Cypjayne Pty Limited v Babcock & Brown International Pty Ltd

INTRODUCTION 1The first to fifth appellants own in partnership land at Prestons in New South Wales on which the business of a retirement village and aged care facility was conducted. The ninth appellant, Blue Hills Village Management (Liverpool) Pty Ltd ("BHVML"), operated the aged care facility. It held 67 low-care Allocated Places under the Aged Care Act 1997 (Cth). 2In the latter part of 2007 the third respondent, Babcock & Brown (Australia) Limited ("BBA"), made a non-binding indicative offer to purchase the land owned by the partnership and the business conducted on the land. The indicative offer price was $30,190,000. 3On 4 October 2007, BBA and the sixth and seventh appellants entered into what was described as "Heads of Agreement for the sale of Blue Hills Village and Blue Hills Manor". The Heads of Agreement were expressed to be non-binding except for an exclusivity period for the conduct of negotiations and a confidentiality agreement. 4After receiving advice on their tax liability, the vendor requested that the structure of the proposed transaction change from what might be described as a direct sale and purchase agreement to a more complex arrangement designed to alleviate the liability of the vendors to Capital Gains tax. 5On 19 December 2007, BHVML and the second respondent, CAGCare Pty Ltd ("CAGCare"), entered into an agreement described as the Allocated Places Purchase Agreement ("the APPA"). The agreement provided for the sale and purchase of the 67 low-care Allocated Places held by BHVML. The purchase price was $4 million subject to certain adjustments contained in Schedule 3 of the agreement. 6Although certain other transaction documents had been drafted, none were executed at that stage. Rather the APPA was subject to a number of conditions precedent including necessary approvals to the transfer under the Aged Care Act 1997 (Cth) and, importantly, on CAGCare or a related corporation entering into agreements on terms acceptable to the buyer and seller to effect the acquisition of the retirement village and the associated business. 7Clause 2.2(a) of the APPA imposed an obligation on the parties to use reasonable commercial endeavours to ensure the conditions precedent were satisfied as quickly as possible. 8Clause 2.5 of the APPA provided that if any of the conditions precedent were not satisfied or waived on or before 30 June 2008 either party could terminate the agreement. That date was extended to 1 September 2008. 9On the same day as the execution of the APPA the first respondent, Babcock & Brown International Pty Limited ("BBIL"), entered into a performance guarantee guaranteeing the obligations of CAGCare under the APPA. 10The condition precedent relating to the formation of acceptable agreements was not satisfied by 1 September 2008. On 2 September 2008, CAGCare gave notice terminating the agreement. Prior to the termination, on 9 July 2008 the appellants had commenced proceedings in the Equity Division of the Court seeking specific performance of the agreement. They continued such proceedings after termination alleging the termination was invalid. Ultimately they amended their claim to seek damages for contravention of cl 2.2(a) of the APPA and wrongful repudiation of the agreement. Accordingly, they claimed damages from BBIL under the performance guarantee. The appellants also claimed BHVML was entitled to the $400,000 deposit paid under the agreement. 11The learned primary judge dismissed these claims and this appeal is brought from that decision. 12It should be added that the primary judge also dismissed claims by the appellants for damages for representations said to have been made in contravention of s 52 of the Trade Practices Act 1974 (Cth). The representations were to the effect that the draft transaction documents which had been prepared at the same time as the APPA were acceptable to CAGCare and that all internal approvals had been obtained. No appeal has been brought from the dismissal of those claims.

Background to the Proceedings 13The parties in the main accepted the findings of fact made by the learned primary judge. What follows is a summary of these facts sufficient for the disposition of these proceedings, supplemented where necessary by reference to other material to which the parties referred in their submissions.

