Kanki's alleged lack of cooperation and of good faith - grounds 13 and 18
93 Neptune argues that the disentitling conduct by Kanki arises from Kanki's breach of cll 6(b)(i) and 6(b)(iii) of the JVA requiring the parties to fully cooperate and to ensure that they acted at all times in the best interests of the Business and in good faith.
94 Neptune contends that the judgment focused solely on the alleged breaches by Neptune to the exclusion of breaches by Kanki, such that Neptune's argument based on Burger King Corp v Hungry Jack's Pty Ltd (2001) 69 NSWLR 558 was not addressed. In Burger King, the Court of Appeal of the Supreme Court of New South Wales (Sheller, Beazley and Stein JJA) said (at [172]-[176]):
172 In Garry Rogers Motors (Aust), Finkelstein J considered (at 43,014) that such a term imposed an obligation on a party "not to act capriciously". He pointed out, however, that such a term will not restrict a party acting so as to promote its own "legitimate interests". As his Honour explained, "provided the party exercising the power acts reasonably in all the circumstances the duty to act fairly and in good faith will ordinarily be satisfied".
173 The same point was made in Kham & Nate's Shoes No 2 Inc v First Bank of Whiting 908 F 2d 1351 (1990) at 1357, that "[p]rinciples of good faith … do not block use of terms that actually appear in the contract". There must be something more. This was explained in Metropolitan Life Insurance Co v RJR Nabisco Inc 716 F Supp 1504 (1989) at 1517:
"In other words, the implied covenant will only aid and further the explicit terms of the agreement and will never impose an obligation 'which would be inconsistent with other terms of the contractual relationship'. … Viewed another way, the implied covenant of good faith is breached only when one party seeks to prevent the contract's performance or to withhold its benefits. … As a result, it thus ensures that parties to a contract perform the substantive, bargained-for terms of their agreement."
See also Rio Algom Corporation v Jimco Ltd 618 P 2 d 497 (1980) (Utah).
174 Burger King Corporation submitted that there should not be implied into the Development Agreement implied terms of reasonableness or good faith (or any hybrid of the two). It raised two general objections to the implication of such terms. First, it was said that caution should be exercised in implying any such terms, "as such terms are calculated to subvert and distort the carefully negotiated and articulated contractual balance which the parties have achieved".
175 Secondly, it was submitted that such a term should not be implied where the application would occasion contradiction of, or friction with, express pro visions of the contract: see, for example, Metropolitan Life Insurance Co v RJR Nabisco Inc. It was submitted that His Honour erred in not asking whether there would be such contradiction or friction. It was then submitted that as the express provisions of the Development Agreement "comprehensively and exhaustively delineate the rights and obligations of the parties. [They] cover the field" and any implied term of reasonableness or good faith would "pro tanto" be inconsistent. The provisions of cl 4.1(a) and cl 4.2 were said to demonstrate this point.
176 Those clauses, it was submitted, established an "objective benchmark against which the grant or withholding of operational approval" was to be made. It was submitted that "[t]he introduction of a generalised qualification of reasonableness to that subject matter would alter the expressly formulated benchmark and to effect a substantive modification to the operation of the express term". We understand this submission to mean that the objective benchmarks were the need to have operational, financial and legal approval as defined in cl 4.2. This submission is acceptable in so far as it goes. However, it does not grapple with two fundamental issues. First, the granting of operational, financial and legal approval is within "the sole discretion" of Burger King Corporation. If full force is given to that concept, it would allow Burger King Corporation to give or to withhold relevant approval "at its whim" including capriciously, or with the sole intent of engineering a default of the Development Agreement, giving rise to a right to terminate. That is hardly the language of objectivity. The point is well illustrated by the observations of Priestley JA in Renard Constructions (at 258):
"It seems clear that the words of the clause empower the principal to give a notice to show cause upon any default in carrying out any requirement in the contract. Thus for a completely trivial default the principal can give a notice to show cause. It is possible to imagine many situations in which, if a notice for some trivial breach were given the contractor might fail, as a matter of fact, to show cause within the specified period to the satisfaction of the principal why the powers should not be exercised against him. (One obvious example would be where, through some mistake, the contractor's attempt to show cause was delivered late.)
