Harold R Finger & Co Pty Ltd v Karellas Investments Pty Ltd

[2016] NSWCA 123

Court of Appeal

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:	Harold R Finger & Co Pty Ltd v Karellas Investments Pty Ltd [2016] NSWCA 123
Hearing dates:	15 and 16 February 2016
Decision date:	25 May 2016
Before:	McColl JA at [1]; Ward JA at [2]; Emmett AJA [285]
Decision:	Appeal dismissed with costs.
Catchwords:	CONTRACTS – whether acceptance of letter of offer to enter into agreement to lease and lease gave rise to binding contract – proper characterisation of agreement where several terms to be included in agreement for lease and lease remained to be agreed – whether letter refusing to proceed with contract “on current proposed terms” amounted to repudiation – whether right to terminate for repudiation lost where party alleging repudiation refused to continue to negotiate agreement for lease/lease documents – whether performance of that obligation had been dispensed with – whether party alleging repudiation was itself in breach of an essential term of the contract   DAMAGES – avoided loss – benefit derived from termination of agreement – whether benefit sufficiently close to claimed head of damages as to be appropriate to set off against it
Cases Cited:	Andros Springs (Owners) v World Beauty (Owners) (1970) P 144 British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 Cardno BSD Pty Ltd v Water Corporation (No 2) [2011] WASCA 161 Carpenter v McGrath (1996) 40 NSWLR 39 Clark v Macourt [2013] HCA 56; (2013) 253 CLR 1 Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 Condos v Clycut Pty Ltd [2009] NSWCA 200 Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1 DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 Foran v Wight [1989] HCA 51; (1989) 168 CLR 385 Goldburg v Shell Oil Co of Australia Ltd (1990) 95 ALR 711 GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10; (2008) 234 CLR 237 Harold R Finger & Co Pty Ltd v Karellas Investments Pty Ltd [2015] NSWSC 354 Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235 Hi-Fert Pty Ltd v Kiukiang Maritime Carriers Inc [2000] FCA 660; (2000) 173 ALR 263 Hoad v Scone Motors Pty Ltd [1977] 1 NSWLR 88 Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 Koch Marine Inc v D’Amica Societa di Navigazione ARL (The Elena d’Amico) (1980) 1 Ll L R 75 Kuru v State of New South Wales [2008] HCA 26; (2008) 236 CLR 1 Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623 Lavarack v Woods of Colchester Ltd [1967] 1 QB 278 Luxton v Vines [1952] HCA 19; (1952) 85 CLR 352 Macourt v Clark [2012] NSWCA 367 Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (1991) 33 FCR 1 Naumann v Ford [1985] 2 EGLR 70 Perini Corporation v The Commonwealth [1969] 2 NSWR 530 Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd [1954] HCA 25; (1954) 90 CLR 235 Robinson v Harman (1848) 1 Ex 850 at 855; 154 ER 363 Ross T Smyth & Co Ltd v T D Bailey Son & Co [1940] 3 All ER 60 Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443 Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149 Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634 Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18; (2000) 200 CLR 121 Shepherd v Felt and Textiles of Australia Ltd [1931] HCA 21; (1931) 45 CLR 359 Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272 Tasman Capital Pty Ltd v Sinclair [2008] NSWCA 248; (2008) 75 NSWLR 1 Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333 United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) 74 NSWLR 618 Violi v Commonwealth Bank of Australia [2015] NSWCA 152 Watpac Construction NSW Pty Ltd v Taylor Thompson Whitting (NSW) Pty Ltd [2015] NSWSC 780 Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454 Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277
Texts Cited:	A Burrows, Remedies for Torts and Breach of Contract (3rd ed, 2004, Oxford University Press) H McGregor, McGregor on Damages (18th ed, 2009, Sweet & Maxwell) W Covell, K Lupton and J Forder, Principles of Remedies (6th ed, 2015, LexisNexis)
Category:	Principal judgment
Parties:	Harold R Finger & Co Pty Ltd (Appellant) Karellas Investments Pty Ltd (First Respondent) Karellas Group Pty Ltd (Second Respondent)
Representation:	Counsel: MLD Einfeld QC with J Horowitz (Appellant) CRC Newlinds SC with DJ Barnett (Respondents)     Solicitors: Reid & Vesely (Appellant) Bradley Allen Love (Respondents)
File Number(s):	2015/00120476
Publication restriction:	Nil
Decision under appeal	Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity Citation: [2015] NSWSC 354 Date of Decision: 2 April 2015 Before: Robb J File Number(s): 2012/00171813

