By letter dated 21 December 2009, on the letterhead of "Karellas Group", Karellas presented to Finger & Co a "binding offer to enter into an Agreement for Lease and Lease with our organization for the … supermarket premises" (the December 2009 letter of offer).
Finger & Co alleged that a binding agreement came into existence on its acceptance, in January 2010, of the terms contained in the December 2009 letter of offer. The alleged agreement, as pleaded, was an agreement to enter into an agreement for lease, and for Finger & Co to grant and Karellas to take a lease, of a supermarket building to be constructed on the land, for a term of 15 years from the commencement of trade, and otherwise "on the terms and conditions set out in the contract" (statement of claim [7]). Not all of the terms required by the December 2009 letter of offer to be included in the proposed agreement for lease/lease were set out in the letter of offer. A number of terms as at that date remained to be agreed between the parties.
Finger & Co alleged that Karellas repudiated that agreement in June 2010, when Karellas notified Finger & Co by letter that it would "not be proceeding with the … proposed Lease on the current proposed terms" and said, or implied, that the contract of 21 December 2009 did not bind the parties to settle the terms of, and then execute, formal documentation embodying the terms and conditions set out in the contract, with such variations or further terms as the parties might subsequently agree. Finger & Co alleged that this amounted to a repudiation of the parties' agreement because it indicated that Karellas was refusing to perform the contract according to its terms and that it would perform the contract only if and to the extent that it suited it to do so, i.e., not with a view to settling terms of formal documentation in accordance with the contract but, rather, with a view to negotiating commercial terms more favourable for itself than those agreed to in the contract (statement of claim [14], [15]).
On 16 August 2010, Finger & Co notified Karellas that it accepted the latter's repudiation of the contract and that it terminated the contract. Finger & Co subsequently entered into an agreement for lease with another entity (Woolworths) under which Woolworths agreed to take a lease of the Newtown premises, though differently configured in some respects. At the same time as the new supermarket to be leased to Woolworths was being built, Finger & Co carried out a residential development on a slab constructed above the supermarket trading area. The residential units in question were subsequently sold at a profit.
Finger & Co brought proceedings in the Equity Division of the Supreme Court claiming damages suffered as a result of the loss of the benefit of its contract with Karellas. Those damages were quantified in the sum of $3,191,868, comprised of the difference between the lump sum value of the Karellas lease and the lump sum value of the Woolworths lease as at the date of Finger & Co's express termination of the contract (calculated, together with interest to 31 May 2012, at $2,367,673) together with other costs including legal, consulting and agents' fees and the difference in the fit-out costs of the premises under the arrangement with Woolworths (as itemised in schedule 1 of the statement of claim).
Karellas denied that acceptance by Finger & Co of the offer contained in the December 2009 letter constituted a concluded and legally binding contract, asserting that it was no more than an agreement to enter into an agreement for lease (defence [1(a)]) or an agreement "in the nature of a heads of agreement under which the parties were to negotiate in good faith a formal agreement for lease and lease on mutually acceptable terms" (defence [1(r)(i)]).
If, which Karellas denied, the December 2009 letter of offer did constitute a binding contract, then Karellas asserted that it was subject to agreement as to certain matters ([1(b)(iii)]), as to which agreement had not been reached or finalised ([1(c)-(n)]). Karellas further pleaded that its correspondence in June 2010 was not a repudiation but amounted to an attempt to engage in and continue negotiations in good faith to reach an acceptable and final agreement for lease and lease (defence [1(s)]) and that Finger & Co's 16 August 2010 letter purporting to terminate the contract was either ineffective, because there was no concluded agreement, or a wrongful repudiation by Finger & Co of the agreement (defence [1(t)]).
Karellas also pleaded that, if there was a concluded agreement that Karellas had breached and/or repudiated, then Finger & Co's loss or damage was the loss of the opportunity to conclude negotiations for the agreement for lease and lease prior to 21 December 2010 ([1(u)]), at which time, if formal documentation had not been executed, Karellas would have been entitled under the terms of the December 2009 letter of offer to withdraw from the agreement. It contended that Finger & Co had suffered no loss or damage because it had lost no meaningful opportunity to conclude negotiations for the agreement for lease and lease prior to that date ([1(u)(iv)]).
Alternatively, Karellas pleaded that the loss and damage was to be reduced by the amount of profit that Finger & Co had made, or would make, on the development of 20 residential units above the supermarket premises (to which I will refer as the "avoided loss issue") (defence [1(u)(iv)]).
[2]
Primary judgment
The primary judge dismissed Finger & Co's claim (Harold R Finger & Co Pty Ltd v Karellas Investments Pty Ltd [2015] NSWSC 354). In summary, his Honour held as follows.
First, that acceptance by Finger & Co of the terms and conditions contained in the December 2009 letter of offer gave rise to a valid and enforceable contract ([210]) under which the parties agreed to be bound immediately by the rent and other commercial terms set out in that letter of offer and agreed to negotiate certain identified additional terms (see [218], [452]).
Second, that Karellas repudiated that contract in June 2010 when it conveyed to Finger & Co that it was willing to negotiate further but only if that secured its objective of accommodating the difficulties caused by a then forecast shortfall in turnover ([449]-[450]).
Third, that, subject to the issue as to whether Finger & Co was itself in breach as at that date, Finger & Co could validly have terminated the agreement as at 9 June 2010 based on the statements contained in the June 2010 correspondence (i.e., for Karellas' repudiation) ([450]).
Fourth, that by the time Finger & Co's solicitors wrote to Karellas' solicitors on 16 August 2010 expressly terminating the agreement, Finger & Co had lost the ability to terminate solely on the ground of Karellas' repudiation ([398]) and was no longer entitled to rely on Karellas' repudiation without first making an offer to Karellas to participate in a renegotiation ([453]). That conclusion was reached by reference to the correspondence that had passed between the parties from June 2010 to 16 August 2010 and, in particular, to the refusal by Finger & Co at that stage to renegotiate any of the then current "provisionally agreed" terms of the agreement for lease, which his Honour considered meant that Finger & Co was not itself ready and willing to perform the contract ([455]).
Hence, the primary judge held that Finger & Co did not validly terminate the heads of agreement on the basis of Karellas' repudiation ([454]). He further concluded that, as at 16 August 2010, Finger & Co's "own position was one of repudiation" ([455]).
As a separate matter, his Honour also considered that Finger & Co was not entitled to terminate the contract while it was in breach of an essential term of the agreement, namely cl 15, finding that it had failed to inform Karellas of the substance of its plans to redevelop the property to add a residential level on the first floor ([456]-[457]).
As to quantum, his Honour addressed the principal issues in contest between the parties, to which I will refer in due course, but made no finding as to the amount that he would have awarded to Finger & Co had he found that it had validly terminated the contract. His Honour indicated that he would have sought additional submissions from the parties as to quantum had that exercise been necessary ([464]).
[3]
Appeal proceedings
Finger & Co appeals from the primary judge's findings both as to the invalidity of its termination of the contract and as to the assessment of damages. It seeks an order, in lieu of the orders made at first instance, for judgment in its favour in the amount claimed in its statement of claim, or such other amount as this Court were to determine, together with interest and costs. Karellas has in turn filed a notice of contention seeking to have the primary judge's decision affirmed on grounds other than those relied on by his Honour, those grounds relating to the issues as to repudiation and damages.
[4]
Background
It is helpful at this point to provide some further details of the relevant events and, in particular, of the relevant communications which passed between the parties.
Prior to the December 2009 letter of offer, acceptance of which his Honour found had given rise to a valid and enforceable contract, the respective parties had been in discussion in relation to the proposed lease of the Newtown premises, to be fitted out as a supermarket. Reliance is placed by Finger & Co on the fact of the earlier negotiations as part of the surrounding matrix of facts against which the December 2009 letter of offer is to be construed (see Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 351). For present purposes, however, all that need be noted is that, not only had there been earlier draft letters of offer, but also, by October 2009, both parties had instructed solicitors in relation to the proposed transaction and Karellas' solicitor had been instructed to prepare an agreement for lease and lease in relation to the premises. The December 2009 letter of offer emanated from Karellas itself rather than from its legal representatives and the primary judge appeared to accept that it had not been the subject of legal advice prior to its acceptance by Finger & Co (see [119]). However, it is clear that the penultimate draft of the letter of offer was forwarded by Karellas' solicitors to Mr Harold Finger, who then forwarded the draft to Finger & Co's solicitors on 30 October 2009 with the message "[p]lease look at this and call me after". Hence it may well be that one or both of the parties had received some legal advice as to one or other of the draft letters of offer before execution of the final version. Nevertheless, the case seems to have proceeded on the basis that lawyers were not involved in drafting the terms of the document that was accepted by Finger & Co in January 2010.
[5]
December 2009 letter of offer
As noted above, the December 2009 letter of offer purported to present a:
… binding offer to enter into an Agreement for Lease and Lease with our organization for the above mentioned new supermarket premises, on the following terms and conditions.
The words "above mentioned" clearly referred to the subject header of the letter, namely "New Store Project at Newtown …".
The description of this letter as a letter of offer accords with the footer appearing on the letter ("Karellas Group Letter of Offer"). Unlike an earlier draft, the December 2009 letter of offer was not headed "Binding Heads of Agreement". However, cl 24, to which I will shortly refer, expressly made provision for a binding heads of agreement to come into existence on acceptance of its terms and conditions.
The December 2009 letter of offer contained a list of numbered terms and conditions, each separately headed. It is necessary to set out a number of those. I will refer to them as clauses, though they could equally be described as items.
Clause 1 of the December 2009 letter of offer, headed "Premises", provided that:
This offer is based on the plans (Reference DA15 Revision C dated 1/10/09) with the final version to be attached to the lease. A copy of the current approved plans are attached to this letter and marked "A". In the event of further amendments, redesigns or changes to configuration, Karellas Group reserves its right to amend this offer.
It was common ground that there was no attachment "A" to the December 2009 letter of offer. It was also common ground that the reference to the "plans" on which the offer was based - identified in the letter as "DA15 Revision C dated 1/10/09" - was a reference to a one-page document, being a ground floor plan showing an area labelled "Thomas Dux Trading Area & Back Office", in one corner of which there was a shaded area labelled "Owners Area for future access to upper floor" of 22m2 as well as a shaded area for an electricity sub-station. The parties are also agreed that the primary judge's reference in his reasons (at [31] and [260]) to the Revision C plan was an erroneous reference to a different plan, namely a plan labelled DA04. Relevantly, the DA15 plan did not (unlike DA04) depict a proposed slab over that part of what was shown in DA15 as the Trading Area & Back Office. Relevantly, the primary judge was incorrect when he said that Revision C showed a new ceiling to be constructed over the trading area, back of house and loading area. It showed no slab over any part of the ground floor at all.
Clause 2 was headed "Lease Area". It provided, relevantly, as follows:
This offer is based on supermarket building of approx 863 square metres lettable area which will be confirmed on final survey and adjusted accordingly (lettable area excludes any Licensed Areas, mezzanine areas, lobby, plant rooms, switch rooms, loading docks, loading bay areas, truck standing apron or similar area, car park and landlord areas) conforming to the Karellas Group Design Brief as referred to [in cl 11] below.
The approximate lettable area of 863 square metres includes an area of 22 square metres that is highlighted on the attached plans. The Karellas Group confirms that the Landlord has reserved the right to excise this area from the area subject to the Lease. If you [presumably, the Landlord] elect to do so the Landlord will pay all costs relating to any change to the fit-out and also costs related to the disruption to the operation of the Supermarket. The rent under this Lease is to be reduced proportionally to the reduction of that lettable area at the time you commence work to refit this area.
…
Clause 2 went on to make provision for a reduction in rent during any such refit period and while the business was disrupted; and also contemplated that extra storage area might be made available above the car park for lease at a payable rent of $350/m2-$450/m2 that it was said "needs to be negotiated and confirmed when relevant". As already noted, there were no plans attached to the December 2009 letter of offer.
Clause 3 identified the tenant as "Karellas Investments Pty Limited or Nominee"; cl 4 identified the landlord as "Harold R Finger or Nominee". The initial lease term (cl 5) was to be 15 years from the commencement of trade. Clause 6 provided for there to be two "Options to Review" (sic; presumably the parties intended to refer to options to renew the lease): one of ten years and one of five years. The letter of offer did not contain any provision as to the terms of any such renewed lease or method of exercise of the options to renew; nor did it make provision for any mechanism for the determination of rent from the commencement of any renewed lease.
Clause 7 dealt with permitted use; cl 8 specified the commencement date of the lease as the date on which Karellas Group commenced trading from the new premises. Clause 9, headed "Occupancy Costs", set out the base rent, including provision for base rent review at consumer price index (CPI) yearly up to and including year 5 and then from year 6 it was to be "either the greater of, 3% of audited GST exclusive turnover figures or the base rent at the end of year 5"; as well as outgoings. It also stated that it was essential that there be 24 hour access to the premises for staff "with the ability to trade [within specified hours] must be permitted by council" [sic]. Clause 10 dealt with GST. It contemplated the incorporation of Karellas' standard GST clause into the lease documentation.
Clause 11 contemplated that a design brief would be issued "which will contain Karellas Groups [sic] current standard Specification". It went on to state that "[t]he Landlord is to deliver a turn-key supermarket premises in accordance with the obligations contained in the Specification". ("Turn-key" premises are, in general terms, ones built and delivered to the tenant as complete without the tenant being required to bear any part of the construction costs.) Clause 11 also stated that the "transmittal documents for the Specification" were to be attached to the Agreement for Lease and that the delivery of premises in accordance with this specification was to be a condition of the lease; thus clearly distinguishing between the agreement for lease and the lease itself. No specification was attached to the letter of offer.
Under the heading "Programming", cl 12 provided that:
The Landlord must provide a development program acceptable to Karellas Group, which specifies the date of handover following practical completion, for inclusion in the Agreement for Lease. The Landlord must comply with the construction program, with normal industry allowance for delays.
It is essential from the opening date that Karellas Group has the full enjoyment of the property. The Landlord will have to satisfy specified completion criteria before Karellas Group will commence to trade, including the Car park complete and fully accessible;
If these criteria are not met but Karellas Group commence to trade, Karellas Group will pay 1% of turnover instead of base rent from commencement of trade until all criteria are met.
Clause 13 dealt with the fit-out period; cl 14 with the conduct of works, schedule of finishes and scope of works. The latter contemplated that documents covering the schedule of finishes and scope of works, together with appropriate landlord's drawing transmittal schedule, "all satisfactory to Karellas Group", would be required for inclusion in the agreement for lease.
Clause 15, to which I will refer in more detail later, was headed "Master Plan". This appears to be a misnomer since (while an earlier draft) no provision was there made for any such document to be prepared or provided to Karellas. Rather, cl 15 contained an acknowledgment, in effect, that the landlord had a right to redevelop the property and an expectation that "such works" be in accordance with Karellas' trading requirements. It also contained a statement as to the essentiality of Karellas understanding the "proposed development direction of this property for the future".
Clause 17, headed "Amenity Provisions", provided as follows:
Karellas Group requires a number of covenants to ensure that premises standards are maintained. These are not intended to impose onerous conditions on the Landlord, but are necessary to ensure that the Karellas Group supermarket trades to its optimum level. These provisions include requirements relating to car parking, building re-development, management standards, strata titling and services, and preservation of the arrangements shown on the site plan referred to below. [There was no further reference to a site plan in the signed letter of offer, though there had been reference to a site plan as part of this clause in the previous draft offer.]
Karellas Group will rely on the preservation of these covenants, rights, and amenities over the term of the lease. These are fundamental to the ongoing success of the supermarket and will be specified within the lease. Failures by the Landlord to observe these principles will result in Karellas Group suffering sales and profitability losses that result from the breach by the landlord. The Landlord will be required to compensate Karellas Group for any losses and must work to maintain a trading environment consisted with that presently contemplated.
Clause 16 dealt with any application Karellas Group might make in relation to a liquor licence; cl 18 with car parking; cl 19 with signage; cl 20 with statutory approvals; and cl 23 with documentation costs (each party being required to pay its own costs including legal costs in connection with the negotiation and preparation of the relevant documentation). Clause 25 provided for the dealings between the parties to be confidential and cl 26 dealt with the provision by Karellas of a bank guarantee by way of security, the amount of which was to be reduced progressively over the term of the lease.
Clauses 21, 22 and 24 should be set out in full:
21. Specific Performance Following Board Approval
The Landlord must acknowledge that Karellas Groups' [sic] agreement to proceed is based on the Landlord's commitment to the project and to the Landlord's development programs. The Landlord must acknowledge that Karellas Group is incurring costs in the negotiation and documentation process and has allocated capital for the completion of the supermarket within the nominated period. If the Landlord fails to perform in accordance with the agreements and approvals, or markets or sells the property (in whole or in part) then Karellas Group may withdraw from the project and claim for costs and loss of profits.
Notwithstanding the above, the Landlord may seek and must obtain Karellas Groups' [sic] consent to a sale or other dealing with the ownership of the property. Karellas Groups' [sic] consent will not be unreasonably withheld if the Landlord can satisfy Karellas Group that the purchaser has the capacity to undertake the development and the Landlord guarantees the completion of the store and all other aspects of the agreement to Karellas Groups' [sic] satisfaction.
22. Documentation & Approvals
This offer has been approved by the Karellas Group Board. The approval by the Karellas Group Board will be operative for a period of 12 months from the date of this letter. If formal documentation is not executed within that time, Karellas Group can elect to terminate the agreement and withdraw from the project.
This offer is subject to finalisation of development plans, programming, Scope of Works specification and finishes to Karellas Group satisfaction.
…
24. Binding Agreement
Although it is intended that a formal agreement for lease will be executed based on the Karellas Group standard documentation, including the commercial terms in this letter, it is intended that acceptance by you of the terms and conditions in this letter will create a binding heads of agreement between you and the Karellas Group.
Pausing there, I note the apparent inconsistency between the statement in cl 22 that the "offer" was subject to finalisation of certain matters and the statement in cl 24 that acceptance of the terms and conditions in the letter was to create a "binding" heads of agreement between the parties. Similarly, the statement in cl 1 that Karellas reserved its right, in the circumstances there specified, to amend its "offer", sits uneasily with cl 24 of the letter of offer. His Honour concluded (at [159]) that cl 1 would only have effect up to the time of the execution of the agreement for lease.
[6]
Conduct after acceptance of the December 2009 letter of offer
The December 2009 letter of offer was signed for Finger & Co in January 2010. Thus, in accordance with the express words of cl 24, a "binding heads of agreement" thereupon came into existence.
After acceptance of the offer, both parties incurred costs in retaining consultants for the purposes of designing and obtaining approval for the construction and fit-out of the supermarket and took steps to negotiate the documentation for the project and agreement for lease/lease.
During the course of the parties' discussions in the period from January 2010 to June 2010, various changes were agreed as to some of the terms set out in the December 2009 letter of offer, such as the inclusion in the proposed demised premises of a mezzanine floor, which was the subject of an approved development application lodged by Karellas with Finger & Co's consent in February 2010, and a change as to the manner in which outgoings were to be borne. In their submissions on appeal, Karellas points out that, rather than requiring Finger & Co to provide a "turn-key" supermarket, by June 2010 the draft agreement for lease provided for the sharing of the costs and obligations of various aspects of construction of the supermarket ([3]).
In March 2010, Finger & Co lodged its own development application seeking approval for the modification of the development consent in particular respects (see [265]). The primary judge noted that this application did not include reference to a first floor slab above the ground floor ([267]).
By 3 June 2010, the parties were close to agreement as to the terms of both the proposed agreement for lease and the lease. This is apparent from the fact that, by email of 3 June 2010, Mr Ben Finger (a director of Finger & Co) requested Mr Vasilli Karellas (a director of Karellas) to send certain amendments to his solicitor "to make the final version of the lease ready for signing" and Mr Karellas responded to the effect that he would get his solicitor to "get the lease off to" the solicitor acting for Finger & Co. However, it was not contended by Finger & Co that, as at June 2010, the then current drafts of the agreement for lease and lease were binding on the parties; nor was it suggested that there had been any binding variation to the terms contained in the heads of agreement.
His Honour found (at [118]) that the parties had not finally bound themselves to proceed on the basis of the variations and additions to the terms contemplated by the heads of agreement as at June 2010. The relevance of there being no binding agreement to the then current "provisionally agreed terms", as his Honour referred to them, is as to the import of the later refusal by Finger & Co to revisit or renegotiate those terms at least insofar as they incorporated the rent specified in the letter of offer.
[7]
8/9 June 2010 correspondence
On 8 June 2010, Mr Karellas sent to Mr Finger an email, attaching a recently obtained turnover forecast, and advising, relevantly, that "[w]ith this level of turnover and on the proposed lease terms the business is not viable for us". Mr Karellas invited Mr Finger to call him to discuss this.
Mr Finger's response to that email was sent by an email later that same day. Mr Finger there noted that there was nothing in the heads of agreement that made Karellas' offer to lease contingent upon any economic report and stated that "[w]e have acted in good faith in the negotiations and expect you to honour your agreement with us to lease the premises". Mr Finger also pointed out that Karellas was aware that the company had already reached an agreement with Woolworths prior to receiving the Karellas offer; and that, on the basis of the Karellas offer, Finger & Co had negotiated to be released from the agreement with Woolworths and had proceeded over the last six months with Finger & Co. Reference was made to the considerable cost at which this had occurred, in terms of holding costs and legal fees. Mr Finger expressed the hope that the matter could be resolved amicably.
By letter dated 9 June 2010, Karellas' solicitors wrote to the solicitors acting for Finger & Co. Among other things, their letter conveyed the following:
I confirm that my client will not be proceeding with the above proposed Lease on the current proposed terms. The reasons for my client's position are explained below. Having regard to the efforts of both parties to achieve an agreement, my client is willing to continue negotiations to see if a suitable outcome could be achieved for both parties. (my emphasis)
The email from your client sent yesterday seems to suggest that there is already a concluded agreement for lease. In the circumstances my client does not believe that this is a proposition that is seriously made by your client. There is no executed Agreement of [sic] Lease and the terms of the Lease are still being negotiated. The letter of 21 December clearly confirmed that the parties would negotiate final terms of an AFL and Lease. Whilst the letter outlined some of the contemplated lease conditions there have been significant changes to the terms as contemplated in the letter of 21 December. There are other aspects of the letter still to be addressed. Importantly there were also a number of important matters that had not been discussed as at December 2009.
