Citation : SHONE -v- DAVIES [2011] WADC 56

Breach of contract - Option to purchase land - Mortgage over land the subject of an option - Implied term - Business efficacy - Rectification - Estoppel - Essential term - Test of essentiality - Misleading and deceptive conduct - Waiver - Term wholly or substantially for the benefit of one party - Meaning of 'in trade or commerce' - Sale of property, residential sub-divisible

Fair Trading Act 1987 (WA), s 5, s 9(1), s 10, s 77

Notice of contention in cross-appeal allowed in part

Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549

Ansett Transport Industries (Operations) Pty Ltd v The Commonwealth of Australia [1977] HCA 71; (1977) 139 CLR 54

Argy v Blunts & Lane Cove Real Estate Pty Ltd [1990] FCA 51; (1990) 26 FCR 112

Australian Competition and Consumer Commission v Gary & Associates Pty Ltd [2005] FCA 404; (2005) 142 FCR 506

BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] UKPCHCA 1; (1977) 180 CLR 266

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337

Concrete Constructions (NSW) Pty Ltd v Nelson [1990] HCA 17; (1990) 169 CLR 594

Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14; (1986) 160 CLR 226

Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31

Franich v Swannell (1993) 10 WAR 459

Gemmell Power Farming Co Ltd v Nies (1935) 35 SR (NSW) 469

Heimann v Commonwealth of Australia (1938) 38 SR (NSW) 691

Helicopter Sales (Aust) Pty Ltd v Rotor-Work Pty Ltd [1974] HCA 32; (1974) 132 CLR 1

Kitching v Phillips [2011] WASCA 19

Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115

Miller & Associated Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31; (2010) 241 CLR 357

O'Brien v Smolonogov (1983) 53 ALR 107

Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165

Tramways Advertising Pty Ltd v Luna Park (New South Wales) Ltd (1938) 38 SR (NSW) 632

Trustees Executors and Agency Co Ltd v Peters [1960] HCA 16; (1960) 102 CLR 537

1 MARTIN CJ: The appeal, cross-appeal and notice of contention in the cross-appeal should each be allowed to the extent indicated by the reasons of Murphy JA, with which I agree.

2 BUSS JA: I agree with the orders proposed by Murphy JA in this appeal and cross-appeal from a judgment of Eaton DCJ.

3 Subject to the observations set out below, I agree with Murphy JA's reasons, with which Martin CJ has already expressed his agreement.

4 My observations relate to the proper construction of the Davies' obligation to pay interest to the Shones under cl 2.1(c) of the option deed; in particular, to the date on which the obligation to pay ceases where the option is exercised, and where the option is not exercised, during the Call Option Period.

[The Davies] shall pay interest to [the Shones] on the balance of the Purchase Price less the Call Option Fee ($3,400,000) at the rate of 8% per annum calculated from the date 12 months after the Call Option Commencement Date by calendar monthly instalments the first of which will be due and payable on the date 13 months after the Call Option Commencement Date.

[The Davies] may exercise the Call Option during the Call Option Period by giving to [the Shones] a Call Option Notice which is duly completed and executed by [the Davies].

If the Call Option is validly exercised:

(a) the Call Option Fee shall be credited to the Purchase Price;

(b) [the Shones] and [the Davies] are regarded as having entered into the Contract as Seller and Buyer respectively;

(c) the date of the Contract is the Option Notice Service Date;

(d) [the Davies] must deliver an executed copy of the Contract with all necessary particulars completed to the other party to the Contract or its solicitors within 3 Business Days after the Option Notice Service Date; and

(e) [the Shones] and [the Davies] must exchange executed counterparts of the Contract within 7 Business Days after the Option Notice Service Date.

If the Call Option is not exercised:

(a) [the Shones] [retain] the Call Option Fee; and

(b) this Deed terminates on the date being the last day of the Call Option Period.

9 The 'Call Option Period' is defined in cl 1.1 to mean 'the period commencing on the Call Option Commencement Date and expiring at 5.00pm on the date 24 months after the Call Option Commencement Date'. In the events which happened, the 'Call Option Commencement Date' was 7 October 2007. Accordingly, the Call Option Period was the period of 24 months commencing on 7 October 2007 and expiring at 5.00 pm on 7 October 2009.

10 It is apparent from the definition of 'Call Option Period', in the context of cl 2.2 and the option deed as a whole, that the Call Option Period limited the time within which the Davies may exercise the option, but did not prescribe the period during which the Davies were obliged to pay interest under cl 2.1(c).

11 Four observations may be made about cl 2.1(c). First, the Davies' obligation was to pay interest 'on the balance of the Purchase Price less the Call Option Fee ($3,400,000) at the rate of 8% per annum'. Secondly, the interest payable was to be calculated from the date '12 months after the Call Option Commencement Date'. That is, the interest payable was to be calculated from 7 October 2008, being the date of commencement of the second year of the Call Option Period. Thirdly, the interest was payable by 'calendar monthly instalments', the first such instalment to be due and payable on the date '13 months after the Call Option Commencement Date'. That is, the first monthly instalment was due and payable on 7 November 2008. Fourthly, cl 2.1(c) does not expressly state when the Davies' obligation to pay interest ceases, either where the option is exercised during the Call Option Period or where the option is not exercised during that period.

12 Clause 4.2, by its express terms, applies if the option is not exercised. It does not apply if the option is exercised.

13 In my opinion, it is apparent when cl 2.1(c) is read with cl 2.2, cl 4.1 and cl 4.2, in the context of the option deed as a whole, that:

(a) if the option is exercised within the Call Option Period, then interest ceases to be payable under cl 2.1(c) upon the Davies paying the balance of the Purchase Price less the Call Option Fee to the Shones pursuant to the contract of sale which is 'regarded as having [been] entered into' upon the option being 'validly exercised': cl 4.1(b); and

(b) if the option is not exercised within the Call Option Period, then interest ceases to be payable under cl 2.1(c) upon the option deed terminating on 'the date being the last day of the Call Option Period': cl 4.2(b).

