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LEGALWISE
Key Contract Drafting Seminar
The Latest Cases and Legislative Changes You need to Know when Drafting Contracts.
Alicia Hill
Principal, McInnes Wilson Lawyers
3 September 2015
Commercial contracts are an inescapable aspect of conducting commercial dealings – from business sale contracts, shareholders agreements, supplier contracts, service provider contracts, joint venture agreements and employment contracts.
While companies spend a significant amount of money to ensure their contracts are viable, in reality, very few contracts are ever perfect. Where there is uncertainty in a contract and disagreement between the parties to it, the courts are called upon to provide their view on how the deal that has been struck and documented should be interpreted and applied.
Therefore, the way in which a clause, or communications between the parties in relation to the contract, or the contract itself is drafted, can determine the amount of time and money the parties to the contract may have to expend if a dispute about the contract arises.
This paper will look at some recent cases that have considered exclusion clauses, pre-emptive rights clauses and formation of contract issues and then the latest legislative development that will affect contract drafting, if it is passed by the Commonwealth government, being the extension of the unfair contract term regime to small business.
RECENT cases
1. Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd [2015] WASC 242
1.1 What this case considers
This decision concerned the proper construction of a pre-emptive rights clause in a joint venture agreement and the validity of the notices issued purportedly pursuant to that clause.
The pre-emptive rights clause was intended to confer on parties to the joint venture agreement a right to purchase the interest of a party in the joint venture in the event that that party proposes to transfer its interest to a third party.
The Court was asked to intervene to confirm whether:
(a) the pre-emptive rights clause was sufficiently clear and certain to be capable of application; and
(b) conditions placed in notices purporting to be a trigger of that clause complied with the drafted requirements in the clause.
1.2 Key Facts
In 2010, Santos Offshore Pty Ltd (Santos), Apache Oil Australia Pty Ltd (Apache Oil), Apache East Spar Pty Ltd (Apache East Spar) and Apache Kersail Pty Ltd (Apache Kersail) entered into two agreements.
The first agreement was a Sale and Purchase Agreement (Spar SPA), by which Santos sold to each of the other parties an interest in a petroleum retention lease which it owned. This retention lease later converted into a petroleum production licence.
The second agreement was the Spar Joint Operating Agreement (Spar JOA) which agreed on terms for the operation and exploitation of the retention lease/production licence under the joint venture.
Importantly, the Spar JOA contained the relevant pre-emptive rights clause (clause 12.3) which was set out as follows:
12.3(A)For the purpose of this Clause 12.3, the term Acquired Party shall refer to the Party that is subject to a Change in Control and the term Acquiror shall refer to the Party or third party proposing to acquire Control from a Change in Control.
12.3(B)Any Change in Control of a Party shall be subject to the following procedure.
12.3(C)Once the final terms and conditions of a Change in Control have been fully negotiated, the Acquired Party shall disclose the final terms and conditions as are relevant to its Participating Interest, including the date of the Change in Control, and its determination of the Cash Value of that Participating Interest in a notice to the other Parties. The notice shall be accompanied by a copy of all instruments or relevant portions of instruments establishing such terms and conditions and which will constitute, subject to this Clause 12.3, an offer to sell such Party’s Participating Interest to the other Parties.
12.3(F)Each other Party shall have a right to acquire the Participating Interest of the Acquired Party for the Cash Value on the equivalent terms and conditions set out in the Clause 12.3(C) notice for cash. No Party may acquire the Acquired Party’s Participating Interest pursuant to this Clause 12.3, unless and until completion of the Change in Control. If, for any reason, the Change in Control agreement terminates without completion, the other Parties’ rights to acquire the Participating Interest under this Clause shall also terminate.
In a complex, multi-tiered corporate structure, Apache Energy Ltd (Apache Energy) held all of the share capital and voting rights of Apache Oil, Apache East Spar and Apache Kersail and in turn, a group of companies (the Apache Group) held all of the share capital and voting rights in Apache Energy.
In April 2015, the Apache Group and certain other companies, entered into an agreement with Viraciti Energy Pty Ltd (Viraciti), by which Viraciti agreed to purchase inter alia all of the shares and voting rights in Apache Energy. This sale would result in a change in control, within the meaning of the Spar JOA, for each of Apache Energy’s subsidiaries.
Accordingly, on 15 May 2015, Apache Oil, Apache East Spar and Apache Kersail issued a notice to Santos which purported to comply with the requirements of the pre-emptive rights clause of the Spar JOA.
Santos argued that some of the conditions contained in the notice failed to comply with that pre-emptive rights clause.
1.3 The Decision
Pritchard J, in the Supreme Court of Western Australia, identified that the dispute revolved around the proper construction of clause 12.3 in the Spar JOA.
Her Honour started by considering the subject matter of clause 12 as a whole, highlighting that it creates a right for the other parties to the Spar JOA to pre-empt the transfer of the Participating Interest, or the change in control as it affects the Participating Interest, and to acquire that Participating Interest for itself.
Her Honour recognised the purpose of such clauses in joint venture agreements, adopting Hargrave J’s description in Beaconsfield Gold NL v Allstate Prospecting Pty Ltd,[1] as:
‘pre-emptive rights operate to ensure that existing participants are empowered to exclude new participants by purchasing the outgoing participants interest if they so desire. They also permit a joint venturer … an enhanced opportunity to reap the rewards from past risk-taking and expenditures.’
Accordingly, Her Honour recognised there is a need for caution in adopting a construction which would restrict the operation of pre-emptive rights clauses or permit their application to be avoided.
