Attia v Caird Seven Pty Ltd

[2016] NSWCA 271

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:	Attia v Caird Seven Pty Ltd [2016] NSWCA 271
Hearing dates:	15 September 2016
Date of orders:	15 September 2016
Decision date:	28 September 2016
Before:	Gleeson JA; Leeming JA; Payne JA
Decision:	Summons seeking leave to appeal dated 4 August 2016 dismissed with costs.
Catchwords:	PROCEDURE – application to vacate consent orders for specific performance – whether justice would be served by vacating the orders – whether prima facie case of breach of contract of sale   PROCEDURE – whether appellants able to advance argument on appeal which was expressly abandoned by counsel before primary judge
Legislation Cited:	Supreme Court Act 1970 (NSW), s 101
Cases Cited:	Be Financial Pty Ltd as trustee for Be Financial Operations Trust v Das [2012] NSWCA 164 Bott v Carter [2012] NSWCA 89 Buckman v Rose (1980) 1 BPR 97,059 Carolan v AMF Bowling Pty Ltd (Court of Appeal (NSW), 16 November 1995, unrep) Chouman v Margules (1993) 17 MVR 144 Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605; [1998] HCA 42 Despot v Registrar General of New South Wales [2016] NSWCA 5 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 Haberle Crystal Springs Brewing Co v Clarke 30 F 2d 219 (2nd Cir 1929) House v The King (1936) 55 CLR 499 JAG Investment Pty Ltd v Strati [1981] 2 NSWLR 600 Johnson v Agnew [1980] AC 367 Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42 Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Aust) Pty Ltd (1978) 139 CLR 231 Sargent v ASL Developments Ltd (1974) 131 CLR 634 Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245
Category:	Principal judgment
Parties:	Mina Attia (first applicant) Shopsmart Pharmacy Franchising Pty Ltd (second applicant)   Caird Seven Pty Ltd (respondent)
Representation:	Counsel: M W Young SC / J P Nathan (first and second applicants) P Herzfeld (respondent)   Solicitors: Bransgroves Lawyers (first and second applicants) Meridian Lawyers (respondent)
File Number(s):	2016/243560
Decision under appeal	Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity – Commercial List Citation: [2016] NSWSC 1088 Date of Decision: 29 July 2016 (orders) / 9 August 2016 (decision) Before: Emmett AJA File Number(s): 2014/354640

Judgment

1. THE COURT: On 15 September 2016, the Court made orders dismissing the applicants’ summons for leave to appeal dated 4 August 2016 with costs. These are the Court’s reasons for making those orders.

Brief facts

2. On 2 August 2013, Mr Attia (the first applicant) entered into a contract for sale of a pharmacy business to Caird Seven Pty Ltd (Caird - the respondent) (Sale Contract). On the same day Caird entered into a franchise agreement with Shopsmart Pharmacy Franchising Pty Ltd, a company controlled by Mr Attia. (Shopsmart – the second applicant). The pharmacy business was located in a Westfield shopping centre in Burwood (managed by the Scentre Group) and was conducted under a lease. The Sale Contract was completed.

3. In December 2014, Caird commenced proceedings alleging that Mr Attia engaged in misleading and deceptive conduct by incorrectly stating the business’ past trading history. Caird sought a declaration that the Sale Contract had been validly rescinded, or, alternatively, an order rescinding the Sale Contract.

4. The dispute was settled and the parties entered into a Deed of Rescission, Settlement and Release on 31 July 2015 (Rescission Deed). By the Rescission Deed the parties essentially sought to unwind the transaction. Mr Attia agreed to buy back the business by paying Caird the purchase price on the same terms as those contained in the Sale Contract.

5. Relevantly, the Rescission Deed required both parties to take all necessary steps and prepare all necessary documents to enable transfer of the lease to Shopsmart. These provisions, collectively, were referred to within the Rescission Deed as the Retransfer Contract.

6. Clause 9.1.1 of the Sale Contract provided that it was an essential provision of the contract that the vendor must, between the contract date and completion, “maintain the goodwill of the business and carry on the business in a proper and business like way”. That clause was incorporated into the Rescission Deed.

7. The assignment of the lease from Caird to Shopsmart provided for by clause (1)(c)(vi) of the Rescission Deed (which referred back to special condition 5.3 of the Sale Contract) was delayed.

8. On 4 September 2015, Caird filed a further amended commercial list statement seeking orders that Mr Attia and Shopsmart specifically perform the Rescission Deed.

9. Before 19 March 2016, an application was made by Mr Attia and Shopsmart to the landlord, the Scentre Group, for consent to the assignment of the lease. On 19 March 2016, the landlord refused consent on the grounds that the prospective assignee’s application did not contain sufficient information (namely, its business plan was incomplete).

10. On 29 March 2016, the solicitors for Mr Attia and Shopsmart wrote to the solicitors for Caird requesting certain documents to enable them to prepare the business plan required by the landlord. Those documents concerned up-to-date financial and operational information. On 30 and 31 March 2016, Caird provided that information to Mr Attia and Shopsmart.

11. On 15 April 2016, an application including a completed business plan was submitted to the Scentre Group by Mr Attia and Shopsmart seeking consent to the assignment of the lease.

12. On 21 April 2016, the proceedings came before Hammerschlag J for directions (the matter being listed for hearing on 26 April 2016). His Honour made the following orders by consent on that day:

1.   Subject to Westfield granting its consent to the assignment of the lease presently held by Caird, Mr Attia and Shopsmart are specifically to perform the Deed dated 31 July 2015.

2.   Mr Attia and Shopsmart are to take all necessary steps and prepare all necessary documents to enable the transfer of the lease.

3.   The parties have liberty to apply on three days’ notice.

4.   The hearing date of 26 April 2016 be retained for the purpose only of the Court considering the costs of the proceedings to date.

