Universal Music Australia Pty Ltd v Pavlovic

Case [2015] NSWSC 791

Supreme Court


New South Wales

Medium Neutral Citation: Universal Music Australia Pty Limited v Pavlovic [2015] NSWSC 791
Hearing dates:20, 21, 22 May 2015, final submissions 4 June 2015
Date of orders: 19 June 2015
Decision date: 19 June 2015
Before: Sackar J
Decision:

See [223]-[225]

Catchwords:

CONTRACTS – binding agreement – existence of binding agreement – intention to create legal relations – terms of settlement agreement reduced to deed – failure to execute deed – whether execution a mere formality – whether parties intended to be immediately bound

CONTRACTS – binding agreement – subsequent conduct – subsequent conduct as admission – whether conduct solely referrable to existence of a contract

CONTRACTS – authority of solicitor to bind client – actual or ostensible authority – litigious and non-litigious contexts

CONTRACTS – termination – whether right to terminate arose – essential terms – intermediate terms – stipulations as to time – whether breach of essential term – whether fundamental breach of an intermediate term
Legislation Cited: n/a
Cases Cited: A W Ellis Engineering Pty Limited v Malago Pty Limited [2012] NSWSC 55
Abadeen Group Pty Ltd v Bluestone Property Services Pty Ltd [2009] NSWCA 386
Almond Investors Limited v Kualitree Nursery Pty Ltd [2011] NSWCA 198
ANZ Banking Group v Ciavarella [2003] NSWCA 304
Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540
Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622
Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187
Camden v McKenzie [2008] 1 Qd R 39
Cleary v Masterton [1999] NSWSC 207
Cubillo v Commonwealth (No 2) (2000) 103 FCR 1
Donellan v Watson (1990) 21 NSWLR 335
Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95
Foran v Wight (1989) 168 CLR 385
Fox v Percy (2003) 214 CLR 118
G R Securities v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631
Grave v Blazevic Holdings Pty Ltd [2012] NSWCA 329
Harvey v Phillips (1956) 95 CLR 235
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115
Locnere Pty Ltd v Jakk’s Bagel & Bread Co Pty Ltd [2003] NSWSC 1123
Lucke v Cleary (2011) 111 SASR 134
Masters v Cameron (1954) 91 CLR 353
Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1
Needlework Warehouse Pty Ltd v Chansonette Pty Ltd [2005] FCA 1525
New South Wales v Hunt (2014) 86 NSWLR 226
Newey v Westpac Banking Corporation [2014] NSWCA 319
Nguyen v Taylor (1992) 27 NSWLR 48
Niesmann v Collingridge (1921) 29 CLR 177
Owners Corporation Strata Plan 62285 v Betona Corporation (NSW) Pty Ltd [2006] NSWSC 216
Pianta v National Finance & Trustees Ltd (1964) 180 CLR 146
QLD Holdings – 1 Pty Ltd v Collingwood Holdings [2009] NSWSC 732
Rossiter v Miller (1878) 3 App Cas 1124
Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149
Sharjade v The Commonwealth [2009] NSWCA 373
Stewart Upton Pty Ltd v Pindar (1990) NSW ConvR 55-529
Summit Properties Pty Ltd v Comserv (No 784) Pty Ltd (1981) 2 BPR 9173
Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106
Texts Cited: n/a
Category:Principal judgment
Parties: Universal Music Australia Pty Limited - plaintiff
Stephen Pavlovic & Ors – defendants
Representation:

Counsel:
R Lancaster SC - plaintiff
N Kidd SC, D Krochmalik - defendants

Solicitors:
Gilbert + Tobin - plaintiff
Levitt Robinson - defendants
File Number(s):2015/77691
Publication restriction:n/a

Judgment

  1. This matter concerns two questions. The first is whether or not the plaintiff (Universal) entered into a binding agreement with the first, second and third defendants (collectively the Pavlovic Parties) on the terms contained in a deed of release, despite the fact that the deed was never executed by the defendants. The second is whether, if there was a binding agreement between the parties, it was lawfully terminated on 23 February 2015.

  2. On 10 April 2015 I made orders facilitating the determination of these matters as a separate question. The plaintiff’s summons, filed on 13 March 2015, seeks other forms of relief relating to a distribution agreement with the first defendant (Mr Pavlovic). Those matters do not bear upon these reasons.

  3. The fifth defendant (Modular) is a business which was founded by Mr Pavlovic in 1998. Modular’s business activities include signing artists, recording music and the sale, marketing and promotion of music recordings. The second defendant (Modularpeople) and the third defendant (Pavlovic Investments) are business entities of Mr Pavlovic. The fourth defendant (Ms Pavlovic) is Mr Pavlovic’s sister.

Background Facts

  1. From 2005, Mr Pavlovic’s shares in Modular have been held on trust for him by Ms Pavlovic. On 2 December 2005 Mr and Ms Pavlovic entered into a variety of agreements with the plaintiff, including a shareholders’ agreement (Shareholders’ Agreement). The effect of the Shareholders’ Agreement was that, from that date, Modular became a joint venture between the plaintiff and Mr Pavlovic. Each of Mr Pavlovic and the plaintiff held 500 shares in Modular.

  2. In 2009, 2011 and 2013 the terms of the Shareholders’ Agreement were varied, such that the expiry date of the joint venture relationship between Mr Pavlovic and the plaintiff was extended

  3. The Shareholders’ Agreement provided that Mr Pavlovic had primary responsibility for the artists and repertoire of Modular, whereas the plaintiff controlled Modular’s financial, accounting, and legal affairs.

  4. In late 2013 Mr Pavlovic and the plaintiff became embroiled in a dispute regarding monies allegedly owed to and by each of the plaintiff and Modularpeople under an International Distribution Agreement dated 31 May 2010 and monies allegedly owing by the plaintiff to Mr Pavlovic. Attempts to resolve these disputes were made during late 2013 and early 2014.

  5. An email of 24 September 2014 from the plaintiff to Mr Pavlovic refers to the position of the parties as being “untenable”. Mr Pavlovic’s response on 7 October 2014 acknowledges that the “relationship is untenable”.

  6. Specific discussions concerning the purchase of Mr Pavlovic’s shares in Modular and the provision of various mutual releases commenced in September 2014. These negotiations were conducted on behalf of Mr Pavlovic by Mr Stephen Gorry (Mr Gorry) of Henry Davis York and on behalf of the plaintiff by Gilbert + Tobin.

  7. On 20 November 2014 Mr Gorry wrote to Gilbert + Tobin. This email included the following remark about Mr Pavlovic’s salary:

[Mr Pavlovic] was not paid today. I assume that is because you believe that we are on the brink of settling the dispute. Please confirm my understanding is correct, if not please let me know Universal’s reasoning.

  1. Gilbert + Tobin responded as follows:

In relation to the issue of Mr Pavlovic’s pay, as set out in clause 2.2(a) of the draft deed of release, Universal requires Mr Pavlovic to resign effective 14 November 2014. I am instructed that other than in respect of the accrued annual leave, Mr Pavlovic has been paid up until 14 November 2014.

  1. It appears that a settlement meeting took place, and on 2 December 2014 Gilbert + Tobin emailed Mr Gorry a draft of the deed. Clause 2.2(a) provided that Mr Pavlovic’s resignation would be effective on 14 November 2014. Clause 2.2(b)(i) an (ii) are identical, in that version, to their final iteration in the version sent through on 24 December 2014.

  2. On 19 December 2014 at 1.39pm Mr Gorry forwarded an email of Mr Pavlovic to the plaintiff on Mr Pavlovic’s instructions. The email outlines grievances Mr Pavlovic had concerning remarks said to have been made by an employee of Universal to a work colleague of Mr Pavlovic. Mr Pavlovic indicated he would not sign the deed unless amendments were made to the “background” section or it was removed completely, the confidentiality clause was amended, and a band managed by Mr Pavlovic was moved to another Universal label. Mr Pavlovic went on to say:

I’m tired of being bullied, harassed and belittled by them [Universal] and as much as I didn’t want this to escalate to the next level there is a cut off point in my patience. I am now at that point and ready to take up the fight.

  1. The plaintiff replied at 4.28pm indicating its willingness to agree to a reciprocal non-disparagement clause and going on to say:

The negotiations to settle this dispute are now exhausted. Universal is only prepared to settle this dispute on the terms of this Deed of release until 23 December 2014.

  1. On 23 December 2014 the plaintiff’s solicitors emailed Mr Gorry attaching a proposed deed of release between the plaintiff, the defendants, and Modular (Proposed Deed). This document was expressed as being in “final form for execution”. The Proposed Deed contained various schedules, two of which were proposed deeds themselves – a deed of termination of the Shareholders’ Agreement and a deed of assignment of the trade marks.

  2. This email also set out a proposed process for entry into the Proposed Deed. This process involved the plaintiff executing the Proposed Deed on 24 December 2014, sending the original and a scanned copy along with a cheque for $100 to Mr Gorry, and then the defendants executing the Proposed Deed and sending the original and a scanned copy to the plaintiff’s solicitors.

  3. Mr Gorry sought instructions from Mr Pavlovic and there is a file note dated 24 December 2014 which reads as follows:

2.30 Pav

- instructions:

- can’t find sister

- will sign

__________________

send us the docs

__________________

  1. At 2.36pm on 24 December 2014 Mr Gorry replied to the plaintiff’s email and said “[h]e [Mr Pavlovic] will sign…I want to discuss arrangements

  2. At 2.46pm Mr Gorry sent a further email to Ms St John in the following terms:

…

I confirm the contents of my discussion with you, that Mr Pavlovic is prepared to sign the documents. He does not though, hold many of the documents you ask for in clause 4.1(b). I understood Universal would be aware of that fact, and I apologise that I had not raised the issue earlier. Would your client be content to agree that he provide all of the documents he has in his possession that fall into that group?

Please let me know if your client is happy to proceed on that basis.

…

  1. At 2.58pm Mr Gorry received a reply:

In our view clause 4.1(b) already covers the situation adequately through the words “in his possession, power or control”.

However, our client is content to give Mr Pavlovic the additional comfort that what Universal is expecting is that he will provide all of the documents he has in his possession that fall within clause 4.1(b) and will make reasonable efforts to hand over or obtain any documents that he does not currently have in his possession, consistently with that clause.

  1. At 3.06pm Mr Gorry emailed Mr Pavlovic saying “[t]hey want to sign this afternoon. Can you? Sign and scan back.” At 3.13pm Mr Pavlovic replied that “[m]y sister is not around and I am now on [sic] black town buying a gift for my daughter”. At 3.15pm Mr Gorry asked whether he could tell the plaintiff when Mr Pavlovic proposed to sign the documents. Mr Pavlovic responded “NYE??” and then, almost immediately, emailed Mr Gorry again to say “[v]ery symbolic”.

  2. At 3.29pm, Mr Gorry sent another email to Gilbert + Tobin, saying “…Assuming I get all the documents today, I will forward them to him, he will sign tomorrow, and then he will scan and forward the documents back to me and then to you on 26 December…”

  3. At 4.13pm the plaintiff’s solicitors replied to Mr Gorry, saying “[i]n the circumstances our client is prepared to allow Mr Pavlovic a further 48 hours to sign the documents and forward copies to us.” The plaintiff did not send an executed copy of the Proposed Deed, or the cheque for $100, to Mr Gorry or Mr Pavlovic until after Mr Pavlovic sought to terminate the agreement on 23 February 2015. None of the defendants executed the Proposed Deed.

