Broughton v B & B Group Investments Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2017 0005

DAVID BROUGHTON	Applicant
v
B & B GROUP INVESTMENTS PTY LTD	Respondent

S APCI 2017 0024

B & B GROUP INVESTMENTS PTY LTD	Cross Applicant
v
DAVID BROUGHTON	Cross Respondent

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JUDGES:	KYROU, FERGUSON and McLEISH JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	20 July 2017
DATE OF JUDGMENT:	31 August 2017
MEDIUM NEUTRAL CITATION:	[2017] VSCA 227
JUDGMENT APPEALED FROM:	B & B Group Investments Pty Ltd v Broughton [2016] VCC 1873 (Judge Cohen)

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CONTRACT – Construction of contract for sale of business – Special condition entitling purchaser to terminate contract after completion of due diligence – Whether condition required causal link between information obtained during due diligence and decision to terminate.

CONTRACT – Sale of business – Termination by purchaser – Measure of damages – Whether time for assessment of damages is date of breach, date of abandonment of application for specific performance or date of trial – Absence of evidence of value of business as at each of those dates – Clark v Macourt (2013) 253 CLR 1, Ng v Filmlock Pty Ltd (2014) 88 NSWLR 146 considered; Johnson v Agnew [1980] AC 367 distinguished.

EVIDENCE – Rule in Browne v Dunn (1893) 6 R 67 – Important allegation not put to applicant at trial.

APPEAL – Whether judge’s findings, which were influenced by assessment of applicant’s credit, should be disturbed on appeal – Robinson Helicopter Co Inc v McDermott (2016) 331 ALR 550 applied.

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APPEARANCES:	Counsel	Solicitors
For the Applicant and Cross Respondent	Mr J W S Peters QC with Mr E W Moon	Madgwicks Lawyers
For the Respondent and Cross Applicant	Mr D K Carlile	RTC Legal

KYROU JA
FERGUSON JA
McLEISH JA:

Introduction and summary

This is an application for leave to appeal against an order made by a judge of the County Court in favour of the respondent, B & B Group Investments Pty Ltd, in a claim for breach of a contract for the sale of a hotel business to the applicant, David Broughton, for $930,000.[1]
[1]B & B Group Investments Pty Ltd v Broughton [2016] VCC 1873 (‘Reasons’).

The contract was executed on 12 December 2014 and the applicant paid a deposit of $93,000 on 15 December 2014. Special condition 2.1(b) set out as a condition precedent to the completion of the contract that the purchaser had not delivered a notice of termination under special condition 3.6 within three days after the completion of a due diligence of the business. Special condition 3.6 stated: ‘Having conducted the Due Diligence the Purchaser will be entitled to deliver a written notice to the Vendor recording its decision not to proceed with this Contract as contemplated in 2.1(b) above’.[2]
[2]Special conditions 2 and 3 of the contract are set out at [24] below.

The applicant conducted a due diligence of the business between 27 April 2015 and 8 May 2015. On 8 May 2015, the applicant’s solicitors gave notice pursuant to special condition 2.1(b) that the applicant would not proceed with the contract (‘Termination Letter’). The respondent disputed that the applicant had validly terminated the contract.

The judge concluded: that the applicant’s right to terminate the contract in accordance with special condition 3.6 was limited to circumstances where the due diligence had resulted in information being discovered which was adverse to the applicant proceeding; that the applicant breached the contract because his decision to terminate it was not influenced to any significant degree by such information; that the respondent had not proved it had suffered any loss arising from the applicant’s breach; and that the respondent was entitled to retain the deposit of $93,000.[3]
[3]Reasons [83], [102], [121]–[123]. See [63]–[64], [165] below.

The applicant seeks leave to appeal against the judge’s decision on the grounds: that the judge misconstrued special condition 3.6; that even if the judge’s construction is accepted, she erred in rejecting the applicant’s evidence that his decision not to proceed with the contract was based on the due diligence; and that the judge erred in finding that the respondent was entitled to retain the deposit.

The respondent filed a cross application for leave to appeal on the ground that the judge failed to determine its loss and damage.

For the reasons that follow, we have concluded that, although the judge did not misconstrue special condition 3.6, she erred in finding that the applicant’s termination of the contract did not satisfy the requirements of that provision. Accordingly, the application for leave to appeal will be granted, the appeal will be allowed and the cross application for leave to appeal will be refused.

Facts

As at December 2014, the respondent operated the City Garden Hotel at 378 Little Bourke Street, Melbourne (‘Hotel’), having acquired the business in 2011. The Hotel was a residential hotel with about 62 rooms, and the business was operated by the Australian-based director and shareholder of the respondent, Bing Han.

The respondent operated the business in accordance with two leases which it had entered into with the landlord, Berjaya Developments Pty Ltd, on 13 September 2011. There were two leases because the land upon which the Hotel operated extended over two titles. The term of each lease was five years commencing on 1 October 2011 and the respondent had an option to renew each lease for a further term of five years. The latest date for exercising the option was 31 March 2016. The leases provided for annual increases of rent of 4 per cent. In the 2013 financial year, the rental payments totalled $1,034,728. At the commencement of the leases, the respondent paid a security deposit of nine months’ rent.

In 2013, due to a commercial opportunity in Laos to which Mr Han needed to devote his time and financial resources, he decided to sell the Hotel business. By mid-2014, the respondent had appointed BBG Business Brokers Group Pty Ltd (‘BBG’) to sell the business. The business was advertised for sale with a turnover of $2.1 million and a lease of 15 years.

The applicant had been interested for some time in acquiring a leasehold hotel business in the Melbourne CBD. On one or two occasions in the six to 12 months before the events the subject of this proceeding, he had made telephone enquiries about an advertised hotel business for sale, which was probably the Hotel. On one of those occasions, he spoke with Allan Qian of BBG, who told him that the business was under contract with another purchaser. However, the business continued to be advertised for sale.

In October 2014, Mr Qian told the applicant that the contract in place was unlikely to proceed.

In late October or early November 2014, the applicant inspected the Hotel business with Mr Qian and Mr Han. The applicant asked for confirmation that the turnover of the business was $2.1 million and the lease term was 15 years. The applicant was given the impression that the advertised turnover details were generally correct. He was told that the balance of the current lease term was two years and that there were two options of five years each.

The applicant said he was interested in purchasing the business for around $950,000 and that he wanted to proceed by way of heads of agreement to incorporate the opportunity for a due diligence. Mr Qian said that this would not be likely as there was already a contract in place with someone else and that the respondent would not want to withdraw it from the landlord’s consideration without having another contract to put to the landlord. Mr Han indicated that a price of $950,000 would be acceptable.

On 6 November 2014, the respondent sent a series of emails to the applicant attaching the respondent’s 2013 tax return and financial statements and the two leases. The financial statements disclosed gross income of $1,772,627 (inclusive of $1,769,030 for room rental receipts) and an operating loss of $29,436. The leases only contained one option to renew for five years. The applicant sent an email to Mr Qian questioning the single option to renew. The applicant then spoke with Mr Qian on the telephone and Mr Qian explained that the landlord had promised an additional option for a further term of five years but it had been agreed that this should be left without documentary confirmation until the next renewal.[4] The applicant also queried the income figure, which was lower than the $2.1 million advertised. The judge found that Mr Qian told the applicant that the business’s turnover had increased since June 2013 and that the 2014 financial statements would show a turnover of between $2 million and $2.1 million.[5]
[4]It appears that this statement was based on the ‘without prejudice’ letter discussed at [19] below.
[5]Reasons [33]. The applicant contends that this finding is erroneous and that the judge should have found that Mr Qian said that the 2014 financial statements would show a turnover of $2.1 million. This issue is not material to the application for leave to appeal.

On 7 November 2014, the applicant sent emails to Mr Qian and the landlord’s solicitor, Lim Whalen & Co. In his email to Mr Qian, the applicant said that he was interested in carrying out extensive renovations of the Hotel on ‘all fronts’, namely, carpeting, internal painting, double glazing of windows in the apartments, all new furniture packs for the entire complex and re-branding of the property with the aim of achieving a four star rating. The anticipated cost of those renovations was ‘up to $1 million’. The applicant said that to make this level of investment, he required the following:

(a) a minimum tenure of 20 years, but ideally 25 to 30 years, in five year blocks;
(b)CPI increases to be capped at a maximum of 4 per cent per year with a market review at the start of each new term; and
(c)a 3 month bond backed by a bank guarantee instead of the current security deposit of nine months’ rent.

On 18 November 2014, BBG sent an email to the applicant attaching a draft sale of business contract, which did not include any special conditions.

On 20 November 2014, the applicant’s solicitors, Madgwicks, sent an email to BBG attaching proposed special conditions. They included special condition 3.6, which was then numbered 4.6.

On 5 December 2014, the respondent’s solicitors, RTC Legal, sent an email to Madgwicks, attaching the leases and a ‘without prejudice’ letter dated 11 December 2012 from Lim Whalen & Co to the respondent’s previous solicitor (‘Landlord’s Without Prejudice Letter’). That letter stated that the landlord ‘will consider granting [a] further term of 5 years’ on a number of conditions set out in the letter. RTC Legal stated that the respondent would not agree to any conditions that would vary the duration of the leases or reduce the security deposit payable under the leases.

On either 6 or 7 December 2014, the applicant met with Mr Han, Mr Han’s daughter and Mr Qian. During this meeting, the applicant said that he wanted to conduct a due diligence, and the price was negotiated down from $950,000 to $930,000.

On 8 December 2014, Madgwicks sent an email to RTC Legal attaching revised special conditions to be included in the contract. Special condition 4.6 had been re-numbered 3.6. On 9 December 2014, RTC Legal sent an email to Madgwicks attaching a contract of sale which incorporated the special conditions proposed by Madgwicks.

On 8 December 2014, the applicant received an email from the respondent’s accountant stating that the 2014 financial statements were scheduled to be completed by 12 December 2014.

On 11 December 2014, Madgwicks sent an email to RTC Legal stating that the applicant’s offer to purchase the business was not capable of acceptance unless and until the respondent could produce evidence from the landlord that the additional option of five years had been granted. This issue, and the applicant’s instructions that the due diligence period must not commence before the extra option was confirmed, were accommodated by the insertion of another condition precedent, namely, special condition 2.1(a).

The parties signed the contract on 12 December 2014 notwithstanding that the applicant had not received the 2014 financial statements. The applicant paid the deposit of $93,000 into BBG’s trust account on 15 December 2014. The relevant special conditions were in the following terms:

2. Conditions Precedent
2.1 Conditions precedent to Completion
Completion is conditional on the conditions set out … below (Conditions) being fulfilled, or waived … , on or before the Completion Date or any other date agreed by the Vendor and the Purchaser in writing.
(a)The Vendor providing proof to the satisfaction of the Purchaser that the Landlord of the Premises has agreed to provide the Vendor (as tenant) with an additional option (over and above that currently enjoyed) to extend the lease for a further term of 5 years. … Party entitled to benefit [of this condition:] Purchaser.
(b)That the Purchaser will not have delivered a written notice to the Vendor stating that it thereby elects to resile from this agreement in terms of 3.6 below on or before 17:00 on the third day following the expiry of the Due Diligence Period set out in Special Condition 3. … Party entitled to benefit [of this condition:] Purchaser.

