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High Whether or not B will have a cause of action for damages for breach of

Distinction contract depends on whether the Heads of Agreement is itself an


(85%+) enforceable contract. Since A and B have executed the Heads of
Agreement, they themselves may have come to an agreement, and
execution excuses the need to go through an offer and acceptance analysis
to find an agreement. Moreover, the language of the document reflects this
conclusion; it records the completion of negotiations for the Heads of
Agreement. Nevertheless, as a matter of law, the parties must have
reached a certain and complete agreement R. Under the objective theory of
contract; it cannot be concluded that the parties have reached an agreement
if it is impossible to ascertain the meaning and legal effect of the terms
agreed. Moreover, despite the execution of a document, there will be no
enforceable agreement if the contents of that document evidence a positive
intention not to contract. In this case, the determining factor will be the
efficacy of the good faith provision.

To reach and understand that point it is necessary to investigate some of


the earlier provisions of the agreement. Clauses 1-3 of the agreement set
out the basic obligations of the parties. The transaction involves the
granting of rights to televise the Olympic Games. Such a transaction
would ultimately require the settling of complex provisions under a formal
contract. The parties have at most concluded an important part of their
negotiations from which they intimate they will not go back on: they have
agreed on a basic pricing structure and have agreed to negotiate
exclusively with each other to finalise the deal, see Seppelt & Sons Ltd v
Commissioner for Main Roads. Although that does not evidence a
concluded contract to televise the games, it may be enough for B at this
point if there is an effective agreement to continue to negotiate. That is, the
Heads of Agreement impose no present duty unless it requires a
commitment to negotiation, as it merely expresses an agreed expectation.
Clause 4 raises a problem for B as it shows that the ultimate price A must
pay is at the discretion of B, with no obvious controls on that discretion.
From the aspect of valuable consideration this is the reverse of the
situation in Placer Development Ltd v Commonwealth. A has promised to
pay but the amount is at the discretion of B, not A. Arguably, it is not a
case of A promising to do nothing nor a case of B promising to do nothing,
the ultimate consideration lying in the mutual promises contained in clause
1. Nonetheless, there is a strong argument that As consideration consists
not only in the promises contained in clause 1 but also in clauses 2,3 and
4, and that clause 4 provides illusory consideration even though it is B
who must determine the amount, and not A, because there is no
mechanism for working out the figure; it is equivalent to A promising
nothing. If these clauses do reflect the intended consideration then it would
not be possible to sever clause 4 from the more certain promises in clauses
1,2 and 3 as that does not represent the intention of the parties.

Moreover, the granting this discretion to B may evidence a lack of


intention to contract with B. However, that lack of intention may only
relate to the final transaction and does not negate the possibility of an
intention to contract on the terms of the Heads of Agreement. The entire
agreement is expressed to be subject to the execution of a formal contract
which gives effect to each of the terms. The effect of such provisions
depends on construction, that is, the reasonable intention of the parties, see
Masters v Cameron. Such provisions may evidence an intention to
immediately contract, in some cases with performance being suspended
until such execution, or they may evidence a lack of an intention to
immediately contract. The provision states that the formal contract is for
the purposes of giving effect to the terms set out in the Heads of
Agreement. So it is arguable that the parties intend that the clauses are to
have no effect until such a document is executed or at least performance is
suspended until such time. Despite this, the subject to provision may also
be simply referring to the more detailed contract, it being a document that
will include the obligations agreed under the Heads of Agreement.
Moreover, concluding that the subject to provision implies a lack of
intention to contract until execution appears at odds with clause 5, which
at least impliedly requires the further negotiations of the parties which
must take place prior to the execution of the formal contract. It is at least
arguable that the subject to provision does not inhibit the Heads of
Agreement taking immediate effect.

Despite the above, clause 5 does introduce the principal difficulty for B.
First, it is drafted in terms of an agreement to agree. Generally, such
agreements are considered illusory, see May & Butcher Ltd v R, Coal Cliff
Collieries Pty Ltd v Sijehama Pty Ltd. The rare instances in which they
have been upheld are where the parties have evidenced a commitment to
the transaction by partly performing and, in particular, by performing those
obligations that are now being claimed by one party to render the contract
void for uncertainty, see Foley v Classique Coaches. Perhaps such cases
are now best seen are examples of estoppel, but in any case there is no
evidence of reliance by either party in this case.

There is then an issue as to whether an express obligation of good faith


and co- operation can save what would otherwise be an agreement to
agree. It is submitted that it cannot; one cannot agree to negotiate to agree.
If I am wrong on that point there is still an issue as to whether the good
faith provision can save the uncertainties raised by the other clauses. At
present in New South Wales a good faith negotiation provision can only be
used to uphold the bargain if the negotiations for the agreement are well
advanced and if there is a mechanism for resolving disputes should
negotiations break down, see Coal Cliff Collieries Pty Ltd v Sijehama Pty
Ltd. The Heads of Agreement expresses the ultimate intent of the parties
but lacks any detail in what would be a complex transaction. It is irrelevant
that negotiations may in fact be well advanced; this must be reflected in
the terms of the Heads of Agreement as that is the transaction that B wants
upheld as a contract.

