Barangaroo Delivery Authority v Lend Lease

Judgment 1BEAZLEY P: I have had the advantage of reading in draft the reasons of Leeming JA. I agree with his Honour's reasons and with the orders he proposes. 2LEEMING JA: This appeal raises a question of construction arising from a commercial contract between the appellant (Authority) and the respondent (Developer). In broad terms, the Developer promised, as part of the consideration for the right to develop land at Barangaroo and the grant to its nominee of a 99 year lease, to pay amounts determined by reference to the "Current Market Value" of the land on which the building had been erected. The term "Current Market Value" is defined at length. One element of the calculation of Current Market Value is a discounted cash flow analysis. 3Subsequently, the Developer contracted with its Nominee, which was approved by the Authority, and in exchange for being nominated to be granted a lease, that Nominee has made monthly payments to fund the Developer's costs. The question of construction is whether those payments are to be included in determining a "pre-financing (ungeared) project IRR" in respect of the discounted cash flow analysis in the calculation of Current Market Value. 4The Developer claimed, and the primary judge held, that the payments should not be included. The Authority appeals from declarations that those payments may not be included as cash inflows in the discounted cash flow analysis. 5For the reasons which follow, I conclude that the appeal must be dismissed. The Authority's construction is unsupported by the text or purpose of the definition of "Current Market Value".

Background 6The Authority and Developer entered into the "Barangaroo Stage 1 Project Development Agreement" (PDA) on around 5 March 2010. The Developer's obligations were guaranteed by the second respondent. The Developer promised to develop the land, relevantly by erecting a number of commercial and residential buildings. The dispute between the parties has arisen in relation to the commercial buildings described in a masterplan as C4 and C5. It is common ground that it is sufficient to deal with C4. 7At a time or times determined by the PDA, the Authority is to make a Call Offer, which is "an irrevocable offer by the Authority to the Nominee to enter into a binding lease of the relevant Premises with that Nominee in the form of the Pro-forma Lease". Although the Pro-forma Lease contains many covenants, some of which may be burdensome, it is sufficient for present purposes to state that it is a 99 year lease with rent of $1 per annum. The relevant Premises are, for present purposes, the land and improvements constituting C4. The Nominee is a person nominated by the Developer and approved by the Authority as an "Acceptable Tenant" (a term which is defined by reference to its solvency and its ability to observe and perform leasehold covenants). The Nominee must not be the Developer (a statement made both in the definition of "Nominee" and in cl 27.1(b) dealing with the Call Offer). 8The PDA makes provision for the Developer to pay to the Authority very substantial fixed amounts, but also an amount (the "Value Sharing Payment") calculated by reference to 50% of the "Premises Land Value": cl 4.5. The Premises Land Value is stated to have the meaning given in Schedule 3 of the PDA. It is there stated that it means the "unimproved value of the Premises". The reference to "Premises" is defined to mean a reference to the land on which has been erected (relevantly) building C4. That value is to be determined in accordance with a mechanism involving two, or perhaps three, Approved Valuers. The details do not for present purposes matter except to say that the valuers are to have appropriate qualifications and at least ten years' experience in valuing comparable property, and that they are required to determine "Current Market Value". Because the parties are in dispute about how the definition operates in a highly material respect, the valuation mechanism cannot commence.

