Cermak v Ruth Consolidated Industries

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2796/01 Karel Vaclav Cermak and Marie Cermak v Ruth Consolidated Industries Pty Ltd and Brett Saunders Ruth JUDGMENT 1 Master: These proceedings concern a lease of the property 23 Nelson Street Annandale. The plaintiffs are the owners of the premises and the first defendant is the lessee under a lease for a term of two years from 19 December 2000 until 18 December 2002. The lessee did not exercise an option for renewal and vacated the premises in December 2002. 2 The plaintiffs make a number of claims in the proceedings. The first claim is for rectification of the lease in respect of the rent payable under the lease. The lease as executed expressed the rent as inclusive of GST. The plaintiffs seek rectification so that the rent is expressed to be exclusive of GST. The amount at issue is the sum of $7071.22. As an alternative the plaintiff seeks to obtain orders in relation to misleading and deceptive conduct. The second claim that the plaintiff makes is a declaration that the description of the property in the lease excludes a storage area directly under the lease property. The defendant company cross claims for a declaration that the occupation of the storage area by the plaintiffs is a breach of the covenant for quiet enjoyment and seeks damages for breach of that covenant. The amount at issue in respect of this aspect of the proceedings is approximately $2400.00. 3 A judge of the court has ordered that a Master hear the whole of the proceedings. The rectification in respect of the rent 4 The relevant clause is item 1 in the appendix to the lease. The rent is specified at what was the agreed rate with the words "inclusive of GST". There is no doubt that when the agent for the owner and the agent for the tenant negotiated the rent for the lease that they did so on the basis that it was exclusive of GST. The plaintiffs' agent was Mr Inangeri and the first defendant's agent was Mr Jarratt. 5 When the solicitor for the plaintiffs prepared the lease, he did so on instructions conveyed to him by Mr Inangeri. Those instructions did not say whether the lease was inclusive or exclusive of GST. Accordingly the solicitor rang the agent and asked whether it was inclusive or exclusive of GST. The agent informed him that the lease was inclusive of GST. 6 It is, of course, clear that rectification is available in respect of a lease. In respect of common or mutual mistake it is necessary to find a contractual intention that a particular term should be included in the written document. Street CJ in Equity in Australasian Performing Right Association Ltd v Austarama Television Pty Ltd [1972] 2 NSWLR 467, described what was necessary in these terms: "It seems rather that the true principle involves finding an identical corresponding contractual contention on each side, manifested by some act or conduct from which one can see that the contractual intention of each party met and satisfied that of the other. On such facts there can be seen to exist objectively a consensual relationship between the parties."

This passage was approved by the High Court in Hooker Town Developments Pty Limited v The Director of War Service Homes (1973) 47 ALJR 320 at 323-4. 7 As relevantly noted by Young CJ in Eq. in Kelly v Ollis [2003] NSWSC 1032 at paragraph 49:

