First Plaintiff v Defendant

Supreme Court of Victoria|2015-02-13|Before: SIFRIS J

CONTRACT - Implied term - Whether term should be implied in fact in order to give business efficacy to the contract - Whether BP Refinery requirements met; BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1937) 180 CLR 266; Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337.

2 Tahiri initially sought to recover the deposit of $825,000 that he paid as purchaser under a contract of sale for the Property dated 26 April 2013 ('the Contract of Sale'). However, on the first day of the trial the Court was informed that the claim was not pressed.

3 Regreen claims damages for the alleged breach of an agreement for the sale of the Rendering Equipment ('Rendering Equipment Agreement') or alternatively damages for conversion of the Rendering Equipment.

4 Castricum Brothers denies that it was obliged to refund the deposit to Tahiri, and contends that it validly rescinded the Contract of Sale when Tahiri failed to pay the balance of the purchase price, and was therefore entitled to retain the deposit under the terms of the Contract of Sale. Although, as noted, Tahiri did not press his claim, the facts relating to this claim are nevertheless of some importance in resolving the Rendering Equipment claim.

5 Castricum Brothers admits that it has on-sold the Rendering Equipment but contends that it is not liable to Regreen because there was an implied term of the Rendering Equipment Agreement that completion was subject to settlement of the sale of the Property ('the implied term'), which Tahiri failed to complete. Castricum Brothers contends the implied term was breached and it has validly terminated the Rendering Equipment Agreement. It returned the money paid by Regreen for the Rendering Equipment (less the costs and expenses of the sale). In the alternative it submitted that, as the Contract of Sale was not completed, the obligation to complete the Rendering Equipment Agreement did not arise, and the Rendering Equipment Agreement came to an end ('the contingent condition'). Although Regreen makes no claim for recovery of the purchase price of the Rendering Equipment under the contingent condition, Castricum Brothers agrees that if the Rendering Equipment Agreement came to an end under the contingent condition scenario, Castricum Brothers will reimburse the full purchase price of $330,000 (including GST) to Regreen.

6 The Contract of Sale was entered into on or about 2 May 2013 with Castricum Brothers as vendor and Tahiri as purchaser. Tahiri paid the deposit of $825,000 by 29 April 2013 (by an initial payment of $20,000 on about 20 March 2013 and a further payment of $805,000 on 29 April 2013). The balance of the purchase price due at settlement was $7,425,000.

7 The Contract of Sale contained a condition that GST was payable in respect of the purchase price except for a part of the Property that was to be subject to a lease between Tahiri and Castricum Food Services Pty Ltd ('Castricum Food Services'), a company related to Castricum Brothers ('the lease back to Castricum Food Services').

8 Settlement was initially due to take place within 90 days of the date of the Contract of sale being 25 July 2013. On 2 July 2013 the solicitors for Castricum Brothers wrote to the solicitors for Tahiri requesting the Transfer of Land to be completed by Castricum Brothers. On 16 July 2013, the solicitors for Castricum Brothers again wrote to the solicitors for Tahiri requesting the Transfer of Land as well as the Statement of Adjustments. Neither was provided.

9 On or about 24 July 2013 Tahiri sought an extension of time for settlement. By letter from its lawyers dated 25 July 2013, Castricum Brothers agreed to extend time for settlement to 26 August 2013. The letter warned that failure to settle by 26 August 2013 would result in a notice of rescission being served.

10 Tahiri did not provide a Transfer of Land or Statement of Adjustments prior to 26 August 2013 or at any time after. Settlement did not take place on 26 August 2013.

11 On 27 August 2013 the lawyers for Castricum Brothers served Tahiri with a notice of rescission ('the Notice of Rescission'). The Notice of Rescission identified the default as '[t]he Purchaser has defaulted by the failure to pay the balance of the purchase money of $7,425,000 plus adjustment of outgoings plus GST on the due date'.

12 The Notice of Rescission provided a period of 14 days of service within which Tahiri was required to remedy the default and pay legal costs and interest on the amount due under the Contract of Sale, failing which the Contract of Sale would be 'rescinded pursuant to General Condition 28.2 of the Contract.'

13 The 14day period within which Tahiri was required to comply with the Notice of Rescission expired by 12 September 2013. Tahiri failed to comply with the Notice of Rescission.

14 Prior to the commencement of this proceeding Tahiri had not indicated to Castricum Brothers that he disputed the validity of the Notice of Rescission, that the Contract of Sale had not validly come to an end in September 2013 or that Castricum Brothers was entitled to retain the deposit. However, in this proceeding Tahiri claimed return of the deposit of $825,000 on various grounds.