14 In other words, if the option is exercised within the Call Option Period, then the Davies' obligation to pay interest under cl 2.1(c) ceases upon payment by them of 'the balance of the Purchase Price less the Call Option Fee ($3,400,000)', in accordance with cl 2.1(c). If, however, the option is not exercised within the Call Option Period, then the Davies' obligation to pay interest under cl 2.1(c) ceases upon the option deed terminating, in accordance with cl 4.2(b), on the last day of the Call Option Period.

15 This is an appeal from a decision of the District Court concerning an option deed. The appellants (the Shones) and the respondents (the Davies) are neighbours. In 2007, the Shones granted the Davies an option to purchase their land, occupying approximately 22 acres (the land), for $3.8 million (the option). The option period was, in effect, for two years. The option deed, drawn by the Davies' solicitors, required the Davies to pay $400,000 which would be credited to the purchase price of the land in the event that they ultimately purchased the land pursuant to the option, but would be forfeited if they did not. The option deed also required the Davies to make certain other payments, including a periodical payment to be made in each month of the second year of the two-year option period.

16 The Davies defaulted in making the periodical payments (save one), and the Shones sued to recover the sums due. The Davies resisted the claim on three bases. The first was that there was an implied term of the option deed that they could terminate it at will, without having to perform

the obligation to make periodic payments in the second year of the option period. The second was that the Shones had breached an essential term of the option deed by mortgaging the land without their consent, which entitled them (the Davies) to terminate the option deed. The third was a counterclaim to the effect that they had entered into the deed by reason of misleading and deceptive conduct and that it should be set aside under s 77 of the Fair Trading Act 1987 (WA).

17 The judge found for the Davies on the basis of their first and second contentions. He rejected the counterclaim on the basis that the relevant conduct had not occurred in trade or commerce within the meaning of s 10 of the Fair Trading Act. The judge did not make any findings of fact with respect to the Fair Trading Act claim.

18 In a case such as this, it was incumbent upon the judge, as a trial judge, to find the facts even if he concluded that the counterclaim could be dismissed on a narrow legal basis. If legal error is demonstrated in a case in which the facts are not found, the risk of a retrial, with all the deleterious consequences for the parties which that course entails, is obvious. In this case, it was inappropriate for the trial judge to dispose of the counterclaim merely on the basis of deciding a question of law.

19 For the reasons which follow, the judge erred with respect to the Davies' first and second contentions, and he erred on the question of law on which he decided the counterclaim. Nevertheless, the adverse consequences of a retrial are averted in this particular matter because the Shones succeed on their notice of contention in the cross-appeal that the Davies' pleaded case did not disclose any arguable claim for misleading and deceptive conduct in any event.

20 The option deed was dated 27 July 2007. Its provisions were to the following effect.

21 Clause 2.1(a) provided, in effect, that in consideration of the payment by the Davies of 'a Call Option Fee' of $400,000, the Shones granted the Davies an option to purchase the land for $3.8 million on the terms set out in an attached contract for sale of land.

22 By cl 2.1(b), the option fee was payable on a date when the Davies settled the sale of certain land in Baldivis which was being sold by the estate of the late Juliette Davies (the commencement date).

23 By cl 2.1(c), the Davies agreed that 12 months after the commencement date, they would pay a monthly interest sum to the Shones, calculated at 8% per annum on the sum of $3.4 million, being the balance of the purchase price for the land. It was agreed that the first monthly payment would fall due 13 months after the commencement date.

24 By cl 2.1(d), the Davies also agreed to pay the Shones $5,000 per month from 28 August 2007 until the commencement date of the option.

25 By cl 2.2, the option could be exercised within a period of 24 months from the commencement date (the option period).

26 Clause 3 and cl 4.2(a) provided, in effect, that if the option were not exercised within the 24-month option period, the option fee of $400,000 would be forfeited to the Shones.

27 Clause 4.2(b) provided that if the option were not exercised, the deed would terminate on the last day of the 24-month option period.

28 Clause 4.1 provided that if the option were exercised, the parties would execute a contract for the sale and purchase of the land in the form attached to the deed, and the option fee of $400,000 would be credited to the purchase price. By the attached form of contract for sale, the parties agreed that $3.4 million would be paid on settlement, that settlement would occur within 28 days of the contract being executed, and that the '2002 General Conditions' were incorporated. It was accordingly agreed that the land would be transferred free of encumbrances except for those specifically noted in the attached contract for sale.

29 By cl 5.2(a), the Shones agreed that until the option deed terminated, or until completion or termination of the resulting contract for sale if the option was exercised, they would not create any mortgage, charge or other encumbrance over the land or increase their current liability under any existing mortgage, charge or other encumbrance, without the written consent of the Davies 'on such terms to preserve the [Davies'] priority under this Deed as the [Davies] may reasonably require, such consent not to be unreasonably withheld'. By cl 5.2(b), the Shones agreed not to sell or transfer the land, or grant another option over it, before termination of the deed. By cl 5.2(c), the Shones also agreed not to do anything which prejudiced, or was likely to prejudice, the Davies' rights under the deed.

30 By cl 5.3, the Shones granted the Davies access to the land during the 24-month option period for preparing surveys and examining the land, and for undertaking environmental assessments and the like, with the Shones' consent.

31 By cl 5.4, the Shones agreed to co-operate with the Davies to facilitate the Davies making any application for rezoning or subdividing the land.

32 By cl 5.5, the Shones agreed that if another owner of land in the vicinity of the land made an application for rezoning which affected the land, they would immediately notify the Davies of the application and assign to the Davies all rights to negotiate in respect of the application for rezoning.

33 By cl 6(a), the Davies were granted the right to lodge an absolute caveat against the title to the land, noting the Davies' interest under the deed. Clause 6(b) provided that if the call option were not exercised, the Davies would withdraw the caveat at their own cost.

34 Clause 7 imposed confidentiality obligations on the parties and provided that the parties would agree on the content of any press release relating to the matters in the deed.

