Dee Why Grand Shopping Centre Pty Limited v Dee Why Projects Pty Limited

Supreme Court of NSW|2011-09-23|Before: Pembroke J

Judgment 1This case concerns the construction of two contracts. The first in time is a building contract dated 18 March 2008 between the first defendant as principal and the second defendant as contractor. The second is a contract for sale of land dated 30 June 2010 between the principal as vendor and the plaintiff as purchaser. The subject matter of the contract for sale of land is, in substance, the retail and public car park component of the building contract. The other components of the Works under the building contract are not part of the subject matter of the contract for sale. Contract for Sale of Land 2The relevant clause of the contract for sale of land is Clause 52. It provides: 52 Construction of Improvements 52.1 Construction Before completion the vendor must cause the Property to reach practical Completion in accordance with the Scope of Works and must procure compliance with the Builder of its obligations under the Building contract. 52.2 Side Agreement The vendor must procure the Builder enters into a side agreement with the purchaser in terms of the side Agreement which is required under clause 66 of the Building Contract. To avoid confusion, the purchaser is to be provided with a bank guarantee for an amount of 42% of the Building Contract retention amount as such retention amount is referred to in clause 5 of the Building Contract. The vendor must procure that replacement bank guarantee as soon as possible after completion and pending delivery of that guarantee, the vendor will make claims under the bank guarantee held in respect of the Building Contract in accordance with the directions of the purchaser. 3It is clear that the second paragraph of Clause 52.2 is in amplification of the obligation on the principal (the vendor) under the first paragraph. Among other things, this is apparent from the opening words "To avoid confusion ...". Taken as a whole, clause 52.1 imposes an obligation on the principal to ensure that the contractor does certain things for the benefit of the purchaser. 4The relevant clause of the building contract is Clause 66. It provides: 66 SALE OF BUILDING COMPONENTS The Principal notifies the Contractor that it may sell components of the Works before Practical Completion, including: the Retail and public car par (sic) Component the Commercial Component the Hotel, the Bottleshop; or parcels of Apartments or any combination. If requested by the Principal in connection with any such sale, the Contractor will either: (a) novate this Contract with the purchaser whereby the Contractor enters into a new Contract in a similar form to this Contract with the purchaser whereby the Contractor agrees with the purchaser to carry out that part of the unperformed Works which relate to the sold component for a contract sum nominated by the Principal, and whereby those unperformed works are removed from this Contract and the Contract Sum reduced by the same amount, and other necessary changes are made; or (b)the Contractor agrees with the purchaser that the Contractor must enter into a tripartite agreement with the Principal and the purchaser the objectives of which include: (i) giving direct rights to the purchaser against the Contractor regarding the performance of the Contractor's obligations to design and construct that part of the Works which relate to the sold component; (ii) giving direct rights and establishing a means for the purchaser to arrange for the Contractor to rectify defects and (if the component includes Apartments), comply with its Home Building Act warranties; and (iii)that the Contractor will supply on completion of the sale of the component the performance security required under Clause 5 in an amount specified by the Principal directly to the purchaser rather than the Principal and the performance security provided or to be provided to the Principal under this Contract shall be reduced accordingly. (c)If the Contractor is required to take action under this clause, then the Contractor shall be entitled: (i) to refuse to novate its contract to a party who the Contractor objects to acting reasonably, based on previous experience or on the party's financial capacity; (ii)to have the performance of the novatee's obligations guaranteed by the Principal; and (iii)to institute a system for the management of the Works and the contracts concurrently, such as ensuring that one claim for payment is lodged segmented between the two principals, rather than administering two contracts in parallel; and (vi) reasonable compensation for additional administration. 5The evident purpose of clause 66 is to provide protection to a purchaser such as the plaintiff. It operates only in relation to a "sale" that occurs before practical completion of the building contract. Its objective is to facilitate the enforcement by the purchaser of the contractor's remaining obligations to perform and complete the work under the building contract and to rectify defects. For sound commercial reasons, the clause seeks to give the purchaser the benefit of the contractor's obligations under the building contract in relation to the component of the Works that constitutes the subject matter of the contract for sale of land. It is intended to result in rights being given to the purchaser and obligations being imposed on the contractor. The inescapable inference is that those obligations should be no greater than those to which the contractor is already subject under the building contract. 6That objective is to be achieved either by the novation contemplated by paragraph (a) or the tripartite agreement contemplated by paragraph (b). The choice as to which method is to be adopted is given to the principal. If the novation contemplated by paragraph (a) is selected, then paragraph (c) provides for the contractor to have certain rights and entitlements which are intended to protect and reinforce its position. This is commercially explicable given that the result of the application of paragraph (a) will be that the contractor is brought into a new contractual relationship with the purchaser in substitution for its subsisting contractual relationship with the principal. In contrast, the application of paragraph (b) will result in a tripartite agreement coming into existence as between contractor, principal and purchaser. The subsisting contractual relationship between the contractor and the principal will continue. There is therefore no need for the protections contemplated by paragraph (c). Among other things for example, there is no need to have the performance of the novatee's obligations guaranteed by the principal, as is contemplated by paragraph (c)(ii).

