Australian Taxation Office (ATO) would be reviewing his income tax returns for the 2008 and 2009 income years. Following review, the Commissioner informed the applicant there would be a delay in issuing his notices of assessment. The Commissioner requested the applicant provide an explanation of the relevant calculations in addition to evidence to show that the applicant was a small business entity and entitled to the small business exemptions.
On 27 October 2010 the applicant was advised by the Commissioner that the review had been completed and his tax return for 30 June 2009 had been adjusted to include a net capital gain of $704,129.
On 3 November 2010 the Commissioner issued to the applicant a Notice of Assessment for the 2009 income year which included a capital gain of $704,129 in his taxable income. On 2 November 2010 the Commissioner issued a Notice of Assessment of Shortfall Penalty on the ground that the applicant treated an income tax law as applying in a particular way that was not reasonably arguable, resulting in a shortfall amount.
The applicant’s accountants, acting on behalf of the applicant, objected to the notice of assessment. The accountants stated they believed the applicant had satisfied the basic condition to access the small business CGT concession and that once that condition was satisfied, they applied capital losses to the gain followed by the 50% 12 month discount; the 50% active asset reduction; and the small business retirement exemption, as the taxpayer was 57 years of age at the time of the CGT event.
On 13 May 2011 the Commissioner issued to the applicant a Notice of Objection Decision (the objection decision) disallowing the applicant’s objection.
On 29 September 2011 the applicant lodged with the Tribunal an application for review of the Commissioner’s objection decision dated 13 May 2011.
The parties agreed that CGT event A1 occurred when the applicant disposed of his interest in the business. This is described in the table at s. 104-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as taking place when disposal contract is entered into or, if none, when [the] entity stops being [the] asset's owner. However, the parties disagreed about when the applicant entered into the disposal contract. This was because the applicant and the purchaser executed what is described as a Heads of Agreement on
7 August 2008 followed by a Contract of Sale of Business executed by the purchaser on 17 December 2008.
Apparently, although this was not discussed in any detail by the parties, the date on which the disposal of the asset occurred is critical because, to be eligible for the small business relief under Division 152-A of ITAA 1997, the applicant must satisfy the maximum net asset value test just before the CGT event (s. 152-15). Accordingly, the parties requested that the Tribunal only answer the following preliminary question:
When did the taxpayer dispose of the CGT asset comprising his interest in the business…?
Disposal of a CGT asset – generally
Section 104-10 of the ITAA 1997 provides the following:
104-10 Disposal of a CGT asset: CGT event A1
(1) CGT event A1 happens if you *dispose of a *CGT asset.
(2) You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.
Note: A change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust (see subsection 960-100(2)). This means that CGT event A1 will not happen merely because of a change in the trustee.
(3) The time of the event is:
(a) when you enter into the contract for the *disposal; or
(b) if there is no contract—when the change of ownership occurs.
...
Note 1: If the contract falls through before completion, this event does not happen because no change in ownership occurs.
Note 2: If the asset was compulsorily acquired from you: see subsection (6).
(4) You make a capital gain if the *capital proceeds from the disposal are more than the asset’s *cost base. You make a capital loss if those capital proceeds are less than the asset’s *reduced cost base. ...
While the expression dispose of is a defined term, in the inimitable style of drafting taxation legislation, when one locates the definition in s. 995-1 (1), one finds it means: you dispose of a CGT asset (in its capacity as a CGT asset) in the circumstances specified in section 104-10. The definition is unhelpful.
EVENTS RESULTING IN THE SALE OF THE BUSINESS
As will become apparent presently, the answer to the question which the parties require me to determine needs to be carefully teased out from the circumstances in which the Heads of Agreement and Contract of Sale of Business documents were executed, and the objective intention of the parties gleaned essentially from the documents. I am also conscious of the fact that the many cases which deal with the difficult subject of intention to create legal relations are cases where the dispute involved the parties to the transaction. In this matter, that is not the case. I did not have any evidence before me from the purchaser of the business.
Heads of Agreement document
The applicant and his business partner, who I will refer to as M, were the owners of the business. Prior to August 2007 the applicant and M engaged a licenced real estate agent (the agent) to find a purchaser for the business. The business operated in a highly regulated industry, being subject to both state and federal legislation.
The agent identified a likely purchaser (the purchaser) and prepared a document entitled Heads of Agreement. The agent made a witness statement on 28 August 2012 which was admitted into evidence. The agent stated that he obtained a pro forma heads of agreement, inserted information and took it to the potential purchaser for signature.
