Cathedral Place Pty Ltd v Hyatt of Australia Ltd
[2003] VSC 385
•10 October 2003
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
No. 2060 of 2003
| CATHEDRAL PLACE PTY LTD and 90 COLLINS STREET PTY LTD | Plaintiffs |
| v | |
| HYATT OF AUSTRALIA LIMITED and | Defendant |
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JUDGE: | NETTLE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 6 and 7 October 2003 | |
DATE OF JUDGMENT: | 10 October 2003 | |
CASE MAY BE CITED AS: | Cathedral Place Pty Ltd v Hyatt of Australia Ltd and Ors | |
MEDIUM NEUTRAL CITATION: | [2003] VSC 385 | |
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Contract – assignment - consent – consent not to be unreasonably withheld – factors relevant to whether refusal to consent unreasonable - Hotel management agreement – whether hotel manager’s refusal to consent to sale of hotel, and assignment of hotel management agreement to new owner, unreasonable – Construction of contract – privity rule - whether two or more contracts between different parties capable of constituting one contract between all parties - Implied term – whether it was an implied term of hotel management agreement that there be no assignment of hotel management agreement without assignee assuming obligations under indemnification agreement – Implied obligation of good faith and fair dealing – whether owner of hotel acting in bad faith or engaging in unfair dealing by selling hotel and assigning hotel management agreement without also procuring new owner to assume obligations under indemnification agreement - Equitable set off – whether obligations due by hotel manager under hotel management agreement able to be set off in equity against third party obligations due to hotel manager under indemnification agreement - whether possible loss of rights of set-off sufficient reason to withhold consent to assignment of hotel management agreement.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs and Third Parties | Mr JE Middleton QC with Mr G P Harris | Arnold Bloch Liebler |
| For the Defendant | Mr Peter Fox | Blake Dawson Waldron |
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HIS HONOUR:
The first plaintiff, 90 Collins Street Pty Ltd, is the trustee of the 90 Collins Street Unit Trust and in that capacity it owns the land and improvements known as the Park Hyatt Hotel, Cathedral Square in East Melbourne. The second plaintiff, Cathedral Place Pty Ltd, is the agent and nominee of 90 Collins Street. The defendant, Hyatt of Australia Ltd, manages the Hotel under an agreement made 24 September 1996 between Cathedral Square, 90 Collins Street and Hyatt (which, as amended, is called “the Hotel Management Agreement”).
Article XV of the Hotel Management Agreement provides that:
“ Article XV
Successors and Assigns
Section 1. Assignment by Hyatt
…
Section 2. Assignment by Owner
Owner shall have the right to assign this agreement or its interest in the Hotel without the consent of Hyatt to any subsidiary or affiliate of Owner, provided that Owner, shall continue to be liable under this agreement to the same extent as though such assignment had not been made.
Except as hereinbefore provided, Owner shall not assign this agreement nor in any manner sell, assign, or transfer its interest in the Hotel without the prior written consent of Hyatt which consent shall not be unreasonably withheld; provided that the proposed transferee executes an agreement with Hyatt whereby the transferee agrees to be bound and to comply with the provisions of this agreement. In the event of a proposed sale, assignment or transfer of Owner’s interests in the Hotel, Owner shall notify Hyatt and Hyatt shall within 30 days signify its consent or refusal or otherwise this condition shall lapse.
In the event of a sale of Owner’s interest in the Hotel with the consent of Hyatt, and upon the purchaser of the Hotel undertaking the obligations of Owner hereunder, Owner shall thereupon [be] released and forever discharged from its obligations hereunder.”
By contract of sale dated 7 August 2003 Cathedral Place agreed to sell the Hotel to Ausco Fitzroy Pty Ltd subject, however, to the Plaintiffs within 90 days of the date of the contract obtaining the consent of Hyatt to the assignment to Ausco of the Hotel Management Agreement.
On 8 August 2003 the Plaintiffs gave notice of the contract of sale to Hyatt and requested Hyatt to agree to the sale, and at the same time submitted to Ausco a draft Deed of Novation and Consent which the purchaser is prepared to execute in order to bind itself to the provisions of the Hotel Management Agreement.
Since 8 August 2003 a volume of correspondence has passed between Hyatt and the Plaintiffs directed to concerns which Hyatt says it has about the sale. In the course of that correspondence the Plaintiffs have offered various assurances to Hyatt in an attempt to persuade Hyatt that its concerns are misplaced. But Hyatt has still not consented to the sale and the matter is becoming urgent. Unless consent is obtained within the 90 days for which the contract of sale provides, there is a risk that Ausco may withdraw.
The Plaintiffs instituted this proceeding by Writ dated 10 September 2003. By their Amended Statement of Claim they allege that Hyatt’s refusal to consent is unreasonable, and they seek a declaration to that effect and a mandatory injunction to compel Hyatt to execute the Deed of Novation and Consent. Hyatt denies that it is acting unreasonably in refusing its consent and counterclaims for, among other things, a declaration that the Owner has not made a valid request for consent under Article XV of the Management Agreement and a declaration that the Deed of Novation and Consent does not conform to Article XV, section 2 of the Hotel Management Agreement. It has also made a third party claim against the Executors of the Estate of Mr TH Lustig, deceased and against Mr Max Moar, for similar declaratory relief. I shall come a little later to the way in which they are affected.
The substance of Hyatt’s concerns is based in Section 7 of Article IV of the Hotel Management Agreement. It provides that for each of the calendar years 2002 to 2006 Hyatt shall pay to 90 Collins Street any amount by which the Owner’s Share of Profit for the year is less than a specified amount (termed the OSP Guaranteed Amount) for that year, either by deferring an appropriate amount of the management fees payable to Hyatt under the Hotel Management Agreement or alternatively by making what are termed “cash advances” to the Owner. Hyatt is to some extent protected against the burden of those obligations by an Indemnification Agreement made between Hyatt and Macrina Nominees Pty Ltd and an Indemnification Guarantee given by the ultimate beneficial owners of the Macrina Group assets (the Estate of Mr TH Lustig, deceased and Mr Max Moar) as security for the performance of Macrina’s obligations under the Indemnification Agreement. Hyatt’s concern is that if the Hotel is sold, there may not be sufficient assets retained in the Macrina Group to satisfy the obligors’ obligations under the Indemnification Agreement and Indemnification Guarantee.
Hyatt is also of the view that whereas as matters stand it is entitled in equity to set off payments due to the Owner under the Hotel Management Agreement against payments due to Hyatt under the Indemnification Agreement and Indemnification Guarantee, that would no longer be possible if the sale proceeded.
Shortly put, Hyatt’s contentions are that:
(1)It is sufficient reason to refuse its consent that the Hotel would no longer be an asset of the group of companies of which Macrina Nominees is a member and of which the Indemnification Guarantors are the ultimate beneficial owners.
(2)Alternatively, it is a sufficient reason to refuse its consent that the assignment would result in the destruction of what Hyatt conceives to be its right of equitable set off.
(3)Alternatively, the Indemnification Agreement and the Indemnification Guarantee form part of the Hotel Management Agreement, so that the benefit of the Hotel Management Agreement cannot be assigned without the assignee also assuming the burden of the Indemnification Agreement and the Indemnification Guarantee.
(4)Alternatively, it is an implied term of the Hotel Management Agreement that the benefit of the Hotel Management Agreement cannot be assigned without the assignee also assuming the burden of the Indemnification Agreement and the Indemnification Guarantee.
(5)Alternatively, the Hotel Management Agreement, the Indemnification Agreement and the Indemnification Guarantee are all so closely bound up that Hyatt is entitled to withhold its consent unless the proposed purchaser and assignee of the Hotel Management Agreement assumes the obligations of Macrina Nominees and of the Indemnification Guarantors under the Indemnification Agreement and the Indemnification Guarantee (as well, of course, as the Plaintiffs’ obligations under the Hotel Management Agreement).