HEADNOTE

[This Headnote is not to be read as part of the judgment]

This judgment relates to an appeal from a decision of Robb J in the Equity Division of the Supreme Court dismissing a claim for damages made by Harold R Finger & Co Pty Ltd (Finger & Co) for the alleged repudiation by Karellas Investments Pty Ltd (Karellas) of a contract that came into existence on the acceptance by Finger & Co of what was described as a binding offer by Karellas to enter into an agreement for lease and lease of supermarket premises in Newtown owned by Finger & Co. 

Finger & Co accepted Karellas’ letter of offer in January 2010. As at that date, a number of terms required to be included in the proposed agreement for lease and lease remained to be agreed between the parties. Following a period of negotiation in relation to the proposed agreement for lease/lease documentation, in the course of which the parties had provisionally agreed lease terms that represented a significant departure from the terms set out in the heads of agreement, Karellas notified Finger & Co in June 2010 that it would not be proceeding with the proposed lease “on the current proposed terms” as the business was not viable for it, having regard to a recently obtained turnover forecast. It indicated that it was prepared to continue negotiations to see if the proposed lease terms could accommodate its concerns.

Finger & Co asserted that this amounted to a repudiation of the contract and in August 2010 it notified Karellas that it accepted the latter’s repudiation of the contract and that it terminated the contract. Finger & Co subsequently leased the premises to another entity and carried out a development of residential units on the first floor, which were sold at a profit.  

The primary judge dismissed Finger & Co’s claim for damages. In doing so his Honour found that Finger & Co’s acceptance of the letter of offer gave rise to a valid and enforceable contract, which Karellas had repudiated by its conduct in June 2010, and that Finger & Co could have validly terminated at that date; but his Honour went on to find that by the time Finger & Co expressly terminated the contract it was itself not ready and willing to perform by reason of its refusal to renegotiate any of the provisionally agreed terms.  His Honour further considered that Finger & Co was in breach of an essential term of the agreement by having failed to inform Karellas of the substance of its plans to construct a residential development on the first floor of the premises.  His Honour made no finding as to the amount he would have awarded Finger & Co had he found that it had validly terminated the contract. His Honour considered that further submissions would have been required in that event. 

Finger & Co challenged his Honour’s findings both as to the invalidity of its termination of the contract and as to the assessment of damages.  Karellas in turn argued, by way of a notice of contention, that his Honour erred in concluding both that there was a binding contract and that, if there was such a contract, Karellas had repudiated it.  

Held, dismissing the appeal with costs (McColl JA agreeing with Ward JA at [1]): 

(1) by Ward JA (at [80]; [94]-[95]); Emmett AJA (at [334]), that the objectively ascertainable common intention of the parties was that they were to be immediately bound by the terms contained in the letter of offer once it was accepted by Finger & Co.  The agreement that came into existence on acceptance of the letter of offer is best characterised as an agreement to negotiate in good faith which bound the parties to enter into a formal agreement for lease/lease on the terms set out in the letter of offer if, and only if, agreement was finally reached between the parties as to the content of the additional terms required to be included in the formal documentation. No binding and enforceable agreement for lease came into existence at any point during the negotiation period in the absence of final agreement on those additional terms.  

(2) by Ward JA (at [103]-[104]); Emmett AJA (at [334]), that, as at June 2010, Finger & Co was entitled to insist upon Karellas continuing to negotiate in good faith the terms of the proposed agreement for lease up until the end of the specified negotiation period for which it provided.  It was not entitled to hold Karellas to the then provisionally agreed lease terms. 

(3) by Ward JA (at [129]; [132]); Emmett AJA (at [335]), that his Honour erred in concluding that the 9 June 2010 letter constituted, or implied, a repudiation of the agreement by Karellas.  The letter foreshadowed that Karellas might refuse to proceed with the then provisionally agreed terms for the agreement for lease and lease but nevertheless invited further negotiation and did not convey an intention by Karellas not to honour its obligations under the contract; and so did not amount to repudiation. 

