Keswick Developments Pty Ltd v Kevroy Pty Ltd
[2009] QSC 176
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- Unreported Judgment
- Appeal Determined (QCA)
- Keswick Developments Pty Ltd v Kevroy Pty Ltd[2009] QSC 176
- Add to List
Keswick Developments Pty Ltd v Kevroy Pty Ltd[2009] QSC 176
Keswick Developments Pty Ltd v Kevroy Pty Ltd[2009] QSC 176
SUPREME COURT OF QUEENSLAND
CITATION: | Keswick Developments P/L v Kevroy P/L & Ors; Keswick Developments P/L v Keswick Island P/L & Ors [2009] QSC 176 |
PARTIES: | KESWICK DEVELOPMENTS PTY LTD ACN 129 203 363 v KEVROY PTY LTD ACN 076 485 115 KESWICK ISLAND PTY LTD ACN 009 998 841 VINCENT HARLEY ALEXANDER
KESWICK DEVELOPMENTS PTY LTD ACN 129 203 363 v KESWICK ISLAND PTY LTD ACN 009 998 841 KESWICK ISLAND HOLDINGS PTY LTD ACN 010 442 175 CONNIE BAY DEVELOPMENT PTY LTD QUEENSLAND MARINA DEVELOPMENTS PTY LTD ACN 101 466 915 ANTOTE PTY LTD ACN 010 501 256 and ACN 104 395 324 |
FILE NO/S: | BS 12924/08 BS 3078/09 |
DIVISION: | Trial Division |
PROCEEDING: | Application |
ORIGINATING COURT: | Supreme Court at Brisbane |
DELIVERED ON: | 6 July 2009 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 16 June 2009 |
JUDGE: | McMurdo J |
ORDER: | In BS 3078/09:
In BS 12924/08:
(a)Yes. (b)Yes. (da)No. (db)Yes. (e)Yes. (f)No.
|
CATCHWORDS: | CORPORATIONS – CONSTITUTION AND LEGAL CAPACITY – CONTRACTS – PRE-INCORPORATION CONTRACTS – where the Vendor had warranted to the Purchaser before the Purchaser came into existence that no “dealings” had taken place in respect of the land – whether the warranty was in respect of dealings at the time of signing or at the time when the contract took effect upon ratification by the Purchaser CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – CONDITIONS – CONDITIONS AND WARRANTIES – where the Vendor had warranted to the Purchaser that no “dealings” had taken place in respect of the land apart from those disclosed in Schedule 3 – where the Vendor granted a new sublease to a third party after the date of signing of the primary contract but before its ratification by the Purchaser – where the new sublease was not disclosed within schedule 3 of the primary contract – where there is a real possibility that the Purchaser knew of the existence of the new sublease but not from Schedule 3 – whether the grant of the new sublease constituted a breach of warranty CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – OTHER MATTERS – where the Purchaser is entitled to exercise options to purchase shares at a certain price – where the contract contains a condition that in the event the Purchaser suffers loss as a consequence of the Vendor’s breach of warranty, the Purchaser is entitled to “retain the value of such loss and damage” from the moneys for the purchase of shares under the option agreement – where the loss and damage has not yet been quantified – whether the whole of the purchase price could be retained pending quantification of the loss and damage – whether “the maximum potential liability” of the Vendor could be retained on condition that any difference between that and the actual liability be refunded upon quantification – whether the right of retention is limited only to such amount as has been quantified by judgment, adjudication or agreement Corporations Act 2001 (Cth), s 127, s 131 Uniform Civil Procedure Rules, r 155, r 292, r 483 Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd (2005) 55 ACSR 1; [2005] NSWCA 319, cited Edson v Sun Kuong Restaurant (1991) 5 BPR 11,452; [1993] ANZ Conv R 228, distinguished Howard Developments Pty Ltd v M Makers & Co. Pty Ltd (1972) 4 BPR 9460, distinguished Jansen v Frexbury Pty Ltd [2007] QSC 387, questioned Kevroy P/L v Keswick Developments P/L; Keswick Developments P/L v Kevroy P/L & Ors [2009] QSC 49, considered Taylor v Johnson (1983) 151 CLR 422, distinguished WWW Dot Wizards Pty Ltd v Globe Valley Pty Ltd [2006] WASC 128, cited |
COUNSEL: | F L Harrison QC, with Charles Wilson, for the plaintiff in BS 12924/08 and for the applicant in BS 3078/09 K C Kelso for the second and third defendants in BS 12924/08 and for the first, second and third respondents in BS 3078/09 |
SOLICITORS: | Kelly Legal for the plaintiff in BS 12924/08 and for the applicant in BS 3078/09 Michael Drummond Lawyer for the second and third defendants in BS 12924/08 and for the first, second and third respondents in BS 3078/09 |
- Keswick Island is situated off Mackay. Much of it is a national park but some is held for development purposes under leases granted by the Crown. This case concerns one of them which was purchased by the applicant, Keswick Developments Pty Ltd (“the Purchaser”). It purchased that lease from one of the respondents, Keswick Island Pty Ltd (“the Vendor”) under a contract which was completed on or about 18 March 2008. The contract price was $1,000,000 although, according to the terms of the contract, the adjusted purchase price paid at settlement was much less.