5.   The balance of the proceedings be stood over to 22 July 2016.

13. Although it was submitted before the primary judge by Mr Attia and Shopsmart that the orders were not truly made by consent, the primary judge made a specific finding that the orders were made by consent and that finding is not challenged on the appeal.

14. On 17 May 2016, Westfield granted its consent to the assignment of the lease. As the primary judge noted, at [14], on that date the condition of order 1 made by Hammerschlag J was satisfied. Thereafter Mr Attia and Shopsmart were under an obligation to perform the Rescission Deed.

15. On 14 July 2016, Mr Attia and Shopsmart purported by letter to terminate the Rescission Deed on the basis that there had been a breach of clause 9.1.1 by Caird. They alleged that, under Caird’s ownership, goodwill in the business had been eroded to an “irreparable” degree.

16. On 14 July 2016, Caird filed a notice of motion seeking performance of the Rescission Deed. The motion came before the primary judge on 22 July 2016. His Honour recorded that “it became apparent that Mr Attia and Shopsmart sought to resist specific performance of the Rescission Deed on the basis that they had purported to terminate it by reason of the alleged breach by Caird of cl 9.1.1”.

17. As the primary judge noted at [18]-[19], it was not open to Mr Attia and Shopsmart to terminate the Rescission Deed without leave of the court, given that the orders made by Hammerschlag J required specific performance of the Rescission Deed.

18. On 22 July 2016, the primary judge made the following orders, which in orders 5-7 made provision for Mr Attia and Shopsmart to seek orders vacating the orders made by Hammerschlag J on 21 April 2016:

1. Order that by 10 August 2016, the First Defendant execute the documentation pertaining to the transfer of the lease of shops 301, 302, 303, 304 and 305 Westfield, Burwood (Lease), which was enclosed under cover of a letter from Landerer & Co to Meridian Lawyers and copied to Bransgroves Lawyers dated 1 July 2016, and provide those executed documents to Meridian Lawyers together with the following required by the Lessor:

(a) an original insurance certificate(s) of currency;

(b) a bank guarantee in favour of Scentre Management Limited ACN 001 670 579 and RE1 Limited ACN 145 743 862 for $86,653.00 for the security required under the Lease;

(c) a cheque in favour of PT Limited, RE1 Limited and Scentre Management Limited for $24,294.04 (inclusive of GST) in payment of advance rent; and

(d) a cheque for $272.60 in favour of Land & Property Information in respect of anticipated registration fees.

2. Order that by 11 August 2016, the Defendants procure a bank cheque in the amount of $2,050,000.00 (being the balance of the amounts referred to in paragraph 1(d) and (e) of the Deed of Rescission, Settlement and Release entered into between the Plaintiff and the Defendants and dated 31 July 2015 (the Deed)), or such other lesser amount specified in writing by the solicitors for the Plaintiff, for the purposes of enabling completion of the Retransfer Contract referred to in the Deed.

3. Order that the Defendants instruct their solicitors to attend and complete settlement of the Retransfer Contract on 11 August 2016.

4. Order that the Defendants take all other necessary steps and prepare all other necessary documents to enable completion of the Retransfer Contract to be effected on 11 August 2016.

5. Direct the defendants to file and serve any motion seeking to set aside the orders made on 21 April 2016 and any stay of orders 1 to 4 above no later than 5.00 pm on Tuesday 26 July 2016, together with any affidavits intended to be relied upon in support of that motion, such motion to be returnable for hearing at 10.15 am on 29 July 2016 before Emmett AJA.

6. Direct the plaintiff to file and serve any affidavits on what it intends to rely in opposition to any such motion no later than 5.00 pm on Wednesday, 27 July 2016.

7. Order that the motion filed on 14 July 2016 be stood over for further hearing on Friday, 29 July 2016 at 10.15 am.

8. Order that the notice to produce dated 20 July 2016 be stood over to Friday 29 July 2016 at 10.15 am.

19. On 25 July 2016, Mr Attia and Shopsmart filed a notice of motion seeking that orders 1 and 2 made by Hammerschlag J on 21 April 2016 be vacated. They also sought consequential orders varying orders 1 to 4 made by the primary judge on 22 July 2016.

20. It was common ground that the parties treated, and invited the court to treat, the application by Mr Attia and Shopsmart to vacate the orders for specific performance, as an interlocutory hearing in which the primary judge was not asked to determine on a final basis whether clause 9.1.1 of the Rescission Deed had been breached so as to give Mr Attia and Shopsmart a contractual right to terminate, but rather whether the court should vacate the orders for specific performance on the ground that they had a prima facie case that such a right of termination existed and, if so, whether the court should exercise its discretion to vacate the orders for specific performance so as to permit them to assert their contractual rights. The primary judge adopted this approach. If the orders for specific performance were vacated it was contemplated that there would be a further hearing to determine whether or not termination of the Rescission Deed could occur, and if not, to make fresh orders for specific performance. It seems that the parties adopted this two stage approach with a view to obtaining an early determination of their rights, if Mr Attia and Shopsmart were unsuccessful at the first stage.

21. It should be observed however that ordinarily, a party seeking to vacate orders for specific performance on the ground of a new event occurring after the date of the making of the orders, would seek to do so in a single hearing at which the party would seek to establish both the new event (such as an alleged breach of contract by the other party to the contract after the making of the orders for specific performance), and why in the exercise of the court’s discretion the orders for specific performance should be vacated: see, eg, Buckman v Rose (1980) 1 BPR 97,059.

Decision of the primary judge

22. The issue before the primary judge was whether the court should exercise its discretion to vacate Hammerschlag J’s orders that the Rescission Deed be specifically performed.

23. The primary judge said, at [20], that in order to succeed it was necessary, but not sufficient, for Mr Attia and Shopsmart to establish a prima facie case that there had been a breach of contract by Caird. Mr Attia and Shopsmart would also need to persuade the court that there was a good reason why the orders – which, it will be recalled, were made by consent – should be set aside.

