CTI Joint Venture Company Pty Ltd v Chief Commissioner of State Revenue
[2013] NSWSC 20
•30 January 2013
Supreme Court
New South Wales
Medium Neutral Citation: CTI Joint Venture Company Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 20 Hearing dates: 29 October 2012 Decision date: 30 January 2013 Jurisdiction: Equity Division - Revenue List Before: Gzell J Decision: Arrangement constituted a novation and neither s 8(1)(b)(i) nor s 8(1)(a) of the Duties Act 1997 applied. Assessment revoked.
Catchwords: TAXES AND DUTIES - Stamp Duties - call options with power in optionee to nominate a substitute - whether an agreement for sale or transfer within s 8(1)(b)(i) of the Duties Act 1997 - nomination effected by giving a call option nomination notice - whether a transfer of dutiable property within s 8(1)(a) of the Act Legislation Cited: Duties Act 1997 (NSW) Cases Cited: ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue [2012] HCA 6; (2012) 245 CLR 338
Braham v Walker [1961] HCA 7; (1961) 104 CLR 327
Carter v Hyde [1923] HCA 36; (1923) 33 CLR 115
Coles Myer Ltd v Commissioner of State Revenue (Vic) (1998) 4 VR 728
Commissioner of Taxes (Qld) v Camphin [1937] HCA 30; (1937) 57 CLR 127
Gathercole v Smith (1881) 17 Ch D 1
Goldsborough Mort & Co Ltd v Quinn [1910] HCA 20; (1910) 10 CLR 674
Laybutt v Amoco Australia Pty Ltd [1974] HCA 49; (1974) 132 CLR 57
Littlewoods Mail Order Stores Ltd v Inland Revenue Commissioners [1963] AC 135
Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 at 698 [388]
Re United Railways of the Havana and Regla Warehouses Ltd [1960] 1 Ch 52
Scarf v Jardine (1882) 7 App Cas 345
Spiro v Glencrown Properties Ltd [1991] Ch 537Texts Cited: JW Carter, Elisabeth Peden and GJ Tolhurst, Cases and Materials on Contract Law in Australia, 5th ed (2007) LexisNexis Butterworths Category: Principal judgment Parties: CTI Joint Venture Company Pty Ltd (Plaintiff)
Chief Commissioner of State Revenue (Defendant)Representation: Counsel:
M Richmond SC/ Christopher Peadon (Plaintiff)
N Hutley SC/ M Sealey (Defendant)
Solicitors:
King & Wood Mallesons (Plaintiff)
Crown Solicitors Office (Defendant)
File Number(s): SC 2012/165290
Judgment
The review in this matter is of narrow compass. The question is whether the substitution of one party for another as the holder of call options was effected by transfer or by novation.
The Facts
The facts are not in dispute. Transport for New South Wales (previously named Transport Construction Authority and Transport Infrastructure Development Corporation) and Rail Corporation of NSW (Landowners), entered into four Call Option Deeds in materially the same form in favour of CRI Chatswood Pty Ltd (CRI). Under the Call Option Deeds CRI was granted options to purchase contiguous parcels of land at Chatswood, New South Wales.
The Call Option Deeds were part of a wider transaction under which CRI was granted development rights by the Transport Construction Authority for the purpose of constructing the Chatswood Transport Interchange Development in and around Chatswood railway station, including a retail complex, car park and podium for three residential towers.
Each Call Option Deed was amended by a deed of variation in materially the same terms between the Landowners and CRI.
As amended, Call (Residential 1) Option Deed was in materially the same terms as the other three Call Option Deeds as amended. The option was granted by cl 4, which was in the following terms:
"In consideration of the Grantee paying to the Grantor the Call Option Fee (receipt of which the Grantor acknowledges), the Grantor grants to the Grantee, on and from the date of this deed:
(a) an option to purchase the Property, exercisable in the period referred to in clause 5.1 (First Call Option); and
(b) a second option to purchase the Property, exercisable in the period referred to in clause 5.3 (Second Call Option),
for the Price and on the terms and conditions contained in the Contract."
