Agreements to agree to purchase land
Much has been written on the law regarding ‘agreements to agree’ and, in particular, the impact of the High Court decision in Masters v Cameron[1] and subsequent decisions of courts which have applied the principles in that case.
In the recent decision in Patel v Sengun Investment Holdings Pty Ltd,[2] the Victorian Court of Appeal applied the principles in an unusual way — holding that a document styled as a ‘Heads of Agreement’ for the sale of land was capable of specific performance as a binding contract in circumstances where the Court accepted its characterisation as a contract not for the purchase of the subject property but for a ‘call option’ for its potential later purchase.
The facts
The applicant (as purchaser) and the respondent (as vendor) executed a documented entitled a ‘Heads of Agreement’. The applicant paid $50,000 to the respondent pursuant to the terms of that document. The terms of the Heads of Agreement required the respondent to prepare a contract for the sale of the property within 14 days of execution of the Heads of Agreement and, following that, the applicant had seven days within which to execute the contract of sale or otherwise forfeit the $50,000.
The day after the parties executed the Heads of Agreement, the respondent through its agent advised the applicant that it no longer wished to proceed with the transaction. The respondent asserted that the document was not a binding contract for the sale of the property.
In response, the applicant insisted that the respondent prepare a binding contract of sale in accordance with the Heads of Agreement. When the respondent failed to do so, the applicant commenced a proceeding in the County Court seeking specific performance of the sale. The respondent in its defence maintained that the parties had not entered a binding contract capable of specific performance.
At trial
At trial, the judge dismissed the applicant’s claim.[3] The judge held that the Heads of Agreement was not a binding contract. In applying the test in Masters v Cameron, the trial judge held that the parties had not intended to create a binding contract until a formal contract for sale of the property had been executed. The judge held that the Heads of Agreement fell into the third category of cases identified by the High Court in Masters v Cameron, namely that the ‘intention of the parties [was] not to make a concluded bargain at all, unless and until they execute[d] a formal contract’.[4]
The judge however held that if the document were a binding contract he would have made orders for its specific performance.
On appeal
On appeal, the applicant argued that the trial judge had erred in holding that the Heads of Agreement was not a binding contract. The applicant pointed, among other things, to the language and form of the document, as well as the circumstances surrounding its execution.
Of key importance on appeal, the applicant conceded that the Heads of Agreement was not a concluded agreement to purchase the property but submitted that the document constituted a concluded agreement which, in effect, reserved to the applicant the option to purchase the property. The applicant argued that, under the terms of the Heads of Agreement, the respondent was obliged to provide a signed contract of sale but the applicant retained the ‘option’ to proceed or not with the purchase. The applicant contended that, under the terms of the purported agreement, if he elected not to proceed he was to forfeit the amount of $50,000 — styled in the Heads of Agreement as a ‘fee’ — which he had paid to the respondent.
The Court of Appeal — Emerton P, Walker and Kaye JJA — noted that such argument effectively sought to characterise the Heads of Agreement as ‘a variant of the second or fourth category of cases’ described in Masters v Cameron.[5] The second category of cases identified in Masters v Cameron is where ‘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’;[6] the fourth, formulated by courts in decisions following Masters v Cameron, is where ‘the parties are content to be bound immediately and exclusively by the terms which they have agreed upon, while expecting to make a further contract in substitution for the first contract which might contain, by consent, additional terms’.[7] In articulating the fourth kind of agreement, the Court cited among other cases the decision in Nursivan Investment Ltd v Anyoption Holdings Ltd, about which I have previously written in this blog.[8]
A fresh characterisation of the contract on appeal
From a procedural perspective, the Court noted that the applicant’s characterisation of the Heads of Agreement effectively as a ‘call option’ had been neither pleaded nor contended for at trial; the applicant’s case in the County Court was that the Heads of Agreement itself constituted a binding contract for the purchase of land. The respondent submitted that the applicant ought be prevented from running a case on appeal which was different from that at trial.
To this, the Court noted that the respondent had been unable to point to any prejudice it would suffer as a result of the applicant seeking to characterise the Heads of Agreement differently on appeal. Nor did the respondent succeed in arguing that it might have sought at trial to cross-examine the applicant as to whether there had been any mention of a call option during the course of the parties’ negotiations, which evidence may have borne upon the question of the nature of the agreement. The Court noted that, based on the evidence presented at trial, it was clear the applicant never had direct contact with the respondent during the course of negotiations.
In allowing the applicant to contend for a different characterisation of the Heads of Agreement on appeal, the Court of Appeal concluded:
[A]lthough the applicant contends for a particular legal characterisation of the Heads of Agreement for the first time on appeal, the case concerns the construction of a document, in light of facts proved at trial. In those circumstances, it is ‘expedient in the interests of justice that the question should be argued and decided’.[9]
In other words, the Court’s determination suggests that provided there is no prejudice to the other party, provided the issue involves a question of law rather than a (new) factual enquiry, and provided the interests of justice permit it, a party generally can seek to characterise a document in a new way on appeal.
Permitting the applicant to present its case on appeal, the Court then turned to the question of whether the applicant’s characterisation of the Heads of Agreement was correct.
What was the agreement?
The Court noted that the starting point, when enquiring as to the true characterisation of the agreement, is the text of the document in question.
Terms of the document. The Court held that, so far as the terms of the document were concerned, the document ‘contain[ed] all the terms that would be essential for the constitution of an agreement for the sale of land’.[10] In particular, the document identified the purchaser and vendor, the property, the purchase price, the manner in which the purchase price was to be paid, and the settlement date.
