FAI General Insurance Company Ltd. v. Parras & Ors. [2002] NSWCA 334

FAI General Insurance Company Ltd. v. Parras & Ors. [2002] NSWCA 334 - NSWCA 2002 case summary — Zoe

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Tuesday 8 October 2002 FAI GENERAL INSURANCE COMPANY LTD. (IN LIQUIDATION) v. PARRAS & ORS Judgment 1 MEAGHER JA: I agree with Hodgson JA. 2 HODGSON JA: On 3 December 2001, in proceedings brought by the respondents against the appellant, Santow J made the following declaration: That the plaintiffs have validly exercised the option to renew the registered lease No.2578223 over the basement in the property in computer folio reference 1/746732 being 244-248 Pitt Street, Sydney for a first further term of five years from 16 July 2001. 3 Santow J also ordered the appellant to pay the respondents' costs of the proceedings. The appellant appeals to this Court from those orders. 4 The facts and circumstances are set out in the judgment of Young CJ in Eq. As appears from that judgment, the case depends on whether, on the true construction of the lease between the parties, the respondents became entitled to a renewal of that lease by reason of exercise of the option contained in Item 1 of the Second Schedule to the lease, which is as follows: If the Lessee intends to take a new Lease of the premises for a further term of the number of years (if any) specified in Item 5 from the expiration of the Term of this Lease and prior to such expiration gives to the Lessor not less than 3 nor more than 6 months' notice in writing of that intention and shall have during the first Term duly and punctually paid the Annual Rent and the Lessee's Proportion of the Outgoings and the Turnover Rent reserved by this Lease at the proper times and shall not, at the time of exercise of this option be in default under this Lease then subject to the provisions of this clause the Lessor will at the cost of the Lessee grant to the Lessee a renewed Lease of the premises for a further term of the number of years (if any) specified in Item 5 from the expiration of the first Term of this Lease at an Annual Rent calculated or determined in accordance with the provisions of this Schedule ("Renewed Lease"). The Renewed Lease shall otherwise contain the same terms and conditions mutatis mutandis as are contained in this Lease except the Lease shall be amended in accordance with Clause 4 below. 5 Relevant to that question is cl.31(14) of the lease, in the following terms: (14) Any notice required to be served on the Lessor under this Lease shall be served personally or by sending the same by pre-paid registered post to the Lessor's registered office (if a company) or (if a natural person) to the address of the Lessor set forth in this Lease or at such other address as the Lessor shall from time to time by notice in writing to the Lessee nominate and any notice required to be served on the Lessee or any Guarantor shall be sufficiently served if served personally or in the case of the Lessee if left addressed to the Lessee on the premises or in the case of either the Lessee or the Guarantor if forwarded by pre-paid post to the last known place of business or abode of the Lessee or the Guarantor (as the case may be) and any notice sent by post shall be deemed to be given at the time when it ought to be delivered in due course of post.

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Further and in the alternative the respondents say that upon the proper construction of the option agreement any alleged failure to comply with clause 31(14) of the Lease in the exercise of the option by the respondents, the application of the said clause is not admitted and the failure to comply is denied, is a matter of breach of the Lease, which breach is denied, for which damages may flow in the nature of costs incurred in determining whether any non-complying mode of service was effected, as opposed to a construction that the said clause is an essential requirement or condition for valid exercise of the option. In respect of any damages suffered by the appellant for the purpose of this ground in this Notice of Contention the respondents accept that the damages are the appellant's costs incurred in the Court below and that if the respondents are successful only on this ground the appellant is entitled to such costs order by this Court in favour of the appellant as if an award of damages for the same had been claimed by the appellant in the Court below. (The respondents also submit to such costs order in this Court and in the Court below as this Honorable (sic) Court of Appeal deems fit in the granting of leave to make this amendment to this Notice of Contention. 8 This Amended Notice of Contention was submitted after the hearing of the appeal, pursuant to discussion and submissions made during the appeal. The respondents sought leave to rely on the additional fourth ground in that amended notice. The discussion during the appeal and a further document submitted by the appellant indicate that, in the light of the concession made by the respondents in that fourth ground, there would be no prejudice to the appellant in allowing that ground to be relied on. For that reason, in my opinion, leave should be granted to the respondents to rely on that ground. 9 It is convenient to deal with the issues in this appeal in three stages. First, to consider whether notice was served in accordance with the terms of cl.31(14). Second, to consider whether notice was given in accordance with the terms of Item 1 of the Second Schedule, leaving aside the effect of cl.31(14). Third, to consider whether, if the first question is answered no and the second yes, cl.31(14) makes the giving of notice ineffectual.