  4. On 27 December 2014, the plaintiff’s solicitors emailed Mr Gorry asking for confirmation that the Proposed Deed had been executed by the defendants.

  5. Further follow up emails were sent by Mr Dario Forato on 7 January 2015 and 9 January 2015 and by Ms Karen Don on 5 January 2015, 9 January 2015, 15 January 2015 and 19 January 2015. Ms Don’s email of 15 January 2015 asks Mr Pavlovic whether there is “any news on when [Ms Pavlovic] will be signing the documents?” Her email of 19 January 2015 asks Mr Pavlovic to please let her know when the plaintiff will be receiving the signed documents.

  6. An email of 20 January 2015 between Mr Pavlovic and Mr Unger-Hamilton, a Universal employee, concerning the movement of a band managed by Mr Pavlovic from one label to another, is in the following terms:

Hi Pav,

I’ve chased George. He told me that your agreement is not signed off yet and that this will be held up until that happens.

When do you expect that to be resolved?

  1. On 23 January 2015 Gilbert + Tobin wrote to Mr Gorry, saying that the plaintiff had not received a signed copy of the Proposed Deed, despite Mr Pavlovic’s indication on 6 January 2015 that he had signed it, and that attempts by the plaintiff to contact Mr Pavlovic has been unsuccessful.

Submissions of the parties

Whether the parties entered into a binding agreement

  1. The plaintiff submits that the parties entered into a binding agreement on or around 24 December 2014, when Mr Gorry informed the plaintiff’s solicitor that Mr Pavlovic would sign the Proposed Deed. It says that, in the circumstances, this was a clear indication that agreement between the parties had been reached. The plaintiff’s primary submission is that the evidence does not support the conclusion that the execution of the Proposed Deed was a necessary precondition to it binding the parties.

  2. The plaintiff points to the fact that all material terms had been agreed and recorded in writing. It relies on, as part of the context in which the agreement is said to have been entered into, the inference it says can be drawn that the solicitors were negotiating with a view to resolving the dispute prior to the Christmas break. In this way, the plaintiff submits that the parties reached finality in the terms of their bargain and intended to be bound immediately to the performance of those terms, while also expecting to later exchange executed copies of a written agreement in the same terms.

  3. The plaintiff relies on the following factors in support of the conclusion that a binding agreement was reached:

  1. The substance and expression of the terms of the Proposed Deed were agreed on or before 24 December 2014;

  2. The clear meaning of Mr Gorry’s statement that Mr Pavlovic “will sign” was that his client had agreed to all the terms and the deal had been finalised;

  3. It is a common feature of commercial life and contractual negotiations that parties negotiate looking to an impending deadline (whether real or merely a time when, for example, people habitually take holidays);

  4. Mr Pavlovic stated in emails to the plaintiff in early January that he had signed the Proposed Deed;

  5. The purpose of the negotiations between the parties was the resolution of a serious dispute in which the plaintiff had communicated an intention to pursue substantial claims for damages and compensation against the defendants;

  6. Another purpose of the negotiations was to effect the severance of any ongoing contractual collaboration or joint enterprise between the plaintiff and the defendants;

  7. Mr Pavlovic took steps during January 2015 for which the plaintiff says the only reasonable explanation is that he was performing his obligations under the Agreement and extricating himself from the joint venture;

  8. The recitals and terms of the Deed, which make reference to the fact that the parties “have agreed to settle their disputes on the terms set out in this deed” support the position that the execution of the Deed was to formalise an enforceable agreement already subsisting between the parties;

  9. The written agreement is not expressed to require, as a precondition to its effectiveness, that it be executed, and none of the obligations of the parties are dependent on the exchange of an executed deed;

  10. The performance of certain obligations by Mr Pavlovic is consistent with the timing contemplated by the deed;

  11. The fact that there were additional documents that were to be executed by the parties, and that the plaintiff pursued Mr Pavlovic for signed copies, is unsurprising given that the parties were unwinding their affairs concerning a joint venture.

  1. In response, the defendants submit that the relationship between the parties had been regulated by a series of agreements, stretching from 2005, which provided that those agreements could only be amended by a written document signed by the parties. He says that each prior iteration of the Shareholders’ Agreement was made by deed and executed by all parties. The Proposed Deed purports to terminate both the Shareholders’ Agreement and the Executive Services Agreement. The defendants submit that the fact that the agreements between the parties could only be amended by written documents signed by all relevant parties is a strong indication that it was the intention of the parties that those agreements would only be amended upon the execution by all the parties of the Proposed Deed.

  2. Secondly, the defendants say that the dispute between the plaintiff and Mr Pavlovic had been ongoing for well over 12 months by the time the Proposed Deed was finalised, and that the culmination of the process was to be the end of a commercial relationship that had lasted for almost a decade. The defendants say commercial relations between the parties had been governed by a detailed regime of rights and obligations and, in that context, it should not be concluded lightly that the parties intended to resolve the dispute without all of them having executed the Proposed Deed.

  3. Furthermore, the defendants submit that the fact the negotiation process involved the drafting of the Proposed Deed objectively suggest that the parties did not intend to be bound until the proper formalities were adhered to. In these circumstances, where a deed was prepared, the defendants say it is very unlikely the parties intended to be bound by an email exchange between solicitors.

  4. The defendants submit that the late December correspondence between the parties cannot constitute the making of a concluded, binding bargain. They say that the email from Gilbert + Tobin of 23 December 2014 set out the process the plaintiff proposed for the parties entering into a binding agreement in the terms contained within the Proposed Deed. That is, the plaintiff would execute the Proposed Deed, the Proposed Deed as executed would be sent to Mr Gorry (with a cheque for $100), and Mr Pavlovic would then execute the Proposed Deed and send it to Gilbert + Tobin. The defendants say there is nothing in the email of 23 December 2014 indicating any willingness on the part of the plaintiff to be bound by the terms of the Proposed Deed after merely receiving an email to the effect that Mr Pavlovic would sign it. They say it is plain that what the plaintiff proposed was that the parties would be bound following the execution and physical delivery of the Proposed Deed by both parties and the delivery of the $100 cheque by the plaintiff.

  5. The plaintiff submits in response that this explanation was put to Ms Don, who rejected it in favour of communicating her understanding that the email indicated an “administrative process”. The plaintiff says that if the intention had been to establish a process for the Proposed Deed to become binding, one would expect greater precision concerning the time and place of execution and exchange of the documents. In response, the defendants say it would be an error to label the “sole nominated process” for signifying assent to the agreement as an administrative process.

  1. The defendants submit that the statements that “he will sign” and “Mr Pavlovic is prepared to sign the documents” were, objectively, nothing more than statements reflecting the intentions of the defendants to be bound at a future time upon the mutual signing of the Proposed Deed. He says that the defendants did not communicate their assent and there are no words in the email correspondence from which an inference can be drawn that the parties intended to be bound immediately and without exchange of the physical documents.

  2. The defendants submit that the email from Mr Gorry which includes the statement “…Assuming I get all the documents today, I will forward them to him, he will sign tomorrow and then he will scan and forward the documents back to me and then to you…” is clearly indicative of an intention that execution and delivery of the physical document was required in order for the parties to be bound. Further, the defendants say the email of Gilbert + Tobin of the same day making reference to giving Mr Pavlovic a further 48 hours to sign the Proposed Deed and forward copies to the plaintiff indicated that the parties had not concluded a binding agreement; if they had, the defendants say it would not have been necessary for the plaintiff to extend the time in this way.

  3. Further, the defendants say that Mr Gorry had no authority to enter into the Proposed Deed on behalf of Mr Pavlovic.

  4. The defendants also point to the following features of the Proposed Deed as tending against the conclusion the parties had concluded a bargain prior to the execution of the deed:

  1. Clause 2.1(a) states that “[t]his deed is executed by the parties on a without admissions basis” and there is an execution page;

  2. The “Execution Date” defined in sch 1 of the Proposed Deed is “the date on which the last party to this deed executes it” and the Proposed Deed contains rights and obligations said to come into effect on and from the Execution Date;

  3. The Proposed Deed contains an entire agreement clause;

  4. The Proposed Deed contains a clause (7.4) which provides that “[n]o variation of this deed is effective unless made in writing and signed by each party”;

  5. The obligation on Mr Pavlovic to procure the transfer of the legal title in the shares of Modular to the plaintiff was in consideration for the payment of $100, “receipt of which is acknowledged” (cl 4.1(a));

Subsequent conduct of the parties

  1. The defendants submit that the conduct of the parties after 24 December 2014 indicates that they did not consider themselves already bound by the terms of the Proposed Deed. The defendants refer to emails from the plaintiff “chasing up” Mr Pavlovic. The defendants say that Mr Pavlovic’s indication to the plaintiff in early January 2015 is not of assistance in establishing whether the parties had entered into a binding agreement at that time. In fact, the defendants say that the reason the sole focus of the plaintiff’s emails was on the signing and physical delivery of the Proposed Deed is indicative of the fact the agreement would not be binding until the execution of the Proposed Deed.

  2. Furthermore, the defendants say that the plaintiff did not deliver an executed copy of the Proposed Deed to the defendants, did not pay the $100 and did not pay Mr Pavlovic the “Accrued Annual Leave Payment” required to be paid by 7 January 2015 until 6 March 2015, after the defendants had communicated their unwillingness to enter into the Proposed Deed.

  3. The defendants also submit that many of the obligations that would have arisen had an agreement on the terms of the Proposed Deed come into effect were not performed, including Mr Pavlovic’s resignation as director of Modular. That resignation occurred on 11 March 2015, and the defendants say that it is clear the resignation was not done pursuant to any obligation in the Proposed Deed.

  4. The defendants submit that the steps that were undertaken were not the principal obligations under the Proposed Deed and were of “small significance”. The defendants say that the failure of the parties to perform most, if not all, the critical obligations under the Proposed Deed indicates that they did not consider themselves bound until the execution and exchange of the Proposed Deed.

  5. The plaintiff submits that the natural and most reasonable explanation for Mr Pavlovic’s behaviour in January 2015 is that he had accepted the terms of the Proposed Deed and considered himself bound. The parties both accept that this matter does not raise an issue about part performance. Rather, the question is whether Mr Pavlovic’s subsequent conduct goes to demonstrating that a contract existed between the parties. The plaintiff submits that by initiating the return of materials on the date the Proposed Deed had nominated for undertaking that action Mr Pavlovic must have considered himself bound to do so by the Proposed Deed. The plaintiff says that Mr Pavlovic in cross-examination accepted that he was buying time, in the sense of performing the agreement for the time being, with the subjective, unexpressed intention to give further thought to his position

  6. The plaintiff also points to the fact that there is no evidence any objection was taken at the time to the termination of Mr Pavlovic’s salary payments. They draw attention to Mr Pavlovic accepting a cheque for the amount of his annual accrued leave in the precise amount of the Annual Leave Payment referred to in the Proposed Deed.