"It must be remembered, as MH McLelland AJA said in Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329, 345 that the court only acts in rectification suits where: it is established by clear and convincing proof that at the time of the execution of the instrument the relevant party or parties as the case may be had an actual intention (if more than one party, a common intention) as to the effect which the instrument would have which was inconsistent with the effect which the instrument as executed did have in some clearly identified way." 8 In the present case the factual circumstances, to which I will turn shortly, tend to suggest that the mistake was unilateral as distinct from common or mutual. The general rule is that in these circumstances rectification is not permitted. There are, however, a number of exceptions. The relevant exception is where the party who is not mistaken is guilty of fraud, whether actual, constructive or equitable. The High Court referred to this principle in Taylor v Johnson (1983) 151 CLR 422. After reviewing both the English authorities and the position in the United States and Canada, the Court concluded with these words: "The particular proposition of law which we see as appropriate and adequate for disposing of the present appeal may be narrowly stated. It is that a party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension. What we have said is sufficient to demonstrate the broad basis of support which the authorities provide for that proposition. Moreover, and perhaps more importantly, it is a principle which is best calculated to do justice between the parties to a contract in the situation which it contemplates. In such a situation it is unfair that the mistaken party should be held to the written contract by the other party whose lack of precise knowledge of the first party's actual mistake proceeds from wilful ignorance because, knowing or having reason to know that there is some mistake or misapprehension, he engages deliberately in a course of conduct which is designed to inhibit discovery of it. Our comment can, for present purposes, be limited in its application to the case where the second party has not materially altered his position and the rights of strangers have not intervened." 9 Earlier the Court in its consideration of authorities referred to what was said in Thomas Bates & Son Limited v Wyndham's (Lingerie) Limited [1981] 1 WLR 505 at pages 514-516. In that case, at page 516, Buckley LJ said that for there to be rectification in cases of unilateral mistake the following must be shown: "First, that one party A erroneously believed that the document sought to be rectified contained a particular term or provision, or possibility did not contain a particular term or provision which, mistakenly, it did contain; secondly, that the other party B was aware of the omission or the inclusion and that it was due to a mistake on the part of A; thirdly, that B has omitted to draw the mistake to the notice of A. And I think there must be a fourth element involved, namely, that the mistake must be one calculated to the benefit of B to resist the rectification to give effect to A's intention on the ground that the mistake was not, at the time of execution of the document, a mutual mistake." 10 As recently observed by Young CJ in Eq. in Kelly v Ollis at paragraph 59: "This analysis has been followed in Australia; see eg Budget Stationery Supplies Pty Ltd v National Australia Bank Ltd (1996) 7 BPR 14,891, 14,936 (Santow J affirmed by Court of Appeal; (1997) 9 BPR 17, 413, 17,428); Re Freehouse Pty Ltd (1997) 26 ACSR 662, 682 (Victorian Supreme Court) and the murmur of approval by the High Court in ; Taylor v Johnson (1983) 151 CLR 422, 431." 11 As it is also relevant in this case, the question of the knowledge of another party's mistake has been considered in a number of cases. They are usefully referred to by Young J (as he then was), in Misiaris v Saydels Pty Limited [1989] ANZ ConvR 403; (1989) NSW ConvR 55-474. His Honour concluded: "In my view it is enough that the defendant strongly suspects that the plaintiff has made a mistake of a fundamental nature about the contract for the Court to provide the remedy of rectification."

In the event that the defendant did know of the mistake, a question then arises as to whether the defendant induced the mistake on the plaintiff's part, deliberately cloaked the mistake, or otherwise behaved unconscionably. See Easyfind NSW Pty Limited v Patterson (1987) 11 NSWLR 98. There are, however, some divergent views on this requirement. 12 Hansen J, in Air New Zealand Ltd & Enzedair Tours Ltd v Leibler, Leibant Investments Pty Ltd & Ninth Astjet Pty Ltd (VSC, 19 November 1996, Unreported), at 94 said:

"In my view it is not essential that there be cloaking or misrepresentation. As a matter of principle, and subject always to the particular facts, where a party does nothing to correct a mistake in a document of which he is aware and allows the other party to sign the document unaware of the mistake, rectification will ordinarily lie; see, for instance, the statement of principle in Roberts, Thomas Bates per Buckley LJ quoted above (and approved in Taylor); Misiaris at 107. In Solle at 692 (which case was referred to with approval in Taylor at 431) Denning LJ gave as an illustration of unconscionable conduct that would entitle the court to set aside a contract the case where, knowing of the other's mistake, a person concludes a contract on the mistaken terms instead of pointing out the mistake. This principle is likewise applicable in a rectification case in determining whether it is inequitable for the unmistaken party to rely on the document according to its terms."

