MAAG Developments Pty Ltd v Oxanda Childcare Pty Ltd [2018] VSCA 289

APPEALS - Whether applicant able to raise new argument not expressly put to trial judge - Where basis of new argument was before trial judge - Where new argument as to contract interpretation a question of law only - Where no prejudice identified by respondent - Applicant permitted to raise argument on appeal.

1 In March 2015, Oxanda Management Danke Pty Ltd ('Vendor') owned land in Altona Meadows, Victoria ('the land'). The Vendor and a related company, Oxanda Childcare Pty Ltd ('Oxanda' or the 'Tenant'), had obtained one or more planning permits from the local council for the purposes of a childcare centre being constructed on the land. In these circumstances, they entered into contractual arrangements with MAAG Developments Pty Ltd ('MAAG' or the 'Landlord') under which:

(1) the Vendor agreed to sell the land to MAAG under a contract of sale; and

(2) on settlement of the contract of sale, MAAG agreed to lease the land to Oxanda following construction and fitout of the childcare centre ('agreement for lease' or 'Deed').

2 The contract of sale was entered into on 11 March 2015. At the time of settlement of that contract, on 21 April 2015, MAAG and Oxanda entered into the agreement for lease - which provided that it was 'executed and delivered as a Deed' on that date. MAAG became the registered proprietor of the land on 27 April 2015.

3 Clause 2.1(b) of the agreement for lease required MAAG to 'do all reasonable things to obtain and keep current' all the necessary regulatory approvals enabling: (1) the building and other works to be undertaken by MAAG on the land; and (2) Oxanda to lawfully occupy the premises constructed by MAAG on the land for the purpose of a childcare centre ('Landlord Approvals'). No issue arises as to whether MAAG did the required 'reasonable things', and it is common ground that the Landlord Approvals were not obtained by the 'Landlord's Works Approval Date' specified in the agreement for lease.[1] In these circumstances, MAAG contends that clause 2.1(e) of the agreement for lease entitled it to terminate that agreement. By notice dated 7 September 2015 it purported to exercise that right.

If:

(i) the Landlord Approvals are not obtained; and

(ii) the Landlord has not settled its purchase of the Land,

by the Landlord's Works Approval Date on terms satisfactory to the Tenant (acting reasonably):

(iii) either party may be written notice to the other terminate this Deed and this Deed will be at an end; and

(iv) neither party will have any right or claim against each other...[2]

5 On the face of clause 2.1(e), the right to terminate on or after the Landlord's Works Approval Date requires two things to have happened before that date:

(1) failure to obtain the Landlord Approvals; and

(2) the contract of sale remaining uncompleted ('not settled').

6 As already stated, however, MAAG settled its purchase of the land at the same time the agreement for lease was entered into. In these circumstances, MAAG contends that, on a proper construction of clause 2.1(e) of the agreement for lease, sub-paragraph (e)(ii) should be ignored, and it was therefore entitled to serve its notice of termination.

7 Oxanda disagrees. It contends that there is no termination right under clause 2.1(e) unless both specified events have not occurred by the Landlord's Works Approval Date. As MAAG had settled the purchase of the land already, sub-paragraph (e)(ii) could never be met, MAAG's termination notice was thus invalidly given, and its purported termination constituted a repudiation of the agreement for lease. Oxanda contends that it has accepted that repudiation and is entitled to damages.

8 Oxanda sued MAAG in the Commercial Court Division. The parties agreed that the only issue for determination by the Court was whether MAAG was entitled to terminate the agreement for lease. If not, they agreed that MAAG's continued reliance on its termination notice amounted to a repudiation of the agreement for lease and that Oxanda was entitled to damages in the sum of $3.5 million.

9 A Commercial Court judge found in favour of Oxanda and awarded it damages of $3.5 million. MAAG applies for leave to appeal against that decision. In order to understand the grounds of appeal, and the respective contentions of the parties, it is necessary to outline the relevant contractual arrangements in more detail.

10 The contract of sale is dated 11 March 2015, and its executed counterparts were exchanged on that day. The following terms of the contract of sale are relevant to the central issue for determination.

11 First, Oxanda is not a party to the contract of sale, which is between the Vendor and MAAG as purchaser. Oxanda is, however, a related company of the Vendor, and the contract of sale includes obligations on the Vendor to cause Oxanda to enter into the agreement for lease.

12 Second, the contract of sale contains many definitions. Relevantly:

(1) The agreement for lease is defined and annexed to the contract of sale. It is both referred to in the terms of the contract of sale and was entered into on settlement of the contract of sale. The contract of sale and the agreement for lease are obviously related commercial transactions. Further, the definition of 'Contract' supports this, as it includes as part of the contract of sale 'any schedule and annexures'.

(2) 'Authority' is defined to mean 'any governmental, semi-government, administrative, municipal or judicial body, authority or entity exercising any powers or functions under a Law'.

13 Third, special conditions 6, 7, 18 and 19 provide, in effect, that the risk that any Authority would not grant the necessary approvals to enable the land to be developed lies with MAAG. For example, special condition 19(a)(iv) provides that:

this Contract is not conditional upon the purchaser or the vendor obtaining any Authority approvals including planning permits or any other approvals for the purchaser's proposed use of the property.

14 In support of this allocation of risk, special condition 20(a) provides that:

On settlement, the vendor assigns to the purchaser all the vendor's right, title and interest in the planning application dated 25 June 2014 attached to this contract at Annexure 2 and the planning permit attached to this Contract.