Current Market Value 9This proceeding at first instance and on appeal is about the definition of Current Market Value (the Value Sharing Payment is derived from it). The definition, in so far as is necessary for present purposes, is as follows (some of the percentages are confidential and have been replaced with "x%"): "Current Market Value means the amount which a purchaser/assignee (Purchaser) would pay to a vendor/assignor (Vendor) for the grant of a Lease of the Premises on which the relevant Works Portion is to be constructed, assuming: (a) a willing buyer and a willing seller in an arm's length transaction, after proper marketing, where each party acts knowledgeably, prudently and without compulsion; (b) the terms of the lease of the Premises are the terms of the Pro-forma Lease, as completed in accordance with this deed; (c) the Lease is granted by the Authority at Practical Completion and the Value Sharing Payment relevant to the Premises the subject of that Lease will be paid by the Developer [sic] to the Authority at the time of the grant of that Lease and the Developer [sic] will incur no costs of funding that Value Sharing Payment until the time of the grant of that Lease; (d) the Purchaser must undertake or procure that works are undertaken on the Premises in accordance with the Developer's obligations under this deed (Approved Development Works). ... (e) that the Purchaser will have incurred the following costs on or before Practical Completion of the Approved Development Works: (i) GST, the actual GST that would be imposed (less any input tax credit entitlement); (ii) no stamp duty; (iii) design and construction costs, the amount determined to be reasonable by a Quantity Surveyor ... ; (iv) Recoverable Stage Costs ... ; (v) development management fee of x% ... and project management fee of x% of the design and construction costs referred to in paragraph (e)(iii); and (vi) all other reasonable developer costs, as determined by the Approved Valuers using their professional judgement ... , after taking into account any relevant reimbursement or payments made or to be made by the Authority to the Developer under this deed in relation to such costs; (f) that ... not less than x% of the GFA [Gross Floor Area] of those non-residential Approved Development Works has been leased to tenants at market rent and with incentives that reflect current market incentives at the Lease Commencement Date for similar pre-lease arrangements ... provided that where the Developer has pre-sold or pre-leased premises included in the Works Portion for which the Current Market Value is being determined, the Developer must provide that information to the Approved Valuer, who must take account of that information; (g) the Purchaser is entitled to derive a pre-financing (ungeared) project IRR of x% in respect of the costs referred to in paragraph (e) and the carrying out of the Approved Development Works; and (h) the extent to which any GST (less any input tax credit entitlement) may be payable in respect of the initial transfer of any Lease. A worked example has been attached (for information purposes only) to this deed at Annexure W for information purposes [sic] only showing how the Current Market Value might be determined." 10In Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 at [17], Lord Hoffmann was required to construe the defined terms "Total Land Value" and "Minimum Guaranteed Residential Unit Value". As in the present case, those terms were found in a building contract where a developer built on land owned by the vendor, and they played an important role in determining the price. His Lordship said: "[T]he contract does not use algebraic symbols. It uses labels. The words used as labels are seldom arbitrary. They are usually chosen as a distillation of the meaning or purpose of a concept intended to be more precisely stated in the definition." 11So too here. In my view, the first step is to seek to identify how (if at all) the complex language chosen by the parties' results in a concept which they chose to label "Current Market Value". In saying this, I am conscious of the criticism expressed, in the context of a statutory definition, in Owners of the Ship "Shin Kobe Maru" v Empire Shipping Co Inc (1994) 181 CLR 404 at 419, against using the defined words to construe the definition. I respectfully doubt that that can be universally true (a doubt shared by the Victorian Court of Appeal in Hardy Wine Company Ltd v Janevruss Pty Ltd [2006] VSCA 28 at [5] even prior to Chartbrook). But even if I must put to one side the fact that the parties' chosen labels are "Current Market Value" and "Value Sharing Payment", the first step must still be to consider the structure and purpose, as well as the text, of this relatively complex definition, which is critical to the commercial bargain struck by the parties. 12There is good reason for that being the appropriate place to commence the analysis. For, to anticipate, the Authority invoked textual arguments, such as whether there is a difference between "funding" and "financing", and the significance (if any) of some of the costs to which it refers being the Developer's actual costs and receipts, as opposed to its reasonable costs and receipts. It is not possible to address those arguments fully - or safely - without having regard to the purpose or objects of the definition. It is axiomatic that the commercial purpose or objects to be secured by the contract are required to be considered in order to determine the legal meaning of its terms: Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 88 ALJR 447 at [35]. That is especially true of a complex definition such as this, where reliance on the mere literal or grammatical meaning is unlikely to be determinative. 13Hence it is convenient immediately to notice the following matters flowing from the definition of "Current Market Value". 14First, the definition has three elements. The Current Market Value to be determined by the Approved Valuers is (a) the price of a hypothetical "sale" (b) based upon eight assumptions, followed by (c) a "worked example" which is stated expressly (and twice) to be "for information purposes only". 15Secondly, the thing which is the subject of the hypothetical "sale" is, relevantly, the grant of a 99 year lease of the C4 building when Practical Completion occurs (see the opening words of assumption (c); Practical Completion is defined elaborately but predictably). The definition has to apply to all of the buildings to be constructed within "Stage 1" and hence is expressed generally; it is presently sufficient to proceed on the basis that the "relevant Works Portion" for the purposes of this appeal is the land on which building C4 is to be constructed. 16The definition thereby proceeds on the basis that the 99 year lease with a rent of $1 per year approximates ownership for the purposes of the calculation of Current Market Value; hence the language of Vendor and Purchaser in respect of the grant of a lease. I am not suggesting there is any error in that course. To the contrary, where value is determined by a discounted cash flow, the present value of the reversion of a 99 year lease is inevitably negligible; I mention this only because of a submission advanced by the Authority based on the subsequent reference to leasing in assumption (f). Because the definition thereafter refers to a "Purchaser", I too shall use the language of Vendor and Purchaser to describe the hypothetical transaction whose price is the Current Land Value. 17Thirdly, the hypothetical Purchaser (viz the tenant of the 99 year lease) is distinct from the Developer. The structure of the provision is that the actual price to be paid by the Developer to the Authority when the Pro-forma Lease is granted to the Nominee is determined by reference to half of the price paid by the hypothetical "Purchaser", who is taken to have acquired a lease of the same property with the same building on it but subject to a series of assumptions. 18The foregoing is sufficient to expose one aspect of the similarity, and two aspects of the differences, between the hypothetical Purchaser and the actual Developer. The similarity is that the Purchaser is assumed to acquire something very similar to what the Developer's Nominee will receive: a 99 year leasehold interest in land with C4 constructed on it. The first difference is that the Developer can never itself acquire such a leasehold interest: as noted above, the Nominee cannot be the Developer (see definition of "Nominee" and cl 27.1(b)). The second difference is that the price paid by the hypothetical Purchaser to the hypothetical Vendor for a 99 year lease is the Current Market Value, whereas the Developer will make a Value Sharing Payment derived by reference to half of the Current Market Value in exchange for its Nominee being granted such a lease (the Developer is also required to make large fixed payments). 19Fourthly, assumption (e) is directed to many of the ordinary costs of constructing Building C4. In some respects it appears to include actual costs incurred by the Developer; in many other respects the assumed costs are the Developer's reasonable costs. (Lend Lease initially contended that all of the costs were distanced from the Developer's actual costs. That is probably not so, at least in respect of some of the design and construction costs, but it is not necessary to reach a concluded view on this point.) 20Assumption (e) also includes (in its closing words) receipts by the Developer, by way of a netting off of payments made by the Authority to the Developer. These appear to be actual receipts. That is to say, it seems that the hypothetical Purchaser is assumed to have received particular receipts to be netted off against the assumed payments, by reference to actual amounts received by the Developer. I am content to proceed on the view, favourable to the Authority, that some of the costs actually incurred by, and some of the income actually received by, the Developer, are assumed to have been incurred and received by the hypothetical Purchaser, without deciding the construction of the particular clauses. 21The effect of the assumptions (d) and (e) is therefore to deem the Purchaser to have incurred obligations and costs which resemble and in some cases equate to those incurred by the Developer. In some cases, the assumed costs are those actually incurred by the Developer; on other occasions, the assumed costs are derived from those incurred (for example, the amounts deemed reasonable by the Approved Valuers in (e)(vi)). 22Fifthly, assumption (g) directs attention to the time value of money. At the time of the hypothetical sale (that is, the grant to the Purchaser of a 99 year lease with building C4 erected on it) the Purchaser is deemed already to have incurred the costs in assumption (e). Assumption (g) is directed to those costs. It recognises that the Purchaser will have incurred additional expense in the meantime. To allow for this, the Vendor and Purchaser are to assume that the Purchaser is "entitled" to a "pre-financing (ungeared) project IRR of x%" in respect of those costs (the Authority described this, aptly, as a stipulation, as opposed to an assumption, consistently with its different language). 23IRR is defined as follows: "IRR means the discount rate at which the net present value of the projected cash flows is equal to zero. It is to be determined by using monthly cash flows and applying the XIRR function in Microsoft Excel." 24That definition is orthodox, but is perhaps unhelpful to those unfamiliar with it. Although not in terms defined, save as above, it is plain that the acronym IRR stands for "internal rate of return". The concept is straightforward. The use of a discount rate is extremely common when dealing with payments and receipts occurring over a period of time. Speaking generally, the use of a particular rate will convert future cash flows into a present value (the greater the discount rate, the smaller the present value). Likewise, the use of a particular rate will convert past cash flows into a present value. 25Where used in the definition of "Current Market Value", the IRR is directed to past cash flows (including the possibility of a netting off for certain refunds), namely, the expenses in assumption (e). 26The natural meaning of an assumption that a person such as the Purchaser is entitled to a project IRR of x% in respect of specified costs already incurred is that, at the relevant time, the person is entitled to be paid an amount of money reflecting a return on those costs of x% per annum. The calculation reflects the amount (including interest calculated at x%) which would have been earned had those amounts been invested over the same period. I put to one side the (contentious) words "pre-financing (ungeared)", and return to them when dealing with the parties' submissions. 27Sixthly, the effect of assumption (f) is that when the Purchaser is taken to have acquired the 99 year lease of land on which C4 has been erected, a particular proportion is taken to have been tenanted at market rates, with incentives in line with market conditions having been given. From that basis, it will be possible for the Approved Valuers to determine the likely future income stream from commercial tenants, including (especially) how long it will take before the incentives initially granted have been absorbed. (The revenue from the first year of a new commercial building may be very low, by reason of lease incentives.) The concluding words of assumption (f) again make relevant to the hypothetical transaction the actual events in the real world that have occurred as a result of the Developer's advance marketing of the building. 28Seventhly, it is plain from the foregoing that the critical assumptions giving content to the hypothetical transaction are (e), (f) and (g). The Purchaser is assumed to have incurred the costs in (e). At the time of the grant of a 99 year lease of building C4, the Purchaser is assumed to be "entitled" to a particular return on the costs in (e). And the Purchaser is assumed to acquire a 99 year lease of building C4 the income from which is informed by assumption (f). 29The operation of the definition is to convert each of those three matters into a sum of money. The Valuers' expertise has a part to play in the determination of the historical costs, and a larger part to play in the determination of the present value of 99 years of rental income. In contrast, the calculation of the present value of the historical costs is entirely mechanical.