(6)Further, and in any event, there are a number of respects in which the Deed of Novation and Consent does not accord to the assignment provisions of the Hotel Management Agreement. Of those the matter of principal concern is a provision of the deed that upon the new owner assuming obligations under the Hotel Management Agreement, the existing Owner will be released in respect of all obligations arising thereafter.
On the pleadings there is also an issue about whether the sale would have the effect of discharging Macrina Nominees in respect of Indemnity Amounts accruing due under the Indemnification Agreement after the date of sale, and also as to whether or not Indemnification Guarantors would remain liable for all amounts. But in the correspondence which preceded the trial, the Plaintiffs wrote that there is no intention that Macrina Nominees should be relieved of its obligations under the Indemnification Agreement, and that they intend that Macrina’s obligations to repay Indemnified Amounts should continue unaffected by the sale of the Hotel, and should apply to all Indemnified Amounts advanced to the current Owner prior to sale, and to the purchaser following sale. Further, in the course of trial the Plaintiffs and the Third Parties announced that there is no longer any intention that the Guarantors be relieved of their obligations under the Indemnification Guarantee. They intend that the Guarantors remain liable in respect of obligations incurred before sale as well as being liable under the Indemnification Guarantee for obligations arising under the Indemnification Agreement following the sale[1]. Thus these issues have ceased to be of practical relevance, although as counsel for Hyatt pointed out, they still go to the question of whether Hyatt was acting unreasonably in refusing consent at the time of institution of the proceedings.
[1]This announcement was made at the outset of the trial and thus Mr Middleton was able to represent the Plaintiffs and the Third Parties notwithstanding Young CJ’s observations in Nangus Pty Ltd v Charles Donovan Pty Ltd (in liq) [1989] VR 184 at p.185
Originally, Hyatt also contended that Indemnification Amounts which are due but not yet payable under the Indemnification Agreement would become immediately due and payable upon the execution of the Deed of Novation and Consent. But that contention was abandoned in the course of the trial. In the result, the only issues of real dispute are those which are listed above.
The Plaintiffs say that most of Hyatt’s contentions are misconceived. In the Plaintiffs’ submission it is not sufficient reason to refuse consent that the Hotel would pass out of the Macrina group, nor is there any right of equitable set-off of the kind alleged by Hyatt, nor is the Indemnification Agreement or the Indemnification Guarantee to be regarded as part of the Hotel Management Agreement, nor is there any implied term of the Hotel Management Agreement of the kind alleged by Hyatt or any other basis to require that the purchaser assume the obligations of Macrina Nominees and the Indemnification Guarantors as a condition of the sale, and that upon their proper construction the assignment provisions of the Hotel Management Agreement themselves provide that once the new owner assumes obligations under that agreement the existing Owner shall be released in respect of obligations arising thereafter.
It is of course not in issue that the Plaintiffs bear the burden of establishing that Hyatt’s refusal of consent is unreasonable[2], but in the way in which the matter has been argued it is convenient to approach the question of reasonableness by reference to Hyatt’s contentions.
[2]Pimms Ltd v Tallow Chandlers Company [1964] 2 QB 547 at p.564; International Drilling Fields Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513 at p.520; Tamsco Ltd v Franklins Ltd [2001] NSWSC 1205 at [49]
Agreed facts:
The parties are agreed upon the following facts:
Entities
(1)The First Plaintiff (“Cathedral Place”) is and was at all material times a corporation duly incorporated in accordance with Australian law.
(2)The Second Plaintiff (“90 Collins Street”) is and was at all material times a corporation duly incorporated in accordance with Australian law.
(3) The Defendant (“Hyatt”):
(a) is a company organised and existing under the laws of Hong Kong;
(b) is registered in Australia as a foreign company;
(c) The first third party (‘Macrina’) is a company incorporated by law.
(4)All claims against or affecting Mr T Lustig are now to be made against the Executors of the Estate of the Late Theodore Henry Lustig c/- Arnold Bloch Leibler, 333 Collins Street, Melbourne.
(5)Cathedral Place is the agent and nominee of 90 Collins Street which, as trustee of the 90 Collins Street Unit Trust (collectively the ”Owner”) is the owner of the land (including the improvements) known as the Park Hyatt Hotel being licensed hotel premises located at 14-20 Parliament Place, 33-61 Cathedral Place and 18-32 St Andrews Place East Melbourne in the State of Victoria (“the Hotel”).
Management Agreement
(6)By an agreement in writing dated 24 September 1996 between Owner and Hyatt, Hyatt agreed amongst other matters to manage and operate the Park Hyatt Hotel on the terms and conditions therein contained (“the Management Agreement”).
Negotiations July 2001 and Amendment to Management Agreement
(7)In or about June 2001, Mr M Moar commenced negotiations with Hyatt in order to vary the terms of the Management Agreement. Mr M Moar was dissatisfied with the performance of the Hotel (which Hyatt contested), and requested an additional income guarantee from Hyatt.
On about 1 October, and as a result of those negotiations:
· the Hyatt and the Owner entered into a written agreement to vary the terms of the Management Agreement (the “Management Amendment Agreement”); and
· Macrina, a company in the Lustig & Moar Group, and a related entity of the Owner, entered into a written indemnity agreement (the “Indemnification Agreement”);
· Lustig and Moar executed a written guarantee pursuant to the terms of the Indemnification Agreement (the “Indemnification Agreement Guarantee”).
Interest of Lustig & Moar
(8) At all material times, the ”ultimate beneficial owners” of:
· the Hotel;
· the rights of the Owner under the Management Agreement (including those as amended);
· to the property and assets of, or held by Macrina;
· any payments by the Hyatt to the Owner under the Management Agreement (including those as amended) by way of “OSP Shortfall Amount” (the “OSP Payments”),
were Mr T Lustig and Mr M Moar.
(9)Mr T Lustig and Mr M Moar bore the ultimate burden to make any reimbursement to the Hyatt of the OSP Payments.
(10)Mr M Moar requested that the Indemnification Agreement should be entered into by a related entity in the Lustig & Moar Group. In entering into Amendment No. 1 to the Management Agreement and in entering into the Indemnification Agreement with Macrina, the matters on which Hyatt relied included the matters in paragraphs 9 and 10.
Payments
(11)Hyatt has paid the sum of $2,496,817.75 to the Owner in OSP Payments and, subject to the terms of the Indemnification Agreement, Hyatt is entitled to be indemnified and reimbursed with interest on that sum.
(12)The payments which Hyatt might be obliged to make under the Management Agreement as amended (section 7A) depend on the level of profitability which the Hotel achieves. It has already paid $2,496,817.75. Hyatt is likely to pay between $2 million and $3 million in respect of calendar year 2003. In respect of later years Hyatt may have to pay nothing further or a very substantial amount more. As indemnity payments are to be made only after 2007 and then only to the extent profits exceed $10 million, the less profitable the Hotel is, the longer the time it will take for Hyatt to recoup the amounts which it has been required to pay.
Sale and consent to sale
(13)By an agreement in writing made 7 August 2003 Cathedral Place agreed to sell the Hotel on the confidential terms and conditions therein contained, including the following clauses:
"7.1 This agreement is subject in all respects to:
(b)The consent of Hyatt to the assignment of the rights interest and obligations of the Vendor under the Management Agreement to the Purchaser;
on or before the date 90 days from the date of this Agreement ("Conditions").
7.3 With respect to the Condition specified in Clause 7.1(b):
(a)The Vendor must make application to Hyatt for consent to assign the Vendor's right title and interest in the Management Agreement (the ‘Assignment’) to the Purchaser within seven (7) days after the date of this Agreement and must also request confirmation that there is no obligation on the Purchaser to make repayments of the Hyatt Payments as that term is defined in the Management Agreement.