On 7 August 2008 the applicant, M and the purchaser executed the Heads of Agreement. The opening clause of that document states:
WHEREBY IT IS AGREED AS FOLLOWS:
The Vendor agrees to sell to the Purchaser and the Purchaser agrees to purchase from the Vendor, the Vendors interest in the … business described in the First Schedule below on the terms and conditions set out in such schedule:
The first schedule of the Agreement identified the name and location of the business as well as the value of goodwill, fixtures, fittings and equipment, and estimated stock at valuation, totalling $5,850,000. It stated a deposit of $20,000 was payable on the signing of the Heads of Agreement and a further $20,000 (described as the balance of the deposit) was to be paid on the signing of the formal contract. The residue of the purchase price was to be paid for goodwill, fixtures, fittings and equipment plus a further amount on account of stock in trade on or before the settlement date. The balance of the purchase money for the stock was to be paid within 10 days from the date when copies of the stock sheets were delivered. The settlement date listed was described as: On or before 20th October, 2008 or any other date that has been mutually agreed.
Following the First Schedule, under the heading Special Conditions, the Heads of Agreement stated: This agreement is subject to and conditional upon; after which the following clause headings appeared:
·… [Identifying] Number
·Lease of the Premises
·Existing Lease
·Due Diligence
·Finance
·Employees Entitlements
·Fixtures, Fittings & Equipment
·Permits, Approvals and Licences
·No Competition
·Franchises, Agencies and Permits
·Vendor to Assist with Transition
·Settlement
·Confidentiality
·Formal Contract of Sale
·Nominee Provision
·Goods and Services Tax (GST)
The clause dealing with the formal Contract of Sale stated:
12. Formal Contract of Sale,
The Vendor and the Purchaser will as soon as practicable execute a formal Contract of Sale in the form approved by the REIV containing similar terms and conditions to be prepared by [the agent].
The second schedule in the Heads of Agreement set out the procedure for stocktaking and valuation and on the final page the parties acknowledged that prior to signing, they had received a copy of the Heads of Agreement. The document also stated, immediately before the signature block, that: The parties hereby agree to be bound by the terms of this Heads of Agreement. It was signed by the applicant, M and the purchaser.
Contract of Sale of Business document
The particulars of sale in this document contained the usual information regarding the parties and their representatives as well as a purchase price of $5,250,000 plus stock. The apportionment of the purchase price which included goodwill, fixtures and fittings and stock are identical to those contained in the Heads of Agreement save for the value of stock. It also referred to the initial deposit of $20,000 as having been already paid.
Under the heading General Conditions, the Contract set out what is usually contained in this type of document including the method of payment, the obtaining of finance and dealing with the lease of the premises. Under the heading Special Conditions, there are a number of clauses under the heading Conditions Precedent. These conditions essentially deal with the ‘Identifying Number’ being granted in respect of matters dealing with the regulation of the particular industry in which the business operated. Other matters contained under this heading are matters which were also described under the heading Special Conditions in the Heads of Agreement. However, they are dealt with in significantly more detail. In addition to that, there are schedules attached to the Contract which identify with precision the assets included in the purchase price, the employees of the business which were to be taken over by the new proprietor and some rules regarding the Stocktake. Also annexed to the contract was a Form of Guarantee which, under the Contract, was to be used in the event that the vendor required one or more of the directors of the purchaser to guarantee the purchaser's performance of the Contract if the purchaser was a proprietary limited company.
In an affidavit sworn by the solicitor for the applicant, who also acted for him in the negotiations for the sale of the business, the solicitor testified that the applicant received at least two versions of a formal contract of sale signed by the purchaser but that an exchange of an agreed version of the contract between the vendors and the purchaser was not completed until 28 January 2009. It was on that date that the applicant received from the purchaser's lawyer a contract executed on behalf of the purchaser in identical form to the contract executed by the vendors which was provided to the purchaser's lawyers on
9 December 2008. The evidence indicates that following the execution of the Heads of Agreement, there were protracted negotiations between the parties or, more accurately, their legal representatives, before final agreement being reached on the terms of the Contract of Sale of Business.The counterpart Contract of Sale of Business appears to have been executed by the purchaser on 17 December 2008. That document was received by the solicitor for the applicant on 28 January 2009.