15 There is no substantial dispute on the facts (relevant to the matters pleaded relating to the return of the deposit) between Castricum Brothers and the plaintiffs.

16 In November 2012, Castricum Brothers appointed Grays (Aust) Holdings Pty Ltd ('GraysOnline') as its agent for the sale of the Rendering Equipment. Shortly thereafter, the process for the sale of the Rendering Equipment began. The Rendering Equipment was listed for sale on the GraysOnline website.

17 On 5 March 2013, in a conversation between the lawyer for Castricum Brothers, Mr Peter Robert Mason ('Mason') and the lawyer for the plaintiffs, Mr Bruce Travers McNab ('McNab'), McNab suggested that the lease back to Castricum Food Services be put in place as part of the Contract of Sale for GST purposes.

18 On 21 March 2013 copies of the Contract of Sale signed by Tahiri were delivered to Mason who advised that Castricum Brothers were not prepared to exchange Contracts of Sale without payment of the deposit.

19 By letter dated 28 March to Mason, McNab confirmed Tahiri's agreement to a 12 month rent free period in relation to the lease back to Castricum Food Services:

... in consideration of your clients being allowed a 12 month rent free period for that part of the land under lease, [Tahiri] will be allowed addition [sic] time [say 12 April 2013] in which to pay the balance of the deposit monies.

20 By email of 3 April 2013 Mason confirmed the agreement to extend the time for payment of the deposit to 12 April 2013.

21 By letter of 12 April 2013 to Mason, McNab requested a further indulgence of time. By letter of 17 April 2013, Mason replied to McNab allowing the further indulgence and suggesting that special condition 26 be amended to reflect the agreement to a 12 month rent free period in relation to the lease back to Castricum Food Services.

22 As noted above, by an exchange of contracts effected on 2 May 2013, Tahiri entered into the Contract of Sale, with settlement of the Contract of Sale originally due to occur on 25 July 2013 and later extended to 26 August 2013. The Contract of Sale did not include the purchase of the Rendering Equipment.

23 On about 15 May 2013, there was a conversation at the Property between Mr Gary Castricum ('Castricum'), the Managing Director and Chief Executive Officer of Carstricum Brothers, Mr Garry Joseph Price ('Price'), a business associate of Tahiri with an interest in Regreen, and Tahiri to the following effect:

(a) Castricum said the removal of the Rendering Equipment would cause damage to the building which Tahiri said '... would be a problem' for the plaintiffs, as the purchasers of the building, because the plaintiffs had '... plans for that building'.

(b) Price asserted that Castricum said, 'I hope you don't mind if we damage the building when we remove the rendering equipment?', or words to that effect, to which Price responded, 'actually I do mind as we have plans for the building' and 'you'll have to go to the expense of taking the roof off'.

(c) Castricum said that, in those circumstances, the plaintiff should buy the Rendering Equipment which was advertised for sale on GraysOnline and that, if he was interested in purchasing the Rendering Equipment, Tahiri should speak to Tim Muir ('Muir') Project Manager/Valuer at GraysOnline.

24 Tahiri deposed that there was no discussion with Muir or Castricum about removal of the Rendering Equipment from the Property. Tahiri also stated that it was his expectation that once settlement of the Contract of Sale occurred, the Rendering Equipment would remain in place. Castricum deposed that he had no expectation about removal or otherwise of the Rendering Equipment, as he regarded oversight of any removal as a matter for GraysOnline and the plaintiffs. Price deposed that '... the whole idea was because we had purchased the Property we should also purchase the equipment in order to avoid the need for it to be removed from the Property, which would have been a costly exercise and one which would cause damage to the rendering building'.

25 By letter dated 23 May 2013 to McNab, Mason confirmed the agreement for the sale of the rendering equipment and that, '[a]s part of this arrangement, [Tahiri] has agreed to grant [Castricum Food Services] a further rent free period of 12 months. This makes a total rent free period [of] ... 24 months from the date of settlement'. He suggested that Special Condition 26 be amended to reflect the increased rent free period, extended from 12 months to 24 months.

(a) at 10.21 am an email was sent to Price enclosing the Rendering Equipment inventory; and

(b) at 11.55am an email was sent to Tahiri, enclosing an invoice ('the Invoice') for the Rendering Equipment dated 1 June 2013 addressed to Regreen under cover of an email which stated '[a]s discussed, we'll require 20% by COB Friday 14th June with the balance to be paid by 5th July.'