24. The primary judge found at [26] that the letter of 14 July 2016, in which Mr Attia and Shopsmart alleged that Caird had breached its obligation to maintain the goodwill of the business and carry it on in a proper and businesslike way, only identified financial material Caird had provided Mr Attia and Shopsmart on 30 and 31 March 2016.

25. Therefore, on the view taken by the primary judge, all of the relevant material relied upon to allege breach of clause 9.1.1 was available to Mr Attia and Shopsmart at the time they consented to the orders made on 21 April 2016.

26. Before the primary judge, Mr Attia and Shopsmart specifically abandoned their reliance upon financial material obtained before 21 April 2016 as founding a breach of clause 9.1.1. The primary judge observed that in any event he would have refused to entertain an argument based upon this evidence because Mr Attia and Shopsmart “cannot now seek to raise, as a basis for setting aside the orders made by consent, material that was available when the consent was given”.

27. The primary judge recorded that the case Mr Attia and Shopsmart ultimately sought to establish was that there was a serious issue to be tried as to whether Caird had breached its obligation under clause 9.1.1 of the Rescission Deed after the consent orders were made on 21 April 2016: [27].

28. The primary judge held that the evidence did not establish “that there was a serious question to be tried as to whether, after 21 April 2016, the goodwill of the pharmacy business had not been maintained or that the pharmacy business was not being carried on in a proper and businesslike way”. It was thus unnecessary for the primary judge to go on to consider whether Mr Attia and Shopsmart had established a good reason why the order made by consent should be set aside.

29. His Honour reached the conclusion that there was no serious issue to be tried about breach of clause 9.1.1 after examining the evidence relied upon by Mr Attia and Shopsmart:

1. photographs indicating empty shelves: his Honour found there was no evidence of the extent of the shelving, and that some photographs showed well-stocked shelves. Therefore the evidence was “quite equivocal”: [29];

2. figures of turnover and profit since April 2016: these figures were contained in an affidavit from Mr Attia. Mr Attia was required for cross-examination but did not attend. His Honour described this evidence as “quite equivocal”. He noted that although “the manner of operating the pharmacy business had been changed to some extent”, that did not of itself amount to a breach: [32]. His Honour also expressed concern that the material information relied upon was apparently obtained by a breach of confidence, whereby Mr Attia accessed the financial records of Caird without authority. Although the Franchise Agreement enabled Shopsmart to access such information, that Agreement had come to an end: [31];

3. affidavit of Ms Guirguis: Ms Guirguis was required for cross-examination but did not attend. She made various complaints in her affidavit about the operation of the business. The primary judge described her evidence as containing “bare assertions” and gave it no weight: [33]. Furthermore, Mr Attia and Shopsmart did not disclose that Ms Guirguis was Mr Attia’s sister-in-law (Senior Counsel for Mr Attia stated on the appeal that Ms Guirguis was in fact Mr Attia’s sister). The primary judge found that this was to the “discredit” of the defendants: [34].

30. The primary judge’s conclusion at [36] was that:

I was not persuaded that there is a prima facie case that there has been a breach of cl 9.1.1. Accordingly, I was not satisfied that there was material before me that indicates that justice required the vacation of the orders made by Hammerschlag J.

31. Accordingly, his Honour dismissed the notice of motion dated 25 July 2016.

32. The Court was informed from the Bar table that the primary judge conditionally stayed his orders pending the outcome of this application for leave to appeal although the condition of the stay had not been fulfilled. The matter was again before the primary judge on 19 September 2016.

Appeal

Notice of appeal

33. Mr Attia and Shopsmart sought leave to appeal under s 101(1)(a) of the Supreme Court Act 1970 (NSW). Their amended draft notice of appeal contained the following grounds:

1. The trial judge wrongly applied the test of whether the applicants had shown a prima facie case that the applicants were entitled to terminate the contract due to the respondent’s failure to maintain the pharmacy business after 21 April 2016. The trial judge should first have determined whether there was a prima facie case that the applicants were entitled to terminate the contract after 21 April 2016 due to the respondent’s failure to maintain the pharmacy business (whether the failure occurred before and/or after 21 April 2016) and then proceeded to determine whether the Court would give leave to the applicants to assert that breach notwithstanding the 21 April 2016 orders.

2. The trial judge erred in finding that the applicants could not raise as a basis of setting aside the orders made on 21 April 2016 any material available to the applicants on or before 21 April 2016.

3. The trial judge erred in finding that all the material relied upon by the applicants on 14 July 2016 to found the purported termination occurring on that date was material available to the applicants on or before 21 April 2016.

4. The trial judge should have found that the applicants had made out a prima facie case that the applicants were entitled to terminate after 21 April 2016 due to the respondent’s failure to maintain the pharmacy business.

5. The trial judge should have exercised his discretion by permitting the applicants to raise their alleged right of termination and should have set aside orders for specific performance to enable that to occur.

34. The principal, if not sole, focus of the amended draft notice of appeal was alleged breaches of clause 9.1.1 which occurred prior to 21 April 2016 and financial information about the pharmacy business that the applicants possessed prior to 21 April 2016.

35. A formidable obstacle to the approach taken by the amended draft notice of appeal was that before the primary judge counsel then appearing for the applicants had expressly abandoned reliance upon evidence in the possession of the applicants before 21 April 2016 and any breach of clause 9.1.1 occurring before 21 April 2016:

HIS HONOUR: There is no material that has come to light that you didn’t have at that stage except perhaps the way in which the business has been conducted since April.

GRATION: That’s correct and that is what the evidence of Mr Attia goes to; how has the business been conducted since April; ... (T44.14-19)

...

HIS HONOUR: Are you relying only on a breach that occurred after the orders were made?

