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Contract law update 2023
Contract law update 2023

Contract formation

Duress and affirmation

If you agree to terminate a contract because someone has drawn a gun on you, are you bound by that termination? The simple answer, of course, is that you are not. Under the doctrine of duress, an agreement (or termination of an agreement) is voidable if illegitimate pressure compelled a person to enter into (or terminate) the agreement. Under this doctrine:

  • The person asserting duress has the onus of proving that illegitimate pressure was brought to bear on them.
  • If that onus is met, the party imposing pressure has the burden of proving that the pressure did not cause the person to enter into (or terminate) the agreement.

These principles were confirmed by the New South Wales Court of Appeal in Elite Realty Development Pty Ltd v Sadek1. That case illustrated the significance of a contract being voidable (that is, terminable at the election of one party) rather than void. Because an agreement entered into under duress is voidable, the 'victim' will be bound by the contract if they subsequently affirm it, provided the duress has ended at the time of affirmation. That is what happened in this case. The court held that the victim 'affirmed' the termination by:

  • accepting a payment under the termination agreement; and
  • signing certain documents without complaint.

Masters v Cameron (again)

A commonly litigated issue is whether communications between parties, which result in a commercial agreement but contemplate the execution of a more formal document, give rise to a binding contract. The critical question is whether the parties intend to be legally bound before the execution of a formal agreement – which is often resolved by applying the '3 classes' from the decision of the High Court in Masters v Cameron2.

The difficulty in ascertaining whether such an intention exists was exemplified by the conflicting judgments of the Queensland Court of Appeal in Al-Freah v Thompson3. The case ultimately turned on a detailed analysis of the communications between the parties. Although the majority of the court found that a binding agreement came into existence, that agreement was able to be terminated due to the failure of a condition precedent (which was not the fault of either party).

This case illustrates the importance of being explicit in such correspondence as to whether a party intends to be legally bound pending the execution of a more formal agreement.

Elite Realty Development Pty Ltd v Sadek [2023] NSWCA 165

Contract formation

In this case, the New South Wales Court of Appeal considered, among other issues, whether a joint venture participant could rescind a termination contract executed under duress.

This case is significant because it demonstrates that a contract formed under duress cannot be rescinded if it has been affirmed by the party when they were no longer operating under duress. A contractual party may no longer be acting under duress even if they continue to suffer a psychiatric illness related to it.

Facts

The court considered two appeals relating to separate property developments, conducted on behalf of Mr Hazem Afyouni and Mr Omar Sadek.

The first proceeding related to a property development in Maroubra. In early 2016, Mr Afyouni and Mr Sadek became parties to a joint venture agreement to develop the Maroubra property. Mr Afyouni and Mr Sadek incorporated two companies as part of the joint venture: Maroubra Road Development Pty Ltd (MDR), which owned the property; Elite Realty Development Pty Ltd (Elite), the builder of the development. Mr Afyouni and Mr Sadek were directors of both companies, and owned 50% of the shares in each.

Their relationship broke down as a result of a disagreement relating to a separate joint venture.

  1. On 8 May 2018, Mr Afyouni changed the access settings on Elite's bank account so that money could only be withdrawn if both he and Mr Sadek were signatories.
  2. On 20 May 2018, a labourer employed by Mr Sadek threatened Mr Afyouni with a gun, demanded that he unblock the Elite bank account and said that if he were not paid, he would return the next day.

Following the gun attack:

  1. On 23 May 2018, Mr Afyouni unblocked the Elite bank account.
  2. On 25 May 2018, Mr Afyouni and Mr Sadek orally agreed to terminate the Maroubra joint venture agreement, on the basis that Mr Afyouni would be paid $700,000 and relinquish his ownership and directorship of MDR.
  3. On 26 June 2018, Mr Afyouni withdrew $200,000 from Elite's bank account, on the basis that it was the first instalment of the $700,000 termination payment.
  4. In January and February 2019, Mr Afyouni sought and received payment of the remainder of the termination payment, and signed documents transferring his ownership in MDC and resigning his directorship. He raised no complaint at that time.
  5. In May 2019, Mr Afyouni first claimed that he entered into the termination agreement under duress.