The Call Option Fee was defined as $10; the Property was a defined parcel of land; the Price was defined as $1; and the Contract was defined as the form of contract for sale of the Property annexed to the deed.
Clause 5.1 stipulated a period in which the First Call Option might be exercised. That period expired on 20 February 2012.
Clause 5.2 specified the manner of exercise of the First Call Option. It was in the following terms:
"5.2 Conditions of Exercise of Call Option
Subject to clause 10, the Grantee may only exercise the Call Option:
(a) by giving to the Grantor the Notice of Exercise of Call Option signed by the Grantee and dated the same date that the Call Option is exercised;
(b) by giving to the Grantor one copy of the Contract (with the current title details of the Property inserted into the contract):
(i) with the name, address and contact information of:
A. the Purchaser; and
B. the Purchaser's solicitor,
Inserted, where applicable, into the Contract, and properly executed by the Grantee; or
(ii) if the Call Option is exercised by the Nominee, with the name, address and contact information of:
A. the Nominee; and
B. the Nominee's solicitors,
inserted, where applicable, in the Contract, and, properly executed by the Nominee, and dated the same date as the Notice of Exercise of Call Option;
(c) by paying the Deposit by cash or cheque made payable to the Grantor; and
(d) if the Notice of Exercise of Call Option is given by the Nominee, by giving the Grantor a Call Option Nomination Notice properly executed by the Grantee and the Nominee and the Nominee must provide evidence of Foreign Investment Review Board approval if this is necessary for the Purchaser to legally purchase the Property."
Clause 5.3 and cl 5.4 defined the Second Call Option Period and the manner of exercise of the Second Call Option. They were in the following terms:
"5.3 Second Call Option Period
(a) The Grantee may exercise Second Call Option at any time during the period which commences on the date which is the later to occur of
(i) 43 days after the date of the Deed of Variation;
(ii) 3 months and 1 day after the date of the Deed of Variation;
(iii) the date a Call Option Nomination Notice is first given under clause 10.1(a); and
(iv) if the Nominee exercises the First Call Option during the period set out in clause 5.1 and the contract between the Grantor (as the vendor) and the Nominee (as the purchaser) is terminated by the Grantor by reason of breach by the Nominee of clause 43 of that Contract, the date of receipt by CRIC of a notice in writing from the Grantor informing CRIC that the Contract is terminated,
and expires 5:00 pm on the date which is the later of:
(v) the Call Option Expiry Date; and
(vi) 10 Business Days after the date referred to paragraph (a)(iv).
(b) In the event that paragraph (a)(iv) occurs:
(i) CRIC replaces the Nominee as the grantee under this deed; and
(ii) the provisions of clauses 5.2, 9 and 10 will apply (mutatis mutandis) to any nomination under, and the exercise of, the Second Call Option.
5.4 Grantor must give notice
The Grantor must serve a notice in writing to CRIC if the Nominee exercises the First Call Option during the period set out in clause 5.1 and the Contract between the Grantor (as the vendor) and the Nominee (as the purchaser) is terminated by the Grantor by reason of breach by the Nominee of clause 43 of that Contract at the same time as the Grantor serves a notice of termination."
CRIC was defined to mean CRI.
Clause 9 and cl 10 were in the following terms:
"9. Exchange of Contracts
After the exercise of the Call Option, the Grantor and the Grantee will promptly exchange copies of the Contracts executed by the Grantor and the Grantee. Failure to exchange the Contracts will not affect the validity of the agreement created by the exercise of the Call Option and the Contracts are deemed to have been exchanged on the terms and conditions contained in the Contract on the date that the Call Option was exercised in accordance with this deed, as applicable.
10. Nominee
10.1 Grantee may nominate Nominee
(a) The Grantee may by giving the Call Option Nomination Notice to the Grantor at any time before exercise of the Call Option, nominate one or more nominees who, as from the date of the Call Option Nomination Notice (but subject to clause 5.3(b)(i)), will replace the Grantee as the grantee under this deed and/or the Purchaser under the Contract upon exercise by the Grantee or the Nominee (as applicable) of the Call Option.
