Tim Barr Pty Limited & Anor v Narui Gold Coast Pty Limited

ii. In early 1990, the defendant, Narui Gold Coast Pty Limited (Narui) acquired a large tract of land comprising some 867 hectares, in northern New South Wales, called Kings Forest.

iii. Between February 1992 and May 2002, Mr Timothy Barr (Mr Barr), the second plaintiff was, through his company, Barr Project Management Pty Ltd, the project manager for Narui.

iv. On 23 June 2000, TBPL and Narui entered into a lease (Lease) pursuant to which Narui leased to TBPL an area of land, comprising approximately 288 hectares, known as Cudgen Paddock (Land). The rent was nominal. The term of the Lease was for 5 years. The Lease contemplated that the Land would be used by TBPL for the cultivation of a certain type of plant. The Lease contains a number of other important covenants, discussed below.

v. The Lease, at clause 15, contains a call option giving TBPL the right to purchase the Land at market value (Option).

vi. On 3 May 2002, Narui, through its lawyers, wrote to Mr Barr, asserting a right to re-enter the Land and terminate the Lease.

vii. These proceedings were commenced by the plaintiffs on 17 May 2002, seeking (at that time) orders restraining Narui from re-entering the Land and forfeiting the Lease.

viii. On 19 March 2003, Austcorp Group Pty Limited (Austcorp) entered into an agreement with TBPL. The agreement provided for a grant of an option to Austcorp to purchase the Land. On 16 April 2003, a subsidiary of Austcorp, Austcorp Project No. 3 Pty Limited, exercised the option.

ix. On 17 April 2003, TBPL served a notice on Narui exercising its Option to purchase the Land.

xi. In essence, the plaintiffs seek declarations concerning the validity of the exercise of the Option by TBPL on 17 April 2003 and orders for the specific performance of the contract for the sale of the Land by Narui to TBPL.

xii. There are also orders sought for relief against forfeiture, damages and restitution in respect of moneys expended on the Land.

xiii. Narui contends that TBPL breached a number of covenants within the Lease, as follows:

a) the Land was used otherwise than for the planting of lemon myrtle trees, in breach of clause 4.1;

b) TBPL did not obtain all necessary licences, consents and approvals to make its use of the Land lawful, in breach of clause 4.3 of the Lease. It is said that the consent of Tweed Shire Council (Council) was required but not obtained, and also that licences under the National Parks and Wildlife Act and the Threatened Species Conservation Act were required but not obtained;

c) TBPL did not comply with the requirements of all relevant authorities with respect to the use of the Land, in breach of clause 4.5 of the Lease;

d) the arrangements with Austcorp described above amounted to a breach by TBPL of provisions of the Lease forbidding assignment and other dealings without Narui's prior written consent (clause 7); and

e) TBPL breached clause 18 of the Lease, which required TBPL to ensure that as a result of the use of the Land that the Land was not re-zoned or re-classified.

xiv. Clauses 4.1, 4.3, 4.5 and 7 of the Lease are deemed by clause 9 thereof to be essential terms and Narui says that the above breaches were fundamental breaches of the Lease, which entitled it to terminate the Lease and re-enter the Land.

xv. In addition, Narui contends that it has validly exercised a right to rescind the Lease because in agreeing to give the warranty in clause 4.3 of the Lease, TBPL falsely represented that all necessary approvals and consents had been obtained, in reliance upon which Narui entered the Lease. . xvi. Narui also says that the Lease, if otherwise valid, is liable to be set aside on the basis of certain dealings between Mr Barr and Shigeo Narui, a director of Narui, which were said to be in breach of fiduciary duties both men owed to Narui.

xvii. It is also alleged by Narui that the Lease was frustrated by the issuing of stop work orders and interim protection orders on the Land.

xviii. Finally, Narui contends that the plaintiffs are disentitled to and should not be granted relief because:

a) Mr Barr and TBPL made certain false representations concerning development applications lodged with the Council prior to the entry by Narui into the Lease; and

b) Mr Barr is said to have forged certain loan documents in order to obtain finance from the Commonwealth Bank, including a guarantee by Narui of Mr Barr's obligations.

xix. The matters raised by Narui in its defence are also the subject of a cross-claim. Declarations are sought concerning the validity of the purported rescission and termination of the Lease, in addition to an order under s.87 of the Trade Practices Act or s.72 of the Fair Trading Act declaring the Lease void (on the basis of misleading or deceptive representations made by the plaintiffs).

xx. Narui also seeks judgment for possession of the Land, damages and declarations concerning the Land being held on constructive trust and recovery of rates and taxes.

