Plaintiff v Defendants

2 The defendants are the legal and/or beneficial owners of the Chadstone Shopping Centre. The plaintiff operates a well-known store at the shopping centre. This proceeding concerns a dispute about the outgoings payable under the current store lease, which is dated 5 February 2001.

3 Since mid-2007, the defendants have been seeking to have the trial of this proceeding split in some way. At a directions hearing on 31 August 2007, they indicated that they proposed to ask the court to determine 11 preliminary questions as to whether the lease contained certain express or implied terms alleged by the plaintiff.[1] On that occasion, I indicated that I would not consider any application for the determination of preliminary questions until after the pleadings had closed. I made various orders for the delivery of an amended statement of claim and subsequent pleadings.

4 By summons dated 8 October 2007, the defendants sought the preliminary determination of the 11 questions which had previously been foreshadowed. An additional construction question was subsequently added in the defendants' written submissions. The defendants said that the only evidence upon which they would seek to rely at the hearing of the preliminary questions was the lease itself. The plaintiff opposed the application. In particular, the plaintiff said that the proposed questions could not be considered in isolation from the background facts, and it would want to lead "a great deal of matrix evidence". It baldly asserted that there would be a substantial overlap between that evidence and the remainder of the evidence at trial, so that there would not be "any conceivable saving of costs or time" by determining preliminary questions.

5 At the hearing of that summons on 12 October 2007, I noted that I did not have evidence from either side as to how many and which witnesses might be called in relation to the various issues, and how much time might be saved by proceeding down the proposed preliminary questions path. I made directions for the exchange of categories of discoverable documents relating only to the issues the subject of the proposed preliminary questions. I indicated that once such discovery had been completed, I would require each side to provide an affidavit which gave details of the number and nature of witnesses and trial estimates. The defendants' summons was adjourned to enable those steps to be completed.

6 The parties were subsequently unable to agree on the categories of documents. On 8 November 2007, I heard and determined a dispute about the discovery categories, extended the timetable for providing discovery and made orders for affidavits relating to the application for the setting of preliminary questions. I adjourned the defendants' summons until 15 February 2008.

7 At the hearing on 15 February, the plaintiff sought leave to further amend its statement of claim, to raise an estoppel argument, the terms of which will be considered shortly. The defendants opposed the granting of such leave. I granted leave to make the proposed amendments.

8 In their outline of submissions dated 13 February 2008, the defendants had foreshadowed that, if I were minded to grant leave to make the proposed pleading amendments, they would not press for the determination of the proposed preliminary questions. Instead, they would seek to have the trial split in such a way as to exclude certain issues from the initial hearing.

9 After hearing oral argument from both sides as to that new proposal, I determined that the trial of the proceeding in the first instance would be of all issues other than those defined as "the excluded issues".[2]

10 It is necessary to consider the pleadings in more depth, in order to understand how and why I propose that the trial be split.

11 All issues relating to the nature and extent of the parties' rights and obligations under or in connection with the lease will be determined in the first part of the trial.

(a) The lease has an initial term of 20 years, with a commencement date of 30 November 1999;

(b) The lease requires the Tenant[3] to pay the Tenant's Contribution to Outgoings for each Outgoings Year, calculated in accordance with clause 4.3 of the lease;

(c) The Tenant's Contribution to Outgoings is calculated by reference to the Tenant's Proportion, being "the proportion expressed as a percentage obtained by dividing the Lettable Area of the [plaintiff's store] by the Lettable Area of the Centre on the Commencement Date";

(d) Outgoings are "the total of all amounts paid or payable by the Landlord for an Outgoings Year in connection with the Centre (other than capital costs and depreciation)";

(e) Outgoings include amounts paid or payable for the following: rates, taxes and other charges; insurance premiums and charges; cleaning; gardening and landscaping; lighting, security and caretaking services; management, administration and marketing of the Centre; supplying, renting, operating, maintaining, servicing, repairing, replacing or upgrading Services; supply charges for Services; repairing, redecorating and maintaining the Centre; valuation fees and other costs and expenses incurred in relation to municipal rates, levies and taxes; expenses for running parking areas, child-minding areas, toilets, parcel pick-up and other facilities; audit expenses; and "any other expenditure reasonably and properly incurred in the operation and promotion of the Centre";

(f) At least 30 days before the beginning of each Outgoings Year, the Landlord must give the Tenant a notice of estimated Outgoings and the Tenant's Contribution to Outgoings. If required by the Tenant, the Landlord must justify the estimate in writing. The Tenant must pay the estimated amount by monthly instalments in advance;

(g) There is provision for adjustment to reflect actual Outgoings after the end of each Outgoings Year. As part of that adjustment process, the Landlord must give the Tenant "an audited statement giving reasonable details of the Outgoings and the Tenant's Contribution to Outgoings." That adjustment process may lead to a further payment by the Tenant, or a repayment by the Landlord.