(b) If the Grantee provides the Grantor with a Call Option Nomination Notice executed by the Nominee pursuant to this clause 10.1, the Grantee irrevocably and unconditionally guarantees to the Grantor the performance of this deed and the Contract by the Nominee. The Grantee guarantees to the Grantor the payment of all money that the Grantee would have been obliged to pay under this deed and the Contract as if there had been no nomination. The Grantee will pay that money to the Grantor on the due dates if required by the Grantor irrespective of whether the Contract has been completed or title has been transferred to the Nominee, provided that upon payment of all that money the Grantor will transfer the Property to the Nominee in accordance with the Contract."
Clause 5.3(b)(i) provided that in the event that the Nominee exercised the First Call Option and the Contract was terminated by the Grantor by reason of breach by the Nominee of cl 43 of the Contract, CRI would replace the Nominee as the grantee under the Call Option Deed.
Clause 43 of the Contract provided for termination for breach by the Purchaser of an essential obligation of the Contract.
The form of the Call Option Nomination Notice was set out in Annexure C to the Call Option Deeds. It had a short recital, identified the Grantor, the Grantee and the Nominee and provided:
"1 Nomination
The Grantee irrevocably nominates the Nominee to be its nominee for the purposes of the Deed.
2 Assumption by Nominee
Commencing from the date of this notice, the Nominee assumes the Grantee's obligations contained in the Deed and the Contract (as defined in the Deed), and without limiting the generality of the foregoing the Nominee (sic) provides the guarantee specified in clause 10.1 of the Deed.
3 Irrevocable
The Grantee and the Nominee acknowledge that the substitution is irrevocably made and that no further substitution is permitted by the Grantee or the Nominee."
The recital referred to the relevant Call Option Deed and stated: "The Deed contains a provision in which the Grantee may nominate one or more nominees ("Nominee") who will replace the Grantee under the Deed."
In November 2010, CRI and CTI Joint Venture Company Pty Ltd (CTI), the plaintiff, as Nominee, executed a Nomination Deed. Relevantly for present purposes cl 2.1 contained the following provisions:
"2.1 Nomination
The Nominee agrees to pay the Nomination Fee to CRI in accordance with this deed and in consideration of the promise to pay the Nomination Fee, CRI will:
(a) in accordance with this deed and clause 9.1 of the Call (Car Park) Option Deed, nominate the Nominee as the Nominee under the Call (Car Park) Option Deed;
(b) in accordance with this deed and Clause 10.1 of the Call (Residential 1) Option Deed, nominate the Nominee as the Nominee under the Call (Residential 1) Option Deed;
(c) in accordance with this deed and clause 10.1 of the Call (Residential 2) Option Deed, nominate the Nominee as the Nominee under the Call (Residential 2) Option Deed;
(d) in accordance with this deed in clause 10.1 of the Call (Residential 3) Option Deed, nominate the Nominee as the Nominee under the Call (Residential 3) Option Deed; and
...."
The Nomination Fee was defined in cl 1.1 as $60,518,675 (plus GST).
In accordance with cl 2.2(a), CTI caused a Commitment Fee of $3,200,000 (plus GST) to be delivered.
Later in November 2010 CTI executed, for each Call Option Deed, a Call Option Nomination Notice in accordance with Annexure C of that deed, a Notice of Exercise of Call Option in accordance with Annexure A of that deed and a counterpart of the Contract.
In early December 2010, CTI delivered the four Call Option Nomination Notices to CRI and CRI executed them. CRI then delivered to the party specified to receive documents on behalf of the Landowners the Call Option Nomination Notices and CTI delivered the Notices of Exercise of Call Option, a counterpart of each Contract and registrable transfers of the relevant Property.
