Commonwealth v Dovoro / Commonwealth v Stonecat [1999] NSWSC 807

New South Wales Supreme Court CITATION : Commonwealth v Dovoro / Commonwealth v Stonecat [1999] NSWSC 807 CURRENT JURISDICTION : Common Law FILE NUMBER(S) : 10290/93; 10288/93 HEARING DATE(S) : 4,5,6,9,10,11,12,13 February 1998 JUDGMENT DATE : 5 August 1999

Commonwealth of Australia (Plaintiff) PARTIES : Dovoro Pty. Limited (Defendant) Stonecat Pty. Limited (Defendant) JUDGMENT OF : Dowd J

COUNSEL : Mr D.H. Murr SC (Plaintiff) Mr J.R. Wilson (Defendants) Australian Government Solicitor (Plaintiff) SOLICITORS : Harrington, Maguire & Co (Defendants)

CATCHWORDS : Misleading representations and reliance thereon; Lease by operation of law; Variation of rent for breach of Pt.5 of TP Act Trade Practices Act 1974 (Cwlth) ACTS CITED : National Health Act 1953 (Cwlth) Conveyancing Act 1919 CASES CITED : Sellara v Adelaide Petroleum (1994) 120 ALR 16 Finucane v NSW Egg Corporation (1988) AdLAR 486 DECISION : Verdict for the plaintiff in each matter on the statement of claim subject to cross claim relief.; Rental varied under s.87 of TP Act in both actions.; Damages awarded against plaintiff in respect of each cross action.; Costs and interest reserved.

THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

DOWD J

5 August 1999

10290/93 - COMMONWEALTH OF AUSTRALIA v DOVORO PTY. LIMITED

10288/93 - COMMONWEALTH OF AUSTRALIA v STONECAT PTY. LIMITED REASONS FOR JUDGMENT

1 HIS HONOUR: The Commonwealth of Australia, ("the Commonwealth"), the Plaintiff in both of these proceedings, erected at 2/12 Macquarie Street, Parramatta, premises to house various Commonwealth Government departments. The building was known as The Jessie Street Centre. It is on the fringe of the Parramatta business district, and was removed from the main shopping area. Limited public parking was available in the vicinity of this location. 2 On the ground floor was constructed an area for occupation as a cafeteria and restaurant, and a separate area for a drugstore, pharmacy and newsagency, as well as other shops. Although access to the ground floor of the building is from various doors, the majority of potential customers for both areas must enter the Parramatta Commonwealth Offices building through its main entrance. 3 The location of the Parramatta Commonwealth Offices was not in an area likely to attract passing pedestrian traffic or casual shopping or trade in normal business hours. The Parramatta Mall and Westfield Shopping Complex are some short distance from the Commonwealth Offices, providing retail banking and service facilities. The building itself had very limited retail activities. Facilities such as the law courts and nearby offices, but principally the building's occupants, were the potential main source of custom. 4 A department of the Commonwealth, known as the Australian Property Group, ("APG"), carried out leasing and property arrangements on behalf of the Commonwealth for the leasing of the Jessie Street Centre. In August 1989, APG advertised for tenders to lease the shop designated as a newsagency/drug store/general purpose store, being Shop number 6 in the retail area of the Jessie Street Centre. 5 On behalf of Stonecat, a consortium of persons who ultimately became directors of Stonecat submitted to the Commonwealth a tender for the lease of the premises, as a result of which APG, on 14 March 1990, granted approval to proceed with a lease on a base rent of $140,000 per annum adjusted annually in accordance with CPI, with additional charges estimated at $35,000 per annum. 6 Subsequently, officers of APG advised that approval had been granted to proceed with a lease, and as a result the consortium on behalf of Stonecat entered into possession pursuant to the agreement to lease, without a formal lease being executed. On 15 March 1991 Stonecat was advised that payment of outgoings and rent would commence on 15 April 1991. 7 On 18 December 1992 a notice to quit was served for non-payment of rent, and a summons for possession of the shop was filed on 29 January 1993, on which summons, on 1 May 1995, Simpson J. granted an adjournment on Stonecat's application, on the condition that Stonecat would consent to an order for possession. The premises were vacated on 3 July 1995. 8 The Commonwealth, after a series of amended pleadings, sued for the sum of $273,912.07, being rent and outgoings from 15 April 1991 to 18 January 1993, the expiry of the Notice to Quit, and claimed mesne profits from February 1993 to July 1995 at a rate of $14,633.33 per month, being the average monthly amount due for rent and outgoings during the term of Stonecat's tenancy, being an amount of $424,366.57, less payments of $36,000 from the period 8 March 1993 to 16 February 1995. The amount therefore owing, as claimed in the statement of claim, is the sum of $662,278.64. In addition to rent and mesne profits the Commonwealth claimed damages, interest and costs. 9 Stonecat eventually brought a cross claim which alleged that the Commonwealth, through APG, made representations to representatives of Stonecat that the total staff at the Jessie Street Centre would be some three thousand persons, and that there would be approximately two thousand visitors per day. 10 It was further alleged that the Commonwealth represented the leased premises could be used as a pharmacy, which would permit a dispensing of pharmaceutical products, and further that the Commonwealth would not do anything to prevent an NHS pharmacy, that there would be no staff canteens or vending machines operating in the complex, and that the Commonwealth would approve or ensure approval for a dispensing pharmacy with full NHS benefits. 11 It was alleged that Stonecat, in reliance on the Commonwealth's representations, undertook a fitout of the subject premises costing approximately $200,000, and entered into the agreement for lease of the premises. It was alleged that the Commonwealth's representations were future matters, and that the Commonwealth did not have reasonable grounds for making such representations. 12 Stonecat alleged misleading or deceptive conduct on the Commonwealth's behalf within s.52 of the Trade Practices Act 1974 ("the TP Act") in that the Commonwealth did not have reasonable grounds for holding the beliefs on which the representations were made and further alleged that the Commonwealth did not have a residential staff of approximately 3,000 as represented, and that at any particular time it did not exceed 2,000. Stonecat alleged further that the Commonwealth complex did not contain a 400 seat conference room as represented. 13 It was further alleged that the rental was not a proper and reasonable commercial rent, and that the premises could not be used as a dispensing pharmacy, and that a staff canteen and vending machines operated through the complex, and the lessee of the cafeteria did not have exclusive rights for the provision of food and associated services. It was further alleged by Stonecat that the Commonwealth would ensure grant of full NHS benefits for the dispensing pharmacy, notwithstanding an announcement to the contrary under the National Health Act 1953, announced on 6 August 1990, and that the premises could not in fact be used as a pharmacy with full NHS benefits. 14 Stonecat claimed loss and damage, being the cost of fitting out the dispensing pharmacy, and loss of profits that would have come from the business if it had included a dispensing pharmacy with full NHS benefits. It claimed a setoff against any sum which the claimant may be entitled to under the agreement for lease. Stonecat further claimed relief against forfeiture under the agreement for lease. 