Keswick Developments Pty Ltd v Keswick Island Pty Ltd
[2009] QCA 340
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- Notable Unreported Decision
- Appeal Determined (QCA)
- Keswick Developments Pty Ltd v Keswick Island Pty Ltd[2009] QCA 340
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Keswick Developments Pty Ltd v Keswick Island Pty Ltd[2009] QCA 340
Keswick Developments Pty Ltd v Keswick Island Pty Ltd[2009] QCA 340
SUPREME COURT OF QUEENSLAND
PARTIES: | |
FILE NO/S: | |
Court of Appeal | |
PROCEEDING: | General Civil Appeal |
ORIGINATING COURT: | |
DELIVERED ON: | 3 November 2009 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 19 October 2009 |
JUDGES: | Chief Justice, Holmes JA and A Lyons J |
ORDERS: |
on the completion of each contract of sale of shares in the third respondent (the Share Sale Contracts) under Put and Call Options over those shares dated 22 November 2007 (formed subsequently on ratification by the appellant after incorporation) the appellant may retain the value of its loss and damage under the Land Sale Contract by way of offset against the amounts payable to the second respondent under the Share Sale Contracts, notwithstanding that that value may not have been agreed, or determined by a court of competent jurisdiction, before the date for payment of the price for the shares.
|
CATCHWORDS: | CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – Construction of purchase agreement – provision for retention at completion of amounts in respect of loss and damage suffered by purchaser because of vendor’s prior breach of warranty – whether agreement to be construed so as to require, absent agreement, the adjudication, prior to completion, of the amount to be retained Eagle Star Nominees Ltd v Merril [1982] VR 557, cited Edson v Sun Kuong Restaurant Pty Ltd [1993] ANZ Conv R 228, cited Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5, cited Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, [2004] HCA 35, considered Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, cited Re Mujaj [1998] 2 Qd R 152, cited Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596, [1979] HCA 51, cited The King v Poggioli (1923) 32 CLR 222, [1923] HCA 11, cited |
COUNSEL: | F L Harrison QC, with C Wilson, for the appellant M M Stewart SC, with KC Kelso, for the respondents |
SOLICITORS: | Kelly Legal for the appellant Michael Drummond Lawyers for the respondents |
[1] CHIEF JUSTICE:
The issue in the appeal
The issue to be determined in this appeal is of short compass.
[2] A purchaser (the appellant) is, at completion of the purchase, entitled “to retain the value of…loss and damage” suffered because of the vendor’s precedent breach of warranty. The issue is whether, absent agreement as to amount, the amount must have been the subject of adjudication prior to the purchaser’s retaining it. The learned primary Judge considered the contract was referring to “an amount which has been duly assessed” (reasons for judgment para 41); “such amount as has been adjudicated or agreed as the loss or damage which (the purchaser) has suffered” (para 38).
[3] But the Judge held that because a declaration “with that qualification” had not been sought by the appellant, that part of the relief claimed by the appellant in its originating application filed on 1 June 2009 should be dismissed. His Honour granted other relief on that application, but it is only in respect of the refusal of that declaratory relief that the appeal is brought.
The parties’ respective contentions
[4] The contrary position, urged for the appellant/purchaser, was that the contract did not envisage a third party assessment, prior to completion, of any amount to be retained or withheld (absent agreement on that amount): rather, it fell to the purchaser, at completion, to make tender in the ordinary way on the basis of its own assessment of the amount due. If it tendered too little, the vendor’s contractual remedies would cut in. The appellant advanced an alternate position, which was that if the amount to be allowed as “loss or damage” had to be assessed externally, as it were, then the time for performance of the obligation to complete had to be deferred pending the carrying out of that assessment.
[5] The learned Judge rightly emphasized the need to focus on the terms of the contracts. He pointed out there was “no formula or scale” by which any amount to be withheld could be calculated, while noting there was, within the contractual framework, “a reasonable time…allowed for the Purchaser to establish the amount of any loss” (the settlements of the three put and call options were staggered over three years – mid 2009, mid 2010, mid 2011). He went on to conclude that the purchaser was entitled to retain only such amount as had been “adjudicated or agreed”.
