Heaps v Addison Wesley Longman

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2690/99 - BARRY WILSON HEAPS & 1 OR V ADDISON WESLEY LONGMAN AUSTRALIA PTY LTD

1 HIS HONOUR: These proceedings were commenced by summons filed on 11 June 1999. By that summons the plaintiff sought declaratory relief with respect to the proper construction of clause 4.3.7 of the lease between the plaintiffs as landlords and the defendant as tenant with respect to units A1 and A2, 6-8 Byfield Street, North Ryde ('Lease'), and with respect to the validity of a determination by the umpire pursuant to that clause. The plaintiffs also sought specific performance, damages and other relief. 2 On 24 August 1999 Registrar Berecry made orders placing this matter in the short matters list for the resolution of a 'preliminary issue', that issue being determination of the plaintiffs' entitlement to the declarations sought in paragraphs 1 and 2 of the summons. Those are the paragraphs concerning the proper construction of clause 4.3.7 of the lease and the validity of the umpire's determination. The matter came before me for determination of the preliminary issue. 3 Counsel for both parties agreed that the 'preliminary issue' is, in fact, the determination of a separate question under Pt 31 of the Supreme Court Rules. After discussion, the parties agreed on a fresh formulation of the separate question in substitution for the formulation made by the Registrar. As now formulated the separate question is as follows: 'Did the appointment of the umpire (R Aitken) cease prior to the umpire's letter dated 19 March 1998?' 4 I propose to make orders vacating the Registrar's orders with respect to the separate question and substituting an order for the determination of the above question under Pt 31. For reasons which I shall indicate, my answer to the new separate question is 'yes'. 5 For the purpose of determination of the separate question, the parties ultimately agreed to rely on only a limited portion of the evidence which was adduced in the application before me today. The limited evidence is the following: Exhibit BH1 to the affidavit of Barry Wilson Heaps, sworn on 8 June 1999 (the Lease); Exhibits AM5, AM6, AM7 and AM8 to the affidavit of Anthony Edward Morris sworn on 30 June 1999; Exhibits MA1, MA2, MA3, MA7 and MA21 to the affidavit of Martin Ian Alfonso sworn on 2 June 1999; and Exhibit PX4 in the proceedings comprising copies of two letters by Mr Aitken, dated 19 March 1999, to Messrs Martin and Gothard respectively, and Mr Aitken's work notes.

