Was there a breach of warranty?
124The warranties were not as simple as a promise that the items listed in schedule 5 were owned by Pacific Resort and located at the hotel at the date of the Option Deed. Each of the warranties in items 2 and 3 of schedule 1 was expressed to be "Subject to the Licence Deed and anything done by the Licensee or the purchaser." That was notwithstanding that the warranties were given "as at the date of the Option Deed". The Licence Deed and the Option Deed were entered into at the same time.
125Counsel for Lescap Group recognised the unbusinesslike consequences of its argument that it was entitled to rescind the contract for the purchase of a hotel for $18.2 million merely because there were a few items, or even only one item that might be of trivial value, that were or was missing when the Option Deed was entered into. If more than one construction of the sale contract is reasonably open, a construction that would give a commercial and businesslike operation to the contract should be preferred (McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 at [22]-[23]). But where the language is unambiguous, a court must give effect to the language unless it can be concluded that the parties must have made a mistake in their language that leads to absurdity (Jireh International Pty Ltd t/as Gloria Jean's Coffee v Western Export Services Inc [2011] NSWCA 137 at [55]). As Macfarlan JA said in the paragraph cited:
"A court is not justified in disregarding unambiguous language simply because the contract would have a more commercial and businesslike operation if an interpretation different to that dictated by the language were adopted."
126The consequence that Lescap Group can rescind if there is any breach of warranty is not an absurdity. It simply arises from the terms of clause 52.2. The parties provided a right of rescission if there were any breach of any of the warranties, without qualification as to the seriousness of the breach or its effect on the purchaser.
127There is no issue about the principles for construing the warranties. The question is whether the contract has the meaning contended for.
128Counsel for Pacific Resort emphasised both the recitals to the Licence Deed and the Option Deed. Recital A to the Option Deed stated that Pacific Resort was the legal owner of the Assets. The recitals to the Licence Deed stated that Lescap Operations had represented to Pacific Resort that it had inspected the assets and was fully satisfied with their state of repair. By necessary implication Lescap Operations represented that the Assets existed when it made its inspection. Lescap Group was a party to the Licence Deed that contained that recital.
129The definition of Plant and Equipment (quoted at para [22] above) down to the words "operated from the property" describes only the equipment and other assets owned by the vendor and located at the property or used in the Business that are considered by the purchaser to be necessary for the operation of the hotel business operated from the property. None of the items that is subject of the claim of breach of warranty that was missing, or was claimed to be missing, from the hotel, was considered by the purchaser to be necessary for the operation of the hotel business. The purchaser was satisfied with such equipment as was there. There is an issue as to whether those qualifying words apply also to the items listed in schedule 5, or whether schedule 5 expands the class of items otherwise within the definition of Plant and Equipment.
130Counsel for Pacific Resort submitted that if items were missing from the hotel premises at the date of the Option Deed, there was a contradiction between the list in schedule 5 and the words in the definition of "Plant and Equipment" that referred to Assets "owned by the vendor and located at the property". Counsel submitted that the contradiction should be resolved by deleting the missing assets from the list in schedule 5. The part to be rejected was any of the items in schedule 5 as would falsify the recitals to the put and call option and the representation in the Licence Deed, namely those which were not in fact present at the date of the Option Deed.
131I do not think this is an available construction. It is not supported by the recitals to the Licence Deed. The implication from Recital D to the Licence Deed that the Assets were at the hotel premises is only that that was the position when the inspection occurred. The warranties were given as at the date of the Option Deed. The argument that the definition of "Plant and Equipment" contains its own contradiction does not accommodate the fact that the definition of Plant and Equipment, whilst containing words of limitation in the general description, goes on to say that the items falling within the definition include, but are not limited to, those listed in schedule 5. The word "includes" is properly used to expand the meaning of words or the class of things which precede it. (The phrase "including, but not limited to" guards against the possibility that the list of things taken to be included would be interpreted as exhaustive.) Because the use of the word "includes" can properly expand a definition of things to include that which would otherwise not be included, there is no contradiction. Nor do the qualifying words in the part of the definition down to "operated from the property" qualify the assets listed in schedule 5.