2.2 Duties in relation to the Conditions
…

(b) Each party must:
…
(iii)within 2 Business Days of a party becoming aware that the Conditions have been fulfilled, notify the other parties in writing of that fact.

…

…
3 Due Diligence
3.1From the date of satisfaction of [Special Condition 2.1(a)] and continuously thereafter for 14 days (Due Diligence Period) the Vendor will afford the Purchaser … unrestricted access to all of the books, records, documents, assets, premises and personnel of the Vendor and the Business (Business Records) to conduct a thorough due diligence investigation into the past and current affairs and prospects of the Vendor and the Business (Due Diligence).
3.2In the conduct of the Due Diligence, the Purchaser and its nominated advisors will be entitled, subject to 3.3 below, to have access to and take copies of and extracts from all of the books, records and documents referred to in 3.1 above all of which will be returned to the Vendor if the Conditions are not fulfilled or this agreement is terminated for any other reason.
3.3The Purchaser will maintain the utmost confidentiality with regard to all information and documentation obtained by it in the conduct of the Due Diligence and will not use any such information or documentation save and except for the purpose of making its decision whether or not to deliver the notice contemplated in 3.6 below (read with 2.1(b) above) and otherwise for implementing and enforcing this agreement.
3.4If requested by the Vendor, the Purchaser undertakes to procure that its nominated advisors will, before receiving any such information or access to the books, records and documents aforesaid, execute a written undertaking to abide the confidentiality of and not to exploit such information and documentation save in compliance with 3.3 above.
3.5Without limiting anything aforegoing the Due Diligence will include verification of the Business Records and all warranties and indemnities given by the Vendors in terms of this Contract.
3.6Having conducted the Due Diligence the Purchaser will be entitled to deliver a written notice to the Vendor recording its decision not to proceed with this Contract as contemplated in 2.1(b) above.

Schedule 6 to the contract contained a number of vendor warranties, including that:

(a)any financial statements provided by the vendor to the purchaser concerning the business disclose a true and fair view of the financial position of the business;
(b)the vendor has paid all taxes relating to the business;
(c)the business is conducted in accordance with all applicable legislation; and
(d)all salary and other entitlements due to any employee have been paid or fully provided for in the accounts unless stated otherwise.

Under general condition 2.2 of the contract, the vendor warranted and represented that each of the warranties in schedule 6 ‘is true, complete and accurate’ both at the date of the contract and the date of settlement.

On 23 April 2015, the respondent provided proof that the landlord had agreed to provide an additional five year option. On 27 April 2015, Madgwicks confirmed that special condition 2.1(a) had been satisfied and that due diligence would commence that day.

On 1 May 2015, RTC Legal sent an email to Madgwicks attaching various documents, including the 2014 financial statements and tax return. The 2014 financial statements showed gross income of $1,980,976 (including room rental receipts of $1,972,320) and an operating profit of $19,187.

On 4 May 2015, Tony Rossiter, a Brisbane-based accountant retained by the applicant, attended at the Hotel to conduct the due diligence. Mr Rossiter was taken on a tour of the premises, interviewed Mr Han and received a printout of a document entitled ‘Manager’s Yearly Report’ for the 2013, 2014 and 2015 financial years. The printout showed higher sales in the 2013 and 2014 financial years than disclosed in the tax returns and financial statements for those financial years. Mr Han showed Mr Rossiter a cashbook which recorded, in pencil, higher receipts than shown in the 2014 tax return and financial statements. Mr Han refused Mr Rossiter’s request to photocopy the cashbook but permitted him to take a note of the numbers recorded in the cashbook.

On 5 May 2015, Mr Rossiter spoke to the applicant by telephone while Mr Rossiter was in a taxi on his way to Melbourne Airport and advised the applicant of matters of concern that emerged in the course of the due diligence. The evidence about this conversation is discussed at [45], [48] and [52] below.

On 8 May 2015, Madgwicks sent to RTC Legal the Termination Letter, which relevantly stated:

Notice of Intention not to Proceed
We write to advise that following our client’s conduct of due diligence enquiries; our client has advised us that they no longer wish to proceed with the transaction in its current form.
Our client’s due diligence enquiries have revealed that were they to proceed with the transaction on the terms set out in the Contract, the purchase of the business in its current form is not commercial and will not provide them with an acceptable return on their investment. It is our client’s view that the Business will require the injection of significant capital, including, without limitation, a full refurbishment of the apartments and common areas. Given what the due diligence investigation has revealed regarding the profitability of the Business and the onerous terms (particularly with regard to the bond and fixed rates of rental increase) and lack of tenure in respect of the leases of the Premises, the opportunity to recover their investment and derive an acceptable return is limited and too risky to be acceptable.
Contract Variation
Notwithstanding the above, our client is prepared to proceed with the transaction on the basis that the Sale of Business Contract be varied to include the following conditions precedent to Completion:
1.The Landlord and the Purchaser having entered either … new Leases or Variation to the current leases of the Premises, by June 30 2015, to include the following terms:
a.the security bond requirement be removed and be replaced with a payment of three (3) months’ rent in advance to reflect industry standards;
b.the granting of a further three five year options (over and above that currently enjoyed) to extend the leases to a possible total of 25 years;

c.whilst preserving the current fixed annual rental increase of 4% during each term, the insertion of an option for a rent review to market at the tenant’s discretion at the commencement of each new term;
d.the tenant having the right to assign or transfer the lease after 30 days of notifying the Landlord unless the Landlord objects to the proposed new tenant on a reasonable basis; and
e.the Landlord agreeing to the Purchaser conducting at its own cost such capital works to the Premises as are necessary to ensure that the Premises are granted a four (4) star rating or equivalent within six months of Completion.

2.If by 30 June 2015 the Purchaser and Landlord have not been able to reach agreement on the above terms, the Contract will be treated as Terminated and the Deposit will be returned to the Purchaser within 3 Business Days.

Given the significant capital expenditure required to bring the Premises up to the necessary standard (our client is of the view that it will need to spend in excess of $1 million), our client believes that their requests as set out above, in particular for additional tenure and removal of the security bond, are reasonable.
…
Please advise your client of our client’s request and inform us by 4.00pm Wednesday 13 May 2015 if your client will agree to our client’s request.
Our instructions are that if we have not received a confirmation from you that your client will agree to the variation to the Contract by that time, this correspondence is to be treated as notice of our client’s intention not to proceed with the transaction under Special Condition 3.6. For clarity, in those circumstances the Contract will come to an end.
If the Contract comes to an end in that way we expect that the Deposit would be returned to our client promptly and without necessity of demand.

By letter dated 14 May 2015, RTC Legal disputed the applicant’s right to terminate the contract.

On 18 May 2015, the applicant received the first draft of Mr Rossiter’s due diligence report which was dated 19 May 2015. The covering email asked whether the applicant had any queries or was happy for the report to be finalised. There then followed exchanges between the applicant and Mr Rossiter in which the applicant requested that a number of changes be made to the draft report to portray the Hotel business and the respondent in a less favourable light. The last version of the report, which was dated 22 May 2015, incorporated the changes requested by the applicant. The significant changes were as follows:

(a)The 19 May version of the report stated that ‘nothing has come to our attention that causes us to believe that the Profit and Loss Statement for the 12 months ended 30 June 2014 is materially misstated except for the matters raised below’. The same paragraph in the final version of the report stated that several matters had been identified which caused Mr Rossiter to believe that the profit and loss statement for the 12 months to 30 June 2014 was misstated. The areas of concern included: that there appeared to be significant undeclared cash sales which were reported in the booking system but omitted from the financial statements; that the cleaning contractor’s rates and reception wages appeared to be unsustainably low; and that generally the quality of the record keeping was considered poor.
(b)The 19 May version of the report showed projected gross cash inflow of $2,216,000 and a projected net profit of $157,725 for the 2016 financial year. The cashflow was said to be achievable. The final version of the report had reduced the projected net profit to $17,501.
(c)The final version of the report had additional paragraphs, including the following:
We note there is a significant discrepancy between the gross income reported in the Vendors Room Master booking system gross revenue and that reported in the Accountant prepared Financial Statements. The Vendor was unable to provide a reliable reason for the discrepancy however the Vendor did provide a journal which allegedly recorded cash sales made by the business which were not entered into the MYOB bookkeeping system nor shown in the Accountants Financial Statements.

In June 2015, the respondent appointed two different agents on a general authority to try to sell the business, at an asking price of $850,000. No offers were received. On 26 February 2016, the respondent granted one of the agents an exclusive sale authority with an asking price of $500,000.

In the meantime, on 4 November 2015, the respondent commenced this proceeding. The pleadings in the proceeding and the relief sought by the respondent are discussed at [41]–[44] below.

On 22 March 2016, being only nine days before the time to exercise the option to renew the leases for a further term was due to expire, the respondent entered into a contract to sell the Hotel business to Ausuni Investment Management Pty Ltd (‘Ausuni’) for $420,000. The contract did not contain a special condition that the landlord agree to an additional option to renew for five years. However, Ausuni was provided with a copy of the Landlord’s Without Prejudice Letter.

Ausuni failed to provide information required to obtain the landlord’s approval to a transfer of the leases before 31 March 2016. As the respondent did not wish to bind itself to a further lease of five years at a rental of over $1 million per year and Mr Han wished to move his capital to Laos, the respondent did not exercise its option to renew the leases for a further term of five years.

On 31 March 2016, RTC Legal wrote to Lim Whalen & Co requesting a three month extension in which to renew the leases. Later that day, Lim Whalen & Co advised that the landlord had rejected the request.

On 24 May 2016, RTC Legal sent an email to Lim Whalen & Co advising of the sale of the Hotel to Ausuni subject to the landlord granting a new lease of five years with a further term of five years on the same terms and conditions as the existing leases. By letter dated 30 May 2016, Lim Whalen & Co advised that, as the respondent had not exercised its options to renew the leases, the landlord had made other arrangements for the premises. Accordingly, the contract with Ausuni did not proceed.

The respondent’s leases of the premises expired by the effluxion of time on 30 September 2016 and the Hotel business ceased operation. The landlord paid the respondent $50,000 for chattels that remained in the Hotel after the respondent vacated the premises.[6]
[6]This payment was not in evidence at trial because it was made after the trial had concluded. In the light of our decision that the applicant validly terminated the contract, the payment is not presently relevant.

