Hillcrown Pty Ltd v O'Brien[2011] QCA 129

SUPREME COURT OF QUEENSLAND

1. FRASER JA:  The respondents made allegations to the following effect in their amended statement of claim.  By a written contract made and completed on 30 June 2000 the respondents agreed to sell to the first appellant two separate areas of land, one of which (“Area B”) held local authority approval “generally” for the construction of a golf course (meaning, according to the respondents’ reply, that the land was zoned so as to permit such construction).  The respondents retained ownership of an area of land (“Area C”) immediately adjacent to Area B.  By a deed between the appellants and the respondents made on the same day the first appellant undertook to complete the construction of a golf course on Area B and the second appellant guaranteed the first appellant’s performance of that obligation.  The first appellant failed to construct the golf course by the time specified in the deed or at all.  The respondents’ proposed residential subdivision of Area C was less profitable, or Area C was less valuable, than would have been the case if the first appellant had constructed the golf course on Area B. 

2. The respondents alleged in paragraph 6 of their amended statement of claim that the first appellant breached the deed by failing to construct the golf course. The relevant obligation was in clause 2 of the deed, which provided:

“2.The [first appellant] will complete the construction of the golf course on or before the 30 June 2002, provided that if the [first appellant] has entered into a construction contract with a bona fide third party on constructions [sic] terms in time to ensure completion of the golf course in terms of this clause by the 30 June 2002 but construction is delayed for reasons beyond the control of the [first appellant] and through no fault on the part of the [first appellant] then the time for completion of the golf course shall be extended by a period equal to the aggregate periods of delay but not exceeding six (6) calendar months.”

3. One ground of the appellants’ amended defence was that the deed was discharged by frustration. In their amended defence the appellants pleaded:

“5 The [appellants] deny the facts alleged in paragraph 6 of the statement of claim because:

(a)on the proper construction of the deed, the time for performance of the first defendant’s obligations pursuant to clause 2 of the deed was of the essence;

(b)at all material times:

(i) it was necessary for a development approval from the Gold Coast City Council (‘GCCC’) to be obtained for the development on the golf course land;

(ii) the parties were aware that such approval would be required:

Particulars

(A) the golf course land was located within the jurisdiction of the GCCC;

(B) the town plan administered by the GCCC required development approvals to be obtained for the development of the golf course on the golf course land;

(C) the knowledge, for the [first appellant] is that of Mr Ingles. The knowledge for the [respondents] is of each of the [respondents];

(D) the fact of knowledge for the [respondents] is to be inferred from their having owned the golf course land prior to the deed and the notorious nature of the need to obtain development approvals from the local authority for the conduct of development on land;

(c) the [first appellant] did not receive the GCCC’s approval to commence construction of the golf course prior to 30 June 2002 or 31 December 2002;

(d) the GCCC’s failure to approve construction of the golf course by 30 June 2002 or 31 December 2002 made the [first appellant’s] obligation to construct the golf course by 31 December 2002 (or alternatively, by 30 June 2002) pursuant to the deed incapable of performance;

(e) by reason of the matters alleged in subparagraphs (a) - (d) above, the deed was frustrated and the [appellants] were discharged from further performance of that agreement.”

4. The primary judge struck out paragraph 5 on the ground that it did not disclose a reasonable ground of defence, holding that the appellants’ obligation to build the golf course was not conditional upon obtaining the approval and the appellants had “shouldered the risk” that approval would not be obtained.  His Honour thought that there was clear evidence for that finding in clause 3 of the deed, which provided:

“3.The [first appellant], the [second appellant] and the [respondents] agree that if the golf course is not constructed on the Golf Course land, the [respondents] will suffer damages as a result of the diminution in value of adjoining land of the [respondents] and the parties have agreed that the amount of such damages is the sum of $1,500,000.00.  In the event of the failure of the [first appellant] to comply with its obligations under Clause 2 hereof, the [first appellant] will forthwith pay to the [respondents] and the [respondents] will accept in full satisfaction and discharge of all claims they may have against the [first appellant] the sum of $1,500,000.00.”

5. Chesterman JA has concluded that, although the primary judge erred by making conclusive findings of fact to that effect, the order striking out paragraph 5 was justified by the insufficiency of the pleading to make out a viable defence of frustration. Peter Lyons J has concluded that, although the pleading of frustration was not beyond criticism, it was maintainable. I respectfully agree with Chesterman JA’s conclusion and his Honour’s reasons for that conclusion, but I will add some short reasons of my own.

6. In the trial division the appellants submitted that the construction of the deed might be influenced by facts extrinsic to the deed, but they did not identify any facts other than those pleaded in paragraph 5 of the amended defence. In those circumstances, and in the absence of any foreshadowed amendment to the pleading, the respondents were entitled to treat the amended defence as containing a comprehensive statement of the extrinsic facts upon which the appellants relied in support of their case that the deed had been frustrated. 

