New South Wales Supreme Court CITATION : Kriketos v Eisman [2007] NSWSC 496 HEARING DATE(S) : 23 & 24 April 2007 JUDGMENT DATE : 16 May 2007 JURISDICTION : Equity JUDGMENT OF : Hamilton J DECISION : No concluded agreement. CATCHWORDS : CONTRACTS [37] – General contractual principles – Offer and acceptance – Agreements contemplating execution of formal document – Whether concluded contract – Intention of parties – Determining intention from communications between parties – Relevant considerations. Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 Baloglow v Konstantinidis [2001] NSWCA 451 Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 CASES CITED : Felthouse v Bindley (1862) 11 CB(NS) 869; 142 ER 1037 G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd (1995) 7 BPR 14,551 Helmos Enterprises Pty Ltd v Jaylor [2005] NSWCA 235 Masters v Cameron (1954) 91 CLR 353 Carter, Peden & Tolhurst, Contract Law in Australia (5th ed, 2007) [3-29] Bill Kriketos (P) PARTIES : Marc Richard Eisman (D1) Stephen Morgan Matthews (D2) Gold's Gym Pty Limited (D3) FILE NUMBER(S) : SC 4968/05 COUNSEL : G P Segal (P) J M Ireland QC (Ds) SOLICITORS : Charles G Roth & Co Mavrakis & Associates IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION HAMILTON J WEDNESDAY, 16 MAY 2007 4968/05 BILL KRIKETOS v MARC RICHARD EISMAN & ORS JUDGMENT 1 HIS HONOUR: Introduction 2 These are proceedings to enforce what is alleged to have been a contract settling disputes among the parties. The contract is alleged to arise from correspondence between the two sides which took place in August 2005. There is no doubt that the parties contemplated the execution of final documentation in which the settlement was to be clothed. The final documentation was not executed. The plaintiff's case is that a binding contract arose from the correspondence. The defendants' case is that there was no concluded contract at all and, even if there were, there was no binding contract pending the execution of the final documentation. As to the latter, the matter in issue between the parties is in which of the categories in Masters v Cameron (1954) 91 CLR 353 the situation between these parties falls. The facts 3 In mid 2005, the plaintiff ("Mr Kriketos") and the first and second defendants (respectively "Mr Eisman" and "Mr Matthews") were directors of and shareholders in a company called Rehab Associates Pty Ltd ("Rehab"). Rehab was the owner of premises at 23 Pelican Street Darlinghurst which were the subject of a lease to the third defendant, Gold's Gym Pty Ltd ("Gold's Gym"). The first and second defendants were directors of Gold's Gym. The lease was for five years commencing on 4 September 2000 and terminating on 3 September 2005. It was therefore in mid 2005 nearing its end. The commencing rent under the lease was $465,000 per annum, which was to be increased at the rate of 2.5% per annum. The lease did not provide for any bond or bank guarantee or any personal guarantees. 4 Disputes having broken out between the parties, there was a shareholders' meeting of Rehab on 29 July 2005. At that meeting, on the motion of Mr Kriketos, there was a resolution for the winding up of Rehab. The validity of that resolution was disputed at the meeting by Murray Godfrey, an accountant representing Mr Eisman and Mr Matthews. 5 Thereafter, there were negotiations between the parties to resolve the disputes. On 3 August 2005 Charles Roth ("Mr Roth"), Mr Kriketos' solicitor, wrote to Peter James ("Mr James"), Mr Eisman and Mr Matthews' solicitor, that he was instructed that an agreement had been reached on the following terms: "1 Our client to pay to your clients $700,000. 2 Your clients' shares to be transferred to our client or his nominee. 3 Mutual releases to be given between our client, your clients and Mr Livschitz. 4 Golds [sic] Gym Limited to be granted a five (5) year lease with a five (5) year option. 5 The commencement rent of the lease to be an amount determined by increasing the rent lastly payable by the greater of 3% of CPI. 6 The rent during the term of the lease to be increased annually by the greater of 3% or CPI. 7 The second lease period to contain a demolition clause providing for the giving of twelve (12) months' notice. 8 Golds [sic] Gym Pty Limited to provide a six (6) month bond or bank guarantee." 6 On 5 August 2005 Mr James replied, agreeing with points 1 and 2 and setting out the following as to points 3 to 8: "3 Mutual releases are given between Marc Eisman, Stephen Matthews Rehab and Golds Gym [sic] as against Bill Kriketos. We cannot give releases on behalf of Mr Livschitz, as we do not act on his behalf in this matter. 4 That the new lease be offered commencing at the date the present lease terminates at the same rent and same terms for a period of 5 years with a 5 year option. 5 That the rent be paid monthly in arrears as is the current position and that the new lease commencing September 2005 be at the same rate as the existing lease and any increase be limited to 2.5% per annum. 6 See 5 above. 7 Agreed, except that the notice must be given in writing. 