Procedural history

As noted at [35] above, the respondent commenced this proceeding on 4 November 2015. In its amended statement of claim dated 22 January 2016, the respondent alleged that the applicant had repudiated the contract, that the repudiation was not accepted by the respondent, and that the applicant was bound to complete the contract and failed to do so. The respondent sought orders for specific performance of the contract, or in the alternative, retention of the deposit of $93,000 and damages, being the difference between the contract price of $930,000 and any resale.

The particulars to para 13 of the amended statement of claim stated the following about special conditions 3.1–3.6 of the contract:

The primary purpose of the Due Diligence is to determine whether the representations and warranties are valid. As such, special condition 3.6 is constrained by the matters set out in Special Condition 3.1 to 3.5.

On 20 July 2016, the respondent amended its statement of claim. It abandoned its claim for specific performance of the contract and sought damages instead. It pleaded that it had been unable to sell the Hotel business and had not renewed the leases.

By his amended defence dated 20 July 2016, the applicant denied that he had repudiated the contract and claimed that he had validly terminated it by serving a notice under special condition 6.3. By counterclaim, the applicant sought return of the deposit.

At the trial, which commenced on 23 August 2016, the applicant gave the following evidence-in-chief about his telephone conversation with Mr Rossiter on 5 May 2015:

[Mr Rossiter] raised some issues that came out of his on site inspection/due diligence. … He said the financial statements couldn’t be relied upon, there was misallocation of … [i]ncome and expenses. … He also stated that there was now three — at least three sets of accounts. He stated that the vendor had showed him a cash journal that reportedly listed undeclared cash sales. …
He stated that the hotel runs 24 hours, is open 24 hours, reception, and that the wages for front office, which is reception, were not enough to run the hotel for one person 24 hours a day, so he felt they were understated. He made reference to the housekeeping hourly wages that were being paid, he stated that they were $16 an hour …
The housekeeping costs were $16 per hour and the award was $22.52 at the time. He said the property was — seemed to be run down, and that essentially the financial statements could no longer be relied upon. There was also some business activity statements that weren’t — I don’t recall if he said they weren’t on hand or they hadn’t been lodged, but there was a reference to some BAS statements.
… [H]e also said that it appeared as though no cash had ever been banked; ‘cash’ meaning cash, not EFTPOS or cheques. And I think that’s all. …
The conclusion was that none of the financial information could be relied upon.[7]

[7]Transcript of Proceedings, B & B Group Investments Pty Ltd v Broughton (County Court of Victoria, CI–15–05203, Judge Cohen, 23 August 2016 – 9 September 2016) (‘Trial transcript’) 334–7.

The applicant then gave the following evidence-in-chief about his reasons for seeking to terminate the contract:

After [Mr Rossiter] told me his findings or concerns, whichever way you want to put it, I’d say findings, this information mostly was, if not all of it, was the first time I’d heard of it. I’d never heard that the financial statements wouldn’t be $2.1m for the current year; I hadn’t heard that there was … a cash journal; I hadn’t heard that — I didn’t know the wages were underpaid, so everything that I based, or everything I’d been told, as in the figures will be $2.1m and so on and so forth, now had been shot out of the water.
So I asked [Mr Rossiter] during that conversation … are you saying that none of these financials can be relied upon, because that — I’d been on the project for a long time and now I’m hearing that I can’t rely upon any of the financial documents, which is going to make it very difficult to trust anything.
… He said, ‘Yes, from my inspection this morning, from what I’ve gone through, I’ve found’ — well, he didn't find that — the 2014 figures were provided for him, but they did not equal the RoomMaster reports that he had a look at and they did not equal the cashbook.
…
Okay, so obviously we were in the due diligence period. I put together and reviewed all of the information, and I obviously went through the verbal things as well in my head from the start to current time; I went from when I’d seen the ad, what I’d been told at the meetings, what I’d been told along the way, also the emails. 1 May we received a large sum of information with regards to [due diligence] with [Mr Rossiter] picking up the rest on the Monday, so I reviewed all the information at hand and part of that information was [Mr Rossiter’s] findings, his to me, I went through all that. Then, having reviewed it myself, I then discussed the potential purchase, or the due diligence, with some close advisors and potential business partner, and once again we discussed — I put to them all the information from start to finish, some of the things that aren’t on paper and the verbal things, what had I been told at this point and that point, and I then came to a conclusion.
… The conclusion was that I couldn’t trust the deal any more, the financials could no longer be relied upon, amongst another — other issues, but the conclusion was that I could not trust the deal any further.
… I had come to the conclusion when terminating [the contract] that … other than the lease, all the financial information I had been provided could no longer be taken at face value.[8]

[8]Trial transcript 337–9.

In relation to the Termination Letter, the applicant said that the letter had terminated the contract and that a contract variation proposal had been included in the letter in order to see whether there was ‘a way to keep this deal alive’.[9]
[9]Trial transcript 339.

During cross-examination, the applicant gave further evidence in relation to his conversation with Mr Rossiter:

Mr Rossiter, on 4 or 5 May, said that the 2013 financials were — there was nothing materially misstated there?---I don’t believe he said that to me, but if you are asking me, he said he did, I guess he did, but I don’t recall that he said that.
But he also mentioned that he thought that some of the expenditure items may have been misallocated or---Misstated, yep. ... [T]he main biggest red flag there was the housekeeping costs.
But he didn’t mention to you any real concerns in relation to his views on turnover, did he?---Yes, he mentioned there was now multiple sets of accounts.
He didn’t mention to you he had any concerns in relation to the turnover figure, did he?---Which figure?
You’ve been telling this court about $2.1m; he didn’t mention to you he had any concerns in relation to that, did he?---Yes, he told me the figures could not be relied upon.
So he told you that the figures that he had in relation to turnover couldn’t be relied upon; is that what he told you on 4 May?---I believe so, because there was multiple sets of accounts.
In relation to expenses, your evidence is that there was a discussion about how much the cleaning costs - - -?---Correct.
Was that the discussion you had on 4 May in relation to cleaning costs?---I believe so.
Are you sure that’s not something you just thought of later and you’ve just added it back into the 4 May conversation because it suits your version of events?---I don’t believe so. Cleaning costs in accommodation is a huge part of your expenditure.[10]

[10]Trial transcript 421–2.

The applicant was further cross-examined about the concerns he held between 4 and 8 May 2015, as follows:

So the concern is, between 4–8 May, if you’re going to invest $1m, then you want a 25-year lease; you agree that was a concern for everybody?---It was a concern because of what we’d found during the [due diligence].
I put to you, it was a concern even before any due diligence was undertaken?
---No, we were happy to move forward when we … executed the contract.[11]

[11]Trial transcript 425.

During cross-examination, counsel for the respondent put to the applicant a series of questions in relation to his knowledge about the Hotel business before the due diligence was conducted. They included the following:

Before you signed the contract, you already knew the 2013 and 2012 results?
---Correct.
…
You knew [that the business would require an injection of significant capital] before you even proposed the first contract back in November 2014, didn’t you?---We knew that we were requiring an injection of capital, including without limitation a full refurbishment; yep, so that’s correct.
There’s nothing new there. Due diligence didn’t reveal anything about the injection of capital because you already knew it?---Yes.
…
The position regarding the tenure of the lease, that wasn’t news to you either, was it?---No, we knew the lease when we entered it.
…
The only thing that had changed then … is the 2014 [financial statements] didn’t show as big a profit as you would hope?--- No, that was one thing that happened, but the 2014 figures and any others, I assume, no longer — weren’t credible to me because there was multiple sets of accounts, and they didn’t know — they didn’t match their RoomMaster accounts, so once — once there’s more than one set of accounts, you lose credibility overall; it’s like, now what do I trust?
…
The position is really, you didn’t get much information on due diligence that you didn’t already know?---No, there was a lot there. I didn’t — everything [Mr Rossiter] told me, I was unaware of.[12]

[12]Trial transcript 437–40.

In relation to the revised proposal set out in the Termination Letter, the applicant said in cross-examination that, as the due diligence had shown that the financial statements could not be trusted and ‘the risk has gone up’, ‘some comfort’ was sought ‘somewhere else’, namely, in the form of better terms from the landlord.[13]
[13]Trial transcript 441.

The applicant also called Mr Rossiter. He gave the following evidence-in-chief about the conversation he had with the applicant on 5 May 2015:[14]

I raised a number of concerns with [the applicant] about the property, particularly that the state of … or the condition of the room fitout was quite poor. In my view, there was significant money to be spent on the rooms to keep them to a reasonable standard. I raised with [the applicant] that the employees appeared to be [receiving] payments below the award rate which wouldn’t be sustainable going forward and would add extra cost to the business to that which was represented by the vendor and I also mentioned to [the applicant] that there appeared to be some discrepancy between the reported income that was explained as being in cash, cash sales not reported in financial reports which, in my experience, is very difficult to verify and created some significant uncertainty generally around the quality of the records provided.[15]

[14]See [30] above.

[15]Trial transcript 490.

Mr Rossiter was not cross-examined in relation to that evidence.

On the last day of trial, after the applicant had closed his case and completed final submissions, the respondent applied to further amend its statement of claim. The judge allowed the amendment. By its further amended statement of claim dated 31 August 2016, the respondent alleged that, although the applicant delivered a termination notice within the timeframe provided in special conditions 2.1(b) and 3.6, those conditions on their proper construction only entitled him to do that if he was relying upon information discovered during the due diligence. It alleged that the applicant’s decision to deliver a termination notice was not, in fact, based on what he learned from the due diligence, so special condition 3.6 did not entitle him to give that notice. Alternatively, the respondent alleged that there was an implied term in the contract that the applicant must act in good faith in deciding whether to deliver a termination notice in reliance on special condition 3.6, and that the applicant was not acting in good faith, or acted unreasonably, arbitrarily or capriciously, when he gave that notice.

The new paragraphs of the further amended statement of claim were in the following terms:

10.1There was a term of [the] Contract, Special Condition 3.6 (‘Special Condition 3.6’), that provided as follows: …
10.2There was a further term of the Contract that a termination of the Contract by the [applicant] in reliance upon Special Condition 3.6 must be exercised in good faith (‘the obligation to act [in] good faith’).
PARTICULARS

The obligation to act in good faith is implied to give business efficacy to the Contract.

10.3Further, and in the alternative, the natural and ordinary meaning of Special Condition 3.6 is that a written notice … not to proceed with the contract exercised pursuant to that clause must only be exercised as a result of or arising out of the due diligence process set out in clauses 3.1–3.5 or alternatively in good faith or alternatively not unreasonably, arbitrarily or capriciously.

PARTICULARS

This interpretation arises from [the] terms of clauses 3.1–3.6 and … having regard to the terms of [the] contract generally and in particular that the information provided in the due diligence was to be used for the purpose of making the decision to deliver a written notice not to proceed.