(4) by Ward JA (obiter) at [174]; Emmett AJA (at [337]), that Finger & Co did not validly terminate the contract in August 2010 because it had refused to renegotiate any of the then current provisionally agreed terms of the contract.

(5) by Ward JA (obiter) (at [197]; [199]), that the agreement imposed no obligation on Finger & Co to make any disclosure of its development plans for the property at all and that any such implied obligation would in any event have been satisfied by the information that Finger & Co did provide to Karellas, namely that development of an area above the premises was a possibility. 

(6) by Ward JA (obiter) (at [235]; [242]; [247]) (Emmett AJA not deciding), that his Honour did not err in determining that the benefit Finger & Co gained by reason of the termination of the agreement with Karellas, being the freeing up of its capacity to carry out a residential development above the proposed supermarket premises unconstrained by the restrictions to which Finger & Co would have been subject had the parties entered into the proposed for lease/lease on the terms contemplated by the heads of agreement, was sufficiently close to the damages claimed by Finger & Co as to be appropriate to set off against any damages that would have been recoverable for wrongful repudiation of the heads of agreement.  However, in relation to this issue, the onus was on Karellas to prove both that Finger & Co gained a compensating advantage by reason of the development as well as the extent of that benefit.  Had the issue arisen for determination, it would have been concluded that Karellas did not discharge the onus of establishing the value or extent of the avoided loss. 

INDEX

JUDGMENT
McColl JA					[1]
Ward JA					[2]
Introduction				[4]
Primary judgment				[13]
Appeal proceedings				[21]
Background				[22]
December 2009 letter of offer			[24]
Conduct after acceptance of the December 2009 letter of offer			[41]
8/9 June 2010 correspondence			[47]
Subsequent correspondence			[51]
Conduct following termination of the heads of agreement			[56]
Appeal				[60]
Was there a binding contract on the terms found by the primary judge? – grounds 1 and 4 of the notice of contention			[61]
• Findings of the primary judge	[61]
• Challenges to those findings	[67]
• Pleading	[70]
• Submissions	[73]
• Determination	[80]
Did Karellas repudiate the heads of agreement? – grounds 5-11 of the notice of contention			[105]
• Findings of the primary judge	[106]
• Challenges to those findings	[116]
• Submissions	[117]
• Determination	[127]
Effect of change to Revision C plans on Karellas’ right to amend its offer – grounds 2-3 of the notice of contention			[134]
Did Finger & Co validly terminate the contract on 16 August 2010? – grounds 1-5 of the grounds of appeal			[140]
• Findings of the primary judge	[142]
Was there a valid termination as at 11 June 2010? – ground 2 of the grounds of appeal		[150]
• Determination	[157]
Was there a valid termination as at 16 August 2010? – grounds 2-5 of the grounds of appeal		[161]
Was there a dispensation of the requirement for performance by Finger & Co? – ground 3 of the grounds of appeal		[162]
• Determination	[170]
Was there a breach of cl 15? – grounds 4 & 5 of the grounds of appeal		[175]
• Findings of the primary judge	[177]
• Submissions	[186]
• Determination	[197]
Damages – grounds 6-8 of the grounds of appeal; grounds 13-18 of the notice of contention			[201]
(i) Avoided loss issue		[203]
• Findings of the primary judge	[203]
• Challenges to those findings	[212]
• Submissions	[214]
• Determination	[221]
(ii) Other adjustments – grounds 6(b) and 7		[250]
• Findings of the primary judge	[253]
• Submissions	[260]
• Determination	[263]
(iii) Relevant counterfactual/loss of a chance analysis – ground 8 of the grounds of appeal; grounds 17 & 18 of the notice of contention		[264]
• Findings of the primary judge	[266]
• Submissions	[271]
• Determination	[278]
Conclusion				[284]
Emmett AJA					[285]

Judgment

1. McCOLL JA: I agree with Ward JA’s reasons and the order her Honour proposes.

2. WARD JA: This dispute relates to the consequences of a decision by the first respondent, Karellas Investments Pty Ltd (Karellas Investments), not to proceed with a proposed lease of a warehouse property owned by the appellant, Harold R Finger & Co Pty Ltd (Finger & Co), in Newtown. The warehouse was to be converted to enable Karellas Investments to carry out a new supermarket business from the site.

