Issue 48 September 2004
BUSINESS BRIEFLY
In this issue:
CONTRACT - V- AGREEMENT
Discussion about agreements and contracts can sometimes read
like the "chicken and the egg" question. It is true
that you cannot have a contract without an agreement. But it
does not necessarily follow that an agreement will necessarily
be the same as a contract. Why is that?
A contract requires agreement on the terms, consideration (usually
but not always money) and an intention by both parties to be
legally bound to each perform their respective promises. But
an agreement may not be intended to be legally binding on the
parties. This is often the case when parties want to formally
record their 'agreement' even though they may not
have concluded all the details of the entire transaction. Commonly
such agreements may be called "Heads of Agreement" or "Memorandum
of Understanding" or "letter of intent". These
latter forms are often put together to indicate good faith and
ongoing commitment to each other to pursue the negotiations with
a view to entering into an enforceable contract at some later
stage. But an agreement 'to agree' (at some future
point) is not enforceable and the courts have always been reluctant
to step into parties' shoes to try and work out what should
have been included, but for some reason, was not.
I am often asked whether or not an MOU is binding. It is usually
the case that it is not and indeed in many cases parties enter
an MOU or a Heads of Agreement because they have not concluded
all the matters to be agreed that would enable them to be considered
to be bound. But of course the legal system it is not a science
and it is often the case that a lawyer, when faced with such
questions, will answer "well that depends." On what
does it depend?
Some of the critical issues include:
- By applying an objective test, does it appear that
the parties intended to be bound? How did they act? What did
they
say? Of what they said, how much of it (and what) was recorded
formally?
- What were the commercial circumstances
at the time – of
the parties, the subject matter of the contract, (what was
being contracted for)?
- What were the dynamics of the negotiation
process? If a term is later asserted by one party to be essential
to the contract
but it is not in the document, what does that indicate about
what is said that they appear to have agreed as important?
If you do want to put together a 'preliminary agreement',
remember these rules as a guideline but always seek the advice
of a lawyer to be sure.
- When you intend to be bound immediately but you also
want to record the detail of the agreement later. The terms
in the formal agreement will be essentially the same but perhaps
explained in more detail but do not change. Where this happens,
you are likely to be bound by the terms of the first agreement
even though a formal document is not signed.
- When you intend
to be bound but not until a formal contract is signed. In other
words, you have reached agreement and the
formal agreement won't vary any terms, but until the formal agreement
is in fact signed, neither party will be 'bound'.
- When you
do not intend to be bound unless and until each party executes
a formal agreement. This usually (with some significant
legal exceptions) means that either party may withdraw at
any time if they have not signed the formal agreement.
The greatest
danger is in not understanding the effect of using certain
words in legal or quasi-legal documents. While
in ordinary
English use they may have a common understanding and
effect, it is not always the case that they have the same 'ordinary'
meaning when they are used in legal documents. What is
of most significance
is to make a clear and unambiguous statement about whether
or not the agreement (or memorandum or letter) is intended
to bind
the parties. At a practical level this can have other
important
flow-on effects, like for example, whether costs and
commitments and other activities might or should be incurred
until
the formal agreement is signed, and whether someone else
might incur costs
thinking that you intend to proceed.
Often people will avoid such issues as they don't want
to stifle the commercial process or offend the other
party. Commercial pragmatism should always be balanced
against
legal risk and they
are not mutually exclusive. It costs less to be sure
than to fight it out later.
Part 2 next issue: Increasing risks of procurement: how
can they be avoided?
For further information about issues covered in this article,
please contact Celine McInerney on 08 8210 1206 or E-mail cmcinerney@normans.com.au
HOW SHOULD A COMPANY EXECUTE A DOCUMENT?
Correct execution of documents, such as agreements and deeds,
by companies is an important issue that is often overlooked.
It is important because if a company has incorrectly executed
a document that company may not be able to rely on the document
often to the company's detriment.
First, it is imperative to ensure that the correct legal entity
is named in the document. This should be the name of an incorporated
entity such as a company. A business name is not sufficient as
this is not a separate legal entity and does not have the legal
capacity to enter into arrangements such as agreements and deeds.
If a company has a constitution it is important to check if
the constitution regulates the execution of documents by the
company. If a constitution sets out mandatory requirements regarding
execution or approval for execution, these must be complied with.
