Sagacious Procurement Pty Ltd v Symbion Health Ltd (formerly Mayne Group Ltd) [2008] NSWCA 149 (11 August 2008)

Last Updated: 2 September 2008

NEW SOUTH WALES COURT OF APPEAL

CITATION:
Sagacious Procurement Pty Ltd v Symbion Health Ltd (formerly Mayne Group Ltd) [2008] NSWCA 149
This decision has been amended. Please see the end of the judgment for a list of the amendments.

FILE NUMBER(S):
40478/06

HEARING DATE(S):
19 and 20 February 2008

JUDGMENT DATE:
11 August 2008

PARTIES:
Sagacious Procurement Pty Ltd (subject to Deed of Company Arrangement) ACN 003 753 526 - Appellant
Symbion Health Ltd (formerly Mayne Group Ltd) ACN 004 073 410 - Respondent

JUDGMENT OF:
Giles JA Hodgson JA Campbell JA

LOWER COURT JURISDICTION:
Supreme Court

LOWER COURT FILE NUMBER(S):
SC 50158/02

LOWER COURT JUDICIAL OFFICER:
Einstein J

LOWER COURT DATE OF DECISION:
16 June 2006; 14 July 2006; 3 August 2006

LOWER COURT MEDIUM NEUTRAL CITATION:
Einstein J, 16 June 2006, unreported; [2006] NSWSC 654; [2006] NSWSC 779

COUNSEL:
J T Gleeson SC & J A Watson - Appellant
B Walker SC & D R Pritchard - Resondent

SOLICITORS:
Sagacious Legal Pty Ltd - Appellant
Freehills - Respondent

CATCHWORDS:
Contract - whether parties made binding contract - oral negotiations and exchanges of letters - letter signed acknowledging and accepting "terms and conditions as outlined above" - construction of letter - regard to surrounding circumstances and subject-matter - and to subsequent communications - on balance, no intention to make binding contract.

LEGISLATION CITED:



CASES CITED:
Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309;
Allen v Carbone [1975] HCA 14; (1975) 132 CLR 528;
Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540;
Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647;
Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622;
Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153;
B Seppelt and Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147;
Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251;
Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd (1995) 7 BPR 97578;
Grey v Australian Motorists & General Insurance Co Pty Ltd (1976) 1 NSWLR 669;
Howard Smith and Co Ltd v Varawa [1907] HCA 38; (1907) 5 CLR 68;
Jones v Sutherland Shire Council (1979) 2 NSWLR 206;
Lemon v Scarlet & Co [1921] HCA 42; (1921) 29 CLR 499;
Lustre Hosiery Ltd v York [1935] HCA 71; (1936) 54 CLR 134;
Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353;
Perry v Suffields Ltd (1916) 2 Ch 187;
Pitcher v Langford (1991) 23 NSWLR 142;
Sinclair Scott & Co v Naughton [1929] HCA 34; (1929) 43 CLR 310;
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 210 CLR 165.

TEXTS CITED:


DECISION:
Appeal and cross-appeal each dismissed with costs.



JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40478/06

ED 50158/02

GILES JA

HODGSON JA

CAMPBELL JA

Monday 11 August 2008

SAGACIOUS PROCUREMENT PTY LTD v SYMBION HEALTH LTD

Judgment

1 GILES JA: The appellant was a small “start up” company providing computer based procurement services, often referred to as eProcurement services. The respondent was a substantial listed public company which owned or operated a number of private hospitals. Throughout the period with which these proceedings are concerned the appellant had a number of names, ultimately its present name, and the respondent was named Mayne Nickless Ltd and later Mayne Group Ltd. I will refer to the appellant as Sagacious and to the respondent as Mayne.

2 The central issue in the appeal was whether a letter dated 16 April 2002 from Sagacious to Mayne (“the April letter”), signed on behalf of Mayne, constituted a binding contract for the provision of eProcurement services for the catering activities in Mayne’s hospitals. There were subsidiary issues concerning breach of that contract. If the appeal were upheld, it would be necessary to remit the proceedings to the Commercial List for the assessment of damages for breach of contract. A cross-appeal going to the authority of the signatory on behalf of Mayne was not maintained.

3 The trial judge, Einstein J, held that a binding contract had not been made. His Honour held that the April letter fell within the third class of case described in Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 at 360, a case “in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract”. His Honour held also that the April letter lacked the certainty necessary for a binding contract.

4 Sagacious contended on appeal that the April letter fell within the fourth class of case described in Sinclair Scott & Co v Naughton [1929] HCA 34; (1929) 43 CLR 310 at 317 and recognised in Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 at 628, on appeal G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 634, a case “in which the parties were content to be bound immediately and exclusively by the terms which they had agreed upon whilst expecting to make a further contract in substitution for the first contract, containing, by consent, additional terms”. It said that the trial judge had placed undue reliance on matters occurring before and after the signature of the April letter, including making an incorrect finding as to a conversation which he had considered told against contractual intention, rather than looking to the terms of the April letter. In Sagacious’ submission, the letter was signed as a contractual document and the trial judge should not have looked beyond it. It said, however, that regard to the preceding and following matters did indicate an intention to be contractually bound as at 16 April 2002.

5 Mayne responded that the existence of the fourth class of case should not be accepted, but contended that in any event the trial judge had been correct in his conclusions. It said that the finding as to the conversation was well-founded, and while itself relying substantially on the terms of the April letter said that the preceding and following matters supported that the parties did not intend to be contractually bound.

6 The trial judge’s findings were in some respects not entirely clear or full. The submissions on appeal as to the circumstances in which the April letter came to be sent and signed, and as to the subsequent conduct of the parties bearing upon whether they intended immediately to be contractually bound, took the Court to some extent beyond the trial judge’s findings.

The prior contractual relationship

7 The relationship between Sagacious and Mayne began with a proposal by Sagacious to Mayne in April 1999 describing its eProcurement services and the advantages for Mayne. Mayne’s catering activities were substantial, at an annual cost to it well over $20,000,000. There were a number of meetings between representatives of Mayne and Sagacious at which the Sagacious representatives gave presentations, and there were negotiations on a possible Strategic Alliance Agreement (so-called). A letter from Sagacious to Mayne dated 20 December 1999 put forward a detailed proposal for a two-year Strategic Alliance Agreement.

8 This resulted in Heads of Agreement dated 24 January 2000, which broadly followed the letter of 20 December 1999 plus a later letter in which Sagacious guaranteed a minimum saving of six per cent of Mayne’s previous catering supply costs. In the Heads of Agreement the parties agreed to “do all things necessary to ensure that within 21 days of the signing of this agreement that [sic] they will enter into a Strategic Alliance Agreement on terms and conditions identical to those outlined herein”. Under the terms and conditions Sagacious would provide e-Procurement services for the catering services in Mayne’s hospitals in return for a fee calculated as a percentage of gross expenditure, and it guaranteed the minimum saving with any shortfall to be deducted from its fee.

9 The Strategic Alliance Agreement was in fact entered into in July 2000, accompanied by a Service Level Agreement stating in detail how the eProcurement services were to be delivered by Sagacious. The documents were lengthy and detailed, going far beyond the Heads of Agreement. The term of the Strategic Alliance Agreement was two years from 1 August 2000. Mayne had an option for renewal, but Sagacious did not.

10 Under the Strategic Alliance Agreement an “implementational phase” was to be completed on or before 24 September 2000. Mayne commissioned a review by KPMG of the procedures and internal controls in Sagacious’ eProcurement services. By a letter to Sagacious dated 22 September 2000 Mayne referred to a number of “points for improvement highlighted in the KPMG audit”, and proposed that “we ensure that the above points are addressed prior to any further roll out at site level”. It was implicit that the implementation had not been fully achieved. The trial judge considered that the letter amounted to “the unilateral and global postponement of the whole of the implementation task”.

11 There were many meetings and letters; it may be that the implementation task continued to some extent. By a letter dated 29 March 2001 Mayne agreed to continuation of the implementation, but said that it required changes to the current agreement, that the continuation of the implementation was “pending the signing of a variation agreement”, and that it would provide a summary of the changes and looked forward to “negotiating these to a satisfactory resolution”.

12 Again there were many meetings and letters. The negotiations went into considerable detail. Prominent in them was Mayne’s stance that it was unlikely to continue with Sagacious unless Sagacious could deliver savings of about $1,300,000 in the period to 30 June 2002, an exercise of commercial power which had significant effect.

13 The culmination was a letter dated 18 January 2002 from Sagacious to Mayne, signed on behalf of Mayne. Amongst the matters it recorded was that for the future, the precise date depending on the option selected by Mayne, Sagacious would be paid monthly at $11.50 per patient based on forecast patient numbers for each month, with subsequent adjustment for actual patient numbers. No longer would Sagacious be paid on the basis of a percentage fee. It was clear from the negotiations that the change in the basis of remuneration was because Sagacious hoped to achieve the savings of $1,300,000 by the per patient per day (“PPD”) remuneration basis, together with prompt payment by Mayne which would let it negotiate favourable arrangements with suppliers. Sagacious had proposed extending its “current procurement programme” into four new regional hospitals. The letter exempted the four regional hospitals from the new basis, which were to “continue along current supply channels until such time agreement is reached between [Sagacious] and [Mayne] to implement these sites and likewise time frames are agreed upon”.

14 The letter of 18 January 2002 was signed on behalf of Mayne by way of agreement “as to the proposal outlined above”, with selection of one of the options and the addition that Mayne “will work with [Sagacious] to implement and achieve the various terms and conditions set out in the proposal”. It was regarded by the parties as varying the Strategic Alliance Agreement, which otherwise continued. The letter provided that in the event of dispute “concerning the operation of the initiatives outlined herein” which could not be resolved, the parties would be bound by the Strategic Alliance Agreement “and the terms and conditions contained within the Strategic Alliance Agreement will prevail”.

15 Sagacious began to invoice Mayne monthly in advance on the PPD basis, and Mayne paid on that basis. However, at least in the short term payment to Sagacious at the $11.50 PPD rate was unprofitable to it. Sagacious had calculated a PPD rate of about $14.50. It had represented to Mayne that reduction to $11.50 would produce savings to Mayne of the order of $1,300,000, but in order to be profitable the $11.50 PPD rate would require pre-billing, introducing a new coordinated national menu, and other cost saving measures such as no longer supplying hospital cafeterias. The trial judge appears to have accepted that Sagacious was prepared to accept an unprofitable rate because having Mayne as a customer was seen as an endorsement which would attract other customers. Mayne was aware that payment to Sagacious at the $11.50 PPD rate was unprofitable unless and until the various measures took effect, and knew and played on Sagacious’ desire to have it as a key customer.

