Evagelakos v UPG 318 Pty Ltd

JUDGMENT

1. HER HONOUR: The plaintiffs, Spiro and Helen Evagelakos, seek specific performance of a contract for sale of land against the purchaser, UPG 318 Pty Ltd, and a guarantor, Bhart Bhushan. There was no dispute that the plaintiffs were entitled to an order for specific performance against UPG 318. The issue was whether the plaintiffs were entitled to such an order against the guarantor, either to perform the contract at the same time as the purchaser or at all.
2. The plaintiffs relied on an affidavit by Mr Evagelakos and their solicitor, Leon Rizos. The defendants called no evidence. There was no cross-examination. The defendants raised only one issue, being the interpretation of the guarantee. Mr Bhushan's position is that specific performance is not available given the terms of the guarantee, but did not suggest that, if his construction of the guarantee clause was not accepted, then any discretionary factors pointed against an order for specific performance being made against him.

Facts

1. In August 2021, Mr and Mrs Evagelakos put their Box Hill property on the market.
2. In September 2021, UPG 318 was incorporated with issued share capital of $100. Mr Bhushan is the sole director of the company. UPG 318's shares are wholly owned by Universal Property Group Pty Ltd. Mr Bhushan is also the sole director of Universal Property Group. He owns 50% of the shares of Universal Property Group. The defendants accepted that UPG 318 was a special purpose vehicle, that is, a corporation brought into existence for the purpose of a particular transaction. The defendants also accepted that Mr Bhushan was the alter ego of UPG 318.
3. On 8 September 2021, Mr and Mrs Evagelakos received an offer from "Bathla Group". This was likely a reference to Universal Property Group, where that company was initially called Bathla Construction Pty Ltd, then Bathla Investments Pty Ltd, before changing its name to Universal Property Group. The offer was to pay $20 million, with a 10% deposit paid over 18 months and settlement in 24 months. A competing offer was received from another (apparently) property developer for $18.5 million, with slightly different arrangements for the deposit and settlement period.
4. On 1 October 2021, UPG 318 submitted a signed contract to buy the Box Hill property for $20.6 million. Mr Bhushan signed the contract as sole director of UPG 318. On 8 October 2021, the vendors proposed to insert a special condition into the contract, being a guarantee clause, "as your client is a Corporation". The purchaser accepted the additional clause without demur, being as follows: 18. GUARANTEE In consideration of the Vendor entering into this contract with a Purchaser purporting to be a corporation, at the request of the person/s in whose presence the common seal of the Purchaser purports to have been affixed or the person/s who sign this contract on behalf of the Purchaser ("guarantor") the guarantor (if more than one jointly and severally) hereby: (i) Warrants that the Purchaser is incorporated; (ii) Guarantees to the Vendor the observance by the Purchaser of the terms of this contract; (iii) Indemnifies and agrees at all times hereafter to keep indemnified the Vendor from and against all damages and losses which the Vendor may suffer arising directly or indirectly out of any breach by the Purchaser of any of the provisions of this contract; (iv) Agrees that the indemnity in paragraph (iii) herein shall continue and the guarantor shall remain liable to the Vendor under the indemnity notwithstanding that as a consequence of such breach the Vendor has exercised any of its rights under this contract notwithstanding that the Purchaser may be wound up and notwithstanding that the guarantee in this clause may for any reason whatsoever be unenforceable in whole or part. (v) This Clause shall not merge on completion.
5. Contracts were exchanged the same day. The contract for sale of land comprised 32 standard conditions (The Law Society of New South Wales Contract for the sale and purchase of land, 2019 edition) together with 18 special conditions, including that extracted above. The price was $20.6 million. A 10% deposit was payable in six-monthly instalments of $515,000. Completion was 24 months after the contract date, that is, on 8 October 2023.
6. Clause 9 provided that if the purchaser did not comply with the contract, or a notice under or relating to it, in an essential respect, then the vendors were entitled to terminate the contract and sue the purchaser for any loss on resale or damages for breach of contract. Failure to complete by the date for completion entitled a party to serve a notice to complete: cl 15. On completion, legal title passed to the purchaser and the purchaser paid to the vendors the price less any deposit plus all adjustments paid by cleared funds in PEXA: cl 16. If the contracts were not completed by the completion date, the purchaser was obliged to pay 8% interest p.a to the vendors on completion: cl 8, special conditions.
7. After exchange, the deposit was (eventually) paid. From July 2023 on, the purchaser sought various extensions to the date for completion. The vendors agreed to extend settlement to 8 November 2023. That date came and went. The purchaser sought to extend the settlement date to 30 June 2024. The vendors did not agree. In May 2024, the vendors issued a notice to complete to UPG 318 and Mr Bhushan, requiring completion on 11 June 2024. That date came and went. In June 2024, the vendors served a second notice to complete, requiring completion by 12 July 2024. The plaintiffs also commenced these proceedings, which were expedited. The purchaser failed to complete on 12 July 2024. The case was heard on 14 August 2024.

