The construction of the Deed
79It is convenient to start with the Deed and the way in which it was construed by the primary judge. It is a commendably brief document apparently prepared by Mr Hadid without the input of lawyers retained for either of the parties. It describes the parties as "friends" and records that they wish to enter into a "business arrangement". As that "arrangement" is one to be entered into by the Deed, it is best understood as being a reference to the further agreements made by the Deed rather than to any agreement described in it as already having been made. This is consistent with the Deed's structure which first sets out "RECITALS AS AGREED" and then records, under the words "THE PARTIES FURTHER AGREE", agreements made by the Deed itself. The clauses which follow purport to record what is to happen in relation to "properties" purchased, including with respect to the sale of those properties, and provide for how Mr Hadid's 50 per cent of the "net profit" is to be calculated.
80As Campbell JA observes in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603 at [379]-[380], although there is a common and longstanding practice of including recitals in an agreement, those recitals can be of various kinds including "statements of the factual background to the transaction, statements of the intention or object of the parties in entering the transaction, or statements that the parties (or one or other of them) have agreed to do or will do certain acts". Because that is so and because the task of a court is to interpret the particular document in dispute, statements that recitals should always be treated in some particular way when construing an agreement must "be treated with caution, and as subject to the context in which they were uttered". This is particularly so where the recitals appear in a fairly informal and brief document drafted without the assistance of lawyers. In such circumstances the principles which are based upon there being a recognised distinction between recitals and operative provisions, and which provide for the use which may be made of the former to construe the latter, have to be approached with considerable caution. That said, it is, relevant to record some of those principles.
81Recitals often set out aspects of the background or context to the transaction which is the subject of the agreement. Used in that way, they are available to assist in the interpretation of the operative provisions, often recording the object or purpose of the agreement as identified by the parties. However, as Allsop P noted in OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2013] NSWCA 27 at [63], ordinarily the recitals do not control the interpretation of the operative provisions when those provisions are clear and unambiguous. The relevant approach was stated succinctly by Lord Esher MR in Ex parte Dawes; In re Moon (1886) 17 QBD 275 at 286:
"If the recitals are clear and the operative part is ambiguous, the recitals govern the construction. If the recitals are ambiguous, and the operative part is clear, the operative part must prevail. If both the recitals and the operative part are clear, but they are inconsistent with each other, the operative part is to be preferred."
82Even in a well-drafted agreement, the recitals may by their terms and the context in which they appear provide a basis for inferring or implying a covenant or promise. For example, as Mason J observed in Ansett Transport Industries (Operations) Pty Ltd v The Commonwealth [1977] HCA 71; 139 CLR 54 at 72 "where in the recitals to a deed or an agreement it is acknowledged that the parties have agreed to do, or will do, certain acts, a promise to do those acts will be read into the agreement in the absence of an express promise to that effect".
83The recitals may also give rise to an estoppel in respect of specific facts stated and adopted as the basis of a transaction, provided that the facts as stated are "certain, clear and unambiguous": Greer v Kettle [1938] AC 156 at 170-171. It was not argued before the primary judge or in this Court that the recitals in cll 1.2 or 1.3 give rise to estoppels between the parties as to the making or existence of earlier binding agreements between them.
84The principal provisions which it is contended should be construed as giving rise to an obligation in Dr Schwartz to purchase all of the properties are cll 1.2 and 2. The primary judge construed cl 1.2 as "requiring" Dr Schwartz to purchase site B and, at his discretion, to purchase or take options to purchase over sites C and D: [27]. He construed cl 2 as giving Dr Schwartz the "right" to purchase the properties in his own name or in the name of a company: [28]. A number of questions arise as to the construction of these provisions. Is the "discretion to buy" in cl 1.2 the same discretion as that referred to in cl 1.3? Is the discretion to buy one or more than one of the properties or to buy any or one or more of the properties? How is the existence of that discretion to be reconciled with the statement in cl 1.3 that Mr Hadid "will negotiate the purchase" of the properties and the statement in cl 2 that Dr Schwartz "will purchase the properties". Does "properties" refer to any of or all of the properties? Clause 2 is in the form of a statement as to what it is agreed "will" happen. But is it a statement that Dr Schwartz will purchase all of the properties and do so in relation to each via "entities he is comfortable with"? Or is it to be understood only as a statement of what will happen in the event that Dr Schwartz purchases any of the properties? The language which the parties have used is in these and other respects susceptible of more than one meaning.
