In the matter of Hunter Distillery Pty Ltd

[2022] NSWSC 948

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Hunter Distillery Pty Ltd [2022] NSWSC 948

Hearing dates:

22 March 2022

Date of orders:

18 July 2022

Decision date:

18 July 2022

Jurisdiction:

Equity - Corporations List

Before:

Williams J

Decision:

Application dismissed, see paragraph [75]

Catchwords:

CONTRACT –– defendants’ application for declaration that a binding agreement was entered into settling the proceedings and orders for specific performance of alleged agreement – where terms of alleged agreement were contained in defendants’ solicitor’s letter, to which plaintiffs’ solicitor replied accepting “the proposed basis for settlement” and stating “I will commence drafting a deed” – whether previous correspondence between parties’ solicitors outlining proposals for “settlement structure” included a deed of settlement - where alleged agreement did not address terms that parties continued to negotiate in without prejudice correspondence and draft deeds exchanged after the alleged agreement was entered into – held that the parties did not enter into a binding settlement agreement – application dismissed

Legislation Cited:

Civil Procedure Act 2005 (NSW), s 73

Cases Cited:

Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622

Feldman v GNM Australia Limited [2017] NSWCA 107

Masters v Cameron [1954] HCA 72; 91 CLR 353

Pavlovic v Universal Music Australia Pty Ltd [2015] NSWCA 313; 90 NSWLR 605

Category:

Procedural rulings

Parties:

Peter Clarke (First Plaintiff and Cross-Defendant/ First Respondent)
Hunter Distillery Pty Ltd (Second Plaintiff and Cross-Claimant/ Second Respondent)
Pokolbin Properties 1 Pty Ltd (Third Plaintiff/ Third Respondent)
Zdzislaw Joseph Slupik (First Defendant/ Applicant)
Blakberry Pty Ltd (Second Defendant)

Representation:

Counsel:
Mr G Carolan (Applicant)
Mr M Ashhurst SC with Mr M Forgacs (Respondents)

Solicitors:
Bilbie Faraday Harrison (Applicant)
SWS Lawyers (Respondents)

File Number(s):

21/136371

Publication restriction:

N/A

Judgment

Introduction

1. These reasons for judgment concern an interlocutory process filed by the first defendant in these proceedings, Mr Zdzislaw Slupik, on 16 February 2022. Mr Slupik seeks:

1. a declaration pursuant to s 73 of the Civil Procedure Act 2005 (NSW) that the plaintiffs and defendants entered into a binding settlement agreement on 20 December 2021 on the terms set out in correspondence between the parties’ solicitors of the same date; and

2. an order that the agreement be specifically performed by the plaintiffs:

1. executing a deed in the form of a document sent by the defendants’ solicitors to the plaintiffs’ solicitors on 11 February 2022; and

2. executing consent orders for the discontinuance of these proceedings.

2. The plaintiffs, who are the respondents to the interlocutory process, dispute that any binding settlement agreement was entered into.

3. For the reasons that follow, I have determined that no binding settlement agreement was entered into. The interlocutory process will therefore be dismissed.

The subject matter of the proceedings

4. The proceedings arose out of a dispute between Mr Slupik and the first plaintiff, Mr Peter Clarke, concerning the operations of a distillery business conducted as a joint venture through the second plaintiff, Hunter Distillery Pty Ltd ACN 147 989 606 (Hunter Distillery), and the third plaintiff, Pokolbin Properties 1 Pty Ltd ACN 149 066 222 (Pokolbin Properties) (the Distillery). The business produces and sells gin, vodka and schnapps.

5. The joint venture was established in about 2010 by Mr Clarke, Mr Slupik and a Mr Peter McLean. Mr McLean’s involvement ceased in about early 2014 and he has played no part in these proceedings.

6. Mr Clarke and Mr Slupik are the directors of Hunter Distillery. Mr Clarke owns fifty per cent of the shares in Hunter Distillery. The remaining fifty per cent is owned by Mayara Pty Limited, which is owned and controlled by Mr Slupik and his wife (Mayara).

7. Hunter Distillery is the trustee of the Hunter Distillery Unit Trust (HD Trust). Mr Clarke owns fifty per cent of the units in the HD Trust. The remaining fifty per cent of the units are owed by Mr and Mrs Slupik and Mayara.

8. Mr Clarke and Mr Slupik are the directors of Pokolbin Properties. That company’s shares are owned equally by Mr Clarke and Mayara.

9. Pokolbin Properties is the trustee of the Pokolbin Properties 1 Unit Trust (Pokolbin Trust). Mr Clarke owns fifty per cent of the units in the Pokolbin Trust and the remaining fifty per cent is owned by companies associated with Mr Slupik.   

10. It is common ground that Mr Clarke and Mr Slupik owe certain fiduciary obligations to one another, and to Pokolbin Properties and Hunter Distillery as the joint venture vehicles.