16 There was, however, an understanding about adjustment of the PPD rate and a long term agreement. The trial judge accepted that on 15 January 2002 Mr Dalton of Mayne said that Mayne wanted “a viable deal” and did not want Sagacious “to go broke by the $11.50 per patient day guarantee”, and that (as recounted by Mr O’Shanassy of Sagacious) -

“I said: ‘Yes, we need to ensure there is a mechanism to deal with adjustments at the end of the period – we are comfortable with the proposition of striking a dollar figure, to assist your financial results for this financial year, provided there is agreement to revisit the dollar numbers and correct them’.

Mr Dalton said: ‘We should begin the deal and we will revisit the numbers during the course of the next few months, after the initiatives kick in and begin to drive down the costs.’

Mr Dalton said: ’I can tell you why there is a push to get these savings. Paul Tissot is under pressure to get results and needs to show $1.3m plus savings to help Mayne’s hospital groups’ Profit & Loss this year. If you agree to this proposal and show savings then you can be assured of a long-term deal. When Paul Tissot asks me “why Sagacious?” I can point to these savings, and a raft of back end savings. Paul Tissot has given me the authority to negotiate this deal and Geoff Morrison has been involved in the process. Geoff is a big supporter of Sagacious.’

I said: ‘We will agree subject to a few things being sorted out. We would need to work through what operational issues would arise if we accepted such an arrangement. It would also be necessary to have an understanding that there would be an adjustment of the payments to us once there is a clearer picture of the actual cost to Sagacious. And we need your commitment to a long term agreement.’

Mr Dalton said: ‘I agree with what you say. [There was then a brief discussion about certain operational issues.] We can work quickly to put a deal together’.”

17 Although the letter of 18 January 2002 purported to record the arrangements agreed between the parties, it did not refer either to adjustment upon a clearer picture of the actual cost to Sagacious, or to a long term agreement.

Negotiations prior to the April letter

18 The Strategic Alliance Agreement was to come to an end on 31 July 2002. Renewal for a term was directly raised at the end of March 2002.

19 On 28 March 2002 Sagacious made to Mayne a power point presentation through which it offered to provide the eProcurement services on a PPD basis under a two and a half year contract. The first slide referred to “contract renegotiation”, and in the second slide the first stated objective was “Rollover New Contract as per Initiative as at January 2002. (Guaranteed PPD)”.

20 The trial judge referred at [158] to “an important conflict of evidence as to what occurred at the 28 March 2002 Power Point presentation”, but did not clearly identify the conflict or make findings (save that he did not regard the evidence of Ms Wood, who said she was a Mayne attendee, as reliable). His Honour recounted at length evidence given by Mr O’Shanassy, including of this occasion, and it may be that he intended thereby to indicate acceptance of it.

21 According to Mr O’Shanassy, Mr Kyne of Sagacious said that what was envisaged was “a general continuation of the terms and conditions set out in the January 2002 agreement with a number of alterations”. Responding to a prior discussion in which Mr Dalton had said that Mayne was “looking for some further improvements from the $11.50”, Mr Kyne said that it may be possible for Sagacious to charge Mayne on a PPD basis decreasing over the term. That was indicated by a slide headed “Outcomes” and subheaded “Term of Proposal”, stating -

“Starting PPD $14.38
· PPD $11.46 Jan 02—Jun 02
· Savings Expenditure	$1,019,035.16
· PPD $11.40 Jun 02-Dec 02
· Savings Expenditure	$1,047,266.01
· PPD $11.30 Jan 03-Jun 03
· Savings Expenditure	$70,769.10
· PPD $11.10 Jul 03-Dec 03
· Savings Expenditure	$147,297.29
· PPD $11.00 Jan 04-Jun 04
· Savings Expenditure	$70,769.70
Total Savings Jan 02-Jun 04
	$2,355,136.10 (13% on Dec 01 Spend)”

22 Still according to Mr O’Shanassy, Mr Kyne said that the PPD rate was to be reviewed against actual costs and set at a commercially viable level if $11.46 was too low, and that the steps down could be adjusted upwards accordingly.

23 Mr O’Shanassy’s evidence as recounted by the trial judge included -

“At this meeting on 28 March 2002, I was concerned to obtain Mayne’s agreement to an adjustment of the amount charged by Sagacious to Mayne per patient day should it transpire that the cost savings initiatives had not had their desired effect such that the costs to Sagacious of providing the procuring services was greater than the amount charged to Mayne or were such that Sagacious was not making a reasonable return. As such, during the course of the meeting on 28 March 2002 there was a conversation in words to the following effect:

I said: ‘What we require is to come to an agreement as to the mechanism by which any adjustment can be calculated, so that when it comes time to make the adjustment between the guaranteed per patient day rate and the actual per patient day rate, there is no dispute on the methodology. It’s hard to get two accountants to agree.’

Either Mr Dalton

or Mr Dunne said: ‘We need to allow time for the saving initiatives to kick in.

I said: ‘We can continue to monitor that. We seem to be able agree upon the actual costs for each particular month but we need to agree upon a mechanism so that adjustment can be made.

Mr Dalton said: ‘Yes, let’s closely monitor the per patient day rate and you can word up the necessary mechanism, which we can sign off on’.”

24 The last slide, headed “Action Plan”, said

“° Agreement to Proposal

° Sign off new contract

° Investigate Cafeteria Solution & Associated Action Points

° Develop and finalise whole of business Policy and Procedure manual”

25 On 4 April 2002 Mr Dalton e-mailed Mr Kyne, referring to discussion within Mayne of “your proposal to renew the Contract with us” and identifying a number of “areas that would need to be reviewed”. The e-mail said, “If we can achieve these agreements then we will progress with a draft of the new agreement ASAP”.

26 Mr Kyne replied on 5 April 2002, responding to the areas and hoping that his reply “clarifies our discussions to date and allows the full and final drafting of our new procurement agreement”.

27 According to Mr O’Shanassy as set out by the trial judge-

“On or about 11 April 2002 I had a discussion with Mr Dalton in words to the following effect:

Mr Dalton said: ‘We have agreed that the term of the agreement should be 2½ years with one proviso. If the central production kitchens come on line in particular States then Mayne can terminate your services for those relevant hospitals affected. Having said that, this super kitchen proposal is in the early stages and is going to take us many months just to get approval, let alone to get them constructed and operational.

The super kitchen proposal is highly confidential, so I don’t want you to be specific about it in our agreement. They’re paranoid in here. They got me to sign a specific confidentiality agreement regarding the super kitchens proposal.’

I said: ‘OK. So in other words, if the super kitchens come on line, this would be the only basis for termination for convenience?

Mr Dalton said: ‘Yes, that’s right.’

I said: ‘OK. So as to give this agreement completeness, I would like to make reference to other provisions in the Strategic Alliance Agreement, which need to be included. Most of them can be verbatim for such things as intellectual property, volume rebates, GST, confidentiality, audit rights, dispute resolution, et cetera. Insofar as the termination provisions are concerned, we’ll adopt the ‘termination for cause’ provisions and obligations to act in good faith with the related definitions of default etc.’

Mr Dalton said: ‘Yes, I agree with this approach’.”

28 Although the trial judge did not advert to it, Mr Dalton’s evidence was to the contrary. He said that a conversation as described by Mr O’Shanassy did not take place, and -

“At no stage did I agree with Mr O’Shanassy or Mr Kyne (or anyone else from Sagacious) a term of a further 2½ years and I never said that the only circumstances in which Mayne could terminate any agreement with Sagacious for convenience was on the basis of the central production kitchens being introduced. I repeat paragraph 50 of this my affidavit;”

29 Paragraph 50 of the affidavit was -

“Subsequently, in around early April 2002, Mr O’Shanassy discussed with me having a clause in any future contract between Mayne and Sagacious regarding central production kitchens. I said to Mr O’Shanassy words to the effect:

‘If we introduce central production kitchens, we do not want to be stuck with paying Sagacious $11.50 a patient day because food production would be cheaper.’

Mr O’Shanassy said words to the effect:

‘We’ll have to think about that. Would you agree to making it a term of an agreement that you could only terminate if central kitchens were introduced.’

I said words to the effect:

‘I doubt that we could agree to that’.”

30 Some time was spent in submissions debating the April letter’s provisions in relation to termination, see below as to its para 1.3(h). It is unfortunate that, having set out Mr O’Shanassy’s evidence, the trial judge did not make a finding to resolve this conflict between Mr O’Shanassy and Mr Dalton. However, if the April letter did constitute a binding contract its provision for termination is a matter of construction of the letter, and Sagacious expressly eschewed a claim on the basis that it was entitled to a contractual payment in the event of so-called termination for convenience. What was said in negotiations would be of little if any assistance in deciding whether the April letter constituted a binding contract. I do not think the absence of a finding impedes decision of the appeal.

31 On or about 15 April 2002 Mr O’Shanassy and Mr Dalton had a further conversation concerning review and adjustment of the PPD rate. This included the conversation as to which Sagacious said the trial judge had made an incorrect finding. I refer separately to it in the next part of these reasons. Common to the accounts given by Mr O’Shanassy and Mr Dalton was that there would be review and adjustment, the conflict between them being whether it would be within a new agreement or as a precursor to any new agreement.

32 It seems at Sagacious’ initiative, there was sent by it to Mayne a draft dated 12 April 2002 of what became the April letter. Amended drafts dated 16 April 2002 were later sent. They showed the introduction after the first draft of a paragraph concerned with incorporating provisions in the Strategic Alliance Agreement (para 1.3(h), see below) and a paragraph concerned with review and adjustment of the PPD rate (the paragraph commencing “Notwithstanding the provisions outlined above ... “, see below),

33 The conversations as recounted by Mr O’Shanassy, and also the conversation on or about 15 April 2002 as recounted by Mr Dalton, would explain the introduction of these paragraphs into the draft letter, although they can not take the place of giving meaning to the April letter according to its terms.

Error as to the conversation between Messrs Dalton and O’Shanassy?

34 According to Mr O’Shanassy as set out by the trial judge -

“I had a further discussion with Mr Dalton on or about 15 April 2002 in words to the following effect:

I said: ‘We need to give some thought to the wording for the mechanism for adjusting the actual versus the estimated per patient day costs at the end of a period of time. I will draft something up to encapsulate what we see as the intent being: If you were to look at the Trial Period and the subsequent 2½ term, then Sagacious would be put in a position so that it would have its COGS, overheads [operating expenses] and a reasonable profit margin covered.’