The commercial operation of the definition 30Although some developments lose money, there was a large body of feasibility studies suggesting that Barangaroo Stage 1 would be profitable. Let it be assumed for simplicity that development costs are kept down and market conditions for commercial office space are buoyant such that C4 is profitable as the feasibility studies suggested. 31The following figures bear no necessary relation to reality; they are designed to expose the essential task performed by the definition. It may be that the Purchaser is assumed to have spent millions of dollars each month over five years to construct C4, such that in order to receive a specified internal rate of return on those costs, the Purchaser must receive, say, $200,000,000 (for the moment, I put to one side the tax treatment of the costs and the receipt). It may also be that the present value of the future rental stream in five years time is, say, $280,000,000. Armed with those essential premises, it is easy to see that a valuer could use his or her expertise to determine an amount which the Vendor and Purchaser could willingly agree should be the price of a 99 year lease. 32The point of the foregoing is that it may be seen that a sensible commercial meaning may be given to the key provisions in the definition of "Current Market Value". The hypothetical Purchaser is taken to be burdened with historical construction costs, on which it is entitled to a specified return. The hypothetical Vendor is selling property which will generate a rental stream, whose present value (it is hoped) exceeds the present value of those construction costs at the specified rate. In those circumstances, the price which the hypothetical Purchaser would be prepared to pay, and for which the hypothetical Vendor would be prepared to sell, may be determined by reference to valuation expertise. 33That hypothetical example bears a strong relationship to the price which the Developer should pay the Authority for the benefit of its granting a 99 year lease to the Nominee, even though the actual situation is critically different from that which has been hypothesised under the definition. The Developer is not acquiring the lease, and the Developer has incurred actual costs. Nevertheless, the hypothetical scenario contemplated by the definition makes sense as a proxy for a measure of the actual value of the (improved) land if it be assumed that the Authority and the Developer agreed that (a) where the assumed costs are determined by a Quantity Surveyor or the Valuers on the basis of what is reasonable, the Developer was to bear the risk of a costs overrun (and take the benefit of an underrun) and (b) the Developer was entitled to the specified return on those costs. 34What is more, a sensible commercial meaning may be given to the definition of "Value Sharing Payment". Plainly enough, part of the consideration to be provided by the Developer is fixed, but part is dependent upon the Current Market Value as calculated above. 35Finally, the provisions resemble well-known methods of valuation, developed to determine the unimproved value of land. As Starke J said in Australian Provincial Assurance Association Ltd v Federal Commissioner of Land Tax [1942] ALR 156 at 158 of the "hypothetical building basis": "The erection of a new building on the land is envisaged, providing office accommodation, which is the best method of obtaining the advantages that the land possesses. Accordingly a building is planned to obtain the full benefit of those advantages. Its cost is estimated, the gross annual rentals or receipts from it are estimated, and from these rentals or receipts are deducted various annual outgoings and interest charges which are also estimated to obtain the net receipts. The capital value of the land is then ascertained by capitalising the net receipts at some given rate of interest, and in this case, I may add, the parties were content to work upon a 4½ per cent basis. The unimproved value of the land is then deduced by deducting from the capital value so obtained the cost of the erection of the building. Adopting this method of ascertaining the unimproved value of the assessed land, I find as a fact that its unimproved value on the 30th June, 1939, was the sum of £76,154." 36Callinan J said in Boland v Yates Property Corporation Pty Ltd [1999] HCA 64; 74 ALJR 209 at [287] that that approach is neither novel nor especially difficult, but requires the making of value judgments. 37In rating cases, this approach is used to determine the unimproved value of land. There are many ways in which statute has caused slight variations to be made to that approach: see for example Valuer-General v Perilya Broken Hill Ltd [2013] NSWCA 265; 195 LGERA 416 at [18]-[39]. 38In this private law context, the parties have agreed to a variant of the same approach in order to determine a component of the price to be paid by the Developer. The approach adopted is more elaborate than that summarised by Starke J, in that an internal rate of return has been applied to the development costs. That rate of return has been agreed, thereby to that extent avoiding disputes such as may be seen in Cidneo Pty Ltd v Chief Executive, Department of Transport and Main Roads [2014] QLAC 3 at [89]-[92]. 39The foregoing is expressed at a level of generality, and does not descend to the detail of the arguments of the parties. It is intended to convey what I would regard as the obvious commercial approach to an elaborate clause whose purpose and object is to identify a key aspect of price (a conclusion readily drawn from the other contractual provisions, even if it be impermissible to have regard to the parties' choice of labels: "Current Market Value" and "Value Sharing Payment").

