Novation v Sale or Transfer
42It is not in issue that the rights held by CRI under each Call Option Deed were dutiable property. The Chief Commissioner raises two issues:
- Whether the Nomination Deed constituted a dutiable transaction as an agreement for the sale or transfer of the Call Options under s 8(1)(b)(i) of the Act; and
- Whether each Call Option Nomination Notice constituted a transfer of dutiable property under s 8(1)(a) of the Act.
43For the reasons that appear below, I am of the opinion that each question must be answered in the negative.
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44CTI's case in its written submissions is that the legal effect of CRI exercising its right under cl 10 of the Call Option Deeds to substitute CTI as grantee was a novation. It did not transfer CRI's rights under the Call Option Deeds to CTI. Instead, it vested new rights in CTI and it was released from its obligations under the Call Option Deeds which obligations were replaced by a guarantee. There was an annulment of CRI's rights under the Call Option Deeds and the creation of new rights under them in CTI.
45CTI submitted that there are a number of indications that the parties intended their transaction to be a novation rather than a transfer.
46Clause 1.2(c) of the Call Option Deeds was in the following terms:
"a reference to any party to this deed includes that party's executors, administrators, successors, and permitted substitutes and assigns, including any person taking part by way of novation."
47It was submitted that the specific reference to novation and the inclusion of the word "substitutes" as a party to such a transaction supported CTI's case.
48Clause 1.2(e) of the Call Option Deeds was in similar vein, it was submitted. It was in the following terms:
"a reference to this deed or to any other deed, agreement, document or instrument is deemed to include a reference to this deed or such other deed, agreement, document or instrument as amended, novated, supplemented, varied or replaced from time to time."
49On the other hand, the Chief Commissioner points to cl 14.2 in the following terms:
"14.2 Grantee must not assign
Other than the Grantee's right to appoint a Nominee under clause 10.1 of this deed, the Grantee must not assign its rights and obligations under this deed to any other person without first obtaining the Grantor's written consent."
50There is no mention of novation and the Chief Commissioner submits that cl 14.2 indicates that the intention of the parties was to transfer the call options from CRI to its Nominees.
51The Chief Commissioner points out that cl 14.2 does not contain terms like "release" of any rights or obligations of the Grantee or to the "creation" or "grant" of any rights in any future nominee.
52CTI responds that the word "assignment" is used in a loose sense and the clause was not intended to cut down the specific provisions in cl 10.1. It points out that the language employed by the parties is not determinative of the proper legal characterisation of the nomination process.
53Further, it was submitted that the language used in cl 10.1 of the Call Option Deeds evidences the parties' intention to create a new call option in favour of CTI.
54It points out that the phrase "must not assign its rights and obligations under this deed" in cl 14.2 of the Call Option Deeds is curious because obligations cannot be assigned. Of significance, it was submitted, is the fact that cl 14.2 does not say: "Other than the Grantee's right to assign to a Nominee under clause 10.1". The exclusion is couched neutrally as: "the Grantee's right to appoint a Nominee."
55In my view the submissions of CTI on these matters are to be preferred to that of the Chief Commissioner. To my way of thinking the preponderance of internal reference supports a novation rather than a transfer or an agreement for the sale or transfer.
56CTI submits that when the Call Option Deeds are read as a whole the intention of the parties is clear that the Nominees appointed under cl 10.1 would be substituted for and replace the old Grantee, CRI.
57It was submitted that this followed from the use of the word "replace" in cl 10.1(a), its use in the recital to the Call Option Nomination Notices, the inclusion of the word "substitutes" and the words "including any person taking by way of novation" in cl 1.2(c) and the inclusion of the word "novated" in cl 1.2(e).
58In addition, it was submitted that cl 10.1(b), in providing that the old Grantee becomes the guarantor of the new grantee, imposes a secondary obligation that presupposes that the old Grantee has ceased to have the primary obligation. The same applies to the assumption of obligation by the new grantee and the provision of the guarantee by the old Grantee in cl 2 of the Call Option Nomination Notices.
