Breakdown of a business relationship lead to two court cases

The first court decision over who was responsible and who was to pay cost was overwritten by the second court decision.

Facts behind BATTERHAM –v- MAKEIG [2010] NSWCA86 (22 April 2010)

Makeig, a property development consultant, entered into an agreement with Mr Batterham to provide project management and consultancy advice to assist with rezoning of real estate in the village of Kitchener near Cessnock.  The intention was to prepare the land for development and sell it on to a developer.

Makeig entered into a written agreement with Batterham.  The document was signed on 5 March 2005.  An essential term of the agreement was as follows:
(a)   Makeig to undertake the management of the project
(b)   Makeig agrees to pay all consultant’s costs now the costs ancillary to consultancy services in a timely manner ...
(c)   Makeig agreed to pay and has paid costs relating to .... comprising the option fee, the land clearing costs and the survey fee.
(d)   All professional work required to achieve the above result will be carried out by Makeig in a timely manner.

The agreement provided that the profit of the enterprise would be split 11/18 to Batterham and 7/18 to Mr Makeig.  This written document was called the “Kitchener Project Agreement.”

The project progressed through the Council process.  In January 2006 Batterham was told by the Council that the Department of Planning required a Local Environment Study.  Further fees were sought by Council in late 2006.  They asked for $36,500.00 which was paid by Batterham on 28 November 2006 and further amount of $16,000.00 on 8 December 2006.

Batterham came to the view that by December 2006 he could no longer work with Makeig.  

Prior to the payment in November 2006, Mr Makeig had delivered up to Mr Batterham an invoice for $450,000.00 seeking to have Council reimburse him for expenditure of his time in preparing the work for the rezoning of the land.  Mr Makeig gave evidence that he had adopted a “poker stance” and refused to make payments or be actively involved in the project until his demands were met.

Mr Batterham terminated the agreement based on Mr Makeig’s breach of the agreement.

Makeig sued Batterham for damages in the Supreme Court and was successful before Justice Ward.

The Court of Appeal on 22 April 2010 reversed this primary judge decision giving judgment in favour of Batterham and ordering that Makeig pay Batterham’s costs of both the Appeal and the Trial below.

NSW Court of Appeal Judgement

The Court of Appeal judgment is a helpful overview of some very important principles of the law of contract.  Helpfully none of the essential findings were on credit of the witnesses but rather on the construction of the facts and the evidence and how those facts can be construed in regard to the law applicable in the case.

Accordingly the Court of Appeal did not feel constrained from reversing the Trial Court decision finding on the construction of the Kitchener Project Agreement.

The Court of Appeal considered the construction of the words “consultant’s costs” and the words “ancillary” and it concluded that it was Makeig’s obligation, under the Kitchener Agreement, to pay the fees to the council for the further work relating to the Local Environment Study.

The Court of Appeal noted that this was a laymen’s agreement and it should be construed according to its commercial purpose not in any pedantic way.  The “lodgement fee” required by the council was in fact a payment for consultants (to be retained by the council) to prepare the Kitchener precinct to be included in the Cessnock master plan.

Makeig did not pay Nov/Dec 06 Council lodge fees and refused to do so.  The Court of Appeal found that although, on Makeig’s evidence, this was a game of “poker” which he was bluffing in order to gain an advantage for himself there was no objective evidence that Batterham knew it was only a bluff and not Makeig’s genuine intention to breach the agreement.  Accordingly the Court of Appeal found it reasonable that Mr Batterham, having received the definite refusal by Makeig to undertake his essential term of the agreement, proceeded to terminate the agreement.

The Court of Appeal observed that the question of repudiation is a question of fact and having regard to the trial judge’s finding that this clause was an essential term the only conclusion based on the evidence before the Court was that Makeig had repudiated the Contract.

Accordingly the Court of Appeal reversed the Trial Judge Decision and substituted their own judgment in its place.

Comment from Mark Streeter - Sydney Lawyer

This was a very interesting case of hotly contests facts and substantial factual issues. Notwithstanding the complexity of the relationship and the number of communications the actual “breach” identified and relied on by the Courts was based on one letter and two conversations!