The second proceeding related to the termination of a joint venture agreement for the development of a property at Avoca Beach. In March 2019, while a director of Elite, Mr Sadek executed a deed (not in his capacity as a director of Elite and to which Elite was not a party) that included a recital stating that the Avoca Beach joint venture agreement had been terminated in 2017. Elite claimed that Mr Sadek breached his directors' duties to Elite by terminating the Avoca Beach joint venture, and sought compensation.

At first instance, the primary judge found that:

  1. In relation to the first proceeding:
    1. Mr Sadek acted in common design with the perpetrator of the gun attack to intimidate Mr Afyouni.
    2. The duress brought to bear on Mr Afyouni by the gun attack was at least one of the reasons he entered into the termination agreement, and Mr Sadek failed to prove the duress was not an operative reason.
    3. Any duress on Mr Afyouni ended from October 2018.
    4. Mr Afyouni subsequently affirmed the termination agreement by actively seeking, and accepting, payment of the remainder of the termination payment, and signing documents to relinquish his interest in and directorship of MRD.
    5. Mr Afyouni was not entitled to rescind the termination agreement.
  2. In relation to the second proceeding, Mr Sadek did not breach his duties to Elite because the Avoca Beach joint venture had not been terminated at law. Elite was not entitled to compensation.
Judgment

Justice Payne (Justices Mitchelmore and Stern agreeing) dismissed both appeals.

In the appeal in the first proceeding:

  1. There was no challenge to the principles applied by the primary judge in determining whether the termination agreement was entered under duress.
    1. There are two elements to duress: i) pressure amounting to compulsion of the will of, in this case, Mr Afyouni; and ii) the illegitimacy of the pressure exerted. It was not necessary for Mr Afyouni's will to be overborne, merely that it was deflected.
    2. The test is objective: that is, was it reasonable for Mr Afyouni to believe that the person engaging in the wrongful conduct would take the action foreshadowed?
  2. There was also no challenge to the legal test applied by the primary judge to the question of affirmation. Affirmation disentitles the party who originally entered a contract under duress from rescinding the agreement. A party can affirm or ratify an agreement entered under duress only once the duress has ended.
  3. The court held that:
    1. the finding at first instance that Mr Afyouni had ongoing post-traumatic stress disorder arising from the gun attack was not inconsistent with the finding that he was no longer acting under duress in performing the agreement after October 2018. That is because a person can suffer from a psychiatric illness while having the ability to autonomously make decisions.
    2. There was no error in the primary judge's conclusion that Mr Afyouni had escaped the effect of duress by October 2018 and subsequently affirmed the agreement.

In the appeal in the second proceeding, the court upheld the primary judge's findings that the recital in the March 2019 deed, which stated that the Avoca Beach joint venture agreement had been terminated in 2017, did not effect a termination of that agreement at law. There were no operative terms in the March 2019 deed effecting a termination and Elite was not a party to the March 2019 deed. Mr Sadek did not breach his directors' duties and Elite was not entitled to compensation (nor had it suffered any loss).

In both proceedings, the court also found against the appellants on other grounds of appeal, which did not concern contract law issues.

Al-Freah & Anor v Thompson & Anor [2023] QCA 175

Formation of contract where parties agree to execute further formal document - operation of conditions subsequent

The majority of the Queensland Court of Appeal held that the exchange of four emails amounted to an immediately binding contract, with the terms of the agreement to be restated in a more precise form, but that the non-fulfilment of conditions subsequent allowed one party to terminate that contract.

This case discusses the principles of contractual formation laid down in Masters v Cameron, the relevance of subsequent conduct to determining whether a binding agreement has been made, and the parties' rights of termination upon non-fulfilment of conditions subsequent.

Facts

Four doctors, including Drs Al-Freah and Thompson, were each ultimate shareholders in and directors of two companies, through which they operated their practices. In November 2021, one of the other shareholders in the companies commenced oppression proceedings against Dr Thompson. The fourth doctor also alleged oppression by Dr Thompson, and Dr Al-Freah alleged that he had been induced by fraudulent misrepresentations by Dr Thompson to purchase shares in the company. At mediation, all of the doctors, except Dr Al-Freah, agreed that the companies should be wound up. Dr Al-Freah instead sought the return of his initial $1.5 million investment.