xxi. The plaintiffs deny that any of the alleged breaches of the Lease occurred, deny that the Lease was frustrated and deny that they breached any fiduciary duty owed to Narui.

xxii. The plaintiffs say further that, even if TBPL did breach clauses 4.1, 4.3, 4.5 or 18 of the Lease: a) Narui is estopped from relying on such breaches because the parties had at all times conducted their relationship on the basis that the use of the Land without the relevant licences or consents would not amount to a breach of the Lease; and

b) Narui, having knowledge of the breaches, affirmed the Lease and waived any right it may have had to terminate, forfeit or rescind the Lease.

xxiii. The plaintiffs contend that the purported termination, forfeiture and/or rescission of the Lease was or were invalid because: a) Narui did not comply with s.129 of the Conveyancing Act ;

b) Narui did not serve a notice of termination which complied with clause 8.1(b) of the Lease; and

c) accordingly, Narui had no right to re-enter the Land.

a) the rectification of the Lease to change the words "lemon myrtle trees" to "lemon scented tea trees", which was what the parties intended should be planted on the Land; and

b) relief against forfeiture on the basis that TBPL, upon becoming aware of Council's view that consent was required for the tea tree plantation, took steps to remedy the alleged breach and seek that consent but was thwarted by Narui. xxv. In addition, the plaintiffs contend that the Option constituted a contract separate from, and independent of, the Lease, so that even if the Lease was validly terminated, forfeited or rescinded, the Option survived that termination, forfeiture or rescission and remained valid and subsisting as at the date of its exercise.

xxvi. Further, even if there were breaches of the Lease, the Option remains valid pursuant to s.133E of the Conveyancing Act because of the failure by Narui to give the notice prescribed by that section.

xxvii. The plaintiffs also say that the Court should decline to make any order rescinding or setting aside the Lease because Austcorp is a bona fide purchaser for value, and thus third party rights have intervened. Turning to the proposed amendments 5 Including for present purposes paragraph 68A [which is not in serious dispute but would be devoid of content unless attached to a pleading of breach of the suggested implied terms], the area of dispute involves a pleading reading as follows:

68A It was an implied term of the Lease that Narui owed TBPL a duty to act in good faith and to deal fairly, in and about the performance of the Lease and in the exercise of any right conferred by the Lease.

68B In breach of the implied term pleaded at paragraph 68A above, Narui purported to terminate the Lease on 3 May 2002 for one or more of the following collateral and improper purposes:

a) in order to prevent TBPL from exercising the Option;

b) in order to give Narui a clear and unencumbered title to the Land, to enable it to sell the whole of the Kings Forest land (which included the Land) to a third party purchaser; and

c) in order to fraudulently put the Kings Forest land beyond the reach of creditors of Narui Norin, the parent company of Narui, and to deprive them of the opportunity of recovering a substantial part of the debts owed to them by Narui Norin. Particulars

The plaintiffs rely on the following facts, matters and circumstances: (i) as at May 2002, Narui Norin had substantial debts (of about $2 billion), and its liabilities far exceeded its assets;

(ii) at all relevant times Narui Norin and Narui had in their possession contemporaneous valuation reports for the Kings Forest land, valuing the property at between $25,000,000 and $35,000,000;

(iii) at all relevant times Narui Norin and Narui were aware that the development costs of Kings Forest far exceeded the then current valuation evidence in its possession;

(iv) from at least 3 May 2002, and until at least 22 December 2003, Narui Norin and Narui, with others, engaged in a course of conduct with the deliberate intent and effect of defrauding Narui Norin's banks and creditors in respect of the true extent of the assets available from Narui to assist in meeting the bank and creditor obligations of Narui Norin;

(v) on 9 September 2002, Narui Norin by agreement with Narui offered to sell its shares in Narui to Leda Developments Pty Ltd (Leda Developments), a company owned and controlled by William Robert Ell (Ell) for $8,700,000, which offer Leda Developments accepted on 13 September 2002 and thereafter claimed an equitable interest in the Kings Forest land;

(vi) on 10 September 2003 Leda Properties Pty Limited, a company owned and controlled by Ell, completed the acquisition of Narui shares from Narui Norin (thereby in effect acquiring the whole of the title to Kings Forest) for $8,700,000, at a substantial undervalue to the true value of those shares having regard to the valuations referred to above;

(vii) also on 10 September 2003, Narui entered into a joint venture with Mount Warning Pty Ltd as trustee for some of the ultimate beneficiaries of Narui. This trust is variously called the Mount Warning Trust, the Kings Forest Trust or the Narui Family Trust. It was the vehicle through which at least $3m was paid by Leda to the Narui family, purportedly for consultancy services rendered, but in reality designed to avoid those funds becoming available to Narui Norin's creditors; and

(viii) the intention and purpose of Narui and Narui Norin in purporting to terminate the Lease on 3 May 2002 and in entering into the agreements and deeds referred to above was to fraudulently put the Kings Forest land beyond the reach of the creditors of Narui Norin and to deprive them of the opportunity of recovering a substantial part of the debts owed to them by Narui Norin. 68C In the premises, the purported termination of the Lease by Narui on 3 May 2002 was invalid and of no effect.