8 Not agreed. Our clients propose a three-month bank guarantee to be provided at the commencement of the new lease." The letter required in addition: "that the amount of $700,000.00 be characterised as follows: (a) $543,494.00 loan repayment to Golds [sic] Gym (b) The balance of $156,506.00 is for share transfers." 7 There is in evidence a diary note of Mr Roth of a conference with Mr Kriketos on 8 August 2005 to review the response to Mr James' letter. This contains the following relevant items: "B He accepts rental increases @ 2½% as this is in current lease. He had prev thought current lease provided for 3% increases. C He wants starting rent at old rent + 2½%. He does not want $700K split up as requested. …… I I suggest we require personal gts from Eisman & Matthews – Agreed. J He will accept 3 months bank gtee." 8 There is a further diary note of Mr Roth of the same date of a telephone conversation with Mr Kriketos as follows: "He has spoken to P Cool & he now wants to accept break up of $700K … I will call P Cool because I don't think break up is approp." 9 On the same day Mr Roth again wrote to Mr James a letter which included the following (using the same numbers as earlier): "3 We interpret this to the effect that there will be the following releases:- (a) Bill Kriketos to Marc Eisman (b) Bill Kriketos to Stephen Matthews (c) Bill Kriketos to Golds Gym (d) Marc Eisman to Bill Kriketos (e) Stephen Matthews to Bill Kriketos (f) Golds Gym to Bill Kriketos (g) Rehab to Golds Gym (other than in respect of the lease) (h) Golds Gym to Rehab In addition the releases referred to above in favour of Bill Kriketos and Rehab will be deemed to include Christopher Kitas in so far as any claim relates to indemnities given by Bill Kriketos in favour of Christopher Kitas arising out of the deed dated 26 November 2004 pursuant to which Bill Kriketos acquired the shares of Christopher Kitas in Rehab. In addition Bill Kriketos and Rehab will require and indemnity from Golds Gym, Marc Eisman and Stephen Matthews in respect of any claim that has or may be made by Ivan Livschitz. 4 Agreed except that the new lease should have substantially the same terms and any additional terms shall be of the usual nature and all outgoings shall be paid by the tenant and that the directors of the tenant shall guarantee the tenant's obligations and the commencing rent of the new lease shall be the rent lastly payable increased by 2.5%. 5 See 4. 6 See 4. 7 Agreed. 8 Agreed." The letter further stated: "In relation to the characterization of $700,000 we advise our client does not accept the break up provided. The payment will be made by our client on the terms reflected herein." These terms were stated to be not negotiable. 10 By letter dated 8 August 2005 but sent by fax at 11.08 am on 9 August 2005 Mr James replied: "4 Our clients insist on the rent for the new period to remain the same." Mr James added that characterisation of the payments of $700,000 was not negotiable. 11 Mr Roth replied by fax sent at 12.53 pm on 9 August 2005: "We refer to the writer's telephone conversation with you and your letter of today's date in relation to the above matter and advise that all but the rent is agreed. The commencing rent of the new lease shall be the rent lastly payable increased by 2.5% with annual increases of 2.5% thereafter. The above is not negotiable and in the absence of the receipt of written acceptance by 4.00 pm today the offer shall be deemed to have been withdrawn." Significantly, there is no evidence whatever as to the content of the telephone conversation referred to. 12 There is in evidence a diary note of Mr Roth that indicates that, at 2.30 pm on 9 August 2005, he had a telephone conversation with Peter Cool, the plaintiff's accountant. The diary note states: "He has just spoken to BK + assured him ok to split $700K as requested. It is a question of fact what the payment is for & not governed by what it is called in a doc." However, there is no evidence that Mr Kriketos' agreement to this requirement was ever communicated to the other side. 13 At 3.39 pm on 9 August 2005 Mr James replied as follows: "In response to your letter of 9 August 2005 received by facsimile at 12.53 pm our client has agreed to accept a rent increase of 2.5% and thereafter annual increases of 2.5% with a market review at the end of 5 years. As previously discussed the 5 year option will contain a 12 month demolition clause. We confirm that all outstanding issues have now been resolved and look forward to receiving relevant documents from you reflecting this agreement." 14 On 10 August 2005 Mr Roth wrote to Mr James a letter enclosing a copy of a draft deed of release for his approval. The draft deed bore date " day of July 2005". It provided for the payment of the settlement sum of $700,000 by bank cheques of $350,000 each to Mr Eisman and Mr Matthews. This was, of course, Mr Kriketos' original proposal and did not accord with what was said to be the other side's non negotiable requirement. 15 On 15 August 2005 Mr Roth forwarded a copy of the annexure to the lease to Mr James. Despite further letters from Mr Roth to Mr James up to 31 August 2005 no response was received from Mr James to these communications. On 13 September 2005 the plaintiff filed a statement of claim commencing these proceedings. The law 16 The law may be taken to be relevantly stated in the following authorities. 