Goldmaster Homes Pty Ltd v Keith Norman Johnson

LOWER COURT Supreme Court JURISDICTION : LOWER COURT FILE NUMBER(S) : LOWER COURT JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION EQUITY DIVISION LIST

4432/99 GOLDMASTER HOMES PTY LTD AND ANOR v KEITH NORMAN JOHNSON PTY LTD

CORAM : Brownie AJ

1. The plaintiffs sue the defendants for damages for breach of a contract to give a first right of refusal on the sale of certain land. The plaintiffs say that one of them is entitled to damages from one or more of the defendants.

The second plaintiff, Mr Rocky Scarcella, is the son of Francesco and Helen Scarcella. Those three persons between them effectively constitute or control a number of entities. Those that are mentioned in evidence include the Frank, Helen and Rocky Scarcella partnership, a company called FHR Holdings Pty Ltd, the first plaintiff Goldmaster Homes Pty Ltd, a family trust and a superannuation fund. The affairs of these various entities are sometimes intermingled. Until about 1997 the first plaintiff conducted a business as a project builder, that is a builder which constructed houses on land owned by other people. In about 1997 it changed its business to that of a speculative or "spec" builder. That is, it acquired parcels of vacant land, erected dwellings there, and then resold the developed land.

One of the complexities of the present case is that the first plaintiff did this through other entities in what might be called the Scarcella interests. For example, another entity in the group bought some vacant land, the first plaintiff did the relevant building work and then the land was sold. This practice had a tax advantage, the detail of which is relevant only to the question of damages.

The first defendant, Mr Johnson, effectively controlled the second defendant, Johnson and Johnson Real Estate Pty Ltd, and the third defendant Hills Development Corporation Pty Ltd, I accept that at the relevant time whilst he managed the second defendant, he left the detail of its business to others and he himself effectively concentrated upon land development work.

In a practical sense he entered into a contract, the subject of the litigation, as the representative of the third defendant and subject to some particular legal questions raised by the lawyers for the defendants, neither the third defendant nor Mr Johnson has ever denied the existence of the contract sued upon. However, one's vision of that contract is to some extent clouded by the fact that there were a number of transactions proceeding more or less concurrently, and by the circumstance that a Mr Morley and companies controlled by him stood as intermediaries between the Scarcella interests and the Johnson interests.

Mr Morley might be described as an estate agent, although I gather he would not like that description. He apparently enjoyed a close relationship with the second plaintiff throughout the relevant period. Through a company Mr Morley controlled, Torulosa Pty Ltd, he worked for the second defendant as a consultant for a period, pursuant to the terms of a deed made between Torulosa and the second defendant. I do not think that the detail of this matters, except that the relationship was extant between March and August 1996 and that during that period Mr Morley represented the second defendant in some respects. He effectively introduced Mr Johnson to Mr Scarcella.

Mr Morley took part in some negotiations concerning an exhibition village, that is, an exhibition aimed at potential homeowners. To state matters shortly, he acquired or intended or purported to acquire from a company called Homequest 2000 Exhibition Village Pty Ltd, an interest entitling him to be the sole estate agent operating within the village area, with the right to sell land and homes to possible purchasers. That right or interest, if and when it was acquired, carried with it an obligation to purchase a lot within the village area and that lot came to be a lot known as lot 122. Mr Morley negotiated to acquire that right or interest in the name of another company that he controlled, Quest Pty Ltd.

Mr Johnson became interested in acquiring the rights of Quest and in time he made an offer to Mr Morley to acquire those rights for the sum of $50,000. Mr Johnson said, and I find that, until 30 September 1996 Mr Johnson knew nothing of any possible interest in those rights possessed by Mr Scarcella or by someone else associated with him. The negotiations between Mr Morley and Mr Johnson concerning the acquisition of the Quest rights proceeded for some months before 30 September 1996.

