Elderslie Property Investments No 2 P/L v Dunn [2008] QCA 158

SUPREME COURT OF QUEENSLAND

CITATION: Elderslie Property Investments No 2 P/L v Dunn [2008] QCA 158

PARTIES: ELDERSLIE PROPERTY INVESTMENTS NO 2 PTY LTD ACN 104 471 276 (plaintiff/appellant) v RODNEY MELVILLE DUNN AND MARGARET ANN DUNN (defendant/respondent)

FILE NO/S: Appeal No 221 of 2008 / BS1635 of 2007

DIVISION: Court of Appeal

PROCEEDING: General Civil Appeal

ORIGINATING COURT: Supreme Court at Brisbane

DELIVERED ON: 20 June 2008

DELIVERED AT: Brisbane

HEARING DATE: 22 May 2008

JUDGES: Holmes and Muir JJA, and White J / Separate reasons for judgment of each member of the Court, each concurring as to the order made

ORDER: Appeal dismissed with costs

CATCHWORDS: CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – OTHER MATTERS – where the parties entered into two deeds in respect of two parcels of land which contained a call option in favour of the appellant and a put option in favour of the respondents – where if an amendment to the Brisbane City Council Planning Scheme was not gazetted by the approval date, the appellant had the right under the contract to extend the approval date on one or more occasions, by a maximum period of 12 months – where the appellant purported to give the respondents notice of extension seven weeks after the expiration of the approval date – whether the call option ceased to be exercisable 12 months after the date of the deeds – whether the deeds ought to be rectified to accord with the respondents' construction of the deeds – whether the respondents had given notice within a reasonable time and effectively extended the approval date / Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, considered / Australian Blue Metal Ltd v Hughes [1963] AC 74, applied / Ballas v Theophilos (No 2) (1957) 98 CLR 193; [1957] HCA 90, applied / Dockside Holdings Pty Ltd v Rakio Pty Ltd (2001) 79 SASR 374; [2001] SASC 78, considered / Fitzgerald v Masters (1956) 95 CLR 420; [1956] HCA 53, considered / Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2004] 1 AC 715, applied / Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, considered / Laurinda v Capalaba Park Shopping Centre Pty Ltd (1988) 166 CLR 623; [1989] HCA 23, applied / L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235, considered / McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65, applied / Re United Pacific Transport Pty Ltd [1968] Qd R 517 / Rudi's Enterprises Pty Ltd v Jay (1987) 10 NSWLR 568, applied / Stickney v Keeble [1915] AC 386, applied / Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd & Ors (2004) 219 CLR 165; [2004] HCA 52, applied / Westpac Banking Corporation v Tanzone Pty Ltd & Ors [2000] NSWCA 25, considered

COUNSEL: M M Stewart SC, with J H Davies, for the appellant / D G Clothier for the respondent

SOLICITORS: Rodgers, Barnes & Green for the appellant / Holding Redlich for the respondent

HOLMES JA: I agree with the reasons of Muir JA and the order he proposes.

MUIR JA: The central question for determination in these proceedings is whether on the proper construction of each of two deeds dated 21 December 2005 entered into between the appellant and the respondents, a call option granted by the respondents to the appellant ceased to be exercisable 12 months after the date of the deed. Other issues for determination are whether the Deeds should be rectified so as to accord with the construction advanced on behalf of the respondents and whether the appellant gave a timely notice under each Deed which had the effect of extending the time within which the call option could be exercised.

The learned primary judge found in favour of the respondents on the construction and extension of time points and therefore found it unnecessary to order rectification. His Honour stated that he would have ordered rectification had he decided the construction argument against the respondents.

Background facts

Before September 2005, there were negotiations between the respondents, represented by a Mr Marriage, and the appellant, represented by a Mr Bowman, concerning the sale and purchase of the two parcels of land owned by the respondents for prices of $3,600,000 and $5,800,000 respectively. On 16 September 2005 a draft contract in respect of Lot 3 was sent by Holding Redlich, the respondents' then solicitors, to TressCox, the appellant's solicitors. The appellant had it in mind that it may want to nominate another entity as the transferee. In order to minimise the incidence of stamp duty, it proposed that instead of the parties entering into contracts for sale and purchase, the respondents would grant the appellant an option to purchase. That would enable the appellant to cause another entity to be the contracting party by having it exercise the option. The respondents were amenable to the proposal provided that they were given a put option which would entitle them, in the event that the Brisbane City Council Planning Scheme was amended in a particular way, to require the grantee of the option to acquire the subject land. On 21 December 2005, the parties entered into a deed in respect of each parcel, which contained a call option in favour of the appellant and a put option in favour of the respondents.