35 It is convenient to add here that prior to the execution of the option deed, the Shones had been sued by another couple, Mr and Mrs Kemp, over a contract for the sale of a lot which the Shones had proposed to create by subdividing a portion of the land. The Kemps had also placed a caveat on the land with respect to their claimed equitable interest. By deed dated 13 July 2007, the Shones and the Kemps had settled their dispute on terms that the Shones would pay the Kemps $400,000 on 7 September 2007 or another agreed date and the Kemps would release the Shones from all claims in respect of the alleged sale of the proposed lot. The judge found that the Davies 'knew of ... the [Shones'] problems with the Kemps': [25].

Events upon and after the execution of the option deed

36 Save to the extent subsequently indicated, the following facts were either found by the judge and are unchallenged in this appeal, or are otherwise not in dispute.

37 On 27 July 2007, the date the deed was executed, the Davies paid the Shones the first $5,000 payment under cl 2.1(d).

38 By a loan agreement dated 30 July 2007, Perpetual Trustees Victoria Ltd (Perpetual) agreed to advance to the Shones a sum of approximately $785,000. It was a term of the agreement (cl 5) that the Shones agreed to provide to Perpetual, by way of security for the loan, a first registered mortgage over the land. It was a special condition of the loan agreement that the Shones' then existing mortgage with the ANZ Bank, in an amount of approximately $378,500, should be repaid.

39 On 12 September 2007, the loan from Perpetual was drawn down by the Shones. $400,000 was applied to settle the dispute with the Kemps. The sum of approximately $364,500 was applied to repay the ANZ Bank. After the deduction of fees, insurance and similar disbursements, the Shones received approximately $13,000 from the drawdown of the loan. The mortgage to Perpetual was dated 10 September 2007 and registered on 18 September 2007.

40 On 7 October 2007, the Davies paid the option fee of $400,000 and the option period commenced.

41 On 13 March 2008, the Davies obtained a copy of the certificate of title for the land, which showed the Shones' mortgage to Perpetual Trustees.

42 7 October 2008 was the first anniversary of the commencement of the option period. The first of the monthly payments under cl 2.1(c) of the option deed was due on 7 November 2008.

43 On 6 November 2008, the Davies wrote to the Shones saying that they would not exercise the option and were 'releasing' the Shones from further performance of the option deed. The letter enclosed what was, in effect, the first and last of the monthly payments made by the Davies to the Shones under cl 2.1(c). The next eleven periodic payments were not paid by the Davies.

44 7 October 2009 was the date for expiry of the option deed under cl 4.2(b).

45 The judge said that he 'propose[d] to imply a further clause' into the option deed: [55]. The further clause proposed by the judge was quite elaborate. It was in these terms:

The grantee may, at any time, by written notice to the grantor terminate the deed and, in such event, the grantor retains:

(a) the call option fee; and

(b) all payments of interest pursuant to cl 2.1(c) and (d) of the deed and the grantee is relieved of any further obligation to the grantor pursuant to cl 2.1(c) and (d) from the date of termination.

46 It is evident that the proposed term was intended to work a significant reformation of the contract.

47 The judge gave, in essence, two reasons for implying the term. First, he decided to imply the term on the basis that the parties did not, he said, turn their mind to the 'particular eventuality' which transpired, which was that the Davies would 'determine that in no circumstances [would] they exercise the option'. His Honour said that there appeared to him to be an assumption by the parties that the Davies 'would inevitably exercise the option': [53]. The second reason was that as cl 2.1(c) referred to payments as 'interest' on the 'balance of the purchase price', the parties must have intended that the payments would not be made if the Davies subsequently decided not to purchase the land: [48]. His Honour said that he applied the five conditions for the implication of a term as set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] UKPCHCA 1; (1977) 180 CLR 266, 283, and found that his proposed term was reasonable and equitable, that it was necessary to give business efficacy to the deed, that it was so 'obvious' that it went 'without saying', that it was capable of clear expression and that it did not contradict any express term of the option deed: [54].

48 The judge also found ([66] - [74]) that cl 5.2 was an essential term that the Shones breached by mortgaging the land to Perpetual, and that the Davies were accordingly entitled to terminate the option deed. The judge rejected arguments by the Shones to the effect that the Davies were estopped from relying on cl 5.2, and he rejected the Shones' claim that cl 5.2 should be rectified so as to provide, in effect, that it had no operation with respect to the Perpetual mortgage: [64].

49 As I have indicated earlier, the judge dismissed the Davies' counterclaim on the basis that the alleged conduct by the Shones did not occur in trade or commerce: [82].

Grounds of appeal, notice of contention and cross-appeal Grounds of appeal

50 By their grounds of appeal, the Shones contended, in effect, that the judge erred:

(b) in finding that the Shones breached cl 5.2 of the option deed by their mortgage with Perpetual (ground 2);

(c) in not rectifying cl 5.2 of the option deed (ground 3);

(d) in failing to find that the Davies were, in any event, estopped from relying upon any breach of cl 5.2 of the option deed (ground 4); and

(e) in finding that any breach of cl 5.2 was a breach of an essential term which entitled the Davies to terminate the deed (ground 5).

Respondents' notice of contention and cross-appeal

51 By their notice of contention in the appeal, the Davies allege that the judge erred in failing to find that the Davies were entitled to terminate the option deed on the basis that the option period 'was a term that was wholly or substantially for the benefit of the [Davies], and which could be waived by them'.

52 The Davies alleged in their cross-appeal that the trial judge erred:

(a) in finding that the option deed was not entered into in trade or commerce within the meaning of the Fair Trading Act; and

(b) in construing cl 2.1(d) of the option deed as requiring the Davies to make a second payment of $5,000 due on 28 September 2007, when he ought to have found that the Davies were not required to make a further payment prior to the option commencement date on 7 October 2007.