11. The second defendant, Blakberry Pty Ltd ACN 105 734 263 (Blakberry), owns the land on which the Distillery operates (the Land). Mr Slupik is the sole director and Mayara is the sole shareholder of Blakberry.

12. Blakberry leased part of the Land (known as the “winery building”) to Pokolbin Properties for a term of five years commencing on 1 July 2014, with an option to renew for a further five years (the Lease). Pokolbin Properties then sub‑leased the winery building to Hunter Distillery for a corresponding term of five years with an option to renew for a further five years (the Sub-lease). The options to renew under the Lease and the Sub-lease were exercisable during the period from 1 January 2019 and 31 March 2019.

13. On 1 July 2014, Blakberry granted Hunter Distillery a licence with respect to a different part of the Land.

14. It is common ground that Hunter Distillery constructed certain improvements on the Land between about March and August 2015, between about March and May 2017 and in the period after 30 June 2019.

15. Evidence was read and tendered at the hearing of the interlocutory process to the effect that the balance sheet value of Hunter Distillery’s fixed assets, including buildings and improvements, was $353,332 as at December 2020, and that Hunter Distillery earned a net profit of $1,446,917 in the period from 1 July 2020 to 28 February 2021.

16. The proceedings were commenced on 14 May 2021. Mr Clarke (the first plaintiff) was granted leave pursuant to s 237 of the Corporations Act 2001 (Cth) to commence and maintain the proceedings on behalf of Hunter Distillery and Pokolbin Properties as the second and third plaintiffs. Mr Slupik (the first defendant) was granted leave pursuant to s 237 to commence and maintain a cross-claim filed on 31 August 2021 on behalf of Hunter Distillery as cross-claimant against Mr Clarke as cross-defendant.

17. At the time of the parties’ settlement negotiations giving rise to the present application, the plaintiffs’ claims were set out in their amended statement of claim filed on 27 August 2021 to which the defendants had filed their defence on 30 September 2021. Mr Clarke had filed his defence to Hunter Distillery’s cross-claim on 11 October 2021.

18. On the pleadings, the issues in dispute between the parties concern:

1. whether Mr Slupik failed to cause the Lease and Sub-lease to be renewed and, if so, whether this constituted a breach of his statutory and fiduciary duties as a director of Pokolbin Properties and Hunter Distillery and/or a breach of his fiduciary duties owed to Mr Clarke, Pokolbin Properties and Hunter Distillery as his joint venture partners;

2. whether Mr Slupik and Blakberry made representations to Pokolbin Properties and Hunter Distillery to the effect that a new lease and sub‑lease would be granted or had been finalised and, if so, whether those representations constituted misleading or deceptive conduct that had caused loss and damage to Pokolbin Properties and Hunter Distillery;

3. whether Blakberry is estopped from resiling from the alleged representations referred to immediately above and should be ordered to grant a five year lease to Pokolbin Properties (on the basis that Pokolbin Properties would then grant a five year sub-lease to Hunter Distillery);

4. whether Mr Slupik breached his statutory and fiduciary duties as a director of Hunter Distillery and/or his fiduciary duties owed to Mr Clarke, Pokolbin Properties and Hunter Distillery as his joint venture partners by allegedly:

1. causing Hunter Distillery’s facilities and resources to be used to develop and produce products for Mr Slupik’s business, Pokolbin Distillery, in consideration for rates of payment determined by Mr Slupik unilaterally and not agreed or authorised by Hunter Distillery;

2. causing Hunter Distillery to purchase plant and equipment for Pokolbin Distillery; and

3. causing alcohol products produced and bottled at the Distillery to be removed for the benefit of Pokolbin Distillery, thereby exposing Hunter Distillery to liability under the Excise Act 1901 (Cth);

5. whether the following alleged conduct by Mr Slupik constitutes oppression within the meaning of s 232(d) and (e) of the Corporations Act 2001 (Cth):

1. making the alleged representations concerning the renewal of the Lease and Sub-lease;

2. failing to cause the Lease and Sub-lease to be renewed;

3. subsequently notifying Pokolbin Properties that the Lease had expired and causing his solicitors to issue a notice of termination of the Sub-lease to Hunter Distillery (purportedly on behalf of Pokolbin Properties);

4. causing Blakberry to terminate Hunter Distillery’s licence referred to at [13] above;

5. his alleged conduct referred to at (4) above in relation to Pokolbin Distillery;

6. whether Mr Clarke breached his statutory duties as a director of Hunter Distillery by soliciting the company’s chief distiller, Mr Paul Addis, to work for the business Small Mouth Vodka from April 2021 after Mr Clarke and Mr Addis purchased Small Mouth Vodka in about March 2020; and

7. whether Mr Clarke breached his statutory duties as a director of Hunter Distillery by using certain assets of the company for the benefit of Small Mouth Vodka.