Relevant provisions of the Deeds

Each Deed relevantly provides:

"2.1.Call option

In consideration of payment of the Call option Fee by the Grantee to the Owner, the Owner grants a Call option to the Grantee to purchase the Property.

…

2.2. Exercise of Call option

The grantee may, at any time during the Call option Period, exercise the Call option by delivering to the Owner or its solicitor:

(a) the Call option Notice duly signed by the Grantee . . . .

…

3.1.Put option

In consideration of payment of the Put option Fee by the Owner to the Grantee (receipt of which is acknowledged), and subject to clauses 4, 5 and 8.16 hereof, the Grantee grants a Put option to the Owner to require the Grantee to purchase the Property.

…

3.2. Exercise of put option

The Owner may, at any time during the Put option Period, exercise the Put option by delivering the Put option Notice (together with the Contract, signed in duplicate by the Owner) to the Grantee or its solicitors."

The definitions of the call and put option periods in Clause 1.1 are:

"(f)Call option Period means the period commencing after the date of this Deed and ending at 5 pm on that day which is 14 days from the date the Grantee receives a notice from the Owner or the Owner's solicitor under clause 8.16 hereof.

…

(k)Put option Period means the period commencing on that day which is the expiry date of the Call option Period and ending at 5 pm on that day which is 14 business days from the expiry date of the Call option Period;"

Clause 8.16 provides:

"8.16.Amendment to the Planning Scheme

(a)Within 7 days after the gazettal of the Amendment to the Planning Scheme, the Owner or its solicitor must notify the Grantee and its solicitor of the gazettal. If the Amendment to the Planning Scheme will not facilitate the Development Approval, then the Put option granted to the Owner pursuant to clause 3 hereof shall be deemed never to have been granted and as such the Owner agrees the Put option may not be exercised by it.

(b)In this 8.16, 'Amendment to the Planning Scheme' means an amendment to the Brisbane City Council Planning Scheme advertised in the Queensland Government Gazette that will enable the Brisbane City Council to issue a Development Approval for the Property and Adjoining Land (as that term is defined in clause 4.1) to be developed in a manner consistent with the development outlined in Annexure B hereto.

(c)If the Amendment to the Planning Scheme has not been gazetted by the Date determined in accordance with clause 8.16(d), the Put option granted to the Owner pursuant to clause 3 hereof shall be deemed never to have been granted and as such the Owner agrees the Put option may not be exercised by it.

(d)The 'Approval Date' shall be the date which is 12 months after the date of this Deed provided however that if on the date 12 months after the date of this Deed the Amendment to the Planning Scheme has not been gazetted then the Grantee may extend the Approval Date (on one or more occasions) by a cumulative maximum of 12 months and in this case the extended date shall become the 'Approval Date'.

(e)In this clause 8.16 'Development Approval' means the development approval for the development outlined in Annexure B hereto."

The only other provisions capable of having a material bearing on the construction issue are Clauses 7.1 and 10. Clause 10 relevantly provides:

"(a)If the Amendment to the Planning Scheme is not approved by the Approval Date, then the Grantee will assign so far as it is lawfully able (and will use all reasonable endeavours to have the authors of the Consultancy Reports assign) the ownership and benefit of the Consultants' Reports and all plans, reports and approvals to the … Owner and to the owners of the Adjoining Land jointly, and the Grantee will have no claim to any ownership or benefit of those terms."

Clause 7.1 provides that upon the exercise of either the put or call option, a contract for the sale and purchase of the subject land would come into existence in terms of Annexure A to the Deed.