…
15.1By reasons of the matters set out in paragraph 13 herein, the [applicant] was not entitled to rely upon Special Condition 3.6 in terminating the Contract (‘the no entitlement to rely upon Special Condition 3.6 Breach’).
15.2In the alternative, if the [applicant] was entitled to rely upon Special Condition 3.6, then the [applicant] breached his obligation to act in good faith when terminating the Contract on 8 May 2015 (‘the Good Faith Breach’).
PARTICULARS

By [his Termination Letter], immediately upon [his] purported termination of the Contract the [applicant] sought to renegotiate the terms of the sale without any variation to the purchase price and in the circumstances did not rely upon the matters arising from [the] due diligence process nor any purported breach of warranty.
15.3Each or either of the no entitlement to rely upon Special Condition 3.6 Breach or the Good Faith Breach constituted an unlawful repudiation of the Contract …

On the question of damages, the respondent’s position at trial was that damages should be assessed as at the date of trial. It submitted that it ought to be awarded the balance of the purchase price of $930,000 on the basis that it would have received that amount had the applicant not terminated the contract. The respondent did not adduce any valuation evidence. The applicant’s position was that, if the judge found that he had breached the contract, the applicable measure of damages would be the difference in value between the contract price and the value of the Hotel business which the respondent retained immediately after the breach. He submitted that the respondent had not proved that it had suffered any loss from the putative breach. In the alternative, he submitted that the respondent had not mitigated its loss on the basis that any loss in the value of the business was caused solely by the respondent’s decision not to renew the leases.

Judge’s decision and proposed grounds of appeal

The judge’s conclusions and the applicant’s proposed grounds of appeal have been summarised at [4]–[5] above. We will discuss each ground separately and set out the judge’s reasons in the context of the ground to which they relate.

Ground 1 and the first limb of Ground 2: Construction of special condition 3.6

Ground 1 and the first limb of Ground 2 (set out in italics) are as follows:

1On the proper construction of special condition 3.6, the applicant’s right to terminate the Contract was not limited to circumstances where the due diligence investigation resulted in new information being discovered that was materially adverse to completing the Contract.
2Even if special condition 3.6 required matters to arise from due diligence, the trial judge erred in construing special condition 3.6 such that the decision not to proceed with the Contract had to be genuinely or entirely based on the due diligence investigation and/or in refusing to accept the applicant’s evidence that his decision not to proceed was based on that investigation …

Principles relating to the construction of contracts

The principles governing the interpretation of contracts were summarised by the High Court in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd[16] as follows:

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice. …
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.[17]
[16](2015) 256 CLR 104 (‘Mount Bruce’).
[17]Mount Bruce (2015) 256 CLR 104, 116–17 [46]–[51] (citations omitted).

Judge’s decision

The judge concluded that the words ‘Having conducted the Due Diligence’ at the beginning of special condition 3.6 were capable of the two conflicting meanings for which the parties had contended. The first meaning — which the applicant had advocated — was that the words imposed ‘a purely temporal limitation on when a notice of the purchaser’s intention not to proceed may be delivered’.[18] The second meaning— which the respondent had advocated — was that the words required that ‘the giving of such [a] notice [must] arise from or be based on the due diligence investigation’.[19] The key difference between the two constructions was whether the quoted words required a causative link between the due diligence and the decision to terminate. The judge adopted the respondent’s preferred construction for the reasons discussed below.
[18]Reasons [73].
[19]Reasons [73].

The judge first considered the objective factors within the terms of the contract which she considered were relevant to determining the meaning of special condition 3.6 and concluded that it was possible to determine its meaning without recourse to circumstances outside the terms of the contract itself. The objective factors identified by the judge were as follows:

First, by its form and overall terms, this was a contract of sale and not heads of agreement, nor an option to purchase at the purchaser’s discretion. This tends to reflect an objective intention by the parties to be bound by their agreement, and not for there to be a purely discretionary right of the purchaser to notify that he did not intend to proceed, albeit within a time period determined by reference to a due diligence period.
Secondly, looking at the interplay between special conditions 2.1(b) and 3.6, if the latter were intended to give the purchaser an unqualified right to terminate the contract within a certain timeframe but not necessarily connected with the outcome or findings on due diligence, then viewed objectively there is no apparent reason to tie the timing of the exercise of the notice of intention not to proceed with the due diligence process itself. If it were merely a ‘cooling off’ period, there is no reason for the existence of clause 3.6 because special condition 2.1(b) could have achieved that result with the omission of the words ‘in terms of 3.6 below’. Further, coming as it does at the end of provisions as to due diligence, there is no reason for the entitlement to give notice of intention not to proceed to appear unless ‘having conducted the due diligence’ is to be construed as requiring a causative connection between the result of the due diligence and the entitlement to deliver written notice of intention not to proceed by the purchaser.
Thirdly, the placement of 3.6 under a heading ‘Due Diligence’ and noting in particular that 3.3 ties the use of confidential information not merely to the performance of the investigation but to the making of the decision whether to give notice under 3.6, in my view points towards the meaning contended by the [respondent].
…
Next, it is necessary to ask what a reasonable businessperson would have understood this term to mean. In my view, in the context of a contract for sale of a business, a reasonable business person would understand the very existence of terms as to due diligence to be for the purpose of allowing the purchaser access to the business records and information so as to verify commercial information and assess the past current and future profitability of the business. The only reason for there to be such a process provided would be to enable a purchaser who found that the facts or records were not as had been anticipated or represented during negotiations, or something else adverse about the business the subject of the agreement, to take what recourse might be available or chosen. In my view a reasonable businessperson on reading special condition 3.6 would not take the initial words to refer only to a time limit for electing to withdraw from the purchase, but as importing some content of the due diligence process into the exercise of the right to give notice of not proceeding.[20]

[20]Reasons [75]–[77], [79].

Despite the judge’s conclusion that the meaning of special condition 3.6 could be determined without having regard to circumstances outside the terms of the contract, in the light of the fact that she made a finding that the clause was ambiguous, she also considered some relevant circumstances external to the contract.[21] Her conclusions were as follows:

First, there is evidence that this document was intended to be a contract of sale, and not heads of agreement. [The applicant] himself gave that evidence, in that he said he asked that the purchase proceed by way of a heads of agreement dependent on conclusion of a due diligence process, but was told by the agent that only a contract would be acceptable because an earlier contract would be withdrawn before this one could be put to the landlord. That in my view supports the construction that it was not intended to be in effect only an option to purchase which could be terminated wholly at the instance of the purchaser provided it was done within a specified period.
The [applicant’s] submission that it is relevant that the clause was proposed by the purchaser’s solicitor and not challenged by the vendor’s, does not in my view assist the [applicant] on this issue of construction. That is because if clause 3.6 was understood by the vendor or its solicitors to connect the right to serve a notice to something adverse being discovered during [the] due diligence investigation, it would be consistent that there was no perceived need to change the wording proposed.
Finally, I have taken into account that the applicable principles of construction also include that a court is entitled to approach the task of giving a commercial contract a construction on the assumption that the parties intended to produce a commercial result. The [applicant’s] counsel submitted that the effect he urges in the construction of condition 2.1(b) with 3.6 is that the contract effectively was no more than an option to purchase which the [applicant] could terminate for any reason whatsoever provided it occurred during the period of due diligence or the following three days. In my view, that submission assists to crystallise why the [applicant’s] contention should not be accepted as to the proper construction of these provisions in this contract. In my view there is nothing to indicate that the parties did not intend by this contract to produce the commercial result of a sale of the business, subject to due diligence investigation not revealing anything adverse of relevance, but not merely to create an option for the [applicant] to purchase at his discretion.[22]

[21]Reasons [80].

[22]Reasons [80]–[82].

Ultimately, the judge adopted the following construction of special condition 3.6:

For these reasons I find that on its proper construction, special condition 3.6 limited the purchaser’s right to serve a notice not to proceed to circumstances where the due diligence investigation had resulted in information being discovered which was adverse to the purchaser proceeding.
…
The question for me to decide is whether any of those matters [which Mr Rossiter discovered during the due diligence], or any I am satisfied were likely to have been known to [the applicant] by 8 May, were genuinely part or all of the basis for him giving notice that he did not intend to proceed under special condition 3.6 of the contract.
…
The purpose of my examination of what was said in the [Termination Letter] is to assess whether it sheds light on whether [the applicant’s] decision was genuinely based on matters arising from the due diligence investigation.
…
[I]n my view special condition 3.6 only entitles the purchaser to deliver a notice of intention not to proceed if genuinely reliant on information that has emerged or arisen out of the due diligence.[23]

[23]Reasons [83], [88], [93], [107].

It appears that the judge construed special condition 3.6 as requiring that any reliance by the applicant on information that emerged or arose out of the due diligence had to be ‘significant’. This is because she stated that she was ‘not satisfied that anything discovered in [the due diligence] process influenced [the applicant’s] decision [to deliver a notice of termination] to any significant degree’.[24]
[24]Reasons [102].

The judge decided that the construction of special condition 3.6 which she had adopted — particularly in relation to genuine reliance — meant that it was not necessary to imply a term as to good faith in the contract.[25]
[25]Reasons [107].

Parties’ submissions on Ground 1 and the first limb of Ground 2

The applicant submitted that, in their natural and ordinary meaning, the words ‘Having conducted the Due Diligence’ at the commencement of special condition 3.6 specify the required sequence of events if the special condition is to be activated. He contended that those words mean that the purchaser can only serve the relevant notice after conducting the due diligence, and that it is undisputed that he had complied with this required sequence.

The applicant argued that the judge erred by reading into special condition 3.6 words which did not appear there, and misconceived his submissions on that point. According to the applicant, he did not submit that the right to terminate was unqualified, nor that special condition 3.6 gave effect to a cooling off period. The point of the words ‘Having conducted the due diligence’, so it was said, is to link the conduct of the due diligence to the service of any notice under special condition 2.1(b). The applicant submitted that that construction is commercially sensible as the right to serve such a notice is temporally limited to the period of three days following expiry of the due diligence period.

According to the applicant, the judge erred in assuming that special condition 3.6 conferred on the purchaser any rights that are independent of special condition 2.1(b). The applicant submitted that while both clauses must be read together, any notice not to proceed must be given under special condition 2.1(b).

The applicant also submitted that the judge erred in finding that special condition 3.6 would be otiose if given the construction contended for by him. He argued that the introductory words of special condition 3.6 carry out the important task of obliging the purchaser to carry out a due diligence before being entitled to deliver a notice under special condition 2.1(b). It followed, so it was said, that the judge also erred in finding that the introductory words had no work to do unless construed as requiring a causative connection between the due diligence and the entitlement to deliver a notice of termination.