7. At the hearing of the appeal, Mr D J S Jackson QC, who led Mr R Jackson for the appellants, referred the Court to statements in Mason J’s reasons in Codelfa Construction Pty Ltd v State Rail Authority (NSW)^[1] that:

“a contract will be frustrated when the parties enter into it on the common assumption that some particular thing or state of affairs essential to its performance will continue to exist or be available, neither party undertaking responsibility in that regard, and that common assumption proves to be mistaken”

and that:

“granted that the assumption needs to be contractual, in the case of frustration, as with the implication of a term, it is legitimate to look to extrinsic evidence in the form of relevant surrounding circumstances to assist us in the interpretation of the contract, unless its language is so plain that recourse to surrounding circumstances would amount to no more than an attempt to contradict or vary the terms of the contract.”^[2]

8. The gist of the appellants’ argument in that respect was that, contrary to the primary judge’s conclusion, the parties to the deed might have proceeded “on the assumption that the construction would be able to be lawfully completed within the period provided by the contract.” However the amended defence did not plead that the parties contracted upon any such assumption.

9. According to the pleadings, the first appellant undertook to construct the golf course by a specified time after the respondents had earlier fulfilled their contemporaneously assumed obligation to transfer the golf course land to the first appellant. In that situation, the pleaded fact that the parties knew from the start that local authority approval was required suggested no more than that the parties, knowing that the work would be illegal unless the necessary approval was obtained, contracted on the assumption that the first appellant, as the owner of the land and the person contractually responsible for the construction, would apply for the approval. The mere fact that the parties knew that an approval was necessary to render the work lawful could not of itself justify construing clause 2 of the deed as though it provided that the first appellant’s obligation was qualified by the assumption, not expressed or otherwise implied in the deed, that the necessary approval would be obtained. The failure to obtain the approval would render performance of the primary obligation illegal, but it would not preclude performance of the first appellant’s “secondary obligation”^[3] to pay damages, an obligation which was recognised in clause 3 of the deed. 

10. The pleaded facts were therefore incapable of justifying a conclusion that the failure to obtain the approval rendered the first appellant’s performance of its obligation “a thing radically different from that which was undertaken by the contract” or produced “such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.”^[4]  No other basis for frustration was identified in argument. 

11. The appellants referred to the following passage in Lord Wrenbury’s opinion in Horlock v Beal:^[5] 

“Where a contract has been entered into, and by a supervening cause beyond the control of either party its performance has become impossible, I take the law to be as follows: If a party has expressly contracted to do a lawful act, come what will – if, in other words, he has taken upon himself the risk of such a supervening cause – he is liable if it occurs, because by the very hypothesis he has contracted to be liable. But if he has not expressly so contracted, and from the nature of the contract it appears that the parties from the first must have known that its fulfilment would become impossible if such a supervening cause occurred, then upon such a cause occurring both parties are excused from performance. In that case a condition is implied that if performance becomes impossible the contract shall not remain binding.”

12. That analysis should be understood in the context of the facts which Lord Wrenbury went on to summarise. The loss of use of the ship upon which a seaman was employed was held to amount to such a “supervening cause” which rendered impossible the venture contemplated by that contract and thereby frustrated it. The present case is in a different category, involving a claim that the deed was frustrated by a foreseeable and (so far as the pleading reveals) foreseen event which rendered performance of the primary obligation illegal but had no necessary effect upon an expressed obligation to pay damages for non-performance.

13. I also respectfully conclude that the allegation that the failure to obtain the approval made the first appellant’s obligation incapable of performance was not a sufficient pleading. Such an event was capable of frustrating the deed only if it produced a situation in which the significance of the first appellant’s obligation differed radically from that contracted for in the deed.  The nature and degree of the difference necessary to support a finding that the deed was frustrated would be matters for the trial judge to determine on the evidence, but the amended defence did not plead facts which were capable of justifying a conclusion that there was any difference. 

14. It became clear in the course of the appellants’ arguments, however, that the appellants seek to justify the conclusion that there was such a difference by reference to additional or different facts extrinsic to the deed. It is not necessary or desirable in this appeal to lay down any general rule about pleading extrinsic facts bearing upon the proper construction of contracts generally. It is sufficient to observe that in this case, in which the appellants did plead the extrinsic facts relied upon for the conclusion that the contract was frustrated, the additional or different extrinsic facts upon which the appellants now wish to rely form part of the “data for decision”^[6] and should have been pleaded. 

15. I agree with the orders proposed by Chesterman JA.

16. CHESTERMAN JA:  The respondents to the appeal were the plaintiffs in an action they brought against the appellants in 2004.  By their amended statement of claim filed on 24 November 2008 they pleaded: 

“1.… prior to 30 June 2000, the plaintiffs were the registered proprietors of … land described as:-

(a)Lots 809 and 810 on SP 118059 … (“Area A”);

(b)Lot 812 on SP 118059 … (“Area B”) which held local authority approval generally for the construction of a golf course thereon;

(c)Lot 15 on RP882829 … (“Area C”) immediately adjacent to Area B.

…

3. By a Contract in writing dated 30 June 2000, the Plaintiffs agreed to sell Area A and Area B to the first Defendant for $6,963,000.00.

4. The Contract was completed on 30 June 2000.

5. By a deed made between the Plaintiffs, the first Defendant and the second Defendant at the same time as the Contract, it was agreed that:-

(a)the first Defendant would construct a golf course to a certain standard on Area B on or before 30 June 2002;

(b)the second Defendant would guarantee the due and punctual performance by the first Defendant of its obligations under the deed.

