New South Wales Supreme Court CITATION : Whitty v Fin Control Systems Pty Ltd [2000] NSWSC 332 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 4579/99 HEARING DATE(S) : 23/03/2000 JUDGMENT DATE : 23 March 2000 PARTIES : Brian Whitty (P) Fin Control Systems Pty Limited (D) JUDGMENT OF : Young J COUNSEL : A Radojev (P) D Ryan SC and C Parry (D) SOLICITORS : Williams Woolf & Zuur (P) Deacons Graham & James (D) CATCHWORDS : Contract [7]- Agreement subject to further document- Heads of Agreement to settle litigation- On facts, parties had made contract. Allen v Carbone (1975) 132 CLR 528 Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 Bell v Lever Bros Ltd [1932] AC 161 Brulotte v Thys Co 379 US 29 (1964) Geebung Investments Pty Ltd v Varga Group Investments (No 8) Pty Ltd (1995) 7 BPR 14,551 CASES CITED : Grist v Bailey [1967] Ch 532 Halliday v Overton (1852) 14 Beav 467 Huddersfield Banking Co Ltd v Henry Lister & Son Ltd [1895] 2 Ch 273 Maconachie v Harpur (1993) 79 LGERA 75 Masters v Cameron (1954) 91 CLR 353 Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 Solle v Butcher [1950] 1 KB 671 Upper Hunter District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 DECISION : See paras 49-52 THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG J THURSDAY 23 MARCH 2000 4579/99 - BRIAN WHITTY v FIN CONTROL SYSTEMS PTY LIMITED JUDGMENT 1 HIS HONOUR: On 26 May 1993 the plaintiff assigned various patent rights to the defendant. Disputes must have broken out between the parties as to the operation of this agreement because on 2 July 1996 the plaintiff commenced proceedings in respect of the agreement. The primary thrust of the statement of claim was for a declaration that the agreement was void for uncertainty, although there were alternative orders for damages and rectification. 2 The defendant filed a defence which, inter alia, claimed that it was a part inventor, confessing and avoiding some parts and traversing other allegations in the statement of claim. It also filed a cross-claim to the effect that it had in fact complied with the agreement and required a declaration accordingly. 3 The proceedings were listed before Bergin J for hearing on 18 March 1999. Her Honour was told that the matter was settled and was asked to stand the matter over for a month, which she did. On that day the parties produced and signed a document entitled "Heads of Agreement". A copy will appear as the appendix to these reasons. 4 The Heads of Agreement contemplated that during the month for which the proceedings were adjourned, the parties would make a joint statement and would also enter into a new agreement which would govern their rights in the future. The agreement would contain the terms referred to in the Heads of Agreement. Unfortunately, this did not happen and within the month it became clear that it would not happen. 5 By summons filed on 4 November 1999 the plaintiff commenced the present proceedings seeking a declaration that the former proceedings had been settled, and an order for specific performance. 6 The issues in the current suit were defined in dialogue between counsel and myself during the morning. During that dialogue the plaintiff abandoned any claim for specific performance and indicated that he sought damages for breach at common law or under s 68 of the Supreme Court Act 1970. 7 Initially the defendant relied on an alleged illegality because of the patent law of the United States of America, but this defence was redefined as a defence of mistake, which I will deal with in due course. 8 Although the case was set down for two days, it in fact finished in an hour and a half and I am indebted to Mr Radojev, for the plaintiff, and Mr Ryan SC and Ms Parry, for the defendant, for coming to the real issues in the case with the minimum of fuss and technicality. 9 The issues as refined are: A. Did the parties, by signing the Heads of Agreement, agree to be bound forthwith or was that document a mere agreement to agree? B. Is the Heads of Agreement void for uncertainty? C. Should the Heads of Agreement be set aside for operative mistake? D. Is the plaintiff entitled to damages? I will deal with these four issues seriatim. 10 A. There have been a whole series of cases in which the present sort of problem has been considered by courts. The question that arises in this sort of case is a question of fact: What did the parties intend? Did they intend to make a conclusive bargain? (see Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 548). 11 However, it is useful to see the approach made in other cases to this sort of question and the factors that were considered helpful in ascertaining the parties' intention as a matter of fact in those other cases. 