For the principal, in such circumstances, to be able then to exclude the contractor from the site and/or cancel the contract would be, in my opinion, to make the contract as a matter of business quite unworkable. One way of explaining this view is to say that no contractor in his senses would enter into a contract under which such a thing could happen. The reasonable contractor, the reasonable principal and the reasonable looker-on would all assume that such a result could not come about except with good reason.
The over-riding purpose of the contract from both the contractor's and the principal's point of view is to have the contract work completed by the contractor in accordance with the contract, in return for payment by the principal in accordance with the contract. The insertion of a subclause such as subcl 44.1 not subject to the constraint of reasonable use by the principal is quite inconsistent with all the main contractual promises by each party to the contract to the other."
(Citations omitted.)
95 Of course in the JVA there was no need to imply a duty of good faith as the duty was express as was the duty to co-operate. There can be little doubt as Neptune contends, that acting capriciously in serving the default notice or in refusing to approve the transfer of Seadeck to Brisbane would create problems for Kanki if indeed it had been acting capriciously. That was the first threshold question.
96 It cannot be accepted that the Burger King argument was not addressed as Neptune asserts. The primary judge referred to this argument (at [54] and to the issue by reference to Allphones at [255] and [260]-[261]), where his Honour said:
54 Neptune argued that the power of a party to give a notice of termination under cl 13(a)(iii) of the JVA had to be exercised reasonably and in good faith in respect of a substantive breach of an operational provision, and not capriciously for some extraneous purpose, relying on Burger King Corporation v Hungry Jack's Pty Limited (2001) 69 NSWLR 558 at 571-572 [176]-[177], 573 [183]. It contended that Kanki had not alleged any breaches justifying termination. Rather, it submitted that Kanki had alleged breaches of the general obligations of the parties in cl 6 of the JVA and that the ascertainment of any breach of that character involved Kanki's subjective evaluative judgments as to the existence and nature of any breach.
…
255 Mr Ozmen had told Mr Robertson and Mr Douchkov from the inception of their relationship in 2014 that he, Mr Ozmen, had no money, and the Australians would have to pay all expenses in getting Seadeck to Sydney and getting her ready for the joint venture business. In those circumstances, it is safe to infer that, when he engaged with Culture Map, Mr Ozmen needed financial resources in order to assert and protect Kanki's and Entertainment's rights under the JVA and the charterparty in circumstances where Kanki had not received any substantial funds from net profit or otherwise since late January 2017 or early February 2017.
…
260 The express duties of trust and to act in good faith operated to govern a decision of a party to invoke the provisions of cl 13(a)(iii) by giving a notice, such as the [Breach Notice]. Obviously, the parties contemplated, when they included cl 13(a)(iii), that there could come a point in their relationship when a breach was of such a character that one party, in good faith, could require the other party to remedy that breach within 14 days, failing which the JVA would terminate.
261 In other words, not every breach of the JVA would be capable of founding the right to give a notice to remedy under cl 13(a)(iii). For example, if the parties disagreed on which of two brands of French champagne of similar price or quality should be offered to guests on board Seadeck, the fact that Neptune chose one rather than that which Kanki preferred would not be sufficient to justify a notice under cl 13(a)(iii). As Mason ACJ, Wilson, Brennan and Dawson JJ said in Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549 at 561-562:
Since the judgment of Diplock LJ in Hongkong Fir [[1962] 2 QB 26] it has been recognized in England that a term in a contract may stand somewhere between a condition and a warranty. Such an intermediate or innominate term, it has been held, is capable of operating, according to the gravity of the breach, as either a condition or a warranty. In Hongkong Fir the obligation of seaworthiness was readily classified as innominate because a breach of the obligation might be trivial, making damages an adequate remedy, or grave, in which event it should have effect as a breach of condition. The innominate term brings a greater flexibility to the law of contract, as Lord Wilberforce has remarked on more than one occasion: Reardon Smith Line Ltd. v. Hansen-Tangen [[1976] 1 WLR, at 998; [1976] 3 All ER, at 576-577]; Bunge Corporation [[1981] 1 WLR, at 715-716; [1981] 2 All ER, at 541-542]. Although nothing less than a serious breach of an innominate term entitles the innocent party to treat the contract as at an end, the breaches of cll. 8 and 9 merit this description. (emphasis added [in the original])
97 The real difficulty with this argument on appeal and at first instance is that it first depends upon a finding that the party who seeks to terminate has breached a duty. Not only was no such finding made against Kanki, but such a finding was expressly and properly rejected.