(b)In the event that the consent of Hyatt is not obtained to the Assignment or confirmation in respect of the Hyatt Payments is not made on or before the date specified in Clause 7.1 then either of the parties may terminate this Agreement forthwith in writing.
(c)The parties must use their best endeavours to obtain the consent of Hyatt to the Assignment."
(14)On 8 August 2003 the Owner sought the Hyatt’s consent to the sale of the Hotel.
(15) The Hyatt has:
· not consented to the sale of the Hotel and the assignment of the Management Agreement; and
· has asserted that is not acting unreasonably in withholding its consent.
Other Matters
(16)The Owner may not have immoveable property equivalent to its interest in the:
(a)Hotel available to the Owner to support its past obligations under the Management Agreement once the Hotel is sold.
(b)Macrina does not presently have, and may not in the future have, immoveable property available to it to support is obligations under the Indemnification Agreement.
(c)While contending that it is under no obligation to do so, Macrina has not informed Hyatt whether and, if so, how its obligations under the Indemnification Agreement will be secured.
(d)The Guarantors under the Indemnification Agreement Guarantee have not confirmed that their obligations under the Indemnification Agreement Guarantee will continue with respect both to guaranteed payments made and any further guaranteed payments which fall due under the Management Agreement as novated despite the novation of the Management Agreement and the sale of the Hotel to an entity which is not related to Macrina.
(e)The Guarantors under the Indemnification Agreement Guarantee may not have, or may not have any, or any sufficient, immoveable property available to support their obligations under the Indemnification Agreement Guarantee.
(f)While contending that they are under no obligation to do so, the Guarantors have not informed Hyatt whether and, if so, how their obligations under the Indemnification Agreement Guarantee will be secured.
(g)Hyatt asserts it sent to Max Moar on the date there appearing a letter dated 5 September 2001, but Max Moar denies receipt of that letter.
Question 1: Loss of Security
Is it sufficient reason to refuse consent that Hyatt fears a loss of security for the repayment of Hyatt payments?
As Hyatt would have it, so long as Macrina Nominees remains a member of a group of companies of which the hotel is a major asset, it is unrealistic to suppose that Macrina Nominees either could not or would not choose not to perform its obligations under the Indemnification Agreement or that the Indemnification Guarantors could not or would not perform their obligations under the Indemnification Guarantee. But once the Hotel ceases to be an asset of the group, and the Owners Share of Profit ceases to flow to the Plaintiffs, Hyatt asks who is to say that Macrina Nominees and the Indemnification Guarantors might not be left deprived of the resources needed to meet their obligations? For all one knows there might be none. And if that be so, why should Hyatt’s reluctance to consent to the sale be seen as unreasonable. Hyatt has paid a large amount of money by way “cash advances” on the faith of an Indemnification Agreement and Indemnification Guarantee which until now have had a substantial real property asset behind them. Is it unreasonable to refuse to consent to a sale which may very well change all that?
But as the Plaintiffs would have it, the Indemnification Agreement and the Indemnification Guarantee are not and have not ever have been secured on real property or indeed upon any other assets, and neither instrument contains anything in the nature of a negative pledge or asset coverage covenant. There is nothing which expressly prohibits the Plaintiffs from assigning away such if any interest as they may have in the Owners Share of Profit and nothing which expressly prohibits the Indemnification Guarantors from disposing of their ultimate beneficial interest in the Hotel. At least according to the express terms of the agreements it has always been open to the Plaintiffs, Macrina Nominees and the Indemnification Guarantors to deal with their assets in a way which may leave themselves devoid of the capacity to meet their obligations. In those circumstances, the Plaintiffs say, may it not be said that for Hyatt now to withhold its consent, in order only to obtain or maintain asset coverage, is an attempt by Hyatt to obtain for itself an advantage for which it did not contract?
Most of the authorities which bear on consents to assignments are to do with questions of whether landlords have acted unreasonably in refusing their consents to assignments of leases. Consequently, not all of the considerations which have been regarded as significant are applicable in a case like this. But logic dictates that the approach should be similar. The ordinary principles of contract apply to leases as much as to other contracts[3], and there is authority in England and in New Zealand that the principles applicable to consents to the assignment of leases apply to other forms of contract[4].
[3]Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at p.29
[4]British Gas Trading Ltd v Eastern Electricity plc [1996] EWCA 1239 per Leggatt LJ; WEL Energy Group Ltd v Electricity Corporation of New Zealand Ltd [2001] 2 NZLR 1 at p.7; see also Tower Ltd v McConnell Dowell Co Ltd [2002] 3 NZLR 280; cf. Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1 at pp.17-18
The starting point in the exposition of the landlord and tenant cases is the well known decision of Tomlin J in Re Gibbs Houlder Brothers and Co Ltd’s Lease[5]. In that case it was held that the only acceptable basis for refusal of consent to the assignment of a lease was concern as to the character and personality of the proposed assignee or with matter affecting the use or occupation of the premises. His Lordship said:
“… I come to the conclusion that the principle as stated – by A. L. Smith L.J. in Bates v Donaldson is accurately stated, and when he said what he did say, he meant what he said, and that it is by reference to the personality of the lessee or the nature of the user or occupation of the premises, that the Court has to judge of the reasonableness of the lessor’s refusal. It is quite true that the injury threatened or apprehended to the lessor may be in respect of something which has nothing to do with the lease of the demised premises; it may be in relation to other property of which he is the owner, but the danger must come from the nature of the user or occupation or from the personality of the assignee.”
[5][1925] Ch 198 at p.209
That decision was upheld on appeal[6], and in that process Warrington LJ added to the reasoning of Tomlin J the observation:
“The question whether a particular act is reasonable or unreasonable is obviously one that cannot be determined on abstract considerations. An act must be regarded as reasonable or unreasonable in reference to the circumstances under which it is committed, and when the question arises on the construction of a contract the outstanding circumstances to be considered are the nature of the contract to be construed, and the relations between the parties resulting from it.
The first question that arises is: What is the inference to be drawn as to the intention of the parties in inserting in the lease a provision of this kind? What was the danger which the lessor contemplated, and against which the lessee was content to allow the lessor to protect himself?”[7]
[6]op cit, 575
[7]op cit at p.584
In Lee v K Carter Ltd [8] Tucker LJ spoke in terms which seem to have taken the analysis one step further. After referring to Warrington LJ’s observations in Gibbs, his Lordship said:
“I quote that observation because I think that it requires to be borne in mind, in approaching this and all other cases where the question is whether or not the withholding of consent was in the particular circumstances reasonable or unreasonable, that the answer must in every case depend upon the facts of the particular case.”[9]
[8][1949] 1KB 85 at p.92
[9]See also West Layton v Ford [1979] QB 4593; Ashworth Frazer Ltd v Gloucester City Council [2001] 1 WLR 2180; Arball Pty Ltd v Chow [1993] ANZ Conv R 12, 28, (1992) V Conv R 54- 429
But a more limited view of the matter was taken by Walsh J in Colvin v Bowen[10]. After considering the authorities which culminated in Houlders case, his Honour concluded:
“According to the view thus preferred, the grounds upon which a refusal may be based must be concerned either with the character and personality of the proposed assignee, or with matter affecting the use or occupation of the premises which may result from the proposed assignment. The somewhat less narrow view, to which reference is made by Sargant LJ in Houlder’s Case, requires that the reason for refusal must be something affecting the subject matter of the contract which forms the relationship between the landlord and the tenant, and not something extraneous and dissociated from the subject matter of the contract.
