Com of State Revenue v KJRR Pty Ltd

[1999] HCATrans 278

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M31 of 1999

B e t w e e n -

COMMISSIONER OF STATE REVENUE (in his capacity as Comptroller of Stamps)

Applicant

and

KJRR PTY LTD

Respondent

Application for special leave to appeal

McHUGH J
GUMMOW J
KIRBY J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 10 SEPTEMBER 1999, AT 10.08 AM

Copyright in the High Court of Australia

MR G.H. GOLVAN, QC:   If the Court pleases, I appear with my learned friend, MR P.R. BEST, on behalf of the applicant in this matter.  (instructed by Solicitors for the Commissioner of State Revenue)

MR J.F. BLEECHMORE:   If the Court pleases, I appear on behalf of the respondent.  (instructed by Mirabelli, D’Ortenzio & Co)

McHUGH J:   Mr Golvan.

MR GOLVAN:   If the Court pleases, the applicant contends that this is a case which warrants special leave on a number of grounds, the first being that the High Court has not considered what Justice Tadgell has described as the tantalising problem as to whether an instrument grants a lease or a licence since Radaich v Smith in 1959 and then not ‑ ‑ ‑

GUMMOW J:   So?

MR GOLVAN:   Not in the context, we say, of a no right of exclusive possession clause, a collateral franchise agreement or a clause which has the effect of avoiding stamp duty obligations imposed on a lease.  The matter, we say, really imposes ‑ ‑ ‑

GUMMOW J:   I do not know what that means, Mr Golvan.  Your client can get his Act amended if he wants it…...  I do not quite see what your problem is.  Otherwise, if you want the Act to operate according to settled principles of law, then it will operate.

McHUGH J:   It is just a factual question, is it not?

MR GOLVAN:   No, your Honour.  We say that the matter raises a number of very paramount issues central to principles of contractual law or ‑ ‑ ‑

GUMMOW J:   No, they are not, they are central to your attempt to get revenue, that is what they are all about.

MR GOLVAN:   Yes, your Honour.

GUMMOW J:   You want to change the law so you get more revenue; change the general law so that a revenue statute which operates on the general law produces more revenue to you.

MR GOLVAN:   And our submission, your Honour, is that ‑ ‑ ‑

GUMMOW J:   When, if you want to, you can change your statute.

MR GOLVAN:   The circumstances of this case, your Honour, really require revenue to have been paid on a lease without the necessity to have changed the statute.  But quite apart from the revenue law provision, of course it has implications for other statutes which impose statutory regulations such as retail tenancies Acts which are very much government by whether a particular instrument is a lease or a licence.  The matter does raise important considerations. 

McHUGH J:   I do not know that it raises anything that was not raised back prior to 1959.

MR GOLVAN:   What we say has occurred is that in fact Courts of Appeal in both Victoria and New South Wales have approached the application of principles in Radaich v Smith in very different and inconsistent ways.  I refer to the decisions of the Court of Appeal of New South Wales in Lewis v Bell in which Justice Kirby was the President at the time, Rental Bond Board v Bayman Developments, which was a decision of the Court of Criminal Appeal of New South Wales in which the primary judgment was written by Mr Justice Street, and the decision by the Court of Appeal in the present case which all sought to apply Radaich v Smith and did so in different way and, we would say, inconsistent ways, and that what the application seeks is an opportunity for the High Court to formulate the manner in which the correct principles should be applied.

McHUGH J:   But how can you?  The touchstone is exclusive possession. 

MR GOLVAN:   That is correct.

McHUGH J:   If you have exclusive possession, it is a lease; if you have not, it is a licence, and the question is, on the facts of a particular case, do you have exclusive possession?  This agreement said no, it is a licence.  The franchise agreement gave a powerful reason why it would be a licence as opposed to exclusive possession.  It is just a simple factual case, is it not?  What is this Court going to say?  Could you formulate the legal proposition for which you would contend which would be of general application in these cases.

MR GOLVAN:   Your Honour, we say that the correct test was applied by the primary judge in this case, Mr Justice Gillard, who carried out a careful examination of the provisions of the licence agreement and, to some extent, the franchise agreement, pages 78 to 84 of the application book, and after carrying out that careful test concluded that there was exclusive possession to conduct a business for a term at a rental without interference.  We are talking about essentially a shop which was going to be used for selling sports good and sportswear in Warrnambool.

KIRBY J:   I think we know the facts.  The appeal to the Court of Appeal presumably was against fact as well as law, against factual assessments as well as legal principle.

MR GOLVAN:   It was treated as a re‑hearing, but essentially the decision came down to an analysis of principle.