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NOTICE IN ACCORDANCE WITH ITEM 1? 13 The primary judge found that the notice was posted before 5pm on Wednesday 11 April 2001, in a pre-paid envelope addressed to "The Secretary, FAI General Insurance Limited, C/- FAI Property Services, 8th Floor, 77 Pacific Highway, North Sydney, NSW, 2060". He accepted evidence from postal officials that in those circumstances, there was a 93.7% chance that it was delivered on Thursday 12 April and a 98.2% chance that it was delivered no later than Tuesday 17 April (the last day for the giving of the notice). He found that such delivery by the postal service would have been effected at the offices of FAI Property Services on the 8th Floor of 77 Pacific Highway, North Sydney. The primary judge also found that the appellant lessor carried on at those premises its property business involving the leasing of properties including the subject property. 14 There was evidence from the appellant that the notice was not received, in particular evidence of office practice that the notice would have been brought to the attention of Mr. McElroy and his evidence that the notice did not come to his attention. The primary judge did not reject this evidence. 15 However, that evidence was far from conclusive. It was established that there were a number of files relating to this property; there was no evidence of any systematic search of the files or any other search for the document, even after the allegation of exercise of the option was plainly brought to the appellant's attention on 10 May 2001; the system of dealing with mail was not written, and did not include the use of a date received stamp, suggesting that it was of less than perfect efficiency; a provisional liquidator of the appellant had been appointed on 15 March 2001 and there have been two moves of FAI Property Services since April 2001; and the possibility that the notice may have been sent on to the secretary of the appellant or the provisional liquidator was not excluded, and no enquiry was made of either of those persons concerning the notice. 16 In all those circumstances, in my opinion the primary judge's finding that, on the balance of probabilities, the notice was delivered to the appellant at its place of business on 8th Floor, 77 Pacific Highway, North Sydney, no later than 17 April, should not be set aside. 17 The respondents also relied on s.170 of the Conveyancing Act, which is in the following terms: 170(1) Any notice required or authorised by this Act to be served shall be in writing, and shall be sufficiently served: (a) if delivered personally, (b) if left at or sent by post to the last known residential or business address in or out of New South Wales of the person to be served, (b1) in the case of a mortgagor in possession or a lessee, if left at or sent by post to any occupied house or building comprised in the mortgage or lease, (b2) in the case of a mining lease, if left at or sent by post to the office of the mine, (c) if delivered to the facilities of a document exchange of which the person on whom it is to be served is a member, or (d) in such manner as the Court may direct. (1A) In the case of service by delivery to the facilities of a document exchange, the notice is, unless the contrary is proved, to be taken to have been served on the second business day following the day of delivery of the notice to those facilities. (2) Any notice required or authorised by this Act to be served on a lessee or mortgagor shall, if served otherwise than by post, be sufficient although addressed to the lessee or mortgagor by that designation only, without the name of the lessee or mortgagor, or generally to the persons interested, without any name, and notwithstanding that any person to be affected by the notice is absent, under disability, unborn, or unascertained. (2A) The provisions of this section extend to notices required to be served by any instrument affecting property (including any dealing under the Real Property Act 1900 ) executed, made or coming into operation after the commencement of the Conveyancing (Amendment) Act 1930 , unless a contrary intention appears in the instrument or dealing or in the Real Property Act 1900 . (3) This section does not apply to notices served in proceedings in any court. (4) This section applies only if and so far as a contrary intention is not expressed in any instrument, and shall have effect subject to the provisions of such instrument. (5) In this section, "business day" means any day except Saturday or Sunday or a day that is a public or bank holiday throughout the State. 18 For reasons given by Young CJ in Eq., in my opinion the notice in this case was a notice "required to be served" within cl.31(14), and in my opinion also within s.170. Accordingly, s.170 applies, unless the lease, that is relevantly cl.31(14), discloses a contrary intention. The primary judge relied on s.76 of the Interpretation Act, which says that delivery is taken to have been effected on the fourth working day after a letter has been posted; but it is common ground that the fourth working day would be after 17 April, and accordingly too late. However, actual delivery by 17 April has been proved; and it may be that the date of delivery in the ordinary course of post would also be sufficient, although I do not need to decide that. 19 In my opinion, the primary judge was justified in finding that the 8th Floor, 77 Pacific Highway, North Sydney was the relevant place of business of the appellant, for the purposes of s.170 of the Conveyancing Act; and he was justified in finding that, subject to the effect of cl.31(14), the notice was given both at common law and in accordance with the provisions of s.170 of the Conveyancing Act.

