Mitchell v Leafs Gully Farm Pty Ltd

Court of Appeal (NSW)|2016-04-26|Before: Beazley P, Leeming JA, Payne JA, Gilbert J, Lindsay J

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Judgment

BEAZLEY P: I have had the advantage of reading in draft the reasons of Leeming JA. I agree with his Honour's reasons and with his proposed orders.
LEEMING JA: Following a hearing lasting five days and involving many factual and legal disputes, Mr Richard Gordon Mitchell appeals from the judgment of the primary judge ordering that a contract for the sale of land be specifically performed. Although Mr Mitchell's notice of appeal contains nine grounds, Mr Coles QC, who with Mr Russell appeared for him, acknowledged at the outset that the principal question was the effect of the deed of option and series of deeds of variation and of novation which the parties had entered into.
The point is simply stated. The first respondent, Leafs Gully Farm Pty Ltd (LGF), is the nominee of the second respondent, AGL Power Generation Pty Ltd (AGL Power). It purported to exercise, as nominee, an option to acquire three parcels of land owned by Mr Mitchell in southwestern Sydney. The question is whether LGF was entitled to insist that it receive the benefit of $3,150,000 of option fees paid by the grantee of the option. Mr Mitchell accepted that he would have been obliged to give a credit to AGL Power if it itself exercised the option. However, he contended that he was not obliged to do so in the event that AGL Power's nominee exercised the option. Mr Mitchell did not deny that in taking that stance he was in breach of his promise to AGL Power. However, he maintained that the benefit of his promise to give a credit was purely a matter of contract between Mr Mitchell and AGL Power, and not part of the irrevocable offer which AGL Power's nominee LGF purported to accept, and that as a non-party to the contract between grantor and grantee, LGF could not insist upon Mr Mitchell giving a credit of the $3,150,000.

