CASTLE CONSTRUCTIONS PTY LIMITED v FEKALA PTY LIMITED & ORS [2006] NSWCA 133 | Case summary

CASTLE CONSTRUCTIONS PTY LIMITED v FEKALA PTY LIMITED & ORS [2006] NSWCA 133 | Case summary | Zoe

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CASTLE CONSTRUCTIONS PTY LIMITED v FEKALA PTY LIMITED & ORS JUDGMENT 1 MASON P: A vendor/purchaser dispute returns to this Court presenting damages issues. The previous stages of the litigation were Castle Constructions Pty Ltd v Fekala Pty Ltd [2001] NSWSC 659 (Santow J), Castle Constructions v Fekala [2002] NSWSC 76 (Windeyer J), Fekala v Castle Constructions [2002] NSWCA 297 (Beazley, Hodgson and Santow JJA), Castle Constructions v Fekala [2004] NSWSC 672 (Berecry AM) and Castle Constructions v Fekala [2005] NSWSC 642 (Palmer J). 2 On 28 June 2001 Fekala and its fellow mortgagees (the vendors) contracted, by mortgagee sale at auction, to sell an Eastwood property to Castle Constructions (the purchaser) for $3million. The property was equipped as a private hospital, but use as a hospital had been suspended when the mortgagees obtained vacant possession. 3 The purchaser is controlled by Mr Lahoud, an experienced developer. He investigates suitable sites with a view to obtaining development approval and then reselling, sometimes with development approval, sometimes after construction. He prefers not to get involved in construction if the site is more than 5 km from Northbridge, as Eastwood was; but there is nothing to suggest that this predilection was generally known. 4 While the instant contract remained uncompleted the purchaser applied for development approval for a large block of home units. 5 But other options were not eschewed. There was an unsuccessful application to Santow J for an interlocutory injunction to restrain the vendors from removing the hospital equipment. The purchaser's assertion that the sale contract extended to this equipment was a hopeless endeavour, but it arguably discloses its interest in re-opening the hospital, at least for a time. Representatives of the mortgagor had floated the idea of entering into a lease for that purpose. The purchaser submits that its claim to the chattels was no more than an attempt to secure valuable assets. At the end of the day, these dealings during the currency of the contract have no relevance unless they cast light on the contemplation of both vendors and purchaser at the time of contracting. I do not think that they do. 6 The purchaser did not complete on the contractual date, 9 August 2001. On 14 August the vendors served a notice fixing 3pm on 29 August for completion, time being of the essence. On 28 August the vendors' solicitor purported unilaterally to "waive" the requirement of the notice to complete, fixing 12 September as the new (essential) date for completion. 7 The purchaser ignored this feint. Its solicitor attended for settlement on 29 August armed with the necessary cheques and instructions to settle. This Court held ([2002] NSWCA 297 at [32]) that the purchaser was ready, willing and able to complete. However, the vendors were not ready because some of them (there were 37 in all) had not yet signed the transfer. Settlement was declined on behalf of the vendors shortly before 3pm and the purchaser gave notice of termination one hour later. 8 The vendors' solicitor got ready to complete by 12 September, the date notified in the second notice to complete. Earlier that day he notified the purchaser that the vendors were now ready to settle and that they did not accept the validity of the purchaser's termination. 9 On 25 September 2001 the purchaser filed process seeking a declaration that it had validly terminated, damages and costs. Three days later the vendors filed a cross-claim seeking specific performance, interest, damages and costs. 10 Windeyer J found for the purchaser and his decision was upheld in this Court. The final orders included reference to a Master to enquire into the damages sustained by reason of the vendors' breach in failing to complete. 11 The purchaser was entitled to loss of bargain damages based upon the difference between market value and the contract price, market value being determined at the date when completion should have occurred (Diamond v Campbell-Jones [1961] Ch 22; Hoffman v Cali [1985] 1 Qd R 253). However, the purchaser led no evidence to suggest that the market value at that date was greater than the contract price. Nor were outgoings such as architect's costs sought to be recovered. Rather, the purchaser claimed as damages the loss of profit on a hypothetical re-sale with development approval that would have taken place in about April 2002 had the contract not been breached. This invoked the "second limb" of the rule in Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145. 12 The purchaser relied upon unchallenged evidence from experts in land development and valuation. It established the probability that development approval to erect 52 home units could have been forthcoming by April 2002. Its valuer proved that a sale with such approval as at 30 April 2002 would have yielded $7,280,000 (52 units at $140,000 per unit). Estimated expenses associated with the hypothetical project, including of course the $3 million purchase price, were $3,582,190. Rounded out, this produced $3,598,000 as the sum claimed in the proceedings.. 13 Acting Master Berecry found that the purchaser was not entitled to any damages because it had not taken all reasonable steps to mitigate its loss consequent upon the breach. The purchaser's appeal to Palmer J was dismissed, on the different ground that the breach did not cause the particular loss for which the purchaser contended. 14 The issues presented in this appeal are: • Causation: Was the claimed loss caused by the breach? • Remoteness: Did the purchaser establish that the loss was not too remote? • Mitigation: Did the vendors establish that the purchaser had failed to mitigate this loss?