The Worked Example 40It is convenient to turn to the worked example referred to in the definition before returning to assumptions (c) and (g), which are problematic. It is necessary to do so, because the primary judge relied on the worked example, and the Authority submitted that he was in error to have done so. 41The worked example is stated to be "for information purposes only". Those words diminish the force to be given to the example, but the Authority, properly, conceded that it must play some role, for unless the information is in some way useful, why include it at all? 42The verbal definition of "Current Market Value" necessary to convey a relatively simple series of calculations is unavoidably lengthy. That is because its subject matter is numeric, and they expressly contemplated a cash flow analysis (indeed, using a particular named piece of software). 43The worked example confirms that the essential methodology involves deriving the present value of the future rental stream, and applying a discounted cash flow analysis to the historical costs. 44The worked example comprises, inter alia, a number of columns representing months and rows mostly representing various revenue and cost items, and some assumptions. I deal first with revenue, then costs. 45The assumptions are all directed to revenue. They are as to Gross Floor Area, Efficiency, Net Lettable Area, Car Park Bays, a commercial rental rate of $850/sqm/pa, a car park rate of $12,000/bay/pa, and signage of $175,000, and there is a confidential "Initial Yield". The Net Lettable Area of 55,500 square metres is the product of the Gross Floor Area of 60,000 square metres and the Efficiency of 92.5%. The product of the Net Lettable Area and the $850 rental rate, divided by the yield, is the "End Value Commercial", an amount recorded in the rightmost column many months into the future. It reflects the discounted amount of future payments of rent of the assumed Net Lettable Area at the assumed rate. The same process produces an "End Value Car park". A relatively small amount of signage revenue has been included. Those three amounts have been added, and an amount described as "Incentives" has been deducted. 46To summarise, (a) the only revenue items are derived from future rental and signage, (b) there has been a deduction for incentives, and (c) the future cash flow over 99 years has been reduced to a present value through the application of a yield. 47The balance of the spreadsheet is dominated by cost items, principally Design and Construction Costs, to which are added Development Costs, Selling Costs, Levies and Recoverable Stage Costs. The values are all subject to a confidentiality order. They are very substantial, but are all incurred prior to or in the month in which the revenue items are recorded (the last costs have been incurred in the same month as the revenue has been brought to account, consistently with the hypothetical sale occurring at Practical Completion). An amount described as "Current Market Value" is included, as is a box described as "Ungeared IRR" at the same percentage rate as appears in assumption (g). 48As it happens, the Current Market Value is the amount which, if it were received, and from which tax at the corporate rate of 30% were deducted, is the amount which reflects the IRR at the same percentage rate of all of the costs identified in the previous paragraph. (An electronic copy of the spreadsheet was not in the appeal papers, but it requires little effort to reconstruct it given the verbal descriptions in assumption (g) and the definition of IRR.) 49It may be helpful if one aspect of this be expanded. The XIRR function referred to in the definition of the IRR will determine a rate of return based, say, on a series of outflows over time followed by a cash inflow (for example, development costs followed by receipt of a sale price). The exercise involves no expertise; it is entirely formulaic. Conversely, if the outflows are known, and there is to be a single cash inflow whose timing is known, then that amount can be fixed so as to achieve a specified IRR. 50That is what has occurred in the worked example. The cash outflows are all of the development costs, calculated monthly. When those costs are all incurred, an amount is calculated such that, if it were received and the Developer paid 30% tax upon it, then the 70% remaining produces an IRR of the specified percentage on those costs. 51It seems clear enough that the precise figures in the worked example can have no bearing upon the PDA; that, at the least, must be the consequence of "for information purposes only". Nevertheless, what emerges from the worked example is the following. 52First, the only entries contributing to the IRR calculation are the cost items, and all of those cost items contribute to that calculation. 53Secondly, the revenue (based on assumptions of rent and signage) over 99 years has been reduced to a present value, calculated at the same point in time at which all the costs have been incurred. 54Thirdly, the row described as "Current Market Value" is the amount which, if 70% of it was received following the incurring of all of the cost items, would give an IRR of the specified percentage on those cost items. 55Fourthly, the revenue items play no part in the IRR calculation. 56All of the foregoing is confirmatory of what is set out in words in the definition. The only aspect which goes further than what is contained in the text of the definition is that the worked example generates a "Current Market Value" based on an after-tax internal rate of return on costs (whether that in fact is an element of the parties' bargain is not something on which I need to express a view). 57It may perhaps be helpful to notice two other aspects of the worked example. The first is that it includes two rates, applied to two different cash flows. The "Ungeared IRR" percentage is the rate which in fact has been applied to costs and used to generate the "Current Market Value", while the assumed "yield" has been applied to revenue. That is natural. A developer is running a very different business from a commercial landlord, with a different cost of capital, and is subject to very different timeframes for risk and return on investment. 58The second is that the result in the worked example, as it happens, is that the present value of the revenue items exceeds the sum of the development costs and the Current Market Value. That result is also one which has a natural meaning. It means that a developer who incurred those costs, and obtained an after-tax return on those costs of the specified rate has spent less than the present value of the future rent and signage. Another way of saying this is that the development in the worked example is one which is profitable, even allowing for an after-tax internal rate of return on the Developer's costs. As much accords (unsurprisingly) with the feasibility studies which were incorporated into the PDA.