The mechanism provided to resolve negotiation breakdowns will not save


the situation. Terms necessary for the venture only captures those terms
that are obvious. This mechanism will not allow for the implication of the
complex terms that are necessary for this transaction. Reference to an
external standard only helps if it exists; the Olympics are a rare event and
the parties vary each time and technology varies between games. It is
doubtful that one could produce a set of standard terms for such a contract,
see Whitlock v Brew; nor that there is a trade in such contracts, see Three
Rivers Trading Co Ltd v Gwinear & District Farmers Ltd.

Finally, B might argue that clause 5 could be upheld as a contract in its


own right on the basis that it constitutes an agreement to negotiate.
However, the language itself does not reflect such an agreement so as to
sever it, and at present such clauses have only been considered are being
relevant to the efficacy of the entire agreement on the principles discussed
above. It follows that B has no contractual rights against A.

Pass (50-64%) For B to have contractual rights against A it is necessary to prove a


contract exists between A and B. For there to be a contract it is necessary
that the parties have reached an agreement. This is done by using the tools
of offer and acceptance. An offer is a statement evidencing an intention to
contract on certain terms without further negotiation and is distinguishable
from an invitation to treat. To determine whether there is an offer you
apply an objective test from the position of a reasonable person in the
position of the party hearing the statement. An acceptance on the offer
must be unequivocal and be communicated to the offeror unless
communication is waived by the offeror. Acceptance can only be made by
the person to whom the offer is made and an offer will lapse if not
accepted within a reasonable time. In addition to there being an agreement
there must be valuable consideration and an intention to contract. We can
dispense with the latter requirement because this is a commercial contract
and there is a presumption that the parties intended to contract.

As noted above an offer is a statement evidencing an intention to contract


on certain terms without further negotiation. Applying this test it is
possible to conclude that A has made an offer, being an offer to acquire the
rights to Bs licence in return for payment. A reasonable person in Bs
position would conclude that an offer has been made because the
statements made by A are clear and A has executed the document.

There has also been an acceptance as B has signed the Heads of


Agreement which shows that he has accepted As offer by accepting all the
terms put up by A without changing any of them. The mirror image rule is
therefore made out.

For B to now enforce the contract it is necessary for consideration to move


from B. B has provided consideration in agreeing to grant the licence and
agreeing to determine the price under clause 4.

Even if there is an offer and acceptance and valuable consideration a


contract will not be enforced if it is uncertain or incomplete. For example,
an agreement to enter into a lease without agreement as to the term of the
lease or the rent to be paid is uncertain, see Whitlock v Brew.

In this case there are two uncertain aspects. First the final price is not
certain as it is left to the discretion of B to determine. A reasonable person
in the position of A would be unlikely to finally commit to such a
provision as it leaves A in the position of not knowing how much she will
have to pay. In addition, the court could not fix this uncertainty by
implying that a reasonable price be paid as that is not what the parties
agreed. Second, although there is a good faith obligation the law requires
there to be a mechanism by which gaps in the contract can be filled as well
as negotiations to be well advanced, see Coal Cliff Collieries Pty Ltd v
Sijehama Pty Ltd. Here the negotiations have barely begun and the
mechanism is too uncertain to be given effect to.
It is therefore concluded that there is no contract between A and B.

A good way to use this resource is to read through the following problem question. After you
have read it, consider how you might answer it in point form and in terms of structure. You
should then read through the answers to the questions to give you an idea of what a pass, credit,
distinction and high distinction answer would look like. You should not think of these answers as
being model answers. (There is no such thing and, in any case, you have many better examples in
your casebook.) You should also not consider any of these answers as necessarily right, they all
have weaknesses and you should be guided by your own reading of the cases and text and your
own analysis. The answers given were written under exam conditions; a higher quality and
properly referenced answer would be expected in a take home assessment task.

The Problem scenario and question

Following lengthy negotiations for the acquisition of cable television rights to the 2012
Olympics, Alice and Bruce sign the following document:

Heads of Agreement - Cable Television Rights

This document records the completion of negotiations of the Heads of an Agreement by virtue of
which Alice and Bruce agree to execute a formal contract which gives effect to each of the terms
set out below.

1. Alice agrees to acquire from Bruce, and Bruce agrees to grant, the exclusive right
to exploit the licence that Bruce holds to televise the 2012 Olympics.

2. Alice agrees to televise all events at the 2012 Olympics and to provide facilities
sufficient to enable appropriate overseas telecasts.

3. Alice agrees to pay a sum of $3 million on the signing of the formal contract.

4. Alice agrees to pay such sum as Bruce considers to be sufficient in respect of the
revenue obtained from:
(a) approved sponsors; and (b) overseas telecasters.

5. Such other terms as may be agreed between the parties, acting in good faith and in
a spirit of co-operation appropriate to the event to which the Agreement relates.
All such terms to be:
(a) necessary for the efficacy of the venture; and (b) of a kind normally found in
contracts of this type.

Alice decides that the price is too high and refuses to comment on a draft of the formal contract
prepared by Bruce's solicitors. The draft in fact contains a large number of additional terms,
including an obligation that Alice spend no less than $2 million in promoting the telecast and
obtaining sponsors.

Advise Bruce whether he has any contractual rights against Alice.

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