New South Wales Supreme Court CITATION : Kent v Ireland (No 2) [2004] NSWSC 870 HEARING DATE(S) : 23/08/04, 24/08/04, 25/08/04, 26/08/04 JUDGMENT DATE : 28 September 2004 JUDGMENT OF : Gzell J DECISION : Declaration that contract not valid be extended. Contract not void for uncertainity nor subject to rectification. Plaintiff limited to compensation in terms of formula in the contract. Defendant entitled to outstanding licence fees and outgoings and to possession. CATCHWORDS : CONTRACTS - General Contractual Principles - Construction and Interpretation of Contracts - Whether option to extend contract could be exercised when party was in breach of terms as to payment of licence fees and outgoings - Whether contract void for uncertainty - Whether contract should be rectified to include provisions of earlier contract omitted from later one - Whether general damages available in addition to formula for compensation in the contract - Cross claim for outstanding licence fees and outgoings and possession of site - No priniciples involved PARTIES : Paul Kent - Plaintiff John Ireland T/as Sunnybrook Hotel and Convention Centre - Defendant FILE NUMBER(S) : SC 2572/03 COUNSEL : Mr Kent - Plantiff (In Person) Mr G M Colman - Defendant SOLICITORS : Dibbs Barker Gosling Lawyers IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GZELL J TUESDAY 28 SEPTEMBER 2004 2572/03 PAUL KENT v JOHN IRELAND T/AS SUNNYBROOK HOTEL AND CONVENTION CENTRE (N0 2) JUDGMENT 1 The defendant, John Ireland, owned the Sunnybrook Hotel and Convention Centre at Warwick Farm. It contained a tennis complex. The plaintiff, Paul Kent, operated the tennis complex under licence. Mr Kent fell behind in payments due under the licence agreement. He purported to exercise an option to extend the licence agreement. He claimed damages for breach of the licence agreement and specific performance of the extended agreement. Mr Ireland claimed a declaration that the purported exercise of the option was invalid, a declaration that the licence agreement was void for uncertainty, rectification of the licence agreement, an order for payment of outstanding amounts and an order for possession. These seven claims constituted the issues in the case. Introduction 2 12 tennis courts, a clubhouse, sheds and shower and toilet block constituted the tennis complex. Courts 5, 6, 7 and 8 were hard courts, the remainder were of synthetic grass. Court 6 had been converted into a volleyball court. It and court 5 were unplayable when Mr Kent took possession of the tennis complex on 29 March 1999. Mr Ireland said that courts 7 and 8 were also unplayable. Mr Kent said they were playable but were in a condition that would require work to be done on them quite soon. 3 An agreement dated 30 March 1999 was executed by the parties in March and April 2000. It provided that Mr Ireland might terminate the agreement on giving Mr Kent 28 days' written notice if Mr Kent was in arrears for more than 30 days in payment of licence fees. Mr Kent being in arrears, Mr Ireland sent Mr Kent a letter dated 22 January 2001 indicating that he would serve notice in accordance with that provision to terminate the agreement within 28 days. A notice of the same date stated Mr Ireland's intention to terminate the agreement 180 days from that date. 4 Mr Kent said he did not receive the notices. In any event, the parties negotiated a new agreement dated 1 April 2001. It was executed by Mr Ireland on 28 August 2001 and by Mr Kent shortly thereafter. By this second agreement Mr Ireland granted to Mr Kent a licence to use the tennis complex for a period of three years commencing on 1 April 2001. It contained an option for a further licence for five years on the same terms that might have been exercised by Mr Kent if he had observed and performed all his obligations under the agreement. The second agreement referred to Mr Kent as Paul and to Mr Ireland as John. So far as is presently relevant, cl 4 was in the following terms: "4.1 If Paul has observed and performed his obligations under this Agreement he will have the option to require John to grant him a further licence for a period of five years. 4.2 The option shall be exercised by Paul delivering to John a written notice not sooner than six months and not later than three months before the expiration of the term of this agreement. 4.3 Such further licence shall be for a period of five years and shall be on the same terms and conditions as this agreement." Exercise of Option 5 Mr Kent sent a written notice to Mr Ireland purporting to exercise the option on 30 December 2003. Mr Ireland's solicitors responded that since Mr Kent had not paid rental payments and outgoings in accordance with the second agreement he had not observed and performed all his obligations under the second agreement and his purported exercise of the option was invalid. 