85Because the language is ambiguous or susceptible of more than one meaning, it is unnecessary to take up Mr Hadid's invitation to consider whether this Court was correct to conclude in Franklins Pty Ltd v Metcash Trading Ltd that on the current state of High Court authority, the identification of ambiguity is not a pre-condition to examining evidence of surrounding circumstances: see Franklins Pty Ltd v Metcash Trading Ltd at [14]-[18], [63], [388]; MBF Investments Pty Ltd v Nolan [2011] VSCA 114 at [197]-[202]; Home Building Society Ltd v Pourzand [2005] WASCA 242 at [25]-[32]; Lion Nathan Australia Pty Ltd v Cooper's Brewery Ltd [2006] FCAFC 144; 156 FCR 1 at [46], [51]-[52], [238]; Ralph v Diakyne Pty Ltd [2010] FCAFC 18 at [46], [47]; Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; 86 ALJR 1 at [2]-[5]; and Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [52]. For the same reason, Dr Schwartz's submission that the primary judge was not entitled to have regard to evidence of surrounding circumstances known to the parties must be rejected. However, it remains necessary to consider whether his Honour made impermissible use of material answering that description.
86The correct approach to the construction of a commercial contract, such as the Deed, is discussed in Franklins Pty Ltd v Metcash Trading Ltd, esp at [19]. The underlying task remains one of construing the words which the parties have used. In construing the language in question, regard must be had to the other parts of the text so that, as far as possible, the various provisions are given a consistent or congruent operation: Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; 129 CLR 99 at 109; Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522 at [16]). The meaning to be ascribed to the language adopted by the parties is to be assessed objectively, in the sense that it is not governed by the subjective beliefs or understandings of the parties, but rather by what a reasonable person would understand by the use of that language: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165 at [40]. In a commercial context that usually requires that the preferred meaning is that which makes commercial sense and gives effect to the aims and purposes of the parties, to the extent that they can be identified legitimately from the text and context. Of course, minds may differ as to what constitutes "business common sense" in a particular case: Maggbury Pty Ltd v Hafeli Australia Pty Ltd [2001] HCA 70; 210 CLR 181 at [43]. In the end, it remains the position that the meaning ascribed to the language must be an available one, albeit adopting an approach to construction which is not "narrow or pedantic". Reference to notions of commercial or business common sense does not permit "judicial rewriting" of an agreement in disregard of the language which the parties have adopted: Australian Broadcasting Commission v Australasian Performing Right Association Ltd at 109; Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; 149 CLR 337 at 352; Jireh International Pty Ltd v Western Exports Services Inc [2011] NSWCA 137 at [55].
87In addressing the construction of the relevant provisions of the Deed, it is convenient to start with a consideration of the operative clauses other than cl 2. Clause 3 assumes that properties may be acquired by companies with a share capital and, in that event, provides that Dr Schwartz will hold 50 per cent of the shares "in trust" for Mr Hadid "pursuant to this Deed". The latter words and the terms of cl 5 are consistent with any such beneficial interest being extinguished upon the payment to Mr Hadid of 50 per cent of the net profit calculated in accordance with cl 4. Construed in this way, cl 3 would provide a form of security to Mr Hadid with respect to the performance of Dr Schwartz's obligations under cll 4 and 5, at least where a property is owned by a company with a share capital.
88Clause 2 requires Dr Schwartz to purchase the properties in "entities he is comfortable with". Those entities could include an entity to which cl 3 would apply. The primary judge did not construe the reference to such entities as limited to a company with a share capital. Nor did either of the parties submit that cl 2 should be given that construction. If it was construed in that way, cl 2 would require that any property purchased by Dr Schwartz be held by a company to which cl 3 could apply. If "entities" in cl 2 is not given that limited interpretation, it nevertheless operates, in the event that Dr Schwartz purchases any property, to permit that purchase to proceed other than in his name. Mr Hadid argues that the expression "the properties" used in cll 1.3, 2, 3 and 4 refers to each and all of the three relevant sites. The meaning to be given to that expression must take account of the language of cl 1.2 and the context in which it is used in cll 1.3, 2, 3 and 4. As used, the expression is capable of referring to any of the properties, not only to each and all of them.