53 In the cross-appeal, the Shones, by notice of contention, contend in effect that:

(a) the Davies' pleaded case on misleading and deceptive conduct was insufficient to give rise to a contravention of s 10 of the Fair Trading Act;

(b) if misleading and deceptive conduct could be established by a breach of cl 5.2 (which was denied) there was, in any event, no breach of cl 5.2 or alternatively, the Davies were estopped from relying on cl 5.2; and

(c) if the pleaded conduct of the Shones contravened s 10 of the Fair Trading Act (which was denied), the Davies did not suffer any loss as alleged.

54 The option deed ran to 15 pages. It was a detailed and evidently carefully drawn deed (prepared by the Davies' solicitors), which expressly addressed the issue of termination. The judge, in my respectful view, erred by implying his implied term into the deed.

55 It is to be recalled that a term cannot be implied by reason of business efficacy, unless it can be said that both parties would have consented to its inclusion. In Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14; (1986) 160 CLR 226, 241, Gibbs CJ and Mason, Wilson, Brennan & Dawson JJ said of the alleged implied term in that case that it was:

[Not] so obvious that both [parties] ... would clearly have agreed to its inclusion in the contract ... had they directed their minds to it at the time they concluded their bargain. This will commonly be the situation where the term sought to be implied is adverse to the interests of one of the parties, as they are adverse to the interests of [one party] here. An implication which may be regarded as obvious to one party may not be so regarded by the party detrimentally affected: Scanlan's New Neon Ltd v Tooheys Ltd [1943] HCA 43; (1943) 67 CLR 169 at 197; Treitel: The Law of Contract (1983) 6th ed, at 159. Unless it can be said that both parties would have consented to its inclusion, a term cannot be implied.

56 In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337, 346, Mason J said:

For obvious reasons the courts are slow to imply a term. In many cases, what the parties have actually agreed upon represents the totality of their willingness to agree; each may be prepared to take his chance in relation to an eventuality for which no provision is made. The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue. And then there is the difficulty of identifying with any degree of certainty the term which the parties would have settled upon had they considered the question.

57 The two reasons assigned by the judge for implying the term are unsustainable. The first, that the parties did not turn their mind to the question of whether the Davies might not exercise the option, is clearly incorrect. The parties, in the option deed, went to some length to explain what would happen in the event that the Davies did not exercise the option (cl 3, cl 4.2(a) and (b) and cl 6(b)). They obviously turned their minds to it. The deed had to be construed as at the date that it was entered into, and not with an eye to the Davies' ultimate decision not to purchase the land.

58 As to the second reason, the judge has, with respect, given unwarranted emphasis to certain words used in cl 2.1(c), without seeking to construe cl 2.1(c) as a whole and ascertain its meaning within the context of the option deed read as a whole. When that exercise is done, the description of the payments as interest on the balance of the purchase price may be seen as serving to emphasise that the parties appreciated the existence of an opportunity cost to the Shones in tying up the land for the second year. It is true that cl 2.1(a) referred to the payment of $400,000 as the consideration for the grant of the option to purchase the land for $3.8 million on the terms set out in the attached contract for sale. However, the sum of $400,000 was not expressed to be the sole consideration for the length of the exercise period of the option conferred under cl 2.2, or for the other benefits conferred on the Davies under the deed. The monthly payments in cl 2.1(c) were evidently intended to be paid in advance of the exercise of the option, but only if the Davies did not exercise the option in the first 12 months after the commencement date. The monthly payments were in addition to the $400,000 and were evidently integral to the parties' overall bargain. The obligation to pay would not be incurred if the option were exercised in the first 12 months. The obligation would cease in the second year, either upon the exercise of the option, or upon the completion of the contract for sale resulting from the exercise of the option by virtue of cl 2.1 and cl 4.1 properly construed (it is unnecessary to determine which for present purposes). In this way, the Shones, in effect, obtained a measure of protection if land values escalated over the course of the second year, and the Davies purchased the flexibility of taking up to two years to investigate the potential for subdivision without having to commit to purchasing the land and outlaying the capital sum of $3.8 million.

59 Nor can the five criteria in BP Refinery (Westernport) Pty Ltd v Shire of Hastings be seen as having any application. The differences between the Davies (in this appeal) and the trial judge as to the proper formulation of the implied term (see [61] below) suggests that the term is not readily capable of clear expression.

60 Moreover, there was certainly nothing 'obvious' about giving one party, but not the other, the right to terminate the deed at will. Such an asymmetrical right of termination could not be described as necessary to give business efficacy to the contract, as the option deed was clearly effective without the implication of such a term. The option period was a lengthy one in which the Shones were not only precluded from dealing with the land, but were also under positive obligations to the Davies in relation to the use of the land and the giving of assistance to the Davies in matters relevant to its potential subdivision: cls 5.3 - 5.5. Nor was the implied term reasonable and equitable because it served to deprive the Shones of valuable rights under cl 2.1(c) of the option deed. Further, the implied term for the Davies to terminate at any time at will was inconsistent with the express terms of the deed if the option was not exercised. Clause 4.2(b) addressed the topic of the termination of the option deed. By cl 4.2(b), the parties agreed that it should terminate, in effect, upon the expiration of the option period. The express agreement in cl 4.2(b) cannot simply be explained as an otiose statement of the consequences of the effluxion of time. In my view, it served to indicate that the parties' bilateral obligations were to continue throughout the currency of the option period, and that accordingly cl 4.2(b) covered the field that would otherwise be occupied by the alleged implied term: see Gemmell Power Farming Co Ltd v Nies (1935) 35 SR (NSW) 469, 476 - 477; Heimann v Commonwealth of Australia (1938) 38 SR (NSW) 691, 694 - 695; Ansett Transport Industries (Operations) Pty Ltd v The Commonwealth of Australia [1977] HCA 71; (1977) 139 CLR 54, 72 - 73; Trustees Executors and Agency Co Ltd v Peters [1960] HCA 16; (1960) 102 CLR 537, 545 - 546; Helicopter Sales (Aust) Pty Ltd v Rotor-Work Pty Ltd [1974] HCA 32; (1974) 132 CLR 1, 12; Kitching v Phillips [2011] WASCA 19 [70].