Factual background

Little need be said of the underlying facts, which, on the issues identified above, were wholly uncontroversial.
At relevant times, companies associated with the Australian Gas Light Company (AGL) were seeking project approval, under (former) Part 3A of the Environmental Planning and Assessment Act 1979 (NSW), for a gas fired power station on land owned by Mr Mitchell and his daughters and their families. The land comprised lots 101-105 in a certain deposited plan. Mr Mitchell owned lots 101-103, and his daughters and their families owned lots 104 and 105. It is convenient to note immediately that in November 2009, lots 104 and 105 were purchased by an AGL entity, and no issue arises on this appeal in relation to them. In what follows I will refer only to the provisions insofar as they relate to lots 101-103, even though the transactions extended to lots 104 and 105.
By Deed of Option dated 25 October 2005, Mr Mitchell agreed to grant to AGL or its nominee an option to purchase lots 101-103, defined as follows: "'Option' means the option granted by the Grantor to the Grantee or its nominee pursuant to this deed to purchase the Property from the Grantor for the Purchase Price on the terms set out in the Pro Forma Contracts."
The Purchaser was defined to mean "the person who exercises the Option" and the "Purchase Price" was, relevantly, $15,000,000 for lots 101-103. The "Option Fee" was, relevantly, $150,000 for lots 101-103.
Clauses 2, 3 and 4 of the Deed of Option are central to this appeal. They are as follows: "2 OPTION TO PURCHASE In consideration of the payment of the Option Fee by the Grantee to the Grantor (the receipt of which is acknowledged by the Grantor) the Grantor grants the Option to the Grantee or its nominee. 3 EXERCISE OF OPTION 3.1 The Option may only be exercised by the Grantee or its nominee at any time after the date 12 months from the date of this deed and prior to 5.00 pm (Sydney time) on the Option Exercise Date, by delivery to the Grantor's Solicitor of: (a) a Notice of Exercise of Option executed by the Grantee or its nominee; (b) a cheque for the Deposit Amount less the Option Fee paid, as the balance of the deposit payable under the Contracts drawn in favour of the Grantor's solicitor (as stakeholder); and [(c)] the Vendor Disclosure Documents all dated not more than two months before the date of exercise of the Option. 3.2 Notwithstanding anything else contained in this deed, the parties agree that: (a) the Vendor Disclosure Documents referred to above (the up to date certificates) are taken to be attached to the Contracts which come into existence immediately after exercise of the Option and the contents of the up to date certificates are specifically disclosed in the Contracts; and (b) if execution of formal contracts is required pursuant to clause 5.2, the up to date certificates must be inserted in the contracts (and where there is an earlier certificate, diagram or reply from the same body or authority inserted in the Pro Forma Contracts, then in substitution for that earlier certificate, diagram or reply) before the contracts, are executed by either party. 3.3 If the Purchaser is the nominee of the Grantee then the Notice of Exercise of Option must include the confirmation set out in Schedule B duly completed and executed by the Grantee and the Purchaser. 4 OPTION FEE If the Option is exercised, the Option Fee must be credited as part payment of the Deposit Amount and the purchase price payable by the Purchaser under the Contracts. If the Option is not exercised, the Option Fee is and remains the property of the Grantor."
Three things may be noted about those clauses immediately. First, cll 3.1 and 3.3 expressly contemplated exercise of the Option by AGL's nominee. Secondly, the procedure to be adopted in exercising the Option turned on whether it was exercised by AGL or by a nominee, insofar as cl 3.3 required in the latter case the confirmation in the form of Schedule B. Thirdly, there is a necessary link between the obligation on the part of Mr Mitchell in cl 4 to give credit for the $150,000 Option Fee, and the documents to be provided upon the exercise of the Option in cl 3.1(b): the cheque was not to be in the amount of the deposit, but instead for "the Deposit Amount less the Option Fee paid".
Three contracts for the sale of land were annexed as schedules E, F and G to the deed. These were defined in the Deed of Option as the "Pro Forma Contracts". Schedule E, which related to lots 101-103, specified a purchase price of $15,000,000 with a deposit of $750,000, and with completion 20 weeks after the contract date.
Clause 8 of the Deed of Option permitted two further extensions of the time within which the Option might be accepted. The Deed as executed provided that the additional Option Fees (in the case of Mr Mitchell, $200,000 in each case) were to be treated in the same manner as the Option Fee for the purpose of cl 4. That is to say, they were to be deducted from the Deposit Amount if the Option were exercised: see cll 8.2 and 8.4.