13 The plaintiff pleads that it is only required to pay in respect of such of the Outgoings under the lease as are or were "reasonably and properly incurred in the operation and promotion of the Centre." It says that such a requirement arises either upon a proper construction of the lease[4] or as an implied term of the lease.[5] The defendants deny the existence of any such term. They say that the lease expressly provides that only one type of expense[6] is subject to the qualification that it is payable only if "reasonably and properly incurred."

14 The plaintiff also pleads that the lease requires the Landlord to provide sufficient details in respect of each Outgoing, including supporting documents, as are reasonably necessary to enable the Tenant to satisfy itself of a number of things, including that the Tenant's Contribution to Outgoings are Outgoings for which the Tenant is liable under the lease, and that they were "reasonably and properly incurred in the operation and promotion of the Centre."[7] The defendants deny that such an extensive obligation exists. They say the Landlord is only required to prepare a statement giving "reasonable details of the Outgoings" and specifying certain matters, and to provide the Tenant with the statement after it has been audited by a qualified auditor.

15 Further or in the alternative, the plaintiff pleads that the parties entered into the lease (and a prior agreement to lease), and conducted their affairs under the lease, on an assumed basis, namely that the management fees which the Tenant was liable to pay as part of the Outgoings were costs actually incurred in performing the management, control and administration of the Centre and did not include any profit element. It pleads that since the 2004 Outgoings Year, the Landlord has departed from the assumed basis, in circumstances such that it would be unconscionable to do so, and the Landlord is estopped from doing so.[8] The defendants deny proceeding on the assumed basis, and deny that the circumstances are such that any such estoppel would arise.

16 The plaintiff then goes on to plead certain factual matters relating to the actual calculation of Outgoings for each of the 2001 to 2006 Outgoings Years.[9] In particular, it lists the documents with which it was provided, and the Tenant's Proportion used to calculate the Tenant's Contribution to Outgoings in each year. These allegations are substantially admitted.

17 A schedule to the lease provides that 14.09% is the relevant percentage to use when calculating the Tenant's Proportion. The parties agree that for each of the 2002 to 2006 Outgoings Years, the Landlord did not use 14.09% as the relevant percentage; instead, it used several higher rates. The plaintiff says that what occurred was not in accordance with the lease.[10]

18 The defendants say that 14.09% was inserted in the schedule instead of 14.90%, as a result of a common mistake prior to execution of the lease. In their counterclaim, they seek to have the lease rectified to correct that figure. The defendants also say that a dispute between them as to the Tenant's Proportion for the 2001 and 2002 Outgoings Years was settled in June 2002, on the terms contained in an agreement ("the first settlement agreement"), which had the effect of varying the lease.[11]

19 In respect of the 2001 to 2005 Outgoings Years, the plaintiff makes a further claim. It alleges that various management fees charged as part of the Outgoings were paid to one or more related parties of the Landlord. Most of the allegations about the relationships between relevant parties, and the ability of those parties to control or influence the Landlord, are disputed.

20 The defendants also rely upon the second settlement agreement, being an alleged agreement made in December 2004 in settlement of the management fees aspect of the Outgoings dispute for the 2003 to 2005 Outgoings Years. The defendants say amongst other things that the second settlement agreement would defeat the plaintiff's claim that the management fees for those three years were not reasonable and proper.

21 The following are all "excluded issues", that is to say, issues which I have determined will not be determined as part of the initial hearing of the trial.