Mr Dalton said: ‘Yes, that’s our intention, but how is the dollar adjustment dealt with at the end of the period?’

I said: ‘Well, it can either be paid as a lump sum or paid in the early stages of the subsequent 2½ year term. Sagacious cannot afford to carry the liability that’s likely to crystallise.’

Mr Dalton said: ‘Yes, I understand. There needs to be a trigger amount, why don’t we make it $12.00 per patient day?’

I said: ‘OK, that seems reasonable. Obviously, if we need to adjust the actual per patient day rate at the end of the trial period, then we can do that and still adhere to the step downs between now and the end of 2004.’

Mr Dalton said: ‘Yes, I agree’. ”

35 This evidence was in para 96 of an affidavit sworn by Mr O’Shanassy on 25 August 2005. In para 71 of an affidavit sworn on 3 April 2006 Mr Dalton gave evidence of a discussion with Mr O’Shanassy which he placed at “around [the] time” of receipt from Mr Kyne on 17 April 2002 of a draft of the April letter; the date is probably mistaken. According to Mr Dalton -

“I had a discussion with Mr O’Shanassy at around this time. During this discussion Mr O’Shanassy said words to the effect:

‘I want to amend the letter to include reference to the $11.50 PPD being reviewed after 30 June. We can then assess how we have gone against the rate. I have told you before that we are struggling to make money at that rate. I want some mechanism whereby we can sit down and talk about this if, notwithstanding the things that we are doing to try and meet this rate, we find that we still can’t do it. We can refer to this as a trial or something like that. If it transpires that the rate is unachievable, and we want to suggest a higher rate, you will have the opportunity to decide whether you want to go forward with us or we could talk about some other payment mechanism. This will be fair to both of us because we will both be in a position to assess whether it is feasible to enter into a new agreement based upon a guaranteed PPD model. By this stage, the effect of the national menu will be known and we will know what we have been able to renegotiate with our primary suppliers.’

I said words to the effect:

‘That sounds sensible. If we do decide to enter into a new agreement, there is no point in locking you into a PPD rate if it is not sustainable and if it is going to cause you to go broke.’

Mr O’Shanassy said words to the effect:

‘It will take a little bit of time to gather all the date after 30 June. I suggest that we do this in mid July.’

I said words to the effect:

‘OK. That will still allow us time to make a decision before the end of July as to whether we want to go ahead or not.’

Mr O’Shanassy said words to the effect:

‘I will put something in the letter and send you another version’.”

36 By a further affidavit sworn on 18 May 2006 Mr O’Shanassy responded to this, as part of responding to much else in affidavits filed on behalf of Mayne -

“36. Paragraph 71: I refer to paragraph 96 of My First Affidavit. I did not say to Mr Dalton the words, or words to the effect: ‘you will have the opportunity to decide whether you want to go forward with us or we could talk about some other payment mechanism’. Mr Dalton did not say to me: ‘if we do decide to enter into a new agreement’.”

37 The trial judge said at [79] that he was -

“ ... able to accept some important aspects of conversations between Mr Dalton and Mr O'Shanassy for the simple reason that Mr O'Shanassy, in answering the affidavit version of these conversations given by Mr Dalton, is selective in that which is denied and that which is not denied. That which he did not deny may be accepted as having been said in the conversations and has a dramatic impact on certain findings.”

38 The trial judge said at [203] that it was very important to note what of Mr Dalton’s version of the conversation was denied by Mr O’Shanassy and what was not. He reproduced Mr Dalton’s version in marked up form, and said -

“205 Clearly there is particular significance to be found in the failure of Mr O'Shanassy to deny that in the above described conversation:

i. Mr O'Shanassy had said that after the ‘trial’ both parties would be in a position to assess whether it was feasible to enter into a new agreement based upon a guaranteed PPD model;

ii. Mr Dalton had said that this sounded sensible and that there was no point in locking Sagacious into a PPD rate if it was not sustainable;

iii. Mr O'Shanassy had indicated that it would take some time to gather all the data after 30 June, suggesting that that be done in mid July;

iv. Mr Dalton had said that this would be in order as it would still allow Mayne to make a decision before the end of July as to whether they wished to go ahead or not.

206 These matters not being denied by Mr O'Shanassy, are strongly supportive of an inter partes communication anterior to the countersigning by Mr Dalton of the April letter, which posited the parties being in a position to assess the feasibility of entering into a new agreement, and of making that decision following the trial period: at a time when the effect of the national menu would be known and when Sagacious would know what it had been able to renegotiate with its primary suppliers. None of this is suggestive of anything otherwise than the parties, by the letter, intending not to legally bind themselves to an agreement providing for the longer term, unless and until a subsequent formal document was executed.”

39 Sagacious submitted that the trial judge fell into error because in the cross-examination of Mr O’Shanassy it was made clear that he denied Mr Dalton’s version of the discussion in its entirety. In the cross-examination counsel for Mayne put to Mr O’Shanassy sentence by sentence the discussion as recounted by Mr Dalton, and that Mr O’Shanassy had not denied in his affidavit of 18 May 2006 much of the discussion as so recounted. The substance of Mr O’Shanassy’s responses was that the discussion had been as stated in his own affidavit and he had thought he had been denying the entirety of what Mr Dalton had said, and he specifically denied the sentences about the opportunity to decide on going ahead, assessment of feasibility of entering into a new agreement, and time to make a decision on going ahead or not.

40 The trial judge did not refer to this cross-examination. Mayne submitted that there was nonetheless no error because the trial judge must have declined to accept Mr O’Shanassy’s evidence in the cross-examination. Mayne described it as an unconvincing explanation by Mr O’Shanassy of his selective denial of Mr Dalton’s evidence, Mr O’Shanassy being a lawyer who was ordinarily precise in his affidavits.

41 However, that was not how the trial judge dealt with this matter. When making observations upon the reliability of witnesses, he said of Mr O’Shanassy that in some areas he was regarded as giving reliable evidence and in other areas his evidence could only be accepted when consistent with contemporaneous written materials or with the evidence given by others who were accepted as reliable, and that his reliability as a witness was “dealt with through the judgment as occasion demands”. The trial judge did not refer in the present connection to Mr O’Shannasy’s reliability, or come to his view of the discussion on the basis of reliability or unreliability. He acted upon what he erroneously saw as failure to deny parts of Mr Dalton’s evidence.

42 In my opinion, there was error in the factual basis on which the trial judge found that importance in the discussion to his conclusion against a binding contract. His Honour’s apparent acceptance to the effect that Mr O’Shanassy and Mr Dalton were agreed in leaving entry into a new agreement for later decision in the light of the trial period can not stand.

43 It does not follow that Mr O’Shanassy’s account of the conversation should be accepted. A fresh finding could be that Mr O’Shanassy’s evidence in the cross-examination should not be accepted and the conversation was as Mr Dalton recounted it. Such a finding could be significant to whether the April letter constituted a binding contract.

44 There are considerable difficulties in this Court making a fresh finding. On the one hand, the trial judge did not embrace Mr O’Shanassy’s reliability, see above. On the other hand, he explained at [73]-[77] considerable reservations about Mr Dalton’s reliability: indeed the acceptance of the “undenied” evidence of the conversation seems to be at odds with what was there said. In the light of the more adverse view of Mr Dalton’s evidence and the terms of the April letter, it may be that there is reason to prefer the evidence of Mr O’Shanassy, but it would be hard for this Court to make a finding when we have not seen and heard Mr O’Shanassy and Mr Dalton and in isolation from the whole of their evidence. A new trial should be avoided if at all possible. I propose to proceed on the assumption of acceptance of Mr O’Shanassy’s account.

45 Even on the assumption that Mr O’Shanassy’s account of the conversation is accepted, there was nothing like agreement that the April letter then in draft form was to become an immediately binding contract. Mr O’Shanassy and Mr Dalton were discussing what was to go in an agreement, and Mr O’Shanassy was to draft something “to encapsulate what we see the intent being”. The next draft of the letter had the new penultimate paragraph on the subject, commencing “Notwithstanding the provisions outlined above ... “. The paragraph as part of the April letter, rather than the conversation out of which the paragraph came, must be considered for its contribution to whether or not the letter constituted a binding contract.

The April letter

46 The April letter in its final form is lengthy, but there is no escape from setting it out. It was marked for Mr Dalton’s attention, and read -

“Dear Sir

Procurement Services

We would like to initially take this opportunity to thank you for your time to date, and feel that we have met a targeted proposal that meets the financial objectives of Mayne Health (“Mayne”) and conversely delivers optimal service delivery in the procurement of catering materials. Our far reaching objective of securing and strengthening our long term relationship with Mayne is also achieved under this agreement.

This proposal merges all of the terms and conditions which have been negotiated and agreed to by Mayne and Sagacious Procurement Pty Limited (“Sagacious”). Accordingly, this letter supersedes all previous correspondence in relation to our contract renegotiation discussions to date and the presentation to Mayne Executives of 28 March 2002.

The Sagacious proposal to Mayne is as follows:

1 PRE CONDITIONS:

Following are the Terms and conditions as outlined in the proposal of 28 March 2002, and also including those terms and conditions applicable from the agreement dated 18 January 2002.

1.1 Condition 1 – Menu Design

(a) For the term of this agreement, Sagacious will present new annual menus recommending all specifications and brands to satisfy price requirements whilst maintaining current quality and standards. Mayne are to agree to these annual menu recommendations prior to implementation.

(b) Sagacious agree to provide menu support for design, printing and distribution nationally of all menus for the terms of this agreement.

1.2 Condition 2 – Control

(a) Sagacious and Mayne are to agree on the following mechanism to alert “abuse” on expenditure and to provide means to rectify and remedy any such abuse of this initiative:

(i) site category percentages are to be agreed on a three (3) month rolling average basis;

(ii) any adjustments in price are to be adjusted in the consecutive months breakdown in category percentage spend make up;

(iii) the only variable left to affect this make up is volume of purchases. Subsequent to the adjustments on price, should the percentage make up on categories be exceeded by greater than 5%, it triggers the following actions;

(iv) Mayne hospitals have 48 hours to provide written submission on justification of excessive expenditure;

(v) Sagacious and Mayne to jointly analyse justification and to reconcile expenditure; and

(vi) remedial action to be implemented within 24 hours of identification of analysis results. Mayne are to provide a detailed breakdown of all expenditure under express SAP codes.