6. In breach of its obligations under the deed, the first Defendant failed to construct a golf course on area B by 30 June 2002 or by any later time. 

7. In the premises, the second Defendant is in breach of his guarantee.”

17. The plaintiffs claimed $2,205,000 by way of damages.

18. By paragraph 4 of their amended defence the appellants put forward a different construction of the deed to that pleaded in the amended statement of claim. Of particular relevance to the appeal they pleaded:

“5The defendants deny the facts alleged in paragraph 6 of the statement of claim because:

(a)on the proper construction of the deed, the time for performance of the first defendant’s obligations pursuant to clause 2 of the deed was of the essence;

(b)at all material times:

(i)it was necessary for a development approval from the Gold Coast City Council (“GCCC”) to be obtained for the development on the golf course land;

(ii)the parties were aware that such approval would be required:

Particulars

(A)the golf course land was located within the jurisdiction of the GCCC;

(B)the town plan … required development approvals to be obtained for the development of the golf course on the golf course land;

(C)the knowledge, for the first defendant is that of Mr Ingles.  The knowledge for the plaintiffs is of each of the plaintiffs;

(D)the fact of knowledge for the plaintiffs is to be inferred from their having owned the golf course land prior to the deed and the notorious nature of the need to obtain development approvals from the local authority for the conduct of development on land;

(c)the first defendant did not receive GCCC’s approval to commence construction of the golf course prior to 30 June 2002 or 31 December 2002;

(d)the GCCC’s failure to approve construction of the golf course by 30 June 2002 or 31 December 2002 made the first defendant’s obligation to construct the golf course by 31 December 2002 (or … by 30 June 2002) … incapable of performance;

(e)by reason of the matters alleged in subparagraphs (a)-(d) … the deed was frustrated and the defendants were discharged from further performance of that agreement.

6. The first defendant denies the facts alleged in paragraph 7 of the statement of claim because the obligations the performance of which (he) guaranteed … have discharged by operation of law in the premises referred to in paragraph 5.”

19. By their reply the respondents disputed the conclusion of law set out in paragraph 5(d) of the defence and pleaded, with respect to the contention that the deed was frustrated,

“4.(a)…

(b)further …

(i)it was an implied term of the deed that the first defendant would do all things necessary to ensure completion of the golf course by 31 December 2002;

(ii)in breach of that term, the first defendant failed to do all things necessary to obtain (GCCC’s) approval within sufficient time to ensure such completion;

(iii)in the premises of (i) and (ii), the first defendant may not rely on the (GCCC’s) not having given its approval within such time as would have allowed the first defendant to have constructed the golf course by 31 December 2002 to discharge the first defendant from further performance of the deed.”

20. On 15 November 2010 the plaintiffs applied to a judge of the Trial Division to strike out paragraph 5 of the amended defence pursuant to UCPR 171(1)(a) on the ground that it did not disclose a reasonable ground of defence.  On 13 December 2010 the order sought was made.  The defendants appeal the order which will preclude them from contending during the future course of the action that the events pleaded, or others, had the effect in law of discharging their obligations under the deed or, will at least, make it difficult for any such contention to be raised. 

21. Before turning to the reasons for judgment and the arguments it is convenient to set out the relevant terms of the deed. The plaintiffs were described as “the O'Briens”, the first appellant was called “the Purchaser” and the second defendant was designated “the Guarantor”. The deed provided:

“1.The Purchaser agrees to construct on the Golf Course land the golf course to a design and layout and in accordance with the specifications to be determined by the Purchaser provided that the golf course should be of a standard no less than the Gold Coast Country Club Golf Course … .  For the purpose of this clause, the golf course shall be constructed and the Purchaser’s obligations under this clause shall be fulfilled upon completion of all earth works and drainage necessary for the construction of the golf course and grass has been sown on the course.  A certificate … of a Consulting Engineer … addressed to the O'Briens that the golf course has been completed shall … release the Purchaser and the Guarantor from their obligations … .

2. The Purchaser will complete the construction of the golf course on or before the 30 June 2002, provided that if the Purchaser has entered into a construction contract with a bona fide third party on constructions terms in time to ensure completion of the golf course in terms of this clause by the 30 June 2002 but construction is delayed for reasons beyond the control of the Purchaser and through no fault on the part of the Purchaser then the time for completion of the golf course shall be extended by a period equal to the aggregate periods of delay but not exceeding six (6) calendar months.

3. The Purchaser, the Guarantor and the O'Briens agree that if the golf course is not constructed … the O'Briens will suffer damages as a result of the diminution in value of adjoining land … and the parties have agreed that the amount of such damages is the sum of $1,500,000.00.  In the event of the failure of the Purchaser to comply with its obligations under Clause 2 … the Purchaser will forthwith pay to the O'Briens … in full satisfaction and discharge of all claims they may have against the Purchaser the sum of $1,500,000.00.

