Gibbins Thomson Pty Ltd v The Council of the City of Liverpool

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5800/03 Gibbins Thomson Pty Ltd v The Council of the City of Liverpool JUDGMENT 1 His Honour: In this matter I have come to a decision and I propose to give my reasons for it now. I must acknowledge the assistance I received from counsel in the full and thorough submissions received from them. It certainly enabled me to come to a decision about the matter perhaps more speedily than I otherwise might have been able to. 2 These proceedings concern disputes arising out of an agreement made on 29 May 1995 between the Council of the City of Liverpool, which I will refer to as the Defendant, and Gibbins Thomson Pty Ltd, the Plaintiff. The Plaintiff undertook the management of four tennis courts owned by the Defendant for an initial period for five years from the commencement date 1 September 1994 with an option for a further ten years. Mr Pesman of counsel appears for the Plaintiff and Mr Henry of counsel for the Defendant. 3 By its summons and amended Statement of Claim the Plaintiff claims a declaration that the notice of termination by the Defendant dated 12 November 2003 in relation to an agreement between the Plaintiff and the Defendant dated 1 September 1994 is invalid. It should be noted that the claim for damages included in the summons was withdrawn by Plaintiff's counsel during the course of the proceedings before me. 4 By its amended defence and cross-claim the Defendant denies the Plaintiff's claim and contends that it was entitled to terminate the agreement. Under its cross-claim it claims that having lawfully terminated the agreement on or about 12 November 2003, it is entitled to the payment of certain outstanding management fees and claims recovery of such fees pursuant to the terms of the agreement. 5 On 18 November 2003 the Plaintiff obtained an interlocutory injunction which, on 8 December 2003, upon it giving to the Court the usual undertaking as to damages, was extended up to the hearing of the proceedings or until further order. 6 Relevant provisions of the agreement are cl 5.2 as follows: "(a) a management fee of $13,500 p.a., indexed annually to CPI, will be payable to Council for the Term. CPI means All Group Consumer Price Index applicable to Sydney published by the Australian Bureau of Statistics, but if such index is discontinued or abolished then "price index" shall mean such index as the Australian Bureau of Statistics substitutes there for (sic) shall mean such measure of change in the cost of living. (b) Expenditure by Gibbins Thomson of up to $23,000.00, for the construction of a public toilet facility attached to the eastern side of the Club-House, will be reimbursed to Gibbins Thomson by Council, by way of reduction of the annual management fee".

Clause 14.3 provides: "(a) by agreement between Gibbins Thomson and Council; or (b) by Council by written notice to Gibbins Thomson if, at any time during the Term, Gibbins Thomson fails to meet any of its obligations under this Agreement and such failure continues for more than thirty (30) days after Council has given written notice of the failure to Gibbins Thomson. In the event of notice given under this clause, Gibbins Thomson shall pay to Council an amount equal to the annual management for the remainder of the contract term". Background

7 It is common ground that no management fees were paid by the Plaintiff to the Defendant and that the first demand for payment of management fees was made by the Defendant to the Plaintiff by letter of 25 September 2003. It is also common ground that this letter was the first occasion on which the Defendant asserted that the Plaintiff had failed to fulfil its obligations under the agreement. 8 It is relevant to note some of the correspondence which was in evidence. I turn, firstly, to the letter of 14 March 1999 from the Plaintiff to the Defendant in which notification was given of the intention to take up the agreement to manage the tennis centres for a further ten years. Furthermore, by letter dated 3 September 2001 from the Defendant to the Plaintiff the Defendant sought some further information, in particular financial and accounting records relevant to the centres managed by the Plaintiff. Details of the information sought were identified including details of the expenses and revenues for the financial years 1999/2000 and 2000/2001. It was requested that the information be submitted by 7 September 2001. 9 I refer next to the letter from the Defendant to the Plaintiff of 27 June 2002 in which the agreement was referred to and the author of the letter indicated that there had been received by the Defendant no notice pursuant to cl 14.2 of the agreement to extend the term. It was stated that, regardless of the fact that the formal agreement no longer existed, the Defendant sought the Plaintiff's agreement pursuant to 14.3(a) to terminate the agreement effective on 31 July 2002. That letter met with the response contained in the letter from the Plaintiff to the Defendant of 9 July 2002 in which it was stated that the agreement with which these proceedings were concerned were the subject of the letter 14 March 1999 to which I have referred. A copy of that letter was included. 