These proceedings were the subject of an expedited hearing before me in September. On 10 October, I delivered my judgment: Urban Fortune Global Ltd v Deicorp Projects (Partridge Ave) Pty Ltd [2022] NSWSC 1352. This judgment deals with the orders to be made to give effect to my earlier decision. It assumes familiarity with my October judgment, the paragraphs of which are referred to as "J1".
The background to the proceedings is set out at J1 [1]-[12]. The chronology of key facts is outlined at J1 [13]-[45]. For present purposes, the relevant background and chronology may be summarised as follows.
The dispute between the parties concerns a group of properties held by the defendant ("Deicorp PA") at Castle Hill. The holding consists of ten pieces of residential land, which collectively are subject to a development approval for demolition of the existing houses and construction of a 272 unit apartment building.
The dispute arises out of an agreement between Deicorp PA and the first plaintiff ("UFG"). That agreement took the form of a letter dated 23 April 2021 from UFG to Deicorp, which was countersigned on behalf of Deicorp and returned (strictly speaking, a copy was returned) to UFG on 26 April. There was a dispute before me about whether the countersignature on behalf of Deicorp was valid, and I found against Deicorp on this point. I refer to the countersigned letter as the "Letter Agreement".
The Letter Agreement contemplated the sale by Deicorp PA of the Castle Hill properties for the sum of $45 million. It provided for a thirty day "due diligence" period, during which "the Purchaser" could investigate the proposed purchase and consider whether to proceed. If the transaction went ahead, the "Purchasing Entity" was to be a "special purchase vehicle" nominated by "the Purchaser".
The Letter Agreement also provided that the parties were to "use all reasonable endeavours to agree the terms of a Contract for Sale … to the intent that the Contract for Sale will be available for execution and exchange upon the Purchaser's successful completion of due diligence". This is the part of the Agreement that has proved controversial. The dispute is about whether the reasonable endeavours obligation can be enforced against Deicorp PA.
On 5 May, the solicitors for Deicorp PA sent the solicitors for UFG a draft contract for the sale of land on a "subject to instructions" basis. The contract identified the purchaser as "to be confirmed". One of the proposed special conditions required the directors of the purchaser (which, it was obviously assumed, would be a company) to give personal guarantees of its obligations under the contract.
On 14 May, UFG's solicitors responded with their own proposed contract. The contract identified the purchaser as Mr Jason Lam, an executive of UFG, "as trustee for" the second plaintiff ("Polytech A1"). At that point, as the identification expressly stated, Polytech A1 had not actually been incorporated; this did not happen until 28 May, after the end of the due diligence period. The special conditions attached to the contract differed in some respects from the special conditions proposed by Deicorp's solicitors on 5 May (which, at that stage, had not been confirmed by Deicorp). In particular, the guarantee provision was deleted.
On 19 May, Deicorp PA's solicitors responded, and advised that their client no longer wished to proceed with the contract. On the following day, UFG's solicitors wrote back, protesting Deicorp's failure to continue negotiations. The letter nevertheless made an offer to avoid litigation, which involved UFG accepting the terms of the draft put forward on 5 May (thereby accepting that the directors of the Purchasing Entity would have to give personal guarantees). But there was no response from Deicorp before the expiry of the due diligence period.
Initially, the plaintiffs sought an order for specific performance of the draft contract provided by UFG's solicitors on 14 May. But, by the time the proceedings came on for hearing, the plaintiffs accepted that specific performance would be impracticable, and, instead, sought a determination that they were entitled to damages (either under Lord Cairns' Act or at common law for breach of contract). The quantification of any damages was to be dealt with afterwards, but the amount claimed was foreshadowed to be as much as $90 million.
The first point argued on behalf of Deicorp PA was that the agreement to use reasonable endeavours to negotiate a contract of sale was nothing more than an agreement to agree, and therefore did not give rise to any enforceable contractual obligations. I rejected this contention. I thought that there was an enforceable legal obligation on Deicorp to make an offer capable of acceptance by the Purchasing Entity. Deicorp was also obliged to keep such an offer "in play", in the sense that, if its offer were met by a counteroffer, Deicorp would be obliged either to accept the counteroffer or to make a further offer.
I concluded, however, that this was as far as the obligation extended. Any offer made by Deicorp PA had to be consistent with the terms which had been agreed in the Letter Agreement (such as the price). But, otherwise, it was not possible for the Court to go into the reasonableness or unreasonableness of the terms offered by Deicorp. The plaintiffs' claim for damages, on the footing that Deicorp should have agreed to the 14 May proposal, therefore failed.