The Lease 6 The Lease is for a term of seven years commencing on 1 January 1994 and terminating on 31 December 2000. The rent is calculated in accordance with Part 4, which deals with 'base rent' and the lessee's contribution. Clause 4.1 deals with the payment of the base rent. 7 Clause 4.2 deals with the review of the base rent and sets up a procedure by which the lessor may notify the lessee in writing not earlier than three months prior to, or later than three months subsequent to, each review date of the lessor's assessment of the base rent to apply from that review date. In the present case the lessor invoked that procedure for a review to be effective on 1 January 1998. Clause 4.2 provides that if the lessor and the lessee are unable to agree upon the base rent to apply from a review date, the lessee may require a review of the base rent, determined in accordance with clause 4.3. Clause 4.3 is headed 'Dispute of Lessor's Assessment on Review of Base Rent - Expert Determination Procedure'. Clause 4.3 was invoked by the lessee from the present case. 8 The procedure set out in clause 4.3 involves the lessee giving the lessor a notice of dispute and nominating a qualified valuer within a stated time. The lessor must respond by also nominating a qualified valuer. The valuers so nominated are then required within 21 days to determine jointly the base rent as at the review date. If they do so their determination is final and binding on the parties. There are provisions dealing with the determination of the base rent in the event that the lessor or lessee fails to nominate a valuer. 9 Clause 4.3.7, which is the crucial clause in this case, deals with the procedure in the event that the nominated valuers are unable to agree on the base rent. It says: 'Should the valuers be unable to agree on the Base Rent of the Premises within the period referred to in Clause 4.3.3 or within such extended period as the Lessor and the Lessee may agree in writing then:- (i) if the Base Rent as assessed by the valuer nominated by the Lessee is more than that assessed by the valuer nominated by the Lessor then the Base Rent of the Premises shall be as determined by the Lessee's valuer; (ii) if the difference between the respective assessments of the valuers is not greater than 1.75% of the aggregate of their assessments then the Base Rent of the Premises from the particular Review Date shall be deemed to be one half of the aggregate of the said assessments; (iii) all the circumstances other than those covered by paragraphs (i) and (ii) of this Clause 4.3.7 the valuers shall agree upon and appoint a valuer also being qualified in the manner provided in Clause 4.3.6 ('the umpire'), and obtain the umpire's acceptance in writing of his appointment and who as a condition of his acceptance will undertake to hand down his determination of the Base Rent within twenty-one (21) days of his being instructed to proceed with his determination; (iv) if the valuers are unable to agree upon the nomination of the umpire or for any reason whatsoever fail to appoint the umpire within a further seven (7) days following the 21 days referred to in Clause 4.3.3 or within such extended period as the Lessor and the Lessee may agree in writing or if either or both valuers have failed to assess the Base Rent within the period referred to in Clause 4.3.3 or within such extended period as the Lessor and the Lessee may agree in writing, then either valuer either party may request the President of the Australian Institute of Valuers and Land Economists (New South Wales Division) to make an appointment of the umpire who must:- A. be a valuer qualified the manner provided in sub-clause 4.3.6; B. as a condition of his acceptance of the appointment undertake to hand down his determination of the Base Rent within twenty-one (21) days of his being instructed to proceed with his determination; and C. not be a person previously nominated by a valuer whose appointment has not been agreed to by the valuers pursuant to this paragraph: (v) should it be necessary for the umpire to determine the Base Rent, his determination shall be final and binding on the parties hereto; (vi) if an umpire appointed under this paragraph fails to hand down his determination on the Base Rent within the required period or within such extended period as the Lessor and the Lessee may agree in writing, then either party may make a fresh request for the appointment of a substitute umpire under this paragraph and thereupon the appointment of any umpire previously appointed pursuant to this clause shall cease without limitation no fee or other payment shall be payable to such person.' 10 For the purposes of the present case the crucial elements of 4.3.7 are these. First, sub-paragraph (iii) requires the valuers to 'agree upon and appoint' an umpire who is a qualified valuer and obtain the umpire's acceptance of the appointment and his undertaking to hand down his determination within 21 days. 11 Next, sub-paragraph (iv) deals with two circumstances, namely, the case where the valuers are unable to agree upon the nomination of the umpire or fail to appoint an umpire within a stated period, and secondly, the case where either or both valuers have failed to assess the base rent within a stated period. In either of those cases sub-paragraph (iv) permits either party to request the President of the Australian Institute of Valuers to appoint the umpire. 12 In the present case the evidence shows that on 23 January 1998 the lessee's valuer approached Mr Aitken proposing that he be appointed as umpire under clause 4.3.7. On 6 February 1998 Mr Aitken wrote to both the lessor's valuer and the lessee's valuer confirming that he was able to accept the appointment. Mr Aitken's diary notes indicate that on 9 February 1998 he received a fax from the lessee's valuer confirming his appointment and also had a conversation with the lessor's valuer confirming his appointment. Consequently, his appointment as umpire took effect under sub-paragraph (iii) on 9 February 1998. Mr Aitken forwarded his determination as umpire to the valuers for the lessor and lessee on 19 March 1998, well outside the period of 21 days in which he had undertaken to hand down his determination. The determination itself is dated 11 March 1998. 13 As shall become evident, if the determination had been made on 11 March 1999 then it would have preceded the plaintiffs' attempt to invoke sub-paragraph (vi) of clause 4.3.7. Although it was outside the 21 day period, it would arguably have been an effective determination even assuming that the plaintiffs had been successful in invoking paragraph (vi) on the following day. But it has not been submitted to me that the determination was 'handed down' so as to become effective on 11 March rather than on 19 March 1998 when it was transmitted to the valuers. On the limited evidence before me I am unable to find that the determination was handed down before 19 March 1998. 14 On 12 March 1998 the lessor's solicitors wrote three letters to the lessee's solicitors. One of those letters ('the Election Letter') was in the following terms: 'RE: HEAPS LEASE TO ADDISON WESLEY LONGMAN PTY LTD SUB-LEASE TO TODAYTECH WHOLESALE (AUST) PTY LTD We refer to our letter of 16 January 1998.

We are instructed to advise you that under Clause 4.3.7(vi) of the Lease, our client elects to make a fresh request for the appointment of a substitute umpire under paragraph 4.3.7 of the Lease. Our client proposes that the new umpire be Mr Tom Phelan, Knight Frank, Elizabeth Plaza, North Sydney.

