Avenue (WA) Pty Ltd v Plazaline Pty Ltd
[2007] WASC 173
•31 JULY 2007
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: AVENUE (WA) PTY LTD -v- PLAZALINE PTY LTD [2007] WASC 173
CORAM: JENKINS J
HEARD: 14 MAY 2007
DELIVERED : 31 JULY 2007
FILE NO/S: CIV 1135 of 2007
BETWEEN: AVENUE (WA) PTY LTD (ACN 118 771 181)
Plaintiff
AND
PLAZALINE PTY LTD (ACN 078 532 608)
Defendant
Catchwords:
Conveyancing - Contract for sale of land conditional on approval of third party - Vendor purporting to terminate to contract because conditions of approval not acceptable - Vendor's obligation to take reasonable steps to fulfil contract - Specific performance - Purchaser not ready and willing to perform contract
Legislation:
Nil
Result:
Application for an order for specific performance of the contract refused
Category: B
Representation:
Counsel:
Plaintiff: Mr A J Power
Defendant: Mr A P Hershowitz
Solicitors:
Plaintiff: Williams Handcock
Defendant: James Chong & Co Pty Ltd
Case(s) referred to in judgment(s):
Bahr v Nicolay (No 2) (1988) 164 CLR 604
Butts v O'Dwyer (1952) 87 CLR 267
Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79
Ferguson v Wilson (1866) LR 2 Ch App 77
J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282
Kennedy v Vercoe (1960) 105 CLR 521
Mehmet v Benson (1965) 113 CLR 295
Patrick Stevedores Operation No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1
Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537
Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656
Strati v JAG Investments Pty Ltd [1980] 1 BPR 9600
Suttor v Gundowda Pty Ltd (1950) 81 CLR 418
JENKINS J: The plaintiff, Avenue (WA) Pty Ltd ("Avenue"), seeks specific performance of a contract for the sale of land between it and the defendant, Plazaline Pty Ltd ("Plazaline"), dated 26 March 2006 ("the contract"). Under the terms of the contract Avenue offered to purchase and the defendant agreed to sell Lot 532 on Plan 19636 being the whole of the land in Certificate of Title, Volume 2052, Folio 854 and having a street address of 53 Davidson Terrace, Joondalup ("the land") for $1,485,000.
Plazaline denies that Avenue is entitled to specific performance of the contract and says that, because it terminated the contract for non‑fulfilment of a condition of the contract, it is now at an end.
Factual background
On 17 June 2004 Plazaline entered into an agreement with the Western Australian Land Authority ("LandCorp") ("the LandCorp agreement"). The LandCorp agreement recited that other parties had entered into an agreement to purchase the land from LandCorp. Pursuant to the terms of the contract between those parties and LandCorp, the other parties were required to obtain development approval to undertake development on the land, obtain a building licence for such development and achieve practical completion of the development within the times specified in the contract. The other parties had failed to complete the development in accordance with the terms of the contract. The contract between LandCorp and those parties did not allow the other parties to transfer the land prior to the completion of the development without LandCorp's prior written consent. LandCorp had agreed to allow the other parties to transfer the land to Plazaline, subject to Plazaline entering into the LandCorp agreement.
Pursuant to cl 5.1 of the LandCorp agreement, if Plazaline failed to cause commencement of construction of development on the land on or before 5 July 2005 or failed to cause practical completion of development on or before 5 January 2007 Plazaline agreed to pay LandCorp, on demand, liquidated damages for each day from the due date of either commencement of construction or practical completion of development (as the case may be) that the default continued. Liquidated damages were defined to mean the daily sum of $120. Plazaline agreed that the liquidated damages were a genuine pre‑estimate of the loss likely to be suffered by LandCorp as a consequence of any default.
Pursuant to cl 6.2 of the LandCorp agreement, Plazaline agreed that until it completed the development on the land it would not sell the land without first obtaining the consent in writing of LandCorp. If such consent was given the sale was to be subject to such conditions as may be imposed by LandCorp.
On 8 July 2004 Plazaline became the registered proprietor of the land. It paid approximately $818,000 for the land.
Although Plazaline obtained development approval, it failed to commence construction of the development on the land on or before 5 July 2005. By letter dated 7 September 2005 LandCorp advised Plazaline that it was in default under the agreement and that liquidated damages would apply. By further letter dated 15 December 2005 LandCorp advised Plazaline that as at 16 December 2005 liquidated damages were assessed at $19,560. It pointed out that the LandCorp agreement provided for damages to continue to apply until completion of the works.
On 26 March 2006 Plazaline and Avenue entered into the contract. The contract was in the standard form Real Estate Institute of Western Australia 2003 form of contract and incorporated the 2002 Joint Form of General Conditions for the Sale of Land ("the General Conditions"). As stated previously, the purchase price was $1,485,000 including GST. Settlement was to occur 30 days from the contract becoming unconditional. Special condition 8 of the contract provided:
"This offer is subject to approval of the sale of the land from LandCorp prior to commencement of the due diligence period."
Special condition 9 of the contract provided that the parties agreed to 14 days due diligence from the time all satisfactory documentation had been received by the buyer and with an option to extend the due diligence period. Special condition 10 of the contract provided:
"The seller to provide any and all planning approvals, working drawings, engineer's information including investigations and quotes information undertaken to date within 10 days of this offer and prior to the commencement of the due diligence period, and this information to form part of the sale."
By letter dated 28 March 2006 Plazaline asked LandCorp to approve the transfer of the land to Avenue. The letter asserted that the new owner would be "on site" within five to six months from that date.
In early April 2006 the parties agreed to a variation of the contract in the following terms:
"The buyer and seller agree that the due diligence period referred to in clause 9 of the contract will commence from the latter of
A.the fulfilment by the seller of clause 10; and
B. the fulfilment in writing by LandCorp of clause 8 which is due on or before 11 April 2006 or no later than 30 April 2006."