It appears to me to be clear from the judgments in the cases mentioned that the principles contained in those cases would exclude from consideration, as a ground for refusal of consent, the circumstance that the lessor desires to resume possession of the property in order to occupy it. Despite the critical remarks and the expressions of doubt to which those principles were subjected in Tredegar v Harwood, the authority of Houlder’s Case has been affirmed subsequently, and it must be regarded by me as binding in cases to which the principles it contains are applicable.”
[10](1958) 75 WN (NSW) 262 at p.264
Significantly, that reasoning was accepted and applied by Mason J in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd[11]. His Honour said:
“Approaching the contract in the present case in the light of these observations, I conclude that the respondent was not entitled to refuse to grant a lease to the appellant so as to deprive the appellant of a benefit which would otherwise accrue to it under the contract. A refusal on that ground would be capricious and arbitrary. On the other hand, a refusal on the ground that there were doubts that the appellant could or would pay the rent promptly would, if the ground were made out, not be capricious or arbitrary. I say "promptly" because the respondent as owner was entitled to look for a tenant who would not only pay the rent, but would pay it promptly and in accordance with the provisions of the lease. If the evidence established that the respondent entertained doubts, reasonably based, that the appellant would pay the rent promptly and without difficulty, then it was reasonable to refuse to grant the lease on that ground (Tredegar v. Harwood [1929] AC, at p.81).
[11](1979) 144 CLR 596 at p.607
A broader approach was adopted by Lord Denning in Bickel v Duke of Westminster[12]. His Lordship said:
“Two propositions have been canvassed in this case as if they were propositions of law. The first proposition is that, in order to be reasonable, the landlord’s refusal must be based on (i) either the personality of the assignee or (ii) the user or occupation of the premises. If his reasons have nothing to do with either, then his refusal is unreasonable. Such is said to be the ground of the decision in In re Gibbs and Houlder Breothers and Co. Ltd’s Lease [1925] Ch. 198, 575, which was doubted in the House of Lords in Viscount Tredegar v Harwood [1929] A.C. 72, 82: but is said to be still binding in this court.
If such be the law, then it follows that Grosvenor Estate cannot reasonably refuse consent to the assignment by the Foresters to the lady. The personality of the assignee cannot be impeached on any score, and her user and occupation of the premises cannot be criticised in any respect…
If those cases can properly be regarded as laying down propositions of law, I would agree that we ought to hold the landlords’ refusal to be unreasonable. But I do not think they do lay down any propositions of law, and for this reason. The words of the contract are perfectly clear English words: ‘such licence shall not be unreasonably withheld’. When those words come to be applied in any particular case, I do not think that the court can, or should, determine by strict rules the grounds on which a landlord may, or may not, reasonably refuse his consent. He is not limited by the contract to any particular grounds. Nor should the courts limit him. Not even under the guise of construing the words. The landlord has to exercise his judgment in all sorts of circumstances, It is impossible form him, or for the courts, to envisage them all… Seeing that the circumstances are infinitely various, it is impossible to formulate strict rules as to how a landlord should exercise his power of refusal. The utmost that the courts can do is to give guidance to those who have to consider the problem. As one decision follows another, people will get to know the likely result in any given set of circumstances. But no one decision will be a binding precedent as a strict rule of law. The reasons given by the judges are to be treated as propositions of good sense – in relation to the particular case – rather than propositions of law applicable to all cases…” (Emphasis added.)
Significantly, that approach has since been approved by the House of Lords in Ashworth Frazer Ltd v Gloucester City Council[13].
[12][1977] QB 517 at p.524
[13][2001] 1 WLR 2180
But despite the apparent differences between the English and Australian decisions, I do not consider that there is any doubt about the principles to be applied in a case like this. I treat as binding, and with respect plainly right, the observations of Mason J in Secured Income[14] that the terms of the contract are paramount. His Honour said:
“It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party’s obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself.” (Emphasis added.)
[14]supra at pp.607 - 8
It also seems to me that whatever the differences between the English and Australian decisions, the English cases do not imply any lessening of the significance which is to be attributed to the terms of the contract. Neither Bickel nor Ashworth directly questions the rectitude of the proposition that “the outstanding circumstances to be considered are the nature of the contract to be construed, and the relations between the parties resulting from it”[15]. To the contrary, in West Layton Ltd v Ford[16] Roskill LJ said:
“… the right approach is to look first of all at the covenant and construe the covenant in order to see what its purpose was when the parties entered into it; what each party, one the holder of the reversion, the other the assignee of the benefit of the relevant term, must be taken to have understood when they acquired the relevant interest on either side.”[17]
And his Lordship made those observations in the context of expressing approval for what Lord Denning had said in Bickel.
[15]per Warrington LJ, [1925] Ch at p.584
[16]supra at p.605B
[17]see also British Gas Limited v Eastern Electricity plc, supra
At first blush, Lord Denning’s observation that the lessee is “not limited by the terms of the contract to any particular grounds”, and the House of Lords’ affirmation of that approach, may seem to suggest something else. But I do not think so. Properly understood they are really no more than a recognition that circumstances are infinitely variable. As a matter of principle, the question is one of contract and therefore the terms of the contract must always be determinative. It is just that while in one set of circumstances fear of a particular consequence may be seen as falling short of the sort of danger against which the lessee contracted to allow the lessor to protect, in another set of circumstances fear of a similar danger may well be a reasonable basis for the lessor to withhold consent. Consequently, while considerations of the kind identified as relevant in Houlders may prove determinative of the outcome of cases in which the contract and facts are similar to Houlders, in other cases the terms of the contract and therefore the supposed intention of the parties[18], and the facts, may reveal a conception of reasonableness of broader dimension. In those sorts of cases there may be relevant considerations apart from the character and personality of the proposed assignee and matters affecting the use or exploitation of the rights assigned[19]. It will depend on the contract.
[18]Eddadock Pty Ltd v Denning Properties Pty Ltd [2002] NSWSC 208 at [53]
[19]For and example, see JA McBeath Nominees Pth Ltd v Jenkins Development Corporation Pty Ltd (1992) 2 Qd R 121
All that having been said, however, in this case the assignment provisions of the Hotel Management Agreement present as routine. Looked at in context they support a conclusion that the parties’ purpose was to allow Hyatt to protect itself against the danger of an assignee who might not be a satisfactory substitute for the Owner – which is to say, might not be able to sustain the Hotel Management Agreement for the remainder of the term - but I see nothing in the terms that points in the direction of any wider or different considerations. Of course that may not be the end of the matter, for as has already been seen, in terms of principle the inquiry is one into the supposed intention of the parties and thus as a matter of principle and according also at least to some of the authorities, the answer depends upon “all the facts of the case[20].” But given the terms of the contract, the scope of permissible considerations is in my view relatively constrained.
[20]See, for example, Sportoffer Ltd v Erewash Borough Council, unreported, Chancery Division, 5 March 1999
As a matter of principle, and as a matter of authority, Hyatt may have regard to the question of whether the proposed purchaser is a suitable substitute - able to go the distance, and also to the possibility of detriment to any other proprietary and financial interests to which Hyatt may be entitled. Accordingly, Hyatt is entitled to resist the creation of a relationship between itself and the new owner which differs from that created under the original agreement[21], and Hyatt is entitled to withhold consent to an assignment which might trench upon rights accrued under the Hotel Management Agreement and perhaps even rights arising out of the Hotel Management Agreement[22]. The refusal to consent for either reason would be no more than necessary to ensure that Hyatt continued to enjoy the rights for which it contracted. But as a matter of principle and according to the authorities, Hyatt would not be entitled to refuse consent in order only to acquire rights or benefits to which it was not entitled under or arising out of, or at least contemplated by the agreement[23]. As a matter of principle and as a matter of authority, the refusal of consent for those purposes would operate to deprive the Owner of a benefit for which the Owner had contracted, namely, the right to assign to a suitable substitute consistently with the rights and interests of Hyatt. To adopt and adapt the terms employed by Mason J in Secured Income, it would breach the obligation implicit in the agreement to do all such things as are necessary on Hyatt’s part to enable the Owner to have the benefit of the contract.
