New South Wales Supreme Court CITATION : Ousley v Varsity Life [2005] NSWSC 462 HEARING DATE(S) : 9 May 2005 JUDGMENT DATE : 9 May 2005 JURISDICTION : Equity Division - Commercial List JUDGMENT OF : McDougall J at 1 DECISION : See paras [49] and [50] of judgment CATCHWORDS : CONTRACT - where plaintiff and defendant concluded Management Rights Agreement and Unit Sale Agreement - where common ground that Unit Sale Agreement rescinded - whether Management Rights Agreement terminated - whether implied term that lawful rescission of Unit Sale Agreement determines Management Rights Agreement - whether Management Rights Agreement continues to be enforceable upon rescission of Unit Sale Agreement - whether Management Rights Agreement discharged by frustration after rescission of Unit Sale Agreement - whether plaintiff entitled to forfeit deposit for Management Rights Agreement - whether plaintiff entitled to damages - no question of principle Australis Media Holdings v Telstra Corporation (1998) 43 NSWLR 104 B P Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20 Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Davis Contractors Limited v Fareham Urban District Council [1956] AC 696 CASES CITED : Mackay v Dick (1881) 6 App Cas 251 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153 Secured Income Real Estate v St Martins Investments Pty Ltd (1979) 144 CLR 596 Ousley Pty Limited (Plaintiff) PARTIES : Varsity Life Pty Limited (Defendant) FILE NUMBER(S) : SC 50039/05 R R I Harper SC (Plaintiff) COUNSEL : R W Tregenza (Defendant) Massey Bailey (Plaintiff) SOLICITORS : Andreones (Defendant) LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST McDOUGALL J 9 May 2005 Ex tempore (revised 11 May 2005) 50039/05 OUSLEY PTY LIMITED v VARSITY LIFE PTY LIMITED JUDGMENT 1 HIS HONOUR: The plaintiff (Ousley) and the defendant (Varsity Life) entered into two agreements in August 2003. One, called the Management Rights Agreement, was made on 12 August 2003. It gave Varsity Life the right to manage (otherwise than as a strata management agent) a strata title development in Wollongong known as Northgate Apartments. The other, called the Unit Sale Agreement, was a contract for sale by Ousley to Varsity Life of unit 111 in the Northgate Apartments. 2 The consideration under the Management Rights Agreement was $1.6 million, with a deposit of $160,000 payable to Ousley's solicitors Mallesons Stephen Jaques as stakeholder. The consideration under the Unit Sale Agreement was $300,000, with a deposit of $30,000 which was likewise payable to Mallesons Stephen Jaques as stakeholder. 3 It is common ground that Varsity Life rescinded the Unit Sale Agreement on 13 February 2004 pursuant to its express contractual right under cl 31. The question for decision is whether the Management Rights Agreement has thereby come to an end. Varsity Life says that it has, and that it is entitled to the return of its deposit together with any interest accrued thereon. The Issues 4 On 22 April 2005 the Court ordered that the question of liability be determined first. The parties have agreed the relevant issues. Stripped of some verbiage, they are: (1) Did the Management Rights Agreement come to an end, or was it available to the defendant to bring that agreement to an end, upon the lawful rescission of the Unit Sale Agreement. (2) Whether there is an implied term in the Management Rights Agreement that upon the lawful rescission of the Unit Sale Agreement, the Management Rights Agreement would come to an end or was otherwise liable to be rescinded or terminated by the defendant. (3) Whether performance of the Management Rights Agreement is enforceable by either the plaintiff or defendant upon rescission of the Unit Sale Agreement. (4) Whether the defendant's purported rescission of the Management Rights Agreement constituted a repudiation of the Management Rights Agreement. (5) Whether upon the lawful rescission of the Unit Sale Agreement the Management Rights Agreement was discharged by frustration. (6) Whether the plaintiff is entitled to forfeit the deposit of $160,000 paid by the defendant pursuant to the Management Rights Agreement. (7) Whether the defendant is entitled to return of the deposit of $160,000 paid by the defendant. (8) Whether the plaintiff is entitled to damages. The Relevant Contractual Terms 5 Clause 3 of the Management Rights Agreement dealt with settlement. It provided, that with some exceptions, settlement should be contemporaneous with settlement of the Unit Sale Agreement: " 3 Settlement _________________________________________________________ Conditional on settlement of unit sale 3.1 Subject to clause 3.2, settlement of this Contract is subject to the contemporaneous settlement of the Unit Sale Agreement and will take place on the Settlement Date. 3.2 If completion of the Unit Sale Agreement is delayed due to any default or delay on your part under the Unit Sale Agreement, settlement of this Contract will proceed on the Settlement Date. Interdependent contract 3.3 The parties agree that: (a) default under this Contract by you is deemed to be default by you under the Unit Sale Agreement and we may terminate the Unit Sale Agreement; (b) if this Contract is terminated due to default by us, the Unit Sale Agreement is deemed to be rescinded; and (c) default under the Unit Sale Agreement by you is deemed to be default by you under this Contract; (d) termination or rescission of the Unit Sale Agreement due to default by you will not effect [sic] this Contract in any way. …" 6 By cl 4.1, time is of the essence. 