98 Contrary to the suggestion that the primary judge did not consider Kanki's alleged breaches, it is clear that he considered the arguments, but rejected them and in our view did so correctly.
99 The claim is that evidence of Kanki's lack of cooperation and good faith was demonstrated by these actions:
(a) in November or December 2016, Mr Ozmen began demanding payment of money from Neptune prior to any accounting records at a time when Mr Ozmen knew the Business was not yet profitable;
(b) in late January or February 2017, Mr Ozmen demanded payment in circumstances where there was no money in the joint venture's account;
(c) at no stage did Mr Ozmen or his representatives comply or refer to the preconditions or mechanisms for payment set out at cl 10 of the JVA, for example, invoices were not issued; and
(d) where Neptune declined to provide any further funds, Kanki persisted with demands.
100 As his Honour noted, Neptune could hardly complain that Kanki (or Mr Ozmen) was asking for money as profit distributions on the basis asserted by Neptune from 2 February 2017 (that this money was needed as working capital) without providing Kanki with a detailed set of management accounts showing (at least with management account levels of approximate accuracy) what the operations, cash flow and balance sheet of the joint venture were. Yet, as at July 2017, Neptune's financial reporting to Kanki indicated that the business in the preceding four months had been consistently operating at a loss.
101 It follows that, insofar as the demands were concerned, no argument under Burger King arises. In any event, it is by no means clear that his Honour's application of Allphones was incorrect. In Allphones, Perram J said (at [55]-[57]):
55 I do not think it is necessary to reach a view on whether a party who has repudiated an agreement may take advantage of a breach by the other party of an essential term and, thereupon, terminate the agreement. This is because the outcome of that question has no impact on the position of express powers of termination. It is, I think, plain that the parties could by their compact expressly provide that powers given to them under it could be exercised even where the party seeking to do so had repudiated the agreement. None of the familiar doctrines which can strike at the validity of contractual terms would invalidate such a provision. It does not, for example, find itself keeping company with the many bargains which the common law will not countenance such as those which operate in restraint of trade or those which have the effect of undermining the criminal law.
56 It follows that the suggested principle is one which, if it exists, conforms itself to the agreement at which the parties have arrived. This in turn means that it is either a presumption about how the parties' bargain is to be interpreted or it takes the form of an implied term. As to the former, it is difficult to ascertain why the parties should be presumed to have intended one answer to this question rather than another. The very many circumstances in which the issue may arise caution against a simplistic approach to the parties' intention. Should it be presumed, for example, that where both parties have repudiated the agreement neither should be able to escape it notwithstanding the express bargain between them that either could? Particularly where, as here, the right of termination is expressly conferred in the case of fraud, it is difficult to identify the redeeming features of an approach to interpretation that locks the victim of a fraud into an inescapable bargain with its perpetrator as a result of an act of repudiation which may be trivial by comparison.
57 For similar reasons I do not think that a term having a similar effect could be implied. No doubt there are implied terms which require the parties to a contract to do everything that is necessary on each of their parts to ensure the smooth operation of the contract. The decisions of Cockburn CJ in Stirling v Maitland (1864) 5 B & S 840 at 852; 122 ER 1043 at 1047 and Lord Blackburn in McKay v Dick (1881) 6 App Cas 257 at 263 show as much. But for reasons I have just given, I do not think that the implication of such a term is plausible. To the contrary, an implied term which perpetually confines the parties to a contract which neither wish for and both have repudiated seems to me to have little to commend it.