The Dispute 7The contract for sale was entered into on 30 June 2010. Practical completion under the building contract occurred on 29 July 2010. Settlement of the contract for sale occurred on 31 August 2010. I was informed that there are defects requiring rectification by the contractor. The purchaser wishes to have the benefit of the side agreement contemplated by clause 52.2 of the contract for sale. It wishes to have direct rights against the contractor to compel performance of the latter's obligations under the building contract. The purchaser therefore seeks to compel the principal to procure the contractor to enter into the side agreement that is required by clause 66 of the building contract. The principal is willing to do so. In turn, it wants the contractor to perform its obligations under clause 66 of the building contract. It has chosen to proceed by a tripartite agreement as contemplated by clause 66(b). A tripartite agreement has been tendered to the contractor but it refuses to execute it.

Meaning of " Sale " 8The contractor raises the following primary issue. It says that clause 66 only operates when settlement of a contract for sale has occurred before practical completion of the building contract. If this is the correct construction, it would mean that the purchaser in this case is not entitled to any direct rights against the contractor in relation to the rectification of defects. The contractor's construction requires me to construe the words "sale" in the expression "any such sale" in clause 66 as if it meant the sale which takes place upon settlement, namely when the title is conveyed or transferred and the consideration paid. On the other hand, the purchaser and the principal contend that "sale" should be construed to mean, at the least, that which occurs on the exchange of contracts. If I adopted the contractor's construction, the apparent purpose of clause 66 would not be achieved. 9That purpose is to ensure that the purchaser is in as good a position as the principal in relation to compelling the performance of the contractor's obligations under the building contract. This result would follow if the principal elected to proceed by way of the novation contemplated by paragraph (a). It is also the objective of the tripartite agreement contemplated by paragraph (b). The stated objectives of the tripartite agreement include the conferral of direct rights on the purchaser, as against the contractor, in relation to (i) the contractor's obligations to design and construct that part of the Works that constitute the sold component and (ii) the contractor's obligations to rectify defects in relation to that part of the Works. 10It is, of course, well recognised that the rectification of defects after practical completion may involve substantial work by a contractor. It is an area of contract performance and administration that is often contentious. In this case, the purchaser contends that there is approximately $900,000 worth of defect rectification work to be carried out. The contractor accepts that there is a significant amount to be undertaken but says the figure is closer to $100,000. 11The building contract contains provisions dealing specifically with the rectification of defects after practical completion. The defects liability period is twelve months. Clause 37 contemplates that the principal's representative may give a direction to the contractor during the defects liability period to complete the rectification work. If the rectification work is not carried out, the principal's representative may cause the work to be carried out at the contractor's expense. In that event, the reasonable cost of the rectification work will be a debt due from the contractor to the principal. 12In this case, the contractor's construction would leave the purchaser with no direct rights against the contractor in relation to the rectification of defects. I do not think that such an outcome was intended by clause 66. In the particular context in which it is used in clause 66, the expression "any such sale" must refer, I think, to the sale connoted by either the exchange of contracts or the settlement of the sale - so long as one or the other occurs before practical completion of the building contract. In either event, the purchaser may well have a practical commercial need to be able to compel the contractor to perform its obligations under the building contract. 13I do not think that the parties intended to adopt any narrow or technical meaning of the word "sale" in the expression "any such sale". What they contemplated was that, "in connection with any such sale", the purchaser would be put in the same position as the principal in seeking to compel the contractor to perform its obligations under the building contract. Those obligations could be those that relate to the design and construction of the Works. Equally, they could be those that relate to the rectification of defects during the defects liability period. The contractor's construction operates in an arbitrary fashion. It would deprive the purchaser of a substantial benefit intended to be conferred by clause 66. In a case of ambiguity such as this, I should prefer the construction that does not lead to a result that is impractical, unfair or unjust: Seven Network (Operations) Limited v Warburton (No 2) [2011] NSWSC 386 at [22]. 14I should acknowledge, although the contractor's submissions did not rely on them, the general statements concerning the meaning of a sale in Chan v Dainford Ltd (1985) 155 CLR 533 at 537 and Fazzolari Pty Ltd v Parramatta City Council (2009) 237 CLR 603 at [49]. But the general proposition must yield, in an appropriate case, to the particular context, syntax and evident purpose in which the precise question arises in a given case. In this case, those factors point to the result which I have explained. To do otherwise would emasculate the utility of clause 66 and would not give effect to its intended purpose. Examples of the word "sale" not being construed in particular cases to mean a transfer of property in return for money or other consideration include Octra Nominees Pty Ltd v Chipper [2007] FCAFC 92 at [50] - [51] and Sun World Inc v Registrar, Plant Variety Rights (1997) 75 FCR 528.