12 There are four categories into which a situation such as the present can be placed; that is, the situation where the parties have signed a relatively informal document with the obvious intention that a more formal document will be produced at a later date. The four classes are, in summary: (i) the parties intend to be bound at once though they will later restate their terms more formally and precisely; (ii) the parties consider that their contract is only to come into force when a condition precedent is fulfilled, such as the exchange of a more formal document; (iii) the parties have merely agreed to agree; and (iv) the parties have made a provisional contract intending to be bound by it but assuming that in due course a further contract will be made between them containing both the agreed terms and further terms which they will both agree upon. 13 The first three of those classes are over-simplified statements of what appears in the leading case of Masters v Cameron (1954) 91 CLR 353, 360. The fourth derives from Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310, 317 and Baulkham Hills Private Hospital Pty Limited v GR Securities Pty Ltd (1986) 40 NSWLR 622, 628. 14 It is clear that the answer to the question will not be provided merely by seeing that the parties have intended that there shall afterwards be a formal agreement prepared; see eg Masters v Cameron at p 361. 15 In the Commonwealth Games case at 548 to 549, Gleeson CJ said, after noting that the question was whether the intention of the parties was to make a concluded bargain: "Cases which typically give rise to problems of the kind presently under consideration are cases in which there is no doubt that the parties had a common intention that at some stage, and by some means, they would enter into contractual relations. They have entered into negotiations for that specific purpose. The problem which arises is that they have exchanged communications which, on the one hand, use the language of agreement but, on the other hand, disclose an expectation that at some future time a document embodying the terms of their contractual arrangement will be brought into existence. Where, as in the present case, the communications which the parties have exchanged are in writing, the question of their 'intention' is, prima facie, to be resolved objectively, and as a matter of construction of the relevant documents." 16 One is assisted in deriving the intention of the parties not only by looking at the document which they have signed, but also to the commercial circumstances surrounding the making of the document in question, the communications between the parties and also the communications between the parties subsequent to the making of the document; see Allen v Carbone (1975) 132 CLR 528, 531 to 532 and the Commonwealth Games case at p 550. 17 In Geebung Investments Pty Limited v Varga Group Investments (No 8) Pty Limited (1995) 7 BPR 14,551 at 14,553 Gleeson CJ again directed his mind to the particular question of intention and noted that there may be contracts made even involving a large amount of money without the intervention of lawyers, but if the nature of the contract requires resolution of certain points: " ... then failure to agree on such points cannot be ignored by a court in the supposed interests of giving effect to the expectations of the parties. That would be to disregard their intentions." 18 Kirby P, at 14,569 to 14,570, gave a list of eight factors derived from the authorities which guided courts in this sort of case to reaching a conclusion; the eight factors included the size, importance and complexity of the subject matter, the conduct of the parties before and after the making of the contract and whether the informal agreement showed that the parties had reached consensus on all matters of importance, not just on the main matters of importance. 19 Turning back to the facts of this particular case, there are some indicia in the Heads of Agreement that the parties did intend that the Heads of Agreement would operate as a provisional contract or, indeed, operate as a contract being supplemented within the month by a new agreement to replace the 1993 agreement. The most weighty of these is the statement in operative clause F(i) that, whilst the proceedings were to be adjourned for one month to permit a formal agreement encompassing the Heads of Agreement to be entered into, the parties acknowledged that they were bound by this agreement. There is also the conduct of the defendant's solicitor immediately afterwards in writing a letter trying to set up the mechanics for making a joint statement that the matter had been settled. 20 On the other hand, Mr Ryan SC pointed to eight matters which were indicia against there being such a contract. Essentially, these were: (i) the proceedings had not been terminated but merely stood over for a month. (I would note here what Powell JA said in the Geebung case at 14,583); (ii) there was incomplete coverage of the major matters; (iii) there were problems with a perpetual flow of royalties which were not sufficiently addressed; (iv) recital 4 noted that the parties had reached an "in principle" settlement; (v) that the same recital involved a wish to enter into a new agreement; (vi) the fact that the whole of the Heads of Agreement was predicated on the fact that a new agreement would come into force and that rather than the Heads of Agreement governing the rights, nothing was really to happen until the new agreement came into force; (vii) the new agreement was one which would contain certain terms but this was really an inclusive defence, it did not indicate what other matters might be in the agreement; and (viii) when one reads the whole of the Heads of Agreement in the light of the surrounding circumstances, one can see that there was great uncertainty about major matters. 