27 By letter dated 25 July 2013 to McNab, Mason advised that Castricum Brothers was prepared to extend the settlement date to 26 August 2013 for a third one year rent free period - making a total of three years rent free in relation to the lease back to Castricum Food Services.

28 As noted above, Tahiri did not settle on the Contract of Sale, and the Contract of Sale was rescinded on 12 September 2013.

29 On 30 September 2013, McNab wrote to Mason to arrange access to the Property to allow an inspection of the rendering plant to 'assist my client in being able to finally secure funding with a view to making an acceptable proposal to your client concerning the property.' The request was refused on the basis that an inspection had already been completed.

30 On 17 October 2013, Muir wrote to Tahiri stating that:

(a) Castricum Brothers required the removal of the Rendering Equipment by 29 November 2013;

(b) in the event that Regreen elected to abandon the Rendering Equipment, Castricum Brothers agreed to refund the amount paid to purchase the Rendering Equipment less selling commission, relisting costs and any shortfall in realisable value; and

(c) confirmation of Regreen's intentions was required by COB on 8 November 2013.

31 Regreen did not remove the Rendering Equipment by 29 November 2013.

32 On 6 December 2013, Muir again wrote to Regreen. In his letter he noted the absence of any response to the 17 October 2013 letter and stated that as a result of Regreen's failure to remove the Rendering Equipment, Castricum Brothers deemed that the Rendering Equipment had been abandoned.

33 On 19 December 2013, Castricum Brothers sent a cheque for $285,450 to Regreen.

34 On 14 February 2014, Castricum Brothers and Mr Catalfamo, a Director of a third party, Australian Meat Properties Pty Ltd ('AMP'), executed a contract of sale for the Property which included the Rendering Equipment among other equipment at the Property, with AMP nominated as the purchaser on 25 February 2014.

35 Regreen claims that the Rendering Equipment Agreement was a separate agreement that did not depend on the Contract of Sale. It contends that the sale by Castricum Brothers to AMP was a repudiation of the Rendering Equipment Agreement which Regreen accepted. Regreen asserts that Castricum Brothers have converted the Rendering Equipment to its own use and claims substantial damages.

36 Castricum Brothers denies the claim and asserts that it was an implied term of the Rendering Equipment Agreement that the Contract of Sale settle. By agreement between the parties this was the only issue in the case. Accordingly, if there was no implied term as contended, the claim for conversion will be made out. Conversely if there was an implied term as contended, the claim will fail.

37 Castricum Brothers argued that the implication of the implied term 'in fact' in order to give business efficacy to the Rendering Equipment Agreement met all five of the requirements set out by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings.[1]

38 Regreen submitted that none of the implied term requirements were met. It claims that the Rendering Equipment Agreement stood and was capable of standing and being implemented independently, and that the subsequent conduct of Castricum Brothers provided confirmation of this.

39 Where, as is often the case, contracts do not deal with every eventuality or contingency, or circumstances not expressly contemplated by the parties at the time of contracting, courts may need to fill the gap. In such circumstances a term may be implied in fact in order to give business efficacy to the contract.

40 In Commonwealth Bank of Australia v Barker,[2] Gageler J said:

Contractual terms implied in fact are "individualised gap fillers, depending on the terms and circumstances of a particular contract". Contractual terms implied in law, of the kind in issue in the present case, are "in reality incidents attached to standardised contractual relationships" operating as "standardised default rules". The former are founded on what is "necessary" to give "efficacy" to the particular contract. The latter are founded on "more general considerations", which take into account "the inherent nature of [the] contract and of the relationship thereby established".[3]

41 Of course it is necessary as a matter of construction to have regard to the terms of the Rendering Equipment Agreement in order to assess whether the agreement represents the entirety of the obligations of the parties. It is also necessary to determine the factual matrix or objective background. The enquiry is one of construction and not designed to impose additional obligations on parties that they have not agreed to or that are otherwise reasonable or desirable and should have been agreed to. The question as a matter of construction is rather what was agreed to or more accurately what was the presumed intention of the parties.

Implication of a term in fact in a contract, by reference to what is necessary to give it business efficacy, was described in Codelfa Construction Pty Ltd v State Rail Authority (NSW) as raising issues "as to the meaning and effect of the contract". Implication is not "an orthodox exercise in the interpretation of the language of a contract, that is, assigning a meaning to a particular provision." It is nevertheless an "exercise in interpretation, though not an orthodox instance." The implication of terms in fact was also characterised in Attorney General of Belize (Belize) v Belize Telecom Ltd as an exercise in construction. Lord Hoffmann, delivering the judgment of the Privy Council, said:

it is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means. [4]

The distinction thus drawn is appropriate even though the scope of the construction approach adopted by Lord Hoffmann has been debated.

