Kempston Holdings v Harper Macrae & Associates

LEGISLATION CITED : Uniform Civil Procedure Rules 2005

Air Services Australia v Zarb (Court of Appeal, 26 August 1998, unreported) Borg v Howlett [1996] NSWSC 153 (24 May 1996) Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 Commonwealth of Australia v Griffiths & Anor [2007] NSWCA 370; 70 NSWLR 268 David Jones v Perpetual Ltd & Anor [2006] QSC 337 (10 November 2006) CASES CITED : Dey v Victorian Railway Commissioners [1949] HCA 1; (1949) 78 CLR 62 General Steel Industries Inc v Commissioner for Railways (NSW) & Ors [1964] HCA 69; (1964) 112 CLR 125 Miles v Bull [1969] 1 QB 258 Spellson v George (1992) 26 NSWLR 666 Webster & Anor v Lampard [1993] HCA 57; (1993) 177 CLR 598 Wolverhampton Corporation v Emmons [1901] 1 KB 515

TEXTS CITED : Jones and W Goodhart, Specific Performance (1986) Butterworths London Spry, The Principles of Equitable Remedies Specific Performance, Injunctions, Rectification and Equitable Damages (2010) Lawbook Co Australia

Kempston Holdings Pty Limited (ACN 130 596 039) (First Plaintiff) PARTIES : Ruby Investments Dubbo Pty Limited (ACN 130 592 380 (Second Plaintiff) Harper Macrae & Associates Pty Limited (ACN 002 452 502) (First Defendant) Brisk Bay Holdings Pty Limited (ACN 003 147 582) (Second Defendant)

COUNSEL : M Bradford (Plaintiffs) S K Hill (Defendants)

SOLICITORS : Booth Brown Samuels & Olney (Plaintiffs) Angel M Frost (Defendants)

SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

2009/20230 KEMPSTON HOLDINGS PTY LIMITED & ANOR v HARPER MACRAE & ASSOCIATES PTY LIMITED & ANOR

JUDGMENT (Summary judgment - specific performance, building works in hotel) 1 HER HONOUR: By notice of motion filed 9 November 2009, the plaintiffs seek firstly, summary judgment pursuant to Part 13 r 1(1) of the Uniform Civil Procedure Rules 2005 on the claim for specific performance of the first and second defendants' obligation to complete the whole of the building work referred to in the Contract for Sale of Business made on 27 May 2008 ("the Contract"); secondly, in the alternative, summary judgment pursuant to Part 13 r 1(1) of the Uniform Civil Procedure Rules on the claims for (a) specific performance of the first and second defendants' obligation to complete the ground floor renovations (including the fit-out) in accordance with the terms of the Contract; and (b) a declaration that the plaintiffs are entitled under the Contract to complete the balance of the work and, for that purpose, to access the moneys held by the National Australia Bank under the Bank Guarantee, or so much of those moneys as is necessary to enable them to complete that work; thirdly, further, or in the alternative, summary judgment for the plaintiffs on their claim for damages pursuant to Part 13 r 1(2) with those damages to be assessed by the Court at a later date. 2 The first plaintiff is Kempston Holdings Pty Limited (ACN 130 596 039). The second plaintiff is Ruby Investments Dubbo Pty Limited (ACN 130 592 380) ("the purchasers"). The first defendant is Harper Macrae & Associates Pty Limited (ACN 002 452 502). The second defendant is Brisk Bay Holdings Pty Limited (ACN 003 147 582) ("the vendors"). The purchasers relied on the affidavit of Nelson William Kelly sworn 6 November 2009. The vendors relied on the affidavit of Robert Osborne sworn 17 February 2010.

