[1973] HCA 36
Australian Casualty Co Ltd v Federico (1986) 160 CLR 513[1986] HCA 32
Australian Education Union v Department of Education and Children's Services (2012) 248 CLR 1[2012] HCA 3
Charter Reinsurance Co Ltd v Fagan [1997] AC 313
Cherry v Steele-Park (2017) 96 NSWLR 548[2017] NSWCA 295
Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd (2019) 101 NSWLR 679[2019] NSWCA 185
Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544[2017] HCA 12
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640[2014] HCA 7
Fitzgerald v Masters (1956) 95 CLR 420[1956] HCA 53
HDI Global Specialty SE v Wonkana No 3 Pty Ltd (2020) 104 NSWLR 634[2020] NSWCA 296
In the matter of Peak Invest Pty Ltd (admins apptd)Five Island Invest Pty Ltd (admins apptd)
Surry Hills Pub Invest Pty Ltd (admins apptd) and Four by Four Investments Pty Ltd (admins apptd) [2021] NSWSC 1714
James Adam Pty Ltd v Fobeza Pty Ltd (2020) 103 NSWLR 850
[2020] NSWCA 311
Maggbury Pty Ltd v Hafele Aust Pty Ltd (2001) 210 CLR 181
[2001] HCA 70
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104
[2015] HCA 37
Simic v New South Wales Land and Housing Corp (2016) 260 CLR 85
Judgment (14 paragraphs)
[1]
The J & P Marlow (No 2) Pty Ltd (First Appellant)
Blue Marlin Enterprises Pty Ltd (Second Appellant)
Joseph Hayes and Andrew McCabe in their capacity as joint and several liquidators of Peak Invest Pty Ltd (in liq), Five Islands Invest Pty Ltd (in liq), Surry Hills Pub Invest Pty Ltd (in liq) and Four By Four Investments Pty Ltd (in liq)
(First Respondent)
Peak Invest Pty Ltd (in liq) (Second Respondent)
Five Islands Invest Pty Ltd (in liq) (Third Respondent)
Surry Hills Pub Invest Pty Ltd (in liq) (Fourth Respondent)
Four by Four Investments Pty Ltd (in liq) (Fifth Respondent)
Batiha Pty Ltd (Sixth Respondent)
Blue Onion Capital Pty Ltd (Seventh Respondent)
Strong Run Pty Ltd (Eighth Respondent)
Clear Run Investments Pty Ltd (Ninth Respondent)
Representation: Counsel:
[2]
P Braham SC with M Rose (First and Second Appellants)
Submitting appearance (First to Fifth Respondents)
D S Weinberger (Sixth to Ninth Respondents)
[3]
Deutsch Miller (First and Second Appellants)
Maddocks (First to Fifth Respondents)
Hegarty Legal (Sixth to Ninth Respondents)
File Number(s): 2022/309520
Publication restriction: N/A
Decision under appeal Court or tribunal: Supreme Court of NSW
Jurisdiction: Equity - Corporations List
Citation: [2022] NSWSC 1288
Date of Decision: 05 October 2022
Before: Williams J
File Number(s): 2021/348287
[4]
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
[5]
HEADNOTE
[This headnote is not to be read as part of the judgment]
This appeal concerns the construction of four materially identical hotel management agreements pursuant to which the First and Second Appellants, J & P Marlow (No 2) Pty Ltd and Blue Marlin Enterprises Pty Ltd (the Marlow Group) were entitled to a Capital Gains Bonus Fee (CGBF) upon the sale of four hotels.
The four hotels are situated on land which was owned by four companies (the Second to Fifth Respondents or the Landowners). The Landowners, now in liquidation, were the trustees of four unit trusts. The trust property of those unit trusts comprised the land on which each of the hotels is situated and the gaming machine entitlements (GMEs) used at those hotels. Each of the four hotels was operated by a separate company, all of which are also under administration (the operating entities). The operating entities are referred to in the respective hotel management agreements as "the Company".
Between 19 April 2022 and 13 October 2022, the land on which each of the hotels was located was sold together with the respective hotel businesses. At this time, a hotel management agreement between the Marlow Group and the relevant Landowner and operating entity was on foot in respect of each of the hotels (the 2021 HM Agreements). Those agreements appointed the Marlow Group as the "Hotel Manager" of each of the hotels and stipulated that it was to provide various "Services" in relation to each of the hotels in exchange for certain fees, including a CGBF.
Item 3 of Sch 2 of each of the 2021 HM Agreements set out a formula according to which the CGBF was to be calculated. It provided that the CGBF was 15% of the "Net Sales Price", less the "Purchase Price" and "Net Capital Expenditure". "Net Sales Price" was defined as:
"the sale price of the Property under a contract signed by the Landowner as the seller (which may include the Company as the seller of the Business), less any adjustments, taxes, fees, legal costs and agents' commissions payable by the Company and the Landowner in connection with its sale or disposition of the Property and otherwise in connection with the operation of the Business."
The "Property" was defined in cl 1.1 of the 2021 HM Agreements as "the property located at [the physical address of the relevant hotel]" while the "Hotel" was defined as "[the relevant hotel name], operated from the Property". The "Business" was defined as the "management of the Hotel" which was said to include "the sale of liquor, food and other beverages, gaming activities and other events…"
In the winding up of the Landowners, the Marlow Group lodged proofs of debt claiming to be entitled to a CGBF calculated using the formula in the 2021 HM Agreements on the basis that the "sale price of the Property" encompassed the sale price of both the land upon which each of the hotels was constructed and each of the hotel businesses (the Marlow Group Claims). Thereafter, the liquidators, Joseph Hayes and Andrew McCabe (the First Respondent) sought declarations as to the proper construction of the CGBF formula such that they would be justified in paying the Marlow Group Claims.
On appeal, the Appellants argued that the primary judge erred in her construction of the phrase, "sale price of the Property" within the definition of "Net Sales Price" in item 3 of Sch 2 of the 2021 HM Agreements, by holding that it did not encompass either:
1. that part of the sale price which was attributable to the price of the hotel business being operated on the land; and
2. the GMEs being sold together with the land.
The Court held, dismissing the appeal that:
1. Each Company's leasehold interest in the hotels was not a form of "property" which fell within the definition of "Property" in the 2021 HM Agreements. It is unnatural to refer to a lease as being "located at" a particular address and the definition of "Lease" in the 2021 HM Agreements differentiated between the operating entities' "occupation and use of the Property" pursuant to the Lease, and the Property itself: [57]-[58] (Bell CJ).
2. The requirement in cl 5.3 of the HM Agreements that "the Property and the Hotel" be sold "as one package and as a going concern" did not necessitate that the "sale price of the Property" encompass the value of the cashflow generated from the hotel business. Clause 5.3's terms expressly differentiated between the "Property" and the "Hotel". Moreover, the definition of Net Sales Price referred to "the Landowner in connection with its sale or disposition of the Property". The goodwill of the Hotel, or the Business, was not that of the Landowner's to sell such that it could not fall within the definition of "Property": [63]-[64] (Bell CJ).
3. The argument that nothing in the definition of "Net Sales Price" in the 2021 HM Agreements required the sale price of hotel business to be excluded involved focussing on the definition of "Net Sales Price" in isolation from the rest of the agreement. It ignored the defined terms and would entail giving the term "Property" a meaning that departed from its meaning elsewhere in the 2021 HM Agreements. It also overlooked the fact that the Landowner could only sell the land and the structures affixed to it: [66] (Bell CJ).
Fitzgerald v Masters (1956) 95 CLR 420, referred to.
1. Clause 5.3, by providing that the sale of the land and business in respect of each hotel was to be in "one package", did not prohibit the sale occurring by way of separate, but interdependent, sales contracts which ascribed separate sale prices to the land and business in respect of each hotel. Even if it did, the case was not premised on a claim for damages for breach of contract: [67]-[68] (Bell CJ).
2. The fact that, pursuant to cl 14.1(e) of the 2021 HM Agreements, the Hotel Manager was entitled to a CGBF "calculated on the basis of an independent valuation of the Property as the sale price of the Property" if the relevant operating entity terminated the agreement did not mean that the Property encompassed the "Business". The use of the definite article "the property" was not apt to refer to a separately held leasehold interest: [69] (Bell CJ).
3. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood them to mean. This necessitates consideration of the commercial purpose of the contract but this commercial purpose must be discerned objectively with primary reference to the terms of the contract itself: [75] (Bell CJ).
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; Electricity Generation Corporation v Woodside Energy Ltd (2014) 252 CLR 640, referred to.
