Factory 5 Pty Ltd (In Liq) v State of Victoria (No 2)

Factory 5 Pty Ltd (In Liq) sought to appeal a decision by the Federal Court of Australia which found that it had no entitlement to recover damages from the State of Victoria for the termination of negotiations for a contract to sell licensed merchandise. The case, Factory 5 Pty Ltd (In Liq) v State of Victoria (No 2), involved a dispute over whether a legally binding contract had been formed between Factory 5 and Melbourne 2006 on 23 December 2004. The crux of the case lay in interpreting a letter signed by both parties on 23 December 2004 which stated that Factory 5 "is to be appointed" subject to certain conditions being met, including reaching agreement on a legally binding long form agreement. The Court had to determine whether this letter constituted a binding contract or merely an agreement to agree in the future. The Court found that the letter did not represent a binding contract because an objective bystander would appreciate that the parties had not agreed on all critical terms at the time of signing.

The Court considered the nature of the negotiations and correspondence leading up to the signing of the letter, noting that Melbourne 2006 had proposed terms in a letter dated 16 December 2004, which was to be the basis of negotiations but not a formal offer. Factory 5 responded with its own terms, and despite several exchanges, the parties had not reached a consensus on all critical terms by the time they signed the letter on 23 December 2004. The Court concluded that the letter evidenced an agreement to agree rather than a binding contract, aligning with the principles outlined in Masters v Cameron (1954) 91 CLR 353. The Court also noted that the subsequent negotiations for a long form agreement, which ultimately failed, supported the finding that no binding contract was formed on 23 December 2004.

The appeal was dismissed, and the Court ordered that if Factory 5 did not file and serve written submissions for another order as to costs by 2 November 2012, the Court would order that Factory 5 pay the State’s costs, set off against the costs payable by the State under a previous order made on 23 May 2011. This decision underscores the importance of clear and comprehensive agreement on all critical terms before a contract can be deemed binding.