Supreme Court New South Wales Medium Neutral Citation: GPG Fortitude Valley v Thakral Capital Australia [2018] NSWSC 1196 Hearing dates: 23/07/2018 and 24/07/2018 Date of orders: 03 August 2018 Decision date: 03 August 2018 Jurisdiction: Equity - Commercial List Before: McDougall J Decision: Plaintiffs entitled to declaratory relief; see at [58]. Catchwords: CONTRACT – interpretation of note deed and associated documents – whether Event of Default occurred – where defendants contend that plaintiffs breached negative pledges contained in the note deed – unnecessary to resolve question of construction and breach – even if plaintiffs breached negative pledges, no evidence that that breach had any material and adverse effect – no Event of Default – plaintiffs entitled to consequential declaratory relief. Legislation Cited: Evidence Act 1995 (NSW) Cases Cited: Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640 Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 Minumbra Lancewood Pty Ltd v AM Lancewood Investment Nominees Pty Ltd [2013] NSWSC 1929. Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 Category: Principal judgment Parties: GPG Fortitude Valley Issuer Pty Ltd (First Plaintiff) GPG Fortitude Valley Pty Ltd (Second Plaintiff) 237 Barry Parade Pty Ltd (Third Plaintiff) Thakral Capital Australia Pty Ltd (First Defendant) TCAP Investments Limited (Second Defendant) Diversity Capital Limited (Third Defendant) Thakral Capital Investments Limited (Fourth Defendant) Representation: Counsel: G D Dalton QC / D R Sulan (Plaintiffs) T J F McEvoy QC / B L Hutchins (Defendants) Solicitors: Arnold Bloch Leibler (Plaintiff) Cornwalls (Defendants) File Number(s): 2018/74572 Judgment 1. HIS HONOUR: The question dividing the parties is whether the plaintiffs (it is convenient to refer to them jointly as "GPG") have committed an "Event of Default" under a note issue deed made on 14 May 2014 (the original note deed) as varied on 2 April 2015 (the amended note deed). The original and amended note deeds were made to enable notes to be issued by the first plaintiff (the issuer) to the third and fourth defendants (the initial note holders). The notes were issued to raise third tier finance for the purposes of a substantial property development to be undertaken by GPG in Brisbane. The parties, the development and the central dispute 1. As I have said, the first plaintiff was the note issuer. The second plaintiff (the developer) was to undertake the development. The development comprised a number of stages. The third plaintiff (the stage 1 landowner) owned the land that was to be the subject of stage 1 of the development. 2. All those companies are controlled by Mr Timothy Gurner. So, too, is another company known as FV No.1 GPG Pty Ltd (the stage 2 landowner). 3. The first defendant was the note originator. The second defendant was the security trustee, in respect of security given for the benefit of the noteholders. The third defendant (Diversity) was an original noteholder. Diversity did not agree to the April 2015 variation. The fourth defendant was another original noteholder, and did participate in the variation. It is convenient to refer to the first, second and fourth defendants jointly as "Thakral". 4. The finance provided for the development comprised three tiers: 1. senior debt, $180 million, from a syndicate headed by Australia and New Zealand Banking Group Limited; 2. a mezzanine debt facility of $39.5 million; and 3. an advance from the noteholders, including $16.225 million from Thakral. 1. Part of the land required for stage 2 of the development was owned by R.W. Winning (Holdings) Pty Ltd (Winning). In January 2015, the stage 1 landowner contracted to buy that land (the Winning land). 2. In early 2015, Mr Gurner decided to separate stage 1 and stage 2 of the development. That involved using a separate company to be the developer of stage 2, and having the land for stage 2 owned or under the control of the stage 2 landowner. It also, of course, required amendment of the original note deed and the associated documentation. 3. As part of the process of separation, the stage 2 landowner became the purchaser of the Winning land (this involved rescission of the contract between Winning and the stage 1 landowner, and the execution of a fresh contract between Winning and the stage 2 landowner). The consideration payable by the stage 2 landowner to Winning was $11,700,000. That consideration was to be satisfied by the transfer of property as follows: 1. the stage 1 landowner would transfer land known as the Winning Showroom, having an agreed value of $10,700,000, to Winning on settlement of the purchase of the Winning land; and 2. as to the remaining $1 million, Winning had the option to purchase two apartments in stage 1 of the development for $1,280,000, on the basis that on settlement, Winning would pay only $280,000. 