7 Clause 5 dealt with remedies. Because it was referred to in argument, I shall set out cl 5.1: "5.1 If you breach any term of this Contract then we may (besides any other remedy available to us): (a) cancel the contract, keep the Deposit and sue you for damages; or (b) affirm the contract and sue you for damages and specific performance; or (c) without notice to you resell the Management Rights in the manner and on the terms we think fit; or (d) at our option do any one or more of the above things." 8 Clause 6 gave an express right of the termination event. I set it out so far as is relevant: "6.1 If the Owners Corporation fails or refuses to pass the Resolution at the general meeting of the Owners Corporation called for that purpose (among other purposes if applicable) and convened to commence upon conclusion of the First Annual General Meeting of the Owners Corporation, then: (a) this Contract will be terminated and the Deposit refunded to you; and …" 9 By cl 11.1, the defined terms "Resolution", "Settlement Date" and "Unit Sale Agreement" have the following meanings: " … Resolution means a resolution by the Owners Corporation to appoint the Caretaker as the caretaker for Northgate Apartments and to enter into the Management Agreement. Settlement Date means the date the Owners Corporation passes the Resolution which must occur at a general meeting convened to commence upon conclusion of the First Annual General Meeting for that purpose (but need not be solely for that purpose) and not before. … Unit Sale Agreement means the contract for the sale of the Unit to you or a party related to you with the same date as this Contract. … " 10 Clause 11.3 contained the usual provision that headings are inserted for convenience and do not affect the interpretation of the agreement. 11 Clause 60 of the Unit Sale Agreement attempted, although not completely, to mirror the provisions of cl 3 of the Management Rights Agreement. It provided as follows: "60 Interdependent Contract 60.1 Interdependency This contract is interdependent with the agreement entitled "Contract for Sale of Management Rights – Northgate Apartment" dated on or around the date of this contract … to the extent that: (a) settlement of this contract is conditional upon the contemporaneous settlement of the Management Agreement; (b) if the Management Agreement is terminated due to default by the purchaser under that agreement, the purchaser will be deemed to be in default under this contract and this contract may be terminated by the vendor; (c) if the Management Agreement is terminated due to default by the vendor under that agreement … this contract will be deemed to be rescinded (without the need for further notice) and the provisions of clause 19 apply; and (d) any breach of this contract by the purchaser will be deemed to be a default under the Management Agreement." 12 By cl 61, Varsity Life had the right to be offered what was called an "alternate apartment" on the ground floor of the Northgate Apartments building if one should become available, and in effect to substitute that for unit 111 in certain circumstances. Clause 61.5 confirmed that, if there were a switch of apartments as contemplated by cl 61, the "New Contract" made pursuant to cl 61 would be interdependent with the Management Rights Agreement in terms of cl 60. It read as follows: " 61.5 Interdependency of New Contract The parties acknowledge and agree that a New Contract entered into under this clause will be deemed to be the contract interdependent with the Management Agreement and that the provisions of clause 60 apply to it from the date of exchange of the New Contract". 13 By cl 32, completion of the Unit Sale Agreement was subject to registration of the strata plan defined by Schedule A. Nothing turns on the definition of the strata plan. The date for registration was by Schedule B 31 December 2003, subject to extension of time under cl 32. It is common ground that time was not extended. In those circumstances, cl 31.2 was enlivened. It read as follows: " 31.2 Effect if conditions are not met If the plan referred to in schedule A is not registered on or before the date stipulated in schedule B, then either party may rescind by written notice to the other." Precontract negotiations 14 Before the agreements were made, there were discussions between Mr Rory O'Brien for Ousley and Mr Michael Teys for Varsity Life. It is common ground that, at some stage, Mr Teys made it clear to Mr O'Brien that Varsity Life wished to buy or lease a unit in the Northgate Apartment building for the purposes of the business to be conducted by it pursuant to the Management Rights Agreement. I am not able to conclude that (as was at one stage submitted for Varsity Life) this occurred at their first meeting. On Mr O'Brien's evidence, it was at a later meeting. Since Mr Teys agreed that this may have been said after the first meeting, I would, if necessary find that the relevant conversation took place, as Mr O'Brien said, at some stage after the initial discussions. However, I do not regard this as significant. 