15 Stonecat also sought an order under s.87 of the TP Act, varying the agreement to release the cross-claimant from payment of rents other than the sum of $36,400 per annum, or such other figure as the court thinks fit, and further seeks damages under s.82 of the Trade Practices Act, and damages generally. The cross claimant claimed interest including compound interest. 16 The Commonwealth admitted in its defence to the cross claim the representation that the total staff in the Jessie Street Centre would be 3,000, but otherwise denied the facts alleged. The Commonwealth also admitted a representation that one of the objectives of the premises was a retail area providing a comprehensive range of retail services which might include a dispensing pharmacy, but denied that it did not have reasonable grounds for making the representations. 17 In relation to the allegation that the Commonwealth would do all that was reasonably necessary to have a full dispensing NHS pharmacy, the Commonwealth contended that it was an implied term of the agreement that the terms agreed were subject to the laws of the Commonwealth, and to administrative acts carried out in the implementation of the policy of the Commonwealth Government from time to time. 18 The Commonwealth admitted that an agreement had been entered into by the relevant Minister and the Pharmacy Guild, which caused the determination which prevented the creation of an NHS pharmacy, but revoked this from 23 January 1991. The Commonwealth denied that Stonecat was prevented from conducting a dispensing pharmacy, but says that a Mr. Peter Marshall, the proposed pharmacist of Stonecat, was unable to conduct a dispensing pharmacy as a consequence of the determination. The Commonwealth denied breach of any contract and said there was no basis for any relief against forfeiture. 19 As to the other claim, in August 1989 there were discussions between officers of APG and those negotiating on behalf of Dovoro, concerning the tender for the lease of restaurant premises to be known as "The Atrium", being substantially the same person negotiating for Stonecat, to provide restaurant and cafeteria services for the occupants of the building. An invitation to tender was issued to persons ultimately becoming directors of Dovoro in September 1989, as a result of which a number of meetings took place with officers of APG. 20 On 16 October 1989 a letter tendering for the lease was forwarded to APG, subsequent to which, on 16 November 1989, a tender was submitted for lease of the restaurant/cafeteria, which was accepted on 4 January 1990 by APG. There then followed, during 1990, a series of discussions and negotiations concerning the fitting out of the restaurant and alterations to the cafeteria, and concerning problems with the liquor licence and fitout. 21 In November 1990 Dovoro entered into occupation of "The Atrium". On 15 March 1991 APG advised Dovoro of the date of commencement of rent, namely 1 April 1991, Dovoro having gone into possession on the terms of the draft lease which had been submitted subject to variations negotiated by correspondence. On 18 December 1992 a notice to quit was issued for non-payment of rent. Dovoro vacated the premises on 30 July 1995. 22 The Commonwealth brought proceedings against Dovoro for rent in pursuance of the lease agreed between the parties from 1 April 1991, from which date the plaintiff claimed rents and outgoings until 18 January 1993 of $854,377, and mesne profits from February 1993 to July 1995 at a rate of $37,500 per month, being the average amount due for rent during the period of the tenancy, being an amount of $1,087, 500, making a total of $1,937,877 for rent and mesne profits, less rent paid from 21 January 1992 to 16 February 1995 of $83,988.37, leaving an amount owing of $1,853,888.63. The Commonwealth claimed damages and interest. 23 Dovoro pleaded a cross claim that the Commonwealth represented that the lessee of the cafeteria/restaurant premises would have exclusive rights to the provision of food and associated services in the complex, and that the staff of the premises would be approximately 3,000, with some 2,000 visitors per day, and that there would be anticipated daily sales of at least $10,000 for the cafeteria; that everything would be done to attract patronage, that the foyer of the complex would be used for concerts, balls and functions including weddings and formals, that the premises would be able to supply liquor and that no liquor licence was required, that there would be a 400 seat conference room on the fourth floor, that the rental of the premises at $300,000 per annum and $120,000 for lease of the kitchen equipment was a proper and reasonable commercial rent, and that there would be no staff canteens or vending machines operating elsewhere in the complex. 24 Dovoro undertook renovations and works on the premises of some $120,000, and entered into the premises pursuant to the agreement for lease. 25 Dovoro alleged against the Commonwealth that the Commonwealth had engaged in deceptive or misleading conduct, or conduct likely to deceive in breach of s.52 of the TP Act in that it is alleged that the Commonwealth did not have reasonable grounds for holding the opinions and beliefs that were asserted, in that Dovoro was not granted the exclusive rights for provision of catering, that sales in the cafeteria were not of the order of $10,000 per day, and that at no stage did the residential staff approximate 3,000 persons, nor did it exceed 2,000 persons. 26 It was further alleged that, contrary to the assertion of the Commonwealth, the foyer centre was not available for concerts, balls and large functions including weddings and formals, that approval for sale of liquor was still required from the New South Wales Liquor Administration Board, that the complex did not contain a 400 seat conference room, that rental as proposed was not a proper and reasonable commercial rent, and that the Commonwealth had not received two other tenders offering a rent as high as represented by it, and there was a staff canteen and vending machines throughout the complex. 