(a) The events leading up to the execution of the APPA 14On 29 August 2007 BBA made a non-binding indicative offer to purchase the Retirement Village and the business conducted thereon for $30,190,000. The offer noted that BBA proposed to offer the opportunity to a company Babcock & Brown Communities Limited ("BBC"). BBC was not a related corporation of BBA. Its shares were stapled with units in the Babcock & Brown Communities Trust and the stapled securities were listed on the Australian Securities Exchange. The evidence of Ms Ku Shiao Min ("Ms Ku") established that BBA and its related companies at all times held less than 20 percent of the BBC securities. Related companies of BBA derived fees from providing management services and financial advice to BBC. 15On 4 October 2007 BBA and the sixth and seventh appellants signed a letter described as "Heads of Agreement for the sale of Blue Hills Village and Blue Hills Manor". That letter was expressly stated to be non-binding except for an exclusive negotiating period and a confidentiality clause. Clause 3 of the Heads of Agreement stated that the offer was subject to confirmatory due diligence, internal and external approvals, documentation and execution of satisfactory sale contracts. 16The Heads of Agreement envisaged the transaction would involve: (a) The acquisition of the business of the Retirement Village including the land on which the business was conducted. (b) The vendor's entitlement under certain residency contracts. (c) The 67 bed licences. (d) The vendor's entitlement under the existing residency agreements, accommodation charge agreements and bond agreements relating to the Blue Hills Manor. 17From about 19 November 2007 the structure of the proposed transaction significantly changed. The amended proposal prepared by the tax adviser to the appellants, a Mr Baltins of KPMG, involved a series of sequential steps. The steps were summarised in the judgment of the learned primary judge ( Cypjayne Pty Limited v Babcock & Brown International Pty Ltd [2010] NSWSC 180 at [38]) in the following terms: "(1) In step 1 BBC would acquire the bed licences from BHVML for their market value of $4 million and the fixed assets from the Partnership for the written down value of $80,000. (2) In step 2 BHVML would use most of the money received under the APPA to repay a loan BHVML owed to the Partnership. (3) In step 3 BBC would lend the Partnership $24,948,240 unsecured and on terms that it would be recoverable only from the partners for the time being (not, that is, from anyone who left the Partnership). Mr Baltins contemplated (not in clear terms) deferred repayability of the loan and commercial rate of interest; at a later stage the proposed transaction differed a little from this. (4) In step 4 the Partnership would use the $24.9 million loan and the $3.8 million received from BHVML to pay out the current accounts of the Partners and an unsecured debt of $5.6 million to a bank; these would approximately equal the moneys received. (5) In step 5 each Partner would assign a 99.9 per cent share of its interest to one of the BBC entities for a total consideration of $1,159,580. (6) In step 6 the BBC entities would be admitted into the Partnership, in which they would own a 99.9 per cent interest. (7) In step 7 the BBC entities would pay $2,180 to other Partners to procure their retirement. (8) In step 8 the original Partners would retire. (9) In step 9 there would be a transfer of title to land from the retired Partners to the BBC entities ... (10) In step 10 the retired Partners would pay consultant and agents' fees; and (11) In step 11 the new partners would progressively repay outgoing resident loans." 18The steps self-evidently were designed to reduce the consideration payable to the Partnership for the disposal from $30,190,000 to $1,161,760 and thereby produce a significant saving of Capital Gains Tax. 19The learned primary judge found that BBA was prepared to enter into the new structure. As a consequence a number of draft documents designed to give effect to the transaction were prepared. In addition to the APPA and the performance guarantee by BBIL, they included agreements described as an Asset Purchase Agreement, a Warranty Deed, a Loan Agreement, Deeds of Assignment of 99 percent of the interest in the partnership, Deeds of Admission to the Blue Hills Partnership and Deeds of Procurement of Retirement of the Partners (collectively called the draft transaction documents). 20At about the same time a majority of the investors in BBC indicated they opposed BBC making any further investments at that time. As a consequence Mr John Martin, the Managing Director of BBC, told Ms Ku that it was unlikely that BBC could make another acquisition in calendar year 2007. The appellants were aware of this. This is apparent from the advice given to them by their solicitor, Mr Osborne, on 16 December 2007. In a letter to the appellants of that date Mr Osborne advised: "BBC as a listed entity have an obligation to announce acquisitions. For their own internal reasons they do not wish to have to announce this acquisition until next year. Accordingly only the allocated places agreement is being signed in 2007 - the balance of the documents will be entered into in the period January to completion in March 2008 ... The result of BBC's requirement not to announce this year means that the agreements will not be binding until at least January when the public announcement is made, though the unusual nature of the transaction means that in practical terms the agreements will not be binding until completion. The matter has been considered at length by the CEO's. The position of both CEO's (and the writer) is, taking into account all the circumstances of the negotiations and the fact the structure of the deal was radically altered half way through at the Partners' request, there is no viable commercial option to avoid the uncertainty surrounding the binding nature of the agreements prior to completion." 21The belief of Mr Osborne as to the extent that the APPA bound the parties to the overall transactions is not relevant to the construction of the APPA: see Franklins Pty Ltd v Metcash Trading Limited [2009] NSWCA 407; (2009) 72 NSWLR 603 at [4] and the cases there cited. However, it is relevant that each party knew that BBC had not made any final commitment to the transaction at the time the APPA was executed. 22Approval for CAGCare to enter into the APPA was given by Mr Topfer, an officer in the Babcock & Brown group, following the submission to him of a Capital Approval Request ("CAR") dated 28 November 2007. A CAR according to Ms Ku was required to be processed for any transaction in the Babcock & Brown group which required capital expenditure. She stated that a CAR sets out a description of the asset which is the subject of the capital expenditure, the outcome of the due diligence, the terms of the acquisition and the nature of the funding. It also required the identification of any legal accounting or other issues and an assessment of cash flow requirements and funding proposals for the transactions. 23On 19 December 2007 the APPA was entered into. The primary judge found (at [44]) that CAGCare was incorporated as the contemplated purchaser on 3 December 2007. It had no employees and no assets. Senior counsel for the appellants accepted that at the time of entering into the agreement CAGCare was a special purpose vehicle which had no assets.