1.3 Condition 3 – Operational Requirements

(a) This agreement does not incorporate expenditure on items outside the express SAP expense codes Sagacious currently purchase and those items are for catering use only;

(b) Sagacious and Mayne will adhere to the current catering materials database, subsequent additions will only be implemented with the joint agreement of Mayne and Sagacious;

(c) Sagacious and Mayne to jointly manage the stock take process at each hospital on a recurring monthly basis;

(d) Mayne agree that all catering external ordering facilities, i.e. commercial cards, petty cash etc, are to remain removed from each site/hospital;

(e) Sagacious agree that the monies obtained through pre-billing will be utilised for the supply of catering materials to Mayne;

(f) Sagacious are responsible for the supply of catering materials to all Mayne hospitals to ensure a 24 x 7 seamless hospital operation. Sagacious will do all things reasonable to guarantee supply;

(g) Sagacious will raise a monthly GST invoice on the 10th working day of each month. Payment of the GST invoices is to be made within 48 hours of receipt; and

(h) Sagacious and Mayne acknowledge this agreement (and the final Service Level Agreement) will include provisions, or similar in intent, to the July 2000 Strategic Alliance Agreement. Such provision will include:

Subcontracting

Dealings with 3rd parties

Conflicts of Interest

Intellectual Property

Volume Rebates

Communication Costs

Fees are inclusive

Taxes generally

GST

Termination

Obligation to act in good faith

Confidentiality

Permanent Disclosure

Audit Rights

Dispute Resolution

1.4 Condition 4 – Proposed New Terms

(a) Sagacious agree to (and will invoice Mayne accordingly for) the application of the CPI going forward on a quarterly or annualised basis (Mayne to determine preference), using the previous quarters/annual CPI result for food only to apply to the coming quarter/year. The following example illustrates the concept.

The CPI movements are as follows:

Category	% Change Sept.2001 Qtr to Dec 2001 Qtr (3 months)	% Change Dec Qtr 2000 to Dec Qtr 2001 (Previous Year)
Food	7.5	2.6
All groups	0.9	3.1

Therefore, the relevant figure to apply for the following year in the abovementioned example would be 2.6%.

(a) Sagacious will provide its services (as described in this proposal) to Mayne for a period commending 1 May 2002 through to December 2004 (or any further period as agreed) (“the Term”); and

(b) During the Term, Mayne will use Sagacious’ services for all of Mayne hospital sites. However, Mayne can elect, with six (6) months notice to Sagacious, to remove certain groups of hospitals in regions or States from the Sagacious proposal if Mayne decides to substantially change or alter its food service operations which result in making the Sagacious service redundant.

3 BILLING STRUCTURE:

We refer to Attachment 1 for Schedule of Billing and provide the following explanation as to the billing process:

Step 1

Current invoicing closes off as at 30 April 2002 at $11.50 PPD.

Sagacious to raise invoice for two (2) months (1 May 2002 – 30 June 2002) based on forecast patient numbers for months of May/June at $11.50 per patient per day for core Mayne sites. Sagacious to raise invoice for two (2) months (1 May 2002 – 30 June 2002) based on forecast patient numbers for months of May to June 2002 at $10.02 per patient per day for the remaining Mayne sites (Shepparton, Wangaratta, Port Macquarie, Orange) (“the Regional Sites”).

Step 2

Sagacious to raise invoice for one (1) month in advance for each month (1 July 2002 – 31 December 2002) based on forecast patient numbers for months of July to December 2002 at $11.40 per patient per day for core Mayne sites. Sagacious to raise invoice for one (1) month (1 July 2002 – 31 December 2002) based on forecast patient numbers for months of July to December 2002 at $10.52 per patient per day for the Regional Sites.

Step 3

Sagacious to raise invoice for one (1) month in advance for each month (1 January 2003 –30 June 2003) based on forecast patient numbers for months of January to June 2003 at $11.30 per patient per day for core Mayne sites. Sagacious to raise invoice for one (1) month (1 January 2003 – 30 June 2003) based on forecast patient numbers for months of January – June 2003 at $9.93 per patient per day for the Regional Sites.

Step 4

Sagacious to raise invoice for one (1) month in advance for each month (1 July 2003 – 31 December 2003) based on forecast patient numbers for months of July to December 2003 at $11.10 per patient per day for core Mayne sites. Sagacious to raise invoice for one (1) month (1 July 2003 – 31 December 2003) based on forecast patient numbers for months of July to 31 December 2003 at $9.75 per patient per day for the Regional Sites.

Step 5

Sagacious to raise invoice one (1) in advance for each month (1 January 2004 – 31 December 2004) based on forecast patient numbers for months of January to December 2004 at $11.00 per patient per day for core Mayne sites. Sagacious to raise invoice for one (1) month (1 January 2004 – 31 December 2004) based on forecast patient numbers for months of January to December 2004 at $9.66 per patient per day for the Regional Sites.

In relation to the abovementioned conditions, Sagacious and Mayne will continue to abide by the following guidelines to implement the guaranteed reduction in PPD Food:

(a) Mayne are to provide Sagacious with forecast patient numbers for 2003 and 2004 as soon as practically possible and to provide forecast hospital invoice totals in accordance with the stepped guaranteed reduction in PPD food costs as outlined above;

(b) Sagacious to continue to issue “statements of expenditure” to all sites less applicable % discount to achieve overall monthly patient per day food costs in accordance with stepped guaranteed reduction in PPD food costs as outlined above; and

(c) Mayne to provide actual patient numbers for the preceding month on or about the 10th day of each month.

4. RETAIL PRODUCT PURCHASING:

In relation to the extraction of the kiosk cafeterias and non-specific per patient day food expenditure items (“Retail Product Purchasing”), Sagacious confirm that we will be extracting these expenditure/amounts from per patient day expenditures. Our preliminary analysis indicates that the removal of these non-specific expenditure/amounts will reduce the per patient day costs by more than $0.50.

(a) We confirm our preliminary position as follows:

(i) upon agreement between Sagacious and Mayne, these non-specific expenditures will be extracted effective 1 July 2002;

(ii) this expenditure will be dealt with separately from the guaranteed per patient day arrangement;

(iii) Sagacious will propose a specific methodology in reporting and billing for these expenditures on 1 May 2002;

(iv) it is anticipated that additional software and hardware will be supplied to these individual sites (kiosks & cafeterias) to manage this segment of your procurement operations.

5 SYSTEMS UPGRADE:

Sagacious agree to upgrade the current e-commerce system to a fully web-enabled system during 2002. Included in this upgrade is the introduction and implementation of “Bedside Ordering” palm devices to integrate with the procurement and inventory management solutions. (Note: excludes all hardware Capital Expenditure costs) The implementation of the new system is contingent upon Mayne’s agreement to the system and its implementation. Sagacious envisage the following necessary steps and estimated timeframes before a final date of transition can be reached.

(i) Key Stakeholders (Mayne to view system in Sydney Corporate Office;

(ii) Mayne to agree to trial implementation;

(iii) Sagacious/Mayne to Business Process Map a trial site;

(iv) Sagacious to agree existing process and proposed process using new system;

(v) Sagacious to implement trial site for a period of not less than three (3) months; and

(vi) Sagacious and Mayne to agree upon results of trail [sic] and begin subsequent national rollout.

6 ANCILLARY PROCUREMENT SERVICES:

(a) Over the term of this agreement, Sagacious will develop a “Whole of Business” Catering Policy and Procedure manual to encompass the entire Mayne Health Catering Operation and associated procurement and supply of catering materials.

(b) Sagacious offer to Mayne its Procurement Services and retains the right to propose opportunity areas to Mayne where it believes it can offer costs reductions through the implementation of the Sagacious Procurement Business Model. Mayne agree to assist Sagacious in the collation of data to put forward proposed areas of cost reductions in those areas currently not serviced by Sagacious. These may include

(i) medical centre(s), Mayne Logistics and other business units food expenditure on such products as identified; and

(ii any other non-food items.

7 MISCELLANEOUS

(a) Sagacious maintain “first right of offer” on its services to any and all hospitals Mayne may acquire/develop and /or any commercial production facilities in the area of providing catering services over the term of this contract outside of those hospitals Sagacious currently services.

(b) The individual components of the proposal, as outlined above (sections 1, 2, 3, 4, 5, 6 and 7) are interdependent in terms of the rights and obligations imposed upon Mayne and Sagacious. For the avoidance of doubt, it is understood that neither Sagacious nor Mayne can arbitrarily remove any term or condition in the sections outlined above.

(c) Sagacious and Mayne acknowledge and confirm that they are bound by these terms and conditions and will act in good faith to expedite the finalisation of the Service Level Agreement which will be provided to Sagacious by Mayne.

Notwithstanding the provisions outlined above, the parties hereby expressly agree as follows:

1. Sagacious will provide its services between 15 January 2002 and 30 June 2002 on a trial basis;

2. The guarantee per patient day rate of $11.50 will be reviewed on 15 July 2002 (or at any earlier date as agreed) and the necessary adjustments will be made so as to accurately reflect the guaranteed per patient day rate against the actual per patient day rate observed during the trial period. An adjustment will only be made from 1 August 2002, if it is found that a patient day rate of $12 is exceeded; and

3. Any adjustments necessary (as described above) will be incorporated into the contract for services provided by Sagacious to Mayne during a contract period of not less than two and a half years. In other words, the subsequent contractual terms will be adjusted so that Sagacious receives revenue sufficient to meet the Costs of Goods (COGS) purchased for Mayne and a reasonable Sagacious overhead & profit component.

We trust that the proposal outlined above is consistent with all of the relevant terms and conditions which have been recently negotiated and finalised and to this end, we would ask that you acknowledge your acceptance of same by signing in the space below and providing us with a copy of same.

Yours faithfully

Sagacious Procurement Pty Limited

[signed]

Paul O’Shanassy

Chief Executive Officer

Enclosures (1) – Patient Per Day Reduction”

47 The signature on behalf of Mayne was to a note at the end of the letter, included in the letter as sent by Sagacious -

“I hereby acknowledge and accept the terms and conditions as outlined above in relation to Sagacious Procurement Services to Mayne.

[Signed] 16/4/02

Kevin Dalton Date

Operations Manager – Services”

After the April letter

48 Mayne prepared in draft a letter to Sagacious in the nature of a letter of intent, and a detailed Product Supply Agreement based on Mayne’s standard form and incorporating some general terms of supply. The draft Product Supply Agreement was some 65 pages. It was expressed to commence on 1 May 2002 and to have a term of two years six months. The draft letter of intent thanked Sagacious for its “recent proposals regarding the renewal of the Agreement for the supply of catering products and related services”, and said -

“We are pleased to advise that, conditional to your acceptance of the terms and conditions of Supply Agreement 10105-C (attached), Sagacious Procurement Pty Limited has been successful as the ongoing supplier of catering supplies to Mayne.