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DOES CLAUSE 31(14) MAKE THE NOTICE INEFFECTUAL? 20 I agree with Young CJ in Eq. that cl.31(14) draws a clear distinction between notices given by the lessee and notices given by the lessor. In relation to notices given by the lessor, the effect of the provision is to make the specified service sufficient. In the case of notices given by the lessee, the effect of the provision is that the service "shall be" as specified. That is, in the case of the lessor, service otherwise than as specified is not as such a contravention of the provision; whereas in the case of the lessee, service otherwise than as specified by the provision is a contravention of the provision. 21 As noted earlier, I agree with Young CJ in Eq. that the notice in this case was relevantly a "notice required to be served" within the meaning of cl.31(14); and accordingly there was in this case a contravention of cl.31(14). The question then is, what are the consequences of that contravention? Does it invalidate the giving of the notice, or is it merely a breach of the provision giving rise to a claim for damages if damage is thereby caused to the lessor? I prefer the latter alternative. 22 I accept that service by a lessee in accordance with cl.31(14) would be sufficient for the giving of notice for the purposes of Item 1. I do not think the lessor could say, where the lessee did as required by cl.31(14), that there was not notice in accordance with Item 1. However, the question is, can the lessor say, when it has actually received notice, that Item 1 was not complied with? 23 Such an assertion would be contrary to the terms of Item 1 itself, unless the construction of Item 1 is controlled by cl.31(14). It would be an unjust result, in cases where the notice has plainly come to the attention of the relevant officer of a corporate lessor (though this is not so in the present case). It would give a drastic effect to a clause which, rather surreptitiously, gives an advantage to the lessor and which, in my opinion, should be construed contra proferentem. 24 I note that Item 1 requires that the lessees "shall not, at the time of exercise of this option be in default under this Lease". It could be argued that the time of exercise is the time of the lessor's receipt of the notice, and that the failure to comply with cl.31(14) meant that the lessees were in default under the lease at that time. However, in circumstances where no relevant notice under s.133E of the Conveyancing Act was given, this could not invalidate the exercise of the option. 25 Accordingly, my view is that compliance by the lessee with cl.31(14) is not a condition precedent to satisfaction of Item 1, although it is an obligation under the lease. Damage may be caused to a lessor where failure to comply with cl.31(14) gives rise to a doubtful situation. In such a case, the lessor is entitled to put the lessee to strict proof of giving of notice in accordance with Item 1. The respondents acknowledge that, if this is the correct approach, it has costs consequences. In my opinion it means that, except to the extent that the lessor acts unreasonably, the costs of proceedings made necessary to resolve the doubtful situation are damages caused to the lessor by the lessees' breach. 26 For that reason, in my opinion the appeal should be allowed to the extent of setting aside the primary judge's costs order, but otherwise dismissed. The respondents should pay the costs of the appeal: although the appeal has succeeded only on a limited basis, the precise point on which the balance of the appeal has failed was raised only by the late addition of ground 4 of the Notice of Contention.