[21]British Gas, supra; Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1 at 4 at p.21; Secured Income, supra at p.610
[22]Tattersalls Hotel Penrith v Permanent Trustee Co of NSW Ltd [1942] 42 SR (NSW) 104
[23]International Drilling; British Gas, supra
Hyatt makes no secret of the fact that the reason for its refusal to consent is because it fears for the future financial position of Macrina Nominees and the Indemnification Guarantors. And in a sense, that is a concern which arises out of the Hotel Management Agreement, because the obligations of Macrina Nominees and the Indemnification Guarantors are intimately connected to the obligations of the Owner under the Hotel Management Agreement. But subject to the question of implied term, Hyatt does not have a contractual right to insist that Macrina Nominees and the Indemnification Guarantors retain or even remain close to assets sufficient to satisfy their respective obligations. Subject to the question of implied term, Hyatt contracted on the basis that the obligations of Macrina Nominees and the Indemnification Guarantors would be unsecured and unsupported by negative pledge or covenant to maintain any sort of asset coverage.
Furthermore, I do not consider that it is possible to imply a term that the benefit of the Hotel Management Agreement cannot be assigned without the assignee also assuming the burden of the Indemnification Agreement and the Indemnification Guarantee.
Clause 4 of the Indemnification Agreement provides that:
“…L&M (scil. Macrina Nominees) further covenants and agrees that this Agreement and the obligations hereunder shall be absolute and unconditional and shall be in full force and effect notwithstanding any amendment, addition, assignment, renewal, extension or other modification of the Management Agreement, whether or not L&M shall have knowledge or have been notified of or agreed or consented thereto. Hyatt shall have no obligation to inform, or obtain the consent or approval of, L&M in the event of any amendment, addition, assignment, renewal, extension or other modification of the Management Agreement, including any such action which may increase the amount of or accelerate the payment of any Hyatt Payments. Hyatt and Owner may settle, release, compromise, or collect and Hyatt Payment without the prior notice to, or consent or approval of, L&M…” (Emphasis added.)
and clause 10 of the Indemnification Agreement provides that:
“… Neither party shall have the right to assign this Agreement or any obligations or rights hereunder without the consent of the other party, except that Hyatt shall have the right to assign its rights and obligations under this Agreement to any one or more affiliates or wholly-owned subsidiaries of Hyatt International Corporation, provided that each assignee enjoys the benefits of the Hyatt International Corporation organization in the same degree as Hyatt.”
Thus, as it appears to me, Clause 4 expressly contemplates that the Hotel Management Agreement may be assigned without assignment or novation of the Indemnification Agreement and Clause 10 means that unless there be some agreed amendment to the contrary, an assignment of the Hotel Management Agreement should not involve an assignment or novation of the Indemnification Agreement.
Hyatt argues that is not so, on the basis, it says, that the effect of the implied term is not only that the new Owner must assume the obligors’ obligations under the Indemnification Agreement and the Indemnification Guarantee, but also that the original obligors are to remain bound as if there had been no assignment. Hyatt also contends that if there were to be a further assignment, the effect of the implied term would be that the further assignee would be required to assume the obligors’ obligations under the Indemnification Agreement and Indemnification Guarantee and that the original obligors and the original assignee would both remain bound, and so on.
But all of that seems to me to be most unlikely. The whole argument rests on an assumption that the Hotel Management Agreement gives to Hyatt an implied right to insist that the Hotel will remain an asset of the Macrina Group of companies for the life of the agreement. Yet, self evidently that is not so. Such a term is not so obvious that it goes without saying. Otherwise it would be an implied term of every unsecured obligation that the obligor maintain sufficient asset coverage to ensure an ability to meet the obligation when due – which is clearly not the case – and it is not necessary to give business efficacy to the express terms of the agreement, because they are capable of operating without the existence of the implied term, just as is any other unsecured obligation. The position might perhaps have been different if the parties had contracted on the assumed basis that the Owners Share of Profit was to be the only source available to Macrina Nominees and the Indemnification Guarantors with which to meet their obligations as obligors. For then it might have been possible to imply some sort of obligation upon the Owner to refrain from destroying or relevantly diminishing the status quo ante[24]. But there is no evidence that the parties did enter into the contract on that basis, despite a plethora of correspondence said to be relevant as part of the factual matrix. Hyatt sought to rely upon one letter dated 5 September 2001, but the receipt of that letter was not proved, and in any event it would not prove the existence of an assumption that the Owners Share of Profit was to be the only source of funds available to Macrina Nominees and the Indemnification Guarantors. Indeed it rather suggests the contrary.
[24]cf. Ansett Transport Industries (Operations) Pty Ltd v The Commonwealth (1977) 139 CLR 54 at p.61; Coachcraft Ltd v SVP Fruit Co Ltd (1980) 4 ACLR 816 at p.824; Arthurson v State of Victoria [2001] VSC 244
In my opinion, the fact that there is express provision for assignment is probably sufficient in itself to exclude the idea that there could not be a change in Owner without the assignee assuming obligations under the Indemnification Agreement and Indemnification Guarantee. But, whether or not that is so, I consider that such if any perceived connection as there may be between the power to withhold consent and the consequent potential to procure the maintenance of assets within the Macrina group, is altogether too oblique to support the conclusion that consent might be refused.
Upon the evidence and the basis of the agreed facts, if the assignment proceeds Hyatt would have the benefit of what it contracted for – an owner that is satisfactory and able to go the distance, and an Indemnification Agreement and Indemnification Guarantee from Messrs. Lustig and Moar. In those circumstances I do not consider that the feared loss of security is sufficient reason for Hyatt to withhold consent.
Question 2: Equitable set-off
Hyatt contends that because Messrs Lustig and Moar are what are described as the ultimate beneficial owners of the Hotel and the rights under the Hotel Management Agreement, and are also the people who are ultimately burdened by the Indemnification Agreement and the Indemnification Guarantee, Hyatt is entitled in equity to set off amounts payable to Hyatt under the Indemnification Agreement against amounts payable by Hyatt under the Hotel Management Agreement. Hyatt says that if the assignment proceeded that would cease to be so - for the reason that Messrs Lustig and Moar would cease to be the ultimate beneficial owners of the Hotel – and in Hyatt’s contention that is reason in itself to withhold consent to the assignment.
I do not accept the argument. I do not consider that Hyatt would be entitled in equity to the right of set-off for which it contends and, even if it were, I do not consider that such would afford it a contractual entitlement to refuse its consent to an assignment.
The essential ingredient of the sort of equitable set-off which is referred to – which is allowed when a party seeking the benefit of the set-off can show some equitable ground for being protected against his adversary’s demand[25] - is that the set-off actually go to the root of, be essentially bound up with or in other words “impeach” the title of the plaintiff[26]. It is not sufficient that there be countervailing claims or that they be mutual or even that countervailing claims arise out of the same transaction. And in the circumstances here postulated, there would not even be that[27]. The set-off must go to the root of and impeach the primary claim, and I do not accept that any claim which Hyatt may have to be paid under the Indemnification Amounts or under the Indemnification Agreement goes to the root of or otherwise impeaches the Owner’s right to be paid the Owner’s Share of Profit under the Hotel Management Agreement.