…
My client is genuinely disappointed that a final agreement has not been reached at this stage. They were certainly looking forward to a long term relationship with your client and saw the potential for development of this site in this particular suburb.
The letter went on to say that there were a number of contributing factors to Karellas' decision, the first being the concern Karellas had in relation to the impact of a future development of the site on the supermarket business and the second being that a market analysis report recently commissioned by Karellas showed a significantly reduced turnover to that which Karellas had been factoring into its business analysis. The letter stated that it appeared from the report that there were limitations on the possible turnover that could be achieved in that area having regard to the size of the supermarket currently proposed. The letter concluded with the following two paragraphs:
We note that you have previously indicated to the writer that your client has a number of other parties that would be interested in operating a Supermarket business from the site.
As indicated above, my client is prepared to continue negotiations with your client to see if the proposed lease terms could accommodate the above matters.
[8]
Subsequent correspondence
Finger & Co's response to the 9 June 2010 letter, conveyed by its solicitors' letter dated 11 June 2010, was, relevantly, as follows:
… We note your advice that your client will not be proceeding with the lease "on the current proposed terms". The thrust of your letter appears to be that your client would proceed with the lease of the premises but on negotiated terms favourable to your client. We are instructed by our client that it is not interested in renegotiating the terms of the lease with your client. After over five months of protracted and detailed negotiations not only on the terms of the lease but on the specifications for the building works to be carried out (both by your client and by our client) final agreement was reached between our clients. It was only after Sydney Council refused your client's Section 96 Application to use trolleys that your client sought to withdraw from the lease.
…
As you are no doubt aware your client's withdrawal from the lease will result in our client incurring substantial losses. Our client will endeavour to mitigate those losses. However, we are instructed to put your client on notice that our client will hold it liable for all losses incurred by our client as a result of your client's actions including but not limited to loss of future income, holding charges, consultants' fees and legal fees.
We will communicate further with you when our client's loss has been quantified.
Thereafter, there was debate between the respective legal representatives as to whether (which Finger & Co asserted and Karellas disputed) Karellas had withdrawn from the negotiations for the agreement for lease and lease as contemplated by the heads of agreement. In their letter dated 21 June 2010, Karellas' solicitors twice noted that Finger & Co had no interest in continuing with negotiations as to the terms of the lease. Finger & Co did not in terms reject that proposition; rather, its solicitor's response, by letter dated 22 June 2010, was to the effect that Karellas' solicitors' letter was self-serving and achieved no purpose, and that "[w]e do not intend to engage in any further correspondence in relation to whether or not negotiations had been finalised. You are well aware of our client's position in relation to the matter".
By letter dated 5 July 2010, Karellas' solicitors wrote to the solicitors acting for Finger & Co, stating that:
We note from your correspondence that you do not intend to engage in any further correspondence in relation to whether or not negotiations had been completed. We take from your statement that your client does not intend to negotiate further in relation to a lease of the Premises. In short your client has ended all negotiations with our client. Our client has accepted that position but reserves all its rights in respect to your client's actions.
Finally, on 16 August 2010, the solicitors acting for Finger & Co wrote to Karellas' solicitors, referring to Mr Karellas' email of 8 June and to the 9 June 2010 letter, stating:
It is clear from the above two pieces of correspondence that your client is not prepared to proceed with the proposed Lease on the terms set out in the heads of agreement dated 21 December 2009 (the "Contract").
As such, your client has repudiated the Contract. Our client accepts your client's repudiation and hereby terminates the Contract.
Both parties accept that, by 16 August 2010 at the latest, the heads of agreement had come to an end.
[9]
Conduct following termination of the heads of agreement
Meanwhile, on 23 June 2010, Mr Finger met with design consultants, following which a proposed sketch of a residential scheme was forwarded to Mr Finger with alterations to the entry stair that had the effect of reducing the original proposed supermarket trading floor area from 707m2 to 677m2. Also at around that time agents acting for Finger & Co began communicating with other prospective tenants for the supermarket premises.
An agreement for lease dated 16 May 2011 was subsequently executed with Woolworths under which Finger & Co was obliged to carry out specified works to the supermarket premises to reach practical completion by the anticipated date of practical completion (1 June 2012). The premises the subject of the Woolworths agreement for lease were not wholly identical with those the subject of the proposed lease to Karellas. In particular, there were changes to the means of access to the first floor and the trading and back areas in the Woolworths plan were smaller in floor area, primarily because of the area excised from the trading floor in order to be used for a stairway and lift to the upper floor.
The primary judge noted (at [478]) that a revised build programme circulated to Woolworths on 23 December 2011 contemplated the construction of the supermarket premises and the residential development as part of the one construction project, which is what ultimately occurred. Construction of the residential premises was complete by 8 March 2013, that being the handover date under the Woolworths agreement for lease at which Finger & Co gave possession of the supermarket to Woolworths. Had the construction of any such residential development taken place while Karellas was in occupation of the supermarket premises, it seems a matter of commonsense to infer that there would have been constraints on the manner in which the building work was carried out, having regard to the covenant for quiet enjoyment that would be implied (if not express) in any supermarket lease entered into between Finger & Co and Karellas, which constraints would not have arisen if the development occurred while the supermarket premises were unoccupied (as it ultimately did). Mr Ben Finger appeared to accept as much in cross-examination (T 92.38-93.5).
Mr Ben Finger also accepted in cross-examination that in gross terms Finger & Co had received about $11 million from the sale of the 20 residential units (T 90.29) and that the cost of the building and development was about $4.7m (T 90.33), though he maintained that an interest component had to be taken into account when calculating the profit from the residential development (T 91.3) and that the net profit was in the order only of hundreds of thousands of dollars (not in the millions).
[10]
Appeal
Finger & Co's appeal is predicated on the existence of a binding contract that was repudiated by Karellas. Since Karellas maintains that his Honour erred in concluding both that there was a binding contract on the terms set out in the letter of offer, as varied or supplemented by formal documentation ([218], [452]), and that, if there was a binding agreement in those terms, Karellas had repudiated it ([450]), it is convenient to deal first with grounds 1-11 of Karellas' notice of contention before addressing Finger & Co's appeal grounds in relation to the termination of the contract.
[11]
Was there a binding contract on the terms found by the primary judge? - grounds 1 and 4 of the notice of contention
Findings of the primary judge
The primary judge concluded that it was intended by the parties that the heads of agreement be final and binding; not a "mere agreement to agree" (see [119]-[126]). (Karellas maintains that its position was not that it was a mere agreement to negotiate, acknowledging that obligations of exclusivity and confidentiality were imposed by the December 2009 letter of offer - AT 28.)
At [208], the primary judge made a number of findings.
First, that the parties intended to be bound immediately when they executed the heads of agreement (Karellas accepts that this was the case). Second, that they had agreed the essential terms of the lease (as to premises, commencement, term and rent). Third, that they had agreed "most" of the other important terms, or a mechanism for determining those terms; and that they contemplated spending considerable time, effort and money in implementing the agreement, and did so. (Karellas also accepts those second and third matters, though it argues that the agreed terms could legitimately be made the subject of further negotiations.) Fourth, that the effect of the agreement was to stultify Finger & Co's property for a period of up to one year while the negotiations took place. (Karellas does not accept that the heads of agreement had this effect.)
His Honour had earlier concluded (at [130]) that, subject to the qualification that an obligation to act reasonably might not be effective to lead to the settlement of formal documentation complying with the intentions in the heads of agreement, the heads of agreement contained an implied term of the type referred to by Macfarlan J in Perini Corporation v The Commonwealth [1969] 2 NSWR 530 at 545 whereby the parties were bound to do all cooperative acts necessary to bring about the contractual result. Nevertheless, his Honour accepted that the duty to cooperate could not apply to the negotiation of varied or additional terms ([140]).
His Honour concluded (at [210]) that the "heads of agreement" was a valid and enforceable contract from the date of its execution for two stated reasons. First, that cl 17 (which required negotiation of amenity provisions) was not too uncertain or incomplete for the heads of agreement as a whole to be unenforceable ([214]), since his Honour was not satisfied that the court could not have determined the terms of the covenants required to satisfy cl 17 if it had been required to do so ([211]). Second, and even if the court would not have been able to determine the covenants required by cl 17 in the absence of agreement by the parties, that the parties had impliedly agreed to conduct negotiations ([216]).
His Honour considered the parties' contract to be a particular species of the type of contract described by Giles JA in Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149 at [66], where the parties agree to be bound immediately by existing terms but contemplate that variations or additions may be included in the formal documentation ([121]; [218]).
Challenges to those findings
By ground 1 of its notice of contention, Karellas maintains that his Honour erred in holding, at least implicitly, that under the heads of agreement the parties agreed to grant and take a lease on the commercial terms there set out or as varied or supplemented by formal documentation and contends that his Honour should have held that:
a. it was only if and when all relevant terms were agreed and formal documents executed that binding obligations to grant and take a lease on particular terms would have arisen;
b. the heads of agreement created binding obligations on the parties to negotiate towards agreeing and settling relevant terms (including any additional terms) and formal documentation, and to do so exclusively and confidentially, but gave the parties an express right to terminate if those negotiations were not concluded by 21 December 2010; and
c. either party was entitled to seek to renegotiate or vary the commercial terms specified in the heads of agreement as part of the negotiation process and to consider the overall position reached at the end of negotiations (including in relation to the commercial terms in the heads of agreement and any additional terms) in deciding whether or not to execute formal documentation.
Similarly, by ground 4 of the notice of contention Karellas maintains that:
4. The primary judge erred in holding that Finger was entitled to insist upon Karellas entering into formal documents that contained the commercial terms in the heads of agreement, including rent (J [404], [452]).
Broadly speaking, the difference between the parties' respective positions as to the consequence of Finger & Co's acceptance of the December 2009 letter of offer seems to be that, on Karellas' construction, the "binding heads of agreement" were the equivalent of an agreement to negotiate, albeit implicitly to do so in good faith and containing certain binding obligations as to confidentiality and exclusivity, whereas Finger & Co argues for the existence of an agreement of a kind falling within the so-called fourth Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 category, namely an immediately binding agreement to enter into an agreement for lease/lease, on certain specified terms and on such other terms as are either subsequently agreed by the parties or able to be determined by the court (whether having regard to the Karellas standard lease/specification documents or by reference to the implied obligation to Karellas to cooperate in order that Finger & Co might have the benefit of its agreement (citing by way of example Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235).
Pleading
As noted in the introduction to these reasons, the "contract" on which Finger & Co relies, being one "made" by the December 2009 letter of offer (statement of claim [5]), was alleged to be a contract by which the parties had agreed: first, that they would enter into an agreement for lease by which Finger & Co would grant and Karellas would take "a lease of a supermarket building to be constructed on the land, for a term of fifteen years from commencement of trade, and otherwise on the terms and conditions set out in the contract"; and, second, that the parties or their nominees would respectively grant and take a lease of the supermarket building on those terms (statement of claim [7]). The "contract" was particularised as comprising the letter of offer, the then current approved plans for the construction of a new building referred to in the letter (i.e., DA15 Revision C); and further terms implied by the express terms or as a matter of law (statement of claim [7]).
Finger & Co further alleged (at [10]), by reference to cll 24 and 22 of the December 2009 letter of offer, that the parties were subject to implied obligations to act reasonably to settle and execute the formal documentation for the agreement for lease within 12 months of the date of the December 2009 letter of offer and (at [11]) that the said obligations were essential terms of the contract because, unless both parties complied with those obligations, Karellas could elect to terminate the contract and in so doing would deprive Finger & Co of the whole of the benefit of the contract.
That there was a distinction drawn in the pleading between an agreement to enter into an agreement for lease (and ultimately a lease) and an agreement for lease itself is made clear by other allegations in the pleading that referred to the settlement, and execution, of formal documentation for an agreement for lease "embodying the terms and conditions set out in the contract (with such variations or further terms as the parties might subsequently agree on)" (see for example statement of claim [10]).
Submissions
Karellas argues that it is implicit in his Honour's reasons (at [218], [404], [452]) that his Honour concluded that, on the proper construction of the heads of agreement, Finger & Co could have required Karellas to enter into an agreement for lease containing only the commercial terms in the heads of agreement ([17]). It points in this regard to the finding (at [404]) that, as at 9 June 2010, Finger & Co was entitled to insist upon Karellas entering into formal documents that contained the commercial terms of the heads of agreement (but was not then entitled to refuse to re-negotiate other terms); and to his Honour's statement (at [452]) that, as at 16 August 2010, Finger & Co "had a right under the heads of agreement to hold Karellas to the rent, and the other commercial terms, set out in that document".
Karellas contends that such a conclusion was incorrect. While accepting that the heads of agreement imposed a binding obligation on the parties, during the period to 21 December 2010, to negotiate in good faith as to the terms of the proposed agreement for lease/lease, Karellas submits that neither party could be compelled to enter into an agreement for lease/lease that did not contain a final bargain with which it agreed ([19]). It characterises the heads of agreement as comprising an offer as to the critical commercial terms for the proposed agreement for lease, which would be accepted by execution of the formal documentation if and when that occurred, together with an obligation to negotiate the formal documentation in accordance with a binding framework to govern that process.
Karellas points to various clauses of the letter of offer as supporting its construction of the heads of agreement ([20]), including: cl 1, which gave Karellas the right to amend its offer in the event of further amendments to the plans or configuration of the premises; cll 11-19, which identified a range of matters required to be provided and/or agreed during the negotiation period for inclusion in the final agreement for lease/lease documentation; and cl 22, which provided that the offer was subject to finalisation of various matters to Karellas' satisfaction.
It maintains that the first paragraph of cl 21 identifies the particular (and, on Karellas' argument, seemingly the only) respect in which the heads of agreement document was binding, namely the obligation to negotiate exclusively and confidentially towards mutually acceptable formal documentation ([23]). Karellas argues that the express right to terminate the heads of agreement if formal documentation was not executed within 12 months (cl 22) is inconsistent with a construction that the heads of agreement constituted an immediately binding contract to grant and take a lease ([24]).
Relevantly, Karellas argues that the "agreed" terms contained in the heads of agreement, such as the rent, were not terms that were "set in stone" but were, like all the other terms of the proposed agreement for lease/lease, amenable to negotiation ([19]).
Finger & Co, on the other hand, argues that a construction of the heads of agreement as being no more than an agreement to negotiate a formal agreement for lease/lease is irreconcilable both with the opening words of the heads of agreement, which refer to a "binding offer to enter into an Agreement for Lease and Lease", and with cl 24, which refers to the creation of "binding heads of agreement" ([4]). It notes that the heads of agreement had been the subject of extensive negotiations between the parties prior to the execution of the final document ([5]) and emphasises the language of the heads of agreement, such as that in cl 21, as being the language of covenant and obligation ([6]). It places weight on the commercial significance of the property being 'stultified' for a period of 12 months, pointing out that cl 21 in its terms obliged it to seek and obtain Karellas' consent to a sale or other dealing with the ownership of the property.
Determination
There is no doubt, by reference to cl 24 of the December 2009 letter of offer, that the objectively ascertainable common intention of the parties was that they were to be immediately bound by the terms contained in the letter of offer once that letter was signed by Finger & Co. The parties referred to the agreement so concluded as a "binding heads of agreement". However, as Karellas points out, that begs the question as to what it is that the parties thereby bound themselves to do.
The difficulty for Finger & Co in seeking to argue that, on acceptance of the December 2009 letter of offer, there was an immediately enforceable agreement to enter into an agreement for lease referrable to the "terms and conditions set out in" the heads of agreement is that a number of the clauses in the heads of agreement specifically contemplated the need for agreement between the parties as to particular matters; not all of which could be dismissed as non-essential terms.
Hence his Honour postulated (at [134]) that an examination of all or any number of the matters left undetermined by the letter of offer might lead to the conclusion that there was too great a field of uncertainty or incompleteness for the heads of agreement to be enforceable at all. Indeed, much of the reasoning of the primary judge was directed to the question whether the "binding heads of agreement" was sufficiently certain in its terms to be enforceable, having regard to the fact that the parties clearly contemplated that there were a number of matters still to be agreed for inclusion in the formal lease documents.
Finger & Co relies on well-known authority to the effect that there may be a binding contract even though the parties may expect to make a further contract in substitution for the first contract containing, by consent, additional terms (citing GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 634) or even though performance of some or all of the terms is conditional upon execution of a formal document (citing Masters v Cameron at 360-361). There can be no dispute that agreements of such a kind have been recognised as binding in a number of cases.
I agree that it is implicit, in the primary judge's conclusion that, as at 9 June 2010, Finger & Co was entitled to insist upon Karellas entering into an agreement for lease on those agreed terms including the stipulated rent, that his Honour considered that acceptance of the letter of offer gave rise to an immediately binding and enforceable agreement to enter into an agreement for lease/lease on the commercial terms set out in the heads of agreement document alone. The difficulty I have with that conclusion is that the December 2009 letter of offer (and hence the heads of agreement) itself made clear not only that the agreement for lease/lease was to be the subject of later formal documentation but also that there were a number of important terms to be included in the agreement for lease/lease that were required to be agreed.
In other words, what the heads of agreement contemplated was a process of negotiation as to the additional terms required to be included in the agreement for lease/lease before any such agreement for lease was to come into existence. What was clearly also contemplated was that agreement might not ultimately be reached on those additional terms, since there was a right on the part of Karellas to withdraw from the project if formal documentation was not executed within 12 months. The content of the heads of agreement does not in my opinion permit a construction that the agreement for lease/lease would be complete without those additional terms. Hence I am unable to accept the position taken by Finger & Co (AT 11.37; 15/2/16) that specific performance (in the sense of an order that Karellas execute an agreement for lease) could have been sought at the point that the heads of agreement came into existence. That is inconsistent with the acceptance by Finger & Co (AT 25.35; 15/2/16) that the matters required by cl 17 to be included in the lease documentation were fundamental matters to be agreed; i.e., that they were essential terms to be included in the agreement for lease/lease whether or not they would be made essential terms of the agreement for lease/lease.
[12]
Did Karellas repudiate the heads of agreement? - grounds 5-11 of the notice of contention
As noted earlier, the repudiatory conduct pleaded by Finger & Co (statement of claim [15]) was constituted by the combined effect of the 8/9 June 2010 communications (extracted at [47] and [49]-[50] above).
Findings of the primary judge
His Honour considered first the terms of the 8 June 2010 email and concluded (at [368]) that it was not an act of repudiation but was a genuine request, "even though in retrospect perhaps somewhat guileless", on the part of Karellas to see whether Finger & Co could in some way accommodate Karellas' difficulty (as to the viability of the business).
Relevant to considering the meaning conveyed to the reasonable reader by the subsequent communications, his Honour accepted (at [374]) that the statements made in the 8 June 2010 email required the conclusion that Karellas was acting in the belief that it would not be viable for Karellas to proceed upon "the proposed lease terms" in the global sense, i.e., the terms of the currently proposed drafts of the agreement for lease and lease, including so many of the terms in the heads of agreement that had been included in the draft documentation but also the variations and additions the subject of the negotiations since entry into the heads of agreement. The meaning so attributed to "proposed lease terms" had an important consequence for his Honour's findings as to repudiation (see [108] below). His Honour concluded that the meaning that would reasonably be understood by Finger & Co from the 8 June email was that the shortfall in the forecast turnover would make the business unviable for Karellas ([372]). Read with the 9 June letter, such a conclusion must be correct.
His Honour then considered the import of the 9 June 2010 letter from Karellas' solicitors. His Honour accepted that it was legitimate "in principle" for Karellas to reconsider its position as to the terms of the draft documentation (see [391]) and noted that the final statement in that letter was that Karellas was prepared to continue negotiations, albeit that his Honour considered that the "adequacy" of the offer to continue negotiations was arguably undermined by the qualification that Karellas' purpose in continuing negotiations would be to see if the proposed lease terms could accommodate the matters referred to in the letter ([397]).
His Honour's conclusions as to repudiation are contained from [426] onwards. Implicitly (see [435]-[436]), his Honour concluded that Karellas had not refused to settle and then execute formal documentation containing the terms and conditions required by the heads of agreement; rather, his Honour said that what Karellas did was to refuse to proceed "on the current proposed terms". His Honour concluded that that step, considered in isolation, could not be a repudiation of the contract.
His Honour considered that each of the statements made in the third paragraph of the 9 June 2010 letter was true: there was no executed agreement for lease; the terms of the lease were still being negotiated; the heads of agreement did not include all of the intended lease conditions; there had been "significant changes" to the terms contemplated by the heads of agreement; and a number of "important matters" had not been discussed as at December 2009 ([437]-[438]). His Honour did not accept that the making of those statements implied that Karellas refused to enter into formal documentation containing only the terms and conditions required by the heads of agreement ([439]).
Hence his Honour did not accept the first basis on which it was alleged that Karellas had repudiated the contract (as pleaded at [15(1)] of the statement of claim).
From [443], his Honour considered the second basis on which Finger & Co had pleaded repudiation (at [15(2)] of the statement of claim), namely that Karellas had indicated that it would perform the contract only if and to the extent that it suited it to do so; that is, not with a view to settling terms of formal documentation in accordance with the heads of agreement but, rather, with a view to negotiating commercial terms more favourable to itself than those agreed to in the contract.