Summary judgment 3 Part 13 r 1(1) of the Uniform Civil Procedure Rules 2005 provides: "13.1 Summary judgment (cf SCR Part 13, rule 2; DCR Part 11A, rule 2; LCR Part 10A, rule 2)

(1) If, on application by the plaintiff in relation to the plaintiff's claim for relief or any part of the plaintiff's claim for relief: (a) there is evidence of the facts on which the claim or part of the claim is based, and (b) there is evidence, given by the plaintiff or by some responsible person, that, in the belief of the person giving the evidence, the defendant has no defence to the claim or part of the claim, or no defence except as to the amount of any damages claimed, the court may give such judgment for the plaintiff, or make such order on the claim or that part of the claim, as the case requires. (2) Without limiting subrule (1), the court may give judgment for the plaintiff for damages to be assessed. (3) In this rule, a reference to damages includes a reference to the value of goods." 4 Rule 13.4(1) of the Uniform Civil Procedure Rules provides that the court may dismiss proceedings generally, or in relation to any claim for relief, in three circumstances. These are, if the proceedings are frivolous or vexatious, or if no reasonable cause of action is disclosed, or if the proceedings are an abuse of the process of the court. 5 Rule 14.28(1) of the Uniform Civil Procedure Rules provides that the court may at any stage of the proceedings order that the whole or any part of a pleading be struck out if the pleading firstly, discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading, secondly, has a tendency to cause prejudice, embarrassment or delay in the proceedings, or thirdly, is otherwise an abuse of the process of the court. 6 Rule 14.28(2) provides that the court may receive evidence on the hearing of an application for an order under subrule (1). 7 In Commonwealth of Australia v Griffiths & Anor [2007] NSWCA 370; [2007] 70 NSWLR 268 Beazley JA (with whom Mason) agreed said: "11 The general principles relating to the summary disposal of proceedings are well-known: see General Steel Industries Inc v Commissioner for Railways (NSW) & Ors [1964] HCA 69; (1964) 112 CLR 125 at 129. If it is demonstrated that there is a real question to be tried, the matter is inappropriate for the entry of summary judgment: Dey v Victorian Railway Commissioners [1949] HCA 1; (1949) 78 CLR 62. The tests stated in the authorities as to whether it is appropriate that a case be disposed of by the entry of summary judgment include statements such as that the matter is "so obviously untenable that it cannot possibly succeed"; "manifestly groundless" or "would involve useless expense": see General Steel Industries at 129.

12 The summary disposal of proceedings or part thereof deprives a party of the right to a contested hearing. For that reason it is said that the requirement for establishing that there is no triable issue is demanding: Air Services Australia v Zarb (Court of Appeal, 26 August 1998, unreported). In Webster & Anor v Lampard [1993] HCA 57; (1993) 177 CLR 598, Mason CJ, Deane and Dawson JJ said at 602: '… the issue before the learned Master on the application for summary judgment was not whether [the plaintiffs] would probably succeed in their action against [the defendant]. It was whether the material before the Master demonstrated that that action should not be permitted to go to trial in the ordinary way because it was apparent that it must fail. The power to order summary judgment must be exercised with 'exceptional caution' and 'should never be exercised unless it is clear that there is no real question to be tried.' (Citations omitted)" 8 More specifically, summary judgment for specific performance was discussed in Borg v Howlett [1996] (Supreme Court of New South Wales, Young J, 24 May 1996, unreported) where Young J (as he then was) stated: "Although relatively unusual, it is competent for the Court to give summary judgment in proceedings for specific performance in a proper case, see Jones and Goodhart on Specific Performance (Butterworths London 1986) at 192 and following. However, as with all cases of summary judgment, the Court will only give such a judgment if the plaintiff is unarguably entitled to it, and even then, may in its discretion refuse an order if it can be seen that the circumstances of the case are such as to require closer investigation: Miles v Bull [1969] 1 QB 258. See also Spellson v George (1992) 26 NSWLR 666." The dispute 9 On 27 May 2008, the purchasers entered into a written contract for the purchase from the vendors of a hotel business at Dubbo known as the Amaroo Hotel ("the contract") for the sum of $2.25M together with associated agreements including a lease of the hotel premises ("the lease"). The lease is for an initial term of 15 years with four 10 years options so that if those options are in due course exercised, the lease will continue until 2063. These facts are not in dispute. It was an express term of the contract that completion would take place on 1 July 2008. Completion did take place on 1 July 2008. There is no dispute that the vendors have not completed any of the work and that they have not carried out any of that work since the contract was completed on 1 July 2008. 10 Under the express terms of the contract were provisions which (a) required the defendants to complete the ground floor renovations, including the fit-out, generally in accordance with a development consent obtained from the Dubbo City Council in 2006 and in accordance with the plan annexed to the contract ("the approvals") by the completion date; (b) to complete the balance of the works in the basement area, including the fit-out, in accordance with those approvals by 12 February 2009; and (c) to deliver to the vendors a Certificate of Occupancy from the relevant consent authority evidencing the satisfactory complete of the works referred to in (a) and (b). (ASC [1] - [2A]). 11 The purchasers allege that the contract contains express provisions that come into effect in the event the vendors did not complete the work. There are provisions for discounts in rent until such time as the work was completed, for the retention of part of the purchase money of $750,000 under bank guarantee until such time as the work was completed, and to enable the purchasers to access that money for that purpose in the events the vendors did not complete the work by 12 February 2009. 12 The main issues for determination are whether the purchasers are entitled under the contract by means of an order for specific performance to require the defendants to complete the work. If not, whether the purchasers are entitled to access the $750,000 for that purpose and if not, whether the vendors are liable in damages for their breach of the relevant obligations in the contract. 13 The defendants plead that the vendors are not entitled to sue for damages or seek specific performance. Paragraphs 6 and 7 of the defence to the amended statement of claim read: "6. In further answer to the whole of the Amended Statement of Claim, the defendant says that: (a) The Contract expressly contemplated that the works might not be completed in accordance with the terms of clauses 5.1(a) and 5.2(b): clause 5.2(a);