CTI lodged the four Contracts and associated transfers with the Chief Commissioner of State Revenue, the defendant, and paid duty assessed at $3,524,641 on the Contracts and $40 on the associated transfers. The former figure was calculated on the Nomination Fee of $60,518,675 (plus GST) plus the aggregate consideration payable under the Contracts of $3,829,461.90. There is no dispute in relation to this duty.
The Legislation
Chapter 2 of the Duties Act 1997 (Act) imposes duty on transactions concerning dutiable property. Section 8(1)(a) charges duty on a transfer of dutiable property and s 8(1)(b)(i) charges duty on an agreement for sale or transfer of dutiable property. Dutiable property is defined exhaustively in s 11(1). It includes, as s 11(1)(k), an option to purchase land in New South Wales.
The Law
The central concept of a sale is the transfer of property from a seller to a buyer for a monetary consideration (Littlewoods Mail Order Stores Ltd v Inland Revenue Commissioners [1963] AC 135 at 152; Commissioner of Taxes (Qld) v Camphin [1937] HCA 30; (1937) 57 CLR 127 at 133-134).
It is common ground that the Act does not extend the concept of a sale to a transaction whereby property is created rather than transferred.
"Transfer" was considered in Coles Myer Ltd v Commissioner of State Revenue (Vic) (1998) 4 VR 728. At 730 Ormiston JA, with whom Winneke P agreed, said:
"There are two parties to every transfer, the transferor who disposes of all rights in the transferred property and the transferee
who receives or acquires them so as thereafter to have the power to exercise effectively the same rights in the future. For an instrument properly to be characterised as a 'transfer' one
must be able to find that the property has passed from transferor to transferee so that the property is vested in a transferee who
for all practical purposes is then capable of exercising the same rights as were capable of being exercised by the transferor before
the transfer was executed."
In Gathercole v Smith (1881) 17 Ch D 1 at 6 James LJ said the word "transfer" was "one of the widest terms that can be used". In Coles Myer at 740 Ormiston JA said of these words:
"The latter words, as do the words of like import from the Webster's Dictionary definition, place proper emphasis on the bilateral nature of the act of transfer, namely, that it requires not merely the disposition by the former owner but also the receipt of the relevant rights by the new owner."
His Honour went on to say:
"Although the word 'transfer' is not a term of art and is a word of wide connotation, to my way of thinking it is the passing of rights to another, so as to vest them in that other person, which is essential to a transfer, properly understood. It is not a mere disposition, a ridding oneself of the right or interest, it is the vesting in the transferee of that right or interest, precisely or substantially, which is necessary to effect a transfer, as ordinarily understood in the law."
In Coles Myer, as the result of a share buy-back, a shareholder executed a transfer of the shares to the company. Upon registration of the transfer the shares were cancelled and the rights attaching to them were extinguished. The majority of the Court of Appeal held that it was entitled to look at the real nature or substance of the transaction to ascertain whether the transfer was properly characterised by its purported description and the form that it took. Their Honours held it was not a transfer in that it failed to vest any property, right or interest in the company.
It is common ground that the grant of an option, as opposed to a transfer of it, is not a transfer. In Camphin at 133-134 Latham CJ said this:
"When an owner of land grants a lease the lessee obtains a proprietary interest in the land, which is personal property, but the owner has not sold this personal property to the lessee. He himself never was the owner of that personal property. He has created a term in the lessee, and the lessee owns a proprietary interest which he did not own before, but that interest has not been sold to him. The transaction is properly described by saying that the owner of the land has leased his land and has created a term in the tenant and a reversion in himself. The result of giving an option for value is that the person to whom the option is given acquires an equitable interest. But this equitable interest has not, in my opinion, been sold to him. The equitable interest is measured by what a court of equity would decree in an action for specific performance. The right of the person who may be called the owner of the option is a right to prevent the owner of the property in question from disposing of it inconsistently with the option, together with a right, if he exercises the option, to compel the owner of the property to carry out the contract which has been made by the exercise of the option. This right of the optionee is a right which has been created by the option, but it is not a right which the owner of the property ever possessed. He has created a new right in the optionee which is a right of property, but he has not transferred to the optionee any right which previously belonged to him as the owner of the property in relation to which the option was given. Thus there has been no sale of any property."
