Court Considers whether Non-Fulfilment of a Condition Precedent is Fatal to a Sale Transaction
A recent decision of the NSW Supreme Court considered whether non-fulfilment of a condition precedent contained in a Heads of Agreement was fatal to the sale of a business.
In ASSK Investments Pty Limited v AMA Group Limited  NSWSC 1756, the plaintiff (ASSK) and the defendant (AMA) entered into a binding Heads of Agreement (HOA), which contemplated the sale of a smash repairs business (Business). Pursuant to clause 2, the parties agreed to enter into Business Sale Agreements (BSA) subject to the terms and conditions set out in the HOA.
Clause 7 of the HOA was headed ‘Conditions Precedent’ but did not include any operative language as to the time within which the conditions must be met, nor did it identify what was dependent on fulfilment of the stated conditions. Clause 7(b) required ‘all necessary third-party consents, authorisations and approvals being obtained (including the Purchaser’s Board approval)’.
Upon completing due diligence of the Business, the AMA board did not approve the purchase and AMA sought to resile from the transaction. ASSK commenced proceedings against AMA seeking specific performance of the HOA or alternatively, damages.
ASSK argued that, by the terms of the HOA, the parties agreed to the sale and purchase of the Business and that AMA board approval was not a condition precedent. Alternatively, if AMA board approval was required, then ASSK argued that such approval was given when a director of AMA signed the HOA with the authority of its board of directors. AMA contended that it was not bound by the HOA to buy the Business and that the sale was to be effected by the BSA which was subject to AMA board approval. As approval had not been given, AMA was not obliged to proceed with the acquisition.
In making an order for specific performance of the HOA, Hammerschlag J held:
the HOA was a commercial contract which was to be given a business-like interpretation having regard to the language used by the parties and the commercial circumstances;
the object of the HOA was to secure the sale and purchase of the Business. It was not simply an agreement for the provision of further information coupled with an option to purchase. This was reflected in the terms of the HOA which contained detailed machinery for (among other things) the ascertainment of the purchase price, a mechanism for resolving disputes, and comprehensive warranties;
the execution of a BSA was not a pre-condition for a binding sale, as the purpose of the BSA was to record the transaction;
clause 7(b) had to be viewed in the context of clause 7 and the HOA as a whole. Clause 7 had no unifying concept and included differing conditions, including some which were not in the nature of conditions precedent to a sale transaction. For example, one condition precedent provided that ASSK would transfer its business names and domain names to AMA following execution of the HOA;
as far as clause 7(b) was a condition precedent to anything, it was a condition precedent to the entry into the BSA, not the sale transaction;
to construe clause 7 as requiring AMA board approval as a condition precedent which, if not fulfilled, would bring down the entire transaction had potentially ‘capricious, unreasonable, inconvenient and unjust’ consequences; and
further board approval was not necessary because clause 7(b) contemplated that the parties would obtain ‘necessary’ authorisations and approvals, and the HOA had been executed by a director and company secretary of AMA acting with the authority of its board of directors.
This decision is a helpful reminder that parties must take care when drafting Heads of Agreement. Parties should ensure that conditions precedent contain obligations which are consistent with the transaction contemplated by the parties and that the Agreement sets out how those conditions precedent will operate.
The full decision can be found here.