(b) The APPA 24The APPA was entered into on 19 December 2007 between BHVML as seller and CAGCare as buyer. The agreement related to the 67 low-care Allocated Places issued to BHVML under Pt 2.2 of the Aged Care Act 1997 (Cth). The purchase price comprised a fixed amount of $4 million and a variable amount calculated in accordance with Schedule 3. Clause 4.2(a) of the agreement provided for the payment of a deposit of $400,000. Clause 4.2(d) provided that the seller was entitled to the deposit if the agreement was completed whilst cl 4.2(e) provided that the buyer was entitled to the deposit if the agreement was not completed other than as a consequence of a breach by the buyer of cl 2.2. 25Clause 2 of the APPA provided as follows: " 2 Conditions for Completion 2.1 Conditions precedent Completion of this Agreement will not proceed unless and until each of the following conditions precedent have been satisfied or waived: (a) approval under the AC Act: the buyer receives written confirmation of the approval of the Secretary of: (i) the Buyer as an approved provider for the purposes of the AC Act; and (ii) the transfer of the Allocated Places to the Buyer in accordance with this Agreement for the purposes of Part 2.2 of the AC Act on terms acceptable to the Buyer (acting reasonably); and (b) Acquisition of Village and Facility: the Buyer or a Related Corporation of the Buyer enters into agreements on terms acceptable to the Buyer and the Seller to effect the acquisition of the Village and the Facility and the business operations associated with them. 2.2 Reasonable endeavours (a) The Buyer and Seller must each use its reasonable commercial endeavours to ensure the Conditions are satisfied as quickly as possible including by providing all reasonable assistance to the other Party as is necessary to satisfy the Conditions. (b) The Buyer must use its reasonable commercial endeavours to become approved as a provider of aged care under the AC Act as quickly as possible. (c) Without limiting Clause 2.2(a), the Buyer and Seller must jointly prepare and submit an application to the Secretary for approval of the transfer of the Allocated Places to the Buyer in accordance with this Agreement ( Application ) as soon as practicable and in any event within 5 Business Days of the date of this Agreement. (d) Each party must provide the Secretary with any information in relation to the Application as may be required of that Party and must do so expeditiously and in any event not more than 5 Business Days after receiving notice of the request. (e) Each Party must provide to the other a copy of any correspondence that the Party receives from the Secretary and/or the Department in relation to the Application. 2.3 Notice The Buyer and the Seller must promptly notify the other in writing if any Condition is satisfied or cannot be satisfied. 2.4 Waiver The Conditions may be waived only by agreement between the Buyer and the Seller. 2.5 Cuff-off date (a) If any Condition is not satisfied or waived on or before 30 June 2008, the Buyer or the Seller may terminate this Agreement. (b) Upon termination, this Agreement has no further effect and neither the Buyer nor the Seller is liable to the other except: (i) under any Clause expressed to survive termination; and (ii) in respect of any breach of this Agreement occurring before termination; and (iii) the Buyer must return to the Seller all documents and other materials obtained from the Seller in accordance with the Confidentiality Agreement; and (v) if the Agreement is terminated under Clause 2.5(a) the Seller must repay the Deposit to the Buyer." 26Clause 3.1 provided for the sale and purchase of the Allocated Places whilst cl 4 stated the purchase price. Clause 7.1 nominated the date for completion as the date nominated by the Secretary of the Department of Health as the date for the transfer for the Allocated Places. Clause 8.7 contained an entire Agreement Clause. 27By Deed dated 23 April 2008 the Cut-off date referred to in cl 2.5 was extended to 31 August 2008.