The terms also provided for payment of a ‘fee’ of $50,000 on acceptance of the offer contained in the document. The Court noted that ‘[i]f, by executing the Heads of Agreement, the parties did not intend thereby to enter into a legally binding contract, [the relevant clause] of the Heads of Agreement, and the payment by the applicant to the respondent, would have the consequence that the applicant paid $50,000 to the respondent in exchange for receiving no rights at all’.[11]
Form and terminology. Besides the particular terms of the document, the Court held that the form of, and the terminology employed in, the Heads of Agreement favoured its characterisation as a binding contract. Among other things, the document referred to a ‘Vendor’ and ‘Purchaser’ and made reference to an ‘offer’ being ‘accept[ed]’.
The Court also held that although certain clauses of the document required the formulation and execution of a contract of sale, such matter did not preclude the Heads of Agreement from being a binding contract in its own right; ‘[t]he decided cases make it clear that the fact that the Heads of Agreement contemplate the formulation of a contract of sale, which might contain further terms and conditions, does not, of itself, preclude the conclusion that the Heads of Agreement do constitute a legally binding contract by the parties’.[12] Among other things, the Court pointed to a decision of the High Court where a clause requiring the execution of a further agreement, at least in that case, ‘was to be construed as limited to permitting insertion of further terms that were not inconsistent with those in the offer, and which were limited by reference to the “reasonableness” of requiring the inclusion of those terms’.[13]
The Court concluded that the Heads of Agreement constituted a binding contract, and described its effect as follows:
[T]he respondent, in consideration of the payment of $50,000 by the applicant, agree[d] to enter into a contract for the sale of the property, conditional upon the applicant executing and exchanging with the respondent a contract of sale consistent with the terms contained in the Heads of Agreement. Pursuant to that contract, the vendor [was] required to provide to the applicant a contract of sale containing such terms. The purchaser would then have seven days to execute and return the contract of sale.[14]
It was the last quality — imposing a deadline for execution of a contract of sale — which arguably coloured the Heads of Agreement as something akin to a ‘call option’.
Despite noting that the applicant’s characterisation of the Heads of Agreement as a call option was a ‘variant’ of the second or fourth category of contract in the Masters v Cameron lineage, the Court of Appeal did not specify the category in which it ultimately found the document to have existed. This arguably was consistent with the Court’s recognition that ‘the categories are not themselves exclusive formulations of the kinds of agreement that may be entered into between the parties‘.[15]
Could the agreement attract an order for specific performance?
On the other main point raised on appeal — whether or not the trial judge was correct in holding that he would have made orders for specific performance of the Heads of Agreement had he found it to have been a binding contract — the Court of Appeal held that such relief would have been appropriate. Among other things, the Court identified evidence at trial to the effect that damages would not have been an adequate remedy for the applicant and that the applicant had wished to purchase the land for its unique characteristics.
On the question of costs
Having determined the appeal, in a separate judgment on the question of costs the Court of Appeal held that the applicant was entitled to its costs of the appeal but not of the trial.[16]
As to the costs of trial, Court noted that the applicant had not established that he was entitled to succeed on his claim at trial, particularly given the different characterisation of the Heads of Agreement at trial. Put another way, the applicant had not established any error by the trial judge.
As to the costs of the appeal, the Court held:
The underlying issue in the case, both at first instance and on appeal, was whether the Heads of Agreement constituted a binding agreement. While, as we have noted, the argument, presented by the applicant in respect of that issue, was significantly different on appeal, nevertheless, ultimately, the applicant did succeed in establishing that the Heads of Agreement was a binding legal contract.[17]
The Court’s costs orders are a reminder that a successful party can be deprived of costs of an appeal where it succeeds on a point not relied on at trial.
[1]: (1954) 91 CLR 353.
[2]: [2023] VSCA 238.
[3]: Patel v Sengun Investment Holdings Pty Ltd [2022] VCC 1085.
[4]: Masters v Cameron (1954) 91 CLR 353, 360.
[5]: Patel v Sengun Investment Holdings Pty Ltd [2023] VSCA 238, [54].
[6]: Masters v Cameron (1954) 91 CLR 353, 360.
[7]: Patel v Sengun Investment Holdings Pty Ltd [2023] VSCA 238, [53].
[8]: [2017] VSCA 141. The Court also cited GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, 635 and Molonglo Group (Australia) Pty Ltd v Cahill [2018] VSCA 147, [135].
[9]: Patel v Sengun Investment Holdings Pty Ltd [2023] VSCA 238, [65], citing Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12; Sambucco v Sambucco [2023] VSCA 199, [23]–[35] (McLeish, Walker JJA, Gorton AJA).
[10]: Patel v Sengun Investment Holdings Pty Ltd [2023] VSCA 238, [68]. The Court later noted that even a document with ‘quite sparse’ details could still constitute a binding contract: [77], referring to Niesmann v Collingridge (1921) 29 CLR 177.
[11]: Patel v Sengun Investment Holdings Pty Ltd [2023] VSCA 238, [69].
[12]: Ibid [76].
[13]: Ibid [78], citing Godecke v Kirwan (1973) 129 CLR 629, 642 (Walsh J), 645 (Gibbs J).
[14]: Patel v Sengun Investment Holdings Pty Ltd [2023] VSCA 238, [79].
[15]: Ibid [75].
[16]: Patel v Sengun Investment Holdings Pty Ltd [2023] VSCA 263.
[17]: Ibid [14].