Clause 5.1 provided that the Contracts were made on and by virtue of exercise of the Option, and cl 6 required Mr Mitchell to grant consent to any application for consent or approval made by the grantee or its nominee.
By Deed of Novation dated 20 October 2006, AGL Power Generation (NSW) Pty Ltd (AGL NSW) was substituted for AGL. By Second Deed of Novation executed in 2010, AGL Power was substituted for AGL NSW. Aside from explaining how AGL Power became a party, those two deeds are wholly irrelevant to this appeal.
There were also two Deeds of Variation. The first, dated 5 August 2008, made provision for three further extensions of the Option Period. The fees (in relation to Mr Mitchell's land) were $200,000, $100,000 and $100,000. The extensions operated until 25 April 2009, 25 July 2009, and 25 October 2009 respectively. There were two other aspects of the First Deed of Variation relevant to this appeal. The first was that the clauses (cll 8.2 and 8.4) in the original Deed of Option which required credit to be given for the Option Fees already paid were deleted. The second was that the terms of the Pro Forma Contracts were varied, so as to reduce the time for completion from 20 weeks to six weeks, and to add a new special condition which, relevantly, required the Purchaser to grant a lease to Mr Mitchell for a period of three months after completion at a rental of $10 per week.
Project approval for a gas fired power station was granted on 11 August 2009. It may be presumed that it was in that context that the Second Deed of Variation was made on 29 September 2009. It provided for a further five extensions of the existing Option. The first of those extensions involved the provision of a "Sixth Notice of Extension of Option Period" and the "Sixth Additional Option Fee". The latter was $3,000,000. The effect of providing a Sixth Notice of Extension of Option Period and a cheque for $3,000,000 was to extend the period during which the Option might be exercised until 25 October 2010. Each of the subsequent four extensions involved a fee of $500,000 and the right to a further extension of one year.
Clause 6 of the Second Deed of Variation is critical to the appeal. It is as follows: "6. If the Option in respect of the Mitchell Property is exercised the Sixth Additional Option Fee must be credited towards the Purchase Price for the Mitchell Property payable by the Purchaser under the Contracts for the Mitchell Property but shall not constitute any part of the deposits under those Contracts. The Option Fee only shall be credited towards the deposits and purchase prices under the Contracts for Lots 101 to 105 in DP716209 (the 'Property') in the amounts paid to each Vendor as set out in Item 1 of Schedule A of the Deed of Option. If the Option is not exercised the Sixth Additional Option Fee is and remains the property of Richard Gordon Mitchell."
In contrast, cl 7 provided that the Seventh, Eighth, Ninth and Tenth Additional Option Fees were not to be credited towards the Purchase Price.
It will also be seen that, unlike cll 3.1(b) and 4 of the original Deed of Option, the Sixth Additional Option Fee was not to be credited against the deposit (which it dwarfed), but was still to be credited against the Purchase Price.
Over the period between 2006 and 2013, the time for exercising the Option was extended nine times, and the First through to the Ninth Additional Option Fees were paid.
Ultimately, by Notice of Exercise of Option dated 15 October 2013, (10 days before the expiry of the time provided by the Ninth Notice of Extension of Option Period), LGF purported to exercise the Option to purchase lots 101-103. The notice was accompanied by confirmation by AGL Power that LGF was its nominee and entitled to exercise the Option in accordance with cl 3.3 of the Deed, and by a bank cheque in the amount of $600,000.
LGF contended that the contract price was $11,850,000, being the $15,000,000 specified in the Pro Forma Contract, less the first Option Fee of $150,000 (which was deducted from the Deposit Amount) and the Sixth Additional Option Fee of $3,000,000.
LGF commenced proceedings on 13 January 2014. It sought a declaration that there was a binding and enforceable contract between it and Mr Mitchell for Lots 101-103 in the amount of $11,850,000. Mr Mitchell maintained that he was entitled to $15,000,000 as the Purchase Price. There were numerous other issues at trial which were resolved adversely to Mr Mitchell and from which no appeal has been brought. They need not be summarised here.
Stamp duty was only paid on the Notice of Exercise of Option on 20 March 2015, part way through the hearing at first instance. Mr Mitchell made it clear that no point was taken based on the fact that the litigation had commenced with an unstamped Notice of Exercise of Option pursuant to an unstamped deed.