His Honour considered that a reasonable person in the position of Finger & Co would understand that the second reason referred to in the 9 June 2010 letter (namely, the effect of the significant reduction in forecast turnover of the supermarket business) implied that Karellas had a pressing need to secure a reduction in the agreed rent, and perhaps a variation of other terms, to reduce the operating costs of the proposed supermarket ([445]). His Honour noted that the statement as to Karellas' willingness to continue negotiations was qualified by reference to the two objectives there stated: first, to see if a suitable outcome could be achieved for both parties; and second, to see if the proposed lease terms could accommodate its concerns as to the impact of future developments of the site and the significantly reduced forecast of turnover ([446]). His Honour concluded that the second of those objectives was capable of having a repudiatory meaning ([448]). His Honour explained that meaning as being that:
… Karellas are prepared to renegotiate the currently proposed terms to see if new terms can be agreed that satisfy Karellas' concern about "the above matters"; being the impact of future development, and also Karellas' concern about the effect of the substantial reduction in the forecast turnover. The expression "to see if" conveys the meaning that Karellas were prepared to negotiate further, but if the process did not lead to the desired accommodation, it would miscarry because Karellas would not then proceed. The use of the expression "the above matters" refers to the two concerns collectively, one of which (covenants concerning the consequences of further development) Karellas were entitled to renegotiate under the heads of agreement, and the other of which (the rent) was fixed by the heads of agreement. (emphasis as per original)
His Honour concluded that the second objective identified in the letter would convey to a reasonable reader that Karellas would negotiate further but only if that secured its objective of accommodating the difficulties caused by the forecast shortfall in turnover ([449]). In reaching that conclusion his Honour noted that: the revelation by Karellas of its misjudgement of the forecast turnover was "potent"; the letter was peremptory in tone; and the refusal to proceed on the basis of the then current draft terms encompassed the commercial terms in the heads of agreement, as well as later variations and additions. His Honour considered that the issue of the rent would have been at the forefront of the reasonable reader's mind and said that the reason for the "dramatic escalation" of the dispute by Karellas would not have been evident if it were other than to secure a reduction in the rent ([449]).
His Honour thus concluded (at [450]) that, had Finger & Co terminated the heads of agreement on the basis of the statements made in the 9 June 2010 letter, that termination would have been valid. From what his Honour went on to find, it is clear that his Honour was there speaking of the situation which would have applied had Finger & Co terminated the contract on or shortly following receipt of the 9 June letter. His Honour's conclusion on this issue was expressed to be subject to the separate question as to whether Finger & Co was precluded from terminating the contract because it was itself in breach at that time (an issue addressed by his Honour when considering the allegation by Karellas that Finger & Co had breached cl 15 of the heads of agreement by not disclosing to it the proposed future direction for the property and that this was a breach of an essential term of the heads of agreement.
Challenges to those findings
In its notice of contention, Karellas raises a number of grounds in support of its argument that his Honour erred in holding that the 9 June 2010 letter amounted to a repudiation of the heads of agreement such that Finger & Co would have been entitled at that time to terminate the heads of agreement. Those grounds are as follows:
5. The primary judge erred in holding that if Finger had terminated the heads of agreement on the basis of the statements made in the 9 June 2010 letter, the termination would have been valid (J [450]).
6. The primary judge erred in characterising one of Karellas' concerns, being a concern as to viability of the proposed supermarket given projected turnover, as not legitimate (J [452]).
7. The primary judge erred in finding that by the 9 June 2010 letter, Karellas offered to renegotiate the current terms only if their two concerns could be accommodated (J [452])
8. The primary judge erred in holding that Karellas offered to renegotiate proposed lease terms only on an illegitimate basis or subject to an impermissible condition (being that its concern about projected turnover be addressed) (J [453]).
9. The primary judge erred in holding that the 9 June 2010 letter constituted, or implied, an act of repudiation of the heads of agreement (J [453]).
10. The primary judge should have held that Karellas was entitled to seek to negotiate all or any terms of the proposed agreement for lease or lease, including those specified in the heads of agreement (specifically rent), and that the 9 June letter did just that and did not repudiate the heads of agreement.
11. In the alternative to 10, having found that there were a number of matters that gave rise to legitimate scope for Karellas to negotiate in a way that could moderate the effect of the rent specified in the heads of agreement (J [531]), even if the rent itself were non-negotiable, the primary judge should have held that:
(a) Karellas was entitled to seek to negotiate any of those other matters, including for the purpose of ameliorating the impact of the projected supermarket turnover;
(b) the 9 June 2010 letter stated that Karellas wished to negotiate such matters; and
(c) therefore, the 9 June 2010 letter did not repudiate the heads of agreement.
Submissions
Karellas emphasises, as is the case, that the 9 June 2010 letter did not state that Karellas wished to renegotiate the heads of agreement or intended not to perform and be bound by it; and that the letter expressly stated that Karellas was prepared to continue the negotiations contemplated and required by the heads of agreement. It argues that it was permissible for it to have regard to its own commercial interests when negotiating the terms of the agreement for lease/lease documentation and that the fact that the motivation for a negotiating stance is the amelioration of a perceived commercial disadvantage does not render the taking of that stance repudiatory ([32]).
It submits that it was not legitimately open to the primary judge to conclude that the 9 June 2010 letter necessarily sought a renegotiation of the rent specified in the heads of agreement; nor was it open to his Honour to conclude that the rent was a matter not legitimately open to Karellas to seek to renegotiate ([33]).
Karellas notes that the relevant statement in the 9 June 2010 letter was not that it wished to renegotiate rent or that it would not execute formal documentation unless the rent was reduced; rather it was that Karellas wished to continue negotiations "to see if the proposed lease terms could accommodate" the impact of future development and the reduced forecast turnover ([36]). Karellas notes that there was no pleaded allegation that the extent of the reduced forecast turnover was such that the business was not viable without reductions in rent and that such an argument, made in closing submissions for Finger & Co, was rejected by his Honour (see [371]; [429]) ([37]).
Karellas submits that there were numerous other matters that could have ameliorated the reduced forecast turnover, as the primary judge recognised at [371], [531] and [538]; and that an inference could not be drawn that Karellas was refusing to enter into any formal documentation that did not contain reduced rent ([38]). Pausing there, his Honour did not make such a finding. His Honour's conclusion that the 9 June 2010 letter amounted to a repudiation of the heads of agreement was based, as noted earlier, not on a refusal by Karellas to enter into formal documentation on particular terms but instead on the intimation by Karellas that it would only continue to negotiate on its own terms.
Karellas argues that the rent provided for in the heads of agreement was not a binding agreed term but that, even if it was a fixed term, it was not illegitimate for Karellas to seek to vary or renegotiate that amount ([42]). So, for example, it is submitted that Karellas could have sought reduced rent in return for maintaining the departure from the provision of a "turn-key" supermarket or could have offered "more generous provisions" regarding future development.
It is further submitted by Karellas that, on the primary judge's construction of the heads of agreement (i.e., that it was a binding agreement to take a lease on certain commercial terms subject to any variations or additions that might be agreed), it could not be a repudiation of the heads of agreement for Karellas not to agree to some or all of the proposed variations or additions for any reason. Further, it is submitted that since the draft formal documents had departed substantially from the heads of agreement, it could not be said that Karellas had refused to execute formal documents that reflected the heads of agreement nor had it indicated that it would only execute formal documentation reflecting the heads of agreement if and when it suited it ([43]).
Determination
The relevant question when determining whether Karellas had repudiated the heads of agreement by the communications of 8 and 9 June 2010, as his Honour noted (at [341]), was whether those communications manifested an intention by Karellas no longer to be bound by the heads of agreement or only to fulfil it in a manner substantially inconsistent with its obligations. This was to be determined by reference to what a reasonable person in Finger & Co's position would have understood the communications to have conveyed (see Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623 at 658) ([342]).
In this regard, I note that repudiation has been said to be a drastic conclusion which should only be held to arise in clear cases of a refusal, in a matter going to the root of the contract, to perform contractual obligations (see Lord Wilberforce in Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277 at 283).
In my respectful opinion, the primary judge erred in concluding that the 9 June 2010 letter conveyed to the reasonable reader that Karellas would only continue to negotiate if Finger & Co agreed to reduce the rent. I note that his Honour accepted that the issue was one that was finely balanced.
The reason that I have reached the contrary conclusion to that reached by his Honour is that the unviability of the business was stated to be "on the proposed lease terms". The proposed lease terms at that stage encompassed a range of matters, including the proposed variation to include the mezzanine level and the change to the original proposal that the lease be on a "turn-key" basis. I accept that the most obvious way of accommodating a concern as to the viability of the business, where that concern was stated to arise from a significant reduction in the forecast turnover and where rent at a lower percentage of forecast turnover had earlier been expressed to be "impossible", would be a reduction in rent. However, that would not necessarily be the case; and I accept Karellas' submission Finger & Co in effect pre-empted the exploration of that issue by refusing to depart from the then provisionally agreed lease terms.
Moreover, I do not accept (as previously explained) that the fact that a term was stipulated in the heads of agreement, i.e., the rent, means that to seek to renegotiate that term would amount to a repudiation of the heads of agreement. That had in effect already happened in relation to the proposed area of the leased premises, which itself was an agreed term in the heads of agreement.
I consider that the primary judge placed too much weight on the reference to Karellas' willingness to negotiate "to see if" Karellas' concerns could be accommodated. The letter of 9 June 2010 was inviting further negotiation. It was certainly foreshadowing that there might be a refusal by Karellas to proceed with the then presently negotiated terms for the agreement for lease and lease if some kind of renegotiated arrangement could not be reached that would satisfy its concerns as to the future viability of the business. However, I am not persuaded that the letter conveyed an intention by Karellas not to honour its obligations under the heads of agreement (i.e., to use his Honour's words, a refusal by Karellas to negotiate in good faith "towards" a proposed agreement for lease/lease that would include not only the agreed terms in the heads of agreement, with any agreed variation thereto, but also the additional terms that the heads of agreement required be included in the formal documentation). Repudiation is not lightly to be found (Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940] 3 All ER 60 at 71; affirmed in Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 at 633).
[13]
Effect of change to Revision C plans on Karellas' right to amend its offer - grounds 2-3 of the notice of contention
Grounds 2 and 3 of Karellas' notice of contention relate to the import, to the question of repudiation, of the change to the DA15 Revision C plan. In view of the conclusion I have reached above, these do not arise for determination. For completeness, I note that those grounds are as follows:
2. The primary judge erred in holding that because Karellas did not characterise its conduct as an express exercise of its contractual right to amend its offer, it did not enliven that right (J [313]-[314]).
3. Having found that there was a material change to the Revision C plans (J [310]), the primary judge should have held that Karellas had the right to amend its offer and that the 9 June 2010 letter was not repudiatory in circumstances where Karellas had that right.
Karellas notes that his Honour found that there was a material change to the Revision C plans by the introduction of a concrete floor slab over the whole of the property ([310]) and complains that his Honour nevertheless went on to hold that Karellas did not exercise its right under cl 1 of the heads of agreement to amend its offer ([312]). Karellas accepts that at [310] his Honour was referring to the incorrect plan and that the relevant Revision C plan is a single page which shows the supermarket trading, back office, car park and loading areas but no slab above them. However, it says that this does not dispose of the issue regarding its right to amend under cl 1 of the heads of agreement.
The issue was raised by [1(h)] and [1(r)(ii)] of Karellas' defence. Karellas pleaded that the development applications lodged in February 2010 (by it) and March 2010 (by Finger & Co) constituted further amendments, redesigns or changes to configuration within the meaning of cl 1 of the heads of agreement, by which Karellas was entitled to amend its offer.
The argument addressed by the primary judge (at [313]-[314]) was as to whether, if there was an available right to withdraw from the agreement and so terminate it at the time of an alleged repudiation of the agreement, the availability of that right meant that the act of alleged repudiation ceased to have that effect. His Honour concluded that, if the contract was on foot because Karellas had not exercised a right to withdraw, subsequent conduct that amounted to a repudiation would justify termination of the contract and the extant but unused right to withdraw would be a matter relevant to whether or not Finger & Co had suffered any damage as a result of that repudiation. I agree. This is not analogous in my view to the situation where a party terminates (wrongly) on the basis of an alleged breach of contract at a time where there is an available right to terminate for another breach (Shepherd v Felt and Textiles of Australia Ltd [1931] HCA 21; (1931) 45 CLR 359).
In written submissions on the appeal the argument seemed to be raised somewhat differently to that addressed by his Honour. Karellas submitted that as it had a right to amend its offer (on the footing that Finger & Co would have had to provide the amended plans necessary to permit the residential development to occur), there was no repudiation because Karellas' act in seeking to negotiate was a step in the exercise of the right to amend. Finger & Co in response argues that the flaw in this submission is the assumption that Finger & Co would have built exactly the same upper level development even if Karellas had proceeded to lease the supermarket, which it says is contrary to the evidence (referring to T 60.10-48, 78.44-79.48, 80.32-50 & 92.9-16).
The grounds raised in Karellas' notice of contention in this respect do not go to the damages case, per se. Rather, it seems to be argued that his Honour should have treated the 9 June 2010 correspondence as exercising a right to amend. However, Karellas made no amended offer. It simply refused to proceed on the then current provisionally agreed terms and called for further negotiations. His Honour did not err in not treating this as an exercise of the right under cl 1. I see no flaw in the reasoning of the primary judge at [313]-[314].
[14]
Did Finger & Co validly terminate the contract on 16 August 2010? - grounds 1-5 of the grounds of appeal
The conclusion that there was no repudiation by Karellas is determinative of these proceedings. However, it is necessary, in the event that that conclusion were later be found to be incorrect, to deal with the issues raised in Finger & Co's appeal (Kuru v State of New South Wales [2008] HCA 26; (2008) 236 CLR 1).
The challenge by Finger & Co to the finding that it did not validly terminate the contract is put as follows in its notice of appeal:
1. Having concluded that the First Respondent ("Karellas") had, by its correspondence of 8 and 9 June 2010, repudiated the Heads of Agreement dated 21 December 2009 (the "Contract") [449-50], the primary judge erred in holding that the Appellant ("Finger") did not validly terminate the Contract [454].
2. The primary judge erred in failing to hold that Finger validly terminated the Contract by its correspondence of 11 June and/or 16 August 2010.
3. The primary judge erred in concluding that, following Karellas' repudiation of the Contract, Finger was not entitled to terminate the Contract:
(a) without first making an offer to Karellas to participate in a renegotiation of the terms of the proposed lease referred to in the Contract [453]; and
(b) because, by refusing to renegotiate the terms of the proposed lease, Finger was itself not ready and willing to perform the Contract [455].
4. The primary judge erred in concluding that Finger was not entitled to terminate the Contract because it was in breach of cl. 15 thereof [457], when:
(a) there was, contrary to his Honour's conclusion at [160], no implied obligation in cl. 15 requiring Finger to supply information to Karellas (particularly in circumstances where an express obligation upon Finger to do so had been deliberately removed from the final version of the Contract); and
(b) cl. 15 (which his Honour concluded was "inherently nebulous" [155]) was not an essential term of the Contract, contrary to his Honour's conclusion at [457].
5. In concluding that Finger was in breach of cl. 15 [326] (assuming that clause imposed the obligation referred to in Ground 4(a), above), the primary judge erred:
(a) in failing to bring to account his own finding that Finger had not formed any definite intention to proceed with any particular development [299], especially in light of the fact that Finger was prevented by the terms of the proposed lease from carrying out any upper level development for a period of 3 years [229 & 480];
(b) in finding that Finger had disclosed nothing to Karellas regarding the future development direction of the property at 21-23 Erskineville Road, Newtown (the "Property") [321], when the unchallenged evidence was that Finger had disclosed to Karellas from the outset the possibility that it would carry out an upper level development of some kind at the Property;
(c) by misconstruing the evidence, in that his Honour found [29-33] that the plans referred to in the Contract as "Reference DA 15 Revision C dated 1/10/09" ("Revision C") were the 12-page plans for the whole of the Property at Ex. A, pp. 1370-81, when in fact Revision C was the single page plan of the ground floor of the Property at Ex. A, p. 1383;
(d) by concluding in consequence that the residential development contemplated by Finger was inconsistent with Revision C [471];
(e) in failing to bring to account the fact that Karellas did not, at any relevant time, ask Finger to provide it with any information pursuant to cl. 15; and
(f) in finding that, by its letter of 21 June 2010, Karellas required Finger to comply with cl. 15 [459].
Findings of the primary judge
The basis on which the primary judge held (at [454]) that Finger & Co did not validly terminate the heads of agreement in reliance on Karellas' repudiation was that, following receipt of the 9 June 2010 letter, Finger & Co had refused to renegotiate any of the then current provisionally agreed terms of the contract, including matters that his Honour considered Karellas was entitled to require it to revisit (see [452]; [453]).
His Honour noted (at [398]) that it was Finger & Co's case that the repudiation was accepted by its solicitors' letter of 16 August 2010 (a position from which Finger & Co now seeks to resile, arguing on this appeal that the repudiation was accepted at an earlier date). His Honour concluded that, as Finger & Co did not immediately terminate the contract (on receipt of the 8/9 June 2010 communications) it "lost the ability to do so solely having regard to the two communications" ([398]).
His Honour found that, as at 16 August 2010, there was a "stand-off" between the parties and that each had in effect adopted the position that it would not renegotiate the current provisionally agreed terms (at [453]). His Honour concluded (at [453]) that, by 16 August 2010, the terms and conditions as contemplated by the heads of agreement were "not on the table" and that the act of repudiation that his Honour considered should be implied from the 9 June 2010 letter had by then "ceased to be operative, or to have the practical effect that it initially had", going on to say that:
… The offer by Karellas to renegotiate, but only on an impermissible condition, ceased to have any meaning while Finger refused to renegotiate on any basis. Finger could not effectively terminate the heads of agreement for repudiation by Karellas, on the ground that Karellas would not settle the formal documentation required by the heads of agreement, without Finger first making an offer to Karellas to participate in a renegotiation intended to achieve that result. (my emphasis)
His Honour explained (at [455]) that his conclusion that Finger & Co did not validly terminate the heads of agreement (as stated at [454]) was one that he had reached having regard to the combined effect and meaning of the conduct of both of the parties. That was clearly a reference to the position referred to at [453], namely that after receipt of the 8/9 June 2010 communications Finger & Co had refused to negotiate on any basis.
His Honour went on to say that his conclusion was supported by the fact that Finger & Co's position was itself one of repudiation because its adamant position was that it would not renegotiate any of the then current proposed terms "including those that concerned subject matters that remained open for negotiation at Karellas' insistence" and thus was itself not ready and willing to perform the contract ([455]).
If I read his Honour's reasons correctly, the findings that Finger & Co was not itself ready and willing to perform the contract and that its own position was one of repudiation were supportive of the principal reason that Finger & Co could not validly terminate as at 16 August 2010, but were not themselves the principal reason that it could not do so. The principal reason was that the repudiatory conduct of Karellas ceased to have any operative or practical effect while Finger & Co refused to negotiate "on any basis" or unless and until Finger & Co first made an offer to Karellas to participate in a renegotiation intended to achieve that result.
[15]
Was there a valid termination as at 11 June 2010? - ground 2 of the grounds of appeal
The letter of 11 June 2010 is extracted at [51] above. Finger & Co accepts that it did not in its terms expressly terminate the agreement but maintains that the letter contained statements that were only consistent with a termination of the heads of agreement, noting that particular language is not necessary if the election to disaffirm the contract is apparent to the recipient (Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [155]) ([23.1]).
The statements contained in the 11 June 2010 letter that are relied upon in this context are those that: noted the advice that Karellas would not be proceeding with a lease on the current proposed terms; conveyed the view that Karellas' position was that it would proceed with a lease on negotiated terms favourable to it; informed Karellas that Finger & Co had no interest in re-negotiating the lease terms; and advised that Karellas' conduct would result in substantial losses and that Finger & Co would endeavour to mitigate those losses but would hold Karellas liable for them, including loss of future income, holding charges, consultants' fees and legal costs.
Finger & Co notes that loss of bargain damages would be recoverable only if the contract were at an end (Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245 at 260) and hence submits that the above statements in the 9 June 2010 letter were consistent only with a termination of the heads of agreement; not with an intention on the part of Finger & Co to affirm the contract (referring there to Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634 at 646; Karacominakis at [155]) ([23]).
An immediate difficulty with a submission that his Honour erred in failing to find that the agreement was validly terminated by the letter of 11 June 2010 is that no such allegation was pleaded by Finger & Co; nor does it appear that the case was conducted on the basis that the agreement might have been terminated at an earlier date than that contended for in Finger & Co's pleading. His Honour correctly proceeded on the basis that Finger & Co's pleaded case (statement of claim at [16]) was that Finger & Co had accepted Karellas' repudiation and terminated the contract by its solicitors' letter dated 16 August 2010 (see at [20]; [452]).
Karellas points out that there was no application made in the proceedings before his Honour to amend to plead a different termination date and submits that the submission now made, which is contrary to the pleaded case, should be rejected ([45]). Nevertheless, it accepts that it can point to no prejudice if the point is now raised.
Finger & Co argues that the issue whether Finger & Co terminated the heads of agreement on 11 June 2010 is a question of law involving the construction of the 11 June letter and that no evidence on that issue could have been called by Karellas; hence it is not precluded from raising the argument on appeal (citing Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1 at 8; Violi v Commonwealth Bank of Australia [2015] NSWCA 152 at [125]).
As to this issue, it can hardly be suggested that his Honour erred in not concluding that the heads of agreement were terminated on a date earlier than that for which Finger & Co had itself contended. There is much to be said for Finger & Co being held to the forensic positions it had adopted before the primary judge. The significance of the earlier date of acceptance of repudiation goes largely to the question whether Finger & Co was at that stage in breach of cl 15 of the heads of agreement.
Determination
In light of the conclusion I have already reached on the repudiation issue, nothing turns on this issue. Nevertheless, if it had been necessary to determine whether the 11 June 2010 letter operated to terminate the heads of agreement, my conclusion would have been as follows.
I do not accept the submission by Karellas that the 11 June 2010 letter merely reserved Finger & Co's rights while it made a decision whether it was in its commercial interests to accept the asserted repudiation or to seek to compel performance of the contract as it saw it. I consider that the import of the 11 June 2010 letter was to reserve Finger & Co's right to claim damages consequent upon Karellas' decision not to proceed with the proposed lease. The basis on which such a damages claim would arise could only be if the repudiation were to be accepted. Hence the reservation of rights was consistent with an intention to accept the repudiation.