A dispute about assumption (g) which need not be resolved 59Assumption (g) is what has given rise to the dispute. It provides (emphasis in original): "(g) the Purchaser is entitled to derive a pre-financing (ungeared) project IRR of x% in respect of the costs referred to in paragraph (e) and the carrying out of the Approved Development Works;" 60Assumption (g) accordingly refers back to the costs set out in assumption (e), which include GST, design and construction costs, recoverable stage costs, a development management fee and "all other reasonable developer costs". 61There emerged during the hearing of the appeal a dispute as to the meaning of "entitled". The Developer pointed to the fact that the brief to the Approved Valuers (itself an Annexure to the PDA) stated in cl 5.7 that their valuation was to include, inter alia: "(i) Full details of all revenue, cost and economic assumptions; (ii) The Current Market Value which must be calculated as an amount which enables the purchaser of the land to achieve exactly a pre-financing (ungeared) project IRR of x% on the development costs." (emphasis added) 62The Authority submitted that the IRR was to be regarded as a floor to the determination of Current Market Value. That submission accorded with some of the precontractual documents which were incorporated within the PDA (including a reference in cl 3(3) of the Developer's Commercial Proposal to a "minimum project IRR"). The Authority also submitted that the question had not been the subject of argument previously, and ought not be determined on appeal. The Developer acknowledged that the question was not particularly germane to the issues arising on appeal. 63It is not necessary to determine this issue in order to resolve this appeal, and I do not do so. The Valuers have not as yet commenced their task, and it is unclear whether, if at all, there is any dispute as to the balance of the definition. The dispute which has crystallised is whether certain amounts known as Construction Funding Amounts (CFAs) are to be included in the cash flow analysis involved in the determination of a pre-finance (ungeared) project IRR.

The C4 Agreement and the CFA payments 64There are two agreements, for buildings "C4" and "C5", entered into in July 2012, more than two years after the PDA, between the Developer and a related company in its capacity as a trustee, defined in those agreements as the Owner. It is sufficient to refer to one of those agreements, that governing Building C4 (C4 Agreement). The recitals to that Agreement are as follows: "1. The Owner is the trustee of the Trust. 2. The Developer agrees to carry out on behalf of the Owner, and the Owner agrees to the carrying out of, the Development Works by the Developer on its behalf in accordance with this Agreement. The Development Works will be for the benefit of and for the use and enjoyment of the Owner. 3. The Developer agrees to: A. nominate the Owner as being entitled to accept a Call Offer under the terms of the Project Development Agreement and the BDA Side Deed from the BDA [the defendant Authority]; B. nominate the Owner and the Central Plant Co-Owner in the Central Plant Proportions, as being entitled to accept the Call Offers in respect of the three Leases of the respective Central Plant Lots under the terms of the Project Development Agreement and the BDA Side Deed from the BDA. The Owner agrees to accept the Call Offers as set out in this Agreement. 4. In consideration of the agreements by the Developer in this Agreement, the Owner must make the payments to the Developer contemplated in clause 18. 5. The Owner's Guarantor guarantees the performance of the obligations of the Owner under this Agreement." 65The payments referred to in recital 4, which are the subject of the guarantee referred to in recital 5, are governed by cl 18 of the C4 Agreement. Commencing in August 2012, the Developer was required to provide a monthly progress statement of "the Cost to Complete", "the Proportion", "the amount claimed by the Developer" and "the total amount previously certified under this clause 18". The "Proportion" reflects the proportion of the Development Works which are certified to have been completed. Twenty business days after each certification, cl 18.3 provides for there to be a "CFA Payment Date". Clause 18.4 defines a "CFA Amount" by reference to a formula. 66The CFA payments are large. It was admitted on the pleadings that: "The CFA Amounts are monthly amounts the C4 Owner and the C5 Owner are required to pay to the Developer to fund the construction and other costs to be incurred by the Developer in connection with the Development Works carried out on behalf of the C4 Owner and the C5 Owner (as the case may be) and for the benefit of the C4 Owner and the C5 Owner (as the case may be)." 67The formula is subject to a proviso whose effect is that the total CFA amounts cannot exceed a certain percentage of the amounts shown in a CFA Payment Schedule. That Schedule, and the percentage, are confidential; suffice it to say that the CFA payments amount to hundreds of millions of dollars. 68By the "Barangaroo Building C4 Investor's Side Deed" (Side Deed), and speaking generally, the Authority confirms that the Owner is an acceptable tenant (cl 2.1), the Developer nominates the Owner as its Nominee entitled to accept a Call Offer in respect of building C4 (cl 2.2(a)), which nomination cannot be revoked (cl 2.2(b) and (c)). Clause 2.4(d) has the effect, again speaking generally, of deeming a lease to come into existence upon the Owner accepting a Call Offer.