68D Further or in the alternative, the purported termination of the Lease pleaded at paragraph 6A above was in breach of the implied term pleaded at paragraph 68A above, in that Narui purported to terminate the Lease for one or more of the collateral and improper purposes pleaded at paragraph 68B above, or alternatively, for the collateral and improper purpose of giving Narui a clear and unencumbered title to the Land to enable Narui Norin to sell the whole of its shareholding in Narui to a third party purchaser. Particulars The plaintiffs repeat the particulars to paragraph 68B above". The gravaman of the defendant's complaint that no reasonable cause of action is disclosed 6 The gravaman of the defendant's complaint in terms of the proposition that no reasonable cause of action is disclosed may be summarised as follows:

i. The issue for consideration is not the possible existence of the implied term pleaded at paragraph 68A, but, rather, its alleged content as pleaded at paragraph 68B. [The defendant accepts that whilst not yet pronounced upon by the High Court (see Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289), the New South Wales Court of Appeal has upheld the proposition that in some contracts, including leases, there may exist an implied duty to act in good faith and to deal fairly in and about the performance of the contract/lease and in the exercise of any right conferred by the contract/lease: Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 265; Alcatel Australia Ltd v Scarcella & Ors (1998) 44 NSWLR 349 at 369; Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187 at [144], [160], [167], [171]-[177], [187]; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 at [183]-[208].]

ii. The alleged breach pleaded at paragraph 68B (said to be part of the duty to act in good faith) is said to be neither based upon a failure to co-operate nor unreasonable, capricious, arbitrary or unconscionable conduct.

iii. Unconscionability is invoked at paragraph 68E of the new pleading (which is not opposed) and unreasonableness and a failure to co-operate is invoked at paragraphs 19A and 20 both in support of relief against forfeiture (paragraph 34) and as an allegation of breach of a different implied term (paragraphs 50-53A).

iv. The sole allegation made in the impugned paragraphs is that the termination breached the pleaded implied term because Narui acted for one or more of three " collateral and improper purposes ".

v. The defendant contends that it is not reasonably arguable that any implied duty of good faith can extend to preclude Narui, as lessor, from relying upon an express right of termination for breach merely because it had the alleged state of mind or purpose. 7 The defendant's contention is in short that it is not reasonably arguable that the alleged implied term arises presently for the following reasons:

(1) such a term would be inconsistent with or contradict the express right to terminate for breach or at the very least would add a gloss on the express power of termination on its ordinary reading [ Thiess Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd (2000) 16 BCL 255; Apple Communications Ltd v Optus Mobile Pty Ltd [2001] NSWSC 635 at [16]-[17] per Windeyer J; Vodafone at [183]-[208] per Giles JA with whom Sheller and Ipp JJA agreed];

(2) such a term is neither necessary nor reasonable;

(3) it is not a breach of an implied term of good faith to exercise an express right of termination for breach, where the purpose may be characterised as 'improper', if there is no allegation that the termination is, otherwise, unreasonable;

(4) such a term would superimpose upon the contract a requirement which the contract was not intended to have on its proper construction;

(5) it cannot be said that the implied term is necessary in order to prevent the contract being terminated at the landlord's whim or capriciously;

(6) it cannot be said that the implied term is necessary as otherwise the enjoyment of rights under the contract would be rendered nugatory, worthless, or, perhaps be seriously undermined;

(7) such a term is not required in order to ensure the tenant receives its substantive, bargained-for terms or that the landlord generally adhered to the bargain [ Overlook Management BV v Foxtel Management Ltd [2002] NSWSC 17 at [66] per Barrett J] ;