GRATION: That’s correct, your Honour. The rundown over the last three months for the second quarter of 2016, the rundown during that period has indicated that the business, for whatever reason, is no longer being operated in a business-like way and that has resulted in a very poor performance. (T98.33-40)

…

HIS HONOUR: As I understand the way you’ve been putting it today, your case is that you rely only on what has happened since 21 April, is that right?

GRATION: That is right, your Honour.

HIS HONOUR: You say there’s been a breach. Whether there had been a breach before 21 April, that might have entitled you to defend a claim for specific performance, you say that things have happened after 21 April, which now entitle you to terminate, or put up as a defence to the claim for specific performance, even if you had one before, whether you had one before or not, is that right?

GRATION: That is exactly so, your Honour. ... (T118.13-25)

[italics added]

36. Those concessions were recorded by the primary judge at [27]-[28] of the judgment.

37. On appeal, the applicants conceded that, ordinarily, parties should not be permitted to depart from the way their case was put at trial. However, they submitted that the rule is subject to exceptions, and this Court should exercise its discretion to permit the applicants to argue a new point on appeal.

38. Therefore, a threshold question is whether reliance upon an argument based on alleged breaches of clause 9.1.1 occurring prior to 21 April 2016 and financial information about the pharmacy business that the applicants possessed prior to 21 April 2016 should be permitted.

Notice of contention

39. The respondent advanced a draft notice of contention which addressed alternative bases for the exercise of the discretion to refuse to vacate the orders for specific performance:

1. It was not in the interests of justice that the orders made on 21 April 2016 and 25 July 2016 be vacated on the grounds that:

a. throughout the proceeding, the appellants have sought to delay and avoid completion of the settlement agreed with the respondent;

b. the appellants failed to disclose at the hearings on 21 and 26 April 2016 that a contention would or might be advanced that the Rescission Deed should not be enforced because of a breach on the part of the respondent;

c. the appellants failed to disclose at the hearing on 29 July 2016 the relationship between the first applicant and Mona Guirguis; and

d. the appellants obtained evidence for the hearing on 29 July 2016 by a breach of confidence against the respondent.

2. By reason of the matters in grounds 1(b)-(d), the appellants did not come to the Court with clean hands.

Leave to appeal

40. It was common ground that leave to appeal was required in this case. Generally speaking, leave will only be granted concerning matters involving issues of principle, questions of general public importance or involving an injustice which is reasonably clear, in the sense of being more than merely arguable: Carolan v AMF Bowling Pty Ltd (Court of Appeal (NSW), 16 November 1995, unrep) per Kirby P; Be Financial Pty Ltd as trustee for Be Financial Operations Trust v Das [2012] NSWCA 164 at [32]-[38].

41. An initial submission was made by the applicants that if leave were not granted they would be left to their remedy in damages which were “inadequate” when measured against the sum at stake (the difference between $2.2 million and the present value of the business). No evidence was led or referred to by the applicants in support of that submission and it can safely be put to one side as a matter tending in favour of the grant of leave to appeal.

The test for vacating an order for specific performance

42. In Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 260, Mason CJ (Deane, Dawson and Toohey JJ agreeing) stated that the High Court would continue to treat as authoritative the proposition that “rescission after an order for specific performance requires the leave of the Court or, more appropriately, the vacation of the order”.

43. An order vacating an order for specific performance does not follow as of course where one party is in default. It is a matter for the exercise of the Court’s discretion whether, in all the circumstances, to discharge the order for specific performance would be unjust to the other party: Despot v Registrar General of New South Wales [2016] NSWCA 5 at [114].

44. In JAG Investment Pty Ltd v Strati [1981] 2 NSWLR 600 Hope JA said at 606B (Glass and Mahoney JJA agreeing) that an order vacating a decree for specific performance:

... does not follow as of course; it is undoubtedly a matter for the exercise of a discretion. As McLelland J, said in Buckman v Rose [(1980) 1 BPR 97,059 at 2]:

“The power is of a discretionary nature to be exercised on equitable principles according to the requirements of justice as between the parties.”

45. In Johnson v Agnew [1980] AC 367 at 399 Lord Wilberforce said:

Once the matter has been placed in the hands of a court of equity, or one exercising equitable jurisdiction, the subsequent control of the matter will be exercised according to equitable principles. The court would not make an order dissolving the decree of specific performance and terminating the contract (with recovery of damages) if to do so would be unjust, in the circumstances then existing, to the other party, in this case to the purchaser.

46. The decision of the primary judge not to vacate the orders for specific performance involved an exercise of discretion. It was common ground that if leave to appeal was granted, in order to succeed on the appeal the applicants must establish error in the sense described in House v The King (1936) 55 CLR 499.

Grounds 1 and 2: wrong test and too narrow view of relevant evidence

Applicants’ submissions

47. The parties addressed grounds 1 and 2 together and it is convenient to continue to do so.

48. First, the applicants submitted that the primary judge applied an erroneous test and misdirected himself as to “vital matters in the exercise of the discretion”. They submitted the primary judge erred in “narrowing the test” by considering only post-21 April 2016 breaches of contract. The applicants also submitted the Court’s analysis of whether a prima facie case existed should not be confined to the events after 21 April 2016 or material that only became known to the applicants after that date.

49. Second, it was submitted that the trial judge conflated the following two questions:

1. whether there was a prima facie case of breach of clause 9.1.1; and

2. whether the court should exercise its discretion to permit the applicants to bring that prima facie case before the court notwithstanding the making on 21 April 2016 of orders for specific performance which the applicants “did not resist”.

50. Third, the applicants submitted that the court could only properly have declined to “permit the applicants to assert their contractual right” if, on 21 April 2016, the applicants:

1. had a right to terminate;

2. knew of that right;

3. proposed to exercise that right;

and

4. allowed specific performance orders to be made without informing the court of their proposed termination.