Reasons of the primary judge 69The reasons of the primary judge deal at [1]-[226] with the discretion to make purely declaratory relief, confidentiality orders, and the background and terms of the various contracts. 70The primary judge then turned, at [227]-[237], to principles of contractual construction, uncontroversially referring to the need to construe the contract as a whole, by reference to the parties' objective intention, in light of its purpose and object. His Honour rejected the Developer's tender of some documents said to bear upon the surrounding circumstances. His Honour did so in reliance upon what had been said in Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; 86 ALJR 1 at [3]-[5]. His Honour's judgment preceded what was said in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 88 ALJR 447 at [35], however, as there was no challenge to the rejection of the evidence, it is not necessary to say anything about the consequences of that decision. 71The dispositive reasoning of the primary judge is at [238]-[315]. Its length makes a fair summary of it difficult. In light of the way in which the appeal was presented, it is not necessary to summarise it completely. Indeed, much of it is reflected, at greater length, in the description already given of the operation of the clause, and it will be plain that I have benefited from his Honour's analysis. 72One theme of the reasons of the primary judge was that the definition turned on amounts deemed to have been received by the hypothetical Purchaser, which were distinct from the actual CFA payments received by the actual Developer (at [271]-[274], [292]-[293]). Another was that "the meaning of 'pre-financing (ungeared) project IRR' must take substantial colour" from the worked example (at [288]; see also at [310]). A third was what amounted to an elision of any difference between "funding" and "financing", representative of which was the statement that the "value" generated by the definition was to be determined "not affected by decisions that may have been made by the plaintiffs about how construction of a building is to be financed, whether by debt or equity financing" (at [310]). 73His Honour held that the values could not include the CFA payments in the cash flow analysis required by assumption (g), but said that those payments could inform the evaluative aspects of the exercise to be undertaken by the Valuers.

The parties' submissions and their resolution 74A recurring theme in the Authority's oral submissions was what was said to be an inconsistency between the CFA payments being excluded from the cash flow analysis, but nevertheless being amounts to which the Valuers could have regard. 75The Authority said that it was wrong for the CFA payments to be used by the Valuers if those payments were not be included in the cash flow analysis required by the IRR calculation. If they were to be taken into account at all, then they needed to be taken into account within the cash flow analysis. As it was put orally: "They are large, that is significant sums of money and they have been received at particular times, and they are times well prior to your capacity to realise your investment, that is to otherwise from the market tenancies to get return. That's why they're significant. It is impossible to imagine any other way they're significant. They are, in short, significant for reasons which are utterly central to, essentially characteristic of a discounted cash flow analysis." 76I cannot agree with this submission. There is no inconsistency in using the CFA payments as a check of reasonableness, and not including them within the IRR calculation. 77It will be seen that the definition of Current Market Value requires the expertise of Valuers in at least three respects. First, they may be required to form a view as to the reasonableness of certain costs to be included in the cash flow. Secondly, they will inevitably be required to form a view as to the likely rental stream of the building C4, and the appropriate present value of that stream. Thirdly, having determined the cost (including the hypothetical Purchaser's internal rate of return) of C4 and its value, they will be required to determine the price for the grant of the 99 year lease. 78In carrying out those activities, the CFA payments may inform the Valuers' opinion. It would be wrong to impute a contractual intention that they be disentitled from relying on them. The CFA payments reflect a particular actual transaction, as the price which one party has been prepared to pay, in July 2012, for the right to be the Nominee. Plainly enough, the hypothetical transaction required to be valued by Schedule 3 is not wholly dissimilar from the actual transaction that has occurred. Why should the Valuers, in conducting an exercise, aspects of which are plainly intended to reflect the commercial reality as to the costs and revenue associated with erecting building C4, be unable to test their opinions against reality (for example, as a test of reasonableness of the plausibility of the rental income stream determined pursuant to assumption (f))? Indeed, it was common ground that they could do so. 79However, it does not follow from being able to take into account the CFA payments for the purpose of informing, or testing, the evaluative aspects of the Valuers' tasks, that the CFA payments must be included in the cash flow contributing to the IRR calculation in assumption (g). Assumption (g) is not evaluative. It involves of itself no expertise whatsoever - it is defined by reference to the output of a function in a computer program. The underlying question is whether the inputs into the computer program include the CFA payments, and that does not turn upon whether some other aspect of the Schedule 3 mechanism requires or permits the Valuers to have regard to them. 80Once the different natures of different aspects of the mechanism specified in the definition of Current Market Value are observed, the alleged inconsistency vanishes. Whether the CFA amounts are to be included in the cash flow analysis required by assumption (g) turns not on any inconsistency with what happens in other parts of the mechanism, but upon questions of contractual construction, to which I now turn. 81The Authority's written submissions identified four flaws in the reasoning of the primary judge, which were elaborated in oral address. I deal with each in turn, noting that there was overlap between the second and third.