1. In effect, by those agreements, when the contract for sale from Winning to the stage 2 landowner was completed, the stage 2 landowner became indebted to the stage 1 landowner for the total consideration. 2. The smaller amount, $1 million, was a short-term loan that was discharged by a series of inter-company transactions that need not be described. It is the indebtedness of the stage 2 landowner to the stage 1 landowner for the larger amount, $10,700,000, that lies at the heart of this dispute. 3. The original note deed contained a number of negative pledges. They were repeated in the amended note deed. The amended note deed also included, among the plethora of negative pledges and as an exception to the general prohibition on lending, provisions intended to deal expressly with the debts that would arise as between the stage 2 landowner and the stage 1 landowner when the former completed its purchase of the Winning land. 4. Clause 17.1(e) of the amended note deed (there was an identical clause in the original note deed, but numbered 17.1(d)) provided that the "Obligor[s]", including relevantly, the stage 1 landowner, could not deal with anyone except at arms' length, in the ordinary course of business and for valuable consideration. Clause 17.1(g) provided that, relevantly, the stage 1 landowner could not make loans to anyone, with four specified exceptions, and could not do a number of other things. There had been a similar provision (although numbered 17.1(f)) in the original deed, but it did not contain the specific exceptions that are found in the amended deed. 5. The first two exceptions can be put to one side for the moment. The third (cl 17.1(g)(C)) recognised that a loan amount might be owing by the stage 2 landowner to the stage 1 landowner in respect of the latter's providing the consideration for the transfer to the former of the Winning land. The fourth exception (cl 17.1(g)(D)) related to a debt that might arise between the stage 2 landowner and the stage 1 developer under a separate agreement. 6. In essence, GPG contended that cl 17.1(g)(C) was a specific provision which dealt exclusively with the subject of that loan, and that the general prohibition in cl 17.1(e) had no application. Thakral contended to the contrary. The issues for decision, and approach to their resolution 1. The parties agreed on the three issues that required decision. I set out those issues: a. Does clause 17.1(e) of the Amended Note Deed apply to the loan between 237 BP [the stage 1 landowner] and FV No.1 [the stage 2 landowner] so that the loan "must bear interest and be secured"? b. If clause 17.1(e) does apply, has 237 BP breached the clause by entering into the loan which does not bear interest and is not secured? c. Has there been an Event of Default under clause 9.1(b) of the Amended Note Terms? 1. As I have said already, the fundamental question in dispute is whether there has occurred an "Event of Default". If there has been an Event of Default, the noteholders are entitled to receive a higher return. There is no other relevant consequence. 2. It is apparent that if any of the three issues is answered in favour of GPG, no Event of Default has occurred. Accordingly, since I am of the view that, for reasons I shall give, the third issue must be resolved in favour of GPG, I do not propose to spend time dealing with the first and second issues. 3. I take that approach because: 1. there were no disputed questions of primary fact; 2. there was no issue as to the credibility of the witnesses of fact; 3. if my decision goes on appeal then, one way or another, all three issues will be re-argued; 4. to the extent that the resolution of the first and second issues depends on inferences to be drawn from uncontested primary facts, an appellate court is in at least as good a position as I am to do so; 5. the resolution of the first two issues really depends on the construction of the relevant provisions of the complex contractual documents, and their application to what are, as I have said, uncontentious facts; 6. the parties' submissions were expressed very clearly in writing and elaborated in oral submissions that have been recorded in the transcript; and 7. by focusing on what I perceive to be the dispositive issue, the proceedings can be dealt with (at first instance) more expeditiously than otherwise would be the case, and the length of these reasons can be shortened very considerably. 1. Thus, I propose to decide the third issue on the assumption that the first and second issues are answered in favour of Thakral. I should however make it quite clear that I do not so decide. Ruling on admissibility of evidence 1. Mr Kevin Barry, the joint managing director of the first and second defendants, swore two affidavits. In one of them, sworn on 9 May 2018, he gave evidence at [67] to [90] of events that had happened after 2 April 2015. 