Would you please confirm if your client agrees with our nomination of a new umpire failing which a request will be made to the President of the Australian Institute of Valuers and Land Economists (NSW Division).

EDGINGTON & ALFONSO' 15 The other two letters were, first, a letter alleging that the lessee had breached clause 4.3.6 of the Lease in that the valuer appointed by the lessee had failed to provide a determination, and, second, a letter alleging that the lessee had breached 4.3.12 of the lease by not paying the base rent specified in the lessor's rent review notice from the relevant rent review date. It is unnecessary for me to determine whether the second and third letters made valid claims. 16 Counsel for the defendant submitted that the second and third letters shed light on the intention of the author of the Election Letter. I reject that submission. It seems to me that the letters are equally plausibly interpreted as showing the intention to invoke as many remedies under the Lease as the ingenuity of the solicitor could conjure up in obviously limited time. The Election Letter is to be construed in accordance with its terms and, in my opinion, it has a clear and plain meaning. 17 The answer to the separate question requires the Court, first, to construe clause 4.3.7 and, in particular, sub-paragraph (vi) of that clause. Second, it requires the Court to construe the Election Letter to determine whether it constitutes a 'fresh request' for the purposes of sub-paragraph (vi). I shall address these two issues in turn.

The Proper Construction of Sub-paragraph (vi) 18 Sub-paragraph (vi) applies if an umpire 'appointed under this paragraph' fails to hand down his determination of the base rent within the required period. There is no suggestion in the evidence before me that there was any extension of time, and therefore the required period was 21 days from the time of his appointment on 9 February 1998. It is plain from the facts that Mr Aitken failed to hand down his determination of the base rent within that period. 19 There is a question whether Mr Aitken was, in the circumstances, 'an umpire appointed under this paragraph'. In my view he clearly was, although I acknowledge that to reach that view I must take a somewhat generous approach to the construction of the word 'paragraph'. I am fortified in doing so by the knowledge that neither party before me submitted that Mr Aitken was not within that description. In my view the word 'paragraph' where it first appears in sub-clause (vi) is a reference to clause 4.3.7 as a whole, including both sub-paragraphs (iii) and (iv). Since Mr Aitken was appointed under sub-paragraph (iii) he qualifies as 'an umpire appointed under this paragraph' so construed. Consequently, sub-paragraph (vi) applies. 20 Where it applies sub-paragraph (vi) allows either party to make a 'fresh request for the appointment of a substitute umpire under this paragraph'. This time the words 'this paragraph', in 'fresh request … under this paragraph', clearly refer to sub-paragraph (vi). If as a matter of fact, either party does so, then sub-paragraph (vi) spells out the consequence, namely that the appointment of any umpire previously appointed pursuant to this clause (that is clause 4.3.7) ceases. 21 The only controversial question is whether, it being clear that the defendant has not done so, the plaintiffs have made such a fresh request. The plaintiffs say that they have done so, and what is more, that they did so on 12 March 1998 by means of the Election Letter, prior to Mr Aitken making the determination of 19 March 1998. Consequently, say the plaintiffs, Mr Aitken's office as umpire had ceased prior to his determination. 22 In my opinion the words 'fresh request for the appointment of a substitute umpire' in sub-paragraph (vi) refer to the process of appointment of an umpire described in sub-paragraph (iv). 23 The plaintiffs seek to resist this construction on several grounds. First, they say that the words 'fresh request' would be capable of applying, on this construction, only if a request had already been made under sub-paragraph (iv), and in the present case no such request has been made. It seems to me that the words 'fresh request' are not limited to circumstances where, as a matter of fact, a request has already been made under sub-paragraph (iv). Rather those words contemplate that the request made for the purposes of sub-paragraph (vi) must be 'fresh' in the sense of 'new' and 'different from' any request which may have been made under sub-paragraph (iv). In other words, whether or not a request has already been made under sub-paragraph (iv), what is contemplated by sub-paragraph (vi) is a new request for the appointment of an umpire by the President under the sub-paragraph (iv) procedure. 24 The plaintiffs also say that the construction which I favour would create difficulty because it would prevent a party from seeking to replace the recalcitrant umpire with a new umpire by agreement. They say that if the parties were to reach agreement as to a replacement umpire, there would be two umpires in place. The plaintiffs urge me to prefer a construction which would allow the words 'fresh request' to encompass a case where a new umpire is appointed by agreement of the parties. 