Farah Construction Pty Ltd v J Cranny and Son Pty Ltd

[2002] NSWSC 364

Reported Decision: (2003) NSW ConvR 56-028

New South Wales

Supreme Court

CITATION:	Farah Construction Pty Ltd v J Cranny & Son Pty Ltd and Another [2002] NSWSC 364
FILE NUMBER(S):	SC 2209/01
HEARING DATE(S):	22/04/02
JUDGMENT DATE:	30 April 2002
PARTIES :	Farah Construction Pty Ltd - Plaintiff J Cranny & Sons Pty Ltd - 1st Defendant M J Davis Valuations Pty Ltd - 2nd Defendant
JUDGMENT OF:	Gzell J

COUNSEL :	W Hodgekiss for the Plaintiff P Clay for the Defendants
SOLICITORS:	D C Balog & Associates Solicitors Butler Law Group Solicitors
CATCHWORDS:	Contracts - promise to negotiate in good faith - rejection of offer - failure to make counter-offer - no breach of duty - whether promise illusory and unenforceable
CASES CITED:	Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1
DECISION:	See par 21 and 22

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

GZELL J

30 APRIL 2002

2209/01 FARAH CONSTRUCTION PTY LTD v J CRANNY & SONS PTY LTD AND ANOTHER

JUDGMENT

1 The plaintiff purchased a property in Byer Street, Enfield adjoining that of the defendant. The plaintiff was granted approval by Burwood Council to develop its property together with the property adjoining on the other side to that of the defendant. There was a factory building on the defendant’s land. The defendant took proceedings against the plaintiff in the Land and Environment Court to restrain it from demolishing any part of the dividing wall between the two properties. The parties entered into terms of settlement on 25 January 2000 whereby the defendant undertook to ensure vacant possession of its factory and the plaintiff undertook, at its expense, to obtain all necessary consents and to demolish the factory on the defendant’s land. Clauses 8 and 9 of the terms of settlement was in the following terms:

“8 Cranny shall in good faith enter into negotiations with Farah for the sale to Farah of the property.
9 Each of the parties shall do all things reasonably required to give effect to this agreement.”

2 In these proceedings the plaintiff claims a declaration that the defendant is in the breach of the terms of settlement and seeks damages or equitable compensation for that breach. An invoice from TMR Demolition & Excavation to the plaintiff was in evidence. I find that the plaintiff paid $28,000 to demolish the factory on the defendant’s site and to remove the rubbish therefrom.

3 Farah George Elias, the sole director and secretary of the plaintiff, swore a number of affidavits. Peter Howard Cranny, a director of the defendant, swore affidavits. Both were cross-examined. Little turns on the oral evidence because the history of negotiations is set out in the correspondence passing between the parties and their legal advisors.

4 In cross-examination, Mr Cranny said that he had told Mr Elias at the time of the Land and Environment Court proceedings that the best offer he had received for the property was $650,000 subject to an option to enable the proposed purchaser to look into the viability of the site. On 2 February 2000 the plaintiff wrote to the defendant re-iterating an offer made on 24 January 2000 to match the $650,000 subject to a 12 month option, and asking the defendant to cause its solicitors to prepare a contract for sale of the land.

5 On 7 March 2000, Mr Cranny wrote to the plaintiff enclosing a preliminary study of the development potential of the defendant’s land prepared by J P McManus & Associates on 3 March 2000 and stated that the defendant was prepared to negotiate as soon as the site was cleared.

6 On 26 April 2000 the solicitors for the defendant wrote to the plaintiff stating that the defendant had obtained advice as to the market value of the property and offering to sell at $1.25 million. In cross-examination, Mr Cranny said that Mr McManus put an approximate figure in excess of $1 million on the land and he, Mr Cranny, set the initial price.

7 On 4 May the plaintiff responded as follows:

“We received from your office by fax on the 26th April 2000 a one page letter which purports to be an offer for sale made in accordance with clause 8 of the parties ( sic ) agreement “to negotiate in good faith” as set out in paragraph 8 of the Terms of Settlement in the Land & Environment Court dated the 25th January 2000.
The letter is marked “without prejudice” and purports to submit an offer for sale of the property by your client for a purported sale price of $1,250,000.00.
We note for the record that it is now more than three (3) months since the terms of settlement were agreed and this is the first time we have received any such correspondence or purported negotiations from you ( sic ) client.
We submit that this “offer” is not in accordance with the terms of our agreement with your client in paragraph 8 “to negotiate in good faith” and is declined.
Should your client contend to the contrary that this offer is “in good faith” we shall be pleased to receive copies of any documentation, advises ( sic ) or information supporting that contention and the calculation of the offer to us including the following:
1. Market value assessments or appraisals
2. Development Plans or proposals for the property
3. Consultants ( sic ) reports on the property
4. Reports of any meeting by your client or consultants with Burwood Council
5. Notes of any discussions regarding saleability of the property
6. Offers for purchase by any third parties.”

