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Contract Law News, July/August 2010
In this case the courts have reiterated the need to ensure that all parties to a series of transactions are “on the same page” to ensure the desired outcome of a project is achieved
Sharjade Pty Ltd v The Commonwealth; RAAF (Landings) Ex-Servicemen Charitable Fund Pty Ltd[2009] NSWCA 373
This case considered a contractual dispute relating to a property development.
Two contracts were in issue. Firstly, the Commonwealth and a company known as Darwinia (which was a subsidiary of an association of ex-RAAF personnel) entered into an option agreement concerning the sale of a vacant block of land. Darwinia proposed to develop the site as a retirement village – units in the development were to be sold to retired RAAF service personnel. The option agreement was entered into in November 1995, and was for a 12 month period. A bank guarantee was to be provided and Darwinia undertook to pay interest upon confirmation of the purchase. Secondly, Darwinia entered into a Heads of Agreement with Sharjade whereby the latter company was to arrange finance for the development project, including a bank guarantee for the purchase price. Darwinia was given the task of promoting the project and to pursue pre sales of units.
In December 1998, Darwinia exercised the option, but the parties did not enter into a formal contract. In March 2000, the Commonwealth sought interest payments and the bank guarantee from Darwinia, but later served a notice terminating the option and purchase in May 2000. Subsequently, Darwinia wrote to Sharjade terminating the parties’ heads of agreement.
Ultimately, the development went ahead without the involvement of Sharjade. Sharjade sued Darwinia for wrongfully terminating the heads of agreement, and also sued the Commonwealth for inducing Darwinia’s breach.
At first instance, Sharjade’s claim against Darwinia was upheld. The trial judge held that the Commonwealth had not been entitled to demand the interest and bank guarantee from Darwinia (which was to be provided by Sharjade) because a formal Contract of Sale had not been entered into as was required under the option agreement.
However, her Honour found that the Commonwealth had not induced Darwinia to breach its contract with Sharjade since the Commonwealth was unaware of the heads of agreement between Darwinia and Sharjade and could not therefore be said to have sought or intended to bring about a termination of these heads of agreement.
Importantly, her Honour found that Darwinia had been in breach of its heads of agreement with Sharjade in failing to adequately promote the project and secure pre-sales of units.
ON APPEAL,the Court held that a Contract of Sale had been entered into upon Dawrinia exercising the option with the Commonwealth, even though no formal Contract of Sale had been signed. The Commonwealth had given sufficient notice to Darwinia to fulfil its financial obligations under the option agreement for the Commonwealth to terminate this agreement when Darwinia did not provide the interest or bank gurarantee.
Then Court of Appeal agreed with the trial judge that Darwinia had breached its contract with Sharjade in failing to secure pre-sales of units, and that Sharjade was also in breach of this contract in failing to arrange finance for Darwinia before it became due and payable to the Commonwealth under the option agreement.
Sharjade’s breach was held to be sufficient to allow Darwinia to terminate its agreement with Sharjade, since Darwinia had advised Sharjade that the Commonwealth had given notice that payment of interest and the provision of the bank guarantee was to be paid, time being of the essence. Because the obligation breached by Darwinia was not interdependent with the obligation breached by Sharjade, Darwinia was entitled to terminate the heads of agreement on the basis of this latter breach. Sharjade had breached a fundamental term of the agreement, whereas Darwinia had not. As a result, Sharjade failed in its claim that the Commonwealth had induced Darwinia to breach the heads of agreement. Further, the necessary ingredients for the tort of inducement to be made out were lacking in any event, since the Commonwealth had no knowledge of the terms embodied by the heads of agreement between Darwinia and Sharjade.
It is critical when entering into a “series” of arrangements relating to one project to ensure all loose ends are tied up satisfactorily so all parties comply with their respective obligations to achieve the desired result. Forum law will assist and advise on drafting and revising contracts and setting up project structures to achieve your desired outcome.