In Re United Railways of the Havana and ReglaWarehouses Ltd [1960] 1 Ch 52 at 88, Jenkins LJ and Romer LJ said:
"The contractual right to receive payment of a debt is an item of property, that is to say, a chose in action. It can be transferred by the creditor to a third party, but the validity of the transfer necessarily depends upon the lex situs, because the courts of the country where the debt is have jurisdiction over the title to it. Novation, on the other hand, does not involve the transfer of any property at all, for, as we have already pointed out, it comprises the annulment of one debt and the creation of another."
Options have been described as irrevocable offers or conditional contracts or sui generis arrangements (Spiro v Glencrown Properties Ltd [1991] Ch 537 at 544). The Chief Commissioner does not cavil with this proposition pointing to Carter v Hyde [1923] HCA 36; (1923) 33 CLR 115 at 122-123 and Camphin as examples in support of the irrevocable offer characterisation, and Laybutt v Amoco Australia Pty Ltd [1974] HCA 49; (1974) 132 CLR 57 at 73 and Goldsborough Mort & Co Ltd v Quinn [1910] HCA 20; (1910) 10 CLR 674 at 677 as examples in support of the conditional contract characterisation.
Dixon CJ in Braham v Walker [1961] HCA 7; (1961) 104 CLR 327 called the various descriptions of the nature of an option as a "standing controversy".
It has been suggested that the view that commands most support in Australia is that of an irrevocable offer coupled with a promise by the grantor not to revoke the offer for a given period (JW Carter, Elisabeth Peden and GJ Tolhurst, Cases and Materials on Contract Law in Australia, 5th ed (2007) LexisNexis Butterworths at [3-81]).
CTI submits that for the purpose of s 8(1)(b)(i) of the Act the nature of the options granted by the Landowners to CRI under the Call Option Deeds should be considered from the perspective of the option holder, CRI, rather than the Landowners, because a transfer or sale involves the vesting in the transferee of precisely or substantially the rights formerly held by the transferor, in this case CRI as option holder. The Chief Commissioner agrees with this view.
He also agrees with CTI that from CRI's perspective the call options are properly characterised as irrevocable offers because CRI was free to accept or not accept the offer and cannot be said to have been under any contractual obligation, conditional or otherwise, to enter into the Contracts.
The Chief Commissioner adds that the fact that the Call Option Deeds were not stamped indicates that CRI regarded the call options as irrevocable offers because, in the event that they were conditional contracts, transfer duty under s 8(1)(b)(i) of the Act would have been payable on their first execution as agreement for sale or transfer of dutiable property.
In addition the Chief Commissioner agrees with CTI that in this case it does not matter what the juristic nature of the call options is for the purpose of determining whether they were capable of being sold or transferred.
It is common ground that a novation in its simplest sense refers to the making of a new contract in place of the old which is thereby discharged (Scarf v Jardine (1882) 7 App Cas 345 at 351).
The effect of a novation is upon the obligations of both parties to the original, executory, contract. The inquiry in determining whether there has been a novation is whether it has been agreed that a new contract is to be substituted for the old and the obligations of the parties under the old agreement are to be discharged (ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue [2012] HCA 6; (2012) 245 CLR 338 at 346 [12]).
It is not correct to describe novation as involving the succession of a third party to the rights of a party under original contract (ALH Group at 346 [12]).
It is common ground that the benefit of a contract can be transferred but the burden of a contract cannot. That requires novation.
Novation v Sale or Transfer
It is not in issue that the rights held by CRI under each Call Option Deed were dutiable property. The Chief Commissioner raises two issues:
- Whether the Nomination Deed constituted a dutiable transaction as an agreement for the sale or transfer of the Call Options under s 8(1)(b)(i) of the Act; and
- Whether each Call Option Nomination Notice constituted a transfer of dutiable property under s 8(1)(a) of the Act.
For the reasons that appear below, I am of the opinion that each question must be answered in the negative.