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Causation 15 The vendors' temporary but time-essential breach presented the purchaser with the opportunity to be discharged from what it then saw as a problematic bargain. One concern of Mr Lahoud was that the dispossessed mortgagor was making threats to restrain completion of the sale, asserting that the mortgagees had acted unreasonably in selling, but also as a ploy to get a "piece of the action" (Blue 11, 14-17). 16 Palmer J held that the breach of contract did not produce the loss of profit for which the purchaser contended. The loss of resale profits stemmed, not from the breach that triggered termination, but from the purchaser's choice not to proceed with the venture because of the commercial risks involved. As his Honour put it (at [48]-[49]): When the opportunity arose for Castle to escape the contract because of Fekala's temporary difficulty in obtaining all of the co-mortgagees' signatures, Castle seized that opportunity with alacrity and terminated the contract. … [W]hatever loss of profits Castle may have suffered from not proceeding with the Eastwood Property venture was caused, not by Fekala's breach of contract in failing to deliver an executed transfer on time, but rather by Castle's independent decision that it did not wish to proceed with the venture at all. To use the words of Robert Goff J in Koch [ Marine Inc v D'Amica Societa di Navigazione ARL (the "Elena d'Amico") [1980] 1 Lloyds Rep 75], the decision of Castle not to proceed with the contract was an independent decision, independent of the wrongdoing but taking place in the context of a pre-existing breach of contract by Fekala. The loss of the profits of the venture did not, therefore, arise out of, nor was it in any real sense caused by, Fekala's breach of contract. 17 Palmer J viewed causation independently of mitigation (see at [38]) and, in at least some of his reasoning, saw the causal chain as broken from the outset, ie at the moment of termination. 18 Koch Marine involved a ship owner's repudiation of a time charter. The normal measure of damages, in accordance with the first limb of Hadley v Baxendale, would have produced an award based on the difference between the contract rate for the balance of the charter period and the market rate for chartering a substitute vessel for that period. Goff J held that any damages beyond the normal measure were subject to the plaintiff proving that those damages were caused by the defendant's legal wrong. Furthermore, the plaintiff could not recover if it were demonstrated that there had not been a reasonable effort to mitigate. 19 These principles were in no way controversial. Nor was his Lordship's statement illustrating the interplay between causation and mitigation when he said (at 88): … What is alleged to constitute mitigation in law can only have that effect if there is a causative link between the wrong in respect of which damages are claimed and the action or inaction of the plaintiff.