  7. The plaintiff submits that Mr Pavlovic’s assertion that he continued to perform work for Modular should not be accepted and that, in fact, he ceased to perform his duties as an employee and executive of Modular after December 2014.

  8. The plaintiff says that even if it is accepted that Mr Pavlovic did not sign the Proposed Deed and misrepresented the position to the plaintiff, this does not advance Mr Pavlovic’s case. The plaintiff submits that a reasonable person in the position of the plaintiff in January 2015 would have understood – as the plaintiff did understand – that Mr Pavlovic was admitting and affirming that the contract had been previously agreed and was on foot. The plaintiff says that, to the extent Mr Pavlovic may have had reservations about the contract, he did not communicate these to the plaintiff. To the extent such evidence is relevant, the plaintiff points to the evidence of Ms Don and Mr Ash that they believed that a binding agreement had been concluded between the parties.

  9. The defendants say that privileged communication between Mr Pavlovic and Mr Gorry, in which Mr Pavlovic instructed Mr Gorry that he would sign, is not relevant to the question of whether a contract had been formed. The defendants, in closing submissions, clarified that they do not rely on an argument that Mr Pavlovic did not instruct Mr Gorry that Mr Pavlovic would sign the Proposed Deed.

Mr Pavlovic’s credit

  1. The plaintiff submits that Mr Pavlovic’s denial in his oral evidence that he instructed Mr Gorry to sign the agreement should not be accepted. The plaintiff says that Mr Gorry’s file note is a contemporaneous written record by a solicitor of what occurred and recorded instructions on an important matter. Further, the plaintiff submits that Mr Gorry’s later inquiries as to when not if Mr Pavlovic would sign the Proposed Deed are consistent with the file note being an accurate record of the instructions given to him.

  2. Furthermore, the plaintiff says that as Mr Gorry has not been called by the defendants to give evidence the Court should infer that Mr Gorry’s evidence would not have supported Mr Pavlovic.

  3. The plaintiff says that Mr Pavlovic is a person who is prepared to lie and give false accounts of events in order to advance his case. The plaintiff says that Mr Pavlovic’s suggestion that Mr Gorry had told him that it was up to Mr Pavlovic whether he signed the agreement or not is not supported by any contemporaneous materials and is not consistent with the other exchanges between Mr Gorry and Mr Pavlovic.

  4. The plaintiff characterises Mr Pavlovic as being an unreliable witness and submits that the case advanced by Mr Pavlovic is reliant upon positive assertions by Mr Pavlovic that he lied when he emailed representatives of the plaintiff stating that he had signed the documents. The plaintiff says that it reflects poorly on Mr Pavlovic’s credit that he would make a deliberate representation to a counter-party in a commercial dispute about an important matter.

  5. The plaintiff also points to corrections Mr Pavlovic made to his evidence concerning alleged deficiencies in the way the plaintiff dealt with him regarding the books and records of Modular. The plaintiff draws to the Court’s attention Mr Pavlovic’s acceptance in cross examination that he had been selective in his affidavits in order to convey the impression to the Court that he had a grievance concerning the financial information provided to him. The plaintiff also says that Mr Pavlovic’s attempts to emphasise the seriousness of the alleged failure to provide financial information were prompted by his desire to advance his case, and that the structure of the Proposed Deed did not require the participants to come to a view about the value of Mr Pavlovic’s shares.

  6. The defendants submit in response that these clarifications are not indicative of poor credit; rather, although Mr Pavlovic accepted that he had seen profit and loss statements, he had not received balance sheets or information concerning the overall financial position of the company. The defendants say the evidence supports this assertion. They say further that, as the Proposed Deed involved Mr Pavlovic assigning his shares in Modular, he would have been required to form a view as to the value of the shares he was assigning.

  7. The plaintiff says, further, that Mr Pavlovic’s word that the payment of his salary ceased “without any prior warning” cannot be accepted in view of the evidence elicited during cross examination and that his assertion that he was stressed and anxious because he was being pursued by the plaintiff is implausible and further demonstrates his willingness to lie to advance his case. The defendants say that Mr Pavlovic did raise the issue with Mr Gorry, and the defendants submit that Mr Gorry’s email of 20 November 2014 in which he says “[Mr Pavlovic] was not paid today. I assume that is because you believe that we are on the brink of settling the dispute. Please confirm my understanding is correct…” corroborates Mr Pavlovic’s account.

  8. The plaintiff’s submission is that there are two far more probable explanations for the misrepresentations made by Mr Pavlovic. They say that, first, he may have been telling the truth in January 2015 when he said he had signed the Proposed Deed, but then subsequently changed his mind and destroyed the signed documents. Second, they suggest that he may not have signed the Proposed Deed but represented that he had in order to “buy time” while considering how he could escape from the agreement.

  9. The plaintiff says that Mr Pavlovic’s explanation that he did not sign the Proposed Deed because he was struggling with the indemnity clause should not be accepted. The plaintiff says that this explanation was raised for the first time at the hearing, and is implausible in view of the surrounding circumstances.

  10. The defendants submit that the evidence before the Court does support the inference that Mr Pavlovic had made representations because he was stressed and anxious. In particular, the defendants point to an email which he had Mr Gorry forward on to Gilbert + Tobin in which he said he was “tired of being harassed and belittled by [the plaintiff]”. He also had Mr Gorry make an assertion to the plaintiff on 29 September 2013 that their conduct “could be characterised as bullying, or commercial duress” and informed his current solicitor on 6 January 2015 that the plaintiff was “pressuring” him to sign and that the threats of legal action by the plaintiff had caused him a “great amount of personal stress”.

Termination of the agreement

  1. The defendants, as an alternative to the position that there was no binding agreement between the parties, say that, if there was any such agreement, it was validly terminated by the defendants on 23 February 2015.

  2. The defendants say that the terms of any agreement entered into between the parties would consist of the written terms of the Proposed Deed in addition to other provisions contained within the correspondence of the parties’ solicitors on 23 and 24 December 2014. They allege that the plaintiff failed to comply with the terms of the agreement in three respects:

  1. The plaintiff failed to deliver an executed copy of the Proposed Deed on 24 December 2014 or within a reasonable period after that date;

  2. The plaintiff failed to make payment of the sum of $100 on 24 December 2014 or within a reasonable time after that date;

  3. The Accrued Annual Leave Payment was not paid by the plaintiff on or before 7 January 2015, as required by the Proposed Deed.

  1. On 23 February 2015 the defendants purported, by letter from their solicitors to the solicitors of the plaintiff, to terminate the agreement (to the extent it had come into force). The defendants say that they are entitled to justify termination by reference to any basis available for termination at the time of termination, whether or not that basis was stated in the notice of termination.

  2. Consequently, the defendants say that the issue is whether the breaches of the agreement by the plaintiff were of a sufficiently serious nature to give the defendants a right to terminate the agreement. They allege either a breach of an essential term or a fundamental breach of an intermediate term.

  3. In response, the plaintiff rejects that the emails of 23 and 24 December 2014 concerning administrative matters formed additional terms of the agreement. They say that the Proposed Deed does not specify a time for performance of the steps discussed in the email correspondence and that it is clear that the parties considered these steps to be merely formalities. The plaintiff points out that the letter received on 2 February 2015 from Levitt Robinson made no reference to any failure by the plaintiff to comply with the terms of the agreement. It was not until 23 February 2015 that an reference was made to a termination of the agreement on the basis of a breach of an essential obligation.

  4. The plaintiff submits that the contention of the defendants that the agreement was terminated depends upon an interpretation of the Proposed Deed that does not have a foothold in the express terms and is without foundation in the context of the dealings between the parties. The plaintiff says that the three grounds relied upon by the defendants as supporting the termination of the agreement do not, independently or taken together, constitute a breach of an essential term or a sufficiently serious breach of a non-essential term. The plaintiff says that they did, in fact, perform their major obligation under the agreement – to refrain from initiating proceedings against the defendants.

  5. The plaintiff says that there is no indication that time was intended to be of the essence regarding the matters identified by the defendants, and that in context it is clear the contrary is the case. The plaintiff submits that the email correspondence clearly indicates that the parties understood that the obligations would be performed in due course. Further, the plaintiff says that the obligation to make the accrued leave payment was contingent upon Mr Pavlovic signing the relevant documents and returning various assets. The plaintiff submits that there was no particular urgency attendant upon the matters contained in the Proposed Deed and there was only a general expectation (particularly given the intervening holiday period) that matters would be finalised without unreasonable delay.

  6. The plaintiff says that Mr Pavlovic’s claim he would not have entered into the agreement without the assurance of strict performance of the plaintiff’s obligation to pay his leave entitlement prior to 7 January 2015 should not be accepted, and that the payment of the leave entitlements was, on any view, merely a consequence of his resignation as Managing Director of Modular.

  7. The plaintiff further submits that, to the extent that the plaintiff was in breach of the agreement due to late performance, it was only notified of that breach on 23 February 2015, at which point it took immediate steps to rectify it. The plaintiff says it was at all times ready and willing to perform its obligations under the agreement. The plaintiff also says that any breach by the plaintiff was a consequence of breaches by Mr Pavlovic, beginning with his failure to return the signed documents and his general silence in January 2015.

  8. Finally, the plaintiff says that Mr Pavlovic was not ready, willing and able to perform the agreement such that he could be permitted to terminate the agreement on the basis of alleged repudiation by the plaintiff. The plaintiff submits that, in fact, Mr Pavlovic’s conduct from 2 February 2015 onwards in actively disclaiming the existence of the agreement amounted to repudiatory breach, though not one that was accepted by the plaintiff.

Mr Gorry’s authority to bind Mr Pavlovic

  1. It should be noted that no point of distinction between the defendants was raised by the defendants; there were no arguments made concerning authority that were idiosyncratic to one particular defendant.

  2. The defendants submit that Mr Gorry’s emails with Gilbert + Tobin were incapable of creating a binding contract in the terms of the Proposed Deed because, except in exceptional cases, solicitors have no authority to bind their clients. The defendants say Mr Gorry had no actual authority to bind Mr Pavlovic because there was no clear and cogent evidence that Mr Pavlovic had expressly authorised Mr Gorry to enter into the contract on his behalf. The defendants point out that the execution page was to be executed by Mr Pavlovic, not a lawyer on his behalf, and that none of the relevant communications in December 2014 contain any explicit (or, Mr Pavlovic says, implicit) conferral of authority.

  3. The defendants also submit that there is no evidence Gilbert + Tobin had any authority to contract on behalf of the plaintiff.

  4. Furthermore, the defendants say that Mr Gorry had no ostensible authority to bind Mr Pavlovic. They point to authority to the effect that a solicitor authorised to negotiate and agree terms of a contract does not ordinarily have authority to enter into a contract on behalf of his or her client. They say, further, that the dispute did not take place in a litigious context such that Mr Gorry could be taken to have authority to bind Mr Pavlovic. The plaintiff says in response to this that the settlement did come into existence in a litigious context.

Legal principles

Intention to create a binding agreement

  1. Discussion of this point must commence with the seminal statement of Dixon CJ, McTiernan and Kitto JJ in Masters v Cameron (1954) 91 CLR 353 at 360-362 (emphasis added, footnotes incorporated into the text):

Where parties who have been in negotiation reach agreement upon terms of a contractual nature and 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. 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.