15 Fourth, special condition 16 provides that MAAG may nominate an additional or substitute 'transferee', while remaining liable itself under the contract of sale. If MAAG exercises that nomination right, special condition 16.1(a)(iii) relevantly provides that MAAG must:

at least 5 Business Days before the due date for settlement ... deliver to the vendor's legal practitioner:

(A) a signed notice nominating the additional or substitute transferee;

(B) the Agreement for Lease (in duplicate) in a form approved by the Vendor:

(1) and amended as follows:

(i) delete the name of the Landlord wherever occurring and replace with the name of the transferee of the title to the property; and

(ii) delete the ACN of the Landlord wherever occurring and replace with the ACN of the transferee of title to the property (if applicable); and

(2) executed by the transferee of title to the property as Landlord ...[3]

16 Fifth, special condition 17.1 provides that: '[O]n settlement ... the Agreement for Lease must be ... entered into ... by the Landlord and the Tenant named in the Agreement for Lease ...'.[4]

17 Sixth, special condition 22 - which is in different typeface and was apparently added late in the negotiation of the contract of sale - is in the following terms:

Further condition regarding lease documents

Notwithstanding anything else in this contract, the parties agree that:

(a) within 24 hours after exchange of this contract, the parties will execute the Agreement for Lease; and

(b) settlement of this contract is conditional on execution of the Agreement for Lease.[5]

18 Consistent with the contract of sale, the agreement for lease was entered into 'on settlement' of the contract of sale on 21 April 2015, as follows:

(1) Before settlement, Oxanda delivered its executed counterpart of the agreement for lease to MAAG's solicitors.

(2) At the time of settlement, MAAG delivered its executed counterpart of the agreement for lease to Oxanda's solicitors.

(3) Thus the agreement for lease was 'entered into', in the sense that it became binding as a deed, at the time of - 'on' - settlement. It was, accordingly, dated 21 April 2015.

19 The first recital to the agreement for lease reflects that state of affairs, because it assumes settlement of the contract of sale has occurred prior to the agreement for lease being entered into. Recital A states:

The Landlord is, or is entitled to be, registered as owner of the Land.

20 The agreement for lease contains a number of key definitions, as follows:

Approvals means the approval of every relevant government, statutory authority and service provider, including the benefited party of any easement registered over the Land, for the relevant works to be lawfully commenced and completed.

Deed means this deed of agreement for lease ...

Final Sunset Date means [24 months from 21 April 2015].

Landlord's Works means:

(a) all work to be undertaken (or already undertaken) by or on behalf of the Landlord in respect of the Premises as referred to in Schedule 1 of this Deed; and

(b) the building work generally described in the Specifications to be carried out (or already carried out) by the Landlord on the Land.

Landlord's Works Approval Date means [120 days after 21 April 2015].

Lease means the form of lease of the Premises prepared by or on behalf of the Landlord and executed or intended to be executed by the parties to this Deed on or about the date of this Deed and included at Schedule 3 of this Deed.

Practical Completion means that stage when:

(a) a Certificate of Final Inspection, or Certificate of Occupancy (as required) for the Landlord's Works has issued (which may or may not contain conditions);

(b) all Services (as that term is defined in the Lease) are connected to the Premises by way of permanent connection; and

(c) the Landlord's Works for the Premises are reasonably complete as determined by the Project Manager (despite any minor omissions or minor defects that are not then complete),

and Practically Completed has a corresponding meaning.

Premises means the Land and the improvements to be constructed on the Land in accordance with this document.

Tenant's Works means:

(a) all works to be undertaken by or on behalf of the Tenant in respect of the Premises as referred to in Schedule 2 of this Deed;

(b) any additional or other work to be carried out by the Tenant under this Deed; and

(c) so as to fully complete and fitout the Premises ready for the Tenant's business.

21 Clause 4.1(b) of the agreement for lease obliged MAAG to grant and Oxanda to take a lease on the terms contained in a form of lease contained in a schedule and 'intended to be executed by the parties' to the agreement for lease 'on or about the date of' that agreement. The lease was to commence on the 'Date of Commencement', defined as the earlier of the completion of the Tenant's Works or commencement of trade by Oxanda at the childcare premises.

22 Although the agreement for lease does not refer to the contract of sale, it is evident from recital A, clause 4.1(b), and the terms of the contract of sale, that they were related transactions. Neither party argued to the contrary.

23 The most relevant provisions of the agreement for lease are contained in clauses 2.1 and 2.3, which provide as follows:

2.1 Landlord's Works Approvals

(a) The Landlord and the Tenant agree and acknowledge that the Tenant has obtained [the] planning permit ... required for the Landlord's Works (Planning Permit) and has assigned the Planning Permit (and the intellectual property in it) to the Landlord.

(b) The Landlord will do all reasonable things to obtain and keep current all necessary Approvals for the Landlord's Works and for the Tenant to lawfully occupy the Premises [as a childcare centre] ... under the Lease [with certain exceptions]... (Landlord Approvals).

(c) The Landlord acknowledges and agrees that the Landlord will:

(i) obtain the prior written consent of the Tenant (which may be withheld or granted with conditions, by the Tenant acting reasonably) to the form and content of the applications the Landlord makes for Landlord Approvals;

(ii) ...

(iii) consult with the Tenant if any Government Authority indicates any application requires modification before a Landlord Approval will issue. For clarity, the Landlord agrees to only make the modification if the Tenant has given its prior consent (which may be withheld or granted with conditions, by the Tenant acting reasonably).

(d) ...

(e) If:

(i) the Landlord Approvals are not obtained; and

(ii) the Landlord has not settled its purchase of the Land,

by the Landlord's Works Approval Date on terms satisfactory to the Tenant (acting reasonably):

(iii) either party may by written notice to the other terminate this Deed and this Deed will be at an end; and

(iv) neither party will have any right or claim against each other, and the Security Deposit will be refunded in full to the Tenant.

(f) The Landlord and Tenant agree:

(i) the Tenant must apply for and actively seek and prosecute [its application for Approval to operate a childcare business from] ... the Premises [Provider Approval];

(ii) if Provider Approval does not issue by... [two months after certain steps to be taken by the Tenant following completion of the Landlord's Works (Provider Approval Date)], then:

(A) ...

(B) ...

(C) the Landlord may immediately terminate this Deed and Lease.

2.3 Cancellation

(a) Despite anything to the contrary, if the Landlord has not:

(i) commenced construction of the Landlord's Works on or before the date that is six months after the date of this document, the Tenant or Landlord may by written notice to the other after that date, cancel this Deed; or

(ii) effected Practical Completion by the Estimated Date of Practical Completion, then:

(A) ...