51. Fourth, the applicants submitted that:

Even if the applicants had a suspicion on 21 April that the clause may have been breached and had in their possession some evidence which, if properly analysed, supported that suspicion (which is the case), if it was also the case that after 21 April 2016 the applicants obtained further material evidence, analysed the new and old evidence, concluded that there was grounds [sic] for termination and sought then to terminate, the applicants have in no way misconducted themselves as to preclude their agitation of the question of termination.

Consideration of grounds 1 and 2

First issue - Should the Court’s analysis of whether a prima facie breach of clause 9.1.1 existed be confined to the events after 21 April 2016 and material that only became known to the applicants after that date?

52. The applicants’ first submission, that the primary judge erred by considering only post-21 April 2016 breaches of contract and material which became known to the applicants after that date, should be rejected.

53. The primary judge only considered whether a prima facie breach of clause 9.1.1 after 21 April was established because that was the case that Mr Attia and Shopsmart contended for.

54. The case conducted by the applicants before the primary judge was, and was only, that the order for specific performance should be vacated because there was sufficient evidence before the court to conclude that there was a prima facie case that Caird had breached clause 9.1.1 after the making of the consent orders on 21 April 2016. The primary judge confirmed this with counsel for Mr Attia and Shopsmart on at least three occasions as set out at [35] above.

55. The primary judge also indicated that he would not be prepared to entertain a case based on evidence available to the applicants before 21 April. That decision also reflected the case the applicants presented to him. This exchange bears repeating:

HIS HONOUR: As I understand the way you’ve been putting it today, your case is that you rely only on what has happened since 21 April, is that right?

GRATION: That is right, your Honour. (italics added)

56. The primary judge did not impermissibly “narrow the test” by focussing only on the post-April 21 period. The applicants conducted their case that way.

57. If the applicants wanted the discretion to vacate the orders to be exercised having regard to pre-21 April 2016 breaches of contract and material which became known to the applicants before 21 April 2016, it was incumbent upon them to draw the primary judge’s attention to those matters: Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42 at [120]-[121]. They did not do so. To the contrary, the applicants expressly disavowed the case sought to be presented on this application.

58. These conclusions are sufficient to dispose of what the applicants identified as the first, and principal, issue on the application for leave to appeal.

59. The applicants sought to depart from the course they took at trial for three reasons. They submitted that:

1. the respondent would not be prejudiced by allowing the applicants to argue a new point on appeal as the case had initially been prepared on the basis that the pre-21 April 2016 material was relied upon;

2. this case is analogous to an appeal from a summary judgment and the Court should be more willing to allow a new point on appeal;

3. in deciding whether to allow such a departure, the Court should take into account that counsel at the hearing “took a line in this hearing that he should not have taken” in limiting the applicants’ case to breaches of clause 9.1.1 occurring after April 21 2016.

60. As to the first matter, parties are bound by the way a trial is conducted by counsel. As Barwick CJ said in Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Aust) Pty Ltd (1978) 139 CLR 231 at 241:

Suffice it to say it should only be in the clearest case and for the most cogent reasons that a party who has conceded [a] matter at trial should be allowed to make the validity of what has been conceded the basis for overturning the result of the trial.

61. This is not a case which is clear or where there are any cogent reasons to permit the applicants to agitate the matters they conceded before the primary judge on appeal.

62. As to the second matter, the suggestion that the present case is analogous to an appeal from a summary judgment is untenable. An application to set aside orders for specific performance which had been made by consent in proceedings in which the applicants were represented by counsel bears no similarities to a summary judgment.

63. As to the third matter, it became apparent during the course of the application for leave that although no ground of appeal was specifically addressed to this topic, and the written submissions filed did not expressly make this claim, the applicants sought to argue that their case was confined to alleged breaches of contract after 21 April 2016 and information obtained after that date due to a mistake made by counsel then appearing for the applicants.

64. There was initially some lack in clarity as to this submission. However, Senior Counsel in this Court subsequently submitted that “I was not suggesting that he was, generally speaking, an incompetent counsel, merely that he made a mistake on one discrete question which was this point of he should have been arguing breach at any time, not merely after 21 April. That's my only criticism of him, and I just want to make that perfectly clear”.

65. The fact that all that was being submitted by the applicants was that counsel then appearing for them “made a mistake” falling short of “flagrant” or “gross” incompetence, provides no reason to permit a different case to be conducted on an application for leave to appeal than that presented before the primary judge. That accords with what Kirby P said in Chouman v Margules (1993) 17 MVR 144 at 149. It is necessary to go further and establish that there has been a miscarriage of justice: see Bott v Carter [2012] NSWCA 89 at [28].

66. Before leaving this issue, and in fairness to counsel appearing for the applicants before the primary judge, we should record our view that the course taken by counsel appearing before the primary judge to disclaim reliance on evidence available to the applicants on 21 April was clearly open to him. On the material before the court, the applicants had studied the available financial information about the business with some care. They were prepared, prior to 21 April 2016, to assert to the landlord of the business that the business was in serious decline. It is apparent that the applicants had in their possession before 21 April all of the material necessary to assert a breach of clause 9.1.1 if they had chosen to do so. That evidence is extracted at [79] below. In those circumstances, the approach taken by counsel appearing before the primary judge to limit the applicants’ case to breaches of clause 9.1.1 occurring after 21 April 2016 and information obtained after that date was perfectly understandable and appropriate.

Second issue – Did the primary judge conflate the existence of the prima facie case of breach of contract and the exercise of discretion?

67. The applicants’ second submission, that the primary judge conflated the existence of the prima facie case of breach of contract and the exercise of discretion, should be rejected.

68. The primary judge correctly stated the test drawn from JAG Investment Pty Ltd v Strati that an order vacating a decree for specific performance does not follow as of course, and that it is undoubtedly a matter for the exercise of discretion.

69. The primary judge found, at [20], that in order to succeed it was necessary, but not sufficient, for Mr Attia and Shopsmart to establish a prima facie case that there had been a breach of contract by Caird. Mr Attia and Shopsmart would also need to persuade the court that there was a good reason why the order – which, it will be recalled, was made by consent – should be set aside.

