Project Blue Moon Pty Ltd v Fairway Trading Pty Ltd

BLUE MOON'S SUBLEASE ‑ CLAUSE 7 4 By clause 7(1)(c) of its sublease Blue Moon was precluded from using the premises

"for any purpose which may be or become illegal or which does or may cause a nuisance, damage, annoyance or inconvenience to the Owner, its tenants of neighbouring premises or others whether through noise, vibration, impact, dust, smell, smoke, escape of any substance or excessive traffic or through other means."

By subclause (2) in conjunction with item 14 in the Schedule the premises were not to be used for any purpose other than a "brasserie in conjunction with a bar", and it was provided that

"Nothing in Schedule Item 14 … shall override or modify Subclause (1) or be construed to do so."

By subclause (5) Blue Moon acknowledged that the landlord reserved the right to let other parts of the building to tenants carrying on the same type of business as that permitted to be carried on by Blue Moon. Subclause (11) provided that

"The Tenant must not cause or allow the Premises to be used in such a way as to disturb the use and enjoyment of the Land by other occupants of other parts of the Land or other land."

TRIBUNALS' REASONING ON DEROGATION 5 After expounding the law as to a landlord's obligation not to derogate from its grant, the Tribunal examined clause 7 of the sublease in order to ascertain the ambit of the grant. The Tribunal noted the competing contentions. Fairway's contention was that while the permitted use authorised the provision of live entertainment, Blue Moon was not entitled to infringe clause 7(1). Blue Moon's contention was that it was within the contemplation of the parties that noise and vibration might extend beyond the walls of the premises at times outside the usual hours of the businesses then being conducted by the other tenants, and that in those circumstances clause 7 should not be read as excluding activities which were an integral part of the purpose for which the sublease had been obtained. The Tribunal was of the view that the terms of clause 7 were wide enough to admit either interpretation, and that in those circumstances, there being a patent ambiguity, it was appropriate to receive extrinsic evidence as to the ambit of the contemplated purpose. This evidence enabled the Tribunal to conclude that it was understood that the entertainment provided in the conduct of Blue Moon's business would generate noise and vibration which would emanate beyond the walls and ceilings of the premises, but that no nuisance would be occasioned to the occupiers of the premises in which the businesses of Café Macchiato and Chorleys were conducted, because it would occur outside the times during which those businesses usually traded. In those circumstances the Tribunal concluded that clause 7 did not preclude Blue Moon from providing loud entertainment at the time it did. The Tribunal's conclusion was expressed as follows:

"… the only act which the applicant could rely upon is the act of granting a lease to Nipero in the circumstances and in the terms in which it did. To put it in another way, even if one ignores the change in lessee from Mr von Braun to Nipero, the applicant's case is that the respondent's action in allowing the nature of the business conducted in the premises of Café Macchiato to change from that of a café simpliciter to a use encompassing a bar was one which detrimentally affected their use of their premises. It was inherently likely that such a change of use would lead to later closing times in the premises of Café Macchiato with consequent conflict between Café Macchiato's use of its premises and the applicant's use of its premises. The use of the two adjoining premises which had previously been compatible was thus rendered incompatible."

6 Fairway's submission that it was not the grant of the sublease to Nipero that affected Blue Moon's use of its premises but the Noise Direction Notice was answered by the Tribunal as follows:

"[This] merely raises an issue of causation. The granting of the lease to Nipero in the present circumstances was the primary act in a chain of actions flowing from that act which had the end result of detrimentally affecting the applicant's use of its premises. The circumstances to which I refer are the fact that the applicant's use of the premises was one which the parties to the lease contemplated would generate noise and vibration, the fact that had the respondent made any appropriate enquiries prior to granting the lease to Nipero it would have ascertained that the business to be conducted by Nipero would be incompatible with the applicant's use of its premises and the consequent fact that it was reasonably foreseeable that Nipero would react in the way it did. The fact that the grant of the lease simpliciter did not affect the applicant's use of its premises is immaterial. It set in train a chain of causation which the respondent knew, or would have known had it made appropriate enquiries, would lead to the applicant's use of its premises being detrimentally affected."

