Contracts - General contractual principles - Construction and interpretation of contracts - Other matters - Existence of express or implied condition precedent.

Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99; Boreland v Docker & Ors [2007] NSWCA 94; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165; Biscayne Partners Pty Ltd v Valance Corp Pty Ltd and Ors [2003] NSWSC 874; State of New South Wales v Bannabelle Electrical Pty Limited [2002] NSWSC 178; Australia and New Zealand Banking Group Ltd v Robert John Burgess and Lois Joy Burgess [1994] TASSC 137; Perri v Coolangatta Investments Pty Ltd [1982] HCA 29; (1982) 149 CLR 537; referred to.

Judgment Number: [2008] TASSC 74

BLACKLEY INVESTMENTS PTY LTD v BURNIE CITY COUNCIL

1 On 2 December 2003, the Council entered into a contract of sale with Blackley Investments Pty Ltd ("the company") pursuant to which the Council agreed to sell to the company two blocks of land it owned at Camdale in Tasmania ("the land") for $1,000,000. The contract was to be completed "within 90 days of a planning permit for the Development being issued as a result of the s43A application becoming effective in accordance with s43I." No such permit was ever issued. In August 2006, the Council purported to terminate the contract as a consequence. The company did not accept that the termination was lawful and "affirmed" the contract. It issued a notice to complete. That was not complied with. The company thereafter issued a writ by which it sought an order for specific performance of the contract or, in the alternative, damages for wrongful termination. At trial, the company limited its claim to one for specific performance.

2 The Council opposes the order on the basis the contract was properly terminated and there is no contract on foot in respect of which specific performance could be ordered. Even if the contract had not been properly terminated, specific performance should not be ordered because the company cannot complete the entirety of the contract. The issue to be determined is whether, on a proper construction of the contract, the Council was entitled to terminate it. The company accepts that if the Council was so entitled, it is not entitled to the order it seeks.

3 The contract contained a definition section and each clause had a heading. Two definitions were particularly relevant to the parties' arguments. These were of the terms "Development" and "s43A application". "S43A application" was defined to mean "an application requesting the Planning Authority to initiate an amendment to the Planning Scheme to enable planning approval of the Development and for a planning permit for the Development in accordance with Section 43A Land Use Planning & Approvals Act 1993." "Development" was defined as "the development defined in clause 14.1".

4 Clause 8 of the contract dealt with the price and deposit. Clause 8(2)(b) provided that part of the deposit was to be paid "within 7 days of the lodgment [sic] by the Purchaser of the s43A application."

"This Agreement must be settled within 90 days of a planning permit for the Development being issued as a result of the s43A application becoming effective in accordance with s43I."

5 Clause 14 of the contract was headed "The Development". Clauses 14.1 and 14.4 relevantly provided:

"14.1 The Purchaser's proposed development of the Property ('the Development') is as an integrated development of medium density housing comprising at least 70 dwelling units on individual fee simple titles or strata titles or a mix of both together with a small retail development and a restaurant or coffee shop. The maximum height of any building is not to exceed 3 storeys, but there is to be a mix of storey heights.

14.4 The Purchaser acknowledges that Council has only agreed to sell the Property to the Purchaser on the basis that the Purchaser will complete at least half of the Development in accordance with the terms of this agreement and that the provisions of clause 16 are reasonable to ensure the Purchaser's compliance with that requirement of Council."

6 Clause 15 of the contract was headed "Planning Approval". By cl 15.1, the parties acknowledged that the Development was prohibited under the relevant planning scheme. Clause 15.4 required the company to promptly approach and obtain information from the Department of Infrastructure, Energy and Resources, Tasrail and the Department of Primary Industry, Water and Environment as to their likely requirements for conditions on any planning permit relating to traffic access from the Bass Highway, traffic and pedestrian access across a railway line and penguin habitation protection and other environmental issues. Other parts of cl 15 required the company to keep the Council informed of its progress with discussions required pursuant to cl 15.4. Clause 15.6 gave the company the right to rescind the contract before lodgement of any s43A application, if the responses it received as a result of the approaches required by cl 15.4 indicated requirements on any future permit which would be so expensive to adhere to that they would jeopardise the financial viability of the proposed development. If the company chose to rescind the contract in those circumstances, it would lose a non-refundable part of the deposit, but otherwise the contract would be at an end.