In each of the first two cases there is a binding contract: 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. Of these two cases the first is the more common. Throughout the decisions on this branch of the law the proposition is insisted upon which Lord Blackburn expressed in Rossiter v. Miller (1878) 3 App Cas 1124 when he said that the mere fact that the parties have expressly stipulated that there shall afterwards be a formal agreement prepared, embodying the terms, which shall be signed by the parties does not, by itself, show that they continue merely in negotiation. His Lordship proceeded: " . . . as soon as the fact is established of the final mutual assent of the parties so that those who draw up the formal agreement have not the power to vary the terms already settled, I think the contract is completed" (1878) 3 App Cas, at p 1151 : see also Sinclair, Scott & Co. Ltd. v. Naughton [1929] HCA 34; (1929) 43 CLR 310, at p 317 . A case of the second class came before this Court in Niesmann v. Collingridge (1921) 29 CLR 177 where all the essential terms of a contract had been agreed upon, and the only reference to the execution of a further document was in the term as to price, which stipulated that payment should be made "on the signing of the contract". Rich and Starke JJ. observed ((1921) 29 CLR, at pp 184, 185) that this did not make the signing of a contract a condition of agreement, but made it a condition of the obligation to pay, and carried a necessary implication that each party would sign a contract in accordance with the terms of agreement. Their Honours, agreeing with Knox C.J., held that there was no difficulty in decreeing specific performance of the agreement, "and so compelling the performance of a stipulation of the agreement necessary to its carrying out and due completion" (1921) 29 CLR, at p 185 : see also O'Brien v. Dawson [1942] HCA 8; (1942) 66 CLR 18, at p 31.

Cases of the third class are fundamentally different. 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: Governor & c. of the Poor of Kingston-upon-Hull v. Petch [1854] EngR 995; (1854) 10 Exch 610 (156 ER 583). The parties may have so provided either because they have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document, as in Summergreene v. Parker [1950] HCA 13; (1950) 80 CLR 304 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 (1878) 3 App Cas 1124. 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" (1878) 3 App Cas, at p 1149 . And Lord Blackburn said: "parties often do enter into a negotiation meaning that, when they have (or think they have) come to one mind, the result shall be put into formal shape, and then (if on seeing the result in that shape they find they are agreed) signed and made binding; but that each party is to reserve to himself the right to retire from the contract, if, on looking at the formal contract, he finds that though it may represent what he said, it does not represent what he meant to say. Whenever, on the true construction of the evidence, this appears to be the intention, I think that the parties ought not to be held bound till they have executed the formal agreement" (1878) 3 App Cas, at p 1152 . So, as Parker J. said in Von Hatzfeldt-Wildenburg v. Alexander (1912) 1 Ch 284, at p 289 in such a case there is no enforceable contract, either because the condition is unfulfilled or because the law does not recognize a contract to enter into a contract.

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 [1919] HCA 13; (1919) 26 CLR 183. Nor is any formula, such as "subject to contract", so intractable as always and necessarily to produce that result: cf. Filby v. Hounsell (1896) 2 Ch 737. But the natural sense of such words was shown by the language of Lord Westbury when he said in Chinnock v. Marchioness of Ely [1865] EngR 335; [1865] EngR 335; (1865) 4 De GJ & S 638 (46 ER 1066): "if to a proposal or offer an assent be given subject to a provision as to a contract, then the stipulation as to the contract is a term of the assent, and there is no agreement independent of that stipulation" (1865) 4 De GJ & S 638, at p 646 (46 ER, at p 1069). Again, Sir George Jessel M.R. said in Crossley v. Maycock (1874) LR 18 Eq 180: "if the agreement is made subject to certain conditions then specified or to be specified by the party making it, or by his solicitor, then, until those conditions are accepted, there is no final agreement such as the Court will enforce" (1874) LR 18 Eq, at pp 181, 182. (at p362)

  1. In Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622, McLelland J made the following observation 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”.

  1. The matter went on appeal (G R Securities v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631), and McHugh JA, with whom Kirby P and Glass JA agreed, made the following remarks at 624-5:

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 the light of the surrounding circumstances: Godecke v Kirwan (1973) 129 CLR 629 at 638; Air Great Lakes Pty Ltd v K S 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. 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).

Thus, in Niesmann v Collingridge (1921) 29 CLR 177, the defendant made a “firm offer” of his land to the plaintiff at a specified price part of which was payable “on the signing of contract”. The plaintiff verbally accepted the offer. The High Court upheld a finding that there was a binding contract. Rich J and

Starke J said (at 185) that the signing of the contract was a term of the bargain which could be specifically enforced. 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 ¼ 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 judgment 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”.

  1. The issue of whether the agreement was intended to be binding is to be determined objectively by reference to the language employed by the parties, in its context and in light of the correspondence between the parties viewed as a whole: see Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 (ABC v XIVth Commonwealth Games) at 548-550D, 551B-D (Gleeson CJ, with whom Hope and Mahoney JJA agreed); ANZ Banking Group v Ciavarella [2003] NSWCA 304 at [33] (Santow J, with whom Tobias JA and Young CJ in Eq agreed). The commercial context of the dispute must also be taken into account: ABC v XIVth Commonwealth Games at 548.

  2. The relevant principles were recently summarised by by Sackville AJA (with whom Macfarlan and Gleeson JJA agreed) in Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1 at [59] - [63]:

[59] First, in Australia the “objective” theory of contract has been accepted: see, most recently, Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640 at [35]. Consequently, in determining whether a binding contract has been concluded, the law is concerned not with the parties’ subjective intentions, but with “the outward manifestations of these intentions”: Taylor v Johnson [1983] HCA 5; 151 CLR 422 at 428 (Mason ACJ, Murphy and Deane JJ). Thus what matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; 218 CLR 451 at [22] (per curiam); Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; 219 CLR 165 at [40]-[41] (per curiam). In a case where the ordinary process of offer and acceptance has taken place, the court inquires as to what a reasonable person would infer or deduce from observing the exchanges between the parties: NC Seddon, RA Bigwood and MP Ellinghaus, Cheshire & Fifoot Law of Contract (10th Aust ed 2012, LexisNexis Butterworths) at [3.4].

[60] Secondly, it is not necessary, in determining whether a contract has been formed, to identify a precise offer or acceptance; nor is it necessary to identify a precise time at which an offer or acceptance can be identified: Ormwave Pty Limited v Smith [2007] NSWCA 210 at [68] and authorities cited at [68]-[75] (Beazley JA, Santow and Ipp JJA agreeing). The questions to be asked are:

“in all the circumstances can an agreement be inferred? Has mutual assent been manifested? What would a reasonable person in the position of the [plaintiff] and a reasonable person in the position of the defendant think as to whether there was a concluded bargain?”

Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; 53 NSWLR 153 at [81] (Heydon JA).

[61] Thirdly, an agreement that is incomplete will not give rise to an enforceable contract. As was said in Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd [1982] HCA 53; 149 CLR 600 at 604 (Gibbs CJ, Murphy and Wilson JJ):

“It is established by authority, both ancient and modern, that the courts will not lend their aid to the enforcement of an incomplete agreement, being no more than an agreement of the parties to agree at some time in the future.”

[62] An alleged contract will fail for incompleteness if, even though the parties have used clear language, a term which is regarded as essential as a matter of law has not been agreed: J W Carter, Carter on Contract (2014, LexisNexis) at [04-120]. The principle was stated by Viscount Dunedin in May and Butcher Ltd v The King [1934] 2 KB 17 n at 21:

“To be a good contract there must be a concluded bargain, and a concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties. Of course it may leave something which still has to be determined, but then that determination must be a determination which does not depend upon the agreement between the parties.”

[63] If the parties have not agreed on all essential terms, for example because they have left one such term to be settled by future agreement, the contract is incomplete no matter what the parties themselves may think: G. Scammell and Nephew Ltd v H.C. and J.G. Ouston [1941] AC 251 at 260 (Lord Russell of Killowen); O’Brien v Dawson [1942] HCA 8; 66 CLR 18 at 37 (Willams J, Rich J agreeing); Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 at 170 (Tadgell J); Australian Securities and Investments Commission v Fortescue Metals Group Ltd [2011] FCAFC 19; 190 FCR 364 at [123]-[124] (Keane CJ); at [212] (Emmett J); at [223]-[227] (Finkelstein J) (an appeal to the High Court was allowed, but not on this point: Forrest v Australian Securities and Investments Commission [2012] HCA 39; 247 CLR 486).

  1. See also A W Ellis Engineering Pty Limited v Malago Pty Limited [2012] NSWSC 55 at [96]-[113].

  2. In Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 at 105, the Court (Gaudron, McHugh, Hayne and Callinan JJ) considered (footnotes omitted):

Because the inquiry about this last aspect may take account of the subject matter of the agreement, the status of the parties to it, their relationship to one another, and other surrounding circumstances, not only is there obvious difficulty in formulating rules intended to prescribe the kinds of cases in which an intention to create contractual relations should, or should not, be found to exist, it would be wrong to do so. Because the search for the “intention to create contractual relations” requires an objective assessment of the state of affairs between the parties (as distinct from the identification of any uncommunicated subjective reservation or intention that either may harbour) the circumstances which might properly be taken into account in deciding whether there was the relevant intention are so varied as to preclude the formation of any prescriptive rules.

  1. It is also appropriate to have regard to the subsequent conduct of the parties in ascertaining their intentions at the relevant time. In Abadeen Group Pty Ltd v Bluestone Property Services Pty Ltd [2009] NSWCA 386 at [112] Sackville AJA (with whom Hodgson and Campbell JJA agreed) considered that:

112. In determining whether the parties intended to conclude a contract, their post-agreement conduct may be taken into account. The conduct may be relevant, among other purposes, in order to show that:

“it was not in the contemplation of either party that they were to be bound until all the essential preliminaries had been agreed to, nor until a formal contract had been drawn up embodying all the matters incidental to a transaction of such a nature”.

Barrier Wharfs Ltd v W Scott Fell & Co Ltd [1908] HCA 88; 5 CLR 647, at 669, per Griffiths CJ. See also Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, at 547-548, per Gleeson CJ (with whom Hope and Mahoney JJA agreed); Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; 53 NSWLR 153, at 163-164, [25], per Heydon JA.

  1. In Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149 at [99]-[106], Giles JA (with whom Hodgson and Campbell JJA agreed) set out the principles concerning consideration of subsequent conduct:

99   Regard to the parties’ subsequent communications is of some importance in this case. That regard may be had to their subsequent communications is undoubted. In Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd Gleeson CJ said at 547-8

“There is ample authority for the proposition that reference may be made to the correspondence between the parties subsequent to 13 June 1986 for the purpose of showing that ‘it was not in the contemplation of either party that they were to be bound until all the essential preliminaries had been agreed to, nor until a formal contract had been drawn up embodying all the matters incidental to a transaction of such a nature’: Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 at 669 per Griffiths CJ; see also Howard Smith and Co Ltd v Varawa (1907) 5 CLR 68; Hussey v Horne-Payne (1879) 4 App Cas 311; B Seppelt and Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 and Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251.”

100   So also in Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153 at [25] Heydon JA said succinctly, referring to the same cases, that “post-contractual conduct is admissible on the question of whether a contract is formed”.