(B) if Practical Completion has not been effected by the Final Sunset Date, the Tenant (provided it has not contributed to such failure) or Landlord may by written notice to the other after that date cancel this Deed. ... [6]

24 Reading the agreement for lease as a whole, it is clear that the parties intended to give four opportunities for one or both of them to terminate the agreement for lease, as follows:

(1) If the Landlord Approvals are not obtained by the Landlord's Works Approval Date, either party may terminate - clause 2.1(e);

(2) If construction of the Landlord's Works has not commenced within 'six months after the date of this document', either party may terminate - clause 2.3(a)(i);

(3) If Practical Completion does not occur by the Estimated Date of Practical Completion, on the Final Sunset Date, either party may terminate - clause 2.3(a)(ii)(B).[7]

(4) If the Tenant does not get Approval to operate a childcare business at the Premises by the Provider Approval Date, MAAG may terminate - clause 2.1(f).

25 Against this background, and review of the relevant provisions of the contract of sale and the agreement for lease, we turn to consider the reasons of the trial judge.

26 The trial judge summarised the principles to be applied in interpreting commercial contracts. In doing so, he noted that contractual interpretation requires, among other things, that consideration be given to the commercial purpose or objects of the contract and the need to avoid an interpretation 'making commercial nonsense or working commercial inconvenience'.[8] To that, we would add that, in construing commercial contracts: 'Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties ... intended to produce a commercial result"'.[9]

27 The trial judge then characterised the commercial purpose of the transactions effected by the contract of sale and the agreement for lease - which he called the 'deal' - as involving a sale of the land to MAAG 'on the condition that MAAG would build a childcare centre on it to be used and occupied by Oxanda'.[10]

28 Next, after reviewing the submissions of the parties and relevant texts and case law about the circumstances where 'and' may need to be read as 'or', or vice versa,[11] the trial judge summarised the legal position on that topic in the following terms:

In my opinion, having regard to the decisions and commentary to which reference has been made, the overwhelming position of the courts in approaching matters of construction involving 'and' and 'or' is that these words should, ordinarily, be given their ordinary and natural meaning unless the language or context indicates otherwise.[12]

29 In this context, the trial judge considered the competing contentions of the parties as to whether the context indicated that 'and' should be read 'or'. The judge noted MAAG's contentions that, given the contract of sale had settled at the same time as the agreement for lease was entered into, as required by the contract of sale, giving 'and' its ordinary conjunctive meaning would work commercial nonsense or inconvenience and thus produce a commercially absurd result. In rejecting these contentions, the trial judge reasoned as follows:

Oxanda, on the other hand, submits that cl 2.1(e) has utility in circumstances that it was open to MAAG to complete the exchange of executed counterparts of the Agreement for Lease before completion of the Contract of Sale. Once the Agreement for Lease is in operation, it says that either party would only have a right to terminate if the Landlord Approvals are not obtained and the Landlord has not settled its purchase of the Land by the Landlord's Works Approval date. As submitted by Oxanda it is clear in my view from the provisions of the Contract of Sale, particularly special conditions 16 and 17 and also the 'overarching' provisions of special condition 22 that the parties contemplated the entering into, execution and exchange of counterparts of the Agreement for Lease prior to settlement of the Contract of Sale. Consequently, cl 2.1(e) would have operation with respect to both its conditions or elements. So it cannot be said, against the construction contended for by Oxanda, that on the face of these documents - the Contract of Sale and the Agreement for Lease - this would leave cl 2.1(e) with no operation. And, having regard to the effect of the operation of special condition 16 it cannot be said that the possible operation of cl 2.1(e) was so unlikely as to be illusory.[13]

30 Thus, the trial judge interpreted the contract of sale as contemplating that the parties could enter into the agreement for lease before settlement. Put another way, the judge held that special conditions 16, 17 and 22 of the contract of sale permitted that to occur; and thus it could not be said that reading 'and' in clause 2.1(e) as conjunctive would give rise to a 'possible operation of cl 2.1(e) [that] was so unlikely as to be illusory'.[14]

31 The trial judge then used that reasoning in accepting Oxanda's contention that it was MAAG's interpretation which made no commercial sense. The trial judge summarised Oxanda's contention as follows:

Additionally, Oxanda submits that the construction contended for by MAAG makes no commercial sense. It says that MAAG's construction would permit it to avoid its obligations to lease back the Land to Oxanda, after failing to obtain the Landlord Approvals by the Landlord's Works Approval Date, regardless of the fact that MAAG had acquired the land as part of what was a sale and leaseback transaction. Consequently, the sale and leaseback 'deal' could be undone to the prejudice of one or other of the parties. In my view this is certainly a possible consequence as cl 2.1(e) is, subject to parties observing other obligations under the Agreement for Lease, a 'walk away' provision.[15]

32 In accepting that submission, the judge reasoned:

As to the issue of commercial absurdity, I accept the submission by Oxanda that MAAG's construction would have the potential to permit it to avoid its obligations to lease back the Land after failing to obtain Landlord Approvals and, as indicated previously, it does not follow that cl 2.1(e) construed as contended by Oxanda necessarily leaves the provision with no work to do. So, looking at the Agreement for Lease at the time it was drafted and agreed to by the parties as part of the sale and leaseback 'deal', these provisions did have a real prospect of operation. The arguments as to commercial sense or absurdity raised by MAAG do indicate some possible undesirable consequences with respect to the timing of termination of the Agreement for Lease for failure to settle the purchase as a result of their having to wait up to 120 days until the Landlord's Works Approval Date is reached. However this is what the parties have agreed in my opinion, and in clear language. There is, in my opinion, no commercial absurdity in construing cl 2.1(e) as contended for by Oxanda. As observed previously it is a provision which allows the parties to 'walk away' from the 'deal' if after 19 August 2015 the purchase of the Land has not been settled - so the vendor has not received the purchase price - and the Agreement for Lease cannot proceed because the Landlord's Works proposed have not been approved and cannot be achieved. Thus the commercial purpose of the 'deal' is lost - so the parties are free to 'walk'. For this to occur though it is evident that one or other party would be prejudiced if both of the conditions or elements of cl [2.1(e)] had not first come into play.[16]

33 Reading this paragraph as a whole, it appears that the trial judge rejected MAAG's submissions on commercial absurdity because:

(1) MAAG's interpretation would allow it to terminate the agreement for lease - in the judge's words 'avoid its obligations to lease back the Land' - if the Landlord Approvals were not obtained by the Landlord's Works Approval Date.