7 If the company did not elect to rescind the contract as permitted by cl 15.6, it was required to lodge a s43A application with the planning authority (in the first instance this was the Council) within six months of the date of the contract. Clauses 15.9 and 15.10 in effect required the company to ensure that any application that it made was competently and effectively prepared and pursued. Clause 15.10.1 imposed an obligation on the company to include in its application a draft amendment to the planning scheme which was consistent with terminology, style and layout of the remainder of the existing scheme. The company was required to use all reasonable endeavours to obtain the necessary amendment to the planning scheme and the planning permit. Clause 15.12 permitted the company to rescind the contract within 21 days of the occurrence of any one of four events listed. In effect, the company could rescind the contract if its s43A application were unsuccessful.

8 Clause 16 of the contract was headed "Purchaser's Development Obligations". Clause 16.1 provided, in part, that the company was required to complete certain parts of "the Development in respect of which the planning permit is granted, including infrastructure and landscaping ('the Approved Development') within the following time periods ...". Clause 17 placed restrictions on the company's capacity to transfer any title, I infer issued in respect of any approved subdivision, unless all the Approved Development on that particular title had been completed in a manner required by cl 16.2.

9 While the contract contained specific provisions which permitted the company to terminate the contract in certain circumstances, it contained no specific provision allowing for the Council to terminate the contract in the event that any s43A application made by the company was unsuccessful.

10 The company duly lodged the s43A application with the Council in its capacity as the planning authority. The Council initiated the draft amendment sought by the company and approved the proposed permit to allow the "Development" to proceed. The matter then went to the Resource Planning and Development Commission ("the RPDC"). On 21 July 2006, that is over two and a half years after the contract had been entered into, the RPDC rejected the draft amendment and refused the permit. There is no suggestion that this was through any fault on the part of either the company or the Council. The company did not elect to rescind the agreement pursuant to cl 15.12 as a consequence of the failure of the s43A application.

11 However, by a letter dated 18 August 2006, the solicitors for the Council advised the company as follows:

"I am instructed by the Burnie City Council to advise you that it considers the contract between you and it for the sale of land at Camdale (described in the contract as being lots 1 and 2 on sealed plan 4357) as having lapsed, come to an end or otherwise automatically terminated.

Alternatively, if that has not occurred, then Council gives notice that it rescinds the contract.

Without limiting the grounds for the above, they include:

Ø implied terms in the contract

Ø the impossibility of performance of the contract

Ø frustration of the contract

Ø breach of the contract by you

and while reliance is made on the entire contract and circumstances I refer particularly to clauses 9.1, 14, 15.11, 16 and 17."

12 By letter dated 6 September 2006, the solicitors for the company rejected the Council's assertion that the contract had lapsed or otherwise come to an end. They did not accept that the Council had any right to rescind the contract. They said "Our client elects to affirm the Contract" and forwarded a Notice to Complete. That notice was in the following terms:

"1 That the purchaser is ready and willing to accept title to the property situate at Camdale in Tasmania and described in the folio of the register Volume 4357 Folio 1 and 2 and to pay to you the full purchase price thereof in accordance with an Agreement for Sale dated 2nd December 2003.

2 You are required to complete the sale by handing to Bartletts Barristers & Solicitors, the Solicitors for the Purchaser Certificate of Titles Volume 4357 Folio 1 and 2 and an executed transfer on or before the 29th November 2006 at 4:00pm and in this respect time is of the essence of the contract.

3 The Purchaser appoints 3:00 pm on the 29th November 2006 at the office of Bartletts Barristers and Solicitors Level 1, 63B Wilson Street, Burnie in Tasmania as the time and place of completion.

4 Unless you complete within the time specified in this Notice the Purchaser will be entitled to terminate the Contract and pursue their other rights at law and in equity."

13 By letter dated 13 November 2006, the solicitors for the Council advised the company's solicitors as follows:

(a) it is not obliged to complete the contract; and

(b) your letter 6th September 2006 to us and the Notice to Complete are of no effect; the Council having successfully terminated the contract on or about 18th August 2006.

My client has terminated the contract and does not intend to reinstate it."

14 Counsel for the company contended that the contract provided for two separate, yet interrelated scenarios, namely the sale and purchase of the land on the one hand and the Development on the other. If the company took all steps it was required to take by the contract in respect of seeking an amendment to the planning scheme and a planning permit and it was unsuccessful, that is the Development could not proceed, that would still leave the bare agreement for sale and purchase intact to be completed in any event. Its contention was, in effect, that there was nothing in the agreement which could be construed as a condition precedent to completion such that if the Development did not proceed, the contract came to an end.