KIRBY J:   As I understood your written submissions, you are content to apply the statute to the general law but you say that the general law has moved on a little since these matters were earlier decided by this Court and that we should look at that movement in England and consider whether or not it is appropriate here.  But put against that is the suggestion that the way in which you ran the case, denying that this was a case of sham, really puts you out of court in this application for having that question tendered to our decision.

MR GOLVAN:   But what we are saying, your Honour, is that we do not pursue the argument this was a sham.  We pursue the argument this was a pretence and what we say is that there is a doctrine ‑ ‑ ‑

KIRBY J:   What does that mean?  What is the difference between a pretence and a sham?

MR GOLVAN:    ‑ ‑ ‑ there is a very different concept of a pretence and there is a very different doctrine of a sham.

KIRBY J:   This is Doctrine with a capital “D”?

MR GOLVAN:   In essence, a sham is an arrangement in which the parties have an intention of defeating some sort of statutory regulation or defeating some sort of revenue code, whereas a pretence really is a situation where, on a true analysis ‑ ‑ ‑

GUMMOW J:   No, it is not, that is not what a sham is, according to Lord Diplock.  A sham is where the parties as between themselves have an understanding that the document they are agreeing to does not represent their true arrangement.

MR GOLVAN:   Yes, that is Snook’s Case, your Honour, and we accept that, but we say that there has been a distinction drawn in the English cases between a sham and a pretence.

GUMMOW J:   I know, but what is this pretence doctrine?

KIRBY J:   That is the very thing you want to have debated.

MR GOLVAN:   That is the very question that we say should be examined by this particular ‑ ‑ ‑

GUMMOW J:   Quite, Mr Golvan, but you need some evidence, do you not?

MR GOLVAN:   No, you do not, with respect, your Honour, because that is the deficiency, with the greatest of respect, in the Court of Appeal’s analysis because what the English cases have said, in looking at the pretence doctrine, was that it was a doctrine that could be applied upon looking at the nature of the instrument itself.  In other words, you construe the instrument and the surrounding circumstances ‑ ‑ ‑

KIRBY J:   This is like Justice Frankfurther’s view about obscenity, you know it when you see it.  This is, in fact, when you look at this, whatever the parties intended in their subjective minds, when the Court looks at it it knows it is a pretence.

MR GOLVAN:   Exactly, your Honour.

KIRBY J:   Is that the idea?

MR GOLVAN:   That is exactly, your Honour, and the situation ‑ ‑ ‑

GUMMOW J:   How does that fit in with freedom of contract, for starters?

MR GOLVAN:   That is the very principle that the Court really has to consider because one of the issues that is raised by this application is to what extent are the parties free to contract and incorporate clauses that attempt to define the nature of their relationship when, on an analysis of their true relationship ‑ ‑ ‑

GUMMOW J:   What is the true relationship?

McHUGH J:   What is the true relationship, other than that evidenced by the document.  If they say you have got a licence and not a lease, what, does the Court come along and say, “I’m sorry, just looking at that I say it is a pretence.”

MR GOLVAN:   There is a very famous statement by Lord Templeman in Street v Mountford that says you cannot, in effect, call a spade a fork, and that is the ‑ ‑ ‑

McHUGH J:   You do not have to go to Lord Templeman.  Justice Windeyer said much the same thing in Radaich.

KIRBY J:   Probably Lord Templeman copied him, without acknowledging it.

MR GOLVAN:   I think, in fact, he applied Justice Windeyer or followed Justice Windeyer.  The very same principle applies, with the greatest of respect.  We say that the appropriate test is to look at the nature of the instrument, the circumstances of the instrument, the surrounding circumstances, and to determine whether, as a matter of substance and effect, the agreement ‑ ‑ ‑

GUMMOW J:   Whether you can contradict an express term, that is what it comes to, does it not?

MR GOLVAN:   In fact, in Radaich v Smith the Court has ignored what appeared to be an express term that stipulated that the parties’ relationship was that of a lease and not a licence.

KIRBY J:   But if we are to look at these English cases – and I have some sympathy for the view that the Court should, in an appropriate case, look at it ‑ would we not be better positioned to look at it in a case where a party has asserted a sham and all the facts that are relevant, including the rights of the party against whom this allegation is made, are out, and then we can apply the sham test and the pretence test and say, it does not meet the sham test, hence this newfangled ‑ ‑ ‑

MR GOLVAN:   I can understand that this may not be the perfect case for deciding – for determining every possible application but it is ‑ ‑ ‑

GUMMOW J:   What you are doing is you are destroying, in effect, a contractual bargain between A and B, when only A is here.  B is not here and you are X.

MR GOLVAN:   No you are not, your Honour, what you are doing ‑ ‑ ‑

GUMMOW J:   So that X can extract some revenue, that is what you are doing.