(2) Although there were 'possible undesirable [commercial] consequences' if clause 2.1(e) is given its ordinary meaning, the ordinary meaning involves no commercial absurdity because clause 2.1(e) had a 'real prospect of operation' if the agreement for lease was entered into before settlement of the contract of sale, and in these circumstances the clear language should not be displaced by the commercial context.

34 In reaching his conclusion, it appears that the trial judge treated the commercial purpose of the contract of sale and the agreement for lease, when read together, as a 'sale and lease back "deal"', which should not be avoided in the absence of clear language.

35 There are two grounds of appeal, each with many sub-paragraphs. Ground 1 alleges error by the trial judge in his interpretation of clause 2.1(e). Ground 2 alleges error by the trial judge in not finding that MAAG's termination notice was validly given. The parties agree that, if leave to appeal is granted on ground 1 and the appeal succeeds on that ground, ground 2 should also be allowed. In that result, Oxanda's damages claim would be dismissed.

36 Given its length and the detail of the argument which it contains, it is convenient to quote the whole of ground 1:

Ground 1: the learned trial judge erred in accepting a construction of clause 2.1(e) that required both of the circumstances set out in sub-clauses 2.1(e)(i) ('the Landlord Approvals are not obtained') and 2.1(e)(ii) ('the Landlord has not settled its purchase of the Land') to be present by 'the Landlord's Works Approvals Date,' before either party could exercise the right to terminate under clause 2.1(e)(iii) (J[36], [40][48]).

6.1. The learned trial judge's failure to properly construe clause 2.1(e) of the Agreement for Lease in part resulted from the following misconceptions or erroneous assumptions and findings:

6.1.1. his Honour erroneously characterised the commercial purpose of the transaction as being, in effect, a sale of Land by Oxanda to MAAG, on the one hand, coupled with a guarantee by MAAG that it would construct and lease a child-care centre to Oxanda. That was inconsistent with the provisions of the Agreement for Lease, which contemplated that construction might not be approved or completed and therefore gave the parties the ability to dissolve the agreement, at various stages, without fault;

6.1.2. his Honour misconceived the evidence and objective circumstances and found, incorrectly, that special conditions 16, 17 and 22 of the Contract of Sale made it 'clear... that the parties contemplated the entering into, execution and exchange of counterparts of the Agreement for Lease prior to settlement of the Contract of Sale.' (J[40], [45], [47]);

6.1.3. at J[48] his Honour purported to examine (and did so in error) the Agreement for Lease 'at the time it was drafted and agreed to by the parties as part of the sale and leaseback "deal"' to find that both sub-clauses 2.1(e)(i) and (ii), read together, had a 'real prospect of operation';

6.1.4. his Honour further erred in finding there was 'no commercial absurdity in construing cl 2.1(e) as contended for by [the respondent].' (J[48]);

6.1.5. the trial judge's analysis of the meaning and conjunctive operation of 'and' in clause 2.1(e)(i) (at J[27]-[32], [36], [47]) was ultimately an irrelevant distraction from the proper assessment of what a reasonable businessperson would have understood clause 2.1(e) to mean (notwithstanding that a conjunctive 'and' was included within it) and whether, having regard to the evident redundancy, absurdity or inconsistency of the words 'and the Landlord has not settled its purchase of the Land' in clause 2.1(e), those words should be omitted or ignored as a matter of an orthodox application of principles of contractual construction.

6.2. Additionally, the learned trial judge's construction of clause 2.1(e) of the Agreement for Lease was erroneous because it was not what reasonable businesspersons would have understood clause 2.1(e) to mean, having regard to the text, context and commercial purpose (as objectively determined) of the transaction as a whole (Objective Context), which included:

6.2.1. the relevant transaction was made up of two discrete elements (namely, a Contract of Sale between [the Vendor and MAAG] and, separately, the Agreement for Lease between [MAAG and Oxanda]);

6.2.2. at the time of entering into the Agreement for Lease, neither party to it could guarantee that the relevant Approvals would be obtained or that the development of the child-care centre, anticipated in the Agreement for Lease, would be completed or ultimately leased;

6.2.3. [the] sale of land to [MAAG] was not conditional on [Oxanda] first receiving a completed child-care centre and lease from the applicant;

6.2.4. the text of special condition (SC) 17 of the Contract of Sale required the Agreement for Lease to come into existence as an agreement 'on settlement' of the purchase of Land, not before (which SC 22 did not change);

6.2.5. prior to entering into the Contract of Sale [the Vendor, Oxanda and MAAG] (by their representatives) all confirmed to each other that the Agreement for Lease was to come into existence as an agreement on settlement of the purchase of Land, not before;

6.2.6. as a matter of fact, on 21 April 2015, the Agreement for Lease was only entered into and came into existence as an agreement on settlement of the purchase of Land (J[18]);

6.2.7. the operation of the Agreement for Lease was predicated on [the] sale of the Land to [MAAG] having settled;

6.2.8. the text of clause 2.1(e)(ii) of the Agreement for Lease is (unless properly construed) prima facie contradictory, inconsistent or absurd, in that, it purports to enliven a right of termination only if settlement of the purchase of Land had not occurred by a date ('Landlord's Works Approval Date'), which date was itself to be determined by reference to the date the Agreement for Lease came into existence, namely "on settlement" of [MAAG's] purchase of the Land; and

6.2.9. the relevant clause (2.1(e)) was a sub-clause of 'clause 2 Landlord's Works' within the Agreement to Lease, which enabled the parties to terminate the Agreement for Lease at the 'Approvals' stage, where other sub-clauses within clause 2 imposed obligations (or granted rights, including as to termination) at later stages of the construction process.