27 It was also alleged that the Commonwealth represented that the premises would be ready for occupation by March 1990. It was alleged that the Commonwealth had made the above representations falsely and recklessly, as a result of which Dovoro suffered loss and damage. 28 The cross claimant further claimed an order under s.87 of the TP Act varying the agreement for lease by reducing the rental to 5%, or alternatively 10%, of the gross turnover of the cross claimant's business conducted, or such other rent as the court deems fit. Dovoro also sought damages under s.82 of the said Act. It was alleged by Dovoro that the loss of profits for the year ending 30 April 1991 to 30 April 1995 due to the Taxation office canteen and vending machines, was $490.000. 29 The Commonwealth admitted that it had represented there would be no food retail outlet other than the proposed cafeteria/restaurant, and admitted that it had represented the total staff would be 3,000, but otherwise denied the contentions of Dovoro, and also admitted that the fitout would be completed so as to allow occupation by March 1990, and otherwise denied the facts alleged. 30 The Commonwealth further admitted that it represented to Dovoro that the foyer was suitable for functions, and that it would be available for hire on request, but otherwise denied the facts as alleged. The Commonwealth admitted that it expected wine and beer to be served, but otherwise denied the facts alleged. The Commonwealth admits that it represented that the market value of the restaurant was some $300,000, but otherwise denied the facts alleged, but disputed Dovoro's entitlement to damages or relief against forfeiture. 31 Both actions were heard together, and the evidence in one matter was evidence in the other. Obviously some evidence, particularly as to damages, would relate to one or other action only, but most of the evidence was common. 32 In accordance with the pleadings, Mr Murr on behalf of the Commonwealth conceded that the existence of an Australian Taxation Office ("ATO") was at variance with the representation made by the Commonwealth that no other retail food outlet would be on the premises, and it was conceded that the existence of the canteen had an adverse effect on the trading of Dovoro. It is conceded that it was a representation that did not come to fruition, and that it cost Dovoro money. The Commonwealth said that its expert evidence said that the amount was of the order of $50,000 per annum. 33 Mr Murr conceded that as to the second major alleged misrepresentation that there were to be some 3,000 public servants working in the building, that that in fact had been represented, but it was not conceded that the figure of approximately 3,000 fulltime staff was wrong. Mr Wilson for the defendants did not accept that there were only two misrepresentations, although it was not proposed to rely on all of the assertions set out in the pleadings. 34 The proceedings were conducted on the basis of a large number of affidavits filed by all parties to the proceedings, and by the tender of documents produced on subpoena. There was then oral evidence given by witnesses who had sworn affidavits or given a statement. 35 The restaurant the subject of the lease to Dovoro had access from the building, but the building was secured at 6 o'clock at night. It also had external access after that hour from the adjoining street. It was necessary for occupants of the building to actually leave the building in Macquarie Street and walk round into O'Connell Street to access the restaurant. It was an agreed condition of the use of the restaurant that public servants would have the right to bring in their own food and consume it within the cafeteria area, free of charge, and in fact a number did so throughout the period of the lessee's occupation. 36 A considerable part of the affidavit evidence and the oral evidence in the hearing related to a series of conversations which had occurred from the time of the awarding of the tender to each consortium, and the commencement of the business by Stonecat and Dovoro respectively. Those conversations occurred between the various combinations of parties, both at the APG offices at Chatswood and on the Jessie Street site. 37 Involved in the discussions was Mr Peter Hampson, who was the Director of Development of APG. He was at the time of the hearing retired for some years. Responsible to him was a Mr Ron Mead, the Supervisor of the person responsible for much of the negotiations, Mr Phillip Beggs. One of the meetings involved Mr Arthur Gallery, the State head of APG. Negotiations on behalf of Stonecat and Dovoro involved Directors of that company, Mr Barry William Brown, Mr Michael Berger and Mr Paul Berger. 38 Section 52 of the TP Act prohibits conduct that is misleading or deceptive, or likely to mislead or deceive, and provides that where a representation is made and the corporation does not have reasonable grounds for making it, it shall be taken to be misleading, and in relation to a representation as to a future matter, the corporation shall, unless it produces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation. 39 The TP Act provides that a person who suffers loss or damage as a result of misleading or deceptive conduct may recover such damage against a person involved in that conduct. Section 87 of the TP Act provides that the court may make an order which the court considers appropriate against a person who is engaged in a contravention of certain parts of the Act, including breach of s.52, to compensate for loss or damage. 40 There has been no issue in these proceedings concerning the coming into effect of the lease on the basis of the submitted agreement to lease, as varied by correspondence in respect of each premises. The lease at common law came into effect from the taking of possession. Both parties seem to have accepted that there would be a rent holiday until a stipulated date, and there has been no challenge to the fact that rent became payable under the lease in accordance with the draft lease submitted from the nominated date by the Commonwealth, subject to the rent holiday. The lease then by virtue of s.127 of the Conveyancing Act 1919 became a tenancy at will, terminable on one month's notice. 41 I wish to now set out an examination of the various issues raised in the cross-claims by Stonecat and Dovoro. These are not ranked in order of importance.