[6] I note that His Honour did not specify what sort of adjudication he considered the parties intended, bearing in mind that contracting business entities would not necessarily take the same view of that concept as would a lawyer: curial, arbitral or by an expert – maybe any could apply. Also, he did not address another arguable problem were the adjudication to be carried out by a court. Presumably the “loss and damage” flowing from the vendor’s breach of warranty (which was the granting of a sub-lease to a company called Kevroy Pty Ltd) was any consequent diminution in the value of the lease being purchased, to be assessed as at completion. The Judge presumably contemplated an adjudication of the amount of that loss in advance of completion, which would raise the prospect of a court’s being asked to grant declaratory relief in arguably hypothetical circumstances. The submissions before His Honour apparently did not deal with these particular matters.
[7] What I discern as the appellant’s principal submissions, to the contrary of the position adopted by the Judge, are these:
1. first, that properly construed, the contract did not contemplate such a process of independent assessment in anticipation of completion; and
2. second, as per the notice of appeal, that so far as His Honour’s approach involved implication, that was unnecessary in order to give the contract business efficacy, and it was unreasonable, and not obviously necessary.
[8] In their outline of argument, Counsel for the appellant rely particularly on the parties’ not having specified the procedure which His Honour contemplated, by contrast, for example, with cl 16 of the contract annexed to the put and call options. Counsel relied analogously on the circumstances ordinarily confronting a purchaser, at completion, who asserts a right to abatement of the purchase price (cf. The King v Poggioli (1923) 32 CLR 222, 246-9; Eagle Star Nominees Ltd v Merril [1982] VR 557, 559-560).
[9] His Honour’s approach was obviously driven by considerations of business or commercial convenience. Come the obligation to complete, both parties would benefit were the extent of any reduction in the amount payable already definitively ascertained. Securing convenience is not however a definitive driver in the construction of contracts.
[10] Also as to convenience, the related practical questions already flagged would still arise: how should the amount of the reduction be determined; and determined in a way binding both parties; allowing also for the need for a determination in anticipation of the time for completion, so as not to occasion delay.
[11] Counsel for the respondents emphasized there being “three separate completion dates pursuant to the option deeds, all one year apart, that are available for any abatement should such loss have occurred and have been ascertained”, allowing sufficient time to carry out such an adjudication. They referred to Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, as to the relevance of “the genesis of the transaction, the background, the content, the market in which the parties are operating” (Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995-6).
[12] Counsel also submitted that the court “is not entitled to disregard clear words under the guise of interpreting the contract to re-write it” (cf. Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5, para 38). That is obviously so. But the respondents’ approach, which His Honour adopted, involves adding words which are not expressed. That can only be justified if, objectively assessed, the parties intended the contract be read that way, or if the inclusion of those words should be justified by a process of necessary implication.
[13] The parties were, and are, at one, as to the usefulness of the declarations sought from His Honour, which he declined to make because the position he considered appropriate did not accord with the position being promoted on behalf of the appellant.
The primary Judge’s reasons
[14] The learned Judge’s reasoning emerges from the following substantial extract from his reasons for judgment:
“[29] Given that the Vendor breached this warranty by the agreement with Kevroy, and if the Purchaser thereby suffered a loss, what if anything would it be entitled to retain from the purchase price for the shares in Connie Bay? According to the first of those deeds, it is ‘such loss or damage’. According to the second of them it is ‘the value of such loss or damage’.
[30]Mr Kelso for the respondents argues that only a crystallised loss, meaning a loss which had been quantified by a judgment or by agreement, could be retained… There is yet no evidence that any particular loss has been suffered from this breach of warranty…
[31]On behalf of the Purchaser, there are two arguments… The first is that it should be entitled to exercise the call option but not pay the purchase price or any part of it until the amount of its loss has been quantified by adjudication or agreement, when it would then pay the price for the shares less that loss. This argument refers to what is said to be the analogous position under some contracts for the sale of land where there is an error or misdescription in the particulars of sale. Alternatively, it is argued that the Purchaser has a right to set-off what is described as "the maximum potential liability" of the Vendor for this breach of warranty, on condition that the Purchaser pays to Holdings the appropriate sum if the actual liability to Holdings, once the Purchaser's loss has been quantified in this litigation, proves to be less than this ‘maximum’ which is withheld.