25 In my opinion the construction which I favour does not prevent the parties to the Lease, who are the only parties to this contract, agreeing to modify the terms of clause 4.3.7 to whatever extent they choose. For example, the parties could agree, in circumstances to which sub-paragraph (vi) were otherwise applicable, that they would select an umpire without approaching the President, and that their doing so would have the effect of extinguishing the office of the existing umpire. That variation to the existing arrangement would be valid, assuming there were no vitiating elements. If the parties agreed upon the identity of a replacement umpire but omitted to deal with the status of the existing umpire, then a degree of confusion could well arise. It may be that a proper construction of what they had done would lead to the inference that the office of the existing umpire had been extinguished by their consent; or alternatively, a proper construction of their new agreement may be that the two umpires would remain in office until some further event happened, such as the delivery of a determination by the quicker of the two. All of those matters are matters of construction of an agreement by commercial parties, of a kind with which this Court is very familiar. 26 The plaintiffs' contention that the construction which I favour would prevent the parties from agreeing on a replacement umpire fails because it overlooks the ability of the parties to vary their contract. 27 The plaintiffs also say it cannot be the case that the entire procedure in sub-paragraph (iv) is to be followed in the event that a 'fresh request' is made under sub-paragraph (vi). I agree. The prerequisites for the first application for sub-paragraph (iv) are clearly irrelevant in the event that a fresh request is made for appointment under sub-paragraph (vi), because those prerequisites are directed towards an earlier point of time when valuers have been engaged and their offices are still live. The effect of treating the words 'fresh request' as referring to a request for the President to make the appointment is to pick up the words of sub-paragraph (iv) beginning 'then either valuer or either party may request ...,' and not the previous words of that sub-paragraph. 28 The view which I favour is supported by a number of textual considerations. The first is that while sub-paragraph (iii) envisages that the valuers will 'agree upon and appoint' the umpire, sub-paragraph (iv) uses the word 'request', and therefore there is a natural linking of the words 'fresh request' in sub-paragraph (vi) with sub-paragraph (iv). 29 Additionally, the 'fresh request' is for an 'appointment', and this implies that the request will lead to action by a person who has a power to make the appointment. The only person with a power to make the appointment unilaterally for the purposes of any part of clause 4.3.7 is the President under sub-paragraph (iv), whereas the valuers under sub-paragraph (iii) must agree before the appointment can take effect under that sub-paragraph. 30 Although, in my view, the making of a fresh request under sub-paragraph (vi) is to be seen as a request for the President to appoint a substitute umpire, it is noticeable that sub-paragraph (vi) is silent as to the person to whom the request is to be made. Consistently with the wording of sub-paragraph (vi) the request could be made directly to the President, or if could be made to the other party to the lease who would be able to transmit the request to the President for action. In either event, a document seeking to invoke sub-paragraph (vi) would fall within the description 'a fresh request for the appointment of a substitute umpire'. There is no basis for implying additional words into the sub-paragraph requiring that the request must be made direct to the President. Indeed, the normal inference, in a commercial contract which empowers 'either party' to give a notice or take some other step involving written communication, is that in the absence of other provisions it is sufficient for that step to be taken by communicating with the other party to the contract. 31 Counsel for the defendant resisted the view that the request for the purposes of sub-paragraph (vi) may be made to the counterparty to the contract. He contended that to be a valid request under sub-paragraph (vi) the request must be made to the President. He submitted that the contrary view requires the Court to create a procedure by implication from the clause for the transmission of the request from the counterparty to the President. I disagree. The clause is simply silent as to the destination of the request. What is required under the clause is only a 'request', not that the appointment be made. If the counterparty receives the request, then as a matter of commercial common sense it is likely that the counterparty will transmit it to the President for action, but an alternative would be for the counterparty to respond by suggesting the modification of clause 4.3.7 to permit selection of an umpire by agreement. Alternatively, the requesting party may choose to nominate an umpire when making the request, to see whether a modifying agreement can be reached. All of these possibilities are within the wording of sub-paragraph (vi) and I am not prepared to read extra words into it to exclude any of them. 32 Counsel for the defendant submitted that is counter-intuitive to interpret sub-paragraph (vi) so that a request for the appointment may be made to a person other than the person with power to appoint. I disagree. There is nothing counter-intuitive in supposing that the parties would have contemplated that the fresh request be made to the counterparty. Although one assumes that the counterparty would find out soon enough if the request were made direct to the President, the making of the request direct to the counterparty is a good way of ensuring that the counterparty knows what is happening. That, it seems to me, fits with the likely commercial intention of the parties. 33 One has to construe the clause as it is without creating any implications beyond what is necessary to give it commercial efficacy. In that regard it is significant that the conduct which terminates the appointment of the existing umpire is the making of the request, rather than any action upon the request. That reinforces the view that the request may validly be made to the counterparty.