(8) such a term is not required in order to prevent the original purpose of the Lease being subverted[ Overlook Management BV v Foxtel Management Ltd [2002] NSWSC 17 at [66] per Barrett J] ; it cannot be said that the term is required to prevent the landlord cynically resorting to the black letter [ Overlook Management BV v Foxtel Management Ltd [2002] NSWSC 17 at [67] per Barrett J] . Dealing with the issue 8 It is important to recall that the defendant apparently concedes that [subject to the plaintiffs being in a position to plead appropriate breaches of the implied term recited in paragraph 68A] it would have no grounds for complaint insofar as the pleading contends for an implied term of the lease whereunder Narui owed to TBPL, a duty to act in good faith and to deal fairly in and about the performance of the Lease and in the exercise of any right conferred by the Lease. 9 In short the defendant whilst expressly acknowledging that the issue for consideration is not the possible existence of the implied term pleaded at paragraph 68A, takes issue only with its alleged content. 10 The following may be said in this regard:

i. as already observed one is here dealing with the so-called 'General Steel test';

ii. as the plaintiffs have contended it is now accepted that there is an obligation on each party to a contract to act in good faith and reasonably towards the other contracting party, both in performing obligations and in exercising or enforcing rights: Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349; and Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187;

iii. in Alcatel (1998) 44 NSWLR 349 Sheller JA accepted [at 368] that: "If a contract confers power on a contracting party in terms wider than necessary for the protection of the legitimate interests of that party, the Courts may interpret the power as not extending to the action proposed by the party in whom the power is vested or, alternatively, conclude that the powers are being exercised in a capricious and arbitrary manner or for an extraneous purpose , which is another way of saying the same thing";

iv. there is authority for the proposition that at least in some contractual circumstances [as for example the exercise of powers under a franchise agreement], the implied duty of good faith may be breached if the defendant is shown to have acted for some ulterior motive: Burger King at [142]-[185], Mangrove Mountain Quarries Pty Ltd v Barlow [2007] NSWSC 492, JF Keir Pty Ltd v Priority Management Systems Pty Ltd (admin apptd) [2007] NSWSC 789 at [27]-[28], Bamco Villa Pty Ltd v Montedeen [2001] VSC 192 at [162] et seq;

v. it is extraordinarily difficult in the absence of precise facts for the Court on an interlocutory application to rule that a particular claimed breach of the accepted implied term could not be made out where the breaches are said to have occurred by reason of particular collateral and improper purposes, here of the defendant;

vi. further support in favour of the Court being presently wary of acceding to the strike out application is to be found in the judgment of Finkelstein J in Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703, where his Honour said (at [35]): "If such term is implied it will require a contracting party to act in good faith and fairly, not only in relation to the performance of a contractual obligation, but also in the exercise of a power conferred by the contract. There is no reason to think, prima facie at least, that the obligation of good faith and fair dealing would not act as a restriction on a power to terminate a contract, especially if that power is in general terms." Decision 11 In circumstances where it seems common ground that the principles which inform the obligations on parties to a contract to act in good faith [and reasonably towards one another both in performing obligations and in exercising or enforcing rights] represent a relatively recent and still developing form of the jurisprudence in this country, the principled the exercise of the Court's discretion is to lean in favour of allowing the present amendments. Reverting to the statements of principle earlier set out in these reasons, I do not see that the paragraphs of the proposed third further amended statement of claim to which objection has been taken are "so obviously untenable that [they] cannot possibly succeed" or satisfy the test of being "manifestly groundless". 12 I acknowledge that the defendant forcefully contends that in the present state of the authorities, at least at first instance, an unremarkable express regime for the termination of a lease in case of specified breaches by a tenant is, without more, incompatible with an implied duty only to exercise the power for a 'proper purpose': So much is said to be apparent from Apple Communications Ltd v Optus Mobile Pty Ltd [2001] NSWSC 635 at [17] where Windeyer J observed that: "If a contract allows for termination for any reason then it does not seem to me to be unreasonable to terminate it for a reason unconnected with conduct of a contracting party." [See also the remarks of Buchanan JA in Esso Australia Resources Pty Limited v Southern Pacific Petroleum NL [2005] VSCA 228 at [23]-[24] that: "It is difficult to discern a want of good faith in the exercise of a power which can serve only the interests of the party upon whom the power is conferred. The ostensible purpose of the exercise of such a power will almost invariably be its true purpose." 13 Essentially the present state of the law in this area is simply not as clear as to permit the defendant to satisfy the General Steel test. This is a major litigation with numerous issues of fact and law. In an area where there is a real possibility of doubt the discretion must be exercised in favour of the allowing of the amendments. Dealing with the other grounds relied upon by the defendant 14 There was no substance in the contention that the pleading should be disallowed because the purpose and tendency of the pleading is proven to cause embarrassment to the defendant and its witnesses with a view to obtaining some collateral advantage in the proceedings.