Date of disposal of CGT asset
Although both parties agreed that the relevant CGT event is A1, which provides that the disposal of a CGT asset takes place when the disposal contract is entered into, Mr Christopher Wallis of counsel, who appeared on behalf of the applicant, submitted that the Heads of Agreement document was not a disposal contract. While the applicant offered a number of possible dates on which the disposal may have taken place, they all relate to the Contract of Sale of Business. On the other hand, Mr Peter Nicholas of counsel, who appeared on behalf of the Commissioner, submitted that the disposal took place when the Heads of Agreement was signed by the vendors and purchaser on
7 August 2008.As I have already indicated above, much of the common law dealing with intention to create legal relations is based on disagreements between the parties to the contract. It is therefore perhaps unsurprising then in commercial agreements it is presumed that the parties intend to create legal relations and thus make a contract (see Seddon NC and Ellinghaus MP, Cheshire and Fifoot's Law of Contract (9th Australia ed, LexisNexis Butterworths, 2008) at 5.11). However, as the authors state, it is not uncommon that parties negotiating a contract wish to make use of a document which on its face does not appear to be a contract as such or else its status may be ambiguous, yet it may contain detailed clauses and undertakings. They suggest that it may be an aid to negotiations, or it may be an attempt to make a commitment of sorts, or it may be needed to show to a third party such as a financier.
The agent who was responsible for drafting the Heads of Agreement document testified that he had been involved in the sale or purchase of businesses of the kind in question here since 1994. He is not a lawyer. He explained the strict legislative restrictions and licensing provisions applicable to the type of business that was the subject of this dispute. He said that given the highly regulated nature of the industry in which the business operated, his experience was that business owners were reluctant to make all confidential information about their business available to every purchaser.
The agent testified that it was long-standing practice in the industry for an intending purchaser and vendor to enter into an in-confidence period of exclusivity during which the intending purchaser used professional advisers to carry out due diligence. He said the practice had evolved over the years to protect both the vendor’s and purchaser’s interest by having a prospective purchaser sign a document conferring a right to exclusive dealing and also an obligation to maintain confidentiality. The agent said this practice was embodied in a variety of documents, often called a Heads of Agreement and sometimes simply a Confidentiality Agreement. The parties to a Heads of Agreement were aware and accepted that it conferred rights to exclusive dealings and obliged confidentiality, and if the purchaser chose to proceed with the sale, they would be required to enter into a Sale Contract. The agent also said that a purchaser identified themselves as a serious intending purchaser by paying a security deposit being more than a nominal sum and, in certain circumstances, non-refundable.
The agent then testified that the way his company operated was to have the parties execute a Heads of Agreement provided by the company prior to them having taken legal advice. The company advised the parties that the Heads of Agreement did not oblige them beyond exclusivity and confidentiality but that they would be required to sign a sale contract if they decided to proceed. Evidence in identical terms was given by the applicant in a witness statement he made on 16 August 2012. He also gave evidence that in a number of other businesses of the same kind, where he was a potential purchaser but did not purchase, on each occasion he was required to sign a confidentiality agreement. He also testified that it was industry practice that a party which had signed a Heads of Agreement could walk away at any time if unsatisfied with the results of a due diligence enquiry.
The question of course is whether, irrespective of what the agent intended to be the effect of the document, or for that matter, the subjective intention of the parties, the Heads of Agreement is a legally binding document between the vendors and the purchaser which binds the parties to the disposal and acquisition of the business in question. This was clearly stated by the Supreme Court of New South Wales, Court of Appeal (Kirby P, Glass JA and McHugh JA) in G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 634 where McHugh JA, with whom Kirby P and Glass JA agreed, said:
However, the decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in light of the surrounding circumstances: Godecke v Kirwan (1973) 129 CLR 629 at 638; Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 332-334, 337. If the terms of a document indicate that the parties intended to be bound immediately, effect must be given to that intention irrespective of the subject matter, magnitude or complexity of the transaction.
The often quoted authority on the topic of intention to create legal relations is the High Court of Australia decision in Masters v Cameron (1954) 91 CLR 353. The first thing to note about that case, which involved a contract for the sale of land, is that there was a memorandum which had been signed by the seller and the purchaser. The memorandum set out a detailed description of the property and the purchase price. The only clause in the memorandum which was of concern to the Court was a statement which said:
This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my solicitors on the above terms and conditions, and to the giving of possession on or about the Fifteenth Day of March 1952.
The Court (Dixon CJ, McTiernan and Kitto JJ) had no doubt that the parties had agreed that there should be a sale and purchase and that the price and the date of possession were all clearly settled. Their Honours said, at 360:
All the essentials of a contract are there; but whether there is a contract depends entirely upon the meaning and effect of the final sentence in that portion of the document which the appellant signed.
In my opinion, the Heads of Agreement document in this matter leaves little room for doubt that the parties to that document had agreed to the sale and purchase of the business in question. As in the Masters v Cameron case, the essentials of the agreement are set out in the document. Furthermore, the Heads of Agreement expressly states that the parties agree to be bound by the terms of that document. I should also refer to a decision of the Supreme Court of Western Australia (Pidgeon, Ipp and Anderson JJ) in Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 where Ipp J said, at 111:
… The relevant circumstances may include prior negotiations and subsequent conduct:… In accordance with the general rule, however, direct expressions of intent, made after the contract was arrived at, are not admissible.