[25]Rawson v Samuel (1841) Cr & Ph 161 at 178; 41 ER 451 at 458 per Lord Cottneham LC
[26]Ralston v South Greta Colliery Co (1912) 13 SR (NSW) 6 at pp. 15-16 (FC), per Cullen CJ
[27]Indrisie v General Credits [1985] VR 251 at p.254
Hyatt argues that its contention finds support in the decision in Ralston v South Greta Collery Co, in as much as in that case a defendant was held entitled to set off against an obligation which it owed to the plaintiff an obligation owed by the plaintiff to a third party. But the equities in that case were very different to those which arise here. The plaintiff was the lessee of a colliery and in consideration of the agent arranging for a sub-lease of the colliery the plaintiff agreed to pay the agent a portion of the royalty payable by the sub-lessee to the plaintiff. Subsequently, the agent assigned part of the royalty to the sub-lessee and the sub-lessee was held entitled to set-off the part royalty against the plaintiffs claim against the sub-lessee for the whole of the royalty. The case is therefore authority for the proposition that where B being entitled to be paid an obligation by A assigns or promises to pay to C part or all of the amount of that obligation, and C in turn assigns the benefit of that chose to A, A may set off the chose against his obligation to pay B. In such circumstances, the benefit of the obligation payable to C and assigned to A impeaches the burden of the obligation of A to B, because in truth it is part of the obligation of A to B[28]. The position here is different.
[28]As Cullen J observed, the net effect of what occurred was tantamount to B forgiving part of that obligation.
The amounts which are payable by Hyatt under the Management Agreement are not the same as or even constituted in part by the amounts payable to Hyatt under the Indemnification Agreement. The Indemnification Agreement creates rights of payment which are separate and distinct from the Owners rights to be paid. The Owner is not bound to pay anything to the parties to the Indemnification Agreement and they are not sureties for any obligation of the Owner. This is a true collateral arrangement whereby in consideration of Hyatt having agreed to enter into the Hotel Management Agreement with the Owner and thus subjected itself to liability to make certain payments to the Owner, the Indemnifiers agree to make certain payments in certain conditions to Hyatt. There is no basis for set-off in those circumstances.
Hyatt also invokes the authority of Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd[29]. But I see little in that case which is of assistance to Hyatt’s contentions. There the plaintiff entered into an agreement to build and lease a warehouse to tenants and in an action brought by the plaintiff to recover rent under the lease, the tenants were held entitled in equity to set off their claim for the damages which they claimed to have suffered by reason of defective construction of the warehouse floor. The claim for damages arose under the construction agreement and not the lease, but the set-off was allowed on the basis of the close connection between the agreement and the lease. There was, however, already abundant authority that a tenant is entitled to set off a claim for rent against a bona fide cross claim for damages arising from his landlord’s breach of lease. This case decided only that in the particular circumstance with which it was concerned, it would have been manifestly unjust not to extend the same right of set-off to a claim for damages arising under the agreement anterior to the lease.
[29][1980] QB 137
Hyatt suggests that its contention finds support in the observations of Woodward J in Galambos & Son Pty Ltd v McIntyre[30] and in the decision of Tadgell J in Eagle Star Nominees Ltd Merrill[31]. But if anything, those authorities seem to me to point the other way. The analysis in Galambos reiterates the orthodoxy of a cross claim which is so closely bound up with the claim as to impeach it and, in light of that requirement, in Eagle Star Tadgell J held that because a contract for the sale of land made no reference to an alleged collateral contract to assign the benefits of a contents policy of insurance, the purchaser was not entitled to set off a claim for damages which flowed from a failure to assign the policy against the vendor’s claim for purchase price or possession. In his Honour’s opinion, the two contracts were independent and in no way mutual.
[30](1974) 5 ACTR 10
[31][1982] VR 557
Lastly, Hyatt prays in aid the absence from equitable set-off of a requirement for mutuality and refers to the decision in Cochrane v Green[32] in which a defendant was held entitled in equity to set off a debt due from the beneficiary of a trust against a claim brought by the trustee of the trust, and to the decision in Agra Bank v Leighton[33] in which a debt due by a principal was permitted to be set off against a claim brought in the name of a nominee on behalf of the principal. But upon my reading of those authorities, neither of them goes near to establishing that a debt owed to an obligee may be set off against an obligation owed by a third party on a basis of no more than that the third party might in some sense be described as the ultimate beneficial owner of the assets of the obligee. If that were the case, a debtor of a listed unit trust, for example, would be entitled in equity to set off debts owed to the trust company against amounts owed by a unit holder to the debtor. But I should not have thought that is possible. As I see it, there would be no inequity in allowing the unit trust company to assert its claim unaffected by the unit holder’s indebtedness, and leaving the debtor to pursue his remedy directly against the unit holder.
[32](1866) 9 CB(NS) 448; 142 ER
[33](1866) LR 2 Ex 56
No doubt in a simple case like Cochrane or Agra Bank it may be seen as inequitable to allow a beneficiary to assert a claim without bringing to account the amount of the debtor’s cross-claim. But that is because the relationship between the beneficiary and the trustee’s claim is so immediate that it would be unrealistic and unfair not to treat the trustee’s claim as being the claim of the beneficiary[34]. In such a case, the trustee is really only a name, and in effect the beneficiary is the plaintiff albeit not in name. Contrastingly, in a more complex case, like the case of a listed unit trust, I do not consider that it would be inequitable to refuse a right of set off. There would be no such relationship between the trustee’s claim and the unit holders as to make it unrealistic or otherwise unfair to treat the claim and beneficial interest as separate and distinct.
[34]Ralston v South Greta Colliery Co, ibid
Furthermore, for the reasons already expressed, I consider that the parties in this case are to be taken as having contracted on the basis that Hyatt’s obligations to the Owner under the Hotel Management Agreement are separate and distinct from the obligors’ obligations under the Indemnification Agreement and the Indemnification Guarantee. As I have noted already, it is an express term of the Indemnification Agreement that the obligations thereunder shall be absolute and unconditional and shall be in full force and effect notwithstanding any amendment, addition assignment, renewal, extension or other modification of the Management Agreement. And I have excluded as untenable the existence of an implied term which might more closely bind them. If I am correct about that, it is a further reason to conclude that there is no equity which warrants Hyatt setting off payments under the Hotel Management Agreement against Indemnification Payments. It would be contrary to equity to facilitate one party acting towards another in a fashion which did not accord with their assumed conventional basis of dealing[35].
[35]Verwayen v The Commonwealth (1990) 170 CLR 393 at pp.414 and 445
Finally, if it were possible in equity to set off payments under the Hotel Management Agreement against Indemnification Amounts due under the Indemnification Agreement or Indemnification Guarantee, and if it were the case that sale of the Hotel operated to bring that possibility to an end, I should still not regard that eventuality as a sufficient reason for Hyatt to withhold its consent to the sale.
As I have analysed the Hotel Management Agreement and the Indemnification Agreement, Hyatt did not contract for a right of recourse to the Owners Share of Profit. It accepted instead the benefit of the Indemnification Agreement and the Indemnification Guarantee. Thus it has always been open to Messrs Lustig and Moar, and it is still open to them, to dispose of their ultimate beneficial interest in the Hotel without the consent of Hyatt. And if that were to occur then, even upon Hyatt’s analysis, there would no longer be any right of set-off. In the result, since Hyatt has no contractual right to prevent the destruction of the supposed right of set-off before any sale of the Hotel, I cannot conceive of reason to interpret the contract as impliedly conferring upon Hyatt a right to prevent any destruction of the supposed right of set-off that may result from a sale of the Hotel. Logic and common sense impel the view that the position in each case should be the same, and in effect that means that there is no right of prevention in either case.
Question 3: Indemnification agreement, part of the Management Agreement?
Not much mention was made in the course of the trial of Hyatt’s contention that the Hotel Management Agreement and the Indemnification Agreement are one. But in case it matters, I should say that I do not accept the contention. Of course there are circumstances in which a number of agreements made at or about the same time between the same parties should be treated as one agreement or at least as if one of them imports the terms of the other.[36] But that cannot be so where the parties to the several agreements are different[37]. The inevitable consequence of the privity rule of contract is that there cannot be two agreements between different parties amounting to one agreement between all of the parties.