1. The proper construction of a commercial contract is to be determined objectively by reference to its text, context and purpose. There is thus some room for departing from the literal or ordinary meaning of the words employed: [89]-[90] (Meagher and Kirk JJA).
Electricity Generation Corporation v Woodside Energy Ltd (2014) 252 CLR 640; Simic v New South Wales Land and Housing Corp (2016) 260 CLR 85; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, referred to.
1. Caution should be exercised by courts in attributing a commercial purpose to a contract both because business commonsense is a topic about which minds may differ and because an attributed commercial purpose should not be used to give contractual terms a meaning that they cannot reasonably bear: [76]-[80] (Bell CJ).
Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd (2019) 101 NSWLR 679; XL Insurance Co SE v BNY Trust Company of Australia Ltd [2019] NSWCA 215; Skanska Rasleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; Maggbury Pty Ltd v Hafele Aust Pty Ltd (2001) 210 CLR 181; Australian Casualty Co Ltd v Federico (1986) 160 CLR 513; Charter Reinsurance Co Ltd v Fagan [1997] AC 313, considered.
1. The primary judge's construction of the definition of "Net Sales Price" was not commercially absurd or incongruent but, even if it was, the Appellants' preferred construction of the "Net Sales Price" as encompassing the sales price of the hotel businesses could not be reconciled with the language employed by the parties in the context of the 2021 HM Agreements read as a whole: [81] (Bell CJ).
2. Although it is not for courts to impute purpose to contractual parties, various textual and contextual matters suggest that a reasonable businessperson would understand that the commercial purpose of the CGBF was to reward the Hotel Manager's contributions to an increase in the value of the Property and Business together, not merely the value in the freehold property: [91] (Meagher and Kirk JJA).
3. Recognising that commercial purpose is important and although the Court should seek to construe the terms of the contract consistently with it so far as is reasonably possible, the various constructions contended for by the Appellants were not reasonably open on the text: [98]-[100] (Meagher and Kirk JJA).
Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; Cherry v Steele-Park (2017) 96 NSWLR 548, referred to.
1. Clause 5.3's requirement that the sale of the Business and Property occur "as one package" and as a "going concern" did not merge the distinct concepts of the Property and Business but rather, acknowledged that the sale of the Property would not take place alone. The fact that the amounts to be deducted from the "sale price of the Property" included expenses payable by the Company could also be justified by the fact that the Company was required to participate in the Landowner's sale of the Property by selling the Business concurrently: [107] (Meagher and Kirk JJA).
2. The Appellants' preferred construction would involve introducing into the definition of "Net Sales Price" the sale of an additional asset owned by the Company and not the Landowner. It was not possible that the Property could be construed as referring to the freehold and leasehold interests in the property, or as encompassing the liquor licence and other operating assets which would be necessary to enable the purchaser to operate the hotel as a going concern: [108]-[110] (Meagher and Kirk JJA).
3. While the primary judge's construction may not reflect the subjective intention of the parties, it is not so absurd or inconsistent with the parties' objectively determined intention that words should be read into the definition of "Net Sales Price": [112] (Meagher and Kirk JJA).
Westpac Banking Corp v Tanzone Pty Ltd (2000) [2000] NSWCA 25; HDI Global Specialty SE v Wonkana No 3 Pty Ltd (2020) 104 NSWLR 634; James Adam Pty Ltd v Fobeza Pty Ltd (2020) 103 NSWLR 850, referred to.
1. In construing item 3 of Sch 2 of the 2021 HM Agreements, the primary judge was correct to exclude the GMEs from the meaning of "Property". Although declarations in respect of the GMEs had not been sought by the parties, if they perceived a genuine difficulty with what her Honour had said in relation to the GMEs, they might have objected in the between the primary judge's reasons being published and the making of final orders: [84]-[85] (Bell CJ); [113] (Meagher and Kirk JJA).
[6]
JUDGMENT
BELL CJ: This appeal concerns the proper construction of a provision in four materially identical hotel management agreements pursuant to which the First and Second Appellants, J & P Marlow (No 2) Pty Ltd and Blue Marlin Enterprises Pty Ltd (the Marlow Group), were entitled to a Capital Gains Bonus Fee (CGBF) upon the sale of four hotels.
The four hotels: the Rose & Crown Hotel in Parramatta, the Corrimal Hotel in Corrimal, the Crown Hotel in Surry Hills, and the North Nowra Tavern in North Nowra, are situated on land which was owned by four companies. Those companies (the Second to Fifth Respondents or the Landowners), now in liquidation, were the trustees of four unit trusts. The trust property of those unit trusts comprised the land on which each of the hotels is situated and the gaming machine entitlements (GMEs) used at those hotels.
Each of the four hotels was operated by a separate company, all of which are also under administration (the operating entities). The operating entities are referred to in the respective hotel management agreements as "the Company".
Between 19 April 2022 and 13 October 2022, agreements were reached for the sale of the land on which each of the hotels was located and the GMEs used at the hotels together with the respective hotel businesses being operated by each of the operating entities.
At the time the hotel land and businesses were sold, a hotel management agreement between the Marlow Group and the relevant Landowner and operating entity was on foot in respect of each of the hotels (the 2021 HM Agreements). Broadly speaking, those agreements appointed the Marlow Group as the "Hotel Manager" of each of the hotels and stipulated that it was to provide various "Services" in relation to each of the hotels in exchange for the payment of certain fees, including a CGBF. Each agreement also set out a formula according to which the CGBF was to be calculated.
In the winding up of the Landowners following the sale of three of the four hotels, the Marlow Group lodged proofs of debt claiming to be entitled to a CGBF in respect of each of those hotels, calculated using the formula in the 2021 HM Agreements, on the basis that the "sale price of the Property", which was the starting point for calculating the "Net Sales Price" component of the CGBF formula, encompassed the sale price of both the land upon which each hotel was constructed and the sale price of each of the hotel businesses (the Marlow Group Claims). Thereafter, the liquidators of the respective Landowners, Joseph Hayes and Andrew McCabe (the First Respondent), sought declarations that this was the correct construction of the CGBF formula such that they would be justified in paying the Marlow Group Claims.
[7]
Factual and procedural background
At PJ [4], the primary judge provided the following helpful summary of each Landowner, unit trust, hotel and operating entity:
Company in liquidation Unit trust Land Hotel
Number of units on issue and number of unitholders as determined by Administrators / Liquidators Operating entity prior to Receivers' sale
Peak Unit Trust 11 Victoria Road, Parramatta
Peak Invest Pty Ltd (in liq) (Peak Invest) 636 units on issue Rose and Crown Hotel, formerly operated by RC One Pty Ltd (subject to deed of company arrangement)
21 unitholders
Five Islands Investment Unit Trust 268 Princes Highway, Corrimal
Five Islands Invest Pty Ltd (in liq) (Five Islands) 555 units on issue Corrimal Hotel, formerly operated by Corrimal Pub Pty Ltd (subject to deed of company arrangement)
20 unitholders
Surry Hills Pub Unit Trust 587 Crown Street, Surry Hills
Surry Hills Pub Invest Pty Ltd (in liq) (Surry Hills) 1267 units on issue Crown Hotel, operated by Surry Hills Pub Pty Ltd (subject to deed of company arrangement)
20 unitholders
Four by Four Investments Trust 82 Page Avenue, North Nowra
Four by Four Investments Pty Ltd (in liq) (Four by Four) 7,000,000 units on issue North Nowra Tavern, formerly operated by North Nowra Pub Trading Pty Ltd (subject to deed of company arrangement)
One unitholder (as trustee for another trust)
[8]
Between 9 January 2019 and 17 July 2020, each of the Landowners, together with the relevant operating entities, entered into hotel management agreements with the Marlow Group in relation to each of the hotels (the 2019 HM Agreements). Clause 14.1(b) of each of the 2019 HM Agreements provided that the agreements would terminate on the date on which the relevant operating entity had an administrator appointed.
On 24 November 2021, following a resolution of the sole director of the Landowners pursuant to s 436A of the Corporations Act 2001 (Cth) (the Corporations Act), Hayes and McCabe were appointed as joint and several administrators of the companies.
On 22 December 2021, Black J made orders appointing Hayes and McCabe as receivers and managers of the property, assets and undertakings of each of the unit trusts, with powers including a power of sale, but subject to a requirement that the receivers and managers not distribute the proceeds of sale without further order or direction of the Court: In the matter of Peak Invest Pty Ltd (admins apptd); Five Island Invest Pty Ltd (admins apptd); Surry Hills Pub Invest Pty Ltd (admins apptd) and Four by Four Investments Pty Ltd (admins apptd) [2021] NSWSC 1714.