Clause 8.16 and the giving of notice under Clause 8.16(d)

The agreements for sale and purchase originally in contemplation were to be subject to the amendment of the Brisbane City Council Planning Scheme so as to permit the appellant to lodge a development approval in respect of the subject land and the adjoining lot. That condition, slightly altered, found expression in Clause 8.16. Under Clause 8.16, if the Amendment to the Planning Scheme was not gazetted by the Approval Date, the appellant had the right under Clause 8.16(d) to extend the Approval Date, on one or more occasions, by a maximum period of 12 months. The sub-clause made no express provision for the time within which the appellant was required to act in order to effect the extension. The learned primary judge held, and the parties do not dispute, that the appellant was required to exercise its right to extend within a reasonable time.

The appellant purported to give the respondents' notice of extension under Clause 8.16(d) on 8 February 2007, some seven weeks after the expiration of the Approval Date. The primary judge held that the notice was not given within a reasonable time.

The appellant's contentions

The appellant's counsel argues that Clause 8.16 imposes no restriction on the time within which the call option may be exercised and points out that under Clause 2.2 the appellant has the right to exercise it at any time during the Call Option Period. That period is not limited or defined by reference to the Approval Date.

On the appellant's argument the Call Option Period expires on 21 December 2007. That date, two years after the date on which the Deeds were entered into, is arrived at in this way. Clause 7 of the Deeds provides that immediately upon exercise of the put option or the call option a contract for the sale and purchase of the subject land will be deemed to have been entered into. The form of contract is Annexure A to each Deed.¹ Clause 2 of each form of contract provides that the settlement date will be the earlier of "the date which is 12 months after the Contract Date or 2 years from the date of the Deed."

The appellant argues in the alternative that the notice purporting to extend the Approval Date was given within a reasonable time and that as a result of the notice, the Approval Date became 21 December 2007. If either of these arguments is correct the Call Option Period had not expired when the appellant purported to exercise the call option.

The primary judge also found, contrary to the appellant's contentions, that the respondents' obligation to give notice of gazettal under Clause 8.16(a) was limited to gazettals on or before the Approval Date as duly extended.

Consideration of Clause 8.16

Under Clause 8.16 the put option expires in two circumstances. The first is where an amendment to "the Planning Scheme" is gazetted and such amendment "will not facilitate the Development Approval." The second is if the Amendment to the Planning Scheme has not been gazetted by the Approval Date. In the first of those circumstances, the appellant has 14 days from receipt of notice from the respondents within which to exercise the call option. If the call option is not exercised the put option is exercisable by the respondents within 14 days from the expiry of that 14 day period.

In the second of those circumstances though, on a literal construction of the Deed, the appellant's right to exercise the call option continues indefinitely unless there is an Amendment to the Planning Scheme.

By way of contrast, if the gazettal of the amendment to the Planning Scheme does not take place by the Approval Date, the rights of the respondents are significantly altered for no reason which is apparent from the terms of the Deed or surrounding circumstances. The respondents do not have the ability to extend the Approval Date. That right is vested in the appellant even though, on the appellant's construction of the Deed, subject to its argument in relation to Clause 10, the appellant's rights are not affected by any extension.

The role of Clause 10

The appellant asserts that there is a benefit to it in extending the Approval Date. That benefit is said to arise under Clause 10(a). Under that clause, if the Amendment to the Planning Scheme is not approved by the Approval Date, the appellant must assign its rights to "consultants' reports and all relevant plans and approvals" to the respondents. By giving notice under Clause 8.16(d) extending the Approval Date, the appellant is able to retain the benefit of these reports and documents for the whole of the call option period. I do not consider that this contention has substance.

The object of contractual construction is to “ascertain and give effect to the intentions of the contracting parties.”²Those intentions, to be determined objectively, are 'what a reasonable person would have understood [the words of the contract] to mean.'³ And to ascertain that “normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.”⁴ Such a reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation which they were in at the time of the contract.⁵ The Deeds, as commercial contracts, “should be given a businesslike interpretation”. The interpretation of each Deed requires “attention to…the commercial circumstances which the document addresses, and the objects which it is intended to secure.”⁶ Commercial contracts are to be construed with a view to making commercial sense of them.

In Wickman Machine Tool Sales Ltd v L Schuler AG⁷ Lord Reid said:

"The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear."

In Antaios Compania Naviera SA v Salen Rederierna AB⁸, Lord Diplock expressed stronger views concerning the imperative to make business sense of commercial contracts, stating:

“If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.”

The foregoing principles have application to Clause 10(a) and to the construction of the Deeds generally.