6 Clause 3 of the second agreement required Mr Kent to pay a licence fee of so much per month depending on the number of tennis courts in use. Clause 16.1 required him to pay for electricity at specified rates depending on the number of courts in use. 7 Mr Kent did not dispute that he was in arrears when he purported to exercise the option. There is some difference between the parties as to the extent of those arrears. Mr Kent appeared for himself during the hearing. By leave, I allowed him to produce a schedule of his version of amounts outstanding during final submissions. That schedule acknowledged amounts due to 31 July 2004 of $69,104.09. The amounts due to the end of December 2003 were $45,710.21. Mr Kent said he could not pay these dues because the number of playable tennis courts available to him since 8 May 2002 prevented his generation of sufficient income to discharge the obligations. 8 Those allegations, if established, might sound in damages. But, unfortunately for Mr Kent, they do not overcome the problem that he was not entitled to exercise the option to extend the licence for a further period because he had failed to observe and perform his obligations under the second agreement. 9 In my judgment, the purported exercise of the option was invalid and Mr Kent's licence to use the tennis complex came to an end on 1 April 2004. Specific Performance 10 It follows that Mr Kent is not entitled to specific performance of an extension of the second agreement. Uncertainty 11 It was submitted on behalf of Mr Ireland that the second agreement was void for uncertainty because it suffered from internal tensions that could not be resolved. In view of my finding that the agreement came to an end by effluxion of time, this issue no longer has the significance it might have had if the option had been validly exercised. In case I am wrong in that view, however, I deal with the issue. 12 The first recital to the second agreement stated that Mr Ireland was the owner of the Sunnybrook Hotel which contained a tennis court complex with six tennis courts, club house, sheds and shower and toilet block "shown in the diagram 1 attached, Courts 3 & 4, 9, 10, 11, 12". No diagram was attached. But the parties were aware of the existence of a diagram that identified 12 tennis courts by number together with the club house and shower and toilet block. 13 The first draft of the second agreement was proffered to Mr Kent by Mr Ireland. Mr Ireland did not have legal assistance. It was modelled on the first agreement of 30 March 1999. Mr Ireland duplicated that agreement and wrote on it his proposed alterations. The parties intended their agreement to have commercial effect. They were aware of the identity of the six courts specified in the second agreement and of the hard courts numbered 5, 6, 7 and 8 that, under the second agreement, Mr Kent was entitled to resurface at his expense and at his discretion. In my view the lack of the diagram did not render the second agreement void for uncertainty. 14 Clause 3.1 of the second agreement provided for the payment of a licence fee in the first year based on a specified amount for each of six tennis courts. Clause 3.2 provided for payment of a licence fee in the second and third years at specified amounts per month for six courts, seven courts, eight courts, nine courts or 10 courts. It was submitted that this clause was inconsistent with the recital that specified the tennis complex as including six courts. But Mr Kent had the option to resurface up to four hard courts. If he did, seven to 10 courts would become payable and clause 3.2 provided for an increased licence fee should that occur. 15 Clause 15.5 of the second agreement provided that if Mr Kent repaired courts 5 and 6, he would be granted a rent-free period until such time as his costs had been recovered. If Mr Kent wished to repair courts 7 and 8, cl 15.5 provided for a similar method of cost recovery. Clause 15.7 provided that should works be undertaken on courts 5 and 6, a further term of two years should be granted to Mr Kent in addition to the option period under the same terms and conditions of the second agreement. Clause 15.8 provided that should Mr Ireland wish to reclaim the land on which courts 5, 6, 7 and 8 were constructed and Mr Kent had not recovered all his capital costs in repairs by means of the rent-free period, Mr Ireland should pay Mr Kent the balance of moneys remaining under the rent-free period but that would not affect Mr Kent's entitlement to the additional option period of a further two years. 