19. In the amended statement of claim, the plaintiffs seek:

1. a declaration that Blakberry is estopped from resiling from the alleged representations concerning the Lease and Sub-lease and an order requiring Blakberry to grant a five year lease to Pokolbin Properties and requiring Pokolbin Properties to grant a five year sub-lease to Hunter Distillery;

2. damages for alleged misleading or deceptive conduct in relation to the renewal of the Lease and Sub-lease;

3. compensation under s 1317H of the Corporations Act and/or equitable compensation for Mr Slupik’s alleged breaches of his duties as a director of Pokolbin Properties and Hunter Distillery;

4. equitable compensation for Mr Slupik’s alleged breaches of fiduciary duties owed to his joint venture partners;

5. in respect of the alleged oppression, an order that Mr Slupik acquire Mr Clarke’s shares in Pokolbin Properties and Hunter Distillery and his units in the HD Trust and the Pokolbin Trust for an amount to be determined as being the fair value of those shares and units if Mr Slupik had not engaged in the alleged oppressive conduct.

20. In the cross-claim, Hunter Distillery claims damages under s 1317H of the Corporations Act for Mr Clarke’s alleged breaches of his duties as a director.

21. It is common ground that, on 18 November 2020, Mr Slupik caused the solicitors then acting for him to write to the solicitors then acting for Mr Clarke stating that his commercial relationship with Mr Clarke had irreconcilably broken down and seeking Mr Clarke’s agreement to the voluntary winding up of Hunter Distillery under Part 5.5 of the Corporations Act.

The settlement negotiations

22. The Court made orders referring the matter to mediation on 26 November 2021. The mediation was arranged for 21 December 2021.

23. In a telephone conversation approximately two weeks prior to the mediation, the plaintiffs’ solicitor told the defendants’ solicitor that he had instructions to try and settle the matter prior to mediation. The parties’ solicitors then engaged in the correspondence referred to below.

24. In describing the salient aspects of the correspondence, I will refer to Mr Clarke, Hunter Distillery and Pokolbin collectively as the plaintiffs (notwithstanding that Hunter Distillery and Mr Clarke are also cross-claimant and cross-defendant) and to Mr Slupik and Blakberry collectively as the defendants.

25. The solicitors conducting the correspondence on behalf of the parties were Mr Philip Hewitt of SWS Lawyers (SWS) for the plaintiffs and Mr Andrew Harrison of Bilbie Faraday Harrison (BFH) for the defendants.

26. On 6 December 2021, Mr Harrison wrote to Mr Hewitt in relation to a proposal they had discussed previously to obtain a joint valuation of the Hunter Distillery business in advance of the mediation. Mr Harrison put forward proposals as to the valuer to be engaged jointly by the parties and the bases on which any joint valuation should be prepared.

27. On 9 December 2021, Mr Hewitt wrote to Mr Harrison stating:

“We refer to the above matter and are instructed by our client to amend the previous offer such that:

(i)   Clarke resigns as a director of Hunter;

(ii)   Clarke’s units to be either transferred or the subject of a buy back depending on our client’s CGT position;

(iii)   Clarke shares to be transferred at a nominal rate as the companies are simply trustees of the respective trusts;

(iv)   Clarke receive fifty-five (55)% of cash currently held in the bank accounts of Hunter; and

(v)    Clarke receive fifty (50)% of the agreed value of the plant and equipment held by the trusts.

(vi)    Deed of Settlement between the parties to the current litigation to finalise all outstanding matters between the parties.”

28. There is no evidence of the terms of the “previous offer” referred to, but nothing turns on that.

29. On 10 December 2021, Mr Harrison responded to Mr Hewitt’s 9 December 2021 letter, stating that Mr Slupik:

“… will agree to settlement on the following terms:

i.   Mr Clarke resigns as a director of Hunter Distillery;

ii.   Mr Clarke’s units to be either transferred or the subject of a buy back depending on his CGT position;

iii.   Mr Clarke’s shares to be transferred at a nominal rate;

iv.   Mr Slupik will pay $150,000 to the trust for the Hunter Distillery plant equipment;

v.    The parties agree to appoint the company accountant Mr Minter to:

a.   Equalise the drawings between Mr Clarke and Mr Slupik;

b.   Identify any outstanding taxation liabilities, monies owing for employee entitlements and monies outstanding to third party creditors.

vi.   After the drawings have been equalised and the above liabilities paid, the money in the bank account be split on a 50/50 basis between Mr Clarke and Mr Slupik;

vii.   Deed of Settlement be entered into.”

30. Mr Hewitt responded in the following terms on 13 December 2021:

“Our clients [sic] instructions are:

(i)   One of the valuations by Slatterys is for a working distillery, not a fire sale situation. Your client, if settlement can be reached will get a working distillery so that the appropriate valuation should be at the higher valuation not $150,000.00;

(ii)    The current balance sheet shows stock and work in progress to be valued at $580,000.00. This needs to be reflected in any proposed valuation;

(iii)    Pokolbin Properties Unit Trust also needs to be valued and included in any proposed settlement;

(iv)    Our client believes that an independent accountant should be appointed given Minter’s position as Mr Slupik’s accountant. Please provide the names of three possible accountants;

(v)   Clearly liabilities and drawings need to be recognised, and on that basis all assets of the two trusts must also be recognised to arrive at a proper accounting for the parties.”