- Some of the land the subject of this lease had been subleased by the Vendor, mostly to two companies under the same ownership as the Vendor, Connie Bay Development Pty Ltd (“Connie Bay”) and Queensland Marina Developments Pty Ltd. The shareholder of those companies is another respondent, Keswick Island Holdings Pty Ltd (“Holdings”).
- On the same day as the contract of sale of the head lease was signed, which was 22 November 2007, documents providing for a potential sale by Holdings to the Purchaser of those shares were signed. That which related to the shares in Queensland Marina Developments Pty Ltd has resulted in a transfer by Holdings to the Purchaser of those shares, about which there is no controversy. As to Connie Bay, there are three relevant contracts, each relating to a different one-third of its shares and providing for a call option, under which the Purchaser may elect to purchase the parcel, and a put option, under which Holdings can elect to sell the parcel if the call option is not exercised. None of the Connie Bay options has been exercised. There are different periods for the exercise of the options between the three agreements, but the earliest of them requires the call option to be exercised no later than 15 July next. The price for that one-third parcel, should the call option or the put option be exercised, would be $3,000,000.
- By the time that the sale of the head lease settled in March 2008, there was a registered sublease which had been granted by the Vendor to Kevroy Pty Ltd (“Kevroy”), which is a company unrelated to the Vendor. This is a sublease which expires, as does the head lease, in 2096. The Purchaser says that this is an encumbrance which it did not agree to accept, and that it made false the Vendor’s warranty in the contract of sale, under which the Vendor warranted that there had been no dealings with the land other than as set out in the contract. This sublease was not referred to in the contract.
- Accordingly, the Purchaser claims damages for breach of that warranty and damages for breach of other terms of the contract. In that claim for damages, which is made in BS 12924/08, the Purchaser offers no particulars of that loss and damage as the rules require. It does not state the nature and amount of the damages claimed as required by UCPR r 155(1).
- The plaintiff is considering the exercise of the first of the call options (as it must do by 15 July next), but it wishes to retain all or some of the price of $3,000,000 which would be then payable within 33 days of the exercise of the option. It claims to be entitled to that until it is awarded damages for breach of the warranty. Of course, these damages are claimed against the Vendor, whereas it is Holdings which is to be paid for any shares in Connie Bay. But Holdings has agreed that in the event of a breach of the warranty by the Vendor, the Purchaser could “retain the value of such loss and damage from the monies due to be paid” by it to Holdings.
- The Vendor and Holdings deny that there was a breach of warranty, or otherwise a breach of the contract of sale of the head lease. They also deny that the Purchaser would be entitled to withhold any sum for damages unless and until there was an award of damages.
- In BS 12924/08, the Purchaser applies for what it says is a summary judgment against the Vendor under UCPR r 292. The judgment which it seeks is in the form of a judgment for damages to be assessed. Alternatively, it applies under UCPR r 483 for the determination of separate questions and for declaratory relief. In other proceedings commenced by an originating application,[1] the Purchaser applies for declaratory relief against the Vendor and Holdings. Broadly speaking, the effect of the declarations which are sought in these applications is that the Kevroy sublease resulted in a breach of warranty and otherwise a breach of contract, and that the Purchaser is entitled to exercise the call option without having to pay to Holdings the agreed price for that parcel of shares until there is an assessment of damages as claimed against the Vendor.
The contract of sale
- The contract document was in the standard REIQ/Queensland Law Society form with the addition of certain special conditions. They were within schedule 2 to the document, of which cl 2, in part, was as follows:
“2.Warranties
The Vendor warrants that no dealings other than the dealings revealed by the searches in Schedule 3 have taken place in respect of the Land.
[…]
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 monies 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:–
[The various put and call options between the Purchaser and Holdings, including the three in relation to Connie Bay, are then set out].”
- Schedule 3 to the document contained the results of a search of the register maintained under the Land Act 1994 (Qld). Within the encumbrances which were there listed was a sublease granted to Kevroy. But this is not the sublease of which the Purchaser complains. Rather it was a sublease granted in 2003 to expire on 22 June 2010, which was surrendered on 23 January 2008 when Kevroy was granted the sublease of which the Purchaser complains. As mentioned already, this sublease is for the balance of the term of the head lease, expiring in 2096. Accordingly, the relevant Kevroy sublease was not disclosed within schedule 3 of the contract document.
- The Purchaser says that the dealing constituted by the agreement to grant this new sublease led to a breach of the warranty, because it was a dealing other than as revealed by the searches in schedule 3. However, it was a dealing which post-dated the signing of the contract of sale in which the warranty was in terms that no dealings had taken place. It was not a promise that no further dealings would take place. There was effectively a promise in those terms by another clause of the contract. I shall return to it in discussing the Purchaser’s entitlement to damages for breach of contract. But it does not assist the Purchaser to retain some of the price otherwise payable to Holdings, because Holdings’ agreement is expressed to apply to damages only for breach of this specific warranty.
A pre-incorporation contract
- The day on which the contract document for the sale of the head lease was signed (20 November 2007) was prior to the agreement for the sublease (20 December 2007). But the contract came into existence after this dealing. This is because the Purchaser was not incorporated until 14 January 2008. This was a contract purportedly made with the Purchaser before its registration. The contract document referred to the Purchaser as “Keswick Developments Pty Ltd as trustee for the Keswick Property Trust (to be incorporated)”. Part 2B.3 of ch 2B of the Corporations Act 2001 (Cth) thereby applied.