Submissions

1. The plaintiffs sought specific performance against the guarantor given his continuing breach, since 8 November 2023, of the guarantee in cl 18(ii) and the indemnity in cl 18(iii). Mr Bhushan guaranteed that UPG 318 would observe, that is, perform the terms of the contract, that is, all the terms of the contract. By the simple words of the guarantee, Mr Bhushan agreed to ensure, and be personally liable for, the performance by the purchaser of the contract. Indeed, it was hard to see what else he could possibly have meant. This obliged him to perform the contract himself if UPG 318 did not, and also to "see to it" that UPG 318 performed its obligations: Moschi v Lep Air Services Ltd [1973] AC 331, 348-349 (Lord Diplock). Mr Bhushan's obligation was "a promise that the obligation will be performed, in the sense that the guarantor will be personally liable for the debt, default or miscarriage of the principal": Geraldine Andrews and Richard Millett, Law of Guarantees (7th ed, Sweet & Maxwell, 2015) at p 3, [1-004]. The true nature of Mr Bhushan's obligation was to "answer for" the default of UPG 318: Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 254, 256 (Mason CJ).
2. The plaintiffs submitted that specific performance should be ordered against the guarantor under cl 18(ii) because, once a default by UPG 318 had occurred when it failed to complete, the guarantor was in breach of cl 18(ii), and was therefore liable in damages (which damages are co-extensive with UPG 318's liability in damages for its breach of cll 15 and 16.7 of the contract), and those damages, like those as against UPG 318, are an inadequate remedy. The characterisation of the liability under cl 18(ii) as "primary" or "secondary" was not determinative, nor necessarily useful. The question was "whether the [Plaintiffs] are entitled to an order for specific performance against the [Second Defendant] given the content of his obligations": Taylor Square TT Pty Ltd v Kinselas Pty Ltd (No 2) [2024] NSWSC 987 at [35]. Considerations of commercial commonsense informed the construction of the Guarantee Clause, particularly as to whether it involved a distinct and separate promise to perform. As in Taylor (No 2), a reasonable businessperson would have understood cl 18(ii) of the Guarantee Clause to constitute a promise by the Second Defendant to cause the First Defendant to complete; the chapeau highlighted doubts about the status and internal governance of the purchaser, and the genesis of the guarantee was a concern about the purchaser's status as a corporation.
3. In addition, the plaintiffs submit that they are entitled to an order for specific performance quia timet on the basis of the indemnity in cl 18(iii). Depending on the form of wording, an indemnity may require the obligor "to prevent the indemnified party from suffering loss rather than to compensate the indemnified party for loss he or she has suffered": Paterson v Pongrass Group Operations Pty Ltd [2011] NSWSC 1588, [57] (White J). Equity may order the obligor "to pay the money direct to the creditor [to] relieve the other party from sustaining those damages": McIntosh v Dalwood (No 3) (1930) 30 SR (NSW) 332, 334-335 (Harvey CJ in Eq) upheld in McIntosh v Dalwood (No 4) (1930) 30 SR (NSW) 415 at 418 (Street CJ, with whom Owen and Long Inness JJ agreed); Re Richardson [1911] 2 KB 705, 709 (Cozens-Hardy MR); Newman v McNicol (1938) 38 SR (NSW) 609 at 626 (Long Innes CJ in Eq); Firma C-Trade SA v Newcastle Protection & Indemnity Association [1991] 2 AC 1 at 36 (Lord Goff); Silver v Dome Resources NL (2007) 62 ACSR 539, 568 [119]-[120] (Hamilton J).
4. The plaintiffs submitted that the indemnity referred to both losses and damages, where losses must mean something different from damages and be something wider. The plaintiffs submitted that their loss caused by UPG 318's failure to complete the contract was "the loss of the benefit which performance of the contract in accordance with its terms by both parties would by now have produced to [the Plaintiffs] but for the fault of [the Defendants]…": Peter Turnbull at 250 (Kitto J). That "loss", for the purpose of the indemnity in cl 18(iii) of the Guarantee Clause, was the purchase price it was promised to, but did not, receive. Damages were an inadequate remedy. The plaintiffs are entitled to an order for specific performance quia timet of cl 18(iii) of the Guarantee Clause, requiring Mr Bhushan to direct UPG 318 to pay the purchase price. The plaintiff sought an order for specific performance against both defendants at the same time. There was said to be no difficulty in doing so: Ryan (No 1), [87]-[88] (Parker J) cf Taylor Square TT Pty Ltd v Kinselas Pty Ltd [2024] NSWSC 799 at [68] (Rees J). It would be merely delaying the inevitable if the Court were to proceed otherwise. The better reading of cl 18 was that it created a concurrent obligation on the defendants. Nor was there any risk that both defendants would offer to pay the balance of the purchase price at settlement, where Mr Bhushan controlled UPG 318.
5. In context, the plaintiffs submitted that the proper, and commonsense, construction of the phrase "observance by the Purchaser of the terms of this Contract" in cl 18(ii) of the Guarantee Clause was to create an obligation to perform: Danckwerts LJ in Ayling v Wade [1961] 2 All ER 399. It did not mean that Mr Bhushan was to have UPG 318 passively "observe" those terms without doing anything in relation to them; that is, complying with those terms by action, including paying the purchase price. So much failed to acknowledge the commercial realities. It was hard to find any negative covenant on a purchaser in a contract for sale. Rather, the covenants would be seen as positive obligations on a purchaser to tender payment in consideration for the transfer of title. To read the clause in the manner contended for by the defendants would deprive the clause of much of its significance. Rather, the clause is a promise by the second defendant that he would perform and also cause to be performed by the first defendant the obligations in the contract.
