FEDERAL COURT OF AUSTRALIA Tudehope v Gordonstone Coal Management Pty Ltd [2000] FCA 914 CONTRACT - enforceability of vendor's option to buy-back property following non-payment or late payment of consideration by it - time for accrual of option rights - time of entry to deed or upon payment - whether requirement to pay a condition precedent to buy-back rights - where consideration is nominal sum - analysis of language and structure of deed. Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352, cited Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632, 641-2 cited DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, 431 cited Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549, 556-557 cited Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537, 552 referred to Mehmet v Benson (1965) 113 CLR 295, 307-8 cited Barba v Gas & Fuel Corporation (Vic) (1976) 136 CLR 120, 131-2 referred to Lewis construction (Engineering) Pty Ltd v Southern Electric Authority of Queensland (1976) 50 ALJR 769 cited NEIL JOHN TUDEHOPE v GORDONSTONE COAL MANAGEMENT PTY LTD & OTHERS QG 170 OF 1997 KIEFEL J 7 JULY 2000 BRISBANE IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QG 170 OF 1997 BETWEEN: NEIL JOHN TUDEHOPE APPLICANT AND: GORDONSTONE COAL MANAGEMENT PTY LTD ACN 000 480 071 FIRST RESPONDENT AND: ARCO COAL AUSTRALIA INC ARBN 009 738 407, MITSUI GORDONSTONE INVESTMENT PTY LIMITED ACN 002 429 763, AND MLC COAL INVESTMENT PTY LIMITED ACN 060 305 044 SECOND RESPONDENTS AND: GORDONSTONE COAL MANAGEMENT PTY LTD ACN 000 480 071 CROSS-CLAIMANT AND: NEIL JOHN TUDEHOPE FIRST CROSS-RESPONDENT PAUL BORG SECOND CROSS-RESPONDENT SIMON GARY BURNETT THIRD CROSS-RESPONDENT DAVID FAITH FOURTH CROSS-RESPONDENT TONY HARB FIFTH CROSS-RESPONDENT MAXWELL PETER SIXTH CROSS-RESPONDENT STEPHEN DAVID ROBERTS SEVENTH CROSS-RESPONDENT BEVAN JOHN VANDERSEE EIGHTH CROSS-RESPONDENT JAMES JOHN MAHER NINTH CROSS-RESPONDENT KEVIN BARRY NILSEN TENTH CROSS-RESPONDENT JUDGE: KIEFEL J DATE OF ORDER: 7 JULY 2000 WHERE MADE: BRISBANE THE COURT DECLARES THAT: 1. Part 3 of the Deed entered into between the applicant and the 1st Respondent provides for an enforceable grant of a Buy-Back Option in favour of the 1st Respondent. THE COURT ORDERS THAT: 2. The applicant pay the 1st Respondent's costs incurred with respect to the determination of this issue, including any reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QG 170 OF 1997 BETWEEN: NEIL JOHN TUDEHOPE APPLICANT AND: GORDONSTONE COAL MANAGEMENT PTY LTD ACN 000 480 071 FIRST RESPONDENT AND: ARCO COAL AUSTRALIA INC ARBN 009 738 407, MITSUI GORDONSTONE INVESTMENT PTY LIMITED ACN 002 429 763, AND MLC COAL INVESTMENT PTY LIMITED ACN 060 305 044 SECOND RESPONDENTS AND: GORDONSTONE COAL MANAGEMENT PTY LTD ACN 000 480 071 CROSS-CLAIMANT AND: NEIL JOHN TUDEHOPE FIRST CROSS-RESPONDENT PAUL BORG SECOND CROSS-RESPONDENT SIMON GARY BURNETT THIRD CROSS-RESPONDENT DAVID FAITH FOURTH CROSS-RESPONDENT TONY HARB FIFTH CROSS-RESPONDENT MAXWELL PETER SIXTH CROSS-RESPONDENT STEPHEN DAVID ROBERTS SEVENTH CROSS-RESPONDENT BEVAN JOHN VANDERSEE EIGHTH CROSS-RESPONDENT JAMES JOHN MAHER NINTH CROSS-RESPONDENT KEVIN BARRY NILSEN TENTH CROSS-RESPONDENT JUDGE: KIEFEL J DATE: 7 JULY 2000 PLACE: BRISBANE REASONS FOR JUDGMENT 1 The remaining issue in these proceedings involves ten persons. Mr Tudehope has been substituted as the representative for that group. I have amended the names of the cross-respondents to refer only to those ten persons. Each of them entered into a Deed with Gordonstone Coal Management Pty Ltd pursuant to which they purchased a house property in Emerald. The Deed also contained a "Buy-Back Option" in favour of that company. The question for determination is as to the enforceability of that option. (In these reasons I shall refer to Mr Tudehope as "the applicant" or "the purchaser" (the description under the Deed) and to the second respondent as "Gordonstone" or "the vendor"). 2 By an undated Deed entered into some time prior to the date nominated for completion, 11 December 1995, it was agreed that Gordonstone would sell to the applicant the land, improvements and chattels identified in the Reference Schedule to the Deed, a dwelling house at Emerald. The other nine group members entered into deeds in the same terms. The Deed referred to the applicant as a "purchaser" and recited his wish to participate in the Gordonstone Home Ownership Plan. That Plan included a scheme of subsidised home purchases offered by Gordonstone to its employees at its Gordonstone mine. 3 Part 2 of the Deed was entitled "Contract of Sale" and by clause 2.1 Gordonstone agreed to sell, and the applicant agreed to buy, the property at a specified price "and upon the terms and conditions of this Deed". The price was specified in the Reference Schedule and it was to be paid on the date for completion in exchange for vacant possession, together with an executed transfer in favour of the purchaser capable of immediate registration (cl 2.2). Time was deemed to be of the essence of Part 2 (cl 2.16). 