Therefore, the remaining question in this case is the effect of the stated special condition which refers to the Formal Contract of Sale.
The Court in Masters v Cameron suggested that where parties who have been in negotiations reach agreement on terms of a contractual nature but 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. The Court said, at 360:
…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.
The Court said that in each of the first two cases, there was a binding contract. That was because:
… 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.
The Court explained that the third class of cases is fundamentally different. Their Honours said, at 361-362:
… They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own: … The parties may have so provided either because they have dealt only with the major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document, as in Summer-greene v Parker (9) or simply because they wish to reserve to themselves a right to withdraw at any time until the formal document is signed. These possibilities were both referred to in Rossiter v Miller (1). Lord O'Hagan said: "Undoubtedly, if any prospective contract, involving the possibility of new terms, or the modification of those already discussed, remains to be adopted, matters must be taken to be still in a train of negotiation, and a dissatisfied party may refuse to proceed. But when an agreement embracing all the particulars essential for finality and completeness, even though it may be desired to reduce it to shape by a solicitor, is such that those particulars must remain unchanged, it is not, in my mind, less coercive because of the technical formality which remains to be made" (1).
Referring to the clause in the memorandum dealing with the formal contract of sale, the Court said, at 362:
The question depends upon the intention disclosed by the language the parties have employed, and no special form of words is essential to be used in order that there shall be no contract binding upon the parties before the execution of their agreement in its ultimate shape: Farmer v Honan (4). Nor is any formula, such as "subject to contract", so intractable as always and necessarily to produce that result: cf. Filby v Hounsell (5).
At this point, it is worthwhile noting that the Heads of Agreement document makes it very clear that the vendors and the purchaser had agreed to the sale of the business as the document expressly states that to be the case. Furthermore, they had agreed to the sale on the terms and conditions set out in the first schedule. The document also states that the parties agreed to be bound by the terms of the Heads of Agreement.
Later cases, such as the Baulkham Hills Private HospitalPty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622, suggest there is a fourth class of case in addition to the three mentioned in Masters v Cameron. McLelland J said, at 628:
There is in reality a fourth class of case additional to the three mentioned in Masters v Cameron, as recognised by Knox CJ, Rich J and Dixon J in Sinclair, Scott & Co v Naughton (1929) 43 CLR 310 at 317, namely, "… one in which the parties were 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". Their Honours refer to the speech of Lord Loreburn, in Love & Stewart v S Instone & Co (1917) 33 TLR 475 at 476, where his Lordship said that:
"It was quite lawful to make a bargain containing certain terms which one was content with, dealing with what one regarded as essentials, and at the same time to say that one would have a formal document drawn up with the full expectation that one would by consent insert in it a number of further terms. If that were the intention of the parties, then a bargain had been made, none the less that both parties felt quite sure that the formal document would comprise more than was contained in the preliminary bargain."
On appeal to the Court of Appeal, the decision of McLelland J was upheld. Dealing with the point I have referred to in the preceding paragraph, McHugh JA said, at 634-635:
Even when a document recording the terms of the parties' agreement specifically refers to the execution of a formal contract, the parties may be immediately bound. Upon the proper construction of the document, it may sufficiently appear that "the parties were 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": Sinclair, Scott & Co Ltd v Naughton (at 317).
… That decision was applied in Godecke v Kirwan where a document signed by the vendor and the purchaser offered to buy the vendor’s land at a specified price subject to the conditions of the Transfer of Land Act 1893 (WA) and eleven special conditions. Possession was to be taken "upon the signing and execution of a formal contract of sale within 28 days of acceptance of this offer". One of the special conditions provided for "a further agreement to be prepared… by (the vendor's) solicitors containing the foregoing and such other covenants and conditions as they may reasonably require". The High Court held that the document constituted a contract. Walsh J, with whose judgement Mason J agreed, said that the parties did not intend to make the execution of a formal contract a condition of the existence of a binding contract. He held (at 641) that "… there should be implied a promise by each of the parties that he would sign a formal contract within the twenty-eight days and would do everything necessary to enable this to be done within that time".
I should also point out that in the Baulkham Hills Private Hospital case before the Court of Appeal, the Court noted that the vendor, in a letter in which it accepted the offer made by the purchaser, said: On receipt of such written acceptance, our client would consider there to be a legally binding agreement in principle between yourself and it, until such time as formal Contracts were exchanged as aforesaid. Of that clause, McHugh JA said, at 635:
… Although the words "in principle" are curious, they cannot prevail against the conclusion to be drawn from the words "a legally binding agreement". Those words convincingly indicate that the parties intended to be bound immediately. Probably the phrase "legally binding agreement in principle" was intended to mean that the parties had reached agreement on the main matters and were content to be immediately bound.