15 It is apparent that Mr Teys made it clear to Mr O'Brien that the units would be required for the proper enjoyment, and perhaps to facilitate the eventual sale of, the management rights. Again, if it were relevant and necessary to do so, I would find that this was done after the initial meeting. 16 It was because of the apparent significance to Varsity Life of a caretaker's unit in the building that the alternate apartment clause in the Unit Sale Agreement was negotiated. Unit 111 was not on the ground floor of the building. Clearly enough, Varsity Life thought it would be more beneficial if it could obtain a unit on the ground floor. That is why cl 61 takes the form that it does. 17 It is clear that, in the course of negotiations, the parties regarded the sale of the unit (by Ousley to Varsity Life) as interdependent with the sale of the management rights. This is the uncontroverted evidence of Mr O'Brien in paragraph 7 of his affidavit sworn on 10 December 2004. However, it was said, the reverse situation - that the sale of the management rights was interdependent with the sale of the unit - was not contemplated in negotiations. For reasons I will make clear, it is not necessary for me to express a concluded view on the factual question. Analysis 18 The fundamental question turns on the proper construction of cl 3.1. I was referred to a number of authorities dealing with the principles of construction to be applied in relation to the commercial agreements, and to the use that might be made of extrinsic evidence. These principles are well known and I do not think it is necessary to set them out. 19 Each agreement indicated (I use this word because the indication comes in some cases from headings) that it was interdependent with the other. Thus, in cl 3.1, the heading preceding cl 3.3 "Interdependent Contract" shows (to the extent that it is proper to have regard to it in the process of construction) the purpose that the parties thought was achieved by cl 3.3. The position is clearer in cl 60 because cl 60.1 of the Unit Sale Agreement itself stated that the two contracts were interdependent. 20 I accept that the content of the word "interdependent" is to be derived from its context. In other words, the connotation of that word depends on the way in which the parties sought to apply it. This is perhaps, more apparent in cl 3 of the Management Rights Agreement (which uses the word only in a heading) than it is in the case of cl 60.1, which uses the word in the text of the clause, and a cognate form of it in the heading. However, I think, there is no fixed legal concept of "interdependency" which the parties, by using the word or its cognate form "interdependent", must be taken to have intended. This shows, I think, that what the parties mean by interdependency, or by one agreement being interdependent with the other, is to be ascertained from seeing the way in which they used and explained that term or that concept. 21 I approach the question of construction - in particular, although not exclusively, of cl 3.1 - against the background, that, as I find, Ousley through Mr O'Brien well understood that Varsity Life's primary interest was in the management rights, but that Varsity Life regarded the presence of an on site caretaker, residing in a unit, as important for the enjoyment of those rights. As I have indicated, that background is confirmed to some extent by cl 61 of the Unit Sale Agreement. 22 I also approach the question of construction on the basis that the parties intended to enter into both agreements at once. This is apparent from the definition of "Unit Sale Agreement" in cl 11.1 of the Management Rights Agreement. It is also, I think, apparent from the language of cl 60.1 of the Unit Sale Agreement. 23 I therefore think that it is appropriate to have regard to the circumstance that the parties should be taken to have had in mind, when making the Management Rights Agreement, the relevant provisions of the Unit Sale Agreement, and the rights and obligations that those terms would impose. 24 The first question is the proper construction to be given to cl 3.1. 25 Mr R R I Harper SC for Ousley submitted that cl 3.1 applied only where both contracts were available to be settled. Where they were not, he submitted, the consequence was determined by their express terms. Clause 3.1, he submitted, did not contemplate the situation in which the Unit Sale Agreement came to an end without breach or fault on the part of either party. It is, I think, a necessary consequence of this submission that the same must be said of cl 60.1. 