Thus, the contract was subject to LandCorp's approval being obtained no later than 30 April 2006. Clause 22 of the General Conditions provided that time was of the essence in relation to the provisions of the contract.
On 18 April 2006 LandCorp sent a facsimile to Plazaline advising that a "termination fee" of $87,600 had been assessed on the basis of the following:
| "Original committed commencement date of 5 July 2005 Assumed commencement date of 5 July 2006. | ||
Assessed delay therefore of: | 365 days | |
| Advised likely commencement date of 13 October 2006 | ||
Extended likely delay of: | 439 days | |
| Original committed completion date of 5 January 2007 Assumed completion date of 5 January 2008 | ||
Assessed delay therefore of: | 365 days | |
| Advised likely completion date of 13 April 2008 | ||
Extended likely delay of: | 463 days | |
| Total of Assessed delays therefore of | 730 days | |
($87,600) | ||
Total of extended likely delays of: | 902 days | |
(($108,240) | ||
| LandCorp's proposal of $87,600 assumes the shorter duration of the period of default of 730 days, as opposed to the likely delay of 902 days." | ||
On 18 April, Mr Stephen Paul Griffiths, the sole Director of Avenue, sent a facsimile to LandCorp which said that it would take approximately 10 months before Avenue could commence development of the land. He said that his reasonable expectation was that the earliest start date would be March 2007 as long as the purchase was without complication. Mr Griffiths also said that construction would take a further 16 months. These time periods were not used by LandCorp to determine the conditions of approval. LandCorp used time periods given by Plazaline for that purpose.
On 19 April 2006 LandCorp sent a letter to Plazaline advising that it had approved the on selling of the land on the following conditions:
1.Plazaline pay a termination fee of $87,600 to LandCorp on settlement;
2.Avenue to agree to commence construction within six months of settlement or by 13 October 2006, whichever is the earlier;
3.Avenue to agree to complete construction within 24 months of settlement or by 13 April 2008, whichever is the earlier; and
4.Avenue to agree to pay liquidated damages at the rate of $240 per day if in default in respect to conditions 2 and 3.
The letter advised that if these conditions were acceptable Plazaline was to confirm that in writing and LandCorp would arrange for the preparation of the necessary documentation.
Mr Agus Michael Kwan is a director and shareholder of Plazaline. He was primarily responsible for making decisions on behalf of Plazaline relating to the land. He testified that at the time of entering into the contract he did not know on what terms LandCorp may give approval for the sale of the land or whether it would be approved at all. He said that he understood that there may be some penalty imposed for the late commencement of development. However, he took comfort from the fact that he had been advised that any penalty imposed could be appealed. He believed that it was unlikely to be a significant penalty due to the inability of Plazaline to commence construction at an earlier time because of delays in obtaining development approval. These delays, he said, were the fault of the local government. Mr Kwan testified that he had been told of other termination fees imposed by LandCorp and that these had not been significant. Mr Kwan was of the view that the termination fee of $87,600 was too high given the other termination fees he was aware of and the reasons why Plazaline was on selling the land.
On 21 April 2006 Mr Kwan telephoned Mr Kevin Anthony Brincat, a real estate sales representative employed at David Evans Real Estate, Plazaline's real estate agent. Mr Kwan advised Mr Brincat that he was not satisfied with the condition relating to a termination fee of $87,600. Mr Kwan followed up that conversation with a letter of the same date. The letter was also sent to Mr Griffiths. The substance of the letter stated that Plazaline could not accept condition 1 of LandCorp's approval and that it had sent a response to LandCorp. The letter stated that Mr Kwan did not know if the other conditions were acceptable to Avenue. He said that he was expecting a response from LandCorp within the next few days.
Mr Kwan also telephoned Mr Peter Brewer. Mr Brewer is a consultant to LandCorp and holds the position of project manager for the Joondalup area. He is a registered builder and was engaged by LandCorp in 1994. Since then he had been involved in all aspects of land development and sales of land in Joondalup as a consultant for LandCorp. Since about 2002 part of his role with LandCorp was assess "termination fees" which were imposed as a condition of the on sale of land in the Joondalup area. Mr Brewer was responsible, on behalf of LandCorp, for determining the conditions of approval of the sale of the land from Plazaline to Avenue. However, the conditions he proposed were approved by LandCorp's executive.
Mr Kwan attempted to negotiate a lower termination fee but Mr Brewer advised him that the LandCorp approval was final and, if it was unacceptable the land would have to be developed by Plazaline pursuant to the LandCorp agreement. Mr Kwan told Mr Brewer that Plazaline could not accept the termination fee and would not proceed with the sale to Avenue.
On the same date Mr Brewer sent a facsimile to Mr Kwan which confirmed that LandCorp's approval of the sale to Avenue was conditional upon the four conditions specified above. He stated that Plazaline's exclusion of the first condition negated LandCorp's approval of the sale.
Between 19 and 27 April 2006 representatives of David Evans Real Estate and Mr Griffiths discussed the future of the contract. Mr Griffiths was concerned that Plazaline had failed to provide Avenue with the documentation referred to in special condition 10 of the contract. He expressed the view that Avenue intended to proceed with the purchase of the land but felt that the purchase price needed to be reduced given that much of the documentation which was supposed to form part of the contract did not appear to exist and Avenue was going to be put to the cost of obtaining it. Mr Griffiths also said that it would not be possible for Avenue to start construction by the date that Plazaline had given to Mr Brewer. Mr Griffiths suggested that LandCorp should modify conditions 2 – 4.
