If you have ever wondered what fears keep litigation lawyers up at night then the Victorian Court of Appeal’s judgment in Queensland Phosphate Pty Ltd & Anor v Korda and Shephard (as liquidators of Legend International Holdings Inc (In Liq))1 (Queensland Phosphate) will make for compelling reading.
The lawyers for the parties had made several attempts to settle the dispute in the lead up to trial. Two weeks before the trial, the lawyers for the Applicants thought that they had in fact settled the dispute. However, the lawyers for the Respondent and the Court of Appeal disagreed. Queensland Phosphate provides guidance to lawyers in managing settlement negotiations and, importantly, knowing when a settlement agreement has actually been reached.
1.1 Queensland Phosphate concerned the highly publicised insolvency of Joe Gutnick's phosphate enterprise. In short, the liquidators of Legend International Holdings Inc claimed that the company had entered into a number of voidable transactions that would have the effect of stripping the company of its primary asset, being the shares in Paradise Phosphate Limited, which in turn owned a number of phosphate tenements. The defendants (and Applicants in the appeal) were Paradise Phosphate Limited and Queensland Phosphate Pty Ltd, the would-be recipient of the shares in Paradise Phosphate.
1.2 In the lead up to trial, the Applicants' lawyers made two settlement offers, followed by a counteroffer from the lawyers for the Respondent. Finally, the Applicant's lawyers sent an email stating:
We refer to your letter of 19 April 2017 attached to your email below. We are instructed to accept your clients' offer. We will correspondent [sic] with your firm tomorrow in respect to the agreed terms.
1.3 There were subsequent discussions between the lawyers, however their recollections of what was discussed varied. The lawyer for the Applicants maintained that settlement had been reached. The lawyer for the Respondent maintained that any agreement was subject to entry into a deed of settlement.
1.4 A week before trial, the liquidators filed a summons in which they sought a declaration that the proceeding had not been settled. In an urgent hearing, both lawyers were cross examined on the substance of their conversations. Judd J found that no settlement agreement was reached.
2. Court of Appeal decision
2.1 The Applicants appealed the decision on the basis that the primary judge erred in concluding that the parties' correspondence did not constitute an immediately enforceable agreement. The Court of Appeal upheld the primary judge's decision. In doing so, the Court of Appeal held that the relevant principles of contractual interpretation to be applied were:
(a) whether an agreement is formed is to be determined objectively from the terms of the documents (in this case, emails), which are to be read in light of the surrounding circumstances;
(b) if an essential term is not agreed, any alleged agreement was incomplete and would not give rise to an enforceable contract. If "matters of importance" are not agreed then it is less likely that the parties intended to be bound before the execution of a formal document;
(c) subsequent communications between the parties could be considered by the Court in order to determine which terms were essential to reaching agreement.
2.2 The Court of Appeal found that a settlement agreement was not reached due to the following factors:
(a) there was no provision in the settlement offer as to essential terms of settling the dispute, being:
(i) the responsibility for Paradise Phosphate's ongoing expenses;
(ii) the potential financial recovery of the receiver of Paradise Phosphate;
(iii) releases and their timing, extent and the parties to be released;
(iv) timing and dismissal of the proceeding; and
(b) the subsequent incomplete discussions between the lawyers concerning whether or not indemnities were to be provided to the directors.
3.1 The decision of the Court of Appeal provides useful guidance to lawyers in managing settlement negotiations. In particular:
(a) it is important to consider the level of detail necessary in a settlement offer in order to ensure that acceptance of the offer will constitute a binding agreement. The level of detail required will depend on the complexity of the underlying dispute;
(b) in order to settle a simple debt claim, an offer to pay an amount and dismiss the proceeding may suffice. However, in more complex cases, the offer may need to propose terms that would result in a comprehensive solution to the dispute. In particular, lawyers should consider the payment of related costs in the litigation
(e.g., receiver's fees), releases of parties to the litigation and the procedure for having the proceeding dismissed; and
(c) in complex cases there may be no enforceable agreement until a deed of settlement and release is executed.