26 Clause 3.1 provides what might properly be called a condition precedent to completion (as does cl 60.1(a) of the Unit Sale Agreement): see Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 and Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153. 27 Where cl 3.1 has its counterpart in the agreement referred to in cl 3.1 - the Unit Sale Agreement - I do not think it is appropriate to read cl 3.1 down in the way Mr Harper submitted. In other words, I think that the relevant context for the construction of cl 3.1 includes at least cl 60 of the Unit Sale Agreement. 28 Clause 3.1 is mirrored by cl 60.1(a). Leaving aside the reference to cl 3.2(b) (which does not presently arise for consideration because the circumstances enlivening it have not arisen), settlement of the one agreement is to take place contemporaneously with settlement of the other. Further, the Management Rights Agreement provides what the Settlement Date will be. That Settlement Date therefore governs settlement not just of the Management Rights Agreement but also of the Unit Sale Agreement. 29 The effect of Mr Harper's submission would apply equally to cl 60.1(a) where the Management Rights Agreement came to an end without fault on either side. The application of his submission would be to convert each agreement from one, settlement of which could only be required together with settlement of the other, to one, settlement of which could be required without any need to tender performance or completion of the other. In each case, of course, this is limited to the circumstance where the inability to complete, or tend the performance of the other agreement occurs without fault on either side. 30 In my judgment, cls 3.1 and 60.1(a) were intended to apply to the very situation under discussion, where completion of the other agreement could not be required because, without fault on either side, that other agreement has come to an end. 31 It follows, in my judgment, that cl 3.1 should not be read down. It should be construed to mean, as it says, that neither party can call on the other to complete the Management Rights Agreement unless the Unit Sale Agreement is then also available to be, and is simultaneously, completed. The same construction, mutatis mutandis, should be given to cl 60.1(a) of the Unit Sale Agreement. 32 Thus, for the purposes of cl 3.1, if the Unit Sale Agreement comes to an end without the fault of either party (that is, in circumstances not caught by cls 3.2 or 3.3 of the Management Rights Agreement), neither party could require the other to complete the Management Rights Agreement. This, I think, forms part of the parties' concept of interdependency. 33 On Mr Harper's submission as to the proper construction of cl 3.1, it would be open to Ousley, having contracted on terms of both agreements, to engineer a termination by Varsity Life of the Unit Sale Agreement, but nonetheless to hold Varsity Life to completion of the Management Rights Agreement. By this I mean that Ousley could so conduct itself under the Unit Sale Agreement that its conduct was a clear breach, and so that Varsity Life was forced with the choice either of terminating for breach or of accepting performance substantially different to that for which it contracted. But, nonetheless, Ousley could require Varsity Life to complete the Management Rights Agreement. That, I think, is a very strange concept of interdependence. 34 It might also be open to Ousley, having secured the Management Rights Agreement on 12 August 2003, not to contract with Varsity Life at all on the terms of the Unit Sales Agreement, but nonetheless to hold Varsity Life to the performance of the Management Rights Agreement. That example might be somewhat more speculative than the previous example; but if that is another consequence of the correct application of Mr Harper's preferred construction of cl 3.1 then, once again, it is a very strange concept of interdependence. 35 Accordingly, I conclude, cl 3.1 has been enlivened in the events that have happened. That is because Varsity Life, without any fault on its part, and pursuant to an express contractual right to do so, has rescinded the Unit Sale Agreement (because the strata plan was not registered by the stipulated time). 36 That leaves the second question, which is the consequence of this state of affairs. Mr R W Tregenza of counsel for Varsity Life relied alternatively on an implied term and on the doctrine of frustration. He framed the implied term thus: "That upon rescission or termination of the Unit Sale Agreement with or without fault by us then you may terminate or rescind this agreement". 37 Such a term, he submitted, met the well known five point test expounded by the Privy Council in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20 and approved in (to give one example only) Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337. 