Fairway's contention that the premises could still have been used to conduct the business of a "brasserie in conjunction with a bar" without loud live entertainment was dealt with as follows:

"… this is not the test which this Tribunal must apply. The authorities establish that practical frustration of the contract is not necessary to establish derogation from the grant. All that is required is that the acts of the respondent have rendered the applicant's premises materially less fit for the purpose for which they were leased. The issuing of the Noise Direction Notice effectively precluded the applicant from providing its usual live entertainment to its patrons. This rendered the premises, as a question of fact, materially less fit for the purpose for which they were leased."

As we have said, the Tribunal dismissed Blue Moon's alternative claims under clause 13 of the Code.

PRIMARY JUDGE'S REASONING Derogation 7 The primary judge identified two impediments to any finding that Fairway had derogated from its grant. The first was that the implication of an obligation on Fairway's part not to sublet adjacent premises to tenants who might object to the provision of loud music could not be derived from the purpose specified in Schedule 1 item 14, the course of antecedent negotiations between Blue Moon and Giusida, or from von Braun's previous practice of closing the café at between 9:00 and 9:30 pm, because such an obligation would be inconsistent with clause 7(1). The second was that the implication of an obligation on Fairway's part not to sublet adjacent premises to tenants who might conduct businesses after the time at which the café had usually closed, and hence attract customers who might be annoyed by loud music at night, could not stand with clause 7(1)(c). In this connection the primary judge referred to the requirements for the implication of contractual terms laid down in cases such as BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283 and Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 346, and concluded that the implied obligation asserted by Blue Moon was not reasonable and equitable, was not necessary to give business efficacy to the lease, and was inconsistent with the express terms of clause 7. His Honour said:

"[Counsel for Blue Moon] submitted, in effect, that the obligation [not to sublet adjacent premises to any tenant intending to conduct business after the usual closing time of the café] should be implied from the circumstances in which the grant was made and that it existed independently of the sublease. Whilst it may be true that the obligation not to derogate from a grant may arise from the mere fact of the grant of an interest in land for a particular purpose it does not follow that the nature of that obligation may be determined without reference to the limitations of the grant. On the contrary, as the learned President observed, one must ascertain what has been granted before one may determine whether a particular act has derogated from that grant. A party cannot complain if the conduct of its business is subject to limitations which it agreed to accept. Nor can an obligation to refrain from a particular act be implied if the agreement between the parties contemplated that the relevant party would be free to do that such an act. Ultimately, whether the obligation is said to arise by implication from the mere grant of the sublease or from an implied term of the sublease, the test is substantially the same. The proponent must demonstrate that the nature of the grant, with all its attendant limitations and qualifications, was in the circumstances such that it involved the assumption of the obligation claimed. In my view, the terms of the sublease in the present case precluded such an implication."

The primary judge did not agree with the Tribunal's conclusion that the derogation brought about by the grant of the sublease to Nipero justified Blue Moon terminating its sublease. His Honour was of the view that if there had been a derogation, it did not involve the breach of an essential term of the sublease.

Clause 13 of the Code 8 Clause 13 of the Code provides in part that

"A party to a lease shall not engage in conduct, in its dealings with the other party to the lease, that is ‑

The primary judge agreed with the Tribunal's conclusion that Fairway's conduct was neither unconscionable within par (a) nor harsh and oppressive within par (c). As to the former, his Honour adopted the meaning of "unconscionable" found in Commercial Bank of Australia v Amadio (1983) 151 CLR 447 at 474‑475, and concluded that Blue Moon was not under any special disability. As to the latter, his Honour was unable to see how the grant to Nipero could be regarded as harsh and oppressive conduct.