(c) The events following execution of the APPA 28On 15 February 2008 Ms Ku indicated to the sixth and seventh appellants that BBC would not be going ahead with the proposed purchase. She stated that she would put together a fresh proposal for Babcock & Brown to acquire and warehouse the Retirement Village for 6-12 months at which time BBC would be in a better position to consider the acquisition. 29On 28 February 2008 Mr Osborne wrote to the solicitor for CAGCare, Mr Velez of Watson Mangioni Lawyers stating that he expected CAGCare and the Babcock & Brown group to perform the obligations under the APPA and complete the acquisition of the Retirement Village on the agreed terms. 30On 27 March 2008 Ms Ku commenced drafting a CAR for decision by BBA. On 14 April 2008 she circulated a full statement of what was proposed and the draft transaction documents to a number of persons in the BBA organisation, including a Mr Naz Klendjian, an internal tax adviser. Mr Klendjian recognised an immediate Capital Gains Tax problem for any Babcock & Brown entity which entered into the transaction. Put shortly, Mr Klendjian formed the view that if the transaction proceeded in the manner contemplated there was a significant risk that the cost base for the assets to be acquired would be significantly less than the amount actually paid for them. In these circumstances if the assets were on sold as contemplated the Babcock & Brown Consolidated Group would incur a significant Capital Gains Tax liability. 31Mr Klendjian received external advice from PricewaterhouseCoopers on 30 April 2008 and discussed the issues with representatives of the appellants on 2 May 2008. Those discussions did not resolve the issue. As a consequence Mr Klendjian received further advice from PricewaterhouseCoopers and also retained the firm of solicitors Clayton Utz to advise him. The advice of Clayton Utz of 13 May 2008 confirmed his concerns. 32On 19 May 2008 Mr Klendjian attended a meeting at the office of Mr Baltins of KPMG where the concerns were discussed. At the end of the meeting Mr Baltins undertook to send a revised structure. 33On 27 May 2008 Mr Osborne forwarded to Mr Velez a revised proposal prepared by Mr Baltins. Although Mr Klendjian was essentially satisfied that his material tax concerns had been met he sought further advice from Clayton Utz on the structure. Clayton Utz made certain amendments to Mr Baltins' proposal to take account of stamp duty considerations. As a consequence Mr Klendjian provided what he described as his final signoff to those responsible for the CAR on 25 June 2008. 34It appears that there were no communications between parties concerning the tax issues after 27 May 2008. In particular, the appellants were not advised of the revised Clayton Utz proposal or of the fact that Mr Klendjian had given his signoff on it. 35On 11 June 2008 Mr Topfer who was the ultimate decision-maker for BBA sent an email to Ms Ku stating: "Don't think we will get there on Blue Hills, send me revised CAR". The learned trial judge noted that this was not an adverse decision but that it did not bode well. Ms Ku in her evidence recounted that she had sent the CAR to Mr Topfer but did not hear back from him. 36On 12 June 2008 Ms Ku received an email from a Ms Thurgood, an employee of BBA with responsibility for finance, stating: "We have removed Project Aqua from our cash forecasts at this stage. There is a less than 50% chance it would be approved". Project Aqua was the Babcock & Brown codename for the transaction. His Honour found that Ms Thurgood was an employee in the finance department of the Babcock & Brown group. 37On 24 June 2008 Mr Osborne wrote to Mr Velez stating his understanding that approval for the transfer of the Allocated Places would be given on or before 27 June 2008 and a transfer date of 1 July 2008 would be nominated. The letter stated that the condition in cl 2.1(b) was satisfied at 19 December 2007 when the draft transaction documents were handed by Mr Velez to Mr Osborne. The letter set out a programme for completion of the transaction between 30 June 2008 and 3 July 2008. The letter acknowledged that there were a number of outstanding issues including completion of schedules to the agreement which Mr Osborne said his client would attend to and details of the Babcock & Brown entities which were to be admitted to the partnership. 38Mr Velez responded on the same day rejecting the proposition that cl 2.1(b) of the APPA had been satisfied. He stated that resolution of the tax issues was required and that the transaction documents would need to be updated to take this into account. Mr Velez proposed an extension of the completion date to 1 September 2008. 39Mr Osborne responded by letter of 26 June 2008 addressed to Mr Clarke, a solicitor assisting Mr Velez. He asserted that cl 2.2(a) imposed an obligation on the parties to use reasonable endeavours to ensure the "conditions" (that is the conditions in cl 2.1(a) of the APPA) were satisfied as quickly as possible. He stated that the terms of the documents had been agreed and as the condition in cl 2.1(a) of the APPA had been satisfied the sellers were entitled to demand completion. The letter threatened an application to the court and proposed an extension to 15 July 2008 for completion. 40The learned primary judge was critical of this letter. He stated (at [130]) that the letter did not acknowledge or deal with the need for more time to comply with "State law". He said the letter made no reference to the schedules the sellers were to prepare. He stated (at [134]) that no real reason was given for the assertion that the condition in cl 2.1(b) had been satisfied describing the contention that it had been fulfilled as absurd. 