Forming a binding settlement agreement
In 2024, the courts were faced with a number of cases where the validity of a settlement agreement was in dispute. To be enforceable, a settlement agreement must satisfy all foundational requirements for a valid contract. These include the requirements that:
- the agreement be supported by good consideration; and
- the parties, by that agreement, intended to create a legal relationship.
While it is trite that a contract must be supported by consideration, what exactly amounts to 'good' consideration? It is a long-established principle that performance of an existing duty, whether arising under a contract or statute, is not sufficient. This principle was qualified in Wigan v Edwards (1973) 1 ALR 497, where Justice Mason acknowledged that performance of an existing obligation can be good consideration if it is given by way of a bona fide compromise of a disputed claim. If one party believes, in good faith, that it is excused from performing a pre-existing contractual obligation, performing or promising to perform this obligation will be good consideration for a new promise by the other party. The New South Wales Court of Appeal in Creative Academy Group Pty Ltd v White Pointer Investments Pty Ltd [2024] NSWCA 133 considered these principles in the context of a commercial arrangement for the development of childcare centres. The decision carefully examines the need for a genuine dispute that is being compromised in order for the new agreement to be supported by consideration.
Settlement agreements are often concluded following a series of correspondence between the parties. This can give rise to the vexed issue of what point in time communications between parties form a binding contract when entry into a formal agreement was contemplated. Readers of the Contract Law Update (2023, 2022) will recall our discussion in previous years of the distinction between a binding contract and a mere 'agreement to agree'. The New South Wales Court of Appeal in Radovanovic v Stekovic [2024] NSWCA 129 considered whether acceptance of an offer made in a Calderbank letter in settlement of a dispute demonstrated an intention to be bound immediately upon acceptance, or whether the parties would only be bound upon entry into a formal deed of settlement and release.
Sinclair v Balanian [2024] NSWCA 144 also considered the parties' intention to be bound by an agreement. In this case, commercial parties sought to settle a dispute by entering into a deed of settlement, release and indemnity without legal input. While the document lacked the formalities required to be a binding deed, it was still held to be valid as a contract and, troublingly for the individuals, was found to be binding on signatories in their personal capacity rather than only as representatives of the commercial parties.
Creative Academy Group Pty Ltd v White Pointer Investments Pty Ltd [2024] NSWCA 133
Consideration where new promise made—restitution of monies paid
The New South Wales Court of Appeal considered whether a settlement proposal between the parties was supported by good consideration. The issues before the court included whether a new promise in the context of an existing contract was good consideration, and whether restitution of monies paid by one party was available on the basis that either the contract was unenforceable, or the monies were paid under a mistaken belief.
This case considers whether a new promise can amount to 'consideration' in the context of a pre-existing contractual arrangement. It emphasises the principles expounded by Justice Mason in Wigan v Edwards (1973) 1 ALR 497 that a promise to perform an existing legal duty only amounts to consideration if it is a 'bona fide compromise of a disputed claim'; otherwise, a new promise must be more than what is promised under the existing contract.
Creative Academy Group Pty Ltd and White Pointer Investments Pty Ltd entered into an oral agreement around October 2017 for the services of Hilton Hedley, White Pointer's sole director and secretary (the Moncur Agreement). Mr Hedley agreed to identify suitable childcare sites for CAG and assist it to lease the sites in return for a fee of $2000 per child placed at each childcare centre. Half of the fee would be paid upon the execution of a lease agreement and granting of development approval of a site, and the remaining half would be paid upon the opening of the relevant childcare centre.
In early 2020, and after being introduced to some sites by Mr Hedley, CAG proposed an alternate arrangement where it would pay a lesser amount per a child's place in advance, and White Pointer would be required to refund these advances if the relevant childcare centre did not open (the Settlement Proposal).