10 Next is the letter of 25 September 2003 from the Defendant to the Plaintiff. Omitting formal parts, it says: "I must advise you that Gibbons (sic) Thompson (sic) has not fulfilled its obligations under the Agreement in that it has failed to (i) pay Council any management fees since the commencement of the Agreement on 1 September 1994, (ii) maintain the facilities in good working order, (iii) pay all operating costs, and (iv) maintain accurate records of visitation and fees collected. By Council's calculations the outstanding management fees to date total $134,916.00. Council requires Gibbons (sic) Thompson (sic) to pay this amount to Council within 30 days of the date of this letter. The other matters will be subject to further communication". 11 The next relevant letter is that from the Defendant to the Plaintiff of 12 November 2003. Omitting formal parts it says: "I refer to my letter dated 25 September 2003 in which I advised you that Gibbins Thomson had not fulfilled its obligations under the Agreement in that it had failed, amongst other things, to pay Council any management fees since the commencement of the Agreement on 1 September 1994. I further advised you that Council required Gibbins Thomson to pay the outstanding management fees to Council within 30 days of the date of that letter. It is my understanding that as of this date Gibbins Thomson has not payed the outstanding management fees to Council. Gibbins Thomson's failure to meet its obligations under the Agreement has continued for more than thirty days after Council gave written notice of this failure. Therefore I give notice in accordance with Clause 14.3(b) of the Agreement that the Agreement is terminated. Council's calculations of the monies owed by Gibbins Thomson are as follows: Outstanding management fees $134,916.00 Management fees for the remainder of the term $108,679.00 Less expenditure on toilet facility -$23,000.00 Less expenses for closure of Voyager Point -$2,500.00 Amount owed by Gibbins Thomson to Council $218,095.00 Please forward this amount to Council within 30 days. Council will allow Gibbins Thomson 1 week to bring its current operations to a close and vacate the tennis centres". 12 The Plaintiff submits that the letter of 12 November 2003 is not a valid notice of termination under cl 14.3(b) of the agreement. Shortly stated, Mr Pesman, on its behalf, put that for the notice to be effective it is necessary that prior written notice of the failure of the Plaintiff to meet its obligations under the agreement be given to the Plaintiff in accordance with the same provision. He puts and, indeed, it appears to be common ground, that on the proper construction of 14.3(b) entitlement to give a notice of termination prior to the end of the term is conditional upon giving written notice of failure. The Plaintiff submitted that the letter of 25 September 2003 is bad on its face and is incapable of being reasonably understood as a notice of failure under the sub clause upon which the Defendant could rely to give a notice of termination if the failures referred to in it continued for more than 30 days. It is put that nothing stated in the letter would reasonably be taken to indicate that its purpose is to lay the foundation for the giving of a notice of termination. The letter is also attacked on the basis that the asserted failures identified in points (ii), (iii) and (iv) therein lack sufficient specificity. Furthermore, it is put that the notice is flawed by reason that the amount of the management fees claimed to be outstanding is wrong. I note that the Defendant concedes that that amount is wrong. 13 A further ground of challenge was that in the circumstances the Defendant was not entitled to terminate the agreement by reason of its breaches of some conditions. It was submitted that the Defendant was in breach of cl 3(a), in that it did not provide a club house for the Wattle Grove facility, and was in breach of cl 12.2, in that it failed to take out and maintain an insurance policy in which the Plaintiff was named as an insured in respect of its property or contents kept at the centres. 14 For the Defendant, Mr Henry submitted that the letter of 25 September 2003 gave adequate notice of failure for the purposes of cl 14.3(b). He put that the fact that the amount claimed for outstanding management fees was wrong did not detract from its validity, and that it was clearly stated that such was but the Defendant's calculation with which it was open to the Plaintiff to disagree. He put that the terms of the letter should be considered with regard to a reasonable recipient fixed with knowledge of the agreement and hence that such a person would have had no difficulty in understanding that continued failure to effectively fulfil the obligation for more than 30 days after the letter would entitle the Defendant to give notice of termination. He put that as a matter of construction of cl 14.3(b) it was not necessary for the letter to serve as an effective notice of failure that it contain a reference to the clause and/or an indication that the Defendant was entitled to terminate if failure continued for the relevant period. 