- Section 131 of the Corporations Act provides:
“Contracts before registration
(1)If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered, the company becomes bound by the contract and entitled to its benefit if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract:
(a)within the time agreed to by the parties to the contract; or
(b)if there is no agreed time – within a reasonable time after the contract is entered into.
(2)The person is liable to pay damages to each other party to the pre-registration contract if the company is not registered, or the company is registered but does not ratify the contract or enter into a substitute for it:
(a)within the time agreed to by the parties to the contract; or
(b)if there is no agreed time – within a reasonable time after the contract is entered into.
The amount that the person is liable to pay to a party is the amount the company would be liable to pay to the party if the company had ratified the contract and then did not perform it at all.
(3)If proceedings are brought to recover damages under subsection (2) because the company is registered but does not ratify the pre-registration contract or enter into a substitute for it, the court may do anything that it considers appropriate in the circumstances, including ordering the company to do 1 or more of the following:
(a)pay all or part of the damages that the person is liable to pay;
(b)transfer property that the company received because of the contract to a party to the contract;
(c)pay an amount to a party to the contract.
(4)If the company ratifies the pre-registration contract but fails to perform all or part of it, the court may order the person to pay all or part of the damages that the company is ordered to pay.”
- In BS 12924/08, it has been determined that Kevroy’s sublease prevails over the Purchaser’s interest.[2] A Lyons J there held that the contract of sale was within s 131, that it was ratified by the Purchaser on 14 January 2008 and that this then gave rise to a contract which had effect on and from that date but not prior to it.[3] Citing the commentary in Ford’s Principles of Corporations Law[4] and WWW Dot Wizards Pty Ltd v Globe Valley Pty Ltd,[5] her Honour concluded that the Purchaser’s ratification did not have a retrospective effect, in that it did not result in a contract between the Vendor and the Purchaser which related back to the date on which the contract document had been signed. Holdings was not a party to that judgment, but all parties in the present matters accept the correctness of her Honour’s conclusions.
- However, a different question now arises, which is whether the warranty in this contract speaks of the circumstances when the contract document was signed or those when it took effect as a contract with the Purchaser. The Purchaser submits that it is the latter date, so that the agreement for the Kevroy sublease was a dealing which occurred before then. The sublease itself was not granted until 23 January 2008 which was after the Purchaser’s ratification of the contract of sale. However as A Lyons J held, and as the parties here accept, the agreement for that sublease was made on 20 December 2007, when the Vendor and Kevroy settled some litigation between them.[6] On that basis her Honour considered that any competition between equitable interests should be resolved in favour of Kevroy because its interest dated from 20 December 2007, whereas the Purchaser had no interest prior to 14 January 2008.
- Although the signing of the contract document did not then give rise to a contract between the Vendor and the Purchaser, it had some immediate legal consequences. The person who signed for the Purchaser, a Mr Chappell, became contingently liable to pay damages under s 131(2). The contingencies were that the company did not become registered, or if registered did not ratify the contract.[7] He was also exposed to a claim for damages in the event that the Purchaser ratified the contract and then became liable to pay damages for its breach.[8] Part 2B.3 does not expressly define the legal position of the other party, the Vendor in the present case, pending the registration of and ratification by the unincorporated party. In particular there is no express provision that the other party may or may not unilaterally withdraw within the period in which the contract may be ratified.[9] But as counsel for the Purchaser accepted, much of the purpose of Pt 2B.3 could be defeated if the party in the position of the Vendor here could unilaterally withdraw. In that sense the Vendor was bound from the date of signing. Nevertheless the warranty could be enforced only by the Purchaser, and if and when it became registered and ratified the contract. The more likely intention to attribute to the parties is that the Vendor meant to warrant the extent of its dealings as at the time when there became a contract between it and the party to which the warranty was given.
- This is consistent with other terms of the contract document, many of which referred to “the date of this Contract” in a context where the term could have had no sensible operation if that was understood to be the date of signing rather than the date of ratification. For example, cl 17.1 provided that the property would be at the risk of the Purchaser “on the next Business Day after the date of this Contract”. The same applies to cl 17.2, which provided that:
“From the date of this Contract until Completion, the Vendor shall use best endeavours to administer the Property and properly enforce the Leases … [and that s]hould any matter or circumstance arise which may materially affect the proper performance of the terms of any Lease by any party, the Vendor shall immediately notify the Purchaser in writing.”
Importantly, cl 17.3 provided that:
“In addition to the obligations contained in clause 17.2, the Vendor shall not without the prior written consent of the Purchaser …:
- accept or to agree to accept a surrender of any Lease; or
- grant any Lease for any part of the property which is vacant at the date of this Contract or which may become vacant prior to completion; […].”
The references in this clause to a “Lease” must be read as a sublease, the property to be sold being the head lease. Clause 17.3 gave the Purchaser a protection against dealings prior to completion but only from “the date of this Contract”, which, as I have said, could not be sensibly construed within other clauses of this contract as the date on which the document had been signed by the Vendor and Mr Chappell. Therefore if the warranty as to the extent of dealings spoke from 22 November 2007, there would be a gap in which the Purchaser would be unprotected against adverse dealings by the Vendor because cl 17.3 precluded dealings only from 14 January. The more likely intention was that this warranty in special condition 2 would speak of the circumstances as at the time when it took effect as a warranty to the Purchaser: upon the Purchaser’s ratification. The question then is whether the Vendor’s agreement with Kevroy for the grant of a new sublease, which was reached on 20 December 2007, resulted in the Vendor being in breach of that warranty.
