28/07/2015

A recent Supreme Court decision highlights the danger of making verbal agreements during wider negotiations and demonstrates just how easily statements made (no matter how reluctantly) can be enforced years later.

A group of four siblings each controlled certain shareholdings within their own separate companies under the corporate conglomerate of the ‘ADC/EDC Group’ which was set up by their father. In 2009, negotiations were entered into in relation to a proposed internal buyout, whereby one of the companies (Justin Pty Ltd) sought to buy out the remaining three companies owned by the other siblings.  Some of these siblings also had an interest in a subsidiary company within the group, called Yulema Pty Ltd. Yulema Pty Ltd had an outstanding debt of approximately $1.04million at the time that Justin Pty Ltd sought to buy out the other interests in the group.

One of the siblings, David Roche, who had no interest in Yulema Pty Ltd, allegedly agreed during negotiations that if Yulema repaid the debt, he would in turn reimburse Yulema one-third of the $1.04 million owed. Evidence was given during the proceedings that David Roche ‘reluctantly agreed’ to repay part of the debt to enable the wider agreement of the sale to Justin Pty Ltd. At the time of the negotiations, Mr Roche was almost 80 years old and was not in good health and eventually when this dispute was heard by the Supreme Court in 2015, Mr Roche had passed away and was unable to give evidence.

During the course of negotiations, Mr Reynolds, who was an agent for Yulema Pty Ltd, agreed with his uncle, Mr Roche, that Mr Roche would partly reimburse Yulema if the company were required to repay any part of a $1.04 million debt. Although not expressly provided for in the written buyout agreement (known as ‘the 2009 Deed’), this verbal agreement was referred to as the ‘side agreement’ and was entered into just before an ultimate consensus was reached for the buyout. The side agreement was found to be a ‘classic collateral contract’- the consideration for which was the subsequent execution of the 2009 Deed relating to the main agreement of the buyout of the companies.

In Yulema Pty Ltd & Anor v Simmons & Anor [2015] NSWSC 640, Yulema Pty Ltd argued that they had satisfied their debt in 2011 and accordingly were now entitled to be repaid one third of the debt (plus interest) by Mr Roche. However, the defendants argued that payment of the debt was conditional upon agreement and execution of the buy out agreement – an argument which was quickly rejected on the basis that the 2009 Deed was executed by all the parties.

Not only did the court find that the side agreement did exist and was enforceable, Justice Slattery also found that it did not contain certain ambiguous phrases or implied terms- which were put forward by the defendants- which would have potentially voided the agreement on the basis of uncertainty and unreasonableness had they been included.

Despite Mr Roche not being alive at the time of these proceedings, it was ultimately found that his reluctantly made statements in 2009 amounted to an enforceable agreement and his estate was ordered to pay almost $350,000 as well as Yulema’s costs for the proceedings.

This case serves as a warning to anyone who may find themselves involved in negotiations that verbal agreements can be just enforceable as written agreements and can have very expensive repercussions years down the track.

When conducting negotiations, it is important to clearly ensure that all parties are aware that any verbal statements made do not constitute offers or acceptance or amount to a separate agreement. Negotiators should ensure that both sides have a clear understanding of the parameters of the agreement and of each party’s respective liabilities. For best protection, parties should clearly define the agreement in writing and remember that offers or deals should not be made unless you are willing to commit to them in the future.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.