…

5. In consideration of the O'Briens agreeing to enter into this Deed with the Purchaser … at the request of the Guarantor, the Guarantor does hereby agree to guarantee the due and punctual performance by the Purchaser of its obligations under this Deed … .  The Guarantor further covenants and agrees that the Guarantor will indemnify … the O'Briens against any loss or damage suffered by the O'Briens … arising in consequence of the failure on the Purchaser to meet its obligations under this Deed provided that such guarantee and indemnity shall be limited to the sum of $1,500,000.00 plus Court awarded interest and legal costs on a solicitor and own client basis.  … .”

22. The primary judge set out the relevant pleadings and the terms of Rule 171 before rehearsing the parties’ respective arguments and referring at some length to the relevant authorities; Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143, Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 and Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696.  His Honour then concluded: 

“[13] The obligation undertaken by the first defendant in this case was an absolute one. It contracted to build a golf course on identified land before a particular time. The deed contains a provision in which the parties expressly advert to the possibility of the golf course not being constructed. Clause 3 of the deed provides:

“The purchaser, the guarantor and the O'Briens agree that if the golf course is not constructed on the G C land, the O'Briens will suffer damages as a result of the diminution in value of adjoining land of the O'Briens and the parties have agreed that the amount of such damages is the sum of $1,500,000. In the event of the failure of the purchaser to comply with its obligations under clause 2 hereof, the purchaser will forthwith pay to the O'Briens and the O'Briens will accept in full satisfaction and discharge of all claims they may have against the purchaser the sum of $1,500,000.”

[14] A provision of that sort is the clearest evidence that the parties did contemplate the possibility that the golf course could not be constructed for some reason. The defendant pleads that the parties were aware of the need to obtain development approvals from the local authority for the construction of the golf course. It is clear that the parties were well aware that there was a risk that such approval might not be given and thus render the golf course unable to be built. This falls within the principle enunciated by Lord Wrenbury in Horlock v Beal [1916] AC 486 at 525:

“Where a contract has been entered into, and by a supervening cause beyond the control of either party its performance has become impossible, I take the law to be as follows: If a party has expressly contracted to do a lawful act, come what will – if, in other words, he has taken upon himself the risk of such a supervening cause – he is liable if it occurs, because by the very hypothesis he has contracted to be liable.”

…

[16] The factual issues which might be triable are those which are relevant to the question of whether or not a contract has been frustrated. The factual issues which arise then are whether or not there is a radical difference in performance, whether the parties foresaw the frustrating event, and whether the defendant took the risk that the eventuality in question might occur.

[17] As to the first, the contractual obligation was to build the golf course by 31 December 2002. It is now incapable of being built without permission from the local authority. It may be that it could be built at some time in the future. But the point is that should it ever be built then there is a radical difference between it possibly being built in the future and the obligation undertaken by the defendant.

[18] As to the second matter, it is clear that the parties, by the terms of the deed and by the pleading of the defendant, had foreseen the possibility of a refusal by the local authority to grant leave or that the defendant would simply not comply with the provision.

[19] As to the third factor, the obligation upon the defendants was absolute, that is, the building of the golf course was not conditional upon obtaining the appropriate permission. The risk taken by the defendants is evidenced by the clause in the deed referred to above. The fact that the amount agreed upon by the parties would most likely render it a penalty does not detract from the fact that the defendants clearly shouldered the risk.”

23. The approach which the court should take when deciding whether a contract has been frustrated was authoritatively explained by Mason J in Codelfa.  His Honour said (356-7):

“In Brisbane City Council v Group Projects Pty Ltd, Stephen J discussed the authorities. … I agree with Stephen J’s acceptance of the approach adopted by Lord Reid and Lord Radcliffe in Davis Contractors. Lord Reid said that the task of the court is to determine “on the true construction of the terms which are in the contract read in light of the nature of the contract and of the relevant surrounding circumstances”, “whether the contract which they did make is … wide enough to apply to the new situation: if it is not, then it is at an end”. Later he described frustration as “the termination of the contract by operation of law on the emergence of a fundamentally different situation”.

Lord Radcliffe said:

“… frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract … .  It was not this that I promised to do.”

…

“…the earlier cases provide many illustrations of the proposition that a contract will be frustrated when the parties enter into it on the common assumption that some particular thing or state of affairs essential to its performance will continue to exist or be available, neither party undertaking responsibility in that regard, and that common assumption proves to be mistaken.”

24. The appellants submitted that the primary judge had erred in finding that the deed contemplated the golf course might not be constructed by the due date because GCCC did not give approval in time; and complained of the primary judge’s consequential conclusion, that having foreseen the possibility the first defendant had assumed the risk and contracted to build the golf course by the contractual date, come what may.

25. The appellants also criticise the judge’s reliance upon clause 3 as indicating that the first defendant had undertaken the obligation to build the golf course in absolute terms by promising to pay damages if it did not. The appellants submitted that the right to damages was “premised upon there being a failure of the first defendant to comply with its obligations”, and there would have been no such failure had the obligation been discharged by frustration. The appellants’ argument continued that the contract said nothing as to whether or not the first defendant’s obligation to build the golf course was conditional upon it being lawful to do so by the grant of approval from GCCC. The appellants accepted that all parties to the deed must have known of the requirement for approval but submitted it was not permissible for the primary judge to find as a fact that the parties were actually aware that there was a risk that approval might not be given. It was equally likely, the appellants submitted, “that the parties simply proceeded on the assumption that the construction would be able to be lawfully completed within the period provided by the contract”.