4 The "Buy-Back Option" was defined, in clause 1.1, as "the option to purchase the Property granted by Part 3". Clause 3.1 of Part 3, upon which the submissions focussed, provided: "(a) The Purchaser grants to the Vendor an irrevocable option to purchase the whole of the Property on the terms and conditions of the Option Contract. (b) The Vendor agrees to pay the Purchaser the sum of $10.00 as the consideration for the grant of this Buy-Back Option. (c) The Vendor must pay the $10.00 consideration on the date of completion of the purchase of the Property by the Purchaser." 5 The Buy-Back Option could be exercised by the "Second Exercise Date" and by the giving of a Buy-Back Notice (cl 3.2). That date was twenty years from the date of the Deed. On service of that notice the prior purchaser and vendor became, respectively, seller and purchaser of the property on the terms and conditions of the Option Contract and the new seller was required to execute an Option Contract when tendered to him (cl 3.3(a) and (b)). 6 The Option Contract referred to in clause 3.1 was defined as follows: " 'Option Contract' means a contract of sale on the terms and conditions in Part 2 as modified by the terms and conditions of Part 3 in the case of the Buy-Back Option and of Part 4 in the case of the Sell-Back Option." The "Option Price" was the original purchase price, plus the "Gordonstone Subsidy", together with the value of any approved alterations to the property, less any restoration costs (cl 1.1 and Schedule 2, Item D). The Gordonstone subsidy was an amount determined by the formula contained in the Schedule, which had regard to the value of the additional equity in the property earned by a purchaser over the time he or she participated in the scheme. So far as concerned subsidised purchases, the purchaser's interest in the property increased incrementally from forty-five per cent of the subsidised price to one hundred per cent over a period of ten years from the original purchase date and without any further monies being expended by that purchaser. 7 The benefit of the Buy-Back Option could be assigned by the vendor, and it was expressed to bind the purchaser's successors in title to the property (cl 3.4 and 3.5). By clause 3.6: "The Vendor and Purchaser declare that their common intention in entering into this Deed is that Part 3 creates a conditional contract and not an offer coupled with an agreement not to rescind the offer." 8 Up to the period of the First Exercise Date (ten years from the date of the Deed) the vendor was not able to give a Buy-Back Notice unless one of the conditions set out in clause 3.8 was satisfied, together with any collateral conditions attaching to it pursuant to clause 3.9. In summary, clause 3.8 referred to the following occurring before the Buy-Back Option could be exercised: (a) The purchaser no longer being an employee; (b) The purchaser ceasing in occupation of the property; (c) The purchaser committing a breach of the Deed and not remedying it upon notice requiring it to be remedied; (d) The purchaser breaching a mortgage to which the vendor had consented; (e) The purchaser committing an act of bankruptcy; (f) Property of the purchaser being taken in execution of the Court process; (g) The purchaser breaching the Deed of Covenant entered into with a financier and the vendor. After the passage of ten years and up to the "Second Exercise Date" at twenty years, the vendor was not able to give a notice exercising the Buy-Back Option except in the circumstances referred to in (c) to (g) or on one other additional occurrence which is not here relevant. There were further restrictions placed upon the giving of a Buy-Back Notice in the event that a Sell-Back Notice had been given. 