41It should be noted that it was not contended by the appellants either at trial or on appeal that the condition in cl 2.1(b) had been fulfilled either at the time of the letter of 26 June 2008 or at the time of termination of the agreement. 42On 25 June 2008 Mr Kirsh, who had taken conduct of the matter from Ms Ku, suggested that the best way to progress the matter was to put the transaction up for internal approval. 43On 30 June 2008 Ms Ku sent a revised CAR to Mr Topfer. It recommended the transaction. 44By summons dated 9 July 2008 the appellants commenced proceedings against the first and second respondents seeking specific performance of an alleged agreement said to have been made on 19 December 2007. it was alleged that it was a term of the agreement that the draft transaction documents be entered into. These proceedings were set down for an urgent hearing on 11 August 2008. 45The learned primary judge concluded (at [133]) that the consequence of institution of the proceedings was that the prospect of internal approvals, exchange of contracts or any other progress evaporated. 46On 14 July 2008 the Department of Health and Ageing agreed to an alternate transfer date of 1 September 2008 for the transfer of the Allocated Places. 47On 12 August 2008 the appellants sought leave to file an amended summons recognising the consequence would be an adjournment of the proceedings. Although the amended summons pleaded as an alternative a breach of the reasonable endeavours provision in cl 2.2(a) of the APPA, it maintained the position that there was a contractual obligation on the first respondent to execute the draft transaction documents. At a hearing before Rein J on 12 August 2008 the then Senior Counsel for the appellants made it clear that the claims were pleaded in the alternative. 48On 20 August 2008 Mr Osborne wrote to Mr Velez indicating that although the appellants' primary position was that the transaction documents had been agreed on 19 December 2007 they were prepared to continue discussions on their terms in good faith. 49On 28 August 2008 Mr Velez declined to enter into negotiations whilst the appellants sought specific performance of the alleged 19 December 2007 agreement. On 29 August 2008 Mr Osborne renewed his client's offer to negotiate. 50On 2 September 2008 the first respondent gave notice of termination of the agreement.

The Reasoning of the Primary Judge 51I have already indicated that the primary judge was critical of the approach of the appellants in asserting that a binding agreement to enter into the draft transaction documents had been reached at 19 December 2007. He was particularly critical of this in circumstances where the appellants had not supplied the information necessary to complete the schedules to the agreements. 52As I have also indicated above the learned primary judge also found that on the institution of the specific performance proceedings the prospect of an agreement or any further progress evaporated. 53Notwithstanding these criticisms and findings the learned trial judge did not appear to conclude that the receipt of the letters of 24 June and 26 June 2008 or the institution of the specific performance proceedings absolved the second respondent from its reasonable endeavours obligations. The primary judge, however, did conclude (at [144]) that reasonable commercial endeavours did not require the second respondent to press the third respondent to allocate capital without making the modifications to the transaction documents which Mr Klendjian had decided were appropriate. 54The primary judge concluded that Mr Topfer had decided against approval at some time in early July 2008. He stated (at [139]) that Mr Topfer as an officer of BBA was entitled to take the commercial risk and interests of that company into account in determining whether to enter into the agreement. 55The primary judge also concluded that the reasonable commercial endeavours required by cl 2.2(a) of the APPA were to be directed towards entering into agreements which would fulfil cl 2.1(b), that is agreements on terms acceptable to CAGCare (at [140]). He stated that it was not an obligation to find terms which were acceptable. He said the use of the word "commercial" was to exclude any conduct which was not commercially motivated, that is, capricious or without sound reason. He concluded that if the terms were not acceptable to CAGCare for a commercial reason there was no breach of cl 2.2(a) in not entering into the transaction. He stated that Ms Ku, who he seems to have inferred was acting on behalf of CAGCare, made a thorough and wholehearted attempt to obtain the necessary commitment of capital. He found that she directed her attention to other ways of progressing the transactions after BBC indicated its lack of interest. He described this as an exemplification of reasonable commercial endeavours and stated that the detailed consideration of the Capital Gains Tax position was also an exercise of such endeavours. 56The primary judge also found that even if there was a breach of cl 2.2(a) it had no effect on the course of events or on the failure to enter into an agreement. He pointed out that CAGCare had no capital of its own and that after the efforts of Ms Ku to obtain capital were unsuccessful CAGCare would have been "commercially deranged" to enter into the agreement (at [145]). 57In reaching his conclusion the primary judge placed some reliance on the fact that the Heads of Agreement indicated there was no intention to enter into a legal relationship except with all internal approvals and on exchange of executed documents.