[32]Neither of those submissions is particularly directed to the terms of the relevant deeds.
…
[33]… what must be decided here is the effect of the deeds executed by Holdings and what it has agreed may be retained. Neither special condition 2 of the contract of sale nor the deeds makes provision for any machinery for the quantification of the loss, by an arbitrator or otherwise. That loss, of course, is something which can be objectively evaluated. But there is no formula or scale by which a single answer is able to be calculated. The Purchaser's claim is for unliquidated damages.
…
…there is no…express provision for the assessment of the Purchaser's loss. Holdings has agreed that something may be retained but it has not agreed to participate in a process by which the loss is to be quantified. And Holdings has not agreed to pay an amount to the Purchaser on completion: rather. it has agreed that something might be retained. Its obligation would be to transfer the relevant shares, and it would be able to perform the contract without bringing about an adjudication of the quantum of the Purchaser's claim. Therefore the argument that the Purchaser may delay the completion of the resultant contract for the sale of shares whilst it pursues its action for damages has no support in these authorities.
…
[36]Neither of the alternative arguments for the Purchaser should be accepted. There is then an alternative construction, which is that the Purchaser may retain that amount which in fact is the amount of its loss. But this would have similar practical difficulties in the operation of the contract for the sale of the shares, because inevitably the parties would have different views as to what is that amount. Again, Holdings must be in a position to be able to decide whether the amount which is tendered on completion is such as to oblige it to transfer the shares. Under this construction, somehow Holdings would have to make an assessment that what was withheld was no more than the amount at which the Purchaser's loss would be assessed in these proceedings. The practical outcome would likely be either a breach by Holdings' declining to transfer the shares because it considered that too much was being withheld, or Holdings having to transfer the shares for too low a payment. Again, objectively this is unlikely to have been intended.
[37]That predicament would be avoided if the respondents' construction is accepted. The parties would know precisely how much could be withheld. The vendor of the shares, Holdings, would not be forced to wait for almost $3,000,000 whilst there was an adjudication of what might turn out to be a relatively small claim for damages. From the Purchaser's perspective, it would not have to tender payment of an excessive amount and nor would it be at risk that if it did not tender a sufficient sum, it would be in breach. In short, the adoption of the respondents' argument would provide the certainty which, on an objective view, the parties are likely to have intended. And this accords with the words which have been used, although the language might have been clearer. By agreeing that what may be retained is the ‘value’ of the loss, the parties have agreed that what may be retained is the loss and damage as evaluated. That is not an unlikely intention to attribute to them having regard to the probable timing of events. The contract for the sale of the leasehold was to be settled, and did settle, in early 2008. The call options were exercisable no earlier than 1 July 2008. The first of the put options was exercisable no earlier than 1 July 2009. In approximate terms, the Purchaser had nearly a year and a half between completing the contract for the purchase of the head lease and the expiry of the earliest call option periods or the first date when it could be compelled to purchase that parcel of shares by the exercise of a put option. The dates under the second and third of the Connie Bay contracts were respectively one year and two years later still. A reasonable time was thereby allowed for the Purchaser to establish the amount of any loss.
[38]In my conclusion the respondents’ argument as to the right of retention should be upheld. The Purchaser is entitled to retain only such amount as has been adjudicated or agreed as the loss or damage which it has suffered for the breach of warranty resulting from the Kevroy dealing.”
The facts
[15] It is not necessary to traverse in complete detail the rather complicated background circumstances giving rise to the present controversy. They may be gathered sufficiently, indeed comprehensively, from the well-informed primary judgment.
[16] It suffices, for the present, to offer the following brief summary of the factual background, taken substantially from the appellant’s Counsel’s outline of argument.