3. The second respondent, Karellas Group Pty Ltd (Karellas Group), is part of the same group of companies as Karellas Investments. It was joined as a party to the proceedings in the event that the reference to “Karellas Group” in the relevant documentation was found to be a reference to it rather than to Karellas Investments. In these reasons I will use the word Karellas, as the primary judge did, to refer both to Karellas Investments and, in the alternative, to Karellas Group. However, I note that the primary judge ultimately concluded, albeit with some hesitation, that the better view was that Karellas Investments was the relevant contracting party ([103]) and a challenge to that finding was abandoned at the commencement of the hearing of this appeal.

Introduction

4. By letter dated 21 December 2009, on the letterhead of “Karellas Group”, Karellas presented to Finger & Co a “binding offer to enter into an Agreement for Lease and Lease with our organization for the … supermarket premises” (the December 2009 letter of offer).

5. Finger & Co alleged that a binding agreement came into existence on its acceptance, in January 2010, of the terms contained in the December 2009 letter of offer. The alleged agreement, as pleaded, was an agreement to enter into an agreement for lease, and for Finger & Co to grant and Karellas to take a lease, of a supermarket building to be constructed on the land, for a term of 15 years from the commencement of trade, and otherwise “on the terms and conditions set out in the contract” (statement of claim [7]). Not all of the terms required by the December 2009 letter of offer to be included in the proposed agreement for lease/lease were set out in the letter of offer. A number of terms as at that date remained to be agreed between the parties.

6. Finger & Co alleged that Karellas repudiated that agreement in June 2010, when Karellas notified Finger & Co by letter that it would “not be proceeding with the … proposed Lease on the current proposed terms” and said, or implied, that the contract of 21 December 2009 did not bind the parties to settle the terms of, and then execute, formal documentation embodying the terms and conditions set out in the contract, with such variations or further terms as the parties might subsequently agree. Finger & Co alleged that this amounted to a repudiation of the parties’ agreement because it indicated that Karellas was refusing to perform the contract according to its terms and that it would perform the contract only if and to the extent that it suited it to do so, i.e., not with a view to settling terms of formal documentation in accordance with the contract but, rather, with a view to negotiating commercial terms more favourable for itself than those agreed to in the contract (statement of claim [14], [15]).

7. On 16 August 2010, Finger & Co notified Karellas that it accepted the latter’s repudiation of the contract and that it terminated the contract. Finger & Co subsequently entered into an agreement for lease with another entity (Woolworths) under which Woolworths agreed to take a lease of the Newtown premises, though differently configured in some respects. At the same time as the new supermarket to be leased to Woolworths was being built, Finger & Co carried out a residential development on a slab constructed above the supermarket trading area. The residential units in question were subsequently sold at a profit.

8. Finger & Co brought proceedings in the Equity Division of the Supreme Court claiming damages suffered as a result of the loss of the benefit of its contract with Karellas. Those damages were quantified in the sum of $3,191,868, comprised of the difference between the lump sum value of the Karellas lease and the lump sum value of the Woolworths lease as at the date of Finger & Co’s express termination of the contract (calculated, together with interest to 31 May 2012, at $2,367,673) together with other costs including legal, consulting and agents’ fees and the difference in the fit-out costs of the premises under the arrangement with Woolworths (as itemised in schedule 1 of the statement of claim).

9. Karellas denied that acceptance by Finger & Co of the offer contained in the December 2009 letter constituted a concluded and legally binding contract, asserting that it was no more than an agreement to enter into an agreement for lease (defence [1(a)]) or an agreement “in the nature of a heads of agreement under which the parties were to negotiate in good faith a formal agreement for lease and lease on mutually acceptable terms” (defence [1(r)(i)]).