(b) The parties agreed to a reduction of rent from $14,500.00 per week to $8,500.00 per week in that event and while so long as the works were incomplete: clause 5.2(a); and

(c) Pursuant to and in accordance with that agreement, the plaintiffs have been paying and the defendant have accepted rent at $8,500.00 instead of $14,500.00 per week. 7. In the premises, the defendants say that: (a) The non-completion of the works as contemplated by clauses 5.1(a) and 5.2(b) was not a breach of contract;

(b) In the alternative, on a proper construction of the Contract, the parties had agreed on a genuine pre-estimate of the plaintiffs' damages in that event and the parties are bound by that agreement; (c) Further and in the alternative, having regard to the facts, matters and circumstances set out above, the Contract contained in the following implied term: The discounts of weekly rent provided for in clause 5.2(a) are genuine and binding pre-estimates of the Purchasers' damages while so long as the works contemplated in clauses 5.1 and 5.2 are not completed. For the avoidance of doubt, the parties acknowledge that the said discounts apply to the exclusion of any other reckoning of damages."

The relevant terms of the contract 14 Clauses 4 and 5 of the contract read: "Completion 4.1 Completion shall take place on 1 July 2008. 4.2 On Completion the Vendor shall give to the Purchaser possession of the Business and the Premises as agreed in this Contract and the Lease shall commence from the Completion Date. 4.3 On Completion the Purchaser shall pay to the Vendor as directed by the Vendor's Solicitor. i by bank cheque(s) one million two hundred and seventy five thousand dollars ($1,275,000.00) and release the deposit, plus or minus any adjustments referred to in the Contract. … 4.4 The Purchaser shall make a final payment of seven hundred and fifty thousand dollars ($750,000.00) within seven (7) days (and time is of the essence) from the issue of an occupation certificate issued by the consent authority certifying completion of the work in accordance with Development Application No. D2006/432 ("the Certificate of Occupancy"). The Purchaser agrees to pay the Vendor in addition to the unpaid balance of the purchase price interest at the rate of 15% p.a. for the period of the date specified in this condition as the date for payment and the actual date for payment. 4.5 In addition to the items in clause 4.3, on Completion a bank guarantee will be issued by the National Australia Bank guaranteeing to make payment of the balance of the purchase price being $750,000.00 on 12 February 2009 subject to completion of the work at the Property generally in accordance with Development Application No. D206/432 and the issue of the Certificate of Occupancy. 4.6 The Purchaser expressly acknowledges that it has no right to rescind or terminate this Contract for any matter arising from Clauses 4 and 5 of this Contract. Completion of work 5.1 The Vendor agrees to: a. complete the work at the Property generally in accordance with Development Application No 2206/432 and the current approval plan annexed to this Contract dated 9 April 2008 and signed by Nelson Kelly and Veronica Cusack. b. fit out the Basement and Ground Floor to a standard not less than the current fit out of the Ground Floor of the premises but to include i 'can bar' to be replaced with a bar containing no less than 6 beer taps ii the Basement nightclub bar to contain no less than 3 x 6 beer taps iii the Ground Floor Beer Garden bar will be served by no less than 2 x 3 beer taps or as otherwise agreed by the parties in writing. c. deliver to the Purchaser the Certificate of Occupancy evidencing satisfactory completion of the work. 5.2 a. In the event that the entire ground floor renovations (not just the kitchen) are not finalised (with an occupation certificate issued) by Completion then a reduced rental of $8,500 per week plus GST is payable. The rental of $10,000.00 per week plus GST is payable from the date than an occupation certificate relating to the ground floor renovations has issued, and the fit out on the ground floor is complete (including provision of the items referred to in the hotel inventory relating to the ground floor areas and the proposed kitchen and beer garden). The Purchaser acknowledges that it shall not be entitled to a reduced rental if there are minor defects which do not affect the operation of the ground floor area. Commencement of trading from the ground floor renovation area shall be deemed to be acceptance by the Purchaser that the work has been completed in accordance with this Contract and the increased rental shall be immediately payable. b. Completion of the balance of the work in accordance with Development Application No. D2006/432 is to take place on or prior to 12 February 2009. Payment of the balance of the purchase price is to take place in accordance with condition 4.4. The Lessee shall make payment