The Appellants' Submissions 58The appellants' primary submission was that the primary judge erred in failing to find that the second respondent failed to bring about the fulfilment of the condition precedent contained in cl 2.1(b) of the APPA after the tax issue was resolved in June 2008. The appellants submitted that after the tax issue was resolved there were essentially no other outstanding issues and no reason why agreements to give effect to the transactions could not have been entered into. 59It was integral to this submission that the requirement to use reasonable commercial endeavours contained in cl 2.2(a) did not permit CAGCare to decide not to enter into agreements to give effect to the transaction even if it had no funds to complete the transaction or no support from its related companies. Senior Counsel for the appellants submitted that the reasonable commercial endeavours provision related to the entry into the agreement not to its performance and the fact CAGCare may have been at a severe risk of being unable to perform was immaterial. He submitted that if the construction found by the primary judge was correct then either party could walk away from the agreement: a construction which he described as thoroughly uncommercial. 60The appellants submitted that the activities of Ms Ku in submitting the CAR to Mr Topfer and recommending its approval was not sufficient to constitute reasonable endeavours. They pointed out that transaction documents were not submitted to Mr Topfer for his consideration and his refusal to proceed was for reasons extraneous to the form of those documents. The appellants submitted entering into the agreements was not subject to any internal approvals. 61The appellants also contended that neither the letters of Mr Osborne of 24 June 2008 or 26 June 2008 nor the institution of the specific performance proceedings absolved CAGCare from continuing to make reasonable commercial endeavours to ensure the agreements were entered into. They pointed to the fact that the solicitor for the appellants had indicated their clients' willingness to continue to negotiate and to the fact that the criticism by the primary judge of the failure of the appellants to complete the schedules to the agreement ignored the fact that the information required to complete the schedules was relatively straightforward and could have been supplied promptly had CAGCare showed any willingness to proceed. The appellants also submitted that the learned primary judge erred in using the Heads of Agreement as an aid to construction. They submitted he was in error in finding that that document continued to govern the relationship between the parties, pointing to the fact that the Heads of Agreement were expressed to be non-binding and pointing to the entire agreement clause in the APPA. 62In his oral submissions Senior Counsel for the appellants, as an alternative, submitted that there was also a contravention of cl 2.3 of the APPA in that there was a failure by CAGCare to inform BHVLM that cl 2.2(a) was not satisfied as finance could not be obtained. He submitted CAGCare did not do enough to obtain finance pointing at one stage to the possibility of vendor finance. He accepted that these assertions were not particularised.

The Respondents' Submissions 63As the oral submission of the respondents emerged, their primary submission was that the institution of the specific performance proceedings by the appellants, asserting that there was an obligation on CAGCare to execute the draft transaction documents, was the reason the transaction did not proceed. Reliance in that regard was placed on the evidence of Ms Ku. The respondents submitted that by reason of the appellants wrongfully asserting in their solicitor's letters of 24 and 26 June 2008 and in the proceedings that there was a binding obligation to enter into the draft transaction documents, CAGCare was absolved from taking any further steps pursuant to the reasonable commercial endeavours provision as such steps would have been futile. 64Against the proposition that their primary submission was incorrect the respondents said that all the reasonable commercial endeavours provision required was for CAGCare to take reasonable steps to secure support for the transaction from its related corporations and in the event it was unable to do so there was no contravention of cl 2.2(a) and no obligation to proceed with the transaction providing CAGCare had not acted arbitrarily or capriciously. As a corollary it submitted that even if there had been a breach of the reasonable endeavours obligation it was not causative of the failure of the transaction.