The facts surrounding the execution of the lease. 13 The plaintiffs purchased the property in 1985 and over a period made some improvements to it. In 1992 they granted a lease of Unit 1 and some car spaces to the first defendant. That lease expired on 19 December 1996 and had an option for renewal for 4 years. Some time in 1994 the first defendant also took over occupation of Unit 2 and some leasing arrangement continued. Apparently there must have been an exercise of the option as the parties appear to agree that the then leasing arrangements expired on 19 December 2000. 14 In August 2000 the first defendant indicated to the new agent appointed by the owner, Gerard Harding Real Estate, that they wished to renew the lease after its expiry at the end of the year. In May 2000 the plaintiffs had signed a management agency agreement with their new agents and once he became aware that the lessee wished to renew the first plaintiff instructed Mr Inangeri of that firm to carry out the negotiations for the new lease. 15 The second defendant is a director of the first defendant and he appointed a Mr Robert Jarratt to negotiate the new lease with Mr Inangeri on behalf of the first defendant. 16 For some months there were inconclusive negotiations between Mr Inangeri and Mr Jarratt as they endeavoured to come to some compromise. Finally, on 2 November 2000, there was a meeting between them where some form of agreement seemed to have been reached. It is apparent from Mr Jarratt's evidence that the discussions on this day were based upon the then existing lease being used for the purposes of negotiating the new lease. Some agreement was reached as Mr Jarratt deposed, in paragraph 8 of his affidavit, to the following terms: "At the end of the meeting I said to Mr. Inangeri in words to the following effect, 'I have my client's authority to agree on all these terms now so I can tell him we have completed the deal.' We then shook hands and Mr. Inangeri said in words to the following effect, 'Yes we have a deal but I will need to check this with my client. It will not take long, I will do it in the next couple of days and confirm it in writing to your client.'" 17 There was a letter dated 7 November 2000 from Mr Inangeri to the second defendant confirming a number of points and seeking agreement on them. As a result of that letter there was a letter sent on the first defendant's letterhead signed by the second defendant in these terms: "Wednesday, November 08, 2000 Gerard Inangeri Gerard Harding 405 Parramatta Rd, Leichhardt NSW 2040 RE: 23 Nelson St, Annandale Dear Gerard, I refer to recent discussions with Robert Jarratt of Jarratt Partners and my understanding of the verbal agreement reached by both of you in relation to the above property. The terms of the lease agreed for this property are: 1) Terms and conditions are as outlined in the previous lease and include terms and conditions outlined below. 2) Landlord and tenant have agreed to share the outgoings on a 50/50 basis, such outgoing defined and limited to Land tax, Building Insurance, Council Rates and Water Rates. The landlord has greed to provide copies of all relevant accounts relating to the above and acknowledges the agreement for outgoings does not include expenses related to the air conditioning service. Such outgoings to be paid monthly at a figure not exceeding $185.10 per month. 3) The tenant agrees to pay GST on rent and outgoings, the landlord agrees to provide a valid tax invoice for these items. 4) Tenant agrees to pay reasonable legal costs associated with the production of the lease. These expenses not to exceed $1000. 5) Date of commencement December 19th 2000. 6) Agreed term of the lease is 2 years with a 3-year option at the end of the 2nd year. 7) Rent review based on CPI changes. 8) The Roller Door to be repaired and fully operational prior to December 19th 2000. 9) The rent to be $43,917 per annum divided by 12 months @ $3659.75 per month. Please confirm your agreement of the above so we can agree to finalise the lease."

As can be seen the writer sought agreement on these matters so that the lease could be finalised. This suggests the absence of any final agreement in respect of the lease at that stage. 18 On receipt of the above letter the agent gave instructions to Mr Romano, of Nesci and Romano Solicitors in Leichhardt, to prepare the lease. Those instructions given on 9 November 2000 simply indicated an amount for rent without dealing with the GST. The letter giving instructions did not forward the letter of 8 November 2000. 19 On 13 November 2000 Mr Romano spoke to Mr Inangeri on the telephone and asked him whether the rent included or excluded GST. Mr Inangeri, told him in error, that it was inclusive of GST and that the lease was drawn on this basis. 20 In late November or early December the new lease was sent to the first defendant's solicitors and was perused by Mr Brett Ruth. It was not based on the existing lease and was a new form of lease. In addition it included provisions for a security deposit, a new make good clause and a clause altering the responsibility for the air-conditioning system. 21 The matter was the subject of correspondence between the solicitors and, ultimately, there was a meeting on 21 December 2000 at the offices of lessor's solicitors. Prior to attending that meeting, which was the meeting that ultimately resolved the executed document, Mr Brett Ruth had a discussion with Mr Jarratt. He gave evidence of this discussion in paragraph 7 of his affidavit sworn 12 April 2002, which was in these terms: "The meeting with Ciro Romano was on 21st December 2000. On that day I telephoned Rob Jarratt and said, 'Have you read the Lease. Do you know what the story is with the GST on the rent?' I said this because, upon reading the lease, I noticed that no mention was made therein of any GST payable on the rent or outgoings by the First Defendant. As the lease had been drafted by the Plaintiff's solicitor, I assumed this omission was intentional. Robert Jarratt said, 'They have changed a lot of the terms and conditions that were agreed on by us. See if you can change the security deposit and air conditioning clauses. Try and get rid of the painting clause. They may have altered the GST clause as a trade off for the new Clauses that they have put in. These will cost you money. They have been so erratic it is hard to know what they are thinking.' I then attended a meeting with my Solicitor who made some hand written amendments to the Lease agreement. These amendments are annexed hereto and marked 'I'".