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20 Goff J illustrated his proposition in the following terms (at 89): Now where, as for example in a case of a breach by a seller in failing to deliver the goods on the due date, there is an available market and advantage is not taken of the available market then, generally speaking, the decision by the buyer not to take advantage of the available market is an independent decision, independent of the breach, made by the buyer on his assessment of the market. It is perfectly true that his decision is made in the context of a pre-existing breach of contract by the seller, in the sense that the breach of contract provided the occasion upon which the buyer makes his market judgment; but even if there had been no breach at all it would have still been possible for the buyer to have made the same decision. 21 This reasoning is developed in a lengthy passage at 89-90 that need not be set out. The presently critical point is that absence of causation may be inferred from the same facts that are capable of generating a finding of failure to mitigate. Goff J's statement that this occurred "generally speaking" illustrates that the two findings do not always go arm in arm. 22 The facts of Koch Marine are far removed from the present case. Koch Marine involved a commodity for which there was an available market to which the innocent purchaser could go for an identical replacement product when faced with the vendor's/supplier's wrongful repudiation. This is not the instant case, even as regards the mitigation issue raised as regards the Cammeray project (see below). 23 Palmer J's references to the purchaser having seized an opportunity to "escape the contract" (at [35] and [48]), to its decision that "the venture was too risky" (at [48]) and to the purchaser's choice "not to undertake the transaction for its own business reasons and because of the commercial risks involved" (at [50]) do not state in terms that the contract had become a losing bargain by the time it was terminated. The evidence does not permit such a finding. The highest it goes is that the purchaser was content to exercise its legal right to terminate having regard to a range of considerations. 24 A plaintiff seeking damages for a particular loss must prove that the loss was caused by the defendant's breach. Where the loss claimed is the economic benefit that would have been earned in consequence of the bargain the court must necessarily examine the overall position of the victim. The compensation principle means that the court will not generally order the defendant to pay an amount that will make the claimant's position better than it would have been if the contract had been performed (see generally Treitel, The Law of Contract, 11th ed, 2003, p933). 25 The causation enquiry is thus focused upon the situation that would have eventuated for the plaintiff had the contract not been breached. 26 Herein lies a difficulty with the judge's reasoning so far as that it focuses on the situation at the time of breach, because his Honour did not address what the purchaser would have done had it not been presented with the vendors' wrongful failure to complete and had it been forced to go on with the contract. 27 The purchaser's belief at the time it terminated that it was party to a problematic contract is of course the antithesis of the position advanced in this Court. But that in itself cannot be fatal to an otherwise good claim for damages. The subjective and uninformed views of the innocent party at the moment of breach do not preclude that party from proving actual loss, with the aid of expert evidence if need be. But this is not the area of present discourse nor is it the reason why I disagree with Palmer J to the extent that he addressed causation independently of the mitigation issue. 28 In my opinion, it was wrong to characterise the vendors' breach as a "temporary difficulty in obtaining all of the co-mortgagees' signatures". That was not the breach found to justify termination in the earlier proceedings before Windeyer J and in this Court. The breach that led to termination was the failure to comply with what had become an essential time stipulation requiring settlement to be offered by both parties by 3pm on 29 August 2001. The situation was therefore entirely different from that referred to by Glass JA in his celebrated dictum in Lohar Corporation Pty Ltd v Dibu Pty Ltd (1976) 1 BPR [97014] at p9186 about conveyancing practice not being "measured out by coffee spoons". In that case, as in this, the purchaser wanted to get out of the contract if it could, but in this case (unlike that) the nature of the vendors' breach was found to be such that the purchaser was validly entitled to terminate and thereupon claim damages for its lost bargain. Because the purchaser in the present case was justified in terminating, any provable loss "will be attributable to the seller['s] breach of contract and not to the cancellation" (Sotiros Shipping Inc & Anor v Sameiet Solholt (The "Solholt") [1983] 1 Lloyd's Rep 605 at 607 per Sir John Donaldson MR). 29 If the purchaser can establish that it suffered loss in consequence of the vendors' failure to complete the contract when it should have, then (subject to the remoteness and mitigation issues) loss of bargain damages are recoverable notwithstanding that the purchaser rejoiced secretly when the vendors were hoist on the petard of their own notice to complete. 30 As stated by Parke B in Robinson v Harman (1848) 1 Ex 850 at 855, 154 ER 363 at 365, the compensation principle in contract is that "where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed". In a claim, such as the present, for expectation damages, it has been stated that: The onus of proving damages sustained lies on a plaintiff and the amount of damages awarded will be commensurate with the plaintiff's expectation, objectively determined, rather than subjectively ascertained. That is to say, a plaintiff must prove, on the balance of probabilities, that his or her expectation of a certain outcome, as a result of performance of the contract, had a likelihood of attainment rather than being mere expectation (per Mason CJ and Dawson J in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 80). 31 Subject to two provisos, the virtually unchallenged evidence led before the Acting Master established on the balance of probabilities what Castle would have expected to realise by way of profit had the contract been completed and the property resold with development approval by the end of April 2002. The mathematics of the claimed $3.598m loss are no longer in dispute. 32 But two provisos need to be recorded at the outset. First, there is no allowance for the "holding" costs that would have been incurred because of the purchaser outlaying the entire purchase price ($3m) on 29 August 2001. The purchaser's mathematics appear to treat this sum as spent in April 2002, ie the moment when the profit was realised. 33 Secondly, the mathematics assumes that any movement in the market price of the land between the date when completion should have taken place and the date of the hypothetical resale (and the evidence showed a significant hike in property values during this period) is to the purchaser's account. The legitimacy of this assumption turns on the purchaser's ability to invoke the so-called second limb of the rule in Hadley v Baxendale, thereby fending off the argument that the loss of this profit is too remote.