101   In Barrier Wharfs Ltd v W Scott Fell & Co Ltd at 669 Griffiths CJ had considered that subsequent correspondence between the parties showing that they continued in negotiation “negatives the idea of an existing concluded contract”. In Howard Smith and Co Ltd v Varawa (1907) 5 CLR 68 his Honour had said at 78 that “the question being whether the parties had in fact concluded an agreement on 1st December, any statements or conduct on their part after that date inconsistent with the existence of a concluded contract are relevant for this purpose”. In B Seppelt and Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 regard was had to subsequent communications showing that the parties contemplated the execution of a formal contract, and Mahoney JA said at 9155, with reference to Barrier Wharfs Ltd v W Scott Fell & Co Ltd and Howard Smith and Co Ltd v Varawa, that although it was not conclusive on whether a binding contract had previously been made, the regard -

” … does provide support in the present case for the view that, as the parties understood it, whether the contract was to proceed was affected by matters to be agreed concerning settlement, and that in relation to that agreement, it was proposed to exchange contracts and proceed in the normal course of conveyancing”.

102   The juridical basis on which the subsequent communications bear upon contractual intention may not be settled.

103   In Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 McLelland J suggested at 9255-6 that the probative value of subsequent communications lay in the light they shed on “the proper interpretation of the earlier communications alleged to constitute the contract”, such as by showing continued negotiations whereby the alleged contractual dealings could not properly be interpreted as mutual assents to be bound; his Honour said they could also be admissions by conduct of the existence or non-existence of a subsisting contract, with the probative force “vary[ing] inversely with the strength of the available direct evidence of the matters in question”.

104   Interpretation of the earlier communications may not be an ideal description of the use of the subsequent communications on the first basis to which his Honour referred. It has been put a little differently in other cases. In Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd at 548 Gleeson CJ spoke of “interpretation and understanding of the earlier communications in that it constitutes an important source of information as to what are matters incidental, or for that matter essential, to a transaction of the nature in question”. In Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd one of Kirby P’s “principles” was -

“4. In order to determine in what areas the parties were, and were not, in agreement, and what matters they considered necessary in order for an agreement to exist, it is legitimate to examine their subsequent conduct. Where correspondence between the parties after an informal agreement refers to important terms and conditions not mentioned during that informal discussion, it may more readily be inferred that the earlier discussion was simply a preliminary negotiation and not a binding agreement;”

105   I respectfully suggest that subsequent communications are not simply aids to interpretation, or a source of information as to matters with which a concluded contract should deal. Their probative value may be more direct. To repeat, the objective intention of the parties is fact-based, and found in all the circumstances. That in their subsequent communications the parties have continued in negotiations, or have expressed the common understanding that they are not legally bound unless and until a formal contract is executed, is of itself probative as to their contractual intention: see Howard Smith and Co Ltd v Varawa, stating simply that any statements or conduct inconsistent with the existence of a concluded contract are relevant.

106   The basis of subsequent communications as admissions is very different. It does not depend on communication between the parties, and that basis gives scope for evidence of, for example, a party’s internal memoranda saying or less directly conveying that there is or is not a concluded contract. Admissions bearing upon contractual intention present difficulties. As Gleeson CJ said in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd at 550, “it will often be necessary to identify with some care the fact which is said to have been admitted”. What is said to be admitted may be a relatively straightforward fact, for example that A discussed with B the price for goods. But if a matter of mixed law and fact is involved, or the application of a legal standard, admissibility may be more contentious. It is considered in Grey v Australian Motorists & General Insurance Co Pty Ltd (1976) 1 NSWLR 669 at 675 per Glass JA and 684-5 per Mahoney JA; Jones v Sutherland Shire Council (1979) 2 NSWLR 206 at 231 per Mahoney JA; and Pitcher v Langford (1991) 23 NSWLR 142 at 147 per Kirby P and 160 per Handley JA, but see the reservations, with reference to other cases, in Cross on Evidence, Aust ed, at [33465]. An admission by conduct in a case such as the present may bring its own difficulties. And a statement that there is or is not a concluded contract, for example, may if admissible, carry significant weight or little weight depending on the circumstances, and the weight of any admission will depend on the source of knowledge of the person making the admission: cf Lustre Hosiery Ltd v York (1936) 54 CLR 134 at138-9 per Rich, Dixon, Evatt and McTiernan JJ.

  1. It is clear that conduct said to demonstrate the existence of a contract will be treated differently to conduct said to demonstrate a contract did not exist.

  2. In Cleary v Masterton [1999] NSWSC 207 Young J dealt with an issue regarding whether the parties had entered into a binding settlement agreement. In that case, following settlement discussions and a course of correspondence, a draft deed of release was prepared. A letter sent by one party said (emphasis added) “[a]s soon as that document has been sent my client will execute same and will be returned to you fairly shortly in the hope that this matter can be resolved in all it’s [sic] aspects by 13 July, 1998.” Young J considered that there was no binding agreement between the parties. He observed at [37] that the correspondence between the parties suggested that some matters between the parties remained unresolved. Young went on to say at [39]-[40]:

[39] Litigation in the Supreme Court is a serious matter and settlement of that litigation is a serious matter. If parties have brokered a deal whereby there is to be a deed of release and a discontinuance, the parties, to my mind, intend as a general rule that there is no contract until that release has been delivered and exchanged and the notice of discontinuance is at least signed. There may be in any particular set of circumstances some other intention manifested, but I think that is the general rule.

[40] In the instant case, the parties had not reached that point. Accordingly, it seems to me that this is in the third category of Masters v Cameron, that there was to be no contract until the formalities had been completed.

  1. In Niesmann v Collingridge (1921) 29 CLR 177, which was referred to in Masters v Cameron as an example of the second class of cases, the plaintiff sought specific performance of a contract for the sale of land and the question for determination was whether a binding agreement for the sale of a property was constituted by the verbal acceptance of a written offer. Quoting Lord Blackburn in Rossiter v Miller (1878) 3 App Cas 1124 at 1151, Knox CJ observed at 182:

The mere fact that the parties have expressly stipulated that there shall afterwards be a formal agreement prepared, embodying the terms, which shall be signed by the parties does not, by itself, show that they continue merely in negotiation. It is a matter to be taken into account in construing the evidence and determining whether the parties have really come to a final agreement or not. But as soon as the fact is established of the final mutual assent of the parties so that those who draw up the formal agreement have not the power to vary the terms already settled, I think the contract is completed.

  1. In Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 at 138 Brooking J made reference to the complexity of the arrangements that governed the relationships between the parties in that case. He considered it “extremely unlikely that parties in the position of those said to be contracting in the present case, whose relationships had always been regulated by a series of formal and complicated agreements, would have intended to become bound immediately...”

  2. At 176 Tadgell J referred to the “nature, magnitude and complexity” of the matters under discussion as informing his consideration of whether the parties intended to be immediately bound. At 198 Phillips J referred to the “complicated and formal” contractual relationships that had previously existed between the parties.

  3. In Locnere Pty Ltd v Jakk’s Bagel & Bread Co Pty Ltd [2003] NSWSC 1123 Palmer J said at [13]-[15] (emphasis added):

13    I am unable to accept that submission. In my opinion there is not sufficient evidence to satisfy the Court that the parties, by their conduct, evinced an intention to be bound immediately upon confirmation of acceptance of amendments to the Deed, rather than by formal execution and exchange of counterparts of the Deed, as had been contemplated. From the very beginning of discussions for compromise on 19 June 2003, the parties could have specified some means of evidencing a concluded agreement other than by Deed, which is a formal and solemn document. But for some reason they chose not to do that.

14    Thereafter, formal drafting of a Deed and its despatch with a request for execution and delivery by return, seems really to confirm that both parties regarded the agreement between them as one which should be attended by the formality entailed in execution and delivery of counterparts of a Deed. This is evident even in the acceptance by the Plaintiffs’ solicitors of the amendments to the Deed in their e-mail of 29 August. The e-mail makes it quite clear that the Plaintiffs’ solicitors still insisted upon execution of the Deed in duplicate and required that the Deed be brought to the next hearing of the matter on Monday, 1 September 2003, no doubt in order that the proceedings might then be finally disposed of after formal delivery of executed counterparts of the Deed had taken place.

15    In short, I can find nothing in the evidence as to the conduct of the parties which persuades me that they evinced an intention that a binding and enforceable agreement between them would come into existence by an exchange of e-mails rather than by exchange of executed Deeds, as they had previously stipulated.

  1. In that case, directions had been made by the Court in accordance with a document signed by the solicitor for the applicant and counsel for the respondent. The Court noted that the proceedings had been compromised by the parties and that “[s]ubject to the entry by the parties into a mutually agreeable Deed”, the applicant was to file a Notice of Discontinuance. This was considered crucial to the conclusion that the parties had not entered into a binding agreement prior to the Deed referred to being executed in a satisfactory form.

  2. In QLD Holdings – 1 Pty Ltd v Collingwood Holdings [2009] NSWSC 732 White J considered that an agreement fell into the third Masters v Cameron category, In that case, the plaintiff alleged that a document faxed to the defendant gave rise to a binding agreement for the sale of land. The defendant argued that the parties did not intend to be bound until the paperwork had been finalised by the acting solicitor. At [81], White J observed:

There is a further consideration that the document provided for the signatures of both parties. When Mr Guerinoni sent the document to Mr Castino on 19 September, it was unsigned. It would be inferred from the fact that the document provided for its being signed by both parties that even if it were intended that the document be contractually binding, that would not be so unless and until the document was signed by both parties and the signed acceptance communicated to each party. That is to say, even if the document was capable of giving rise to an immediately binding contract, that contract did not come into existence upon the provision of Mr Valentino’s signed copy of the document to Mr Guerinino. At that point, Mr Guerinoni would not be bound because he had not signed the document, although the document provided for his signature. When the document signed by Mr Guerinoni was sent to Mr Stanton, it was sent under cover of the letter from Mr Barraket that showed that Mr Guerinoni did not intend that he would be required to purchase the plaintiff’s shares by releasing the $500,000 in Mr Castino’s trust account unless the matters referred to in Mr Barraket’s letter of 24 September 2007 (quoted at para [54] above) were attended to. As Mr Valentino did not agree to all of those matters, there never was a point at which both parties expressed their intention to be bound by the terms of the document headed “Transfer of Shares & Units”.

  1. In Grave v Blazevic Holdings Pty Ltd [2012] NSWCA 329 at [55] Bergin CJ in Eq (with whom Campbell and Barrett JJA agreed), the Court of Appeal observed that the “general rule” stated by Young J in Cleary v Masterton did not rise above an empirical generalisation. There is no doubt that each case will turn upon its facts and the precise circumstances surrounding the alleged agreement.