70. The primary judge did not conflate the existence of the prima facie case of breach of contract and the exercise of discretion. Rather, he addressed the issue he needed to decide on the basis that if he was not persuaded that there was a serious question to be tried as to whether, after 21 April 2016, the goodwill of the business had not been maintained or that the pharmacy business was not being carried on in a proper and businesslike way, it would be unnecessary for his Honour to go on to consider whether Mr Attia and Shopsmart had established a good reason why the orders made by consent should be set aside.

71. The primary judge did not err in proceeding in this way.

Third issue – Did the primary judge err in declining to permit the applicants to “assert their contractual right” given their state of knowledge about that right?

72. The applicants’ third submission is that the court could only properly have declined to “permit the applicants to assert their contractual right” if, on 21 April 2016, the applicants knew of the right to terminate and proposed to exercise that right. That submission should be rejected.

73. The principles governing applications for the vacation of a decree of specific performance are clear. Such an order will only be made if the considerations of justice require it. The justice of the case did not require vacation of the order for specific performance made by consent on 21 April 2016.

74. The applicants specifically accepted before Hammerschlag J that they had no defence to the suit for specific performance:

HIS HONOUR: Has your client got any defence to the claim that they should make the application to Westfield? What’s the defence?

GRATION: The defence to it is that until the point noted 31 March carried, the plaintiff provided further information and operational information requested by the defendant.

HIS HONOUR: Have you got any defence to Mr Herzfeld’s claim for specific performance that make the application?

GRATION: It has been made. There is a defence—

HIS HONOUR: That’s the defence? It’s an analogy to payment. You didn’t have a defence before but not you have one because you have performed.

GRATION: Up until 31 March the plaintiff had not provided the material necessary in order to provide that application to Westfield. It was impossible for the defendant, as they said in correspondence, to provide the application to Westfield because they did not have the information necessary.

HIS HONOUR: If this is the case – and you say now that you have made the application and that’s now the defence – we are all agreed you made the application. The caveat that this application may not succeed because the person to whom it was made may consider it’s inadequate, why shouldn’t there be an order for specific performance, if it’s impliedly given, your clients must perform?

GRATION: That’s exactly what I say in my submissions that I have drafted for your Honour. (italics added)

75. The applicants then consented to the orders for specific performance on 21 April 2016. No reason has been shown why, in the exercise of discretion, the primary judge should have concluded that the consent orders should be vacated. Certainly, nothing approaching House v The King error was demonstrated. That is a sufficient basis to reject the applicants’ submission.

76. In addition, the applicants’ consent on 21 April to the orders for specific performance constituted an election to affirm the Rescission Deed.

77. The relevant principles are set out in the judgment of Stephen J in Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 642:

The nature of the knowledge which an elector must possess is a matter upon which the authorities are somethat at variance. An elector must at least know of the facts which give rise to those legal rights, as between which an election must be made; without that knowledge the doctrine of election will not be available to make irrevocable his choice of one particular right, although in appropriate circumstances an estoppel may still arise which produces that very consequence and this without any such requirement of knowledge on the part of the party who is estopped. The extent of knowledge of relevant facts necessary for the doctrine of election to apply has been described as “full knowledge of the material facts” (Bennett v L & W Whitehead Ltd [1926] 2 KB 380, at p 410). In Elder's Trustee & Executor Co Ltd v Commonwealth Homes & Investment Co Ltd (1941) 65 CLR 603 a knowledge of circumstances such as will provide information from which the decisive fact giving rise to the legal right is “a clear if not a necessary inference” was held to be sufficient: at 617.

78. In the same case Mason J said at 658:

If a party to a contract, aware of a breach going to the root of the contract, or of other circumstances entitling him to terminate the contract, though unaware of the existence of the right to terminate the contract, exercises rights under the contract, he must be held to have made a binding election to affirm. Such conduct is justifiable only on the footing that an election has been made to affirm the contract; the conduct is adverse to the other party and may therefore be considered unequivocal in its effect. The justification for imputing to the affirming party a binding election in these circumstances, though he be unaware of his alternative right, is that, having a knowledge of the facts sufficient to alert him to the possibility of the existence of his alternative right, he has acted adversely to the other party and that, by so doing, he has induced the other party to believe that performance of the contract is insisted upon. It is with these considerations in mind that the law attributes to the party the making of a choice, though he be ignorant of his alternative right. For reasons stated earlier the affirming party cannot be permitted to change his position once he has elected. 

79. The applicants, on 21 April 2016, had full knowledge of the material facts that they argue gave rise to a legal right to terminate for breach of clause 9.1.1. Such knowledge is demonstrated by the contents of the business plan they sent to the Scentre Group on 15 April 2016 which concluded:

Based on historical sales data obtained from July 2012 through to 31 March 2016 (attached as Exhibit 3), it has been established that there has been a massive deterioration in the outlet’s sales performance from since [sic] [Caird] came to acquire and operate the business in November 2013.

The decline was due in some part to noted deviations from the Shopsmart Wholesale Pharmacy business operating model. The Shopsmart Wholesale Pharmacy business model was developed to optimise to profitability.

The noted deviations are as follows:

De-badge the outlet of the agreed trading brand “Shopsmart Wholesale Pharmacy”.

Cut staff level which affected in a negative way customer service and customer retention which were designed to enhance customer patronage.

Shutdown the lottery and lotto operations which had historically increased traffic into the outlet, generate[d] positive cash inflow and float, and generate[d] an almost cost free incremental revenue stream.

Ceased promotional campaigns by opting out of the Shopsmart Wholesale Pharmacy catalogue campaign.

Failed to maintain a reputable credit rating with major suppliers resulting in periodic supply restrictions and restricted terms of trade. This contributed to the decline in sales as customers were unable to make a purchase as essential tradable stocks became scarce and unavailable.