The appointment of Sagacious Procurement as Mayne’s supplier of catering products and related services is subject to the parties executing an agreement in a form satisfactory to Mayne.

The new pricing and billing structure as detailed in Clause 11, Product Supply Agreement of Agreement 10105-C is to be made effective from 1 May 2002.

Please review the attached draft Agreement and confirm your acceptance of the draft terms and conditions in writing no later than 29 April 2002. The Agreement will thereafter be finalised in an executable format by Mayne Legal Counsel and forwarded to Sagacious Procurement for execution.”

49 The two drafts were sent to Sagacious on 22 April 2002, with the request that it “read and let know if you are comfortable with the draft agreement and letter of intent”.

50 Mr Dalton and Mr O’Shanassy discussed the drafts, and changes were made. Relevantly, the first of the paragraphs of the letter of intent set out above was changed by the addition of the words emphasised -

“We are pleased to advise that, conditional to your acceptance of the terms and conditions of Supply Agreement 10105-C (attached), Sagacious Procurement Pty Limited has been successful as the ongoing supplier of catering supplies to Mayne. This agreement (based on your proposal on 16 April 2002) supersedes the strategic Alliance [sic] of July 2000 as of January 2002.” (emphasis added)

51 The emphasised words, or at least the words in parentheses, were added at the suggestion of Mr O’Shanassy. The trial judge regarded his description of the April letter as a “proposal” as significant, and as inconsistent with the letter being “regarded as a binding document”. Perhaps of more significance was Sagacious’ acceptance that its future role as supplier of catering supplies was subject to acceptance of the terms and condition of the Supply Agreement and execution of a satisfactory formal agreement. The trial judge noted that Mr O’Shanassy did not ask that the letter of intent be altered in that respect, although he did not expressly attribute significance to that fact. Mr O’Shanassy’s evidence had included that, because no such thing has been raised with him prior to the April letter, he “did not pay any real attention to this part of the letter”. The trial judge clearly enough did not accept this evidence.

52 The letter of intent was formally sent on 14 May 2002, although it seems without the Product Supply Agreement. However, the parties did not proceed as it had envisaged. A Mayne internal e-mail dated 10 May 2002 sent by Mr Dalton recorded that he had “met with Sagacious again they have a couple of changes to enable more time to come up with an appropriate agreement”. Sagacious referred on appeal to evidence given by Mr O’Shanassy, it seems in relation to this meeting, that Mr Dalton agreed to “postpone the final documentation of our agreement until we get the results from the trial period”, in order to avoid the complexity of drafting the adjustment and related provisions. According to Mr O’Shanassy, he also said without demur from Mr Dalton that as far as Sagacious was concerned “our 16 April 2002 agreement is comprehensive in its terms and conditions and we should be able to rely on it”. In his evidence on the subject Mr Dalton broadly accepted the postponement, but not the reliance on the April letter. The trial judge did not make findings, but it can be taken that there was agreement upon the postponement.

53 Mr Dalton’s evidence included that “further presentations showed that there was [sic] continued changes that were put forward by Sagacious”.

54 The trial judge referred to a presentation on 25 June 2002. The slide headed “Objectives” had as the first two items “Rollover agreement to supersede Strategic Alliance Agreement Start Date: July 2002” and “Further Long Term Relationship with Mayne Health”. The slide headed “Trial Results” referred to a six month trial at $11.50 PPD and the steps “Develop initiatives for new financial year beginning 01 July 2002” and “Review & Negotiate new agreement based on trial results”. The trial judge saw significance in this last item. He did not refer to the two last slides, which were -

“Contract Options

· Fixed Term 2.5 Yrs

· Fixed Management Fee

*COGS

*Operating Costs

*Profit Margin (ref workings)

· Percentage Based Management Fee

· Guaranteed PPD”

“Action Plan

· Finalise & sign off agreement at cost plus structure

· Implement initiatives outlined for completion as at 31 December 2002

· Review cost structures as at 31 December 2002

· Develop & finalise whole of business Policy and Procedure manual

· Investigate further catering efficiency initiatives”

55 Mr O’Shanassy wrote to Mayne by a letter dated 4 July 2002, referring to discussions on 25 June 2002 and providing “our proposal concerning the abovementioned procurement services”. The proposal was in the form of a so-called discussion paper, which in the recital of the “Background” referred to the Strategic Alliance Agreement and relevantly said -

“E. Following on from negotiations in December 2001, and the requirement to achieve stringent budget targets for the year ended 30 June 2002, Sagacious began a trial for the period 15 January to 30 June 2002 (‘the Trial Period’) during which time Sagacious would charge Mayne on a per patient day rate of $11.50. The Trial Period proposal was detailed in the agreement of 16 April 2002. During the Trial Period, a number of initiatives were introduced (as outlined in the 16 April 2002 proposal) with the objective being to significantly reduce the per patient day cost.

...

I. As contemplated in the proposal of 16 April 2002, the information and results obtained from the Trial Period would form the basis of the negotiation and finalisation of an agreement between Sagacious and Mayne for a further term (‘the Agreement’) (originally contemplated being for 2.5 years so as to merge with other Mayne procurement initiatives being considered.)”

56 The discussion paper then put forward a detailed proposal for the provision of eProcurement services on a management fee basis for a term of three years from 1 July 2002.

57 These were indeed “continued changes”, in truth proposals for a completely different basis for provision of eProcurement services. However, during the period after the April letter and until the termination of the relationship at the end of July 2002, there was conduct in conformity with the April letter. Sagacious billed Mayne two months in advance. The amount was significant; the extra month in advance was about $1,300,000. Mayne paid the invoices. The billing included the regional hospitals, which had been exempted from the PPD basis in the letter of 18 January 2002 but came within para 1.4 of the April letter whereby all hospitals were to be covered. Sagacious finalised a new national menu, which was brought in from 6 May 2002.

58 There then emerged the dispute which ended in this litigation.

59 Mr Robert Wise became National Manager Health Funds & Contracts at Mayne. On 9 July 2002 he e-mailed to Mr Kyne advising of his appointment and, referring to the discussion paper of 4 July 2002, saying -

“I understand that the immediate need is to establish whether we will continue our relationship beyond 30 July 2002 at the conclusion of the initial term of the contract. In the interim I assume that the terms agreed in your correspondence dated 18 January 2002 will continue. I look forward to catching up soon and suggest a meeting in the week commencing 22 July.”

60 Mr O’Shanassy replied to Mr Wise by a letter dated 11 July 2002. There was quite a change from the letter of 4 July 2002. The letter of 11 July 2002 included -

“The current agreement between Mayne to and Sagacious is detailed in the Agreement of 16 April 2002, a copy of which I enclose for your review. As you will note, there are a number of substantial differences to the 18 January 2002 Agreement.

I assume that you have been fully briefed on the contractual and operational aspects of the Mayne/Sagacious relationship which I attempted to distil in the 4 July 2002 Discussion Paper.

Putting aside the various operational aspects, which you expect to be in a position to discuss in the week commencing 22 July 200, there are a number of contractual and financial aspects of our agreement which we need to canvas as soon as possible. Important amongst these, is that by 15 July 2002, Mayne/Sagacious are to review the actual per patient day costs against the per patient day figure pertaining to the Trial Period (15 January 2002 to 30 June 2002) and make any necessary adjustments.

In relation to the actual per patient day cost for the month of June 2002, I expect that our Chief Financial Officer, David Edwards, will have completed his Department’s reconciliation and analysis by Monday, 15 July 2002 which will work in well with the review date.

It would be appreciated if you could contact me to discuss these matters and ultimately, see yourself clear to meet with me and other relevant members of Sagacious early next week to address the abovementioned matters. We will make ourselves available on short notice to travel to Melbourne if this best suits y our work schedule.”

61 Mr Wise replied by letter dated 12 July 2002 -

“I am keen to review with you the agreement dated 16 April 2002 and your subsequent proposal dated 4 July 2002 that emanated from discussions with Geoff Morrison and others.

I note that the outcome data from the ‘trial period’ will be provided by you on Monday 15 July 2002. I am not available to meet with you next week but will make arrangements for a time to meet the following week.”

62 A review meeting was arranged for 23 July 2002, but was postponed by Mr Wise. Mr O’Shanassy wrote to Mr Wise on 24 July 2002 expressing concern as to the state of the relationship with Mayne, and in substance maintaining that both were bound under “the 16 April 2002 Agreement”.

63 A meeting was then arranged for 31 July 2002. However, by a letter dated 31 July 2002 Mayne wrote to Sagacious -

“We refer to your letter dated 24 July 2002.

As you are aware, during the past 3 months Sagacious Procurement Pty Ltd (Sagacious) has made presentations to and prepared discussion papers and proposals for us in relation to a proposed agreement for the provision of a catering procurement system to Mayne Health hospitals.

We note the assertion in your letters dated 11 July 2002 and 24 July 2002 that the letter from yourself to Kevin Dalton dated 16 April 2002 embodies the current agreement between Mayne and Sagacious.

We do not agree that the 16 April 2002 letter contains or describes any agreement on our part to engage Sagacious to provide a procurement system to us until December 2004. To the contrary, it is our position that whilst the parties have engaged in negotiations towards an agreement to apply after the expiration of the July Strategic Alliance Agreement, those negotiations have to date not concluded in a legally binding agreement. This is reflected in your 4 July 2002 letter to us, which contained a new range of proposals concerning procurement services for our consideration.

However, if the 16 April 2002 letter does constitute an agreement between us (which is denied), then we note that clause 1.3(h) of that letter provides relevantly as follows:

‘Sagacious and Mayne acknowledge this agreement (and the final Service Level Agreement) will include provisions, or similar intent, to the July 2002 Strategic Alliance Agreement. Such provisions will include:

Termination ... ‘.

The effect of this clause is to incorporate the applicable parts of clause 9 of the July 2000 Strategic Alliance Agreement into the ‘agreement’ which you assert exists.

Clause 9 of the July 2000 Agreement provides that Mayne may terminate for convenience by giving one month’s notice during the Initial Term and after the Initial Term it may terminate the agreement for convenience by giving three months’ written notice: see Clause 9.1(a) and (c).

Insofar as the letter dated 16 April 2002 constitutes a legally binding agreement between Sagacious and Mayne we hereby give you notice that any such agreement is terminated three months from the date hereof.”

