Angus Developments Pty Limited v Kim

Supreme Court of NSW|2017-05-12|Before: Pembroke J

Solicitors: Jones Day - for the plaintiff BCP Lawyers & Consultants - for the first and second defendants File Number(s): 2017/077460

Introduction

This is the hearing of a separate question relating to the construction and effect of a development agreement between the plaintiff as Developer and the defendants as Landowner. The agreement relates to a 'Project'. The recitals to the agreement record that the objectives of the parties in relation to the Project are (1) the obtaining by the Developer of approval for the rezoning and mixed use development of a number of parcels of land at Dulwich Hill and (2) the management by the Developer of the sale of each parcel of land 'on the terms of this agreement.
The defendants are the owners of one of the parcels of land at Dulwich Hill. I was informed that although rezoning and mixed use development approval have not yet been formally obtained, the planning approval process is well underway and that a majority of landowners has voted in favour of acceptance of an offer of $25.21 million for the Project Land. The defendants have not. They contend that on the proper construction of the agreement, they are not obliged to sell their parcel until 'Development Consent' within the meaning of the agreement has been obtained.
The defendants rely, among other things, on the definition of 'Project' and on Clause 5.1 of the agreement. The former does not assist. It states that 'Project' means the Developer 'seeking' to obtain a rezoning and mixed use development approval and 'seeking' to sell the Project Land. Both goals are qualified by the words 'in accordance with this agreement'. The definition does not, by itself, determine anything.

Timing of Sale

The central issue is the timing of any sale. Clause 8.1 of the agreement states that 'At any time, including prior to Development Consent being achieved, the Developer may initiate and manage a marketing and/or sale process for the Project Land' (emphasis added). The plaintiff contends that this must necessarily include the conduct of the sale process to completion. The defendants contend that while the Developer may 'manage' the sale process before obtaining Development Consent, it must stop short of sale and await the outcome of the planning approval process and the obtaining of Development Consent, however long that may be, subject to the expiry of the term.

The Development Agreement

The headings in the agreement are for convenience only. Clause 8 of the agreement is headed 'Sale of the Property'. Clause 8.1 is headed 'Marketing & Sale'. Clause 8.2 is headed 'Offers'. Clause 8.3 is headed 'Sale'. And Clause 8.4 is headed 'Voting'. More relevant is the actual wording of Clauses 8.1 to 8.4. Those clauses stipulate the parties' obligations in relation to the sequence of events that might naturally be expected to occur - marketing, offer, sale and voting. The four clauses set out a scheme designed to achieve the sale of the Project Land predicated on an offer in the price bands specified in Clauses 8.3(a) and (b). None of the obligations specified in Clauses 8.1 to 8.4 is expressed to be conditional on the obtaining of Development Consent. Indeed, the opening statement in Clause 8.1 expressly disavows any requirement for Development Consent to be obtained before initiating and managing the sale process.
The specified price bands are explained in Clauses 8.3(a) and (b). The former mandates a sale if the purchase price offered for the Project Land is $28 million or more. The latter provides that if the purchase price is below $28 million but more than $25.2 million, the Landowner agrees 'to vote with the Project Participants in accordance with Clause 8.4 as to whether the Project Land is to be sold for such a purchase price'. Clause 8.3(b) then provides that if, after voting pursuant to Clause 8.4, fifty per cent (50%) or more of the Project Participants vote in favour of selling the Project Land for the price offered, the Landowner 'agrees to sell'. This is what has happened but the defendants are unwilling to sell their parcel.

Memorandum of Understanding

The agreement was preceded by a memorandum of understanding. It is expressly referred to in the agreement. It is not a binding agreement and the scheme embodied in it is materially different to that envisaged by Clause 8 of the agreement. In a sense, the memorandum of understanding is a background fact but its relevance is questionable. The agreement expressly stated that it superseded all prior discussions, negotiations, understandings and agreements, including the memorandum of understanding. The parties made competing contentions as to whether the core difference between the memorandum of understanding and the agreement was relevant or significant to the central question of construction of the agreement.
That core difference relates to the apparent significance of obtaining Development Consent. The memorandum of understanding expressly limited the entitlement of the Developer to initiate and manage a sale process for the Project Land only 'if an acceptable Development Approval is achieved'. This is an unusual approach. It would make little sense in a development project to delay the 'initiation' of the sale process, let alone the 'management' of the sale process, until after obtaining re-zoning and mixed use development approval. However, the memorandum of understanding also obliged the parties to negotiate in good faith with a view to reaching a binding agreement. When they did so, they appear to have agreed to dispense with this limitation. This would seem to explain the language of the opening words of Clause 8.1 of the agreement and the absence of any express statement making the operation of Clauses 8.2 to 8.4 subject to the obtaining of Development Consent.

