South Dowling v Cody Outdoor Advertising [2005] NSWSC 391 | Case summary

47 LICENCE AGREEMENT The purchaser acknowledges that it has read the licence agreement between Pias Settlements Pty Limited and Claude Neon Pty Limited being a Deed of Agreement dated the 28th day of August 1997. Pursuant to that Deed the Purchaser acknowledges that the Vendor will cease to be bound by the Deed and that the purchaser agrees to enter into an agreement in terms reasonable and acceptable to the Licensee preserving the rights and obligations under the said Deed which is annexed and marked with the letter "X". 23 The reference to the document annexed and marked "X" is, I think, a reference to a "conformed version" of the licence agreement which merged the provisions of completion and subsequent events. 24 It appears that Tada gave Pias a direction (said in submissions to be under clause 4.3 of the contract or pursuant to a right under the general law) requiring Pias to complete by transferring the land to South Dowling. (I say "it appears" because that is what happened; no form of direction, whether under clause 4.3 or otherwise, was proved; and the settlement statement makes no reference to any such direction.) 25 It does not appear that any draft agreement of the kind referred to in special condition 47 of the contract, or any agreement of the kind required by clause 7 of the licence agreement, was prepared and submitted, by one party to the other, before completion. I think the inference from the evidence (or lack of it) is that the parties, or the legal advisers, simply overlooked the need to obtain such an agreement. However, it is clear that the parties intended that South Dowling should have the benefit of the licence agreement (ie of Pias' rights as licensor). On settlement, Pias' solicitors handed over a direction addressed to Cody. Omitting formal parts, it reads as follows: "We act for Pias Settlements Pty Limited to whom you have been paying rent [sic] in connection with the above property. This property was sold to Healthconnectiv Holdings Pty Limited [the former name of South Dowling] (ACN 095 091 160) of level 15, 74 Castlereagh Street, Sydney on 30 July 2002. You are hereby directed to pay all future instalments of rent [sic] to your new Lessor [sic] or as directed by that party." 26 It is admitted on the pleadings that, by that letter, Pias on 30 July 2002 directed Cody to pay all future payments pursuant to the licence agreement to South Dowling. 27 On 1 August 2002, Country State Property Services Pty Limited (Country State), which appears to be a related corporation of South Dowling, wrote to Cody in relation to payment of "rental". That letter, omitting formal parts, reads as follows: "Country State Property Services Pty Ltd act as Property Managers on behalf of Healthconnectiv Holdings Pty Ltd (ACN 095 091 160) whom [sic] have purchased the above property from Pias Settlements Pty Ltd as of 30 July 2002. Country State Property Services hereby direct all rental [sic] instalments due from the 1st August 2002 to be paid to this office via Bpay facility on the first day of each month as per your current Lease [sic] terms. Our Biller Code No is 68627 and your Bpay customer number is 601461. Should you require further information or assistance regarding the content of this letter please do not hesitate to contact the undersigned at your convenience. Thank you in anticipation for [sic] your ongoing patronage of our premises and Country State Property Services welcome the opportunity to develop a mutually satisfactory relationship that will benefit both parties." 28 It appears that Cody made payment for the month of August 2002 to Pias. On 2 August 2002, Pias wrote to Cody. That letter, omitting formal parts, reads as follows: "We refer to the sale of the above property and confirm that settlement took place on Tuesday, 30 July 2002. Please find enclosed your cheque for rent [sic] for the month of August 2002, which is now payable to the new owners. Effective immediately, could you please cancel any future payments to our account with regard to your regular monthly rental payments. The new lessor [sic] will advise their account details directly to you. We would like to take this opportunity to thank you for your support and co-operation and wish you every success for the future. " 29 On 7 August 2002, South Dowling sent an invoice for "rental" to Cody. The amount claimed was one-twelfth of the annual amount stated in the schedule to the contract. It was required to be paid by 15 August 2002. 