MR GOLVAN:    ‑ ‑ ‑you are applying a principle that the Court has applied in Radaich v Smith – the High Court applied in Radaich v Smith, that the English cases have applied in the pretence cases, and you say you look at the substance and effect of the arrangement and that carries greater weight than a label that the parties place on the arrangement themselves.  That is the question.

GUMMOW J:   I know ‑ ‑ ‑

MR GOLVAN:   And in this ‑ ‑ ‑

GUMMOW J:   Just listen to me for a minute.

MR GOLVAN:   I am sorry, your Honour.

GUMMOW J:   What I am trying to explain to you is the result you seek has this impact on one of the parties to the contract but not the other.  That does not seem an appropriate vehicle for doing these things, does it?  The franchisee and the franchisor are not in dispute about what they were doing.

KIRBY J:   But that will often be the case if they are avoiding ‑ ‑ ‑

MR GOLVAN:   That will occur in every case where a determination is made that the true substance and effect of the transaction ‑ ‑ ‑

GUMMOW J:   It will occur in insolvency, but that is a different question.  This is a question of universal succession.

MR GOLVAN:   In all of the cases it will have greater effect or impact upon one party than another or it may have impact upon one party rather than another, but the critical question in this particular case is really what test should be applied where the parties have in fact put together an arrangement which has all the features about it of a sublease ‑ ‑ ‑

GUMMOW J:   Have you any avoidance provision in your Stamps Act?

KIRBY J:   Whilst that is being ‑ ‑ ‑

MR GOLVAN:   I am not aware of any avoidance provisions in the Stamps ‑ ‑ ‑

KIRBY J:   You would be aware of it, surely, if it existed.  But you say that is the critical question, but the critical question for me, because I am sympathetic to the conclusion Justice Gillard reached, is whether this is a suitable vehicle.  Your client is well positioned to deal with the problem, either in the way Justice Gummow first mentioned by amending and clarifying the legislation or securing that amendment in Parliament or, secondly, by waiting for the next case, and there will be many of them, in which the issue can be presented where you, as it were, allow a party a full chance to explore the factual assertion that this looks like a lease, it smells like a lease and, effectively, it is a sham or it is false within this new pretence doctrine.  That is the case when this Court can take it up.

MR GOLVAN:   Our submission is that this is a suitable case because it, in fact, does not turn specifically on facts that may be unique to this particular case.  There is no dispute about the facts.  The dispute really is a construction dispute and it is a suitable case in which these issues can be explored and clarified by the High Court.

McHUGH J:   I must say I do not understand this argument.  What does a court do with an express clause which says, “This is a licence.  As between us you have no exclusive right of possession.”  Does the court say, “We just disregard that.”  See, when you talk about the true relationship between the parties are the substance of the relationship, your argument seems to me to entirely omit from the discourse that vital clause.

MR GOLVAN:   That is the critical question that we say is the question that should be examined by the High Court.  Now, our submission would be that Mr Justice Gillard applied the right test.  He said he looked at the nature of the arrangement contained in the licence agreement, the surrounding circumstances, what type of business it was – it was a shop in an arcade ‑ and he said that a clause between the parties which purports to impose particular rights and duties should be ignored if, in fact, it is not part of the true bargain between them.

GUMMOW J:   How do you find out what the true bargain was, Mr Golvan?

MR GOLVAN:   The true bargain, we say, is actually ascertained by looking at the terms of the document itself and by looking at the surrounding circumstances.  That is the test ‑ ‑ ‑

GUMMOW J:   What are the surrounding circumstances?

MR GOLVAN:   The surrounding circumstances in this case are the circumstances that were clearly before the court and that is that we are dealing with a lease in which the respondent effectively had a lease for a term – I am sorry, was entitled to occupy the premises for a term, less one day, than the head lease; that there was a fixed rent which was equivalent to the rent in the head lease; that we are talking about a retail shop in an arcade that effectively could not be conducted unless the respondent was given exclusive possession of that business.  Now, this case has about it all of the features, we contend, that the Court had before it in Radaich v Smith.

McHUGH J:   That seems to indicate that the parties never intended the licence provision to operate at all and that it was a sham.

MR GOLVAN:   No, that is not the question, your Honour.  The question is not whether the parties intended the licence provision to operate; the question is, with respect, whether looked at as a totality, the substance and effect of the transaction is in fact a lease rather than a licence.  If that is the position, then the clause in question, in which the parties put a label on the grant, is ignored.

McHUGH J:   But there is nothing wrong with the owner of land saying, “I want to reserve my rights to enter when I want to.  Now, as a matter of practicality, I may never exercise those rights, but it is a legal right I want.”  Why is not that the proper conclusion in this particular case?

MR GOLVAN:   Because, looked at as a totality, that reservation of rights does not represent the true agreement between the parties.

McHUGH J:   But how do you know that?