CTI's case in its written submissions is that the legal effect of CRI exercising its right under cl 10 of the Call Option Deeds to substitute CTI as grantee was a novation. It did not transfer CRI's rights under the Call Option Deeds to CTI. Instead, it vested new rights in CTI and it was released from its obligations under the Call Option Deeds which obligations were replaced by a guarantee. There was an annulment of CRI's rights under the Call Option Deeds and the creation of new rights under them in CTI.
CTI submitted that there are a number of indications that the parties intended their transaction to be a novation rather than a transfer.
Clause 1.2(c) of the Call Option Deeds was in the following terms:
"a reference to any party to this deed includes that party's executors, administrators, successors, and permitted substitutes and assigns, including any person taking part by way of novation."
It was submitted that the specific reference to novation and the inclusion of the word "substitutes" as a party to such a transaction supported CTI's case.
Clause 1.2(e) of the Call Option Deeds was in similar vein, it was submitted. It was in the following terms:
"a reference to this deed or to any other deed, agreement, document or instrument is deemed to include a reference to this deed or such other deed, agreement, document or instrument as amended, novated, supplemented, varied or replaced from time to time."
On the other hand, the Chief Commissioner points to cl 14.2 in the following terms:
"14.2 Grantee must not assign
Other than the Grantee's right to appoint a Nominee under clause 10.1 of this deed, the Grantee must not assign its rights and obligations under this deed to any other person without first obtaining the Grantor's written consent."
There is no mention of novation and the Chief Commissioner submits that cl 14.2 indicates that the intention of the parties was to transfer the call options from CRI to its Nominees.
The Chief Commissioner points out that cl 14.2 does not contain terms like "release" of any rights or obligations of the Grantee or to the "creation" or "grant" of any rights in any future nominee.
CTI responds that the word "assignment" is used in a loose sense and the clause was not intended to cut down the specific provisions in cl 10.1. It points out that the language employed by the parties is not determinative of the proper legal characterisation of the nomination process.
Further, it was submitted that the language used in cl 10.1 of the Call Option Deeds evidences the parties' intention to create a new call option in favour of CTI.
It points out that the phrase "must not assign its rights and obligations under this deed" in cl 14.2 of the Call Option Deeds is curious because obligations cannot be assigned. Of significance, it was submitted, is the fact that cl 14.2 does not say: "Other than the Grantee's right to assign to a Nominee under clause 10.1". The exclusion is couched neutrally as: "the Grantee's right to appoint a Nominee."
In my view the submissions of CTI on these matters are to be preferred to that of the Chief Commissioner. To my way of thinking the preponderance of internal reference supports a novation rather than a transfer or an agreement for the sale or transfer.
CTI submits that when the Call Option Deeds are read as a whole the intention of the parties is clear that the Nominees appointed under cl 10.1 would be substituted for and replace the old Grantee, CRI.
It was submitted that this followed from the use of the word "replace" in cl 10.1(a), its use in the recital to the Call Option Nomination Notices, the inclusion of the word "substitutes" and the words "including any person taking by way of novation" in cl 1.2(c) and the inclusion of the word "novated" in cl 1.2(e).
In addition, it was submitted that cl 10.1(b), in providing that the old Grantee becomes the guarantor of the new grantee, imposes a secondary obligation that presupposes that the old Grantee has ceased to have the primary obligation. The same applies to the assumption of obligation by the new grantee and the provision of the guarantee by the old Grantee in cl 2 of the Call Option Nomination Notices.
It was submitted that the Call Option Nomination Notices did not adopt the language of a sale or transfer. The word "substitution" was used in cl 3 to describe the transaction and that meant novation.
The Chief Commissioner submitted that the use of the word "replace" in the recital to the Call Option Nomination Notices was of no consequence as it formed part of a recital only.
CTI pointed out, however, that the text of the recital comprises part of each Call Option Deed because it was included as annexure C. Furthermore, in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 at 698 [388] it was held that the recitals in a deed can be looked at as part of the surrounding circumstances of a contract without a need to find ambiguity in the operative functions of the contract. This proposition has not found favour with the High Court, however (see Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45).