2. The evidence covered two distinct period of time, and several different topics. In very broad outline, [67] to [72] dealt with negotiations between Thakral and GPG in the period April to July 2015. The negotiations concerned the possibility that Thakral would provide some finance for the stage 2 development. 3. The second time period covered (in [73] to [90]) was December 2015 to December 2016. That evidence concerned negotiations to obtain the consent of the senior and mezzanine lenders to the transactions that were necessary to enable the stage 2 landowner to become the purchaser of the Winning land, and as part of that to enable the stage 1 landowner to provide the purchase price through the transactions that I have outlined at [8] above. 4. GPG objected to that evidence. Thakral submitted that it was relevant, and admissible. I ruled that even if the evidence were admissible (a question that in my mind was seriously open to debate), its utility was so minimal that any probative value would be outweighed by the time taken up in dealing with it and the inferences to be drawn from it. Thus, I said, even if the evidence were admissible, I would reject it in the exercise of the discretion given by s 135 of the Evidence Act 1995 (NSW). I added that I would give more detailed reasons. What follows are those more detailed reasons. 5. There is no doubt that in some circumstances, evidence of events subsequent to the formation of a wholly written contract may be admissible. One of the purposes for which, it has been said, such evidence may be admitted is if it is probative of antecedent surrounding circumstances of a kind that may be taken into account in the construction of the contract. See the judgment of Allsop P in Franklins Pty Ltd v Metcash Trading Ltd [1] at [13]. 6. In the same case, Campbell JA said at [324] that an event occurring after a wholly written contract was made could be used to prove something that is relevant to the construction of the contract. His Honour gave, as an example, an admission by a party to the contract, made after the formation of the contract, of the truth of some fact that was a relevant part of the context within which the contract had been made. 7. The difficulty with the particular paragraphs is that any understanding of the extent to which they fleshed out, or could be said to give rise to admissions of, relevant "factual matrix" circumstances would require detailed analysis of the events and of the various documents referred to. That would be a time consuming exercise. In my view, that exercise was likely to divert the court from its primary task: to construe the written contract that the parties made. 8. I accept, of course, that there are occasions where evidence of circumstances prevailing before and at the time a contract is made, being circumstances known to both (or all) parties, may be taken into account in the process of construction [2] . It is not necessary to go further and examine the precise uses to which such evidence may be put. However, the theoretical admissibility of that evidence does not take away from the proposition that what is required to be construed is the parties' written formulation of their bargain. 9. In my respectful view, there is a very real danger that an over-zealous pursuit and analysis of evidence of surrounding circumstances may divert the court from its primary task. There is a concomitant and equal danger that the court may be misled into seeking to construe the wholly written factual matrix instead of the contract that emerged from it. 10. On reading the relevant paragraphs of Mr Barry's affidavit, I found it difficult to see what they proved that could be relevant to the process of construction. To overcome that obstacle, one would need to expend considerable time and intellectual effort in analysing the paragraphs closely, and the various documents that they called up. To my mind, the marginal utility of that exercise, as an aid to the task of construction of the written contract, was so minimal that the time taken to perform it could not be justified. 11. Accordingly, I rejected the paragraphs in question. Relevant provisions of the contract documents 1. The variation to the original note deed was effected by a deed of variation made on 2 April 2015. That document provided by cl 2.1 that the contract documents would be amended so that they read in accordance with defined annexures. I set out cl 2.1: 2. Variations 2.1 Effective from the 2nd day of April 2015 (the Operative Date): (a) the Note Issue Deed will be amended so that it reads in accordance with Annexure A and the Issuer will be a party to the Note Issue Deed (as amended); (b) the Project Rights Agreement will be amended so that it reads in accordance with Annexure B and the Issuer will be a party to the Project Rights Agreement (as amended); (c) the General Security Deed will be amended so that it reads in accordance with Annexure C; (d) the Share Security Deed (Issuer) will be amended so that it reads in accordance with Annexure D; (e) the Security Trust Deed will be amended so that it reads in accordance with Annexure E and the Issuer will be a party to the Security Trust Deed (as amended). 