On 26 April Mr Griffiths wrote to his settlement agent. He expressed the view that the timeframes "offered" by LandCorp were "impossible to achieve". He continued:
"4.Liquidated damages of $240 per day or $87,600 per annum is a point that could be accepted if the points 2 and 3 are amended to be within a [sic] reasonable timeframes (as I outlined recently)."
I assume that the "reasonable timeframes" that Mr Griffiths referred to were those he had given to Mr Brewer on 18 April.
On 27 April 2006 Mr Brincat sent a letter to Plazaline. The letter referred to Avenue's complaints about the failure of Plazaline to provide the documentation pursuant to special condition 10 of the contract and the cost for Avenue to obtain those documents. It further referred to LandCorp's termination fee. In respect to Avenue's ability to comply with conditions 2 – 4 Mr Brincat said that the dates needed to be amended to 13 March 2007 and 13 September 2008 respectively, in order to be obtainable and also to meet the need for Avenue to complete the documentation. Having regard to these matters, Mr Brincat stated that Mr Griffiths had suggested that a new offer should be drawn up for the purchase of the land. The conditions upon which this would be done included a change in the LandCorp dates as specified above and a $73,000 reduction in the purchase price.
On the same date Plazaline wrote to Mr Brincat and Mr Griffiths advising them that Plazaline was not able to accept the terms and conditions LandCorp had placed upon its approval of the transfer of the land. The letter further stated that the contract was at an end and that Mr Brincat was authorised to return the deposit to Avenue.
On 11 August 2006 Avenue lodged a caveat on the land alleging an interest in it pursuant to the contract. This caveat has been extended pursuant to orders made by this Court.
On 15 April 2007 the development approval granted on 15 April 2005 expired because development had not substantially commenced. On 16 April 2007 Plazaline lodged a new development application for the land. As of the date of the hearing of this application no construction has commenced on the land.
The basis of Avenue's application for specific performance of the contract is that LandCorp gave approval for the on sale on 19 April 2006 and Plazaline could not cancel the contract because it did not like the conditions placed on the approval.
Resolution of issues between the parties
Construction of special condition 8 of the contract special conditions
The first issue to determine is what is meant by "approval" in special condition 8 of the contract. Does it mean unconditional approval or does it include a conditional approval?
The parties clearly contemplated that LandCorp's approval of the on sale may be conditional. Mr Griffiths, on behalf of Avenue, testified that during negotiations for the contract he was told that Plazaline knew that it would need to pay a fee to LandCorp as a condition of approval of any sale.
Plazaline was a party to the LandCorp agreement which expressly stated that LandCorp's consent to any on sale was subject to any conditions imposed by it. Mr Kwan, on behalf of Plazaline, knew that LandCorp's approval of the sale of the land to Plazaline had been conditional and he believed that approval by LandCorp to the Plazaline sale to Avenue would be similarly conditioned.
However, this does not automatically mean that "approval" in special condition 8 means a conditional approval. Having regard to the authorities, it appears that the preferable construction is that even where the parties believe that an approval will be conditional they do not intend that a conditional approval obliges the parties to complete a contract of sale until the approval becomes unconditional. For example, in Strati v JAG Investments Pty Ltd [1980] 1 BPR 9600, McLelland J held that the conditional approval of a local government to a plan of subdivision was not an approval within the meaning of a special condition of the relevant contract for sale of land which provided that it was subject to the approval by the local government council. McLelland J at 9605 said:
"In my opinion an approval subject to conditions which must be fulfilled before the approval becomes capable of being acted upon is not ipso facto a fulfilment of the condition contained in special condition 1 of the contract; a contingent approval is not in my view sufficient. However, I am of the opinion that the conditional approval of 19 April 1972 brought about a state of affairs where fulfilment of the condition contained in special condition 1 of the contract could be achieved by fulfilment of the conditions to which the approval of 19 April 1972 was made subject. None of those conditions has been fulfilled. Consequently, there has not been any 'approval' fulfilling the condition contained in special condition 1 of the contract."
In my opinion this is the preferable construction of special condition 8 of the contract and that intended by the parties. Such a construction means that there is certainty as to the fulfilment of the clause. If an approval included a conditional approval, the conditions of which had not been agreed to or met by the relevant party, it would lead to the absurd result that one party could insist upon the other party performing the contract even where it was clear that a condition precedent to the performance of the contract, the approval of the third party, was never going to be satisfied.
Thus I find that "approval" in special condition 8 of the contract means an unconditional approval or a conditional approval where the parties have met or agreed to meet the conditions of approval.
An implied term
The next issue to determine is what obligations, if any, were imposed on the defendant after LandCorp gave conditional approval to the sale. Was Plazaline obliged to comply with all lawful conditions imposed by LandCorp, as submitted by Avenue? Alternatively, did the defendant only have to do what was reasonable, indeed what it regarded as reasonable, in order to fulfil the contract, as submitted by Plazaline?
A convenient starting point for a consideration of the law in respect to this issue is Butts v O'Dwyer (1952) 87 CLR 267. In that case, the High Court considered whether a transfer of land which was to be subject to the relevant Minister's consent was subject to a condition that the person giving the transfer had to do all that was reasonable on his part in order to obtain the Minister's consent. The High Court held that such a condition would be implied. It said at 280:
" … we think that such a condition should be implied. It has been held in cases too numerous to mention both before and after the classic statement of Bowen LJ in the case of The Moorcock that the law raises an implication from the presumed intention of the parties where it is necessary to do so in order to give to the transaction such efficacy as both parties must have intended that it should have."
Such a term has been implied by the High Court in other similar contracts; Kennedy v Vercoe (1960) 105 CLR 521: Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537.