[The allegation is that the predominant purpose behind the pleading is to cause embarrassment to the defendant and its witnesses, with a view to obtaining a collateral advantage in pressuring Mr Hiroyuki Narui not to give evidence and/or the defendant to settle the proceedings on more favourable terms than might otherwise be the case.] 15 I accept that the standard of proof for establishing an abuse of process is a high one: Williams v Spautz (1992) 174 CLR 509 at 518-520. As the plaintiffs have contended:

i. the defendant's conjecture and supposition is insufficient to establish the alleged predominant purpose;

ii. the chronology of events relied upon demonstrates that the plaintiffs have - admittedly belatedly - sought to advance a cause of action, even though much of the evidence which might support the cause of action was previously available to the plaintiffs;

iii. that is no reason to shut the plaintiffs out from pursuing a legitimate claim;

iv. there is no evidence that would establish that the plaintiffs' predominant purpose in raising this arguable cause of action is to cause embarrassment or to obtain some kind of collateral advantage. 16 Additionally the defendant's submission assumes that the cause of action is arguable. As the plaintiffs have contended, the proposition put forward by the defendant appears to be that a party cannot raise a valid and arguable cause of action, if there may be other benefits to the raising of that matter, such as an improvement in the party's settlement position. That proposition cannot be accepted in the broad. The defendant would need to demonstrate that the plaintiffs have no intention of prosecuting the cause of action to a conclusion in order to succeed on this ground. In Carson v Legal Services Commissioner [2000] NSWCA 308, Sheller JA (with whom Giles JA agreed) reviewed the relevant authorities (including Williams v Spautz) in some detail and concluded (at [107]) that:

"It follows that if a litigant has a genuine cause of action which the litigant wishes to pursue in any event to a conclusion, there is no abuse or impropriety in prosecuting that cause of action because the litigant may also have an ulterior purpose in view as a desired by-product of the litigation." 17 Sheller JA relied in reaching that conclusion upon what Mason CJ, Dawson, Toohey and McHugh JJ had said in Williams v Spautz at 522 to the effect that it was very doubtful whether a litigant with a genuine cause of action which he would wish to pursue in any event can be debarred from pursuing that cause of action even if he is also shown to have an ulterior purpose in view of a desired by-product of the litigation. Sheller JA also referred with apparent approval to the statement by Brennan J (also in the majority) in Williams v Spautz at 535 that"

"There is no impropriety of purpose (whatever may be said of motive) when a plaintiff commences or maintains a proceeding desiring to obtain a result within the scope of the remedy, even though the plaintiff has an ulterior purpose - or motive - which will be fulfilled in consequence of obtaining the legal remedy which the proceeding is intended to produce. To amount to an abuse of process, the commencement or maintenance of the proceeding must be for a purpose which does not include - at least to any substantial extent - the obtaining of relief within the scope of the remedy." 18 The defendant has not been able to establish that the plaintiffs do not intend to prosecute the cause of action to a final conclusion. 19 Nor was there substance in the contention that the amendment had a tendency to cause prejudice or delay in the proceedings for the reason that the plaintiffs could have brought forward the amendment from around September 2004 there being no reasonable explanation for the three-year delay. 20 As the transcript records [at pages 8-10], Mr Barker QC exposed the reasons why good faith and reasonableness ought to be pursued as a live issue, inter alia travelling through the chronology where after various arguments concerning applications to set aside subpoenas and client legal privilege, the plaintiffs were in late August 2007 permitted access to some documents. Inspection of the particular documents produced in August 2007 enlivened the plaintiffs' interest in the significance of all documents and it was at that point in time that the decision was taken to plead the amendments now in issue. In particular the two documents at the bottom of the page of schedule A to the notice of motion [Exhibit JD1 to the affidavit of Mr Dalzell described as dated 18 July 2002 and July 2002] were produced in August of 2007. In short, documents which were previously subject to a claim for legal professional privilege were produced to the plaintiffs on 22 August 2007 and on 18 September 2007 draft amended pleadings were served on the defendant. The fact that documents produced subsequently support the cause of action is a reason to grant the amendment, not to refuse it. 21 Whilst it may appear regrettable that the amendment is pursued as late as the present I cannot see that in the particular circumstances the plaintiffs should be shut out from the amendment by reason of difficulties of memory of witnesses. 22 It has become quite clear that these proceedings should receive a hearing date at the earliest possible time consistent with the defendant being in a position to meet the amended pleading. Orders 23 The orders are as follows: 1 the Court makes Order 1 as sought in the plaintiffs' notice of motion filed on 24 October 2007;

2 the plaintiffs are to pay the defendant's cost of and occasioned by the amendment;

3. the defendant is to pay the plaintiffs' costs of the issue raised by paragraph 1 of the notice of motion filed on 24 October 2007;

4 Otherwise costs are reserved. ***********

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.