89One matter of significance which arises from the terms of the operative clauses is that whilst Mr Hadid is to receive 50 per cent of the net profit from the purchase and sale of properties, and may be given a beneficial interest to secure that entitlement, he is not required to make any contribution to any acquisition, or to contribute in any way to any shortfall, in the event that the exercise of purchase and sale is unprofitable. Under the "business arrangement" recorded in those clauses, Dr Schwartz bears the whole of the risk of loss.
90Reference must then be made to cll 1.2 and 1.3. Two matters of context are relevant when considering those provisions. The agreement for the purchase of site B bears the same date as the Deed and it is accepted that at the time the Deed was made Dr Schwartz had decided to proceed to purchase site B on terms which had been negotiated with its owner by Mr Hadid. The other matter is that whilst the investment proposal recorded that the plan was to buy site B and then to "buy or option" sites C and D, the recommended strategy was to "option" those two sites. That proposal contemplated that any such option would be exercised or assigned at the time of any on-sale. There does not appear to have been any dispute or difference between the parties as to the particular means by which any property might be acquired or on-sold.
91Clause 1.2 contains the expression "at his discretion" and cl 1.3 the expression "at Jerry's discretion". In ordinary language a discretion is a right to decide something or act according to one's judgment. In cl 1.2, the parties are not likely to have made or recorded the making of an agreement, the very existence or continued existence of which was in the discretion of Dr Schwartz. For that reason, the words "at his discretion" in that clause ought not be read as qualifying the word "agreed" which immediately precedes them. The only other subject matter which the clause identifies as for the decision or judgment of Dr Schwartz is whether to buy "one or more properties". That choice is between buying one or buying more than one property. That Dr Schwartz was recognised as having such a choice was consistent with his having agreed the terms upon which he would buy site B. It remained for him to decide whether to buy sites C and D. This is an interpretation of the clause urged by Dr Schwartz.
92Another available interpretation is that the discretion was whether to buy any of or one or more of the properties. That interpretation is more favourable to Dr Schwartz but would not lead to any different outcome in these proceedings. In my view, the first of these interpretations more closely reflects the language used. Neither is the interpretation adopted by the primary judge and urged by Mr Hadid. His Honour considered that the discretion given was in relation to each of the properties and the "buy or option" part of the investment proposal: [26]. On that basis he construed cl 1.2 as recording the existence of an agreement, already made or to be inferred, that Dr Schwartz would buy site B and then, at his discretion, buy or take options over sites C and D: [27]. His Honour construed the words "at his discretion to buy one or more properties" as meaning 'at his discretion to purchase or enter into an option to purchase all of the properties'.
93There are significant difficulties with the construction adopted by the primary judge. The language of the clause makes no reference to any choice arising between purchasing or entering into an option to purchase particular properties. The primary judge's reasoning for adopting the interpretation he did was that the investment proposal proffered a choice between purchasing or entering into an option to purchase sites C and D. That is so, although ultimately the proposal suggests a strategy which in terms is "we option C and D". At the same time the proposal does not require that Dr Schwartz bind himself in advance to purchase or enter into options to purchase all of the properties irrespective of the price at which or other terms on which they might be acquired. In adopting this construction, the primary judge seeks to give effect to what is said to be the actual intention or expectation of the parties as recorded in the investment proposal in a way which necessarily contradicts the language of the clause. That is an impermissible use of evidence of surrounding circumstances.