The applicant accepted that if the words ‘in terms of 3.6 below’ were omitted from special condition 2.1(b), the purchaser’s right to terminate would be unqualified and the purchaser would not need to complete any due diligence. However, he submitted that the inclusion of those words in special condition 2.1(b) does not mean that a notice not to proceed with the contract can only be served if the purchaser discovers fresh matters in the course of the due diligence. According to the applicant, on the judge’s construction of special condition 3.6, the condition would not be satisfied if the due diligence disclosed information which confirmed, or even exacerbated, concerns that the purchaser already had.

The applicant contended that the judge erred in concluding that the fact that the contract was a contract of sale and not a heads of agreement ‘tends to reflect an objective intention by the parties to be bound by their agreement’.[26] According to the applicant, the parties’ choice of the form of their agreement was influenced by the need for the respondent to obtain the landlord’s approval for the transfer of the leases. The applicant submitted that the form of the agreement has no bearing on the meaning of the special condition concerning due diligence and cannot be used as a justification for limiting his right to terminate the contract.
[26]See [61] above.

The applicant argued that the wording of special condition 3.3 is at best neutral. He submitted that the reference in that provision to information or documentation only being used by the purchaser for the purpose of making a decision whether to deliver a termination notice reinforces that a purchaser can only terminate the contract having performed a due diligence. According to the applicant, having made provision for a due diligence, it is commercially sensible for the vendor to restrict the purposes to which the information and documents may be employed.

The applicant submitted that the judge erred in relying on the placement of special condition 3.6 under the heading ‘Due Diligence’. According to the applicant, this does not mean that a purchaser may only exercise the right under special condition 2.1(b) if matters are discovered in the course of the due diligence.

The applicant contended that the judge further erred in her assessment of the understanding of the reasonable business person, and that that assessment contradicts the judge’s finding that the opening words of special condition 3.6 are genuinely capable of two possible meanings. According to the applicant, the judge’s conclusion on that point is telling because the importing of some content of the due diligence process into the exercise of the right to give a termination notice recognises implicitly that words will have to be read into the contract. The applicant submitted that given that the contract does not specify a standard by which to assess causation between the due diligence and the decision not to proceed, the judge should have adopted the other available construction of special condition 3.6, being that the notice can only be served after the purchaser has conducted the due diligence.

According to the applicant, the judge failed to consider the relevance of the absence of any obligation on the applicant to give any reasons for not proceeding with the contract upon the construction of special condition 3.6. He submitted that if the contract could only be terminated upon reliance on a matter discovered during due diligence, one would expect that the purchaser would be required to explain the matters relied upon in delivering the notice, at least to allow the vendor to assess whether the notice not to proceed is proper.

The applicant further submitted that the judge erred in construing special condition 3.6 in such a way that the purchaser could only exercise the option not to proceed with the contract if: the matters discovered during the due diligence were ‘genuinely part … of the basis’ or ‘all of the basis’ for giving notice; the decision to give notice was ‘genuinely based’ on those matters; or the applicant was ‘genuinely reliant’ on those matters.[27] According to the applicant, the judge, in effect, added words to the contract that were not in it.
[27]See Reasons [88], [93] and [107], which are set out at [63] above.

In oral submissions the applicant conceded that while surrounding circumstances known to both parties at the time the contract was executed — such as the fact that he had received incomplete financial information from the respondent — helped explain why the parties agreed to include the due diligence provisions in the contract, they did not assist in the construction of those provisions. He submitted that the question of construction is to be determined by reference to the text, context and purpose of the provisions.

The respondent submitted that the words ‘Having conducted the Due Diligence’ in special condition 3.6 must be considered in the context of the matters set out in special conditions 3.1 to 3.5 and the limited purpose for which confidential information may be used under special condition 3.3. According to the respondent, given the purpose for which the due diligence can be conducted and the benefit to the purchaser of obtaining confidential information from the vendor, the judge correctly construed special condition 3.6 as requiring a causal link.

The respondent disputed the applicant’s submission that the words ‘Having conducted the Due Diligence’ in special condition 3.6 were only temporal on two bases. First, the temporal requirement is already set out in special condition 2.1(b). Secondly, the construction adopted by the judge gives those words meaning and purpose. According to the respondent, on the construction advocated by the applicant, the words ‘Having conducted the Due Diligence’ are rendered otiose.

Decision on Ground 1 and the first limb of Ground 2

We agree with the applicant’s submission that the proper construction of the words ‘Having conducted the Due Diligence’ in special condition 3.6 is to be determined by the text of the condition, the context of the contract as a whole and the purpose of the condition and other provisions of the contract.

Having regard to these considerations, for the reasons that follow, we have concluded that the words ‘Having conducted the Due Diligence’ in special condition 3.6 serve three purposes. The first purpose is to impose a condition precedent to the entitlement to deliver a notice of termination under special condition 2.1(b). The second purpose is to complete the temporal requirements imposed by special conditions 2.1(b) and 3.1 for the giving of such a notice. The third purpose is to impose a requirement for a causal link between the due diligence and the applicant’s decision to give such a notice.

What is immediately obvious about special condition 3.6 is that it is not a stand-alone provision. Its express references to the defined term ‘Due Diligence’ and special condition 2.1(b) have the effect that, in order to discern the meaning and effect of special condition 3.6, at the very least, it is necessary to read it in the context of special conditions 2.1(b) and 3.1. As those provisions, in turn, refer to special conditions 2.1(a) and other provisions of special condition 3, it becomes obvious that all the provisions of special conditions 2 and 3 bear upon the construction of special condition 3.6.

In the light of the above considerations, the text of special condition 3.6 on its own is of limited assistance in construing it. The only aspect of the meaning of the condition that can be confidently discerned from its text is that the words ‘Having conducted the Due Diligence’ require that the due diligence must have been conducted in order for the purchaser to be entitled to deliver a notice of termination.

The words ‘Having conducted the Due Diligence’ hint at, but do not elucidate, their role in defining the period within which a notice of termination may be delivered by the purchaser. That period can only be ascertained by reading those words in conjunction with special conditions 2.1(b) and 3.1 in the following sequence. First, the ‘Due Diligence Period’ established by special condition 3.1 is the period of 14 days commencing on the date that special condition 2.1(a) (which deals with the granting of an additional option of five years by the landlord) was satisfied. Secondly, special condition 2.1(b) specifies the deadline by which the purchaser is permitted to deliver a notice of termination, namely, on or before 5 pm on the third day following the expiry of the ‘Due Diligence Period’. Put another way, the deadline is on or before 5 pm on the seventeenth day after the date that special condition 2.1(a) is satisfied. Thirdly, special condition 3.6 establishes the time at which the right to deliver a notice of termination commences, namely, the conclusion of the due diligence.

By virtue of special condition 3.6, if the purchaser had opted not to conduct a due diligence, the purchaser could not give a notice of termination under special condition 2.1(b). This is because such a notice would not be ‘in terms of 3.6 below’, as under special condition 3.6, the entitlement to give a notice of termination could only arise once the purchaser has conducted the due diligence. On the other hand, where the purchaser has opted to conduct a due diligence, the period for the giving of a notice of termination commences as soon as the due diligence is completed within the 14 day Due Diligence Period. Thus, if the due diligence has been completed within seven days after special condition 2.1(a) is satisfied, the purchaser would have 10 days within which to give a notice of termination. If, on the other hand, the due diligence has been completed within 14 days, the purchaser would have three days within which to give such a notice.

In the present case, the due diligence commenced on 27 April 2015 and concluded on 8 May 2015. The Termination Letter was delivered on 8 May 2015. The respondent has not suggested that the applicant has not satisfied the temporal requirements in special condition 2.1(b).

We now turn to the third purpose of special condition 3.6, namely, the causal link requirement. That requirement is not expressly stated in the condition. On one reading, the words ‘Having conducted the Due Diligence’ merely supply the temporal elements that we have already discussed. On another reading, however, those words suggest that the due diligence must give rise to the delivery of a notice of termination in a causative sense. The question of which of these divergent constructions is correct cannot be resolved by reference solely to the text of special condition 3.6. The context in which the condition appears is therefore of vital importance.

When special condition 3.6 is read together with special condition 2.1(b) to which it refers, it becomes clear that special condition 3.6 defines the circumstances in which a notice of termination can be given under special condition 2.1(b). As these special conditions refer to ‘the Due Diligence’ and ‘the Due Diligence Period’, respectively, they require consideration of those defined terms.

The phrase ‘Due Diligence Period’ is defined in special condition 3.1 as follows: ‘From the date of satisfaction of [Special Condition 2.1(a)] and continuously thereafter for 14 days’. That definition does not assist in the interpretation of special condition 3.6.

The phrase ‘Due Diligence’ is defined in special condition 3.1 as ‘a thorough due diligence investigation into the past and current affairs and prospects of the Vendor and the Business’. This definition does not state exhaustively the purpose of the due diligence, as special condition 3.5 provides that ‘the Due Diligence will include verification of the Business Records and all warranties and indemnities given by the [Vendor] in terms of this Contract’. In order to understand what the due diligence involves, it is necessary to consider special condition 3 in its entirety.

Special condition 3 informs the construction of special condition 3.6 in the following manner. First, as we have already discussed, special conditions 3.1 and 3.5 indicate the purpose of the due diligence. Secondly, special conditions 3.1 and 3.2 oblige the vendor to provide to the purchaser and his or her nominated advisors information about the business (including its records) for the purposes of the due diligence. Thirdly, special conditions 3.3 and 3.4 impose confidentiality obligations on the purchaser and his or her nominated advisors in relation to the information that is provided to them.

Special condition 3.3 is very significant because it requires that the information that is provided to the purchaser and his or her nominated advisors may not be used by them ‘save and except for the purpose of making [the purchaser’s] decision whether or not to deliver the notice contemplated in 3.6 below (read with 2.1(b) above) and otherwise for implementing and enforcing [the contract]’. These words, which are incorporated by reference in special condition 3.4, are very specific. The use to which the information and records may be put is not stated in general terms as ‘for the purposes of the Due Diligence’ but specifically in relation to the making of a decision whether to deliver a notice of termination of the contract. This specificity indicates that the phrase ‘Having conducted the Due Diligence’ in special condition 3.6 requires that, at the conclusion of the due diligence, the applicant must make such a decision.

Logically, in combination, special conditions 2.1(b), 3.3, 3.4 and 3.6 mean that any decision to deliver a notice of termination must be causally related to any concerns that emerged in the course of the due diligence. Those concerns must relate to the matters set out in special conditions 3.1 and 3.5.

In the light of the above considerations, the causal link that must be satisfied under special condition 3.6 is that the due diligence must give rise to objective matters of concern about ‘the past and current affairs and prospects of the Vendor and the Business’ (special condition 3.1) or the ‘verification of the Business Records and all warranties and indemnities given by the [Vendor]’ (special condition 3.5), and the purchaser must have relied on those matters of concern in deciding to deliver a notice of termination.