132Counsel for Pacific Group relied on Bonython v The Commonwealth (1948) 75 CLR 589 per Dixon J at 625 as supporting a proposition that the contract should bear the construction which the parties as reasonable people would have agreed upon if there were missing items, namely that the items would be taken to be deleted from schedule 5. The price was struck without reference to the list.
133I do not think that Bonython v The Commonwealth takes the matter any further. There the question was as to the meaning of debentures issued in 1895 by the Government of Queensland in pounds sterling when the monetary system of the colony of Queensland was the same as that of Great Britain. The question was whether in 1945 the obligation to pay a sum in pounds sterling was to pay in the currency of the Commonwealth of Australia or of Great Britain. In holding, with the majority of the Court, that the obligation was to pay in the money of account that then obtained in Australia, Dixon J applied observations of Lord Watson in Dahl v Nelson (1881) 6 App Cas 38 at 59 that:
"... when the parties to a mercantile contract ... have not expressed their intentions in a particular event, but have left these to implication, a Court of Law, in order to ascertain the implied meaning of the contract, must assume that the parties intended to stipulate for that which is fair and reasonable, having regard to their mutual interests and to the main objects of the contract. In some cases that assumption is the only test by which the meaning of the contract can be ascertained. There may be many possibilities within the contemplation of the contract ... which were not actually present to the minds of the parties at the time of making it, and, when one or other of these possibilities becomes a fact, the meaning of the contract must be taken to be, not what the parties did intend (for they had neither thought nor intention regarding it), but that which the parties, as fair and reasonable men, would presumably have agreed upon if, having such possibility in view, they had made express provision as to their several rights and liabilities in the event of its occurrence."
134Dixon J asked which of the two moneys of account would the parties have presumably adopted as fair and reasonable men if, having the possibility of a separation of the two money systems in view, they had expressly provided for its occurring (at 626). The answer was that both the Queensland Government and the purchaser of debentures from it must be taken to have assumed that they would abide by the monetary system of Australia.
135This is far removed from the present case. This is not a case of the occurrence of an unforeseen event that changed the landscape in which the contract was made. If there is no contradiction between the general words in the definition of Plant and Equipment and the list in schedule 5 because the word "including" expands what would otherwise be included in the definition, then one cannot strike items out of the list on the ground that the parties, as reasonable persons, would have agreed to their deletion if the matter had been raised at the time of the contract. That would be to rectify the contract, not to construe it.
136The question remains what effect is to be given to the words "Subject to the Licence Deed and anything done by the Licensee or the purchaser" which qualify the warranties in items 2 and 3. Counsel for Pacific Resort submitted that the warranties in items 2 and 3 of schedule 1 were qualified by those words so that the warranties had no relevant operation. Counsel submitted that because, in the Licence Deed, Lescap Operations had said it had inspected the Assets and was satisfied with their state of repair, and Lescap Group was also a party to the Licence Deed in which that was recited, Lescap Group could not assert a breach of warranty. The warranties were themselves subject to the Licence Deed. Counsel for Pacific Resort submitted that:
"The words 'subject to the Licence Deed' show that the warranties themselves are given subject to the Licence Deed, which records at its outset a relevant representation made by a company related to the plaintiff. If that representation was false, as it must have been on the assumed facts, then the warranty was not operative at all. The alleged breach of warranty is inconsistent with the truth of the representation."