On 23 December 2021, Mr Sule Arnautovic and Mr John Vouris were appointed as joint and several administrators of the operating entities, pursuant to s 436A of the Corporations Act. Each of the 2019 HM Agreements was accordingly terminated.
McCabe, Hayes, Arnautovic and Vouris jointly agreed on 24 December 2021 that the four parcels of land, and the hotels situated upon them, should be sold together with the hotel businesses.
On 28 December 2021, the 2021 HM Agreements were entered into by each of the Landowners and operating entities with the Marlow Group. The key provisions of those agreements are outlined later in these reasons.
On 31 December 2021, the creditors of the Landowners resolved to wind up each of them and appointed Hayes and McCabe as joint and several liquidators. The investigations of Hayes and McCabe as liquidators and receivers revealed that Five Islands was a creditor of Corrimal Hotel Pty Ltd and Surry Hills was a creditor of Surry Hills Pub Pty Ltd.
Consequently, to avoid uncertainty for purchasers and prevent disputes about the apportionment of sale proceeds, the receivers proposed a deed of company arrangement (DOCA) on 17 January 2022 for the consideration of the creditors of the operating entities. It involved pooling the assets of each of the Landowners and operating entities associated with each hotel. That DOCA was rejected by the creditors of the operating entities who instead entered into a different DOCA on 9 February 2022 which did not provide for the pooling of the assets of each Landowner and operating entity. Arnautovic and Vouris became the deed administrators on 28 February 2022.
[9]
The 2021 HM Agreements
It was common ground that the four 2021 HM Agreements were materially identical, apart from the addresses and names of the relevant hotels, Landowners and operating entities.
The provisions of the 2021 HM Agreement in respect of the Rose & Crown Hotel (the RC Agreement) was treated by the primary judge and the parties, at first instance and on appeal, as representative of all of the 2021 HM Agreements. It is thus convenient to identify the key provisions of that agreement.
The parties to the RC Agreement were:
(a) RC One Pty Ltd (administrators appointed), which was referred to as "the Company";
(b) Peak Invest, as trustee for the Peak Unit Trust which was referred to as "the Landowner"; and
(c) the Marlow Group, jointly and severally, which was later defined as "the Hotel Manager".
The Recitals to the RC Agreement, which pursuant to cl 1.2(k) formed part of the agreement, were:
"A. The Marlow Group specialises in the management of hotels. The Company has engaged the Hotel Manager to provide the Services, in connection with the operation of the Business.
B. This Agreement replaces in its entirety the 'Hotel Management Services Agreement' entered into between the Company, the Landowner, Pub Invest Pty Limited (ACN 606 333 975) and the Marlow Group, dated on or around 9 January 2019.
C. The terms of this Agreement follow."
Clause 1.1 of the RC Agreement defined "Property" as "the property located at 11 Victoria Road, Parramatta NSW 2150".
The term "Hotel" was defined as meaning "the Crown Hotel, operated from the Property". (It appeared to be accepted that the reference in this agreement to the "Crown Hotel" was intended as a reference to the Rose & Crown Hotel.)
The "Hotel Manager" was defined as the Marlow Group.
The term "Lease" was defined as:
"the lease between the Landowner and the Company regarding the Company's occupation and use of the Property (including the Hotel), payment of rent and outgoings and other related matters."
The Lease was not in evidence. However, a Valuation Report relating to the sale of the Rose & Crown Hotel dated 17 January 2022 which was in evidence noted that it was subject to a lease to RC One Pty Ltd expiring on 30 June 2027 with an option of a 10 year renewal.
The term "Business" was defined as:
"… the business consisting of:
(a) management of the Hotel, which includes the sale of liquor, food and other beverages, gaming activities and other events; and
(b) such other business activities as the Company and Hotel Manager agree."
[10]
Primary judgment
The primary judge dealt with the construction of the 2021 HM Agreements at PJ [68]-[97]. At PJ [69], her Honour first referred to Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] (Electricity Generation) where it was said that:
"The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. As Arden LJ observed in Re Golden Key Ltd (in rec), unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that the parties … intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'." (citations omitted)
In holding that the "sale price of the Property" within the definition of the term "Net Sales Price" in item 3 of Sch 2 meant the sale price of the land and building, but did not include the sale price of the hotel business operated from that land by the Company, the primary judge first noted that the terms "Property" and "Hotel" were defined differently in the RC Agreement (and all of the 2021 HM Agreements): PJ [77]. Her Honour went on to hold at PJ [82] that:
"the fact that the hotel is both a business and a building affixed to the land does not mean there is no relevant distinction between the land and the hotel business. Nor does it mean that the term "Property", which the parties have expressly defined by refence to the street address of the land, should be construed as including the hotel business. That is particularly so in circumstances where it is clear from the terms of the 2021 HM Agreements that the land and the hotel business have different owners."
The primary judge did not accept that the distinction between the definitions of "Hotel" and "Property" was undermined by the fact that the term "Business" was also defined. Rather, her Honour considered that the "Business" included, but was not limited to, the hotel business encompassed by the definition of "Hotel": PJ [83].
[11]
Grounds of Appeal
As noted at [9] above, the Appellants grounds of appeal are that the primary judge erred in her construction of the phrase "sale price of the Property" within the definition of the "Net Sales Price" in item 3 of Sch 2 of the 2021 HM Agreements in holding that it did not encompass:
1. that part of the sale price which was attributable to the price of the hotel business being operated on the land; and
2. the GMEs being sold together with the land.
On this basis, the Appellants contend that the primary judge ought to have made the declarations sought in prayers 2 to 3C of the second further amended interlocutory process: see [25] above.
[12]
Consideration
The principal issue on appeal, as it was at first instance, concerned the meaning of, and what was entailed in, the expression "sale price of the Property" in the definition of "Net Sales Price" in item 3 of the Sch 2 of the RC Agreement and its analogues.
Mr Braham SC, who appeared for the Appellants with Mr Rose, submitted that the "sale price of the Property" referred to the sale of not only the Landowner's freehold interest in the land, which was subject to the Company's leasehold interest, but the Company's leasehold interest as well. He submitted that both estates were a form of property and fell within the RC Agreement's definition of "Property", namely "the property located at 11 Victoria Road, Parramatta NSW 2150."
Whilst it is natural to refer to a building such as the physical Rose & Crown Hotel as being "located at" a particular address, it is far less natural to refer to a lease as being "located at" an address. Rather, one speaks of a lease over or in respect of particular land, and as having a leasehold interest "in" a particular property.
Mr Braham's attempt to subsume within the contractual definition of Property both the Landowner's interest in the land on which the Rose & Crown Hotel stood, including the physical hotel itself, together with the Company's leasehold interest in the Rose & Crown Hotel, does not sit comfortably with the definition of Lease in the RC Agreement as meaning "the lease between the Landowner and the Company regarding the Company's occupation and use of the Property (including the Hotel), payment of rent and outgoings and other related matters". That is because that very definition expressly differentiates between, on the one hand, the Lease and the Company's "occupation and use of the Property" pursuant to the Lease, and, on the other hand, the Property itself. The definition of Property plainly enough referred to the Landowner's freehold interest in the land it had acquired in 2004, including the improvement on that land, the physical structure known as the Rose & Crown Hotel.
The RC Agreement also drew a clear distinction between the Property and the Business. The Business was that of the Company and comprised the "management of the Hotel, which includes the sale of liquor, food and other beverages, gaming activities and other events." The Company was able to conduct the Business by reason of the Lease. Mr Braham submitted that, for all practical purposes, the Business corresponded to the Company's leasehold interest.
[13]
Conclusion
For the reasons reflected above, the primary judge did not err in her construction of the RC Agreement and its analogues, nor in the orders she made.
The appeal should be dismissed with costs.
MEAGHER AND KIRK JJA: We agree with the order proposed by the Chief Justice. The context of the appeal is set out by his Honour, and the following assumes familiarity with his judgment.
Four members of the High Court summarised the core principles of construction of commercial contracts as follows in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]:
1. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean.
2. That requires consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. That, in turn, is facilitated by an understanding of the genesis of the transaction, the background, the context and the market in which the parties are operating.
3. Unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption that the parties intended to produce a commercial result. The contract is to be construed so as to avoid it making commercial nonsense or working commercial inconvenience.
Put simply, as Gageler, Nettle and Gordon JJ stated in Simic v New South Wales Land and Housing Corp (2016) 260 CLR 85; [2016] HCA 47 at [78], the "proper construction of [a contract] is to be determined objectively by reference to its text, context and purpose" (citation omitted). Inherent in recognition of the importance of context and purpose is that the construction adopted may depart from the literal or ordinary meaning of the words employed. Gibbs J, for example, indicated as much in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36 (ABC v APRA; at 109, citation omitted):
if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, "even though the construction adopted is not the most obvious, or the most grammatically accurate" … Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument.