9 The purchaser was required, under Part 5, to sign and deliver a consent caveat, in the form of the Schedule, at the time of completion of the contract, and the vendor agreed to withdraw it once the Buy-Back Option lapsed (cl 5.1). Clauses 5.2 and 5.3 provided for the deposit by the purchaser of any instrument of title for the property with the vendor, who was to retain it until the time for the exercise of a Buy-Back Option lapsed "to better secure the Vendor's rights under the Buy-Back Option" and notwithstanding clause 2.2; and for a Power of Attorney in favour of the vendor who was permitted to register it "to secure the proprietary interest of the vendor in the property under the Buy-Back Option and the performance of the Purchaser's obligations to the Vendor under this Deed". The vendor was not permitted to exercise that power until a certain time had elapsed after a request was made of the purchaser to execute a document under an Option Contract. 10 It was further provided that the purchaser was not to mortgage the property without the written consent of the vendor; but that the vendor would consent to such a mortgage so long as the proposed financier entered into the Deed of Covenant referred to above. By that deed it was provided that until after the Second Exercise Date, or until the Buy-Back Option or Sell-Back Option was exercised, the financier was not to deal with the property as security without the vendor's written consent; was not to part with the possession of any instrument of title; and consented to the vendor registering the caveat over the property. 11 The purchaser's obligations were dealt with in Part 7 and included continuing obligations with respect to dealing with the property, its occupation, maintaining insurance, keeping in repair and effecting alterations. Each of them were expressed to ensure until either the delivery of a Buy-Back Notice or Sell-Back Notice or the Second Expiry Date. 12 Evidence as to part of the background to the Deed (Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352) showed that the ten dollars referred to in clause 3.1(b) and (c) was the amount fixed upon as the value for the purpose of any assessment of capital gains tax and followed a request on the part of Gordonstone of the Australian Taxation Office for a ruling. That Office accepted that the parties to the plan would be seen as dealing with each other at arm's length as far as concerned the options, and that the value of $10.00 for the Buy-Back option (and nil for the Sell-Back option) was acceptable for capital gains purposes, that is to say, the potential for the imposition of capital gains tax on an employee's purchases had been avoided. 13 The applicant contended that the grant of an option to buy back the property did not come into effect in the present case for two reasons: there was no consideration paid; and the payment of the ten dollars was a condition which had to be fulfilled before the Buy-Back Option was binding or enforceable, and this could not now be fulfilled. The $10.00 was not paid to any of the 10 purchasers, but was tendered only on 9 December 1997, after the commencement of the proceedings. It was not accepted. Argument focussed substantially on the submission regarding the $10.00 as a condition precedent. 14 Gordonstone submitted that, in the context of the Deed as a whole, clause 3.1(c) cannot be said to require strict and timely performance of the promise to pay. Gordonstone also sought to have regard to the practical consequences of the construction for which the applicant contended, but the correctness of this approach was disputed by the applicant. I shall put it to one side for present purposes. 15 The test, as to whether a term of a contract is a condition, is whether it appears from the contract read as a whole, or particular terms of it, that strict or substantial performance of the promise was intended and that the promisee would not likely otherwise have entered into it: Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632, 641-2; DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, 431. Generally speaking, the Courts prefer a construction which will not give rise to an automatic right to rescind, so as to encourage the performance rather than avoidance of contractual obligations: Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549, 556-557. Here, the applicant submitted that if the option agreement came into existence he and the other group members were nevertheless entitled to rescind upon non payment at the date for completion and had exercised that right by the commencement of the proceedings. 