A textual foundation for including CFA amounts on the revenue side of the cash flow calculation? 82The Authority submitted that the reference to "cash flows" in assumption (g) picking up the definition of "IRR" meant that all cash flows incurred by the hypothetical Purchaser needed to be included. This submission was buttressed by the fact that (through the concluding words of assumption (e)) there were some amounts which were paid to the Developer which were assumed to be paid to the Purchaser. But fundamentally, the submission was that it was wrong to have regard to cash outflows and to ignore inflows. As it was put: "A valuation that takes account of monthly cash outflows, but ignores cash inflows which the Developer expects to receive in the same month, will not accord with the contractual language: it will not have regard to the 'projected cash flows' or be determined using 'monthly cash flows'." 83This submission must be rejected. First, the text and purpose of assumption (g) are directed to one thing: to apply an internal rate of return to the expenses in assumption (e). True it is that where there is a right to a netting off in respect of some of those expenses, that is to be taken into account, but that merely confirms that it is the net expenses of the Purchaser whose present value is being determined. 84Secondly, the IRR calculation applies only to expenses assumed to be incurred by the hypothetical Purchaser. The language to which the Authority points ("cash flow") does not pick up the CFA payments used to pay those expenses. Of course the CFA payments are highly significant to the actual Developer, but the calculation required to be made by assumption (g) applies to the assumed cash flow of the hypothetical Purchaser. 85Thirdly, the construction amply answers the description of "commercial nonsense" in the familiar sense recently restated in Woodside at [35] ("A commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'"). It does so for two separate reasons. The first is that it would be commercial nonsense for the Current Market Value to fluctuate dramatically if the actual Developer were in fact funding the development costs internally from its own resources, as opposed to (say) bills drawn on a lender's construction funding facility or (as here) from amounts paid as consideration for the sale of the nomination right. There is no sensible reason for the assumptions governing the position of the hypothetical Purchaser to be construed so as to pick up the payments in the latter case, which have no bearing whatsoever on the value of the land on which C4 is built. The second is that the point of the exercise is to determine an amount to be paid by a hypothetical Purchaser in order to be granted a 99 year lease. It would flout business commonsense, in calculating how much the hypothetical Purchaser should pay, to include amounts which the actual Nominee has already paid by way of consideration for the 99 year lease. 86There was, perhaps, a suggestion made orally, but not in writing, that the CFA payments were consideration for the right to be nominated as a tenant under a 99 year lease, and in that way came within assumption (f). I am not in fact sure whether that submission was made, and the Authority confirmed in reply that it sought merely to rely on the logic in a passage of the reasoning of the primary judge (T47.11-17). To the extent it was made, I would reject the submission. The 99 year lease which the clause treats as tantamount to ownership is entirely distinct from the leases (strictly, sub-leases) to commercial tenants which assumption (f) requires to be valued. Moreover, the cash flow the subject of assumption (g) is, expressly, of the "costs referred to in paragraph (e)". Even if some strained construction of assumption (f) enables the CFA payments to fall within it, there is no assistance to the Authority in relation to assumption (g) unless the payments fall within assumption (e).

The meaning of "pre-financing (ungeared)" and whether the CFA amounts are "financing" 87It was common ground that the words "pre-financing (ungeared)" in assumption (g) required the exclusion of debt finance from the cash flow analysis. The Authority referred to a familiar distinction, expressed in the API Standards (to which the Approved Valuers were required to adhere) between discounted cash flows being gross or net of debt financing. The fact that debt financing was excluded did not, according to the Authority, entail that the CFA payments should be excluded. Indeed, it suggested that payments that did not bear the character of debt financing should be included. The Authority said that the CFA payments, far from bearing the character of financing, were consideration for the sale of the nomination right, were in the nature of revenue, and did not have to be repaid. Nor was there any element of "gearing"; as it was put, correctly, "You don't gear things by shareholders funds and you don't gear things by progress payments". 88To the extent that the Authority's submission relies on the express exclusion of debt financing as a basis for including the CFA payments, it amounts to an expressio unius argument, and should be treated with a caution that will be familiar (cf Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission [2002] HCA 49; 213 CLR 543 at [34]). 89A countervailing expressio unius argument may be seen from the closing words of assumption (e). To the extent that the Authority is required to reimburse the actual Developer for some of its expenses which otherwise would fall within assumption (e), the hypothetical Purchaser is taken likewise to have the benefit of that reimbursement. That might suggest that the reimbursement by the Nominee through the CFA payments of the actual Developer's expenses falls outside the cash flows identified by assumption (e). 90Of course the Authority is correct to conclude that the CFA payments are in the nature of partial payments of the consideration for the nomination right. They are not a form of debt financing; debt financing involves an obligation to repay. (I put to one side the submission fairly made by the Developer that the Authority's distinction was unsound, because it is artificial to split financing between debt and equity, as the existence of convertible notes and convertible preference shares readily reveals.) 91But expressio unius submissions are of little weight, when one asks: what is being calculated by assumption (g)? It is an amount such that the hypothetical Purchaser, burdened with the expenses as set out in assumption (e), may obtain a specified rate of return on those expenses when a lease is granted. That accords with the text and the purpose of the assumption. The CFA payments do not fall within any aspect of the expenses in assumption (e). 92Yet another way of exposing the difficulty with the Authority's submission is that what is being determined is the value of land. How rationally is it to be imputed to these two sophisticated parties to a commercial contract an objective intention that the very substantial price to be paid is to depend on how the Developer funds the development? It would be absurd if the Authority were to receive a substantially smaller payment for the grant of the same 99 year lease had the Developer funded the C4 building by a facility from its financier, as opposed to early payments from its Nominee. There is, with respect, no answer to the Developer's submission: "It would be an absurd result if the Developer were able to affect the Current Market Value of the land (and therefore any potential Value Sharing Payment) by its unilateral choice as to how it funded the construction costs of the Approved Development Works. That is particularly so in circumstances where there is no constraint on the Developer's choice as to how it funds those construction costs." 93In addition, the Developer pointed to a series of precontractual documents, all of which were incorporated into the PDA, which were inconsistent with the Authority's construction. They included the "Detailed Response" by the Developer to questions posed by the Authority, a "Proponent Presentation", the "Developer's Commercial Proposal" and the "Financial Model" (which was provided to the Authority). They are addressed in detail by the primary judge at [178]-[201]. These take the matter no further. If they went the other way, then there would be a question as to whether there was an "inconsistency" between them and the definition in Schedule 3, in which case the terms of the latter were to prevail. Save that they provide no support to the Authority, it is not necessary to say anything more about them.