Decision 65The critical question in my opinion is whether cl 2.2(a) prevented CAGCare from withdrawing from the transaction when it formed the view that it was not in its commercial interests to go ahead. 66Clause 2.2(a), like the provision of any commercial contract, should be construed by an examination of the text of the provision in the context of the agreement as a whole and the known surrounding circumstances including the purpose and object of the transaction. As part of a commercial contract it should be given a businesslike interpretation; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40]; McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 at [22]; Franklins Pty Limited v Metcash Trading Limited [2009] NSWCA 407; (2009) 76 NSWLR 603 at [14], [19]. 67The expressions "best endeavours" and "reasonable endeavours" generally speaking have been considered by the courts as imposing similar obligations. In Transfield Pty Limited v Arlo International Limited [1980] HCA 15; (1980) 144 CLR 83, a provision requiring the appellant use best endeavours in and towards the design, fabrication, installation and selling of the respondent's pole was described by Mason J as a standard of reasonableness (at 100) and further (at 101) as a standard of endeavour which is measured by what is reasonable in the circumstances having regard to the nature, capacity, qualifications and responsibilities of the licensee viewed in light of the particular contract. In the same case Wilson J (at 107) described it as an obligation to do all that could be reasonably expected having regard to the circumstances of the licensee's business operation. In Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, Mason J (at 91-92) said the extent of the obligation is governed by what is reasonable in the circumstances (see also Dawson J at 144). 68In the present case the obligation under cl 2.2(a) was to use reasonable commercial endeavours to ensure the conditions were satisfied as quickly as possible. It seems to me that the use of the word "commercial" indicated that the parties contemplated the possibility of some commercial steps being needed to be taken to enable the condition precedent in cl 2.1(b) to be effected as distinct from merely making reasonable endeavours to draft documents to give effect to arrangements which had already been agreed upon. 69In considering the extent of the obligation it must be remembered that CAGCare was the only company in the Babcock & Brown group which entered into the APPA and gave the covenant in cl 2.2(a). It is true that BBIL entered into a performance guarantee but that guarantee was a guarantee of the due and punctual performance by CAGCare in respect of the Guaranteed Obligations defined as the obligations of CAGCare under the APPA. The performance guarantee did not impose any separate obligations on BBIL. 70Having regard to the financial position of CAGCare which was known to both parties it was evident that it did not have the capacity (in a commercial sense) to enter into the transaction without the support of its related companies, which those companies had no obligation to provide. In that context CAGCare, in my opinion, was obliged to take steps reasonably available to it to put itself in a position where it could enter into the transaction or cause a related corporation to enter into the transaction and to negotiate agreements in acceptable form. However, if such endeavours did not result in a related corporation being prepared to enter into the agreements or CAGCare being financially able to do so the reasonable endeavours obligation did not require CAGCare to proceed with the transaction. 71In my opinion, the distinction drawn by Senior Counsel for the appellants between entering into agreements and their performance does not alter the position. The obligation was to take reasonable commercial endeavours to ensure that CAGCare or a related corporation enter into an agreement to effect the acquisition of the Retirement Village and the associated business. It did not impose an absolute obligation on CAGCare to enter into such agreements or to ensure that a related party did so. If CAGCare was not in a financial position to fulfil the obligations which would arise as a consequence of the entry into such agreements, in my opinion, it was not required to enter into them. Its obligation in this context was to use reasonable commercial endeavours to place itself in a position where it could enter into such agreements. 72Senior Counsel for the appellants submitted the effect of this construction was that either party could walk away from the agreement. That may be correct in certain circumstances but it is a consequence of the fact that parties who had to participate if the transaction was to proceed were not parties to the APPA. Thus, from the point of view of the appellants it was a matter for the partnership whether it decided to sell the land and business. BHVML could not compel this. Similarly, CAGCare could not enter into the agreement without the financial support of its related companies which had no obligation to provide it. 73The question remains whether CAGCare did use reasonable commercial endeavours. No complaint of its conduct is made up to the time of resolution of the tax question. Following this on 30 June 2008 Ms Ku forwarded a revised CAR to Mr Topfer. That CAR identified the investment opportunity, it identified the tax issues and stated that the transaction documents needed to be considered to reflect the revised tax structure. It suggested that after acquisition the Retirement Village could be packaged with other assets and on sold to interested parties such as Lend Lease or Stockland. It set out strategic reasons in support of the proposal and stated that external finance of up to 65 percent of the acquisition cost was available. It stated that external due diligence had been completed and recommended approval. 