[14]
Amendments
24 April 2024 - Revisions made as follows:
[14] "... 2019 HM Agreements were accordingly terminated." was changed to "... 2019 HM Agreements was accordingly terminated."
[30] following "... Parramatta NSW." the postcode "2150" was inserted.
[36] second sentence within the quote "... (Base Fee, Bonus Free and Capital Gains Bonus Fees) ..." the word "Bonus Free" was changed to "Bonus Fee".
[45] within the quote at (C) "services provided appointed contractors and service providers,..." the word "by" was added so it reads "services provided [by] appointed contractors and service providers, ...".
[46] the citation "(2014) 252 CLR 640" was changed to "(2014) 251 CLR 640". This change was also made to the coversheet.
[66] third sentence, the reference to the publisher "LawBook Co" was changed to "Thomson Reuters". This change was also made on the coversheet.
[69] following "... Parramatta NSW." the postcode "2150" was inserted.
[77] the reference to the case "Skanska Rasleigh Weatherfoil Ltd v Somerfield Stores Ltd ..." was changed to "Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd ...".
97 within the quote "calculated on the basis of an independent valuation of the Property as the sale price which was sold on the effective date of the termination of the agreement", the words "of the Property" were added so it reads "calculated on the basis of an independent valuation of the Property as the sale price of the Property which was sold on the effective date of the termination of the agreement"
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 24 April 2024
Parties
Applicant/Plaintiff:
The J & P Marlow (No 2) Pty Ltd
Respondent/Defendant:
Joseph Hayes & Andrew McCabe in their capacity as joint and several liquidators of Peak Invest Pty Ltd
That application for declaratory relief was opposed by Batiha Pty Ltd, Blue Onion Capital Pty Ltd, Strong Run Pty Ltd and Clear Run Investments Pty Ltd (the Sixth to Ninth Respondents or collectively, the Contradictors), who were each unit holders in one or more of the unit trusts. While the Contradictors did not dispute that the Marlow Group was entitled to a CGBF calculated in accordance with the formula contained in each of the 2021 HM Agreements, they contended that the "sale price of the Property" only encompassed the sale price of the land where the relevant hotel was located, and not any amount attributable to the sale of the businesses which operated from the physical locations of the respective hotels.
On 26 September 2022, Williams J (the primary judge) refused to grant the declaratory relief sought by the Marlow Group. Instead, her Honour held that the "sale price of the Property" within the definition of the term "Net Sales Price" meant the sale price of the land, including the hotel building constructed on that land, and did not include the sale price of the hotel business operated from that land or the GMEs used at each of the hotels: In the matter of Peak Invest Pty Ltd [2022] NSWSC 1288 (the primary judgment). Orders 1-4 of the orders made by the primary judge on 5 October 2022 gave effect to her Honour's preferred construction of the 2021 HM Agreements.
On appeal, the Marlow Group contends that the primary judge erred in holding that the "sale price of the Property" did not include the sale price of the hotel business operated from the land or the GMEs sold together with the land such that the CGBF payable to the Marlow Group was not calculable on that basis.
The ultimate sale of the hotels and hotel businesses between 19 April 2022 and 13 October 2022 followed a marketing campaign which took place in two "tranches". Tranche one involved the Rose and Crown Hotel and the Corrimal Hotel while tranche two involved the Crown Hotel and the North Nowra Tavern.
Separate, but interdependent, contracts were entered into in relation to the sale of each parcel of land and each hotel business. Pursuant to those contracts of sale, a separate value was attributed to the land and GMEs (being the trust property being held on trust by the Landowners) and to the business, plant and equipment and stock (being the assets of the operating entities). The total gross sale price for all four hotels was $126.4 million.
The Commonwealth Bank of Australia was a secured creditor of each of the four Landowners. There were also various other unsecured creditors. Those unsecured creditors included the Marlow Group, which lodged the Marlow Group Claims in the winding up of Five Islands, Peak Invest and Four by Four, which were calculated in a manner consistent with the declarations that were sought but which were ultimately rejected by the primary judge. At the time of the primary judgment, it was also anticipated that, upon the completion of the sale of the Crown Hotel on 13 October 2022, the Marlow Group would submit a proof of debt calculated in the same manner in relation to the winding up of Surry Hills.
On 18 August 2022, Hayes and McCabe filed an amended interlocutory process seeking directions pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) in Sch 2 to the Corporations Act that they would be justified in admitting the Marlow Group Claims. That application turned on the construction of the provisions of the 2021 HM Agreement concerning the CGBF. They also sought orders as to their remuneration in their capacity as the receivers and managers of the unit trusts and as administrators and liquidators of the Landowners.
On 18 July 2022, the Court made orders granting leave to the Marlow Group and the Contradictors to be heard in relation to the interlocutory process. The liquidators limited their own role to making such submissions as may be of assistance to the Court while the Marlow Group and the Contradictors made competing submissions about the construction of the 2021 HM Agreements.
After the primary judge wrote to the parties on 8 September 2022, the liquidators filed a further amended interlocutory process and then a second further amended interlocutory process substituting their application for directions with an application for declaratory relief. This was to avoid any other unitholders or unsecured creditors appealing an adjudication made by the liquidators in respect of the Marlow Group Claims such that the Court would be asked to determine the same substantive issue twice.
The declaratory relief sought in prayers 2 to 3C of the second amended interlocutory process was as follows:
"Declarations as to the Marlow Group Claim in the windings up of Peak Invest, Five Islands, Four by Four and Surry Hills Pub Invest
2. An order that, pursuant to rule 7.6(2)(c) of the Uniform Civil Procedure Rules 2005 (NSW), Batiha Pty Ltd be appointed to represent the class of unitholders of each of the:
(a) Peak Unit Trust created by Trust Deed dated 13 August 2014;
(b) Five Islands Investment Unit Trust created by Trust Deed dated 20 April 2016;
(c) Surry Hills Pub Unit Trust created by Trust Deed dated 15 April 2017; and
(d) Four By Four Investments Trust created by Trust Deed dated 20 May 2020.
3. A declaration that, on the proper construction of the Hotel Management Agreements dated 9 January 2019 and 28 December 2021, the capital gains bonus fee in Item 3 of Schedule 2 is to be calculated on the total sale price in the contracts for sale of the Rose and Crown Hotel dated 6 March 2022 (after settlement adjustments), such that Peak Invest Pty Ltd (in liquidation) (Peak Invest) is liable to pay:
(a) J & P Marlow No. 2 Pty Ltd the sum of $3,250,548; and
(b) Blue Marlin Enterprises Pty Ltd the sum of $650,110.
3A. A declaration that, on the proper construction of the Hotel Management Agreements dated 9 January 2019 and 28 December 2021, the capital gains bonus fee in Item 3 of Schedule 2 is to be calculated on the total sale price in the contracts for sale of the Corrimal Hotel dated 6 March 2022 (after settlement adjustments), such that Five Islands Pty Ltd (in Liquidation) (Five Islands) is liable to pay:
(a) J & P Marlow No. 2 Pty Ltd the sum of $2,434,373; and
(b) Blue Marlin Enterprises Pty Ltd the sum of $486,874.
3B. A declaration that, on the proper construction of the Hotel Management Agreements dated 17 July 2020 and 28 December 2021, the capital gains bonus fee in Item 3 of Schedule 2 is to be calculated on the total sale price in the contracts for sale of the North Nowra Tavern dated 13 April 2022 (after settlement adjustments), such that Four by Four Investments Pty Ltd (in Liquidation) (Four by Four) is liable to pay:
(a) J & P Marlow No. 2 Pty Ltd the sum of $1,226,519; and
(b) Blue Marlin Enterprises Pty Ltd the sum of $245,304.
3C. A declaration that, on the proper construction of the Hotel Management Agreements dated 1 July 2019 and 28 December 2021, the capital gains bonus fee in Item 3 of Schedule 2 is to be calculated and payable by Surry Hills Pub Invest Pty Ltd (in liquidation) (Surry Hills) to J & P Marlow No. 2 Pty Ltd and Blue Marlin Enterprises Pty Ltd on the total sale price in the contracts for sale of the Crown Hotel dated 13 April 2022 (after settlement adjustments)."
Clauses 2.1 and 3.1 provided that the Company appointed the Hotel Manager to provide Services in accordance with the terms of the agreement. The "Services" were outlined in Sch 1 to the RC Agreement.