16 A like submission was made with respect to those provisions it being said that they stood outside the definition of the tennis complex. In my view a similar answer is apposite. The second agreement was not confined to the six tennis courts identified in the recital. The agreement clearly contemplated that should Mr Kent, in his discretion, resurface courts 5, 6, 7 and 8 they would become part of the tennis complex and a mechanism for initial payment for their restoration by Mr Kent and subsequent recovery of his costs was built into the agreement. I reject the submission that the second agreement was void for uncertainty on that account. 17 A like answer arises with respect to the submission that because cl 19.2 provided for maintenance of courts 5, 6, 7 and 8 should they be reconstructed, the second agreement was void for uncertainty because those courts did not form part of the tennis complex. 18 Tennis court availability was provided in cl 19 of the second agreement. Counsel for Mr Ireland pointed to an internal inconsistency in the provision that was in the following terms: "19.1 Should any of the courts become damaged or unusable for any reason, including whilst John is attending to maintenance, then John will return the court to a usable condition within sixty day. 19.2 John agrees to ensure that at all times there will be a minimum of six courts available for Paul's use and that any damages that occur to courts 5, 6, 7 and 8 when completed, will also be rectified according to 19.1, with the exception of damages caused due to poor workmanship in the reconstruction of courts 5, 6, 7 and 8. 19.3 During the currency of this agreement or any option period, a credit will be made to Paul in the following months rent for any loss occasioned to him by the unavailability of any courts calculated on a pro rata licence fee basis for the period of unavailability. For any period beyond ninety days that the courts are unavailable according to clause 19.1, John shall compensate Paul at the rate of $33 per day for unusable courts, for a maximum period of a further ninety days, after which time the calculation will be on a pro rata licence fee basis as above. Best endeavours must be used to fix the courts as fast as possible." If there were only six courts initially in the tennis complex, how could six courts be made available to Mr Kent at all times if one required maintenance? 19 There is an internal tension in the provision, but its object was plain enough. Mr Ireland's obligation was to maintain the tennis courts with a view to each of the six original courts being available for Mr Kent's use. Mr Ireland's obligation was to repair a court within 60 days. If the period extended beyond 90 days, a formula for compensation of Mr Kent was provided. I do not regard the clause as being so vague or uncertain as to render the second agreement void. Rectification 20 Again, in view of my finding that Mr Kent was not entitled to exercise the option to extend the licence, this issue may no longer be relevant. For completeness, however, I set out my views. 21 When Mr Ireland proffered a draft of the second agreement based upon a photocopy of the first agreement, two pages of the first agreement containing cl 24 to cl 30 were not included. Those clauses dealt with termination of the agreement, renovations, capacity and service of notices. Mr Kent said that those provisions were not included in a subsequent typed up version of the draft agreement that Mr Ireland sent to him. 22 Mr Ireland exercised some care in the terms of the original draft of the second agreement he sent to Mr Kent because he ticked the clauses from the first agreement as he went through it to compile his first draft. 23 When Mr Kent received the typed up version which he described as "a cut and paste job" as it comprised sheets with partial information typed with different fonts, he was again aware that the draft skipped from cl 23 to cl 31. 24 Mr Kent re-typed the cut and paste draft. In so doing, he inserted from the first agreement cl 29 dealing with capacity and cl 30 dealing with service of notices. 25 That document became the subject of discussion between Mr Kent and Mr Ireland at a meeting on 1 August 2001. Mr Ireland said he did not notice that cl 24 to cl 28 had not been reproduced in the draft. 26 Following the meeting, Mr Kent re-typed the agreement incorporating the changes agreed to at the meeting and delivered a copy to Mr Ireland. It did not contain the clauses from the first agreement dealing with termination and renovations. It was that document that was executed by the parties as the second agreement. 27 Mr Ireland said he did not notice that the provisions of the first agreement dealing with termination and renovations were missing when he executed the second agreement. By his cross claim he sought rectification of the agreement by the inclusion of those provisions. 