It is not necessary that the objective matters of concern be new in the sense that they had not been considered prior to the due diligence. It suffices if information was gained in the course of the due diligence — or advice had been received from the expert conducting the due diligence based on information he or she gained — that enabled the purchaser to better assess the magnitude of any adverse matters regarding the past and current affairs and prospects of the vendor and the business, or the veracity of the business records, warranties and indemnities. As for reliance, special condition 3.6 does not require that the objective matters of concern must be the sole or even the dominant reason for the purchaser deciding to deliver a notice of termination. It simply requires that those matters must form part of the decision to deliver such a notice.

Our interpretation of special condition 3.6 is supported by the purpose of the contract as a whole, and the due diligence provisions in particular. The purpose of the contract was to enable the applicant to purchase the Hotel business. The purpose of special conditions 2.1(b) and 3 was to protect the applicant by enabling him to conduct a due diligence. The due diligence provided an opportunity for him to gain insight into risks concerning the respondent or the Hotel business of which he was not already aware or to gain a more informed appreciation of risks, of whose general nature he was already aware. In order for this purpose to be achieved, it is necessary for there to be a causal link between information gained in the course of the due diligence and a decision to deliver a notice of termination.

Our interpretation of special condition 3.6 is also supported by an objective consideration of the commercial sense of that interpretation in comparison to that of the interpretation advocated by the applicant. If, as the applicant contended, the words ‘Having conducted the Due Diligence’ did not require a causal link between the due diligence and termination of the contract, the applicant would be entitled to terminate the contract at the conclusion of the due diligence even if nothing adverse was discovered during the due diligence. Indeed, on the applicant’s preferred interpretation, he would have been entitled to terminate the contract even if the due diligence disclosed that the transaction was more favourable to him than he had thought prior to the due diligence.

Such an interpretation does not make any commercial sense. If the parties had intended that the applicant should have an unfettered right to terminate the contract provided that he exercised it within a particular period, the parties would have been expected to specify that right in a stand-alone clause. By way of contrast, it makes good commercial sense to link the right to terminate to information gained in the course of the due diligence, and the inclusion of the right to terminate as part of the special condition that deals with due diligence is consistent with that.

Our interpretation of special condition 3.6 does not involve reading into the provision words which do not appear there. Rather, our interpretation involves distilling the meaning of the words that appear there by reference to the text, context and purpose of that provision, as required by the principles governing construction of commercial contracts.

We reject the applicant’s submission that, if special condition 3.6 intended that there be a causal link between information gained during the due diligence and the purchaser’s decision to deliver a notice of termination, it would have required the purchaser to explain the matters he or she relied upon in delivering such a notice. It is not customary for commercial contracts to impose obligations on parties to give explanations or reasons for exercising a contractual right. In any event, in the present case, the Termination Letter explained why the applicant decided not to proceed with the contract.

It follows from the above discussion that the judge was correct to reject the applicant’s submission that special condition 3.6 imposed a mere temporal requirement, and to find that the condition required a causal link. However, as is evident from our discussion at [93]–[95] above, our construction of the condition is not coextensive with the judge’s construction, as set out at [63] above. In particular, we do not think that the adjective ‘genuine’ adds anything to the notion of ‘reliance’. The requirement in special condition 3.6 is that the applicant relied on objective matters of concern to which the due diligence gave rise. If there was actual reliance, then it was, by definition, genuine; if any purported reliance was not genuine then it did not constitute reliance for the purpose of special condition 3.6. As noted below, we also differ from the judge as to the extent of the reliance required to be demonstrated.

Although we have not fully adopted the judge’s construction of special condition 3.6, any differences between that construction and our construction are insufficient to make out Ground 1.

The first limb of Ground 2 erroneously attributes to the judge a finding that the decision to terminate the contract must be ‘entirely based on the due diligence investigation’. The judge made no such finding. By using the phrase ‘were … part or all of the basis for … giving notice’,[28] the judge recognised that partial reliance is sufficient. However, in finding that the matters that were discovered during the due diligence did not influence the applicant’s decision to terminate the contract ‘to any significant degree’,[29] the judge appears to have placed a qualitative gloss on the extent of reliance which is not warranted by the wording of special condition 3.6. To the extent that she did so, the first limb of Ground 2 would be made out.
[28]See [63] above.
[29]See [64] above.

Second limb of Ground 2: Rejection of applicant’s evidence

The second limb of Ground 2 is set out in italics below:

Even if special condition 3.6 required matters to arise from due diligence, the trial judge erred in construing special condition 3.6 such that the decision not to proceed with the Contract had to be genuinely or entirely based on the due diligence investigation and/or in refusing to accept the applicant’s evidence that his decision not to proceed was based on that investigation.

Principles relating to appeals against findings of fact

In Robinson Helicopter Co Inc v McDermott,[30] the High Court summarised the circumstances in which an appellate court may substitute its own findings of fact for those of the trial judge as follows:[31]

A court of appeal conducting an appeal by way of rehearing is bound to conduct a ‘real review’[32] of the evidence given at first instance and of the judge’s reasons for judgment to determine whether the judge has erred in fact or law. If the court of appeal concludes that the judge has erred in fact, it is required to make its own findings of fact and to formulate its own reasoning based on those findings.[33] But a court of appeal should not interfere with a judge’s findings of fact unless they are demonstrated to be wrong by ‘incontrovertible facts or uncontested testimony’,[34] or they are ‘glaringly improbable’ or ‘contrary to compelling inferences’.[35]

[30](2016) 331 ALR 550 (‘Robinson Helicopter’).

[31]Robinson Helicopter (2016) 331 ALR 550, 558–9 [43].

[32]Fox v Percy (2003) 214 CLR 118, 126–7 [25].

[33]Devries v Australian National Railways Commission (1993) 177 CLR 472, 479–81; Fox v Percy (2003) 214 CLR 118, 128 [29]; Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357, 380–1 [76] (‘Miller’).

[34]Fox v Percy (2003) 214 CLR 118, 128 [28].

[35]Fox v Percy (2003) 214 CLR 118, 128 [29]. See also Miller (2010) 241 CLR 357, 380–1 [76].

In conducting the ‘real review’ required of it, this Court must bear in mind that it has not seen or heard the witnesses and must respect the advantages that this gave the trial judge. However, the Court cannot rely on this consideration as a basis for avoiding conducting the necessary review. As the majority explained in Fox v Percy:[36]

Within the constraints marked out by the nature of the appellate process, the appellate court is obliged to conduct a real review of the trial and, in cases where the trial was conducted before a judge sitting alone, of that judge’s reasons. Appellate courts are not excused from the task of ‘weighing conflicting evidence and drawing [their] own inferences and conclusions, though [they] should always bear in mind that [they have] neither seen nor heard the witnesses, and should make due allowance in this respect’. In Warren v Coombes,[37] the majority of this Court reiterated the rule that:

The value to be paid in accordance with the ruling principle is assessed at the date of breach of contract, not as a matter of discretion, but as an integral aspect of the principle, which is concerned to give the purchaser the economic value of the performance of the contract at the time that performance was promised. In this way, the measure of damages captures for the purchaser the benefit of the bargain and so compensates the purchaser for the loss of that benefit.
The application of the ruling principle to measure value lost at the date of breach of contract serves the important end of bringing finality and certainty to commercial dealings. It ensures that whatever might befall the purchaser after the date of breach, for good or ill, and whether by reason of the purchaser’s acumen, or lack of it, in dealing with other persons who were not party to the contract, and whatever movements may occur in the market, these developments have no bearing on the entitlement of the purchaser and the liability of the seller.[78]

[77](2013) 253 CLR 1.

[78]Clark (2013) 253 CLR 1, 31–2 [109]–[110] (citations omitted).

The injured party is not entitled, by the award of damages upon breach, to be placed in a superior position to that in which he or she would have been had the contract been performed.[79]
[79]Clark (2013) 253 CLR 1, 11 [27], 19 [60] citing Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 82.

In Johnson v Agnew,[80] Lord Wilberforce (Lords Salmon, Fraser, Keith and Scarman agreeing) considered these principles in the context of an innocent vendor attempting to resell property the subject of a contract of sale breached by the purchaser. He said the following:

In cases where a breach of a contract for sale has occurred, and the innocent party reasonably continues to try to have the contract completed, it would to me appear more logical and just rather than tie him to the date of the original breach, to assess damages as at the date when (otherwise than by his default) the contract is lost. Support for this approach is to be found in the cases. In Ogle v Earl Vane (1867) LR 2 QB 275; LR 3 QB 272 the date was fixed by reference to the time when the innocent party, acting reasonably, went into the market; in Hickman v Haynes (1875) LR 10 CP 598 at a reasonable time after the last request of the defendants (buyers) to withhold delivery. In Radford v De Froberville [1977] 1 WLR 1262, where the defendant had covenanted to build a wall, damages were held measurable as at the date of the hearing rather than at the date of the defendant’s breach, unless the plaintiff ought reasonably to have mitigated the breach at an earlier date.
In the present case if it is accepted, as I would accept, that the vendors acted reasonably in pursuing the remedy of specific performance, the date on which that remedy became aborted (not by the vendors’ fault) should logically be fixed as the date on which damages should be assessed.[81]

[80][1980] AC 367.

[81]Johnson v Agnew [1980] AC 367, 401.

In Hooper v Oates,[82] following termination of a contract for the sale of land by the vendors due to the purchaser’s repudiation, the vendors attempted to sell the property for 14 months without success. The property was then let for 6 months before being re-offered for sale, without success, and the vendors ultimately moved back into the property. During that time, the value of the property had fallen substantially. The vendors sought an assessment of damages as at the date they moved back into the property rather than the date of breach of the contract. Lloyd LJ (Leveson and Toulson LLJ agreeing) said the following:

It seems to me that the breach date is the right date for assessment of damages only where there is an immediately available market for the sale of the relevant asset or, in the converse case, for the purchase of an equivalent asset. This is most unlikely to be the case where the asset in question is land. If the defaulting party is the buyer, much will depend on what the seller does in response to the breach … If he resells, the buyer may be able to show that, in so doing, the seller failed to take reasonable steps to mitigate his loss, for example by taking too long, or failing to follow proper professional advice, or in some other way. Absent any feature of that kind, the eventual resale price is likely to be the figure to be set against the contract price for assessment of the damages, not because it represents the market value at the date of the breach, but because it shows what loss the seller has suffered, uncomplicated by issues of remoteness or failure to mitigate.[83]

[82][2014] Ch 287.

[83][2014] Ch 287, 299 [38].

