Left hanging out on the line: the importance of the commercial context in contracts

By Mark Petrucco and Anna Cao 

Hills Health Solutions Pty Ltd (Hills), originally the Australian manufacturing company that invented the iconic Hills Hoist clothesline but later pivoted to provide technologies, is in external administration following the Court of Appeal judgment in Stellar Vision Operations Pty Ltd v Hills Health Solutions Pty Ltd [2023] NSWCA 102, The NSW Court of Appeal overturned the primary judgment of the Supreme Court of NSW and  ordered Hills to pay a $5.48 million to Stellar Vision Operations Pty Ltd (Stellar). In reaching its judgment, the Court of Appeal challenged the characterisations and legal conclusions drawn from factual findings in the primary judgment. The decision is significant as it highlights the importance of considering the commercial context and objective intention of contracts.

The decision and resulting external administration of Hills is a timely reminder of the significant impact that unresolved disputes can have on a company’s financial position, particularly in the context of unpredictable outcomes in court proceedings.

Context and background

Stellar and Questek

In early 2013, Stellar and a company called Questek Australia Pty Ltd (Questek) had discussions regarding the possibility of entering into a joint venture for the supply of Patient Entertainment Systems to hospitals. While those discussions progressed, on 24 October 2013 Questek submitted a tender to supply Patient Entertainment Systems to the Western Sydney Local Health District (WS Health District Bid). Although only Questek was formally listed as a nominee party to that tender, the WS Health District Bid contained material with the letterheads of both Questek and Stellar and material that made it clear that it was a joint bid. In February 2014, Questek was notified that it had won the WS Health District Bid.

Hills hoisted in

From late 2013, Hills and Questek participated in discussions in respect of Hills’s proposed purchase of all Questek’s right, title and interest in its business. On 24 March 2014, following the successful WS Health District Bid, Hills and Questek executed a letter of undertaking (Undertaking) by which Questek and Hills agreed and acknowledged, among other things, to honour the intent of previous discussions between Questek and Stellar in relation to the WS Health District Bid.

On 3 April 2014, under the business purchase agreement, Hills acquired all of Questek’s business.  By December 2014, Hills had entered into a deed of agreement with the Western Sydney Local Health District and informed Stellar that it would not be proceeding further with Stellar as its software supplier for the project.

The case in dispute

The key issues before the Court of Appeal were:

1. whether the Undertaking between Hills and Stellar with respect to the WS Health District Bid was a binding contract which Hills breached by not proceeding with Stellar; and
2. whether Hills and Stellar were in a fiduciary relationship with respect to the WS Health District Bid and if so, whether Hills breached its fiduciary duty by excluding Stellar from the benefit of the contract after securing it.

The primary judge’s decision^[1]

Chief Justice in Eq Ward, at first instance, dismissed Stellar’s claims and held that:

1. the Undertaking with respect to the WS Health District Bid was not a binding contract because it remained to be agreed how the parties would share in the profits. Without entry into a formal joint venture agreement, the parties did not intend to be bound; and
2. the parties were not in a fiduciary relationship because they did not progress beyond mere negotiation and the necessary mutual confidence in their relationship, and there was no undertaking or agreement by Hills to act for, on behalf of or in the interests of Stellar.

The Court of Appeal’s decision^[2]

Stellar appealed to the Court of Appeal which found that the Undertaking did constitute a binding contract which Hills had breached, and that Hills and Stellar did have a fiduciary relationship which Hills had breached.

Whether there was a binding contract

In finding that the Undertaking constituted a binding contract, the Court of Appeal considered whether the parties intended to create legal relations in the context of the categories identified in Masters v Cameron (1954) 91 CLR 353 at 360, in which the High Court identified three categories of cases:

1. where the parties reached agreement upon all the terms of their bargain and intended immediately to be bound, but proposed to have the terms restated in a form which would be fuller or more precise, but not different in effect;
2. where the parties reached agreement upon all the terms of their bargain and intended no departure from or addition to their agreed terms, but have made performance of one or more of the terms conditional upon the execution of a formal contract; and
3. where they did not intend to make a concluded bargain at all unless or until they execute a formal contract.

The Court of Appeal found that the Undertaking, viewed in the broader commercial context of the Undertaking as a whole, and the parties’ aims and expectations as revealed by the Undertaking, constituted an express and binding agreement that Hills and Stellar would honour the intent of previous discussions.

Whether there was fiduciary relationship

Further, the Court of Appeal considered the following features of the parties’ relationship (among others) as features which established mutual trust and confidence of a fiduciary nature:

1. the WS Health District Bid contained by Questek and Stellar’s logos and referred to combined resourcing offering a ‘true partnership’;
2. the parties acknowledged through the Undertaking that the WS Health District Bid was a joint tender;
3. Stellar had contributed to the WS Health District Bid by assisting with technical specifications, and had continued to work on implementation following the success of the WS Health District Bid; and
4. the Undertaking was akin to a partnership.

Key takeaway

The key takeaways from this Court of Appeal decision are that:

• an intention to create binding legal relations is determined objectively and factually from the perspective of a reasonable person in the position of the parties;
• in ascertaining intention, it is important to consider the commercial context in which the parties were communicating, and the subject matter of the supposed contract; and
• in determining whether a relationship is fiduciary in nature, it is necessary to consider the nature of the dealings between the parties and whether there was an underlying relationship of mutual trust and confidence.

Immediately following Hills’ $5.48 million loss in the Court of Appeal, its parent company, Hills Limited was placed into administration, with Stellar, the largest creditor, owed $8.4 million out of a total of $10.9 million in claims by unsecured creditors. In August 2023, at the second meeting of creditors, the creditors voted to save Hills Limited from being placed into liquidation, after voting to accept a proposal by Starplex International, a related company of Stellar, that Hills Limited execute a deed of company arrangement with estimated returns to creditors of 68.39 cents to the dollar.^[3]

The blow out of this decision and how it has impacted the iconic Hills Limited is a reminder of the financial burden of damages in unresolved commercial disputes, even for well-established companies such as Hills Limited. It is undeniable that Hills’ loss in the Court of Appeal has had a significant impact on its financial condition in circumstances where its debt to Stellar made up more than 75% of its total debts to unsecured creditors in administration.

This article was written with the assistance of Garima Sharma, Law Graduate.

[1] Stellar Vision Operations Pty Ltd v Hills Health Solutions Pty Ltd [2022] NSWSC 144.
[2] Stellar Vision Operations Pty Ltd v Hills Health Solutions Pty Ltd [2023] NSWCA 102.
[3] Nichols, N. (8 August 2023) ‘Creditors vote to save Hills Limited after accepting 68c in the dollar‘, Business News Australia