6. The plaintiffs submitted that, as in Taylor (No 2) (at [32], [37]), a reasonable businessperson in the position of the parties would have understood that the Mr Bhushan was promising that his special purpose vehicle, UPG 318, would perform the contract, and that he would make that happen. The court would not be ultimately assisted by the definitions referred to by the defendants. As Leeming JA (with whom Beazley P and Emmet AJA agreed) held in Tal Life Ltd v Shuetrim; MetLife Insurance Ltd v Shuetrim (2016) 91 NSWLR 439 at 457-458, [80] "[d]ictionary definitions may assist in identifying the range of possible meanings a word may bear in various contexts, but will not assist in ascertaining the precise meaning the word bears in a particular context". Gray J was in dissent in in McFarlane v Reffold (2013) 116 SASR 83 and misquoted by the defendants: see also MacFarlane v Reffold at [56]-[57] (Gray J); see also R v Patel; Ex parte Attorney-General (Qld) [2011] QCA 81 at [39].
7. The defendants submitted that nothing in the language of cl 18 provided a basis to order specific performance against Mr Bhushan. The guarantee was framed more narrowly than the guarantees in Sunbird, Ryan or Taylor. Guarantees are to be construed strictly: Ankar Pty Ltd & Arnick Holdings Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 561. The clause was distinguishable from that considered in Ryan as the guarantor's obligation is not stated to be given as principal: at [77]; see likewise Bowman Development Corp Pty Ltd v Young Forever Property Pty Ltd (No 2) [2020] QDC 073. The clause was a classic 'see to it' provision that imposed a positive obligation on Mr Bhushan to take some steps to try to have UPG 318 comply with its obligation to perform, but fell short of requiring Mr Bhushan to perform the contract in substitution for, and in place of, UPG 318.
8. The defendants submitted that the guarantee did not include an undertaking by Mr Bhushan to render performance of UPG 318's obligation to complete the purchase if UPG 318 did not. Mr Bhushan accepted that, where a guarantor has provided a guarantee as a principal, the guarantor may be compelled to perform the purchaser's obligation. Here, the only party with the obligation to pay the purchase price was UPG 318. A guarantor is not to be made liable beyond the terms of the contract of guarantee: Commercial Bank of Australia Ltd v Colonial Finance Mortgage & Investment & Guarantee Corporation Ltd (1906) 4 CLR 57 at 65-66. The guarantee could be described as a 'see to it' or secondary obligation: Sunbird Plaza Pty Limited v Maloney (1989) 166 CLR 245; [1988] HCA 11 at [6], 255 (Mason CJ). It followed that Mr Bhushan's liability was limited to an action for damages at common law and not an action for specific performance.
9. The guarantee clause was not a direct or primary obligation of Mr Bhushan to pay a sum of money to the vendors, but an obligation to ensure that another person, UPG 318, did so; the vendors' remedy for UPG 318's failure lay in damages for the breach of the Guarantee Clause only: Allcott Hire Pty Ltd v Silk [2016] NSWSC 1135 at [39]-[44], [76]-[77] (Rothman J); Gujarat NRE India Pty Ltd v Wollongong Coal Ltd [2018] NSWSC 1459 at [181] (Robb J).
10. Here, Mr Bhushan guaranteed "the observance by the Purchaser of the terms of this contract". As a matter of language, there was no attempt by the parties to impose a primary liability on Mr Bhushan, nor did the guarantee require "performance" nor refer to "all" of the purchaser's obligations, unlike Ryan and Taylor; see also Sunbird at 271 (Gaudron J). As noted by Gray J in McFarlane v Reffold [2013] SASCFC 31, "As a matter of construction, it might be expected that the words 'observance' and 'performance' carry different meanings": at [53]. In the context of landlord and tenant disputes, "observe" concerns negative covenants and the word "perform" concerns positive covenants: at [55]. 'Performance' means "completion of a party's obligations under a contract by satisfactorily doing each thing set out as a term or condition of the contract": Australian Law Dictionary (3rd ed, 2018, Oxford University Press). "Observe" has several meanings including: "[f]ulfil or comply with … a … legal … obligation"; and, "to keep or maintain in one's action, conduct" (Macquarie Dictionary (Pan MacMillan Australia, 2024)). 'Observance' cannot be taken to extend as far as completing the terms of the contract, given the difference in meaning between those two terms. "Observe" and "perform" were not interchangeable; "observe" was a lesser obligation than "perform". In the alternative, Mr Bhushan should not be compelled to do something until the principal has failed: Fairborne Pty Ltd v Strata Store Noosa Pty Ltd [2009] QSC 250; Sunbay Projects Pty Ltd v PR Wieland Holdings Pty Ltd [2010] QSC 368.
11. The defendants submitted that the indemnity was limited to contractual breach. The indemnity was not concerned with the purchase price, as the price is not damage. In the absence of transfer of title, the vendors were not in a position of loss vis a vis the purchase price. Whilst the vendors would be protected in respect of any losses they have suffered by reason of the purchaser's failure to complete, the purchase price was not covered by the indemnity.