38 I agree, although I would rephrase the implied term somewhat differently: "If the Unit Sale Agreement is rescinded or terminated by either party, in either case without fault by you, then you may cancel this contract." I use the word "cancel" because it is the one chosen by the parties: see, for example, cl 1.2. Such a term gives business efficacy to the Management Rights Agreement. It is needed because otherwise that agreement would continue in perpetuity, incapable of completion unless the doctrine of frustration applied. The deposit would accrue interest in perpetuity, but no one save the institution with which the deposit was invested would have any benefit from it. Such a term fills what, on my view as to the proper construction of cl 3.1, is a lacuna in the Management Rights Agreement. 39 Mr Harper submitted that, on the construction advanced by him, there was no lacuna in the Management Rights Agreement. That is correct. However, as I have pointed out, the effect of that construction is to permit a wholly unreasonable consequence: to introduce a very strange concept of interdependency. For that reason, I think, it is better to face the problem of a lacuna and deal with it by the mechanism of implied term. 40 For essentially the reasons I have given in relation to business efficacy, the implied term would meet the second and third criteria: that it is reasonable and fair between the parties; and that it is so obvious as to go without saying. 41 By definition (because the term has been expressed) the fourth requirement is met. 42 Likewise, on what I think is the proper construction of cl 3.1, the fifth requirement - that the term be not inconsistent with any express term of the contract - is met. I should note there was no submission put to the contrary on this point. 43 It is therefore not necessary for me to deal with the question of frustration. However, in case I am wrong in my view of the implied term, I will indicate my conclusion. A contract is frustrated when, without fault on either side, it cannot be performed because performance would be radically different to that which the contract required: see Davis Contractors Limited v Fareham Urban District Council [1956] AC 696 (which has been approved in very many cases, including Codelfa). To require performance of one only of two contracts that were interdependent in the way that I have explained would enliven the doctrine. It would require performance of a kind radically different to that which, objectively, the parties agreed to undertake. 44 Therefore, I conclude that, if it were necessary to resort to it, the doctrine of frustration would apply. It may be noted there was no pleaded issue under the Frustrated Contracts Act. 45 Mr Harper objected, in answer to both ways in which the case was put, that Varsity Life was disentitled to relief because the circumstance that enlivened cancellation or frustration was Varsity Life's own act in rescinding the Unit Sale Agreement. 46 He relied on cases such as Mackay v Dick (1881) 6 App Cas 251, Secured Income Real Estate v St Martins Investments Pty Ltd (1979) 144 CLR 596 and Australis Media Holdings v Telstra Corporation (1998) 43 NSWLR 104. The principle is clear. I am prepared to assume that it is capable of application to the Management Rights Agreement, but I do not think that it has been enlivened. 47 Varsity Life rescinded the Unit Sale Agreement pursuant to an express contractual right. There is no suggestion that it contributed in any way to the circumstances that enlivened that right. Clause 31 of the Unit Sale Agreement must be understood as one for the benefit of both parties. It is completely unclear, why one party's exercise of that right should deprive it of rights under an interdependent contract (in the way that I have explained) when the parties must have known that the circumstance giving rise to the exercise of the right might arise. Otherwise, the doctrine relied upon would operate as an unexplained and ill defined fetter on the clear and untrammelled right given by cl 31 to each party. I do not accept that that is what the parties intended. 48 I note that at one stage it was suggested that Varsity Life might not have exercised its right under cl 31 in good faith. That was not put to its director, Mr Teys, who gave affidavit and oral evidence and was not cross-examined), and for that reason alone I would not find so. In any event, the circumstances that have been proved go nowhere near showing an absence of good faith – which may explain why this point was not pressed in final submissions. 49 I therefore conclude that Varsity Life is entitled to the return of its deposit together with any interest that has accused on that deposit. It is entitled to orders accordingly. I will hear the parties on costs. 50 Having reserved costs as I shall do, I stand the proceedings over to Wednesday this week at 9.30 am so the parties can bring in orders to give effect to the reasons I have given. If the parties cannot agree on all orders, I will hear argument at 9.30 am on Wednesday 25 May 2005. ****** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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