31. On 15 December 2021, Mr Harrison responded to Mr Hewitt’s letter referred to immediately above stating that Mr Slupik (my emphasis):

“… will agree to settlement structured on the following terms:

i.   Mr Clarke resigns as a director of Hunter Distillery;

ii.   Mr Clarke’s units are either transferred or the subject of a buy back at nominee’s value depending on his CGT position;

iii.   Mr Clarke’s shares are transferred at a nominal rate;

iv.   Plant and equipment referred to in the Slattery valuation report that is owned by Hunter Distillery be auctioned and the proceeds (after auction costs and expenses are deducted) be divided equally between Mr Clarke and Mr Slupik;

v.    An independent person (accountant) be appointed to do a stocktake as at a fixed date with Mr Slupik to obtain the stock and pay half of the independent person’s valuation to Mr Clarke;

vi.   The company accountant who is an independent professional who is familiar with the entities:

a.   Equalise the drawings between Mr Clarke and Mr Slupik;

b.   Identify any outstanding taxation liabilities, monies owing for employee entitlements and monies outstanding to third party creditors.

vii.    After the drawings have been equalised and the above liabilities paid, the money in the bank account be split on a 50/50 basis between Mr Clarke and Mr Slupik;

viii.   Deed of Release be entered into.”

32. I note that it is plain from the correspondence above that the parties had materially different views about the value of the plant and equipment as at 13 December 2021, and the proposal that the plant and equipment be auctioned and the proceeds divided equally between Mr Clarke and Slupik appears to have been introduced by Mr Slupik’s solicitor on 15 December 2021 as a mechanism to resolve that element of disagreement.

33. On 16 December 2021, Mr Hewitt replied:

“Our client [Mr Clarke] agrees to your proposal subject to the following clarifications:

1.   Any settlement relates to both the Hunter Distillery Unit Trust and the Pokolbin Properties No 1 Unit Trust such that bank accounts, drawings, current assets, non-current assets and liabilities for each is determined and agreed;

2.   An independent stocktaker be appointed that neither party accompanies on the stocktaking. Alternatively, we understand that the books of the two trusts have stock collated every month such that, unless one party has a reason to believe that the figures contained in the month end report are incorrect, the parties could utilise these figures to agree on stock;

3.   Given the bookkeeper has draft final year end accounts, those draft accounts should form the basis of any final accounts dealing with the issues required to achieve a separation of the parties. Enclosed is a draft balance sheet for Hunter Distillery which should form the basis of discussions.”

34. It will be recalled that the “proposal” with which Mr Clarke’s qualified agreement was communicated in Mr Hewitt’s 16 December 2021 letter was a proposal for the structure of a settlement.

35. On 20 December 2021, Mr Harrison sent a letter marked “without prejudice” to Mr Hewitt by email at 10:04am in the following terms:

“We refer to your letter dated 16 December 2021 and attach settlement terms our client will accept to resolve the matter.

In relation to the further points raised in your correspondence of 16 December 2021 we are instructed:

1.   Our client does not agree to using any draft final end of year accounts prepared by the bookkeeper, who is not sufficiently qualified to carry out the forensic task needed in relation to the companies and trusts;

2.    In relation to the stock-take our client agrees for neither party to be present during the stock-take;

3.    The attached provides for Mr Slupik to purchase the stock from the company at wholesale price, after which the money will filter down to both parties after the accounting exercise contemplated in the terms (and similar to the surplus funds sitting in the bank account);

4.   It is agreed for Pokolbin Properties 1 Trust to be included in the exercise undertaken by the company accountant (and you will see in the attachment the terms contemplate both companies and trusts).

We await your response once you have had the opportunity to take instructions.”

36. The attachment to the letter read as follows:

“1.   The plant and equipment owned by Hunter Distillery Pty Ltd is to be removed from the premises and auctioned. The proceeds (after auction costs and expenses) be divided equally between Mr Clarke and Mr Slupik

2.   An independent and suitably qualified person is to be appointed to carry out a stocktake of the Hunter Distillery stock as 31 December 2021. Neither party is to be present during the stocktake. Mr Slupik is to purchase the stock from Hunter Distillery at the company’s wholesale price.