61 Finally, I should mention two particular submissions made by the Davies in this appeal. First, the Davies did not seek to support the implied term as formulated by the judge. They contended that the judge's implied term would need to be qualified by words making it plain that they could only terminate during the call option period, and not beforehand. That qualification, however, does nothing to address the substance of the difficulties to which I have referred above. Secondly, the Davies submitted that the option deed contained an irrevocable offer, as opposed to a conditional contract for the sale of the land, and therefore their implied term was more easily accommodated. I am unable to accept that submission. Even if the option deed were construed as containing an irrevocable offer, the agreed consideration for the length of the exercise period and for the other promises made by the Shones in cls 5.2 - 5.5 and cl 6 included the promise by the Davies to pay the monthly instalments under cl 2.1(c) in the second year of the option period. It is unnecessary to determine the juristic nature of the option in this case, but even if it were an irrevocable offer, that characterisation could provide no basis for implying a term that the Davies could avoid the performance of their promise to make payments under cl 2.1(c) by unilaterally terminating the option deed.

63 The trial judge, and the parties, proceeded on the basis that the relevant issue under cl 5.2 was whether the grant of the Perpetual mortgage breached cl 5.2(a) of the option deed.

64 The Shones challenge the trial judge's finding that the mortgage was granted on 10 September 2007. They contend that the mortgage to Perpetual was 'created' within the meaning of cl 5.2 of the deed, on or about 23 or 25 July 2007, prior to the parties entering into the option deed. For that reason, it is alleged, there was no breach of cl 5.2 of the option deed by the grant of the mortgage to Perpetual.

65 In this regard, the Shones rely upon certain evidence from Mrs Shone to the effect that the mortgage document had been executed on 23 July 2007, or 25 July 2007, and given to the Shones' mortgage broker. In par 14 of her first witness statement, Mrs Shone also gave hearsay evidence to the effect that the mortgage broker 'then returned [the mortgage document] to the new mortgagee'. She did not say, however, when the broker sent the mortgage document to the mortgagee.

66 None of this is evidence that the mortgage was 'created' prior to the execution of the option deed on 27 July 2007. The word 'create' in cl 5.2(a) has its ordinary meaning, which is to bring something into existence.

67 The loan facility agreement between Perpetual and the Shones bears the date 30 July 2007. Mrs Shone said in her affidavit of 29 September 2009 that she signed the loan agreement on 30 July 2007.

68 The loan facility agreement provided that the 'New Security', ie, the mortgage, 'is to be provided ... for the Loan' (emphasis added). The loan was drawn down on 12 September 2007. The mortgage was registered on 18 September 2007.

69 The grant or creation of the mortgage in equity would occur, following entry into the loan facility agreement, by actual or constructive delivery of the mortgage document to the lender for the purpose of securing a loan drawn in accordance with the loan facility agreement. A legal mortgage would be created upon the registration of the mortgage. In these circumstances, it could not be said that the mortgage was brought into existence, or 'created', prior to 27 July 2007.

70 Furthermore, even if the Shones were correct in contending that they created the mortgage prior to 27 July 2007, the point goes nowhere. Even on that hypothesis, they were still in breach of cl 5.2(a) when they drew down the loan from Perpetual on 12 September 2007 because, at that time, they increased (on this hypothesis) their current liability under that mortgage.

72 Nevertheless, for the reasons given below in relation to ground 5, contrary to the judge's conclusion, the Davies were not entitled to terminate the option deed for breach of cl 5.2(a).

73 In light of my conclusion with respect to ground 5, it is strictly unnecessary to deal with these grounds. Nevertheless, I will briefly outline why, in my opinion, these grounds cannot succeed.

74 Underlying both of these grounds is the contention, in effect, that prior to the option deed being entered into, there was a common intention, or an assumption by the Shones which had been encouraged by the Davies, that the Shones should borrow $400,000 to pay the Kemps, and mortgage the land to secure the borrowing.

75 The judge did not make any finding of the parties' common intention. He did reject the contention that the Shones made the assumption alleged [64], but he gave no reasons for that finding.

76 The difficulty with these grounds is that, even if the common intention or assumption existed, there is no basis for rectifying the deed or finding an estoppel. The alleged common intention and assumption are consistent with the operation of cl 5.2. The asserted common intention or assumption is consistent with the objectively ascertained contractual intention that if the Shones were to mortgage the land in order to pay the Kemps, it should be done in conformity with cl 5.2. No doubt, the reasonableness of the Davies' response under cl 5.2 would be judged in the light of any common intention or knowledge, existing at the time of entry into the deed, that the Shones would shortly need to mortgage the land to pay the Kemps in order to extinguish the Kemps' claim on the land and remove their caveat. That, however, is a circumstance relevant to the operation of cl 5.2. It is not one which points to the Davies' rights under cl 5.2 being foreclosed by an estoppel, or which points to the need for rectification.

77 The judge found that the breach of cl 5.2(a) of the option deed was a breach of an essential term which entitled the Davies to terminate the deed. He found, in effect that the Davies knew that the Shones would need to borrow $400,000 to repay the Kemps: [68] - [69], [72] - [73]. He referred to the test for essentiality outlined by Sir Frederick Jordan in Tramways Advertising Pty Ltd v Luna Park (New South Wales) Ltd (1938) 38 SR (NSW) 632, 641 - 642, where the former Chief Justice of New South Wales said:

The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor.

78 The primary judge found that cl 5.2(a) was an essential term because he accepted the evidence of the Davies that they expected compliance with cl 5.2, and had placed substantial importance on the protection offered by that term.

79 His Honour in this regard seems to have applied the test stated by Sir Frederick Jordan in Tramways Advertising v Luna Park by reference to the subjective intention of the promisee. That, with respect, was erroneous.

80 The question of whether cl 5.2(a) was an essential term (or condition) is a question involving the proper construction of the option deed. An essential term is one where the parties have agreed that any breach of it will always justify termination by the innocent party. See Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115 [47] - [48], [56], [69] - [70]; Tramways Advertising v Luna Park (641 - 642).