26. The primary judge had relied upon a passage from the judgment of Lord Wrenbury in Horlock v Beale [1916] 1 AC 486 at 525: 

“Where a contract has been entered into, and by a supervening cause beyond the control of either party its performance has become impossible, I take the law to be as follows: If a party has expressly contracted to do a lawful act, come what will – if, in other words, he has taken upon himself the risk of such a supervening cause – he is liable if it occurs, because by the very hypothesis he has contracted to be liable.”

The appellants argued that the deed did not in terms impose such an obligation on the first defendant and whether, in accordance with the principles of frustration of contracts, the changed circumstances required a contractual performance fundamentally different from that contemplated by the contract was to be determined by the true construction of the contract in the light of surrounding circumstances.  The primary judge should not, the submission continued, have determined that the contract was frustrated without an examination of those surrounding circumstances.

27. The appellants point out that it is at least arguable that the parties would not have intended the golf course to have been constructed without approval, so that the performance of the contract was unlawful. Accordingly they complain:

1. that the primary judge did not consider the possibility that the parties had proceeded on the common understanding or assumption that GCCC approval for the construction of the golf course would issue promptly and without difficulty so that the golf course could be built within the contractual timeframe;

2. the fact that approval was not given may have invalidated the common assumption the continued existence of which was essential to the performance of the contract the parties made; and

3. whether there was such a common assumption and whether any such assumption was invalidated could only be determined after an appropriate investigation of the facts at trial.

28. The appellants’ essential criticism is that the judgment found against frustration by reference only to the terms of the deed and the (assumed) fact that the parties knew of the risk that approval might be withheld. The appellants contend it was an error not to consider the surrounding circumstances. They submit his Honour should have refused to strike out paragraph 5 of the amended defence because whether or not the contract had been frustrated would depend upon an examination and analysis of the common assumptions of the parties and those surrounding circumstances, which could only be undertaken at a trial.

29. The appellants did not contend before the primary judge that there were any surrounding circumstances relevant to the question of frustration other than those set out in paragraph 5 of the amended defence. There was no application to amend the pleadings and no suggestion made in affidavit or argument that there might be other facts which could qualify as “extraneous circumstances” bearing upon the parties’ presumed intention, or tending to indicate that the first defendant had undertaken the risk of not obtaining approval at all or in time to build in accordance with clause 2.

30. The immediate answer to the argument is that paragraph 5 of the defence does not identify sufficient circumstances connected with the making of the deed to support an argument that construction of the golf course without approval, or without timely approval, was something radically different from what the parties contemplated when they made their deed.

31. The respondents accordingly argued that there was nothing in the pleaded defence which would allow a finding of frustration. They submitted:

“Awareness of a need to obtain development approval … necessarily involves awareness of a risk of refusal … .  Once it is accepted that the parties foresaw that approval might be refused (or … delayed past the agreed date for performance), the doctrine of frustration is excluded where … the parties made no provision for that possibility in the contract.  … his Honour inferred from clause 3 … that “the parties did contemplate the possibility that the golf course could not be constructed for some reason”.  (The) finding that the parties were well aware of the risk that approval might not be given follows from the … allegation in the … defence that the parties were aware of the need to obtain approval.  … (The first defendant) contracted to build a golf course by a date and if not, to pay the respondents $1.5 million.  Tritely, it was an implied term … that (the first defendant) would do all things necessary to build the golf course in a lawful manner, including obtain development approval.  Therefore, (it) did contract to do a lawful act (and by a particular date).  Clause 3 of the deed … demonstrates that (the first defendant) contracted to obtain approval and complete the golf course in time, “come what will”. … The critical issue … is whether the building of the golf course with approval by some time after 31 December 2002 is fundamentally different from the building of the golf course with approval by 31 December 2002.  It is … untenable to suggest that a promise to lawfully construct a golf course by a certain date or pay … damages is frustrated because it was not constructed by that date for a reason in the common contemplation of the parties as (possibly) (impeding) performance… .”

32. The appellants have a point when they complain that the primary judge disposed of the application to strike out paragraph 5 by making conclusive findings of fact and construing the deed by reference to the findings without regard to the possibility that evidence might alter the facts or require the deed to be construed in the light of other circumstances. But against that must be set the point that the defendants pleaded only that approval was required if the golf course were to be built lawfully and the parties knew that to be so, together with the fact that approval was not obtained before 31 December 2002. These facts by themselves are not enough to establish frustration of the contract as the doctrine was explained by Mason J. The defendants did not plead that the absence of building approval prior to 31 December 2002 radically altered the performance required by the deed, or was something which the parties had not completed, or which they assumed would not occur.

33. Paragraph 5 of the amended defence was therefore inadequate to raise frustration as a defence, and the primary judge was right to strike it out. It was of no consequence that the basis for doing so was wrongly described in the absence of any intimation that the result would have been different had the judge proceeded on the appropriate basis and considered whether the pleaded facts would allow a finding of frustration.

34. To overcome that problem counsel for the appellants, in the course of argument, intimated that they did wish to amend their pleadings to allege further facts and circumstances in support of the plea of frustration.