The decision of the primary judge

The primary judge dealt with many issues which do not arise on appeal. His Honour regarded the Deed of Option (as varied and novated) as the principal source of the parties' rights and obligations. His Honour analysed the juristic nature of a right of nomination and a right of assignment, in order to address an argument advanced at trial that the right of nomination amounted to an assignment, contrary to a covenant against assignment. His Honour regarded the Deed of Option as giving rise to an irrevocable offer. His Honour concluded that LGF was a joint promisee, and rejected the objection based on privity on the basis that it was sufficient for consideration to move from any one of a number of joint promisees.
On the central issue arising on appeal, his Honour reasoned as follows: "The first defendant's submission that the plaintiff is not entitled to an allowance for option fees paid by or on account of the second defendant is closely associated with his contentions to the effect that, upon a proper construction of the option documentation: (a) the plaintiff has the character of a 'stranger' to the option agreement made between the defendants; and (b) any entitlement to a credit for option fees paid to the first defendant was 'personal' to the second defendant in the sense that it has not inured for the benefit of the plaintiff as a stranger to the option agreement. These contentions are bound to fail because, on a proper construction of the option documentation: (a) the plaintiff, as the second defendant's 'nominee', is not correctly characterised as a 'stranger' to the option agreement; (b) there is nothing in the option documentation that requires or allows option fee 'credits' to be characterised as personal to the second defendant; (c) the option documentation (clause 4 of the Option Deed and clause 6 of the Deed of Second Variation) specifically provided for the option fee to be 'credited as part payment of the Deposit Amount [to the extent of $150,000] and the purchase price [to the extent of $3,150,000] payable by the Purchaser under the Contracts'; (d) Clause 3.1(b) of the Option Deed provided for the Option Fee of $150,000 to be deducted from the deposit paid on exercise of the option; and (e) definition of the terms 'Option' and 'Contracts', in clause 1.1 of the Option Deed, by reference to a Pro Forma Contract annexed to the Option Deed does not allow the pro forma contract to rise above the text of the Option Deed, including clause 4, or clause 6 of the Deed of Second Variation. If and to the extent that (contrary to my opinion) any entitlement to a credit resided in the second defendant 'personally' rather than the plaintiff as the second defendant's 'nominee', it would be enforceable in these proceedings by the plaintiff via its joinder of the second defendant: Karaguleski v Vasil Bros & Co Pty Limited [1981] 1 NSWLR 267 at 270B-C There is no basis in the documentation for attribution of the character of a 'personal right' to rights for a credit allowance on exercise of the option. Clause 4 of the Option Deed, clause 6 of the Deed of Second Variation and the definition of 'Purchaser' in clause 1.1 of the Option Deed speak to the contrary" (at [99]-[101]).
His Honour made the declaration sought by LGF and ordered that the contract be specifically enforced.