6.3. His Honour should have found, by reference to the Objective Context, that on a proper construction of clause 2.1(e) of the Agreement for Lease, a reasonable business person would have understood clause 2.1 (e) of the Agreement for Lease to mean that:

6.3.1. clause 2.1(e) enabled either party to terminate the Agreement for Lease in circumstances where 'Landlord Approvals' were not obtained by the 'Landlord's Works Approval Date' and without needing to establish fault on any parties' part; and

6.3.2. as a matter of objective fact, the inclusion of the circumstance described as 'the Landlord has not settled its purchase of the Land' in the text of clause 2.1(e)(ii) of the Agreement for Lease was redundant surplusage and meaningless (or would lead to absurdity and inconsistency), with the result that, in order to avoid absurdity or inconsistency, it was necessary to omit or ignore the words 'and (ii) the Landlord has not settled its purchase of the Land' in clause 2.1(e) of the Agreement for Lease.

with the result that, in order to avoid absurdity or inconsistency, it was necessary to omit or ignore the words 'and (ii) the Landlord has not settled its purchase of the Land' in clause 2.1(e) of the Agreement for Lease.[17]

37 Before considering the rival contentions, it is first necessary to consider whether MAAG should be allowed to rely on any contentions which Oxanda alleges were not made at trial.

Should MAAG be allowed to rely on arguments not made at trial?

38 MAAG's principal contention on appeal is that, having regard to the structure and terms of the contract of sale and the agreement for lease, clause 2.1(e)(ii) is inconsistent with the intention of the parties; with the result that it cannot have been intended and is properly to be disregarded as redundant surplusage. On this basis, MAAG contends that this Court should construe clause 2.1(e) as containing only sub-paragraph (i). It contends that this result should be reached by simply omitting or ignoring the words 'and (ii) the Landlord has not settled its purchase of the Land' ('surplusage contention').

39 Oxanda contends that MAAG should not be entitled to raise the surplusage contention because that construction was not advanced before the trial judge.

40 In written and oral submissions on the application for leave to appeal, MAAG contended that its surplusage contention was, in substance, argued at trial. Reference was made to various aspects of the pleadings, written submissions and transcript of argument below. MAAG contends that those materials demonstrate that:

(1) while it did not expressly make the surplusage contention, it did so in effect, by contending below that sub-paragraph (e)(ii) was inconsistent with special condition 17 of the contract of sale and that, accordingly, sub-paragraph (ii) was redundant surplusage which was never intended to have any operation; and

(2) its contentions below were based on both the structure and proper interpretation of the two contracts on the one hand, and on the fact that settlement occurred contemporaneously with the entry into the agreement for lease on the other.

41 By reference to similar material, Oxanda contended to the contrary. In our view, reading the relevant trial materials as a whole, the substance of the arguments sought to be advanced by MAAG on appeal does not markedly differ from its construction arguments put below. We accept, however, that the surplusage contention was not expressly put to the trial judge.

42 In these circumstances, the relevant principles to be applied were recently summarised by this Court in Naumovski v Ugrinovski.[18] In that case, the applicant for leave to appeal sought to resile altogether from a construction of certain heads of agreement which had been advanced below. That was a more extreme departure from the case below than we have here. But even in such a case, the Court said that it would have been prepared to entertain the argument if it had any merit.[19] In reaching that conclusion, the Court referred to[20] an earlier decision of this Court in Boz One Pty Ltd v McLellan,[21] where the relevant principles were summarised in the following terms:[22]

Ordinarily, a party will not be permitted to raise on appeal an issue which was not pursued by that party at first instance unless it raises a pure question of law (such as the construction of a statute or some other instrument) or a question that arises out of facts which are not in dispute.[23] Leave to raise a new argument on appeal usually will not be granted if evidence could have been given (including by way of cross-examination) which possibly could have prevented the argument from succeeding at trial.[24]

43 Counsel for Oxanda acknowledged these principles were capable of application to this case, and even acknowledged that he could not point to any different evidence which Oxanda would have called at trial if the argument now sought to be relied on had been put. Counsel expressly conceded that Oxanda was unable to point out any specific prejudice arising from the surplusage contention being raised for the first time on appeal. In circumstances of that kind, leave to raise a new argument is more readily given, especially when the disputed question is one of law, such as the proper interpretation of a contractual term, as here.

44 But, notwithstanding these concessions, Oxanda submits that we should exercise our discretion to refuse MAAG leave to rely upon the surplusage contention. Particular reliance was placed upon the fact that this proceeding arises out of a Commercial Court dispute.[25] In the circumstances of this case, however, especially given the substance of the construction arguments advanced below, we do not see such a departure from the case conducted below that the Commercial Court context should deprive MAAG of the opportunity to present a modified construction of clause 2.1(e) in this Court. In all the circumstances, it would in our view be unjust to shut out the argument.

45 To the extent necessary, we give leave to MAAG to raise the surplusage contention.

Ground 1: Did clause 2.1(e) give a right to terminate after settlement of the contract of sale?

46 There was no dispute as to the general principles of contract interpretation to be applied in this case. This is primarily because it is unnecessary to look outside the words of the contract of sale and the agreement for lease, when construed as a whole, in order to resolve the issue for determination. In such circumstances, it is sufficient to set out the following passage from the plurality judgment (French CJ, Hayne, Crennan and Kiefel JJ) in Electricity Generation Corporation v Woodside Energy Ltd:

The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach ... will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that the parties ... intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it 'making a commercial nonsense or working commercial inconvenience'.[26]

47 Further, as we have said, the parties agree that the proper interpretation of the agreement for lease is informed by the terms of the contract of sale, because those two documents constitute the commercial 'deal' in the sense discussed above.