The statement I have quoted above has significance in the matter before me because the Heads of Agreement contains a clause expressly stating the parties agreed to be bound by the terms of the Heads of Agreement. Furthermore, that document expressly refers to an agreement made on 7 August 2008 and it uses the words whereby it is agreed as follows, followed by the agreement to sell and purchase.
Mr Wallis submitted that, in essence, the Heads of Agreement was an agreement to agree. With respect, I cannot accept that submission. Mr Wallis also submitted that the surrounding circumstances leading to execution of the Heads of Agreement which I should consider are: that the agent was not a lawyer and provided the Heads of Agreement in response to the applicant's request; the agreement was executed at the start of negotiations before the parties had seen their lawyers; and the agent witnessed the three persons signing the agreement so that he could proceed in dealing with the purchaser in relation to the business. Despite that, in my opinion, the Heads of Agreement is clearly a document capable of binding the parties to the sale and purchase of the business. That is what the parties have expressly agreed to and they have also agreed to be bound by its terms. The only remaining question therefore is whether the so-called Special Condition, under which the Formal Contract of Sale clause appears, has the effect of negating a binding agreement until such time as the Formal Contract of Sale was executed.
While I have the benefit of the applicant's evidence regarding the circumstances in which the Heads of Agreement document was executed, including his subjective intention that the document only provided an opportunity to the prospective purchaser to carry out due diligence, I do not have any evidence from the intending purchaser describing the circumstances which led to the execution of that document. With respect to the applicant, his stated intention does not accord with what is set out in the Heads of Agreement. Objectively, if it was intended to simply accord the prospective purchaser an opportunity to carry out due diligence and to have exclusive rights of doing so, a simple confidentiality agreement would have achieved that purpose. The Heads of Agreement goes significantly further than that.
While the agreement is said to be subject to and conditional upon the execution of a formal contract of sale, the clause itself uses the words: The Vendor and Purchaser will as soon as practicable execute a formal Contract of Sale…. The applicant also contended that if the purchaser wanted to complete the purchase, then the parties would enter into a new contract for the sale of the business drawn by the solicitors in the approved form. The first thing which needs to be said is that the clause dealing with the formal Contract of Sale does not make the execution of that document conditional upon the purchaser wishing to proceed with the sale of the business. Secondly, the expression used in that clause is promissory in nature and does not sit comfortably with the statement that the agreement is subject to and conditional upon the execution of a formal contract. In fact, other than the first subject dealt with under the Special Conditions, being the Identifying Number, the remaining matters dealt with under that heading either specify that the subject matter, if not satisfied, may permit the purchaser to avoid the agreement; or they simply deal with matters in a general sense which clearly need to be fleshed out. Some examples are:
Due Diligence
…
In the event that the Purchaser being not satisfied that the purchase price herein agreed to is justified, then they may, on or before the expiration of 10 business days after the provision of the required information may cancel this agreement by notice in writing to the Vendor and the Vendor’s agent whereupon all monies paid under this agreement shall be refunded in full.
Existing Lease
…
The Purchaser may end this Contract and any money must be repaid to the purchaser if –
(a) the landlord does not consent to the transfer, or
(b) the mortgage or chargee does not consent to the transfer of the lease
Finance
This Agreement is conditional on the Purchaser securing on or before September 26th, 2008 such financial accommodation as is required by the Purchaser…
Permits, Approvals and Licences
The Purchaser obtaining all relevant permits approvals and licences to enable the Purchaser to operate the… business on the premises.
Employees Entitlements
…The Vendor shall extend offers of employment to all staff prior to the Settlement Date.
No Competition
The Vendor must not exercise, carry on or be in any manner whatsoever either directly or indirectly concerned or interested either individually or in partnership with or as a manager, servant or agent of the shareholder in, director of or beneficiary of any other person, firm, company, corporation or trust… within the in a radius of five (5) kilometres from the Premises during a period of three (3) years from the Settlement Date.