Mr Mitchell's submissions on appeal

Mr Mitchell's submissions were commendably concise. He submitted, and it was common ground for the purpose of this appeal, that the Deed of Option was to be regarded as containing an irrevocable offer. Mr Mitchell submitted that the irrevocable offer, insofar as it related to lots 101-103, was found in the draft contract for sale of land which was Schedule E to the Deed, subject to subsequent amendment (for example, altering the time for completion and special conditions effected by the First Deed of Variation). He submitted that there was a clear distinction between the promises contained in the Deed of Option itself (and the Deeds of Variation), and the irrevocable offer which was created by that deed. Although the various AGL parties from time to time could enforce the contractual rights in the Deed of Option (as varied), as well as accepting the irrevocable offer, Mr Mitchell submitted that a nominee could only accept the offer in the terms of the draft contract for the sale of land.
As noted above, Mr Mitchell did not demur from the proposition that his stance left him in breach of his obligations to AGL, but nevertheless insisted, in accordance with what Barwick CJ had said in Coulls v Bagot's Executor and Trustee Co Ltd (1967) 119 CLR 460 at 478, that the nominee could not enforce a contractual promise to which it was not party. He added that the nominee was not in existence until shortly before the exercise of the Option.

Consideration

Mr Mitchell's submissions are to be rejected for the following reasons, which can be expressed quite narrowly. It is not necessary to analyse the position more broadly in order to resolve this appeal, and it would be inappropriate to do so, having regard to the narrowness of the submissions advanced in this Court.
Mr Mitchell's entire argument turns upon the proposition that the contractual provisions requiring a credit to be given for some (but not all) of the Option Fees paid were distinct from the irrevocable offer to the grantee or its nominee. That proposition is not sound. As Mr McHugh SC, who with Mr Hutton appeared for LGF, submitted, the Deed of Option made quite elaborate provision for the way in which the grantee or its nominee would accept the irrevocable offer. Not only did cl 3 of the Deed of Option make provision for the time of acceptance, the delivery of vendor disclosure documents, and confirmation in the form set out in Schedule B to the Deed that the Purchaser was the grantee's nominee, but it also specified the amount of the cheque which was required to be provided as the deposit. Clause 3.1 made it clear that acceptance of the original irrevocable offer would require the service of a Notice of Exercise of Option and, had the Option been exercised before any of the extensions had been made, a cheque not in the amount of $750,000 as stated in the Pro Forma Contracts, but instead in the amount of $600,000.
Provisions governing the manner in which an offer may be accepted are, necessarily, part of the offer itself. As Owen J, Roper CJ in Eq and Herron J said in Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1959) SR (NSW) 122 at 123: "[The] offer prescribed the time and manner for acceptance. Only by performing the conditions prescribed could it be accepted …"
Clause 3.1 makes it plain that the offer was capable of being accepted by the grantee's nominee (see the references to "or its nominee" in the opening words, in cll 3.1(a), and 3.3). It follows that rather than the obligation in cl 4 to credit as part payment of the deposit the amount of the Option Fee being a contractual promise separate from the irrevocable offer, the irrevocable offer itself was qualified by that obligation.
It is thus incorrect to submit that the irrevocable offer was confined to the terms of the Pro Forma Contract annexed to the Deed of Option (and as modified - for example as to completion date - by the later deeds). The offer included at least those provisions in the Deed of Option which specified how and when the offer could be accepted.
Test the matter this way. It could not be suggested that a nominee could validly exercise the Option without at the same time supplying the written confirmation required by cl 3.3 in the form of Schedule B. Yet Mr Mitchell accepted that a nominee could accept his irrevocable offer. It necessarily follows that the Pro Forma Contract did not contain all of the terms of the irrevocable offer.
The position is clearest in connection with cl 4 of the Deed of Option, because that clause specifies unambiguously what is to be done - either by the grantee or its nominee - in order to exercise the Option. There is, in my opinion, no sound way in which cll 2, 3 and 4 can be construed so as to separate the obligation to credit the $150,000 Option Fee from the calculation of the deposit to be paid by the person who accepts the irrevocable offer. Those clauses are inconsistent with the payment of an amount of $750,000 to satisfy the obligation to pay the deposit sum of $750,000. Reading the Deed of Option as a whole, it is clear that the irrevocable offer incorporates those clauses. The result is that a payment of $600,000 was required from the person exercising the Option.
This in turn illustrates the critical error in the argument advanced by Mr Mitchell. His written submissions revealingly included the following: "28. Clause 2 contains the option to purchase, and provides that 'the Grantor grants the Option to the Grantee or its nominee.' 29. Expanding the terms of that grant to incorporate the full text of the defined expression 'Option', clause 2 thus provides that: '2. ... the Grantor grants the option to purchase the Property from the Grantor for the Purchase Price on the terms set out in the Pro Forma Contracts'" (emphasis in original).
Those submissions disclose error. First, they are textually inaccurate, because they omit the important opening words in the definition of "Option". The "Option" is defined to mean "the option granted by the Grantor to the Grantee or its nominee pursuant to this deed to purchase the Property from the Grantor for the Purchase Price on the terms set out in the Prof Forma Contracts". The emphasised words confirm that the irrevocable offer is not confined to the draft Pro Forma Contracts, but is subject also to other provisions in the Deed of Option itself. As much is confirmed by recital F: "The Grantor has agreed to grant to the Grantee or its nominee an option to purchase the Property on the terms and subject to the conditions in this deed."