- For the Vendor and Holdings, it was not argued that the agreement for this sublease was not a “dealing”. Rather the argument was that the Purchaser cannot rely upon it as a dealing within the warranty because the Purchaser knew of it when the contract was ratified. To the extent that this argument is raised on the pleadings, it arises in this way. Paragraph 33A of the further amended statement of claim[10] pleads that the Vendor did not disclose the new sublease in the contract of sale. By para 33A of its defence, the Vendor denies that allegation, pleading that it is untrue because “the [Vendor] did disclose the sublease to the [Purchaser] on or before 14 January 2008”. Then in para 33B of the defence, it pleads that the relevant Kevroy agreement occurred after the creation of schedule 3 to the contract of sale (as it did) and “was disclosed to the [Purchaser] immediately it was created”. Two things may be noted of that pleading. Firstly it does not deny, and nor was there a basis for doing so, that the agreement to grant the new sublease to Kevroy was not disclosed within schedule 3 of the form of contract. Secondly, the defendant’s plea that there was a disclosure of that dealing prior to 14 January 2008 is put forward as an answer to the claim for breach of warranty but without any explanation of the legal basis for doing so. So there is no plea that the terms of the document signed on 22 November were varied or that the Purchaser should be estopped from enforcing the warranty in this way. The Vendor simply refers to Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Ltd[11] in support of a submission that in the circumstances
“the ratification of the commercial contract with knowledge of the existence of the new Kevroy sublease is consent to enter into an altered contract.”
That proposition is not pleaded.
- As already noted, in the proceedings decided in favour of Kevroy, A Lyons J held that the contract of sale was ratified on the day on which the Purchaser became registered. The Vendor’s argument is that the agreement for the new sublease was clearly enough disclosed prior to that day. Of course this was at a time when the Purchaser did not exist. Nevertheless that would not preclude a finding that the Purchaser ratified the contract with knowledge of the Kevroy agreement albeit that the ratification followed very soon after the Purchaser came into existence. In the present context, where the Purchaser seeks summary relief without a trial, it is sufficient if the Vendor can show a factual issue to be tried in this respect (assuming that the outcome of that issue could provide a defence). The Vendor has demonstrated at least a triable issue as to the fact of the Purchaser’s knowledge. On 10 January 2008, solicitors acting for Kevroy faxed a letter of that date to Mr Chappell which set out some of the terms of settlement between the Vendor and Kevroy. They included an agreement to grant to Kevroy a residential sublease for the balance for the term of the head lease on terms similar to other residential subleases except for certain amendments which were there described. Now Mr Chappell was not a director of the Purchaser upon its registration or for at least some months thereafter. However according to an affidavit by Mr M S Kelly, the solicitor for the Purchaser, he became aware on or about 11 January 2008 that the Vendor was proposing to extend the sublease. He says that his awareness was only “in general terms”. But it happened by Mr Chappell providing him with a copy of that letter of 10 January from Kevroy’s solicitors. Undoubtedly Mr Kelly was acting for those who were attending to the registration of the Purchaser and who would decide on its behalf to ratify the contract. So there is at least the real possibility that the Purchaser was aware of the contents of that letter of 10 January when it ratified the contract.
- Mr Kelly had a telephone discussion with the Vendor’s solicitors on 14 January in which he asked for information to enable the Purchaser “properly to consider the Kevroy issue”. On the same day he emailed a letter to the Vendor’s solicitors asking for “relevant correspondence and documentation to enable our client to be in a position to properly consider the Kevroy issue”. Apparently there was no reply to this letter, at least prior to the ratification of the contract on that day. Indeed it is possible that the ratification preceded Mr Kelly’s letter. The parties are agreed that the contract was ratified on 14 January although the evidence does not disclose the precise act by which that occurred.
- The Vendor’s solicitor has sworn an affidavit to the effect that Mr Kelly knew of the terms of the Kevroy settlement earlier than 11 January 2008. It is unnecessary to discuss that contest. On any view there is at least a triable issue that the agreement for the Kevroy sublease was disclosed and became known by the Purchaser upon its registration and prior to its ratification of the contract.
- The question then is whether this provides a defence to the Purchaser’s claim that the agreement for lease was a dealing by which the warranty was false. It may be accepted for present purposes that the Vendor and Mr Chappell had been able to vary the terms of what they had signed on 22 November 2007, so as to exclude the agreement for the new sublease from the operation of the warranty. However they did not do so. There is no indication in the evidence that the relevant parties prior to the registration of the Purchaser (the Vendor and Mr Chappell) or after its registration (the Vendor and the Purchaser) agreed to such a variation. And as mentioned, such an agreement is not raised by the Vendor’s pleading.
- Nor is there any apparent basis for an argument that, by an estoppel, this claim for breach of warranty is precluded. The submissions for the Vendor did not attempt to articulate such a case. Instead there was simply the bald contention, to which I have referred, that the ratification with knowledge of the new Kevroy sublease constituted “consent to enter into an altered contract”.