In Ng v Filmlock Pty Ltd,[84] the New South Wales Court of Appeal considered the correct approach to measuring a vendor’s damages following breach of a contract for the sale of land by the purchaser. The Court held that the prima facie measure of those damages was the difference, if any, between the contract price and the market value of the land at the time that the bargain was lost, with consequential adjustments as might be required on the facts of the particular case.[85] Emmett JA (Gleeson JA and Tobias AJA agreeing) said the following:

The general rule is that damages for breach of a contract for sale of land are assessed as at the date of the breach of contract. That question is usually addressed by comparing the contract price with the value of the relevant land at the time of the purchaser’s breach. If the value is greater than the contract price, the vendor has suffered no damage. However, if the value is less than the contract price, it may be inferred that that discrepancy is an element of the vendor’s loss.[86]

[84](2014) 88 NSWLR 146.

[85]Ng (2014) 88 NSWLR 146, 150 [14], 151 [23], 157 [50].

[86]Ng (2014) 88 NSWLR 146, 150 [14] (citations omitted).

In that case, the vendors had not adduced any evidence of the value of the land as at the date that they brought the sale contract to an end by accepting the purchaser’s repudiation of it. The only evidence of the value of the land was the value attributable to it under the resale contract, which was entered into 13 months after the termination of the sale contract. Emmett JA questioned the approach of the English Court of Appeal in Hooper v Oates and noted that the Court had not explained what was meant by an ‘immediately available market’ or an ‘eventual resale price’. Emmett JA said the following:

While a sale of land might take longer than the sale of other types of assets, it does not follow that there should be a departure from the general rule, which focuses on the value of the land as at the date of termination of the contract. There is good reason for that approach where the damages sought by the innocent seller are loss of bargain damages. The critical date is when the bargain was lost.
…
A resale at any date is such a variable factor that it should not be the necessary basis for assessment. The English Court of Appeal relied, in [Hooper v Oates], on the value of the relevant property at the date when the vendor ‘finally decided to retain the property’, after the vendor had taken reasonable, but ultimately unsuccessful, steps to find a new buyer. That is an unsatisfactory formulation of the date for determining the measure of the loss of a vendor. An unacceptable degree of uncertainty would be created by the adoption of a date that is, in reality, dependent on an arbitrary decision by the vendor, notwithstanding that its attempts to re-market the property may have been reasonable. However, it is not necessary to express a final view as to whether there may be circumstances in which it is appropriate to depart from the general rule.[87]

[87]Ng (2014) 88 NSWLR 146, 152 [26]–[27].

Emmett JA said that it may be possible, in appropriate circumstances, to draw an inference that the price at which the property was resold 13 months later is the value of that property at the relevant time. [88] However, in that case, Emmett JA concluded that the measure of damages could not be calculated without evidence as to the market value of the land as at the date of the purchaser’s repudiation.[89]
[88]Ng (2014) 88 NSWLR 146, 153 [30].
[89]Ng (2014) 88 NSWLR 146, 155–6 [40]–[41].

Gleeson JA agreed with Emmett JA. He added his own observations, including the following:

[T]he general rule that damage is assessed at the date of breach of contract is not inflexible. Johnson v Perez (1988) 166 CLR 351 at 367 recognises that the general rule will yield if ‘in the particular circumstances, some other date is necessary to provide adequate compensation’. See generally: 355–356, 371 and 386.
…
Accordingly, I would not exclude the possibility that, in an appropriate case, the interests of justice may require that ‘the date of breach’ rule should not apply and damages may be assessed by reference to a later date, such as the contract price on resale.
…
[W]hether a market value may be assessed in the case of land as at ‘the date of breach’ is ultimately a question of fact. Of necessity, the sale of land will generally require a period to elapse for proper marketing. Unsuccessful attempts by a vendor to resell the property are not determinative as to whether there is no market for the land. Much will depend on the usual method of sale for the land in question having regard to its location, particular characteristics, the range of likely interested purchasers, and the time usually required for proper marketing of land of that type. Expert valuation evidence is likely to have a significant role.
It needs to be emphasised that departure from the general rule is not a matter of discretion: Clark v Macourt at [109] (Keane J). A vendor claiming damages assessed at a date later than ‘the date of breach’ must demonstrate that there are particular reasons on the facts which would make it unjust to apply the prima facie or ‘usual’ measure of damages.[90]

[90]Ng (2014) 88 NSWLR 146, 157 [52], 158 [56], [58]–[59].

The onus lies upon the wronged party to establish that a departure from the general rule — that the date for assessment of damages is the date of breach — is necessary in order for them to be properly compensated.[91]
[91]Baguley v Lifestyle Homes Mackay Pty Ltd [2015] QCA 75 [53] (‘Baguley’).

In Metal Fabrications (Vic) Pty Ltd v Kelcey,[92] Murphy J considered what was required of an innocent party in mitigating its loss as a result of a breach. He said the following:

The respondents were under a duty only to act reasonably to mitigate their loss. This did not require them to chance their arm further, to risk any capital they might borrow too far or to take steps which would cause their financial ruin, if they failed …
[T]he measures which the sufferer from a breach of contract may be driven to adopt ‘ought not to be weighed in nice scales’. So long as the respondents can be seen to have acted reasonably and justifiably in the circumstances, they should not be debarred from recovering the actual loss flowing to them simply because it is asserted that, by taking some other course, the loss might well have been lower.[93]
[92][1986] VR 507 (‘Metal Fabrications’).
[93]Metal Fabrications [1986] VR 507, 513 (citations omitted).

Judge’s decision

The judge held that the principle according to which damages for breach of contract are awarded is that the damages should put the promisee in the same position, so far as money can do, as it would have been had the broken promise been performed.[94]
[94]Reasons [110]. The judge referred to Robinson v Harman (1848) 1 Ex 850, 855; 154 ER 363, 365; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272, 286 [13]; Clark (2013) 253 CLR 1, 6 [7], 11 [26], 19 [60], 30 [106].

The judge said that, where a purchaser fails to complete a purchase of an item, the measure of damages depends on whether there is a ready market for that item. The judge added that, where the item is goods, there is normally a ready market whereas, where the item is land, it is normally recognised that an alternative sale will not be instant at the time of breach, and that, where the land is resold within 12 months, the usual measure of damages is the difference between the contract price and the resale price. The judge considered that a business being sold as a going concern did not neatly fall within the categories of sale of goods or sale of land and that the situation was further complicated in this case because the business ultimately became worthless.[95]
[95]Reasons [111]–[112].

The judge identified the following evidence relevant to the value of the business:

•The [applicant] was willing to pay $930,000 to purchase the business as at December 2014.
•The [applicant] was still willing to pay $930,000 to purchase the business as at 8 May 2015, provided there were longer and more favourable lease terms.
•The business had been on the market for more than 12 months prior to the [applicant] signing the contract to purchase it.
•There is evidence of only one previous firm offer to purchase, at approximately $1 million, but that purchaser had not been approved by the landlord.
•At the time the [applicant] terminated the contract, there was less than 17 months to run under the current leases, and only 10 months until the decision of whether to exercise the option to renew for a further five years needed to be made.
•Despite two other agents being appointed to sell the business from June 2015, and the price being lowered to $850,000 at that stage, and to $500,000 in February 2016, there were no offers received until March 2016.
•In March 2016, a contract was signed with a different purchaser, Ausuni … , for a price of $420,000. That was only nine days before the final day for exercise of the option to renew the leases.
•The new purchaser failed to provide information required to obtain the landlord’s approval to a transfer of lease before 31 March 2016, and the [respondent] decided not to exercise the option to renew the lease as it did not wish to bind itself by a further lease for five years at a rental of over $1 million per year, nor even to continue to run the business at all, given Mr Han wished to move his personal input and capital resources to Laos.[96]

[96]Reasons [113].

The judge found that the principle outlined at [159] above favoured the respondent’s claim that it should receive the balance of the purchase price under the contract. However, she said that the situation was complicated by the fact that the respondent had retained the business and would not have done so had the promise been performed.[97]
[97]Reasons [114].

The judge held that if the proper measure of damages was the difference in value between the contract price and the value of the asset immediately after the breach, as submitted by the applicant, the only evidence at the latter point in time was that the applicant was still willing to pay the price of $930,000, even though dependent on his obtaining different lease terms.[98] The judge said the following in that regard:

Whether that was a realistic value of the business even when [the applicant] signed the contract is impossible for me to determine, as there is no evidence of alternative offers at that time, and although an earlier offer is described as being of at least $1 million, it did not proceed. The evidence of both Mr Han and the agent, Mr Qian, is that the landlord was difficult, and obtaining approval of a proposed transferee was anticipated to be difficult, although it was achieved albeit after four months’ consideration for the [applicant]. The time and difficulty in obtaining that approval was clearly a factor relevant to the ability to sell the business and, therefore, an influence on price.
Also relevant to the ability to sell the business was the tenure available under the leases and clearly obtaining further options for renewal from the landlord was also a slow and difficult prospect which also impacted on the ultimate marketability and price of the business.[99]

[98]Reasons [115].

[99]Reasons [116]–[117].

The judge rejected the applicant’s argument that his termination of the contract, even if wrongful, did not cause the respondent loss in the value of its business, because that was solely caused by Mr Han’s decision not to exercise the option to renew the leases.[100] The judge said the following:

In my view, that argument is too simplistic, as it ignores the fact that Mr Han’s decision to sell in the first place was already based on his wish both to leave Australia himself and to regain his security deposit, both to take up an opportunity in Laos. Therefore, those factors were not new after the [applicant’s] termination of the contract, but did impact the price at which he would be prepared to sell the business as the deadline for exercise of the option to renew the lease approached, and also the expiry of the then current lease.
On the other hand, in my view, it is also simplistic of the [respondent] to claim that it is entitled to the entire balance of the contractual purchase price. That is simplistic because the [respondent] did retain the business after [the applicant] indicated he would not complete the purchase. Further, although reasonable and understandable in the circumstances, the decision not to exercise the option to renew the lease for another five years doomed the saleability of the business from that time, especially as there was a buyer committed had the lease continued. Finally, although there is no evidence as to how profitable the business was after 8 May 2015, there was evidence that it was continuing to operate up to and at the time of the hearing, and any profits would need to be brought into account. I assume from the tone of the evidence, that it would have operated up until the expiration of the lease at the end of September, which has now passed.[101]

[100]Reasons [119].

[101]Reasons [119]–[120].

In the light of those considerations, the judge concluded as follows:

Ultimately I have decided that there is simply inadequate evidence to enable me to properly assess the [respondent’s] loss from what I have found to be the [applicant’s] breach of contract. There is no other evidence of the market value of the business than the amount willing to be paid by [the applicant]. I am not convinced by the [applicant’s] submission that the proper measure of the [respondent’s] loss would be the value of the business the day after his breach, because of the total impracticality of reselling the business that soon, the partial similarity in this regard to sales of land, and because the business was placed with agents in attempts to resell it. However, there is no evidence to enable me to assess whether there were any reasonable attempts at marketing it. Nor do I know why it took until February 2016 for the price to be lowered, and there is no evidence about what advice was being received by the [respondent] in that regard over the intervening eight months. It was clearly not readily saleable, as proven by the 12 month period before [the applicant] made his offer. Whether that was a reflection of the lower value of the business even at that stage I am unable to decide.
Ultimately, I am not satisfied that a proper measure of damages is the balance of the whole purchase price under the contract. I am also not satisfied that there is any other appropriate measure on the evidence available.
I consider that the only order I should make in the circumstances is that the [respondent] is entitled to the deposit paid under the contract by the [applicant], namely $93,000 …[102]
[102]Reasons [121]–[123].