21 The defendant's list looks long, and it is certainly much longer than the plaintiff's list. Although it contains some significant matters, when it is fully examined it is not quite as formidable. For instance, recital 4 is just that; a recital. Only limited use can be made in construing a document and I believe the same rule applies when one is looking at intention in recitals, especially when they conflict with operative parts of the document; see eg Halliday v Overton (1852) 14 Beav 467, 470; 51 ER 366, 367. 22 Secondly, the Heads of Agreement exudes the confidence of both parties that they will enter into a new agreement, not merely that they might. The parties realised that there needed to be a new agreement but they intended by the Heads of Agreement that the new agreement would come into force and the proceedings would be dismissed. 23 As to uncertainty, para 14 of the written submissions that were lodged by counsel for the defendant sets out the lack of essential terms and uncertainties. A copy of these submissions will be left with the papers. These submissions focus on clause 1C of the Heads of Agreement, although they do not entirely deal with clause 1C, which I will come to in a moment. They also consider that the definition in 1A(iii) of "rebatable on costs" is inclusive only and leaves undecided what other matters could be taken into account. Clause 1B(iii), which provides that payments of royalties for US sales to be made out of the US, does not indicate in what currency any payment should be made or where payment should be made. 24 There will often be cases in documents where the drafter has not thought of everything or where one can see an apparent contradiction or where matters have not been spelt out as clearly as possible. However, one does not lightly say that the parties did not intend to make a contract merely because there are those infelicities. Certainly when one comes to the point where at least one major matter has been omitted, as the former Chief Justice said in the Geebung case one cannot find a contract. It is a significant factor that there is incomplete coverage, but it is only one factor. 25 Of course, it goes without saying that the mere fact there are two factors in favour of there being a contract and eight against is no way to decide the case. One must look at all the factors together, look at the surrounding circumstances and say whether, objectively, the parties have at least made a provisional contract. 26 In my view, the circumstances were that the parties were settling litigation, they had come to court, they had doubtless thought about their chances of success and the issues deeply, and the surrounding circumstances suggest that they wanted to put an end to their disputes of the past once and for all and to get on with their common commercial life. This does tend to suggest that they were in the mood to decide once and for all what their commercial position would be; see Maconachie v Harpur (1993) 79 LGERA 75. 27 This is reinforced by the provision in the operative part of the document that the agreement is to bind, even though there is to be a formal agreement. 28 Mr Ryan SC, in his usual skilful manner, sought to avoid the semantic significance of the words used in 1F(i) by saying that the other factors, particularly recital 4, showed that the semantic significance was virtually nil. However, it does not seem to my mind that that was so. Despite the fact that there is incomplete coverage of various matters, it does not seem to me that the seriousness of those matters is as much as was contained in the submissions of counsel for the defendant. 29 Putting it all together, in my view the parties did intend that the agreement would at least be a provisional agreement pending the formation of a new agreement; that is, it was to operate as a contract between them, at least until it was subsumed in a new agreement containing those terms, plus whatever other terms the parties agreed on. 30 B. The next matter is whether the contract is void for uncertainty. It is a hard road for any commercial person to urge that a document that has been signed by or in front of solicitors on a formal occasion which purports to be an agreement is void for uncertainty. The Court will strain, as far as it legitimately can, to find a meaning rather than hold that it is void for uncertainty. It will only be if the Court cannot legitimately so find that it will find the document void for uncertainty; see Upper Hunter District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429, 437. 31 I have already considered the broad headings of the uncertainty which is alleged. As I have said, these focus mainly upon clause 1C. That was a clause which provided, essentially, that in the event that the defendant sells its business or its intellectual property rights, including the plaintiff's invention, it will ensure that the purchaser continues to pay to perpetuity the plaintiff's royalties. 