3.    The accountant, Mr Minter, who is an independent professional who is familiar with the entities, is to:

a.   Identify any outstanding taxation liabilities, monies owing for employee entitlements and monies outstanding to third party creditors;

b.   Complete the accounts of the companies and trusts;

c.    Equalise the drawings between Mr Clarke and Mr Slupik;

d.   After the drawings have been equalised and the above liabilities paid, divide and pay the balance of the funds held equally between Mr Clarke and Mr Slupik;   

e.   Upon payment in 4(d) [sic] Mr Minter is to:

(i)   Register the transfer of Mr Clarke’s shares in Hunter Distillery Pty Ltd and Pokolbin Properties 1 Pty Ltd to Mr Slupik or as he directs;

(ii)   transfer Mr Clarke’s units in Hunter Distillery Unit Trust and Pokolbin Properties 1 Unit Trust to Mr Slupik or as he directs;

(iii)   Lodge with ASIC Mr Clarke’s resignation as an officeholder in the companies.

4.   The parties will execute a Deed of Release in respect of the matters identified in the Supreme Court proceedings.”

37. The terms set out in the attachment added little to the settlement structure proposed in Mr Harrison’s 15 December 2021 letter referred to at [31] above. The principal changes to the settlement structure previously proposed were that:

1. the auction of the plant and equipment was to take place off site;

2. neither party was to be present during the stocktake;

3. the amount payable for the stock was to be calculated by reference to the company’s wholesale price;

4. the accountant was to complete the accounts in addition to identifying any outstanding liabilities and equalising the drawings; and

5. Mr Clarke’s units were to be transferred to Mr Slupik (the alternative of a buy back of the units having been removed from the proposal).

38. At 11:41am on 20 December 2021, Mr Hewitt sent an email to Mr Harrison stating: “Without prejudice… we are instructed to agree to the proposed basis for settlement. I will commence drafting a deed”.

39. At 11:46am on 20 December 2021, Mr Hewitt sent a further email to Mr Harrison which stated: “please confirm that I am authorised to confirm with M/s Bergin that the mediation in [sic] not going ahead tomorrow.”

40. The defendants rely on Mr Hewitt’s email sent at 11.41am on 20 December 2021 as accepting the defendants’ offer on behalf of the plaintiffs and giving rise to a binding contract in the terms set out at [36] above.

41. At 12:53pm on 20 December 2021, Mr Hewitt sent a third email to Mr Harrison, which read “…our instructions are not to agree to the removal of the equipment, common sense says that the purchaser pay for removal otherwise I will commence to draft a deed.”

42. Mr Harrison replied on 21 December 2021, stating:

“We refer to communications yesterday.

We note at 10:04am we wrote to you with proposed settlement terms and at 11:41am you wrote back advising the proposed basis for settlement was agreed.

The wording of the proposed settlement terms was deliberate and stated the plant and equipment owned by Hunter Distillery is to be removed from the premises and auctioned.

Our instructions are not to alter this element of the agreement and for the auction of the plant and equipment to take place off-site.

Our client had valid reasons for seeking this arrangement…

…

We otherwise look forward to reviewing the draft Deed.”

43. The mediation did not proceed.

44. On 22 December 2021, Mr Hewitt sent Mr Harrison a draft deed of settlement, reserving Mr Clarke’s right to review and amend it. The draft deed included provisions relating to the following matters that had not been addressed in the terms attached to Mr Harrison’s 20 December 2021 email:

1. the identity of the auctioneer to be engaged to auction the plant and equipment and the timing of that engagement;

2. the identity of the plant and equipment to be auctioned (the draft deed excluded equipment of Hunter Distillery and/or Pokolbin Properties that is currently installed at the Pokolbin Distillery);

3. the terms and conditions on which the auction was to be carried out;

4. the right of each party to bid for items in the auction;

5. the parties’ joint liability for the costs of the auction;

6. the identity of the independent person to be engaged to carry out the stocktake and the timing of the engagement of that person;

7. the timing of Mr Slupik’s payment for the stock to Hunter Distillery after completion of the stocktake;

8. the timing of and procedures for the accounting exercise, including the parties’ right to provide information to the accountant on the condition that it is also provided to the other parties and a prohibition on either party engaging with the accountant without notifying the other party;

9. an obligation for the parties to appoint an independent expert to determine the final form of accounts in the event that the parties fail to reach agreement about the final form of accounts or if there is an “event of default” (as defined) during the accounting process;

10. a warranty by Mr Slupik in favour of Mr Clarke that the accounts for the financial year ended 30 June 2021 and the period from 1 July to 24 December 2021 would be finalised by 1 March 2022 and an obligation for Mr Slupik to pay $10,000 to Mr Clarke for breach of warranty in the event that this did not occur;

11. an indemnity by Mr Slupik in favour of Mr Clarke for any costs or penalties arising from any breach of the Excise Act as a result of the transfer of products from Hunter Distillery;

12. timing of and procedures for “Settlement” following calculation of all sums payable to Mr Clarke following the auction of the plant and equipment, the stocktake and the finalisation of the accounts;

13. the filing of a notice of discontinuance of these proceedings within 7 days after payment of those amounts to Mr Clarke;

14. mutual releases between the parties with respect to actions, demands and claims that were in any way connected with or related to the subject matter of these proceedings; and

15. mutual non-disparagement and confidentiality obligations.