35. It is clear from Mason J’s exposition of the nature of frustration that, where a contract does not address the consequences of a supervening event, whether it has become frustrated will seldom, if ever, depend only upon the terms of the contract, but will, as well, involve an investigation of what the parties knew or contemplated about the factual context in which the contract was to be performed.  It follows that it will often not be possible to determine the question, frustration or not, with reference only to the terms of the contract. 

36. The appellants having indicated that they did wish to supplement their pleading to assert additional facts to support the plea of frustration, counsel for the respondents did not strenuously oppose their being given an opportunity to do so. That course is appropriate to avoid the possibility of injustice which might arise if the appellants were deprived of an opportunity to advance an arguable case of frustration. It should not, however, be thought that a similar course will be followed in all cases in which, as here, the announced intention to amend comes late and is unaccompanied by an affidavit deposing to the existence of further available facts or even an identification of what the facts might be.

37. I would allow the appeal to the extent only of adding an order that the defendants have leave to deliver a further amended defence within 21 days of the delivery of judgment.

38. The appellants should pay the respondents’ costs of the appeal which was only necessary because of their failure to plead frustration properly in the first instance, and their decision not to amend, or even intimate that they wished to amend, earlier than the hearing of oral argument on the appeal.

39. PETER LYONS J:  I have had the advantage of reading the draft reasons prepared by Chesterman JA.  His Honour helpfully sets out many of the matters relevant to this appeal. 

40. To determine the present appeal, it seems to me necessary to give further consideration to the decision at first instance, and then to discuss principles relating to the frustration of the contract, as they apply to the contract the subject of the respondents’ claim. It will then be necessary to consider pleading requirements, when a party alleges a contract to be frustrated. Finally, it will be necessary to reach a conclusion about the outcome of the appeal.

Proceedings at first instance

41. Since they are of critical importance, it is convenient to reproduce paragraphs 5 and 6 of the appellants’ amended defence:-

“5The defendants deny the facts alleged in paragraph 6 of the statement of claim because:

(a)on the proper construction of the deed, the time for performance of the first defendant’s obligations pursuant to clause 2 of the deed was of the essence;

(b)at all material times:

(i)it was necessary for a development approval from the Gold Coast City Council (“GCCC”) to be obtained for the development on the golf course land;

(ii)the parties were aware that such approval would be required:

Particulars

(A)the golf course land was located within the jurisdiction of the GCCC;

(B)the town plan … required development approvals to be obtained for the development of the golf course on the golf course land;

(C)the knowledge, for the first defendant is that of Mr Ingles.  The knowledge for the plaintiffs is of each of the plaintiffs;

(D)the fact of knowledge for the plaintiffs is to be inferred from their having owned the golf course land prior to the deed and the notorious nature of the need to obtain development approvals from the local authority for the conduct of development on land;

(c)the first defendant did not receive the GCCC’s approval to commence construction of the golf course prior to 30 June 2002 or 31 December 2002;

(d)the GCCC’s failure to approve construction of the golf course by 30 June 2002 or 31 December 2002 made the first defendant’s obligation to construct the golf course by 31 December 2002 (or … by 30 June 2002) … incapable of performance;

(e)by reason of the matters alleged in subparagraphs (a)-(d) … the deed was frustrated and the defendants were discharged from further performance of that agreement.

6The first defendant denies the facts alleged in paragraph 7 of the statement of claim because the obligations the performance of which the second defendant guaranteed pursuant to the deed have (been) discharged by operation of law in the premises referred to in paragraph 5.”

42. The respondents applied for an order that paragraph 5 of the appellants’ amended defence be struck out on the ground that it discloses no reasonable defence, or alternatively would tend to prejudice or delay the fair trial of the proceeding; and for consequential directions. At the hearing at first instance, they contended that the contract was not discharged by frustration.^[7] 

43. The submissions for the appellants at the hearing at first instance included the following:^[8] 

“(c)As it is necessary to construe the deed and to have regard to the genesis of the transaction, there will need to be a trial in order to determine the purpose and the circumstances known to the parties at the time of entering into the deed.

…

(h)It should (not) be presumed that the first defendant had taken the risk that it might be lawfully prevented from constructing the golf course.  Such a conclusion could not be properly drawn in the absence of consideration of the circumstances in which the deed was executed.  There should be a consideration of those circumstances in order to arrive at a conclusion.”^[9]

44. Consistent with the approach for which the respondents contended, the learned primary judge determined that the contract had not been determined by frustration. He concluded that the obligation undertaken by the first appellant was an absolute one.^[10]  He treated clause 3 of the deed, dealing with liquidated damages in the event of the failure of the first appellant to construct the golf course by (at the latest) 31 December 2002, as demonstrating that the parties contemplated the possibility that the golf course could not be constructed for some reason; and that its operation was intended to extend to the impossibility of performance of the construction obligation, by reason of the fact that the local government refused to grant a development application, so as to permit the first defendant to construct the golf course as required by the deed.^[11] 

45. It will be apparent that his Honour’s conclusion was reached without a consideration of the circumstances in which the deed was executed, as then known to the parties. 