17 In Masters v Cameron supra Dixon CJ, McTiernan and Kitto JJ said at 360: "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 implied, 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." 18 In Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 McLelland J said at 627 - 628: "There was a binding contract, if, and only if, by the exchange of letters the parties mutually communicated their respective assents to being legally bound by terms capable of having contractual effect: see the discussions in Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 at 9254 ff and Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309. In the last-mentioned case Mahoney JA (at 326) identified three questions which it is often useful to consider in such a context as the present, namely '… did the parties arrive at a consensus?; (if they did) was it such a consensus as was capable of forming a binding contract?; and (if it was) did the parties intend that the consensus at which they arrived should constitute a binding contract?' … There is in reality a fourth class additional to the three mentioned in Masters v Cameron , as recognised by Knox CJ, Rich J and Dixon J in Sinclair Scott and 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.'" 19 His Honour's decision was upheld by the Court of Appeal in G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631. McHugh JA (with whom Kirby P and Glass JA agreed) said at 634: "… 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)." 20 In Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 Gaudron, McHugh, Hayne and Callinan JJ said at 105: "…the search for the 'intention to create contractual relations' requires an objective assessment of the state of affairs between the parties [ Masters v Cameron (1954) 91 CLR 353 at 362 per Dixon CJ, McTiernan and Kitto JJ; ABC v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548-549 per Gleeson CJ] (as distinct from the identification of any un-communicated subjective reservation or intention that either may harbour) …" 21 In Helmos Enterprises Pty Ltd v Jaylor [2005] NSWCA 235 Young CJ in Eq quoted a number of the above authorities and said at [56]: "The vital question is always what the parties intended by the words they have used." 22 In Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd (1995) 7 BPR 14,551 Kirby P said at 14,562 – 14,563: "It is well settled that a court may have regard to the parties' communications after the formation of an allegedly binding agreement in order to determine, objectively, whether or not the parties intended to form a binding agreement: See eg Australian Broadcasting Commission v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 547-8; Liquorland (Australia) Pty Ltd v GYG Holdings Pty Ltd and Ors (Unreported, Court of Appeal 28 October 1994), Powell JA at 39-40; Barrier Wharfs Ltd v W Scott Fell and Co Ltd (1908) 5 CLR 647, 668; Howard Smith and Co Ltd v Varawa (1907) 5 CLR 68; Marek v Australian Conference Association Pty Ltd [1994] 2 Qd R 521, 529; Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251, 9255; and B Seppelt and Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147, 9149 and 9156." 23 In Baloglow v Konstantinidis [2001] NSWCA 451 Giles JA said at [138] that the Courts will strive to give effect to agreements made through the lawyers acting for parties to disputes, and referred to Geebung supra at 14,570. Geebung emphasised that courts will attempt to give effect to agreements reached between the parties personally for the settlement of proceedings. However, Gleeson CJ warned at 14,553: "On the other hand, if the nature of the dispute between the parties is such that its resolution necessarily requires agreement on certain points, or if the parties themselves contemplate that they must agree on those points, their failure to agree on such points cannot be ignored by a court in the supposed interest of giving effect to the expectations of the parties. That would be to disregard their intentions." Contentions 24 The plaintiff contended that an agreement was concluded as a result of Mr Roth and Mr James' exchange of correspondence. The plaintiff particularly relied upon the concluding words of Mr James' letter dated 9 August 2005 referred to in [13] above "reflecting this agreement". 25 The plaintiff in its amended statement of claim made alternative claims as to the form in which the agreement ought be declared to be in force. The primary form is a form reflecting the terms of the correspondence. The sole provision in this form as to the $700,000 is a term that the plaintiff should pay the defendants $700,000. The alternative form is substantially in the form of the deed forwarded under cover of Mr Roth's letter of 10 August 2005. This form contains a provision for the payment of the $700,000 to Mr Eisman and Mr Matthews "in equal proportions". 