The letter proceeded on an unstated assumption that the agreement was, or would be, at an end. However, this was not in terms made clear in the letter. I am not persuaded that the letter would reasonably have made clear to a party in Karellas' position that Finger & Co was acting so as to terminate the heads of agreement with effect from that date. Such a letter would have been consistent with the adoption of a threatening stance in an attempt to force Karellas to re-consider its position. Finger & Co's intention to terminate was only made clear when the solicitors wrote on 16 August 2010 expressly stating that it was so doing.
Thus I am not persuaded that the primary judge erred in failing to hold that there was a valid termination of the heads of agreement on 11 June 2010. Ground 2 of the notice of appeal, insofar as it asserts this, is not made out.
[16]
Was there a valid termination as at 16 August 2010? - grounds 2-5 of the grounds of appeal
Finger & Co next argues that its right to terminate was not lost between June and August 2010. This raises the alternative part of ground 2 as well as grounds 3-5 of the grounds of appeal.
[17]
Was there a dispensation of the requirement for performance by Finger & Co? - ground 3 of the grounds of appeal
I consider first the matters raised by ground 3.
Finger & Co argues that its refusal to negotiate expressly arose out of Karellas' repudiation: "namely, Karellas' denial of its obligation to perform the fundamental agreed condition as to rent" ([25.1]). Finger & Co argues that once Karellas had intimated that it was not prepared to perform the contract according to its terms, Finger & Co cannot be said to have breached its own obligation to negotiate (citing Foran v Wight [1989] HCA 51; (1989) 168 CLR 385 at 420). In particular, Finger & Co argues that Karellas' "refusal to pay the agreed rent" rendered it pointless for Finger & Co to take further steps to perform the contract, i.e., to engage in further negotiations. It submits that Karellas' refusal thus absolved and discharged it from any further performance of its contractual obligations as from the time of the repudiation (citing Shepherd v Felt and Textiles of Australia Ltd at 377-378 per Dixon J) ([25.2]).
Finger & Co argues that its position is analogous to that considered in Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd [1954] HCA 25; (1954) 90 CLR 235, where an intimation that it was useless for the plaintiff to pursue the conditions of the contract had the effect that it was not obliged to do so (citing Peter Turnbull at 246 per Dixon CJ; Foran v Wight at 396, 404 per Mason CJ) ([25.3]). It submits that in those circumstances the question whether it was ready and willing to perform the contract does not arise and that, so long as Karellas maintained its position that the lease was not viable on the agreed terms, it was open to Finger & Co to treat the contract as at an end and sue for damages (citing Peter Turnbull at 250, 254 per Kitto J) ([25.4]).
Karellas points in response to the finding by his Honour (at [451]) that Finger & Co's position, in the correspondence between the solicitors between 9 June and 16 August 2010, was that it was "entitled to require Karellas to proceed on the basis that the formal documentation would incorporate the terms that the parties had negotiated to that point" (emphasis as per original); a stance that his Honour recognised was inconsistent with Finger & Co's case in the proceedings. It argues that his Honour's conclusion that Finger & Co had lost its right to repudiate was not based merely on its refusal to negotiate but included its insistence on a position contrary to the heads of agreement, namely that there be no departure from the then current iteration of the proposed formal documentation (referring to [400]-[404], [419]-[420], [451] and [453]).
Karellas points out that in order to be entitled to rescind for anticipatory breach, a plaintiff must be willing to perform the contract on its proper interpretation (citing DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 at 433; Foran v Wight at 407) ([53]). Moreover, it argues that Finger & Co did not establish that it would have been ready and willing to perform had Karellas not (as Finger & Co contends it had) dispensed with the need for performance (citing Foran v Wight at 395-407 per Mason CJ). Finger & Co's response to this is that, had Karellas raised this issue in its defence or during the hearing, it could have adduced evidence expressly addressing the issue of its willingness to proceed with the proposed lease but for Karellas' repudiation ([16.1]). It argues that the time at which a plaintiff needs to demonstrate readiness and willingness to perform is at the time of repudiation (referring to Foran v Wight at p 398.3) and that what the plaintiff must show is that "at the time they were absolved from future performance, there was not a "substantial incapacity" on their part or a 'definitive resolve or decision' against the performance of their obligations" (referring to Foran v Wight at p 454 per Dawson J and p 409 per Mason CJ).
Karellas further submits that if the heads of agreement were binding in the manner found by the primary judge, then Finger & Co was obliged either to continue negotiations or to require Karellas to execute formal documentation on the commercial terms in the heads of agreement and that Finger & Co was not willing to do either; rather, its position was that the current version of the proposed documentation be executed and that it was not prepared to continue negotiations with respect to that documentation (Karellas referring to the finding of his Honour to this effect at [451]) ([55]).
Addressing the submission based on Peter Turnbull (to the effect that Karellas by its conduct had dispensed Finger & Co from further performance with the contract), Karellas points out that the letter of 9 June 2010 did not contain a refusal to pay the agreed rent; rather, it requested further negotiation. It is submitted that that request did not dispense with performance by Finger & Co of its obligation to negotiate - to the contrary, it required performance of that obligation ([51]).
Finger & Co submits that all the evidence points to the conclusion that up until Karellas' repudiation on 8/9 June 2010, Finger & Co was ready, willing and able to perform the heads of agreement and had been doing so ([16.4]). It also submits that Karellas is wrong in asserting that it insisted that there be no departure from the then current iteration of the proposed formal documentation. Rather, it argues that, read in light of Karellas' clear indication on 8/9 June 2010 that it would only be proceeding with the lease if the rent were reduced, the statement by Finger & Co in its 11 June 2010 correspondence that it was not interested in renegotiating the terms of the lease must be read as a statement that it was not interested in doing so in circumstances where Karellas was not prepared to pay the agreed rent. It argues that any such negotiations would have been pointless ([17]).
Determination
The argument that Karellas' repudiation dispensed with the requirement that Finger & Co continue to negotiate the terms of the proposed agreement for lease/lease turns in substance on whether the 8/9 June 2010 correspondence (including the invitation to continue negotiations in that correspondence) is properly construed as conveying that Karellas would continue to negotiate only if Finger & Co agreed to reduce the rent. In other words, the argument depends on whether Karellas' continuation in the negotiations was conditional upon some form of commitment in advance by Finger & Co that it would reduce, or at least that it would be prepared to consider reducing, the rent stipulated in the heads of agreement.
I accept that, had Karellas' position as at 9 June 2010 been that it would not negotiate further in relation to the terms of the agreement for lease/lease documentation unless Finger & Co agreed to reduce the rent, i.e., had it issued an ultimatum to that effect, then this would have had the effect of dispensing with the need for Finger & Co to continue negotiations. It would have been pointless for Finger & Co to continue negotiating other terms if (which it was not obliged to do) it was not prepared to reduce the rent and Karellas was not prepared to proceed with the lease negotiations unless it did.
Therefore, had I accepted Finger & Co's construction of the 8/9 June 2010 correspondence, I would have concluded that Karellas had dispensed with performance of the contract in the sense of relieving Finger & Co from the need to continue negotiations.
That would not necessarily lead to the conclusion that Finger & Co could validly have terminated the contract by accepting Karellas' repudiation if it was at the same time wrongly demanding, in effect, that Karellas adhere to the then current provisionally agreed terms. That said, I would not have concluded that simply because Finger & Co adopted a wrong interpretation of the current contractual arrangements it was not, as at the time of the 8/9 June 2010 correspondence constituting the alleged repudiation, ready, willing and able (had it not been dispensed from the requirement to do so) to continue negotiations for the proposed lease.
The difficulty I have with ground 3 is that it is based on a premise which I am unable to accept - namely that the 8/9 June correspondence imposed some form of ultimatum as to the rent. Ground 3 is therefore not made good.
[18]
Was there a breach of cl 15? - grounds 4 & 5 of the grounds of appeal
Ground 5 relates to the finding that, as at 16 August 2010, Finger & Co was in breach of cl 15 of the heads of agreement and that this was an essential term of the agreement.
Clause 15 provided as follows:
15. Master Plan
We understand that the Landlord has the right to develop the property in a predetermined, orderly manner. However, we will expect such works to be in accordance with Karellas Group trading requirements.
It is essential for Karellas Group to understand the proposed development direction of this property for the future. (my emphasis)
Findings of the primary judge
His Honour construed cl 15 as imposing a positive obligation on Finger & Co, compliance with which was essential, to provide information to Karellas, before it was required to execute an agreement for lease, that would enable Karellas to understand the proposed development direction for the property in the future ([155]; [458]). At [321], his Honour said that Finger & Co was not absolved from its positive disclosure requirement because its plans were conceptual and provisional. His Honour nevertheless accepted that this was an "inherently nebulous requirement" and observed that relatively little information might be required to satisfy the obligation ([155]).
His Honour rejected the submission of Karellas that the obligation extended to the completion and provision of a master plan in respect of the future development of the property, since that had been deleted from the earlier draft heads of agreement ([157]). In the previous draft letter of offer there was a concluding sentence that followed the above paragraphs, which stated: "If further development is proposed, it must be shown on a master plan, approved by Karellas Group, and included in the documentation".
At [162] his Honour said:
There might be scope for argument about the amount of detail that Karellas were entitled to receive, but that would not make the requirement uncertain. It would probably be satisfied by some reasonably specific schematic plan or description as to the development that Finger wished to pursue. (my emphasis)
His Honour concluded at [299] that, over the period from at least early February 2010, Finger & Co was "seriously exploring" the design of a residential development for construction above the premises proposed to be leased to Karellas but accepted that during that period Finger & Co did not form any definite intention to proceed with a residential development and (at [320]) referred to the proposal as "conceptual, provisional and under investigation".
His Honour did not accept that Karellas knew from the outset that Finger & Co had an intention to put a first floor slab over the whole site area of the property and to construct a further development over the whole of that area ([34]). Pausing there, as already noted, the correct plan labelled DA15 Revision C did not show any slab at first floor level. His Honour's acceptance (at [305]) that Finger & Co proposed to construct a first floor slab to facilitate later development above the supermarket, and that Karellas was aware of it, seems to be based on his incorrect assumption that the plan referred to in the heads of agreement showed a slab above the trading and back office areas. It did not.
His Honour further said that there was no evidence that, by the date of the heads of agreement, Karellas had been made aware that Finger & Co retained the right further to develop the property in a way that would require any different slab at first floor level than was depicted in Revision C, or to develop the car park and loading dock areas for any new use ([34]).
His Honour considered that the introduction of a slab on the first floor over the whole site area of the property (for which provision was made in the development application lodged in March 2010 pursuant to s 96 of the Environmental Planning and Assessment Act 1979 (NSW)) was a material change to that which he considered (incorrectly) had been shown in the Revision C plan, stating that the more extensive the first floor development, the greater the likely disruption to Karellas' trading activities ([310]).
At [327], his Honour said:
It will be convenient to note, however, that Finger itself alleges that the heads of agreement contained an implied term that imposed a duty on both parties to act reasonably to settle the terms of the formal documentation embodying the terms and conditions set out in the heads of agreement, in the sense that I have considered above. That term, in so far as it was implied as considered above, was mutual. An implied obligation upon Finger to act reasonably would probably not have obliged it to disclose its residential development proposals in isolation of the existence of clause 15. But given the terms of clause 15, if Finger was required to act reasonably to facilitate the settlement of the terms of the formal documentation, including the covenants required by clause 17, Finger ought to have disclosed to Karellas the information that it had concerning the residential development proposal, albeit with whatever qualifications and contingencies existed.
His Honour held (at [456]) that Finger & Co had breached the obligation contained in cl 15 by failing to inform Karellas of "the substance of its plans to redevelop the Property to add a residential level on the first floor" and held (at [457]) that Finger & Co was not entitled to terminate the contract while it was in breach of cl 15. His Honour based the latter conclusion in part on the use of the word "essential" in the clause.
Submissions
The first issue raised in this context is whether cl 15 imposed any obligation on Finger & Co to inform Karellas of the "proposed development direction" of the property and, if so, whether this was an essential term. The second is whether his Honour erred in finding that Finger & Co was in breach of any such obligation.
As to the first issue, Finger & Co argues that cl 15 had no greater effect than an informative recital in a deed and that to treat it as imposing an obligation of the kind his Honour considered it imposed would be to give it a meaning that the parties had, by deleting the obligation on Finger & Co to produce a master plan, in effect agreed it would not have (referring to Codelfa Construction Pty Ltd v State Rail Authority of NSW at 353; Watpac Construction NSW Pty Ltd v Taylor Thompson Whitting (NSW) Pty Ltd [2015] NSWSC 780 at [56]) ([29]).
Finger & Co argues that the word "essential" in cl 15 described the understanding of Karellas as it performed the contract, not the importance of the term to the contract nor the importance of one or other party's obligations under the contract. It submits that the word did not ascribe to the clause the consequence that a breach (assuming it imposed an obligation on Finger & Co) would give rise to a right to terminate.
Insofar as his Honour's conclusion to the contrary was based on cl 1 of the heads of agreement, Finger & Co submits that cl 15 did nothing to facilitate the operation of cl 1 of the heads of agreement since any potential development proposal contemplated by cl 15 must have concerned the space above the ground floor, whereas cl 1 referred to DA15 Revision C, which was a plan of the ground floor of the property and conveyed nothing about what was to be constructed above.
Karellas on the other hand maintains that cl 15 played a critical role in the scheme provided by the heads of agreement. It notes that cl 12 provided that it was essential that Karellas have the full enjoyment of the property from the opening date and that, while cl 15 recognised Finger & Co's right to develop the property, this was to do so in a "pre-determined" manner. It is submitted that it was essential that Karellas understand the proposed development direction of this property for the future so that this could form the foundation for the negotiation of amenity provisions respecting building re-development under cl 17 and that without the disclosure required by cl 15, there was no foundation for the negotiation of amenity provisions regarding re-development ([59]).
Karellas notes that parties can stipulate that a term is fundamental or essential even if objectively the term may seem to have little importance, and that effect must be given to that stipulation (referring by way of example to Shevill v Builders Licensing Board at 627; Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10; (2008) 234 CLR 237 at [42]) ([62]). It argues that since an understanding of the proposed development direction of the property for the future could only come from disclosure by Finger & Co, the stipulation that it was essential that Karellas have that understanding amounted to a stipulation that it was essential or fundamental that Finger & Co make such a disclosure ([63]).
Determination
In its terms, cl 15 imposes no obligation on Finger & Co to make any disclosure of its plans for the property at all. To the extent that Karellas argues it was entitled to disclosure of some form of master plan in respect of the property or its future development direction, that would be inconsistent with the deletion from the previous draft of the positive obligation to prepare and provide such a plan. I accept that there is an argument that once there was the deletion of reference to the master plan it might be said that it was necessary to imply a term requiring disclosure of the future development direction if any effect were to be given to the acknowledgement as to the essentiality of Karellas having the understanding to which reference is there made.
However, I have difficulty construing cl 15 as anything other than an acknowledgement that Karellas regarded it as essential to have the understanding there set out. Nor do I consider that an acknowledgement of the essentiality that Karellas have such an understanding amounts to a contractual stipulation that provision of information to enable that understanding is an essential term of the contract.
Even if there had been an obligation to provide information as to the "proposed development direction" of the property, that requirement, which the primary judge himself considered could be satisfied by relatively limited information, was in my opinion sufficiently complied with by the information that Finger & Co did provide - namely that development of an area above the premises was a possibility (something that was clear from the excision of the access area for the upper floor area on Revision C and in cl 2 of the heads of agreement) and that it was likely to involve the construction of a slab above the supermarket trading and back office areas (something which was clear from the development application forwarded in March 2010). Finally, I see no reason to read the 21 June 2010 letter, which demanded provision of a master plan, as a request for information of the "proposed development direction" for the property.
Had the issue arisen for determination, I would have concluded that grounds 4 and 5 were made out.
[19]
Damages - grounds 6-8 of the grounds of appeal; grounds 13-18 of the notice of contention
To the extent that his Honour made findings as to the damages that would have been recoverable had the claim by Finger & Co been upheld, those findings were obiter. Karellas contends that his Honour should have made a positive finding as to quantum (ground 13 of its notice of contention). His Honour did not do so because he considered it would have been necessary for there to be further submissions on that issue. Unless his Honour erred in rejecting Karellas' contention that Finger & Co's loss was nil, or in rejecting Finger & Co's contention that there should be no deduction from its claimed damages for the matters that his Honour considered required allowance to be made, criticism cannot fairly be made of the fact that the primary judge did not consider himself in a position to quantify the precise amount of damages without the benefit of further submissions. I do not propose to say anything further about ground 13 in those circumstances.
Challenges to his Honour's findings as to damages are made in three broad respects: first, as to the avoided loss issue in relation to the profits Finger & Co made on the upper floor residential development (ground 6(a) of the appeal; grounds 14-16 of the grounds of contention); second, as to other matters for which his Honour considered allowance ought be made (grounds 6(b) and 7 of the grounds of appeal); and, third, as to the reasoning process with respect to what might have eventuated had the heads of agreement not been terminated and Karellas' contention that the only loss sustained by Finger & Co was the loss of the chance for it to reach a concluded agreement for lease with Karellas, the value of which it said was nil (ground 8 of the notice of appeal; grounds 17 and 18 of the notice of contention).
[20]
(i) Avoided loss issue
Findings of the primary judge
His Honour concluded, subject to one qualification, that the assessment of Finger & Co's damages should be undertaken on the basis that the damages should be reduced by the amount of its profit from the residential development ([551]). The qualification was that his Honour did not accept that the whole of the profit earned by Finger & Co should necessarily be brought to account in reduction of the amount of the damage that it suffered for the reason that this was not a case where, absent Karellas' breach, Finger & Co could not have constructed any residential development at all above the supermarket premises but that any development it could have carried out in those circumstances would have been confined by the heads of agreement ([561]). Thus his Honour considered that an allowance would need to be made for the difference between the profit that Finger & Co had made from the development actually carried out and that which it may notionally have made had the heads of agreement been performed and had Finger & Co implemented a residential development "within the confines of what was permitted by the heads of agreement" ([561]).
Pausing there, the reference to the heads of agreement being performed involves an assumption that the continuation of negotiations would have resulted in an executed agreement for lease/lease on particular terms. If, as I consider to be the case, the only relevant obligation under the heads of agreement (leaving aside the obligations of exclusivity and confidentiality) was that the parties negotiate in good faith with a view to reaching agreement on the terms of the formal lease documentation, there is no warrant for making the assumption inherent in his Honour's conclusion at [561]. That, in essence, raises the loss of a chance issue the subject of grounds 17-18 of Karellas' notice of contention, to which I will turn in due course.
His Honour found (at [552]) that there was a causative link between the termination of the heads of agreement and the opportunity that Finger & Co had seized to construct the residential development on the property. (Finger & Co accepts that, but for the termination of the heads of agreement, it could not have carried out the residential development that it actually carried out (see T 10; 16/2/16) - but maintains that this was not the correct test.)
His Honour's conclusion that the profit earned from the development was to be taken into account in assessing Finger & Co's damages was expressed (at [552]) on the basis that it was proper and just to do so because there was a sufficient connection between the profit that it earned on the construction of the residential development and the circumstances in which the heads of agreement were terminated.
In that regard, his Honour made a number of findings. First, that Finger & Co had seized the opportunity following the termination of the heads of agreement to adjust the nature and timing of its redevelopment project for the property to optimise its ability to achieve both the supermarket and the residential development in the most cost-effective way ([553]). Second, that without Karellas' consent, which it was probable would not have been given, Finger & Co could not have constructed the residential development that it in fact undertook had the heads of agreement been performed ([554]). Third, that Finger & Co was able to make significant adjustments to the layout of the supermarket for the purposes of the Woolworths lease that it would not have been able to make if the heads of agreement had been performed ([555]). Fourth, that it was able to avoid any planning restrictions that may have been an impediment to the implementation of any residential development of the property with which it would have had to deal if the heads of agreement had been performed, there referring to the fact that on Revision C there was only one means of access to the first floor from within the supermarket premises ([556]). Fifth, that Finger & Co was able to avoid the very serious impediments to the efficient construction of the residential development that it would have faced had it attempted to construct a residential development around a trading supermarket ([557]). Sixth, that it avoided the liability it probably would have incurred to Karellas for breach of covenants in the lease had it attempted construction around a trading supermarket ([558]). Finally, that it was able substantially to accelerate the completion of the residential development compared to the timing that would have operated had Finger & Co been confined by the terms of the proposed lease ([560]), this being a reference to the fact that the proposed draft lease as at June 2010 precluded commencement of any development above the supermarket for a period of three years from the commencement of the Karellas lease.
His Honour considered the third to sixth reasons to have additional significance in that, had those restrictions continued to exist at the time Finger & Co had to make a decision as to whether or not the proposed residential development was feasible as a commercial and planning matter, they would have substantially increased the doubts experienced by Finger & Co concerning the commercial viability of proceeding with a residential development at all ([559]).
At [562], his Honour said that it was entirely a matter for speculation as to the probability that Finger & Co could viably have proceeded with, and made a profit from, the "more restricted development"; noting that the only evidence on the subject of whether Finger & Co could successfully have constructed a residential development "within the confines of the heads of agreement" consisted of an assertion to that effect by Mr Ben Finger in cross-examination (see T 92.12).
His Honour went on to address the question of onus (at [563]) in terms which indicate an acceptance that Karellas bore the burden of proving that loss had been avoided and the extent to which it had been avoided (referring to the statement of principle by Giles JA in Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443 at [44]), but added there was "a real question" in the present case as to the extent to which the burden of adducing evidence had shifted to Finger & Co. Pausing there, his Honour did not make clear to what extent if any he considered that the evidential burden had shifted to Finger & Co, simply noting that it was the only party whose knowledge, intention and experience were relevant to the issues that would arise in the assessment of its damages out of the further redevelopment of the property.
His Honour considered Finger & Co's damages claim to be in the nature of an ambit claim and said that this had seriously exacerbated the difficulty involved in making an objective assessment of the quantum of loss ([563]). Had it been necessary to do so, his Honour said that on the present evidence and without the advantage of further submissions he would be driven to make a global assessment of general damages but did not indicate what that would have been ([564]).