28 Clause 25 of the first agreement provided that Mr Ireland could terminate the agreement by giving Mr Kent 180 days' written notice should the land be required for any purpose other than tennis. In February 2001, a discussion took place between Mr Kent, Mr Ireland and Mr Kent's solicitor, Thomas Edgar Edmunds, concerning a proposal that Mr Kent pay for the restoration of courts 5, 6, 7 and 8 on the basis that he recover his costs by a rent-free period. 29 Mr Ireland said he was asked whether he could take out the termination clauses from the agreement to which he replied in the negative because of a possible sale, in which event a purchaser would want vacant possession. Secondly, he said he needed to keep flexibility to give uninhibited access to the entire property if he began to redevelop the site. 30 Mr Kent and Mr Edmunds said that no such statement was made by Mr Ireland. Mr Edmunds said there was no statement or discussion to the effect that Mr Ireland wished to keep the termination clauses for flexibility to give uninhibited access to the entire property if he began to redevelop. Mr Edmunds was not cross examined. 31 Mr Edmunds said that during the meeting he said that if Mr Kent had some security of tenure he was prepared to put his own money into fixing the courts but he could not be expected to put his money in without greater security of tenure. 32 Mr Kent's version was that he said he might be willing to re-do the middle courts at his own expense so long as he was paid back by a rent-free period: "But I would need greater security of tenure. So we would have to take out the 180 day termination clause". 33 I prefer the evidence of Mr Kent and Mr Edmunds to that of Mr Ireland. Mr Kent could not be expected to invest his own funds if the second agreement could be terminated on 180 days' notice. A solicitor advising him would clearly be interested in his obtaining greater security of tenure and the first step in that regard would be removal of the termination on 180 days' notice provision. 34 I find that it was the intention of the parties that the termination clauses be removed from the second agreement. That is consistent with their removal from the first draft proffered to Mr Kent by Mr Ireland. 35 In his cross claim, Mr Ireland pleaded that Mr Kent should have drawn his attention to the absence of the termination clauses from the second agreement. I reject any suggestion to that effect. It was Mr Kent's understanding that their deletion was in accordance with his agreement with Mr Ireland. In those circumstances, there was no reason for him to alert Mr Ireland to their non-inclusion. Furthermore, it was Mr Ireland's responsibility to read the document he signed and he was the party who initiated the draft of the second agreement with the exclusion of the clauses in question. 36 Had it been necessary for me to consider the question, I would not have ordered rectification of the second agreement. Mr Kent's Damages 37 Paul Alexander Russell, a chartered accountant, prepared a report on amounts due by Mr Ireland to Mr Kent under the second agreement for periods during which courts were under repair. In accordance with cl 19.3 he calculated a pro rata reduction of the licence fee for 90 days, compensation at $33 per day for a further 90 days and a pro rata reduction of the licence fee thereafter. 38 It seems to have been common ground that court 9 was unavailable in the period from 22 February 2003 to 16 September 2003 and Mr Russell's calculation of $4,323.72 was appropriate. 39 While Mr Kent did not particularise any unavailability of courts 10 and 11 in his statement of claim, Mr Ireland conceded that he was entitled to compensation. Court 10 was unavailable to Mr Kent between 17 September 2003 and 1 October 2003 giving rise to a pro rata reduction of licence fee of $163.38. 40 Court 11 was unavailable from 1 December 2003 to at least 19 February 2004. Mr Russell's calculations for that period amounted to $945.27. Tennis New South Wales inspected court 11 on 27 January 2004 when it was recorded that it has not been completed to Mr Ireland's satisfaction and he was to get the contractors back to rectify it. Mr Ireland claimed that that had been achieved by 19 February 2004. Mr Kent claimed that the court was unplayable at the time of trial. 41 Mr Kent tendered a video commencing at 11.40 am on 16 July 2004 depicting the condition of the court amongst other things. Objection was taken on the basis that the condition of the courts on 16 July 2004 was not relevant to my determination. I reject that submission. Mr Kent is currently holding over under the terms of the second agreement. That agreement provided a formula for the calculation of compensation. If the tennis court was unplayable at the time of hearing, a calculation of compensation to the date of judgment would need to be made. Mr Russell's calculation up to 31 July 2004 added a further $3,763.56. 