And, as CTI points out, by virtue of the giving of a Call Option Nomination Notice, CTI is substituted for CRI as the person entitled to exercise the First Call Option under cl 5.1.
In my view that submission should be decided in favour of CTI.
The Chief Commissioner submits that where, as in this case, the terms of the Call Option Deeds do not impose any contractual obligation on the Grantee prior to exercise of the option, the entirety of the property held by the Grantee can be transferred and novation, in that context, has no work to do.
CTI's answer to this submission is to point to the obligations imposed on the Grantee under the Call Option Deeds. Clause 9 required the Grantee upon exercise of the option, promptly to exchange copies of the Contract executed by both parties. Clause 12.3 required CRI to make an additional payment in the amount of the GST. Clause 13 required the Grantee as caveator to consent to the registration of the Building Rights Package and the registration of a transfer document in connection with the sale of the Property to the Grantee or the Nominee. Clause 14 provided that the Grantor might assign its rights and interests under the Call Option Deeds to a Landowner. Clause 14.1(c)(i) provided that if the Grantor gave a notice to this effect to the Grantee, it agreed that it would fully perform the terms, conditions and obligations contained in the Call Option Deeds with the assignee as if it had entered the deed directly with the assignee. And the Grantee irrevocably indemnified the Grantor with respect to any failure by the Grantee to perform the terms of the Call Option Deeds after assignment.
Clause 10.1(a) of the Call Option Deeds states that the Grantee may nominate one or more nominees who: "will replace the Grantee as the grantee under this deed and/or the Purchaser under the Contract" upon exercise of the option.
The term "Grantee" is defined in the Call Option Deeds to mean CRI. The Chief Commissioner argued that the ancillary obligations upon the Grantee in the Call Option Deeds are imposed on CRI. The term "grantee" is not defined. The Chief Commissioner submitted that the Nominee would not replace CRI as a party to the Call Option Deeds and the ancillary obligations remained imposed upon CRI.
The Chief Commissioner referred to cl 5.3 and cl 5.4 of the Call Option Deeds as establishing a continuing vitality in the original Call Option Deeds. The notice referred to in cl 5.4 was to be given under the original Call Option Deeds and not some replacement of them. But that is a feature of any novation. The machinery for effecting the substitution will be spelled out in the document or conversation establishing the entitlement to effect the novation and in that sense it will retain a continuing vitality.
The Chief Commissioner submitted that CTI did acquire the Grantee's rights and obligations under the Call Option Deeds with respect to the Contracts because the term "Purchaser" is used and it is defined to mean the purchaser of the Property described in the Contract (whether the Grantee or the Nominee).
This is a commercial transaction and is to be construed as such. The Chief Commissioner's submission based upon a contrast between Grantee and grantee and any continued vitality in the Call Option deeds is strained. It should be rejected.
Of significance, in my opinion, is the assumption of the guarantee by CRI. If CTI assumed no liability under the nomination and all liabilities remained with CRI, there would be no point to the guarantee. CTI would owe no obligation to the Landowners requiring any grantee from CRI and there would be no point to a guarantee from CRI if it remained subject to all liabilities.
The Chief Commissioner submitted that the guarantee was irrelevant in characterising the legal effect of the nomination. He cited common commercial practice for an assignor to provide a guarantee to a third party in respect of its assignee's obligations.
In this case CRI guarantees to the Landowners the performance by CTI of its obligations under each Call Option Deed to pay money and perform other obligations. The guarantee demonstrates in clear language that CTI has been substituted for CRI under the Call Option Deeds and that CTI has obligations under those deeds. If CTI's obligations to the Landowners are capable of being guaranteed, the arrangement must have imposed binding obligations on CTI owed to the Landowners.