32 Mr Ryan SC and Ms Parry say that that is a fairly meaningless concatenation of verbiage, it is vague as to what is "its business" or "its intellectual property rights", and the surrounding circumstances show that there are other companies involved throughout the world exploiting the plaintiff's invention in respect of the majority of which the defendant does not have any shares, though most of its directors have at least shares in holding companies and that how could it ensure that the purchaser would continue to pay royalties? 33 The mere fact that someone enters into an agreement which, in the cold light of day, appears to be onerous or silly is not sufficient to hold that a contract is void for uncertainty. If someone has made a promise that that person finds almost impossible to fulfil, then that person just pays damages for breach. Of course, there are limits to the proposition that I have just put, but in an agreement which was intended to be replaced in due course by a later agreement, one allows a greater latitude. The overall intention of clause 1C was quite plain that, putting aside corporate structures, there had been an assignment of the patent to the defendant which was being exploited world-wide through various corporations and was producing a royalty flow. If there was an opting out by the defendant so that that royalty flow would not continue through it, then it was to do what it could - to put it weakly - or to make sure that - to put it strongly - the royalty flow continued. 34 Questions have been raised as to what would happen if the defendant licensed someone to exploit the rights rather than selling its intellectual property rights, but the mere fact that certain things could happen that the parties had not contemplated is not enough to find the contract void for uncertainty. One would have to work out whether there were any implied terms or whether, on a true construction of the words which the parties had used, that particular event fell one side of the line or the other. 35 I do not consider that the matters raised in the defendant's submissions are sufficiently weighty to say that the contract is void for uncertainty. 36 C. Two types of mistake are relied on as a ground for setting aside the contract. There was no actual cross-claim to set aside the Heads of Agreement but the way in which the case was argued it seemed to me that what was being put was that the contract should not be specifically enforced, as was the plaintiff's original claim, or, alternatively, should be rescinded because of these mistakes. 37 First, there was an alleged common mistake that the contract could be performed in such a way that royalties stemming from US patents could be the source of perpetual income flow and, secondly, there was the mutual mistake as to how the royalties flowing from the Californian subsidiary company of the defendant - putting it loosely - could be affected by the Heads of Agreement. 38 Various text books on the law of contract use the terms "common mistake" and "mutual mistake" in different ways, so I should make it clear that I am using the terms in the sense defined in the Seventh Australian Edition of Cheshire and Fifoot's Law of Contract at p 471; that is, a common mistake is a situation where both parties make the same mistake and the mutual mistake is where parties act at cross purposes. 39 Evidence was given by Professor Wiley of the UCLA Law School to the effect that under US patent law, as interpreted by the Supreme Court of the USA in Brulotte v Thys Co 379 US 29 (1964), an agreement to pay royalties on a patent after the patent had expired was unenforceable after the expiry. I have put that in an over-simplified form but that is how I understand the purport of the evidence. 40 I was also reminded that under s 145 of the Patents Act 1990 (Cth) provision is made for either party to give notice to put an end to the agreement in such circumstances after the patent has expired. 41 Accordingly, it is difficult, if US law applies, to have a binding agreement whereby the royalty flow from a patent will continue to go to the inventor after the expiry of the patent. 42 However, the present agreement was not one that was made under US law. It was made in New South Wales between a natural person and a New South Wales corporation. The agreement provided that US royalties would be paid outside the USA and I cannot see how necessarily the parties made any common mistake as to the operation of US law on the flow of income. 43 Even if they did, and even assuming that the parties or at least the plaintiff did intend perpetual income flow, it would not seem to me that a mistake in this area would be sufficiently material to be the sort of operative mistake that would enable the contract to be set aside. 44 There seems to be a distinction in the authorities between mistake that will vitiate a contract at common law and mistake which will enable equity to set a contract aside. The cases suggest that it is only if there is a case of res sua or res extincta or where the mistake is an essential and integral element to the subject matter (Bell v Lever Bros Ltd [1932] AC 161, 235), that the mistake will be operative; see also Grist v Bailey [1967] Ch 532, 537. If there be a mistake in the present case, the mistake is not of that fundamental nature. 