White Pointer commenced proceedings against CAG for amounts it alleged were outstanding under the Moncur Agreement. In its cross-claim, CAG alleged it was entitled to restitution of all amounts paid to White Pointer because the services provided by White Pointer and Mr Hedley required that they were licensed as real estate agents in NSW and the ACT as per the Property and Stock Agents Act 2002 (NSW) and Agents Act 2003 (ACT). White Pointer was successful at first instance.
Justices Adamson and White allowed the appeal in part. Justice Meagher dissented on the application of the Agents Act 2003 (ACT) and the availability of restitution.
Settlement Proposal was not enforceable
The Court of Appeal unanimously upheld the finding that the Settlement Proposal was not binding.
Justice Adamson (Justices White and Meagher agreeing) considered the general rule articulated in Wigan v Edwards (1973) 1 ALR 497 at 512 that 'a promise to perform an existing duty is no consideration', as well as the qualification that such a promise can be sufficient consideration 'when it is given by way of a bona fide compromise of a disputed claim, the promisor having asserted that he is not bound to perform the obligation under the pre-existing contract or that he has a cause of action under that contract'.
Her Honour found that CAG's conduct in offering to pay part of the sum owing under the Moncur Agreement for existing sites but characterising it as an advance for a different site was an attempt to conceal 'part-performance of an existing obligation as a valuable concession'. Her Honour found that CAG's promises were no more than threats to withhold performance under the agreement to gain an unfair advantage, and did not amount to consideration. Further, there was no bona fide dispute about the terms of the Moncur Agreement that the Settlement Proposal purported to resolve. The Settlement Proposal therefore failed for lack of consideration and was unenforceable.
No restitution
The appellants alleged they were entitled to restitution of amounts they had paid to White Pointer given the terms of the NSW Act and the ACT Act. The appellants argued that the Moncur Agreement was illegal, contrary to public policy and unenforceable.
Justice Adamson found that the NSW Act did not go as far as to require White Pointer to repay monies already received under the Moncur Agreement where that choice was available to the legislature. That Act makes clear that an unlicensed agent is not entitled to bring proceedings to recover a fee for services performed without the requisite licence, but does not require those agents to pay back monies already received. Her Honour found it was not incongruent with public policy for the court to refuse to order White Pointer to return the monies already paid to it under the Moncur Agreement. Her Honour applied the same analysis with respect to the ACT Act and the payments White Pointer received for ACT sites.
The appellants also argued they were entitled to restitution of the monies paid because they were paid under the mistaken belief that White Pointer could have enforced a right to payment, and that this was the only available inference on the evidence. Her Honour found that other explanations arose on the evidence, including that the appellants had a 'strong commercial interest' in using the respondents' services and that as a new entrant to the childcare sector they would have been unlikely to secure and lease any of the sites without the respondents' connections. It could not be inferred that CAG was concerned about whether the respondents were or were required to be licensed when it only needed the benefit of the respondents' connections. Her Honour also found that the appellants had not established causation, as she did not accept that CAG would have impacted their future business by not paying White Pointer on the basis that they did not hold the requisite licences.
Radovanovic v Stekovic [2024] NSWCA 129
Accepting Calderbank offer—binding settlement agreement—Calderbank offer indicating intention to be bound immediately
The parties exchanged correspondence in the course of a family dispute over the distribution of proceeds from a property sale. The appellant sent a Calderbank letter, expressed as 'without prejudice save as to costs', offering terms of a proposed settlement that were accepted by the respondents. The issue arising was whether this gave rise to a binding settlement agreement, or whether the parties intended not to be bound until a formal settlement agreement was executed.
This decision emphasises the importance of taking a commercially sensible approach when determining when parties intend to be bound by an agreement.
Goran Radovanovic was the sole registered owner of a property in Queanbeyan, NSW. In 2020, he sold the property for $675,000. Mr Radovanovic's sister and her husband (together, the Stekovics) asserted an equitable interest in the property and placed a caveat on the title. They agreed to remove the caveat if the proceeds of sale were held on trust by the appellant's solicitor, BDN, while the dispute was resolved.