Sometime before that date the third defendant commenced work involved in subdividing some vacant land at Kellyville, known variously as the Green Road land, the Glenhaven Estate or the Glenview Hills Estate. As at that date the local council had given a development consent to the subdivision but the relevant work of subdividing the land was still at a preliminary stage. Road works had just begun, no survey pegs had been driven, and the future lots had not been priced.

Concurrently, there were dealings concerning other lots of land in the Kellyville district, being land having no direct connection with the Green Road land. The second defendant acting as a real estate agent for a vendor, a stranger to the litigation, was involved in selling certain lots of land on behalf of this vendor to FHR Holdings Pty Ltd. These sales were negotiated upon "builders' terms", that is, terms generally favourable to a purchaser who was a builder, such as the first plaintiff. There was, it seems, a common expectation amongst real estate agents and property developers in the district that in circumstances such as this a developer or builder such as the first plaintiff would, upon completion of the relevant construction work, retain the same estate agent, here the second defendant, on the resale of the developed land.

Finally, there was yet another transaction proceeding concurrently. The first plaintiff contracted with another company controlled by the first defendant, Laston Pty Ltd, to the general effect that the first plaintiff would construct a house for Laston upon certain land in Kelbrae Close, Castle Hill. In the course of execution of that contract by the first plaintiff it seems that Mr Scarcella and Mr Johnson fell out. According to Laston, the work done by the first plaintiff was defective and in time Laston made claims against the first plaintiff. According to Mr Johnson, Mr Scarcella made threats against Mr Johnson and his family and Mr Johnson commenced proceedings for apprehended violence.

Whilst it is common ground that these proceedings were dismissed, each man says in substance that he considered or had been told that the other had not contested the matter. The detail of this dispute does not seem to me to be significant: all that the plaintiffs rely upon is the circumstance that the two men were significantly at odds by 1997.

Generally speaking this was then the background as at 30 September 1996. Laston and the first plaintiff were in a contractual relationship concerning the building of a dwelling on the land in Kelbrae Close, although the dispute about supposedly bad workmanship had not then arisen; Mr Johnson had been dealing with Mr Morley and only Mr Morley concerning the acquisition of Quest's interest in The Exhibition Village; and Mr Johnson expected that the first plaintiff would retain the second defendant to sell the land previously purchased by FHR Holdings Pty Ltd, upon which the first plaintiff had constructed dwellings. Mr Morley had severed his relationship with the Johnson interests. There is a dispute between Mr Johnson and Mr Scarcella as to what was said on 30 September 1996 particularly, but also as to other events.

