A F C Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWSC 985 | Case summary

1 The central issue in this case is whether, on the correct construction of a special condition in a contract for sale of land, the price payable under the contract is GST inclusive or whether the purchaser must, in addition to paying the amount specified in the contract as the purchase price, reimburse the vendor for GST payable by it. 2 On 19 January 2006, the plaintiff and defendant entered into an option deed by which the defendant granted the plaintiff an option to purchase properties in Kogarah. The option fee was $50,000. The deed annexed the form of notice of exercise of the option. The exercise price was expressed in that notice to be $4,000,000. The deed also annexed the terms of the contract for the sale of land that the parties were to enter into in the event that the option was exercised. 3 The option period was extended on a number of occasions in accordance with the original deed and, subsequently, as a consequence of variations to it. On each occasion, an extension fee was paid by the plaintiff. 4 Clause 5 of the option deed provided: "5.1 The Option Fee and any Extension Fee(s) do not include any GST. 5.2 If the Grantor incurs a liability to pay GST in connection with this Deed, the Grantee must pay to the Grantor on demand in addition to the Option Fee and any Extension Fee(s) the amount of the GST." 5 On 18 December 2009, the plaintiff exercised the option by serving a notice in accordance with the deed together with an executed contract for the sale of land in the form annexed to the deed. Subsequently, on 21 December 2009, the plaintiff paid the balance of the deposit, which was 5 per cent of the sale price - that is, $200,000. 6 The contract for sale was in the form of the Law Society of New South Wales and Real Estate Institute of New South Wales standard form - 2005 edition. The contract stated the sale price was $4,000,000, with a deposit of $200,000. On the first page of the contract was a box in which were written the words "GST AMOUNT (optional) The price includes GST of: $ ". The dollar amount was left blank. The defendant attached some significance to the fact that this box was not completed. However, in circumstances where its completion is expressed to be "optional", I do not think any significance can be attached to it. 7 Towards the bottom of the first page of the sale contract, under the heading "Tax information", were a number of statements concerning tax and next to them boxes to indicate which of those statements were correct. Against the statement "GST: Taxable supply" the box "yes in full" was marked with a cross. 8 Clause 13.2 of the standard terms of the sale contract provided: "Normally, if a party must pay the price or any other amount to the other party under this contract, GST is not to be added to the price or amount."

"Normally" is defined in clause 1 of the standard terms to mean "subject to any other provision of this contract". 9 The contract contains five special conditions. Special condition 4 provides: "The sale is a taxable supply and the purchaser will pay to the vendor on completion the amount of Goods & Services Tax for which the vendor is liable." 10 Special condition 3 provides that, if the purchaser fails to complete within time, it shall: "… pay to the vendor on completion in addition to the balance of purchase monies and any other monies payable to the vendor interest on the balance of purchase monies at the rate of ten per cent (10%) per annum …." 11 The dispute between the parties turns on the correct construction of special condition 4. The defendant says that that special condition requires the plaintiff to pay, in addition to the purchase price, the amount of GST payable by the defendant in respect of the supply by it under the sale contract. The plaintiff says that special condition 4 simply records the fact that the amount payable by the purchaser includes an amount payable by the defendant in respect of GST. 12 I prefer the interpretation contended for by the defendant. The difficulty with the interpretation contended for by the plaintiff is that, on that interpretation, the clause has no practical effect. Without the clause, the plaintiff would still be liable to pay to the defendant the amount of GST for which the defendant is liable since that amount will be included in the purchase price. Why would the parties have included special condition 4 if it were simply stating the obvious? 13 The general principle is that the words of a contract should be interpreted in a way which gives them an effect rather than a way in which makes them redundant: North v Marina [2003] NSWSC 64 at [45]; Davuro Pty Ltd v Wilkins [2000] FCA 1902, (2000) 105 FCR 476 at [152], [230]. That principle does not operate as an invariable rule. In some cases, it may be appropriate to interpret words in a way that makes them redundant. That may be appropriate where the alternative construction of the words is inconsistent with other provisions of the contract or where the alternative construction is inconsistent with the commercial purpose of the contract or where it appears that the words have been included out of abundant caution: see Re Strand Music Hall Co Ltd; Ex parte European and American Finance Co Ltd (1865) 35 Beav 153 at 159; 55 ER 853 at 856 per Sir John Romilly MR; Dryden Construction Co Ltd v New Zealand Insurance Co Ltd [1959] NZLR 1336; Beaufort Developments (NI) Ltd v Gilbert-Ash NI Ltd [1999] 1 AC 266 at 273-4 per Lord Hoffmann. However, in my opinion, none of those exceptions applies in this case. The relevant provision is included as a special condition of the contract. Generally, the purpose of special conditions is to alter or to supplement the standard terms. In this case, clause 13.2 of the standard terms make it clear that normally the price is GST inclusive, with the result that when the purchaser pays the purchase price it is paying an amount which includes the amount of GST for which the vendor is liable. By including special condition 4, the parties must have intended to alter that position. By using the word "normally" as defined, the general terms contemplate that that might happen. 14 Mr Vincent, who appeared for the plaintiff, sought to avoid the conclusion of the previous paragraph by contrasting special condition 4 with clause 5.2 of the option deed and special condition 3 of the contract of sale. Clause 5.2 of the option deed provides that, on demand, the plaintiff must pay GST "in addition" to the option fees. Special condition 3 says that the plaintiff must pay interest "in addition" to the balance of the purchase moneys (in the event of a delay in settlement). 15 In my opinion, these provisions do not assist the plaintiff. I do not think that much can be read into the fact that clause 5.2 of the option deed and special condition 3 use the words "in addition". Special condition 4 and clause 5.2 of the option deed are included in different agreements. In those circumstances, I do not think that it can be inferred that by using different language in the two agreements the parties intended to achieve a result where GST was payable in addition to the option fees but not in addition to the purchase price. If anything, clause 5.2 of the option deed seems to me to count against the construction contended for by the plaintiff. That clause makes it clear that GST is payable in addition to the option fee (in the event that GST is payable by the defendant). A substantial part of the option fee is to be applied towards the deposit in the event that the option is exercised. It would be odd for the parties to provide that the amount of GST was payable in addition to the option fees - and therefore the deposit - but not in addition to the sale price itself. In my opinion, it is more likely that special condition 4 was intended by the parties to mirror the position in relation to the granting of the option. It is true that the parties used very different language in the two clauses to achieve that result. However, as I have said, I do not think much can be inferred from that fact. 16 Although special condition 3 is in the same agreement as special condition 4, it is concerned with a different subject and the structure of the clause is different from the structure of special condition 4. Moreover, special condition 3 contemplates that moneys other than the purchase price may be payable on completion. That is consistent with an interpretation of special condition 4 that an amount in addition to the purchase price is payable under that special condition. On its face, special condition 4 seems to be concerned with the payment of an amount which is not the purchase price - that is, payment of an amount which is not included in the $4,000,000. In those circumstances, I do not think any significance can be attached to the fact that special condition 3 uses the words "in addition" and special condition 4 does not. 17 It follows that the plaintiff's summons should be dismissed with costs.

A F C Holdings Pty Ltd v Shiprock Holdings Pty Ltd

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