Uncertainty 15The contractor's second contention is that clause 66(b) is void for uncertainty. I explained in Seven Network Limited v Warburton (No 2) (supra) at [38] - [40] the principles which compel a court to give effect to the parties' contract wherever possible, and not to be too quick to strike it down. However the contractor's submissions were not really directed to any particular aspect of clause 66(b) that was said to be vague or meaningless. Nor was any complaint made, before or during the hearing, about the precise terms of the side agreement that was proffered by the principal. Those terms mirror faithfully and clearly what is expressly and implicitly contemplated by clause 66(b). I should add that the purchaser and the principal contended that it was not open to the contractor to take this point because it was not advanced on the contractor's behalf prior to its written submissions at the hearing and there was no cross claim by the contractor expressing the point. However, I do not think there is any real prejudice. I have formed the view in any event that the point lacks merit and should be decided against the contractor. 16The contractor's objection is at a conceptual and non-specific level. It says that clause 66(b) is uncertain and incomplete. A contract will fail for incompleteness if some essential part of the bargain is yet to be agreed. However where parties have agreed to their essential terms, a court is unlikely to declare their agreement to be void. Generally speaking, courts enforce bargains freely made. They do not destroy them. The agreement contemplated by clause 66(b) is not incomplete. Its purpose and object are clear. Its essential terms are clear. The three matters on which the contractor has agreed are set out sufficiently in sub-paragraphs (i), (ii) and (iii). 17The construction of the contractor's obligations in relation to those three matters is assisted by an understanding of the evident purpose of clause 66 as a whole. As I have said, the parties intended that the purchaser should be in as good a position as the principal in relation to compelling the performance of the contractor's obligations under the building contract. I do not think that any of the parties, but particularly the contractor, could have any reasonable uncertainty about the obligations to which the contractor is committed by clause 66(b) of the building contract. There is some looseness of drafting to which I will return, but sensible commercial men of business would be in no doubt about the essential terms that were agreed by clause 66(b). 18The straightforward nature of those essential terms is reflected in clause 2.2 of the proposed side deed. It is headed "Builder to perform obligations": 2.2 Builder to perform obligations On the Effective Date the Builder in compliance with clause 66 of the Building Contract: (a) agrees to provide the Defects Bond in relation to the Defects Liability Period to the Purchaser; (b) agrees with the Purchaser that it will for the benefit of the Purchaser, as if the Purchaser were principal under the Building Contract, duly and punctually observe its obligations under the Building Contract in relation to the rectification defects in the Property during the Defects Liability Period; and (c) agrees to provide the Purchaser those items set out in clause 42.3(j) and clause 50 of the Building Contract which relate to the Property within the time period required by the Building Contract. 19Each of those obligations of the contractor is either expressly required by clause 66(b) or obviously implicit because it is necessary for the reasonable and effective operation of the intended agreement. Nothing turns on the drafter's use of the word "objectives" in clause 66(b). It does no more than describe and state the obligations to which the contractor has agreed. Additionally, the opening words "the contractor agrees with the purchaser" are not entirely appropriate because the purchaser is not a party to the building contract. But the words add nothing and can be ignored. The paragraph would be more syntactically correct if read as if it commenced with the words "enter into a tripartite agreement". Further, the words in sub-paragraph (b)(ii) "...and establishing a means" are also unnecessary and inapt in the circumstances. They can also be ignored. The obvious intent faithfully reflected in the proffered side deed, is that the sub-paragraph be read as if it said "giving direct rights for the purchaser to arrange for the contractor to rectify defects". 20I should specifically mention that the contractor has raised no objection to any of the incidental terms of the proffered side deed. And, it does not suggest that the principal obligations on the contractor set out in clause 2.2 the side deed are not accurately derived expressly, or by necessary implication, from the terms of clause 66(b). For those reasons, I do not think that clause 66(b) is void for incompleteness.