22 Mr Jarratt also gave evidence of this conversation at paragraph 10 of his affidavit sworn 24 April 2002 in these terms: "In mid December I received a Lease from Brett Ruth which was supposed to be based on the agreement reached in our November 2 meeting. The Lease was substantially different from the previous Lease and contained a number of terms that had not previously been discussed. The wording and structure of the Lease was also completely different. On or about the 18th December I received a telephone call from Brett Ruth who said in words to the following effect, 'Have you looked at the new Lease?' I then said in words to the following effect, 'You will have to do something about the extra clauses. Try and get them to delete the clauses relating to painting and maintenance, air conditioning and the security bond, this is going to cost you a lot of extra money.' Mr Ruth, 'What do you make of the GST clause?' Jarrett, 'I don't know. They may have just stuck that in to sweeten the whole deal for you. It is not unusual for this type of guy to do things like that. Cermak has been so erratic in these discussions it is hard to know what he thinks.'" 23 At 3:50pm on 21 December 2000 there was a meeting with Mr Romano at which Mr Ruth and Mr Cermak attended. The parties carefully went through the lease and argued about a number of new provisions. Ultimately, because he had no option, Mr Ruth accepted these provisions and he expressed his displeasure at the manner in which the negotiations had been conducted. There is no evidence of any discussion of the GST at the time. 24 On 22 December 2000 the plaintiffs and the defendant executed the lease, and counter parts were exchanged. Immediately thereafter there were suggestions from the first plaintiff that he might need to change some matters. Ultimately a claim was made, in early January, that the GST provision had been left out by mistake. The parties were at issue on that matter thereafter. 25 At paragraph 16 of his affidavit sworn 25 October 2001 Mr Cermak gave evidence that there was no discussion about the GST at the meeting and that he thought that the question of rent and GST had been settled in accordance with his earlier instructions. Mr Romano, the plaintiff's solicitor, also gave evidence in his affidavit sworn 26 October 2001 that there was no discussion of the rent and its expression of being inclusive of GST. It seems clear, therefore, that the plaintiff certainly signed the lease on the mistaken basis that he believed it was exclusive of GST, where as, in fact, it was inclusive of GST. 26 There is also no doubt that Mr Brett Ruth was well aware of what the lease provided, but the real question is whether he knew that it was due to a mistake on the part of Mr Cermak. The other requirements, namely, that Mr Brett Ruth did not draw the mistake to Mr Cermak's attention and that it would benefit Mr Brett Ruth clearly apply and there is no question on either matter. The question at hand however, is whether Mr Brett Ruth strongly suspected that Mr Cermak had made a mistake of a fundamental nature about the contract. 27 Both Mr Brett Ruth and Mr Jarratt were cross-examined on this matter. Mr Ruth denied that he knew that there was any error and I am prepared to accept his evidence, which he gave in a straightforward way. Given that Mr Jarratt has also given corroborative evidence, it seems to me that Mr Ruth believed that the change was deliberate and was not as a result of a mistake. On the basis that that was his belief, there was no occasion for him to raise the possibility of there being a mistake in the discussion which ensued in Mr Romano's office on 21 December 2000. Thus, given his situation, he was intent on negotiating the best of a bad deal. 28 In these circumstances it seems to me that the plaintiff is not entitled to relief by way of rectification for unilateral mistake. 29 There was a suggestion in the submissions of the plaintiff that because the parties had agreed on one aspect of their renewed lease, namely the rent and GST applicability, that they could then continue to negotiate for other terms at a later stage and in that circumstance there could be mutual or common mistake. 30 In the witness box Mr Ruth agreed, when cross-examined about his letter of 8 November 2000, that a verbal agreement had been reached between Mr Jarratt and Mr Inangeri about the property. He agreed that the letter reflected what he thought was the agreement. It is abundantly plain, however, that such agreement was predicated upon the terms of the old lease and it is quite clear that the written document, which was ultimately executed, was not predicated upon the old lease, but on a new form with additional conditions. Rent and whether or not it was inclusive of GST was a critical matter for the whole arrangement. In my view it could not be said that there was some common intention that the document signed on 21 or 22 December 2000 was to exclude GST on the rent. 31 The plaintiff's claim for misleading and deceptive conduct basically relied upon the same facts that I have dealt with above. The only matter that could be said to be misleading or deceptive would be the failure of Mr Ruth to question whether or not a mistake had been made in relation to GST. Given his knowledge and the circumstances surrounding the matter I cannot conclude that his conduct was misleading and deceptive, and accordingly, the plaintiffs are not entitled to the relief they seek on this basis. The storage area 32 The description of the leased area in the lease was as follows: "Part F/1 1/227538 being a two-storey rendered building fronting Nelson Street, Annandale, including three car spaces and known as 23 Nelson Street, Annandale"