48 MAAG also relies on the decision of the New South Wales Court of Appeal in Update Constructions Pty Ltd v Rozelle Child Care Centre Ltd,[27] to support its contention that it is open to the Court to simply disregard sub-paragraph (ii) from clause 2.1(e). Coincidentally, that case also concerned the construction of childcare premises. The relevant contract to be interpreted was a fixed sum building contract. The contract was in a standard form and, as written, contained a general variation clause (clause 8) with a price fixing formula to be applied to such variations. Because the proprietor was using a Commonwealth government grant to build the childcare centre, and that grant was given on condition that no funds would be available for variations arising during construction unless prior agreement was reached with the Minister, the parties deleted clause 8 from their building contract.

49 But clauses 6 and 16 of the standard form contract remained. Their subject matter was not general variations (dealt with under the deleted clause 8) but required variations, either because variations were necessary to comply with statutory notices and the like (clause 6) or because the variations were necessary due to unanticipated 'below the surface' site conditions (clause 16). In the event that either of these variations was required, the building contract cross-referred to the general variation clause (clause 8) which had been deleted. Clause 6 provided that any variation under that clause would 'be deemed to be a variation under clause 8', and clause 16 provided that any variation under that clause would 'be dealt with in accordance with clause 8'.

50 There were variations under both clauses 6 and 16. The builder's variation claims were the subject of arbitration and an application for leave to appeal to a single judge of the New South Wales Supreme Court. On appeal, the Court of Appeal considered the effect of the deletion of clause 8 on the operation of clauses 6 and 16, in the context of the builder's claims to be paid for necessary variations within the meaning of those clauses. It is only necessary to refer to the reasoning concerning the clause 16 claim. As well as providing that the builder was required to undertake the necessary variations where the below-the-surface site conditions were not as described in the contractual drawings and specifications, clause 16(a) constituted a contractual warranty by the proprietor that the site would 'satisfactorily support' the proposed building works. On its face, clause 16(e) incorporated the deleted clause 8, as follows:

Should the Builder consider that the Works as shown on the Drawings or described in the Specification require to be varied because of conditions encountered below the surface of the site, the Builder shall forthwith notify the Proprietor and obtain his instructions before proceeding and any consequent variation of the Works shall be dealt with in accordance with Clause 8 of these Conditions ...[28]

51 The judge at first instance had determined that the reference in clause 16(e) to clause 8 deprived clause 16(e) of any operation, and the whole of clause 16(e) was therefore rendered inoperative. Priestley JA (Kirby P and Samuels JA agreeing) rejected that interpretation, in the following terms:

[The judge below] thought the facts that cl 8 of the printed form was struck out, and the words 'and any consequent variation of the works shall be dealt with in accordance with cl 8' meant the whole of subcl (e) became inoperative. Whether or not this is so depends on whether the last quoted words from subcl 16(e) can be disregarded, leaving the remainder of the subclause operative. The deletion of cl 8 made the quoted words meaningless. As such they can be disregarded; see Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 at 427, unless to disregard them would mean disregarding the main purport and substance of the clause in which they appear, or would alter entirely the scope and intention of the agreement ... The basic rule is to try to give effect to the intentions of the parties, gathered from the provisions of the whole contract. In the present case I do not think it is in any way inconsistent with the intentions of the parties simply to ignore the quoted words. ... It seems to me that the contract as a whole makes better sense and is more consistent with the intention of the parties derived from the rest of the contract generally, and particularly cl 16(a) to cl 16(d), if the words quoted from subcl (e) are ignored. The result of that view is that the true construction of the contract would not prevent Update recovering damages for breach of the cl 16(a) warranty.[29]

52 In his concurring judgment, Kirby P stated that:

The foregoing approach to the construction of the contract does the least offence to the presumed intention of the parties when they executed it. ... It is sufficient to dispose of the claim within the contract, in the way that Priestley JA has demonstrated, by a little sensible pruning of the words used.[30]

53 As noted in Update Constructions, the governing authority in Australia is the decision of the High Court in Fitzgerald v Masters.[31] In that case, Dixon CJ and Fullagar J stated as a general principle that:

Words may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency.[32]

54 In England, the principle has been expressed in terms that clear mistakes may be corrected by this process. For example, in Chartbrook Ltd v Persimmon Homes Ltd,[33] Lord Hoffmann said that:

there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant.[34]

55 Thus, where it is clear on a proper interpretation of a contract as a whole that 'something has gone wrong with the language' so as to indicate a mistake has been made, whether because the words do not make sense in context or because it is necessary to alter them to avoid absurdity or inconsistency, the Court may substitute words, insert words, delete words or rearrange words as necessary.[35]

56 Based on these principles of interpretation, MAAG contends that the ordinary meaning of clause 2.1(e) demonstrates that something has clearly gone wrong in the drafting of that clause, because it is contrary to the structure and other terms of the contract of sale and agreement for lease when construed as a whole. Thus, MAAG contends that the addition of sub-paragraph 2.1(e)(ii) is inconsistent with the two contracts when construed in their full context and having regard to their commercial purpose.

57 As to commercial purpose, MAAG's contentions begin with a criticism of the trial judge's characterisation of the commercial purpose of the 'deal'. Its contentions largely mirror those we have summarised above when setting out the judge's reasons. MAAG points to the fact that it purchased the land without any guarantee that a childcare centre could be constructed on it, or could be constructed by a particular time, with the result that there was no guarantee that the agreement for lease would ever lead to a lease from it to Oxanda commencing.

58 Next, MAAG contends that the judge erred in concluding that the contract of sale contemplated or permitted the agreement for lease to be executed before the contract of sale was settled. It contends that special conditions 16, 17 and 22 are inconsistent with the trial judge's conclusion, and relies on the coincidence between its construction and recital A to the agreement for lease - which makes it plain that the parties intended that the contract of sale would be settled either before, or at the time of, entering into the agreement for lease.

59 On this basis, MAAG contends that something has clearly gone awry in the drafting of clause 2.1(e), as the addition of sub-paragraph (ii) is inconsistent with the contract of sale and the agreement for lease when construed together as a whole and, in that context, leads to commercial nonsense or inconvenience. On this basis, it contends that sub-paragraph (e)(ii) can be disregarded in accordance with the principles discussed above, so as to make it consistent with the presumed intention of the parties to give either party an opportunity to terminate the agreement for lease if the Landlord Approvals were not obtained by the Landlord's Works Approval Date 'on terms satisfactory to the Tenant (acting reasonably)'.