High Court of Australia asked to rule if a contract existed and was binding

Masters versus Cameron [1954] HCA 72 is a classic legal case that is still the leading authority on whether there is a binding contract or not. Even though this law case is over 50 years old the legal precedent it set is still used in Australian court cases today.

The Facts

This legal dispute arose in respect of a sale of land from the Plaintiff (in the original trial) to the Defendant. On 6 December 1951 Mr & Mrs Masters (the Defendants and proposed purchasers) agreed to buy from Mrs Cameron (the Plaintiff and Vendor) a farming property in Western Australia called “Bokhara”. The agreement was contained in a short written document.  Both the vendor and the purchasers signed their signatures to the document. A deposit of £1,750 was paid by the proposed purchases to the Vendors agent shortly after signing the agreement. Final settlement of the property was scheduled to occur on 15 March 1952.

The written agreement included, at the request of the Vendor, a specific provision in the following form:
“This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my solicitors on the above terms and conditions.”

After signing the initial agrement on 6 December 1951 the Masters changed their minds and decided not to proceed with the purchase of the property and claimed a refund on the deposit. No ‘formal contact’ had been signed by the partys in reliance on the above term of the Contract.

The issue to be determined by the High Court was whether a binding contract had already been made.

High Court of Australia Decision

The High Court noted that there were 3 common circumstances where parties in the course of a negotation agree on terms of a contractural nature, namely::

(a)   Parties reach ‘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 fuller and more precise form but not different in effect.
(b)   Parties have agreed on all the terms of their bargain and intend no departure or addition thereto but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.
(c)   The intention of the parties is not to make a concluded bargain at all unless and until they have executed a formal contract.

In the first two instances a binding contract has been made. In the third instance no binding contract has come into being.

The Court noted that it was in deciding which of the classes a particular contract or agreement that a document fell, it was necessary to enquire as to the intention disclosed by the language the parties had employed. The High Court found that despite parties having taken steps consistent with and in anticipation of a formal contract being executed, signed and completed these further actions did not amount to a binding representation or a stop-all.

Accordingly, the proposed purchaser in this case entered into financial difficulties and decided to pull out of the agreement.  The Court found that on the expressed intention in the signed document there was no formal contract entered into and as this had been subject to a “formal contract” and the parties were not bound.
The defendants were successful and obtained orders for the recovery of the deposit paid and an order for costs.

Comment from Mark Streeter Sydney Lawyer

Despite the case being decided over 50 years ago this decision is still the leading authority for interpreting agreements that are ‘subject to contract’.

The parties, the terms and the existence of an agreement between the parties are an essential element of the enquiry into the enforceability of every contract. Fundamental to this enquiry are the following:

(a)   The identify of the parties to the agreement
(b)   The subject of the agreement (for example to undertake work or provide specified goods or services)
(c)   An acceptance of the offer to provide the Subject of the agreement on the terms offered
(d)   Performed in accordance with the agreement
(e)   Tax invoice being issued and demand for payment made
(f)   Payment not being made

Often, deals are done on a hand-shake or on a telephone. Sometimes there are documents or emails - sometimes not.

The absence of a signed agreement which contain all the relevant terms usually makes it more expensive (both in terms of time and in legal costs) to compile the evidence to enforce the agreement by compiling the documents and statements that collectively give an account of the contract and the elements described above.

It pays to act on overdue accounts

Every business needs to manage their cashflow. Overdue accounts can make this hard. This case study demonstrates how bringing in Streeterlaw Sydney Lawyers speeded up the process dramatically.

The Pain

• Aged debt in excess of 18 months owed to a corporation.
• Debt amount $10,000

The Debt Recovery Solution

Step 1

Rather than simply writing a letter to the last known address the Streeterlaw legal team went to work. A series of telephone calls and searches enabled the legal team to identify the correct contact telephone number for the director of the debtor company.

Step 2

A debt recovery letter of demand was dispatched informing them of the consequences of their failure to pay the debt within the prescribed time frame.