1. Clause 2.2 provided that the parties to the variation deed who had been parties to the original note deed would be bound by the amended note deed as if they had executed it. They were bound to perform their obligations under it, and gave representations and warranties as expressed in it. There were equivalent provisions relating to the other agreements described in cl 2.1. 2. Clause 3.10 of the amended note deed (which was annexure "A" to the variation deed) provided as follows: 3.10 Release of land for Winnings transfer On request by the Developer the Security Trustee will release Volumetric Lot 1 on SP271989 Alfred Street, Fortitude Valley; from the Note Security if an Event of Default is not subsisting and will not arise by those properties being released from the Note Security, those properties are released from the Senior and Mezzanine Security and following that release from the Senior and Mezzanine Security the Developer will comply with the loan to value covenant in clause 21.1(1)(a) of the Senior Facilities Agreement. The release will be provided at the settlement of the transfer of those properties. 1. Clause 17 of the amended note deed provided, as I have said, for various negative pledges to be given. Although the debate focused only on a few paragraphs, it is convenient to set out the whole of cl 17.1: 17. Negative Pledge, Subordinated Liabilities and Permitted Payments 17.1 Negative Pledge (a) An Obligor (other than Gurner) must not create or allow to exist without the prior written consent of the Security Trustee (given in accordance with an Ordinary Resolution of the Noteholders whilst Note Debt is outstanding) any Security Interest over all or any part of its present or future revenues, property, assets or undertaking other than the Permitted Encumbrances. (b) The Issuer must not, without the prior written consent of the Security Trustee, have or incur any Financial Indebtedness except the Note Debt and the Mezzanine Secured Money. The Issuer must not accept subscriptions for Mezzanine Notes if to do so would cause the total issue price of Mezzanine Notes at any time to exceed A$39,500,000 unless the Security Trustee (acting on the instructions of an Extraordinary Resolution of Noteholders whilst Note Debt is outstanding) has agreed to that amount being exceeded. (c) The Developer, must not, without the prior written consent of the Security Trustee, have or incur any Financial Indebtedness except: (i) the Senior Secured Money owed to the Senior Finance Parties under the Finance Document (as defined in the Senior Facilities Agreement); (ii) the Financial Indebtedness which is a Subordinated Liability incurred in accordance with clause 17.4 of this Deed or which has been approved by the Security Trustee; (iii) the Financial Indebtedness which is incurred in accordance with clause 3.1 of the Note Terms; (iv) the Financial Indebtedness which is incurred in accordance with the Loan Agreement; (v) pursuant to a Guarantee for the Mezzanine Secured Money; (vi) pursuant to a Guarantee for the Note Debt; or (vii) Permitted Unsecured Financial Indebtedness. (d) The Land Owner must not, without the prior written consent of the Security Trustee, have or incur any Financial Indebtedness except: (i) in relation to advances made to the Land Owner by the Developer in accordance with the Development Agreement; (ii) pursuant to a Guarantee of the Financial Indebtedness of the Developer as described in clause 17.1(c) of this Deed; (iii) pursuant to a Guarantee for the Mezzanine Secured Money; (iv) pursuant to a Guarantee for the Note Debt; or (v) Permitted Unsecured Financial Indebtedness. (e) The Issuer, the Developer and the Land Owner must not deal with any person except at arm's-length in the ordinary course of business for valuable consideration. (f) The Issuer, the Developer and the Land Owner must not pay any fee or charge under any management agreement or other arrangement except (without double counting) as expressly permitted by the Development Agreement, the Development Management Agreement or the Project Rights Agreement or as approved in writing by the Security Trustee. Any such payment under the Development Agreement is subject to the payment being made when there is no subsisting