Challenges to those findings
By its notice of appeal Finger & Co contends that:
6. The primary judge erred in concluding that there ought be taken into account when assessing damages:
(a) the profits subsequently derived by Finger from the upper level residential development at the Property [561]; and
(b) the advantages accruing to Finger in constructing such development by reason of the termination of the Contract [514-522];
when there was no relevant causal link between that development and the termination of the Contract, and no evidence adduced by Karellas as to the quantification of such profits or advantages.
The avoided loss issue is that raised by ground 6(a). On that issue, Karellas raises the following grounds in its notice of contention:
14. The primary judge erred in finding that the circumstances of the case did not justify a conclusion that necessarily the whole of the profit earned by Finger on the development it undertook should have been brought to account in reduction of the amount of damage that it suffered (J [561]).
15. Having found that:
(a) Finger made a net gain of about $5 million that it would not have received if it had not been able to complete the residential development (J [482]); and
(b) Finger could not have constructed the 22 unit residential development that it in fact undertook under the heads of agreement (J [517], [554]),
the primary judge should have held that the whole of that net gain should be brought to account such that Finger's loss was nil (cf J [561]-[564]).
16. In the alternative to 15, the primary judge should have held that:
(a) in the circumstances, Finger bore the onus of establishing that it would have proceeded with a more restricted development, the details of that development, that it would have been permitted under the heads of agreement, and what profit Finger would have made on such a development (cf J [561]-[563]; and
(b) Finger had not discharged that onus.
Submissions
On the avoided loss issue there are in substance two areas of dispute between the parties as to the correct principles to be applied.
First, Finger & Co argues that the rule as to avoided loss only applies where the action from which the benefit is derived is action taken to avoid the consequence of the wrong (referring to Macourt v Clark [2012] NSWCA 367 at [106]) or, in other words, to mitigate potential loss resulting from the wrong (referring to Ruthol at [40]; Macourt v Clark at [11]). It submits that his Honour erred in framing the test by reference to a causative link and that the correct test was whether the profit arose out of an attempt to mitigate. It argues that the avoided loss rule is inapplicable in the present case because the upper level development was something it had proposed to undertake independently of Karellas' breach of contract ([36.3]).
Finger & Co characterises the position as one similar to that described in Ruthol (at [60]) where Karellas "has little claim to have the damages recoverable for its wrongdoing reduced when its wrongdoing put [Finger & Co] into this position and [Finger & Co] happened to gain an actual benefit from business decisions not made to remedy the adverse consequences of [Karellas'] breach of contract" ([23]). It accepts that if it had not been able to build on the property at all under the terms of the heads of agreement then it would have to take the benefit of being able to do so into account in some way but says the whole of the profits could not be offset and in any event Karellas failed to prove the extent of the benefit that it obtained.
Karellas, on the other hand, argues that the principles discussed in Macourt v Clark (at [98]-[110]) and Ruthol (at [40]) in relation to the bringing into account of a benefit obtained from taking mitigating action are a subset or instance of the fundamental question of quantifying the loss suffered by reference to the difference between the position the plaintiff is actually in and the position the plaintiff would have found itself in but for the repudiation and termination ([80]). It submits that the termination of the heads of agreement freed up the capacity of Finger & Co to construct an upper floor development without the constraints that would otherwise have applied and that his Honour correctly held that Finger & Co was required to bring to account the profit it made from the residential development of the property, relying on the general principle (restated in Carpenter v McGrath (1996) 40 NSWLR 39, and Tasman Capital Pty Ltd v Sinclair [2008] NSWCA 248; (2008) 75 NSWLR 1) that a plaintiff entitled to receive damages is entitled only to its net loss caused by the breach ([77]).
Karellas also argues that, if the issue is to be approached in terms of mitigation of loss, then the relevant action by Finger & Co was the obtaining of an alternative tenant under agreements that were premised on, and permitted, the particular residential development that Finger & Co carried out and hence it submits that the benefit which Finger & Co obtained from carrying out that development flowed directly from the action it took to mitigate its loss ([84]).
Determination
It is not disputed that the fundamental principle governing assessment of damages for breach of contract is that the innocent party is entitled to be put in the position it would have been in had the contract been performed (Robinson v Harman (1848) 1 Ex 850 at 855; 154 ER 363 at 365; Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454 at 471; applied as the "ruling principle" on common law damages for breach of contract in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272 at [13] per French CJ, Gummow, Heydon, Crennan and Kiefel JJ).
The avoided loss "rule" or principle is one that arises for consideration in the context of the concept of mitigation of loss. In British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673, Viscount Haldane LC, with whom Lords Ashbourne, Macnaghten and Atkinson agreed, said (at 689) that when "in the course of business" the plaintiff has taken action arising out of the transaction, which action has diminished his loss, then the effect in actual diminution of the loss suffered may be taken into account, emphasising (at 690) that to be taken into account the subsequent transaction "must be one arising out of the consequences of the breach and in the ordinary course of business". The rule or principle has been applied in various cases (for example Hoad v Scone Motors Pty Ltd [1977] 1 NSWLR 88; Goldburg v Shell Oil Co of Australia Ltd (1990) 95 ALR 711; Monroe Schneider; Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64; Hi-Fert Pty Ltd v Kiukiang Maritime Carriers Inc [2000] FCA 660; (2000) 173 ALR 263; Tasman Capital Pty Ltd v Sinclair; Cardno BSD Pty Ltd v Water Corporation (No 2) [2011] WASCA 161).
In Ruthol, Giles JA, with whom Santow JA and Hunt AJA agreed, stated the principle in the following terms (at [40]):
If the innocent party does take action to mitigate the loss to it consequent on the guilty party's wrong, even if the action goes beyond reasonable action, in general the guilty party is entitled to an allowance for the benefit to the innocent party from that action.
As so stated, the rule is premised on action being taken to mitigate loss.
At [49]-[50], Giles JA noted the observations of Robert Goff J in Koch Marine Inc v D'Amica Societa di Navigazione ARL (The Elena d'Amico) (1980) 1 Ll L R 75 at 88 to the effect that the principles of mitigation were aspects of the principle of causation (the "wider principle … that, subject to the rules of remoteness, the plaintiff can recover, but can only recover, in respect of damage suffered by him which has been caused by the defendant's legal wrong") and that "there must be a causative link between the breach of contract and the action or inaction in question to bring into play the principle of mitigation of damage". Pausing there, the finding by the primary judge at [552] that there was a causative link between the termination of the heads of agreement and the construction of the residential development, as I read it, is in effect a finding that the principle of mitigation has been brought into play; not as a statement of the test to be applied when determining whether account should be taken of the benefit.
[21]
(ii) Other adjustments - grounds 6(b) and 7
Ground 6(b), set out above, complains that his Honour erred in concluding that certain advantages accruing to Finger & Co in carrying out the construction by reason of the termination of the heads of agreement should be brought to account on the basis that there was no relevant causal link and no evidence adduced by Karellas as to the quantification of such profits or advantages.
The matters to which his Honour referred at [514]-[522] were as follows:
that the premises leased to Woolworths are less in net area than were proposed to be leased to Karellas because of the additional excision of the area used for the lobby stairwell and lift (and hence an adjustment should be made to allow for the reduction in rent Finger & Co would receive from Woolworths proportional to the reduction in the net lettable area compared to that which was to be leased to Karellas ([514]);
the excision of the 22m2 and the commencement of the construction of the residential development would have been delayed for at least three years after the commencement of the Karellas lease (by reference to cl 13.10 of the draft lease), hence there was an early receipt of profit from the earlier construction of the residential development ([515]);
the combined effect of cll 13.10 and 13.11 of the draft lease would have been that during the construction period and for a time thereafter the rent payable by Karellas would have been reduced to 2% of annual turnover of business for the preceding financial year ([516]);
Finger & Co could not have constructed the residential development that it did without Karellas' consent and it was improbable that consent would have been given or, if it had, would have been for a substantial consideration ([517]);
there may have been difficulty constructing an equivalent residential development without impinging on the premises leased to Karellas in a way that would breach the lease ([518]-[520]) and hence it was probable that it would have taken Finger & Co much longer and cost considerably more to carry out a comparable development ([521]);
all of which his Honour concluded would provide grounds for a reduction in the damages for the loss of the benefit of a lease on the terms (provisionally) agreed in June 2010 ([522]).
Ground 7 then challenges a particular finding in relation to the operation of cl 13.11 of the proposed lease in relation to the payment of compensation for disruption to Karellas' business as a result of alterations to the property:
7. His Honour erred in concluding that cl. 13.11 of the proposed lease provided for an automatic reduction in rent during construction works by Finger [516], when in fact such reduction in rent was only triggered by a 5% reduction in the turnover of Karellas' business.
Findings of the primary judge
His Honour noted (at [505]) the paramount rule that the damages to which Finger & Co would have been entitled had it succeeded on its claim must be measured by the difference between the position in which it would have been had the contract not been repudiated and the position in which Finger & Co actually is as a result of the breach. However, his Honour pointed out (at [506]) that not all of the terms and conditions of the agreement for lease/lease had been agreed by June 2010.
His Honour concluded (at [508]) that:
There is one qualification to my acceptance of Finger's calculation that will require a reduction in the amount claimed. In submissions, Finger acknowledged that it had overstated the rent that it would have received from Karellas, as in order for Finger to construct the residential development that it in fact constructed, it would have had to excise the 22 m² in area referred to in Revision C, in accordance with the terms of the draft lease, in order to be able to construct one of the access stairs to the residential level. Consequently, if the lease to Karellas had proceeded, there would have been a pro rata reduction of the rent payable in the proportion of 22 m² to the total net lettable area. That calculation has not been done, although in submissions Finger offered to provide it. If an award of damages is to be made in favour of Finger, then the damages will have to be adjusted to make that allowance.
His Honour then proceeded to articulate the matters for which adjustment would have to be made (at [513]-[522]), noting at [523] that one reason for doubting that Finger & Co would have been entitled to damages calculated on the basis of the loss of benefit of a lease on the terms agreed by June 2010 was that it was inconsistent with the case that Finger & Co pleaded and ran at the hearing - that being that it was entitled to force Karellas to enter into an agreement for lease/lease on the commercial terms in the heads of agreement based upon Karellas' standard documentation and assuming that the parties had cooperated reasonably to settle the terms of the formal documentation.
His Honour accepted that in principle Finger & Co's damages should be calculated by reference to the benefits that it would have received if Karellas had performed the contract ([523]).
At [544], when his Honour set out a recapitulation of the analysis he had undertaken of the damages claim thus far, he made it clear that the further reductions that he considered would in principle be necessary to make to Finger & Co's damages claim beyond those that it had conceded (i.e., the matters at [514]-[521]) had been based on the assumption, which he was rejecting, that the parties would have entered into an agreement for lease containing all the terms provisionally agreed as at June 2010. His Honour went on to say:
… Karellas were not bound to execute an agreement for lease containing the terms provisionally agreed by June 2010, and they had in fact refused to do so. Finger's case was explicitly that Karellas were entitled to abandon any varied or additional terms, but were obliged to revert to the negotiation of the terms for the agreement for lease that were contemplated by the heads of agreement. In considering the probable result of that process, had it been undertaken, the Court should attempt to distinguish between the terms provisionally agreed by June 2010, which appear to have been in the mutual interests of the parties, and those for which Karellas had a right, and an interest, in renegotiating. The Court should not assume that Karellas would have acted irrationally, and accordingly the probability it is that they would have proceeded with the terms provisionally agreed that were in their interest. That, however, left considerable scope to Karellas to alter their position and to renegotiate in relation to a number of significant aspects of the proposed agreement for lease.
Submissions
Finger & Co argues that his Honour incorrectly concluded that the quantum of its claim should be reduced on account of certain financial advantages accruing to Finger & Co by reason of the termination of the heads of agreement and by reference to Karellas' ability to negotiate with Finger & Co "in such a way as to moderate the effect of the rent it had agreed to pay" under the heads of agreement ([35]).
First, it argues that his Honour's conclusion at [515] as to the benefit of early receipt of the profit from the residential sales ignored the prospect that any hypothetical advantage from earlier receipt of sale proceeds might have been offset by: residential price increases between 2011 and 2014; a potential saving in holding charges; differential taxation treatment and any number of other potential countervailing factors. It argues that Karellas, as the party in breach, failed to discharge its burden of providing that Finger & Co's loss was offset by the asserted perceived benefit (referring to Ruthol at [44]; [53]) ([37.1]).
Second, Finger & Co argues that Karellas did not establish either an entitlement to any set off against Finger & Co's damages, or the quantum of any such set off, in respect of the following ([37.2]):
the matter referred to at [514], arguing that it was not established that there would be a reduction in the ground floor area being leased to Woolworths as compared to that which would have been leased to Karellas in circumstances where Woolworths leased a larger mezzanine area than Karellas' proposed mezzanine area, and that the evidence did not establish whether Woolworths would have paid any more rent had the ground floor area been the same as Karellas' proposed ground floor area;
the matter referred to at [516], arguing that Karellas did not establish that there would have been a reduction in rent payable by Karellas during construction works by Finger & Co and noting that there was no entitlement to an automatic reduction in rent during construction works and that Karellas did not adduce any evidence as to how the likely turnover of its business would be affected by construction works undertaken above the supermarket, and consequently, whether it would be entitled to a reduction in rent pursuant to cl 13.11 of the proposed lease; and
the matter referred to at [521], arguing that it was not established that there would be an increase in construction costs for an upper level development undertaken whilst Karellas was in occupation of the ground floor when there was no evidence as to the quantum of such costs, and in circumstances where it was entirely possible that such costs would have been offset by any rise in value of residential real estate between 2011 and 2014.
Determination
As Karellas points out, his Honour did not resolve the issues discussed at [514]-[522] nor did he make findings about them. His Honour made clear that those observations were made as to issues premised on an assumption he rejected; i.e., based on the wrong counterfactual. Accordingly, it is not necessary to explore further the issues raised by these grounds of appeal.
[22]
(iii) Relevant counterfactual/loss of a chance analysis - ground 8 of the grounds of appeal; grounds 17 & 18 of the notice of contention
Ground 8 of the grounds of appeal is that:
8. In determining that there ought be brought to account in the assessment of damages a range of possible occurrences that might have eventuated had the Contract not been terminated [532-549], his Honour's process of reasoning miscarried in that:
(a) such occurrences were entirely the subject of speculation and were not supported by the evidence adduced;
(b) his Honour ought to have found that the lease which the parties would have entered into was that which had been agreed between the parties immediately prior to Karellas' repudiation of the Contract; and
(c) in determining that Karellas might not have consented to any subsequent upper level development at the Property, his Honour:
(i) overlooked the provision in cl. 2 of the Contract which permitted and contemplated the undertaking of such development; and
(ii) misconstrued the evidence in relation to Revision C, as set out in Ground 5(c), above.
Consideration of that ground raises matters relevant to grounds 17 and 18 of the notice of contention:
17. The primary judge should have found either that Finger's loss was nil or that Finger had not established any loss.
18. In the alternative, given paragraph 3 above, the assessment of the value of Finger's loss of chance (J [549]) should have regard to the fact that Karellas had a right to amend its offer under cl 1 of the heads of agreement.
Findings of the primary judge
After rejecting the counterfactual which Finger & Co had urged the primary judge to accept, namely that if the heads of agreement had not been terminated the parties would have entered into formal lease documentation on the terms provisionally agreed by June 2010, his Honour proceeded to consider the probable result had the parties reverted to negotiation of the terms of the lease contemplated by the heads of agreement. His Honour considered that the probability was that Karellas would have proceeded with the terms provisionally agreed that were in its interest but said that this left considerable scope to Karellas to alter its position and renegotiate in relation to a number of significant aspects of the proposed agreement for lease ([544]).
His Honour made certain observations as to matters upon which he considered Karellas would have insisted ([545]) and concluded both that the commercial effect of Karellas adopting such a position would be that this would have caused Finger & Co to consider its own commercial position ([546]) and that the primary driver of the outcome would probably have been Finger & Co's own commercial appreciation of the different feasibility and prospects of the more restricted development that Finger & Co could have insisted upon consistently with the terms of the heads of agreement ([547]).
At [547], his Honour accepted that it was a matter of speculation as to the course that the parties would have undertaken and as to what the result would have been.
Karellas in its defence had pleaded that any loss or damage was the loss of the opportunity to conclude negotiations for the agreement for lease and lease prior to 21 December 2010 ([1(u)(i)]). In submissions it had argued that the value of that chance was nil. In part this was because it was said that Karellas would have availed itself of the right under cl 22 to withdraw from the arrangement. His Honour did not accept that argument, though he accepted that in principle what Finger & Co had lost was a chance or opportunity to enter into an agreement for lease/lease with Karellas ([525]). On this issue his Honour concluded at [549] that:
Had I been required to make a positive assessment of Finger's damages, it would have been necessary for me to rule on Karellas' primary submission that Finger only lost the value of a chance that the parties would have in fact executed an agreement for lease by 21 December 2010; and that the value of that chance was nil. I accept that Finger lost the value of the chance, but I would not accept that the value of that chance was nil. The evidence before the Court showed that the parties were in fact capable of negotiating satisfactory terms in a relatively expedited way when they were acting cooperatively. Their consultants were also able to reach the necessary technical agreement on the various documents required by the heads of agreement in a relatively short time. Even though it must be accepted that the advent of Karellas' realisation that the turnover was likely to be substantially less than was originally expected would probably have significantly changed the atmosphere in which further negotiations were conducted, there is no basis for me to conclude that more probably do [sic: than] not the parties would have been unable to reach an agreement before 21 December 2010. The failure of Karellas to call any persuasive evidence on this issue reinforces me in my conclusion that I should not find that the parties would have failed to reach any agreement. The probabilities are that they would have reached an agreement, but for the reasons that I have set out above, the terms of that agreement are a matter of speculation. The need for speculation arises partly out of the dearth of evidence, and partly out of the relatively unusual circumstance that the contract was not a lease, or even an agreement for lease, but it was an executory heads of agreement that required a significant number of steps to be taken by the parties acting reasonably and cooperatively before the terms of the agreement for lease could be known. (my emphasis)
In other words, his Honour was unable to place a value on the chance that Finger & Co had lost of reaching an executed agreement for lease by the end of the negotiation period provided for under the heads of agreement.
Submissions
Finger & Co takes issue with the conclusion by his Honour (at [531]) that there were a number of related matters that gave "legitimate scope" for Karellas to have negotiated after June 2010 in such a way that the effect of the agreed rent might have been moderated. (His Honour's reference to "legitimate" scope appears to be by way of distinction between those matters which his Honour considered were agreed terms on which Karellas could not insist on renegotiation, such as the rent.) The matters to which his Honour there referred were: the absence of final agreement concerning the documents required by cl 17 of the heads of agreement; Karellas' right under cl 1 to insist that Finger & Co adhere to Revision C or give Karellas the right to amend the terms upon which it would proceed; the changes from Revision C made in the drawings approved as part of Finger & Co's s 96 application to construct a first floor slab over the entire ground floor area of the property; and Finger & Co's obligation in cl 15 to inform Karellas of the proposed development direction of the property.
Finger & Co argues that there was no evidence to support a conclusion that the effect of the agreed rent might have been moderated or as to how and to what extent that moderation might have occurred and that his Honour's approach amount to impermissible speculation (Luxton v Vines [1952] HCA 19; (1952) 85 CLR 352 at 358; Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18; (2000) 200 CLR 121 at 166-167; Condos v Clycut Pty Ltd [2009] NSWCA 200 at [68]) ([39]).
Finger & Co points out that by 4 June 2010, Karellas had specified all of the cl 17 covenants that it required in the lease and submits that, in the absence of any evidence from Karellas that it would have required different covenants had it not repudiated the heads of agreement, there was no basis for the primary judge to find that Karellas would have done so. It is further submitted that the primary judge's finding (at [538]) that it was probable that Karellas would have insisted upon different covenants had the parties reverted to an attempt to settle the formal documentation in accordance with the heads of agreement is contradicted by his Honour's conclusion (at [323]) that what Karellas would have done had it known about the development direction of the property was a matter of speculation ([41.1]-[41.2]).
As to the suggestion that the drawings approved on Finger & Co's s 96 development application constituted a material departure from Revision C, Finger & Co argues that this was based upon his Honour's misunderstanding of what the Revision C plan showed and thus it afforded Karellas no legitimate scope for either amending or renegotiating the terms of the heads of agreement ([41.3]).
Finally, it is submitted by Finger & Co that no legitimate scope for Karellas to negotiate a moderation of the effect of the rent arose out of the disclosure obligation his Honour found was imposed by cl 15 of the heads of agreement. It points to his Honour's finding that, had Finger & Co complied with cl 15 in June 2010, it would have at least informed Karellas that Finger & Co "only had a positive development plan that involved residential development, and that residential development was proposed to be constructed on a greater area of the first floor than the Bondeck slab shown in Revision C" ([534]). It argues that Karellas was well aware that Finger & Co proposed to construct a development over the whole of the property since it had received the s 96 plans in March 2010; after which cl 13.11 was inserted into the draft lease providing for compensation in the event that Finger & Co's construction works caused Karellas' turnover to drop by more than a specified percentage. It is submitted that there was no basis for his Honour to conclude that Karellas would have sought any further or different covenants had it known that Finger & Co was investigating the possibility of constructing a residential development, as opposed to a commercial or retail development ([41.4]).
Determination
As noted earlier, his Honour acknowledged that the outcome of any resumed negotiations was a matter for speculation ([547]). His Honour had earlier concluded (at [118]) that the parties were not bound to enter into an agreement for lease on the terms as negotiated at June 2010 and had observed (at [440]) that the bargain that the parties contemplated that they would implement as at June 2010 was substantially different to that which was "inherent" in the heads of agreement. His Honour considered that there would have been some difficulty at that stage in reverting to the terms and conditions "as required by the heads of agreement".
While his Honour expressed the opinion that it was probable that certain negotiating stances would be taken by Karellas in any further negotiation, he made no finding as to the outcome of such a negotiation; nor could there have been. The very fact that the exercise was no more than speculation is what led to his Honour being unable to place a value on the lost chance for Finger & Co to secure an executed agreement for lease.
