Moratic Pty Ltd v Lawrence James Gordon & anor

Moratic Pty Ltd v Lawrence James Gordon & anor - [2007] NSWSC 5 - NSWSC 2006 case summary — Zoe

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Ajayi v R T Briscoe (Nigeria) Limited [1964] 1 WLR 1326; [1964] 3 All ER 556 Allied Marine Transport Ltd v Vale Do Rio Doce Navegacao SA (The Leonidas) [1985] 1 WLR 925 Amalgamated Investment and Property Co Limited v Texas Commerce International Bank Limited (in liq) [1982] QB 84 Amherst v James Walker Ltd [1983] 1 Ch 305 BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 Butts v O'Dwyer (1952) 87 CLR 267 Byrne v Australian Airlines (1995) 185 CLR 411 Cairns v Burgess (1905) 2 CLR 298 Castlemaine Tooheys Ltd v Carlton and Untied Breweries Ltd (1987) 10 NSWLR 468 Central London Property Trust v High Trees House Ltd [1947] KB 130 Chattis Nominees Pty Ltd v Norman Ross Homeworks Pty Ltd (1992) 28 NSWLR 338 Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Combe v Combe [1951] 2 KB 215 Commonwealth v Verwayen (1990) 170 CLR 394 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Limited (1986) 160 CLR 226 Crabb v Arun District Council [1976] Ch 179 Dabbs v Seaman (1925) 36 CLR 538 Eslea Holdings Limited v Butts (1986) 6 NSWLR 175 Foran v Wright (1989) 168 CLR 385 Grundt v Great Boulder Gold Mines Limited (1937) 59 CLR 641 Ha v State of New South Wales (1997) 189 CLR 465 CASES CITED : Hamlyn & Co v Wood & Co [1891] 2 QB 488 Hardwick Game Farm v Suffolk Agricultural Poultry Producers Association [1967] 1 WLR 287 Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Jabetin Pty Ltd v Liquor Administration Board (2005) 63 NSWLR 602 Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101 Legione v Hateley (1983) 152 CLR 406 McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125 Masters v Garcia (2005) 65 NSWLR 92 Meredith v Fitzgerald (1948) 77 CLR 161 Mineaplenty Pty Ltd v Trek 31 Pty Ltd [2006] NSWSC 1203 MK & JA Roche Pty Limited v Metro Edgley Pty Limited [2005] NSWCA 39 Pondicil Pty Limited v Tropical Reef Shipyard Pty Limited (FedCA, Cooper J, 1994, BC9406064) Proprietors Strata Plan 30102 v Energy Australia (NSWCA, 29 September 1997, BC9704799 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 Secured Income Real Estate v St Martin's Investments Pty Ltd (1979) 144 CLR 596 State of New South Wales v Banabelle Electrical Pty Limited (2002) 54 NSWLR 503 The Moorcock (1889) 14 PD 64 Thompson v Palmer (1933) 49 CLR 507 Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387 Handley, Estoppel by Conduct and Election, Sweet & Maxwell, 2006 Meagher, Gummow & Leeming, Equity Doctrines and Remedies, 4th ed