Pritchard J identified four key questions which she would be required to determine in relation to the meaning and application of the terms of clause 12.3:
(a) what is the meaning of the phrase “the final terms and conditions as are relevant to its Participating Interest“ in cl12.3(C);
(b) what is the meaning of the phrase “on the equivalent terms and conditions set out in the Clause 12.3(C) notice“ set out in cl12.3(F);
(c) Does the phrase “on the equivalent terms and conditions set out in the Clause 12.3(C) notice“ in cl12.3(F) apply to the identification of the terms and conditions set out in the cl12.3(C) notice; and
(d) Is cl12.3 uncertain and therefore unenforceable?
Firstly, Her Honour reached the conclusion that the words “such terms and conditions as are relevant to its Participating Interest” should be construed as requiring a close connection between the terms and the Participating Interest. Accordingly, the terms and conditions which are relevant to the Participating Interest will be those which bear upon, or operate upon, or are otherwise closely connected or related to, the Participating Interest and to its acquisition by the acquiring party.
With respect to the second and third questions, Her Honour concluded that the preferable construction of the phrase “on the equivalent terms and conditions set out the Clause 12.3(C) notice for cash” operates in relation to the determination of consideration to be paid for the Participating Interest. This construction was supported by Her Honour referring to the immediate context in which the phrase appeared, as clause 12.3(F) broadly concerned consideration.
The “equivalent terms and conditions” was held to recognise that the terms and conditions in the notice, in so far as they have a bearing on the consideration to be paid, must be understood as applying so as to result in an equivalent cash price for the acquisition of the participating interest.
Her Honour also held that the only modifications which could be made to the terms and conditions from the change of control transaction agreement, were modifications to reflect the fact that the offer constituted by the terms and conditions in the notice is an offer to sell the Participating Interest only, as opposed to the whole company, and modifications to make clear the Participating Interest will be acquired for cash, rather than on the basis of such other form of consideration as may have been contemplated by the change in control transaction agreement.
Finally, Pritchard J held that clause 12.3 was not uncertain, as the words she found had a clear meaning.
Her Honour concluded that clause clearly outlines the means for identifying the terms and conditions of a change in control transaction agreement which will constitute the offer to sell the acquired party’s Participating Interest to the other parties to the Spar JOA.
Pritchard J then considered whether each of the conditions challenged by Santos in the clause 12.3 notice failed to comply with the requirements of that clause.
Her Honour found that all of the following conditions failed to comply with the requirements for clause 12.3:
(a) a condition adjusting the purchase price of the Participating Interest at the date of competition;
(b) a condition requiring Santos to acquire all of the Participating Interests, being the interests of Apache Oil, Apache East Spar and Apache Kersail;
(c) a condition indemnifying the acquired party against all costs and liabilities in respect of the Participating Interest; and
(d) a condition requiring Santos to assume any payment obligation of the acquired party under the Spar JOA.
Accordingly, Pritchard J made declarations that each of the notices were wholly invalid and that the invalid conditions could not be severed from the notices.
The ultimate effect of the decision was that Apache Oil, Apache East Spar and Apache Kersail would have to issue new notices that complied with clause 12.3 of the Spar JOA
2. Vantage Systems Pty Ltd v Priolo Corporations Pty Ltd [2015] WASCA 21
2.1 What this case considers
This decision concerned whether a binding agreement for lease after an exchange of communications despite no formal documentation being signed by the parties.
In particular whether the revised lease proposal and the relevant emails sent by Vantage to Priolo’s agent constituted a binding agreement for lease.
2.2 Key Facts
By a written agreement dated 6 August 2003, Vantage Systems Pty Ltd (Vantage) leased part of an office building from Gamol Pty Ltd (Gamol) for a period of three years, commencing 1 July 2003.
Gamol also granted Vantage a licence to use six car bays on the property.
Vantage sub-leased part of the premises to a third party.
Vantage exercised its option to renew the lease under the written agreement, extending the lease and the licence for an additional three years expiring 30 June 2009.
In December 2007, Priolo Corporations Pty Ltd (Priolo) became the registered proprietor of the premises.
In May 2009, there were discussions between Priolo’s commercial leasing agent and Vantage concerning the possibility of a new lease of the premises being executed upon the expiry of the original lease, as extended by the option to renew.
Priolo’s agent sent Vantage a proposal for a new lease, which was not acceptable to Vantage due to the amount of rent payable and the period for which a bank guarantee was provided.
On 4 June 2009, after a series of communications, Priolo’s agent emailed Vantage attaching a revised proposal for a new lease stating ‘can you please confirm in writing that this proposal is acceptable to Vantage and we will arrange for [Priolo’s] solicitors to prepare the draft documentation.’
Importantly, the revised proposal contained all of the essential terms for an agreement for lease, despite containing a material error that the licence fee for the six car bays was $375 per bay per annum, when it should have stated that the fee was $375 per bay per month.
Vantage responded to the revised proposal by stating that it was happy with the terms of the proposal and that ‘we should be good to start wrapping it all up’, however, it would also require the sub-lessee’s acceptance.
Shortly thereafter Vantage sent another email stating the sub-lessee had approved the revised lease proposal.
Accordingly, Priolo instructed its solicitors to prepare the draft lease and car parking documentation, which was sent to Vantage on 2 July 2009. However, Vantage did not sign the new lease and car parking documentation due to being unhappy with the terms, in particular, the ‘make-good’ clause.