Secondly, it is not merely because the definition of "Option" includes the words "pursuant to this deed" or because of recital F that the irrevocable offer includes terms found in the Deed of Option. That is the necessary consequence of provision being made in the Deed of Option for basal matters such as the time within which the Option may be exercised and the things which must occur in order to do so. Even if there were no definition of "Offer" and no recital F, the inevitable consequence of clauses such as cl 3.1(b) is that they qualify the terms of the offer which has been made.
I turn to cl 6 of the Second Deed of Variation. The Deed uses the same defined terms as the original Deed of Option. The Deed also provides that: "The parties have agreed the terms and conditions of the Deed of Option as amended by the First Deed of Variation shall apply except where such terms and conditions conflict with the provisions below in which case the provisions below shall prevail".
Clause 6 refers to the Purchase Price payable by the "Purchaser". The Purchaser is defined to mean the person who exercises the Option, thereby including a nominee. Clause 6 also refers to the "Option", which picks up the definition reproduced above, which also expressly contemplated exercise by a nominee.
Clause 6 is not capable of being characterised solely as a personal contractual promise by Mr Mitchell to AGL Power, for substantially the same reasons as cl 4 of the Deed of Option. The ordinary construction of the words "must be credited towards the Purchase Price" in cl 6 is that they qualify the terms of the Pro Forma Contract. Whereas cll 3.1(b) and 4 of the Deed of Option qualify the obligation to pay $750,000 by way of Deposit, cl 6 qualifies the obligation to pay the balance of the Purchase Price. The nature of both clauses is the same: both qualify the irrevocable offer made by Mr Mitchell.
Put differently, following the execution of the Second Deed of Variation, it remained incorrect to say that the irrevocable offer was the Pro Forma Contract considered alone. The irrevocable offer was the Pro Forma Contract as modified by the Deed of Option (itself as varied and novated).
A third way of making the same point is an answer to that part of Mr Mitchell's submissions which emphasised that both Deeds of Variation expressly varied some of the terms of the Pro Forma Contract (by altering the day of completion and introducing a new special condition). That is admittedly one way of varying the terms of the irrevocable offer. But it is not the only way in which the terms of that offer can be varied. Clauses 3.1(b) and 4 of the Deed of Option, and cl 6 of the Second Deed of Variation, also vary the terms of the irrevocable offer. They do so by altering an essential term: the amount which is required to be paid. It is not to the point that it might have been possible to achieve this by a textual variation (say, by providing that if the Sixth Additional Option Fee is paid, then the Purchase Price in the Pro Forma Contract is altered by replacing $15,000,000 by $12,000,000). The question is, what is the legal effect of formal promises to treat amounts already paid as part of the Purchase Price. I have no difficulty in concluding that they alter the terms of the irrevocable offer. That is because there is no sensible way of preserving a Purchase Price of $15,000,000 with a promise to give a credit of $3,000,000 towards that price "payable by the Purchaser", bearing in mind that the Purchaser may be AGL Power or its nominee.
Ordinary principles of construction confirm this result. The parties were agreed that the various deeds were to be construed by reference to what a reasonable businessperson would have understood their terms to mean, requiring in turn consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects: Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640 at [35]. I do not accept that a reasonable businessperson would understand the position any differently from what has been outlined above. After all, both cl 4 of the Deed of Option and cl 6 of the Second Deed of Variation speak unequivocally in terms of a credit towards the Purchase Price "payable by the Purchaser". As has been noted, the Purchaser is defined to mean the person exercising the Option, including therefore a nominee. No reasonable businessperson would understand those words to mean that a purchaser which was the relevant AGL company would enjoy the benefit of the credit of the Option Fees, but a purchaser which was a nominee would not.
Finally, I accept LGF's submissions that the construction propounded by Mr Mitchell is unbusinesslike and arbitrary for a further reason. Mr Mitchell's construction attaches significant financial consequences to a matter (the identity of the Purchaser) which must be one of indifference to the outgoing vendor. It substantially diminishes the value of the right of nomination (whether to a subsidiary company, or to an unrelated company such as LGF). It is arbitrary, because Mr Mitchell's construction cannot stand in the way of AGL Power itself exercising the Option for $11,850,000, and transferring the land to LGF.
There is no sound contextual reason to displace the meaning which emerges from the language chosen by the parties. To the contrary, everything points to the conclusion reached by the primary judge.
When it is appreciated, as it must be, that the provisions in cll 3 and 4 of the Deed of Option and cl 6 of the Second Deed of Variation qualify the terms of the irrevocable offer, then Mr Mitchell's submissions based on privity fall away. It was at all times accepted that the irrevocable offer was open to acceptance by a nominee.
The foregoing reasoning is somewhat narrower than that of the primary judge, but that merely reflects the way the appeal was argued.

Orders

For those reasons, the appeal must be dismissed. The other issues arising on the appeal (including whether LGF repudiated the contract) do not arise.
It is also unnecessary to deal with an issue which was noted and not resolved by the primary judge, involving a claim by LGF against AGL Power, which LGF sought by its submissions (although without a cross-appeal) to raise in this appeal.
The Court indicated that it would invite the parties to be heard on the question of costs following delivery of judgment.
I propose the following orders: 1. Appeal dismissed. 2. The parties to supply within 14 days either: 1. agreed orders as to the costs of the appeal, or 2. the orders which they propose, any evidence in support of those orders, and submissions not exceeding 4 pages in support of the orders they propose.
PAYNE JA: I agree with Leeming JA.

Amendments 04 May 2016 - [33] - "of" inserted before "the Option Fee" [45] - "purpose of objects" replaced by "purpose or objects" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 04 May 2016

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Judgment (8 paragraphs)

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