15 With regard to the Defendant's entitlement to terminate Mr Henry submitted that to the extent it was in breach of the agreement the circumstances were such as not to disentitle it. He argued that even assuming breaches of conditions of cls 3(a) and 12.2 as alleged there was no relevant relationship between those conditions and cl 5.2(a) by which the Plaintiff was bound to pay the management fees. 16 It is convenient to consider whether the letter was sufficient as a notice of failure under cl 14.3(b). The relevant principles are set out in a number of places including Mannai Investments Co Pty Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 particularly pp 767-768. See also Carter and Harland, "Contract Law in Australia" 4th edition, p 736. Shortly stated, it is plain that courts do not adopt, a rigidly strict approach to contractual termination clauses. It is the substance of such a notice i.e.: what it conveys to the reasonable person in the promisor's position which matters. Ultimately, the relevant test is whether a reasonable person in the position of the recipient is left in no doubt that the right has been exercised. 17 Construction of the relevant document must be approached objectively. As I have indicated, the relevant principles are conveniently set out in Lord Steyn's speech in Mannai at pp 767-768. Relevant to the construction of contractual notices is the contextual score. The question is what reasonable persons in the circumstances of the parties would have understood. It thus poses the question whether the reasonable person would be taken to have understood the purpose of the notice in the way contended for by the Defendant bearing in mind that he or she will be aware of the agreement including cl 14.3. In particular, I should quote from the following passage on p 768 of the report: "(3) It is important not to lose sight of the purpose of the notice under the break clause. It serves one purpose only: to inform the landlord that the tenant has decided to determine the lease in accordance with the right reserved. That purpose must be relevant to the construction and validity of the notice. Prima facie one would expect if a notice unambiguously conveys a decision to determine a court may nowadays ignore immaterial errors which would not have misled a reasonable recipient. (4) There is no justification for placing notices under a break clause in leases in a unique category. Making due allowance for contextual differences, such notices belong empty general class of unilateral notices served under contractual rights reserved, e.g. notices to quit, notices to determine licences and notices to complete... Even if such notices under contractual rights reserved contain errors they may be valid if they are `sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate.' That test postulates that the reasonable recipient is left in no doubt that the right reserved is being exercised. It acknowledges the importance of such notices. The application of that test is principled and cannot cause any injustice to a recipient of the notice. I would gratefully adopt it." 18 It seems to me as a matter of construction the letter of 25 September 2003 cannot reasonably be understood as a notice of failure within the meaning of cl 14.3 of the agreement upon which the Defendant could rely to terminate prior to the end of its term. There is no statement in the letter which would convey to the reasonable reader that it is sent as a notice under the provision and/or that continuation of the failures for more than 30 days after the notice would entitle the Defendant to terminate the agreement and/or that the Defendant intended to terminate pursuant to 14.3(b) if the failures continued for more than the time provided. In my opinion the proper construction of cl 14.3(b) in its context requires that the contemplated notice would contain in clear and unambiguous terms information of the kind to which I have referred. 19 It seems to me to be relevant that the letter was the first occasion after nine years on which the Defendant had complained of non-fulfilment by the Plaintiff of any of its obligations although there had been ample opportunity to do so earlier. For example, the Defendant agreed to renew the lease, and from the associated correspondence it might be readily inferred that the Plaintiff would have concluded that the Defendant did not, at least up to that point of time, require the Plaintiff to remedy any failures to meet its obligations although it seems on the evidence that at least the breach of the obligation to pay management fees had been continuous. 20 In my opinion the hypothetical reasonable recipient to whom Lord Steyn refers who read the letter would not have understood that its purpose was to change what had become the status quo, which had been in place since the date of the agreement nine years earlier. Until then neither party had indicated to the other that it would insist on strict adherence to the terms of the agreement failing which it might move to terminate. 