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Remoteness 34 A party seeking to recover unusual losses under the second limb of Hadley v Baxendale must show, in the words of Alderson B (at 354, 151) that the loss was "such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it". 35 Alderson B's statement is not to be read as a statute, and it is not always possible to draw a sharp line of demarcation between the two "limbs" in a particular case (see generally Jackson v Royal Bank of Scotland plc [2005] 1 WLR 377 (HL). Nor is it possible to construct a bright line test as to the specificity of the contracting parties' reasonably supposed contemplation as to the probable result of breach. The degree of likelihood of the contemplated event has been discussed in several cases conveniently summarised by McHugh JA in Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 363-6. 36 The decisions dealing with land purchasers' claims accept that (profitable) re-sale may be within the parties' common contemplation, but they require the purchaser to go beyond proving that this was merely one of a range of foreseeable outcomes. Courts are wary lest such an award produces over-compensation because the potential for profitable redevelopment may have been built into the market value at the time of breach (see Engell v Fitch (1869) LR 4 QB 659 at 665, 668; Diamond; Cottrill v Steyning & Little Hampton Building Society [1966] 1 WLR 753; Seven Seas Properties Ltd v Al-Essa (No 2) [1993] 3 All ER 577. See generally McGregor on Damages, 17th ed, 2003 pp774-6). 37 Remoteness is a question of fact (Wenham v Ella (1972) 127 CLR 454 at 466). But it is obvious why sale of land differs generally from sale of goods in this context. The wholesale vendor of meat knows that its retailing purchaser is buying with a view to resale. But land may be acquired for a range of purposes including letting, use for a range of business purposes, personal occupation or resale. Sometimes the intended purpose is disclosed in the contract or the pre-contractual negotiations. Sometimes the zoning of the property will give a clue. Sometimes the purchaser may have a "wait and see" policy. 38 A "developer" who buys land will not always disclose his or her intentions to the vendor, assuming they are formed at the time of contracting. Considerations such as cash flow, town planning difficulties, likely market changes and taxation may all bear upon the developer's decision-making as it evolves from time to time. Some of these will be personal to the developer. The property to be acquired may be held and used for its existing use for an indefinite period. The purchaser may decide to trade it in for a better project that later comes into view. 39 The modern understanding of the second limb is Hadley v Baxendale does not require the innocent party to show a contractual undertaking to provide compensation if the special loss eventuates (see generally Dobbs, Law of Remedies 2nd ed vol 3 pp 91-2). Accordingly, the present case is not resolved in the vendors' favour by pointing to the special condition in the contract for sale (No 36) negating any understanding, agreement, warranty or representation other than that spelt out in the contract itself. On the other hand, the law is conscious of the injustice of visiting the party in breach with the consequences of a loss that was not within that party's reasonable contemplation when contracting, because it may have lost "the opportunity to make an informed decision whether or not by entering into the contract to accept such risk, and whether to negotiate some exclusion from such liability" (Seven Seas Properties per Gavin Lightman QC at 582; see also Hadley v Baxendale at 355, 151, C Czarnikow Ltd v Koufos [1969] 1 AC 350 at 422 and Jackson at 388 [36]). 40 An additional reason for caution stems from the fear of double compensation. The market for land that is generally known to be capable of (re)development builds into the present value the possibilities of future gain stemming from such development (see generally Spencer v Commonwealth (1907) 5 CLR 418 at 441, Yates Property Corporation Pty Ltd (in liq) v Darling Harbour Authority (1991) 24 NSWLR 156 at 175-6). A fully informed market will make due allowances for the likelihood of favourable town planning decisions, the cost of development, and the time which may elapse before the property is available for sale, either with development approval or fully developed. 41 The caselaw dealing with consequential losses in contracts for the sale of land reflect these principles. 42 In Engell v Fitch (1869) LR 4 QB 659 at 665, 668 and Bain v Fothergill (1874) LR 7 HL 158 at 202, 211 there are statements recognising that there is no general rule that a buyer of land will recover the loss of profit on a resale. In Engell, it appears that the resale contract had been entered into by the date on which the vendor ought to have completed the head contract, ie the date of breach. The second contract was taken into account as evidence of market value at the date when the first contract was breached, but not as a loss within the common contemplation of the parties when they entered into the first contract. In other words, the matter fell within the so-called "first limb" of Hadley v Baxendale. 43 This was the analysis of Engell in the compelling reasons of Martin CJ in Holland v Hardy (1882) 3 NSWLR 450. The Chief Justice pointed out that the two contracts in Engell were only 12 days apart. He observed (at 453): It was held in [ Engell that] the price at which the land was sold so recently afterwards (the word recently is not in the judgment) was prima facie evidence of the value of the land at the time of the purchase by the plaintiff, and there being no other evidence to the contrary the plaintiff recovered that difference in value as damages. It may very well be that a sale about the same time as the sale to the plaintiff would be very good evidence of what the value was at that time.