45. On 24 December 2021 at 12:01pm, Mr Harrison sent Mr Hewitt a revised draft deed. Mr Harrison’s covering email read:

“Please see attached a draft Deed in word containing proposed amendments we have incorporated into it.

We realise you sent the document over as a working draft to try and get the ball rolling and it was sent without review by your client. We are in a similar position in sending this back to you at the present time (ie. The Deed arrangements are subject to review by our client).

We are content to check emails over the break and can work intermittently on trying to further advance the Deed as required.”

46. The revised draft deed contained changes to the provisions concerning many of the matters set out at [44] above. By way of example only, the revised draft deed:

1. changed the time period within which the parties were required to engage the auctioneer and independent stocktaker;

2. changed the wholesale price reference points against which the independent stocktaker was required to value the stock;

3. changed the time period within which the accountant was required to undertake the accounting exercise;

4. removed the independent expert regime from the accounting provisions;

5. deleted Mr Slupik’s warranty that the accounts would be finalised by 1 March 2022 and the corresponding obligation to pay $10,000 to Mr Clarke if this did not occur; and

6. added an indemnity by Mr Clarke in favour of Mr Slupik for any costs or penalties arising from any breach of the Excise Act from the movement of products from Hunter Distillery to Small Mouth Vodka.

47. At 12:18pm on 24 December 2021, Mr Hewitt emailed an updated draft deed to Mr Harrison. The covering email stated:

“Please see our further draft, noting that we have not reviewed the draft just forwarded to us and so this draft does not reflect any of your proposed amendments, and subject o [sic] our instructions, those proposed amendments may be acceptable to our client. Likewise, the writer shall review emails during the break and attempt to progress the matter.”

48. Mr Hewitt’s updated draft deed retained Mr Slupik’s warranty that the accounts would be completed by 1 March 2022 and his obligation to pay $10,000 to Mr Clarke in the event that the accounts were not completed by that date. Mr Hewitt’s updated draft deed also incorporated some substantive changes to the first draft that he had prepared on 22 December 2021, including:

1. a requirement for Mr Slupik or his nominee to purchase the plant and equipment installed at Pokolbin Distillery (which was to be excluded from the auction) at values yet to be approved by Mr Clarke;

2. a new provision requiring the accountant to prepare a valuation of the units in the HD Trust and Pokolbin Trust; and

3. a new independent expert determination procedure to apply in the event of any dispute between the parties concerning the accounts of Hunter Distillery, the HD Trust, Pokolbin Properties and the Pokolbin Trust and the valuation of the units in the two trusts prepared by the accountant.

49. The covering letter attached to Mr Hewitt’s updated draft deed proposed that “As an alternative to the proposed auction set out in the proposed deed, our client, for the purposes of avoiding the costs of an auction is prepared to purchase the plant and equipment from Hunter Distillery and Pokolbin Properties at the ARV rate set out in the Slattery’s report.”

50. On 10 January 2022, Mr Harrison emailed Mr Hewitt a draft deed that Mr Slupik would agree to. Mr Harrison’s covering email stated:

“… this document reflects the agreement in principle reached between the parties in an exchange of correspondence on 20 December 2021 (our letter to you dated 20 December 2021 attaching settlement terms sent 10:04am, and your email acceptance dated 20 December 2021 sent 11:41am).

The most recent draft version of the Deed you sent through introduces a number of new concepts never agreed to such as some form of penalty regime applying only to our client in the event the accounts are not finalised, that the auction be on site etc.

The wording of the agreed settlement terms were deliberate in that the plant and equipment owned by Hunter Distillery is to be removed from the premises and then auctioned.

Similarly the agreement struck was for the company accountant Mr Minter to complete the accounts of the companies and trusts, not ‘in the event of a dispute’.

We would be pleased to have your comments and instructions in relation to the attached.”

51. Mr Hewitt responded on 14 January 2022 with a revised draft deed. Mr Hewitt confirmed that the reference to a payment of $10,000 (being the “penalty regime” to which Mr Harrison had objected) had been removed, but stated that “the balance of the deed remains noting that the clauses are for the benefit of both parties and clarify the obligations of the parties. Please take instructions noting that we reserve our client’s right to amend as he has not had the opportunity to review this version.”

52. On 21 January 2022, Mr Harrison replied to Mr Hewitt with a marked-up copy of the revised draft deed referred to immediately above. Mr Harrison’s covering letter stated that his client’s position was that the correspondence exchanged between Mr Harrison and Mr Hewitt on 20 December 2021 amounted to a binding agreement between the parties in the terms of the term sheet referred to above at [36]. Mr Harrison contended that his marked-up revised draft deed reflected those agreed terms. Mr Harrison stated that “For this reason the concept of a Valuation, and our client paying an amount equal to 50% of that Valuation as a settlement term, have been removed from the version of the deed you have submitted”. Mr Harrison also stated that it was an agreed term that Hunter Distillery’s plant and equipment would be removed from the distillery premises and that therefore the auction would be held offsite, as referred to above at [41]. Finally, Mr Harrison stated that the “agreed tasks to be undertaken by the company accountant in finalising the Accounts of the companies and trusts have also been reinstated into the Deed.”