Right to terminate

  1. In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 Gleeson CJ, Gummow, Heydon and Crennan JJ summarised the applicable principles as follows (footnotes omitted):

47   For present purposes, there are two relevant circumstances in which a breach of contract by one party may entitle the other to terminate. The first is where the obligation with which there has been failure to comply has been agreed by the contracting parties to be essential. Such an obligation is sometimes described as a condition. In Australian law, a well-known exposition was that of Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd [40] who, in comparing conditions and warranties, employed language reflected in many statutory provisions. The widespread statutory adoption of the distinction between conditions and warranties, or essential and inessential terms, is an established part of the background against which the common law has developed. The Chief Justice of New South Wales said (references omitted):

“In considering the legal consequences flowing from a breach of contract, it is necessary to remember that (i) the breach may extend to all or to some only of the promises of the defaulting party, (ii) the promises broken may be important or unimportant, (iii) the breach of any particular promise may be substantial or trivial, (iv) the breach may occur or be discovered (a) when the innocent party has not yet performed any or some of the promises on his part, or after he has performed them all, and (b) when the innocent party has received no performance from the defaulting party, or has received performance in whole or in part; and to remember also that the resultant rights of the innocent party and the nature of the remedies available to him may depend upon some or all of these matters.

The nature of the promise broken is one of the most important of the matters. If it is a condition that is broken, ie, an essential promise, the innocent party, when he becomes aware of the breach, has ordinarily the right at his option either to treat himself as discharged from the contract and to recover damages for loss of the contract, or else to keep the contract on foot and recover damages for the particular breach. If it is a warranty that is broken, ie, a non-essential promise, only the latter alternative is available to the innocent party: in that case he cannot of course obtain damages for loss of the contract.

The question whether a term in a contract is a condition or a warranty, ie, an essential or a non-essential promise, depends upon the intention of the parties as appearing in or from the contract. The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor. If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight. If he contracted in reliance upon a substantial performance of the promise, any substantial breach will ordinarily justify a discharge. In some cases it is expressly provided that a particular promise is essential to the contract, eg, by a stipulation that it is the basis or of the essence of the contract; but in the absence of express provision the question is one of construction for the Court, when once the terms of contract have been ascertained. In general, Courts of common law have been more ready than Courts of Equity to regard promises as essential. This is in part due to the fact that Courts of common law are in the main concerned with ordinary commercial contracts in which it is common to find provisions which are intended to be strictly and literally performed. It is now provided by s 13 of the Conveyancing Act 1919 (taken from the Judicature Act 1873 , 36 and 37 Victoria, Ch 66, s 25(7)) that stipulations in contracts, as to time or otherwise, which would not before the commencement of the Act have been deemed to be or to have become of the essence of such contracts in a Court of Equity shall receive in all Courts the same construction and effect as they would have heretofore received in such Court. This serves to make equitable liberality of construction supersede common law strictness, so far as is consistent with apparent intention, in fields where equity and common law overlap; but it does not affect the principle that effect must be given to the apparent intention of the parties as disclosed in the contract.”

48   What Jordan CJ said as to substantial performance, and substantial breach, is now to be read in the light of later developments in the law. What is of immediate significance is his reference to the question he was addressing as one of construction of the contract. It is the common intention of the parties, expressed in the language of their contract, understood in the context of the relationship established by that contract and (in a case such as the present) the commercial purpose it served, that determines whether a term is “essential”, so that any breach will justify termination.

49   The second relevant circumstance is where there has been a sufficiently serious breach of a non-essential term. In Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd , the English Court of Appeal was concerned with a stipulation as to seaworthiness in a charterparty. Breaches of such a stipulation could vary widely in importance. They could be trivial or serious. The Court of Appeal held that to the accepted distinction between “conditions” and “warranties”, that is, between stipulations that were in their nature essential and others, there must be added a distinction, operative within the class of non-essential obligations, between breaches that are significantly serious to justify termination and other breaches. This was a recognition that, although as a matter of construction of a contract it may not be the case that any breach of a given term will entitle the other party to terminate, some breaches of such a term may do so. Diplock LJ said that the question whether a breach by one party relieves the other of further performance of his obligations cannot always be answered by treating a contractual undertaking as either a “condition” or a “warranty”. Of some stipulations “all that can be predicated is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend upon the nature of the event to which the breach gives rise”.

50   In this way Diplock LJ set the policy of the law favouring certainty of outcome through the classification of terms as conditions against that which encourages contractual performance and favours restriction of the right to terminate to cases where breach occasions serious prejudice. As it is put in the eleventh edition of Treitel:

“[T]he policy of leaning in favour of classifying stipulations as intermediate terms can be said to promote the interests of justice by preventing the injured party from rescinding on grounds that are technical or unmeritorious.”

Perhaps the adoption of other taxonomies for contractual stipulations might achieve similar outcomes. However, Hongkong Fir was decided in 1961 and has long since passed into the mainstream law of contract as understood and practised in Australia.

51   It may be true that this Court has yet to accept Hongkong Fir as an essential element in the grounds for decision in any particular case. However, in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd, Mason A-CJ, Wilson, Brennan and Dawson JJ referred to Hongkong Fir with evident approval and said that the concept of the intermediate and innominate term brings a greater flexibility to the law of contract. With that in mind, it was entirely appropriate for Campbell J to proceed with an analysis of the facts in which Hongkong Fir was applied.

52   The practical utility of a classification which includes intermediate terms, and the consequent greater flexibility of which the Court spoke in Ankar, appears from several consequences. First, the interests of justice are promoted by limiting rights to rescind to instances of serious and substantial breaches of contract. Secondly, a just outcome is facilitated in cases where the breach is of a term which is inessential.

  1. Insofar as the defendants say that the plaintiff’s failure to comply with the time stipulations in the Proposed Deed are examples of post-contractual conduct tending to indicate the parties had not concluded a binding agreement, I disagree. Both parties were substantially performing their obligations (Mr Pavlovic in taking various steps, such as transferring domain names and returning materials, and the plaintiff in refraining from commencing proceedings). Neither party, it seems, was particularly punctilious about performing their obligations in accordance with the time stipulations in the contract. But in the first half at least of January no one was complaining. Mr Pavlovic, in taking the steps he did, never once insisted on an exchange of executed documents. Of course, given he says he was engaged in a ruse he could hardly do that for fear he would have to do the same.

  2. One point raised by the defendants was the email exchange between Mr Pavlovic and Mr Unger-Hamilton in which Mr Unger-Hamilton observed that Mr Ash from the plaintiff had told him (Mr Unger-Hamilton) that “your deal [the agreement between the plaintiff and the defendants] is not signed off yet.” I consider this statement to be equivocal, in the sense that it is not inconsistent with the plaintiff believing that a binding agreement had been entered into. Although it mentions the fact Mr Pavlovic has not “signed off”, it also focuses upon the “agreement”. It may be that by this time the plaintiff was entertaining some apprehensions about Mr Pavlovic’s tardiness in returning the relevant documents. That is not inconsistent with the parties having concluded a binding agreement.

Performance

  1. I am satisfied that Mr Pavlovic took deliberate steps during January 2015 for which the only reasonable explanation is that he was performing his obligations under the Proposed Deed and had commenced the process of extricating himself from the joint venture business.

  2. I am satisfied that in January 2015 Mr Pavlovic returned various physical and digital assets and information of Modular Recordings that had been in his possession, such as computers, computer discs, web site logins, a domain name, subscriber data bases, passwords and the like. More to the point, Mr Pavlovic does not contest that he returned these materials. He also knew at the time that the Proposed Deed and in particular cll 4.2, 4.3 and 4.4 required him to return equipment, documents and information on 5 January 2015 (T86/26). Somewhat flippantly, he tried to suggest the items were those the plaintiff was entitled to anyway. I reject that. Mr Pavlovic says he was involved, as he would have it, in a masquerade. I reject that. He was, in my view, doing exactly what he agreed. That he got cold feet cannot be gainsaid but it is not clear precisely when that occurred.

  3. Mr Pavlovic said in his evidence, somewhat pathetically, that some of the materials were just lying around and he concluded, independently of any obligations under the Proposed Deed, that he should just return them to the plaintiff (T86.35-87.01). I regard that evidence again as contrived.

  4. It can be no coincidence that Mr Pavlovic initiated the return of these materials on 5 January 2015, the date nominated in the Proposed Deed. That is, again, evidence consistent with him admitting he was bound by that deed. For what it is worth, he accepted during cross examination that he knew that his communications, for example of 13 January 2015, would be understood by the plaintiff as indicating that he had complied with his obligations under the Proposed Deed (T90.10-90.36).

  5. Mr Pavlovic knew, in accordance with the agreed arrangements, that his salary had ceased on 14 November 2014. There is simply no evidence in any of the materials before the Court that Mr Gorry, or for that matter Mr Pavlovic, apart from Mr Gorry’s enquiry, took any objection to that matter. Mr Gorry raised the issue with the plaintiff in late November, and after that point no further reference to it was made. It is obvious that both Mr Pavlovic and Mr Gorry accepted this was part of the winding up of their arrangements.

  6. On any view belatedly, but nonetheless on 6 March 2015, Mr Pavlovic received the cheque for $32,508.89 from the plaintiff for his Accrued Annual Leave Payment pursuant to cl 2.2(b)(iii) of the Deed. He banked the cheque. Mr Pavlovic says that he accepted the payment because he had resigned from his employment and considered that the cheque was a “down payment”. The problem with that is that he has never made a claim for any additional payment for any accrued leave. Again, although it may be belated, Mr Pavlovic’s conduct is entirely consistent with his performance of his obligations under the Proposed Deed and an acceptance or recognition that the plaintiff had performed theirs.

  7. Mr Pavlovic gave some evidence that suggested that he continued to work for Modular and had, in fact, remained stoically at the wheel (affidavit of 7 May 2015 [64]-[65]). If that evidence is put forward on the basis that he had not accepted the arrangements it runs contrary to all of the other evidence as to his conduct in January 2015. In any event, it does not really address (head on or otherwise) his behaviour on or about 24 December 2014. I regard this evidence as largely irrelevant to a determination of the issues in these proceedings. But even if he did those things, given his track record in the integrity department I would not believe a word he said unless it was corroborated and this evidence is not. It is self-serving, gratuitous and carries no weight, in my view.

  8. On 5, 7 and 9 January 2015 Mr Pavlovic repeated (according to him falsely) that he would be returning the “signed documents”. Objectively it seems to me that to the reasonable person he was in the process of performing his side of the bargain. Although the plaintiff made efforts to secure the signed documents, the correspondence does not give the sense that they are raising concerns or complaining; rather, they are seeking to complete the administrative formalities attendant upon the arrangement. It is to be noted, of course, that at no point during this period did Mr Pavlovic or his sister raise any concern about the $100 cheque which was clearly intended by the parties to be a token amount.

Termination of the agreement

  1. The defendants, as an alternative argument, submit that even if the Court were to find that there was a binding agreement as at 24 December 2014, the plaintiff failed to comply with the terms of the agreement in three respects and the defendants lawfully terminated it on or about 23 February 2015.

  2. The defendants contend that the terms of such an agreement would be constituted by the written terms of the Proposed Deed together with other provisions contained in the correspondence of the parties on 23 and 24 December 2014. This is a matter of controversy between the parties.

  3. The defendants thus contend that, apart from the terms contained in Proposed Deed, the agreement also included the following terms

  1. That on 24 December 2014, the plaintiff would execute the Proposed Deed;

  2. That on 24 December 2014 (or alternatively within a reasonable time after 24 December 2014), that the Proposed Deed as executed by the plaintiff (both a scanned copy and the original) would be sent by the plaintiff’s solicitors for and on behalf of the plaintiff to Mr Gorry for and on behalf of the defendants; and

  3. On 24 December 2014 (or alternatively within a reasonable time after 24 December 2014), payment of the sum of $100 would be delivered by cheque from the plaintiff’s solicitors for and on behalf of the plaintiff to Mr Gorry for and on behalf of Mr Pavlovic and Ms Angela Pavlovic (ostensibly as the consideration for the purchase of Mr Pavlovic’s shares in Modular, which were held by Angela Pavlovic as trustee).