Clause 5 was entitled "Obligations of the Company". Clause 5.1(f) provided that the Company must "[p]ay the Hotel Manager all moneys, whether as Fees (Base Fee, Bonus Fee and Capital Gains Bonus Fees) or reimbursements promptly in accordance with this Agreement."
Clause 5.3 of the 2021 HM Agreements provided:
"5.3 Sale of Property and Hotel
The Company and the Landowner agree to sell both the Property and the Hotel as one package and as a going concern."
Under the heading "Fees and Costs", cl 6.1 stipulated that, in consideration for the provision of the "Services", the Hotel Manager was entitled to receive "the Fees". "Fees" was defined by cl 1.1 as "the fees set out in Schedule 2". Pursuant to cl 6.2, the Hotel Manager was also entitled to be reimbursed for "all fees, costs, expenses, charges, fines, penalties and outlays … it properly and reasonably incurs in connection with the operation of the Business".
The "Base Fee" was set out in item 1 of Sch 2 as being $325,000 per annum, increasing annually by 3% or in line with Consumer Price Index increases. The "Hotel Manager" was also entitled, where certain "Bonus Fee Conditions" were met, to receive a "Bonus Fee" pursuant to item 2 of Sch 2 calculated as 15% of the difference between the "Net Income" of the operation of the "Business" and the "Preferred Return".
Item 3 of Sch 2 in relation to the Capital Gains Bonus Fee was of central importance to the litigation. It provided as follow:
"(a) Upon occurrence of any Capital Gains Bonus Event, if the Capital Gains Bonus Fee Conditions are satisfied, then the Hotel Manager is entitled to receive the Capital Gains Bonus Fee, being an amount calculated as follows:
A = (B - C - D) x E
Where:
A is the amount of the Capital Gains Bonus Fee;
B is the Net Sales Price;
C is the Purchase Price;
D is Net Capital Expenditure; and
E is 15%.
(b) The Capital Gains Bonus Fee is payable by the Landowner. The fee is calculated and payable within 30 days of completion of the Capital Gains Bonus Event.
(c) The Hotel Manager's entitlement to the Capital Gains Bonus Fee is conditional upon the following criteria being satisfied:
(i) The calculation of the Capital Gains Bonus Fee results in a positive number.
(ii) The Hotel Manager not being in breach of this agreement.
(d) For the purposes of Item 3 of this Schedule 2, the following terms are defined:
'Capital Gains Bonus Event' means the sale or other disposition of the Property by the Landowner.
'Capital Expenditure' means the aggregate of the capital expenditure undertaken on the Property, including the amounts of any minor and major capital works programs (such as improvements of the Property and refurbishment of the building and premises).
'Net Capital Expenditure' means the amount of the Capital Expenditure less any applicable depreciation or amortisation costs relating to works undertaken.
'Net Sales Price' means the sale price of the Property under a contract signed by the Landowner as the seller (which may include the Company as the seller of the Business), less any adjustments, taxes, fees, legal costs and agents' commissions payable by the Company and the Landowner in connection with its sale or disposition of the Property and otherwise in connection with the operation of the Business.
'Purchase Price' means $13,719,854."
The primary judge accepted at PJ [63] that the amount of $13,719,854 exceeded the amount actually paid for the land and business of the Rose and Crown Hotel in 2014, as it did in respect of the purchase price for each of the other hotels the subject of each of the other 2021 HM Agreements. Her Honour thus accepted that the amount defined as the "Purchase Price" was referable to the purchase of the relevant land on which the Rose & Crown Hotel was located as well as the hotel business operated from that location.
Unlike the other "Fees" in Sch 2, the CGBF was said by item 3(b) of Sch 2 to be payable by the "Landowner" and not "the Company", in apparent tension with cl 5.1(f), referred to at [36] above.
Clause 14.1 of the RC Agreement should also be noted. It provides:
"14.1 Termination
This Agreement will terminate on the earlier of the following:
(a) The date the Company, the Landowner and the Hotel Manager mutually agree.
(b) The date the Hotel Manager, Marlow or Blue Marlin is wound up, has a receiver, a receiver and manager, provisional liquidator, or an administrator appointed or enters into any scheme or arrangement with creditors or any resolution is proposed which would if passed, result in the party being wound up, whether voluntarily or otherwise.
(c) The date determined under clauses 14.2 or 14.3.
(d) 90 days after completion of the sale or other disposition of the Property by the Landowner.
(e) 120 days after the Company provides a written notice of termination to the Hotel Manager.
(f) 120 days after the Hotel Manager provides a written notice of termination to the Company."
Item 4(a)(iii) of Sch 2 provided that if the Company terminated the RC Agreement pursuant to cl 14.1(e), then the Hotel Manager was entitled to receive, on the date of termination, the CGBF "calculated on the basis of an independent valuation of the Property as the sale price of the Property".
Finally, attention should be drawn to item 12 of Sch 1 which provided that:
"12. Capital works programs
(a) The Hotel Manager will:
(i) provide the Company and the Landowner with insight into the short term capital works opportunities and longer term capital works opportunities for the Hotel;
(ii) complete detailed capital expenditure programs with expected return on investment and cashflow analysis on proposed capital works programs;
(iii) coordinate all minor and major capital works programs undertaken at the Hotel;
(iv) manage capital works programs, including:
(A) oversee the preparation and lodgement of development applications;
(B) appointment of contractors and service providers, including terms of appointment;
(C) services provided [by] appointed contractors and service providers, including architects, town planners, builders, certifiers, draftsmen, solicitors etc;
(D) certification of completed works;
(E) scheduling of approved capital expenditure works; an
(F) managing capital expenditure and payments to contractors and service providers.
(b) The purchasing and scheduling of approved capital works will be undertaken by the Hotel Manager at the best price possible with no margin added.
(c) Minor capital works programs will be completed by the Hotel Manager's appointed approved tradesmen to reduce costs to the Company.
(d) Capital works programs will be conducted at the Company's cost and expense."
The primary judge acknowledged that, in the definition of Net Sales Price in item 3 of Sch 2 of the RC Agreement, the deduction of adjustments, taxes, fees, legal costs and agents' commissions "payable by the Company and the Landowner in connection with its sale or disposition of the Property and otherwise in connection with the operation of the Business" (emphasis added) from the "sale price of the Property" in order to reach the "Net Sales Price" gave rise to an apparent inconsistency. At PJ [90], her Honour held that:
"There is an obvious inconsistency within the "Net Sales Price" definition, but it lies in the inclusion of the reference to "the Company" in the phrase "payable by the Company and the Landowner in connection with its sale or disposition of the Property and otherwise in connection with the operation of the Business". The inclusion of "the Company" is inconsistent with the grammar of that phrase ("its sale") and with the fact that the words do not cover adjustments, taxes, fees, legal costs and agents' commissions payable in connection with the sale of the hotel business as opposed to the operation of that business."
However, the primary judge did not consider that this inconsistency should be resolved by reading the reference to the "sale price of the Property" in the definition of "Net Sales Price" as if it included the sale price of the hotel business as well as the land: PJ [89]. Rather, the primary judge reasoned at PJ [91]-[92] that:
"I am satisfied with the requisite high degree of conviction as to the existence of that inconsistency and as to what the objective intention is taken to have been. In my opinion, the reasonable businessperson would understand the reference to adjustments, etc, "payable … in connection with the operation of the Business" as capturing any and all adjustments, taxes, fees, legal costs and commissions payable by "the Landowner" upon the sale of the land that are not directly referable to the sale of the land but that are connected with the hotel business that has been operated from the land. The reasonable businessperson, knowing that "the Landowner" owned the land and gaming machine entitlements, would understand these adjustments as potentially including any amounts payable by "the Landowner" in respect of any gaming machine tax referable to the gaming activities connected with the hotel business operated on the land.
Even if I had not identified the inconsistency and self-evident objective intention of the parties referred to at [90]-[91] above, I would not have been satisfied with the requisite degree of conviction that the legal meaning of the "Net Sales Price" definition for which the Marlow Group contends is self-evident. There is no rational basis for imputing to the parties an intention that "the Landowner" would be solely responsible for the payment of a CGBF calculated as including an amount referable to the sale price of the Operating Entity's hotel business."