53. On 28 January 2022, Mr Hewitt wrote to Mr Harrison with an offer that Mr Clarke would accept $950,000 in full and final settlement of the proceedings on the basis that all stock, plant and equipment and cash held by the HD Trust and the Pokolbin Trust would remain with Mr Slupik.

54. On 2 February 2022, Mr Harrison responded by reiterating that the correspondence between the parties on 20 December 2021 amounted to a binding agreement but making an offer for Mr Slupik to pay Mr Clarke $250,000 for plant, equipment and stock to eliminate the requirement for the auction and stocktake.

55. At a directions hearing on 7 February 2022, the Court noted that the parties had been progressing a settlement and that Mr Slupik’s position was that a binding settlement agreement had been entered into. Directions were made for Mr Slupik to file an interlocutory process to enforce the alleged agreement.

56. On 8 February 2022, Ms Susan Moran of SWS Lawyers wrote to Mr Harrison disputing the existence of any binding settlement agreement and stating she now held instructions to progress the proceedings in the matter.

57. In a separate letter of the same date marked “without prejudice”, Mr Andrew Windybank of SWS Lawyers wrote to Mr Harrison disputing the existence of any binding settlement agreement, withdrawing Mr Clarke’s $950,000 offer referred to at [53] above and setting out an entirely new offer described as Mr Clarke’s final offer together with a substantially re-drafted deed reflecting that new offer.

58. Mr Harrison responded by letter dated 11 February 2022 maintaining that there was a binding settlement agreement, rejecting Mr Clarke’s new offer and attaching a draft deed that was said to be based on Mr Hewitt’s initial draft, amended to reflect the alleged binding settlement agreement.

59. As I have mentioned earlier in these reasons, the plaintiffs seek an order requiring that the alleged settlement agreement be specifically performed by the parties executing a deed in the form of the draft deed attached to Mr Harrison’s letter of 11 February 2022.

Consideration and determination

60. The applicable principles are well established and were not in dispute.

61. The question of whether the parties intended to bind themselves to a contract is to be determined objectively having regard to the intention disclosed by the language they have employed, reading their communications in their commercial context including the subject matter of the communications, the parties’ previous dealings leading up to the making of the alleged contract and the circumstances surrounding those previous dealings. The question is what each party, by their words and conduct, would have led a reasonable person in the position of the other party to believe: Pavlovic v Universal Music Australia Pty Ltd [2015] NSWCA 313; 90 NSWLR 605 (Pavlovic) at [15] per Bathurst CJ and [64]-[65], [72] per Beazley P, as Her Excellency then was (Meagher JA agreeing), and the authorities there cited.

62. Regard may be had to the conduct of the parties after the alleged formation of the contract in order to determine whether the parties intended at that earlier time to enter into a binding agreement: Pavlovic at [118] per Beazley P (Meagher JA agreeing) and the authorities there cited; Feldman v GNM Australia Limited [2017] NSWCA 107 (Feldman) at [90]-[91] per Beazley P (McColl and Macfarlan JJA agreeing) and the authorities there cited.

63. The three categories of case described in Masters v Cameron [1954] HCA 72; 91 CLR 353 and the fourth category described in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 are not strict, prescriptive, exhaustive or exclusive. The primary question is whether, objectively assessed, the parties intended to enter into a legally binding contract: Pavlovic at [69] per Beazley P (Meagher JA agreeing at [162]); Feldman at [67]-[71] per Beazley P (McColl and Macfarlan JJA agreeing) and the authorities there cited.

64. In the present case, the parties were negotiating the terms on which they might settle their multifaceted dispute arising from their joint venture that operated a business that had produced a net profit of almost $1.5 million in the financial year to date at the time of their negotiations. Mr Clarke wished to exit the joint venture, and the parties had very different views about the value of the assets of the joint venture. By 16 December 2021, it was common ground between the parties that the value of those assets would be established through auction of the plant and equipment and stocktake of the stock, but they had not discussed or agreed on the identity of the auctioneer and the person to conduct the stocktake. Nor had their negotiations canvassed the terms and conditions on which the auction was to be conducted, including how any reserve prices were to be struck or whether the parties themselves were entitled to bid. These matters were not addressed in the correspondence exchanged by the parties’ solicitors on 20 December 2021.

65. It was also common ground by 20 December 2021 that some form of accounting exercise would be required to determine the parties’ respective entitlements to the assets of the joint venture after equalising drawings. The defendants regarded this as a forensic task. Their 20 December 2021 terms identified the key elements of the accounting process but did not address the time frame within which it was to be conducted or the extent to which the parties would be entitled to be involved in or have any visibility over the process, including by providing information or making submissions to the accountant.