64 And so to this litigation.

Consideration

65 It was common ground that whether the parties intended immediately to be contractually bound was to be determined objectively, according to the intention disclosed by their words and conduct. It is sufficient to refer to Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548-9 per Gleeson CJ, with whom Hope and Mahoney JA agreed, and the cases there cited.

66 It must be remembered, however, that the intention in question in the present case was not a general intention at some time to enter into a contract, but an intention to make an immediately binding contract. Parties may enter into a binding contract upon terms and conditions necessary for their contractual relationship, in the expectation that at a later time the formal contract will be executed consistently with those terms and conditions or perhaps with additional terms and conditions. Conversely, parties may agree upon quite detailed terms and conditions for a contractual relationship but not intend immediately to be contractually bound on those terms and conditions; this may be pending negotiations on other matters or until execution of a formal contract. Unsurprisingly, a conclusion must be reached in the circumstances of the particular case, although judges are wont to formulate guiding “principles” or “propositions”. While I will refer to some “principles”, they are subservient to the fact-specific objective finding of the parties’ intention. .

67 As I have indicated, Sagacious submitted that the trial judge should not have looked beyond the April letter. It submitted that what it described as “extra-contractual evidence” had no significance, because the April letter was sent as a “proposal” which “merges all the terms and conditions which have been negotiated and agreed to” and “supersedes all previous correspondence in relation to our contract renegotiation to date”, and was signed on behalf of Mayne to “acknowledge and accept the terms and conditions outlined above”. It drew attention to the reference by Gleeson CJ in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd at 549-50 to a case where the parties had signed a single document containing an expression such as “subject to contract” where the outcome “will ordinarily turn on the construction of the single document”. It referred to the significance of signature of a document as a commitment to its terms, even if the terms were not known or understood, as explained in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 210 CLR 165 at [40]- [45] per Gleeson CJ and Gummow, Hayne, Callinan and Heydon JJ. It said that the parties’ contractual intention should therefore be found only by regard to the April letter.

68 Where the question is whether a document constitutes a legally binding contract, McHugh JA said in G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd at 634 that “the decisive issue is the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances”. However, there is the prior question whether the document is the sole repository of the parties’ contractual intention. A formal document expressed to be “subject to contract”, for example, may provide that starting-point, but it may nonetheless be shown that a legally binding contract was not intended. McHugh JA gave examples in Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 336-7, and said that a party may prove that before signing an agreement the signatories agreed that it did not constitute a binding contract and that “the intention to be bound is a jural act separate and distinct from the terms of their bargain”.

69 The answer to what can generally be described as a Masters v Cameron question is not necessarily found in a single document. The intention of the parties may be found in a series of communications, or it may be shown that the signed document is only part of their putative contractual relationship. Further, in ascertaining the intention of the parties, whether from a series of communications or from a single document, regard can be had to the commercial circumstances in which the parties exchanged their communications or arrived at the document and to the subject-matter of the putative contract. The objective intention of the parties is fact-based, found in all the circumstances including “by drawing inferences from their words and their conduct in the making of [their] agreement”: Allen v Carbone [1975] HCA 14; (1975) 132 CLR 528 at 532 per Stephen, Mason and Murphy JJ; see also Australian Broadcasting Corporation v XIV Commonwealth Games Ltd at 548 per Gleeson CJ. Regard can also be had to the conduct of the parties after the occasion of the putative contract, to cast light on the meaning of the communications in question and otherwise on whether they intended immediately to be contractually bound, of which I say more later in these reasons.

70 Even in construing the April letter as a contract, regard could be had to evidence of surrounding circumstances. Putting that aside, I do not think the signature of the April letter closed off regard to the circumstances in which the letter was sent and signed and to the conduct of the parties thereafter. The prior question remained. Although Mr Dalton signified Mayne’s acknowledgment and acceptance of “the terms and conditions outlined above”, where there is a Masters v Cameron question it must still be asked whether what was thereby signified was with the intention that the parties be immediately contractually bound on those the terms and conditions. The parties may have agreed, but what had they agreed? To confine attention to the terms of the April letter begs the question.

71 The terms of the April letter are nonetheless important to finding the parties’ contractual intention. Mr Dalton did sign by way of acknowledgment and acceptance of the outlined terms and conditions, and para 7(c) of the letter contained its own acknowledgment that the parties “are bound by these terms and conditions and will act in good faith to expedite the finalisation of the Service Level Agreement which will be provided by Sagacious to Mayne”. The April letter referred from time to time to “this agreement”, see the first paragraph and paras 1.1(a) and (b), 1.3(h) and 6(a). Paragraphs 1.1(a) and (b) and 6(a) referred to “the term of this agreement”, clearly enough the period from 1 May 2002 to December 2004 in para 1.4. If one goes no further, these are strong indicators that the parties intended that the letter should constitute a binding contract, albeit that they were to negotiate in good faith to a formal contract called in the letter a Service Level Agreement.

72 However, on going further there are contra-indicators within the April letter itself, suggesting that the agreement it recorded was upon terms and conditions for a contract in advanced negotiation but yet to be finalised and become binding. As was said by Higgins J in Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 at 650 -

“There is no contract unless the two parties mutually consented to be bound one to the other by one agreement. Moreover--though it ought to be superfluous to say it--it is one thing for two parties to settle what are to be the terms of an agreement, if it should be made; and quite another thing to make the agreement.”

73 Some of the matters to which I will refer bring into consideration one of the “principles” found in the cases, a formulation by Kirby P in Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd (1995) 7 BPR 97578 at 14,569 being that “[t]he existence of matters of importance on which the parties have not reached consensus in their informal agreement will render it less likely that they intended immediately to be bound before the execution of a formal document”. It is ordinary reasoning: in Australian Broadcasting Corporation v XIV Commonwealth Games Ltd at 548 Gleeson CJ said that “as a matter of fact and commonsense” the more numerous and significant the areas in respect of which the parties had failed to reach agreement, the slower a court will be to conclude that they had the requisite contractual intention. And the ordinary reasoning can extend to where the parties have failed to express their agreement clearly as well as where they have failed to reach agreement; put another way, failure to reach agreement includes where there is obscurity or incompleteness in the agreement. While the courts will endeavour to give effect to a contract made between businessmen notwithstanding that its terms have not been fully or well stated, that the terms have not been fully or well stated is material to whether a contract was made.

74 Paragraph 1.3(h) of the April letter stated an acknowledgment that “this agreement (and the final Service Level Agreement) will include provisions, or similar in intent, to the July 2000 Strategic Alliance Agreement”. It said that “such provision will include”, followed by a list of provisions purportedly identifiable in the Strategic Alliance Agreement.

75 This underlined that a final Service Level Agreement was yet to come; it was unclear whether this meant an equivalent to the Strategic Alliance Agreement or, by reference to the Service Level Agreement which had accompanied the Strategic Alliance Agreement, an equivalent detailed and necessary part of the contractual relationship, but in any event there was yet to be agreement upon it. But by the words “this agreement ... will include”, with words of futurity used in relation to “this agreement” as well as in relation to the Service Level Agreement, it also conveyed that acknowledged and accepted in the April letter was of terms and conditions to be part of a contract to which the parties were not yet bound, giving some point to the frequent use of the word “proposal” as a description of the contents of the letter.

76 Further, the provisions to be included were left unclear in two respects. They were to be “similar in intent” to the Strategic Alliance Agreement, and the list was inclusory rather than definitive. These were important provisions for a major contractual relationship, which one would expect the parties to wish to have clear before they were contractually bound. In particular there were significant provisions of the Strategic Alliance Agreement

77 A matter which occupied some time in submissions was the provision “Termination” to be imported from the Strategic Alliance Agreement.

78 Para 1.3(h) of the April letter would, if it constituted a binding contract, incorporate the provision, or a provision similar in intent to, the Strategic Alliance Agreement provision(s) identified as “Termination”. Clause 9 of the Strategic Alliance Agreement, under the heading “Termination”, provided for termination by Mayne for convenience (cl 9.2), termination by Sagacious for cause (cl 9.2), termination by Mayne for cause (cl 9.3) and an obligation of both parties to act in good faith (cl 9.4). Mayne could terminate for convenience during the Initial Term on one month’s notice and with payment of an Early Termination Payment on a sliding scale, and after the Initial Term on three month’s notice without that payment. The Initial Term was the two years commencing on 1 August 2000.

79 It will be recalled that as a fall-back Mayne had in its letter of 31 July 2002 purported to terminate on three months notice. Sagacious would have a largely Pyrrhic victory if it established a binding contract which had been validly terminated.

80 Sagacious submitted that as a matter of construction of the April letter it incorporated only cll 9.2 and 9.3 of the Strategic Alliance Agreement. It said that the Initial Term was no longer relevant, that para 1.3(h) separately referred to a provision “Obligation to act in good faith” and so cl 9.4 was not to be imported, and that a limited termination for convenience flowed from para 1.4(b) of the April letter (removal of certain groups of hospitals et cetera) so an inconsistent cl 9.1 could not have been intended.

81 Termination for convenience had been the subject of the 11 April 2002 discussion between Mr O’Shanassy and Mr Dalton, according to Mr O’Shanassy super kitchens expressly being the only occasion for termination for convenience but according to Mr Dalton not so. As I have said, the trial judge did not resolve this conflict in the evidence.

82 It was by no means clear that the construction for which Sagacious contended was the correct one. At the least the residue of the Initial Term could have been relevant, or in the incorporation of cl 9 of the Strategic Alliance Agreement a corresponding Initial Term could have been created. The Strategic Alliance Agreement had another provision imposing an obligation of good faith, cl 1.2, to which para 1.3(h) of the April letter could have been referring. Paragraph 1.4(b) was not a termination provision, but a provision for reduction in scope in certain events. Whatever the discussion between Mr O’Shannassy and Mr Dalton had been, its availability as an aid to construction would be doubtful at best, but if it were available para 1.4(b) was not in terms of super kitchens.

83 I do not decide the correct construction of the April letter in this respect. While it was open to the parties to make an immediately binding contract which was obscure, the obscurity on such an important matter gives point to the futurity in the provisions to be included and to the lack of clarity in “similar in intent”. This at least of the listed provisions to be taken up from the Strategic Alliance Agreement needed the clarification which would be expected in the final expression of a binding contract, and the obscurity is an indicator that the parties did not intend immediately to be bound.

84 The penultimate paragraph of the April letter commencing “Notwithstanding the provisions outlined above ... “ provided for a trial period and review and adjustment of the PPD rates, and that any adjustments “will be incorporated into the contract for services provided by Sagacious to Mayne during a contract period of not less than two and a half years”. The adjustment was to be to “the subsequent contractual terms”. This was not the language of adjustments within a presently binding contract, but conveyed that a contract was to be made after the trial period and review taking up any adjustments to the proposed PPD rates.