of the increased rental of $14,500.00 twenty eight (28) days from: i the issue of the Certificate of Occupancy; and ii the issue of a place of public entertainment approval for the nightclub (up to 900 patrons); and iii completion of the fit out of the nightclub (including provision of the items detailed in the inventory included in the Contract); and iv the Purchaser acknowledges that it shall not be entitled to a reduced rental if there are minor defects which do not affect the operation of the nightclub area. c. If completion of the balance of the work in accordance with Development Application No. D2006/432 does not take place on or prior to 12 February 2009 (time being of the essence): i. the Vendor shall obtain a Quantity Surveyor's report calculating the costs of completing the work ("Cost of Work"); ii on receipt of the Cost of Work the Purchaser is authorised to have access to this amount from the part of the balance of the purchase monies of $750,000.00; and iii the reduced rental of $10,000 per week plus GST will continue to apply until the works are completed the Certificate of Occupancy has been issued, the place of public entertainment approval has issued and completion of the fit out of the nightclub. 5.3 Commencement of trading from the nightclub shall be deemed to be acceptance by the Purchaser that the work has been completed in accordance with the terms of this Contract and the rent shall increase to $14,500.00 per week plus GST. 5.4 … 5.5 In the event of any dispute regarding the work to be carried out by the Purchaser both parties agree that the firm of Walton Smith Consultants in Dubbo (Quantity Surveyors) shall be appointed to resolve the dispute and that the Vendor and Purchaser agree to accept the decision of that firm. The costs of Walton Smith Consultants shall be paid equally by the Vendor and the Purchaser." 15 However, the purchasers have expressly acknowledged that they have no right to rescind or terminate this contract for any matter arising out of clauses 4 and 5 of the contract (clause 4.6). Further, clause 24 reads that if a party exercises a right to rescind expressly given by this contract the deposit and any other money paid by the purchaser under this contract must be refunded otherwise a party will not be liable to pay the other party any damages, costs or expenses. 16 It is common ground that the vendors have not provided a copy of the quality surveyor's report calculating the costs of completing the work as provided for in clauses 5.2(c)(i) to the purchasers. Clause 5(a) of the contract refers to the entire ground floor renovations. The balance of work refers to the basement where the nightclub is to be constructed. It is only if the balance of work, ie the basement where the nightclub is to be constructed does not take place on or prior to 12 February 2009, the vendor may, subject to 5(2)(c)(i) have access to the sum of $750,000. For the purchasers to have access to this sum of money, the vendors are required to do something, namely obtain quantity surveyors report that calculates the costs of completing the work. The purchasers are not aware of any such report being done and are reliant on the vendors to do it. Even if a quantity surveyor's report is obtained the ground floor work will not take place unless the vendor decides to do it. 17 The purchasers submitted that it is fanciful for the vendors to plead that they are entitled to do nothing to complete the work in circumstances where $750,000 of the purchasers' money could be quarantined indefinitely, and perhaps for the next 55 years, under a facility which the purchasers are required to maintain for the duration of that period. The purchasers further submitted that the Court should take into account commercial objectives of the parties and that the contract given a business-like interpretation. If this interpretation is given then the vendors' case that the contract imposes no obligation on them to complete the work is wholly unsustainable. 18 The vendors submitted that the reduced rent clauses amount to mandatory, self-executing liquidated damages clauses which evidence an intention to exclude liability for delay in completion. 19 According to the vendors there is an ambiguity in clause 5.2 and that the construction of the contract will require a trial judge to examine pre-contractual negotiations and the surrounding circumstances of the contract. The vendors further submitted that the purchasers cannot sue for damages or seek specific performance because the contract expressly contemplates that the works might not be completed and contains clauses which result in the purchasers' rent being reduced depending on how much of the building work has been completed (clauses 5.2(a) and 5.3(c)). The vendors say that these reduced rent clauses amount to mandatory, self-executing liquidated damages clauses, which is evidence of an intention to exclude liability for delay in completion.