The obvious role of Clause 10 was to ensure the assignment of the relevant reports and documents when, but only when, they ceased to be of benefit to the appellant. That occurs when the call option is exercised or otherwise terminates.

It is improbable also that the primary intention of the parties in including Clause 8.16(d) in the Deeds was other than to ensure that the appellant could extend the Call Option Period. The appellant's contention that one may look to the form of contract in order to determine the expiry date of the call option may be dismissed. The Deeds give no indication that the annexed contract forms are to fulfil any other than their normal and obvious roles of embodying the parties' agreements of sale and purchase once the options are exercised. It is contrary to normal practice and expectations that a term in a contract of sale which is to come into existence upon the exercise of an option be regarded as providing for the time within which the option itself is to be exercised. There would need to be some clear indication in the instrument creating the option before such an unorthodox approach to the construction of the instrument would be justified. There is no such indication here, clear or otherwise.

The Call Option Period and the Put Option Period were intended to be inextricably linked. The purpose of the put option was to enable the respondents to require the appellant to purchase the subject land if the Deeds became unconditional. That is, if there was an “Amendment to the Planning Scheme” before the “Approval Date.” This arrangement was the natural consequence of the conversion of the initial transactions from agreements for sale and purchase to deeds containing put and call options. On a literal reading of Clause 8.16 the linkage between the put options and the call options is broken if the Amendment to the Planning Scheme is not gazetted by the Approval Date as the put option is then "deemed never to have been granted." But that does not accord with the intention of the parties and is a conclusion one would reach only by reading Clause 8.16 in isolation.

The call option ceases to be exercisable 14 days after receipt by the appellant of the notice from the respondents under Clause 8.16. That notice, by necessary implication, was required to be given by the respondents to the appellant only where the “Amendment to the Planning Scheme” was gazetted by the “Approval Date.” Unless Clause 8.16 is construed in this way the call option may continue indefinitely. Even the appellant does not contend that this could have been the parties' intention.

As Clause 8.16(c) would bring the put option to an end where no gazettal took place by the Approval Date, it is apparent that the parties intended, the put and call options being linked, that the call option would expire with the put option. To terminate the put option in the circumstances envisaged by Clause 8.16(d) without also terminating the call option would not serve any sensible commercial purpose. It would be contrary to what reasonable persons in the position of the parties would have been likely to intend.

This construction is achieved by avoiding excessive focus on clause 8.16 and by considering that clause as part of the whole Deed so as to render all its provisions harmonious with one another.⁹

In my view the Deeds, properly construed, should be read as if Clause 1.1(f) provided:

“Call option period means … and ending on the first to occur of the Approval Date or 5pm on that day which is 14 days from the date the Grantee receives notice from the Owner or the Owner's solicitor under clause 8.16 hereof.”

Rectification

I agree also with the primary judge's conclusion that rectification is unnecessary.

It is well established that a court in construing a contract may supply omitted words and correct words inserted in error where it is necessary in order to achieve the parties' contractual intention.

In Fitzgerald v Masters¹⁰ the court read the word "inconsistent" as meaning the precise opposite. Dixon CJ and Fullagar J, explaining their reasons for so doing said:¹¹

“There is a superficial difficulty in cl. 8, because it purports to incorporate a set of conditions so far as they are inconsistent with what has been specifically agreed upon. No real difficulty, however, is created. Words may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency.”

In Re United Pacific Transport Pty Ltd ¹² W.B. Campbell J, after citing the above passage from Fitzgerald v Masters, construed the instrument before him as if "mortgagee" in clause 2 of the instrument read "mortgagor". Examples of greater textual interference in the process of construction are provided by Westpac Banking Corporation v Tanzone Pty Limited & Ors¹³ and Dockside Holdings Pty Ltd v Rakio Pty Ltd ¹⁴, both intermediate appellate court decisions.

In Watson v Phipps¹⁵ the Privy Council, on appeal from the Full Court of the Supreme Court of Queensland, construed a clause in a lease which provided that “the lessee may offer to purchase the demised land from the lessor for a stipulated sum” as creating a right to purchase. The Full Court had ordered that the lease be rectified to achieve this result but the Privy Council regarded rectification as unnecessary. In the course of the reasons, delivered by Lord Brightman, it was said:

“The function of a court of construction is to ascertain what the parties meant by the words which they have used. For this purpose the grammatical and ordinary sense of the words is to be adhered to, unless they lead to some absurdity or to some repugnance or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified so as to avoid that absurdity or inconsistency, but no further: see the speech of Lord Wensleydale in Grey v Pearson (1857) 6 HLC 61 at 106, repeated by Lord Blackburn in Caledonian Railway Co v North British Railway Co (1881) 6 App Cas 114 at 131.”