As to whether Plazaline was under an obligation to take reasonable steps to fulfil the conditions of the approval, there is no reason why I would not apply the dicta in Butts v O'Dwyer (supra). In Strati v JAG Investments (supra) at 9605 McLelland J said:
"Where a contract for the sale of land is made subject to a condition there arise, subject to any sufficient indication to the contrary, implied obligations binding each party (a) to take all reasonable steps available to him to procure fulfilment of the condition and (b) to refrain from taking any step which would prevent or inhibit fulfilment of the condition."
This conclusion is consistent with the dicta in Butts v O'Dwyer (supra) and I apply it to the facts of this case.
I do not accept that it was for the defendant alone to decide whether a condition imposed on the approval was acceptable. If the parties had agreed Plazaline was to have such a right, I would have expected it to be expressed in the contract.
In my opinion the defendant was under an obligation to take all reasonable steps available to it to obtain LandCorp's unconditional approval of the on sale to Avenue and to refrain from taking any step which would prevent or inhibit fulfilment of the requirement for LandCorp's unconditional approval.
On the above construction, special condition 8 has not yet been fulfilled. That is, LandCorp has not given unconditional approval to the sale or conditional approval to the sale, the conditions of which have been met or agreed to be met by the parties.
Plazaline's breach of the implied term
The next issue to determine is whether in the circumstances Plazaline was entitled to terminate the contract.
Relevantly, the failure of LandCorp to approve the sale may have been brought about by failure on the part of either or both parties to take reasonable steps to obtain the approval or it may have been brought about without any default by either party. The question as to who may avoid the contract depends on what occurred. If one party has, by its default, brought about the lack of consent the other party alone has the option of terminating the contract. If the lack of unconditional approval happened without default on either side then either party may avoid the contract: Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 441.
Plazaline submits that it was entitled to terminate the contract because the lack of approval was a state of affairs brought about through no fault of either party.
Avenue submits that Plazaline was not entitled to terminate the contract because it was in default of its obligation to take all reasonable steps to obtain LandCorp's approval to the sale.
Approval not having been obtained from LandCorp, Plazaline was entitled to avoid the contract unless that state of affairs was brought about by its own default. In the factual context of this case that depends on whether acceptance of an obligation to pay a termination fee of $87,600 was a reasonable step that Plazaline was obliged to take.
Avenue submits that it was entirely reasonable. It says that Plazaline purchased the land for $818,000 in June 2004. Approximately two years later it sold it to Avenue for $1.485 million; a gross profit of $667,000. The termination fee was approximately 13 per cent of that gross profit.
Avenue submits that whether it was reasonable for Plazaline to pay the termination fee must be judged against the reasons given by Mr Brewer for the imposition of the termination fee.
I asked Mr Brewer what, in his view, was the purpose of the termination fee. His reply was:
" … the purpose of the termination fee or any fee paid has reflected the requirement by that current owner to on sell. The last thing that LandCorp ever wants to happen is to allow an on sale because you know that with an on sale the whole development process just goes – we're going backwards. Where we can we will assist to ensure that the original owner can proceed with the development and that may be granting an extension to the commencement dates and completion dates. That was in an environment when the market was slow and we were doing all that we could to assist owners. The situation has changed the markets are more buoyant now and the demand for commercial development is strong."
I asked him again whether there was anything further he could tell me as to what the purpose of the termination fee is and what LandCorp hopes to achieve by the termination fee. Mr Brewer replied:
"Trying to introduce a new purchaser who is more prepared and geared up to get the development started. It does reflect on the increased value of the land. That was taken into consideration in most of the cases, just reflecting the market."
Mr Brewer was asked whether LandCorp looked to penalise the owner for on selling. Mr Brewer said that LandCorp was looking to get the development started as soon as possible. He said he did not like using the word "penalise". He said that LandCorp was not trying to discourage future on sales because it would have imposed a much larger fee if that was the purpose.
When LandCorp sells a parcel of land such as this one it is in order to promote the development of the land and to deter speculation for the purpose of profit making. If the conditions of sale designed to promote development are not met, LandCorp imposes a termination fee as a condition of on sale. Mr Brewer was definite that the termination fee and liquidated damages were two different things. When Mr Brewer was asked how LandCorp determined the termination fee he replied:
"The circumstances of each individual case are taken on their merit and the fee is calculated or judged accordingly. In this particular instance … the fee was based on firstly the request by the owner to be allowed to on sell. LandCorp would consider the reasons why there was such a request and would consider such as medical reasons; can't proceed with the project for some other personal reasons; is in a financial situation that prevents them from going ahead with the project; how much work is already been done to show that they were genuine in getting this project up to the stage that it has achieved, and a fee would be assessed based on those considerations. It's a bit airy‑fairy I agree."
Mr Brewer said that there was no strict formula for assessing a termination fee.
What is apparent from Mr Brewer's evidence is that a vendor cannot predict what the termination fee shall be. In this case, Mr Brewer used the agreed figure for liquidated damages as a basis for calculating the termination fee but this was because, as he said, it "was a convenient figure" and not because there was any policy to use it. It was put to Mr Brewer that the termination fee was an arbitrary figure. He did not admit that. Rather, he said he thought that it was fair and reasonable. He noted that if the termination fee had been determined on the basis that it was equivalent to liquidated damages it would have been around $150,000. This would have to include a prediction as to when the development would be commenced and completed. Mr Brewer's facsimile of 18 April discloses that liquidated damages would have been $108,240 on the basis of dates supplied by Plazaline.
In particular, vendors can not use the amount of termination fees imposed in other on sale approvals to determine the amount of a termination fee in their case. LandCorp had imposed termination fees in other approvals of on sales but these were calculated on different bases due to the slower market conditions in those times and the genuine needs asserted by the owners to on sell the land. They were said to be nominal figures.