20 The vendors further submitted that there was an implied term in the contract to the effect that the discounts of weekly rent provided for in clause 5.2(a) were genuine and binding pre-estimates of the purchasers' damages and so long as the works contemplated in clauses 5.1 and 5.2 were not completed than the discounts applied to the exclusion of any other reckoning of damages. 21 The purchasers referred to David Jones v Perpetual Ltd & Anor [2006] QSC 337 (10 November 2006). David Jones sought the following relief at [144]-[145]: "Specific performance and injunctive relief

[144] In its amended Statement of Claim, David Jones claims the following relief.

"Specific performance of the Varied Agreement for Lease on terms which require the Second Defendant to construct:

(a) the areas of the Stage 2 Building which are identified in the Varied Agreement to Lease as being subject to the Lease without the Recent Changes; and

(b) the columns on grids D10 and D10 with a diameter of not more than 1150mm; further or alternatively, an injunction restraining the Second Defendant (whether by itself, its servants or agents or otherwise howsoever) from constructing: (a) the areas in the Stage 2 Building which are identified in the Varied Agreement to Lease in a way which includes the Recent Changes; and (b) any column on grid D10 or E10 with a diameter of more than 1150mm." [145] The defendants do not contend that if David Jones is successful on its construction argument it is not open to the Court, as a matter of discretion, to grant specific performance and/or injunctive relief. They argue that such relief should not be ordered because an award of damages to David Jones would provide an adequate remedy. Additionally, such relief is opposed on grounds that the hardship suffered by the defendants in the event of such an order would so outweigh the detriment suffered by David Jones, if it were confined to damages, that it would be unjust to grant the relief." 22 Muir J in David Jones ordered specific performance for the construction of some of the work. 23 The vendors referred to ICF Spry in The Principles of Equitable Remedies Specific Performance, Injunctions, Rectification and Equitable Damages (2010) Lawbook Co Australia at 113. The learned author discussed the court's disinclination to order specific performance in building contracts where there is a lack of clarity in what building works are to be enforced and refers to Wolverhampton Corporation v Emmons [1901] 1 KB 515 where Romer LJ at 524-525 set out three separate conditions that he regarded as both necessary and sufficient to overcome difficulties in enforcement or supervision of performance: "It has, I think, for some time been held that, in order to bring himself within that exception, a plaintiff must establish three things. The first is that the building work, of which he seeks to enforce the performance, is defined by the contract; that is to say, that the particulars of the work are so far definitely ascertained that the court can sufficiently see what is the exact nature of the work of which it is asked to order the performance. The second is that the plaintiff has a substantial interest in having the contract performed, which is of such a nature that he cannot adequately be compensated for breach of the contract by damages. The third is that the defendant has by the contract obtained possession of land on which the work is contracted to be done." 24 Whilst Spry points out this formula is too rigid to accord with equitable principles, it does point to uncertainty and indefiniteness of contractual obligations as a factor militating against the granting of performance in specie. In this case, it is the purchasers who are in possession and the work is to be done by the vendors. 25 Mr Osborne is the sole director of the first defendant and deposed in his affidavit sworn 17 February 2010 that he was familiar with the dealings which have taken place between the purchasers and vendors. He gives evidence on two topics, pre-contractual negotiations and whether the vendors are in a financial position to carry out the renovations. 