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44 In Holland, damages were calculated by the trial judge with reference to a sale of the land that occurred 18 months after the sale to the plaintiff. The Full Court set aside the award because it was not based on an enquiry as to the value of the land at the time of the original contract. (The defendant was an agent sued for breach of warranty of authority, hence the unusual date selected for the valuation exercise.) Martin CJ observed (at 454): I do not say that the evidence of the price at which the land was re-sold should have been shut out altogether, but some evidence ought to have been given to show the value at the time of the sale to the plaintiff. 45 In Diamond, the buyer was a dealer in real estate who had previously bought and converted several town houses similar to the subject matter of the contract that was breached. Nevertheless, the buyer failed to recover as damages, in an action against the repudiating seller, the profit that he would have made upon the conversion of the house into flats and offices. The plaintiff argued that the house was one that everyone considered to be fit only for conversion and no longer suited to single occupation. It was said to be at least "on the cards" that a purchaser would convert the house before disposing of it. However, it was found that the defendant had no actual knowledge at the time of the making of the contract as to how the plaintiff proposed to deal with the house. The court was unprepared to impute any such knowledge to him. 46 Buckley J observed that there was no evidence as to what the defendant actually knew nor as to the matters sought to be imputed to him. He rejected the proposition that anyone entering into a contract must be treated as having constructive notice of the nature of the other party's business. It was recognised that there can be cases where the nature of the subject-matter of a contract or of its terms may be such as to make it clear that one of the parties was entering into the contract for the purpose of a particular business in circumstances where the court can infer that the other party must have appreciated that this was so. But his Lordship observed (at 36) that: … this can rarely be the case where the contract is for the sale of land. The vendor of a shop equipped for use as a butcher's shop would not, in my judgment, be justified by that circumstance alone in assuming, and ought not to be treated as knowing, that the purchaser would intend to use it for the business of a butcher rather than that of a baker or candlestick-maker, at any rate in the absence of covenants of other forms of restriction confining its use to butcher's business. Special circumstances are necessary to justify imputing to a vendor of land a knowledge that the purchaser intends to use it in any particular manner. 47 A different result was reached on the facts in Cottrill v Steyning & Little Hampton Building Society [1966] 1 WLR 753, but in that case there was not the slightest doubt that the defendants knew what the plaintiff's intentions were and knew exactly how he intended to pursue them (see at 756). 48 There is a most helpful discussion of the cases in this field by Bergin J in Sumy Pty Ltd v Southcorp Wines Pty Ltd [2004] NSWSC 1000. 49 The purchaser's claim fails, according to these principles. 50 The evidence showed that there was a steep rise in property values in the period between the date of breach and the date of the hypothetical sale. Mr Lahoud swore that in the period around 28 February 2002: … the state of the market was the best I have experienced in 25 years in the business. Development sites were in extremely high demand and bidding for them at auctions can best be described as frantic. Compared with six months earlier, the prices for development sites in all areas of Sydney moved upward by 25% to 30%. (Blue 31)

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Failure to mitigate 54 In my view, the damages claim should also be rejected because, even if remoteness is assumed in the purchaser's favour, the purchaser unreasonably failed to avoid the loss of profit it sought to prove. In brief, it failed because it chose not to accept the vendors' offer to complete the original contract according to its terms and under the supervision of the court, such offer being propounded in the cross-claim for specific performance filed on 28 September 2001. 55 Before Berecry AM, the purchaser failed for not having taken reasonable steps to mitigate its loss. There were two independent strands raised by the vendors: failure to take up the vendors' offer to complete the subject contract, and failure to pursue an alternative development at Cammeray. The Acting Master found for the purchaser on the first strand and for the vendors on the second. By contrast, Palmer J did not think that the case was one in which the purchaser failed to mitigate its damages for loss of profit because no causally related loss was established. 56 In my view, mitigation principles do provide an additional reason for rejecting the purchaser's claim, although I disagree with the Acting Master on each strand of his reasoning. 57 In Sherson & Associates Pty Ltd v Bailey [2000] NSWCA 275 Heydon JA said (at [77]): A plaintiff "cannot be said to have really incurred any loss which might have been avoided by his taking such steps as a reasonably prudent man in his position would have taken to avoid further loss to himself": Driver v Wat Services Homes Commissioner (1923) 44 ALT 130 at 134 per Irvine CJ (emphasis added). A plaintiff cannot recover damages for losses "which he would not have incurred had he acted reasonably in the ordinary course of his business": TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 162 per Priestley JA (emphasis added). Subject to the criterion of reasonableness, the plaintiff "is completely free to act as he judges to be in his best interest": The Soholt [1983] 1 Lloyd's Rep 605 at 608 per Sir John Donaldson MR (emphasis added). "The word 'reasonable' has in law the prima facie meaning of reasonable in regard to those existing circumstances of which the actor, called on to act reasonably, knows or ought to know": In re a Solicitor [1945] KB 368 at 371 per Scott, Lawrence and Morton LJJ; see also Adams v Eta Foods Ltd (1987) 78 ALR 611 at 621 per Gummow J.