Principles

1. The vendors seek the assistance of the Court to compel the guarantor to perform his obligations according to the terms of the contract: Waterways Authority of New South Wales v Coal & Allied (Operations) Pty Ltd [2007] NSWCA 276 at [59]-[62] (per Beazley JA); Paolucci v Makedyn Pty Ltd (2021) 20 BPR 41,749 at [10]-[11] (per Leeming JA, White and McCallum JJA agreeing). In requiring the performance of a contractual term, equity is acting in aid of the plaintiff's legal rights: Paolucci v Makedyn at [16]. As such, the critical question is the scope of the guarantor's obligations under the contract.
2. The guarantee forms part of a commercial contract. The relevant principles of construction are notorious, recently repeated in Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6 at [27], quoting Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544 at [16] (per Kiefel, Bell and Gordon JJ): "It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it."
3. If after considering the contract as a whole and the surrounding circumstances, the Court concludes that the language of a contract is unambiguous, then the Court must give effect to that language unless to do so would give the contract an absurd operation: Cherry v Steele-Park (2017) 96 NSWLR 548; [2017] NSWCA 295 at [73]-[75] (per Leeming JA, Gleeson and White JJA agreeing).
4. When construing a contract of guarantee, the court is still entitled to look to the general setting in which the contract came into existence but the liability of a guarantor is strictissimi juris and ambiguous contractual provisions in a guarantee should be construed in the surety's favour: Ankar Pty Ltd & Arnick Holdings Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 561; Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28 at [17]-[19], [23]. The same principles apply when construing an indemnity: Andar at [23]; see, for example, Erect Safe Scaffolding (Australia) Pty Ltd v Sutton (2008) 72 NSWLR 1 at [23]-[24].
5. As an aspect of the contra proferentum rule, it should be used whilst "bearing in mind the fundamental purpose of construction of a document, namely, to ascertain the intention of the parties arising from the document as a whole and reading the document with such background information as was known by all the parties to it": Rava v Logan Wines Pty Ltd [2007] NSWCA 62 at [51], [53] (Campbell JA). As Campbell JA there explained, "The contra proferentem rule is to be used only where the document is otherwise ambiguous, and … is a principle of last resort … Where it is understood in that way, the application of the principle for construction of guarantees … does not involve preparing a list of all the possible meanings of a clause that the language can bear without breaking, and choosing the meaning that it most favourable to the guarantor … Rather, the choice is limited to choosing amongst meanings that are fairly open by reason of the application of other rules of construction": at [55]-[56].
6. As to the scope of a guarantor's obligations, it has been said that the liability incurred by a guarantor when guaranteeing the principal's performance of a contract may be an undertaking by the guarantor to render the performance contracted for should the principal not render it or a promise to ensure ('to see to it') that the principal performs: M P Ellinghaus, "Essentials of the Modern Law of Guarantees" (1989) 2(2) Corporate & Business Law Journal 144 at 145-6. As to the former type of guarantee, the guarantor's promise to secure the performance of the principal's obligations may be collateral to the promise of the principal and in the nature of a distinct and separate promise to perform the principal's obligation if they do not: Jowitt v Callaghan (1938) 38 SR (NSW) 512 at 517 (Jordan CJ). For example, in Ryan v UPG 322 Pty Ltd [2023] NSWSC 1293, the guarantee clause imposed an obligation on the guarantor "as a principal", creating a concurrent obligation to perform the contract with the purchaser. Having regard to this "critical factor", Parker J made orders for specific performance against both the borrower and guarantor simultaneously: at [77].
7. In Moschi v Lep Air Services Ltd [1973] AC 331, Lord Reid observed that a guarantor's obligation may be of a different kind, being to "answer for" the principal's failure to fulfil its obligation, "Then if … the principal debtor acts or fails to act as required by his contract, he not only breaks his own contract but he also puts the guarantor in breach of his contract of guarantee. Then the creditor can sue the guarantor … for damages [for] the loss suffered by the creditor due to the principal debtor having failed to do what the guarantor undertook that he would do": at 344-345; followed in Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 256 (Mason CJ).
8. There are many types of guarantees; everything turns on the terms of the particular guarantee, where the parties are at liberty to make such agreement as they choose: Sunbird at 256. Clear drafting which imposes an obligation to perform the contract if the purchaser does not will obviously assist a vendor who seeks an order for specific performance against the guarantor.
9. Such drafting was not achieved in Sunbird, albeit no orders for specific performance were sought against the guarantors in that case. The guarantors jointly and severally guaranteed "THE PERFORMANCE BY the said abovementioned purchaser OF ALL THE TERMS AND CONDITIONS of the contract including the payment of all moneys payable hereunder by the said abovementioned purchaser." Gaudron J observed at 271: "The guarantee does not in terms oblige the [guarantors] to pay the balance [of the] purchase price in the event of the purchaser's failure to complete the contract. In the context where, as here, the purchase price is payable by the purchaser upon settlement and is not recoverable as a debt prior to settlement, a promise of 'performance by the … purchaser of all the terms and conditions of the contract including the payment of all moneys payable …' does not, standing alone, import an obligation that the [guarantors] will themselves pay the balance purchase price if the purchaser fails to do so. Such an obligation, if it exists, must be spelt out from the word 'guarantee' in its particular contractual setting."
10. Her Honour considered that the contractual setting did not permit the implication of an obligation that the guarantors would pay the purchase price, when regard was had to other contractual provisions which altered the guarantors' obligations if the contract was assigned by the purchaser: at 271-272. Mason CJ (Deane, Dawson and Toohey JJ agreeing) agreed, but for different reasons.
11. Much of the case law relied on by the parties is concerned with different types of guarantees. Whilst this may assist in construing the guarantee before the Court, most of these cases were not concerned with whether an order for specific performance ought be made. As to when an order for specific performance may be made, Parker J observed in Ryan at [79]: "… Specific performance as relief is granted because of the risk to the vendor … that the other party to the contract will not comply with its obligations. In that sense, relief is granted quia timet … Usually, as in the present case, the refusal [by the purchaser to go ahead with the contract] would give rise to a breach of contract and indeed a repudiatory breach. But this is not necessary. All that is required is a sufficient risk of non-compliance to justify a decree."