46. It is also apparent that neither the case advanced at first instance by the respondents, nor the reasons for judgment, are concerned simply with the question whether the allegation of frustration has been properly pleaded. Rather, both were concerned with whether the contract was in truth discharged by frustration. His Honour concluded that, in the present case, the issue of the alleged frustration of the contract was “not real”.^[12] 

Principles relating to frustration of a contract

47. In Brisbane City Council v Group Projects Pty Ltd,^[13] Stephen J referred with approval to the approach taken by Lord Reid in Davis Contractors Ltd v Fareham Urban District Council.^[14]  His Honour said:^[15] 

“Lord Reid rejected the notion of the implied term as the basis of the doctrine.  He says^[16] that the task for a court, confronted with the parties' contract, is to determine, on the true construction of the terms of the contract, read in the light of the nature of the contract and of the relevant surrounding circumstances when the parties made it, ‘whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end.’”

48. In Codelfa Construction Pty Ltd v State Rail Authority NSW^[17] Mason J expressed agreement with the acceptance by Stephen J of the approach adopted by Lord Reid in Davis Contractors.^[18]  Like Stephen J in Group Projects, Mason J referred with approval to the approach of Lord Radcliffe in Davis Contractors, citing the following passage from Lord Radcliffe’s speech:^[19] 

“…frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.  Non haec in foedera veni.  It was not this that I promised to do.”

49. Mason J summarised the doctrine as follows:^[20]

“… a contract will be frustrated when the parties enter into it on the common assumption that some particular thing or state of affairs essential to its performance will continue to exist or be available, neither party undertaking responsibility in that regard, and that common assumption proves to be mistaken …”.

50. His Honour went on to note that, while the assumption needs to be “contractual”,

“… it is legitimate to look to extrinsic evidence in the form of relevant surrounding circumstances to assist us in the interpretation of the contract, unless its language is so plain that recourse to surrounding circumstances would amount to no more than an attempt to contradict or vary the terms of the contract.”^[21]

51. His Honour continued:^[22]

“The critical issue then is whether the situation resulting from the grant of the injunction is fundamentally different from the situation contemplated by the contract on its true construction in the light of the surrounding circumstances.”

52. In Reardon Smith Line Ltd v Hansen-Tangen,^[23] Lord Wilberforce said,

“… what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were.”

53. In Australia (in contradistinction to the apparent position in England since Investors Compensation Scheme Ltd v West Bromwich Building Society^[24]), the scope of the inquiry about background matters is limited to matters known to both parties, or facts which are notorious, so that knowledge of them will be presumed.^[25]

Was the decision at first instance correct?

54. The critical findings of the learned primary judge were that the parties had foreseen the possibility of a refusal by the local government to grant a development approval; and that the appellants accepted the risk of that refusal.^[26] 

55. The basis for the first of these findings is said to be the terms of the deed and the defence. In my view, the defence does not go so far. While it pleads that the parties knew an approval would be required, it does not plead that the parties foresaw the possibility of a refusal of a development application. Such a conclusion should not be assumed, nor be too easily implied in the defence. For all that is known at this stage, obtaining an approval might have been thought to be a formality. That this is by no means impossible is apparent from the allegation in the statement of claim that there was already “local authority approval generally for the construction of a golf course” on the land; and, in response to the denial by the appellants of that fact, an assertion in the reply that the land was “zoned so as to permit construction of a golf course”. 

56. The contract itself makes no express mention of the need to obtain development approval to construct the golf course. The only provision of the contract referred to by the learned primary judge which might relate to this matter is clause 3, which made provision for the payment of a liquidated sum ($1.5m) in the event that the golf course was not constructed as required by the contract.

57. A clause of this kind is by no means uncommon or inappropriate where a contract requires the performance of work by a fixed time, in cases where it is not necessary to obtain a permit from a government or other entity. There is nothing in the clause itself to show that it reflects an awareness of the possibility that the local government would not grant a development approval. Without more, it does not support the conclusion for which it was relied upon.

58. For the conclusion that the appellants accepted the risk that the local government would refuse to grant a development approval, the learned primary judge again relied on clause 3. In my respectful opinion that reliance is misplaced. As the written submissions of the appellants suggest, a clause intended to specify the consequences of a breach of an obligation stated in some other provision of the contract is not itself intended to define (or qualify) the scope of the obligation. Nor does the language of clause 3 have that effect.

59. The learned primary judge, in support of his conclusion, relied upon the following statement of principle by Lord Wrenbury in Horlock v Beal:^[27] 

“Where a contract has been entered into, and by a supervening cause beyond the control of either party its performance has become impossible, I take the law to be as follows: If a party has expressly contracted to do a lawful act, come what will – if, in other words, he has taken upon himself the risk of such a supervening cause – he is liable if it occurs, because by the very hypothesis he has contracted to be liable.”

60. In the appeal, the respondents support his Honour’s reliance on this passage, and submit that the first appellant had undertaken to do a lawful act, “come what will”.

61. The passage relied upon from Horlock v Beal is immediately followed by the following:^[28] 

“But if he has not expressly so contracted, and from the nature of the contract it appears that the parties from the first must have known that its fulfilment would become impossible if such a supervening cause occurred, then upon such a cause occurring both parties are excused from performance.”