42 Tennis New South Wales did not inspect court 11 again before trial. I am not satisfied by watching the video that Mr Kent has established that it was then in an unplayable condition. The video showed sand covering a court or courts, patching of segments of artificial grass of different colouring, the lifting of portion of a line, bowing of fences, lack of stability of fence posts and wire protrusions, a dangling lens on a light fitting and general untidiness of the surrounds of courts. In the absence of expert evidence, however, I am unable to tell whether court 11 was unplayable when it was filmed. I should mention that Mr Kent had an obligation to expend up to $6,000 per annum on minor repairs. That figure had not been reached in July 2004 and some of the matters of complaint were likely to have been rectified by expenditure within that amount. 43 In my judgment, compensation under the second agreement for the period of unavailability of court 11 amounted to $945.27. 44 Mr Ireland utilised courts 3 and 4 to extend a marquee on courts 1 and 2. There is a difference of a few days between the parties as to the commencement of that activity. Mr Ireland said it was on 13 May 2002. Mr Kent said it was on 8 May 2002. 45 The marquee was pulled down on 4 June 2002 but the courts required repairs. On 20 February 2003 Mr Ireland again took control of courts 3 and 4 until 3 March 2003 when the courts were again unplayable. Mr Ireland asserted that court 3 was available to Mr Kent in a playable condition on 21 July 2003. 46 On 4 August 2003, Tennis New South Wales inspected court 3 and noted that the repatching did not have abutting seams and was not safe for play. The light pole at the northern end of courts 3 and 4 had not been re-installed and the fencing was in an extremely dangerous condition. Mr Kent asserted that court 3 was not in a playable condition between 20 July 2003 and 4 August 2003. The clear inference from the report of Tennis New South Wales was that he was correct in this assertion. 47 I found Mr Kent to be a witness of truth. He was meticulous in every detail. He pointed to bookings turned away to justify his assertion that courts 3 and 4 were taken by Mr Ireland on 8 May 2003. I accept that evidence. 48 Mr Ireland maintained that courts 3 and 4 were returned to Mr Kent in a playable condition on 23 October 2003. Photographs of the courts taken by Mr Kent on 22 October 2003 were in evidence. The photographs of court 4 demonstrated a difference in pile height of the patched court that Mr Ireland identified at two millimetres prior to trimming. Court 3 was patched with three replacement strips. Photographs taken by Mr Kent on 26 October 2003 showed that the centre mark on the base line of court 4 was not in the centre. The photographs of court 3 revealed a seam about a third of the way into the court from a singles sideline and a further seam beyond the centre marker from the baseline to the service line. No work was done on court 3 between that date and 27 January 2004 apart from possible re-grooming. 49 On 27 January 2004, Tennis Australia inspected courts 3 and 4 and concluded that their patching and re-sanding was satisfactory for social play and group lessons of a minor nature but that competition play and private coaching could be dangerous. The courts required tennis to be played on them so that the sand infill could settle evenly. 50 Mr Russell's assessment of compensation under the second agreement for court 3 totalled $10,699.80. That figure should be replaced by his estimate for court 4 to 23 October 2003 of $11,770.71 to account for the period 21 July 2003 to 3 August 2003. Both estimates should be increased by $58.35 for the period from 8 May 2003 to 13 May 2003 giving adjusted totals of $11,829.06 for each court. 51 Mr Kent did not establish that further repair work was carried out on courts 3 and 4 between 23 October 2003 and the date of inspection by Tennis New South Wales on 27 January 2004. But the question remains whether Mr Kent was obliged to accept courts suitable for minor group lessons and social play but dangerous for use for competition play and private coaching. 