The clause dealing with the Identifying Number provides that in the event that the Identifying Number is not granted and/or surrendered on or before the settlement date, either party has the option of having the agreement (Heads of Agreement) declared null and void and to have the moneys paid under that agreement refunded to the purchaser. This clause as well as the other clauses which give the purchaser the option of avoiding the agreement make it reasonably clear that the parties had entered into a binding agreement subject to some conditions being met, and where those conditions have not been met prior to settlement date, the contract made under the Heads of Agreement may be avoided. They cannot properly be described as conditions precedent as that description is applied to conditions which must be met before a contract comes into existence. In that case, there would be no purpose in setting out clauses under the Special Conditions which expressly state that the agreement may be avoided or cancelled by one or either party if in fact there was no agreement to avoid or cancel. As the authors of Cheshire and Fifoot's Law of Contract, state at 5.25:
… Whereas there is a very strong presumption that the words 'subject to contract' operate as a condition precedent to formation, other 'subject to…' conditions may operate merely to suspend performance of an already binding contract. This type of condition is sometimes described as either a condition precedent to performance or as a condition subsequent or resolutive condition. These latter phrases are not used precisely (they are rarely linked to the subject-matter on which they operate) but they mean that a contract will be terminated (subsequent to formation) if the condition is not satisfied. The important point about conditions subsequent (or precedent to performance) is that a contract is in being and certain obligations will therefore be created.
There are other terms, such as the Employees Entitlements clause, which are not intended to place a condition on the agreement. That clause and others such as the clause dealing with Fixtures, Fittings & Equipment plainly need to be restated with more particularity.
The fact that the parties contemplated a formal agreement containing similar terms and conditions to that set out in the Heads of Agreement is not an obstacle to finding that the Heads of Agreement constitutes a binding legal agreement. This is precisely what McLelland J said in the Baulkham Hills Private Hospital case. Also, Isaacs J (although dissenting) said in Sinclair, Scott & Company Limited v Naughton (1929) 43 CLR 310 at 325:
… As observed by the Lord Chancellor (Lord Cranworth) in Ridgeway v Wharton (2), the fact of a subsequent agreement being prepared may be evidence that the previous negotiations did not amount to an agreement, but the mere fact that persons wish to have a formal agreement drawn up does not establish the proposition that they cannot be bound by a previous agreement.
The statement I have quoted above was referred to by the New South Wales Court of Appeal in Tasman Capital Pty Ltd v Sinclair (2008) 75 NSWLR 1. Giles JA with whom McColl JA and Young CJ agreed, added at [27]:
… If the parties have come to a binding agreement, it does not matter that there may be later refinement or additional agreement. Thus in John R Keith Pty Ltd v Multiplex Constructions (NSW) Pty Ltd [2002] NSWSC 43 Einstein J felicitously said at [224] that –
"… regardless of classification, the principle that is now recognised is that there can be an informal contract with the expectation that other terms will be negotiated and by consent included in the formal document. That is, to say that such further negotiations and activity regarding other terms is still to take place does not mean the existing informal contract is not binding: …”
In my opinion, this matter is similar to the Baulkham Hills Private Hospital case where there was an express acceptance of the offer by the appellant subject to formal contracts being exchanged. The acceptance letter stated that either party could rescind the contract in the event that all necessary approvals for the transfer of a licence were not received within 30 days from the date of exchange of contracts. It also contained a clause permitting the vendors to rescind the contract if the cost of works required exceeded a particular sum. As I have said above, the letter also contained a concluding clause stating there to be a legally binding agreement in principle between the parties until such time as formal contracts were exchanged. McHugh JA at 635, with whom Kirby P and Glass JA agreed, found that: The effect of the correspondence was to create an immediately binding contract which was to continue until formal contracts were exchanged.
His Honour also said that under the agreement, each party was obliged to do all that was necessary to enable the other party to have the benefit of the agreement. He said, at 635-636:
This included doing everything necessary to enable contracts to be exchanged by 18 April 1986: Godecke v Kirwin (at 641). If the parties agreed on additional terms, they would be added to the formal contract. If they did not, the formal contract would give effect only to the agreed terms and conditions of the correspondence. The case, therefore, is one where the parties were bound by the informal agreement but expected to make further contract which by consent might contain additional terms: Sinclair, Scott & Co Ltd v Naughton (at 317).
As I have already mentioned above, the formal Contract of Sale contained terms similar to those in the Heads of Agreement. The purchase price for goodwill and fixtures and fittings is identical. The stock valuation was $300,000 as opposed to $600,000 in the Heads of Agreement. The difference between the two can be explained by the passage of some five months between the two documents being executed. The initial deposit of $20,000 is identical. The restraint of trade clause is also identical. The formal contract contained two conditions dealing with the required Identifying Number associated with the conduct of the business. Again, these clauses are identical to those set out in the Heads of Agreement. The remaining so-called Special Conditions flesh out similar conditions in the Heads of Agreement as well as containing some additional clauses dealing with matters such as collection of book debts, business records, the list of assets which are included in the sale agreement as well as details regarding existing employees. In my opinion, adopting the words used by the Court in Masters v Cameron, the formal Contract of Sale simply restates the terms set out in the Heads of Agreement in a fuller and more precise form, but not different in effect. I find the parties intended to substitute the formal Contract of Sale for the Heads of Agreement which refined and added to those matters agreed earlier, although maintaining the essential terms and the effect of the earlier agreed terms.