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62 As the vendors point out, they were not only offering Eastwood to the purchaser, but were engaged in litigation against the purchaser in an attempt to compel it to purchase that property on the contractual terms. In these circumstances, it lies ill in the mouth of the purchaser to say that it lost the profit realisable in April 2002 from the development and resale of a property it was unable to secure. 63 The Acting Master found (at [61]) that the vendors' offer to complete the contract was bona fide and that the vendors were at all times willing to sell the property to the purchaser until they decided to re-sell it sometime in the first half of 2002. The vendors established that the transfer was executed by 12 September 2001. 64 The Acting Master nevertheless held that the vendors had not established that the purchaser unreasonably failed to mitigate the loss it claimed. He explained his conclusion in the following terms (at [59] and [61]): The claim for specific performance indicated the defendants' willingness to complete but not necessarily a willingness to abandon any claim for damages. Mr Lahoud's evidence was that on his calculations the probability was that if the defendants succeeded and obtained damages those damages could run as high as $940,000. This was tested by counsel for the defendant, however, Mr Lahoud was unshaken on his evidence and his opinion was that liability could have been as high as $940,000. Therefore, that was a relevant consideration that the plaintiff had to take on board in determining whether or not to accept the defendants' offer. Would it have been prudent to purchase the property knowing of the threat of litigation by a disgruntled mortgagor? In late July when Mr Lahoud became aware of the threat of the mortgagor he offered to rescind the contract. The basis of the offer was the cost and uncertainty any potential litigation would have on the commercial objectives of the plaintiff. In my opinion but for the threatened litigation there would have been no reasonable basis for the plaintiff not to have completed the purchase. The threatened litigation was a significant factor in weighing up all matters. That the defendant did not abandon its claim for damages supports the plaintiff's decision not to accept the offer. I do not think that it was unreasonable for the plaintiff.

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The damages component was calculated on the basis of the vendors having been deprived of the opportunity to have the purchase price with which to invest for an appropriate return during the pendency of the specific performance proceedings. 66 It is unproductive to cavil with the detail of this assessment or to question the strained reasoning whereby something sworn to by Mr Lahoud in June 2003 reflects upon his thought processes in the period August 2001 to May 2002. Let it be assumed that these matters were in Mr Lahoud's mind at the relevant period. 67 I nevertheless fail to see how they could have amounted to a reasonable basis for not having offered to submit to specific performance in accordance with the primary claim in the vendors' cross claim. 68 Mr Lahoud swore that he did not regard the claim for specific performance as something that Castle could reasonably accept. "Not only did the claim require it to give up its legal rights, including its claim for damages, it also exposed Castle to a claim for costs and interest which I did not believe Castle should have to pay" (Blue 30). 69 In my view, this reasoning is specious. The cross claim made no requirements; it merely listed the relief that the vendors were seeking. Naturally, the purchaser's summons and the vendors' cross claim were antithetical in their primary claims. And obviously, submission to specific performance (with or without admission of liability to do so) would have put an end to the purchaser's primary claim that the contract had been terminated. 70 But the purchaser's contention is specious because it fails to engage with the context in which the mitigation issue arises. At this stage of the argument, the vendors necessarily accept that the contract came to an end on 29 August 2001 in consequence of their breach. And they may be taken as accepting for the sake of argument that the purchaser established a prima facie entitlement to loss of profit damages in the sum claimed and on the basis claimed by the purchaser. The vendors' response when they invoke the mitigation argument is to contend that the purchaser would not have found itself unable to develop and sell the property in April 2002 had it not steadfastly and unreasonably refused to accept completion of the contract proffered on 12 September 2001 and the specific performance formally proffered by the vendors through the cross claim from 28 September 2001 onwards. It is not open to the purchaser to factor into this scenario the assertion that it was being required to give up its claim to be the innocent party entitled to damages consequent upon the vendors' breach. That would be to ignore the very context in which the mitigation issue arises. 71 There is an independent strand in the purchaser's attempted justification of its unwillingness to contemplate the renewed offer of contractual performance. Mr Lahoud contended that he perceived that the vendors were always seeking specific performance plus damages (see Supp Black 19-22). The vendors' cross claim sought, in the alternative to specific performance, a declaration that the vendors were entitled to the deposit (presumably as upon forfeiture); damages for delay in completion or, in the alternative, for loss of bargain; interest on damages; and costs (Blue 563). The presently relevant paragraphs of the vendors' cross claim sought: 4. Damages for delay in completion or, in the alternative, for loss of bargain; 5. Interest on damages pursuant s94 of the Supreme Court Act .