43 It is necessary to examine each of the requirements of the test.

The term is necessary to give business efficacy to the contract

44 The purpose of the Rendering Equipment Agreement, it was submitted, was to ensure that the Rendering Equipment would remain with the building for which it had been specifically incorporated, because of the express concerns of the parties. In particular, the conversation between Castricum, Tahiri and Price demonstrated that the parties perceived that the removal of the Rendering Equipment would be a problem, and would require removal of the roof. The business purpose of the sale of the Rendering Equipment was to avoid removal. Accordingly, it was submitted that without the implied term, the effect of the contract would be to require the very thing (i.e. removal of the Rendering Equipment from the building), which it was intended to avoid.[5]

45 Castricum submitted further that if the parties had intended that the Rendering Equipment Agreement could proceed without the sale of the Property, the agreement failed to deal with the following issues:

(a) what would be the rights of access, including the period during which the removal and works would be undertaken;

(b) which party would be responsible for the cost of make-good; and what were to be the make good requirements; and

46 Regreen argued that although the parties had not considered or contemplated this situation and indeed were working towards a settlement of the Contract of Sale, the non-contemplated failure to settle did not affect the ability of the Rendering Equipment Agreement to stand on its own according to its terms. Further the failure to deal with certain matters could be addressed by implied terms.

47 The critical question is whether the contract would be commercially ineffective without such a term. Put another way the term must be necessary to make the contract work such that without such a term it would be unworkable.[6] According to The Laws of Australia a term will be implied '... if it is required to implement the intention, purpose or commercial objective of the parties'.[7]

48 I accept the submission made by Castricum Brothers. Neither contracting party wanted the Rendering Equipment removed. In fact the opposite was the case. The implied term gives effect to this intention and objective of the parties. But for this term, the very thing the parties wished to avoid - namely removal - would presumably be required. Accordingly in my opinion the term is necessary to make the contract work. Although the contract could theoretically work without the suggested implied term and notwithstanding the increased cost and inconvenience, this is not what the parties wanted.

49 Castricum submitted that the term was equitable to both parties. This was so since if the Contract of Sale had been terminated by Tahiri for breach by Castricum Brothers, but Castricum Brothers had still sought to retain the purchase money and had required Regreen to proceed with the removal of the Rendering Equipment and re-instatement of the building; Castricum Brothers would be in breach of mirror implied terms and would accordingly be liable to Tahiri.

50 Regreen maintained its position that the Rendering Equipment Agreement operated independently.

51 The critical question is whether the term is fair.[8] In my opinion the term is fair and reasonable. As submitted by Castricum Brothers, it would in the converse case be most unfair to require removal. Both contracts were predicated on non-removal of the Rendering Equipment. There is nothing unfair in not permitting or requiring removal of the Rendering Equipment, provided of course the amount paid is returned. In such circumstances there is no burden or cost on the plaintiffs. What they sought to acquire as an indivisible unit - that is land and equipment - albeit under two agreements, did not happen. It is entirely fair and appropriate in the circumstances to judge the transaction as a composite transaction notwithstanding, as pointed out, its separate parts.

The term is so obvious that it goes without saying

52 At the time of entry into the Rendering Equipment Agreement, Tahiri had already contracted to buy the Property and had paid the deposit. It was submitted that in the circumstances surrounding the entry into the Rendering Equipment Agreement, and given the cost of removing the Rendering Equipment, it was obvious that the Rendering Equipment Agreement was predicated on Tahiri (as the sole director, company secretary and shareholder of Regreen) completing the Contract of Sale. As Tahiri deposed 'the purpose of me purchasing the rendering equipment in the first place was to avoid the need for it to be removed from the Property .... The cost of removing the Rendering Equipment within 14 days, relocating it, and re-installing it after settlement would have been in the order of many hundreds of thousands of dollars'.

53 Regreen submitted that the suggested term was not obvious and that in any event the agreement was capable of operating separately and independently.

54 The critical question is whether it can reasonably be assumed that had the parties put their minds to the term sought to be implied they would have adopted the term.[9] In Shirlaw v Southern Foundries (1926) Ltd,[10] Mackinnon LJ said that a term was sufficiently obvious if:

[W]hile the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common "Oh, of course!"[11]

55 The matter is judged by reference to the reasonable bystander.[12]

56 In my opinion a reasonable bystander would, at the time of the making of the Rendering Equipment Agreement, have said 'oh, of course!'. This reaction would have been entirely consistent with the contemplation and presumed intention of the parties.