137Counsel for Lescap Group submitted that the significance of those words was that they provided protection to Pacific Resort if Lescap Group or Lescap Operations went into occupation before execution of the Option Deed, either pursuant to the Licence Deed or otherwise. If that had occurred, there was a risk that conduct on the part of Lescap Operations could materially have affected Pacific Resort's ability to comply with the warranties. Lescap Operations might have removed assets. The same words qualified other warranties (namely relating to the liquor licence (item 4), the absence of litigation (item 5), absence of restrictions on use of the property and notices from any competent authority (item 8), and absence of contamination (item 9)). It was submitted that all of those warranties could be affected by things done by Lescap Operations that could materially have affected Pacific Resort's ability to comply with the warranties. Counsel submitted that although the Option Deed and the Licence Deed were entered into at the same time, the parties did not contemplate that that would necessarily be so. In the Licence Deed the Option Deed was defined as a deed entered into "on or about the same date as this deed". The Licence Deed was a schedule to the Option Deed.
138The consequence of this argument would be that the qualifying words "Subject to the Licence Deed and anything done by the Licensee and the purchaser" or at least the words "Subject to the Licence Deed" would have no operation in relation to items 2 and 3 of schedule 1, because the warranties spoke of the position at the date of the Option Deed and nothing done under the Licence Deed could affect the warranties.
139I do not accept either submission.
140The difficulties with the submission of Lescap Group are twofold. First, the Licence Deed and the Option Deed were entered into at the same time. The fact that the Licence Deed was a schedule to the Option Deed indicates that the draftsman contemplated that it might be entered into after the Option Deed, but not before. As the warranties were given as at the date of the Option Deed there would be no need for the qualifying words if the concern was that things done by Lescap Operations under the Licence Deed might affect the warranties.
141Secondly, the warranties were qualified not only by being subject to the Licence Deed, but also by being subject to anything done by the Licensee or the purchaser. If the only concern of the draftsman was to protect against the position that compliance with the warranties might be adversely affected by things done by Lescap Operations (or Lescap Group), that concern was addressed by the warranties being subject to "anything done by the Licensee or the purchaser". The statement that the warranties were also subject to the Licence Deed indicates a further qualification to the warranties.
142The words "Subject to the Licence Deed and anything done by the Licensee or the purchaser" express two separate concepts. They are not an hendiadys, that is to say a single concept composed of two distinct phrases joined by the word "and". The qualification expressed by those words is not that the warranties are subject to the Licence Deed and anything done under it, which might be construed as a hendiadys. The second part of the qualification is as to anything done either by the Licensee or by the purchaser, and is not confined to things that might be done under the Licence Deed. There would be nothing that could be done by the purchaser under the Licence Deed that could qualify the warranties because the Licence Deed conferred no rights on the purchaser. It only imposed obligations on the purchaser as guarantor and indemnifier. Hence the words "Subject to the Licence Deed" have an operation beyond that conveyed by the words "Subject to ... anything done by the Licensee or the purchaser".
143Nor do I accept the submission of counsel for Pacific Resort that the qualifying words negate the warranties in items 2 and 3. That construction cannot be adopted if it is possible to give work to all parts of the clauses.
144Initially both parties took an "all or nothing" approach to the qualifying words and did not make submissions on the detail of how the qualifying words and the warranties should be construed so as to give work to all of the provisions. They did not address the conflict between the warranties of ownership in item 2 and the definition of Fixtures, Fittings and Equipment that referred to leased assets. They made submissions on the onus of proof only in relation to the application of the definition of "Excluded Assets". After judgment was reserved I invited and received written submissions on these questions.
145Counsel for Lescap Group noted that Recital D to the Licence Deed was not a term of the deed, and that the party making the representation was Lescap Operations, whereas the warranties in the sale contract operated in favour of Lescap Group. Counsel also submitted that Recital D concerned only the state of repair of the Assets as they were to be used in the operation of the hotel. Counsel submitted that Recital D could not be elevated to a term that determined the scope of application of the warranties.