- Any estoppel argument would be affected by the fact that the form of contract was signed by the Vendor well in advance of the contract coming into existence. If in that interim period the Vendor was unable to unilaterally withdraw, then it could not argue that it acted in reliance upon anything from the Purchaser, by going ahead with the sale but only upon an understanding, known to the Purchaser, that the new sublease would not be caught by the warranty.[12] And there was no argument for the Vendor that it was free to unilaterally withdraw. As I have said, its only argument was that some alteration to the terms of the contract of sale should be inferred from the Purchaser’s ratification with knowledge of this new dealing. The Purchaser’s knowledge was therefore inconsequential. The warranty exempted only the dealings which were set out in schedule 3 to the form of contract. It did not contain a general exemption, such as a reference to any other dealing of which the Purchaser was aware. Of course it was impossible for the Vendor to include within the specific exemptions in schedule 3 to the contract a dealing which was yet to occur. But it was entirely within the Vendor’s power to prevent the occurrence of further dealings. If the warranty was to be interpreted as speaking from 22 November 2007, it was open to the Vendor to engage in further dealings which might have greatly diminished the value of the property to be sold, but to do so before there was a concluded contract by the act of the Purchaser’s ratification, and to do this with no financial consequence to the Vendor or recompense to the Purchaser. And had there been some dealing which was so serious as to dissuade the Purchaser from ratifying the contract, nevertheless Mr Chappell would have been exposed to a liability for damages and in that event, there would have been a potential liability on the part of the Purchaser by s 131(3)(a).
- In my conclusion the Vendor was in breach of the warranty in special condition 2 because there was a dealing, constituted by the agreement to give Kevroy its new sublease, which was not within those exempted by schedule 3.
The put and call options
- The agreements for put and call options for shares in Connie Bay are in substantially identical terms. They were signed on 22 November 2007, and were also subject to s 131. There is no question that they have been ratified. As noted already, they relate to different portions of the shares in Connie Bay and they prescribe different periods in which the put and call options may be exercised. That which is to be exercised earliest prescribes a period for the call option of 1 July 2008 to 15 July 2009, and for the put option from 1 July 2009 also to 15 July 2009. On the exercise of either option, the Purchaser is to deliver to Holdings two copies of a contract for the purchase of that parcel of shares duly executed by the Purchaser. The date of that contract is deemed to be the date of the exercise of the option. Holdings is to execute the contract within three business days of receiving it. The form of the contract is attached to the option agreement. The purchase price would be $3,000,000, of which $5,000 was paid on the signing of the option agreement and the balance to be paid on completion. Completion is to take place 33 days from the date of the exercise of the option.
- Neither the option agreements nor the contracts attached to them provide for the effect of a breach of the warranty in special condition 2 of the contract for the sale of the head lease. However, documents later executed by Holdings do so. First there is a deed, dated simply 2009, but which was apparently executed prior to 4 March this year.[13] The parties are the Vendor, the Purchaser and Holdings. Plainly it was executed after the registration of the Purchaser because it refers to its ACN number. It recites that the Vendor and Purchaser had entered into the contract for the sale of the leasehold and that:
“The Contract contains a Special Condition that, in the event that [the Purchaser] suffers loss and damages [sic] as a consequence of [the Vendor’s] breach of any of the warranties contained in the Contract, [the Purchaser] can offset its loss and damage against moneys it owes to [Holdings] under the Put and Call Option agreements entered into between [the Purchaser] and [Holdings] on 22 November 2007 (“the Special Condition”).”
Clause 1 of this deed provides:
“In consideration of [the Vendor] entering into the Contract with [the Purchaser], [Holdings] agrees to be bound to the Special Condition contained in the Contract.”
That stated consideration was a past consideration, but this promise was made in what was expressed to be a deed and executed in accordance with s 127 of the Corporations Act. As set out earlier, the special condition provided that in the event that the Purchaser suffered loss and damage in consequence of a breach of warranty, the Purchaser could retain “such loss and damage from moneys due to be paid to [Holdings]” under these agreements for the acquisition of shares in Connie Bay.
- There is a further deed, dated 22 April 2008, between the Vendor, the Purchaser and Holdings. Again it recites the contract for the sale of the head lease. It recites also the option agreements. And it recites that the Vendor and the Purchaser came to an agreement in special condition 2 of the contract of sale which “the parties wish to document … in this Deed”. By cl 3.1, Holdings “acknowledges and agrees that it is bound by the provisions of special condition 2 of the Contract”. Clause 3.2 provides:
“In the event that [the Purchaser] suffers any loss and damage as a consequence of the [the Vendor’s] non-compliance with the Warranties contained in special condition 2 of the 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 moneys due to be paid by [the Purchaser] to [Holdings] under the contracts to be entered into pursuant to the … [Connie Bay] Put and Call Options.” (emphasis added)
What may be retained from the price of the shares?
- 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”.
- 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. His argument was strongly critical of what he said was the delay by the Purchaser in pursuing its damages claim. To a point that criticism is well-founded. There is yet no evidence that any particular loss has been suffered from this breach of warranty. And as I have mentioned, the pleaded case for damages for that breach does not meet the requirements of the UCPR. But the delay, such as it has been, does not go to the present question which is one of the construction of the agreement between Holdings and the Purchaser.