Drafting History

The relevance of the memorandum of understanding is a practical question as well as a legal question. It is the bane of courts, let alone of counsel who practise in commercial law, that even when the issue is only one of the construction of a written contract, hundreds, if not thousands of pages relating to the parties' negotiations and prior drafting history are sometimes tendered. In general, and unless the purpose of the documents is to establish relevant, mutually known background facts, they are unhelpful and inadmissible. The intentions, aspirations, expectations, sometimes misconceptions, of the parties reflected in those documents do not matter, except in a rectification claim. The prior contemplated terms are 'superseded by, and merged in, the contract itself': Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 352. The investigation of those subjective matters 'would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract': Codelfa at 352.
There appears to be one recognised exception to this principle but its scope is not fully settled and it is almost certainly only available in cases of ambiguity. Its modern origin lies in the explication by Sir Frederick Jordan in Heimann v Commonwealth of Australia (1938) 38 SR (NSW) 691 at 695. His Honour was considering the implication of a term but 'the implication of a term is an illustration of the process of construction': Codelfa at 353.
In Codelfa at 353, Mason J, adopting Sir Frederick Jordan, stated that 'evidence of mutual intention, if amounting to concurrence, [may be] receivable to negative an inference sought to be drawn from the surrounding circumstances.' In Esso Australia Ltd v Australian Petroleum Agents' & Distributors' Association [1999] 3 VR 642 at 647-8 [19], Hayne J reviewed the authorities and expressed himself firmly in favour of receiving such evidence where necessary to negative an inference sought to be drawn from surrounding circumstances 'that the contract bears a meaning positively rejected by the deletion'. Many intermediate appellate courts have since expressed similar, sometimes more robust views, especially in relation to the significance of words that have been deleted. Rogers CJ Comm D set out a careful review of the authorities in NZI Capital Corporation Pty Ltd v Child (1991) 23 NSWLR 481 at 490-494.
In Codelfa, Mason J did not limit himself to deletions. It is possible that the principle may well extend to other evidence that indicates mutual concurrence in rejecting another construction, meaning or perceived consequence - one that the parties have united in rejecting. Most recently, in Walker Group Constructions Pty Ltd v Tzaneros Investments Pty Ltd, [2017] NSWCA 27, Bathurst CJ approved the general principle explained by Mason J in Codelfa and specifically adopted the passage from the judgment of Hayne J in Esso Australia to which I have referred.
This however is a different case and I do not think the exception applies on these facts. The evidence in this case simply reveals an apparent change of approach between the non-binding memorandum of understanding and the subsequent binding agreement. It is one thing to tender a prior draft that demonstrates by agreed deletion or otherwise, that - at an earlier time - the parties united in rejecting a certain outcome. It is another thing simply to point to a prior document that adopts different language to the final agreement on a key issue. The latter is not capable of amounting to proof, having the effect of negating an inference as to the meaning of the latter. As I said in argument, the parties '… have not rejected a construction, have they? They have rejected words and reformulated words'. The distinction is similar to that explained by Lord Reid in Timber Shipping Co SA v London & Overseas Freighters Ltd [1972] AC 1 at 15-16.
The facts of this case do not amount to a clear illustration of one party contending for a construction which, by reference to the prior drafting history, can be seen to be inconsistent with an approach which they had previously united in rejecting. This area of the law is however replete with danger. Even where parties have previously united in rejecting a certain meaning or outcome, one of the parties may have changed its mind, or been prepared to take a chance on the drafting skill of its solicitor. What will usually always matter most is the language which ultimately appears in the agreement, together with its syntax.

Meaning

Unless there is ambiguity justifying recourse to the surrounding circumstances, the rights and liabilities of the parties pursuant to a written contract are determined by reference to 'text, context and purpose': Mt Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at [46]. And unless there is a clear contrary indication, courts assume that the parties 'intended to produce a commercial result' - one that avoids 'working commercial inconvenience': Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR at [35].
As Gibbs J said in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109: … if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust', even though the construction adopted is not the most obvious, or the most grammatically accurate.
In this case, having regard to the language and syntax of the agreement, let alone the obvious commercial purpose, I think the meaning is sufficiently clear, despite the wording of Clause 5.1. I do not think there is any serious ambiguity. As I have said, Clause 5.1 is no more than a statement of object. It is natural to think in terms of a development consent followed by a sale. That is because such a sequence is common, but not necessarily invariable. However, there are many circumstances where the recognised market value of land is enhanced by its development potential, short of obtaining a formal development consent. This may be especially so where an application for development consent has been lodged but not yet approved. Experienced purchasers are often prepared to take the risk of agreeing to a sale price that reflects the likelihood of approval and the enhanced value derived from that likelihood. Commercial parties and their valuers are accustomed to pricing land by reference to its highest and best use, whether or not development approval has been formally obtained. The difference between the memorandum of understanding and the agreement appears to recognise this commercial reality.
The defendants' construction does not produce a commercial result. At a general level, that problem makes the defendants' construction unlikely. More importantly, it is not sustained by the actual language of Clause 8, which is bereft of any express suggestion that a sale is conditional upon the obtaining of Development Consent. I accept that Clause 8.1 uses the words 'initiate and manage' the sale process. But those words must mean that the Developer may conduct the marketing and sale process to conclusion. There was force in the submission of senior counsel for the plaintiff that it would be 'bizarre' if Clause 8.1 meant that the Developer could start but not finish a sale. Such an outcome would be at least 'inconvenient' and possibly 'capricious' in the sense explained by Gibbs J in Australasian Performing Right at 109.
And as a matter of text, there is no indication in the language of Clause 8.1 that the Developer can start but not finish a sale. It would be commercially unusual, possibly pointless, for the Developer to try to market and sell the Project Land in circumstances where it could not sell the land. Ordinarily, in such circumstances, the marketing and sale process will fix the price for the land by reference to its anticipated development potential having regard to the plans that accompanied the development application. There would be nothing to be gained by waiting for Development Consent. It could not be expected to contribute to a higher sale price.
In the result, I have concluded that the construction contended for by the defendants is deeply unattractive; not supported by the language of Clauses 8.1 to 8.4 in which the relevant obligations of the parties are set out; and offends the principle that the parties should be assumed to have intended a commercial result. I therefore answer the separate question in favour of the plaintiff. Clauses 8.3 and 8.4 of the agreement are not subject to a condition precedent that the plaintiff obtain Development Consent as defined in the agreement.

Orders

I order that: 1. the defendants pay the plaintiff's costs of the separate hearing; 2. the plaintiff and the defendants undertake mediation pursuant to Clause 15 of the agreement.

Amendments 19 July 2017 - Para 12: 'th authorities' amended to read 'the authorites' Para 14: 'The former' amended to read 'The latter' 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: 19 July 2017

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