22 The most time-consuming issues are those raised in paras [29]-[34] of the FASOC, which allege that certain management fees and Centre management fees, which were included in the Outgoings for each of the 2001 to 2006 Outgoings Years, were not "reasonably and properly incurred in the operation and promotion of the Centre", for a large number of reasons, including:

(a) They included amounts paid to a related entity of the Landlord;

(b) They were significantly in excess of CPI increases for Melbourne for the same periods;

(d) They were significantly in excess of previous fees;

(e) They were unreasonable and excessive having regard to the work, skill and responsibilities of the recipient; and

(f) The Landlord could and should have contracted with an arm's length party to undertake the activities for substantially lower amounts.

Substantial particulars of these allegations are contained in Schedule B to the claim. The plaintiff seeks to recover what it says has been overcharged for each Outgoings Year, either as money had and received or damages for breach of the lease.

23 The defendants deny any overcharging in respect of management fees. They also raise a limitation bar under s20A of the Limitation of Actions Act 1958, in so far as the plaintiff seeks to recover in respect of any amount attributable to a tax, fee charge or other impost.

24 The next group of excluded issues relate to the adequacy of the information and documentation actually provided by the Landlord to the Tenant.

25 In FASOC para [17], the plaintiff says that the documents provided for each of the 2001 to 2006 Outgoings Years did not:

(a) Constitute an "audited statement giving reasonable details"; and

(b) Include sufficient details, including supporting documents, as were reasonably necessary to enable the plaintiff to satisfy itself that the Outgoings were, amongst other things, Outgoings for which the plaintiff is liable under the lease, and "reasonably and properly incurred in the operation and promotion of the Centre."

Extensive particulars are provided of the various respects in which the documents and the audit process are alleged to have been inadequate. The defendants generally deny these allegations and, in particular, deny that the lease requires the Landlord to provide the information alleged by the plaintiff.

26 FASOC para [19] pleads that the plaintiff has requested the Landlord and the auditor to provide further information, including supporting documents for each Outgoing. This allegation is admitted.

27 FASOC para [20] pleads that the Landlord and auditor have not provided the requested information. The defendants admit the non-provision, but deny any obligation to provide.

28 The final excluded issue is raised in para [57] of the DAC, and flows from the rectification claim discussed earlier. The defendants seek to recover the difference between the amounts actually paid by the plaintiff, and the amounts calculated by applying 14.90% as the relevant percentage for the Tenant's Proportion.

29 I will now consider the effect of splitting the trial, in terms of utility, economy and fairness.[12] I will particularly consider fairness from the plaintiff's perspective, given that it strongly opposes any splitting of the trial.

30 There will probably be very little, if any, overlap between the evidence likely to be called in relation to the excluded and non-excluded issues. The evidence relevant to the plaintiff's claims as to the various terms of the lease, the estoppel claim and the rectification claim is likely to cover the period from about 1995 until February 2001, during which period the 1997 agreement to lease and the 2001 lease were being negotiated. The first settlement agreement is said to have been made orally in June 2002 between Tony Lanarch-Jones on behalf of the plaintiff and Neville Beer on behalf of the defendants, and to be evidenced by a letter dated 21 June 2002. The second settlement agreement concerns mostly written communications between about August 2003 and December 2004.

31 At the conclusion of the first part of the trial, the court will have heard all the evidence and submissions relevant to the existence of the contractual terms, the estoppel claim, the rectification claim and the settlement agreement issues.

32 The 25 January 2008 affidavit of Andrew John Chambers, the plaintiff's solicitor, says that the plaintiff would want to call evidence from John Bolas and Tony Lanarch-Jones. Mr Bolas worked for the plaintiff between 1994 and 2007. Mr Lanarch-Jones was the plaintiff's property and leasing manager from 1998 to 2006. They both live in NSW. The Chambers affidavit says that they would both give evidence about the facts and circumstances existing at the time the lease was entered into, negotiations leading up to the lease, as well as the rectification and settlement agreement issues. Had the proposed preliminary questions been set, I accept that would have led to the undesirable result of those two witnesses needing to be called more than once; splitting a witness's evidence can cause problems in terms of credit as well as cost and convenience.[13] However, as the trial will now be split, the problem appears to have been removed; the Chambers affidavit does not suggest that Messrs Bolas and Lanarch-Jones would give any evidence in relation to the excluded issues.