Mr Johnson's evidence appeared in the early part of the hearing to suffer from the detriment that some of the words used in documents he had signed, or otherwise adopted, could not easily be reconciled with what he said otherwise, so that naturally he was closely cross-examined about these matters. He referred to his limited literacy and his schooling difficulties, but eventually he was goaded into giving one answer that seemed to come from the heart. He said: " Because I am uneducated, when I left school I was told I would be a vegetable. I am not learned like you guys and I could not read or write until I was in grade ten. I suffer epilepsy from reading and I am not that well from reading and writing, and I am not in with the detailed stuff but I am very good with my memory and I am very good with wheeling and dealing." 15. He went on to give a further answer to the particular question he had been asked. Reviewing the whole of his evidence through this prism, I accept him as a truthful witness whose evidence is quite reliable, except to the extent caused by the limitation to his literacy. He appears to be a successful businessman and I accept that he has employed others to work for him, in effect covering up for his difficulties in reading and writing and so as to leave matters of this kind to them, with the consequence that there are sometimes inaccuracies of expression. In particular I accept the thrust of his oral evidence. 16. His evidence is to be contrasted with that of Mr Scarcella who at times seemed to be evasive and inappropriately defensive. A question emerged when he was called in the plaintiff's case in reply as to where he had lived in 1996. The matter was not explored at the time. Whilst I would like to have explored it this afternoon, he is not present. I observe only that it is difficult to reconcile what he said with the contemporary documents recording his address, and I note the address that he gave in his first affidavit. The point seems to be of little relevance except in relation to questions of credit, however, and I do not attach great significance to it, accepting the evidence of Mr Johnson, I find that the following events occurred on 30 September 1996: Mr Scarcella telephoned Mr Johnson and in substance asked that the arrangements that had been made for the making of progress payments in respect of the construction work at Kelbrae Close be changed, it seems in order to assist the first plaintiff with a cash flow difficulty being experienced; instead of there being two previous payments each of 50 percent of the contract sum paid, those payments having to be made at designated times, he sought five progress payments, each of 20 percent of the contract sum paid, now to be paid at different designated times. 17. Mr Johnson agreed to this change, saying that Mr Scarcella had him "by the balls." Mr Scarcella asked Mr Johnson to type up a letter and fax it to Mr Scarcella and Mr Johnson agreed to do this. Then Mr Scarcella raised a question of Mr Johnson taking an interest in the Exhibition Village project and said that he was involved. Mr Johnson said that this was the first time that he had heard of Mr Scarcella being possibly involved and said that if any money was to be paid to Mr Scarcella it would have to come out of the $50,000 that he had previously agreed to pay to Mr Morley or his interests. 18. A short time later Mr Scarcella telephoned Mr Johnson again, saying that he had spoken to Mr Morley and that he and Mr Morley had agreed that the $50,000 previously agreed to be paid by the Johnson interests to the Morley interests would now be apportioned so that the Morley interests would be paid $45,000 and the Scarcella interests $5,000. Mr Scarcella then said to Mr Johnson: "I want to have the right of first refusal over your land out over your blocks at Green Road. Put that in your letter too." 19. Mr Johnson said, "If you pay the price, Rocky, I'll sell you anything." Mr Scarcella then told Mr Johnson what he wanted that to be set out in the letter and Mr Johnson then dictated a letter which was later that day typed out on the letterhead of the second defendant, signed by Mr Johnson, as managing director, and faxed to the first plaintiff. The letter was in these terms: "Dear Rocky, This represents written confirmation of phone conversation between yourself and myself 2.20 pm Monday 30 September 1996. a) Notwithstanding previous agreements I agree to pay five progress payments on the home being constructed on Lot 5 Kelbrae Close, Castle Hill as follows: 1st payment when slab completed, 20% of contract price. 2nd payment when frame up-roof trusses in place, 20% of contract price. 3rd payment when house locked up-windows in, 20% of contract price. 4th payment when internal fixout complete, 20% of contract price. 5th payment on completion and following my inspection and OK note from Council. Plus any variations approved in writing, 20% of contract price. These payments to be made within 7 days of written claim and subject to me satisfying myself that the work has been satisfactorily carried out. b) Its agreed that in condereration to your stepping aside as investor on Lot 122 Homequest 2000 and assigning any rights you have there to us we will pay you the sum of $5000. This to come from the $50,000 originally destined for Peter Morley. c) We undertake to give you right of first refusal on our land to be developed at Green Road, Kellyville. I trust the undertakings contained herein are sufficient to satisfy you and to enable the land sales venture at Homequest to proceed as originally planned." 