15 As to cl 9.1, relied upon by the Council as being the necessary condition precedent, counsel for the company contended the clause was simply a non-essential term relating to a date for completion. He submitted it was a machinery provision only, said nothing about a situation where a permit was not granted and the company did not elect to rescind, and that it must be read in light of the substantive provisions generally of the contract. He submitted it should not be read as giving a different meaning to the balance of the contract.

16 As to cl 16, counsel submitted that, on a proper construction of that clause, the company had no absolute obligation to proceed with the "Development". Clause 16.1, he submitted, related to an "Approved Development" and the clause contained no obligation to construct the "Development". It contained only an obligation to do things relating to an approved development. He submitted that cl 16, and consequentially, cl 17 were irrelevant to the issue of whether the contract was effectively conditional upon the company being able to proceed with the "Development".

17 Counsel for the company submitted the contract was capable of clear interpretation and took the Court to comments by Gibbs J in Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 where, at par3 of his judgment, his Honour said:

"It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, 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' ...".

18 It is crucial to the company's argument that the gaining of a permit for the Development was not either expressly or by implication a condition precedent to the sale, save in the limited sense that an escape route was available to the company in the event of there being no permit. Counsel submitted that what the Council sought to do was in fact imply into the contract a term to the effect that a successful s43A application was a condition precedent to completion of the contract and there was no reason whatsoever, given a plain reading of the contract, for that to occur.

19 As to the possibility of implying into the contract a condition precedent, counsel for the company submitted it would not be equitable as between the parties to imply into this contract a condition that it would be at an end in the event that there were no permit approved, the implication of such a condition was not necessary for business efficacy, it would in effect rewrite the contract to the benefit of the vendor, and clearly the contract could have contained that particular provision, but did not. Instead the contract provided specifically for the company to be able to rescind and in those circumstances it should be inferred it excluded any such right as far as the Council was concerned.

Principles relating to construction of the contract

20 The contract is to be construed having regard to the intention of the parties at the time it was entered into. It is also to be construed having regard to the whole of its terms. In Boreland v Docker & Ors [2007] NSWCA 94 at pars61 - 74, the court considered the use of pre-contractual conversations in the construction of a contract. At par66, the court quoted a passage at par40 in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, where the court there said:

"This Court, in Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction "

Principles relating to the implication of terms

21 In Biscayne Partners Pty Ltd v Valance Corp Pty Ltd and Ors [2003] NSWSC 874, Einstein J at par129 adopted a number of principles set out in State of New South Wales v Bannabelle Electrical Pty Limited [2002] NSWSC 178 and set out paragraphs from that judgment. He quoted from par45 of it, as follows:

"45 The principles upon which a Court will imply a term into a contract as a matter of fact are not in doubt and have been stated and re-stated authoritatively many times. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] HCA 40; (1977) 180 CLR 266, the Privy Council, on appeal from the Supreme Court of Victoria, listed the five requirements necessary to be satisfied as follows (at 282 - 283):

'Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying;" (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract'."

The court in Bannabelle went on in paragraphs following par45 to discuss the individual factors in more detail. As to the equitable and reasonable requirement, the court said that it was clear that such a requirement referred to fairness as between the parties and that it must be judged by reference to the benefits and burdens each party could expect to enjoy or undertake under the contract. As to business efficacy, the implication should be necessary for this purpose and not simply reasonable. However, it did not mean that the term had to be so necessary that, without it, the contract would to all intents and purposes be ineffective. The term must be necessary to make the contract effectively workable according to the presumed intention of the parties. The court also said that the requirement of business efficacy had been tested by asking whether the parties would have readily agreed upon the proposed implied term had it been suggested to them in the course of their negotiations.

22 The vendor was a municipal Council disposing of public land. It was disposing of it on the basis that the purchaser would develop it in accordance with certain parameters (see cl 14). The contract contained not only the parameters of the development, but also imposed obligations on the purchaser to complete at least part of it in a timely fashion. Counsel for the company suggested that cl 16 of the contract was irrelevant because it related to a development other than the development as defined in the contract. With respect, that is a somewhat tortuous interpretation of cl 16 and one which I do not accept. The purchaser could have been under no misapprehension at all, having regard to the terms of this contract, that it was being sold the land for the purpose of completing a specific development. Clause 14.4 can have no other meaning. There can be no reason why the contract would have contained all the detail it did about a development, including controls over the development post-settlement, unless it was the intention of the parties that the sale and development proceed in tandem. It follows inevitably that the parties must have intended that if the Development could not proceed, neither would the contract.