60 Oxanda's key contentions involved the following steps.

61 First, Oxanda relies on the text of clause 2.1(e). It contends that the text of that clause unambiguously requires both (i) and (ii) to exist at the relevant date.

62 Second, Oxanda contends that reference to the context and commercial purpose of the contract of sale and the agreement for lease does not show that clause 2.1(e)(ii) is internally inconsistent with the two contracts when construed as a whole, or works commercial nonsense or inconvenience. It relies on the trial judge's reasoning that the contract of sale contemplated or permitted the agreement for lease to be entered into before settlement of the contract of sale; and contends that recital A to the agreement for lease cannot change the meaning of special condition 17 of the contract of sale or clause 2.1(e) of the agreement for lease.

63 Third, as to special condition 17, Oxanda contends that the critical phrase ('On settlement ... the Agreement for Lease must be ... entered into ...') should, when read together with special condition 22, be construed as requiring the parties to the contract of sale to ensure that the agreement for lease was entered into 'by settlement' or 'before settlement'.

64 Fourth, if the Court rejects the above contentions, and is satisfied that sub-paragraph 2.1(e)(ii) is inconsistent with the contractual scheme as a whole or works commercial nonsense or inconvenience, Oxanda contends that the Court should not disregard sub-paragraph (ii) but should disregard the whole of clause 2.1(e). Oxanda sought to distinguish this from cases where a clause must be given operation, characterising clause 2.1(e) as an optional termination right in circumstances where certain conditions are met.

65 We do not accept Oxanda's contentions. In our view, the trial judge's construction is not the preferable one. In reaching our conclusion, however, we note that (as discussed above) MAAG has, while not changing its underlying contentions, contended that a different construction conclusion should apply to that advanced below. Our reasons follow.

66 First, special condition 22 concerns the time of execution of the two counterparts of the agreement for lease. Given that the agreement for lease is to be a Deed, execution is not enough to bring it into effect. That requires delivery.[36] Moreover, the parties expressly intended that delivery was required. The signing page of the final form of the agreement for lease, which was annexed to the contract of sale, distinguishes between execution and delivery: 'Executed by each party as a deed and delivered on the date above'.[37]

67 Thus, special condition 22 leaves the operation of special condition 17 unaffected. As appears above, special condition 17.1 requires that the agreement for lease must be entered into on settlement of the contract of sale. The references in special condition 17.1 to the agreement for lease being 'entered into' would be understood by reasonable business people as meaning that the agreement for lease became binding. The expression at least requires execution. The agreement for lease shows that here it involves delivery as well.

68 Special conditions 16, 17 and 22 impose obligations in respect of the delivery - or execution and exchange - of executed counterparts of the agreement for lease; with the legal effect that MAAG and Oxanda will have 'entered into' the agreement for lease. Of course, MAAG could promise to bring about its side of that bargain. But the vendor could only promise to use its 'best endeavours' to ensure that Oxanda did so. This was common ground at the hearing before us.

69 We reject Oxanda's contention that the critical phrase in special condition 17 of the contract of sale should be read as requiring the parties to have ensured that the agreement for lease was entered into 'by' or 'before' settlement. It may be that the text - 'On settlement' - can be read as meaning 'by the time of settlement' if read in isolation, but that construction is not supported by the context of the two agreements when read as a whole. In context, and especially given recital A of the agreement for lease, 'on settlement' means 'at the time of settlement'. But even if special condition 17 only required the agreement for lease to be entered into 'by' the time of settlement, special condition 22 still makes it clear that the two instruments are to operate together and that the agreement for lease will never take effect for any significant period before the contract of sale is in force. That is confirmed by the agreement for lease.

70 Second, the signing page of the agreement for lease states that it was: 'Executed by each party as a deed and delivered on the date above'. The 'date above' is 21 April 2015, being the date of settlement. This makes recital A objectively true. Thus, as the basis of the agreement for lease, the parties agreed that settlement of the contract of sale had already occurred at the time the deed was delivered. This makes commercial nonsense of clause 2.1(e)(ii).

71 Third, the contract for sale was not conditional upon the agreement for lease operating so as to give rise to a lease by MAAG to Oxanda of a completed childcare centre on the land. The parties clearly recognised that there was a risk that the necessary permits might not be obtained and, if so, that MAAG could be left with the land. Again, this is confirmed by the agreement for lease. It makes the trial judge's description of the 'deal' - as involving a sale of the land to MAAG 'on the condition that MAAG would build a childcare centre on it to be used and occupied by Oxanda'[38] - not strictly accurate. The 'deal' was that MAAG and the Oxanda interests would enter into related contracts - the contract of sale and the agreement for lease - under which, following completion of the sale, the parties would act reasonably to obtain all necessary approvals for, and to complete construction of, a childcare centre to be built on the land by a particular time. But if that did not occur, then MAAG risked being left with the land but not the lease. Put simply, there was a package 'deal' involving two separate but related transactions. The aim of the parties to the two agreements was that the Landlord Approvals would be obtained and a childcare centre would be constructed within the specified times referred to in the agreement for lease, and the lease would then be entered into; but that aim was not one which either party guaranteed would transpire. The only definite aspect of the 'deal' was that the land would be sold to MAAG to enable it to obtain the Approvals and, if obtained, construct the childcare centre.

72 Fourth, in this context, the parties clearly intended that there would be an opportunity to exit the agreement for lease at four specified dates, commencing with the Landlord's Works Approval Date. That date was 120 days from the date of the agreement for lease. During that period, and beyond (if the agreement for lease is not terminated at that date), clause 2.1(b) imposes onerous obligations on MAAG to 'do all reasonable things to obtain and keep current all Approvals for the Landlord's Works'.