[17] The appellant entered into the following contracts:
1. a contract (the “Land Sale Contract”), formed on 14 January 2008 upon ratification by the purchaser company after its incorporation, to purchase from the first respondent (the “Vendor”) its interest as lessee and sub-lessee under a number of Crown Leases of land at Keswick Island, which is off the coast at Mackay;
2. three put and call options, exercisable at different times, each for the sale by the second respondent (Holdings), to the purchaser, by a Share Sale Contract Annexure A to each option, of a third of the shares in the third respondent (CBD);
3. a deed of covenant (the “Retention Deed”) dated 22 April 2008 between Holdings, the vendor and the purchaser; and
4. a deed (the “Offset Deed”) dated 2009, and made after 14 January 2008 but before 4 March 2009, between Holdings, the vendor and the purchaser.
CBD holds a number of sub-leases of land on Keswick Island. The vendor and CBD are wholly owned subsidiaries of Holdings.
[18] Each of the contracts mentioned in paragraphs 1, 3 and 4 above contains provisions (the Offset Provisions) entitling the purchaser to retain part of the purchase price payable to Holdings for the shares in CBD in certain circumstances.
[19] The Land Sale Contract contained this provision (special condition 2):
“The parties agree that the Purchaser will not be entitled to retain any money from the Purchase Price in order to ensure compliance with the abovementioned warranties but that, in the event that the Purchaser suffers loss and damage as a consequence of the Vendor's non-compliance with such warranties the Purchaser may, in the event that the Purchaser suffers loss and damage as a consequence thereof, retain such loss and damage from moneys due to be paid by the Purchaser to Keswick Island Holdings Pty Ltd ACN 101 442 175 under the following documents executed on even date herewith:
(a) The Put and Call Option between the Purchaser and Keswick Island Holdings Pty Ltd ACN 101 442 175 in respect of thirty-three (33) shares in Connie Bay Development Pty Ltd ACN 101 466 791;
(b) The Put and Call Option between the Purchaser and Keswick Island Holdings Pty Ltd ACN 101 442 175 in respect of thirty-three (33) shares in Connie Bay Development Pty Ltd ACN 101 466 791;
(c) The Put and Call Option between the Purchaser and Keswick Island Holdings Pty Ltd ACN 101 442 175 in respect of thirty-four (34) shares in Connie Bay Development Pty Ltd ACN 101 466 791;
(d) The Put and Call Option between the Purchaser and Keswick Island Holdings Pty Ltd ACN 101 442 175 in respect of one hundred (100) Ordinary shares in Queensland Marina Developments Pty Ltd ACN 101 466 791.”
[20] Slightly different but not materially so, are the terms of 3.2 of the Retention Deed:
“3.2 In the event that (the Purchaser) suffers any loss and damage as a consequence of the (Vendor’s) non-compliance with the Warranties contained in special condition 2 of the (Land Sale) contract then, in addition to or as an alternative to any other remedies available to (the Purchaser), (the Purchaser) is entitled to retain the value of such loss and damage from the monies due to be paid by (the Purchaser) to…Holdings under the (Share Sale) contracts to be entered into pursuant to the…CBD Put and Call Options.”
[21] The learned Judge held that the vendor had breached special condition 2 of the Land Sale Contract, by granting a sub-lease to the company Kevroy Pty Ltd. There is no challenge to that finding.