102 It is well-established that a party cannot take advantage of its own breach, but, in this instance there was no evidence that established that any alleged breach by Kanki (his Honour having found there were no breaches) was responsible for Neptune's breaches. Indeed, Neptune does not appear to make such an argument. The only specific argument of such a breach on the part of Kanki pressed on appeal was the refusal to consent to Seadeck trading during winter in Brisbane. As will be seen, in our view, far from this being a breach on the part of Kanki, the breach in shifting the Seadeck and the operation of the Business to Brisbane without consulting Kanki prior to doing so, was a breach by Neptune.
103 Neptune also seeks to rely upon Kanki's negotiations with Culture Map and, in particular, reliance is placed upon the lack of oral evidence from those who might be called for Kanki, most notably, Mr Ozmen. It was entirely open for his Honour to give little, if any, consideration to the somewhat peripheral evidence concerning Culture Map. Insofar as the pleaded issues of the litigation were concerned, it was the conduct of the parties to the JVA in relation to each other which was the key focus of attention. The determinations in relation to that topic were open to be made on the common ground as to the history of the commercial relationship, the documentary record and his Honour's findings as to the adverse credit of some of Neptune's witnesses. A critical finding in this regard (at [243]-[244]) was that the first communication of any substance between Mr Ozmen and Mr Le was at a meeting two weeks after Kanki was informed of Neptune's decision to relocate Seadeck to Brisbane and months after the issues surrounding accounting information and payment of net profits first arose. In our view, the primary judge's findings as to the absence of a breach by Kanki as asserted were open and correct. In those circumstances, it is unnecessary to consider further argument in relation to Burger King and Allphones.
104 As a postscript, Neptune raises some formal complaints about the content of the Breach Notice asserting that no specific JVA provisions or obligations were specified. It is argued that the form of the Notice, in any event, did not allow for the alleged breaches to be remedied in the manner contemplated by cl 13(a)(iii) of the JVA. This complaint should not be accepted. It was quite clear from Neptune's contemporaneous conduct that the terms of the Breach Notice were understood. In its letter in response to the Breach Notice, Neptune's solicitors specifically addressed Neptune's position as to its cl 10 obligations and the provision of financial information pertaining to the Business. It expressly denied that it was in breach of any obligation under the JVA. Importantly, the primary judge held that despite any complaint about the effectiveness of the notice of termination under cl 13(a)(iii), Neptune's conduct was sufficiently repudiatory so as to constitute a basis upon which a reasonable person in the position of Kanki would have understood correctly that by the time of the Breach Notice on 11 July 2017, Neptune did not intend to take the JVA seriously and was only prepared to carry out the JVA when it suited it, such that it evinced an intention not to be bound by it. It was therefore, in any event, a proper basis for termination of the JVA at common law.
105 The question of whether there was a repudiation or not will be considered further below, but we would also accept Kanki's submission (although it is not essential to our reasoning), that there is no basis to contend that the cl 13 default regime was in any way an exclusive code, governing termination for a breach, thereby depriving the parties of any concurrent right to terminate by law. There is no suggestion that clear words have been used to rebut the presumption that the contracting parties intended that remedies for breach of contract arising by operation of law should operate: Concut Pty Ltd v Worrell (2000) 75 ALJR 312 per Gleeson CJ, Gaudron and Gummow JJ (at [23]).
106 Finally as against this central appeal argument, the reasoning of the primary judge (at [258]-[272]) is compelling. From this passage the following points may be distilled:
Kanki and Neptune agreed in cl 13(a)(iii) and cl 13(b) that if one of them continued to breach any obligation under the JVA after receiving 14 days' notice to remedy the breach, then a default occurred under the JVA in consequence of which the JVA was terminated.
The JVA also required both parties to do everything possible to give each other full cooperation (cl 6(b)(i)), and to act in the best interests of the joint venture's business in good faith (cl 6(b)(iii)), to owe each other a duty of trust (cl 6(d)), jointly operate and manage the business (cl 6(e)), not unilaterally to incur debts or commit the other party to liabilities (cl 6(f)), and to ensure that the joint venture had sufficient working capital to conduct the business at all times (cl 7). These obligations could only be discharged if both parties worked cooperatively with each other.