30 On 16 August 2002, Cody replied to Country State's letter of 1 August 2002. Omitting formal parts, the reply reads: "We refer to your letter dated 1 August 2002. We note that Healthconnectiv Holdings Pty Ltd ( Healthconnectiv ) has purchased the above property from Pias Settlements Pty Ltd ( Pias ) and that settlement of that purchase took place on 30 July 2002. We also note your references to "rental instalments" and "current lease terms" and it appears that you are under the impression that there was a lease between Cody and Pias which is not correct, and further, that the lease has been transferred to Healthconnectiv which is also not correct. We confirm that any relationship we had with Pias in relation to the above premises and the signage located on those premises is at an end, and that Cody has no agreement with and is under obligation towards Healthconnectiv whatsoever. Accordingly, please contact us so that we may discuss the removal of the EPL Tower signage." 31 Also on 16 August 2002, Cody replied to Pias' letter of 2 August 2002. Omitting formal parts, the reply read: "We refer to your letter dated 2 August 2002 confirming that Healthconnectiv Holdings Pty Ltd ( Healthconnectiv ) has purchased the above property from Pias Settlements Pty Ltd ( Pias ) and that settlement of that purchase took place on 30 July 2002. We refer to the Signage Rights Deed relating to signage rights to the EPL Tower located at the above address granted by Pias to Claude Neon (Australia) Pty Ltd dated 28 August 1997 ( the Deed ) (as modified by the Deeds of Variation dated 30 September 1997 and 25 May 1998). While we do not concede that the Deed is binding on Cody (we refer to clause 8.6 of the Deed which prohibits the licensee from assigning, sub-licensing or otherwise dealing with its rights, interest and obligations pursuant to the Deed), on the assumption that the legal relationship between Cody and Pias is governed by the Deed, we make the following points: (a) By reason of the completion of the sale to Healthconnectiv, Pias is in breach of clause 7 of the Deed, as it has failed to ensure that the purchaser, upon sale of the property, enters into an agreement with Cody in terms reasonable acceptable to Cody which preserve Cody's rights and obligations under the Deed. It also appears that Pias has failed to ensure that there is included in any agreement for the sale of the property a provision requiring the purchaser to execute such an agreement upon completion of the purchase of the property. (b) By reason of the completion of the sale of the property, Pias has placed itself in a position where it cannot comply with obligations under the Deed. (c) The conduct of Pias referred to in (a) and (b) above constitutes a wrongful repudiation of Pias's obligations under the Deed. (d) Cody accepts that wrongful repudiation and hereby terminates the Deed." 32 Further correspondence between the parties and their lawyers did nothing to change their entrenched positions. South Dowling took the view that the licence agreement was in force, and that it was entitled to the benefit of it. Cody took the view that the licence agreement had come to an end. I do not think that there is any need to refer in detail to the further correspondence. 33 However, it should be noted that on 11 September 2002, South Dowling's solicitor sent to Cody's solicitors a "deed of assignment and consent to assignment", executed by Pias and South Dowling, for execution by Cody. That document took effect from 30 July 2002. It is admitted on the pleadings that, by that document, Pias and Healthconnectiv entered into the "deed of assignment of licence and consent to assignment" (the second assignment). 34 Not surprisingly, Cody declined to execute the second assignment. The terms of the second assignment 35 As I have noted, the deed stated that it was to be made with effect from 30 July 2002. 36 By clause 2, South Dowling was to agree with Cody that, on and from 30 July 2002, South Dowling would be bound by and would observe and perform all the licensor's covenants in the licence agreement as if South Dowling had originally been a party. 37 By clause 3, South Dowling was to agree that it would pay Cody's costs. 38 Cody did not submit that terms of the document were inappropriate for, or incapable of satisfying the requirements of, clause 7 of the licence agreement. Subsequent events 39 It is admitted on the pleadings that on 7 April 2003, Pias again directed Cody to pay all future payments pursuant to the licence agreement to South Dowling. 40 It is admitted further on the pleadings that Cody has made no payments to South Dowling pursuant to or referable to the licence agreement; of course, Cody says that it has never had any liability to make any such payments. 