59It was submitted that the Call Option Nomination Notices did not adopt the language of a sale or transfer. The word "substitution" was used in cl 3 to describe the transaction and that meant novation.
60The Chief Commissioner submitted that the use of the word "replace" in the recital to the Call Option Nomination Notices was of no consequence as it formed part of a recital only.
61CTI pointed out, however, that the text of the recital comprises part of each Call Option Deed because it was included as annexure C. Furthermore, in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 at 698 [388] it was held that the recitals in a deed can be looked at as part of the surrounding circumstances of a contract without a need to find ambiguity in the operative functions of the contract. This proposition has not found favour with the High Court, however (see Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45).
62And, as CTI points out, by virtue of the giving of a Call Option Nomination Notice, CTI is substituted for CRI as the person entitled to exercise the First Call Option under cl 5.1.
63In my view that submission should be decided in favour of CTI.
64The Chief Commissioner submits that where, as in this case, the terms of the Call Option Deeds do not impose any contractual obligation on the Grantee prior to exercise of the option, the entirety of the property held by the Grantee can be transferred and novation, in that context, has no work to do.
65CTI's answer to this submission is to point to the obligations imposed on the Grantee under the Call Option Deeds. Clause 9 required the Grantee upon exercise of the option, promptly to exchange copies of the Contract executed by both parties. Clause 12.3 required CRI to make an additional payment in the amount of the GST. Clause 13 required the Grantee as caveator to consent to the registration of the Building Rights Package and the registration of a transfer document in connection with the sale of the Property to the Grantee or the Nominee. Clause 14 provided that the Grantor might assign its rights and interests under the Call Option Deeds to a Landowner. Clause 14.1(c)(i) provided that if the Grantor gave a notice to this effect to the Grantee, it agreed that it would fully perform the terms, conditions and obligations contained in the Call Option Deeds with the assignee as if it had entered the deed directly with the assignee. And the Grantee irrevocably indemnified the Grantor with respect to any failure by the Grantee to perform the terms of the Call Option Deeds after assignment.
66Clause 10.1(a) of the Call Option Deeds states that the Grantee may nominate one or more nominees who: "will replace the Grantee as the grantee under this deed and/or the Purchaser under the Contract" upon exercise of the option.
67The term "Grantee" is defined in the Call Option Deeds to mean CRI. The Chief Commissioner argued that the ancillary obligations upon the Grantee in the Call Option Deeds are imposed on CRI. The term "grantee" is not defined. The Chief Commissioner submitted that the Nominee would not replace CRI as a party to the Call Option Deeds and the ancillary obligations remained imposed upon CRI.
68The Chief Commissioner referred to cl 5.3 and cl 5.4 of the Call Option Deeds as establishing a continuing vitality in the original Call Option Deeds. The notice referred to in cl 5.4 was to be given under the original Call Option Deeds and not some replacement of them. But that is a feature of any novation. The machinery for effecting the substitution will be spelled out in the document or conversation establishing the entitlement to effect the novation and in that sense it will retain a continuing vitality.
69The Chief Commissioner submitted that CTI did acquire the Grantee's rights and obligations under the Call Option Deeds with respect to the Contracts because the term "Purchaser" is used and it is defined to mean the purchaser of the Property described in the Contract (whether the Grantee or the Nominee).
70This is a commercial transaction and is to be construed as such. The Chief Commissioner's submission based upon a contrast between Grantee and grantee and any continued vitality in the Call Option deeds is strained. It should be rejected.
71Of significance, in my opinion, is the assumption of the guarantee by CRI. If CTI assumed no liability under the nomination and all liabilities remained with CRI, there would be no point to the guarantee. CTI would owe no obligation to the Landowners requiring any grantee from CRI and there would be no point to a guarantee from CRI if it remained subject to all liabilities.