20. Mr Johnson also took steps to see that the transaction involving the Exhibition Village was promptly executed in a way that was satisfactory to him. Simplifying the account of what happened, he arranged for his solicitors to prepare a deed, one copy of which he was to execute and the other copy for execution by Mr Scarcella. He gave instructions for two of the second defendant's employees, Messrs Bradac and Keenan to take one copy out to Mr Scarcella for execution. It is now common ground it was executed by Mr Scarcella on 1 October 1996. There is a question where it was executed but nothing seems to really turn on that. 21. On the hearing, the defendants raised a number of separate grounds of defence, but their primary case is that the third defendant, acting through Mr Johnson, was always content to allow the plaintiffs to buy any of the lots in the Green Road land, if they paid the asking price. That is, they say that they did give the plaintiffs the right of first refusal but that the plaintiffs, in substance, rejected the land as being too expensive during November 1996, and thereafter did nothing further with a view to acquiring the land or any of it. 22. The third defendant obtained from the local council development consents in respect of six different stages for the subdivision of the Green Road land. These various consents are dated between June and September 1996. The third defendant commenced to market the land, on dates ranging from March to May 1997, preparatory to the council giving final development approval on 18 June 1997, and to the registration of the relevant deposited plans on 24 June and 28 July 1997. 23. Mr Johnson says and I find that on 18 November 1996 he had a conversation with Mr Scarcella in which the latter complained that Mr Bradac had not been servicing him, Mr Scarcella, properly and had not been selling land in the Glenview Hills Estate to Mr Scarcella. The former complaint related to other dealings between the parties and their associates, but as to the latter complaint Mr Johnson replied that he had not yet priced the lots in the subdivision, but that he would price them as soon as possible and send to Mr Scarcella details of the prices fixed. 24. Then Mr Johnson complained to Mr Scarcella that although the second defendant had acted for the vendor to the first plaintiff on the sale of certain blocks of vacant land, upon which the plaintiff had erected dwellings, the first plaintiff had not retained the second defendant as its agent when the land in question was put on the market for resale. Instead, he complained, the first plaintiff had retained another estate agent for whom Mr Morley was then working. 25. Mr Scarcella's response to that complaint was to suggest that Mr Johnson and Mr Morley and their respective associates should split the commission on any sales, a proposal which Mr Johnson rejected. Mr Johnson then wrote to Mr Scarcella on 18 November 1996 in these terms: "Dear Rocky I am writing to clarify the situation as I see it with respect to the relationship between Johnson & Johnson and yourself. Let me begin by saying we are more than a little disappointed at the turn of events. What started out as a promising situation for both of us has gone badly off the rails. Specifically: a) When we sold you land at Kellyville on preferred terms, there was a clear commitment on your part that we would get completed homes to sell. Instead we see Castlehaven signs on them. b) In spite of numerous calls trying to find out details of inclusions, colours etc at Kelbrae, we do not seem to be able to get any answers. We have a couple of clients who not unnaturally want information and we are in grave danger of losing them because we cannot tell them what they need to know. You are not encouraging us to build any further specs with you. c) You keep accusing us of not selling you land on our estate in Glenhaven even though you know we do not have a price on it yet. Furthermore, let me say that in view of what you have done on Gum Log and Rathmore Estate, I would have serious reservations about giving you preferred access to any land of mine. May I make myself clear:- We will not do a joint arrangement with Castlehaven. Nor will we pay Morley 25% of our commission. Nor will we accept a situation where Morley has to release commissions to us. If you believe that Castlehaven can best serve your needs in Kellyville then go to it. Surely you must realise that we are by far the most active and most effective agent in Kellyville. We get the enquiry, we are everyday showing people homes and land in the area. In just the past two weeks we have sold five new homes there. We are actually on site, as you know and are now selling against you rather than for you. Still, that was your choice. Rocky, if you want to develop a relationship that can serve us both, you will need to agree to the following; a) We will not deal through Morley. b) We will not accept only 75% of any commission due with the other 25% going to Morley. c) If you buy land on preferred terms through us, we expect exclusive listings on the finished product even if only for say 3-4months. d) We, for our part, would guarantee to get you the best possible price in the shortest possible time and in so doing, seek to maximise your profits. e) If we are to sell your homes prior to completion, we would expect a full and detailed list of inclusions including colours, model numbers etc. Rocky, I hope you understand where we are coming from. Just as we do not seek to compromise you in your efforts, we do not want to be compromised or merely used either.