There remained a potential damages claim by the plaintiffs, or at least by UFG, for repudiation by Deicorp PA of its contractual obligation to make and keep an offer in play. But I concluded, tentatively, that this obligation did not, strictly speaking, arise until there had been a valid nomination of the Purchasing Entity. The purported nomination on 14 May of Mr Lam as trustee for Polytech A1, a non-existent entity, was, I thought, not a valid nomination of a "special purpose vehicle". No further nomination was made before the expiry of the due diligence period, and, on that basis, it seemed that there had been no repudiation by Deicorp.
This conclusion was tentative, because I considered that the issue had not fully been argued before me. I indicated that I would afford the plaintiffs the opportunity, if they wished, to be heard further on the question.
My offer to the plaintiffs was taken up. I received written submissions from both parties, and supplementary oral argument took place on 9 December.
Counsel for the plaintiffs disputed the tentative conclusion that I had reached. Counsel also submitted that, even if the conclusion were correct, there had in fact been a valid nomination of the Purchasing Entity on 14 May. Counsel submitted that I should declare that Deicorp PA had breached its obligation to take reasonable steps either to accept the offer or to put a counteroffer. Alternatively, it was submitted that I should at least declare that the obligation was enforceable. Either way, UFG would seek to prove at a later hearing that, had Deicorp PA complied with its best endeavours obligations, the terms of a contract for sale would have been agreed, and the plaintiffs (or, at least, UFG) would be entitled to damages.
For their part, counsel for Deicorp PA submitted that my preliminary view was correct. Counsel submitted that there should accordingly be judgment in Deicorp's favour.
[2]
Reconsideration of UFG's claim for damages for repudiation
The Letter Agreement is quoted in full at J1 [74]. As already indicated, I considered that Deicorp PA was subject to an enforceable contractual obligation to make, and to keep in play, an offer to sell the properties for the price, and on the other terms, specified in the Agreement. As I analysed it, the obligation was owed to UFG as the "Purchaser", but the resulting contract would be between Deicorp PA as vendor and the "Purchasing Entity" as the "special purpose vehicle".
At J1 [141]-[143], I stated, when dealing with the present issue:
Counsel's first point fastened on the nomination of Mr Lam as purchaser, purportedly as trustee for Polytec A1, a company which did not then exist. Counsel submitted that this was meaningless and invalid. It was not possible to have a trust in favour of a non-existent entity. ...
…
I think counsel's [point is] well taken. The contract of sale contemplated by the parties was a contract of sale enforceable at law. The purchaser nominated was Mr Lam. His description as trustee for Polytec A1, even if it had then been incorporated, did not alter or qualify his status as the purchaser: see Heydon, JD and Leeming, MJ, Jacobs' Law of Trusts in Australia (LexisNexis Butterworths, 8th ed, 2016) at [21-02]. As a natural person, I do not think Mr Lam met the description of a "special purpose vehicle" under the Agreement, which in my view contemplated a company or some other entity with limited liability.
At J1 [156]-[159], I stated:
... As at 19 May, UFG was apparently proceeding on the basis that the purchaser was to be Mr Lam. The "special purpose vehicle" had not been validly notified.
Deicorp PA did not take the point at the time. But it seems to me, as at present advised, that it was not necessary to do so. The nomination of the special purpose vehicle, like the $45 million price, was not a matter which was to be the subject of negotiation. It was one of the parameters within which the negotiations were to take place.
The question of personal guarantees illustrates the point. While Deicorp PA could put forward a special condition requiring guarantees before the special purpose vehicle had been nominated, the negotiations on that question could not be finalised until the nomination had taken place. Had UFG reacted to the proposed guarantee requirement by incorporating Polytec A1 with "straw" directors, Deicorp might legitimately have insisted that guarantees be provided by people of substance standing behind the company, perhaps even Mr Or himself.
In these circumstances I think that Deicorp's formal obligation to make an offer capable of acceptance was not triggered until the special purpose vehicle had been nominated. That had not validly happened prior to 19 May and it never did validly happen before the expiry of the 30 day due diligence period (there was a debate about whether the period ended on 23, 26 or 27 May, but it is unnecessary for present purposes to decide that issue).
Counsel for the plaintiffs, in their supplementary submissions, took a pleading point. They argued that the plaintiffs' claim should not be defeated by what they characterised as an "unpleaded defence".