33 Although the plaintiff has said it will wish to call one of its employees, Tony Karp, to give expert evidence about the sort of documents the plaintiff would wish to see to in order to be satisfied about the Outgoings, it is not suggested that Mr Karp would give evidence in relation to any other part of the trial; in particular, it is not suggested he would give evidence in relation to non-excluded issues. The lay evidence relevant to the excluded issues is likely to come almost entirely from the defendants' side. Both sides are also likely to call expert evidence addressing the reasonableness and propriety of the Outgoings during the 2001 to 2006 Outgoings Years. It is difficult to see how that evidence would overlap in any substantial way - in time or subject matter - with the evidence concerning the non-excluded issues.

34 In the first part of the trial, the court will determine whether there is a term of the lease that the Tenant is only required to pay in respect of such of the Outgoings as were "reasonably and properly incurred in the operation of the Centre."

35 If the court finds that such a term exists, it would then need to determine to what extent, if at all, any claim in respect of management fees in the 2003 to 2005 Outgoings Years was barred by the second settlement agreement. Only then would orders be made leading to the hearing of the dispute as to which of the Outgoings were reasonably and properly incurred. Given the numerous different categories of expenditure which form part of the Outgoings for the entire Centre (see para [12(e)] above), the many different types of attack on the reasonableness and propriety of those items (see para [22] above), and the fact that the dispute potentially covers six Outgoings Years, preparation for and the conduct of this part of the trial would be substantial. If the defendants succeed in establishing that the second settlement agreement exists and has the effect alleged, that would have the effect of substantially reducing the scope of the second part of the trial.

36 On the other hand, if the plaintiff is unable to establish the existence of the term, this part of the plaintiff's claim will have been completely disposed of. That would obviate the need for extensive discovery, witness statements and a trial dealing with the reasonableness and propriety of Outgoings.

37 In the first part of the trial, the court will also need to determine the nature and extent of the Landlord's obligation to provide details and supporting documentation about each Outgoing, sufficient to satisfy the Tenant of a number of things. In so far as this part of the plaintiff's claim relies upon the argument that all Outgoings are subject to a reasonableness and propriety requirement, part of this issue will be determined by the court's finding on the plaintiff's construction and implied term arguments. In so far as the plaintiff asserts a more general right to receive additional information and documentation above and beyond that which it has received, there are two possible outcomes:

(a) If the plaintiff succeeds in establishing the broad contractual right, the second part of the trial will consider the alleged deficiencies in the information and documents actually provided, and in the audit process; or

(b) If no such right is found to exist, lengthy interlocutory steps and a trial on this issue will be unnecessary. In addition, the plaintiff will not have received through the discovery process the very documents to which it would have been found to have no contractual entitlement.

38 The defendants' claim to have the lease rectified, so as to change the percentage figure of 14.09% to 14.90%, will be heard and determined in full. However, the defendants' claim to have any underpayment arising from the actual use of figures less than 14.90% will not be heard at this stage. Evidence and submissions relating to the underpayment issue is unlikely to take more than a few hours, so the issue is not being excluded from the first part of the trial on the grounds of efficiency. Instead, the issue is being excluded out of fairness to the plaintiff. That will ensure that there is no possibility of the defendants being in a position to obtain an order for payment of any moneys (if they succeed in their rectification claim), before the plaintiff has had its claims for payment finally heard and determined.

39 The plaintiff submits that, whatever the outcome of the first part of the trial, it is likely there would be an appeal. I do not accept that the plaintiff's appeal rights would be prejudiced by the proposed split, were it to lose at the first part of the trial in relation to any issue which has been split. For example, if the plaintiff was unsuccessful in establishing the existence of the alleged contractual terms, or resisting the rectification claim, then appropriate orders (declaratory or otherwise) could be made which could be the subject of immediate appeal by the plaintiff.

40 In its written submissions, the plaintiff baldly asserts that a trial of separate questions will impede any possible settlement. It has not attempted to explain how that might happen. This is not a case where the court has selected for preliminary determination only one or two issues out of a much larger dispute, thereby giving the issue(s) a prominence which might be unfair in settlement discussions.[14] If there is a mediation prior to the hearing of the first part of the trial, I have left open for later consideration the question of whether the defendants should provide some discovery that would enable the plaintiff to make a commercial assessment about the value of its breach claims.

41 In considering questions of efficiency, it is obvious from the earlier discussion of the pleadings that discovery and pre-trial preparation in respect of the excluded issues (apart from the defendants' underpayment claim) would be extensive and expensive.