Consideration

1. As for commercial context in this case, Mr and Mrs Evagelakos were selling their property for $20.6 million to a special purpose vehicle worth $100, at the request of Mr Bhushan or his other company, Universal Property Group, which had submitted the initial offer: see [5]. This was reflected in the chapeau of cl 18, which suggested that a degree of suspicion was held by the vendors as to the corporate status of the purchaser, "purporting to be a corporation". The chapeau further noted that the vendors were entering into the contract with UPG 318 "at the request of the person/s in whose presence the common seal of the Purchaser purports to have been affixed or the person/s who sign this contract on behalf of the purchaser", that is, Mr Bhushan.
2. I consider that a reasonable businessperson in the position of the parties, considering the surrounding circumstances and the commercial purpose of the contract, would have understood that the vendors looked to Mr Bhushan to bring the contract for sale of land to a successful conclusion, by placing the special purpose vehicle in funds, either directly, via Universal Property Group or obtaining finance to complete the purchase, when the time came. However, the question remains what is the measure of protection in fact conferred by cl 18.
3. The parties did not identify any ambiguity in cl 18, albeit both vied for different constructions of the clause. The vendors submitted that Mr Bhushan promised that the special purpose vehicle would perform its obligations under the contract for sale on time and without delay, "He would make it happen … [and gave] a distinct and separate promise to perform the principal obligation if the purchasers did not": Taylor (No 2) at [37]. Mr Bhushan submitted that the language of cl 18 imposed no such obligation.