The primary judge also rejected an argument to the effect that construing the "sale price of the Property" as referring only to the sale price of the land would be "absurd" or "uncommercial" because it would deprive the Marlow Group of a "bonus fee" which reflected the increase in the value of the hotel business by reason of its good management over a number of years. Instead, her Honour reasoned at PJ [95] that:
"There is nothing absurd or uncommercial about the "the Landowner" not being required to pay to the Marlow Group a percentage of any increase in the value of the Operating Entity's hotel business, particularly in circumstances where the hotel business has been managed by the Marlow Group at the Operating Entity's expense in consideration for the "Base Fee" and (where applicable) the "Bonus Fee" paid to the Marlow Group by the Operating Entity. In substance, the Marlow Group seeks a judicial re-writing of the 2021 HM Agreements to overcome the language that the parties chose to record their agreement at the time so as to achieve an outcome that the Marlow Group considers to be more convenient and "fair". The Court is not permitted to engage in such an exercise."
At PJ [97], the primary judge also held that the GMEs in respect of each of the hotels were not encompassed by the definition of "Property" in the 2021 HM Agreements and noted that no party had made any submissions to the contrary.
Great reliance in written and oral submissions made on behalf of the Appellants was placed on cl 5.3 of the RC Agreement which provided that "[t]he Company and the Landowner agree to sell both the Property and the Hotel as one package and as a going concern". This clause, however, tells against the Appellants' argument in that it patently differentiates between the Property and the Hotel. In this context, "Hotel" must be a reference to the operations of the hotel conducted by the Company pursuant to the Lease. This, the leasehold interest, was all that the Company could sell. Reference to the operations of the Hotel accords both with the reference to "going concern" and with the definition of Hotel in the RC Agreement as the "Hotel, operated from the Property" (emphasis added).
Clause 5.3 did not oblige the Company and the Landowner to sell the Property and the Hotel; rather, it entailed a promise to each other as well as to the Marlow Group, as Hotel Manager, that, if there was to be a sale, the Property and the Hotel would be sold together "as one package and as a going concern".
The Appellants submitted that what they characterised as cl 5.3's reference to a "sale in one line", presumably shorthand for "as one package and as a going concern", meant that the reference to Property in the definition of Net Sales Price should be construed as encompassing "the value of the cashflow generated from the gaming, beverage and food sales attributable to the premises and the hotel". The Appellants continued:
"It is that building, with its name, facilities, location, and reputation or goodwill that constitutes the asset from which the cashflow of the associated businesses is derived. Or, to put it another way, in the absence of an extant lease or licence of the building (which a sale in one package ensures is the case) the owner of the building is the only person able to control and exploit the potential cashflow of the associated businesses. Hence, it is appropriate to assess the sale price of the property by reference to its potential to generate that cashflow ... On that analysis, the sale price of the Property and Hotel in one package reflects "the sale price of the Property under a contract signed by the Landowner".
This argument ignores the RC Agreement's clear differentiation between the Property and the Hotel which, for practical purposes, was to be understood as synonymous with the Business operated from the physical premises. Moreover, the argument overlooks the fact that there was an extant lease and that the goodwill of the Business was not that of the Landowner's to sell. It could only sell the freehold (including the physical structures affixed to the land) albeit that, if it wished to do so, cl 5.3 required the Landowner to secure the Company's agreement to sell the Hotel so that the Property and the Hotel were sold "as one package and as a going concern".
The Appellants' argument also overlooks the phrase "the Landowner in connection with its sale or disposition of the Property" in the definition of Net Sales Price (emphasis added). The word "its" referred to the Landowner and, contrary to Mr Braham's submission, was not used distributively to refer both to the Company and the Landowner. The primary judge, in her analysis, was correct to place weight on this textual indication, together with the fact that, by item 3(b) of Sch 2, it was the Landowner (and not the Landowner and the Company) that was to pay the CGBF.
By their second argument, the Appellants appear to contend that, although in the "operative parts" of the RC Agreement, the concept of Property, Hotel and Business are all distinct and describe "different concepts" and have "real utility", nonetheless the term "Property" in the definition of Net Sale Price in Sch 2 need not exclude any amount attributable to the cashflow that could be earned from the operation of a hotel at the Property. Thus, the Appellants submitted that:
"Nothing in the term of the definition of "Net Sales Price" requires the exclusion from the price obtained for the property of that part of the price attributable to the cash flow from the Hotel or Business."
This argument should be rejected for four reasons. First, it involves focussing on the definition of Net Sales Price in isolation from the balance of the RC Agreement. This is heterodox: see Fitzgerald v Masters (1956) 95 CLR 420 at 437; [1956] HCA 53; P Herzfeld and T Prince, Interpretation (2nd ed, 2020, Thomson Reuters) at [22.30] (Interpretation). Second, it ignores the fact that that definition of Net Sales Price employs the defined terms "Property", "Landowner", "Company" and "Business". Third, it entails giving a twice-used defined term, "Property", a meaning that departs from the meaning it is given in the RC Agreement, as understood in the context of that Agreement as a whole, that is to say, the land and physical premises from which the Hotel as a Business operated. Fourth, as already noted, the argument ignores the fundamental fact that it was only the Property in the sense of the land and structures affixed to it that the Landowner could sell.
I would also reject the Appellants' related argument that "entering into two separate sales contracts, with values ascribed to the land and business separately, was a breach of [clause 5.3]." The promise contained in cl 5.3 was to ensure a sales outcome that would maximise the value of the component parts of the overall enterprise, as well as being in the interests of the Hotel Manager. Clause 5.3 did not mandate the form of any sale, provided that it met the commercial requirements reflected in the language "as one package and as a going concern". These requirements were capable of being secured by one tripartite agreement or separate agreements between any purchaser and the Landowner and Company, so long as they were concurrent and interdependent. It should also be added that, whether or not the form of sale in the present case was in breach of cl 5.3, the present case was not premised on a claim for damages for breach of contract.
The Appellants next submitted that cl 5.3's requirement that the Property and the Hotel would be sold "as one package and as a going concern" mandated that any sale price could not differentiate between the value of the Land and the Business and that, as a practical matter, any price from such a sale would need to be expressed as whole. This submission should also be rejected. Clause 5.3's requirement for a concurrent sale did not mean that there needed to be a single sale price and indeed, if a single price was negotiated, as a commercial matter, the Landowner and the Company would need to assign a value to the respective proprietary interests that formed part of any composite sale: in the case of the Landowner, the value of the Property, and in the case of the Company, the value of the Business or, as Mr Braham put, the value of the Company's leasehold interest. There is no reason to suppose that the Landowner would purposefully deflate the amount attributed to the sale of its freehold interest for the purposes of reducing any CGBF payable to the Hotel Manager in a way that would benefit the Company. To do so would not only be economically irrational but would also be likely to entail a breach of any implied duty of good faith.
Reference should also be made at this point to item 4(a)(iii) of Sch 2 which provided that, if the Company terminated the RC Agreement pursuant to cl 14.1(e), then the Hotel Manager was entitled to receive, on the date of termination, the CGBF "calculated on the basis of an independent valuation of the Property as the sale price of the Property". Nothing in this clause suggests that the Property should be taken to subsume the value of the Business operated from the "the property located at 11 Victoria Road, Parramatta NSW 2150", being the definition of Property. It should also be observed that the use of the definite article in the expression "the property" is not apt to include a reference to a separately held leasehold interest.
The Appellants' next argument was arguably its strongest. It was that:
"the outcome arrived at by her Honour is incongruous with the context in which the CGBF is to be calculated. That fee was to be calculated by reference to the difference between the Net Sale Price and the Purchase Price, which her Honour accepted was the purchase price of the land and the business together. It would be incongruous to calculate a bonus, described as a Capital Gain Bonus Fee, by reference to the difference between the purchase price of the land and business, and the sale price of the land only. That is particularly so when one considers that the role of the Marlow Group was to manage the Business (and not, for example, to improve the land). In that context, there could be no rational commercial purpose in having it earn a bonus fee that could bear no relation whatsoever to its success in growing the value of that business."
The Sixth to Ninth Respondents countered this argument in part by noting that item 12 of Sch 1 (set out at [45] above) obliged the Hotel Manager to have a role in any capital works program in relation to the physical premises from which the Rose & Crown Hotel was operated.
More fundamentally, however, whatever incongruity there might appear to be in aspects of the definition of Net Sales Price, that flows not from the primary judge's consideration of the definition, but from the terms of the definition itself. As the Sixth to Ninth Respondents submitted, "the so-called incongruity does not gainsay the bargain which was struck or render it commercially absurd."