Counsel also pointed out that Deicorp PA never took the point at the time that there had been a failure to make a valid nomination of the special purpose vehicle. Counsel submitted that I could infer that this would not have presented a difficulty for Deicorp; alternatively, that question could be determined on further evidence at the later hearing. UFG had, in counsel's submission, been deprived of a right having significant commercial value: Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 92 per Mason CJ and Dawson J; Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 349-55 per Mason CJ, Dawson, Toohey and Gaudron JJ.
Counsel for the plaintiffs also contended that, if their pleading point failed, I should reconsider my tentative conclusion that Deicorp PA was not obliged to make an offer until the Purchasing Entity had been nominated. I was also asked to reconsider my conclusion that Mr Lam, purportedly as trustee for Polytech A1, was not a "special purpose vehicle" in the relevant sense.
Counsel's pleading point requires the defence to be understood in context. It is therefore necessary to say something about the relevant parts of the pleadings.
The plaintiffs' statement of claim began by characterising the Letter Agreement as having created an option in favour of UFG over the properties. The plaintiffs recited UFG's contractual proposal contract of 14 May, including the nomination of the Purchasing Entity as Mr Lam as trustee for Polytech A1 (expressly acknowledging that Polytech A1 was not in fact incorporated until 28 May). The plaintiffs averred that the amendments to Deicorp PA's previous proposal of 5 May were "minimal and appropriate". The effect of the 14 May letter was to exercise the option, giving rise to a binding and enforceable contract for sale of the properties to UFG "as trustee for" Polytech A1.
The plaintiffs pleaded an alternative claim. They recited that Deicorp PA had failed to indicate what, if any, changes it required to the 14 May contract proposal from UFG. The plaintiffs alleged that this was a breach of Deicorp's obligation to take all reasonable steps to agree the terms of a contract of sale. They averred that, as a result, Deicorp could not "rely on its own default" so as to deny that it would have agreed to the terms of the proposed 14 May contract. Alternatively, they alleged that, if Deicorp had performed its obligation, the result would have been a contract which would have "reflected the substance" of the 14 May contract proposal, "or at the very least" Deicorp PA's 5 May contract proposal. The plaintiffs claimed to be entitled to damages in lieu of specific performance of the obligation, or damages calculated by reference to the position they would have been in had the obligation been performed, namely that they would have had "a binding Contract of Sale".
In its defence, Deicorp PA recited (as had in fact been pleaded by the plaintiffs) that Polytech A1 had not been incorporated until 28 May. Deicorp placed the due diligence period as having ended on 26 May. The defence averred that Polytech A1 therefore could not be the beneficiary of the contractual right claimed by the plaintiffs. The response to the allegation of repudiation was a series of denials.
The first matter to note is that the analysis in the plaintiffs' statement of claim does not reflect the interpretation that I have placed on the Letter Agreement. I did not accept that the effect of the Agreement was to give rise to an option, whether in favour of UFG or Polytech A1. My analysis was that the Agreement imposed an obligation to make an offer and to keep it in play.
I also think that it is plain on this form of the pleading that what was being alleged was that the Purchasing Entity nominated had been Polytech A1. Although the fact of the nomination of Mr Lam as purported trustee for Polytech A1, then unincorporated, was pleaded in the Statement of Claim, what was averred was that the agreement gave rise to an entitlement on the part of UFG to enter into the contract as trustee for Polytech A1. The plaintiffs proceeded on the basis that it was appropriate to join the Purchasing Entity as second plaintiff, but the party they joined was Polytech A1, not Mr Lam. It was never alleged that Deicorp PA had any obligation to make an offer to Mr Lam.
In these circumstances, the plaintiffs could not, on any view, have succeeded on the basis that Deicorp PA came under a contractual obligation on 14 May, or on 18 May, to sell the properties to Polytec A1. Still less could the plaintiffs have succeeded on the basis that Deicorp came under a contractual obligation to sell the properties to UFG, whether as trustee for Polytec A1 or otherwise.
It might be true to say that Deicorp PA did not plead that Mr Lam was not a special purpose vehicle, or that Deicorp was under no obligation to make an offer until a special purpose vehicle was nominated. But, given the way in which the case was pleaded and conducted, there was no allegation which required that response. The plaintiffs did not, in fact, plead a claim for damages for repudiation at all.
On my analysis, it might be that, once the conclusion was reached that the Letter Agreement, on its true construction, only required an offer to be made to the Purchasing Entity, and the further conclusion was reached that the Purchasing Entity could not, as at 14 May, have been Polytech A1, the plaintiffs' claim had to fail and there was no need to go any further. Nevertheless, I have, over the objection of counsel for Deicorp PA, reconsidered the views I expressed in my judgment about repudiation. But my views remain the same.