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72 The Acting Master viewed the cross claim as indicating "the defendants' willingness to complete but not necessarily a willingness to abandon any claim for damages". 73 Assuming in the purchaser's favour that it was reasonable to construe the cross claim as claiming damages in addition to specific performance, the issue remains whether it was reasonable for the matter to have been left as it was during the critical period. As indicated, the mitigation issue needs to be addressed in the context of accepting that the purchaser was the wronged party but recognising that it had a "duty" to be reasonable in avoiding or mitigating its damages. On this hypothesis, the vendors had no right to damages for late completion, let alone loss of bargain. And for what it is worth, Mr Lahoud never said that he calculated the $942,750 figure on any such basis. 74 On the evidence, there were no communications on the issue during the currency of the proceedings that culminated in Windeyer J's judgment on 26 February 2002. The parties simply retreated to their corners, coming out fighting at the hearing on 13 February 2002. In these circumstances, I do not consider it to have been reasonable, in the context of mitigating the very loss now sought to be recovered, for the purchaser not to have offered to submit to specific performance simpliciter or even to have raised with the vendors whether they were pressing damages in addition to specific performance. What is clear is that the damages would then have been vastly less than the $585,500 calculated by the purchaser in June 2003. Even more to the point, I agree with Palmer J who said (at [36]): 36 I do not think that Fekala's Cross Claim for damages in addition to specific performance of the contract could have had much impact on the mind of a reasonable person in considering whether to proceed with the purchase of the Eastwood Property or forego entirely the profits which might be derived from that venture. Clearly, when Fekala filed its Cross Claim on 28 September 2001, Mr Lahoud himself did not give consideration to the matter but a reasonable person, properly advised, would have realised that as at 28 September 2001 Fekala's claim for damages, if good, would have been relatively insignificant in the scale of the transaction. Fekala could not claim damages as from 9 August or 29 August for Castle's delay in failing to complete the contract because Fekala itself was not able to complete until 12 September. If Castle had completed the contract on 28 September, when Fekala filed its Cross Claim, and paid any damages, if it were found liable, those damages could only have been to compensate Fekala for the delay in settlement between 12 and 28 September, that is, sixteen days. If the profits to be foregone by Castle in not proceeding with the purchase were truly in the order of $3.5M, damages for sixteen days' delay would have been an extremely small price to pay in exchange for such a profit. It would have been unreasonable to pass up the opportunity to earn that profit at such a small added cost. 75 The purchaser decided that its interests lay in not proceeding with the Eastwood property and this was the reason why it took the opportunity to terminate. The evidence is all one way and this conclusion is supported by all of the findings of Palmer J on causation. The vendors embrace these findings, albeit that they invoke them in the context of mitigation. From 29 August 2001 onwards, the purchaser set its face against the Eastwood venture, turning its eyes to Cammeray, but being blocked from entering into a contract to purchase Cammeray because the Eastwood vendors refused to release the deposit and continued to press the completion of the Eastwood contract. The vendors contend, with justification, that this tends to undermine Mr Lahoud's stance that he genuinely and reasonably held back from going on with Eastwood because of the pendency of the vendors' claim for damages. 76 The other matter referred to by Berecry AM was Mr Lahoud's fear of litigation by the disgruntled mortgagor. Indeed, this arguably was the critical matter, having regard to the Acting Master's statement (at [62]) that in his opinion, but for the threatened litigation, there would have been no reasonable basis for the plaintiff not to have completed the purchase. 77 I do not consider this to have been a reasonable ground for declining to complete. For one thing, the mortgagor's threats had fallen silent by 12 August 2001 at the latest. There is nothing to show that the mortgagor ever learnt that the purchaser's termination of the contract had been put in issue. In any event, the threat was to hold up completion of the contract itself. It follows that, if the contract was completed pursuant to a consensual Supreme Court decree for specific performance, then the very deed that Mr Lahoud says he fears might be blocked would be done before the mortgagor could interfere. 78 There is no suggestion that the purchaser was complicit in the putative wrongdoing of the mortgagees/vendors. In those circumstances the disaffected mortgagor would have had to approach the Court before completion and doubtless would have had to justify any delay on its part. The risk to the purchaser was never more than that completion would be prevented (see generally Forsyth v Blundell (1972) 129 CLR 477). There was no question of the purchaser losing any right to recover damages against the vendors if completion was blocked by intervention on the mortgagor's part. The rule in Bain v Fothergill (1874) LR 7 HL 158 has been abolished in this State (Conveyancing Act 1919, s54B). 79 There is no reasonable explanation for the purchaser's unwillingness to submit to or even explore completion, the very step said to be the only thing impeding realisation of a massive profit in early 2002. After all, this was a commercial contract and the bottom line was always money (cf Payzu at 589 per Scrutton LJ). 80 Payzu involved a plaintiff's failure to accept a reasonable offer from the defendant made at a time when the defendant's breach was causing loss and/or had the potential to increase the plaintiff's loss unless remedied. 81 The "Soholt" shows that an innocent plaintiff may act unreasonably in not taking the initiative by making an offer to the defendant to accept late delivery of the contractual product at the original price. In that case, the purchaser duly cancelled a contract for the sale of a ship because the seller failed to tender the vessel in time. The purchaser suffered a loss of $US500,000 in consequence of the breach. As Sir John Donaldson MR pointed out (at 608) no question of mitigation arose at the termination stage. But the damages were not awarded because the purchaser was found subsequently to have unreasonably failed to mitigate its loss. This finding was based on the conclusion (at 609) that the vendor would have accepted an offer by the purchaser to purchase the vessel at the original price subject to any claim it might have had for the delay. The Master of the Rolls had earlier pointed out (at 608, emphasis in original) that: As a matter of causation, [the loss of $US500,00] unless avoidable by some reasonable further action was directly attributable to the sellers' breach of contract. The learned Judge held that it was in fact avoidable by further action and that such further action would have been reasonable. It is nothing to the point that this further action might , in effect, have reversed the cancellation of the old contract. We say might because the new contract which the learned Judge held that the buyers could and should have made might not have been on the same terms as to price although, on the evidence, he held that it would have been. Whether a loss is avoidable by reasonable action on the part of the plaintiff is a question of fact not law.