The letter went on to raise a number of specific issues with respect to the above headings and further stated:

“We also confirm for the sake of the record that we are ready and willing to negotiate with your client “in good faith” on the sale of the property and request that any offer from your client be based on the market value of the property.”

8 On 14 August 2000 the solicitors for the defendant wrote to the plaintiff enclosing a copy of a valuation from M J Davis Valuations Pty Ltd in the amount of $1.5milion. The letter stated:

“To enable you to consider your position our client would be prepared to sell the land to you for an amount of $1,500,000.00 on the following terms:

1. That a 10% deposit be paid on exchange of contracts.

2. That the contract provide for settlement in forty-two days from the date of exchange of contracts.

3. That in all other respects the contract be in the usual form for the sale of land in NSW.

This offer is open for acceptance within a period of 28 days from the date of this letter.
We point out at this time that we do not consider you have a caveatable interest over our client’s land as previously indicated by us. While our client has no immediate intentions to sell the land should the offer not be accepted within this time we would intend to file the appropriate notice to have your caveat lapse.”

9 In cross-examination, Mr Cranny was asked what he did in terms of the negotiations he undertook to make in settlement of the proceedings in the Land and Environmental Court. He said:

“Yes, I approached Mr McManus to get a valuation on it, and he gave a part valuation, an approximate valuation, and we submitted that to Mr Elias. And he wanted me to substantiate that. So I went back to Mr McManus and he suggested that I go to another person, Mr Barbarello; and he suggested that we should go, if we want to get a complete valuation, we should go to one of two firms that he suggested. And we took a valuation off Mr Davis’ company and we submitted that to Mr Elias.”

In my view that was a reasonable understanding of the requirements of the plaintiff arising from the correspondence. Indeed, counsel for the plaintiff did not submit that the defendant at this stage of the negotiations had failed to comply with its obligations. He submitted that it was thereafter that it demonstrated a lack of open mind and a rigid position in refusing to move from the valuation figure embraced by Mr Davis.

10 On 6 September 2000 the plaintiff responded to the solicitors for the defendant. The letter contained the following:

“In response to your clients ( sic ) “without prejudice” offer contained in your letter we further submit that again this purported offer by your client is not made in accordance with the terms of our agreement “to negotiate in good faith”.
We further note for the record as follows:
1. Although the site inspection was made on the 24th May 2000, the date of the valuation, we did not receive it until the 16th August, 2000.
2. On several occasions we have requested that your client supply us with a draft of an agreement for sale of land acceptable to the vendor but we have not received any draft even though we have supplied your office with copies of all documents to be attached to the contract, including the zoning certificate, sewer diagrams and title documents. We would appreciate a copy of a contract which meets your clients ( sic ) instructions for our consideration.
3. On several occasions we have requested a meeting with your clients and their consultants but, without any correspondence from you or your client, your client has for some undisclosed reason made no contact to discuss the matter with us.
4. In our letter dated the 4th May 2000 we requested that your client supply us with any documentation supporting “the good faith” basis of your clients ( sic ) previous sales offer of a price of $1,250,000.00 dated the 26th April 2000, (see items 1-6 on page 1 and requests on page 2) but nothing has been supplied by your client.
5. Our company has at all times complied with all the terms of the agreement reached with your ( sic ) in the Consent Orders dated the 25th January 2000 and incurred considerable expenses and costs.
It is our companies ( sic ) submission that J Cranny & sons Pty Ltd has not complied with the terms of the agreement and in particular has not complied with paragraphs 8 & 9 of the Consent orders.
We maintain that your client has refused or neglected to negotiate in good faith as per the terms of our agreement and continues to exhibit a real “lack of good faith” with the current purported market sale offer and valuation report tendered in an amount of $1,500,000.00.
This submission is based on the following:
A. The matters set out in numbered paragraphs 1-5 above.
B. No updated report from Messrs J P McManus & Associates has been supplied to us for our reference and consideration notwithstanding your clients ( sic ) assurances that it was being prepared and could be available to us.
C. The purported valuation supplied to us is fundamentally flawed in that:
i. It is not based on the actual development potential of Lot A DP 71511 (“the Cranny site”) as dictated by the current or draft Local Environmental Plan for the site.
ii. It does not indicate on what basis, if any, the number of fifteen (15) units can be built on the Cranny site.
iii. It greatly overestimates the unit potential yield of the Cranny site.
D. Any reliance by you on the purported valuation seeks to mislead our company.
E. No attempt has been made by your client to confer with us or discuss the matter with us.
F. No draft contract has been provided to us despite several requests.
We assert that the purchase offer made to you in our letter dated the 2nd February 2000 was and still is a fair and reasonable offer in all the circumstances and accurately represents the market value of the Cranny site at this time. You may remember it is the same price requested by your clients at the Land & Environment Court hearing in January of this year and made prior to the entering of the terms of settlement and prior to our company incurring substantial costs and expenses.”