Companies are no longer required to have common seals. Nor are
companies required to use a common seal to execute a document
at law. As mentioned above, a company's constitution may
require the use of the seal. Many companies still choose to use
their seals even if there is no compulsion to do so.
Generally the preferred method of execution for a company not
using the common seal is for two directors or a director and
the company secretary to sign the document. In the case of a
sole director/secretary company, the sole director/secretary
of the company should sign the document. To confirm who are the
directors and secretary of a company, details of company officeholders
may be obtained from the Australian Securities and Investments
Commission for a small fee.
Where a company uses its common seal, the seal should be affixed
to the document and such affixing witnessed by two directors
or a director and the company secretary who also sign that they
witnessed the affixing of the seal. In the case of a sole director/secretary,
the sole director/secretary follows this procedure.
The reason why these are the preferred methods of execution
is that the Corporations Act 2001 provides that if a company
executes a document in this way, a person may assume that the
document has been duly executed by the company. The Corporations
Act also states that in legal proceedings the company is not
able to assert that this assumption is incorrect.
There are other ways that a company can execute documents. A
company may appoint someone, such as an individual director or
a solicitor, as its attorney or agent to execute a document under
the terms of a power of attorney or agency agreement. If execution
is purported to occur in one of these ways, the other party should
require evidence of the validity of the appointment of the attorney
or agent, such as a correctly executed power of attorney or agency
agreement.
An individual director may execute a document on behalf of a
company. If correct execution is ever in issue, there must be
evidence to show that the individual director had authority to
execute the document on behalf of the company. If an individual
director (who is not a sole director) executes a document, the
other party should seek verification of the individual director's
authority to execute the document on behalf of the company.
A recent case examined the execution of a document by an individual
director (not being a sole director) of two companies. As there
was no evidence before the court that that director had any express
or implied authority to execute the document on behalf of the
companies, the court treated the document as not having been
signed by the director at all. Luckily for those companies, the
document in question was a charge given by a third company (that
had executed the charge correctly) in their favour so was valid
and enforceable without correct execution by the two companies.
If a different type of document was the subject of this case,
such as a distribution agreement, the impact of failed execution
could have been significant.
For further information about issues covered in this article,
please contact Lucy Evans on 08 8210 1274 or E-mail levans@normans.com.au.
TRADE MARK VICTORY FOR AUSTEREO
On 28 July 2004 the Federal Court upheld an appeal by Austereo
Pty Ltd, the operator of various radio stations including MMM
in Adelaide, against DMG Radio (operator of the NOVA radio stations)
concerning the registrability of the slogan "Sounds Different" as
a trade mark in respect of radio broadcasting services. Austereo
was represented in the appeal by Norman Waterhouse.
It was held that, notwithstanding the extensive use of the "Sounds
Different" slogan by DMG in connection with its NOVA radio
stations, the slogan is not capable of distinguishing DMG's
radio services.
The Court held that, whilst the words "Sounds Different" have
some inherent adaptation to distinguish, "the slogan does
not stray that far from linguistic usage that could naturally
and reasonably be expected of broadcasters – usages that
are not lightly lost to the trade mark system".
Given that there had been no use of the slogan before the priority
date (the date of application for registration), the Court considered
whether, as a result of the use or intended use of the slogan,
it does (or will) distinguish the services as being those of
DMG. The evidence of use demonstrated that the "Sounds
Different" slogan was invariably used in combination or
in close relationship with, one or more of the following Nova
trade marks:
- the word NOVA;
- the word NOVA followed by the radio frequency (eg NOVA 969);
and
- a cartoon like character wearing headphones ("the NOVA
boy").
In support of its case for registrability, DMG tendered survey
evidence conducted in Perth, Sydney and Melbourne three weeks
prior to the trial. The survey indicated a 28% association rate
between the words NOVA and "Sounds Different".
The court concluded that the most reasonable and probable deduction
from the survey evidence was that the mark acquired any such
distinctiveness from its use with the NOVA marks - that use educated
the public as to the association between the sounds different
mark and the NOVA businesses. For this reason, it was held that
DMG's application should clearly not be registered, and
the decision at first instance by the Trade Marks Office to allow
registration was overturned.
This decision is a welcome reminder to businesses to think twice
before they adopt descriptive phrases as trade marks and to consider
carefully how they use trade marks in the marketplace, particularly
when using a variety of marks in combination with one another.
For further information about issues covered
in this article, please contact Julie Catt on 08 8210 1277 or
E mail jcatt@normans.com.au
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