Paragraph (c) 21I have already explained that the principal elected to activate clause 66 by choosing the option specified in paragraph (b), namely a tripartite agreement. Counsel for the contractor sought to take me on an excursus designed to demonstrate that, as a matter of legal theory, the tripartite agreement contemplated by paragraph (b) was a novation. The purpose of this submission was to provide a foundation for the application of paragraph (c). But the point is misconceived. The contractual intention that is evident from the syntax of clause 66 is that paragraph (c) only applies when the principal makes the election contemplated by paragraph (a), namely the novation contemplated by that paragraph and not the tripartite agreement contemplated by paragraph (b). In the circumstances that have occurred, paragraph (c) has no application and does not call for consideration. 22Even if it did, there is no reasonable factual basis for invoking it. There is nothing about the purchaser's financial capacity that justifies the contractor refusing to novate its contract. The purchaser's balance sheet could not by itself give rise to concern. And the circumstance that the purchaser is a trustee is alleviated by the fact that undertakings have been given to the court on behalf of the only two beneficiaries of the trust. They have undertaken that they will not do anything to impede or prohibit the reliance by the purchaser on the right of indemnity given to it under the trust deed. In the face of that evidence, any objection by the contractor would not be reasonable. In any event, as I said, the point does not arise.

Relief 23There is no contest about the purchaser's entitlement, as against the principal, to specific performance of clause 52.2 of the contract for sale of land. The principal accepts, indeed it embraces, that obligation. The only way for the principal to give effect to that obligation is to compel the contractor to perform its obligation pursuant to clause 66 of the building contract. As I have made clear, I see no reason why the contractor should not perform and comply with its obligation under clause 66(b) of the building contract. The side deed that has been proffered by the principal reflects the obligations to which the contractor agreed in clause 66(b). 24The only way to bring about the legal result for which the purchaser and the principal contend, and the one which the contractor is obliged to perform, is to order specific performance of clause 66(b) by requiring the contractor to promptly execute the form of side deed proffered by the principal. In the welter of competing claims and pleadings, a number of which have been abandoned, a cross claim by the principal against the contractor seeking relief to that effect has been overlooked. That relief is not available at the suit of the purchaser but is available at the suit of the principal. The purchaser could not be entitled to specific performance of the contractor's obligation pursuant to clause 66(b) of the building contract - to which it is not party. 25The result that I have foreshadowed is what the principal wishes to achieve although without having sought an order to that effect. The case has been conducted by reference to that question, namely whether the contractor can or should be compelled to execute the side agreement. I should grant leave to the principal to file a cross claim seeking the relief that I have explained. There is no conceivable prejudice to the contractor. That will perfect the formalities. The substance was always clear. Subject to the principal filing its cross claim, I will order the contractor to perform the obligations imposed on it by clause 66(b) of the building contract by duly executing and returning to the principal's solicitors the relevant form of side agreement. The parties should bring in short minutes of order that attach the form of side deed. Although there is no contest about it, I think the purchaser should have the benefit of an order for specific performance of clause 52.2 of the contract for sale of land. As requested I will reserve costs. ooo DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 September 2011

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Judgment (6 paragraphs)

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Cases Cited (5)