Dr Thompson attempted to resolve Dr Al-Freah's claim separately, ahead of resolving the oppression proceedings. To this end, on 17 February 2022, Dr Thompson's solicitors and Dr Al-Freah's counsel exchanged the following emails:

  1. Dr Thompson sent an 'offer' to Dr Al-Freah. The terms of the offer were that:
    1. Dr Thompson would pay $1,500,000 to Dr Al-Freah by a specified date.
    2. Dr Al-Freah would transfer his shares to Dr Thompson.
    3. A 'deed of settlement' would document terms (a) and (b), among others.
    4. Dr Al-Freah would 'also enter another deed of settlement' releasing Dr Thompson and the other directors and shareholders from all claims.
    5. Dr Al-Freah would be released from restraints on his employment 'subject only' to the other directors' agreement, which Dr Thompson would 'seek'.
  2. Dr Al-Freah accepted the offer, subject to some provisos, and asked that they 'go aheads and draw the deed' [sic].
  3. Dr Thompson confirmed his agreement with the provisos and his solicitors stated that they would 'forward a deed to you as soon as possible to cover the terms of the confidential settlement agreement reached between our clients'.
  4. Dr Al-Freah responded with a final email, confirming an additional request regarding the transfer of his shares.

Dr Thompson then sent a letter to the other directors, requesting that they agree to release Dr Al-Freah from any restraints on his employment. The other directors did not agree.

Dr Al-Freah commenced proceedings against Dr Thompson for specific performance, claiming that the four emails constituted an immediately binding contract.

Judgment

The key issues to be resolved on appeal were:

  1. whether Drs Thompson and Al-Freah intended to enter an agreement that bound them independently of the other directors and the resolution of the oppression proceedings;
  2. assuming that they did, whether they intended their agreement to be immediately binding notwithstanding they contemplated subsequently entering into two settlement deeds; and
  3. if the contract were intended to be immediately binding, whether Dr Thompson lawfully terminated the contract following the non-fulfilment of certain conditions subsequent.

Justice Dalton (with Justice Morrison agreeing) found that, considering the language of the emails and the commercial context known to both Dr Thompson and Dr Al-Freah, the four relevant emails were an independent agreement between those two parties and not conditional upon the resolution of the wider oppression proceedings.

Her Honour turned to consider Masters v Cameron (1954) 91 CLR 353, which concerns the circumstances where parties agree commercial terms, but also agree that the terms will be documented in a formal contract. There are three categories of case identified by Masters v Cameron:

  1. The parties have reached finality in the terms and intend to be immediately bound, but propose to restate the terms in a form that is fuller or more precise but not different in effect.
  2. The parties have completely agreed upon the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but have made performance of one or more of the terms conditional upon execution of a formal document.
  3. The intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

To which of these categories a particular case belongs is determined by objectively ascertaining the intention of the parties. Here, the majority held that this case fell into the first category. That was because:

  1. The words of the four emails were indicative of an immediately binding agreement.
  2. There was no language indicating that the parties did not intend to be bound until a further deed was entered into.
  3. The emails contained all of the details necessary for the agreement to be binding.
  4. The parties' subsequent conduct was consistent with there being an immediately binding agreement – the court being able to have regard to that subsequent conduct for the purpose of determining whether or not a binding agreement had been reached (as distinct from construing the terms of any agreement).

Justice Bond dissented, finding that the four emails did not disclose an intention to be immediately bound and that the parties' subsequent conduct demonstrated they did not consider that they had settled a binding agreement.

Having found that the parties' agreement was immediately binding, Justice Dalton turned to consider whether Dr Thompson had lawfully terminated that contract. A condition subsequent of the agreement was that the other directors would release Dr Al-Freah from his employment restraints. Dr Thompson was obliged to, and did, use reasonable endeavours to obtain those releases. As fulfilment of the condition subsequent was within Dr Thompson's power to influence but not to control, the failure to obtain the releases did not render the contract void, but voidable at the instance of a non-defaulting party. As Dr Thompson's failure to obtain the releases was due to no fault of his own, he had the right to terminate the contract (and did). Dr Al-Freah's appeal was dismissed.

Footnotes

  1. [2023] NSWCA 165.

  2. (1954) 91 CLR 353. Those classes were explained in our Contract law update 2022[1] in discussing the decision of the Victorian Court of Appeal in Sully v Enzlisch.

  3. [2022] QCA 175.