So far as the obligation to make an offer is concerned, I simply cannot see how there can be a breach of that obligation until the Purchasing Entity has been validly nominated. As I pointed out in the part of the judgment which I have quoted above, the identification of the Purchasing Entity might be relevant to the special conditions to be proposed by Deicorp PA in its offer.
In the present case, UFG did not purport to nominate Polytech A1 directly as the special purpose vehicle. The nomination was of Mr Lam, purportedly as trustee for Polytech A1. I remain of the view that those additional words had no legal effect; at best, they must be treated as surplusage. I am not sure that, in the end, this was contested by counsel for the plaintiffs.
Counsel for the plaintiffs in their submissions referred to s 131 of the Corporations Act 2001 (Cth). That enactment provides, in certain circumstances, for a contract entered into in the name of a company which has not yet been incorporated to become binding on that company upon or after incorporation. It does not, however, operate retrospectively. If the company is not incorporated, or is incorporated but does not perform the contract, then the person who purported to make the contract on its behalf remains liable to be sued for damages.
Counsel for the plaintiffs also tendered a stamp duty ruling which applies where a contract for the sale of land is made with a purchaser on behalf of a company which is yet to be incorporated. Under the ruling, ad valorem duty is payable on the contract, and then, if the company is incorporated and settlement proceeds with that company as the purchaser, only nominal further duty is payable. Counsel suggested that contracts of this type were well recognised in practice, and, if that was disputed, there could be evidence about it in due course. But again, the ruling recognises, as it must, that where the intended purchaser has not been incorporated the contract is with the person who contracted in the company's name.
In the reasoning which I have quoted above, I expressed the view that a "special purpose vehicle" had to be a company or some other entity with limited liability. Counsel for the plaintiffs submitted that there was no requirement that such a "special purpose vehicle" be a corporation. It was suggested that a partnership or a trustee could also be a "special purpose vehicle".
In retrospect, what I said in my judgment could have been clearer. The Purchasing Entity had to be a particular type of legal entity, namely a "special purpose vehicle". In my view, that term, in its usual meaning, refers to a legal entity or structure which holds the assets and liabilities associated with a particular venture or transaction, and no other assets or liabilities. The idea is that the economic benefit of the venture or transaction can readily be transferred by transferring ownership of the vehicle.
I agree that a "special purpose vehicle" need not necessarily be a company. A limited liability partnership might be a possibility. Whether a unit trust structure, where economic ownership of the structure can be transferred by transferring the units, could be a special purpose vehicle in the relevant sense, does not need to be decided. I remain of the view that Mr Lam, as "trustee" for a non-existent beneficiary, could not fit the bill.
This leaves the point by counsel for the plaintiffs that Deicorp did not in fact take the point about the failure to nominate a special purpose vehicle as the Purchasing Entity. I certainly do not think that acceptance can be inferred from that failure; rather the reverse. But arguably, an obligation to use all reasonable negotiations might have obliged Deicorp, when faced with UFG's 14 May contract proposal, to point out that neither Mr Lam nor Polytech A1 could be the special purpose vehicle and to seek clarification on that point.
There was no evidence as to why Polytech A1 was not incorporated until as late as 28 May. Presumably, however, if the point had been raised it is at least possible that UFG's solicitors would have responded by incorporating Polytech A1 immediately and nominating it as the special purpose vehicle.
But such a claim would have required a different form of pleading. The allegation would have to have been that Deicorp PA failed to take the point about the failure to identify a special purpose vehicle, and, had the point been taken, this would have resulted in the accelerated incorporation of Polytech A1 and the completion of the negotiations on the basis that it was to be the Purchasing Entity.
The difficulty for the plaintiffs is that no such case was pleaded. Nor was there evidence before me to establish it. I do not think it would be proper to give the plaintiffs an opportunity now to put forward a new amended case and to lead further evidence in support of it.
[3]
Conclusions and orders
For these reasons, I consider that the plaintiffs' case as pleaded and run has failed. There is no basis on the existing pleadings for a further hearing on questions of breach or damage. Given the other conclusions I have reached, the plaintiffs' claim must be dismissed.
There may be a debate before me about the costs of the proceedings, especially considering that Deicorp PA failed in its defence about execution of the Letter Agreement. I propose to reserve costs. If the parties can agree the costs outcome a minute of order may be submitted. Otherwise, I will hear further argument.
The orders of the Court are:
1. Judgment for the defendant on the plaintiffs' claim.
2. Costs reserved.
[4]
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Decision last updated: 13 December 2022