72The Chief Commissioner submitted that the guarantee was irrelevant in characterising the legal effect of the nomination. He cited common commercial practice for an assignor to provide a guarantee to a third party in respect of its assignee's obligations.
73In this case CRI guarantees to the Landowners the performance by CTI of its obligations under each Call Option Deed to pay money and perform other obligations. The guarantee demonstrates in clear language that CTI has been substituted for CRI under the Call Option Deeds and that CTI has obligations under those deeds. If CTI's obligations to the Landowners are capable of being guaranteed, the arrangement must have imposed binding obligations on CTI owed to the Landowners.
74Clause 2 of the Call Option Nomination Notices provided that from the date of the notices CTI assumed CRI's obligations under the Call Option Deeds and the Contract. The Chief Commissioner argued that there would be no need for such an overt assumption of liability if upon nomination CTI was substituted for CRI as a party to the Call Option Deeds and the ancillary obligations to the Landowners imposed upon CRI became imposed upon CTI.
75In answer CTI submitted that the explicit reference to an assumption of liability evidenced the parties' intention that there be a novation of the call options upon nomination and it is irrelevant whether such a reference is strictly necessary. I agree.
76The Chief Commissioner refers to the assumptions of liability arising under a novation as bilateral and points to the fact that neither cl 10.1 of the Call Option Deeds nor the Call Option Nomination Notices includes an agreement by the Landowners to be bound to CTI as Nominee. Rather the Landowners are merely notified of the nomination upon delivery of the Call Option Nomination Notice.
77But as CTI points out, party A to a contract can prospectively authorize party B to that contract to "transfer" party B's "rights and obligations" under the contract without party A being a party to the arrangement between party B and the "transferee" (CSG Ltd v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335 at [134]).
78The Chief Commissioner contends that the nomination process is entirely bipartite as between CRI and CTI and requires no action on the part of the Landowners and that is wholly consistent with the characterisation of the nomination of CTI as a transfer or assignment of each call option.
79While the Nomination Deed was bipartite in nature, the Landowners were party to the Call Option Deeds that set out the conditions and processes in order to effect a valid nomination.
80Furthermore, a nomination substituting CTI for CRI under the terms of the Call Option Deeds to which CRI and the Landowners were the parties was a tripartite arrangement to which the Landowners were essential parties.
81The Chief Commissioner argued that if the nomination process created new call options from the Landowners to CTI, it would be expected that CTI would be required to pay a new Call Option Fee of $10 to the Landowners and there is nothing in the evidence suggesting such a payment.
82CTI responded that there was nothing in the Call Option Deeds or the procedure for making a nomination under cl 10.1 to require a further Call Option Fee to be paid. I agree with that submission. The requirement of payment of a Call Option Fee of $10 was a de minimus feature of the arrangement.
83The Chief Commissioner contended that if CTI's construction were correct the Nominee would itself be entitled to nominate a new Nominee and so on ad infinitum such that CRI would drop out as guarantor and the Landowners would not have protection against default by an uncreditworthy new grantee.
84But cl 4 of the Call Option Nomination Notices provided that the substitution of CTI was irrevocable and there could be no further substitutions.
85In oral submissions, Mr Richmond SC, who with Mr Peadon appeared for CTI, refined his submissions and characterised the arrangement as an irrevocable offer, a partial novation or a variation.
86It was submitted that cl 4 of the Call Option Deeds was an irrevocable offer in accordance with the preference for that characterisation of an option to which reference is made above.
87If the conditional contract approach was preferable, the submission was that the arrangement amounted to a partial novation - the substitution of a new party for an existing one without a novation of the entire contract.
88As a fallback position if neither of those approaches was appropriate it was submitted that the arrangement amounted to a variation. A new option in favour of CTI standing with the old contract.
89Mr Hutley SC, who with Mr Sealey appeared for the Chief Commissioner, submitted that each of the three approaches failed.
90In my view the preferable approach is to characterise the Call Option Deeds as irrevocable offers or as providing for partial novations. In either event the analysis set out above is apposite.