  1. The defendants submit that the plaintiff failed to comply with these terms because, first, the plaintiff failed to deliver an executed copy of the Proposed Deed to Mr Gorry on 24 December 2014 (or within a reasonable time thereafter) and, second, the plaintiff failed to make payment of the sum of $100 (either by delivery of a cheque or at all) on 24 December 2014 (or within a reasonable time after 24 December 2014).

  2. As will be dealt with later, it is also submitted that the Accrued Annual Leave Payment was not paid by the plaintiff on or before 7 January 2015 as required by cl 2.2(b)(iii) of the Proposed Deed, the terms of which it is submitted form part of the alleged agreement. Mr Pavlovic’s annual leave payment amounted to the sum of $63,708.89 (before tax) requiring the (after tax) sum of $32,508.89 to be paid to him. It is submitted that this was an essential term of the agreement. I will come to this matter after considering the terms said to be contained in the December 2014 correspondence between the parties.

  3. As at 23 February 2015 the defendants submit that more than eight weeks had passed since the time for performance of the plaintiff’s obligation to deliver an executed copy of the deed and the plaintiff’s obligation to make the payment of $100 to Mr Pavlovic and Ms Pavlovic (and, further, more than six weeks had passed since the time for performance of the plaintiff’s obligation to make the annual leave payment to Mr Pavlovic).

  4. On 23 February 2015, by letter from its solicitors to the solicitors of the plaintiff, the defendants purported to terminate the agreement. The letter specifically made reference to the plaintiff’s failure to make the annual leave payment to Mr Pavlovic as the basis for termination. However, the defendants are entitled, they submit, to justify the termination by reference to any basis for termination that was available at the time of termination, whether or not that basis was stated in the notice of termination.

  5. The defendants correctly identified the issue to be determined as whether the breaches of the agreement by the plaintiff were of a sufficiently serious nature so as to give the defendants a right to terminate the agreement. A prelude to consideration of this matter must be, of course, whether or not the December 2014 correspondence comprised terms of any agreement between the parties.

  6. The defendants rightly point out that neither the terms of the deed nor the correspondence between the parties on 23 and 24 December 2014 contained any clauses setting out the parties’ rights to terminate the agreement upon breach by the other party or parties. As such, their respective rights are to be determined by reference to the common law.

  7. The plaintiff submits that the arrangement was not validly terminated on 23 February 2015 because the plaintiff performed each contractual obligation on 6 March 2015. It is submitted, correctly, by the plaintiff that the alleged basis of entitlement to terminate is not a failure to perform at all, but rather a failure to perform on time or by the time of the purported termination on 23 February 2015.

The obligations under the contract

  1. The Proposed Deed contemplated that the plaintiff and/or Modular would do a number of things:

  1. Make the Accrued Salary and Superannuation Payment on 14 November 2014 (cl 2.2(b)(ii)), which occurred on 14 November 2014;

  2. Make the Accrued Annual Leave Payment on or before 7 January 2015 (cl 2.2(b)(iii)), which occurred on 6 March 2015;

  3. Provide a trade mark licence to Pavlovic Investments in accordance with the Trade Mark Licence Deed, sch 7 (cl 2.5), which Modular did no later than 24 December 2014 when Mr Ash and Ms Don signed that document and other agreement documents on 24 December 2014;

  4. Grant the releases and indemnities in cl 3;

  5. Pay $100 to Mr Pavlovic and Ms Pavlovic in consideration of the transfer of their beneficial and legal interests respectively in the shares in Modular Recordings to the plaintiff (cl 4.1(a)), which occurred on 6 March 2014;

  6. Keep the contents of the agreement confidential (cl 5.1), which has been done by the plaintiff; and

  7. Not disparage the other parties (cl 5.2), which has been done by the plaintiff.

Were the time stipulations in the correspondence incorporated as terms of any agreement between the parties?

  1. The first question that arises in relation to the obligations concerning execution and exchange, and the delivery of the $100 cheque, is whether the December 2014 correspondence between the parties comprised terms of a binding agreement between the parties. I agree with the plaintiff’s submission that the language used is not consistent with them being regarded (objectively) as contractual terms, and that there is no basis for implying terms to that effect. As I have already said, the process set out by the parties in those emails was an administrative one that the parties anticipated would be completed in due course. The evidence supports the proposition that at the time of entering into the agreement on Christmas Eve 2014 the parties considered these steps to be formalities which would be completed by the parties in due course either during or after the Christmas break.

  2. I agree that the tone and terms of the email from the plaintiff’s solicitors of 23 December 2014 sent at 5.47 pm, which attached (amongst other things) the Proposed Deed in final form for execution, do not support the inference that execution and/or exchange were intended to be additional contractual terms.

  3. However, even if I were to determine that the December 2014 correspondence did give rise to additional contractual terms, I would not be satisfied that the plaintiff’s failure to comply strictly with the obligations concerning the timing of execution and exchange and the delivery of the $100 cheque would be breaches of an essential term or fundamental breaches of an intermediate term. These were both relatively unimportant matters in the scheme of the agreement between the parties.

  4. The defendants submit that in relation to commercial contracts it is prima facie the rule that provisions dealing with time are usually treated as conditions or essential terms, such that a failure to comply with the time stipulation gives rise to a right to terminate without service of a notice requiring performance. In addition it is submitted that, even if the provision is not construed as a condition or essential term, an unreasonable delay in performance of an intermediate term, such as to render performance substantially different from that intended by the parties, will constitute a fundamental breach and give rise to a right to terminate. The defendants submit, appropriately, that in each case the question of whether a delay is unreasonable is a question of fact, the resolution of which will depend upon the length of the delay, the nature of the contract, and the detriment, loss or disadvantage suffered by the affected party.

  5. It is submitted by the plaintiff that, generally, the intention of the parties was not to make time of the essence in the contract. Beyond a general expectation that matters would be finalised without unreasonable delay, the parties certainly did not express themselves in terms that the arrangements were affected by any particular urgency. I agree. I think it is a nonsense to characterise such terms as essential. In reality they could not be seen as essential terms. Qualitatively speaking that must be so. I will deal, however, with each in turn.

Failure to deliver executed copies of the documents

  1. Even accepting that the 24 December 2014 correspondence led to the incorporation of additional terms into the contract, I am not satisfied that the plaintiff’s tardy delivery of the executed deed is a breach of an essential term or a fundamental breach of an intermediate term. The additional term, as put by the defendants, is that on 24 December 2014 (or alternatively within a reasonable time after 24 December 2014), the Proposed Deed as executed by the plaintiff and Modular (both a scanned copy and the original) would be sent by the plaintiff’s solicitors to Mr Gorry.

  2. I am not satisfied that Mr Pavlovic would not have entered into the agreement unless assured of strict compliance with this term. It is clear both parties perceived it as being a primarily administrative step, and it was far-removed from the heart of the bargain between the parties. Failure to comply did not deny Mr Pavlovic of substantially the whole of what he had bargained for.

  3. The defendants submit that execution was a necessary precondition to a binding agreement coming into effect because there are obligations in the contract which flow from the “execution date”. I accept the plaintiff’s submission that the timing of steps to be taken in performance is qualitatively different from the question of whether final terms have been agreed. I also note in passing the plaintiff’s reference to Recital L, which provides that the parties “have agreed to settle their disputes on the terms set out in this deed” and cl 2.1(b) which repeats this assertion.

The cheque for $100

  1. The defendants point to the promise that the plaintiff would pay $100 (contemplated by cl 4.1(a)) “by the execution date” or within a reasonable time thereafter. It is submitted the promise was breached because the $100 was not delivered to the defendants until much later, and certainly had not been delivered to the defendants by 23 February 2015. Again, it is submitted that the failure to deliver the cheque was a breach of an essential term entitling the defendants to terminate the agreement, or alternatively a fundamental breach of an intermediate term similarly entitling them to termination.

  2. It is submitted by the defendants that the payment of the $100 was an essential term for a number of reasons. It is submitted that the terms of the Proposed Deed could only be accurate if the $100 had been received by the time the terms came into operation because of the phrasing of cl 4.1(a) (“receipt of which is acknowledged”). It is submitted that to execute and deliver the Proposed Deed knowing the $100 had not been received would be to execute it in knowing it contained a false acknowledgement. It is submitted the parties objectively could not have had the intention of executing a deed which contained a false acknowledgement. That rather overstates the matter in my view.

  3. The plaintiff points out that the settlement agreement provides in respect of the $100, “receipt of which is acknowledged”. The plaintiff submits that equity would not permit that sub-clause to allow the plaintiff to escape the payment if in fact it had not been paid, but further submits that the sub-clause is fatal to the contention that the settlement agreement stipulated a subsequent time for the payment of the $100 that was an essential term of the settlement agreement.

  4. The execution of the Proposed Deed, containing an accurate acknowledgement of the receipt of the $100, was, the defendants submit, an essential part of the agreement. The $100 was important by virtue of being appropriate consideration for the transfer of the shares. Without it, the transfer would not be supported by consideration and was not going to be legally enforceable. On any view, however, the reality is that the $100 is a purely token amount, and is unimportant in the context of the Proposed Deed as a whole.

  5. I have already recorded in part the plaintiff’s response to this. They submit that the agreement does not specify a time for the performance of payment by the plaintiff of $100 to Mr Pavlovic and Ms Pavlovic. It is submitted therefore that an alleged failure to pay on time cannot be made out. I consider that to be a correct analysis.

The Accrued Annual Leave Payment

  1. In relation to the Accrued Annual Leave Payment, the defendants submit that the appropriate construction of the relevant provision (cl 2.2(b)(iii) of the Proposed Deed) is that the plaintiff promised to pay those entitlements on or before 7 January 2015. The defendants submit that this promise was of such importance to Mr Pavlovic that it ought be concluded that Mr Pavlovic would not have entered into the contract unless he had been assured of a strict or substantial performance of that promise. It is further submitted by the defendants that this is manifest from the terms of the agreement and the surrounding circumstances.

  1. The stipulation of 7 January 2015, the defendants submit, should be treated as a condition such that the plaintiff’s failure to comply gave the defendants a right to terminate without service of a notice requiring performance.

  2. The defendants also submit that the releases contemplated by cl 3.1 are expressed to be given “on and from the date on which the actions defined in clause 2 occur”. They submit that the payment of the Accrued Annual Leave Payment was one such action and therefore, unless the plaintiff made the payment by 7 January 2015, the plaintiff could prevent the releases and indemnities given in cll 3.1, 3.2 and 3.3 from coming into operation. Further, the defendants submit that those releases and indemnities were an essential part of the agreement. It cannot be gainsaid, however, that the plaintiff in effect applied the relevant releases and indemnities and did not take legal action against Mr Pavlovic.