146I do not accept these submissions. The warranties are expressly qualified as being subject to the Licence Deed. Recital D is not "elevated". The Sale Contract states that the warranties are subject to the Licence Deed. The recital is not limited to a statement that Lescap Operations is satisfied with the state of repair of the assets it inspected. Rather, Lescap Operations represented that it had inspected the Assets (a defined term), and thus represented that at the date of inspection the Assets existed.
147Recital D was part of the Licence Deed, even though it was not an operative term of that deed. Hence the question is whether it qualifies the warranties in the Sale Contract. The fact that Recital D contains a representation by Lescap Operations and not Lescap Group does not answer the question whether the recital qualifies the warranties in Items 2 and 3, and if so, how it does. That depends on the meaning of the words "Subject to the Licence Deed ..." in Items 2 and 3 of Schedule 1 to the Sale Contract.
148A construction that would give a commercial and businesslike operation to the Sale Contract is to be preferred.
149The warranties in item 2 are as to ownership of the Assets, as to the vendor's not having parted with ownership, possession or control of the Assets, and as to the Assets being unencumbered. The Licence Deed qualifies these warranties in two ways. The first is by clause 16 of the Licence Deed. The second is by Recital D. Clause 16 provides:
"16. Title to Hotel
16.1 Management and Operation
The Owner covenants that the Licensee, upon fulfilling its obligations hereunder, shall have subject to the terms of this deed, full occupation, management and operation of the Property and the Hotel Business and the use of the Assets free of disturbance or hindrance by the Owner in its operation, management or control of the Property during the term of this deed. Except as stated in clause 16.2 the Owner will not be liable under this clause for disturbance by third parties, act of God, accident, or for exercise of the Owner's rights arising from this deed.
16.2 Perform All Obligations
The Owner covenants that throughout the term of this deed it will use all reasonable endeavours to ensure that the Licensee is not without prior written notice disturbed by any mortgagee of the Property or other deed affecting the Land, the Building or the Furniture, Fixtures and Equipment or Operating Equipment except that they may exercise their rights to enter, view and carry out their statutory obligations."
150The warranty in item 2.4 of schedule 1 was that none of the assets was subject to any encumbrance. That is qualified by clause 16 that contemplates that assets may be subject to a mortgage or other deed, but that Pacific Resort will use all reasonable endeavours to ensure that Lescap Operations is not disturbed by any mortgagee otherwise than by a mortgagee's exercising a right to enter, view and carry out statutory obligations. Thus Lescap Group could not complain if an asset were encumbered, provided Pacific Resort complied with clause 16.2.
151The second qualification is from Recital D to the Licence Deed. The implication from Recital D is that Lescap Operations had satisfied itself that the Assets existed at the time of inspection. Prima facie, this is directed to the physical presence of assets and not to their ownership. However, if it could be inferred from evidence that particular items were not situated at the hotel at the date of the Option Deed that the assets did not exist at all (in breach of the warranties in items 2.1 and 2.2) or that the vendor had parted with possession of them (in breach of the warranty in item 2.3) the words "Subject to the Licence Deed" would qualify the warranties in item 2 in the same way as they qualify item 3.2.
152There are two parts to item 3 of schedule 1. The first is the exclusion of any warranty in relation to the depreciation or depreciated value of Plant and Equipment and the property. There is no provision of the Licence Deed that could qualify that exclusion. Nor did counsel suggest otherwise. Hence the qualification to item 3 is as to the warranty in clause 3.2 that as at the date of the Option Deed the Fixtures, Fittings and Equipment and the Plant and Equipment were all located at the property and in the physical possession or control of the vendor. The only part of the Licence Deed that could qualify that warranty is Recital D, that Lescap Operations had represented that it had inspected Assets (which included the Fixtures, Fittings and Equipment (which in turn included Plant and Equipment)) and was fully satisfied with their state of repair. The necessary implication of that provision is that Lescap Operations had inspected the Fixtures, Fittings and Equipment and Plant and Equipment. The qualification to the warranty in clause 3.2 by the words "Subject to the Licence Deed" should be given work to do. That work is that the warranty in clause 3.2 does not apply except in relation to any Fixtures, Fittings and Equipment (which includes Plant and Equipment) that had been made available for inspection, but had been removed (otherwise than by the Licensee or purchaser) as at the date of the Option Deed.