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5748/06 Moratic Pty Limited v Lawrence James Gordon & anor JUDGMENT 1 HIS HONOUR: The plaintiff Moratic Pty Limited is the lessee, by assignment of a lease originally granted on 1 February 1993 to Mr and Mrs Danaher, of the Oaklands Hotel, in respect of which it holds an hotelier's licence to which seven Poker Machine Entitlements are attached. The defendants Mr Lawrence James Gordon and Mrs Judith Ann Gordon are the lessors, and owners of the freehold. The term of the lease will expire on 31 January 2007. Moratic has exchanged contracts for the sale of some of the PMEs. Although a PME allocated in respect of a hotelier's licence is transferable to another hotelier's licence, a transfer does not have any effect unless it approved by the Liquor Administration Board, and an application for such approval must demonstrate, to the satisfaction of the Board, that the proposed transfer is supported by each person who, in the Board's opinion, has a financial interest in the licence [(NSW) Gaming Machines Act 2001, s 19(1), (2)(a), (3)(c)]. The Gordons, who do not support the proposed transfer, claim that they have a financial interest in the licence by reason of a lessee's covenant to pay, in addition to the fixed rent, a "further rent" equivalent to 4% of annual liquor purchases for the hotel (clause 20). No amount has ever been demanded or paid under that covenant, and Moratic brings these proceedings to resolve whether clause 20, in the events which have happened, confers on the Gordons a financial interest in the licence, claiming a declaration that it is not liable to pay any amount under clause 20. The Gordons have brought a cross-claim for the "further rent" under clause 20, for the whole of the term of the Lease from its inception to date. It is common ground that if clause 20 is enforceable, the amount due to the Gordons as at 30 June 2006 would be 4% of $972,478, although there is an issue as to whether interest should be allowed. 2 Moratic contends that it is not liable to pay any amount under clause 20, by reason of an implied variation of the lease, or an estoppel, or an implied term of the lease. Only variation was explicitly pleaded, but the other grounds were argued without objection, and the pleading contains allegation of the facts necessary to found an equitable promissory estoppel or a conventional estoppel. Indeed, the contractual variation case and the estoppel case are closely related: they depend on the same factual basis, and both involve a supervening change in the legal relationship between the parties arising from conduct after the inception of the lease, whereas implication of a contractual term in the lease depends on the presumed intention of the parties when the lease terms were agreed. Accordingly, the issues may conveniently be arranged and stated as follows: · Does the lease contain an implied term to the effect that clause 20 would apply only if the lessee invoked its (former) statutory right to deduct from the rent a proportion of any licence fee which the lessee pays, or that it would not apply if the provision which created that right were repealed? I conclude that there was no such implied term. · Should the parties be taken, by their subsequent course of conduct - in particular, the absence of any payment, and of any demand for payment (or objection to non-payment) of "further rent", while the standard rent was paid monthly, and annual increments in the standard rent were demanded and paid in accordance with the lease, and the consent of the Gordons as lessors given to the transfer of the lease to Moratic in 1999 without assertion of any right under clause 20 or any objection on account of past non-payment of "further rent" - to have agreed to vary the lease by omitting clause 20? I conclude that there was no such contractual variation. · Has that same subsequent course of conduct produced an estoppel precluding the lessors from insisting on performance of the lessee's obligations under clause 20? I conclude that there is no promissory estoppel, because the requisite knowledge to affect the Gordons' conscience in equity is not established; but that the Gordons as lessors and Moratic as lessee dealt with each other on the conventional basis that the only rent payable under the lease was the standard rent, as varied by the annual increments, and a conventional estoppel precludes either from departing from that conventional basis of their relationship. Background

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14 More significantly, however, the legal history of provisions such as clause 20, illuminates whether such a term is necessary to give business efficacy to the contract. In Meredith v Fitzgerald (1948) 77 CLR 161, the High Court considered a substantially identical covenant in the context of the corresponding provisions of the (VIC) Licensing Act 1928, which imposed an annual fee for a licence equal to four percent of the amount paid or payable for all liquor purchased during the preceding year for the premises (s 19(1)(a)), and provided that, notwithstanding anything to the contrary in any agreement, any licensee of premises of which he was not the owner who paid the annual license fee might deduct from the rent payable by him for the premises a sum equivalent to three-eighths of the licence fee, or might recover that amount from the owner in a court of competent jurisdiction (s 19(3)). The appellant Meredith was the licensee and lessee of a hotel under a lease by which she covenanted to pay, firstly, a fixed annual rent and, secondly, by way of further rent, an annual sum equal to an amount computed at the rate of £1/10 for every £100 or fraction thereof of the gross amount paid or payable for liquor purchased during the preceding year for the premises. She argued that the covenant to pay further rent was void as an agreement "to the contrary" within s 19(3)(a), because it provided for payment to the lessor of an amount equivalent to that proportion of the licence fee which the legislation provided should be borne by the lessor (£1/10 percent being equivalent to three-eighths of four percent). The High Court (Latham CJ, Rich, Starke and Williams JJ; Dixon J dissenting) held that the covenant for further rent was not an agreement "to the contrary" and was enforceable. The essential basis of the reasoning was that a covenant to pay rent fixed by reference to an anticipated outgoing was not an agreement "to the contrary" and in no way prevented the exercise of the tenant's statutory right of deduction, but legitimately guaranteed to the lessor a minimum rental income. Latham CJ said (at 168-9):- This reasoning shows that there could be no objection to a rent on the ground that it actually included an amount calculated as probably representing the amount of land tax that would become payable. Further, it would be no objection that the rent (as in the present case) included a sum representing the tax payable at the time when the lease was entered into or that it varied with the amount paid for liquor - which is a measure of the amount of business done by the licensee. There is no agreement to pay three-eighths of the licence fee as it may vary from time to time. The further rent is fixed at 1 pound 10s. per 100 pounds of purchases of liquor, and would remain so fixed if the percentage determining the licence fee were altered.