66. Contrary to the defendants’ submissions, the matters not canvassed in the 20 December 2021 terms were important. They were details that had the potential to impact the outcome of the auction, valuation and accounting process. They were therefore fertile territory for dispute, as subsequently proved to be the case. The defendants’ submissions endeavour to obscure this by referring to the simplicity of the provisions that were included in the first draft of the deed prepared by Mr Hewitt to address those matters, yet ignoring the fact that the defendants objected to and amended many of those provisions in Mr Harrison’s subsequent draft: see [44]-[46].

67. From the outset of their settlement negotiations, the solicitors had expressly stated that any agreed settlement would be recorded in a deed: see [27] and [29]. The defendants’ 20 December 2021 terms contained very little additional detail to their 15 December 2021 proposal that had been described as a mere structure for settlement: see [31] and [36]-[37] above.

68. It is my opinion that, having regard to all of those matters, a reasonable person in the plaintiffs’ position would have understood Mr Harrison’s letter dated 20 December 2021 and the attached terms as setting out the basis on which the defendants were prepared to enter into an agreement to settle the dispute, with any such agreement to be the subject of a deed executed by the parties that addressed the necessary details including the matters referred to at [64]-[65] above. I accept the plaintiffs’ submissions to that effect.

69. Contrary to the defendants’ submissions, I do not consider that the reference to a “Deed of Release” in item 4 of the 20 December 2021 terms would have led a reasonable person in the plaintiffs’ position to understand that the defendants were offering to be bound by the 20 December 2021 terms without entering into any deed governing the matters in items 1 to 3 of those terms.

60. Further, as the plaintiffs submitted, a reasonable person in the defendants’ position would have understood the plaintiffs’ response (through Mr Hewitt) on 20 December 2021 agreeing to “the proposed basis for settlement” and stating that Mr Hewitt would commence drafting a deed, as indicating that the plaintiffs did not agree to be bound unless and until the parties executed a deed governing all aspects of the basis for settlement set out in the 20 December 2021 terms.

61. In my opinion, the parties’ subsequent conduct through their solicitors confirms that neither of them intended to be bound unless and until such a deed was executed. The parties’ solicitors exchanged draft deeds over several weeks on a without prejudice and subject to instructions basis, thereby acknowledging that a deed was required to finalise their “agreement in principle” as the defendants’ solicitor described it on 10 January 2022: see [50]. I accept the defendants’ submissions that the “without prejudice” marking of the correspondence would not necessarily be determinative of whether, considered objectively, the parties had already entered into a binding agreement. However, the exchange of draft deeds subject to instructions and the continuing negotiation through the exchange of those draft deeds of material matters not addressed by the 20 December 2021 terms is inconsistent with a binding agreement having been reached earlier.

62. As the plaintiffs submitted, it is telling that the terms of the orders sought by the defendants for specific performance of the alleged agreement include an order requiring the parties to enter into a deed in the form prepared by the defendants’ solicitors on 11 February 2022. That deed incorporates terms relating to important matters about which the 20 December 2021 terms were silent or which are contrary to the 20 December 2021 terms. Those matters include the identity of the auctioneer and the timeframe within which the parties are required to engage the auctioneer, the parties’ liability for the costs of the auction, the exclusion from the auction of plant and equipment installed at Pokolbin Distillery (being the distillery operated by Mr Slupik), the reference points for the determination of the wholesale price at which Mr Slupik is to purchase from Hunter Distillery the stock identified in the stocktake and the parties’ provision of information to the accountant and communications with the accountant during the accounting process. I accept the plaintiffs’ submission that the inclusion of these matters in the 11 February 2022 deed is inconsistent with the defendants’ contention that the parties entered into a binding settlement agreement on 20 December 2021.

63. I accept the defendants’ submissions that the plaintiffs sought in February 2022 to introduce into the deed many terms that were contrary to the basis for settlement that they had accepted on 20 December 2021: see [57] above. However, that does not affect my conclusion that the parties did not intend by their communications on 20 December 2021 to bind themselves to a contract. As explained above, that conclusion relies on the terms of the 20 December 2021 correspondence considered objectively in the context of the parties’ previous communications and the conduct of both parties thereafter in seeking and failing to agree about additional matters that the correspondence demonstrates they both regarded as necessary to address in any agreement.

Conclusion and orders

74. For all of the reasons above, the defendants’ application must be dismissed. In that event, the plaintiffs sought an order that the defendants pay their costs of the application. The defendants did not identify any reason why the costs of the application should not follow the event.

75. The orders of the Court are as follows:

1. Order that the interlocutory process filed on 16 February 2022 is dismissed.

2. Order that the defendants are to pay the plaintiffs’ costs of that interlocutory process on the ordinary basis in such amount as may be agreed or assessed.

3. List the matter for directions as to the future conduct of the proceedings before the Corporations List Judge on 25 July 2022.

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Decision last updated: 18 July 2022