DEROGATION FROM GRANT 9 It is a principle of general application that a grantor must not derogate from the grant. The grantor must not seek to take away with one hand what has been given with the other. The principle is variously described as a maxim, a presumption of law, an implied obligation, an implied covenant, and an implied contract. See, for example, Myers v Catterson (1889) 43 Ch D 470 at 482, 484. In O'Keefe v Williams (1910) 11 CLR 171 at 193 Griffith CJ described the obligation not to do anything in derogation of the rights conferred under a demise from the Crown as "in substance a contractual obligation". Barton J, at 197‑198, described it as based on the presumed intention of the parties to give efficacy to the agreement, and referred to The Moorcock (1889) 14 PD 64 at 68. See also per Isaacs J at 211. 10 To constitute a derogation from grant in the context of a lease there must be some act rendering the premises "unfit or materially less fit" for the particular purpose for which the demise was made: Browne & Flower [1911] 1 Ch 219 at 226. In Gordon v Lidcombe Developments Pty Ltd [1966] 2 NSWR 9 at 15 Street J said that there must be substantial disturbance or disruption, and that the test would be satisfied "if the degree to which the premises are rendered less fit is so extreme as in the practical sense to render them unfit". Mere interference with convenience or amenities such as privacy and tranquillity will not be sufficient: Nordern v Blueport Enterprises Ltd [1996] 3 NZLR 450. For there to be a derogation it is not necessary to establish "practical frustration of the purpose of the lease": Aussie Traveller Pty Ltd v Marklea Pty Ltd [1998] 1 QdR 1 at 10; Nordern at 455. As was said by Younger LJ in Harmer v Jumbil (Nigeria) Tin Areas Ltd [1921] 1 Ch 200 at 226, the rule is clear; the difficulty is in its application. Harmer and Aldin v Latimer Clark, Muirhead & Co [1894] 2 Ch 437 illustrate the application of the non‑derogation principle. In Harmer land was let for the express purpose of storing explosives. The lessor and those claiming under him were restrained from using adjoining land so as to endanger the statutory licence necessary for the storage of explosives. In Aldin land was leased to a timber merchant for use for his business. The landlord and his assigns were restrained from building on adjoining land so as to interrupt the flow of air to sheds used for drying timber. 11 Central to the extent of a lessor's obligation not to derogate from the grant is the ambit of the grant. The grant may reserve to the lessor the right to derogate, or may qualify or restrict the lessor's prima facie obligation not to derogate. Thus in Myers v Catterson (1889) 43 Ch D 470 a railway company sold a piece of surplus land to the plaintiff together with a house which it had allowed him to erect thereon. The house was close to the railway line. The company retained land on the other side of the railway opposite the plaintiff's house. The conveyance to him contained a recital that all the land other than that sold to the plaintiff would be required for the construction of the railway, and it contained no express grant of right to light. Subsequently a hoarding was erected on the company's land which interfered with the plaintiff's light, and he obtained an injunction requiring removal of the hoarding. Bowen LJ at 483‑484 said:

"Now here it is said that, at the time that the railway company sold this house as a house, with its window lights to be used as lights, the purchaser had notice that the railway company intended to use the remainder of the land in a particular way which would necessarily interfere with the enjoyment of the light to the windows, and would, so to speak, modify the ordinary implication which the law would extract from the transaction.

Therefore it becomes necessary to look at what was the exact character of the conveyance, and at what the purchaser was told at the time he made the purchase. It is clear that he was told that the railway company intended to construct a part of their line on a portion of the remainder.

Now to what extend would that modify the obligation which the law would infer? I think it would modify it to this extent: that the vendor would no longer be bound to leave the window lights intact, but he would have a right to diminish the light to the windows and to interfere with the enjoyment of the land so granted, so far as he required to do so for the purpose of constructing the line; but no further."

His Lordship went on to say that the erection of the hoarding was not for the purpose of the construction of the line, so that the "ordinary presumption of the law" that a vendor cannot derogate from the grant applied. Cotton LJ's judgment, at 477‑478, is to the same effect. Fry LJ agreed with the other members of the Court. Myers v Catterson illustrates the obvious proposition that whether in a particular case a grantor has derogated from the grant depends on the extent of the grant. Where the conduct of which the grantee complains is excluded from the grant or is reserved to the grantor, there will be no derogation. See also Elliott, "Non‑Derogation from Grant", Law Quarterly Review vol 80 (1964) 244 at 255‑260.