81 In determining whether the promisee would not have entered into the contract unless he or she was assured of strict compliance with the relevant term, the court has regard to 'the intention of the parties as appearing in and from the contract ... from the general nature of the contract considered as a whole or from some particular term': Tramways Advertising v Luna Park (641).

82 The construction of a written contract involves ascertaining what a reasonable person would have understood the parties to the instrument to mean. The High Court emphasised the objective nature of the analysis in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, by referring to Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 in these terms at [40]:

This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean.

83 There is a preference for a construction that will encourage performance rather than avoidance of contractual relations. In Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549, 556 - 557, Mason ACJ, Wilson, Brennan & Dawson JJ said:

In deciding whether a promise has the status and effect of a condition, courts are not too ready to construe a term as a condition and, at least where other considerations are finely balanced, will hold that a term is of such a kind that breach of it does not give rise to an automatic right to rescind. This approach is explained by a preference for a construction that will encourage performance rather than avoidance of contractual obligations: Cehave NV v Bremer mbH [1976] QB 44; Bunge Corporation [1981] 1 WLR 715; [1981] 2 All ER 541.

84 The following features may be noted about cl 5.2(a).

85 First, it is not described as a condition, nor does it contain an express right of termination in the event of breach. Secondly, it does not contain an outright prohibition on mortgaging the land or increasing the existing liability under an existing mortgage. Rather, it precludes the optionor from granting a mortgage or increasing an existing liability under a mortgage without first obtaining the written consent of the optionee and giving effect to any term as reasonably required by the optionee to preserve the optionee's priority under the deed. It also provides that the optionee's consent must not be unreasonably withheld. Accordingly, it could not be presumed that any breach, including a breach when the failure to obtain consent arose in circumstances where consent could not reasonably have been withheld in any event, conferred a right of termination.

86 Thirdly, the reference to priority draws attention to the nature of the optionee's interest. At least as from the commencement date, the Davies had an equitable interest in the land which would (generally speaking) have priority over subsequent equitable interests in the property, but which would (again generally speaking) be defeated by registered interests. A new, registered, mortgage by the optionor, which replaced an existing mortgage and which secured the same amount on the same or more favourable terms to the optionor as the existing registered mortgage, would not, in substance, affect the optionee's priority. In each case, its priority would be defeated by the registered security. A new registered mortgage which, in effect, merely replaced a prior equitable interest in the property such as an equitable charge, would also, in substance, not affect the optionee's priority. In each case again, the optionee's priority would be deferred in favour of the holder of the other interest. In sum, there are circumstances in which cl 5.2 could be breached, but the Davies' position would be no worse than their position prior to the breach. It is unlikely that the parties intended that such breaches could warrant termination.

87 Fourthly, it is evident from the terms of cl 5.2, read in the context of the deed as a whole, that cl 5.2(a) is designed to assist in securing the performance of the obligation on the part of the optionor to transfer the land free of encumbrances other than those specified in the deed when called upon to do so.

88 A new registered mortgage, additional to an existing mortgage, would affect priority, but whether it could impede the optionor's ultimate obligation to transfer the property free of encumbrances would depend upon various circumstances, including the terms of the mortgage and the amount secured.

89 The preceding observations indicate that, properly construed, cl 5.2(a) was an intermediate term of the option deed and not an essential term. Objectively, the parties could not have intended that any breach of cl 5.2(a) would justify the termination of the option deed.

90 There was no notice of contention by the Davies to the effect that if cl 5.2(a) was an intermediate term, its breach was sufficiently serious to justify termination of the option deed. Had that contention been made, the Davies would have carried the onus of proof on that issue. Whilst it is strictly unnecessary to deal with this further question, it is clear in my mind that, on the evidence, the Davies would have failed to discharge their onus of proof. The terms of the Perpetual mortgage were not in evidence. So far as can be ascertained from the material available, it merely served to discharge and replace an existing mortgage, discharge and replace a pre-existing liability and a prior equitable interest, and secure increased borrowings of approximately $13,000. This did not deprive the Davies of substantially the whole benefit which it was intended they should obtain from the option deed: cf Koompahtoo v Sanpine [49] - [50]. The breach could not be described as gross, nor could its consequences be regarded as serious: Koompahtoo v Sanpine [71]. Termination for breach in this case would be inconsistent with the law's policy to limit rights of termination to 'instances of serious and substantial breach of contract': Koompahtoo v Sanpine [52].

91 The Davies allege that the 'option period' was itself 'a term that was wholly or substantially for the benefit of the [Davies], and which could be waived by them'. The suggestion that the Davies could waive valuable rights given to the Shones under the option deed is misconceived. The notice of contention should be dismissed.

The cross-appeal and the Shones' notice of contention in the cross-appeal

92 The cross-appeal (in part), and the Shones' notice of contention in the cross-appeal, relate to the Davies' case of misleading and deceptive conduct.

93 The judge dismissed the counterclaim on the basis that the alleged conduct did not occur 'in trade or commerce' within the meaning of s 10 of the Fair Trading Act. By their notice of contention in the cross-appeal, the Shones contend that the judge's dismissal of the counterclaim should be affirmed on other bases. The first is, in effect, that the conduct pleaded by the Davies in their counterclaim, even if established, could not amount to misleading and deceptive conduct. The notice of contention also raises again the assertion (which I have previously rejected) that there was no breach of cl 5.2(a). Thirdly, it is alleged that the Davies did not suffer any loss.

The Davies' pleaded case of misleading and deceptive conduct

94 It is convenient to commence a consideration of these issues by reference to the Davies' pleadings.

95 In the counterclaim, the Davies pleaded, in effect, that the Shones engaged in misleading and deceptive conduct by entering into the option deed with the cl 5.2 promise (par 16), knowing from the existence of the term that the Davies believed that the contractual obligation in cl 5.2 would be performed. That is, the Shones were said to have conveyed an expectation that the clause was promissory (par 17). The Davies also pleaded that the Shones had not disclosed to the Davies prior to entering into the deed that they had received approval for a loan, met with their mortgage broker, signed a loan offer and mortgage documents (pars 18 and 19.1), and had subsequently acted in breach of cl 5.2. (par 19.2) by registering the new mortgage.