In my opinion it cannot be said that his Honour's reasoning process miscarried as contended for in ground 8(a) of the grounds of appeal. His Honour's observations were not findings and were acknowledged as relating to matters in the realm of speculation. Insofar as ground 8(c) contends that his Honour "overlooked", when considering that Karellas might not have consented to an upper level development, the provision in cl 2 of the contract which permitted and contemplated the undertaking of a development of the upper level of the property, as I read his Honour's reasons at [545] the observations there made were not confined to a probable rejection of a proposal to construct residential units over the entire site area of the property but included matters such as a probable insistence by Karellas on conformity with Revision C as to where the structural columns would be placed to support any concrete slab over the trading area. In any event, the error as to the Revision C plan cannot be seen as causing the reasoning (on the issue of what would have eventuated from a further negotiation) to miscarry, given that there were a number of observations that could equally have given rise to his Honour's ultimate conclusion that the outcome of a further negotiation was a matter for speculation.
As to ground 8(b), the acknowledgement by his Honour that it was all a matter of speculation as to the course of events following any reversion to the negotiations contemplated by the heads of agreement (a finding invoked in submissions by Finger & Co) in my view precludes any argument that his Honour ought to have found that the lease which the parties would have entered into was that which had been agreed between the parties immediately prior to the repudiation/termination of the heads of agreement. I see no basis on which such a conclusion could have been reached on the evidence before his Honour. The very "potency" of the reduced turnover forecast which Finger & Co relied upon to support its argument that the heads of agreement had been repudiated makes it highly likely that, had Finger & Co accepted the invitation to continue negotiations in June 2010, Karellas would have been seeking amendments to the terms of the arrangement (whether or not to the rent as such) which would in some way accommodate its concerns. The outcome of any such negotiation was not something that could be predicted, whether or not assumptions were made as to the rationality of the parties' conduct in any future negotiations.
[23]
Conclusion
For the above reasons I would dismiss the appeal with costs.
EMMETT AJA: This Appeal arises out of an agreement entered into on 19 January 2010, relating to the proposed tenancy of a property situated at 21-23 Erskineville Road, Newtown (the Property). The agreement was evidenced by a binding offer dated 21 December 2009, which was signed by Mr Vasilli Karellas on behalf of "Karellas Group" and was addressed to Mr Ben Finger, a director of Harold R Finger & Co Pty Ltd (Finger & Co). The binding offer was accepted on behalf of Finger & Co by Mr Harold Finger, another director of Finger & Co. The binding offer was described as "Heads of Agreement".
It is common ground that the acceptance of the binding offer of 21 December 20110 gave rise to a binding and enforceable agreement (the Agreement) and that the Agreement gave rise to obligations binding on Finger & Co and Karellas Investments Pty Limited (Karellas Investments). However, there is a dispute as to the precise terms of the obligations on the part of the parties that were created as a consequence of the Agreement becoming binding.
It is also common ground that the Agreement came to an end so far as future obligations of any party were concerned at some stage during 2010. The parties disagree, however, as to whether the Agreement was terminated by Finger & Co following repudiation on the part of Karellas Investments or whether the obligations came to an end by reason of termination following repudiation by Finger & Co.
Finger & Co commenced proceedings in the Equity Division against Karellas Investments and Karellas Group Pty Limited (Karellas Group) claiming damages for repudiation of the Agreement. There was originally a dispute as to whether Karellas Investments or Karellas Group was the other party to the Agreement. In the appeal, it was accepted that the other party to the Agreement was Karellas Investments. On 2 April 2015, a Judge of the Equity Division (the Primary Judge) ordered that Finger & Co's claim be dismissed and ordered Finger & Co to pay the costs of the proceedings of Karellas Investments and Karellas Group.
The Primary Judge found that the Agreement gave rise to binding obligations on the part of Finger & Co and Karellas Investments. However, his Honour found that, although Finger & Co purported to terminate the Agreement in consequence of repudiation, Finger & Co was itself in default at the relevant time and, accordingly, its termination was ineffective. His Honour therefore held that Finger & Co's purported termination was itself a repudiation entitling Karellas Investments to terminate the Agreement. In the light of his Honour's conclusion concerning termination, findings as to damages were hypothetical. Nevertheless, his Honour also made findings concerning Finger & Co's claim for damages.
By Notice of Appeal filed on 1 July 2015, Finger & Co appealed from the orders made by the Primary Judge. It complains that his Honour erred in holding that Finger & Co did not validly terminate the Agreement. Finger & Co also complains about the findings as to damages, on the assumption that it is successful in demonstrating that his Honour erred in concluding that it had not validly terminated the Agreement. By Notice of Contention filed on 30 July 2015, Karellas Group and Karellas Investments challenge his Honour's finding that there was a repudiation of the Agreement. They also complain about the findings made by his Honour in relation to damages.
[24]
The Agreement
In 2009, the Property consisted of a former warehouse. It was owned by Finger & Co. In the first part of 2009, Finger & Co engaged in negotiations with Woolworths Limited (Woolworths) with a view to granting a tenancy of the Property to Woolworths for the purpose of conducting a supermarket business. However, apparently before any binding commitment was made by Finger & Co or Woolworths, Mr Harold Finger, and his son Mr Benjamin Finger, engaged in negotiations with Mr Vasilli Karellas and Mr Andrew Karellas, each of whom was a director of Karellas Investments and Karellas Group. Members of the Karellas group of companies operate supermarkets in diverse parts of New South Wales.
The Agreement commenced as follows:
Further to our recent discussions, we have pleasure in presenting this binding offer to enter into an Agreement for Lease and Lease with our organisation for the above mentioned new supermarket premises, on the following terms and conditions.
There then followed 26 items as follows:
1. Premises
2. Lease Area
3. Tenant
4. Landlord
5. Initial Lease Term
6. Options to Renew
7. Permitted Use
8. Commencement Date
9. Occupancy Costs
10. GST
11. Design Brief
12. Programming
13. Fit-out Period
14. Conduct of Works, Schedule of finishes, and Scope of Works
15. Master plan
16. Liquor
17. Amenity Provisions
18. Car parking
19. Signage
20. Statutory Approval
21. Specific Performance following Board Approval
22. Documentation and Approvals
23. Documentation Costs
24. Binding Agreement
25. Confidentiality
26. Security
Item 1 provided that the offer was based on current approved plans, described as "Reference DA 15 Revision C dated1/10/09", which were said to be attached to the binding offer. There were in fact no plans attached. However, the parties have agreed on the document that was so described and was intended to be attached (the October Plan). Item 1 provided that, "in the event of further amendments, redesigns or changes to configuration", Karellas Investments reserved its right to amend the offer.
Item 2 provided that the offer was based on a supermarket building of approximately 863 square metres lettable area conforming to the Karellas Group design brief as referred to later in the Agreement. Item 2 also provided that the "approximate lettable area of 863 square metres" included an area of 22 square metres highlighted "on the attached plans". The October Plan shows a highlighted area of 22 sq metres and it is common ground that that is the area referred to in Item 2. Item 2 then provided that Finger & Co had reserved the right to excise that area of 22 sq metres from the area to be subject to the proposed lease and provided for adjustments in payment of costs if that area were excised. The purpose for the reservation of that right was to enable Finger & Co to carry out further development of the Property above the area intended for the supermarket.
Item 2 also provided that, if extra storage area is made available above the car park and it is beneficial for the extra area "to be leased by the supermarket", a rent of between $350 per sq metre and $450 per sq metre needed to be negotiated and confirmed when relevant. That provision clearly contemplated the possibility of further negotiation between the parties.
Item 3 provided that the tenant would be Karellas Investments and that the landlord would be "Harold R Finger or Nominee". Since at all relevant times Finger & Co was the owner of the Property, it is clear enough that the intended reference was to Finger & Co.
Item 5 provided that the initial term of the Lease was to be 15 years from commencement of trade. Item 8 provided the Lease would commence on the date Karellas Group commenced trading from the new premises.
Item 6 provided for "options to review" of 5 years and 10 years. That was clearly intended as a reference to "options to renew".
Item 9 provided that the base rent was to be $620 per sq metre per annum gross, payable each calendar month in advance. Item 9 also referred to a base rent review in accordance with consumer price index increases yearly up to and including year 5 and provided that, from year 6, the rent review would be either the greater of 3% of turnover figures or the base rent at the end of year 5. Item 9 also provided that the Karellas Investments would not pay or contribute to outgoings in the first 5 years, that from year 6 Karellas Investments would pay the increase in the difference from land tax from the previous year and that Karellas Investments would pay its own utility costs when separately metered. Item 9 also provided that it was essential that there be 24 hour access to the Property for staff, with the ability to trade from 7am to 10pm Monday to Saturday and 8am to 10pm on Sundays.
Item 22 provided that approval of the offer by the Karellas Investments board of directors would be operative for a period of 12 months from the date of the offer. It provided that, if formal documentation had not been executed within that time, Karellas Investments could elect to terminate and withdraw from "the project". The offer was expressed to be subject to finalisation of development plans, programming, scope of works specification and finishes to Karellas Investments satisfaction.
Item 23 provided that each party would pay its own costs in connection with the negotiation and preparation of the "relevant documentation". Item 23 also provided that the Karellas group would prepare "the Agreement for Lease and Lease Documentation". While it may be unusual for the tenant to prepare a lease document, that provision is understandable in the context where the members of the Karellas group were engaged in supermarket operations at a number of different locations.
Item 24 provided that, although it was intended that a formal agreement for lease would be executed, based on the Karellas group standard documentation, including the commercial terms in the Agreement, it was intended that, "acceptance by you" of the terms and conditions in the offer would "create a binding Heads of Agreement between you and the Karellas Group". Thus, it is clear that the intention of the parties to the Agreement was to create a legally binding and enforceable contract. However, the question is what the terms of and obligations arising under that contract were.
Finger & Co contends that the parties had reached consensus as to the subject matter of the proposed lease, as indicated by Items 1 and 2, the identity of the landlord and the tenant, as provided for in Items 3 and 4, the term of the proposed lease, as provided for in Items 5, 6 and 8, and the rent to be reserved under the proposed lease, as provided for in Item 9. It says that those items left nothing further to be determined by the parties in order to have an enforceable and binding agreement for the grant of a lease, albeit that the parties contemplated further formalisation and documentation of the arrangement. However the other items in the Agreement also make it clear that there were matters that were left for further negotiation between the parties as to the terms of the proposed agreement for lease and lease.
First, Item 2 referred to the possibility of negotiation of rent for extra storage area. Parameters were fixed but further agreement would have been necessary if extra storage area were to be made available
Secondly, under the heading "Master Plan", Item 15 provided that Finger & Co was to have the right to develop the Property in a predetermined, orderly manner. However, such works were to be in accordance with Karellas Investments trading requirements and the parties stipulated that it was essential for Karellas Investments to understand "the proposed development direction for [the Property] for the future".
The proper construction of Item 15 was a matter of some dispute between the parties. It may be that it should be construed as no more than recognition by Finger & Co that, if any development above the supermarket were to take place in the future, it would not interfere with the trading operations of the supermarket, once trading by Karellas Investments had commenced. The requirement that Karellas Investments understand the proposed development might be construed as giving rise to an undertaking by Finger & Co to provide reasonable details to Karellas Investments of any proposed development before the development took place. On that basis, Item 15 would not be construed as an obligation to provide any such details at any particular time. Specifically, it would not be construed as a requirement that Finger & Co furnish details of any proposed development prior to entering into a formal agreement for lease or prior to the grant of the lease itself. The relevance of those matters will become apparent in due course.
Thirdly, Item 17 provided for a number of covenants to ensure that premises standards are maintained and said that, while the covenants were not intended to impose onerous conditions on Finger & Co, they were necessary to ensure that the supermarket trades to its optimum level. The proposed covenants were to include requirements relating to car parking, building redevelopment, management standards, strata titling and services and preservation of the arrangements shown "on the site plan referred to below". There was in fact no site plan referred to later in the Agreement. In an earlier iteration of the proposed offer, reference was made to a site plan but that reference was deleted in subsequent iterations.
Item 17 provided that such covenants were fundamental to the ongoing success of the supermarket and would be specified within the proposed lease. It said that failure by Finger & Co to observe those principles would result in Karellas Investments suffering sales and profitability losses and provided that Finger & Co would be required to compensate Karellas Investments for any losses and must work to maintain a trading environment consistent with that presently contemplated.
Thus, Item17 required negotiation of the precise terms of the covenants needed by Karellas Investments. Item 24 has bearing on the extent of any discretion on the part of Karellas Investments, in so far as the formal agreement for lease was to be based on the Karellas group standard documentation. Thus, while further drafting may have been required in order to comply with Order 17, there may not have been great scope for disputation.
Item 18 might be regarded as being in the same category as Item 17. It provided that Karellas Investments required that the area designated on the site plan for car parking would remain as designated supermarket car parking at all times, irrespective of future development. Once again, while some discretion may be left to Karellas Group, there may not have been great scope for further disputation.
Item 11 provided that a design brief would be issued which was to contain the Karellas group's current standard specification and required Finger & Co to deliver a turnkey supermarket premises in accordance with the obligations contained in the specification. It provided that relevant documents for the specification would be attached to the proposed agreement for lease and that delivery in accordance with the specification would be a condition of the proposed lease. Once again, while further documentation was required, the documentation was at the discretion of Karellas and Item 11 may not have left great scope for further disputation.
Item 12 provided that Finger & Co must provide a development program acceptable to Karellas Investments that specified the date of handover following practical completion, for inclusion in the proposed agreement for lease. It also provided that Finger & Co must comply with the construction program, with normal industry allowances for delay. Again, while further documentation was required, there may not have been great scope for disputation between the parties, since the development program must be acceptable to Karellas Investments.
Item 14 provided that Finger & Co would document the project fully and provide all necessary details and contractual clauses. In particular, documents covering schedules of finishes and scope of works would be required for inclusion in the proposed agreement for lease. There was some scope for necessary negotiation in those provisions. However, the scope for disputation may have been somewhat constrained.
Item 22 specified that the offer was subject to finalisation of development plans, programming, scope of works, specifications and finishes to the satisfaction of Karellas Investments. Again there may not have been great scope for disputation, since Karellas Investments must be satisfied about those matters.
Item 19 required Finger & Co to provide space for external signage, which was to be part of the specification. It required that the locations and design of the external signage would be required to be shown and referenced on the site plan. There was in fact no site plan and it would have been necessary for such a plan to be brought into existence. Item 19 also provided that a separate elevation drawing would need to be attached to the proposed agreement for lease and lease documents.
Thus, while the critical matters for the grant of a lease may have been fixed and were not to be the subject of any further negotiation, there were parts of the proposed agreement for lease and lease that required further discussion and settlement. That is to say, while the premises were identified, the identity of the landlord and the tenant were identified, the rent reserved under the proposed lease was identified and the term of the proposed lease was identified, other matters were left for further discussions, although to a considerable extent those matters were left to the discretion of Karellas Investments.
Following acceptance of the offer by Finger & Co to give rise to the Agreement, the parties set about negotiation of the proposed agreement for lease and lease. Considerable progress was made in those negotiations, such that it would be fair to say that there was not a great deal left to be agreed upon before the parties had reached consensus as to the terms of the proposed agreement for lease and lease. It is significant, however, that several of the terms contained in the Agreement were varied in the course of the negotiations.
[25]
The Dispute
In early October 2009, Benjamin and Harold Finger had had a discussion with Andrew and Vasilli Karellas concerning the Property. Harold Finger said that the site was a "local supermarket" and "a trolley less supermarket and that most of the business would come from people walking and cycling and doing basket shops. Benjamin Finger said that they had intentions of developing the upper level and that it could be residential, commercial or retail. He said that they would need to designate a specific area of the supermarket as "owner's area" to enable future access to an upper level as shown on a plan. Vasilli Karellas said that they liked the site and asked that the current plan be sent to them.
On 14 December 2009, Benjamin and Harold Finger met Andrew and Vasilli Karellas to go through a draft of the proposed offer. In dealing with proposed clause 9, the Karellas brothers showed Finger father and son a spread sheet that set out the projected turnover for the supermarket. Vasilli Karellas then said that, based on the projected turnover, it was impossible for them to pay $675,000 per square metre. They then negotiated a new base rent of $620 per square metre.
In early January 2010, Andrew Karellas told Benjamin Finger that Karellas Investments was seeking amendment to the development application for the Property, to add a mezzanine area within the store, to change the approved layout and to seek the use of trolleys within the store. At the end of January 2010, Harold and Benjamin Finger and Andrew Karellas and Michael Briscas, the project manager (quaere) for Karellas Investments met with officers of the City Council to discuss the proposed amendments to the development application. The officers were supportive of the proposal but one of the officers suggested that Karellas Investments would have the best chance of getting approval if they were to use "basket trolleys rather than traditional trolleys". At a further meeting with Council's officers, one of the Council officers recommended that Karellas Investments use "basket trolleys". On 10 February 2010 Karellas Investments lodged a formal application to amend the development approval.
On 24 May 2010, Benjamin Finger, Vasilli Karellas and Michael Biscas attended a meeting of the Council's Planning Development and Transport Committee, which was considering the application to amend the development approval. During the meeting, one of the members of the Committee referred to an economic report that Finger & Co had used in connection with its development application in 2009, saying that the report estimated that the turnover from the proposed supermarket would be between $7 million and $8 million. Several of the members of the Committee said that they had approved the application "as a trolley less supermarket' and that now Karellas Investments was trying "to get trolleys approved".
Following the meeting, Vasilli Karellas said to Harold Finger that he was not aware of the economic report to which reference had been made. He said that the turnover projection seemed very low and asked for a copy of the economic report. Benjamin Finger subsequently sent a copy of the report to the Vasilli Karellas. On 25 May 2010, Benjamin and Harold Finger strongly recommended to the Karellas Brothers that they amend their application and provide for basket trolleys. Vasilli Karellas said that they were going to "stick to our guns on the trolleys". On 31 May 2010, the Council rejected the application on behalf of Karellas Investments for the use of trolleys in the proposed supermarket.
On 8 June 2010, Vasilli Karellas sent an email to Benjamin Finger in relation to the economic report, saying that "the conclusions in the report obviously changes the basis that we have been proceeding" (sic). He said that, "with this level of turnover and on the proposed lease terms the business is not viable for us". He asked Benjamin Finger to telephone him to discuss the matter.
Benjamin Finger responded in the following terms later on the same day,:
You are experienced business man/supermarket operators no doubt you did you due diligence before entering into the heads of agreement with us. There is nothing in the heads of agreement which makes your offer to lease, contingent upon any economic report. We have acted in good faith in the negotiations and expect you to honour your agreement with us to lease the premises. As you are aware we had already reached an agreement with Woolworth's prior to receiving your offer. On the basis of your offer we negotiated to be released from our agreement with Woolworths and have proceeded over the last six months with you.
You will understand that this has been at a considerable cost to us both in holding costs and legal fees.
I hope that this matter can be resolved amicably and look forward to your favourable response. [See 2792]
On 9 June 2010, Williams Love and Nicol, the solicitors for Finger & Co, sent an email to Reid & Vesely, the solicitors for Karellas Investments, in relation to Benjamin Finger's email of 8 June 2010. The solicitors' email relevantly said as follows:
I confirm that my client will not be proceeding with the above proposed Lease on the current proposed terms. The reason for my client's position are explained below. Having regard to the efforts of both parties to achieve an agreement, my client is willing to continue negotiations to see if a suitable outcome could be achieved for both parties.
The email from your client sent yesterday seems to suggest that there is already a concluded agreement for lease. In the circumstances my client does not believe that this is a proposition that is seriously made by your client. There is no executed Agreement of Lease and the terms of the Lease are still being negotiated. The letter of 21 December clearly confirmed that the parties would negotiate final terms of an AFL and Lease. Whilst the letter outlined some of the contemplated lease conditions there have been significant changes to the terms as contemplated in the letter of 21 December. There are other aspects of the letter still to be addressed. Importantly there were also a number of important matters that had not been discussed as at December 2009.
…
My client is genuinely disappointed that a final agreement has not been reached at this stage.
…
There are a number contributing factors to my client's decision. One factor is the concern that my client has in relation to the impact of a future development of the site on the Supermarket business.
…
My client has decided that any redevelopment of the site will have a significant detrimental impact on the Supermarket business to be operated from the site.
The second significant development is that my client recently commissioned their own market analysis report. Prior to this report my client has been relying upon analysis of a likely turnover based on information provided by your client (such as the terms of the Woolworths offer).
The report recently received by my client shows a significantly reduced turnover to what my client had been factoring into their business analysis. I understand that a copy of the report has been provided by my client. You may also be aware that the report received by my client is consistent with two other market reports that your client had previously received but my client was only recently made aware of as a consequence of attending a recent council meeting.
It would appear from the report that there are limitations on the possible turnover that can be achieved in this area having regard to the size of the Supermarket currently proposed.
We note that you have previously indicated to the writer that your client has a number of other parties that would be interested in operating a Supermarket business from the site.
As indicated above, my client is prepared to continue negotiations with your client to see if the proposed lease terms could accommodate the above matters. [2814]
Reid & Vesely responded to Williams Love and Nichol on 11 June 2010, relevantly saying as follows [2815]:
The thrust of your letter appears to be that your client would proceed with the lease of the premises but on negotiated terms favourable to your client. We are instructed by our client that it is not interested in renegotiating the terms of the lease with your clients. After over five months of protracted and detailed negotiations not only on the terms of the lease but on the specifications for the building works to be carried out (both by your client and by our client) final agreement was reached between our clients. It was only after Sydney Council refused your client's Section 96 Application to use trolleys that your client sought to withdraw from the lease.
Your client was aware from the commencement of negotiations back in 2009 that the development approval held by our client precluded the use of trolleys. As you are aware our client totally redesigned the internal layout of the premises and added a mezzanine to accommodate the requirements of your client.
Your letter suggests that you may not be aware of the several Heads of Agreement which exist between our respective clients.
…
It is clear from the Heads of Agreement that your client as early as October 2009 was aware that our client intended to further develop the property.