Step 3

An SMS was dispatched to the director's mobile phone number notifying him of the imminent arrival of the debt recovery letter and inviting him to contact our Sydney office to arrange payment.

Debt Recovery Result:

Full payment by cheque of the $10,000 debt was made within two days of dispatch of demand letter.

Debt Recovery Cost:

Debt recovery costs to the client were less than 1.2% of the value of the debt.

Client testimony:

“We don't know why we waited so long to get you involved - thanks for all your assistance and advice. We so rarely have any debtors that the commencement of legal action was outside of our comfort zone.

I have no hesitation in recommending Streeterlaw for the recovery of commercial debts - it certainly worked for us.”

Case forces unprofessional lawyers to lift their game

In a recent decision on 5 August 2009 the High Court significantly revised the guiding principles relating to case management of proceedings brought before the Courts in Australia.  The decision overruled the previous authority of Queensland v J L Holdings Pty Ltd [1997] HCA 1

The Situation Aon Risk Services Australia Limited v Australian National University [2009] HCA 27 (5 August 2009)

This case reached the High Court from a dispute between the Australian National University (ANU) against its insurance broker Aon Risk Services Australia Limited (Aon) and insurers in which it sought indemnity for losses by reason of the destruction and damage to buildings at their Mount Stromlo Complex in January 2003 fires.  At the hearing before the trial judge in November 2006 the ANU settled with their insurers but then sought an adjournment of the trial to make substantial amendments to its statement of claim against AON.



The trial judge permitted the adjournment and ordered that ANU pay AON’s costs and had regard to the authority of J.L. Holdings in which the primary consideration for the rule in J.L. Holdings is as follows:

It is held to be authority that while case management are a relevant consideration the interest of justice must always be the paramount consideration [100] – [102].

The case progressed to the Court of Appeal of the Supreme Court of the Australian Capital Territory which on 25 August 2008 allowed the appeal but only so far as it modified the costs order to an indemnity basis and continued to permit the amendment to the pleadings.

On 5 August the High Court overturned these two lower Court decisions.  The High Court noted that there was an increasing degree of case management in the Courts and this was reflected in legislation implemented after the J.L. Holdings decision.   The Court considered the A.C.T. equivalent of section 56 – 59 and 61 (1) of the Civil Procedure Act 2005 (NSW) which has the stated intention that the purpose of the Rules of Court are to facilitate the just resolutions of the real issues in civil proceedings with the minimum delay and expense.

The Court acknowledged that having regard to the other “costs” incurred by a party in litigation – such as the opportunity cost of litigation, the strain of litigation upon the witnesses, employees and offices of corporate litigants that it is in the public interest that there be proper and efficient use of public resources.

This decision has been quickly applied in a recent decision in the Supreme Court of New South Wales.  Justice Gzell in the Supreme Court of New South Wales on 14 September 2009 applied this case in refusing leave to a Plaintiff to amend its statement of claim on the first day of trial to expand the potential entities the subject of the alleged wrong doing from 65 to 196 and to split the case from liability into two parts and deal only with liability (leaving quantum for separate and subsequent assessment).  Bastas v Hodes [2009] NSWSC 968

Justice Gzell declined this application on the above authority. 

Comment from Mark Streeter Sydney Lawyer

Personally I see this decision as a very important one. It could have the impact of forcing lazy lawyers to modify the style of practice! The decision in AON provides very strong support for the case management practices of the State and Federal judges.  It is expected that if parties do not comply with directions and properly prepare and present their cases then they will lose the opportunity to “fix it up” later. 

If there is an "application to amend" then the side which wants it must provide an explanation for the delay. They must also demonstrate that this movement (or delay) is brought in good faith. They need to bring to the Court’s attention the circumstances that gave rise to amendment so it may be weighed against the effects of any delay and the objectives of the “just, quick and cheap requirement” of the Court Rules.

Don't be shocked if your debtor appoints an Administrator

Have you ever been ‘surprised’ to receive a letter regarding one of your clients who owe you money advising that an Insolvency Practitioner has been appointed an Administrator of the company?