96 The alleged misleading and deceptive conduct is said to have induced the entry into the option deed (par 21(a)), and induced the payment of the $400,000 (par 21(b)). The Davies sought orders under s 77 of the Fair Trading Act for the rescission of the option deed and refunding of the $400,000 and other amounts paid by them under the deed.

No arguable claim of misleading and deceptive conduct

97 At the outset, it should be noted that if the Shones' alleged misleading and deceptive conduct induced the Davies to enter into the option deed, the non-performance of cl 5.2 after the deed was entered into could not itself be an aspect of the relevant misleading and deceptive conduct. That leaves the pleaded case of misleading and deceptive conduct resting upon the existence of cl 5.2, the conveying of the expectation that cl 5.2 was promissory, the 'non-disclosure' of the loan approval and the signing by the Shones of a mortgage document at the meeting with the mortgage broker.

98 The pleading gives no indication of how those matters might be said to amount to misleading and deceptive conduct. They are not alleged to convey an implied false representation of present fact, or a representation of an opinion not genuinely or reasonably held, or a representation of a future matter for the purposes of s 9(1) of that Fair Trading Act. Moreover, for the reasons indicated earlier, the signing of the mortgage document with the broker on 23 or 25 July 2007 does not signify the grant of a mortgage at that time. The conduct of signing documents and leaving them with the broker on 23 or 25 July is entirely consistent with the obligation to obtain consent under cl 5.2 prior to the grant of the mortgage. Indeed, in substance, that was the case successfully propounded by the Davies in resisting the Shones' claims for rectification and estoppel at trial and in this appeal.

99 At the hearing of the appeal, counsel for the Davies contended that, in substance, the misleading and deceptive conduct by the Shones involved their failure to advise the Davies, prior to executing the option deed, that they were making arrangements for the grant of a mortgage to Perpetual. It was said, in effect, that the Davies had a reasonable expectation that arrangements with respect to the proposed mortgage to Perpetual would be disclosed: Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31, 41; Miller & Associated Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31; (2010) 241 CLR 357 [19], [95].

100 In my view, there is no arguable case of misleading and deceptive conduct of the kind alleged. The parties were at arm's length. The option deed, by cl 5.1, included express warranties by the Shones which did not include a warranty that there were no negotiations underway to obtain a further mortgage. On the Davies' own case, they knew that there were further borrowings to be undertaken by the Shones in order to pay the Kemps and to procure the release of the Kemps' claim on the land. Further, the parties had expressly agreed that any further mortgage by the Shones should be dealt with in accordance with cl 5.2(a). In these circumstances, it is impossible to see how the failure by the Shones to advise the Davies that they were making arrangements with respect to the proposed mortgage to Perpetual involved them engaging in misleading and deceptive conduct.

101 Accordingly I would uphold ground 1 of the notice of contention on the cross-appeal. For the reasons given previously, I would reject ground 2. It is unnecessary to deal with ground 3.

102 The judge's decision to dismiss the counterclaim is properly upheld on the basis of the notice of contention. Nevertheless, I will explain why, in my view, the judge erred on the question of whether the conduct occurred in trade or commerce.

103 Section 5 of the Fair Trading Act defines 'trade or commerce' as 'includ[ing] any business or professional activity'. The word 'business' is defined to include 'a business not carried on for profit' and 'a trade or profession'.

104 In Concrete Constructions (NSW) Pty Ltd v Nelson [1990] HCA 17; (1990) 169 CLR 594, Mason CJ, Deane, Dawson and Gaudron JJ, speaking of s 52 of the Trade Practices Act 1974 (Cth), said (602 - 604):

It is well established that the words 'trade' and 'commerce', when used in the context of s 51(i) of the Constitution, are not terms of art but are terms of common knowledge of the widest import ... The real problem involved in the construction of s 52 of the Act does not, however, spring from the use of the words 'trade or commerce'. It arises from the requirement that the conduct to which the section refers be 'in' trade or commerce.

...

The phrase 'in trade or commerce' in s 52 has a restrictive operation. It qualifies the prohibition against engaging in conduct of the specified kind ... [T]he reference to conduct 'in trade or commerce' in s 52 can be construed as referring only to conduct which is itself an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character ...

What the section is concerned with is the conduct of a corporation toward persons ... with whom it ... has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character ... In some areas, the dividing line between what is and what is not conduct 'in trade or commerce' may be less clear and may require the identification of what imports a trading or commercial character to an activity which is not, without more, of that character.

105 The matters to which the Davies refer in contending that entering into the option deed constituted conduct 'in trade or commerce' include the following:

(a) the land was a single lot of approximately 22 acres of subdivisible size;

(b) in September 2004, the Shones had obtained conditional approval from the Western Australian Planning Commission for the subdivision of the land into three 7-acre lots;

(c) in October 2004, the Shones had entered into a conditional contract by which the Kemps agreed to purchase one of the proposed lots in the then proposed subdivision;

(d) the Shones completed some, but not all, of the works necessary to satisfy the Western Australian Planning Commission's approval conditions;

(e) the Shones had entered into a conditional contract for the sale of the property to a developer, Timefield, in June 2006 and in January 2007 had received an offer from Timefield which provided for an option to purchase, and, if the option were exercised, a purchase price of $4.5 million;

(f) prior to settlement of the dispute with the Kemps, the Shones and the Davies had discussed the dispute and a possible joint sale of their two properties to developers;

(g) the Shones, in effect, made the Davies aware of the competing interest of Timefield and encouraged competition between the Davies and the property developer; and

(h) there were 'business-like' aspects of the deed including cl 5.2, provisions for the payment of interest, confidentiality, and cooperation in relation to rezoning and the subdivision applications.