74The analysis in the CAR was detailed and set out information necessary for a decision-maker to conclude whether or not the transaction should be entered into. It also made a recommendation in favour of entry into the transaction. It is difficult to see what further steps CAGCare should have undertaken to cause an agreement to be entered into. There was little point progressing the transaction documents further until the approval had been obtained. In my opinion, the steps taken constituted compliance with the obligation to take reasonable endeavours pursuant to cl 2.2(a). 75I have reached this conclusion without regard to the Heads of Agreement. In their written submissions in reply the appellants accepted that the Heads of Agreement was part of the background matrix of fact but stated that they were no longer relevant in ascertaining the intention of the parties after the execution of the APPA. The submission states that a reasonable person in the position of the parties would have understood that they had been superseded. That may be so but it does not follow that a reasonable person would necessarily have understood that all necessary internal approvals had been received. That is why a best endeavours obligation to ensure entry into the transaction as distinct from an absolute obligation to do so was imposed. 76Senior Counsel for the appellants also suggested that there was a contravention of cl 2.3 by reason of a failure to inform BHVML that the condition precedent in cl 2.1(b) had not been complied with. He suggested the appellants may have assisted in the acquisition of finance. A breach of cl 2.3 was not particularised and there was no evidence that the appellants were willing or able to assist in financing the transaction. The submission should be rejected. 77It follows, in my opinion, that the appeal should be dismissed. 78I have not dealt thus far with the primary submission of the respondents. As I indicated the respondents submitted that the reason for the failure of the transaction was the institution of the specific performance proceedings. I am unable to accept that submission. Although Ms Ku gave evidence to that effect she was not the decision-maker. The actual decision-maker, Mr Topfer, was not called but he had expressed the view about a month prior to the institution of the proceedings that he did not think "we would get there on Blue Hills" and Ms Thurgood had removed the project from the cash forecast. In her affidavit of 2 July 2009 Ms Ku stated that in early July 2008 she provided Mr Topfer with an update on the transaction but did not hear back from him. In these circumstances she was not in a position to state the reason for the rejection. 79Having regard to the emails of Mr Topfer and Ms Thurgood I am of the view that it should be inferred that Mr Topfer elected not to proceed because he did not believe it was in the commercial interests of Babcock & Brown group to do so not because of the institution of the specific performance proceedings although the initiation of those proceedings may have been a contributing factor. This seems consistent with the conclusions of the primary judge (at [123], [130]). 80Further, I do not believe that the institution of the proceedings coupled with the letters written by Mr Osborne on 24 and 26 June 2008 were matters which of themselves entitled CAGCare to cease using reasonable endeavours to progress the transaction. The assertion of a binding agreement in the terms of the draft transaction documents in the letters and in the summons did not, in my opinion, amount to repudiatory conduct. Even if it did, there was no acceptance of the repudiation: the contract remained on foot and the parties continued to be bound: Bowes v Chaleyer [1923] HCA 15; (1923) 32 CLR 159 at 169, 197-198; Peter Turnbull & Co Pty Limited v Mundus Trading Co (Australasia) Pty Ltd [1954] HCA 25; (1954) 90 CLR 235 at 250, 261. 81Further, as I have stated above, notwithstanding their assertions in the letters and the summons the respondents indicated a continuing willingness to continue to negotiate. However, for the reasons I have given it is my opinion that CAGCare did comply with its reasonable endeavours obligations. There was no point in negotiating further unless and until Mr Topfer gave his approval to proceed. 82Even if there was a contravention of cl 2.2(a) in failing to progress the transaction documents in July and August 2008 no causal link has been established between that breach and the non-fulfilment of the condition precedent resulting from the refusal of Mr Topfer to grant approval. CAGCare in those circumstances was entitled to rely on the non-fulfilment of the condition precedent to terminate the APPA: see Nina's Bar Bistro Pty Limited v MBE Corporation (Sydney) Pty Limited (1984) 3 NSWLR 613 at 614, 621; Kyrwood & Ors v Drinkwater & Ors [2000] NSWCA 126 at [154]; Mitchell v Pattern Holdings Pty Limited [2002] NSWCA 212 at [56]-[57]. 83In these circumstances, in my opinion, the appeal should be dismissed with costs. 84MACFARLAN JA: I agree with Bathurst CJ. 85YOUNG JA: I agree with Bathurst CJ.

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