The guarantee

1. The key clause is cl 18(ii), whereby Mr Bhushan: "Guarantees to the Vendor the observance by the Purchaser of the terms of this contract".
2. In Canty v Paperlinx Australia Pty Ltd [2014] NSWCA 309, Gleeson JA (Barrett and Emmett JJA agreeing) described a guarantee as "a binding promise of one person to be answerable for the debt or obligation of another if that other defaults. The distinctive feature of a contract of guarantee is the secondary nature of the obligation which is assumed by the guarantor. There must be another person who is primarily liable": at [38]. I agree with Mr Bhushan that, unlike Ryan, his obligation as guarantor is not direct or coordinate with the purchasers. There is no attempt by the draftsperson to impose a primary liability on the guarantor. Nor is this dispositive. The question remains whether the vendors are entitled to an order for specific performance against the guarantor given the content of his obligations.
3. The drafting of cl 18 (ii) is somewhat muted. What is meant by "observance"? In ordinary English usage, the Macquarie Dictionary defines "observance" as "the action of conforming to, obeying or following", while H W Fowler, Fowler's Modern English Usage (2nd ed, 1965, Oxford University Press) notes that "Observance is the attending to and carrying out of a duty or rule or custom … observation in turn does not mean performing or complying".
4. In legal usage, "observe" is most often considered in leases, and then generally used in conjunction with the word "perform". In this context, "observe" refers to an obligation not to disobey a negative covenant whilst "perform" refers to an obligation to act in accordance with positive covenants: Reckitt v Cody [1920] 2 Ch 452 at 461; R v Patel; Ex parte Attorney-General (Qld) [2011] QCA 81 at [39].
5. But not always. In Ayling v Wade [1961] 2 All ER 399, the lessee agreed to keep premises in good repair and then sub-let the premises, covenanting with the sub-lessee to pay the rent in the head lease "and to observe the covenants contained in the [head lease] and to keep the [sub-lessee] indemnified against the same …". The fact that the word "observe" was used and not "perform" was the subject to some attention, but Danckwerts LJ held at 402: "… the relative meaning of the words 'observe' and 'perform' in respect of negative and positive covenants … has really no relation to the problem with which we have to deal in this case. The word 'observe' is not a purely negative word. It cannot, I think, mean that the covenantor may simply sit by noticing what is happening and doing nothing. What it means, I think, is 'to comply with the obligation' and therefore it has a positive and not merely a negative meaning. It plainly must have a positive as well as a negative meaning in the present case because, without that, the indemnity ... would be useless …"
6. Ayling v Wade was followed in the interpretation of a criminal statute in R v Patel; Ex parte Attorney-General (Qld) [2011] QCA 81, where the offence referred to omissions "to observe or perform" a duty. The Court of Appeal noted that "in some contexts either word ["observe" or "perform"] might refer to non-compliance with both positive and negative obligations": at [39]. (R v Patel was overturned on appeal to the High Court, but on other issues.)
7. The same approach was taken in construing a contract for sale of land in McFarlane v Reffold [2013] SASCFC 31. The contract included a warranty that the septic system had all necessary approvals. In fact, the septic system was unauthorised. The contract for sale provided that the purchaser could issue a notice requiring the vendor to remedy default "If the Vendor makes default in the observance or performance of any term or condition contained in this agreement to be observed or performed by the Vendor". Kourakis CJ, with whom Vanstone J agreed, resolved the issue by reference to a different clause of the contract and considered that the case did not turn on the different meaning that 'observe or perform' may bear in some contexts: at [25]. In dissent, Gray J applied Ayling v Wade. At [57]-[58]: "The cl 17 warranty in the present case was a warranty that the septic system on the property had been the subject of all necessary consents and approvals. [The vendor] was under an obligation to comply with his warranty. In this context, the phrase in cl 22 "observance or performance" does not, to my mind, mean that [the vendor] may, being aware that the septic system had not been the subject of consent or approval, do nothing. [The vendor] was required to comply with his contractual obligations. In this sense, the words "observance or performance" have a positive meaning and required some action by [the vendor]. To adopt the wording of Danckwerts LJ, in the present case, [the vendor] had undertaken to carry out the obligations implicit in his warranty; that is, to take steps to see that the necessary consents and approvals were obtained. At the very least, [the vendor] had an obligation to inform [the purchaser] of the lack of consent or approval of the septic system, so that [the purchaser] could exercise his rights under the contract."
8. A relevant consideration in both Ayling v Wade and Gray J's analysis in McFarlane v Reffold was that construing "observe" as limited to not disobeying negative covenants deprived another clause - an indemnity or warranty - of operation. A court will strain against interpreting a contract so that a particular clause is nugatory or ineffective: Chapmans Ltd v Australian Stock Exchange Limited (1996) 67 FCR 402 at 411 (Lockhart and Hill JJ).
9. Returning to cl 18(ii), Mr Bhushan guarantees to Mr and Mrs Evagelakos "the observance by [UPG 318] of the terms of this contract". The sub-clause is passively expressed. The more active word "perform" does not appear. Nor is there a related contractual obligation which would warrant a more positive reading of the extent of UPG 318's obligations, which Mr Bhushan has guaranteed.
10. I think cl 18(ii) simply means that UPG 318 will comply with its obligations under the contract for sale of land and Mr Bhushan stands as guarantor in the event that it does not. Any positive obligation - to not only notice what is happening but to do something about it - rests on UPG 318; Mr Bhushan guarantees "observance by" UPG 318. Clause 18(ii) does not squarely impose a positive obligation on Mr Bhushan to not only notice that UPG 318 is not complying with an obligation but to go further and comply with that obligation himself. Nor is cl 18(ii) "useless" without construing the clause as imposing a positive obligation on Mr Bhushan to comply the obligation himself, where his liability for damages for UPG 318's breach of contract remains: Ayling v Wade at 402.
11. The critical obligation on UPG 318 is, of course, to complete the purchase of the Box Hill property on settlement by paying the balance of the purchase price. There is obviously a risk to the vendors that UPG 318 will not comply with this obligation, such that the vendors are entitled to an order for specific performance against the company. But the language of cl 18(ii) is less than emphatic in imposing an obligation on Mr Bhushan to render the performance contracted for if UPG 318 does not.
12. Doubt as to the construction of a guarantee "may arise not only from the uncertain meaning of a particular expression but from its apparent width of possible application": Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [53] (per Gummow, Hayne, Heydon, Kiefel and Bell JJ). The liability of a guarantor is strictissimi juris. Clause 18(ii) does not require Mr Bhushan to pay the balance of the purchase price if UPG 318 does not observe its obligations under the contract for sale of land in that regard. It follows that the vendors are not entitled to an order for specific performance against Mr Bhushan to attend settlement and complete the purchase of the Box Hill property.