Misuse of the worked example? 94The Authority submitted that it was wrong of the primary judge (at [288]-[289]) to regard the worked example as a "dictionary" which could be used to give "substantial colour" to the meaning of assumption (g). This collided with the words "for information purposes only" and to the provision that it was attached to show "how the Current Market Value might be determined" (emphasis added). 95I respectfully agree with this aspect of the Authority's submissions. The absence of funding payments in the worked example cannot dictate that the CFA payments are excluded from the cash flow the subject of assumption (g). I have summarised the worked scenario above in some detail, for the purpose of explaining only that it confirms what can be derived from the text of the definition. The worked example shows one scenario which fits within the definition; it cannot be used safely to conclude that a different scenario does not fit within the definition. I agree with the Authority's submission: "[I]t's not a dictionary in the relevant sense of setting out a word and giving a meaning, or using a word in a way which compels logically one particular meaning to the exclusion of all others or another." 96However, for the reasons already given, his Honour remained correct to declare that the CFA payments should not be included in the assumption (g) cash flows.

A further reason for rejecting the Authority's submissions: assumption (c) 97Assumption (c) provides that the "Developer" will pay the Value Sharing Payment at the time the 99 year lease is granted, and will have incurred no costs of funding that Value Sharing Payment until the time that lease is granted. That assumption is difficult to understand, on two levels. 98First, it is obvious that the assumption contains an error. Assumptions (a)-(h) impact upon the price to be paid by the hypothetical Purchaser to the hypothetical Vendor for a 99 year lease of the land on which C4 is built. When and how the Developer pays the Value Sharing Payment has nothing to do with what the hypothetical Purchaser would pay. Only if assumption (c) affects the position of the Purchaser or the Vendor can it impact upon the determination of the Current Market Value. Hence the Developer submitted, and the primary judge found, that the two references to "Developer" were to be read as "Purchaser", so as to reflect the correction of an obvious mistake: see Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 at [115]-[121]. The Authority did not seek to argue to the contrary on the appeal. 99Although I agree with the Developer that there is an obvious error in assumption (c), I am unpersuaded that the solution proffered by the Developer and accepted by the primary judge is sufficient to resolve the confusion of thought evident in its wording. For the Developer, not the Purchaser, promised in cl 4.5 of the PDA to pay the Value Sharing Payment, and the point of the elaborate definition of Current Market Value is to work out what that Value Sharing Payment will be. There is thus a further difficulty which remains unresolved by the construction proposed by the Developer. 100Assumption (c), even as reworded, is unavoidably recursive or self-referential. The point of the elaborate regime mandated by Schedule 3 is to determine the Current Market Value, which in turn will yield the Premises Land Value and ultimately the Value Sharing Payment. Until the processes contemplated by Schedule 3 are undertaken, neither the Current Market Value nor the Value Sharing Payment can be known. That explains why the assumption is essentially negative. The assumption is that the Value Sharing Payment - the very thing to be determined by the mechanism in the Schedule - has not been paid and no funding costs have been incurred in respect of it. 101Those considerations lead me to the view that assumption (c) is about timing and only about timing. It is already express on the face of the assumption (from the use of the words "at the time of the grant of that Lease" and "will incur no costs of funding ... until the time of the grant of that Lease") that assumption (c) is about timing. The point of assumption (c) is merely that the payment to be made by the hypothetical Purchaser is to be made in one payment, at the time the 99 year lease is granted, without regard to funding costs. That feeds directly into the cash flow analysis. 102That point was not debated between the parties. However, it gives rise to a further reason why the Authority's construction must be rejected. The Authority's construction is squarely contrary to assumption (c). Assumption (c) requires an assumption that no part of the consideration has been pre-paid by the hypothetical Purchaser. Inclusion of the CFA payments in the cash flow is irreconcilable with that assumption.

Orders 103For those reasons, I propose that the appeal be dismissed. There is no reason for the appellant not to pay the respondents' costs. 104TOBIAS AJA: For the reasons comprehensively expressed by Leeming JA in his judgment which I have had the benefit of reading in draft, I agree that the appeal must be dismissed with costs.

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: 21 August 2014