57 It was submitted that the term has been and can be expressed clearly and simply. I agree and note that no argument was put to the contrary. The term does not have the 'lack of precision' that usually militates against the implication of a term.[13]

58 Castricum Brothers submitted that the implied term was not only consistent with the express terms but it was consistent with the parties' stated intention at the time of entry into the contract.

59 Regreen denies that the term was consistent with the express terms of the agreement and pointed to the removal clause in the GraysOnline terms and conditions which Castricum Brothers had in fact (paradoxically) invoked and relied upon as establishing a breach.

60 It is trite that the presumed intention of the parties to which the implied term is directed must give way to the actual intention of the parties as expressed in the contract. However, it is necessary to establish that the term sought to be implied is inconsistent with the presumed intention of the parties derived from the actual terms of the contract and permitted objective contextual evidence.[14]

61 In my opinion the proposed implied term does not contradict and is not inconsistent with any express term. The only term of potential application is the term requiring removal in the GraysOnline website terms and conditions. There is a real issue as to whether these terms were part of the Rendering Equipment Agreement. Tahiri says they were not and that he would never have agreed to such a term. Castricum Brothers did not at trial rely on such a term and sought to explain away its previous misguided reliance on such a term as constituting a breach of the Rendering Equipment Agreement.

62 In my opinion there is no contrary express term and accordingly there is no inconsistency.

63 A peculiar aspect of the case is that despite reliance on the implied term - which was so obvious that it goes without saying - it was not so obvious to Castricum Brothers. In fact the opposite was the case. Their post contractual conduct clearly assumed that there was no such implied term.

64 The parties were in dispute as to whether and to what extent the Court could take such post contractual conduct into account. I do not need to resolve this issue although I consider that the better view is that such conduct may not be taken into account,[15] going as it does to the construction of the contract rather than the existence of the contract.

65 Even if the conduct was taken into account, it merely represents the misguided and incorrect view of one party. It is still necessary to engage in the analysis in relation to the implied term and in this regard for the reasons stated all of the requirements have been met.

66 In the result the plaintiffs' claim must be dismissed. However, I am of the opinion that the implied term was a contingent condition that was not fulfilled. Accordingly, Regreen is entitled to a full refund of the amount paid. I will hear from the parties as to the form of order and costs.

[1] (1977) 180 CLR 266, 283 ('BP Refinery'). Adopted by the High Court of Australia in Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 and Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337.

[2] (2014) 312 ALR 356; [2014] HCA 32 ('Barker').

[4] Ibid [22] (French CJ, Bell and Keane JJ). Citations omitted.

[5] See New South Wales v Banabelle Electrical Pty Ltd [2002] NSWSC 178; (2002) 54 NSWLR 503 [49] (Einstein J): '... the requirement that a term be "necessary to give business efficacy to the contract" does not mean that the term must be so necessary that without the term the contract would, for all purposes be ineffective, but that the term must be necessary to make the contract effective and workable according to the presumed intention of the parties, as disclosed by the terms of the contract and the admissible surrounding circumstances.'

[6] Hospital Products Ltd v United States Surgical Corp [1984] HCA 64; (1984) 156 CLR 41[, 66 (Gibbs CJ)].

[7] Lawbook, The Laws of Australia (at 15 July 2012) 7 Contract, 'An implied term must be necessary to give business efficacy to the contract before it will be implied' [7.4.280].

[8] Peters American Delicacy Co Ltd v Champion [1928] HCA 27; (1928) 41 CLR 316 and BP Refinery. In both cases a term was not implied because it was not fair and reasonable.

[9] Lawbook, above n 9, [7.4.290] citing Codelfa 346, 355 (Mason J) and 374 (Aicken J).

[12] BP Refinery 285-287; Codelfa 374 (Aicken J) and 405 (Brennan J).

[13] See Ansett Transport Industries (Operations) Pty Ltd v Commonwealth [1977] HCA 71; (1977) 139 CLR 54, 62 (Gibbs J).

[14] Helicopter Sales (Aust) Pty Ltd v Rotor-Work Pty Ltd [1974] HCA 32; (1974) 132 CLR 1.

[15] FAI Traders Insurance Company Ltd v Savoy Plaza Pty Ltd [1993] VicRp 76; [1993] 2 VR 343.

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Judgment (97 paragraphs)

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Cases Cited (9)