26 The defendants contended that no legally binding agreement arose. They did this on the basis that: (a) essential terms of the proposed arrangements were not agreed; (b) in any event, it should be inferred that none of the parties intended a binding agreement to arise until the detailed documents which were under preparation were signed. Conclusion 27 In my view, in this case it is not necessary to go past the first of the questions identified by Mahoney JA in Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 326 and set out by McLelland J in the Baulkham Hills Hospital case at 627 - 628, namely, "did the parties arrive at a consensus?" 28 One term as to which agreement is doubtful is as to the manner of characterisation or break up of payment of the $700,000 price. That this was of importance to the parties is illustrated by the differing non negotiable stances that they took in the course of negotiation. The sequence of communications (noting the paragraphs of this judgment in which they are set out) that concerned or might be thought to concern this term are as follows: · James to Roth of 5 August 2005 specified uneven breakup [6]; · Roth to James of 8 August 2005 rejected uneven breakup among terms stated to be not negotiable by plaintiff [9]; · James to Roth dated 8 but sent 9 August 2005 stated characterisation of payments of $700,000 not negotiable by defendants [10]; · Roth to James 12.53 pm 9 August 2005 stated "all but the rent is agreed" [11]; · James to Roth 3.39 pm 9 August 2005 stated "all outstanding issues have now been resolved and look forward to receiving relevant documents from you reflecting this agreement" [13]; · Roth to James of 10 August 2005 enclosed deed containing provision for two equal payments of $350,000 [14]. 29 It is in evidence that, by about 2.30 pm on 9 August 2005 at the latest, the plaintiff was prepared to abandon his non negotiable stance concerning the form of payment of the $700,000. This was not specifically conveyed to the other side and what is relied upon as showing complete agreement is the plaintiff's solicitor's statement in the earlier (12.53 pm) letter stating that "all but the rent is agreed", which was responded to by Mr James' letter at 3.39 pm on 9 August 2005 stating "all outstanding issues have now been resolved". 30 Despite there being evidence of it, the plaintiff's subjective state of mind cannot be relied on in coming to the conclusion as to whether or not agreement was reached. This question must be determined objectively. There is no evidence as to the content of the telephone conversation referred to in Mr Roth's letter of 12.53 pm 9 August 2005. Whatever was meant to be conveyed at 12.53 pm on 9 August 2005 by "all but the rent is agreed", by the very next morning the plaintiff's solicitor presented a document in which the plaintiff's requirement as to payment of the $700,000 is repeated, contrary to the non negotiable stance announced on behalf of the defendants on the face of the correspondence. 31 The plaintiff contended that it must be inferred from his solicitor's "all but the rent is agreed" followed by the defendants' solicitor's "all outstanding issues have now been resolved" that the defendants had agreed to the plaintiff's break up. The question of the break up had gone "off the radar", as Mr Segal, of counsel for the plaintiff, repeatedly said in oral submissions. The plaintiff then, by his solicitor, sent a draft deed containing his version of the break up, despite having personally become indifferent to the manner of the break up. 32 I do not agree that the inference contended for by the plaintiff can be drawn. The plaintiff was the first to declare that all had been agreed, but he could not give away the defendants' stance on the break up. The defendants' "all issues have been resolved" followed on the plaintiff's declaration and in the context is completely equivocal as to the break up. The plaintiff's reiteration of his stance in the draft deed of 10 August 2005 does not advance the matter. The defendants' silence in the face of this reiteration cannot have contractual effect: Felthouse v Bindley (1862) 11 CB(NS) 869; 142 ER 1037; Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523; and see generally Carter, Peden & Tolhurst, Contract Law in Australia (5th ed, 2007) [3-29]. 33 Thus, the situation between the parties as at 10 August 2005, on an objective basis, was that there was no agreement as to the manner in which the $700,000 was to be paid. That issue had been regarded as so important by both sides that it had been treated by both as a non negotiable term. In those circumstances, there cannot be taken to have been an agreement between the parties as to all the terms of their agreement. Therefore, I find that there was no agreement between them. 34 Mr Ireland, of Queen's Counsel for the defendants, also submitted there was no sufficient agreement as to the terms of the releases to be given, but I do not need to determine that matter. 35 In view of the finding in [33] above, there is no need to pass to the question as to which of the categories in Masters v Cameron the matter fell into. 36 The plaintiff's claim must be dismissed. ********** 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. 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