153Such a construction of the warranties in items 2 and 3 mitigates the unbusinesslike consequences of clause 52.2. Lescap Operations had been given the list that became schedule 5 to the Sale Contract. It had had the opportunity to check that all of the items on the list were present at the property. It made the representation recorded in the recital to the Licence Deed that it had inspected the Assets and was satisfied with their state of repair, which must mean it was satisfied the Assets existed. If something was missing when it carried out its inspection, it could be expected to have drawn that to the owner's attention. A sensible commercial construction of the warranties is that the warranty that the Fixtures, Fittings and Equipment and Plant and Equipment would all be located at the property and in the physical possession or control of the vendor would not apply in so far as Lescap Operations had had the opportunity to satisfy itself as to the existence and location of those assets. In my view, that is the qualification meant by the words "Subject to the Licence Deed" in item 3. The warranty in item 3.2 would still have work to do. It would apply if Lescap Group could show that items that had been present when it inspected the Assets were not present as at the date of the Option Deed.
154Accordingly, to establish a breach of the warranties, Lescap Group must show that the items in schedule 5 that were not present at the hotel at the date of the Option Deed had been removed from the premises subsequent to the inspection or opportunity for inspection provided to Lescap Operations, or that the vendor had parted with the ownership, possession or control of assets after inspection or Lescap Operations' opportunity for inspection, or that Pacific Resort did not own the items.
155In the last case, Lescap Group must also show that the items were not Fixtures, Fittings and Equipment located at or used in connection with the operation of the hotel business that were leased by or on behalf of the vendor, or that if the assets were leased, that there was a breach of the warranty so far as it is capable of applying to leased assets. The reason for this qualification is that the definition of Fixtures, Fittings and Equipment includes such items, that is items leased by or on behalf of the vendor. (Items of Plant and Equipment in schedule 5 are also Fixtures, Fittings and Equipment.) It would be absurd if the warranty that the vendor was the legal owner of the Assets and entitled to sell and transfer full legal and beneficial ownership of them applied to leased assets. That absurdity is dealt with by construing the warranty as not applying to the ownership of leased assets, but (so far as the words permit) to the vendor's leasehold interest in such assets. In other words, leased assets included within Fixtures, Fittings and Equipment are included within the assets sold, and the vendor warrants that it has not parted with or encumbered its leasehold interest in such assets and is entitled to transfer such interest.
156Counsel for Lescap Group submitted that the absurdity should be resolved but rejecting the words "leased by or on behalf of" in the definition of Fixtures, Fittings and Equipment, in the context of the warranties in Item 2 of schedule 1. Counsel submitted that those words could not stand when read in the context of the overall purpose and object of the contract, namely, that the purchaser acquire the Assets that were owned by Pacific Resort.
157I do not agree. The key provision of the contract was the clause in the general conditions that "the vendor sells and the purchaser buys the property for the price under these provisions...". "Property" was defined to include "the inclusions". Clause 56 provided that "Included in the sale at no extra cost to the purchaser are the Additional Assets". The definitions of Additional Assets, and relevant components of Additional Assets are quoted at paras [21]-[23].
158It is not absurd that assets within the definition of Fixtures, Fittings and Equipment that were leased should be included in the sale. The only assets excluded from the sale were the Excluded Assets as defined, namely, assets owned by the manager and stock owned by the vendor.
159If leased assets were excluded from the sale, then the warranties would not apply to such assets. It would be absurd for the vendor to give warranties about assets that were not the subject of the sale.
160But if leased assets are included in the sale, as they are by the definition of Fixtures, Fittings and Equipment, it would be absurd if the purchaser could rescind because those assets were not owned by the vendor.