16 The applicant's first position was that no binding agreement for the grant of an option was to come into existence until the money had been paid. In that respect, however, the Courts generally tend against a construction that a particular stipulation is a condition precedent to the formation or existence of a contract: Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537, 552. Mason J there pointed out that "In most cases it is artificial to say, in the face of the details settled upon by the parties, that there is no binding contract unless the event in question happens." 17 As earlier mentioned it is plain, from the background to the transaction, that the nomination of the sum in question was concerned with capital gains tax implications. It also follows that the parties can be seen, in that respect at least, to have viewed the transaction as a whole. What is not apparent, from either cl 3.1 or elsewhere in the Deed, is why payment on the date nominated, the date for completion of the contract of purchase, was to be regarded as of importance. Apart from the use of the word "must" in cl 3.1(c), there is nothing which would explain an obligation to pay on that date or, more to the point, why the grant of an option was to be deferred to the receipt of payment. Similar language is employed in other parts of the Deed, for example in cl 3.2(a) which provides that, to exercise the Buy-Back Option, the vendor "must" serve written notice of its exercise "by no later than" the exercise time on the second exercise date. It is not difficult to conclude, with respect to the exercise of this right, that strict compliance was intended and that time is to be taken as essential to performance of the option. With respect to cl 3.1(c), in my view it is otherwise. 18 The applicant submitted that the clause should be read as requiring strict and timely performance because the purchaser needed to know, at the date of completion, whether the option was to be available to the vendor and that it might be taken up in accordance with the terms of the Deed. The answer to that contention, and the issue relating to the requirement of payment generally, is that cl 3.1 and the Deed as a whole make it clear that a grant of an option was intended to take effect immediately upon entry into the Deed. 19 The language of cl 3.1(a) itself supports the notion of an immediate grant to Gordonstone, as vendor, of an option to buy-back. By it the applicant as purchaser "grants" "an irrevocable option … on the terms and conditions of the Option Contract". Nothing else in that clause detracts from the use of the present tense in connexion with the right created. The definition of 'Buy-Back Option' confirms the grant effected by Part 3. In consideration of it, by par 3.1(b), Gordonstone promises to pay the sum of $10.00. That payment, by par (c), is deferred to the date of completion. I shall later return to questions relating to the effect of non-fulfilment or delay, or breach of par (c), when dealing with the applicant's submissions relating to want of consideration. 20 Nowhere in cl 3.1 is it said that the grant of the option is to be deferred until payment is made. The applicant sought to claim support for such an implication from the provisions relating to the giving of the purchaser's consent to the caveat - which did not have to be provided until completion. From this one might consider that the right it was to protect was not to arise until that time. The later provision of the consent is not however inconsistent with the grant of an option at the time the Deed was made, since it was not until completion that Gordonstone lost its position of control as registered proprietor. 21 Further support for the grant of an Option on signing 'there and then' can be gleaned from the structure of the Deed, which has regard to one overall transaction. In this regard, the applicant submitted that the Deed should be viewed as providing for no more than a series of independent contracts, some of which might come into existence and others which might not. Little if any support for such a construction can be gained from the format and the terms of the Deed. The recital, at cl 2.1, discloses an agreement for the sale of the property "upon the terms and conditions of this Deed" which, of course, encompasses both the buy-back and sell-back options. The scheme was that, after purchase, the purchaser was to have the right to require Gordonstone to take the property back; and Gordonstone was to have the right to buy the property back in certain circumstances, such as where the applicant ceased to be its employee. It was not however suggested, nor