In the case of the previous sale of the land a termination fee of $10,000 had been imposed. Mr Kwan gave evidence that he had asked the real estate agent what fee had been imposed and had been told that there was no fee imposed. He did not ask Mr Brewer whether there had been a termination fee imposed in respect to the on sale to Plazaline and, if so, what the fee was. In my view he did not give a reasonable explanation for having failed to do so. However, even if he had asked Mr Brewer, the answer, without further investigation, would not have allowed him to predict what termination fee would be imposed as a condition of Plazaline's on sale of the land.
In my opinion, the decision as to whether the payment of the termination fee was a reasonable step for the defendant to take in order to obtain LandCorp's approval of the sale has to take into account a number of matters. The first matter to consider are the previous termination fees imposed by LandCorp and the circumstances in which those fees were imposed. The second matter is the value of the land and any increase in the value of it since Plazaline purchased it. The third matter is Plazaline's reasons for the on sale.
In respect to the first matter, a simple comparison with the nominal fees imposed in previous cases tends to suggest that the payment of this termination fee was not a reasonable step to require Plazaline to take to obtain LandCorp's approval. However, it is appropriate to take into account that those fees were imposed in different market conditions and that, in the more buoyant market in which this sale took place, higher fees could be expected.
In respect to the second matter, there had been a significant increase in the value of the land over a relatively short period of time. Plazaline points out that over that period it had expended money in order to obtain the development approval and other information necessary before development could commence. Even taking that expenditure into account, the termination fee appears to be reasonable when the increase in the value of the land is taken into account, as against LandCorp's desire to encourage development.
The third matter does not assist Plazaline. Plazaline had made efforts to comply with the LandCorp agreement by applying for development approval in a timely fashion. However, it took longer than Plazaline expected to obtain the development approval. This meant that it could not comply with the terms of the LandCorp agreement and, even on its best estimate of likely start and completion dates, it was, on the face of it, going to be liable to pay liquidated damages of over $100,000. There were no humanitarian reasons why Plazaline wanted to or had to on sell the property. It appears to have been a purely commercial decision to sell the property rather than expose itself to the risks of holding the land and developing it.
Taking into account all these matters, I am of the view that the acceptance of the termination fee was prima facie a reasonable step for Plazaline to take to obtain LandCorp's approval of the sale to Avenue.
Is the termination fee a penalty?
During the course of the trial Plazaline sought to amend its defence to include an allegation that the termination fee was a penalty and therefore void. Avenue opposed the application and I reserved my decision on it. I have decided to allow the amendment. Whilst the amendment raises different legal issues to those raised by the existing pleadings, it does not raise factual issues that can not be resolved on the evidence presented at trial. Also, as I gave Avenue time to make further submissions relevant to the issue of penalties, it is not prejudiced by the application to amend the defence.
In Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at [10], the High Court said:
"The law of penalties, in its standard application, is attracted where a contract stipulates that on breach the contract‑breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre‑estimate of the damage likely to be caused by the breach."
The High Court approved of the following statement of Lord Dunedin in his speech in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 86 – 87:
"2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage.
3.The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach.
4.To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:
(a)It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach …
(b)It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid …
(c)There is a presumption (but no more) that it is penalty when 'a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage." (Authorities omitted)
The facts of this case are not comparable with the cases referred to by either the High Court or Lord Dunedin. In this case, the termination fee was not stipulated in the LandCorp agreement, it was not imposed for breach of the LandCorp agreement and it was not a sum agreed to between the parties to the LandCorp agreement. There are some similarities between the termination fee and a sum stipulated for breach of a contract. The termination fee was a fee imposed by LandCorp on Plazaline for seeking to terminate the LandCorp agreement at a point of time when Plazaline was in breach of it. The power to impose the termination fee was stipulated in the LandCorp agreement. Despite these similarities, I have decided that neither the termination fee nor the clause which allowed for it to be imposed as a condition of an on sale can be regarded as a penalty. The differences between them and a penalty, as defined by the authorities, is too great.
Even if the effect of the termination fee is paramount in determining whether it is a penalty, I have decided that it is not unreasonable, especially if it is measured against the amount of liquidated damages which Plazaline agreed to pay for breach of the agreement. As Mr Brewer's analysis shows, the termination fee was less than the liquidated damages which LandCorp would have been likely to be entitled to should the LandCorp agreement have continued. Mr Kwan may have genuinely hoped that LandCorp would not have imposed the requirement to pay liquidated damages or that Plazaline would have made up some time once development commenced. Despite such hopes, it does not appear to me that the termination fee was extravagant and unconscionable and neither was it greater than the sum which LandCorp was entitled to under cl 5 of the LandCorp agreement.
Was Plazaline entitled to terminate the contract?
Thus, Plazaline was not entitled to terminate the contract because it was in default of its obligation to take all reasonable steps available to it to fulfil special condition 8 of the contract. The plaintiff says that in these circumstances it is entitled to an order for specific performance of the contract.
On the other hand, Plazaline says that even if it breached the contract there are further reasons which it raises by way of a defence to the claim for specific performance.
LandCorp's conditional approval of the on sale is no longer in force. Therefore, Plazaline is not able to transfer the property to Avenue unless LandCorp gives a fresh approval which is subject to conditions which are reasonable for the parties to fulfil. Plazaline says that two matters arise from this proposition. The first is that equity will not specifically enforce what cannot be done. The second is that, in such a case, any order for specific performance would have to be subject to the necessary approval being obtained from LandCorp. Such an order, Plazaline submits, should not be made because it would be likely to require significant supervision by the Court as it is doubtful that either party would be content to fulfil the new conditions likely to be imposed by LandCorp.
The second defence relied upon by Plazaline is that specific performance should not be ordered because Avenue was not ready and willing to perform conditions 2 – 4 imposed by LandCorp and would not be ready and willing to comply with similar conditions imposed on any fresh approval.