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ORDERS 27 In my opinion the following orders should be made: 1. Appeal allowed to the extent of setting aside the primary judge's costs order and substituting an order that the respondents pay the appellant's costs of the proceedings. 2. Appeal otherwise dismissed. 3. Respondents to pay appellant's costs of appeal and to have a suitors fund certificate if otherwise entitled. 28 YOUNG CJ in Eq: This is an appeal from a judgment of Santow J sitting in the Equity Division. The plaintiffs, present respondents, there claimed that they had validly exercised an option to renew a lease for five years from 16 July 2001 and for an order for specific performance of that lease. His Honour granted the appropriate declaration, though for some reason or other there was no actual order for specific performance made. 29 It is only necessary to set out a brief resume of the essential facts. 30 The appellant FAI General Insurance Co Ltd is the lessor of the basement of 244-248 Pitt Street, Sydney. Its registered office was at Level 42, 50 Bridge Street, Sydney. The respondents became the lessee of those premises by virtue of a registered lease for five years expiring on 16 July 2001 with the benefit of two options to renew. 31 At all material times, a subsidiary of the lessor, FAI Property Services Pty Ltd acted as the lessor's managing agent of the property. This company's registered office was 8th Floor, 77 Pacific Highway, North Sydney. 32 The question on appeal turns on a very short point. Did the respondents exercise their option to renew the lease in time? 33 The option is contained in Item 1 of the Second Schedule to the lease in the following terms: If the Lessee intends to take a new Lease of the premises for a further term of the number of years (if any) specified in Item 5 from the expiration of the Term of this Lease and prior to such expiration gives to the Lessor not less than 3 nor more than 6 months' notice in writing of that intention and shall have during the first Term duly and punctually paid the Annual Rent and the Lessee's Proportion of the Outgoings and the Turnover Rent reserved by this Lease at the proper times and shall not, at the time of exercise of this option be in default under this Lease then subject to the provisions of this clause the Lessor will at the cost of the Lessee grant to the Lessee a renewed Lease of the premises for a further term of the number of years (if any) specified in Item 5 from the expiration of the first Term of this Lease at an Annual Rent calculated or determined in accordance with the provisions of this Schedule ("Renewed Lease"). The Renewed Lease shall otherwise contain the same terms and conditions mutatis mutandis as are contained in this Lease except the Lease shall be amended in accordance with Clause 4 below. 34 The last day for exercising the option was Tuesday 17 April 2001. This came about because 16 April 2001, the last day according to strict mathematics was Easter Monday, a public holiday. 35 The evidence as accepted by the learned Judge, was that the lessee's solicitor's secretary, Ms Xygalas, posted an envelope containing two sheets of paper in a prepaid envelope addressed to "The Secretary, FAI General Insurance Ltd c/- FAI Property Services, 8th Floor, 77 Pacific Highway, North Sydney, NSW 2060", a notice of exercise of option addressed to the "Manager, FAI General Insurance Company Ltd", as well as a covering letter signed by her employer, A C Comino. The Judge accepted that the letter was posted by ordinary post with a prepaid stamp before 5 pm on Wednesday 11 April 2001. His Honour also accepted evidence from postal officials that there was a 93.7% chance that the letter would have been delivered on Thursday 12 April and a 98.2% chance that it would have been delivered no later than Tuesday 17 April. 36 The evidence also made it clear that the employee of Australia Post who delivered the mail to 77 Pacific Highway actually left the letters for the FAI subsidiary on the 8th floor of that building. The officers of the defendant disclaimed any receipt of the notice and the covering letter at any time. 37 The central problem to be dealt with on this appeal is whether clause 31(14) of the lease, which appears under the heading "Miscellaneous", is facultative or mandatory. If it is facultative, as the learned Judge held, then one has to explore whether the notice was given or served under s 170 of the Conveyancing Act 1919, or under the general law. If it is mandatory, then any such consideration is otiose and the only question is whether the lessee complied with its terms. 38 The sub-clause is as follows: (14) Any notice required to be served on the Lessor under this Lease shall be served personally or by sending the same by pre-paid registered post to the Lessor's registered office (if a company) or (if a natural person) to the address of the Lessor set forth in this Lease or at such other address as the Lessor shall from time to time by notice in writing to the Lessee nominate and any notice required to be served on the Lessee or any Guarantor shall be sufficiently served if served personally or in the case of the Lessee if left addressed to the Lessee on the premises or in the case of either the Lessee or the Guarantor if forwarded by pre-paid post to the last known place of business or abode of the Lessee or the Guarantor (as the case may be) and any notice sent by post shall be deemed to be given at the time when it ought to be delivered in due course of post. 39 In Lolly Pops (Harbourside) Pty Ltd v Werncog Pty Ltd (1998) 9 BPR 16,361 at 16,364, I had to consider whether the corresponding clause was facultative and mandatory and was able to make that determination after considering a number of factors which went to the construction of the particular clause. However, I said that I thought that the majority of the previous cases show that "This sort of clause is usually read as being facultative only. That is, it does not prescribe an exclusive method for the service of notices, but only one which may be availed of by the party wishing to give a notice if he, she or it so wishes." I referred to Wilson's Laundry Pty Ltd v Patmoy (1961) 78 WN (NSW) 636 and Tsaoucis v Gallipoli Memorial Club Ltd (1998) 9 BPR 16,265, the latter case affirmed in the Court of Appeal (1998) 9 BPR 16,275. 40 As Santow J said at first instance, relying on a passage in Carter and Harland Contract Law in Australia which is now [228] of the 4th edition (Butterworths, 2002): In most cases an offeror in indicating that acceptance may be made in a particular manner will not be taken to have insisted that that is the exclusive method of acceptance. In such cases any alternative method of acceptance which is as prompt as, and no less advantageous to the offeror than, the prescribed method will suffice.