45 However, the sort of mistake that will lead to equity setting aside the contract does not have to be in that limited class of case. Whenever there is a material mistake the Court may, in its discretion, on whatever terms it deems to be appropriate, set aside the contract; see eg Huddersfield Banking Co Limited v Henry Lister & Son Limited [1895] 2 Ch 273. However, again there must be a fairly fundamental mistake because the Court does not lightly set aside contracts, particularly commercial contracts which parties have seriously made. The sort of mistake that usually leads to this action by equity is a mistake that goes to the core property which is the subject of the agreement, such as was the case in Solle v Butcher [1950] 1 KB 671 and again in the Grist case. 46 In my view, there is not here such a fundamental or material mistake as would induce equity to set the contract aside. 47 So far as the alleged mutual mistake is concerned, it seems to me, with great respect, that it is reading too much into the letters of the solicitors immediately after the Heads of Agreement were made to say that as a matter of fact the parties were at cross purposes as to what would happen about a company called FCS California. The correspondence does show that the plaintiff's solicitors took the view that it would be best to have three agreements rather than what was originally contemplated, but it does not seem to me the material goes so far as to show that the parties negotiated and agreed to the Heads of Agreement under any mutual mistake. 48 Accordingly, the defence of mistake is not made out. 49 D. It follows that there is a contract. The contract has been repudiated. The plaintiff now has accepted that repudiation and he is entitled to damages. 50 As none of the counsel have directed their minds as to how the damages might be assessed for today's hearing but as it appears that there must be, in fact, some damages, the question of damages should either be left for a Master or for me to assess at a later date. 51 I will stand the matter over for mention before the Registrar on 4 May 2000. 52 I order that the defendant pay the plaintiff's costs of the proceedings to date, and reserve further costs. oOo APPENDIX (OMITTING THE SIGNATURE PART OF THE DOCUMENT) HEADS OF AGREEMENT BETWEEN BRIAN WHITTY ("WHITTY") AND FIN CONTROL SYSTEMS PTY LIMITED ("FCS") WHEREAS: 1. On 23 May 1993 the parties entered into a royalty agreement in relation to the sale of fins and plugs based on an invention by Whitty (the old agreement). 2. The parties have disagreed as to the way in which royalties have been calculated under the old agreement. 3. Whitty has commenced proceedings in the Equity Division of the Supreme Court in relation to the old agreement ("the proceedings"). 4. The parties have reached an in principle settlement of the proceedings and wish to enter into a new agreement. NOW THIS AGREEMENT WITNESSETH: 1. The parties will enter a new agreement in relation to the calculation and payment of royalties to Whitty for past, present and future royalties containing the following terms: A. PAYMENT OF ROYALTIES (i) Worldwide other than sales by and to Zacks KK: to be calculated and paid on FCS invoice price less rebatable on costs (as defined herein) X 4.75 per cent. (ii) Sales by Zacks KK: to be calculated and paid on Zacks KK invoice price less rebatable on costs (as defined herein) X 4.75 per cent. (iii) Rebatable on costs include the following: . Tax and any other impost (other than income tax). . Branding royalties. . Agents commission. . Freight - if an add on to invoice. . Packaging - if an add on to invoice. (iv) Products bearing royalties are fins and plugs and production packs (sets) and do not include any accessory items. B. PAYMENT OF ARREARS (i) To be calculated by the parties within one month and to be paid within nine months thereafter with no interest. Such payment to be made in equal monthly instalments. C. In the event that FCS sells its business or its intellectual property rights, including the Brian Whitty invention, FCS will ensure that the purchaser (and to have that purchaser covenant on the same terms to ensure perpetuity) will continue to pay royalties to Whitty in accordance with the terms herein. D. New agreement to reflect the following items: (i) Payment of royalties to be monthly. (ii) Whitty to have reasonable audit rights. (iii) Payments of royalties to be made out of the US for US sales. E. Terms of this agreement to be confidential and the parties to agree on joint statement. F. THE PROCEEDINGS: (i) The proceedings are to be adjourned for one month to permit a formal agreement encompassing these heads to be entered into (whilst acknowledging that the parties are bound by this agreement). (ii) The proceedings will be dismissed with no order as to costs. DATED: 18 March 99. Last Modified: 09/25/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.