106 The Shones contend that the Davies ought not be permitted to refer to the above matters as providing support for the contention that the relevant conduct occurred in trade or commerce. It is said that the above matters cast a wider net than the pleaded case at trial. They further contend that even if that submission were rejected, the following matters confirm the judge's finding that the option deed was not entered into in trade or commerce:

(a) when the deed was entered into, the Shones did not own any other land other than the land the subject of the option deed, which was their home;

(b) the option deed did not concern the sale of a subdivided portion of the land and the land had not been subdivided at the time the deed was entered into, or subsequently;

(c) the earlier proposed subdivision had not been completed and what work was done for the purpose of subdivision occurred before the deed was entered into and before any discussions took place between the Shones and the Davies;

(d) at the time Mrs Shone entered into the deed, she was a housewife, and Mr Shone was a maintenance technician;

(e) neither Mr nor Mrs Shone was in the business of buying and selling real estate when they signed the deed; and

(f) at the time the deed was entered into, the land was not being used in the course of, or for the purpose of, any business activity by Mr and Mrs Shone.

107 The Shones also referred to various authorities in which it was held that the sale of a private residence did not involve conduct in trade or commerce. The principal case relied on was O'Brien v Smolonogov (1983) 53 ALR 107. Reference was also made to subsequent cases which had applied O'Brien v Smolonogov: Argy v Blunts & Lane Cove Real Estate Pty Ltd [1990] FCA 51; (1990) 26 FCR 112, 127 - 128; Franich v Swannell (1993) 10 WAR 459, 481; Australian Competition and Consumer Commission v Gary & Associates Pty Ltd [2005] FCA 404; (2005) 142 FCR 506 [91] - [93].

108 In my view, the matters referred to by the Davies are sufficiently connected in time and subject matter to the grant of the option as to provide relevant context to an assessment of whether the grant of the option occurred in trade or commerce. They formed part of the forensic contest at trial on the question of whether the alleged conduct was in trade or commerce, as is evident from the parties' written submissions at trial and the judge's reasons. They do not go beyond the scope of the matters litigated at trial.

109 Furthermore, in my view, none of the cases referred to by the Shones provide authoritative guidance to the resolution of the question raised in these proceedings. In O'Brien v Smolonogov, the vendors owned a number of adjoining lots covering a large area of approximately 875 acres. They wished to build on one of the lots, and sell the others to finance the building. They advertised the sale in a newspaper and invited negotiations by telephone. The court, having observed that the land in question did not involve trading stock, that the vendor was not conducting land development, and that the land itself was not used for any business activity, continued (113 - 114):

It follows, in our opinion, that the only possible feature of the case which could conceivably be relied upon to suggest that the impugned conduct occurred in trade or commerce was the resort by the appellants to a newspaper as a medium of public advertisement of the land and the use made by the parties of the telephone for the purpose of conducting negotiations. ... But, in our view, the mere use, by a person not acting in the course of carrying on a business, of facilities commonly employed in commercial transactions, cannot transform a dealing which lacks any business character into something done in trade or commerce. Of course, the facilities mentioned have applications which are not commercial in any sense: advertisements in newspapers and the telephone are used by persons for purposes which are not commercial at all. With all respect to the learned judge, we are not persuaded that resort to them can create the business context required by the reference to 'trade or commerce' in s 53A. The conduct complained of was not something done by the appellants in the course of carrying on a business and it lacked trading or commercial character as a transaction. (emphasis added)

110 It is to be accepted that the activity of selling land by private sale, particularly a residence, would not ordinarily be regarded as being in trade or commerce. The real issue in this case is whether anything can be identified in the transaction in question, which imports a trading or commercial character to the activity which, without more, would not have that character: see Concrete Constructions v Nelson (604).

111 I accept the thrust of the Davies' contention to the effect that the matters identified in [105] above import a commercial character to the grant of the option. The grant of an option is, in itself, typically regarded as a species of commercial transaction. It is a step removed from the ordinary sale and purchase of a home. The language and subject matter of the option deed - a 'call option' in respect of subdivisible property - also import the notion of commerciality into the transaction. The optionor's obligations under the deed were designed to assist the optionee in exploring the potential for, and in obtaining, subdivision of the property. The provision dealing with confidentiality also gives the transaction a commercial character. Further, the transaction falls to be considered in the context of the Shones' related dealings with a land developer and the earlier steps undertaken by the Shones with a view to subdividing the land.

112 In these circumstances, it cannot be said, as it was said by the court in O'Brien v Smolonogov (114), that the grant of the option 'lacked ... commercial character as a transaction'. Nor can it be said, as it was said in Argy v Blunts (129), that the 'present is purely a case of a person selling his house'. The house here was merely an incidental aspect of the land the subject of the option and was not in any sense a feature of the transaction. Further, none of the matters referred to by the Shones in [106] above assist in shaking off what is essentially the commercial character of the transaction.

113 For these reasons, this part of the cross-appeal is upheld.

Cross-appeal - cl 2.1(d) - $5,000 payment

114 Ground 2 of the cross-appeal alleges that the judge erred in finding that the Davies were required to make a second payment of $5,000 on 28 September 2007 pursuant to cl 2.1(d) of the option deed.

115 Clause 2.1(d) is straightforward and unambiguous on its face. It provided, in effect, that:

(a) the Davies should pay the Shones $5,000 each calendar month commencing 28 August 2007;

(b) the Davies agreed that the first $5,000 payment, otherwise falling due on 28 August 2007, would be paid in advance on 27 July 2007; and

(c) the obligation to make the monthly payments of $5,000 would cease on the call option commencement date.

116 The call option commencement date was 4 October 2007. The first payment, nominally scheduled for 28 August 2007, was paid in advance on 27 July 2007. The second payment fell due on 28 September 2007. There is no error in the judge's finding in this regard. Even if cl 2.1(d) were ambiguous, which it is not, the Davies' contention of error is ultimately founded upon the subjective intentions of the parties. That is impermissible: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales. This part of the cross-appeal should be dismissed.

117 The appeal should be allowed in part. The cross-appeal should be allowed in part. The notice of contention in the cross-appeal should be allowed in part.