11 Mr Cranny was cross-examined as to his understanding of the value of the defendant’s site and of the number of units that could be built on it. He said he had not made such enquiries. He was asked whether he had spoken with any real estate agents. When he said he had not he was asked if he did not try to sell the land and did not try to find out what the market might give for it, how could he ever negotiate with Mr Elias? He said he did not try to sell because Mr Elais had put a “stopper” on it, that is a caveat was lodged. Mr Cranny said that his wife had made inquiries of Burwood Council and ascertained that the land was a three-storey building site. He was asked if he did not know how many units could be put on site, how could he form any valuation of what was a proper price to negotiate? He said he did not form any price, the valuator did. It was put to him that the valuation he had taken was based upon 15 units on the site. He was asked whether he became aware the site would not take so many units. He answered in the negative and the following exchange took place:

“Q. You say that the question of how many units were on it was not a matter that you felt was of importance to know for the purpose of fixing a property valuation on the site?
A. No. Price was fixed by a valuator, professional valuator. I’m not a valuator, I’m not in the building game. I know nothing about it.”

Mr Cranny said that the price asked in the negotiations was $1.25 million and after receipt of the formal valuation it became $1.5 million and that remained the price at all times. It was not lowered.

12 On 18 September 2000 the solicitors for the defendant wrote to the plaintiff responding to the letter of 6 September 2000 in the following terms:

“We respond as follows:
1. We made an offer to you in our letter dated 14 August 2000 setting out the terms upon which our client would be prepared t sell it’s ( sic ) property.
2. You can keep suggesting for as long as you like as to whether you consider the offer was made in terms of the Order “to negotiate in good faith”.
3. We repeat our client has made an offer. That offer is consistent with the obligations placed on our client by the Order made in the Court on 25 January 2000.
4. Our client is prepared to allow you a further fourteen days from the date of this letter in which to respond to that letter by either accepting it or rejecting it or making a counter offer if you see fit.
If a proposal is not received from you within that time our client will in the near future list the property for sale.”

13 On 4 October 2000 the plaintiff responded stating that a draft agreement for sale had still not been received and no meeting with the defendant and its consultants had been convened. The letter went on to reiterate that the defendant had not complied with the terms of its agreement and that the offer to purchase on 2 February 2000 was fair and reasonable. Counsel for the defendant submitted that the defendant had already indicated the terms of the proposed contract of sale in the letter of 14 August 2000. He further submitted that this letter was no response to the letter of the 18 September 2000 which had called for an acceptance, a rejection or a counter-offer. I agree with those submissions.

14 On 6 October 2000 the solicitors for the defendant responded to the plaintiff’s letter of 4 October 2000:

“We have stated the offer our client is prepared to sell the property to you for.
Please indicate if you intend to make a counter offer in response to that amount.
Your previous offer is manifestly inadequate and is rejected.
Unless we have a counter offer in response to that submitted to you our client will in the future list the property for public sale.”

The response of the plaintiff of 18 October 2000 again complained that the defendant had not supplied a draft agreement for sale, that the defendant had failed to respond to the issues raised in the plaintiff’s correspondence and that the plaintiff had complied with all the terms of the settlement filed in the Land and Environment Court.

15 Again, the letter was unresponsive to the repeated request for a counter-offer if the defendant’s offer were rejected. Negotiation is a two-way street. The defendant had obtained a valuation and put an offer based upon it. It had repeated its request for a counter-offer should that figure be rejected. By this juncture the correspondence reveals a failure on the part of the plaintiff to put any counter-offer thereby failing to continue negotiations with the defendant.