41 South Dowling asserted that Cody had repudiated the licence agreement. On 18 March 2005, South Dowling by its solicitors gave Cody notice that South Dowling accepted the repudiation as bringing to an end the licence agreement. This was done on the agreed basis that Cody would not suggest that South Dowling had affirmed the licence agreement, so as to lose any right of "rescission" that it may have had. The construction of clause 7 42 A determination of the status of clause 7 as a warranty or condition necessarily involves an understanding of its part in the contractual scheme. That in turn requires a determination of the precise rights and obligations that clause 7, on its proper construction, provides. Equally, if clause 7 is a warranty only, a determination of whether, in the circumstances, there has been a repudiation by Pias of its obligations under clause 7 requires a determination of what, precisely, those obligations were. 43 Relevantly for present purposes, clause 7 creates (in the case of sale) two obligations on the licensor. The first is to ensure that the purchaser enters into an agreement with the licensee, and prescribes the content of that agreement. The second imposes on the licensor an obligation to ensure that any contract for sale of the land that it makes includes a provision requiring the purchaser to execute "such an agreement" on completion. Clearly, the reference to "such an agreement" is a reference back to the agreement that, by the first sentence of clause 7, the licensor is required to ensure that the purchaser makes with the licensee. 44 The first sentence - imposing the obligation on the licensor to ensure that the purchaser makes an agreement with the licensee, and prescribing the substance of that agreement - does not in terms specify when that agreement is to be made. However, the second sentence provides that the contract for sale is to require that agreement to be made on completion. The second sentence makes it quite clear that the agreement which, by the first sentence, the licensor is required to procure the purchaser to make with the licensee, is to be made on - ie no later than - completion. 45 There are a number of reasons why this is so. The first is that, I think, the obligation created by the second sentence is ancillary to that created by the first. The second sentence in substance spells out how the licensor is to ensure that the purchaser enters into the agreement with the licensee for which the first sentence provides. 46 The second reason is that the agreement for which the first sentence provides is one that "preserves" the licensee's rights and obligations under the licence agreement. The preservation of those rights indicates that there should be no hiatus between their availability. Up until completion, they are available as against the licensor, because the licensor owns the property. After completion, they are not; and if they are to be available after completion, they must be available against the purchaser. A construction of clause 7 that permitted the agreement for which the first sentence provides to be made at some time after completion would mean that the rights were not preserved but, at best and at the discretion of the purchaser, reinstated. 47 The third reason, related to the second, arises from the nature of the rights created by the licence agreement. They are personal, or contractual; they create no interest in land. At least arguably, they would not be available against a purchaser who became registered, even if that purchaser took with notice of the terms of the licence agreement. Thus, if completion were to occur without the agreement required by the first sentence of clause 7 being made, the licensee might lose its rights. 48 The fourth reason, again related to the second, is that, as the third sentence of clause 7 makes clear, the licensor ceases to be bound by the licence agreement "upon the purchaser entering into such agreement" - ie the agreement called for by the first sentence. But, as I have pointed out, completion without the making of such an agreement, whilst it might not relieve the licensor of its obligations under the agreement, would put it beyond the power of the licensee to perform them; and in those circumstances, the licensee would be remitted to its secondary rights in damages. However, the third sentence, read in conjunction with the second sentence, makes it clear that the release of the licensor (as to future matters) occurs on completion, being the time when, as the second sentence provides, the agreement between the purchaser and the licensee is to be made. 49 In short, when one reads clause 7 as a whole, and pays due attention to the inter-relationship of the obligations that it creates, I think it is inescapable that the time by which the agreement contemplated by the first sentence is to be made is the time of completion of the contract for sale. 50 This construction is consistent with, and facilitates the achievement of, the evident purpose of the clause. The licensee is in no position to protect its interests. It cannot enforce its agreement against a purchaser who, absent fraud, takes a transfer and becomes registered. It depends on the licensor for protection. The licensor is only in an effective position to protect the interests of the licensee whilst the licensor remains the proprietor of the land. It is able to require the insertion of an appropriate term into any contract for sale. It is able to ensure that completion does not take place until that term is performed. Whilst the licensor might retain, even after settlement, a legal right to require a purchaser to contract appropriately with the licensee (and special condition 40 confirms that this is so), that would be of little comfort to the licensee if the purchaser, having completed and become registered as proprietor, locked out the licensee. To my mind, these considerations point strongly to a construction that requires the agreement for which the first sentence of clause 7 calls to be made no later than completion. Clause 7: condition or warranty? 