Event of Default and to the payment not contravening this Deed or the Project Rights Agreement. (g) The Issuer, the Developer and the Land Owner must not: (i) make any loans to any person, except: (A) the Developer may make loans to the Land Owner in accordance with the Development Agreement so long as there is no subsisting Event of Default when the loan is made and this Deed is not contravened by the loan being made); (B) the Issuer may make loans to the Developer pursuant to the Loan Agreement; (C) a loan amount may be owing by FV No. 1 GPG Pty Ltd (ACN 604 293 950) to the Land Owner as consideration for the transfer of that part of the Property specified in clause 0 of this Deed to the extent the consideration is not paid in cash to the Land Owner and applied by the Land Owner to reduce the Senior Secured Money; and (D) a loan amount of A$1,000,000 (plus GST) may be owing by FV No. 1 GPG Pty Ltd (ACN 604 293 950) to the Developer pursuant to the Deed of Assignment dated 10 March 2015 between the Developer, the Land Owner and FV No. 1 GPG Pty Ltd (ACN 604 293 950); (ii) put any person in funds so that person can meet any liability other than pursuant to the Transaction Documents; (iii) give any Guarantee other than pursuant to the Transaction Documents; (iv) give any indemnity (other than an indemnity in a Transaction Document or approved by the Security Trustee); (v) issue any Marketable Securities (including stock units or units in capital) to any person; (vi) enter into any merger, amalgamation or reconstruction; (vii) permit or allow any change to its capital structure as advised to the Security Trustee before the date of this Deed; (viii) form or acquire any subsidiary; or (ix) other than as disclosed to the Security Trustee before the Amendment Date, create any right or allow any caveatable or other interest to arise or continue over any of its property and assets, other than: (A) under a Permitted Encumbrance; (B) a contract for sale entered into in accordance with clause 16.7 of this Deed; or (C) a transfer of contractual rights held by an Obligor in connection with the Stage 2 Project (as that term defined in the Senior Facilities Agreement as at the Amendment Date). (h) The Issuer, the Developer and the Land Owner must not do or omit to do any act, matter or thing in relation to any of its property and assets (including the Property and the Project) if the doing or omission to do that act, matter or thing would or is reasonably likely to have a material adverse effect (using the general meaning of that expression rather than the definition in clause 1.1 of this Deed) on the ability of an Obligor or the Development Manager to comply with its obligations under any Finance Document or on the enforceability of any Finance Document. (i) The Issuer warrants that it is a special purpose entity incorporated for the purpose of Issuing the Notes, issuing the Mezzanine Notes and advancing the proceeds thereof to the Developer pursuant to the Loan Agreement and it has no liabilities other than the Note Debt, the Mezzanine Secured Money or another liability arising under a Finance Document and has no assets other than the amount owed by the Developer pursuant to the Loan Agreement. The Issuer agrees that it will not engage in any other activity or business. (j) The Developer warrants that it is a special purpose entity incorporated for the purpose of undertaking the Project as bare nominee and agent of the Development Joint Venturers in accordance with the Development Joint Venture Agreement and it has no assets or liabilities save for those related to the Project. The Developer agrees that it will not engage in any other activity or business. (k) The Land Owner warrants that it is a special purpose entity incorporated for the purpose of undertaking the Project as bare nominee and agent of the Land Owner Joint Venturers in accordance with the Land Owner Joint Venture Agreement and it has no assets or liabilities save for those related to the Project. The Land Owner agrees that it will not engage in any other activity or business. 1. The "Terms and Conditions of the Notes" (contained in Annexure B of the amended note deed) included a requirement for payments to noteholders. The payments to be made included a "Termination Payment Amount" (cl 2.1) and an "Additional Return" (cl 2.3). 