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17 Thus the independence of the covenant for further rent from the amount of and changes in the licence fee was a significant element in the reasoning that held that the covenant was not an agreement "to the contrary": it was not a covenant to pay (or indemnify the lessor in respect of) the lessor's portion of the licence fee, but a covenant to pay an additional rent which, though calculated according to the same formula as then applied to calculate the lessor's portion of the licence fee, would remain the same regardless of whether or not the licence fee changed. Had the "further rent" not been independent of actual payment of the licence fee, but been conditional upon payment of the licence fee, it would have been an agreement "to the contrary", because it would have fettered or nullified the licensee's right to deduct three-eighths of the licence fee from the rent. This tells against the implication of any such term as Moratic propounds, because, since the efficacy of a covenant such as clause 20 depends at least in part upon its independence from the amount of and changes in the licence fee, the term for which Moratic contends would have jeopardised or detracted from the validity of clause 20. Parties are to be taken to intend their bargains to be valid and effective, rather than void, and where parties adopt drafting devices which have been the subject of judicial consideration they are presumed to intend the provision to have the effect which the courts have previously given it. Accordingly, these parties should be presumed to have intended clause 20 to be valid on the basis of, and to have the effect it was given in, Meredith - including that it operated independently of the statutory right of deduction. That means, in particular, that it was intended to operate according to its terms, requiring payment of additional rent of 4% of purchases, regardless of any increase or reduction in the licence fee - and for that purpose, abolition of an ad valorem licence fee is no more than the most extreme version of its reduction.

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30 Although Moratic relied primarily on equitable promissory estoppel, the analogous but distinct doctrine of common law conventional estoppel [MK & JA Roche Pty Limited v Metro Edgley Pty Limited [2005] NSWCA 39, [71]], which precludes either party from denying an assumption which has formed the conventional basis of a relationship between them [Legione v Hateley (1983) 152 CLR 406, 430 (Mason and Deane JJ)], also operates alongside contractual variation and proprietary estoppel in the field of consensual departures from contractual rights, sharing some characteristics with each. The analogies and distinctions between contractual variation and conventional estoppel appear from the observations of Lord Denning MR in Amalgamated Investment and Property Co Limited v Texas Commerce International Bank Limited (in liq) [1982] QB 84, 121, to the effect that if parties to a contract by their course of dealing put a particular interpretation on its terms, on the faith of which each to the knowledge of the other acted and conducted their mutual affairs, they are bound by that interpretation just as much as if they had recorded it as a variation of the contract. With reference to Grundt v Great Boulder Proprietary Gold Mines, his Lordship explained that such parties had by their course of dealing adopted a conventional basis for the governance of their relations and were bound by it - because, having regard to the dealings between the parties, it would be unjust to allow either to insist on the strict interpretation of the original terms. Nor is it necessary that the parties, in adopting their assumption, have adverted to the express terms of the contract. As Lord Denning MR said in Amalgamated Property Co v Texas Bank [at 121]:- There is no need to inquire whether their particular interpretation is correct or not - or whether they were mistaken or not - or whether they had in mind the original terms or not. Suffice it that they have, by their course of dealing, put their own interpretation on their contract, and cannot be allowed to go back on it.