51 The parties accepted that the test of essentiality was that stated by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) NSWLR 633 at 641-642. His Honour's test has been cited with approval, and adopted, on numerous occasions: see, by way of very partial citation only, Associated Newspapers Limited v Bancks (1951) 83 CLR 322 at 327; DTR Nominees Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 430-431; and Ankar Pty Ltd v National Westminster Finance Limited (1987) 162 CLR 549 at 555. 52 Jordan CJ said that the question, whether a term in a contract was a condition or a warranty, depended on the intention of the parties as it appeared in or from the contract. I take this to mean the intention of the parties objectively ascertained from the contract. A term was essential if the promisee would not have entered the contract except on the assurance of strict (or in some cases substantial) performance. If strict performance were required, and not provided, then the promisee might terminate; equally so, if substantial performance were required, and not provided. 53 His Honour said (omitting citations): "The question whether a term in a contract is a condition or a warranty ie an essential or a non-essential promise, depends upon the intention of the parties as appearing in or from the contract. 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 be, and that this ought to have been apparent to the promisor … . If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight. If he contracted in reliance upon a substantial performance of the promise, any substantial breach would ordinarily justify a discharge. In some cases it is expressly provided that a particular promise is essential to the contract, eg by a stipulation that it is the basis or of the essence of the contract … but in the absence of express provision the question is one of construction for the Court, when once the terms of contract have been ascertained …. In general, Courts of common law have been more ready than Courts of Equity to regard promises as essential. This is in part due to the fact that Courts of common law are in the main concerned with ordinary commercial contracts in which it is common to find provisions which are intended to be strictly and literally performed. It is now provided … that stipulations in contracts, as to time or otherwise, which would not … have been deemed to be or to have become of the essence of such contracts in a Court of Equity shall receive in all Courts the same construction as they would have heretofore received in such Court. This serves to make equitable liberality of construction supersede common law strictness, so far as is consistent with apparent intention, in fields where equity and common law overlap; but it does not affect the principle that effect must be given to the apparent intention of the parties as disclosed in the contract …." 54 In DTR Nominees, the majority (Stephen, Mason and Jacobs JJ) said at 531 that Jordan CJ's "statement of the law … emphasises that the quality of essentiality depends for its existence on a judgment which is made of the general nature of the contract and its particular provisions, a judgment which takes close account of the importance which the parties have attached to the provision as evidenced by the contract itself as applied to the surrounding circumstances". I take their Honours' reference to "surrounding circumstances" to direct attention to the circumstances in which a contract was made, and in which the parties, objectively, should be taken to have understood that it would be performed. 55 In Ankar, the majority (Mason ACJ and Wilson, Brennan and Dawson JJ) said at 556-557 that "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 a breach of it does not give rise to an automatic right to rescind". This, their Honours said, "is explained by a preference for a construction that will encourage performance rather than avoidance of contractual obligations". 56 In Burger King Corporation v Hungry Jack's Pty Limited [2001] NSWCA 187, the Court of Appeal at paras [125]-[126] acknowledged the prima facie rule "that time stipulations in commercial contracts are ordinarily construed as conditions". However, their Honours said, "whether a term is essential depends upon the proper construction of the contract", and this was to be decided according to the principle stated by Jordan CJ in Tramways Advertising. 