Contrary to my findings, the applicant nevertheless submitted that the Heads of Agreement was not an enforceable disposal contract having regard to the general practice in the industry in which the business operated; the agent's past experience in selling and purchasing businesses in the industry; and the agent's assurances to the intending purchaser that they could walk away at any time if they were not satisfied with the due diligence and that they would be required to sign a formal contract if they decided to proceed with the purchase after due diligence.
With respect to the applicant, while that was certainly the agent's evidence, as I have already said, I had no evidence from the intending purchaser. However, even if I were to accept that the agent gave the intending purchaser the assurances I have referred to above, that could not alter the outcome. Objectively, the Heads of Agreement document was binding despite the fact that it may have been voidable at the option of the purchaser if, following the due diligence examination, the purchaser remained dissatisfied. It also provided that the parties agreed they would enter into a formal contract at a future time. The agreement clearly reached by the parties to the Heads of Agreement was not conditional upon the execution of the formal contract. For those reasons, I cannot accept that submission.
Mr Wallis also submitted and it was the agent's evidence that a general practice existed in the particular industry regarding dealings prior to the sale of the type of business with which we are concerned. Be that as it may, without any evidence from the purchaser, even if that were a relevant factor to be considered, I have no evidence about whether the purchaser understood the general practice or whether he had any past experience in dealing with businesses of this kind. It is therefore not a matter which I should take into consideration.
The applicant also contended that he and his business partner, or the intending purchaser would have been able to succeed on a claim for rectification of the Heads of Agreement had that been necessary. It appears from the contentions that the applicant sought to rely on oral evidence to indicate an intention not to enter into a binding agreement under the Heads of Agreement. The contentions refer to the parol evidence rule preventing extraneous evidence to assist in the construction of that document. The High Court decision in Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 made it clear that such evidence is inadmissible. Mason J said, at 352:
… Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.
As best I can understand this contention, the applicant claimed to be able to amend the clause whereby he agreed to sell to the purchaser and the purchaser agreed to purchase the interest in the business. Once again, the essential problem with this contention is the fact that the purchaser is not a party to this proceeding. I simply have no idea what the purchaser might say about the Heads of Agreement. In any event, there is no suggestion that rectification of the Heads of Agreement was sought or needed to be sought because it did not express the true intention of the parties. This contention is simply put on the basis that the applicant or the purchaser would have been able to succeed on a claim for rectification. In fact, because the applicant and the purchaser entered into the formal Contract of Sale without any amendment to the substantial terms and conditions set out in the Heads of Agreement, it seems reasonable to infer that rectification was not in contemplation by either of the parties. Of course it should be abundantly clear that this Tribunal does not have the power to order rectification of a contract, that power being solely reposed in the Court.
Furthermore, the applicant contended that the Tribunal is not bound by the rules of evidence. That is of course plainly correct as it is set out in s. 33(1)(c) of the Administrative Appeals Tribunal Act 1975. However, a Court, when interpreting the written record of the contract would exclude both oral and written evidence extrinsic to a document intended to record the entire contract. That is because, as the learned authors of Cross on Evidence, (3rd Australian ed, Butterworths, 1986) state at [20.27]:
In such circumstances, it would be pointless to admit extrinsic evidence with regard to those negotiations because it is irrelevant. It is for the same reason that evidence that one of the parties to a written agreement did not intend to be contractually bound is inadmissible. On the other hand extrinsic evidence is admissible to resolve an ambiguity in a written document as was illustrated by Lord Davey in the Privy Council….
In my respectful opinion, it is because the evidence is irrelevant that I should exclude it. To do otherwise would be to look at the applicant's subjective intentions upon, or more accurately, prior to, executing the Heads of agreement. Where those intentions are not reflected in the executed document they cannot be relied upon because the document supplants whatever may have been in contemplation prior to its execution. Furthermore, the Heads of Agreement document is not ambiguous.
The applicant also submitted that evidence of custom can be used as an aid to the construction of agreements. He referred to Smith v Wilson (1832) 110 ER 226, where evidence was admitted of a local custom to show that 1000 rabbits meant 1200 rabbits. The applicant contended that I should have regard to the industry practice in relation to entering into non-binding Heads of Agreement to facilitate the sale of the business.