Parties’ submissions on cross application for leave to appeal

The respondent submitted that, in the light of the facts identified by the judge in relation to the value of the business,[103] and her identification of the correct principles for the assessment of the damages,[104] she erred in determining that it was only entitled to the amount of the deposit. According to the respondent, upon finding that the applicant had breached the contract, the judge was obliged to determine the loss and damage suffered by the respondent and in the course of doing so, identify the manner in which loss and damage is to be calculated.
[103]See [161] above.
[104]See [159] above.

The respondent accepted that the general rule is that damages are assessed as at the date of breach. However, it submitted that courts have departed from the general rule where it is necessary to do so in the interests of justice.[105] The respondent contended that in accordance with Johnson v Agnew,[106] the proper date for assessment in this case was 20 July 2016, being the date on which it abandoned its claim for specific performance and the contract was lost.[107] According to the respondent, it had acted reasonably in pursuing the remedy of specific performance up to that date.
[105]The respondent relied on Johnson v Perez (1988) 166 CLR 351, 356.
[106][1980] AC 367.
[107]See [43] above.

The respondent accepted that its submission in that regard differed from the argument it put before the judge, namely, that the proper date for the assessment of damages was as at the date of trial. According to the respondent, the question of the appropriate date is a matter of law and not a matter that depended on different, or additional, evidence.

The respondent submitted that the judge erred in stating that there was no evidence as to the market value of the Hotel business. This finding was said to be contrary to the ‘obvious evidence’ that an offer to purchase must be an indication of the value of the business, and there was an offer by the applicant as at 8 May 2015 and another offer made by Ausani on 22 March 2016. The respondent submitted that each of those offers was evidence upon which the judge should have acted.

According to the respondent, the value of the business as at 20 July 2016 was substantially the same as the value of the business at trial and on 30 September 2016 when the leases ended.

The respondent submitted in the alternative that the correct date for the assessment of damages was the date on which the decision was made not to renew the leases, namely 31 March 2016, and that at that date, the business was worth $420,000 as evidenced by the Ausani contract dated 22 March 2016.

The respondent contended that the question of whether it was reasonable to renew the leases was a question of mitigation which was not relevant to the question of the date for assessment of damages. In that regard, the respondent relied on the passage from Metal Fabrications set out at [158] above.

The applicant submitted that, as the respondent’s position at trial was that the correct date for assessment of damages was the date of trial, it ought not be permitted to rely on a different argument before this Court, namely, that 20 July 2016 is the proper date for that assessment. Notwithstanding his submission, the applicant addressed the substantive question reflected in the cross application for leave to appeal.

The applicant contended that the judge was correct to find that the respondent’s decision not to exercise the options to renew the leases for a further period of five years ‘doomed the saleability of the business from that time’.[108] According to the applicant, a party in breach is not required to compensate the innocent party for the latter’s lack of business acumen and failure to preserve the relevant asset.[109] In this case, so it was said, the respondent let the leases lapse and thereby failed to preserve the value of the business. The applicant submitted that the doing of justice does not require him to compensate the respondent for its decision to terminate the business and allow Mr Han to focus on his business interests in Laos.
[108]See [164] above.
[109]The applicant relied on Clark (2013) 253 CLR 1, 32 [110]. See [149] above.

In relation to the appropriate date for the assessment of damages, the applicant relied on Clark. Although he accepted that the date for assessment may be other than the date of breach if required by the circumstances,[110] he submitted that that is not the usual practice where a purchaser defaults under a contract of sale of land and, by analogy, a contract of sale of business,[111] and that the respondent had not identified any circumstances which justified a departure from the general rule in this case. The applicant submitted that, in fact, the respondent’s subsequent conduct confirmed that damages ought to be assessed at the date of the putative breach of contract.
[110]The applicant referred to Johnson v Perez (1988) 166 CLR 351, 367.
[111]The applicant cited Baguley [2015] QCA 75 [56].

According to the applicant, the onus was on the respondent to establish its loss and damage by, for example, leading evidence from a valuer.[112] The applicant contended that in circumstances where the respondent failed to adduce any such evidence, the judge could not make any findings of fact which supported the respondent’s contention that the date of assessment of damages should be deferred from the date of the breach (whether to 31 March 2016, 20 July 2016 or the date of trial) because there was no evidence upon which to do so.
[112]The applicant referred to Clark (2013) 253 CLR 30 [109]; Baguley [2015] QCA 75 [53].

In those circumstances, so it was said, the respondent had not established that there was a difference between the contractual sum of $930,000 and the value of the business on 8 May 2015, being the date of the putative breach, or any subsequent date. According to the applicant, the respondent had not discharged its onus of proving that it suffered a loss by reason of the applicant’s election not to proceed with the contract.

Decision on cross application for leave to appeal

In accordance with the principles summarised at [148]–[158] above, the first question to be considered is whether, if damages are to be assessed as at the time of the applicant’s putative breach of the contract on 8 May 2015, the respondent adduced any evidence that it had suffered any loss as at that date. This question must be answered in the negative. The respondent did not call any valuation or other relevant evidence and therefore there was no basis upon which the judge could conclude that, on that day, the Hotel was worth less than the sale price of $930,000. As the respondent retained ownership of the Hotel on that day, with an assumed value of $930,000, the judge could not award any damages to the respondent.

The next question to be considered is whether the respondent advanced any basis upon which it would have been appropriate for the judge to assess damages as at a date that was subsequent to the date of breach. Before the judge, the respondent contended that damages should be assessed as at the date of trial. The material before this Court does not indicate the respondent’s rationale for this contention. We are unable to fathom any principled basis for it. The respondent’s failure to exercise the options to renew the leases on 31 March 2016 meant that those leases would expire less than six weeks after the date of the trial. Consequentially, the respondent would have to vacate the Hotel at that time, thus depriving the business of any value.[113]
[113]As discussed at [39] above, the landlord had made other arrangements for the premises.

Notwithstanding that the respondent’s submission that the most appropriate date for assessing damages was 20 July 2016 — when it abandoned its application for specific performance of the contract and, instead, sought damages — was raised for the first time on appeal, we will consider it. This is because the submission was based on legal principle rather than on evidentiary matters.

In our opinion, there was nothing in the circumstances of this case which warranted departure from the general rule that damages are to be assessed as at the date of breach. There was no evidence before the judge as to whether the respondent had continued to expend necessary funds to maintain the Hotel and to keep occupancy rates at sustainable levels. In view of Mr Han’s decision in 2013 to move his capital to Laos, the Hotel may well have become even more run-down than it was in May 2015 when Mr Rossiter inspected it.[114] There was also no evidence as to whether the respondent had taken reasonable steps to market the business and obtain the best price for it. In this regard, we note that one of the June 2015 sale authorities[115] specified a marketing budget of only $550. The absence of evidence on these issues made it impossible for the judge to determine whether the respondent had mitigated its loss. The absence of evidence also meant that adoption of 20 July 2016 as the date for assessing damages was inappropriate because it would have required the judge to speculate on critical issues.
[114]In cross-examination, in response to the question ‘You have business in Laos and don’t have much time to look after the business here?’, Mr Han said ‘Yes, I need to take money from here to Laos’.
[115]See [34] above.

Furthermore, even if 20 July 2016 were adopted as an appropriate date for assessing damages, there was insufficient evidence to enable the judge to determine the value of the Hotel as at that date. The respondent’s asking prices of $850,000 as at June 2015[116] and $500,000 as at 26 February 2016[117] could not be treated as evidence of value. While the offer of $420,000 that was made by Ausuni on 22 March 2016 provided some evidence of value as at that date, its reliability was questionable because Mr Han’s evidence was to the effect that he was keen to sell the Hotel business ‘as soon as possible’ in order to transfer funds to his new business in Laos. Further, the offer of $420,000 did not provide a sound basis for comparing that price with the initial sale price of $930,000 because of the matters discussed at [181] above.
[116]See [34] above.
[117]See [34] above.

In addition, the business being sold under the contract with Ausuni was not the same as the business being sold under the contract with the applicant because, unlike the latter contract, the former contract was not conditional on the landlord granting an additional five year option. This lack of identity in a key feature of the business being sold is an obstacle to departing from the date of breach as the date for assessing damages.[118] We reject the respondent’s submission that the fact that Ausuni was provided with a copy of the Landlord’s Without Prejudice Letter[119] meant that the contract with Ausuni could be treated as containing two options of five years each and, thus, as being comparable to the contract with the applicant. Not only was that letter marked ‘without prejudice’ and conditional, it was also confined to the respondent as tenant and contained no indication that it would automatically extend to any future tenant.
[118]Baguley [2015] QCA 75 [54].
[119]See [19] above.

The facts of the present case are far removed from those in Johnson v Agnew.[120] There, when the purchaser failed to complete the sale of land contract, the vendor successfully obtained an order for specific performance. The purchaser failed to comply with that order and the mortgagee of the land sold it to a third party for a price that was lower than the original contract price. The vendor then applied to the court for dissolution of the order for specific performance and, in lieu of that order, an award of damages. The House of Lords held that damages should be assessed as at the date the remedy of specific performance became aborted and the contract lost because the vendor had acted reasonably in pursuing the remedy of specific performance, which became aborted through no fault of the vendor. By contrast, in the present case, the remedy of specific performance became aborted due to the fault of the vendor, in the sense that the Hotel business ceased because the respondent decided not to renew the leases in order to enable Mr Han to devote his time and capital to his business venture in Laos.
[120][1980] AC 367.

The date on which the respondent decided not to exercise the options to renew the leases (31 March 2016) is even less appropriate than 20 July 2016 as the date for assessment of damages. This is because, for the reasons we have already discussed, that decision was made by the respondent purely based on its own commercial considerations and would have had a devastating, if not fatal, effect on the value of the Hotel business. We cannot think of any reason based on principle as to why damages should be assessed on that date rather than the date of the putative breach of the contract.

For the above reasons, if we had found that the applicant had breached the contract on 8 May 2015, we would have held that the judge did not err in concluding that the respondent was not entitled to any damages beyond retention of the deposit. It follows that the cross application for leave to appeal must be refused.

Conclusion

Having regard to our conclusion that Ground 2 is made out, the application for leave to appeal will be granted and the appeal will be allowed.

[2017] VSCA 227

31 August 2017