26 In regard to the pre-contractual negotiations concerning the reduction in rent, Mr Osborne says that on or about April 2008 he had a meeting with the purchasers' directors, Nelson Kelly and Michael Kempston, and their accountant to discuss the sale of the business and the terms of the contract. One of the matters they discussed was the reduction in the rent if there was a delay in completing the building work and the negotiations included a discussion to the following effect. Mr Osborne said "let's commence the rent at $10,000 per week until the kitchen is completed and if the basement is not done by February 2009, then I would agree to drop the rent to $12,000 per week to compensate you and provide us with the incentive to complete the work". The purchasers' accountant said words to the effect, "that is not enough. The rent should be reduced to $7,000 per week to start and rising to $10,000 per week when the kitchen stage is completed." Mr Osborne says that ended up agreeing to meet half way and dropping the rent to $8,500 per week on commencement rising to $10,000 per week on completion of the kitchen and '$10,000' and '$12,000' was deleted from the draft contract. 27 So far as financing was concerned, in November 2008 funding was sought from the St George Bank. It was unsuccessful. This was the only attempt made to obtain funding prior to the expiration of the date by which the renovations to the ground floor were to be completed. It does not show that the vendors did not make best endeavours to comply with the terms of the contract they entered into. On 20 April 2009, Westpac was approached and negotiations are still continuing. In January 2010, an application for funding approval for $350,000 was made to National Australia Bank. This sum would allow for the renovations to the kitchen area. Further consideration is being undertaken by the National Australia Bank and it will take at least a further two weeks before the outcome is known. Mr Osborne deposed that if the vendors do not obtain a loan to commence the building work, they will be financially unable to commence or complete the building work ([21] Aff). 28 It is my view that the vendors have an arguable defence as outlined in paragraph 19 of this judgment. It is arguable that there is an ambiguity in clause 5.2. In Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at 352, the High Court stated that where the language of a contract is ambiguous or susceptible of more than one meaning objective evidence of the surrounding circumstances known to both parties is admissible to assist in the interpretation of the contract. 29 Further, there is no evidence as to whether the plans are sufficiently complete so that the exact nature of the work can be specifically performed. It is the purchasers who are in possession of the hotel where the vendors has to carry out the work. This is not a matter which is amenable to summary judgment. 30 I dismiss the plaintiffs' notice of motion filed 9 November 2009. It is my view that this matter is suitable for mediation. I make an order that the parties attend mediation. The matter is listed for a status conference before the Registrar at 9.00 am on 18 March 2010. 31 Costs are discretionary. Costs usually follow the event. The plaintiffs are to pay the defendants' costs as agreed or assessed. The order for costs is effective after seven (7) days in the event no application is made to vary that order.

(1) The plaintiffs' notice of motion filed 9 November 2009 is dismissed.

(3) The matter is listed for a status conference before the Registrar at 9.00 am on 18 March 2010.

(4 The plaintiffs are to pay the defendants' costs as agreed or assessed. The order for costs is effective after seven (7) days in the event no application is made to vary that order. Liberty to restore. **********

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