The express duties of trust and to act in good faith operated to govern a decision of a party to invoke the provisions of cl 13(a)(iii) by giving a notice, such as the Breach Notice. Obviously, the parties contemplated, when they included cl 13(a)(iii), that there could come a point in their relationship when a breach was of such a character that one party, in good faith, could require the other party to remedy that breach within 14 days, failing which the JVA would terminate.
Not every breach of the JVA would be capable of founding the right to give a notice to remedy under cl 13(a)(iii).
The three breaches, the subject of the Breach Notice, were capable of remedy within 14 days as to all matters to be put right for the future. The House of Lords in L Schuler AG v Wickman Machine Tool Sales Limited [1974] AC 235 explained the correct approach for determining when some past breaches were technically no longer able to be cured within the contractually stipulated timeframe.
The Breach Notice, relevantly, required Neptune within 14 days to remedy its past conduct in breaching continuing positive obligations by putting things right for the future. It was possible for Neptune, within 14 days, first, to return Seadeck to Sydney, secondly, to provide Kanki with a copy of the catering agreement and explain, if it could, the pricing of the food served on the Vessel and why the cost of providing the food appeared to be greater than the revenue it earned, thirdly, to provide Kanki with 'BAS statements' submitted to the ATO and information about Neptune's subsequent non-payment of GST from February 2017 onwards and, fourthly, to provide Kanki with the financial information it had requested and Neptune's outstanding calculations of net profit over the life to date of the joint venture. Incidentally, Neptune could have also restored the mast, although its failure to do so is not a reason, by itself, that would have supported Kanki's termination arguments. (emphasis added)
Clause 6(e) was not limited to require joint management decision-making only with respect to the subject matters of corporate and private bookings, pricing for general admission, and the quality of beverages and food served on the Vessel.
A reasonable person in the position of the parties would have understood that decisions about commercially significant matters (such as when, how often and where Seadeck would offer its services to the public, how it would be fitted out, when and what repairs or maintenance would be needed, and how much working capital was necessary) were matters for both parties.
Kanki's complaints were not contrived or captious. They reflected genuine concerns as to matters fundamental to the running of the business and a proper understanding of its financial position.
It is no answer that (as Neptune contended) Mr Clarke, as a professional accountant, could look at entries in the Xero system. It took Mr Borella and Mr Gorter about four weeks and Kanki's threat, on 8 April 2017, to issue a notice of breach, to produce the first fortnightly profit and loss statement, and then it was only for the fortnight ended 28 March 2017. Unlike Mr Clarke and Kanki, they had access to information that Neptune and Mr Borella were not prepared, ever, to provide to Kanki about the terms and operation of the catering agreement and the discharge of the joint venture business' liabilities in respect of GST or, as it transpired, the failure of Neptune to lodge 'BAS statements' and so meet the joint venture's GST obligations.
Each of Neptune and Kanki, as joint venturers in the business, had its own liabilities under taxation laws, including the GST Act.
The JVA provided for each party to have many joint responsibilities. Importantly, the structure of cl 10 and the first sentence of cl 6(e) allocated responsibility for collection of all revenue and the payment of day-to-day expenses to Neptune. That is why cl 10 required Neptune either to pay Kanki 50% of the revenue less expenses before taxation (being defined as 'Net Profit'), plus any GST payable, or for Neptune to bear, itself, as between the parties, both any net loss and the amount of any GST payable.
107 Further, the following points (at [274]-[286]) were made:
It was not necessary to determine the taxation issue as to the liabilities of each of Neptune and Kanki for GST under the GST Act. The JVA entitled Kanki to be given full information by Neptune about, among other financial information, GST and any 'BAS statements' that Neptune had lodged. Only on 13 October 2017 did Mr Borella provide, for the first time, his explanation as to why he reasoned that Kanki had to pay half of the GST on all of the taxable supplies that Neptune made in the course of running the day-to-day business on Seadeck. Neptune was in breach of its obligations at the time of the issue of the Breach Notice under cl 6(b)(i), (iii), (vi) and (e) and cl 10(a) and cl 10(b).