2. The Termination Payment Amount was (with an associated defined term) defined as follows in cl 1.1 of the amended note deed: Termination Payment Amount, in relation to a Note, means the amount less fifty cents calculated on the Termination Date which provides to the Noteholder a return which is determined by an XIRR of the percentage per annum specified in item 5 of the Schedule to this Deed on the Issue Price of the Note for the period from and including the day the Note was Issued to and including the Termination Date. It equals the Issue Price plus that return less fifty cents. Refer to Annexure D to this Deed for worked examples (which do not show the fifty cents reduction) of the XIRR calculations. XIRR means an internal rate of return as calculated according to the example in the spread sheet in Annexure D to this Deed. 1. The Additional Return is effectively a return calculated in accordance with Annexure J to the amended note deed. Clause 2.3 defined, or gave content to, the integers to be used in that calculation. The only one that need be set out is the item "Project Revenue": Project Revenue (Item 1) means (without double counting) all income and revenue of any kind received by the Issuer, the Developer, the Land Owner, the Guarantor, the Development Manager (in excess of the amount to which it is entitled under the Development Management Agreement), the Subordinated Creditor (in excess of the amount specified in paragraph (b)(iv)(E) of this clause 2.3) or a Related Body Corporate of any of them in connection with the Project, including all proceeds from the sale or disposal (including any deposit and any forfeited deposit) of an apartment or other asset comprising part of the Project. In determining those proceeds there will be deducted from the price only GST, selling commissions, purchaser incentives and legal costs and disbursements that are paid on settlement. Project Revenue will also include all penalty interest; all claims to compensation; all interest earned, including interest to which the Land Owner or Developer is entitled that is earned on any investment of a deposit under a contract for the sale of a lot comprising part of the Property or the balance of any amounts in accounts of the Issuer, the Developer or the Land Owner less any amounts required to fund contingent liabilities incurred with the approval of the Development Committee; all input tax credits received or receivable in connection with the Project (not paid to the Senior Finance Parties under the Senior Facilities Agreement) or the performance of services in connection with the Project; and an amount equal to $10,700,000 (being the market valuation of the volumetric lot to be transferred to R.W. Winning (Holdings) Pty Ltd (ACN 000 120 605) or its nominee) and the contract price (net of GST) for the apartments to be transferred to R.W. Winning (Holdings) Pty Ltd (ACN 000 120 605) or its nominee (to the extent it is not reflected as cash in a bank account upon repayment of the loan relating to the transfer of these properties).. If the Additional Return is to be calculated before settlement of the sale of all assets of the Project has occurred the Project Revenue will include the net sale price payable under a subsisting contract for that asset and, if it has not been sold, the market value of the asset as determined in accordance with a valuation which is acceptable to TCAP (acting reasonably). 1. Clause 9.1 specified "Events which are Events of Default". The relevant event is that set out in cl 9.1(b): 9.1 Events which are Events of Default Subject to clause 9.2, each of the following events is an Event of Default: … (b) (Failure to comply): an Obligor defaults in performing and observing any of its obligations under the Deed or these Note Terms or in respect of any Note, other than an obligation requiring the payment of money as contemplated by clause 9.1(a) of these Note Terms, provided that the failure to perform or observe the obligation: (i) is reasonably likely to have a material adverse effect (using the general meaning for that expression rather than the definition in clause 1.1 of the Deed) on the ability of an Obligor or the Development Manager to comply with its obligations under any Finance Document or on the enforceability of any Finance Document; and (ii) was not due to any circumstances or events beyond the reasonable control of an Obligor, the Development Manager or a Related Body Corporate of any of them, and, if that default is capable of remedy, it has not been remedied within fourteen Working Days of an Obligor, the Development Manager or a Related Body Corporate of any of them being aware of the default; 1. There were many other provisions and definitions referred to in the course of submissions, but what I have set out in sufficient to give content to my decision on the third issue. The approach to construction of commercial contracts 1. So much has been written on this subject in recent years that is unnecessary to go into any great detail. The process starts, and usually finishes, with the language used by the parties. The court must give a businesslike construction to the contentious clauses of the contract – the meaning that, objectively, a reasonable businessperson, cognisant of the