12 In the present case the extent of Fairway's obligation not to derogate from its grant depends on the terms of the grant. The act of derogation complained of was the grant of the sublease to Nipero which was likely to lead to later closing times in the café premises which Fairway should have known would be incompatible with Blue Moon's use of the premises for loud music at night. Blue Moon's case on derogation depended on it establishing one of two alternative obligations on Fairway's part:

· an implied obligation not to sublet adjacent premises to tenants who might object to loud music, said to arise from the disclosure of a purpose which involved the provision of loud music, and

· an implied obligation not to sublet adjacent premises to tenants who might conduct business after the time at which the café had usually closed and hence attract customers who might object to loud music at night.

Each obligation assumes that Blue Moon was at liberty to produce loud music at night. However, that was not part of Fairway's grant. The grant of the sublease was qualified by clause 7. The premises were not to be used so as to cause a nuisance to Fairway's other tenants: subclause (1). Blue Moon's right to use the premises as a "brasserie in conjunction with a bar" did not modify subclause (1): subclause (2). Blue Moon's use of the premises constituted a nuisance within clause 7(1). The claim that Fairway was not at liberty to sublet to tenants who might conduct business after the time at which the café had customarily closed is inconsistent with clause 7(5), and there is no ground upon which such a term could be implied. We agree with the primary judge's reasons for his conclusion on this point.

13 Counsel for Blue Moon was critical of the primary judge for enquiring, by reference to the criteria in BP Refinery and Codelfa, whether terms should be implied that disabled Fairway from granting the lease to Nipero. There are two answers to this criticism. The first is that his Honour's resort to the implied term cases appears to have been occasioned by the way in which Blue Moon's case was argued before him. Thus, it was accepted by senior counsel for Blue Moon on the appeal that at first instance it had been argued that an obligation on Fairway's part not to sublet to any tenant intending to conduct business after the café's usual closing time should be implied from the circumstances in which the grant was made. That submission naturally led his Honour to test its viability against the BP and Codelfa criteria. The second answer is that in O'Keefe v Williams the High Court approached the question of derogation by reference to Bowen LJ's judgment in The Moorcock, which was one of the authorities upon which the Privy Council's formulation in BP Refinery, approved in Codelfa, was based.

VIABILITY OF THE DEROGATION APPEAL 14 Section 58 of the Act permits an appeal from a decision of the Tribunal to the Supreme Court on a question of law. It was contended for Blue Moon that the primary judge failed to advert to this limitation on the appellate jurisdiction. It is true that his Honour did not refer to s 58. But it is clear that he was aware that the appeal was limited to a question of law. In par 34 of his reasons he acknowledged that whether particular circumstances amount to a derogation from the grant can be a question of fact: Kelly v Battershell [1949] 2 All E R 830 at 837. But his Honour distinguished that case, and concluded that in the present case, where the Tribunal's decision on derogation turned on the construction of clause 7 of the sublease, a question of law was involved. There is no point in the discussion in this paragraph of his Honour's reasons unless it is directed to the law/fact distinction in s 58(1). 15 Whether certain events amount to a derogation from grant will depend on the circumstances of the particular case. The issue in Kelly v Battershell was whether the use of the lower portion of a house as a hotel in a manner which interfered with the convenience, amenity or privacy of the portion demised as a residence amounted to a derogation. The Court of Appeal said that the question whether particular circumstances amount to a derogation, as distinct from a mere interference with amenities, is a question of fact. See also Aussie Traveller at 10 and Nordern at 456. The present case, however, does not involve that distinction or turn on mere matters of degree. The Tribunal's decision that there was a derogation was based on its construction of clause 7, and its view that the clause contained a patent ambiguity. They were questions of law, as the primary judge held.

PRIMARY JUDGE'S ORDERS 16 For Blue Moon it was submitted that the primary judge was not empowered by s 58(3) of the Act to make the order he did, namely setting aside the Tribunal's orders and dismissing Blue Moon's proceeding. Section 58(3) provides:

"The Supreme Court shall hear and determine the appeal and may make any of the following orders:

(a) an order affirming or setting aside the decision of the Tribunal;

(b) an order remitting the case to be heard and decided again, either with or without the hearing of further evidence, by the Tribunal in accordance with the directions of the Court;

(c) such other orders as the Court considers appropriate."