The Election Letter 34 Just as the lease is the commercial instrument, so the Election Letter is a notice of a commercial kind. It must be construed in accordance with the common sense canons of interpretation recently revisited by the House of Lords in Mannai Investments Co Limited v Eagle Star Life Insurance Co [1997] AC 749. Although the issue before the House of Lords was rather different from the one to be addressed by this Court, their Lordships' approach provides some general guidance. Thus, Lord Hoffmann (at 780) refers with approval to the decision of Goulding J in Carradine Properties Ltd v Aslam [1976] 1 WLR 442, 444. Goulding J said the test for the validity of a notice given under a lease was: 'Is the notice quite clear to the reasonable tenant reading it? Is it plain that he cannot be misled by it?' And he went on to say that the reasonable tenant must be taken to know the terms of the lease. 35 In the present case the reasonable tenant or any commercial reader of the Election Letter would be very clear about its meaning. The plaintiffs' solicitors by that letter advised the defendant's solicitors that their client, who was said to be acting under clause 4.3.7(vi) of the Lease, elected to make a 'fresh request for the appointment of a substitute umpire'. 36 I find it difficult to imagine what words might have been used to make clearer the plaintiffs' intention to invoke sub-paragraph (vi), and thereby to terminate the appointment of Mr Aitken as an umpire. The defendant submitted that it was unclear from the letter that its author intended to cause Mr Aitken's appointment as umpire to cease, but the letter refers specifically to the sub-paragraph which causes that consequence to arise once a fresh request is made, and signifies an election to make a fresh request. 37 The Election Letter goes on to propose the new umpire. Properly construed, that is the invitation by one party to the contract to the other to negotiate a variation of the existing procedure, so that an agreed umpire could be appointed in place of the President's nominee. That this is so is clarified by the third paragraph of the Election Letter, which specifically invites the defendant to agree to the proposed nominee, failing which a request would be made to the President. 38 Given the proper construction of sub-paragraph (vi), it seems to me crystal clear that the Election Letter is a 'fresh request for the appointment of a substitute umpire' for the purposes of that sub-paragraph. There would obviously be some real injustice if it were not so, given the clear intention of the author of the Election Letter.

Conclusion 39 My conclusion, therefore, is that the plaintiffs have successfully invoked sub-paragraph (vi) of clause 4.3.7 by the Election Letter dated 12 March 1999, and consequently under that sub-paragraph Mr Aitken's appointment as umpire ceased on that date. He was, therefore, not the umpire at the time when he purported to issue his determination, namely 19 March 1999. 40 The evidence shows that on 7 April 1998 the plaintiffs made a request directed to the President of the Australian Institute of Valuers, and I am informed from the Bar table that a valuer has been subsequently appointed as umpire. It has not been suggested that that appointment is defective.

Costs 41 Although my construction of clause 4.3.7 does not rely on the submissions initially made on behalf of the plaintiffs, it produces the result that the plaintiffs succeed on the separate question and it conforms to the submissions ultimately made on behalf of the plaintiffs. Therefore, my opinion is that costs should follow the event.

Orders 42 I propose to make the following orders: (1) I vacate order 1 made by the Registrar on 24 August 1999 to the extent that it purports to identify the preliminary issue for determination. (2) By the consent of the parties I direct that the following question be determined separately from any other question before the trial of the proceedings under Pt 31 of the Supreme Court Rules: 'Did the appointment of the umpire (R Aitken) cease prior to the umpire's letter dated 19 March 1998?' (3) I answer the separate question 'yes'. (4) I order the defendant to pay the plaintiffs' costs of the determination of the separate question. (5) I stand the matter over to the Registrar's list on Thursday 11 November 1999 at 9.30am for directions as to the further determination of the proceedings. * * * * * * * * * *

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