The construction advanced by the respondents and accepted by the primary judge avoids inconsistency.

Was notice under Clause 8.16(d) given within a reasonable time

No time having been stipulated for the giving of notice under Clause 8.16(d), it is an implication of law that notice be given within a reasonable time.¹⁶ The parties accepted that what is a reasonable time for the giving of notice such as the one under consideration must be determined in the light of the circumstances existing at the time the notice is given.¹⁷ As no argument was advanced on that point I do not propose to consider it further. But the relevant assessment must be made in light of the relevant provisions of the Deed¹⁸, the property the subject of the Deed, and the common purpose of the parties.¹⁹

It is submitted on behalf of the appellant that in deciding that the notice had not been given within a reasonable time the primary judge gave insufficient weight to the following factors:

the Deeds could have had a two year life;

the respondents failed in their duty to do all things reasonably necessary to give the appellant the benefit of the Deeds by breaching their obligations to their secured lender which "made it clear that it was not bound by the Deeds";

lack of prejudice to the respondents; and

the respondents had not called for the assignment to them of the Consultants' reports under Clause 10(a).

It is not correct that there was a lack of prejudice to the respondents resulting from delay in giving notice under Clause 8.16(d). The existence of the call options fettered the respondent's freedom to deal with the subject land. The very existence of that constraint suggested that the notice was to be given with reasonable promptness.²⁰ That it was of concern to the respondents to know whether the appellant wished to exercise the call option is demonstrated by the fact that the respondents, by their solicitors, were pressing the appellant to advise of its intentions concerning the land.

The call option had to be exercised within 14 days of the receipt by the appellant of notice under Clause 8.16. The put option was required to be exercised within 14 business days from the expiry of the Call Option Period. The relative brevity of these periods points to an intention that the parties act promptly in exercising contractual rights.

Another relevant consideration is that the existence of the right to extend for multiple periods not exceeding 12 months in total meant that the appellant was able to protect itself against the loss of its call option without committing itself to the Deeds' continuation for any substantial period. The evidence does not suggest that the appellant failed to act to protect its interests for any good reason.

The fact there may have been uncertainty about whether the respondents' secured lender would exercise its power of sale may be relevant but does not require the conclusion that the appellant could act at its leisure in giving notice under Clause 8.16(d). It had been negotiating with the respondents and agents appointed by the secured lenders with a view to entering into a different contract for the purchase of the subject lands. The negotiations ceased in about mid November 2006. There was no good reason for the appellant to refrain from doing all that was necessary to protect its interests under the Deeds. The giving of a notice under Clause 8.16(d) was a simple matter involving no material cost or unavoidable disadvantage to the appellant.

These considerations support the conclusion of the primary judge, with which I respectfully agree, that the notice was not given within a reasonable time.

Conclusion

Because of my conclusions on the proper constructions of the Deeds it is unnecessary for me to consider the respondents' rectification claim. I merely observe in that regard that the appellant's argument did not appear to me to cast any doubt on the relevant conclusions of the primary judge.

For the above reasons I would dismiss the appeal with costs.

WHITE J: I have read the reasons for judgment of Muir JA and agree with his Honour that the appeal should be dismissed with costs. I agree with his Honour's further observations about the rectification claim.

Footnotes

1. Clause 1.1 of each Deed ↩

2. Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2004] 1 AC 715 at 737 ↩

3. Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179 ↩

4. Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179 ↩

5. Per Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912 ↩

6. McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589 ↩

7. [1974] AC 235 at 251 ↩

8. [1985] AC 191 at 201 ↩

9. See Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 at 109; and The Metropolitan Gas Co v Federated Gas Employees’ Industrial Union (1925) 35 CLR 449 at 455 – 456 ↩

10. (1956) 95 CLR 420 ↩

11. (1956) 95 CLR 420 at 426 ↩

12. [1968] Qd R 517 ↩