relevant background, would understand those terms to have. The terms must be construed in their contractual context and against the relevant factual background. The process of construction should seek to ensure, so far as possible, that all provisions of the contract operate together, and that each is given work to do. The construction must seek to accommodate the evident commercial purpose or object of the contentious provisions. So far as possible, the court should avoid giving those provisions a construction that results in absurdity. Third issue: Event of Default? The pleaded case 1. The pleaded case, as to Event of Default, was that [3] : 1. Thakral was entitled to be paid its percentage of the Additional Return as defined in cl 2.3 of the amended note terms: 2. that Additional Return was to be calculated by reference to Project Revenue, also as defined in cl 2.3 of those terms; 3. the receipts that should go into Project Revenue should include not only the $10.7 million loan amount but also "interest payable thereon"; 4. in those circumstances, the alleged breach of cl 17.1(e) of the amended note deed would have a material adverse effect on the ability of GPG to pay the amount of Additional Return to which Thakral was entitled, so as to result in an Event of Default. The parties' submissions 1. Mr Dalton of Queens Counsel, who appeared with Mr Sulan of Counsel for GPG, submitted that the onus of proving that there was an Event of Default lay on Thakral, the party alleging it. Mr Dalton referred to the decision of Robb J in Minumbra Lancewood Pty Ltd v AM Lancewood Investment Nominees Pty Ltd [4] at [120]. Mr McEvoy of Queens Counsel, who appeared with Ms Hutchins of Counsel for the defendants, did not contest that proposition in either written or oral submissions. Indeed, Mr McEvoy relied upon the decision of Robb J in Minumbra as authority on another point: the approach to construction of "material and adverse change provisions" (a topic that his Honour considered at [121]). 2. Mr Dalton submitted that there was simply no evidence that the suggested breach of cl 17.1(e), even if it were established, could have any, let alone any material and adverse, effect on the ability of GPG to pay to Thakral the required percentage of the Additional Return, calculated in accordance with cl 2.3 of the amended note terms. Mr Dalton submitted, further, that when one looked at the whole of the transaction, the omission of any entitlement to interest was not likely to be material. 3. Mr Dalton's submissions stressed that what had to be shown was the effect (if any) of the suggested breach on the ability of GPG to pay the Additional Return. For that to be shown, he submitted, there would need to be evidence as to the financial position of the project at the time the default occurred, and as to the financial position of GPG. He submitted that materiality was relevant to the question of the ability of GPG to pay whatever the Additional Return might be, not to the amount of the Additional Return itself. 4. In those circumstances, Mr Dalton submitted, Thakral's argument was circular [5] : So that it's a wholly circular argument, your Honour, because the amount that we are to pay can only ever be 28% of the amount that is alleged that we should have obtained. So how can the failure to have obtained it affected the ability to pay it? 1. Mr McEvoy did not directly address the question of the impact of the suggested breach on GPG's ability to pay the Additional Return. His written submissions did suggest that there might be difficulty in recovering the amount of the loan "given that the loan has not been recorded in, made in accordance with, or subject to, a written loan agreement, and has not been secured" [6] . That point was not developed further either in the written submissions or in oral submissions. Instead, Mr McEvoy's submissions focused on the effect that the suggested breach of cl 17.1(e) would have on the amount of the Additional Return. 2. Mr McEvoy posited that an appropriate interest rate on the Interstage Loan (the term that he used, and that it is convenient to use, for the debt of $10.7 million owing from the stage 2 landowner to the stage 1 landowner) would be 25%, and that it should be compounded monthly from December 2016 to December 2019. On the basis of that and other assumptions, Mr McEvoy submitted that there would be a total of $11.9 million to be included in the Project Returns, of which Thakral's 28% would exceed $3.3 million. 