94The construction adopted by the primary judge requires Dr Schwartz "at his discretion, either to buy or to take options over sites D and C": [27]. An agreement in those terms would not secure an outcome likely to have been sought by either of the parties. From Dr Schwartz's perspective, having agreed to purchase site B, it is not likely that he would have wanted to be bound to purchase the remaining properties without first agreeing parameters as to the terms of those purchases. From Mr Hadid's perspective, an obligation to enter into an option to purchase did not necessarily mean that the property would be purchased although it may have increased the likelihood that that would occur. Mr Hadid's argument recognised this difficulty and contended that the discretion went to the "means" of acquiring each of the properties for on-sale. Thus, a discretion in terms described as one "to buy one or more properties" is to be construed as one as to the "means" by which all of the properties had to be purchased. The language used is not capable of conveying that as a possible meaning.
95When addressing the construction of cll 1.2 and 2, the primary judge did not address the interpretation of cl 1.3. That clause provides that Mr Hadid "will negotiate the purchase and sale of the properties". The closing words "at Jerry's discretion" introduce a qualification to Mr Hadid's doing so. It is necessary to identify the subject matter of that discretion. That subject matter could be whether Mr Hadid would negotiate at all the purchase or sale of any particular property. That construction is unlikely as the business arrangement contemplated that Mr Hadid would be remunerated on a basis which took into account the net profit earned on the purchase and sale of all or any of the properties. If the words "at Jerry's discretion" were intended to operate with respect to that subject matter, they might more naturally have appeared before the words "will negotiate". The only other matter which could be the subject of Dr Schwartz's discretion was the negotiation of the "purchase and sale of the properties" using that expression to refer to the terms of purchase and sale. That way of construing the clause would make clear that whilst Mr Hadid was to undertake the negotiations in relation to any purchase and sale, the terms offered, accepted or rejected were "at Jerry's discretion".
96It was argued on behalf of Mr Hadid that the discretion in cl 1.3 was of the same kind as the discretion in cl 1.2. It was directed to the "means" of purchase and sale and no more. When used in cl 1.3 it could not refer to an unfettered discretion to buy or sell all or any of the properties because cl 1.2 recorded an agreement to buy at least one property and cll 4 and 5 assumed a subsequent sale of that property. This argument assumes that the subject matter of the discretion referred to in cl 1.2 is the same as that referred to in cl 1.3. That is not the case. Clause 1.2 describes a discretion to buy one or more than one property. The existence of such a discretion is not inconsistent with the existence of a discretion as to the terms on which any such purchase should occur. Nor is the existence of a discretion of the latter kind inconsistent with an obligation to buy or sell a particular property. If there is such an obligation, a discretion as to the terms of purchase or sale must be exercised in a way which ultimately results in its performance. Whilst the existence of the obligation operates as a constraint upon the exercise of the discretion, it does not have the consequence that there is no discretion to exercise in any process of negotiation, either of purchase or sale.
97The construction of cll 1.2 and 2 adopted by the primary judge, and urged by Mr Hadid, imposes an obligation on Dr Schwartz to purchase two additional properties in circumstances where he is to finance those purchases and bear any loss incurred on their re-sale. That obligation is not subject to any agreement as to the prices at or times by which those properties are to be purchased. The construction contended for by Dr Schwartz imposes no obligation upon him to purchase sites C or D but provides for the position on the basis that, as was expected, he would purchase at least one of the properties. Dr Schwartz having committed to purchasing site B, the prospect of profit from Mr Hadid's proposal provided a sufficient incentive for the parties to enter into an arrangement on the basis that Mr Hadid would be remunerated from any net profit earned on the sale of that and any of the other properties which Dr Schwartz thereafter decided to purchase.
98Taking these various considerations into account, it is my view that the primary judge erred in construing the Deed, and specifically cl 1.2, as requiring Dr Schwartz either to purchase, or take an option to purchase over, each of sites C and D. The language of cl 1.2 describes an agreement that Dr Schwartz at his discretion purchase one or more than one of the three properties. Consistent with that being the construction of that provision, cl 2 provides, in relation to any or the properties that Dr Schwartz does purchase, that he do so in an entity "he is comfortable with". Where used in cll 2, 3 and 4, the expression "the properties" refers to any of the properties and, in context, is a reference to any property purchased in accordance with the agreement described in cl 1.2.