Lastly, Plazaline submits that specific performance should be denied on the discretionary grounds of hardship.
I will address each one of these defences in turn.
Impossibility
If the sale of the land was to now occur the parties would be required to take reasonable steps to obtain LandCorp's unconditional approval to the on sale. Mr Brewer gave evidence that the conditional approval has lapsed by virtue of the non‑acceptance of the four conditions of approval. He said that LandCorp may approve the on sale of the land subject to an updated development programme being acceptable to LandCorp. Naturally, he did not commit LandCorp to take any particular view of another request for approval, saying that LandCorp would need to "review the whole situation". Mr Brewer did say that in such a review, LandCorp would take into account my reasons for decision as well as the further delay in attaining the object of the agreement between LandCorp and Plazaline, the development of the land.
The plaintiff suggested that I could require LandCorp to maintain its conditional approval of April 2006. I do not believe that it would be reasonable for me to find that the conditional approval was still on foot and to thereby or otherwise compel LandCorp to approve the on sale on the same conditions that were acceptable to it in April 2006. Through no fault of its own, the on sale did not occur at that time. As Mr Brewer testified, before granting further approval LandCorp would need to review all the relevant circumstances. I accept that the current circumstances may involve an alteration in one or more of the conditions of sale. I am not prepared to hold LandCorp to the contingent approval given over 12 months ago.
Thus, if specific performance was ordered the order would have to be conditional upon LandCorp's approval of the on sale. The conditions imposed by LandCorp on its April 2006 approval, provide some guide to the types of conditions which may be imposed by LandCorp in the future but it is not possible to predict the precise terms of any new conditional approval.
It is quite possible that the fulfilment of new conditions of approval may require supervision by the Court as the conditions may not be acceptable to one or both parties.
Given these findings, is this a suitable case for an order for specific performance?
First, it is trite to say that equity will not grant specific performance of a contract where performance of it is impossible: Ferguson v Wilson (1866) LR 2 Ch App 77. However, the fact that a contract is subject to the consent of a third party does not automatically mean that a contract is impossible to perform. Where the consent of a third party is required, courts have ordered the parties to take all reasonable or necessary steps to obtain such consent and, if it is obtained, to specifically perform the contract: Butts v O'Dwyer (supra); Kennedy v Vercoe (supra).
In respect to the issue of supervision, Plazaline relies upon the High Court's decision in J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 per Dixon J (Gavan Duffy CJ agreeing) at 297 – 298 for the proposition that "specific performance is inapplicable when the continued supervision of the Court is necessary in order to ensure fulfilment of the contract". That proposition has been revised, to some extent, by the High Court in Patrick Stevedores Operation No 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1 at [78] – [81] where the majority of the Court said:
"We see in the orders no defect which sometimes is expressed as the involvement of the court in 'constant supervision' of continued conduct. Reservations of that nature have been expressed in decisions of this Court. However, questions of degree rather than absolute restrictions upon the scope of curial relief are involved. Reference was made in the Federal Court judgments and in submissions to this Court to the speech of Lord Hoffmann in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd. His Lordship affirmed the refusal by the judge at first instance of an order for specific performance of a lease for a term of thirty‑five years containing a covenant to keep premises open for retail trade during usual hours of business in the locality. His Lordship's statement that the usual practice was not to grant specific performance to carry on an activity over a period of time was made in response to a submission by the lessor to the effect that the equitable remedy was no longer to be understood as granted in the auxiliary jurisdiction where damages would be an inadequate remedy. The lessor submitted, without success, that in cases such as Argyll Stores the court 'should look at the whole panoply of available remedies and consider the appropriate one rather than the gloss of rules put on them restricting their use'.
… What is significant is the acceptance by the House of Lords that the concept of 'constant supervision by the court' by itself is no longer an effective or useful criterion for refusing a decree of specific performance. Rather, Lord Hoffmann placed stress on other propositions. First, a person who is subject to a mandatory order attended by contempt sanction (which 'must realistically be seen as criminal in nature') ought to know with precision what is required; and, second, the possibility of 'repeated applications for rulings on compliance' with orders requiring a party 'to carry on an activity, such as running a business over a more or less extended period of time' should be discouraged.
Reference to constant court applications should not be misunderstood. The courts are well accustomed to the exercise of supervisory jurisdiction upon applications by trustees, receivers, provisional liquidators and others with the responsibility for the conduct of administrations. The reservation of liberty to apply to the Federal Court in respect of certain of the orders to be made is in no way out of ordinary in the exercise of equitable jurisdiction.
Further, those orders do not, in form or in substance, require the administrators to carry on business activities in the sense with which the Argyll case was concerned. Nor do the undertakings and orders leave those bound by them not knowing what is expected of them. This is not a case, referred to by Isaacs and Rich JJ in Pakenham Upper Fruit Co Ltd v Crosby, where the Court 'could never be sure that it was in a position to enforce its order without injustice'." (Authorities omitted)
The issue is now one of a question of degree. In this case, there may well be questions relating to fulfilment of special condition 8 which would have to be considered by the Court should specific performance be ordered. I am not satisfied that those questions would be such as to require an offensive degree of supervision by the Court. For example, supervision of the fulfilment of special condition 8 would not require the court to effectively operate a business over an extended period of time or to control the fulfilment, over a period of time, of detailed contractual terms. The degree of curial supervision of the performance or fulfilment of special condition 8 which may be required does not justify the Court declining to order specific performance of the contract.
Plaintiff's readiness and wiliness to perform the contract
Before considering the relevant legal principles, it is necessary for me to make findings relating to whether Avenue was and is ready and willing to perform the contract.