  3. In addition, the defendants say that the commercial context was that Mr Pavlovic had not been paid his salary since 14 November 2014. It is submitted that in early January 2015 he had been without payment of salary for some six weeks, and that the payment to him of over $32,000 would be of such importance that he would not have entered the agreement without being assured that the plaintiff would make the payment on or before the date stipulated in the agreement.

  4. Next, the defendants submit that there was no legal or practical reason that the plaintiff could not perform their obligation to make the annual leave payment. On a proper interpretation of cl 2.2 of the proposed deed, upon that clause coming into operation the parties were to agree that Mr Pavlovic’s employment came to an end on 14 November 2014. It is submitted that the provision of a signed letter of resignation was perfunctory and that it was not the step that ended the employment. The plaintiff had no basis in law for failing or refusing to make the payment on or before 7 January 2015. In that regard, it is submitted in passing, but not unimportantly, that the language of cl 2.2(b)(iii) is unambiguous and unconditional.

  5. It is therefore submitted that the appropriate conclusion is that the defendants would not have entered the agreement without having been assured that the plaintiff would make the annual leave payment by 7 January 2015 as stipulated. However, even if one construed the obligation as an intermediate term, it is submitted that the delay by the plaintiff in making the payment is so unreasonable that the failure to make the payment was a fundamental breach and went to the root of the contract.

  6. The defendants emphasise the fact that 7 January 2015 date was added at their instigation to bolster their submission that the payment of the amount by this time was an essential term. I, however, consider it to be insignificant one way or the other.

  7. Here, it is submitted by the defendants, it was not a case where the plaintiff was a day or two late, but rather that it was many weeks late because payment was not made until 6 March 2015. It is therefore submitted that in the circumstances, whether the terms were essential or intermediate, the defendants had a right to terminate on 23 February 2015.

  8. The plaintiff submits that the correct construction of cl 2.2(b)(iii) of the Proposed Deed is that the Accrued Annual Leave Payment is a dependent obligation, in the sense that it is a payment to which Mr Pavlovic became entitled upon tendering his written resignation, and which the parties anticipated would be made after Mr Pavlovic had complied with the provisions of the Proposed Deed requiring him to return various assets to the plaintiff.

  9. The plaintiff submits that cl 2.2 provides that Mr Pavlovic “agrees to resign”. He was then to sign all documents necessary to give effect to his resignation “including by providing the plaintiff with a signed copy of the letter of resignation in Schedule 2 by the execution date”. The next step was that the Accrued Annual Leave Payment was to be made on or before 7 January 2015.

  10. The plaintiff submits that on the face of the Proposed Deed it appears that the parties contemplated that the plaintiff would make the payment after receiving Mr Pavlovic’s written letter of resignation (as well as the signed Proposed Deed and other attachments and the return of the assets and materials provided for by the Deed). It is submitted that this is consistent with the nature of the payment for Accrued Annual Leave, which conventionally follows a written resignation.

  11. The plaintiff also points to the fact that under cl 4 (cll 4.2 and 4.4 in particular) Mr Pavlovic was to return certain assets to the plaintiff on or before 5 January 2015. It is submitted that the parties must be assumed to have meant something by the distinction between 5 January and 7 January 2015 dates. It is submitted that the proper inference is that Mr Pavlovic was to return all of the required assets and signed documents before the plaintiff paid the Accrued Annual Leave Payment.

  12. I think the better view of the sequence of events is that submitted by the plaintiff. There is a certain common sense about it. Mr Pavlovic’s resignation would logically come first. It would follow that having resigned he would have no right to retain certain of the assets and therefore the date of 5 January 2015 for the return of these. This would be followed by payment of the Accrued Annual Leave Payment two days later on 7 January 2015. That was the ideal world that was contemplated.

  13. The plaintiff points out that at no time did Mr Pavlovic enquire after the payment of his annual leave entitlements (or, for that matter, the $100 cheque) until complaint was made on 23 February 2015. They say, in my view persuasively, that he appears to have accepted that these amounts would be paid in due course once he returned signed documents and all other relevant materials to the plaintiff. This was all regarded as part of a somewhat desultory process. The other factor which cannot be ignored is that the signed documents (which Mr Pavlovic says he would never and did not sign), the $100, and the Accrued Annual Leave Payment are relatively minor matters in the scheme of things, as a matter of practical reality. To elevate them to essential terms, I consider, stretches the bounds of reality and/or reasonableness.

  14. The obligation, therefore, to pay the Accrued Annual Leave Payment, was dependent on the performance of Mr Pavlovic’s obligations to return various assets and provide copies of the signed documents, including his letter of resignation, to the plaintiff. The plaintiff was not obliged to perform their part of the arrangement until Mr Pavlovic had complied with his obligations. It is submitted that the parties’ conduct, objectively viewed, would indicate that they had proceeded upon that expectation. Of course, Mr Pavlovic did proceed to return the assets and promised to return the signed documents.

  15. Mr Pavlovic also banked the cheque for the Accrued Annual Leave Payment, but only after he had resigned.

  16. Given, in my view, Mr Pavlovic’s credit I could not accept the assertion that he would not have entered into the agreement unless he could be assured of strict performance of the plaintiff’s obligation to pay his annual leave entitlements on or before 7 January 2015. His conduct is quite antithetical to that notion. It is, I am satisfied, in fact a belated contrivance for the purposes of securing a particular outcome in this litigation. If the money were truly important to Mr Pavlovic he would have raised it long before 23 February 2015. Would he care about the exchange of documents, the $100, or the payment of accrued annual leave? I think not. He was getting a piece of litigation out of the way, and having the slate wiped clean.

  17. I cannot accept the alternative proposition, namely that any breach by the plaintiff amounts to a sufficiently serious breach of a non-essential or intermediate term so as to deprive Mr Pavlovic of substantially the whole benefit for which he bargained under the contract, thereby giving him the right to terminate the arrangement. The payment of the Accrued Annual Leave Payment followed his resignation as a director. The resignation was tendered in exchange for a release of the plaintiff’s claims against him and other defendants. The plaintiff had undertaken to give those releases when the agreement was made on 24 December 2014 and was at all times ready willing and able to deliver a signed copy of the deed to him. It was only Mr Pavlovic who lied, seemingly at every turn, and although he pretended he was ready, willing and able to perform the obligations he never had the intention to do so, subjectively at least.

  18. Further, as is pointed out by the plaintiff, there is no evidence of any real or material prejudice to Mr Pavlovic by being kept out of his $32,508.89 for a period of 8 weeks. I agree with the plaintiff that it was really in the form of a tidying up exercise. There was no doubt the payment was always going to be made, as indeed was the token payment of $100.

  19. Whilst Mr Pavlovic was busily working on ways of wriggling out of the agreement, he did not bother to raise his concerns with the plaintiff about the delay on their part until 23 February 2015. Immediate steps were then taken by the plaintiff to rectify matters. The plaintiff had also complied with their primary obligation under the agreement; that is, not to pursue litigation against Mr Pavlovic.

  20. In these circumstances, it is clear that the making of the Accrued Annual Leave Payment was not an essential term. I do not consider, either, that the plaintiff’s failure to make the payment on time was a serious breach of an intermediate term that went to the root of the contract. As such, I do not consider that Mr Pavlovic was entitled to terminate the agreement by virtue of the plaintiff’s failure to make the payment by 7 January 2015.

Mr Pavlovic’s conduct and whether it breached the agreement

  1. In addition, the plaintiff says with some force that even assuming the defendants’ interpretation of the time stipulation in the agreement is correct, Mr Pavlovic breached the arrangements himself. He failed to return materials on or before 5 January 2015, together with signed documents. It is put, again with some force, that he himself was in breach of essential terms and in those circumstances should not be permitted to terminate the agreement.

  2. The plaintiff says that Mr Pavlovic was not genuinely ready, willing and able to perform his obligations under the Proposed Deed such that he could be permitted to terminate the agreement for the alleged breach or repudiation by the plaintiff. According to him, he never wanted to complete the arrangement but was silently plotting ways by which he could extricate his interests from it. Indeed, as is correctly pointed out by the plaintiff, from 2 February 2015 Mr Pavlovic was actively seeking out ways to disclaim the existence of the agreement in a manner which amounted itself to a repudiatory breach (although not one which the plaintiff or Modular accepted).

  3. Given the state of the authority and my reasons otherwise I do not propose to deal finally with this matter. There is no need for me, in this case, to express an opinion concerning the divergence of authority flowing from Foran v Wight, and in light of Bathurst CJ’s remarks in Almond Investors I do not consider that it would be appropriate for me to do so.

Conclusion

  1. In relation to the various matters raised and argued over the course of the trial, I am of the view that, first, a binding agreement between the plaintiff and the relevant Pavlovic Parties came into existence on 24 December 2014. I do not need to set out again my findings regarding the intermediate steps in the reasoning process that has led to this conclusion.

  2. Secondly, I do not consider that the defendants validly terminated the arrangement on 23 February 2015 or at any other time.

  3. I invite the parties to prepare short minutes to reflect my reasons and if it cannot be agreed, to have the matter of costs argued.

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Details
AGLC
Universal Music Australia Pty Ltd v Pavlovic [2015] NSWSC 791
Case
[2015] NSWSC 791
Decision Date

CaseChat Overview and Summary

The case of Universal Music Australia Pty Ltd v Pavlovic involved a dispute between the music company and the defendant regarding the existence of a binding agreement and the terms of a settlement agreement. The primary issue before the court was whether the parties intended to be immediately bound by the terms of the settlement agreement, despite the failure to execute a formal deed. The court also needed to determine if the subsequent conduct of the parties could be considered an admission of the existence of a binding contract. Additionally, the court examined the authority of the solicitor to bind the client and the impact of that authority on the enforceability of the settlement agreement. The case also raised questions about the termination of the agreement, specifically whether a breach of an essential term or a fundamental breach of an intermediate term had occurred.

The court found that the parties intended to be immediately bound by the terms of the settlement agreement, despite the failure to execute a formal deed. The court held that the execution of a deed was a mere formality and that the parties' conduct indicated an intention to be legally bound. The court also considered the subsequent conduct of the parties, finding that it could be considered an admission of the existence of a binding contract. Regarding the authority of the solicitor, the court determined that the solicitor had ostensible authority to bind the client, which further supported the enforceability of the settlement agreement. The court concluded that the right to terminate the agreement arose due to a breach of an essential term, which constituted a fundamental breach of an intermediate term.

The court's reasoning was grounded in the principles of contract law, particularly focusing on the intention of the parties, the formality of executing a deed, and the authority of the solicitor. The court found that the parties' conduct and the ostensible authority of the solicitor were sufficient to establish a binding agreement. The court's decision emphasised the importance of clear communication and documentation in ensuring the enforceability of settlement agreements. The court ultimately ruled in favour of Universal Music Australia Pty Ltd, affirming the existence of a binding agreement and the right to terminate the agreement due to a fundamental breach.

The final orders of the court were that the settlement agreement was binding and enforceable, and the termination of the agreement was valid due to a breach of an essential term. The court granted the relief sought by Universal Music Australia Pty Ltd, including the enforcement of the settlement agreement and the termination of the contractual relationship with Pavlovic. The court also awarded costs to Universal Music Australia Pty Ltd, reflecting the litigious nature of the dispute.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

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Ratio Decidendi

Legal Principle Established

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