42 Although precise estimates are obviously not possible prior to the completion of discovery and preparation of witness statements, the parties are in broad agreement as to the proportion of time which may be saved by splitting the trial into the excluded and non-excluded issues. The defendants estimate that the trial of the non-excluded issues will take about 8 days, being two sitting weeks in the Commercial List; the plaintiff estimates that may take a little longer. However, both sides agree that the trial of the excluded issues, particularly the reasonableness and propriety issues, would take at least as long again.

43 Although case management considerations are not an end in themselves and should never be allowed to lead to an unjust result, the objective of the Commercial List is to provide for the just and efficient determination of commercial disputes, by the early identification of the substantial questions in controversy and the flexible adoption of appropriate and timely procedures suited to the particular case.[15] One of the particular features of the Commercial List is the identification and trial of separate questions in the proceeding, pursuant to rule 47.04.[16] Practitioners are expected to co-operate with the judge managing a proceeding, to implement that procedure.[17]

44 It is not only the parties' time which is a relevant consideration; court time is a limited resource, which has to be allocated between competing litigants and cases.

45 Ordinarily, all issues of fact and law in a proceeding are determined at the same time. However, in the Commercial List, liability and damages issues are frequently tried separately. That is in recognition of the fact that considerable time and money may be spent, and inconvenience incurred, preparing for and conducting a trial of damages issues, which may be wasted if the plaintiff does not succeed in establishing the defendant's liability. An order for party-party costs is unlikely to reflect the true cost to the successful defendant in such a case.

46 The same reasoning applies in the rather unusual circumstances of this case. In particular, extensive discovery and pre-trial preparation, and a lengthy hearing as to the reasonableness and propriety of the Outgoings for the entire Chadstone Shopping Centre over a six year period, will be completely wasted unless and until the plaintiff establishes that the lease contains the relevant term, either as a matter of construction or implication. Even if the plaintiff does establish the existence of the relevant term, its claim may be limited to three, not six, years, if the defendants succeed in relation to the second settlement agreement.

47 The plaintiff also argues that if it is proper to separate breach from the rest of the trial in this case, then that would ordinarily happen in other cases too. I do not agree with what appeared to be put as a "floodgates suggestion". In many (if not most) cases, it would not be appropriate to separate off issues of breach from the remaining liability issues. This case has unusual features: in particular, there is a clear line of demarcation between the excluded and non-excluded issues, and the evidence likely to be called in relation to them; and, as already mentioned, the amount of time and expense which may potentially be saved by proceeding in the proposed manner is substantial.

48 For all of these reasons, I am satisfied that to hear and determine the non-excluded issues prior to the excluded issues will offer an effective, cost-efficient, timely and just means of hearing and determining this proceeding.**

[1] The questions are set out in the schedule to a letter from the defendants' solicitors to the plaintiff's solicitors, dated 26 July 2007.

[2] The excluded issues are those raised in paras 17, 19, 20, 29-34 of the further amended statement of claim ("FASOC") and para 57 of the defence and counterclaim dated 19 February 2008 ("DAC").

[3] Terms which are capitalised in these reasons have a defined meaning in the lease.

[6] Being expenses under para (m) of the definition of "Outgoings" in clause 1.1 of the lease.

[11] DAC [8A] to [8AC], [21], [35].

[12] Tepko Pty Ltd v Water Board [2001] HCA 19; (2001) 206 CLR 1 per Kirby & Callinan JJ; as followed in J. Russell Dorset v. American International Assurance Co. (Aust.) Ltd [2003] VSC 135 per Bongiorno J and Wells Fargo Bank Northwest National Association v Victoria Aircraft Leasing Ltd (No 2) [2004] VSC 341 per Dodds-Streeton J. See also Bridge and Marine Engineering Pty Ltd v Taylor (No 2) [2005] VSC 154 per Harper J.

[13] As to which, see the helpful discussion by Byrne J in Hyder Consulting (Vic) Pty Ltd v CGU Insurance [2001] VSC 449.

[14] Cf the situation discussed in Australian Communications Corporation Pty Ltd v Coles Myer Ltd [2002] VSC 443 at [13] per Bongiorno J.

[15] Practice Note No 4 of 2004 at [1.5].