- On behalf of the Purchaser, there are two arguments on this point. 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.[14] 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.
- Neither of those submissions is particularly directed to the terms of the relevant deeds. The first of those arguments refers to cases and commentaries involving contracts for the sale of land for which time was not of the essence and which contained provisions not only for compensation but also for the assessment of that compensation by an arbitrator appointed by the parties. So in Edson v Sun Kuong Restaurant for example, Hodgson J held that the vendor, having received a claim for compensation for an error or misdescription, could not issue a notice to complete until the amount of the compensation had been determined in the way in which the parties had agreed. That was because the purchaser was not obliged to complete without receiving an amount of compensation.
- But 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. The authorities relied upon by the Purchaser are not immediately relevant, partly because in this case the Purchaser cannot say that its contract entitles it to a certain process for the quantification of its loss. For example in Howard Developments Pty Ltd v M Makers & Co. Pty Ltd,[15] the relevant contract contained a standard condition in these terms:
“8.No error or misdescription of the property shall annul the sale, but compensation if demanded in writing before completion, but not otherwise, shall be made or given as the case may require, the amount to be settled in case of difference by an arbitrator appointed by the parties by mutual agreement or failing agreement nominated by the President for the time being of the Law Society of New South Wales…”
Hope J concluded as follows:
“In my opinion, having regard to all the circumstances of the contract, the obligation of the vendor in a case such as the present is to transfer or convey the whole property which he has contracted to transfer or convey, or, if he is not in a position to do this because of some defect of title which falls within cl 8 of the contract and in respect of which a claim for compensation has been made before completion, his obligation on completion is to transfer or convey what title he has, and to make compensation in respect of the relevant defect constituting the error or misdescription. It follows that the purchaser is entitled to have the amount of the compensation determined before completion. Therefore the vendor is not in a position to complete until the amount of that compensation has been determined, and accordingly is not in a position to give a notice to complete.”[16]
The purchaser there had an express contractual entitlement to have the compensation determined, and the vendor was obliged to have the compensation determined so as to be in a position to complete the contract. In the present case, there is no such 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.
- The Purchaser argues that if it is not able to withhold all of the price from Holdings, pending damages, it is able to retain the amount of “the maximum potential liability” of the Vendor for breach of warranty. This argument relies in particular on a passage from Goode on Legal Problems of Credit and Security (2008, 4th ed) at [7-22] as follows:
“It is not uncommon for a party to stipulate for a right to set off unliquidated, and even contingent, claims against moneys due to the other. Is such a stipulation valid? If, for example, a bank’s customer has a credit balance of ₤10,000 and the bank seeks to exercise a contractual right to “set off” an unliquidated claim for damages for fraud, the two claims cannot at that stage be combined, because one of them is unquantified so that we are unable to say to what extent, if at all, the credit balance is reduced. On the other hand, we must seek to give some meaning to the term of the agreement which enables the bank to “set off” even an unliquidated claim. […T]he so-called contractual set-off in relation to unliquidated claims is in effect two rights rolled up into one: in the first instance, a right to suspend payment, and later, when the amount of the claim has become liquidated, a set-off which will result in pro tanto extinguishment of the…balance.
The application of the set-off clause to a contingent claim is likely to produce a similar effect, though this depends on the circumstances and on the agreement between the parties. Where the contingent claim is of a known maximum amount – as in the case of a guarantee of a fixed indebtedness – it is a question of construction of the agreement whether the bank is intended to have a mere right to suspend payment until the liability matures and the actual amount becomes known, with an ensuing right of set-off, or whether on the other hand the bank is to have an immediate right to set-off the maximum liability upon terms of re-crediting the customer with the appropriate amount if the actual liability proves to be less. In most cases, the former construction is likely to prevail.”
But again the question is one of construction of the subject contract and the deeds. The parties have agreed that something may be retained from the purchase price for the shares. By the deed of April 2008, they have agreed that no more than the value of the Purchaser’s loss may be retained. Suppose the Purchaser claimed a loss of $10,000. The parties could hardly be thought to have agreed that, pending the evaluation of that claim, the Purchaser might withhold the balance price for the shares of nearly $3,000,000. Nor is it a likely intention to attribute to them that if, as here, the Purchaser was yet to put an amount to its claim, it might withhold the whole price. Alternatively, the retention of the “maximum” amount of the loss would not be without its practical difficulties. How is that maximum to be quantified, at least here where the claim is unquantified?
- The present context is different from that example of the bank and its customer. In that example, the party not claiming to have suffered the unliquidated loss would not have to do anything in exchange for the balance as reduced by the bank. But the payment from which any retention is to be made here is to occur in exchange for a transfer of shares. The retention of the upper limit of the Purchaser’s loss might seem reasonable from the Purchaser’s perspective. But for Holdings, it would have to assess in some way the upper limit of the Purchaser’s loss in order to determine whether the amount which is tendered for its shares obliges it to transfer them. Just how Holdings might assess that in the present case is not apparent. On an objective view, it is unlikely that this was the intended effect of the parties’ agreement.
- 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.
- 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.
- 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.
- I turn then to the declaratory relief which is sought within the originating application.[17] The Amended Originating Application seeks relief in relation to what it defines to be “the compensation”, meaning the:
“compensation (including damages for breach of contract and equitable compensation) that…[the Vendor] is liable to pay [the Purchaser] by reason of any breach by [the Vendor] 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 [Contract], and compensation that [Holdings] is liable to pay [the Purchaser] as a consequence of there having been a dealing affecting [the Vendor] 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 Purchaser].”