161The warranties do not dictate what is to be understood by the definitions of the assets sold, because the warranties are subsidiary to the main object of the contract, which is to identify what is sold for the price. But if the warranties did dictate what is included in the definitions of the assets sold, it would not assist Lescap Group, because the warranties would not apply to assets not included in the sale.
162The better construction is that the warranties apply to leased assets, in so far as they are capable of applying.
163Lescap Group has the onus of establishing a breach of warranty. It has the onus of establishing both the positive and negative elements of its cause of action (Currie v Dempsey (1967) 69 SR (NSW) 116 at 125). The onus of proving or disproving that the coffee machines were leased assets would rest on Pacific Resort if that were a true exception to or exemption from liability, or on Lescap Group if the words define the scope of the warranties (Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 at [214]).
164In my view, Lescap Group has the onus of showing that the coffee machines were not leased assets because it has the onus of showing that the items were Assets to which the warranty of ownership was capable of applying.
165In any event, Pacific Resort did not have an onus to adduce evidence to show that the machines were leased because Lescap Group's evidence in chief included the affidavits of Ms Smith and Mr McIntosh. Ms Smith deposed that at the time she commenced working in the hotel (13 November 2007) the coffee-making machines "were leased from outside sources". Mr McIntosh deposed:
"During the time that I have worked at the Hotel, the only espresso machine in the Hotel was located in the bar area. I believe that the machine is leased from Nescafe."
166Mr Chatterjee gave evidence of having executed the document headed "Equipment Loan Agreement" on 5 December 2007 with Nestlé. Counsel for Lescap Group submitted that this was not a lease. That question would only be relevant if it could be inferred that an agreement in the same terms was in place with Pacific Resort, or someone on its behalf. There was no evidence of Nestlé's arrangements with the previous operator of the food and beverage department (if there were a separate operator), or with Pacific Resort, except the evidence of Mr McIntosh and Ms Smith that the machines were leased.
167If the equipment had been provided by Nestlé to Pacific Resort or someone on its behalf on the same terms as the Equipment Loan Agreement made with Mr Chatterjee, in my view the equipment would have been leased by or on behalf of the vendor within the meaning of the definition of "Fixtures Fittings and Equipment". The equipment was provided to Mr Chatterjee free of charge, but on terms that he agreed to use the equipment only for dispensing Nestlé products. The equipment could not be removed from the site and signage could not be altered. Payment of rent is not a necessary criterion for the existence of a lease (Peter Butt, Land Law, 6th ed Lawbook Co at [15.03] and cases cited at footnote 5). What is essential is that the lessee be granted the exclusive right of possession of the goods. Nestlé could terminate the Equipment Loan Agreement at any time, but for so long as it remained on foot, it was necessarily implied that Mr Chatterjee should have the exclusive right of possession of the equipment. The regulation of Mr Chatterjee's use of the equipment did not deprive him of the exclusive right of possession.
168Hence, if it could be inferred that Nestlé had made the coffee-making equipment available to Mr Chatterjee on the same terms as it had formerly been made available to Pacific Resort or someone on its behalf, the warranty in clause 2 would not apply because it was equipment leased by the vendor or on its behalf. The lease would be terminable at any time, but termination of the lease by Nestlé would not be a breach of Pacific Resort's warranty.
169The substance of the matter is that the coffee-making machines owned by Nestlé were available for the exclusive use of the food and beverage operator appointed by Lescap Operations. Lescap Group has not established that Pacific Resort breached the warranties in items 2.1-2.3 of schedule 1 in relation to the coffee-making machines.
170There is no evidence that any of the assets that were not present as at the date of the Option Deed had been present when Lescap Operations inspected or had the opportunity to inspect the assets.
171For these reasons I conclude that Lescap Group has not established a breach of warranties. It follows that it was not entitled to rescind.