Aysun Pty Ltd v Cregan

Judgment 1THE COURT: This appeal concerns the scope of a promise contained in a contract for the sale of a hotel business in Armidale, New England, New South Wales, in the standard Law Society and Real Estate Institute form Contract for Sale of Business 2000 edition. 2On 19 December 2003, the respondents, two sisters, Gypsy Cregan and Pollyanna Cregan entered into a written contract with the appellant, Aysun Pty Ltd ("Aysun") for the sale and purchase of the New England Hotel. The sisters owned the land on which the hotel was situated. The sale was completed four days later, on 23 December 2003. The hotel business included a nightclub that operated on the first floor of the hotel. The dispute that arose between the parties concerned the nightclub. 3Some three months after the sale, in mid-March 2004, the police began to enforce an existing limit of patrons in the nightclub. The limit arose from the terms of an approval under the Local Government Act 1993 (NSW), s 68 by the Armidale Dumaresq Council, to use the first floor area as a place of public entertainment, known as a "PoPE" licence or approval. The maximum approved capacity (including staff and performers) was 400. A copy of the PoPE approval was required to be conspicuously displayed at the venue at all times. It was not in dispute that the principals of Aysun at all times knew of the limit. 4The purchaser claimed that enforcement of the 400 person limit caused a dramatic drop-off in patronage from mid-March 2004, leading to significant trading losses, the closure of the nightclub and its refurbishment in order to build goodwill afresh. The claim was thus for trading losses and loss of profits from April 2004 (shortly after enforcement) until January 2005 (when patronage to the club was restored) and for what were termed "mitigation expenses" incurred in refurbishing the nightclub. 5Originally, the claim was propounded on a number of bases, including misleading or deceptive conduct in contravention of the Fair Trading Act 1987 (NSW), s 42 (in the form that it appeared prior to its amendment by the Fair Trading Amendment (Australian Consumer Law) Act 2010 (NSW), Sch 1). No claim was made at the trial that the business purchased was worth less than the sum paid for it. The only claim made at the trial was that the vendors (the Cregan sisters) breached cl 10.1.7 of the contract for sale and that Aysun was entitled to compensatory damages for that breach. 6Clause 10.1.7 was part of cl 10 which was entitled "vendor's promises" and which was in the following terms: "10.1 The vendor promises that, to the best of the vendor's knowledge and other than as disclosed in this contract - ... 10.1.3 the business is not subject to any charge, encumbrance, lease, mortgage or other liability or security; 10.1.4 the equipment is in proper working order; ... 10.1.7 the vendor has complied with all requirements under legislation relating to the business; 10.1.8 there is no current dispute or litigation relating to the business between the vendor and any other person (for example, any lessor, franchisor, supplier of goods or services to the business, current or former employee, council or government department); ... 10.1.12 anything attached to this contract is accurate and complete. 10.2 These promises are made as at the contract date and are also made as at completion. 10.3 If the vendor becomes aware before completion of any fact which makes a promise in clause 10.1 incorrect or misleading, the vendor must disclose that fact to the purchaser before completion." 7The word "business" was defined in cl 1.1 as follows: "The business means the business identified on page 1 of the contract and includes the chattels, fittings, fixtures, and furniture, goodwill, intellectual and industrial property, licences, permits, plant, quotas and software of the business, together with any other items referred to in this contract as forming part of the business." 8The word "legislation" was defined in cl 1.2 to mean: "an Act or a by-law, industrial award, ordinance, regulation or rule made under an Act". 9The breach of contract alleged by Aysun can be found in para 15 of its amended statement of claim in which the vendors were said to be liable for damages by reason: "of a breach of their warranty contained in clause 10.1.7 of the Contract, namely, that the Vendors had failed to comply with all requirements under legislation relating to the New England Hotel business in that they had permitted the upstairs bar/nightclub to operate at numbers exceeding the maximum of 400 allowed under the Entertainment Authorisation ..." 10The primary judge in the District Court found that there had been a breach of cl 10.1.7; that there had been losses in relation to the nightclub business in the relevant period of $140,000 and mitigation expenses of $35,000; that the enforcement of patron numbers caused those losses; but that the sums should be reduced by 80 per cent because of the influence of other causes. 11Aysun appealed against the primary judge's 80 per cent reduction and submitted that this was wrong in principle once his Honour had concluded (as, it was submitted, he did) that the enforcement (and thus, it was submitted, the breach of contract) was a material cause of the damage. 12The Cregans cross-appealed against the findings of breach and causation. 13The controversy on appeal is to be resolved by allowing the cross-appeal on the basis that even if there were a breach of cl 10.1.7, it did not cause any of the losses claimed. On this basis, the proper order below should have been that there be judgment for the defendants with costs.