I am happy to discuss these matters with you at any time" 26. The reference to the Gum Log and Rathmore Estate was a reference to land purchased when it was vacant, upon which the first defendant had erected the dwellings, which land was then put on the market for resale through the organisation referred as to as Castlehaven, for which Mr Morley was then working. 27. I also accept the evidence of Mr Johnson that he priced the lots in the proposed subdivision at Green Road and made an appointment to see Mr Scarcella at that site on the afternoon of Friday 22 November 1996, but Mr Scarcella did not keep that appointment. Mr Johnson then returned to his office. He had previously arranged for a marketing proposal in relation to the land in the Gum Log and Rathmore Estate to be prepared and sent to Mr Scarcella and on the Friday afternoon he gave instructions to the effect that the prices list be sent off to Mr Scarcella, together with the marketing proposal.

On the following Monday or Tuesday, 25 or 26 November, there was a telephone conversation between Mr Scarcella and Mr Johnson in which Mr Scarcella said, first, that the Green Road land was too expensive, and secondly, that Mr Morley would be marketing the plaintiffs' houses for sale. Mr Johnson inferred from the content of the conversation that Mr Scarcella had received the marketing proposal and also the prices list. Mr Scarcella denied receiving the list and his version of the conversation differs from that of Mr Johnson, but I accept the evidence of Mr Johnson.

On the defendants' case the plaintiffs lost the right of first refusal by showing that they were not interested in the land, first through the statement of Mr Scarcella in the telephone conversation just mentioned, that the land was too expensive and, thereafter, by their inaction and disinterest in the land up until April 1997 when their solicitors wrote a letter of demand.

On the view I take, the details of what the defendants' described as the plaintiffs' inaction and disinterest is not of great significance; it merely served to confirm the view expressed by Mr Scarcella that the land was too expensive and, therefore, by inference, that neither he nor his companies or associated entities were interested in acquiring it or any of it.

However, if this should be thought to be wrong I simply record that I accept the submission contained in paragraph 13 of the defendants' outline of submissions. That is, I make the findings of fact there contended for.

The question then posed is whether the third defendant or the defendants, more generally, breached the obligation stated in paragraph C of the letter of 30 September 1996. As always, this document has to be considered individually and not by analogy or by reference to some preconception of what the term 'right of first refusal' or some similar expression has been held to mean in other cases. See generally Woodroffe v Box (1954) 92 CLR 245 at 256 to 258. The plaintiffs submitted that it was necessary for the defendants to formally put an offer to the plaintiffs and to make it clear to the plaintiffs in effect that this communication was in the nature of an ultimatum, conveying clearly enough to the plaintiffs that they must say whether or not, and by reference to a draft contract, or some other document setting out all the appropriate terms, they wished to buy the land upon the terms upon which the defendants were proposing to sell it to others. The only authority cited for this was Gyurkey v Babler (1982) 103 Idaho 663 651 P2d 928 34 ALR 4d 119.

Reading what was said in that case in the context of the contract there under consideration, as one must, I do not think that the case goes as far as the plaintiffs would like it to go. In particular it does not impose on the defendants, in the circumstances of this case, the need to go so far as to put a formal written offer to the plaintiffs which document contained all of the terms of the proposed contracts of sale. The parties involved here were business people, very experienced in buying and selling land suitable for development in the Kellyville and Castle Hill districts and they did their business together fairly informally.

When Mr Scarcella complained on 18 November 1996 that Mr Bradac had not sold or offered to sell the land of the subdivision, Mr Johnson replied by saying that the land had not then been priced but that he would price it promptly and in substance give Mr Scarcella that information.

I find that Mr Johnson did just that and that Mr Scarcella then responded that the prices asked were too high and then Mr Scarcella allowed matters to stand for some five months whilst the land was being marketed in the usual way, that is the usual way at that time in that district for land of that general description, in circumstances where it seems to me that it is really difficult to accept that Mr Scarcella did not know and fully appreciate that the land was being marketed in this way.

If it is significant I note that there was nothing unusual for land of that type in that district at that time about the terms upon which it was being offered for sale. Again, if it is relevant, the prices obtained in the lots appear to have been as good as, or greater than the prices fixed by Mr Johnson in November 1996, but this was no more than was consistent with a generally rising market.

I find that assuming there was a legal obligation binding upon the third defendant or upon any of the defendants, that obligation being owed to the plaintiffs or either of them to give a right of first refusal, there was no breach of that contractual obligation. On that basis there is no need to consider any of the other questions argued.

I give Judgment for the defendants. I order the plaintiffs to pay the costs of the defendants.

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