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That statement is supported by authorities such as George Hudson Holdings Ltd v Rudder (1973) 128 CLR 387, 395; Spectra Pty Ltd v Pindari Pty Ltd 2 NSWLR 617, 623 and Tonitto v Bassal (1990) 5 BPR 11,258. 41 However, each contract must be looked at on its own wording. It will be noted that subclause (14) deals with two discrete situations, viz: (1) a notice required to be served on the lessor; and (2) a notice required to be served on the lessee or any guarantor. In the first case, the words employed are "shall be served personally or by sending the same by pre-paid registered post", and this is to be contrasted with the words used in the second case, "shall be sufficiently served if served personally …". The change in language is clearly intentional and points to the subclause being mandatory. 42 Santow J said that the view that one might take at first blush from those words must be read in the light of the fact that clause 31(14) prescribes what is required for service of a notice, whereas the clause conferring the option speaks of giving of a notice. 43 His Honour then considered various clauses of the lease where the word "serve" and the word "give" or their derivatives were employed, and found that there was a real distinction between giving a notice and serving a notice. 44 Mr Rayment QC who appeared for the appellant with Mr R G McHugh said that his Honour's analysis of the lease in its use of the verbs "give" and "serve" was not exhaustive. As an adjunct to their submissions, Mr Rayment QC and Mr McHugh listed the situations where the relevant verbs were used in the lease with respect to notices given to the lessor and I must agree that it is hard to see any conscious differentiation between the use of the two verbs. Indeed, any differentiation would be against the usual run of authority; see for instance Re 88 Berkeley Road NW 9 [1971] Ch 648; Alexander v Stocks & Holdings (Sales) Pty Ltd [1975] VR 843. 45 Santow J thought there were two other indications that pointed away from paragraph (14) being mandatory. These were: (a) that the notice was not "required" to be served or given: it was merely a matter of the lessee's choosing whether or not they were to give notice, therefore para 31(14) did not apply; and (b) to take a construction of the lease which meant that the notice was taken never to have been received when on the facts the learned Judge found it had been received was a nonsense. 46 As to (a), in similar cases to the present the courts have taken the view that once the lessees decide to exercise their rights the giving of the notice is a mandatory precondition and so one does get into the area of being required to give a notice; see eg Bressan v Squires [1974] 2 NSWLR 460. That line of cases should be applied here. 47 As to there being an absurd result, it must almost necessarily follow that where one has a particular method of accepting an offer or exercising an option which is mandatory, there is always the possibility that the grantor of the option will be appraised of the fact that the grantee wishes to exercise the option, but that exercise will be ineffective because it has not been done the right way. Indeed, there are decisions in which this has occurred where there has been no suggestion by the judges that the result they reached is absurd. A recent example is Godwin v Swindon BC [2001] 4 All ER 641, though that was a case decided under a Court Rule rather than a commercial contract. 48 With respect to the learned Judge, the reasons given for departing from what his Honour observed was his first blush view of 31(14) do not support such view. 49 Having then taken the view that the subclause is mandatory, I must turn my attention as to what is its proper construction. 50 So far as notices to be served on the lessor are concerned, only two methods are prescribed, viz (i) personal service; or (ii) prepaid registered post to the lessor's registered office. (ii) can be discarded as there was no service by registered post, and what post there was, was not to the registered office. The enquiry then is whether the notice was served personally. 51 Apart from the natural meaning of the word "personally", one has to take into account subclause (15) which reads: Any notice given or document signed and/or served on behalf of the Lessor by its solicitor, or its agent, shall be deemed to have been given or served (as the case may be) by the Lessor personally.