Before going to the declarations which are sought, it must be noted that the only right of retention from the price otherwise payable to Holdings could come from a breach of “the first two lines of Special Condition 2”, and the incurring of a loss or damage as a result. Holdings has not agreed that any loss from the breach of those standard conditions could be withheld from the price payable to it. In argument the Purchaser relied only upon a breach of the warranty in special condition 2 to support its claim for declaratory relief in the Amended Originating Application.
- The declarations sought are as follows:
“(d)[The Purchaser] is entitled to set-off any compensation … against, or otherwise deduct or retain such compensation from the purchase price or other sums (“purchase price”) payable by [the Purchaser] to [Holdings] at or before completion of any agreement in writing (“Contract for Sale of Shares”) formed on [the Purchaser’s] or [Holdings’] exercise of any one or more of the [Put and Call Options]…;
(e)[The Purchaser] is not obliged in equity or at law to pay to [Holdings] any part of the purchase price until after the amount of such compensation, or in the alternative, the amount of such compensation … has been determined by adjudication or agreement;
(f)[Holdings] is not entitled to compel [the Purchaser] 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 … has been so determined.”
- It follows from this judgment that the Purchaser is not entitled to declarations as sought by paras (e) and (f) of the Amended Originating Application. The Purchaser has established that it would be entitled to retain, from the purchase price payable to Holdings under a contract resulting from the exercise of any option granted under an agreement dated 22 November 2007, the amount of its loss and damage by reason of the Vendor, on or about 20 December 2007, agreeing to grant to Kevroy a residential sublease. But the right of retention is for an amount which has been duly assessed, i.e. for a liquidated sum. A declaration with that qualification is not sought by the Purchaser.
Relief in BS 3078/09
- The Purchaser has established that the Vendor breached the warranty in special condition 2, having agreed to grant to Kevroy the new sublease. A declaration to that effect would have utility. That issue is involved in the Purchaser’s proceedings in which it claims damages.[18] But Holdings is not a party to those proceedings. It is a respondent only to the originating application.[19] Accordingly, in that proceeding it will be declared that there was a breach of the warranty contained in special condition 2 of the contract of sale between the applicant and the respondent Keswick Island Pty Limited, in that as at 14 January 2008 there had been a dealing in respect of the Land not revealed by the searches in schedule 3 to the contract, the dealing being an agreement by Keswick Island Pty Limited to grant to Kevroy Pty Ltd a sublease for a term expiring in 2096. Apart from the declaration, the Originating Application must be dismissed.
The applications in BS 12924/08
- I turn to the applications made in the other proceedings. The first defendant in those proceedings was Kevroy, but it has succeeded in resisting that claim by the judgment of A Lyons J. There remain the claims against the Vendor as second defendant and the Vendor’s principal Mr Alexander as third defendant.
- The Purchaser applies for summary judgment under r 292 against Kevroy “for damages to be assessed”. Rule 292 provides that the court may give judgment for a plaintiff against a defendant for all or part of the plaintiff’s claim and may make any such other order the court considers appropriate. By this application, the Purchaser seeks the equivalent of what is described in r 284(2) as a judgment conditional on the assessment of damages, which is the form of the order which may be sought in default of a notice of intention to defend where the plaintiff’s claim is for unliquidated damages. The relevant claim against the Vendor as the second defendant is for an award of damages. The order which is now sought is not for judgment on that claim, for a judgment on that claim must be for a money sum. In substance what is sought is the summary determination of certain questions which arise in that claim.
- It is unnecessary to decide whether r 292 permits the order which is sought. The determination now of the proposed questions would serve the same purpose. And because the Purchaser claims also damages for breach of other terms of the contract of sale, although its right to retain is limited to the assessed damages for breach of warranty, it will be necessary to assess the latter distinctly. That might not be assisted by an order which is simply in the form of a judgment for damages to be assessed.
- In the alternative to its application under r 292, the Purchaser seeks orders that the court decide separately from other questions, some eight questions set out in the amended application, pursuant to r 483. The first and second of those questions are answered by the declaration which will be made in BS 3078/09. Mr Alexander is not a party to those proceedings, and those questions would not seem to be essential in the case against him in these proceedings. Still, there is utility in making a like declaration within these proceedings, because it is in these proceedings that the damages for breach of warranty would be assessed. The questions are as follows:
“(a)Was the written agreement between the First Defendant and the Second Defendant dated 20 December 2007 by which the Second Defendant agreed to grant the first defendant “a residential sub-lease for the balance of the term of the Head Lease (i.e. 94 years)” a dealing within the meaning of that term as used in the warranty (the “warranty”) contained in the first two lines of special condition 2 of an agreement in writing (the “commercial contract”) dated 22 November [2007] between the Plaintiff and the Second Defendant referred to in the Third Amended Statement of Claim?
(b)If the answer to the question at (a) is “yes”, did the fact that that agreement was not revealed by the searches in Schedule 3 to the commercial contract constitute a breach of the warranty by the Second Defendant?”
- It will be ordered that those questions be decided before the trial of the proceeding. Each of the questions must be answered “yes”.