3. Thus, Mr McEvoy submitted, the amount was relevantly material. Decision 1. The first point to make is that there is no evidence that an interest rate of 25%, compounded monthly or otherwise, would have been an appropriate arms' length rate to charge, as between the stage 1 and stage 2 landowners, on the Interstage Loan. The second point to make is that if interest had been payable at that (or any other significant) rate, it would have been something to be factored into the stage 2 developer's calculation of the feasibility of stage 2 of the development. How that exercise might have worked out is something that is unilluminated by the evidence. 2. Putting those matters to one side, the fundamental point is that the hypothetical exercise postulated by Mr McEvoy fails to address the proper construction and operation of cl 9.1(b). If that clause is to be engaged, so as to bring about an Event of Default, the breach must be reasonably likely to have a material adverse effect on the ability of GPG [7] to comply with its obligations under, relevantly, the amended note terms. The clause focuses on the ability of each Obligor to meet its obligations, whatever they might be, under the suite of contractual documents to which that Obligor was a party. Of necessity, that exercise requires an understanding of the extent, or content, of each such obligation. That is because, absent such an understanding, the assessment of material adverse effect cannot be made. 3. However, cl 9.1(b) does not require an assessment of the effect of the breach on the monetary value of the subject matter of an obligation. Put in terms of present relevance: GPG's obligation was to pay Thakral 28% of whatever the Additional Return might be. Thus, the cl 9.1(b) exercise takes the obligation as it stands, and inquires whether the Obligor's ability to meet that obligation has been affected, and if so materially and adversely, by the breach complained of. Clause 9.1(b) is not concerned with the impact of any breach on the quantum of the Additional Return. 4. It may be – there is no need to decide – that a breach of cl 17.1(e), in particular by the failure to insist upon interest, may have reduced the amount of the Additional Return. It may be, therefore, that the damages resulting from that breach would equate to 28% of whatever the additional interest should have been. But that was not the case that Thakral argued. 5. For Thakral to make good its case of Event of Default, it must show, among other things, how the suggested breach of cl 17.1(e) affected the ability of GPG to pay the Additional Return, and did so in a material and adverse way. As I have said, there was no evidence on that point. 6. As to the first of Mr McEvoy's written submissions (see at [46] above), I note two things. First, it does not appear to fall within the pleadings. Secondly, it is unsupported by any evidence. As to the second of those submissions, it, too, lacks evidentiary support. 7. It follows that even if there were a breach of cl 17.1(e) (which would be the case if the first and second issues were answered in favour of Thakral), there would not arise any Event of Default. Conclusion and orders 1. GPG is entitled to declaratory relief. Its summons filed on 7 March 2018 sought alternative declaratory relief: a declaration directed at the event of success on the question of construction (the first and second issues), or a declaration directed at success on Event of Default (the third issue). For the reasons I have given, GPG is entitled to a declaration to the effect that there has been no Event of Default arising out of the Interstage Loan. 2. I see no reason why costs should not follow the event. 3. I make the following orders: 1. declare that for the purpose of cl 9.1(b) of Annexure B – Terms and Conditions of the Notes to the Note Issue Deed being Annexure "A" to the Variation Deed made between the plaintiffs, the defendants and others on 2 April 2015, there has been no Event of Default arising because: 1. the loan amount of $10,700,000 became owing by FV No.1 GPG Pty Ltd to the third plaintiff from about 23 December 2016; and 2. that loan was not recorded in, made in accordance with, or made subject to a written loan agreement; and 3. that loan was not made on terms requiring the payment of interest to the third plaintiff; and 4. that loan was not secured. 1. Order the defendants to pay the plaintiffs' costs. 2. Direct that the exhibits be returned. ********** Endnotes 1. (2009) 76 NSWLR 603. 2. See, eg, Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640 at [35] (French CJ, Hayne, Crennan and Kiefel JJ); Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at [49]-[50] (French CJ, Nettle and Gordon JJ), at [120] (Bell and Gageler JJ). 3. Commercial List Response, [30]. 4. [2013] NSWSC 1929. 5. T24.17-.20 6. Written submissions dated 16 July 2018, [74(a)]. 7. More accurately, the first plaintiff as the note issuer; but since all plaintiffs are, one way or another, Obligors, greater precision is not necessary. 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. Decision last updated: 03 August 2018