The reach and scope of the promise in cl 10.1.7 14The content and proper scope of cl 10.1.7 was as to a past fact - that the vendor (to be taken here in the plural) - "has complied with all requirements under legislation relating to the business" to the best of the vendor's knowledge. 15There was no doubt that the 400 person limit on the PoPE approval was a "requirement" within the purview of cl 10.1.7. The primary judge concluded: "The evidence satisfies me that the POPE limit approval was consistently exceeded in the operating of the hotel in the interests of the defendants in the second half of 2002 and throughout 2003. The evidence satisfies me that the defendants were well aware that the nightclub traded in complete disregard of its obligations in accordance with that approval. I accept that Gypsy Cregan knew, through conversations with her father, with Charles Franklin and with the licensing police, that the limit was being exceeded. I reach the conclusion on the balance of probabilities that Pollyanna Cregan also knew that the limits were being exceeded. I am comfortably satisfied that those limits were consistently exceeded in the eighteen month period leading up to the sale." 16No administrative or other step was taken against Aysun based on any past breach. The steps that were taken by the police in March and April 2004 related to the breaches at that time by the then owner of the business; Aysun. 17After the hearing of the appeal, the appellant sought leave to advance a submission to the effect that damage was caused to it by past breaches, because the police acted more peremptorily in March and April 2004 than they would have done if the past breaches had not occurred. Leave was refused to advance that submission, which had not been made below, and raised questions about the motivation of the police that were never explored. 18The words of cl 10.1.7 comprised a promise about the past not the future. The events of March and April and the enforcement of the PoPE condition then did not flow from any breach by the Cregans in the past of the same condition. There is no conceptual or causal link between any found breach and the events of March and April and their consequences. 19The appellant sought to meet this fundamental difficulty by seeking to construe or imply into cl 10.1.7 greater content than the words can bear. It was submitted that cl 10.1.7, akin to cl 10.1.3 and 10.1.4, was a promise as to the state or character of the business. An analogy was drawn with Burns v MAN Automotive (Aust) Pty Ltd [1986] HCA 81; 161 CLR 653 where the promise was that the prime mover had been fully reconditioned. It had not been and it had a considerable number of faults. The promise that something had been done (full reconditioning) was in substance a promise as to the quality or state of the machine: that it was fully reconditioned. Thus, it was submitted here, that the content of cl 10.1.7 was to the following effect (taking the last version handed up by Mr Climpson and as slightly modified in debate): "As a matter of construction and/or implication, cl 10.1.7 included a promise that: (a) practices in relation to the business, including those concerning night club numbers, were not in breach of requirements under legislation relating to the business; and (b) continuing those practices would not be in breach of requirements under legislation relating to the business." 20The appellant put this submission in two ways - first, that both limbs (a) and (b) above were promissory; and, secondly, that only limb (a) was promissory and limb (b) followed as a matter of commonsense causation. 21Relevant to the argument for this construction or implication were the following: (a) the capacity of cl 10.1.7 to support a representation in terms of either or both of limbs (a) and (b) for the purposes of the Fair Trading Act; (b) the terms of cl 10.3 creating a duty of disclosure; and (c) the warranties that were given over a number of matters, in cl 40 (concerning the liquor licence - see cl 40.8) and in cl 46 (concerning the annexures - see cl 46.2) which amounted to a warranty as to the annexed accounts. 22The argument as to this meaning of cl 10.1.7 should be rejected for two reasons: first, it was not how the case was pleaded and argued below; and, secondly, the words of cl 10.1.7 do not bear this extended meaning. 