could it be, that the exercise of that option would be onerous or operate unfairly to the applicant, and that the creation of such a right or its performance should therefore be viewed more strictly. The applicant was to receive more for the property than had been paid for it. Numerous provisions confirm that the right of Gordonstone to exercise the option was to be available to it - for the periods specified. The right was protected from the time of completion by the consent caveat, the deposit of instruments of title and a power of attorney and by the restrictions to be placed upon any financiers. It bound the applicant's succession in title and was assignable. These were expressed to take effect without reference to the payment of money or the coming into existence of the option agreement. Further, the availability of the right, by reference to the time in which it might be exercised, was expressed in the Reference Schedule to run from "the date of this Deed". Part 3 did create a conditional contract, as cl 3.6 declared. The Option Contract thereby created (cl 3.1(a)) was conditioned to the occurrence of one or more of the matters referred to in cl 3.8, but not to the timely payment of the $10.00. "Must" in cl 3.1(c), in my view, should be read as simply requiring payment, rather than as suggesting some result follows if the promise is not fulfilled on the date of completion. In my view par (c) contained a promise, but it did not amount to a condition of the grant of the option. 22 So far as concerned the Australian Taxation Office, it was necessary that the Deed with the applicant reflect the scheme and the value attributed to the buy-back option which had been the subject of the ruling. The word "must" may have been intended to underscore the obligation to pay, but it is not possible to discern that that meant that non-payment, or the lack of timely payment, was to put Gordonstone substantially in breach of the option agreement, and it is difficult to see that the Australian Taxation office would draw any adverse inferences from the fact that payment had not been made on completion. 23 As far as concerns the applicant's rights, in consequence of the failure to pay on time, it is important that time was not expressed to be of the essence of the provisions of the Buy-Back Option, whereas it was with respect to Part 2. Delay in performance would not have been a bar to performance in equity, although Gordonstone would be required to tender the sums before any claim could be made with respect to the applicant's obligations, as indeed occurred. It is not, however, every breach which will result in the right of a party to rescind or the denial of an order for specific performance. In the latter respect, it is not necessary that Gordonstone show that it has strictly and literally complied: see Mehmet v Benson (1965) 113 CLR 295, 307-8;Meagher, Gummow and Lehane, 'Equity, Doctrines & Remedies' 3rd edn, [2024]. 24 The applicant's contentions with respect to the failure of consideration have been largely dealt with in the above discussion concerning the construction of the agreement. The agreement itself provided for an enforceable promise to pay $10.00: see Barba v Gas & Fuel Corporation (Vic) (1976) 136 CLR 120, 131-2. Questions of sufficiency do not arise. The non-fulfilment or delay in fulfilment of the promise does not have the consequence that the agreement may be brought to an end by the applicant. 25 It has not been necessary for me to deal with Gordonstone's submissions as to the practical consequences of the construction for which it contended. Whilst considerable consequences might be taken into account where there was more than one construction open (Lewis Construction (Engineering) Pty Ltd v Southern Electric Authority of Queensland (1976) 50 ALJR 769), clause 3.1 did not appear to me to be so ambiguous. 26 There will be a declaration that Part 3 of the Deed entered into between Gordonstone and the applicant provides for an enforceable grant of a "Buy-Back Option" to Gordonstone. The applicant should pay Gordonstone's costs. I certify that the preceding twenty-six numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kiefel. Associate: Dated: 7 July 2000 Counsel for the Appellant: Mr P. Keane QC with Mr M. Amarena Solicitor for the Appellant: Nall Payne Counsel for the 1st & 2nd Respondents: Mr S. Sheahan SC with Ms H. Bowskill Solicitor for the 1st & 2nd Respondents: Minter Ellison Date of Hearing: 21 March 2000 Date of Judgment: 7 July 2000