I commence this part of my reasons by referring to par 14 of the statement of claim which pleads that the plaintiff has at all material times been and is now ready and willing to fulfil all its obligations under the contract and the conditions imposed by LandCorp. Plazaline denies those allegations.
The evidence proves that Avenue was not content to accept conditions 2 – 4 imposed by LandCorp on the conditional approval.
On 18 April 2006 Mr Griffiths, on behalf of Avenue, wrote to Mr Brewer and advised him of Avenue's proposed start and completion dates. The corresponding dates in the conditional approval required Avenue to agree to commence work approximately five months prior to the date suggested by Mr Griffiths and to agree to complete construction approximately three months before the date suggested by Mr Griffiths.
Mr Griffiths' response to the dates imposed by LandCorp and the lack of documents and supporting information supplied to Avenue pursuant to special condition 10 of the contract was to press Plazaline to renegotiate the contract to include, amongst other new conditions, changes in the dates in conditions 2 and 3 of LandCorp's conditional approval and an agreement by Plazaline to pay the liquidated damages it had incurred. Mr Griffiths' attempts to renegotiate the contract is inconsistent with Avenue's assertions that it regarded the contract as being on foot and that it was ready and willing to settle on it. It was only ready and willing to settle if Plazaline agreed to substantial changes to the terms of the contract which would have obviated the need for Avenue to agree to conditions 2 – 4 of the conditional approval.
Under cross‑examination, Mr Griffiths was referred to LandCorp's conditional approval of 19 April. The cross‑examination continued as follows:
"When you got site [sic] of this you realised that LandCorp weren't prepared to accede to your request for March 07 as the earliest state date. They had in fact stuck with their earlier position foreshadowed to you of October 2006?---Mm'hm. That would be correct.
When you got that letter you knew there was no way you could ever agree to that. It couldn't be done. You have told us?---It's not necessarily an issue about me agreeing. Them were the imposed terms. I had never had a choice to negotiate, discuss or other.
Well, you had. You told them previously that the earliest start date was March 2007 so when you saw this you knew there was no way in the world you could agree to conditions 2 or 3?---I think that's an opinion and I don't agree with that necessarily because they had a 24‑month time frame to get it constructed. So I would have to pick it up under the construction period rather than the preliminary documentation phase. Given I run a building company I've got the control to do that.
…
You have been told it is conditional. You were not in a position to agree that commencement date, were you?---I wasn't in a position to start it. I might have accepted it though. That was the difference.
But you weren't in a position to agree to start by that date, were you?---I hadn't had any documentation so, no, I couldn't start it physically.
If you couldn't start it you wouldn't agree it, would you?---Yes, I might have.
You might have?---Yes, because I've got 24 months to pick up the time frame. You might not like that but that is a fact."
Later, in his cross‑examination Mr Griffiths said:
"Are you genuinely suggesting to her Honour that you would have contemplated actually agreeing to that start date in those circumstances?---Correct.
If you had agreed to that you would have been up for damages at $240 per day from October till when you would be able to start I March. You would agree?---Probably likely, yes.
And you still say you would have possibly entertained agreeing to that when you have already told us you weren't happy with the purchase consideration, you were looking for a rebate, you were looking for a reduced price?---Mm'hm.
And now you're suggesting that you may have entertained that?‑‑‑Yes, correct; that's correct.
On the one hand you have told us you were unhappy you were paying so much, you were looking for a rebate, and now you're prepared to – and I've done the calculations and it would have been about $30,000 you were in for before you started?---That's correct. I also offered to negotiate that type of money as well with the defendant to reach an amicable settlement."
The "amicable settlement" to which Mr Griffiths referred was, as I understand it, to change the terms of the contract so that Avenue would not have been so adversely affected by the conditions of approval.
After Mr Griffiths was referred to some of the correspondence subsequent to LandCorp's conditional approval, he gave the following evidence:
"So it is not the case, Mr Griffiths, that you were prepared to agree those conditions of LandCorp. You were hoping that LandCorp may agree to modify them, weren't you?---I was hoping, yes.
Then if I could ask you to turn to page 44 of exhibit 2, please. There is an email or a letter sent from Mr Kwan to Kevin Brincat and it is copied to you. They say they have received a response from LandCorp and the conditions and they say 'Attached' and then they carry on:
We cannot accept the first condition they have imposed on us and we have sent a response to LandCorp.
And then:
I do not know if the rest of conditions are acceptable to Steve but for us the first condition is not acceptable.
You got this, didn't you?---I've seen this before, yes.
Yes, and you didn't go back and says [sic], 'Well, yes, the other conditions are acceptable.' You were trying to change them, weren't you?---I didn't go back and say they weren't acceptable, either.
But you were trying to change them, Mr Griffiths?---In your opinion.
We have just shown you the previous email where you said you had hoped to modify them. It's not my opinion?---I'd hoped a lot of things. I'd hoped a lot of things but without the documentation I couldn't be certain of anything.
We've already established, Mr Griffiths, that you were hoping that LandCorp wouldn't insist on condition 2 because you were trying to get them to modify that. Isn't that correct?---I was hoping for a lot of things, actually, and modification of the time frame would have been a nice one. It would have suited both me and your client.
It would have been the only one from your point of view?‑‑‑Well, possibly.
Possibly. The fact is you never agreed anywhere at any time to the conditions imposed by LandCorp in their conditional approval, did you?---If anybody had asked me I would have agreed, but I never agreed and I don't disagree.
So the answer is you never agreed. Is that correct?---Yes. If that's the answer you'd like that's the answer you are given."
I find that Mr Griffiths' answers to this line of questioning do not reflect well on his credibility. He often appeared more interested in deflecting the questions rather than giving direct answers. Also detrimental to his credibility were the answers he gave in response to a line of questions about why he told the Commissioner for State Revenue that the contract was unconditional when he knew that that it was not. I am unconvinced by Mr Griffith's evidence that Avenue was ready and willing to complete the contract according to its terms and the terms of LandCorp's conditional approval.