There were really two aspects to the incongruity argument advanced by Mr Braham. First, it was submitted that the result of the formula would be to compare an apple with an orange, namely the original purchase price of the combined enterprise comprising the land and physical premises and the business operating from it, on the one hand, with the capital value of the land and physical premises alone on the other. Second, this was said to result in a distorted or partial measure of the capital gain in circumstances where it was asserted that the commercial intent underpinning the clause was to reward the Hotel Manager for the capital gain not only in the freehold itself but also the business that operated from it (and to which the Hotel Manager contributed)
Against this, it might be considered equally "incongruent" that the Hotel Manager should share in any capital growth in the value of the freehold property to which it had made no financial contribution. So also, it may appear commercially surprising that the obligation to pay the CGBF which, by item 3(b) of Sch 2, fell on the Landowner in circumstances where, on the Appellants' case, an integer of the formula for the calculation of that Fee was the value of the Company's leasehold interest from which the Landowner would not benefit on any sale.
Ordinarily, the process of contractual construction is possible by reference to the terms of the contract alone: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [48]. Although, in accordance with the well-known passage in Electricity Generation referred to by the primary judge and extracted at [46] above, the meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean and this will require consideration, inter alia, of the commercial purpose or objects to be secured by the contract, the commercial purpose is to be discerned objectively, with the contract itself supplying the best source for the ascertainment of that objectively determined purpose: Interpretation at [29.230].
One must also be cautious in attributing a particular commercial intent or understanding of commercial common sense to parties to a commercial agreement. As I said in Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd (2019) 101 NSWLR 679; [2019] NSWCA 185 at [58], in a passage cited with approval in XL Insurance Co SE v BNY Trust Company of Australia Ltd [2019] NSWCA 215 at [78]-[79]:
"Caution is required when resort is had (as ASC did) to assertions of "commercially unlikely consequences" as a reason for departing from the language parties have in fact used: see, for example, Jireh International Pty Ltd t/as Gloria Jean's Coffee v Western Exports Services Inc [2011] NSWCA 137 at [55]; Cushman & Wakefield (NSW) Pty Ltd v Farrell [2017] NSWCA 24 at [71]; Lindsay-Owen v Winton Partners Funds Management Pty Ltd [2017] NSWCA 78 at [20]. "Business commonsense" is also a topic upon which minds may differ, and what a lawyer may surmise to amount to business commonsense may be far removed from the true position, whether because of a general lack of understanding of commerce, or because of an information deficit as to the commercial positions of both parties and their larger commercial concerns. Indeed, as Spigelman CJ observed writing extra-judicially, "when the matter comes to the level of litigation, each party remains convinced that 'a business like' interpretation or 'business commonsense' happens to coincide with its own commercial interests": "From Text to Context: Contemporary Contractual Interpretation" (2007) 81 ALJ 322 at 330."
So also, in Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732 at [22], Neuberger LJ (as he then was) observed that:
"…the court must be careful before departing from the natural meaning of the provision in the contract merely because it may conflict with its notions of commercial common sense of what the parties may must or should have thought or intended. Judges are not always the most commercially-minded, let alone the most commercially experienced, of people, and should, I think, avoid arrogating to themselves overconfidently the role of arbiter of commercial reasonableness or likelihood. Of course, in many cases, the commercial common sense of a particular interpretation, either because of the peculiar circumstances of the case or because of more general considerations, is clear."
It is pointed out by the learned authors of Interpretation by reference to the High Court's decision in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 (Ecosse) that there may be broad divergence in judicial assessments as to what was the commercial purpose of a particular contract or, in that case, lease: see at [29.230]. This was expressly recognised in Maggbury Pty Ltd v Hafele Aust Pty Ltd (2001) 210 CLR 181; [2001] HCA 70 at [43].
Moreover, attributed commercial purpose may not be used by a court to give to the words of a contract a meaning that they cannot reasonably bear: Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 at 520; [1986] HCA 32. As was observed by Lord Mustill in Charter Reinsurance Co Ltd v Fagan [1997] AC 313 at 388:
"There comes a point at which the court should remind itself that the task is to discover what the parties meant from what they have said, and that to force upon the words a meaning which they cannot fairly bear is to substitute for the bargain actually made one which the court believes could better have been made. This is an illegitimate role for a court."
Although in dissent as to the result, the observations of Nettle J in Ecosse at [98] are, to my mind, apposite in the resolution of the current appeal. His Honour observed (omitting footnotes):
"Where there is ambiguity which permits of two alternative and semantically not improbable interpretations, construction in accordance with what it may be supposed would be the approach of honest and reasonable businesspersons may assist in choosing one such alternative over the other. But where, as here, the language and surrounding circumstances of a commercial contract present a choice between, on the one hand, a plain, ordinary and commercially not irrational meaning of a clause and, on the other, a meaning which is significantly removed from the natural and ordinary meaning of the terms of the clause, which ill-accords with other provisions of the agreement, and which in the end produces an outcome that is more commercially acceptable from one of the parties' point of view only, the precept runs out of application. Unless the Anglo-Australian objective theory of contract is now to be cast aside, the commercial approach to construction is not a licence to alter the meaning of a term that is "clear and fairly susceptible of one meaning only" to achieve a result that the court may think to be reasonable. The court is not authorised under the guise of construction to make a new contract for the parties at odds with the contract to which they have agreed. Where, as here, all things considered, the words of a clause are fairly susceptible of only one meaning, they must be given that effect."
After giving the matter anxious consideration, I reject the argument advanced by reference to commercial purpose and the asserted "incongruity" of the definition of Net Sales Price, on the primary judge's construction. That construction is not commercially absurd, and it was not suggested that a figure representing the Capital Gains Bonus Fee could not be calculated. Moreover, the figure identified in the formula as the Purchase Price is not, in terms, identified as representing anything more than a base figure. Most fundamentally, the Appellants' construction cannot be reconciled with the language employed by the parties, understood in the context of the RC Agreement as a whole.
The Appellants additionally submitted that the primary judge ought to have considered that the GMEs formed part of the value of the Property for the purpose of calculating the CGBF. That submission was as follows:
"In making the findings at J[97], and in ultimately making declarations, that excluded from the calculation of Net Sales Price the value of the gaming machine entitlements sold with the land, her Honour added a qualification to the declarations which was not sought by any party prior to the delivery of judgment, and was not the subject of submissions. It was otherwise contrary to the unchallenged evidence before her Honour.
In his valuation report, Mr Owen included, as part of the value of the land, the gaming machine entitlements, noting that the Rose and Crown's 29 gaming machine entitlements were "attached to the Rose and Crown Hotel and form part of the value of the Hypothetical Lessor's Interest."
Had the issue been sought to be determined, that evidence should have compelled her Honour to reach the opposite conclusion from that set out at J[97] - her Honour ought to have concluded that the gaming machine entitlements formed part of the value of the Property for the purpose of calculation of the CGBF."
The Appellants' submissions went on to note that "[f]ollowing delivery of judgment, her Honour directed that the parties provide proposed orders to give effect to her Honour's judgment. In response to that direction, the Liquidators and the Unit Holders provided the form of the orders ultimately made by the Court."
The parties and, in particular, the Appellants evidently did not raise any objection to what the primary judge had said at PJ [97] as to the GMEs. If they perceived a genuine difficulty with what her Honour had said, by way of completeness, with regard to the GMEs, it would have been entirely appropriate for that matter to have been raised in the gap between the publication of her Honour's reasons and the making of final orders.
On her Honour's interpretation of item 3 of Sch 2 of the RC Agreement, and the definition of New Sales Price, with which I agree, it was appropriate to exclude the GMEs from the meaning of Property. The sale price of the Property was the sale price achieved for the freehold and premises physically situate upon that freehold.
In our view the purpose of providing for the Capital Gains Bonus Fee, as set out in item 3 of Schedule 2 of the Hotel Management Agreement (HMA), is tolerably clear. It provides an incentive to, and reward for, the Hotel Manager contributing to an increase in the value of the hotel business as a whole, that is, the land and the business being operated there. It is unlikely that it was intended simply to reward for any increase in value in the freehold property alone. Of course, it is not for a court to impute purposes to contractual parties where that purpose is not found in the text or context: see, analogously, Australian Education Union v Department of Education and Children's Services (2012) 248 CLR 1; [2012] HCA 3 at [28]. However, our conclusion is based on the following textual and contextual matters.
First, the evident purpose of the formula is to identify a fee payable as a proportion of a capital gain. The formula employed involves taking away from the "Net Sales Price" the "Purchase Price", where the latter is identified as a particular sum. The primary judge accepted at [63] that that sum must be referable to the purchase of the land and the hotel business, a point which was not challenged on appeal. There is a significant discord in ascertaining a capital gain by taking the value of a combined asset as the base price from which the gain is measured, but only looking at one part of that combination as regards the sale price. The net difference is not the capital gain of the asset base that was started with.