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34 The differences in the second and third elements outlined above, impact on the requisite state of knowledge of the defendant, particularly in a case of acquiescence (or inducement by silence). In the case of promissory estoppel where the defendant has not positively encouraged the plaintiff to adopt the relevant assumption, a plaintiff must show that the defendant at least failed to deny the assumption with knowledge that the plaintiff was relying on it to the plaintiff's potential detriment, and that the assumption could be fulfilled only by a diminution or suspension of the defendant's contractual rights [see generally Waltons v Maher, 428-429 (Brennan J); Meagher, Gummow & Leeming, [17-050]]. It is essential to an equitable estoppel that the defendant knows or intends that the party who adopts the assumption will act or abstain from acting in reliance on it [see Crabb v Arun District Council [1976] Ch 179, 188; Waltons v Maher, 423 (Brennan J)]. Such knowledge or intention may easily be inferred where the adoption of the assumption is induced by the making of a promise, but it may also be found where the defendant encourages a plaintiff to adhere to an assumption already formed, or acquiesces in an assumption when in conscience objection ought to be stated [Waltons v Maher, 423 (Brennan J)]. The cases emphasise that a party who seeks to set up an equitable estoppel of this type must show that the other has made, whether by words or conduct, an unequivocal representation that it did not intend to enforce its strict legal rights [Allied Marine Transport Ltd v Vale Do Rio Doce Navegacao SA (The Leonidas) [1985] 1 WLR 925, 941 (Robert Goff LJ); Legione v Hateley, 435-7; Foran v Wright, 410-11, 435-6]. Although there are cases in which silence, when there is an obligation to speak, may convey such a representation, silence is usually not unequivocal, as there can be multiple reasons for a party remaining silent [The Leonidas, 941; Handley, Estoppel by Conduct and Election, Sweet & Maxwell, 2006, p54, [3-013]]. Brennan J, in the passage cited above, limited the circumstances in which silence would found an equitable estoppel to those in which the relevant assumption of the plaintiff could be fulfilled only by a diminution of the defendant's rights (or an increase in its obligations) and the defendant, with knowledge that the plaintiff's reliance on the assumption may cause detriment to the plaintiff if not fulfilled, failed to deny to the plaintiff the correctness of the assumption. His Honour had earlier explained (at 427):- Silence will support an equitable estoppel only if it would be inequitable thereafter to assert a legal relationship different from the one which, to the knowledge of the silent party, the other party assumed or expected: see Ramsden v. Dyson, at pp 140-141; Svenson v. Payne (1945) 71 CLR 531, at pp 542-543; Willmott v. Barber (1880) 15 ChD 96, at pp 105-106. What would make it inequitable to depart from such an assumption or expectation? Knowledge that the assumption or expectation could be fulfilled only by a transfer of the property of the person who stays silent, or by a diminution of his rights or an increase in his obligations. A person who knows or intends that the other should conduct his affairs on such an assumption or expectation has two options: to warn the other that he denies the correctness of the assumption or expectation when he knows that the other may suffer detriment by so conducting his affairs should the assumption or expectation go unfulfilled, or to act so as to avoid any detriment which the other may suffer in reliance on the assumption or expectation. It is unconscionable to refrain from making the denial and then to leave the other to bear whatever detriment is occasioned by non-fulfilment of the assumption or expectation.

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44 After the 1999 assignment, the annual reminders of rent increases were directed to Moratic. Although, at least generally speaking, a lessor has no obligation to remind its lessee of its covenants or the consequences of a breach [Handley, Estoppel by Conduct and Election, Sweet & Maxwell, 2006, p54, [3-013]; Cairns v Burgess (1905) 2 CLR 298], if it choses to do so, such reminders or demands could potentially found an estoppel. However, a demand for rent does not ordinarily convey a representation that the amount demanded is the only rent payable, and will not necessarily prevent a landlord from later recovering amounts which it had by miscalculation or oversight failed to demand; usually, such demands are to be read as excepting errors and omissions [Mineaplenty Pty Ltd v Trek 31 Pty Ltd [2006] NSWSC 1203, [57]-[64]]. In Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101, where an equitable estoppel was upheld, there was an express agreement to accept a lesser rent, in lieu of the rent payable under the lease. It was clear that the tenant knew that a concession was being made, and assumed that payment of the concessional rent would be accepted in full satisfaction, and that that assumption was encouraged by the lessor. But in Mineaplenty, where no estoppel was found, neither party supposed that any concession, or any departure from the terms of the lease, was involved, and neither intended to depart from the terms of the lease: there was no representation or assumption that an amount other than what was properly due under the lease would be accepted, and the amounts charged by the annual notices and the monthly invoices were incorrect by error or oversight, not by intention [Mineaplenty, [57]-[59]]. Similarly, in the present case, the evidence does not reveal a representation or assumption that an amount other than what was properly due under the lease would be accepted; there was merely an absence of payment of or demand for "further rent", which has not been shown to have been intentional.

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