73 Fifth, given the underlying basis of the agreement for lease, that the contract of sale had been settled, clause 2.1(e)(ii) is clear surplusage and could not have been intended. It is wholly unlikely that the parties would intend for MAAG to be spending money, time and resources on seeking approvals unless settlement had occurred and it was (at least) entitled to be registered. It seems clear to us that 'something has gone wrong with the language'.[39]

74 Sixth, this interpretation is bolstered by the fact that both paragraphs 2.1(e)(i) and (ii) are, as a matter of grammar, qualified by the words 'on terms satisfactory to the Tenant (acting reasonably)'. Read in the context of the agreement for lease as a whole, those words make perfect commercial sense as a qualification to paragraph 2.1(e)(i), but are inapposite as a qualification to paragraph 2.1(e)(ii). Senior counsel for Oxanda could not point to any way in which the qualification could apply to sub-paragraph (ii), and acknowledged that Oxanda (as the Tenant) had no say in the matter as to the terms on which the contract of sale would settle.

75 Seventh, we are satisfied for the above reasons that this is an appropriate case for the Court, as a matter of construction, to disregard the words 'and; (ii) the Landlord has not settled its purchase of the Land,' in clause 2.1(e). We do not accept Oxanda's contention that the whole of clause 2.1(e) should be rendered redundant in these circumstances. This is because we are satisfied that the parties clearly intended to provide an opportunity for either of them to terminate the agreement for lease if the Landlord Approvals were not obtained by the specified date on terms satisfactory to Oxanda (acting reasonably). This is part of a considered contractual scheme providing various opportunities for contractual termination in certain circumstances. There is no reason to suppose that the parties would have intended to delete this opportunity because of a clear mistake in the drafting of clause 2.1(e).

76 Finally, although unnecessary for our conclusion, we note that MAAG relied at trial on emails between the solicitors on the day the contract of sale was entered into, before exchange of counterpart contracts. The emails concerned how and when the parties to the contract of sale would enter into the agreement for lease, in the light of the 'new special condition 22'. In summary, it was agreed that MAAG would execute the agreement for lease before settlement and then hand over its signed counterpart to Oxanda's solicitors at the time of settlement of the contract of sale. The expressed reason for this process was: 'Given that the timelines in the Agreement for Lease commence on the date of the Agreement for Lease'. The full text of the key email, from MAAG's solicitors to Oxanda's solicitors, is set out below:

We understand that you are executing the Agreement for Lease and will email the executed copy to us today, as contemplated by new special condition 22 of the Contract.

Special condition 22 of the contract contemplates that our client will also sign the Agreement for Lease within 24 hours of exchange of the Contract. Given that the timelines in the Agreement for Lease commence on the date of the Agreement for Lease (ie. the date both parties sign), our client proposes to execute the Agreement for Lease before settlement and hand your client's counterpart over at settlement with all other settlement documents and monies.

Would you mind confirming you are comfortable with this proposal. Our client would be prepared to sign the Contract as is on the understanding that special condition 22 is interpreted to reflect the process outlined above. To this end, our client does not think it is necessary to amend special condition 22 to reflect the above process.

77 By reply email, Oxanda's solicitors agreed with MAAG's 'proposal regarding operation of special condition 22', and attached a counterpart of the agreement for lease which had been executed by Oxanda. The parties to the contract of sale then exchanged contracts and the contract of sale was entered into.[40]

78 The understanding of the parties in these emails is consistent with our interpretation of the relevant aspects of the contract of sale and the agreement for lease.

79 For the above reasons, leave to appeal should be granted and the appeal allowed. The judgment below should be set aside and, instead, an order made that Oxanda's claims in the proceeding be dismissed. We will hear the parties as to costs.

[1] The Landlord's Works Approval Date was agreed by the parties to be 19 August 2015.

[7] Unless Oxanda has contributed to the failure to achieve Practical Completion; in which case only MAAG can terminate.

[8] Oxanda Childcare Pty Ltd v MAAG Developments Pty Ltd [2018] VSC 370 [20] ('Reasons'), citing Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640, 656-7 [35] ('Electricity Generation') and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 at 116-7 [46]-[52] ('Mount Bruce').

[9] Mount Bruce [2015] HCA 37; (2015) 256 CLR 104, 117 [51], quoting Electricity Generation [2014] HCA 7; (2014) 251 CLR 640, 657 [35].

[18] [2017] VSCA 200.

[21] [2015] VSCA 68; (2015) 105 ACSR 325.

[22] Ibid 348 [143] (citations in original).

[23] Water Board v Moustakas (1988) 180 CLR 491, 497; Devon v Capital Finance Australia Ltd [2014] VSCA 73 [76] ('Devon').

[24] Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1, 7-8; Whisprun Pty Ltd v Dixon [2003] HCA 48; (2003) 200 ALR 447, 461 [51]; Devon [2014] VSCA 73 [75].

[25] Geelong Building Society (in liq) v Encel [1996] VicRp 44; [1996] 1 VR 594, 605; Wieland v Texxcon Pty Ltd [2014] VSCA 199; (2014) 313 ALR 724 [84]-[87] (Nettle, Hansen and Beach JJA); Nolan v Executive Director, Land Management Policy, Department of Environment and Primary Industries [2015] VSCA 301 [51].

[26] [2014] HCA 7; (2014) 251 CLR 640, 656-7 [35] (citations omitted).

[27] (1990) 20 NSWLR 251 ('Update Constructions').

[28] Update Constructions (1990) 20 NSWLR 251, 257 (emphasis added).

[31] [1956] HCA 53; (1956) 95 CLR 420.

[33] [2009] UKHL 38; [2009] 1 AC 1101 ('Chartbrook').

[34] Ibid 1114 [25] (emphasis added).

[35] Sir Kim Lewison, The Interpretation of Contracts (6th ed, Sweet & Maxwell, 2015) 498-505; Sir Kim Lewison and David Hughes, The Interpretation of Contracts in Australia (Lawbook, 2012) 407-10, 417-18.

[36] Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26; (2016) 260 CLR 1, 81 [260] (Gordon J).

[37] Emphasis added. See also sub-clauses 1.2(s) and (t) of the agreement for lease.

[39] Chartbrook [2009] UKHL 38; [2009] 1 AC 1101, 1114 [25].