[36]Re Clarks Refrigerated Transport [1982] VR 989, 996; Commonwealth Bank of Australia v Aspenview Productions Pty Ltd t/as St Martin's Garage [2001] VSC 444, [2002] ACL Rep 190 VIC 1; cf Oceanic Life Ltd v Glowtide Pty Ltd BC 9703232
[37]Malas v British Imex Industries Ltd [1958] 2 QB 127 at 129; Snelling v John G Snelling Ltd [1973] 1 QB 87; Gurtner v Circuit [1968] 2 QB 587; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 at p.117
The parties to the Indemnification Agreement and the Indemnification Guarantee are not the same as the parties to the Hotel Management Agreement. The parties to the Hotel Management Agreement are Cathedral Square and 90 Collins Street and Hyatt. The parties to the Indemnification Agreement are Hyatt and Macrina Nominees. The parties to the Indemnification Guarantee are Messrs Lustig and Moar and Hyatt. Cathedral Square and 90 Collins Street do not have any rights or obligations under the Indemnification Agreement or the Indemnification Guarantee. Messrs Lustig and Moar do not have any rights or obligations under the Hotel Management Agreement. Hyatt does not have any rights or obligations under the Indemnification Guarantee. To that it may be added that shortly before execution of the Indemnification Agreement and the Indemnification Guarantee the parties expressly acknowledged by letter dated 9 August 2001 that:
“… the arrangements contemplated in this letter are separate from and do not form part of the Management Agreement ( as amended by the Guarantee Letter).”
In my opinion, the Indemnification Agreement and the Indemnification Guarantee are not part of the Hotel Management Agreement.
Question 4: Implied term
For the reasons already expressed, I see no warrant for implying a term that requires the purchaser to assume the obligations of the obligors under the Indemnification Agreement or the Indemnification Guarantee. As I have said, the term is not so obvious that it goes without saying, and it is not necessary to imply the term in order to give the Hotel Management Agreement business efficacy. There is express provision for Hyatt to withhold its consent for cause, and there is no reason to suppose that the parties would think the express provision an inadequate protection of Hyatt’s interests. It is not necessary to imply some other or further protection in order to make the agreement work in a reasonable and effective fashion[38].
[38]BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at p.283; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at p.347
That is not to overlook that there are sometimes juridical bases apart from business efficacy for the implication of contractual terms[39]. But the term which is contended for could not be implied as a matter of custom or usage[40], and in my view the term contended for would go well beyond anything needed to deliver to Hyatt the benefit for which it contracted[41]. Late in Hyatt’s argument it was suggested that the term could be implied as one of good faith and fair dealing or, to be more precise, that a consequence of the requirement to exercise good faith and fair dealing was that the Hotel could not be sold without the new owner assuming obligations under the Indemnification Agreement. But I reject that suggestion also. Even allowing for the existence of an implied obligation of good faith and fair dealing, about which I suppose there can no longer be too much doubt[42], there is no lack of good faith or fair dealing in a party to a contract acting to promote its own interests consistently with the basis on which it entered into the contract[43].
[39]Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at pp 440 - 452
[40]cf Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur (Australia) Pty Ltd (1986) 160 CLR 226 at pp.236 – 238; Liverpool City Council v Irwin [1977] AC 239 at p.253
[41]cf Mackay v Dick (1881) 6 App Cas 251 at 263; Butt v M’Donald (1896) QLJ 68 at pp.70-1; Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at p.607
[42]Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349; Burger King Corp v Hungry Jacks [2001] NSWCA 187; cf. Service Station Association Ltd v Berg Bennett Pty Ltd (1993) 45 FCR 84, and see Cheshire and Fifoot’s Law of Contract, 8th Aust Ed at [10.42 –10.46]
[43]Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310; Bamco Villa Pty Ltd v Montedeen Pty Ltd [2001] VSC 192
Question 5: so closely bound as to be inexorable?
Having rejected Hyatt’s contentions based upon the correct construction of the contract, the doctrine of equitable set-off, the notion that the Indemnification Agreement should be regarded as part of the Hotel Management Agreement, and the law relating to implied terms, I see no other basis and I do not understand any to have been argued in support of the view that the Hotel Management Agreement and the Indemnification Agreement are so closely bound up that the Hotel cannot be sold without the purchaser assuming obligations under the Indemnification Agreement.
Question 6: Other issues
I mentioned at the outset that Hyatt has a number of concerns about the form of the Deed of Novation and Consent. Some of those are to do with the form of clause 6 of the Deed, one with clause 8, one with clause 9 and, most importantly, one with clause 4. I shall take them in turn.
(i) Clause 6
Clause 6 of the Deed of Novation and Consent provides that:
“6.1 Hyatt acknowledges that:
(a)the Owner has prior to the date of this Deed complied with all obligations regarding construction, furnishing, equipping and decorating under Article 1 Section 10(e) of the Management Agreement;
(b)in accordance with Article IV Section 6 of the Management Agreement, the first fiscal year commenced 1 June 1999, and that fiscal years are now calendar years;
(c)all parties have complied with their obligations under Article IV Section 7B of the Management Agreement (as inserted by Amendment No 1 to the Management Agreement);
(d)there is no obligation on the Purchaser to make repayments of the Hyatt Payments as that term is defined in the Management Agreement; and
(e)Article VII Section 5 of the Management Agreement does not apply to the Management Agreement from Settlement.”
Hyatt says there is nothing in the Hotel Management Agreement that requires it to make the acknowledgments provided for in clause 6 and that it would not be acting unreasonably in refusing to sign the Deed of Novation and Consent so long as it contained those acknowledgments. I agree.
(ii) Clause 8
Clause 8 of the Deed of Novation and Consent provides that:
“A party to the Deed must not assign or purport to assign or to amend or vary its rights or obligations under this Deed without the prior written consent of the other parties.”
Hyatt says that the provision should more closely track the terms of Article XV of the Hotel Management Agreement, and that it would not be acting unreasonably in refusing to sign the Deed of Novation and Consent until the necessary changes are made. I agree.
(iii) Clause 9
Clause 9 of the Deed of Novation and Consent provides that:
“Each party will bear its own costs of and incidental to this Deed.”
Hyatt says that it should not have to pay any costs in connection with the assignment. But Hyatt is less than clear as to what it means by that. If it means that it should not have to pay any of the Owner’s costs of preparation and execution of the deed, I agree. If it means that it is entitled to have the Owner reimburse it for any costs which it may incur in connection with the examination and execution of the deed, I am inclined to disagree. There is no provision to that effect in the Hotel Management Agreement and therefore, although it will depend upon facts yet to be ascertained, I suspect that a refusal to consent based upon a refusal of the Owner to reimburse Hyatt for those sorts of costs would be unreasonable.
(iv) Clause 3
Clause 3 of the Deed of Novation and Consent provides that:
“3.1 By this Deed but with effect from Settlement:
(a)the Purchaser is substituted for the Owner as a party under the Management Agreement;
(b)the Management Agreement takes effect as an agreement between Hyatt and the Purchaser on the existing terms, except that references to the Owner will be read and construed as if they were references to the Purchaser; and
(c)subject to cluse 3.2, the Owner and the Guarantors are released by Hyatt from all obligations and liabilities under the Management Agreement and all actions, claims or proceedings that the Hyatt (sic) may have against the Owner and the Guarantors under or in respect of the Management Agreement.
3.2The rights and remedies of the Owner the Guarantors or Hyatt against each other which have accrued prior to Settlement, and the obligations of the Owner the Guarantors and Hyatt to each other prior to Settlement, are in no way affected diminished or extinguished by this Deed.”