23 Counsel for the Council contended that cl 9 provided for just this by tying settlement to a successful application for a permit. He contended that cl 9 should be construed as being the necessary condition precedent. However, if it were necessary to imply a term to that effect, then the Court should do so. He submitted that to do so would not be contrary to any of the principles in BP Refinery. With respect I agree. The contention by counsel for the company in reliance on remarks by Underwood J in Australia and New Zealand Banking Group Ltd v Robert John Burgess and Lois Joy Burgess [1994] TASSC 137 that cl 9 dealt only with the date for settlement and was a non-essential term of the contract giving no right to the Council to terminate the contract, cannot succeed. While no issue can be taken with his Honour's statement of the law relied upon, with respect it cannot resolve the issue in this case. The court in Burgess was dealing with a standard form of sale contract which simply provided for completion to be effected within 90 days of the date of the contract. The contract in the present case was a very different and more complex contract, and cl 9 must be read and interpreted in the context of the entirety of it.

24 Clause 9 on its face does not read as a condition precedent to completion. However by it, settlement is tied to the granting of a successful development permit. There is no reason for the parties to have done so unless it was contemplated that, absent that permit, settlement would not proceed. The drafting is inelegant and the clause does not state clearly that the grant of a permit was a condition precedent to settlement. However it must be interpreted as such. To do otherwise makes a large portion of the contract as it relates to the Development completely unnecessary. It is nonsensical to suggest that there would be a provision in a contract such as cl 14.4, or indeed any of the provisions relating to the Development, if the Council intended to sell the land in any event without any controls over how the land was to be used. There can be no logical reason for all the provisions in the agreement relating to the Development unless the completion of that development were to be an integral part of the agreement between the parties.

25 It is not, in the circumstances, necessary to imply a further condition into the contract creating a specific condition precedent. However, if it were thought that the interpretation of cl 9 set out above was wrong, I would have no hesitation in finding that it was necessary for such a condition to be implied into the contract to give effect to the parties' intentions. The contract, read as a whole, invites, in my view, no other conclusion.

Was the Council entitled to terminate the contract

26 That leads to the question, what are the consequences flowing from the failure of that condition precedent? Counsel for the Council contended that the contract was discharged either by frustration following the failure of the application for a permit, by the effluxion of a reasonable time after the decision of the planning authority, or by the letter from the Council's solicitors dated 18 August 2006. The contract in this matter had been signed in December 2003. By the time the planning authority finally rejected the application for a permit, over two and a half years had passed. The decision of the planning authority was not such as to perhaps invite a further application in similar terms. In the circumstances, quite clearly the development, or indeed any development of a similar nature, was not likely to be approved.

27 In Perri v Coolangatta Investments Pty Ltd [1982] HCA 29; (1982) 149 CLR 537 at pars15 and 16, Brennan J said:

"A notice to complete insists upon performance by a party in default to whom the notice is given of an obligation binding upon him. It can have no application to a situation where the party to whom it is given is under no obligation to perform ... .

In the present case, when the time limited for fulfilment of the stipulation passed, the purchasers did not come under an obligation to complete. That obligation remained contingent on their completion of the sale of the Lilli Pilli property. The vendor was then entitled to say: 'As you have not completed the sale of your Lilli Pilli property, our contract is still contingent. I have waited long enough. Our sale is off.' Thereafter the vendor was not seeking to rescind the contract for breach by the purchasers of their obligations; it was seeking to rescind the contract because the event upon which the obligations of both parties were conditioned had not occurred. The ground on which it sought to rescind the contract affected the formation of obligations to complete not their performance."

28 In the present case, on the date upon which the solicitors for the Council sent the letter by which the Council purported to terminate the contract, the contract still retained a number of conditions relating to a development with which the company could not comply and was unlikely ever to be able to. The letter had been sent approximately a month after the final refusal of the s43A application and over two years after the contract had been entered into. In my view it was unreasonable to expect the Council to wait any longer before terminating the contract.

29 I am of the view in the circumstances that the Council, by its solicitor's letter of 18 August 2006, brought the contract to an end and that the notice to complete and the purported affirmation of the contract by the company thereafter were of no effect. The application of the company for specific performance of the relevant contract is dismissed.