85 The second paragraph of the April letter referred to “our contract renegotiation discussions to date”, on one reading meaning that the letter was part of a contract renegotiation yet to be concluded. An important matter on which one would expect further negotiation was the adjustment to which the penultimate paragraph referred, an adjustment “so that Sagacious receives revenue sufficient to meet the Costs of Goods (COGS) purchased for Mayne and a reasonable Sagacious overhead and profit”. On Mr O’Shanassy’s evidence, this had been introduced in the letter as part of his draft of something “to encapsulate what we see as the intent”, without greater clarity in the discussion. Any adjustment was highly important to both Sagacious and Mayne, but the penultimate paragraph was unclear in a number of respects.

86 On one view, an adjustment would be retrospective to 15 January 2002, which would negate the greater part of the savings of $1,300,000 on which Mayne had insisted. But the paragraph also could be understood as providing for adjustment for the future.

87 One description of the adjustment was to bring the guaranteed PPD rate into a relationship with the actual PPD rate. Another, perhaps to apply only prospectively, was to give Sagacious the cost of goods plus a reasonable overhead and profit component. How the two stood together was quite obscure.

88 The reasonable overhead and profit component was itself an uncertain concept. Sagacious submitted that the 4.75 per cent of the original Strategic Alliance Agreement was part of the actual PPD rate and that the overhead and profit component meant the 4.75 per cent. The argument it put produced a Suttor v Gundowda objection by Mayne; I have difficulty in seeing how it could be correct. There was at the least obscurity, and it seems to me likely that the reasonable overhead and profit component was not to be identified with the 4.75 per cent. Testing the significance of the uncertainty against the parties’ own conduct, in the negotiations prior to the Strategic Alliance Agreement Sagacious had sought a percentage fee of 20 per cent, Mayne had refused, and the fee struck was 4.75 per cent; there is a graphic illustration of different views of what could be a reasonable overhead and profit component, with eventual agreement between the parties to two percentage points.

89 Again, it is not necessary to resolve the construction of the penultimate paragraph. It is difficult to accept an objectively found intention that these parties, in the historical setting of their relationship, immediately bound themselves to such obscurity and indeterminacy on such an important matter.

90 Paragraphs 7(b) and (c) of the April letter are of some significance. Paragraph 7(b) states the interdependence of the previous paragraphs as components of “the proposal”, and that “neither Sagacious nor Mayne can arbitrarily remove any term or condition in the sections outlined above”. Paragraph 7(c) refers to the parties being bound by the terms and conditions, but also to acting “in good faith to expedite the finalisation of the Service Level Agreement which will be provided by Sagacious to Mayne”. There were to be further negotiations and execution of a formal contract, and the embargo on arbitrary removal of terms or conditions suggested that they could be removed if there were good reason in the future negotiations. That is, the terms and conditions were agreed as the platform for further negotiations, being binding between the parties as the platform (subject to non-arbitrary change) but not as an immediately binding contract for the provision of eProcurement services.

91 The April letter left rather indeterminate a number of other matters. In a multi-million dollar contract, the terms of which had in the Strategic Alliance Agreement and its Service Level Agreement been stated in detail and at length, one would expect the parties to state them definitively before being contractually bound. A contract can, of course, provide for matters to be worked out during the course of the contract. But the April letter left many matters to be worked out, stating -

· that Sagacious and Mayne “are to agree on the following mechanism to alert ‘abuse’ on expenditure ... “ (para 1.2(a)), the mechanism being outlined but further agreement being contemplated;

· that extraction of certain amounts involved agreement on a separate arrangement and anticipation of supply of software and hardware, (para 4);

· that in that respect Sagacious had a “preliminary position”, it seems only as a preliminary position subject to change (para 4);

· as examples only of language which one would not expect in a major contract of this nature, that Sagacious’ responsibility was “to ensure a 24 x 7 seamless hospital operation” (para 1.3(f)) and that Mayne could remove “certain groups of hospitals” if it decided “to substantially change or alter its food service operations which result in making the Sagacious service redundant” (para 2(b));

· that the upgrade of the e-commerce system was contingent on Mayne’s agreement to it and its implementation (para 5); and

· that Sagacious had a “first right of offer” on its services to new hospitals or commercial production facilities, without any elaboration or mechanism for giving effect to the first right of offer.

92 For a number of reasons, then, the April letter was equivocal in expressing an intention that the parties would immediately be contractually bound. The agreement signified by the acknowledgment and acceptance of the terms and conditions was by no means plainly that those terms and conditions were the terms and conditions of a binding contract, and it was open to conclude that the agreed terms and conditions were the then stage of the negotiations but the binding contract was yet to be finalised.

93 Sagacious submitted that the circumstances in which the letter was sent by it and signed on behalf of Mayne supported an intention to make a concluded contract. It said that, with the Strategic Alliance Agreement as varied by the letter of 18 January 2002 due to expire on 30 July 2002 -

· Sagacious had a strong commercial interest, known to Mayne, in securing a binding long-term contract, both in order to allow Sagacious to recoup losses since January 2002 on the $11.50 PPD rate and in order to use a contract with Mayne as a key customer to obtain contracts with hospitals or other businesses outside Mayne’s business; and

· Mayne had a strong commercial interest, impliedly known to Sagacious, in binding Sagacious to long-term provision of eProcurement services on the PPD basis with a view to security of supply and a favourable PPD rate.

94 Sagacious submitted that Mayne could not be confident even that Sagacious could be kept to the $11.50 PPD rate until the end of July 2002, since under the letter of 18 January 2002 there could be reversion to the management fee under the Strategic Alliance Agreement in the event of dispute. Thus, it submitted, it made commercial sense for the parties to replace their existing contractual relationship and provide for a new long-term contractual relationship, with immediate effect; even if the replacement was by a contract on the “basic parameters” of the new contractual relationship, but later to be replaced by a formal contract taking up Mayne’s detailed terms and conditions.

95 Sagacious’ interest in achieving a long-term contract may be accepted, but less readily Mayne’s interest in making a new contract with immediate effect. The courts should be cautious in placing themselves in businessmen’s shoes, and for a number of reasons it would be rash to see reciprocal commercial imperatives.

96 In the past Mayne had placed considerable pressure on Sagacious, effectively forcing variation of the Strategic Alliance Agreement to its advantage, and Sagacious had knuckled under. It is plain that Sagacious would go to considerable lengths to accommodate Mayne, including by continuing to provide services with a view to a future long-term contract. Mayne’s commercial dominance over Sagacious was such that there was no pressure on Mayne to enter a binding long-term contract, and the proof that it had no need to do so might be thought to be that it declined to proceed with Sagacious at the end of July 2002. Albeit perhaps as a small point, it may be observed that reversion to the management fee under the Strategic Alliance Agreement could not be at Sagacious’ will, since it depended on dispute which could not be resolved. It was not particularly likely that Sagacious would cease providing eProcurement services after 31 July 2002 pending execution of a formal contract.

97 Of particular significance, adjustments in accordance with the penultimate paragraph of the April letter (“Notwithstanding the provisions outlined above ... ) would negate the inroads Mayne had made by insistence on the savings of $1,300,000 and then on reduction of the $11.50 as provided in the steps down in para 3 of the letter. Possibly a significant part of the $1,300,000 would be lost retrospectively, but certainly savings for the future would be compromised. Mayne would pay according to cost of goods plus a reasonable overhead and profit. It is far from evident that Mayne should be taken to have seen that as to its advantage, particularly with the indeterminancy of “a reasonable overhead and profit component”.

98 The Strategic Alliance Agreement had followed the Heads of Agreement, putting what the parties had agreed upon into a detailed formal contract. The presentation on 28 March 2002 had in the last slide referred to first, “Agreement to Proposal” and secondly, “Sign off new contract”. In early April 2002 Messrs Dalton and Kyne had both envisaged drafting a new agreement, referred to by Mr Kyne as a full and final agreement. This provides some support for the April letter being intended as the agreement on the parameters of the new contract, on the way to being bound by “signing off” the formal contract.

99 Regard to the parties’ subsequent communications is of some importance in this case. That regard may be had to their subsequent communications is undoubted. In Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd Gleeson CJ said at 547-8

“There is ample authority for the proposition that reference may be made to the correspondence between the parties subsequent to 13 June 1986 for the purpose of showing that ‘it was not in the contemplation of either party that they were to be bound until all the essential preliminaries had been agreed to, nor until a formal contract had been drawn up embodying all the matters incidental to a transaction of such a nature’: Barrier Wharfs Ltd v W Scott Fell & Co Ltd (1908) 5 CLR 647 at 669 per Griffiths CJ; see also Howard Smith and Co Ltd v Varawa [1907] HCA 38; (1907) 5 CLR 68; Hussey v Horne-Payne (1879) 4 App Cas 311; B Seppelt and Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 and Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251.”

100 So also in Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153 at [25] Heydon JA said succinctly, referring to the same cases, that “post-contractual conduct is admissible on the question of whether a contract is formed”.

101 In Barrier Wharfs Ltd v W Scott Fell & Co Ltd at 669 Griffiths CJ had considered that subsequent correspondence between the parties showing that they continued in negotiation “negatives the idea of an existing concluded contract”. In Howard Smith and Co Ltd v Varawa [1907] HCA 38; (1907) 5 CLR 68 his Honour had said at 78 that “the question being whether the parties had in fact concluded an agreement on 1st December, any statements or conduct on their part after that date inconsistent with the existence of a concluded contract are relevant for this purpose”. In B Seppelt and Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 regard was had to subsequent communications showing that the parties contemplated the execution of a formal contract, and Mahoney JA said at 9155, with reference to Barrier Wharfs Ltd v W Scott Fell & Co Ltd and Howard Smith and Co Ltd v Varawa, that although it was not conclusive on whether a binding contract had previously been made, the regard -

” ... does provide support in the present case for the view that, as the parties understood it, whether the contract was to proceed was affected by matters to be agreed concerning settlement, and that in relation to that agreement, it was proposed to exchange contracts and proceed in the normal course of conveyancing”.

102 The juridical basis on which the subsequent communications bear upon contractual intention may not be settled.

103 In Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 McLelland J suggested at 9255-6 that the probative value of subsequent communications lay in the light they shed on “the proper interpretation of the earlier communications alleged to constitute the contract”, such as by showing continued negotiations whereby the alleged contractual dealings could not properly be interpreted as mutual assents to be bound; his Honour said they could also be admissions by conduct of the existence or non-existence of a subsisting contract, with the probative force “vary[ing] inversely with the strength of the available direct evidence of the matters in question”.