The declaration sought and refused
[22] As mentioned, the appeal is confined to the primary Judge’s refusal to grant the following declaration sought by the appellant, as per the amended originating application filed 1 June 2009:
“1. an order declaring that upon the true construction of
(a)a contract of sale (the "Commercial Contract") formed 14 January 2008 on ratification by the applicant on its incorporation of an agreement in writing dated 22 November [2007] between the applicant as purchaser and the first respondent as vendor as amended by correspondence between the solicitors for those parties, a Deed of Covenant dated 22 April 2008 between the applicant and the first and second respondents (the "Commercial Contract Deed of Covenant"), and a deed dated 2009 (the "Offset Deed") between the applicant and the first and second respondents; and
(b)the Commercial Contract Deed of Covenant; and
(c) the Offset Deed;
in the events that have happened:
(d) the applicant is entitled to set-off any compensation as defined in the Schedule below against, or otherwise deduct or retain such compensation from the purchase price or other sums (“purchase price”) payable by the applicant to the second respondent at or before completion of any agreement in writing (“Contract for Sale of Shares”) formed on the applicant’s or the second respondent’s exercise of any one or more of the options granted to the second respondent by the applicant under clause 3(a) and to the applicant by the second respondent under cl. 4(a) of any one or more agreements in writing (‘Put and Call Options’) dated 22 November 2007, three of which were made between the applicant and the second and third respondents, and were amended by a Deed of Covenant between those parties and the first respondent dated 22 April 2008, and the fourth of which was made between the applicant and the second, fourth and fifth respondents, and amended by another Deed of Covenant between the applicant and the first, second and fourth respondents also dated 22 April 2008;
(e) the applicant is not obliged in equity or at law to pay to the second respondent any part of the purchase price until after the amount of such compensation, or in the alternative, the amount of such compensation as defined in the Schedule (other than compensation for breaches relating to the contracts referred to in schedules A and B to the third amended statement of claim in action No S12924/08), has been determined by adjudication or agreement;
(f) the second respondent is not entitled to compel the applicant to complete the Contract for Sale of Shares, or to terminate the said agreement on the grounds of non-payment of the purchase price until after the amount of such compensation (other than compensation for breaches relating to the contracts referred to in schedules A and B to the third amended statement of claim in action No S12924/08) has been so determined.
…
… ‘compensation’ means compensation (including damages for breach of contract and equitable compensation) that
(a)the first respondent is liable to pay the applicant by reason of any breach by the first respondent of the warranties contained in Standard Conditions 4(b), 17.3(a), (b) and (c), and 32.1(c) and in the first two lines of Special Condition 2 of the Commercial Contract, and compensation that the second respondent is liable to pay the applicant as a consequence of there having been a dealing affecting the first respondent after 22 November 2007 and before completion of the contracts annexed to the Put and Call Options which dealing was not consented to by the applicant;’
Analysis
[23] In my view, the natural construction of these contractual provisions did not contemplate the invocation of an unexpressed external mechanism for the determination of the amount of any allowance to the purchaser in respect of the vendor’s breach of warranty. It was a case analogous to a purchaser claiming an abatement of the purchase price: in such a case it would fall to the purchaser to make the relevant estimate and tender on that basis. Were the vendor to reject the tender, then its adequacy would fall to be assessed by the court in the course of any consequent proceedings for a decree for specific performance, for example, or for an award of damages. See King v Poggioli, supra, p 250; Eagle Star Nominees Ltd v Merril, supra, pp 560-1; Re Mujaj [1998] 2 Qd R 152, 157-159; Edson v Sun Kuong Restaurant Pty Ltd [1993] ANZ Conv R 228, 232.
[24] Counsel for the respondents rhetorically asked “how is one to determine how much to withhold, or how much to accept, without its having been determined or agreed”. The obvious answer is that the parties make their own estimates or assessments, informed as necessary by the expert opinions of valuers. I do not consider that the use in cl 3.2 of the Retention Deed of the term “the value” of the loss and damage suggested the parties contemplated an external valuation by a third party, binding the parties, made in advance of completion.
[25] In my view, the absence from the contractual provisions of a specification for such external assessment by way of adjudication tells strongly against the parties’ having intended that course, and I do not accept the submission of Counsel for the respondent that the provisions were consequently left in ambiguous condition.
[26] As submitted for the appellant, clause 16 of the contract annexed to the put and call options is also significant, in providing for adjustments in relation to the liabilities of CBD, accommodating any uncertainty in that regard by providing:
(a) that the purchase price should be reduced, on account of “adjustable items”, by a sum agreed by the parties, or failing agreement, as determined by an independent accountant;
(b) that if the amount of the adjustment were not agreed or determined by the date for completion, then an estimate of the adjustment would be deducted from the price and “retained” in trust by the vendor’s solicitor, in a sum agreed by the parties, or if not agreed, determined by an independent accountant; and
(c) that completion of the sale be delayed until after the amount of the adjustment has been agreed by the parties or determined by the independent accountant.