[60]

(ii) Failure to pursue in an alternative development at Cammeray 87 It is strictly unnecessary to deal with this alternative. 88 In late July 2001 Castle Constructions made a bid to purchase a development property at Cammeray. The negotiated price was $3.1m. 89 No contract was entered into during the currency of the Eastwood contract. But when that contract was terminated, on 29 August 2001, Mr Lahoud decided to go ahead with Cammeray. He proposed to use the $300,000 deposit expected to be returned from the Eastwood contract as the deposit to purchase Cammeray. But when the Eastwood vendors refused to return the deposit, contested the termination and pressed for specific performance, Mr Lahoud stopped pursuing the Cammeray site. His unchallenged evidence was: 67. This resulted in the non return of Castle's deposit. I had budgeted to use the $300,000 as a deposit for the purchase of the Cammeray site. When the deposit was not returned, I stopped pursuing the Cammeray site until I discovered on or about the middle of September 2001, that it was sold to another developer. The reason that Castle stopped pursuing the Cammeray site went beyond the non return of the deposit. It is the fact that Castle had sufficient resources to have exchanged on Cammeray, despite non return of the deposit. However, submitting a deposit and exchanging is only part of the commitment. What then follows is the need to complete the purchase, and in the case of Cammeray, arrange construction finance. I was not prepared to undertake that commitment, when I had an uncertain commitment in front of me in terms of Eastwood. Castle did not have the financial resources to fully commit itself to a construction project in terms of the Cammeray site, and at the same time, complete purchase of the Eastwood property. Finally, it was totally inconsistent with Castle's business philosophy … which I have followed since at least 1992. I was not prepared to assume, for example, that I could purchase the Eastwood property and then immediately on sell it. That may not have happened, and if it did not, holding the two sites would have been financially disastrous for Castle. Castle's philosophy was based on its previous business experiences and history, approximately 10 years ago, when Castle held two development sites and the market turned, with the consequence that Castle almost went under.

[64]

[49] In those circumstances it is clear, in my opinion, that whatever loss of profits Castle may have suffered from not proceeding with the Eastwood Property venture was caused, not by Fekala's breach of contract in failing to deliver an executed transfer on time, but rather by Castle's independent decision that it did not wish to proceed with the venture at all. To use the words of Robert Goff J in Koch [Marine Inc v D'Amica Societa di Navigazione ARL ( the "Elena d'Amico ") [1980] 1 Lloyds Rep 75], the decision of Castle not to proceed with the contract was an independent decision, independent of the wrongdoing but taking place in the context of a pre-existing breach of contract by Fekala. The loss of the profits of the venture did not, therefore, arise out of, nor was it in any real sense caused by, Fekala's breach of contract. 97 Palmer J. accepted that Castle, through its Director Mr Lahoud, had decided before 29 August 2001 that the Eastwood Property venture was too risky, for reasons not attributable to Fekala's breach of contract, and that Castle should escape from that contract if it could. In these circumstances it is highly unlikely that there truly was an opportunity to make a large profit from the venture. There were profits to be made, and there was a loss of profits, only if Castle would have undertaken the redevelopment venture. If Castle would not have undertaken it if title had been transferred to it, not having a transfer of title could not cause a loss of that kind. 98 The finding that the loss of profits suffered from not proceeding with the Eastwood Property venture (if there was a loss of profits) was not caused by Fekala's breach of contract but was caused by Castle's independent decision that it did not wish to proceed with the venture at all was a finding of fact. It was supported by adequate reasons given by Palmer J., which have not been shown to be wrong. It is strongly in accordance with the overall probabilities, as Castle consistently, firmly and successfully resisted all later attempts by Fekala to transfer the Eastwood Property to Castle. In my opinion no grounds have been shown on which it should be concluded that this finding was wrong. 99 In my opinion the appeal fails on this question of fact, and should be dismissed with costs for that reason.

CASTLE CONSTRUCTIONS PTY LIMITED v FEKALA PTY LIMITED & ORS

At a glance

Court

Decision date

Before

Source

Judgment (65 paragraphs)

Parties

Cases Cited (17)

Cited By (22)