57 As I have already indicated, the relationship created by the licence agreement was that of licensor and licensee. Despite its treatment in the contract for sale, the licence agreement itself created in the licensee no estate or interest in the land. The rights that it did give the licensee were enforceable against the licensor as a matter of contract. Clearly, the licensee could enjoy those rights only when, and for as long as, the licensor was the proprietor of the land. Absent fraud, the rights given to the licensee would cease to be enforceable if a purchaser became registered as proprietor of the land without entering into some agreement with the licensee to ensure continuation of the licensee's rights. 58 The only real protection that the licensee would have, against loss of rights through sale, transfer and registration, is that afforded by a mechanism such as clause 7. In other words, clause 7 provides the mechanism by which rights may be protected, and continued, for the full duration of the "Term", notwithstanding the sale of the land during that term. 59 There is no doubt that the parties regarded the rights given to the licensee by the licence agreement as possessing substantial value. The commencing annual fee was $190,000, increasing by 7.5% each year (ie the fee for each subsequent years was 107.5% of the fee for the immediately preceding year). By the time the contract for sale was made, the fee had apparently increased to the sum in the schedule, namely $253,739.90. It may very well be that, by August 2002, the rights had become less attractive to Cody. That, no doubt, is why Cody took the opportunity that it thought it had to bring the license agreement to an end. But the question of essentiality falls to be considered not as at August 2002 but as at August 1997, when the licence agreement was made. If clause 7 then had the quality of a condition, it did not lose that quality because, with the passage of time and having regard to the events that occurred, the rights that it was designed to protect became perceived as onerous rather than valuable. 60 I should indicate that neither party submitted that the question of essentiality was to be assessed as at March 2002, when the assignment from Claude Neon to Cody took place. But presumably, if Cody then bound itself to pay the licence fee (which by then must have increased to the amount stated in the schedule to the contract for sale), it must have thought that the rights were of sufficient value to justify the fee. 61 Further, as I have indicated in para [50] above, the practical, rather than theoretical, protection afforded by clause 7 requires strict compliance. If the licensor does not ensure, prior to completion of any sale, that the purchaser has entered into the requisite agreement with the licensee, then the licensee is at risk of losing the benefit of its rights once the purchaser becomes registered as proprietor. Indeed, if the alternative argument for which Cody contended is correct (namely, that once Pias ceased to be proprietor of the land, the licence agreement came to an end because the obligations were interdependent and Pias was no longer able to give Cody the benefit for which Cody paid the fee), the licensee loses everything once settlement occurs and the purchaser is registered as proprietor, if the purchaser has not by then entered into the clause 7 agreement with the licensee. These considerations suggest very strongly that strict performance of clause 7 (as I have construed it) is essential for the protection of the licensee's rights under the licence agreement; and that, applying the Tramways Advertising test, clause 7, insofar as it seeks to protect the licensee's rights, must be taken to be a condition. Further, they suggest, it must be a condition of which strict, rather than merely substantial, performance is required. 62 Thus, I think, clause 7 must be seen as central to the licence agreement, because it provided the mechanism for ensuring that the rights given to the licensee remained available notwithstanding changes in the ownership of the land. Given the value that the parties attributed to those rights when they made the licence agreement, I think that clause 7 must be regarded as having the nature of a condition. In other words, I think, if one were to ask whether Claude Neon would have entered into the licence agreement without being assured of strict performance of clause 7, the answer, gathered objectively from the terms of the contract and the circumstances in which it was made, must be "no". 63 I have referred to the question in terms of strict compliance. As I have noted, Jordan CJ in Tramways Advertising put the question alternatively, referring to strict or substantial compliance. In the present case, neither party submitted that any different view should be taken according to whether the test was one of strict, or "merely" substantial, compliance. 