Group pricing had been disregarded to the detriment of the groups [sic] pricing strategy and policy.

80. The appropriate conclusion on the evidence contained in that business plan is that the applicants were aware on 21 April 2016 of their ability to resist the orders for specific performance based on an alleged breach of clause 9.1.1. They did not need to “know” that they had a right to terminate the Rescission Deed nor did they need to have decided to exercise that right before any question of affirmation arose.

81. The respondent also contended that a finding that it was in breach of clause 9.1.1 would have been “necessarily inconsistent with the making of an order for specific performance on that date. Accordingly, the making of that order founds an issue estoppel precluding the applicants from thereafter contending that there had been any breach of the clause prior to 21 April 2016”. It is unnecessary to address this claim to determine the present matter.

Fourth issue – Did the primary judge err in declining to permit the applicants to “assert their contractual right” given their state of knowledge about that right on 21 April 2016?

82. The applicants’ fourth submission should be rejected. On 21 April 2016, the applicants were aware of material that, had they so chosen, could have been deployed in defence of the claim for specific performance. That is a sufficient basis to conclude that the consent orders should not be vacated. No House v The King error has been shown.

83. Further, the applicants were faced with a choice on 21 April 2016 whether to consent to the orders for specific performance or attempt to resist those orders on the basis they had a defence based on an alleged breach of clause 9.1.1 of the Rescission Deed. The applicants, faced with that choice, elected to affirm the contract by consenting to the orders made on 21 April 2016.

84. The applicants deliberately chose to conduct their case before the primary judge based solely upon evidence obtained after 21 April 2016 and based upon breaches of contract alleged after 21 April 2016.

85. The primary judge did not err in limiting his consideration of the issues to those advanced by the applicants before him.

Conclusion re grounds 1 and 2

86. The present case does not involve issues of principle, questions of general public importance or an injustice which is reasonably clear, in the sense of being more than merely arguable.

87. The primary judge did not err in addressing the case presented to him, and only that case. The existence of any House v The King error allegedly made by the primary judge was not adequately addressed by the applicants, let alone established.

88. Leave to appeal on grounds 1 and 2 should be refused.

Ground 3: material available to the applicants before 21 April 2016

Applicants’ submissions

89. The applicants submitted that the primary judge erred, at [26], in concluding that the only material relied upon by the applicants as at 14 July 2014 when they asserted a right to terminate the Rescission Deed was material the applicants possessed as at 21 April 2016. They submitted that his Honour should have found that merely some of that material referred to in the letter of 14 July 2014 was available to the applicants prior to 21 April 2016.

90. The applicants submitted that Mr Attia’s evidence demonstrated that he was aware, prior to 21 April 2016, of various matters which might indicate a breach of clause 9.1.1. The applicants also submitted that “other important material was only obtained by the applicants after 21 April 2016”. That additional material was the sales data obtained on 6 July 2016.

Consideration of ground 3

91. The applicants’ submissions concerning proposed ground 3 should be rejected.

92. Even if leave to appeal were granted, it would not matter to the outcome of that appeal whether or not the applicants had obtained “all” of the material referred to in the 14 July 2016 letter before 21 April 2016. This is because, before the primary judge, the applicants disavowed reliance on material obtained prior to 21 April 2016.

93. Given the conclusions reached in relation to grounds 1 and 2 of the proposed notice of appeal, what would be relevant in any appeal, if leave were granted, would be whether the applicants could demonstrate that they became aware after 21 April 2016 of additional matters which founded an alleged breach of clause 9.1.1 of the Rescission Deed. It does not matter, in addressing that question, whether “some” or “all” of the material referred to in the 14 July 2016 letter was obtained before 21 April 2016.

94. The question whether or not the applicants had obtained “some” or “all” of the material referred to in the 14 July 2016 letter before 21 April 2016 does not involve issues of principle or questions of general public importance. The applicants have not shown an injustice which is reasonably clear, in the sense of being more than merely arguable.

95. Leave to appeal on ground 3 should be refused.

Ground 4: prima facie case

Applicants’ submissions

96. The applicants submitted that if the correct test was applied, the evidence was sufficient to “clear the relatively low bar of establishing a prima facie case and/or a serious question to be tried”. They submitted that the evidence established:

1. staffing levels were reduced by Caird to 2-3 employees at any given time, as opposed to 4-5 employees when the business was in the hands of the applicants;

2. there were on occasions many empty or part-empty shelves in the pharmacy;

3. after May 2015 Caird abandoned all advertising, marketing and distribution of catalogues, other than distributing a leaflet that promoted Local Value Chemist shops in general;

4. the sales figures (excluding dispensary sales and almost all lottery tickets) produced by Caird under a notice to produce for FY14-15 and FY15-16 show a 24.6 per cent decline; and

5. the total sales figures for FY14-15 and FY15-16 indicate an even worse decline of 37.2 per cent over that period.

Consideration of ground 4

97. It is not strictly necessary to consider ground 4 given the rejection of grounds 1-3 above. However, the submissions concerning proposed ground 4 should be rejected for the following reasons.

98. First, the obligation to maintain goodwill and conduct the business properly was confined to the period after the date of the Rescission Deed, being 31 July 2015. It will be recalled that clause 9.1.1 provided:

9.1 It is an essential provision of this contract that the vendor must, between the contract date and completion–

9.1.1 maintain the goodwill of the business and carry on the business in a proper and business like way; ...

99. The “contract date” must be 31 July 2015, because the re-transfer contract was incorporated into the Rescission Deed. The goodwill of the business being conducted prior to 31 July 2015 is thus not relevant. Many of the matters about which the applicants complain do not reflect a failure to maintain the goodwill or conduct the business in a proper and business like way since 31 July 2015.