The sale amount was paid into BDN's account by the purchaser and remained held in trust for nearly two years. In 2022, Mr Radovanovic notified the Stekovics that he intended to have the funds paid out to himself, which prompted the Stekovics to make an offer settling the dispute. These communications were made through the parties' solicitors by email. In reply, Mr Radovanovic rejected the settlement offer and made a counteroffer that:
- Mr Radovanovic would authorise $225,000 of the net sale proceeds to be paid to the Stekovics; and
- the parties would enter a 'deed of settlement and release', which contained a term that the parties would bear their own costs and would otherwise contain 'standard provisions'.
The Stekovics accepted this counteroffer.
By August 2022, no payment had been made, and no formal deed was executed. The Stekovics commenced proceedings that resulted in the order against Mr Radovanovic to comply with the counteroffer.
Mr Radovanovic argued on appeal that he was not bound by the counteroffer.
Justices Meagher, Gleeson and Payne found that the counteroffer was a binding settlement agreement and dismissed the appeal. The court found that an objective bystander would conclude the parties intended to be bound as soon as the Stekovics accepted the counteroffer.
The counteroffer was a Calderbank offer, expressed as being 'without prejudice save as to costs'. This type of settlement offer fixes a time for acceptance and, after that time, may be relied upon by the offeror to seek favourable costs orders in subsequent litigation. Mr Radovanovic argued that the language of 'without prejudice save as to costs' was pro forma language for a Calderbank offer and did not evince an intention to be bound. This argument was rejected.
Justice Payne (with whom Justices Meagher and Gleeson agreed) opined on the nature of Calderbank offers, and stated as a general proposition that provided the time for acceptance is reasonable and it is capable of acceptance, it will ordinarily bind the parties immediately, notwithstanding that the agreement may contain executory promises. His Honour considered that an objective bystander would have understood that the parties intended that the counteroffer, once accepted, would immediately be binding. All the circumstances, including the accompanying threat of litigation, supported the conclusion that there was an intention to be bound.
Further, the language of the counteroffer did not suggest it was the parties' intention to delay entering an agreement until the execution of a formal deed. Instead, it was held to be a term of the agreement that was to be fulfilled in the future but was nevertheless binding from the moment of acceptance.
The court rejected the argument that the counteroffer lacked key terms and was therefore incomplete and not binding. It was commercially obvious, even without an explicit term to this effect, that once the Stekovics received the $225,000, Mr Radovanovic would retain the balance. Further, the circumstances of the funds being held on trust by BDN on behalf of Mr Radovanovic (not on the Stekovics' behalf) meant there was no term needed to specify they authorised BND to release the funds.
Sinclair v Balanian [2024] NSWCA 144
Contract formation—improperly executed deed
In this case, the New South Wales Court of Appeal considered whether a document described as a deed (but not executed as such) was effective as a contract that was binding on the three executing companies and the three individuals who had executed it notionally on behalf of the companies in their capacity as directors. The court unanimously held that the document was a valid and effective contract that was binding on both the companies and individuals in their capacity as individuals.
The case demonstrates that parties to an improperly executed deed may still be held to be bound by its terms in contract. Subject to the language of the document, the obligations may be held to extend to company officers executing the document in their personal capacity.
The case concerned two appeals from two proceedings heard together in the Supreme Court. The proceedings were commenced by the appellants in mid-2021 for claims relating to a digital commodity investment fund business involving the respondents.
The appellants were Fiona Sinclair (for herself and for the estate of her deceased husband, John Sinclair) and the company she owned with Mr Sinclair. The respondents were Mr Ashod Balanian and two of Mr Balanian's companies.