62. I would make a number of observations about his Lordship’s statement of principle, in the context of the present case. The statement relates to a promise to do a lawful act. At the time when the parties entered into the deed, construction of the golf course was not lawful. The first appellant’s promise to construct the golf course could only be regarded as a contract to do a lawful act, on the assumption that a development permit would first be obtained.  That consideration itself might be thought to support the case of the appellants as to the scope of the obligation undertaken by the first appellant. 

63. In the present case, impossibility of performance is a result of the fact that a supervening event did not occur, rather than a result of the occurrence of the supervening event.  The appellants plead that it was known to both parties that the occurrence of a supervening event (approval by the local government) was necessary to enable the first appellant to carry out its promise to construct a golf course.  In those circumstances, his Lordship’s statement of principle would appear to me to have the effect that, absent an express adoption by the first appellant of the risk that the approval would not be obtained, then if the approval is not obtained, the contract is discharged.  Read in context, his Lordship’s statement of principle, it seems to me, favours the case of the appellants, not that of the respondents. 

64. It is no answer to say that an implied obligation fell on the first appellant to take all steps necessary to obtain the approval; and that it failed to do so. That may preclude reliance by the appellants on the fact that the required approval was not obtained; but that is a matter for trial, and it does not have the consequence that the defence should be struck out.

65. It follows that the conclusion reached at first instance is not correct. In any event, it seems to me that this was not a case for the summary determination of the question whether the contract had been frustrated. The authorities referred to earlier (and many others) identify the need to refer to background matters to determine whether a contract has been frustrated. The appellants’ submissions at first instance asserted the need to follow this course. The respondents did not demonstrate that a consideration of the circumstances could not have affected the issue. 

Pleading that a contract is frustrated

66. The Uniform Civil Procedure Rules 1999 (Qld) (UCPR) require that a pleading must be “as brief as the nature of the case permits”; and must contain a statement of all the material facts on which the party relies, but not the evidence by which those facts are to be proved.^[29]  However, the pleading must state specifically any matter that, if not stated specifically, may take another party by surprise.^[30]  A defence must also specifically plead a matter that, a defendant alleges, makes a claim not maintainable, or shows a transaction is void or voidable.^[31] 

67. In my view, the essential matters to be pleaded, in a case like the present case, are that, in the circumstances in which the contractual promise came to be performed, fulfilment of it required something beyond the scope of the obligation undertaken. In other words it is necessary to identify a circumstance, and allege that that circumstance has the effect that provision by the defendant to the plaintiff of the benefit promised under the contract requires the defendant to do something outside the scope of the contractual obligation which the defendant undertook.

68. The submissions of the appellants assert that, in the present case, it is necessary to consider surrounding circumstances, in effect, to determine the scope of the contractual obligation, and accordingly whether provision of the promised benefit requires something of the first respondent which is within or outside the scope of the contractual obligation which it undertook (or put another way, whether it assumed the risk that provision of the promised benefit might be prevented by the fact that a necessary approval for the construction of a golf course might not be obtained).

69. It seems to me that surrounding circumstances which are relevant to determining the scope of the first appellant’s contractual obligation do not, of themselves, constitute material facts, which it is necessary to plead. It may be necessary to plead them, to avoid surprise; but it is difficult to reach that conclusion until the surrounding circumstances on which the appellant relies have been identified. For example, it is conceivable that the matters alleged in the statement of claim and reply will be relied on by the appellants as relevant surrounding circumstances. It is also conceivable that the course of dealings between the parties, including their correspondence, might assist in determining whether reliance by any party on a particular circumstance might take another party by surprise. 

70. More significantly, it seems to me that a failure to plead surrounding circumstances does not mean that a defence should be struck out. A failure to plead matters which might otherwise take one’s opponent by surprise does not, in my view, mean that a defence is not maintainable. 

Should paragraph 5 of the defence have been struck out?

71. The question remains whether paragraph 5 of the defence should have been struck out, on the ground it discloses no reasonable defence. I would answer that question in the negative, though I would not suggest that the pleading is beyond criticism.

72. Paragraph 5 of the defence commences with an allegation that the time by which the construction of the golf course was to occur was of the essence. It then alleges the necessity for a development approval, to the knowledge of the parties at all material times; and that the approval was not received prior to the time by which the golf course was to be constructed. Significantly in my view, it then alleges that the absence of the development approval had the consequence that the obligation undertaken by the first appellant became impossible of performance. In my respectful opinion, while capable of clearer expression, that amounts to an allegation that in the circumstances, the construction of the golf course was beyond the scope of the obligation undertaken by the first appellant. It sufficiently reflects the statement made by Lord Radcliffe in Davis Contractors:^[32] 

“Non haec in foedera veni.  It was not this that I promised to do.”

73. It will be apparent that I do not consider that the pleading that the deed was frustrated should be struck out, because the appellants have indicated that regard should be had to relevant circumstances, and they now wish to allege some circumstances in their pleading.

Conclusion

74. Accordingly, I would allow the appeal and set aside the orders of the learned primary judge. I would order that the respondents pay the costs of the application at first instance, and of the appeal.