Clause 2 of the Call Option Nomination Notices provided that from the date of the notices CTI assumed CRI's obligations under the Call Option Deeds and the Contract. The Chief Commissioner argued that there would be no need for such an overt assumption of liability if upon nomination CTI was substituted for CRI as a party to the Call Option Deeds and the ancillary obligations to the Landowners imposed upon CRI became imposed upon CTI.
In answer CTI submitted that the explicit reference to an assumption of liability evidenced the parties' intention that there be a novation of the call options upon nomination and it is irrelevant whether such a reference is strictly necessary. I agree.
The Chief Commissioner refers to the assumptions of liability arising under a novation as bilateral and points to the fact that neither cl 10.1 of the Call Option Deeds nor the Call Option Nomination Notices includes an agreement by the Landowners to be bound to CTI as Nominee. Rather the Landowners are merely notified of the nomination upon delivery of the Call Option Nomination Notice.
But as CTI points out, party A to a contract can prospectively authorize party B to that contract to "transfer" party B's "rights and obligations" under the contract without party A being a party to the arrangement between party B and the "transferee" (CSG Ltd v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335 at [134]).
The Chief Commissioner contends that the nomination process is entirely bipartite as between CRI and CTI and requires no action on the part of the Landowners and that is wholly consistent with the characterisation of the nomination of CTI as a transfer or assignment of each call option.
While the Nomination Deed was bipartite in nature, the Landowners were party to the Call Option Deeds that set out the conditions and processes in order to effect a valid nomination.
Furthermore, a nomination substituting CTI for CRI under the terms of the Call Option Deeds to which CRI and the Landowners were the parties was a tripartite arrangement to which the Landowners were essential parties.
The Chief Commissioner argued that if the nomination process created new call options from the Landowners to CTI, it would be expected that CTI would be required to pay a new Call Option Fee of $10 to the Landowners and there is nothing in the evidence suggesting such a payment.
CTI responded that there was nothing in the Call Option Deeds or the procedure for making a nomination under cl 10.1 to require a further Call Option Fee to be paid. I agree with that submission. The requirement of payment of a Call Option Fee of $10 was a de minimus feature of the arrangement.
The Chief Commissioner contended that if CTI's construction were correct the Nominee would itself be entitled to nominate a new Nominee and so on ad infinitum such that CRI would drop out as guarantor and the Landowners would not have protection against default by an uncreditworthy new grantee.
But cl 4 of the Call Option Nomination Notices provided that the substitution of CTI was irrevocable and there could be no further substitutions.
In oral submissions, Mr Richmond SC, who with Mr Peadon appeared for CTI, refined his submissions and characterised the arrangement as an irrevocable offer, a partial novation or a variation.
It was submitted that cl 4 of the Call Option Deeds was an irrevocable offer in accordance with the preference for that characterisation of an option to which reference is made above.
If the conditional contract approach was preferable, the submission was that the arrangement amounted to a partial novation - the substitution of a new party for an existing one without a novation of the entire contract.
As a fallback position if neither of those approaches was appropriate it was submitted that the arrangement amounted to a variation. A new option in favour of CTI standing with the old contract.
Mr Hutley SC, who with Mr Sealey appeared for the Chief Commissioner, submitted that each of the three approaches failed.
In my view the preferable approach is to characterise the Call Option Deeds as irrevocable offers or as providing for partial novations. In either event the analysis set out above is apposite.
Conclusion
In my view the nomination of CTI was effected by way of novation and was not a sale or transfer. In consequence, the Nomination Deeds are not agreements for sale or transfer of dutiable property pursuant to s 8(1)(b)(i) of the Act and the Call Option Nomination Notices did not effect a transfer of dutiable property under s 8(1)(a) of the Act.
Court Orders
(1) The decision of the defendant dated 7 May 2012 whereby he disallowed the plaintiff's objection dated 17 April 2012 (Objection) against the defendant's assessment dated 5 April 2012 (Assessment) is set aside.
(2) The Objection is allowed.
(3) The Assessment is revoked.
(4) The defendant is to pay the plaintiff's costs.
(5) The exhibits and subpoenaed material are to be returned forthwith.
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Decision last updated: 30 January 2013
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