…
Your clients on 14 December 2009 agreed that any future development on the site by our client would not need to be approved by your client.
…
Our client finds it difficult to accept that your client, being extremely experienced supermarket operators, owning three supermarkets, would enter into a binding heads of agreement without first carrying out full and proper due diligence. To suggest that your client simply relied on analysis of likely turnover based on information provided by our client defies belief. We are informed by our client that in fact no likely turnover information was provided by it to your client. You might kindly forward to us the information your client claims was provided by our client and relied upon by your client.
As your client is aware and is reflected in the Heads of Agreement dated 2 November 2009 our client had entered an arrangement with Woolworths for the lease of the premises. On the basis of your client's Binding heads of Agreement our client obtained a release from Woolworths to that arrangement and proceeded with your client.
As you are no doubt aware your client's withdrawal from the lease will result in our client incurring substantial losses. Our client will endeavour to mitigate those losses. However, we are instructed to put your client on notice that our client will hold it liable for all losses incurred by our client as a result of your client's actions including but not limited to loss of future income, holding charges, consultants' fees and legal fees.
We will communicate further with you when your client's loss has been quantified.
Williams Love & Nicol replied on 22 June 2010 relevantly saying as follows:
Our client did not withdraw from negotiations of the Agreement for Lease and the Lease as contemplated by the Heads of Agreement. We note that your client has no interest in continuing with the negotiations of the Lease. We are firmly of the view that the negotiations of the lease were not completed.
We cannot agree that as a result of the negotiations that have been occurring over the last five months that "final agreement was reached between our clients" as to the terms of the Lease and the specifications for the building works. It is clear to us that the parties contemplated that upon agreement of the terms of AFL and the Lease, the AFL would be signed by the parties. That obviously has not occurred. The contents of your letter only highlight our view that there is no concluded agreement as to the terms of the Lease.
We agree that the negotiations of the AFL and the Lease have been extensive and protracted but they are incomplete.
This outcome of protracted negotiations of the AFL and the Lease was necessary because of the many matters still to be agreed by our respective clients and also because of the nature of your client's proposed development of the existing Building.
The Heads of Agreement did refer to potential future redevelopment of the Building during the term of the lease but it would appear that the nature of the potential redevelopment was not apparent to either party until recently.
As one example of the incomplete nature of the arrangements, the current version of the draft Lease Annexure includes a clause…dealing with the abatement of rent during the period of the proposed future redevelopment that your client is planning during the term of the Lease. This clause is incapable of being finalised until after our client has reviewed the Mater Plan that is contemplated by the heads of Agreement. Now that your client has obtained approval from the Sydney Council to the amendment of the current development we expect that your client will not be able to provide our client with a detailed Master Plan for future development of the Building.
We note that your client has no interest in continuing with negotiations of the terms of the lease with our client.
You can assume from the above that our client will not be paying any compensation to your client.
Reid & Vesely responded on 22 June 2010 relevantly saying:
We do not intend to engage in any further correspondence in relation to whether or not negotiations had been finalised. You are well aware of our client's position in relation to the matter.
As stated previously our client will hold your client liable for all losses incurred by our client as a result of your client's actions. We confirm that we will be in further contact with you when our client has quantified its losses. [2842]
Williams Love & Nicol wrote again on 5 July 2010 relevantly saying as follows:
We note from your correspondence that you do not intend to engage in any further correspondence in relation to whether or not negotiations had been completed. We take from your statement that your client does not intend to negotiate further in relation to a lease of the Premises. In short your client has ended all negotiations with our client. Our client has accepted that position but reserves all its rights in respect to your client's actions.
…
We note that you again state that your client will hold our client liable for "all losses incurred as a result of your client's actions". Your letter however fails to identify any actions by our client and specifically your correspondence fails to identify any actions that your client alleges have caused losses for your clients We again reiterate that our client did not withdraw from negotiations - it was your client that expressly terminate negotiations.
We confirm that our client will strenuously defend any claim bought by your client and will mount a counterclaim for misleading and deceptive conduct on behalf of your client in addition to a breach of an obligation to act with good faith. [2860]
The next relevant correspondence between the solicitors was from Reid & Vesely to Williams Love & Nicol on 16 August 2010. After referring to the exchanges of 8 and 9 June 2010, Reid & Vesely relevantly said:
It is clear from the above two pieces of correspondence that your client is not prepared to proceed with the proposed Lease on the terms set out in the heads of agreement dated 21 December 2009 (the "Contract").
A such, your client has repudiated the Contract. Our client accepts your client's repudiation and hereby terminates the contract.
We shall advise you of our client's claim for damages once they have fully crystallised. [2902]
[26]
The Proceedings
Finger & Co commenced proceedings against Karellas Group and Karellas Investments claiming damages for the repudiation of the Agreement. On 2 April 2015, a judge of the Equity Division concluded that, while the conduct of Karellas Investments constituted a repudiation of the Agreement, Finger & Co did not purport terminate the Agreement until August 2010. However, at that time, his Honour held, Finger & Co was not ready, willing and able to perform the Agreement because it was in breach of item 15. His Honour held that there was an implied obligation under item 15 for Finger & Co to provide to Karellas Investments details of any proposal for development of the Property and that, at the time of the purported termination, Finger & Co had proposals, albeit in a nebulous state, that it had failed to disclose adequately to Karellas Investments and Karellas Group. His Honour concluded, therefore, that Finger & Co was not entitled to terminate the Agreement and that its purported termination was itself a repudiation of the Agreement, which Karellas Investments subsequently accepted. His Honour therefore ordered that the proceedings be dismissed with costs.
[27]
The Appeal
Finger & Co complained about the conclusion reached by the Primary Judge that it had not terminated the Agreement until August and asserted that it had effectively terminated the Agreement in June, such that the findings that it was in breach of the Agreement were irrelevant. Alternatively, Finger & Co complained about the conclusion made by his Honour that it was in breach of item 15 at the time when it purported to terminate the Agreement in August 2010. In accordance with its notice of contention, Karellas Investments contended that the Primary Judge erred in concluding that Karellas Investments acted in breach of the Agreement and that Finger & Co was entitled to terminate at any time.
The first question, as a matter of logical analysis, is whether Karellas Investments was in breach in July 2010. The second question, as a matter of logical analysis, is whether Finger & Co was ready, willing and able to perform the Agreement.
The terms of the proposed agreement for lease and lease, in the form they had reached in July 2010 differed significantly from the bargain represented by the Agreement. While it may be correct to conclude that certain aspects of the proposed agreement for lease and lease were fixed by the Agreement, there were clearly further provisions that required negotiation between the parties. The Agreement provided that, ultimately, if negotiations failed to reach consensus within twelve months, Karellas Investments could bring the Agreement to an end. Thus, it is clear that the parties recognised that they may never reach finality or consensus in relation to the proposed agreement for lease and lease contemplated by the Agreement.
It follows that it was not necessarily a repudiation of the Agreement for Karellas Investments to say, in July 2010, that it wished to renegotiate terms of the Agreement, including terms that had been fixed. The language of the communications on behalf of Karellas Investments should not be understood as a statement that Karellas Investments was no longer prepared to perform its obligations under the Agreement. It should understood as no more than a statement that information had come to light as a consequence of which, it wished to renegotiate. Its language did not amount to a refusal to perform the Agreement further.
On the other hand, the communications on behalf of Finger & Co evinced a desire to enter into an agreement of lease and lease in the terms of the draft documents that existed as at July 2010. Those terms differed significantly from the terms of the Agreement. At no stage did Finger & Co say that it wished to hold Karellas Investments to the terms of the Agreement on the basis that Finger & Co would also perform its obligations under the Agreement. It is clear that Finger & Co regarded the parties' positions as having advanced well past the positions disclosed in the Agreement.
In those circumstances, Finger & Co was never entitled to terminate the Agreement. At no stage did it evince a desire to perform the Agreement. Its wish was to enter into documentation along the lines of the drafts that had been negotiated over a period of some six months. On the other hand, it was not contended before the Primary Judge or before this Court that a binding agreement had been reached in the terms of the July drafts.
The Primary Judge did not err in the ultimate conclusion reached by him that the proceedings brought by Finger & Co should be dismissed. However, his Honour reached that conclusion for the wrong reasons. In the light of that conclusion, it is not necessary to say anything about the conclusions reached by his Honour on the question of damages. It appears to be common ground that his Honour proceeded on a wrong basis and both parties contended that his Honour erred in his analysis. Failure to deal with the damages questions should not be taken as an acceptance of the correctness of his Honour's analysis of the damages questions.
[28]
Conclusion
The Appeal should be dismissed. Finger & Co should pay the costs of Karellas Group and Karellas Investments of the appeal.
[29]
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Decision last updated: 25 May 2016
nbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd [1954] HCA 25; (1954) 90 CLR 235
Robinson v Harman (1848) 1 Ex 850 at 855; 154 ER 363
Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940] 3 All ER 60
Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443
Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149
Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634
Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18; (2000) 200 CLR 121
Shepherd v Felt and Textiles of Australia Ltd [1931] HCA 21; (1931) 45 CLR 359
Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620
Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322
Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272
Tasman Capital Pty Ltd v Sinclair [2008] NSWCA 248; (2008) 75 NSWLR 1
Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333
United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) 74 NSWLR 618
Violi v Commonwealth Bank of Australia [2015] NSWCA 152
Watpac Construction NSW Pty Ltd v Taylor Thompson Whitting (NSW) Pty Ltd [2015] NSWSC 780
Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454
Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277
Texts Cited: A Burrows, Remedies for Torts and Breach of Contract (3rd ed, 2004, Oxford University Press)
H McGregor, McGregor on Damages (18th ed, 2009, Sweet & Maxwell)
W Covell, K Lupton and J Forder, Principles of Remedies (6th ed, 2015, LexisNexis)
Category: Principal judgment
Parties: Harold R Finger & Co Pty Ltd (Appellant)
Karellas Investments Pty Ltd (First Respondent)
Karellas Group Pty Ltd (Second Respondent)
Representation: Counsel:
MLD Einfeld QC with J Horowitz (Appellant)
CRC Newlinds SC with DJ Barnett (Respondents)
Solicitors:
Reid & Vesely (Appellant)
Bradley Allen Love (Respondents)
File Number(s): 2015/00120476
Publication restriction: Nil
Decision under appeal Court or tribunal: Supreme Court of New South Wales
Jurisdiction: Equity
Citation: [2015] NSWSC 354
Date of Decision: 2 April 2015
Before: Robb J
File Number(s): 2012/00171813
It submits that cl 22 is not inconsistent with an immediately binding contract to grant and take a lease, arguing that it could take effect as a "sunset clause" or a condition subsequent ([7]).
That it was contemplated (by cl 1) that Finger & Co might vary the plans for, or configuration of, the lease premises, and that Karellas would then have a right to amend its "offer", strongly suggests that acceptance of the terms of the December 2009 letter of offer did not immediately give rise to a binding agreement for lease. On Finger & Co's construction, this would mean that if there were to be a change to DA15 Revision C and Karellas were to exercise the right to amend its offer, then that would in effect permit Karellas either unilaterally to vary an already binding agreement for lease or, if it was open to Finger & Co on that construction of the heads of agreement not to accept the amended terms, unilaterally to terminate the binding agreement for lease - all at a time when on that hypothesis there had been no executed agreement for lease.
Similarly, the fact that Karellas had a right to terminate the agreement and "withdraw from the project" if the formal documentation was not executed within 12 months points to the conclusion that no immediately binding agreement for lease came into existence on acceptance of the December 2009 letter of offer. True it is that parties may enter into binding contracts containing a "sunset clause" or a condition subsequent. However, in the present case, what is contemplated on his Honour's construction of the heads of agreement is that as at June 2010 (and logically therefore also at any time following acceptance of the December 2009 letter of offer) there was a present entitlement on the part of Finger & Co to require Karellas to execute a formal agreement for lease containing only the terms specified in the heads of agreement, irrespective of the fact that important terms of that agreement may not at that stage have been agreed and even though the heads of agreement contemplated that the parties would have up to 12 months to negotiate those terms.
I am therefore unable to accept that a binding and enforceable agreement for lease came into existence at any point during the negotiation period in the absence of a final and binding agreement on all the additional terms required to be included in the formal documentation. I consider that, while the drafting of the December 2009 letter of offer is infelicitous in a number of respects, what it makes very clear is that the binding heads of agreement that the parties agreed was intended to come into existence on the execution of the December 2009 letter of offer was not the same as the very subject matter of the heads of agreement; i.e., the agreement for lease. The notion of a "binding offer" to enter into an agreement for lease is better understood, in my opinion, as in effect a commitment by Karellas (if the December 2009 letter of offer were to be accepted) to keep open for 12 months the stipulated terms as part of the negotiations that were to proceed over the 12 month period - tantamount to an irrevocable offer.
The proposition that the court might supply any missing covenants, whether by reference some external document (such as a draft Karellas specification or standard Karellas lease) from which content could be given to covenants of the kind contemplated by the heads of agreement, or on the basis that, acting reasonably, Karellas would have been obliged to accept certain covenants, does not accommodate the fact that the parties had agreed, in effect, to a period of negotiation that could extend for up to 12 months. I have difficulty seeing how it could be said that at any particular point during that 12-month period (here, relevantly, in June 2010) a court could step in and impose on the parties terms that had not at that stage been agreed, even by reference to what it might be said could not reasonably have been refused by one or other of the parties acting reasonably in compliance with an implied duty to cooperate. The December 2009 letter of offer did not itself provide for an external mechanism for the determination of the required additional terms except insofar as the content of some of them was to be in accordance with Karellas' standard documentation.
Having said that, as I read his Honour's reasons (at [215] and [218]), what his Honour was in fact concluding was not that there was as at June 2010 a binding agreement for lease on particular terms (although I appreciate that that is inconsistent with the conclusion implicit in the findings at [218], [404] and [452]) but, rather, his Honour was concluding that, whether or not the court could permissibly have determined the content of the additional covenants required under the heads of agreement so as to meet any invalidity argument based on uncertainty, what acceptance of the letter of offer gave rise to was a binding agreement to negotiate "towards their agreement"; i.e, in colloquial terms, an agreement to agree.
His Honour's recognition that the contract could be terminated if agreement as to the agreement for lease/lease documentation was not achieved within a fixed period (see [218]) puts this contract out of the class of contract contemplated by Giles JA in Sagacious where there is an immediately binding contract the terms of which might be the subject of later variation or additional terms but which would be enforceable whether or not there was any such later variation or addition. Here, absent agreement as to the required additional terms, the parties were (as his Honour found) agreed that the contract could be terminated.
No doubt this is the reason that his Honour said (at [139]) that, as the ultimate question was whether Karellas repudiated the contract on 9 June 2010, all that was necessary was that there be a valid contract on foot at that date and that it was not necessary that by that time the parties had finally resolved all the matters left unresolved by the heads of agreement.
Understood in that light, his Honour's finding (at [218] and [452]) that there was a binding agreement on the part of Karellas to enter into an agreement for lease/lease on the terms set out in the letter of offer, as varied or supplemented by formal documentation, would in my view be incorrect only if and insofar as it contemplated that, absent the final resolution of the additional terms contemplated by the heads of agreement, Finger & Co could insist that Karellas enter into a formal agreement for lease/lease.
Consistent with his Honour's finding that the agreement was one to negotiate "towards" an agreement, the agreement that came into existence on acceptance of the letter of offer would better be described as binding the parties to enter into a formal agreement for lease/lease on the terms set out in the letter of offer, together with the additional terms identified in the letter of offer, if, and only if, agreement was finally reached between the parties as to the content of those additional terms.
The proper characterisation of the heads of agreement in my opinion is that of an agreement to negotiate and, implicitly, as Karellas accepts, an agreement to do so in good faith.
It has been recognised that in some circumstances an agreement to negotiate in good faith can be enforceable. In United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) 74 NSWLR 618, for example, this Court considered the enforceability of a dispute resolution clause requiring that a senior representative of each of the parties "meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference". Allsop P, as his Honour then was, said (at [74]):
… a promise to negotiate (that is to treat and discuss) genuinely and in good faith with a view to resolving claims to entitlement by reference to a known body of rights and obligations, in a manner that respects the respective contractual rights of the parties, giving due allowance for honest and genuinely held views about those pre-existing rights is not vague, illusory or uncertain.
His Honour there distinguished between agreements to negotiate in good faith in the resolution of disputes arising out of existing contracts, and agreements to undertake good faith negotiations in bringing about commercial agreements, saying (at [69]):
It is… unnecessary to consider, in the abstract, a clause providing for good faith negotiations in bringing about a commercial agreement in the first instance. The concern in the present case is the express mutual promises of the parties to undertake genuine and good faith negotiations to resolve disputes arising from performance of a fixed body of contractual rights and obligations. The difference is of great importance.
I accept that insofar as the present case involves an existing contract (the binding heads of agreement) which contemplates negotiations to bring into existence another commercial agreement (the agreement for lease/lease), it might be thought to fall within the kind of case where the question of enforceability of an agreement to negotiate was expressly left open by Allsop P for later consideration.
However, Karellas does not contend that such an agreement in the present case would be unenforceable. Rather, in its notice of contention ([1(b)]), Karellas presses for a finding that the heads of agreement created binding obligations on the parties to negotiate towards agreeing and settling relevant terms (including any additional terms) and formal documentation, and to do so exclusively and confidentially. Hence any issue as to the enforceability of the heads of agreement as an agreement to negotiate does not arise in the present case.
Where I part company with Karellas' submissions on this issue (and its ground [1(c)] of the notice of contention) is that, as I read the heads of agreement, the parties expressly set out certain terms, such as the rent, which they agreed the proposed agreement for lease/lease were to contain (to which I will refer as the "agreed terms"). Some content must be given to the parties' agreement as to those terms. While I accept that, in the absence of some provision indicating that the agreed terms were irrevocable (or "fixed in stone", to adopt the vernacular employed in Karellas' submissions), there was nothing to prevent the parties re-negotiating some or all of those agreed terms. I consider that if all the additional terms contemplated by the heads of agreement were to have been finally agreed then there would have been a compelling argument that Karellas could not at that stage refuse to execute an agreement for lease containing the agreed terms and the other, on this hypothesis, finally agreed additional terms. That situation did not, however, arise in the present case. The case was conducted on the basis that there was no final resolution of the terms left unresolved in the heads of agreement. What follows from the above is that I do not accept that it would amount to a repudiation of the heads of agreement for a party (here, Karellas) to seek to renegotiate those agreed terms, though it might in some circumstances amount to a repudiation if that party refused to continue negotiations unless those agreed terms were varied.
Ground 1 of the notice of contention therefore broadly reflects what I consider to be the proper construction of the heads of agreement, in that I agree with propositions (a), (b) and (c) but the last only up to the point at which all additional terms were finally agreed. Ground 1 of the notice of contention is in substance made good.
Ground 4 is also for those reasons made good. As at 9 June 2010, Finger & Co was not entitled to insist upon Karellas entering into formal documentation containing only the agreed commercial terms contained in the heads of agreement. There were numerous other terms that were required to be agreed before Karellas could be compelled to execute the formal documentation.
Nor, I might add, did Finger & Co seek to bring about that result; rather, in the June correspondence it seems to have been seeking to hold Karellas to the terms that represented the stage of the negotiations that had by then been reached, i.e., what were referred to by the primary judge as the current provisionally agreed terms. It was not entitled to do so.
What it was entitled to insist upon as at 8/9 June 2010 was that Karellas continue to negotiate in good faith the terms of the proposed agreement for lease/lease up until the end of the 12 month negotiation period provided for in the heads of agreement. The relevant question is whether Karellas refused to do so or conveyed to Finger & Co that it would do so only on the basis that Finger & Co agree to a variation of the agreed terms. That leads to the second main issue raised by Karellas' notice of contention.
Finger & Co submits that the clear message conveyed by the 8 June 2010 email was that if Karellas was going to lease the supermarket the parties would have to go back to the start of their negotiations ([9]). It places emphasis in this respect on the statement in the 8 June 2010 email to the effect that, with the reduced forecast turnover, the business was not viable for Karellas on the proposed lease terms. It argues that the preparedness to negotiate expressed in the 9 June 2010 letter was unquestionably directed to a renegotiation of the rent agreed in cl 9 of the heads of agreement and hence that it was implicit in the communications both that Karellas wished to renegotiate the rent and that it would not execute formal documentation unless rent was reduced ([10]).
Finger & Co also places emphasis on the language of the 9 June 2010 letter which it submits went so far as to suggest that the relationship between the parties was effectively at an end, referring to the use of the past tense in the statement of Karellas' disappointment that a final agreement had not been reached at that stage and to the reference to Finger & Co's previous indication that there were a number of other parties that would be interested in operating a supermarket business from the site ([11]). A similar argument made to the primary judge was given little if any weight by his Honour (see [386]; [396]).
Finger & Co argues that the communications of 8 and 9 June 2010 must be considered in the context that, on 14 December 2009, Karellas' position based on the (then) projected turnover had been that it was impossible for Karellas to pay rent of $675/m2, which it is said equated to $582,525 per annum; and that, on 31 May 2010, Mr Vasilli Karellas had indicated to Finger & Co that he had been working on the store turnover being $13-15 million. It is submitted that if it was impossible for Karellas to pay rent of $675/m2 on a turnover of $13-15 million (i.e., between 3.9% and 4.5% of turnover) then it must also have been impossible for Karellas to pay rent of $620/m2, as required under the heads of agreement, on a turnover of $9.8 million (i.e., 5.5% of turnover), leaving aside any amount for mezzanine rental ([13.3]). It further notes that the proposed division of building costs for the supermarket as at June 2010 was set out in the scope of works attached to the draft agreement for lease, which had been agreed in April 2010, and submits that the reference to the proposed lease terms in the communications of 8 and 9 June 2010 could not have been a reference to the division of building costs. It argues that the only way that Karellas' concerns about the "significantly reduced" forecast turnover could be addressed in the "lease terms" was by way of a reduction in rent ([13.4]).