64 Thus, I conclude, clause 7 should be taken to be a condition of the licence agreement. Further, although strictly speaking (for reasons that I shall give), it is not necessary to decide the point, I think that it is a condition of which strict, rather than merely substantial, performance was required. Breach of clause 7 65 As I have construed clause 7, it required Pias to ensure that Tada (as "the purchaser" under the contract for sale) entered into an agreement with Cody of the kind called for by the first sentence of clause 7, and did so on completion of the sale. Equally, if it be correct to regard South Dowling as the purchaser (on the basis that it was the party to whom the property was transferred), then clause 7 required South Dowling to enter into such an agreement with Cody prior to completion. Clause 31.1(f) of the special conditions provided that reference to a person included "a reference to a person's, executors, administrators, successors, substitutes … and assign [sic]". If, as appears to be the case, South Dowling became proprietor as the result of a transfer directed pursuant to clause 4.3, it is appropriate to regard it as a successor, substitute or assign of Tada. 66 Pias did not ensure that either Tada or South Dowling entered into the requisite agreement with Cody. It made no attempt to do so until, on 4 September 2002, it returned to South Dowling's solicitor the deed of assignment of licence executed it. By then, of course, Cody had made it clear that it regarded the licence agreement as being at an end. 67 If clause 7 of the deed was a condition requiring to be strictly performed, then on no view did Pias tender strict performance. But even if it is appropriate to regard clause 7 as a condition requiring substantial, rather than strict, performance, I do not think that it could be said that Pias tendered substantial performance. By settling the transaction (with a transferee by direction, not with the purchaser under the contract) without first obtaining the requisite agreement, Pias exposed Cody to the risk of loss of the licence agreement. Indeed, if the alternative argument to which I have already referred be correct, it did more than expose Cody to the risk of loss; it caused Cody to lose the benefit of the licence agreement. But even on the view that Pias' action did no more than expose Cody to the risk of loss, it meant that South Dowling was in a position where, as proprietor of the land, it could deny Cody the benefit of the agreement. 68 No doubt, Pias, Tada and South Dowling all proceeded on the basis that South Dowling wanted to have the benefit of the licence agreement. The correspondence and other matters to which I have referred in paras [25] to [29] above suggest this. But there is nothing in the evidence to suggest that Pias was alive to the need to do more than leave Cody to the benevolence and self interest of South Dowling. Indeed, one view of Pias' letter of 2 August 2002 is that this was precisely its attitude. 69 Presumably, in the events that have happened, the licence agreement had become disadvantageous to Cody, so that it was in Cody's interest to escape it; and, equally, it was in South Dowling's interest to hold Cody to it. But if events had gone the other way - if the rights conferred by the licence agreement had become more, rather than apparently less, valuable - then South Dowling was in a position where it could re-licence the rights to another party or extract a higher licence fee from Cody. I do not think that, in assessing the question of whether there has been substantial performance, it is appropriate to look at the market conditions prevailing at the time performance was tendered. Rather, the question is whether, regardless of the prevailing market conditions, the real purpose of the clause could have been achieved by such tender of performance as in fact occurred. For the reasons that I have given, it could not; that there was in fact no detriment to Cody (leaving aside its purported termination) reflects not the efficacy of the performance but the prevailing market conditions. 70 Thus, even if the question of breach fell to be answered by whether Pias has tendered substantial, rather than strict, performance, I would conclude that Pias was in breach of its obligations under clause 7. Consequence of breach 71 In consequence, as Jordan CJ pointed out in Tramways Advertising, Cody was entitled to act as it did, and to treat the licence agreement, insofar as it remained to be performed in the future, as no longer binding upon it. Conclusion and orders 72 This conclusion makes it unnecessary for me to consider the other issues that were argued. Those issues included not only those identified in para [4] above, but also the alternative arguments as to why, on Cody's case, there was a breach of condition. Nor do I think that there is any utility in my doing so. I have set out the relevant facts (which, in essence, were not disputed) above. The parties' written submissions will remain with the papers; and their oral submissions were recorded. 73 I make the following orders:

South Dowling v Cody Outdoor Advertising

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (19 paragraphs)

Parties

Cases Cited (5)