Furthermore, subject to language providing otherwise, the use of the label "Capital Gains Bonus Fee" may in the process of construction be treated as the "distillation of… a concept intended to be more precisely stated in the definition": see Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [121] (Bell and Gageler JJ). That label at least confirms the nature of the fee as a reward for a capital gain.
Secondly, the definition of "Net Sales Price" includes as deductions "adjustments, taxes, fees, legal costs and agents' commissions payable by the Company and the Landowner in connection with its sale or disposition of the Property and otherwise in connection with the operation of the Business". To take out costs (etc) incurred by the Company indicates that account is to be taken of the Company's costs of disposing of its business in assessing the net capital gain. This is consistent with the net sale price of the Business being included in the calculation of the capital gain.
Thirdly, and relatedly, the definition of "Net Sales Price" refers to "the sale price of the Property under a contract signed by the Landowner as the seller (which may include the Company as the seller of the Business)". The words in parentheses acknowledge that the Business may be sold under the same contract as the sale of the Property, reflecting in turn the trilateral agreement in cl 5.3 that "[t]he Company and the Landowner agree to sell both the Property and the Hotel as one package and as a going concern". The very fact that promise is made in the HMA - as opposed to, for example, being made in the Lease between the Landowner and the Company - indicates that the promise had some significance for the Hotel Manager.
Fourthly, the fee is described as a bonus. As such, it can readily be understood as intended to incentivise and reward results achieved by the Hotel Manager. The primary role of the Hotel Manager under the HMA was, put simply, to operate the "Business" on behalf of the Company. Particular aspects of the role included marketing and promotions (item 10 of Schedule 1), overseeing décor, artwork, cleaning and gaming (item 11 of Schedule 1), and suggesting and overseeing short term and long term capital works (item 12 of Schedule 1). It is possible that performance of the role would contribute to any capital gain of the land and building, including if the capital works led to an increase in value beyond their cost (where capital expenditure is another deduction in assessing the Capital Gains Bonus Fee). But the nature of the role of the Hotel Manager was more likely to increase the value of the Business. A well-run hotel, attractive to patrons, would increase the value of the Business. And, as recorded in Recital A, the Marlow Group "specialises in the management of hotels". Thus the nature of bonus fee again suggests that the purpose was to reward performance in increasing value of the Property and Business together.
It is also relevant that there are at least minor inconsistencies and infelicities in the language of the HMA, suggesting that its interpretation would be approached by a reasonable businessperson with that in mind. Two examples of problematic drafting are found within Schedule 2 itself:
1. Item 4(a) provides that the Capital Gains Bonus Fee is payable if the Company has terminated the agreement under cl 14.1(e), with the fee "calculated on the basis of an independent valuation of the Property as the sale price of the Property which was sold on the effective date of the termination of the agreement" (emphasis added). The italicised words must have been intended to mean "as if it had been sold".
2. Item 4(d) provides that the Capital Gains Bonus Fee is not payable if "the Hotel Manager fails to achieve the Financial Covenants for three consecutive quarters". The Financial Covenants are set out in Schedule 3. All of them are expressed in terms of six or twelve month periods; none of them are expressed in terms of quarters.
In our view a reasonable businessperson reading item 3 of Schedule 2 of the HMA would have little doubt that the parties were seeking to achieve the purpose of rewarding the Hotel Manager's performance in increasing the value of the Property and Business together. Recognition of this commercial purpose is important to the process of construction. So far as is reasonably possible, the Court should seek to construe the terms of the contract so to achieve that purpose and produce a commercial result. Yet there are limits. Gibbs J explained as much in ABC v APRA at 109 (citation omitted):
If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust.
As Leeming JA put it in Cherry v Steele-Park (2017) 96 NSWLR 548; [2017] NSWCA 295 at [75], the "ultimate question is whether the written language of the contract, when considered in light of legitimately relevant surrounding circumstances, permits a constructional choice to be made between two different legal meanings".
In our view, notwithstanding the considerations identified above, the various constructions suggested by the appellants are not reasonably open on the text.
The word "Property" is defined in cl 1.1 to mean "the property located at 11 Victoria Road, Parramatta NSW 2150". It is that Property which is recognised, in the definition of "Lease" in the same clause, to be subject to a lease between the Landowner and the Company. The word "Business" is defined in terms referring to the "management of the Hotel" or such other business activities as are agreed. In other words, it principally describes the activity of operating the hotel for a profit. In turn, the word "Hotel" is defined to mean "the Crown Hotel, operated from the Property", in the sense of conducted, as one conducts a business.
What is plain is that the concepts of "Property" and "Business" are distinct; the former does not encompass the latter.
The Property is the subject of a lease to the Company. It follows that, absent the surrender of that interest, the Landowner is in a position to sell the Property subject to the lease, and the Company to sell the leasehold interest as an asset of the Business.
The Business describes activities conducted on and from the Property, with the benefit of a right to use and occupy it as a hotel. Clause 5.3 provides that the Property and Business be sold "as one package and as a going concern"; the latter requiring in practice that there be a transfer of the liquor licence, the sale of stock in trade, and the transfer of the benefit of existing operational arrangements, including as to employment, each necessary to enable the hotel to continue as a "going concern" upon sale.
Returning to the elements of the Capital Gains Bonus Fee, the event giving rise to the entitlement to receive that fee is the "sale or other disposition of the Property by the Landowner" (the definition of "Capital Gains Bonus Event"). As defined, the "Net Sales Price" achieved on the happening of that event is "the sale price of the Property under a contract signed by the Landowner as the seller …". Each of these expressions is concerned only with the sale of the Property.
The definition of "Net Sales Price" concludes:
… (which may include the company as the seller of the Business) less any adjustments, taxes, fees, legal costs and agents' commissions payable by the Company and the Landowner in connection with its sale or disposition of the Property and otherwise in connection with the operation of the Business.
The presence of the words in brackets is explained and justified by the provisions of cl 5.3, which contain an agreement that the sale of the Property will be accompanied by the sale of the Hotel business as "one package", and as a "going concern". The fact that this is to occur does not merge the concepts of Property and Business otherwise referred to in the Capital Gains Bonus Fee provisions. Rather, it acknowledges that the sale of the Property will not take place alone. The amounts to be deducted from the "sale price of the Property" include expenses payable by the Landowner in connection with the sale and disposition of the Property. That the amounts to be deducted also include expenses incurred by the Company can be explained and justified by the fact that the Company is required to participate in the Landowner's sale of the Property, and to sell the Business at the same time and as a going concern.
As the respondents submitted, the effect of the appellants' arguments is to construe the definition of Net Sales Price as though it referred to "the sale price of the Property and the sale price of the Business". As the foregoing discussion shows, doing so involves introducing into this definition the sale of an additional and distinct asset which is owned by the Company and not the Landowner.
The appellants resisted this being the position, arguing that the Property could be construed as referring to the freehold and leasehold interests in the property. This argument does not take into account that the leasehold interest is an interest of the Company, which enables its occupation and use of the Hotel, and to which the Landowner's freehold interest is subject. That interest is an asset of the Company and part of the Business which the Company would sell. Unless and until the Company surrenders that leasehold interest, the Landowner is not in a position to sell the Property unencumbered by the lease (which was registered).
Furthermore, even if the lease were surrendered, as another of the appellants' arguments proposed, it would remain for the Company to sell the Business, including the liquor licence and operating assets necessary to enable the purchaser to operate the hotel as a going concern. Accordingly, on no view of the matter can the language "sale price of the Property" be construed as describing the sale price of the Property and of the Business by giving Property either of these extended meanings.
In the result, one must give effect to the language that the parties have used to define the "Capital Gains Bonus Event" and "Net Sales Price". That language draws a distinction between two assets - the Property owned by the Landowner and the Business conducted by the Company with the benefit of the Lease - and provides that the sale price of the Property is the starting point from which the relevant capital gain is to be calculated.
Whilst the construction urged by the respondent and adopted by the primary judge may not reflect the subjective intention of the parties, it cannot be said to be absurd or so inconsistent with the parties' objectively determined intention that words should be read into the critical definition: cf eg Westpac Banking Corp v Tanzone Pty Ltd (2000) 9 BPR 17,521; [2000] NSWCA 25 at [19]-[21]; HDI Global Specialty SE v Wonkana No 3 Pty Ltd (2020) 104 NSWLR 634; [2020] NSWCA 296 at [51]; James Adam Pty Ltd v Fobeza Pty Ltd (2020) 103 NSWLR 850; [2020] NSWCA 311 at [55]-[56]. Nor was rectification sought.
As regards the secondary issue raised with respect to gaming machine entitlements, we agree with what has been said by Bell CJ at [82]-[85].