Finger & Co also submits that a reasonable person in its position would not have interpreted the statement as to the viability of the business as referring to the mezzanine rental as this was only negotiated in late March 2010; the variation as to the mezzanine level was at Karellas' request; and, since no construction work had commenced by June 2010, if Karellas no longer wanted a mezzanine level in the supermarket, that would not be likely to have caused any difficulty (reference being made to Mr Ben Finger's evidence to that effect at T 71.30-36) ([14]).
Accordingly, I am of the view that grounds 5-10 in the notice of contention are made out and that his Honour's decision should be affirmed on those grounds.
His Honour then proceeded separately to address the question whether, if Finger & Co's termination of the heads of agreement on 16 August 2010 would otherwise have been valid, Finger & Co was precluded from terminating the contract because it was in a state of breach; and ultimately held that Finger & Co was so precluded ([457]).
Finger & Co challenges the above findings but also seeks to argue that it terminated the heads of agreement, based on Karellas' repudiation, at an earlier date than that on which it had pleaded it did so.
As to the second issue, Finger & Co argues that the finding of breach was untenable in circumstances where: it had already informed Karellas that it proposed to undertake upper level development of the property; cl 2 of the heads of agreement had expressly allocated an area of 22m2 (highlighted on DA15 Revision C) as a means of access to any such development; and it had sent to Karellas in March 2010 its plans to construct a first floor slab over the entire ground floor area of the property to enable future upper level development ([30]-[32]). It is submitted that this constituted sufficient information to meet the obligation his Honour found it had in relation to disclosure.
Insofar as his Honour concluded that, if a request for provision of that information to Karellas was required, such request was implicitly made by the letter of 21 June 2010 from Karellas' solicitors ([412]; [459]), Finger & Co argues that all that the 21 June letter did was restate the terms of cl 15 as a basis for demanding a master plan incorrectly said to be contemplated by the heads of agreement and that it did not amount to a relevant request for information (and that, in any event, Finger & Co was under no obligation to comply with such a request following Karellas' repudiation on 8/9 June 2010) ([33]).
As to the finding of breach, Karellas accepts that it was known to both parties from the outset that Finger & Co might develop the property in the future but submits that what was critical to Karellas was an understanding of the proposed development direction so that adequate protections could be negotiated ([65]).
In essence, what Karellas argues Finger & Co should have disclosed was that it was seriously exploring a residential development above the supermarket premises that would contain approximately 18 two-storey apartments spread over the whole site, including the trading and back office areas, as well as the concept plans and the architects' drawings.
Karellas argues that disclosure that there might be a development of some kind in the future was not sufficient to allow it to understand the "proposed development direction" of the property.
The second area of dispute on this issue is the question of onus. Karellas appears to concede that it bore the onus of establishing that there was a benefit derived from the freeing up of the capacity to carry out the residential development without the constraints imposed by the heads of agreement. However, Karellas submits that it discharged that onus by establishing that the residential development could not have been carried out, as it was, if the heads of agreement remained in place and that the evidential burden then shifted to Finger & Co. It maintains that if Finger & Co wished to assert that a different development could and would have been built and that the occupancy of Karellas would still have permitted it to derive a profit from the residential development, then Finger & Co had the evidential burden of establishing those propositions and quantifying the profit it would have derived ([84]-[85]).
Finger & Co relies upon the principle that the guilty party must not only prove that there was a compensating benefit but also the extent of that benefit. It argues that the evidence did not establish that the profit derived from construction of the residential units above the ground floor differed from the profit which would have been derived from such a development had the heads of agreement not been terminated and had Karellas become the lessee.
As to the test that has been applied in that regard, a distinction has been drawn between steps "arising out of" or as a direct result of a breach of contract, the benefits from which may be taken into account to reduce the defendant's liability, and steps that are "collateral" to the breach (Lavarack v Woods of Colchester Ltd [1967] 1 QB 278 at 290-1 per Lord Denning MR) or res inter alios acta (British Westinghouse at 691), the benefits from which are not included in the assessment of damages. In Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1, Beaumont J (in the minority but unchallenged on this point) described the distinction thus (at 11-12):
The authorities thus distinguish between a continuous dealing, on the one hand, and an independent, collateral or disconnected transaction, on the other. Benefits from the former are to be brought to account in the assessment of damages, whereas an advantage accruing as a consequence of the latter are to be disregarded.
This language is reflected in the academic consideration of avoided loss (see, for example, Principles of Remedies (W Covell, K Lupton and J Forder, 6th ed, 2015, LexisNexis) at 3.30; McGregor on Damages (H McGregor, 18th ed, 2009, Sweet & Maxwell) at 288 [7-097] and the texts cited by Tobias AJA in Macourt v Clark at [110]-[111]).
In Ruthol, Giles JA referred (at [46]-[47]) to Professor Burrows' analysis in Remedies for Torts and Breach of Contract (A Burrows, 3rd ed, 2004, Oxford University Press) at 158:
Professor Burrows says that "indirect" compensating advantages are not deducted, and that -
"'Directness' puts a limit on the extent to which compensating advantages are deducted on the policy ground that it is unfair that a claimant should have its damages reduced by a benefit that is far removed from the wrong and is essentially coincidental to it. Directness therefore plays an analogous but reverse role to remoteness and intervening cause; they counter a rigid adherence to the compensatory principle by limiting the claimant's damages, whereas directness here counters compensation, as strictly applied, by increasing the claimant's damages."
The learned author says (at p 158) that, where the compensating advantages have been gained from action taken by the claimant subsequent to the tort or breach of contract, "the test for directness appears to turn on whether the compensating advantage derived from actions taken by the claimant to avoid the consequences of the wrong". He adopts the first part of the statement in McGregor on Damages, the full statement being -
"In any event, it is suggested that the basic rule is that the benefit to the claimant, if it is to be taken into account in mitigation of damage, must arise out of the act of mitigation itself; this approach has been adopted by the courts in quite a number of cases. It may be regarded as simply another way of expressing Viscount Haldane's requirement that the transaction giving rise to the benefit 'must be one arising out of the consequences of the breach'." (citations omitted; emphasis as per original)
Giles JA went on, however, to say (at [48]) that references to indirect or collateral benefits were not helpful when faced with novel circumstances and that a test of "arising out of the act of mitigation" was itself not easy to apply. His Honour repeated the observation he had made in Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333 at [253], that the word "collateral" combined "notions of causal significance and judgmental attribution of responsibility in law (positive or negative) for benefits and burdens consequent upon mitigating conduct".
Having referred to the analysis of Robert Goff J in Koch Marine (extracted above), which he found valuable, Giles JA went on to say (at [51]):
… In arriving at recoverable loss, remoteness and foreseeability and intervening cause are limitations on causation in fact. In arriving at reduction in recoverable losses by compensating advantages, being indirect or collateral or not arising out of the act of mitigation itself (whatever phrasing be used) is a limitation on causation in fact. Causation in law involves appreciation of the purpose of the causal inquiry (Environment Agency (formerly National Rivers Authority) v Empress Car Co (Abertillery) Ltd (1999) 2 AC 22 at 31; Chappell v Hart (1998) 195 CLR 232 at [62]; Allianz Australia Insurance Ltd v GSF Australia Pty Ltd (2001) 215 ALR 385 at [54]-[55]; Travel Compensation Fund v Robert Tambree [2005] HCA 69 at [45], [51]), and "determination of a causal question always involves a normative decision" (per McHugh J in Allianz Australia Insurance Ltd v GSF Australia Pty Ltd at [55]; see also Travel Compensation Fund v Robert Tambree at [28], [46]). That does not mean that the decision turns on a value judgment whether the guilty party ought to be held liable to pay damages (Travel Compensation Fund v Robert Tambree at [28], [46]), but deciding whether the compensating advantage is indirect or collateral or does not arise out of the act of mitigation itself may require "the making of a value judgment and, often enough consideration of policy considerations" (Allianz Australia Insurance Ltd v GSF Australia Pty Ltd at [55] per McHugh J). (my emphasis)
British Westinghouse was held not to apply to reduce the plaintiff's damages in Clark v Macourt [2013] HCA 56; (2013) 253 CLR 1, where the claim was for the cost of replacing donor sperm, which did not comply with the relevant industry standards, sold by Dr Macourt to Dr Clark as part of the assets of a fertility clinic. Keane J (who formed part of the majority) explained at [142]-[143] that this was because Dr Clark's claim was not analogous to that in British Westinghouse, there being no evidence by Dr Macourt that might have permitted a finding that the replacement sperm was of a quality which would have commanded a higher price than the non-compliant sperm, and for the further reason that the buyer in British Westinghouse did not claim the difference between the actual value of the goods at the time of delivery and the value they would have had if they had complied with the seller's contractual obligations; rather, the buyer claimed the cost of buying substitute goods several years after the original delivery which the House of Lords held formed part of a continuous dealing with the situation in which the buyer found itself - not an independent or disconnected transaction.
As already noted, Finger & Co's argument is that the residential development was not action taken to mitigate its loss but was a collateral benefit. Had it proceeded, following the termination of the heads of agreement, to carry out a residential development that required no alteration to the area the subject of the proposed Karellas lease, or had the residential development not taken place until sometime after the termination of the heads of agreement, I would have been inclined to agree. However, it is clear in my opinion that, when consideration is given to the actual development carried out, there was a direct benefit to Finger & Co as a result of the termination of the heads of agreement at least insofar as it was able to excise from the supermarket premises the area ultimately occupied for the columns supporting the first floor slab (those columns not being shown on Revision C) and such additional area (beyond the highlighted 22m2 reserved on Revision C) used for access to the first floor. Moreover, the timing of consideration being given to amended development plans in light of the stance taken by Karellas strongly supports the inference that, as his Honour concluded, Finger & Co was seizing the opportunity presented by Karellas' refusal to proceed on the then current proposed lease terms to proceed with plans for a residential development uninhibited by any constraints caused by the heads of agreement or Karellas' likely presence in the premises.
Finger & Co argues that it was speculation for his Honour to conclude that it obtained some benefit from constructing the upper level development without Karellas being in occupation of the supermarket. It points to the evidence that it had received Council approval in May 2010 to build over the entire ground floor area of the property a first floor slab designed to enable any future upper level to be constructed without the need to disrupt the trading of the supermarket below. Nevertheless, when comparing the feasibility of carrying out construction while a tenant was in occupation below, it is hard to believe that there would not be a greater cost, as Mr Finger conceded in cross-examination (see T 92.43; 93.4), if Karellas had been in occupation during the building works; and hence a corresponding benefit from the freeing up of the capacity to build without a tenant in occupation.
The compensating advantage or benefit derived from the termination of the heads of agreement was therefore the ability to carry out a residential development above the proposed supermarket premises freed of the constraints imposed under the terms of the heads of agreement and, had the negotiation of the matters required under the heads of agreement resulted in a binding agreement for lease/lease, freed of the constraints imposed by the need to carry out building works while there was a trading supermarket on the site (subject of course to how the final lease documentation dealt with matters such as the usual covenant for quiet enjoyment and the like). That benefit was a direct consequence of the termination of the heads of agreement. It was the freeing up of a capacity to develop the upper floor without the constraints to which that development would otherwise have been subject. Whether or not this was ultimately of any value to Finger & Co such as ought be taken into account under the avoided loss principle when assessing its damages claim is in my opinion a different question.
I am thus of the view that his Honour did not err in determining that (as the question was framed in Naumann v Ford [1985] 2 EGLR 70 at 74, to which reference was made at [48] in Ruthol) the benefit was sufficiently close to the claimed head of damages as to be appropriate to set off against it. I would be of that view even though (as his Honour accepted and as is clearly the case) Finger & Co would not have been precluded from carrying out an upper floor development of some kind had the heads of agreement not been terminated and even accepting that the decision to proceed with an upper floor development was independent of the termination of the heads of agreement (in the sense that Finger & Co had already been proposing to carry out a development of some such kind above the supermarket premises).
I also add that, in comparing the position in which Finger & Co was following termination of the heads of agreement with the position in which it would have been had the heads of agreement not been terminated, I do not accept that it can be assumed (as his Honour found was probable) that Karellas would have executed formal lease documentation on the terms that were provisionally agreed as at June 2010. Such a conclusion is inconsistent with the state of affairs as at June 2010, by which time Karellas had concluded that a lease on the current provisionally agreed terms was not viable. It stands to reason that in any continued negotiations Karellas would be seeking ways to accommodate its perceived economic difficulty with the then lease terms.
As to the second area of dispute in relation to the avoided loss issue, there is clear authority that the onus was on Karellas to prove not only that Finger & Co gained a compensating advantage but also the extent of that benefit. In Ruthol Giles JA clearly said at [44]:
The avoided loss principle only applies so far as the innocent party in fact gained a compensating advantage. The guilty party bears the burden of proving that loss had been avoided and the extent to which it had been avoided: The World Beauty (1970) P 144 at 154, 158; Simonius Vischer & Co v Holt & Thompson (1979) 2 NSWLR 322 at 361; Monroe Schneider Associates (Inc) v No. 1 Raberem Pty Ltd (1991) 35 FLR 1 at 17. The appellant submitted to the contrary, relying on Erie County Natural Gas & Fuel Co Ltd v Carroll (1911) AC 105 at 118-9, but the decision turned on weak but sufficient evidence that the claimed expense of setting up new gas wells, had been recouped on sale of the gas wells which it was said the innocent party had the burden of rebutting; this was an evidentiary burden once there was evidence of compensating advantage. … It was for the appellant to prove that the respondent had gained an actual benefit, and what benefit. The respondent may have been using borrowed money and not been advantaged by the delay, or been disadvantaged; if it was using its own money and left the purchase money idle, or used it unprofitably, the avoided loss principle did not require the allowance of a notional amount in favour of the appellant.
In Monroe Schneider Burchett J, with whom O'Loughlin J agreed, said as to the onus at 17:
… the principle of British Westinghouse has always been treated as an extension, to a special situation, of the general principle governing mitigation of loss. There is no doubt that the onus in respect of mitigation of loss is on a defendant, and it would be extraordinary if the rule were the other way in respect of an elaboration of it. That the defendant must bear the onus on mitigation has been asserted repeatedly: see Halsbury's Laws of England, (4th ed), Vol 12, par 1196; Vischer (Simonius) & Co v Holt [1979] 2 NSWLR 322 at 361; World Beauty [1970] P 144 at 154, 158; Volpato v Zachory [1971] SASR 166 at 168-169; Wollington v State Electricity Commission (Vic) (No 2) [1980] VR 91 at 93; Karas v Rowlett [1944] SCR 1 at 9, per Duff CJ and Rand J; Roper v Johnson (1873) LR 8 CP 167 at 178, 181-182, 184. In the last case, Grove J (at 184) said:
"The plaintiffs having made out a prima facie case of damages, actual and prospective, to a given amount, the defendant should have given evidence to shew how and to what extent that claim ought to be mitigated."
Ruthol and Monroe Schneider were applied in Tasman Capital Pty Ltd v Sinclair in the context of a claim by a former employee for damages for wrongful dismissal. Giles GA there addressed the question whether the onus of proof of avoided loss (as was the case for avoidable loss) lay on the guilty party (the employer). His Honour said at [58]:
It does not follow that the onus of proof of avoided loss is also on the employer. Failure to mitigate loss is one thing; suffering no loss or less loss because loss has been avoided, even by taking steps beyond the reasonable steps of the "duty" to mitigate loss, is another thing. Damages are compensatory, and on general principles a plaintiff must prove the loss suffered by the breach of contract and the damages awarded should be no more than the loss suffered. The appellant [employer] said that no loss or less loss is suffered where the employee receives income from alternative employment or other benefit from use of the employee's earning capacity during the relevant period, and that the receipt of the benefit is therefore part of proving loss and (at least where it is shown that some benefit was received) it falls to the employee to quantify it.
At [63], Giles JA, referring to Goldburg v Shell Oil Co of Australia Ltd, appears to have accepted that the innocent party (employee) may have borne the onus of proving what he could gain during the period of the contract by the use of the resources which would have been committed to the performance of the contract, "the equivalent being what the employee could have received from the exercise of the employee's earning capacity freed up by the dismissal" but went on to say that:
However, what the employee could have received is not what he did receive, nor is it what he should acting reasonably have received; so far as it encompassed what he should acting reasonably have received, it is not correct that the onus of proof is on the employee. ...
Ultimately, having referred to the statements as to onus by Lord Denning MR in Andros Springs (Owners) v World Beauty (Owners) ("The World Beauty") (1970) P 144 (at 154, to the effect that a party who prays advancement in aid in mitigation of damage must prove the value of it) and by Fenton Atkinson LJ (at 158 in the same case), as well as to statements to the same effect by Samuels JA (with whom Moffitt P and Reynolds JA relevantly agreed) in Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 (at 361) and by Burchett J (with whom O'Loughlin J agreed) in Monroe Schneider, Giles JA concluded at [72] that the guilty party (the employer) bore the onus both as to avoidable loss and as to avoided loss; and at [73] that any difficulty for the guilty party in satisfying that burden was not a sound reason for a different conclusion.
In the present case, therefore, Karellas bore the onus of proving both that Finger & Co obtained a benefit or compensating advantage referrable to the freeing up of its capacity to carry out a residential development unconstrained by the restrictions it would otherwise have had if the heads of agreement had not been terminated (which it satisfied) but also the value or extent of that benefit.
As to the extent of the benefit obtained by Finger & Co, Karellas argues that it discharged its onus by establishing that, had the heads of agreement not been terminated and had it become the tenant, Finger & Co could not have carried out the development that it did without greater cost and difficulty and that this triggered a shift in the onus back to Finger & Co to establish that it could have proceeded with a different development within the confines of what was permitted by the draft lease, and the profit they would have made from such a development. I do not agree.
The benefit or compensating advantage was not that Finger & Co was able to make a profit of $5 million from the development (if, which it did not accept, that be the case). Rather, the benefit was the advantage obtained as a result of being able to place columns in the supermarket premises or of being able to obtain access to the first floor through an area not otherwise available for that purpose under the terms of the heads of agreement, or any costs saving by being able to avoid undertaking the construction work while there was a trading supermarket in operation. Karellas did not seek to establish the value to Finger & Co of those benefits. Hence his Honour considered that the notional profit differential (between the development as carried out and a development that might have been carried out consistent with the terms of the heads of agreement) was a matter of speculation.
Finger & Co contends that in those circumstances Karellas did not discharge its burden of proof and there should be no deduction from its damages claim referrable to the profits made on the residential development.
The primary judge, though leaving open the question whether Finger & Co may have borne an evidential onus in this regard, seems ultimately to have considered that on the evidence before him the appropriate course would have been to make a "global assessment" of the damages to reflect the fact that a benefit had been obtained but could not be precisely quantified on the evidence before him. I am not persuaded that this would have been an appropriate course. It might have been possible to quantify the benefit, say, of being able to place the columns in the premises that would have been leased to Karellas had the lease negotiations resulted in a concluded agreement by some means of attributing a square metre rent value for the area occupied by them, but that would have been a matter on which his Honour could justifiably have sought the assistance of further submissions (noting that his Honour said at [514] that the evidence did not clearly establish the net lettable area of both premises). Nor does it appear that there was any evidence from which a value might have been placed on the costs savings of a development undertaken while the supermarket premises were unoccupied.
Therefore, had the issue arisen for determination I would have been of the view that Karellas did not discharge its onus of establishing the value or extent of the avoided loss.
It follows from the above that I do not accept the premise on which grounds 14-16 of the notice of contention are based, but nor do I accept that the primary judge erred in principle when concluding that account should be taken when assessing Finger & Co's damages of the benefit it obtained from the freeing up of the capacity to build the residential development without the constraints imposed under the terms of the heads of agreement.
Before turning to the remaining two areas of challenge to his Honour's findings as to damages, I should note that Finger & Co argues that, to the extent that the primary judge concluded that there would have been a difference in the profit derived from a development undertaken within the confines of the heads of agreement, he did so on the basis of the erroneous premise (evident at [470]-[471]) that the Revision C plans showed a slab over only part of the ground floor whereas the plans later approved showed a slab over the whole of the property the subject of the s 96 development approval; whereas in fact Revision C did not show a slab at all. The error as to the Revision C plan is conceded but it does not address the matters to which I have referred above.
In other words, as I read his Honour's reasons, what his Honour was saying was that, while some adjustment would have been necessary for the above matters had the appropriate counterfactual been a lease on the June 2010 terms, that was not the appropriate counterfactual; and it was necessary (see [526]) instead to construct a counterfactual as to the likely position had the heads of agreement not been repudiated (or had any such repudiation not been accepted).
It was this which led his Honour to conclude that there were a number of matters which gave rise to legitimate scope for Karellas to negotiate in a way that gave it the possibility of moderating the effect of the rental clause in the heads of agreement ([531]).
Finger & Co argues that his Honour should have found that since the parties had agreed all the terms of the proposed agreement for lease and lease as at 4 June 2010 the most likely course that the parties would have taken, had Karellas not repudiated the heads of agreement on 8/9 June 2010, would have been to execute an agreement for lease and lease in the terms already agreed but that, in any event, his Honour's finding that Karellas would have employed to its advantage, in negotiations with Finger & Co, the matters referred to above, was without foundation.
Karellas acknowledges that his Honour had erroneously referred to the wrong Revision C plan but maintains its position that disclosure of the development direction of the property would have enlivened the right under cl 1 for Karellas to amend its offer and, as noted above, argues that his Honour's observations as to what might have eventuated had the parties reverted to negotiation of the terms contemplated by the heads of agreement were unnecessary and did not lead to any findings as to the issues his Honour had discussed.
Ground 8 is not made out.
As to the matters raised in the notice of contention in this regard, I note that, while his Honour did not place a value on the chance that was lost by Finger & Co, he accepted that it had some value. Had it been necessary in this Court to determine that issue, I would have concluded that no more than a nominal value could have been placed on the loss of the opportunity to conclude an executed agreement for lease documentation prior to the time at which it would have been open to Karellas to withdraw from the negotiations (i.e., December 2010). The fact that the parties had been able provisionally to agree terms as at June 2010 says nothing as to whether they could have agreed other terms that would have met each party's legitimate commercial objectives as they were at June 2010; and the "potency" of the reduced turnover forecast points to the likely difficulty of further negotiations.