Again, I cannot accept that submission. It is premised on the assumption that the Heads of Agreement document is not binding because industry practice would suggest that it is not a document intended to bind the parties. However, against this is the very clear expression used in the document itself. The parties agreed to be bound by it. Even if it were industry practice, and I have no evidence of industry practice other than from the agent and the applicant whose evidence was in fact equivocal on this point, simply stating that it was common practice to enter into a confidentiality agreement which was exclusive, I am nevertheless bound to give effect to the terms as they are expressed in the Heads of Agreement unless the objective evidence provides a rational basis for not doing so. In my opinion, it does not.
Finally, the applicant and the Commissioner submitted that I should have regard to the subsequent conduct following the execution of the Heads of Agreement in ascertaining, objectively, the parties’ intention. While it is correct to say that I can have regard to subsequent conduct following the purported entry into an agreement, I am limited to the question of whether the Heads of Agreement was legally binding on the parties as opposed to the interpretation of its terms. The New South Wales Court of Appeal (Mason P, Heydon JA and Ipp A-JA) made that clear in Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 163-164 where Heydon JA said:
The second relevant principle is that post-contractual conduct is admissible on the question of whether a contract was formed: Howard Smith & Co Ltd v Varawa (1907) 5 CLR 68 at 77;…
The third relevant principle is that post-contractual conduct is not admissible on the question of what a contract means as distinct from the question of whether it was formed.
The principles I have referred to above are usually invoked in cases where it is not clear from the exchange of correspondence between parties that they have reached a binding agreement. Heydon JA referred to several cases where a contract was inferred from the acts and conduct of the parties in the absence of the express words to that effect. In particular he said, at 178:
A similar principle was enunciated in Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 at 682, where Lord Hatherley adopted the language of a concession by Mr Herschell QC as sound:
"… he says that he will not contended that this agreement is not to be held to be a binding and firm agreement between the parties, if it should be found that, although there has been no formal recognition of the agreement in terms by the one side, yet the course of dealing and conduct of the party to whom the agreement was propounded has been such as legitimately to lead to the inference that those with whom they were dealing were made aware by that course of dealing, that the contract which they had propounded had been in fact been accepted by the persons who so dealt with them."
The first point which needs to be made is that the Heads of Agreement document, which was executed by all the parties to the transaction, expressly stated that it was binding. Therefore, it seems to me to follow that conduct subsequent to the execution of that document cannot assist in determining whether the agreement was binding. Further, it cannot be admissible on the basis of determining what the parties intended by the terms contained in the Heads of Agreement. Whether or not the parties complied with the terms set out in the Heads of Agreement cannot be indicative of whether the document constitutes a legally binding contract. While it is clear that subsequent negotiations leading to the execution of the formal Contract of Sale were protracted, and there appears to have been some difficulty in reaching agreement on the detailed terms proposed for the formal agreement, including the addition of the provision for a personal guarantee by the purchaser, the final document agreed to by the parties clearly gives effect to the terms set out in the Heads of Agreement.
Furthermore, the solicitor acting for the applicant in the course of negotiations settling the formal contract wrote to the purchaser's solicitors stating on several occasions that the Heads of Agreement was a legally binding document. I did not have in evidence any correspondence from the purchaser's solicitor denying that to be the case. It follows that, even if I were to take into account the conduct subsequent to the execution of the Heads of Agreement, there was no evidence before me that either of the parties regarded the Heads of Agreement to not be a binding legal agreement. This is despite the applicant's solicitor stating in an affidavit sworn on 16 August 2012 that in his opinion there was no binding agreement on foot between the parties to the sale of business transaction prior to 28 January 2009. Although no doubt the solicitor is entitled to change his mind, I am mindful of the fact that the solicitor's opinion set out in his affidavit is not evidence and I am not required to have regard to it.
Conclusion
The parties to this proceeding requested that I determine the preliminary question regarding when the applicant disposed of the CGT asset comprising his interests in a business. The applicant contended that the disposal took place sometime after the parties had agreed to the terms and conditions under a formal Contract of Sale. The Commissioner contended that the disposal occurred at the time the parties entered into a Heads of Agreement on 7 August 2008.
I have found that the Heads of Agreement was legally binding on the parties upon its execution. Furthermore, by that agreement, the parties agreed to the sale and purchase of the business. In other words, I have found that the disposal of the applicant's CGT asset comprising his interest in the business occurred on 7 August 2008.
I certify that the preceding 68 (sixty -eight) paragraphs are a true copy of the reasons for the decision herein of
Egon Fice, Senior Member......[sgd]..................................................................
Associate
Dated 15 February 2013
Date of hearing 29 November 2012 Counsel for the Applicant Mr C Wallis Solicitors for the Applicant Lachlan Partners Pty Ltd Counsel for the Respondent Mr P Nicholas Solicitors for the Respondent Australian Taxation Office,
Legal Services Branch
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