23It is of course true that the proper content and construction of a written contract is a matter of law: Pioneer Shipping Ltd v BTP Tioxide Ltd (The 'Nema') [1982] AC 724 at 736; Pilgrim Shipping Co Ltd v The State Trading Corp of India Ltd [1975] 1 Lloyd's Rep 356 at 361 and 366; Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1971] 2 QB 23 at 58-59, 63 and 64-65; [1972] AC 741 at 755, 759, 761, 766 and 770; and Yorkshire Insurance Co v Campbell [1917] AC 218; (1916) 22 CLR 315 at 317. However, the positing of an expanded content to cl 10.1.7 had a direct factual consequence. The matters giving rise to the breach must have been "to the best of the vendor's knowledge". 24The importance of the way the appellant now wishes to construe cl 10.1.7 by limb (a) in [19] above is that it focuses not on the fact of past breaches on one or more occasions, but on the practices of the business as a consistent feature of that which was sold. In limb (b) in [19] above, the focus is on the future conduct of the business under proved practices. These matters would have been material facts in the litigation. Further, the knowledge of Gypsy and Pollyanna Cregan as to these matters would have been relevant and was not explored. 25It can be accepted that the primary judge made findings that the limit was "consistently exceeded" and that the sisters were "well aware that the nightclub traded in complete disregard of its obligations in accordance with that approval". Those conclusions, however, were made within a limited forensic context of the pleaded case and are not wide enough to include either or both bodies of facts in limbs (a) and (b) in [19] above. It cannot be safely concluded that the new way in which the appellant now puts the content of cl 10.1.7 could not have been met by evidence: Suttor v Gundowda Pty Ltd [1950] HCA 35; 81 CLR 418 at 438; Coulton v Holcombe [1986] HCA 33; 162 CLR 1 at 7-8. The necessity for "jealous scrutiny" in examining now the raising of points on appeal (see Starke J in Davison v Vickery's Motors Ltd (in liq) [1925] HCA 47; 37 CLR 1 at 35) and the entitlement of a party to the opportunity of informed and reasonably contemporaneous assessment of the relevant evidence or enquiry is to be respected (see Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; 117 FCR 424 at 438-440 [34]-[39]). 26Taking these matters into account the appellant's new ways of putting the contractual argument should not be permitted. 27In any event, the words of cl 10.1.7 do not support the construction in either limb (a) or (b) in [19] above. There was ample commercial content in cl 10.1.7 in its application to the past. If the breach of that promise in the past led to deleterious effects on the business in the future, the vendors would have been liable. Clause 10.3 created an obligation of disclosure. Further, if cl 10.1.7 was knowingly breached, a misrepresentation case may have been available. The content of the damages as loss "by" misleading or deceptive conduct under statutes such as the Fair Trading Act will not necessarily be limited to those constructed by reference to paradigms of tortiously caused loss: Marks v GIO Australia Holdings Ltd [1998] HCA 69; 196 CLR 494 at 503-504 [15]-[17] per Gaudron J, 510 [38] per McHugh J, Hayne J and Callinan J and 528-529 [99]-[103] per Gummow J; and Murphy v Overton Investments Pty Ltd [2004] HCA 3; 216 CLR 388 at 407 [44]-[45], 410 [55] and 413-414 [66]-[67] per Gleeson CJ, McHugh J, Gummow J, Kirby J, Hayne J, Callinan J and Heydon J. Such a case was not run. 28Whilst a clause in a business contract must be given a business or commercial construction: Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603 at 618-619 [19]-[23] and 626 [63], that is not a warrant for reading into words otherwise clear and plain and reflecting a sensible commercial content, a wider body of meaning to make up for an absent provision or as a substitute for an action for misrepresentation or misleading conduct. 29These reasons dispose of the appellate controversy and it is not appropriate in the circumstances to delay the resolution of the parties' dispute by dealing at length with damages should we be wrong on our view of the contract. The resolution of the question of damages may not be as simple as the appellant submitted and a close assessment of the totality of the evidence analysed by the primary judge would be required. 30For the above reasons the orders of the Court will be:

1. Cross-appeal allowed.
2. Orders of the District Court made on 18 November 2009 and entered on 25 May 2010 set aside and in lieu thereof it be ordered as follows: (a) judgment for the defendants; (b) the plaintiff pay the defendants' costs.
3. Appeal dismissed.
4. The appellant pay the respondents' costs of the appeal and cross-appeal.
5. The cross-respondent to have a certificate under the Suitors' Fund Act 1951 (NSW) for the costs of the cross-appeal, if qualified.

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