The indemnity

1. The next sub-clause does not advance matters greatly. For ease of reference, subcl 18(iii) provides that Mr Bhushan: "Indemnifies and agrees at all times hereafter to keep indemnified the Vendor from and against all damages and losses which the Vendor may suffer arising directly or indirectly out of any breach by the Purchaser of any of the provisions of this contract…"
2. In Canty v Paperlinx, Gleeson JA observed that, in contrast to a guarantee, "under an indemnity, a person assumes a primary liability. A contract of indemnity is 'a contract by one party to keep the other harmless against loss' and is not dependent on the continuing liability of the principal debtor. An indemnity is an independent obligation to make good a loss": at [39].
3. The language of cl 18(iii) bespeaks breach of contract and its consequences for the vendors. "Damages and losses which the Vendor may suffer arising directly or indirectly out of any breach by the Purchaser of any of the provisions of this contract" simply refers to contractual damages. When read with cl 9 of the standard conditions, Mr and Mrs Evagelakos can look to Mr Bhushan to pay any such loss or damage, which is recoverable on terminating the contract for breach.
4. Equity may grant specific performance of a contract of indemnity before actual loss has been suffered. In McIntosh v Dalwood (No 4) (1930) 30 SR (NSW) 415, Street CJ (with whom Owen and Long Inness JJ agreed) observed at 418: "The test is always the same. In every case the contractual obligation must first be ascertained in order that it may be seen whether an adequate remedy exists at law in the event of a breach. If the obligation is merely an obligation to indemnify a person, in the sense of repaying to him a sum of money after he has paid it, no equitable relief is needed. Damages will provide an adequate remedy. If, however, the obligation on its true construction is an obligation to relieve a debtor by preventing him from having to pay his debt, equity will in such a case give relief in the nature of quia timet relief, and, instead of compelling the party indemnified first to pay the debt, and perhaps to ruin himself in doing so, will specifically enforce the obligation by ordering the indemnifying party to pay the debt. …." More recently, see White J in Paterson v Pongrass Group Operations Pty Ltd [2011] NSWSC 1588 at [57].
5. Looking at cl 18(iii), is the indemnity to prevent Mr and Mrs Evagelakos from suffering loss or to compensate them for loss they have suffered? Clause 18(iii) refers to indemnifying the vendors "from and against damages and losses which the Vendor may suffer arising directly or indirectly out of any breach by the Purchaser of … this contract". The word "from" indicates that Mr Bhushan is obliged to prevent Mr and Mrs Evagelakos suffering loss in the first place while the word "against" refers to an obligation to also indemnify them for losses that they have already suffered.
6. Having ascertained the extent of the contractual obligation, the question remains whether equity would grant specific performance of the indemnity to compel Mr Bhushan to, effectively, prevent Mr and Mrs Evagelakos from suffering damages or losses in the first place. I can readily see how an order for specific performance may be granted where the principal's obligation is to pay a debt. It is less obvious how a decree of specific performance would operate where the principal's obligation is to buy an asset. None of the cases relied upon by the parties referred to such a situation.
7. The answer is to be found in the harm which Mr Bhushan may be obliged to prevent Mr and Mrs Evagelakos from sustaining. As mentioned, the phrase "damages and losses which the Vendor may suffer arising … out of any breach by the Purchaser of … this contract" refers to contractual damages. The general measure of damages is the amount, so far as money can provide, necessary to put the plaintiff in the position they would have been if the contract had been performed: Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350; Wenham v Ella (1972) 127 CLR 454 at 460 (per Barwick CJ); Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653; [1986] HCA 81. Assessing contractual damages requires the Court to compare the actual position of the party who sustains a loss by reason of the breach to what that party's position would have likely been in a counterfactual scenario in which the contract was performed: Brighton Automotive Holdings Pty Ltd v Honda Australia Pty Ltd (No 2) [2024] VSC 262 at [74] (per Matthews J).
8. Applying this general measure of damages to the contract for sale of land is straightforward, as further expounded by cl 9. The "damages and losses which the Vendor may suffer" include the loss of bargain in the event that Mr and Mrs Evagelakos do not obtain the same price on re-sale, together with the associated expenses of re-selling the property, holding costs and the like. "Damages and losses" does not mean the balance of the purchase price, where the vendors would retain the Box Hill property and, thus, its value at the point in time at which damages would be assessed. To construe "damages and losses … arising directly or indirectly out of any breach … of this contract" as the balance of the purchase price is at odds with the quantification of contractual damages, and would result in Mr and Mrs Evagelakos obtaining a windfall gain.
9. Using the competing offers made to Mr and Mrs Evagelakos for the Box Hill property as a simple illustration, if they were to terminate the contract with UPG 318 for breach and sell the Box Hill property to the under-bidder for $18.5 million, then the loss on re-sale would be $2.1 million. It is conceptually difficult to see Mr Bhushan's obligation under the indemnity, to keep Mr and Mrs Evagelakos indemnified "from" such "damages and losses", as extending to an obligation to pay the balance of the purchase price - which almost certainly far exceeds any loss on re-sale and, in my simple example, is $18.54 million - in order to prevent "damages and losses" of $2.1 million being sustained.
10. Where it is conceptually difficult to equate contractual damages with the balance of the purchase price, this cannot be what a reasonable businessperson would have understood cl 18(iii) to mean, viewed objectively, when the contract was prepared. Nor does cl 18(iii) clearly state that Mr Bhushan's obligation to indemnify Mr and Mrs Evagelakos "from" damages and losses goes so far as to require him to pay the balance of the purchase price so that they do not suffer any loss of bargain or loss on re-sale. Such an obligation would need to be clearly expressed. As such, an order for specific performance of the indemnity is not warranted where an adequate remedy exists at law in the event of a breach, being damages, which is the extent of Mr Bhushan's obligation under the indemnity in any event.