This notice may have you scurrying for a copy of the original credit application to check to see if you obtained a director’s personal guarantee. However be careful about rushing off to commence proceedings for enforcement of the debt while the company is in Administration. Section 440D of the Corporations Act 2001 has the effect of staying the commencement and continuance of litigation against a company that is in Administration. The Stay lasts for the duration of the Administration.

If you already have a judgment debt, section 440F prevents enforcement for the duration of the administration. Section 440J also prevents you from commencing proceedings against directors under personal guarantees for the period of the administration period, without leave of the Court.  

Just because an Administrator has been appointed over the Company does not mean that you will not be paid. You may have a secured interest over goods supplied if your terms of trade have an effective ‘retention of title’ clause. Alternatively, there may be a dividend paid to unsecured creditors as part of a proposed deed of company arrangement or in a liquidation.

Comment from Mark Streeter Sydney Lawyer

Your ability to obtain personal and directors guarantees is a component part of the initial negotiations of the terms of supply. It may also be a function of your bargaining position and your willingness to assume commercial risk. Many customers start off on small orders but then the scale, frequency and amount of the orders increase.  Accordingly having certain credit limits (below which a personal guarantee may not be required) should be periodically reviewed to see whether or not the trading history of the customer has, by their conduct, crept them into a new level where the credit risk policy of your organisation requires the additional protections of a personal guarantee.

Use the “lessons learnt” to improve your starting procedures. The introduction of the Personal Property Security legislation in 2010 will provide another opportunity for you to review your terms of contract and require new signups by existing customers. This may provide you an opportunity to regularize your terms of trade and to “update” your documentation, data and business intelligence on your customers and key employees within those organisations.

What's your experience with Debt Recovery? Is it improving?

As a Sydney lawyer dealing with debt recovery and debt collection it was interesting to read the Sydney Morning Herald article business pay up more quickly. This article commented on the statistics from Dun & Bradstreet’s trade payments analysis which showed a fall in the payment terms for Australian businesses in the third quarter or 2009. This means companies are paying their bills sooner than they were previously.

Surely businesses have learned lessons from the global financial crisis and taken a more serious look at their engagements with their customers. Even if they were not directly touched by the financial meltdown, businesses had good cause to look at their debtors and assess their risk and exposure in the event their customers failed to pay what was owed.

As a lawyer helping Australian businesses in the ‘sharp end’ of credit control we have observed some changes. There is an increased focus on checking existing or potential customer’s credit worthiness. It appears to us that businesses are also spending extra attention on:
* ensuring that there is clear documentation that evidences payment terms
* tighter internal protocols that require orders be completed in writing by an authorized officer of the customer

A clear and common understanding of the terms of trade facilitates a more prosperous relationship for both customer and suppliers.  Uncertainty or misunderstanding can lead to dissatisfaction, objections and queries of accounts and consequential delays in payment.

Comment from Mark Streeter Sydney Lawyer

If you have clients not paying your invoices on time you should consider legal action. Often just bringing a legal firm into the situation can speed up the payment process.

Higher minimum debt for Bankrupt will reduce Bankrupcty Notices

The Attorney General’s Department has recently released an exposure draft of proposed amendments to the Bankruptcy Act on 25 August 2009.

There are a number of technical “restructuring” type changes proposed to be made to the Bankruptcy Act which include a restructure of the organisation of the “Districts” for Bankruptcy, a streamlined process for remuneration of trustees and increase in penalties for non-complying individuals.

One of the changes is a proposed increase of the minimum debt amount a creditor may issue a bankruptcy notice from $2,000.00 up to $10,000.00.

Comment from Mark Streeter Sydney Lawyer

Bankruptcy Notices are often used as an enforcement mechanism by debt collection and debt recovery firms.  Many more Bankruptcy Notices are issued than proceedings actually commenced (or sequestration orders made).

In the financial year 2008/2009 there were 1,953 sequestration (Bankruptcy) orders made across Australia.  1,551 were for an amount greater than $10,000.00 . This means 402 of these orders would not have been made under the new proposed minimum of $10,000.00 (approx 20%) of the current orders made.

A full copy of the legislation amendment draft can be downloaded from this link to Attorney General’s Department