Hyatt contends that upon its proper construction the effect of Article XV of Section 2 of the Hotel Management Agreement is that the purchaser is bound to undertake all of the obligations of the Owner under the agreement, regardless of whether they accrue due before the sale or arise only after the sale, and that inasmuch as the Deed of Novation and Consent provides for the purchaser to undertake only those obligations which accrue due after purchase, it is contrary to the agreement.
The argument is grounded in the words of the last part of Article XV, namely:
“In the event of a sale of Owner’s interest in the Hotel with the consent of Hyatt, and upon the purchaser of the Hotel undertaking the obligations of Owner hereunder, Owner shall thereupon by (sic) released and forever discharged from its obligations hereunder.”
In Hyatt’s contention, the words “obligations of the Owner hereunder” mean what they say: they mean all of the obligations of the Owner hereunder and not just that part of the obligations of the Owner hereunder which have already accrued due at the date of sale.
The Owner’s contention is that the words “obligations of the Owner hereunder” have to be read in context and in particular by reference to the earlier part of Article XV. It provides that:
“…Owner shall not assign this agreement …without the prior written consent of Hyatt which consent shall not be unreasonably withheld: provided that the proposed transferee executes an agreement with Hyatt whereby the transferee agrees to be bound and to comply with the provisions of the this agreement…”
In the Owner’s contention that is to be understood as a requirement that the transferee bind itself to the performance only of those obligations which are yet to accrue due, and therefore, it is said, the latter part of the clause should also be interpreted as applying only in respect of those obligations that are yet to accrue due: the original Owner is to remain liable in respect of past obligations but the new Owner is alone to be responsible for future obligations.
As a matter of language both constructions are open, and in that sense the provision is ambiguous. But of the two competing views, I incline towards the latter. The words “agrees to be bound and to comply with the provision of this agreement“ more readily suggest to me an intention to bind the transferee only into the future than an intention to subject him to liability for the Owner’s past misdeeds. And if something broader had been intended, I should have expected to see a more detailed and explicit reference to the sorts of past liabilities to which the transferee was to be subjected. For example, would it include all obligations accrued, whether or not the time for performance had passed, and would it include liabilities for breach of obligations for which the time of performance had passed? Furthermore, and although I do not place a great deal of emphasis upon this thought, the latter construction more closely accords to the usual sorts of arrangement in landlord and tenant cases: where the assignee is bound only in respect of future obligations, albeit that the assignor ordinarily remains liable for all.
If then the earlier words of the clause are to be given the narrower construction which I prefer, it should follow that the later words of the section are to be construed accordingly. That outcome is partly due to the likelihood that the words first used were more probably intended to control the meaning of the words that followed, rather than vice versa, although of course that is not always so, and partly due to the assumption that those who created the agreement maintained a consistency of intention throughout. It is, however, mostly informed by the improbability that any draftsman would have chosen so oblique a mechanism as the later words of the clause to achieve the relatively unusual outcome of rendering an assignee liable for the past liabilities of the assignor.
That is not to say that the matter as entirely free from doubt; simply that, given the limitations of the drafting, I can do no more than endeavour to construe the words of the clause in context and to understand them in the way in which it is to be supposed that honest and reasonable men of business would have understood them, with reference to their subject matter and surrounding circumstances[44]. Judged according to those standards, I take the meaning of Article XV to be that the transferee is to be liable only in respect of obligations yet to accrue due and that it is only in respect of those obligations that the Owner is to be discharged.
[44]Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 at 300; Schenker & Co (Aust) Pty Ltd v Maplas Equipment [1990] VR 834 at 840-5; Di Dio Nominees v Brian Mark Real Estate [1992] 2 VR 732 at 741-2
It follows, in my view, that it would be unreasonable for Hyatt to withhold its consent in order only to achieve a different result.
Remedies
It is not appropriate to enjoin Hyatt to execute the Deed of Novation and Consent. Apart from anything else, it is not in a form which complies in all respects with the Hotel Management Agreement and for that reason alone it is not unreasonable for Hyatt to refuse consent. So much I think was conceded.
There remains an issue about the scope of declaratory relief. As a general proposition there is no doubt about the propriety of declaring that a defendant is acting unreasonably in refusing consent to an assignment[45]. There is also ample authority that there does not always have to be a completely formed legal right before a party can succeed in a claim for declaration[46]. Accordingly, if the only issues between the Plaintiffs and Hyatt were those upon which I have decided in favour of the Plaintiff, I think that I should be prepared to declare that Hyatt is acting unreasonably in withholding its consent. But obviously they are not the only issues and, because of the issues upon which I have decided against the Plaintiffs, as matter stand Hyatt is not acting unreasonably in withholding its consent.
[45]see, for example, Young v Ashley Garden Properties Ltd [1903] 2 Ch 1; Ideal Film Renting Co Ltd v Nelsen [1921] 1 Ch 575
[46]Johnco Nominees Pty Ltd v Albury-Wodonga (NSW) Corp [1977] 1 NSWLR 43 at p.65; Tamsco Ltd v Franklins Ltd [2001] NSWSC 1205 at [30] – [34]
Nor do I think that it is possible to approach the matter on a basis of declaring that it would be unreasonable for Hyatt to withhold consent if the other issues were rectified. For until and unless the other issues are resolved the question is academic. It is sufficient reason to refuse such a declaration that it would be relief in relation to circumstances that have not occurred and may not ever happen[47], and accordingly I refuse it.
[47]University of New South Wales v Moorhouse (1975) 133 CLR 1 at p.10; Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at pp.581-2; Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334 at [48]–[59]; Electricity Supply Assoc of Australia Ltd v Australian Competition and Consumer Commission [2001] FCA 1296 at [122]
As far as the Hyatt’s Counterclaim is concerned, I suppose that I could make a declaration that the Deed of Novation and Consent does not conform to the Hotel Management Agreement, and I should be prepared to do that if I could see that there would be any utility in the exercise. But as at present advised I do not see how it could achieve a great deal. The only purpose of such a declaration that I can conceive of would be to deter the Plaintiffs proceeding on the basis that the Deed does comply with the Agreement, and inasmuch as I have refused the declarations sought by the Plaintiffs on the basis that the Deed does not comply with the Agreement, Hyatt will have the benefit of an issue estoppel as to that point.
That leaves Hyatt’s third party claim against the Indemnification Guarantors. In so far as that claim is for declarations, the same considerations apply as to the Counterclaim. I am not at present disposed to make any of the declarations which are sought. The rest of it, which is for payment of Indemnity Amounts, was abandoned in the course of the trial and thus should be dismissed.
Conclusion
For the reasons which I have given I would answer the questions set out earlier in this judgment, as follows:
(1)It is not sufficient reason for Hyatt to refuse its consent to a sale of the Hotel that the Hotel would no longer be an asset of the group of companies of which Macrina Nominees is a member and of which the Indemnification Guarantors are the ultimate beneficial owners.
(2)It is not sufficient reason for Hyatt to refuse its consent to a sale of the Hotel that the sale may result in the destruction of what Hyatt conceives to be its rights of equitable set-off of Owners Share of Profit against Indemnity Amounts.
(3)The Indemnification Agreement and the Indemnification Guarantee do not form part of the Hotel Management Agreement.
(4)It is not an implied term of the Hotel Management Agreement that a purchaser of the Hotel must assume the burden of the Indemnification Agreement and the Indemnification Guarantee.
(5)The Hotel Management Agreement, Indemnification Agreement and Indemnification Guarantee are not so closely bound up that Hyatt is entitled to withhold its consent to a sale of the Hotel unless the purchaser assumes the burden of the Indemnification Agreement and the Indemnification Guarantee.
(6)There are a number of respects in which the Deed of Novation and Consent does not satisfy the assignment provisions of the Hotel Management Agreement. They include clauses 6, 8 and 9. But I consider that clause 3 of the Deed does accord with the provisions of the Hotel Management Agreement.
I shall hear counsel on the form of orders.
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