[27] I accept the associated submission for the appellant that “if the parties had intended the limitation imported by His Honour, they could easily have said so, and if they had wanted to avoid the supposed uncommerciality of the words they used, they could have inserted the provision for the interim determination of the amount to be retained, as was done in clause 16…here the parties notwithstanding that they had adopted such a procedure requiring a third party to determine an amount before it could be retained in one case, chose not to impose such a requirement in the present case…instead, they left it to the parties to deal with the particular issue that arose, as often happens at settlement of contracts, relying (in the case of the vendor) on the sanction of the vendor’s right to terminate the contract for breach if the purchaser were unreasonable in the amount that it sought to retain – the inference may be drawn that the purchaser would not wish to be left in a position where it had acquired part only of that land.”
[28] That relates importantly to what is the natural construction of the subject contracts. Compare Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd, supra, to which we were referred by Counsel. Counsel for the appellant referred especially to paras 23, 26-31.
[29] As to implication, where the constraints are well established (Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596, 605-6), embellishing the contracts as envisaged at first instance was not necessary to render them commercially efficacious, because of the circumstances just covered. I would additionally observe again that the “default” mechanism envisaged by His Honour, a process of adjudication, was itself left vague: in particular, by whom, how, and in what proceedings.
[30] In my respectful view, the learned Judge introduced a refinement upon which the parties did not expressly agree, and which was not justified on an orthodox approach to the implication of terms into contracts.
Orders
[31] I would order:
1. that the appeal be allowed;
2. that order 2 made in BS 3078/09 on 6 July 2009, namely that “the amended originating application filed 1 June 2009 is otherwise dismissed”, be set aside; and
3. that there be a declaration that under
(a)clause 3.2 of the Commercial Contract Deed of Covenant dated 22 April 2008;
(b)the recitals and clause 1 of the Offset Deed dated 2009; and
(c)special condition 2 of the contract of sale of certain interests in land formed 14 January 2008 but dated 22 November (no year stated) between the appellant as purchaser and the first respondent as vendor (the Land Sale Contract)
on the completion of each contract of sale of shares in the third respondent (the Share Sale Contracts) under Put and Call Options over those shares dated 22 November 2007 (formed subsequently on ratification by the appellant after incorporation) the appellant may retain the value of its loss and damage under the Land Sale Contract by way of offset against the amounts payable to the second respondent under the Share Sale Contracts, notwithstanding that that value may not have been agreed, or determined by a court of competent jurisdiction, before the date for payment of the price for the shares.
[32] As to costs, the issue ventilated on appeal was but one of a number determined by the primary Judge. The appropriate course is to let the costs order made by His Honour stand, and to order, in addition, that the respondents pay the appellant’s costs of and incidental to the appeal, to be assessed, as necessary, on the standard basis. But because submissions were not made as to costs, the parties should have liberty to apply for a different costs order, within seven days and in writing.
[33] HOLMES JA: I have had the advantage of reading the judgment of the Chief Justice and agree with the orders he proposes. I would add this comment. Counsel for the respondents argued that the learned primary judge’s approach did no more than give content to the words “such loss or damage” and “the value of such loss or damage”; it involved no process of implication. He pointed to this part of the learned primary judge’s reasoning:
“By agreeing that what may be retained is the ‘value’ of the loss, the parties have agreed that what may be retained is the loss and damage as evaluated”[1]
as exemplifying that process of construing the existing words. But by going further and saying that, if not agreed, the evaluation must be carried out by external means and in particular by adjudication, his Honour was, in my view, implying words into the respective clauses. That implication was not necessary to give commercial reality to the contract. In this regard, I respectfully agree with what the Chief Justice has said under the heading “Analysis” as to the reasons for concluding that the requirement for adjudication or agreement should not be read into the contract.
[34] A LYONS J: I agree with the reasons of the Chief Justice and with the orders proposed.
Footnotes
[1] Keswick Developments P/L v Kevroy P/L & Ors; Keswick Developments P/L v Keswick Island P/L & Ors [2009] QSC 176 at [37].