Orders

1. For these reasons, I am not satisfied that the vendors are entitled to an order for specific performance against the guarantor. They are entitled to an order for specific performance against the purchaser. I make the following orders: 1. Declare that the Contract dated 8 October 2021 for sale of land at 29 Hynds Road, Box Hill NSW 2765 in the State of New South Wales, being the land comprised in Folio Identifier 86/10157 (Property) between the Plaintiffs as vendors, the First Defendant as purchaser and the Second Defendant as guarantor (the Contract) is valid and enforceable. 2. Declare that since 8 November 2023 the First Defendant was, and remains, in breach of cll 15 and 16.7 of the Standard Terms of the Contract. 3. Order that the Second Defendant take steps necessary such that the First Defendant performs its obligations under the Contract including the First Defendant's purchase of the Property from the Plaintiffs. 4. Order that the Contract be specifically performed by the First Defendant and carried into execution pursuant to Orders 5 to 10 below. 5. Direct the First Defendant to complete the purchase of the Property at PEXA by not later than 2.00 PM on Friday, 4 October 2024 (Settlement Date) on the PEXA Settlement Platform's Electronic Workspace ID PEXA230571442 (PEXA Workspace) in accordance with cl 30.11 of the Contract. 6. Direct the First Defendant through its conveyancer/solicitor prior to the Settlement Date to attend to verifying its Stamp Duty in the PEXA Workspace. 7. Direct the First Defendant through its conveyancer/solicitor to submit a Settlement Statement to the Plaintiffs' Solicitor two business days prior to the Settlement Date. 8. Direct the Plaintiffs' Solicitor to confirm the Settlement Statement one business day prior to the Settlement Date. 9. Direct the First Defendant through its conveyancer/solicitor prior to the Settlement Date to do all things necessary in the PEXA Workspace to ensure completion can occur on the Settlement Date, including but not limited to: 1. accepting the time and date for completion in the PEXA Workspace; 2. completing and/or creating all documents in the PEXA Workspace for completion to occur; 3. ensuring all source funds are inputted into the PEXA Workspace to ensure completion can occur, and populating any necessary destination line items for the First Defendant; 4. once the total source funds and payment directions are inputted and the documents have successfully passed lodgement verification with the land registry, attending to signing off on the Documents, completing the financial settlement schedule and signing the financial settlement statement. 1. Direct the First Defendant to pay the balance of the monies due under the Contract at the Settlement Date, in return for the Plaintiffs conveying title to the Property to the First Defendant through PEXA. 2. Judgment against the Defendants in the sum of $1,259,703.60, being the sum calculated in accordance with Special Condition 8 of the Contract, as varied by the parties' agreement, calculated up to and including 14 August 2024. 3. Parties to notify any errors and omissions within 7 days, including the correct amount of interest to bring the judgment sum in Order 11 up to the date of these Orders. 4. Parties to file and serve any submissions (limited to three pages) and affidavits as to costs within 14 days, such issue to be determined on the papers. 5. Grant liberty to restore the matter before Rees J on 2 days' notice.

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