I find that from the time that LandCorp gave the conditional approval until the time that Avenue ceased to pressure Plazaline to renegotiate the contract, Avenue was not ready and willing to complete the contract without a renegotiation of its terms. I agree with Avenue's submissions that given Plazaline's refusal to agree with condition 1, it is not fatal to Avenue's case that it did not formally express its agreement or otherwise with the remaining conditions. That does not negate my finding that regardless of Plazaline's attitude toward condition 1, Avenue was not ready and willing to take all reasonable steps to obtain LandCorp's unconditional approval to the on sale in that Avenue was not ready and willing to comply with conditions 2 – 4 of the conditional approval. There is nothing in the evidence to persuade me that if Plazaline had agreed to condition 1, Avenue's lack of readiness and willingness to comply with the other conditions would have changed.
Thus, the issue is whether I should order specific performance of a contract which the plaintiff was not, at the relevant time nor since, ready and willing to perform and where it is not currently possible to say whether it would be ready and willing to perform in the future if LandCorp imposed different conditions on its approval of the on sale?
The relevant legal principles were discussed by the High Court in Bahr v Nicolay (No 2) (1988) 164 CLR 604. Mason CJ and Dawson J at 619 – 620 said:
"It is said that, in general, the plaintiff in an action for specific performance must establish that he has performed the contractual obligations to be performed on his part before the commencement of the action and that he is ready and willing to perform his future obligations under the contract: see Jones & Goodhart, Specific Performance (1986), p 49; Fry on Specific Performance, 6th ed (1921), p 435. This requirement is not peculiar to actions for specific performance; subject to one possible qualification, it applies generally to actions for damages for breach of contract, including contracts for the sale of goods: see, eg; Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd. The possible qualification is that it may be unnecessary for a plaintiff to prove readiness and willingness in an action for repudiation before the time for performance has arrived: cf Y P Barley Producers Ltd v E C Robertson Pty Ltd.
But the plaintiff is not required to show that he has complied strictly with all his obligations under the contract (Fullers' Theatres Ltd v Musgrove) or that he is ready and willing to comply strictly with his future obligations. As Barwick CJ pointed out in Mehmet v Benson:
The question as to whether or not the plaintiff has been and is ready and willing to perform the contract is one of substance not to be resolved in any technical or narrow sense. It is important to bear in mind what is the substantial thing for which the parties contract and what on the part of the plaintiff … are his essential obligations.'
See also the comment of Windeyer J that readiness and willingness 'relates only to essential terms'. In that case the purchaser obtained specific performance despite his failure to pay an instalment of the purchase price in time, a failure which would have entitled the vendor, had he chosen, to terminate the contract. Specific performance secured to the vendor the consideration promised to him by the purchaser, namely the purchase price, compensation being awarded for the purchaser's delay in making payment. See as well the remarks of Lord Radcliffe in Australian Hardwoods Pty Ltd v Commissioner for Railways, which may state the position too adversely to a plaintiff in so far as they may be taken to suggest that a plaintiff who is in breach of an interdependent obligation cannot obtain specific performance."
In the same case, Wilson and Toohey JJ also referred, with approval, to the same passage in the judgment of Barwick CJ in Mehmet v Benson (1965) 113 CLR 295 at 307. Brennan J at 658 – 659 quoted Windeyer J's judgment Mehmet v Benson (supra) where his Honour said:
"At the date when the suit is commenced the plaintiff must then be in a position to say that he is ready and willing to do at the proper time in the future whatever in the events that have happened the contract requires that he do: see Fullers' Theatres Ltd v Musgrove (75). And he must show too that he has performed or been ready and willing to perform the terms of the contract on his part: see Fry on Specific Performance, 6th ed (1921), p 435."
In my view, fulfilment of special condition 8 and, thus, the obligation to take all reasonable steps to fulfil special condition 8, were essential obligations under the contract in the sense that unless those terms were fulfilled the contract would fail.
There may be an argument that the time for Avenue to comply with its obligations in respect to obtaining the unconditional approval of LandCorp has not yet arrived because Plazaline's refusal to comply with condition 1 negated any obligation on behalf of Avenue to fulfil conditions 2 – 4 and the time has not yet come for the performance of a future obligation pursuant to any new conditional approval yet to be given by LandCorp. In other cases, specific performance has been ordered on condition that the other party have liberty to apply for a decree of rescission should the successful party prove to be not ready and willing to complete the contract: Mehmet v Benson (supra).
In my view there is a distinction between such cases and this case. The time for Avenue's compliance with its obligations did arise in April 2006. Although Plazaline's attitude towards condition 1 meant that the contract could not be completed at that time, I have found that Avenue was not ready and willing to complete then and has never been ready and willing to comply with the conditions of LandCorp's conditional approval given in April 2006. On this basis, it does not seem to me that the plaintiff is entitled to an order for specific performance of the contract because it hopes that the new conditions of approval of an on sale will be more favourable to it or that because of more favourable market conditions the detriment imposed by the conditions will be more palatable.
For this reason I refuse to order specific performance of the contract.
Hardship
The hardship relied upon by Plazaline relates to the termination fee which it says it had no contractual obligation with LandCorp to pay. For the reasons I have given earlier in respect to whether it was reasonable for Plazaline to pay the termination fee I do not accept that specific performance should be refused on this ground.
Result
The application by Avenue for specific performance of the contract is refused on the ground that it has failed to establish that it has at all material times been and is now ready and willing to fulfil all its obligations under the contract and, in particular, the conditions imposed by LandCorp as conditions of approval of the on sale of the land to Avenue.
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