The appeals concerned the legal effect of a document entitled 'Deed of Release & Indemnity, Settlement of Proceedings' (the Deed) that was signed at a mediation attended by the parties without their lawyers. The Deed, which was prepared by the mediator, was poorly drafted. The execution page designated signature blocks for the corporate parties but not for Mr Sinclair, Mrs Sinclair and Mr Balanian, who each signed on behalf of their respective companies but not in their individual capacities.
Following the mediation, disagreement arose over the terms of the Deed, which led to Mrs Sinclair and her company filing an interlocutory process in each of the Supreme Court proceedings, seeking a declaration that the Deed was void and unenforceable. It was not disputed that the Deed did not comply with the execution requirements under s38 of the Conveyancing Act 1919 (NSW).
Before the primary judge, and on appeal, Mrs Sinclair argued that the Deed was only intended to take effect if and when properly executed as a deed. In this respect, the appellants placed particular emphasis on the Deed clause allowing execution by counterparts. While accepting the Deed was not effective as a deed, the respondents argued that a valid and binding contract had been formed between the parties, including the individuals in their personal capacities.
At first instance, Justice Henry upheld the respondents' arguments and made declarations that the Supreme Court proceedings had been settled in accordance with the Deed.
The Court of Appeal unanimously dismissed both appeals.
There were four issues on appeal:
- whether the parties intended to be contractually bound by their agreement even though not completed as a deed;
- whether the parties intended that the individuals be personally bound;
- whether the Deed only took legal effect, becoming binding on the individuals, when a counterpart execution page was exchanged; and
- whether the primary judge erred by addressing conduct subsequent to the agreement being reached on the terms of the Deed.
On the first issue, the court found that, based on an objective assessment of the terms of the Deed, its subject matter (settling the two proceedings), and what was conveyed by the parties in the circumstances leading up to execution, the parties intended to be legally bound, whether or not the Deed was effective as a deed. The court noted, among other things, the following in support of the finding:
- Parties can intend that a document expressed as a deed take effect as a contract, whether or not they also intend that it operate as a deed. The Deed frequently referred to itself as an 'agreement', and these references evidenced the parties' intention to be bound by the Deed, regardless of whether it was completed as a deed.
- The parties did not need to use a deed for their settlement, and none of the operative clauses were premised on the Deed having effect as a deed.
- Consistently, at the mediation, the parties and the mediator drew no distinction between a deed and a contract.
- Leading up to execution, the parties were very eager to settle the proceedings and insisted that the Deed be finalised at the mediation, dismissing the mediator's repeated suggestion that they take the Deed to their lawyers to finalise.
On the second issue, the court found the Deed conveyed a common intention for Mrs Sinclair (and Mr Sinclair's estate) and Mr Balanian to be parties to the Deed and to be personally bound by it, despite the absence of execution blocks for them to sign in their personal capacity. The court noted, among other things:
- references to the parties in the two Supreme Court proceedings, which included Mrs Sinclair (and Mr Sinclair) and Mr Balanian;
- the absence of execution blocks for the individuals was less surprising than it might otherwise be in circumstances where the Deed was drafted in a hurry and without review by the parties' lawyers; and
- the settlement of two Supreme Court proceedings contemplated under the Deed required the participation and agreement of all parties to the litigation, including the individuals.
On the third issue, the court rejected the appellants' argument that the Deed only took legal effect when the individuals exchanged counterparts. The court defined the relevant issue as whether the individuals had agreed to be personally bound, despite only executing the Deed in their corporate capacities. The court noted this was an issue of formation, and its determination required an objective ascertainment of each individual's intention as assessed by a reasonable person in the position of the corporate parties, having regard to the Deed as a whole and the surrounding circumstances. Consequently, the court upheld the primary judge's finding that the individuals communicated an intention to immediately bind themselves personally when signing the Deed.
As to the fourth issue, the court found it unnecessary to address whether evidence of conduct post-mediation could be relevant to considering whether the Deed took effect as a contract, given it had found the Deed took effect as a contract immediately upon execution.