It was submitted that par (c) does not empower the Court to make orders disposing of an appeal on the basis of its own findings of fact and law, as the primary judge purported to do. Such a course, it was said, would be inconsistent with the limitation in s 58(1). It was, however, accepted by counsel in the course of argument that if the primary judge was correct in holding that the Tribunal made an error of law, it was open to him to dismiss the proceeding.

CLAUSE 13 OF THE CODE Unconscionable conduct 17 Blue Moon contended that the Tribunal and the primary judge erroneously treated the word "unconscionable" as requiring the existence of a special disability in Blue Moon. This requirement was derived from the observations of Deane J in Commercial Bank of Australia v Amadio (1983) 151 CLR at 474‑475, that

"Unconscionable dealing looks to the conduct of the stronger party in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so."

Since Blue Moon suffered no special disability, its case under clause 13(a) failed. As the primary judge said, it was a straightforward case of two corporations entering into a business transaction.

Blue Moon's submission was that the requirement of "special disability" was an impermissible gloss on clause 13(a). We do not agree. We regard that requirement as inherent in the notion of unconscionability. Section 51AB of the Trade Practices Act 1974, which prohibits a corporation "engaging in conduct that is, in all the circumstances, unconscionable", has been held to pick up the Amadio meaning of unconscionable. See, for example, Swift v Westpac Banking Corporation (1995) ATPR 41‑401 at 40,429, National Australia Bank Ltd v McKay (1995) ATPR 41‑409 at 40,543 and Venning v Suburban Taxi Service Pty Ltd (1996) ATPR 41‑468 at 41,744. On the assumption that the Amadio meaning applied to clause 13(a), the Tribunal's decision was not attacked. It was plainly a decision of fact.

18 If, contrary to our view, the existence of a special disability in one party is not inherent in the concept of unconscionability in clause 13 and, as Blue Moon submits, unconscionable conduct is simply conduct that is not consistent with equity and good conscience at the time it is engaged in, the primary judge would necessarily have concluded that the grant of the sublease was not unconscionable, for he said that this was a straightforward case of two corporations entering into a business transaction. Further, in our view it follows from his and our rejection of Blue Moon's non‑derogation argument, that the grant of the sublease did not involve any unconscionable conduct on Fairway's part. Having regard to the proper construction of clause 7 of Blue Moon's sublease, it was not inconsistent with equity and good conscience for Fairway to grant the sublease to Nipero.

Harsh and oppressive conduct 19 The Tribunal set out its understanding of the meaning of "harsh and oppressive" by quoting from its earlier decision in Kyrgios v Burns Philp Trustee (TT 4 of 1995, unreported, 18 April 1997):

"Conduct will therefore usually be described as 'harsh and oppressive' if it is significantly unfair or severe on a party to a lease, resulting in an unjust burden to that party, and in circumstances in which such conduct goes beyond what is required to protect the legitimate interests of the party whose conduct is complained of. In applying this test the Tribunal will apply the standards of ordinary commercial practice, as well as considering issues relevant to each particular case. This test, whilst clearly incorporating objective elements of consideration such as usual commercial practice, is to be applied subjectively in the sense referred to in the quoted passage from McDonald v McDonald (1964) 81 WN (Pt 2) (NSW) 336, ie that the conduct must be shown to be harsh and oppressive to the particular applicant."

Blue Moon took no exception to this formulation. Rather it took issue with what the Tribunal said immediately after the passage it quoted from Kyrgios, in which it appears to have limited clause 13(c) by reference to the parol evidence rule. It is not clear to us what the Tribunal meant by this. However nothing turns on it, for the Tribunal went on to say that Blue Moon's harsh and oppressive contention added nothing to its case. If the Tribunal was correct in its construction of clause 7, Blue Moon's case was for breach of contract. If it was wrong, then, as the Tribunal said, "it is difficult to see how the respondent's conduct towards the applicant can be characterized as harsh and oppressive". As we have said, the Tribunal was wrong in its construction of clause 7, and its decision on the harsh and oppressive point was one of fact.

CONCLUSION 20 The appeal must be dismissed with costs. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gallop, the Honourable Justice Mathews and the Honourable Justice Sundberg.

Counsel for the Appellants: G C Lindsay SC and G Lunney

Counsel for the Respondent: P H Greenwood SC and TM Johnstone