100. Even if the applicants were permitted to rely upon material concerning the period before 21 April 2016, the comparisons sought to be drawn by the applicants with the business as it existed in 2014 were irrelevant to the obligation contained in clause 9.1.1 properly construed.

101. Second, the applicants’ complaints about a “prima facie breach” of clause 9.1.1 fail adequately to identify what, as a matter of construction, clause 9.1.1 required and how, if at all, the respondent breached those obligations.

102. As the High Court said in Commissioner of Taxation (Cth) v Murry (1998) 193 CLR 605; [1998] HCA 42 at [12], “goodwill” is notoriously difficult to define. In Murry at [19] the High Court described as useful a judicial definition of goodwill provided by Judge Swan in Haberle Crystal Springs Brewing Co v Clarke 30 F 2d 219 at 221-222 (2nd Cir 1929):

A going business has a value over and above the aggregate value of the tangible property employed in it. Such excess of value is nothing more than the recognition that, used in an established business that has won the favor of its customers, the tangibles may be expected to earn in the future as they have in the past. The owner’s privilege of so using them, and his privilege of continuing to deal with customers attracted by the established business, are property of value. This latter privilege is known as good will.

103. The meaning of “goodwill” in the context of clause 9.1.1 was given scant attention by the applicants. The Rescission Deed must be construed by reference to what a reasonable businessperson would have understood its terms to mean, requiring, in turn, consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35].

104. A reasonable businessperson would understand the obligation in clause 9.1.1 as obliging the vendor to conduct the business, from 31 July 2015 until completion, in such a way so as to attempt to maintain the value in the business over and above the value of the tangible assets of the business.

105. Clause 9.1.1 does not provide a warranty that the business will achieve a particular total sales figure in a particular period, much less does it provide a warranty about numbers of customers or the achievement of sale targets for particular products. The applicants’ complaints, even when addressing the period after 31 July 2015, failed to establish a prima facie breach of clause 9.1.1.

106. The applicants’ complaints based on the evidence led before the primary judge may be dealt with shortly:

1. the reduction of staffing levels relied upon by the applicants. This complaint addresses an irrelevant period. The “change” in staffing levels relied upon by the applicants was already a feature of the business in July 2015. Mr Zhao (Caird’s sole director) gave unchallenged evidence that since early 2014 he had “constantly tweaked” the way in which the pharmacy was operated in order to achieve a greater net profit. He stated that “the pharmacy does operate with less staff than when it was operated by [Mr Attia and Shopsmart]”. This evidence does not establish a prima facie case of a failure to maintain the goodwill or conduct the business in a proper and business like way since 31 July 2015.

2. the changes in marketing strategy. This complaint also relates to a matter which occurred before the date of the Rescission Deed. It is thus irrelevant to the question in issue. Mr Zhao’s unchallenged evidence was that he terminated the distribution of Shopsmart’s promotional catalogues in May 2014. Shopsmart branding was removed in “late 2014”. Mr Zhao started distributing Local Value Chemist promotional material in early 2015. This evidence does not establish a prima facie case of a failure to maintain the goodwill or conduct the business in a proper and business like way since 31 July 2015.

3. turnover figures. Whilst the turnover of the business declined between 30 June 2015 to 30 June 2016, that of itself does not demonstrate a prima facie breach of the obligation to maintain goodwill or to conduct the business in a proper and business like way. Goodwill, in the sense of the value in the business over and above the value of the tangible assets of the business, is not necessarily measured in turnover. That is particularly so in circumstances where there was also evidence the business was operated by Caird with a higher gross profit than that obtained by Mr Attia and Shopsmart. The obligation in clause 9.1.1 does not impose a requirement that turnover must be the same at completion as it was on the date of making the agreement, 31 July 2015. In addition, there was no evidence led by the applicants of turnover generally in pharmacy or other businesses during this period, in Burwood or elsewhere. Further, the comparison sought to be drawn by the applicants between financial year 2015 and financial year 2016 figures was inapposite in circumstances where the unchallenged evidence was that tens of thousands of lottery and newsagent sales were discontinued by Caird in late 2014. The applicants did not explain how any meaningful comparisons could be drawn about the business based on these raw turnover figures in these circumstances. The turnover figures, by themselves or in combination with other evidence, did not establish a prima facie case of a failure to maintain the goodwill or conduct the business in a proper and business like way since 31 July 2015.

4. photographs of “empty shelves”. The photographs annexed to Mr Attia’s affidavit of 20 July 2016 showed that on that date, there were some empty shelves and some fully stocked shelves in the business. The primary judge described the photographs as “equivocal”. The photographs, by themselves or in combination with other evidence, did not establish a prima facie case of a failure to maintain the goodwill or conduct the business in a proper and business like way since 31 July 2015.

107. No issues of principle, questions of general public importance or involving an injustice which is reasonably clear, in the sense of being more than merely arguable, were established by the applicants in relation to ground 4.

108. Leave to appeal on ground 4 should be refused.

Ground 5: re-exercise of the discretion

Applicants’ submissions

109. The applicants’ ground 5 was predicated upon a finding by the Court that leave to appeal was granted and one or more of grounds 1-4 of the draft notice of appeal was upheld. It was submitted that the primary judge’s discretion had miscarried and in that circumstance, the applicants submitted that the discretion must be exercised afresh.

Consideration of ground 5

110. Leave to appeal in relation to grounds 1-4 of the draft notice of appeal was refused for the reasons above. In those circumstances it is unnecessary to consider the appropriate exercise of the discretion on the hypothesis that the primary judge’s exercise of discretion miscarried. It is equally unnecessary to consider the matters raised by the respondent’s draft notice of contention.

111. Leave to appeal in relation to ground 5 of the draft notice of appeal should be refused.

Conclusion and Orders

112. For the foregoing reasons the Court made the following orders on 15 September 2016:

1. Summons seeking leave to appeal dated 4 August 2016 dismissed with costs.

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Decision last updated: 28 September 2016