16 On 25 October 2000 the solicitors for the defendant responded to the plaintiff as follows:

“We acknowledge receipt of your letter dated 18 October 2000.
You keep on assisting ( sic ) to have an Agreement for Sale.
Our client has not had an Agreement for Sale prepared.
Our client has not yet listed the property for sale. We reiterate our client had a valuation done. We have given you a copy of that valuation. It is expected our client in the near future will list the property for sale at which time an agreement will be available.
Having not received your counter offer we presume you do not wish to proceed to negotiate at this time. You will then be at liberty to obtain a copy of an Agreement for Sale when the property is listed.
You seem to be suggesting here that simply because our client has not provided you with an Agreement for Sale that he is not negotiating.
This is a commercial property. The parties can readily negotiate on a price without a contract. Steps are now underway to have the caveat removed.
If you are interested in the future in making an offer to purchase this property, you should contact the selling agent at that time.
Our client now considers your opportunity to negotiate for a purchase of the property to have passed and that our client has fulfilled its obligations under the orders previously made.”

17 On 27 October 2000 the plaintiff replied to the solicitors for the defendant stating that it did not wish to be taken to be abrogating the agreement and remained anxious to move forward with the negotiations and suggested that this would be best advanced by a meeting between the plaintiff’s specialist property finance and tax lawyer and defendant’s representatives and lawyers. The solicitors for the defendant responded on 2 November 2000 stating that the time for putting a counter proposal had expired and the defendant was not prepared to incur further costs in meetings.

18 On 22 February 2001 solicitors for the plaintiff wrote to the solicitors for the defendant enclosing a valuation, a completed vendor’s contract for sale for $850,000 and a company cheque for the proposed deposit of $50,000 stating it was open for acceptance until 1 March 2001. The enclosed valuation was for $750,000. On 15 March 2001 the solicitors for the defendant responded to the solicitors for the plaintiff as follows:

“We have taken further instructions from our client. We are instructed to respond as follows:

1. We deny there had been any “fundamental errors” in our client’s valuation.

2. In support we enclose copy letter dated 12 March 2001 from M J Davis Valuations who undertook the valuations on behalf of our client.

3. Given our clients (sic) valuation noted the property as being worth $1.5 million, your client’s offer of $850,000.00 is manifestly inadequate.

4. We accordingly return the original contract and cheque for $50,000.00

5. We also return the original valuation from Strathfield Partners dated 22 February 2001.

Our client considers the negotiations at an end.”

The enclosed letter from M J Davis Valuations maintained its view that 15 units could be developed on the defendant’s site. While accepting that there was evidence to support $70,000 per site, it also asserted that there was evidence to support values greater than $100,000 per site.

19 I gave leave to the plaintiff to file in court a further affidavit of Mr Elias in which he swore that at a site meeting with Mr Cranny on 15 March 2001 Mr Cranny said: “I know the land is only worth $650,000 but you can pay more for the site”. Mr Elias was cross-examined as to this assertion and admitted that he did not have the conversation in question. Its content was relayed to him by a Mr Beaufils. Mr Beaufils did not give evidence in the proceedings. I allowed this matter to be raised with Mr Cranny in oral evidence. Mr Cranny said he was sure that he did not say words to the effect alleged to Mr Beaufils. He said he did not know the value of the land and there had already been an offer of $850,000. I was impressed by Mr Cranny as a witness. He was precise and careful in his answers and had a clear recollection of the amounts involved, if not of the precise sequence of events. The alleged conversation was put to him in cross-examination and he said he never said that. I accept the evidence of Mr Cranny that the alleged conversation did not take place.

20 Counsel for the plaintiff submitted that the evidence revealed a failure to negotiate on the part of the defendant by its assertion that only one figure was appropriate as the purchase price. On the other hand, counsel for the defendant submitted that the correspondence revealed a preparedness to negotiate on the part of the defendant and a failure on the part of the plaintiff to respond in the normal way by putting forward a counter-proposal until well after the opportunity had been given and the time for negotiation had expired. He submitted there was no obligation on the part of the defendant to consider the valuation and counter-offer finally put forward in the solicitor’s letter of the 22 February 2001. Nevertheless, the defendant put the valuation to its valuer who considered the criticisms and maintained its professional view. In my view the evidence reveals a preparedness to negotiate on the part of the defendant and a failure to do so on the part of plaintiff. If the plaintiff had sought legal advice sooner than it did, the position might well have been otherwise.

21 In Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 it was held that a promise to negotiate in good faith is illusory and cannot be binding. That may be the fate of clause 8 of the agreement between the parties in settlement of the proceedings in the Land and Environment Court. I do not decide that issue because it is sufficient for present purposes that I find there was no breach of duty on the part of the defendant.

22 I decline to make the declarations sought or to order the payment of $28,000 by way of damages or equitable compensation. I dismiss the plaintiff’s claim. I will hear the parties on costs.

Last Modified: 05/06/2002