104 Interpretation of the earlier communications may not be an ideal description of the use of the subsequent communications on the first basis to which his Honour referred. It has been put a little differently in other cases. In Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd at 548 Gleeson CJ spoke of “interpretation and understanding of the earlier communications in that it constitutes an important source of information as to what are matters incidental, or for that matter essential, to a transaction of the nature in question”. In Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd one of Kirby P’s “principles” was -

“4. In order to determine in what areas the parties were, and were not, in agreement, and what matters they considered necessary in order for an agreement to exist, it is legitimate to examine their subsequent conduct. Where correspondence between the parties after an informal agreement refers to important terms and conditions not mentioned during that informal discussion, it may more readily be inferred that the earlier discussion was simply a preliminary negotiation and not a binding agreement;”

105 I respectfully suggest that subsequent communications are not simply aids to interpretation, or a source of information as to matters with which a concluded contract should deal. Their probative value may be more direct. To repeat, the objective intention of the parties is fact-based, and found in all the circumstances. That in their subsequent communications the parties have continued in negotiations, or have expressed the common understanding that they are not legally bound unless and until a formal contract is executed, is of itself probative as to their contractual intention: see Howard Smith and Co Ltd v Varawa, stating simply that any statements or conduct inconsistent with the existence of a concluded contract are relevant.

106 The basis of subsequent communications as admissions is very different. It does not depend on communication between the parties, and that basis gives scope for evidence of, for example, a party’s internal memoranda saying or less directly conveying that there is or is not a concluded contract. Admissions bearing upon contractual intention present difficulties. As Gleeson CJ said in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd at 550, “it will often be necessary to identify with some care the fact which is said to have been admitted”. What is said to be admitted may be a relatively straightforward fact, for example that A discussed with B the price for goods. But if a matter of mixed law and fact is involved, or the application of a legal standard, admissibility may be more contentious. It is considered in Grey v Australian Motorists & General Insurance Co Pty Ltd (1976) 1 NSWLR 669 at 675 per Glass JA and 684-5 per Mahoney JA; Jones v Sutherland Shire Council (1979) 2 NSWLR 206 at 231 per Mahoney JA; and Pitcher v Langford (1991) 23 NSWLR 142 at 147 per Kirby P and 160 per Handley JA, but see the reservations, with reference to other cases, in Cross on Evidence, Aust ed, at [33465]. An admission by conduct in a case such as the present may bring its own difficulties. And a statement that there is or is not a concluded contract, for example, may if admissible, carry significant weight or little weight depending on the circumstances, and the weight of any admission will depend on the source of knowledge of the person making the admission: cf Lustre Hosiery Ltd v York [1935] HCA 71; (1936) 54 CLR 134 at138-9 per Rich, Dixon, Evatt and McTiernan JJ.

107 Subject to a qualification, neither Sagacious nor Mayne relied in the appeal on conduct other than communications between the parties, understanding communications in the wide sense of conduct between them extending to (for example) the billing and payment two months in advance (Sagacious) and the presentation of 25 June 2002 and submission of the discussion paper (Mayne). I refer to the qualification later in these reasons.

108 Sagacious submitted that the intention to make a binding contract was supported by the communications whereby, in accordance with the April letter –

· from 1 May 2002 Sagacious billed Mayne two months in advance and Mayne paid Sagacious two months in advance;

· the regional hospitals were included in Sagacious’ eProcurement services and its billing; and

· new national menus were introduced from 6 May 2002.

109 These are valid considerations, except perhaps the introduction of new national menus as that seems to have been in train since much earlier in the year. But they are only part of the picture. Other communications after the April letter quite strongly indicated that the parties had not intended to make an immediately binding contract.

110 The provision by Mayne to Sagacious of the draft Product Supply Agreement and the letter of intent, and their acceptance by Sagacious as the next steps in coming to a binding contract, conveyed that there was at that point no binding contract. Particularly is that so when the letter of intent was amended at Sagacious’ request to state that “this agreement”, being an agreement for which the terms and conditions of the draft Product Supply Agreement were to be accepted, was “based on your proposal on 16 April 2002” and the contractual relationship was explicitly subject to execution of a formal contract.

111 Sagacious’ submissions included that this was a “parallel proposal for a replacement contract”, one which was postponed because of difficulty in drafting, and that the reference to “proposal” was in the circumstances of little moment. I do not think that can be accepted. In the letter of intent the Product Supply Agreement was not treated as the replacement for a currently binding contract found in the April letter.

112 Not until later did Sagacious assert that the April letter represented a binding agreement between Mayne and Sagacious. Other than in the billing and payment consistent with the April letter, it did not in important communications between itself and Mayne treat the April letter as the embodiment of a present contractual relationship. On the contrary, it made the presentation of 25 June 2002 and submitted the discussion paper, proposing a very different contractual relationship to operate from July 2002 and in the discussion paper putting the detailed proposal for the provision of eProcurement services on a management fee basis as the fulfilment of what para I in the Background had said was the negotiation and finalisation of a long-term agreement “[a]s contemplated in the proposal of 16 April 2002”. The long-term agreement proposed was not even the terms and conditions of the April letter with refinements – it was quite different.

113 Of course, if a binding contract had been made subsequent negotiations not resulting in a new contract would not affect it: Lemon v Scarlet & Co [1921] HCA 42; (1921) 29 CLR 499 at 409, referring to Perry v Suffields Ltd (1916) 2 Ch 187. But on whether a contract had been made, and adopting the words of Griffiths CJ in Barrier Wharfs Ltd v W Scott Fell & Co Ltd, these matters negative the idea of an existing concluded contract.

114 Sagacious submitted that the explanation lay in changed personnel in Mayne, giving Sagacious reason to “tread carefully”. The trial judge had said at [56] that “Sagacious being a small start-up company, was very conscious at all times of the huge significance of the Mayne connection to its prospects”, and that it “had no desire to raise the litigation gun against Mayne” and “[i]ts approach to contractual/logistic problems was ‘softly softly’.” However, it is not evident that treading carefully meant failing to assert that there was a binding contract in place.

The qualification as to uncommunicated conduct

115 The trial judge referred at [208] to the minutes of a meeting of Sagacious’ directors held on 1 May 2002, recording that Mr O’Shanassy “reported as to ongoing discussions with Mayne executives in driving down the actual PPD” but saying nothing of the April letter or that a new contract had been made. His Honour said, “The balance of probabilities permit the drawing of an inference that had Mr O'Shanassy considered the agreement to be a binding agreement for a long term, such an important matter would have been reported at the meeting.” This appears to have been taken into account as an indicator that a binding contract had not been made. Mayne’s written submissions included reliance on the absence of reference to the April letter of a concluded contract in the minutes.

116 However, in oral submissions Mayne made clear that it relied only on communications between the parties. I therefore do not consider use of the absence as an admission. It does, however, have some relevance to Sagacious’ submission that the explanation for failure to assert that the April letter represented the current agreement between the parties was that it was treading carefully. There was no occasion to tread carefully in the privacy of the directors’ meeting.

Conclusion

117 As is not uncommon, there are indicators for and against a binding contract constituted by the April letter. I do not think the answer to the question is found from the April letter alone. In my opinion the circumstances in which the letter was sent and signed, the terms of the letter and the nature of the putative contract are on the whole contrary to the requisite contractual intention. The billing and payment consistent with the April letter is material, but businessmen not uncommonly act upon an anticipated contractual relationship prior to the contract. The subsequent communications otherwise tend quite strongly against a binding contract. I consider that the better view is that there was not to be a binding contract until the conclusion of ongoing negotiations, including taking into account the trial period results, and execution of a formal contract.

118 It is not necessary to consider the challenge to the existence of a fourth class of Masters v Cameron cases (but see the discussions in Peden, Carter and Tolhurst, “When Three Just Isn’t Enough: the Fourth Category of the ‘Subject to Contract’ Cases” (2004) 20 JCL 156 and McLauchlan, “In Defence of the Fourth Category of Preliminary Agreements: Or are there Only Two?” (2005) 21 JCL 386). Nor is it necessary to consider the issues concerning breach of contract.

An addendum

119 It is regrettably necessary to refer to a matter arising after the Court had reserved judgment on 20 February 2008.

120 In accordance with directions given at that time, some further written submissions were received. On 14 May 2008 Mayne filed a notice of motion in which it sought leave to refer the Court to a decision given by Bergin J on 7 May 2008. Mayne had asked for Sagacious’ consent to referring the Court to the decision, but Sagacious had instructed its solicitors not to consent.

121 Bergin J had held that a promise to pay a “reasonable” fee was unenforceable because in its context the word was “vague and illusory”. The decision was on its own facts, and was no more than illustrative that use in a contract of the criterion of reasonableness may vitiate the contract for uncertainty: it may also be acceptable, for example a term that something shall be done within a reasonable time is often implied in law. Nonetheless, it can be seen why Mayne considered that it should be drawn to the Court’s attention.

122 It was not in accordance with the proper conduct of litigation, and contrary to the duty resting upon Sagacious pursuant to s 56 of the Civil Procedure Act 2005, for Sagacious to have declined its consent. The reasons given for the instructions not to consent were without substance. The first reason was that the Practice Note required lists of authorities not less than 24 hours prior to the hearing, an absurdity in the case of a subsequent decision, and the other reasons were no better.

123 After Mayne had filed its notice of motion, Sagacious modified its position. It confirmed that it did not consent and the reasons it had earlier given, but said that it did not oppose a copy of the decision being provided to the Court if Mayne “genuinely considers it necessary and appropriate, provided that this is done without making submissions”. Objection was taken to the letter by which Mayne had proposed to refer the Court to the decision on the ground that it said that the material paragraphs dealt with an issue “relevant to these proceedings”, which was said to be a submission as to the relevance of an issue.

124 Sagacious’ modified position was no less inappropriate. I would have ordered Sagacious to pay Mayne’s costs of the notice of motion, but those costs will be caught up in the general order consequent upon dismissal of the appeal.

Orders

125 I propose that the appeal and the cross-appeal each be dismissed with costs.

126 HODGSON JA: I agree with Giles JA.

127 CAMPBELL JA: I agree with Giles JA.

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AMENDMENTS:


28/08/2008 - Correction: First word "Mayne" replaced with "Sagacious" - Paragraph(s) 108


LAST UPDATED:
28 August 2008