21 In such circumstances, in my view, it was necessary in order to achieve the purpose of an effective notice of failure under cl 14.3(b) to state in unambiguous terms that it was given pursuant to that clause and to inform the recipient of the basis for its entitlement to give a notice of termination, and of its intention to do so. There is nothing to be found in the contents of the letter in the circumstances in which it was given which would have enabled the Plaintiff to understand its underlying purpose. 22 I therefore hold that the letter of 25 September 2003 does not constitute sufficient notice under cl 14.3(b) of the agreement and thus is not effective to entitle the Defendant to move to terminate the agreement pursuant to its letter of 12 November 2003. 23 Perhaps put a different way, it is plain that the letter of 12 November 2003 is predicated on the sufficiency and effectiveness of the letter of 25 September 2003. For the reasons that I have stated, in my view the letter of 25 September 2003 was ineffective and as a consequence the letter of 12 November 2003 is invalid as a notice of termination of the agreement within the meaning of cl 14.3(b). 24 For these reasons I hold that the Plaintiff is entitled to a declaration in terms of the first prayer in the summons filed 18 November 2003. 25 In the circumstances, it is unnecessary to deal with the alternative grounds of challenge, namely, that the Defendant, by reasons of breaches on its part is not entitled to terminate the agreement at the time of the letter of 12 November 2003. However, without deciding, I should indicate my preference for the Defendant's submissions on that ground. 26 I now turn to the cross-claim. Under the cross-claim the Defendant claims an amount of outstanding management fees payable under the agreement. On the basis that it was held that the Plaintiff was entitled to the declaratory relief sought, the Defendant claims the sum of $109,798, being the total fees payable under cl 5.2(a) for the seven years from September 1997 to September 2004 inclusive, with interest. Alternatively, and on the same basis, it claims the sum of $65,990 and interest. This last mentioned sum represents the difference between the sum of $109,798 referred to and the sum of $43,808 referrable to what has been described as the Bigge Park conversion costs. 27 It is common ground, and for which there is ample evidence to support the finding, that on or about 26 August 1997 it was agreed between the parties that the Defendant would reduce the amount of the management fees payable by the Plaintiff under the agreement by the amount equivalent to the cost to the Plaintiff of the conversion of the Bigge Park Tennis Centre to a multi purpose facility. It is accepted that the amount of the conversion is $43,808 and that the work was done in about September 1997. 28 In support of its claim the Defendant submits that the Plaintiff's claim that the management fees payable should be reduced by the amount of conversion costs is, in substance, a set off so as to attract the application of s 74 of the Limitation Act (1969) NSW (the Act). The submission proceeds with reference to s 14(1)(a) and s 63 of the Act to support the proposition that as the Plaintiff's entitlement to the reduction had arisen prior to 18 November 1997 (being six years prior to the 18 November 2003 when these proceedings were commenced by summons) the claim is, in effect, statute barred. Accordingly, it is said the entitlement to the agreed reduction has been extinguished so that the Defendant is entitled to the full amount claimed, namely, $109,798. 29 The Plaintiff submits, in effect, that the Defendant's reliance upon the Act in the circumstances is misconceived and that the Act has no application. It is put that the Plaintiff's denial of the entitlement of the Defendant to the amount of $109,798 claimed does not involve a claim by way of set off within the meaning of s 74 of the Act or upon a cause of action founded on contract within the meaning of s 14(1)(a). 30 In my opinion, the Plaintiff's submission should be accepted. The effect of the agreement in respect of the cost of conversion was that the amount thereof should be taken into account by the Defendant in calculating the amount of management fees it might claim from the Plaintiff. Thus, if and when the Defendant made demand for payment of the fees, the amount originally payable under cl 5.2(a) was to be reduced by the amount of this cost. It was not the case, in my opinion, that the cost can be categorised as a debt recoverable from the Defendant by the Plaintiff, and nor was the intention of the parties to the agreement in respect of it to that effect. 31 Accordingly, I find that the amount for management fees which the Defendant is entitled to recover from the Plaintiff is the sum of $42,990. On the cross-claim there should be a verdict for the Defendant in the amount of $42,990. 32 I direct the parties to bring in short minutes which will give effect to the relief and the verdict to which I have referred. If questions of interest and costs cannot be agreed, then arrangements should be made with my Associate on or before Wednesday 8 December 2004 to re-list the matter for argument. I direct the exhibits be returned. **********

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