Neptune was not entitled to constantly ignore its obligation under cl 6(e) to discuss and finalise arrangements for the operation and management of the joint venture Business. Nor was Neptune entitled to eschew its obligation to make decisions jointly when it contemplated relocating Seadeck to Brisbane. The relocation was a major decision that affected the overall operation of the Business. Neptune and Kanki jointly (as opposed to Neptune solely) had possession and control of Seadeck under the CA. Neptune decided on about 15 May 2017 to take Seadeck to Brisbane without, and regardless of whether it had, Kanki's consent. As Mr Douchkov said, by then this was the only option, whether Kanki liked it or not, or as Mr Auld put it in his email of 17 June 2017, Kanki or Mr Ozmen did not 'have the right to stop us from making money'.
The Breach Notice was valid. No doubt, it could have been better expressed in parts, but it identified, and Neptune (or a reasonable person in its position would have) understood from it, the critical obligations on Neptune's part that required remedy, namely, the return of Seadeck to Sydney, the provision to Kanki of the catering agreement and information as to the pricing of the food, financial information and the position with 'BAS statements' and GST.
Lord Reid explained in Schuler (at 249H-250B) that what is sufficient to put things right for the future depends on the nature of the breach. His Lordship said:
It appears to me that clause 11(a)(i) is intended to apply to all material breaches of the agreement which are capable of being remedied. The question then is what is meant in this context by the word "remedy". It could mean obviate or nullify the effect of a breach so that any damage already done is in some way made good. Or it could mean cure so that matters are put right for the future. I think that the latter is the more natural meaning. The word is commonly used in connection with diseases or ailments and they would normally be said to be remedied if they were cured although no cure can remove the past effect or result of the disease before the cure took place. And in general it can only be in a rare case that any remedy of something that has gone wrong in the performance of a continuing positive obligation will, in addition to putting it right for the future, remove or nullify damage already incurred before the remedy was applied. To restrict the meaning of remedy to cases where all damage past and future can be put right would leave hardly any scope at all for this clause. On the other hand, there are cases where it would seem a misuse of language to say that a breach can be remedied.
For example, a breach of clause 14 by disclosure of confidential information could not be said to be remedied by a promise not to do it again.
Here, Neptune could have offered to meet or to provide Kanki with a clear, detailed and open financial justification for relocation of the ship that might have satisfied Kanki that she should stay in Brisbane.
Instead, Omniwealth's 14 July 2017 response affirmed Neptune's breaches and evinced an intention that Neptune would not be bound by its obligations to make any relocation decision jointly and to provide Kanki with any further financial information including about GST or the catering issues. That letter, effectively, confined Kanki to the role of a passive investor with no say over a major decision, namely where Seadeck, of which it was supposedly in joint possession and control under the CA, would be or trade and no right to any more information about the joint venture or its business (including that GST was not being paid) than Neptune had chosen to give to it or might choose to give it in the future.
Even if the Breach Notice was ineffective as a notice under cl 13(a)(iii) to bring about automatic termination of the JVA under cl 13(b), it was effective to enable Kanki to treat the JVA as at an end when, on 14 July 2017, Neptune refused to comply with any of its requirements.
A reasonable person in Kanki's and Entertainment's positions would have understood, correctly, by the time of the issue of the Breach Notice, that Neptune did not, and did not intend to, take the JVA seriously, and was only prepared to carry out its part of the JVA if and when it suited Neptune: Carr v Berriman (1953) 89 CLR 327 (at 351-352) and Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 (at 633, 644 and 658).
The Breach Notice made plain that, if Neptune failed to remedy the breaches alleged, Kanki would treat the JVA as at an end. Even though the Breach Notice expressly relied on cl 13 of the JVA, it also sufficed as a notice to remedy one or more breaches at common law to entitle Kanki to treat the JVA as terminated once Neptune did nothing to remedy any of its breaches and persisted in its denial of Kanki's right to make important decisions jointly.
108 For these reasons, grounds 13 and 18 cannot succeed.