MR GOLVAN:   Because if you remove clause 2.2 in this case and you looked at the arrangement, there would not be, with the greatest of respect, any doubt that it was a lease.  The difference in this case was the fact that the parties have applied a label to the arrangement and what Radaich v Smith, we say, indicated, and what the English pretence cases indicate, is that you look at the substance and effect of the transaction and if the substance and effect of the transaction is in fact a transaction which provides exclusive possession, if in fact the business cannot be conducted without exclusive possession, if it has all of the features of a grant which gives exclusive possession, then merely because the parties choose to apply a label which is inconsistent with that substance and effect is not something that the Court should allow to over-weigh all the other considerations.

Now, this is one of the questions that the Court really needs to consider:  what weight you should give to a clause of that type.  Do you give it no weight, do you give it paramount weight, do you give it some weight?  That is one of the critical considerations that needs to be considered.  In our respectful submission, this case is an excellent vehicle in which to do that because it is essentially a construction case in which these issues very much come up for consideration.  There are no unique factual circumstances that are peculiar to the parties.  Rather it is a case which really turns upon construction in which the operation of this clause stands for consideration and the Court can examine whether or not the English pretence doctrine is in fact a doctrine which applies in Australia and, really, raise many of the questions that were raised by Mr Justice Tadgell in the Court of Appeal decision concerning the limits and application of the English pretence doctrine, and raise important questions and considerations that the applicant submits should be dealt with and clarified by this Court.

Some of those questions are:  does it only apply to terms inserted for the purpose of avoiding statutory protection, such as the Rents Act, which is one of the issues raised by Mr Justice Tadgell?  How is it to be determined that a term has been inserted for an inadmissible and ulterior purpose, if that is a relevant consideration?  How are the courts to read the agreement at its face value?  Does the doctrine apply to commercial agreements?  There are a range, we would say, of very important questions that really need to be determined, questions that were raised by Mr Justice Tadgell and, indeed, Mr Justice Gillard, the primary judge applied the doctrine in this case as an application of the principles in Radaich v Smith, whereas Justice Tadgell thought it was unnecessary to apply the doctrine in the circumstances of this case because, in fact, no evidence had been adduced that the clause did not mean what it said. 

Now, what we say, if the Court pleases, is that the test which was applied by the Court of Appeal in the present case is a test which, on analysis, is a test in which a no right of exclusive possession clause is to have effect in accordance with its terms unless there is some supporting evidence that the clause was illusionary or a pretence in the sense that it was inserted for the purpose of avoiding stamp duty.  Mr Justice Callaway and Mr Justice Chernov placed weight on hypothetical commercial reasons why the franchisor might want to exercise its rights under the particular clause, although those hypothetical commercial reasons were not incorporated into any provision of the licence or the franchise agreement.

KIRBY J:   Does this not illustrate the problem?  Instead of judges speculating and going into all sorts of theories and possibilities, you run it at trial and you put it to a party, and it may well be that that would lend great weight to your case, even if it falls short of a sham, that the parties say, “Well, I didn’t know, I just took the lawyer’s advice”, that it is something which, for the purposes of the revenue statute, is going to be dealt with in this particular way.  But then the Court has facts.

MR GOLVAN:   But, your Honour, as a matter of reality, it may be impossible for a person challenging the grant to in fact adduce evidence to indicate what the actual intentions of the parties might be.

KIRBY J:   I agree that there could be some problems.

MR GOLVAN:   That is a major problem, and we say that speculation about the possible uses that a franchisor might have for premises, based upon the kind of commercial purposes for which premises may be used, are really highly unrealistic and open up a Pandora’s box in which parties wishing to preserve a grant speculate about hypothetical commercial justifications which have no resemblance in reality or, in fact, conform with the true intentions of the parties.

McHUGH J:   I think you time is up, Mr Golvan.

MR GOLVAN:   If the Court pleases.

McHUGH J:   We need not hear you, Mr Bleechmore.

Special leave will be refused in this case.  Justice Gummow and I are of the view there is no reason to doubt the correctness of the judgment of Court of Appeal.

KIRBY J:   In my opinion, having regard to the evidence, the issues and the manner in which the trial of those issues was conducted, this case is not a suitable vehicle to reconsider the decision of this Court in Radaich v Smith 101 CLR 209 or any relevance to the law there established or the facts of the suggested principle of pretence as stated in Antoniades v Villiers (1990) 1 AC 417. I also would refuse special leave.

MR BLEECHMORE:   The respondent would seek an order for costs, if the Court pleases.

McHUGH J:   You cannot oppose that, Mr Golvan. 

MR GOLVAN:   No.

McHUGH J:   The application is dismissed with costs

McHUGH J:   The Court will now adjourn to reconstitute.

AT 10.31 AM THE MATTER WAS CONCLUDED