52 Clause 15.2 of the second agreement required Mr Ireland to re-grass or repair courts when the pile near the base line or service line reached a minimum of three to four millimetres. It was submitted that a court with such a depth of pile was at a low standard and Mr Kent was obliged to accept a court repaired or re-grassed to a low standard. I reject that submission. The depth of pile heralded the time when repairs or re-grassing were to take place but did not dictate the standard of those repairs or re-grassing. By cl 2.1 of the second agreement Mr Ireland agreed that Mr Kent would use the tennis complex to conduct, amongst other associated activities, court hire both permanent and casual, coaching classes, social functions and barbecues, tournaments and events management. Mr Kent was entitled to repaired or re-grassed courts fit for those activities. Courts 3 and 4 were not fit for tournaments or events on 27 January 2004. In my judgment the compensation formulae under the second agreement required a further abatement of licence fees for each court for a further 96 days to 27 January 2004 at $11.67 per day, a total of $1,120.32 per court. 53 There was no evidence as to how long courts 3 and 4 would require to be played upon before the sand settled and they were suitable for tournament play. I allow a further 28 days for this process to take place on each court giving a further $326.76 for each court. Mr Kent has not established to my satisfaction by the 16 July 2004 video that courts 3 and 4 were unplayable at trial. 54 In my judgment Mr Kent was entitled to compensation and abatements of licence fees under the second agreement totalling $31,984.65. 55 Phillip Charles Edmund Cox, a chartered accountant, prepared a report in which he generated estimated profit and loss accounts for the three years ended 30 June 2001, 2002 and 2003 from computer printout material provided to him by Mr Kent. Those figures established a decline in the surplus generated by Mr Kent from the tennis complex in those three years. The percentage of surplus to income declined from 28.88% in 2001 to 10.64% in 2002 and to 7.39% in 2003. 56 Mr Cox concluded that Mr Kent had suffered losses as a result of the unavailability and unplayability of various courts and this had a flow-on effect to other aspects of the income of the centre. Mr Cox estimated Mr Kent's loss of personal goodwill at $75,222.00 and the estimated cost of additional working capital required because of the downturn in the business, at $20,000.00 plus interest, a figure of $22,723.00. 57 Mr Cox arrived at his figure for loss of personal goodwill by averaging the surplus generated by Mr Kent in the 2001 and 2002 years of $54,546.00 in the first year and $20,667.00 in the second year. The average was $37,611.00. Mr Cox said this figure had been lost by Mr Kent in each of 2002 and 2003 giving a total loss of $75,222.00. In my view that approach does not take account of the actual surpluses made in the two years. 58 Mr Cox estimated additional working capital needs on the basis that Mr Kent had borrowed $10,000.00 from his parents and a further $10,000.00 under a home loan. To the total he added interest at the rate of 6.59%. 59 Clause 32 of the second agreement provided that, from time to time, Mr Ireland might require the use of courts 3 and 4 for temporary extension of the marquee at the higher rate of $66 per day applied to such periods. Mr Kent argued that this provision was limited to occasional use and did not cover the situation in which he had been deprived of the use of courts 3 and 4 for extensive periods. 60 The use of those courts for extension of the marquee was occasional. What took the time was the need for repair and the second agreement provided a formula as a pre-estimate of the compensation reasonably payable to Mr Kent for both those occurrences. In my view, Mr Kent is bound by the terms of the second agreement and is not entitled to additional compensation for loss of personal goodwill or cost of additional working capital. Amounts Outstanding to Mr Ireland 61 To the end of July 2004, Mr Ireland claimed he was owed $66,949.90 for licence fees, electricity and telephone. Mr Kent's figures for those expenses to that date totalled $64,104.09. I propose to accept Mr Kent's figures. Because I propose to allow Mr Kent to remain in possession of the tennis complex until 31 October 2004, to this total must be added licence fees for three months at $2,195.50 per month, a total of $6,586.50. Electricity at $385 a month adds a further $1,155.00. To this total of $71,845.59 any telephone use in the four month period from July 2004 to October 2004 will need to be added. I will give judgment in favour of Mr Ireland for the difference between this adjusted total and $31,984.65. Possession 62 In my view, it is appropriate that Mr Kent should have a reasonable period in which to vacate. I will make an order that he deliver up possession of the tennis complex to Mr Ireland on or before 31 October 2004. 63 I will hear the parties on costs. I direct the parties to bring in short minutes of orders reflecting these reasons. ********** Last Modified: 10/06/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.