- The other questions which the Purchaser wishes to have decided now concern whether the new sublease constituted an “encumbrance” for the purposes of the contract of sale, whether it resulted in a breach by the Vendor of the obligation to transfer the lease free from encumbrances other than as set out in the contract, and whether the agreement with Kevroy on 20 December 2007, the acceptance of the surrender of the former Kevroy sublease and the grant of the new sublease offended standard condition 17.3(a), 17.3(b) or 17.3(c) of the contract of sale.
- I have concluded that only what occurred on or after 14 January 2008 (the ratification of the contract) could have involved a breach of cl 17.3. It follows that the agreement of 20 December 2007 did not amount to an agreement to accept a surrender of a sublease within cl 17.3(a).
- The acceptance of the surrender of the previous sublease involved a breach of cl 17.3(a) and no argument was advanced against that, except by the argument that the contract had been in some way varied by the Purchaser being informed of the agreement with Kevroy. Similarly it is established that the grant of the new sublease breached cl 17.3(b). On surrender of the previous sublease, that land became “vacant” in the relevant sense, which was that it was not subject to a sublease.
- In my view the acceptance of the surrender of the former sublease and the grant of the new sublease did not also involve a breach of cl 17.3(c), because it refers to “any other dealing concerning any Lease”, the intention being that this would cover something not within cl 17.3(a), (b) or otherwise within (c). And this would add nothing to the Purchaser’s proven case of a breach of those other provisions.
- The other questions concern whether the new sublease constituted an “encumbrance” within the meaning of that term as used in Item L of the contract and cl 4(b) of the standard conditions which required the Vendor to provide a transfer of the Land in favour of the Purchaser “free from Encumbrances (other than those set out in Item L)”. The only issue here (again apart from that of the suggested variation of the terms of the contract from the disclosure of the Kevroy agreement) is whether the sublease constitutes an “encumbrance”. There is no submission for the respondents that it was not an encumbrance. In Jansen v Frexbury Pty Ltd[20] McMeekin J accepted without comment that a sublease under the Land Act 1994 (Qld) was an encumbrance. According to Butterworths’ Australian Legal Dictionary an encumbrance is:
“a proprietary right held by one person over the property of another that limits the ways in which the owner may use or deal with the property…”
The question here is what it means in the context of this contract. The item schedule of the contract refers to encumbrances at item 11 and to “leases and service contracts” at item 12, suggesting that a lease, in this case a sublease, would not be an encumbrance. I am not persuaded to decide this question now. Its decision would not affect the completion of any contract to purchase the Connie Bay shares and it is unlikely to affect the damages ultimately recoverable by the Purchaser, given the breaches of cl 17.3.
- As to the questions in relation to cl 17.3, it will be ordered that the following questions be decided before the trial of the proceeding:
(da)Did the first Kevroy contract alleged in paragraph 17A of the Third Amended Statement of Claim amount to an agreement to accept a surrender of a sublease within SC 17.3(a)?
(db)Did the acceptance of the surrender of the Kevroy sublease amount to accepting a surrender of a sublease within SC 17.3(a)?
(e)Did the grant of the new sublease by the Second Defendant to the First Defendant constitute the “grant of any Lease for any part of the Property which is vacant at the date of this Contract or which may become vacant prior to completion” within the meaning of those words as used in cl. 17.3(b) of the standard conditions?
(f)Did either or both of the Second Defendant’s accepting the surrender of sublease No 706746464 and granting the new sublease amount to consenting to a “dealing concerning any Lease” within the meaning of those words as used in cl. 17(3)(c) of the standard conditions?
Those questions are decided as follows:
(da)No.
(db)Yes.
(e)Yes.
(f)No.
- I will hear submissions as to what further orders and directions ought to be made to progress proceedings BS 12924/08. I will hear the parties as to costs on each proceeding.
Footnotes
[1] BS 3078/09.
[2] Kevroy P/L v Keswick Developments P/L; Keswick Developments P/L v Kevroy P/L & Ors [2009] QSC 49.
[3] [2009] QSC 49 at [40].
[4] Austin and Ramsay (2007, 13th ed) at [15.290].
[5] [2006] WASC 128.
[6] [2009] QSC 49 at [58].
[7] s 131(2).
[8] s 131(4).
[9] Which in this case was a reasonable time from the signing of the contract document, there being no time agreed: s 131(1)(b).
[10] In BS 12924/08.
[11] (2005) 55 ACSR 1; [2005] NSWCA 319.
[12] Cf. Taylor v Johnson (1983) 151 CLR 422.
[13] According to para [69] of the affidavit of M S Kelly filed 2 April 2009.
[14] The argument cites Edson v Sun Kuong Restaurant (1991) 5 BPR 11,452; [1993] ANZ Conv R 228 and Howard Developments Pty Ltd v M Makers & Co. Pty Ltd (1972) 4 BPR 9460, as well as Wikrama-Nayake, Voumard The Sale of Land, (1995, 5th ed) at [7320] and P Butt, 1985, The Standard Contract of Sale in New South Wales at 373-4.
[15] (1972) 4 BPR 9460.
[16] (1972) 4 BPR 9460 at 9467-8.
[17] BS 3078/09.
[18] BS 12924/08.
[19] BS 3078/09.
[20] [2007] QSC 387 at [7].