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It will be noted this again is a one-sided provision, only applying to notices given by the lessor, not those given or served on it. Apart from being an indication that there is no semantic significance between "given" and "serve", it also has the effect of showing that whilst there was an expansion of the meaning of the word "personally" in cases of notices to be served by the lessor, there was no expansion in the case of notices to be served on the lessor. 52 The lessor was a corporation. The common law rule was that there could not be personal service on a corporation aggregate; see Newby v Von Oppen (1872) LR 7 QB 293 and see also Rochester Communications Group Pty Ltd v Lader Pty Ltd (1997) 143 ALR 648, 661. So far as court process is concerned, this position was alleviated by statutory provisions such as that which became s 16 of the Common Law Procedure Act 1899, allowing process to be served on the chief officer or secretary of the corporation. However, as Rochester's case shows, this sort of provision whether contained in Act or Court Rules does not apply to service of notices such as involved in the present case. The Corporations Act section 109X allows service on a company "for the purposes of any law" iter alia by delivering a copy of the relevant document personally to a director of the company who resides in Australia. However, almost certainly the present is not a document served "for the purposes of any law" and in any event, the provisions of s 109X were not satisfied. 53 Accordingly there has been no personal service and there has been no service by registered post. Accordingly, the notice has not been served at all in accordance with the mandatory requirements of clause 31(14). 54 Because of this conclusion, it is not at all useful to explore the interesting arguments that were presented as to the proper interpretation of s 170 of the Conveyancing Act 1919 or whether service on the lessor's managing agent, a subsidiary company in its Group, was service on the lessor. 55 It is also unnecessary to explore whether one of the purposes of 31(14) was to ensure that the time of service would be fixed because of the deeming provision which could not be contradicted (vide Godwin's case supra), nor is it necessary to examine whether his Honour was justified in holding that the notice was actually delivered, nor whether the subsidiary company which was the managing agent was authorised to accept service. 56 During argument, Mr Street SC developed the argument that Item 1 of the Second Schedule to the lease conferred an option which could be exercised if the lessees: (1) Gave the lessor notice in writing; (2) Had duly paid all rent and outgoings; and (3) Were not at the time of the exercise in default under the lease. 57 It was put that these were the only conditions precedent to the exercise of the option. The giving of notice was not made subject to the notice being given in accordance with the lease. 58 The submission stressed that the exercise of an option was the acceptance of an irrevocable offer which required merely the performance of the three conditions mentioned above. 59 Mr Street SC said that this view was reinforced by the reference to the bringing into effect a renewed lease which was something different to "this lease" referred to in cl 31(14); cf Trade Practices Commission v Tooth & Co Ltd (1979) 142 CLR 397, 406-7. 60 It followed that where the Court was satisfied that the lessor had been given notice in writing of the exercise of the option either cl.31(14) was irrelevant to the case or else its breach sounded only in damages. Mr Street SC was prepared to adopt the second alternative on the basis that the damages were confined to the lessor's costs of seeing that the notice was actually served. 61 By leave, an amended notice of contention was filed on 9 September 2002 to put this matter properly before the Court. 62 I find the question raised by this submission a difficult one. Clause 31(14) appears to have been deliberately drawn to protect the lessor from receiving any notice from the lessees and it would be an odd result to exclude from its operation the most significant notice to be given under the lease. The notice is given under the lease even though it results in a renewed lease. 63 On the other hand, one construes a contract so as not to "defeat its main object and intent" (see eg Thos Cook v Kumari [2002] NSWCA 141). 64 The main object and intent of the lease was to provide the lessees with a five year lease with an option to renew for a period of 5 years + 10 years. 65 I consider that the rule of construction last referred to plus the contra proferentem rule lead to the result that the point made in the amended notice of contention should succeed. 66 I agree with Hodgson JA as to the cost consequences that must follow. 67 I thus agree with the orders proposed by Hodgson JA.

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