The Folio identifier that is referred to is that for Lot 1 in deposited plan 227538. On that Lot there are erected two buildings one of which is used by the plaintiff as a residence and the other which faces a different Street namely Nelson Street which is the subject of the lease. 23 Nelson Street Annandale is a building having two stories and underneath car spaces and a storage area. On an ordinary reading of the lease description the storage area would be included as it is within the confines of the building and is accessed from the car space area and stairs inside the building. 33 I turn to the factual situation in relation to the storage area. The first discussions in relation to this, which are referred to in the evidence, were in 1994 when the first defendant took over Unit 2, which had entry on the street level of the building. At that time according to Mr Brett Ruth he had discussions with Mr Cermak, who asked if he could store some tools behind the door in the disputed area, Mr Ruth's response was that this could happen as long as it did not interfere with his business. The first defendant gave some evidence that in 1995 he had a discussion with Mr Lee Ruth, the second defendant's father. Mr Lee Ruth was an employee of the business, not a director. According to him, Mr Lee Ruth wanted to use it to store old documents. Mr Cermak said that he needed to store his electrical equipment there but he could have the rest of the space at $65 per month, to which there was a counter offer of $45 a month made by Mr Lee Ruth. According to the first plaintiff the additional sum of $45 per month was paid during the term of the first lease. The defendants deny the fact of such payment. In response to that denial, the plaintiffs' tendered no documentary evidence to prove payment of that amount. Plainly the records which would show the amount of the rent paid, including the additional amount, would be available to the plaintiff and such records would have been recent. In these circumstances I accept the defendants' version that no such amount was paid. 34 There does not seem to be any doubt that the plaintiff had some equipment and machinery in the storage and void areas in the time up until the new lease was negotiated. There is absolutely no evidence of any discussions between the parties at the time of negotiating the new lease as to whether it included the storage area.

35 There is some evidence from Mr Inangeri that when Mr Cermak engaged him to negotiate the lease he pointed out that the only lease-able area was upstairs and the car spaces as he had his goods stowed in the basement. However, Mr Inangeri confirmed that there was never any discussion between himself and Mr Ruth regarding the storage space. It is also apparent that the matter was not discussed at the meeting on 21 December 2000 in Mr Romano's office. 36 After the falling out in January 2001, the parties were at issue, and in March 2001, the plaintiff padlocked the door into the storage area. A dispute arose about this and eventually, in June 2001, the plaintiff gave the second defendant the key which enabled him to inspect the area, which he found had been converted into a workshop with benches, grinders, tool cabinets and a lot of electrical equipment. Apart from preventing the first defendant from being able to use the space the business being carried on there also created problems for the first defendant, in that it had the potential to it's insurance over the building. 37 In these circumstances it seems to me that there is absolutely no basis for suggesting that there should be any rectification of the lease to exclude the storage areas. The matters are not the subject of agreement between the parties and there is no suggestion of the second defendant being aware of any mistake on the part of the plaintiff. 38 On the ordinary construction of the lease it would include the storage areas. In these circumstances, the first defendant is entitled to occupation of the relevant area under the terms of the lease. Reasonable notice requiring that space to be made available was clearly given by 28 May 2001, when an invoice was sent by the first defendant to the plaintiffs in respect of their use of the area. Although there was initially some evidence before me as to the rental value of the area, the parties are now agreed that Exhibit C sets out the appropriate rental value of the area. That amount is $1,620.00 per annum, and accordingly the first defendant is entitled to judgment on the cross claim against the plaintiffs in an amount at this rate from 1 June 2001 until the termination of the lease. 39 I direct the parties to bring in short minutes and argue costs. **********

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