10. If, which Karellas denied, the December 2009 letter of offer did constitute a binding contract, then Karellas asserted that it was subject to agreement as to certain matters ([1(b)(iii)]), as to which agreement had not been reached or finalised ([1(c)-(n)]). Karellas further pleaded that its correspondence in June 2010 was not a repudiation but amounted to an attempt to engage in and continue negotiations in good faith to reach an acceptable and final agreement for lease and lease (defence [1(s)]) and that Finger & Co’s 16 August 2010 letter purporting to terminate the contract was either ineffective, because there was no concluded agreement, or a wrongful repudiation by Finger & Co of the agreement (defence [1(t)]).

4. Karellas also pleaded that, if there was a concluded agreement that Karellas had breached and/or repudiated, then Finger & Co’s loss or damage was the loss of the opportunity to conclude negotiations for the agreement for lease and lease prior to 21 December 2010 ([1(u)]), at which time, if formal documentation had not been executed, Karellas would have been entitled under the terms of the December 2009 letter of offer to withdraw from the agreement. It contended that Finger & Co had suffered no loss or damage because it had lost no meaningful opportunity to conclude negotiations for the agreement for lease and lease prior to that date ([1(u)(iv)]).

5. Alternatively, Karellas pleaded that the loss and damage was to be reduced by the amount of profit that Finger & Co had made, or would make, on the development of 20 residential units above the supermarket premises (to which I will refer as the “avoided loss issue”) (defence [1(u)(iv)]).

Primary judgment

13. The primary judge dismissed Finger & Co’s claim (Harold R Finger & Co Pty Ltd v Karellas Investments Pty Ltd [2015] NSWSC 354). In summary, his Honour held as follows.

14. First, that acceptance by Finger & Co of the terms and conditions contained in the December 2009 letter of offer gave rise to a valid and enforceable contract ([210]) under which the parties agreed to be bound immediately by the rent and other commercial terms set out in that letter of offer and agreed to negotiate certain identified additional terms (see [218], [452]).

15. Second, that Karellas repudiated that contract in June 2010 when it conveyed to Finger & Co that it was willing to negotiate further but only if that secured its objective of accommodating the difficulties caused by a then forecast shortfall in turnover ([449]-[450]).

16. Third, that, subject to the issue as to whether Finger & Co was itself in breach as at that date, Finger & Co could validly have terminated the agreement as at 9 June 2010 based on the statements contained in the June 2010 correspondence (i.e., for Karellas’ repudiation) ([450]).

17. Fourth, that by the time Finger & Co’s solicitors wrote to Karellas’ solicitors on 16 August 2010 expressly terminating the agreement, Finger & Co had lost the ability to terminate solely on the ground of Karellas’ repudiation ([398]) and was no longer entitled to rely on Karellas’ repudiation without first making an offer to Karellas to participate in a renegotiation ([453]). That conclusion was reached by reference to the correspondence that had passed between the parties from June 2010 to 16 August 2010 and, in particular, to the refusal by Finger & Co at that stage to renegotiate any of the then current “provisionally agreed” terms of the agreement for lease, which his Honour considered meant that Finger & Co was not itself ready and willing to perform the contract ([455]).

18. Hence, the primary judge held that Finger & Co did not validly terminate the heads of agreement on the basis of Karellas’ repudiation ([454]). He further concluded that, as at 16 August 2010, Finger & Co’s “own position was one of repudiation” ([455]).

19. As a separate matter, his Honour also considered that Finger & Co was not entitled to terminate the contract while it was in breach of an essential term of the agreement, namely cl 15, finding that it had failed to inform Karellas of the substance of its plans to redevelop the property to add a residential level on the first floor ([456]-[457]).

20. As to quantum, his Honour addressed the principal issues in contest between the parties, to which I will refer in due course, but made no finding as to the amount that he would have awarded to Finger & Co had he found that it had validly terminated the contract. His Honour indicated that he would have sought additional submissions from the parties as to quantum had that exercise been necessary ([464]).

Appeal proceedings

21. Finger & Co appeals from the primary judge’s findings both as to the invalidity of its termination of the contract and as to the assessment of damages. It seeks an order, in lieu of the orders made at first instance, for judgment in its favour in the amount claimed in its statement of claim, or such other amount as this Court were to determine, together with interest and costs. Karellas has in turn filed a notice of contention seeking to have the primary judge’s decision affirmed on grounds other than those relied on by his Honour, those grounds relating to the issues as to repudiation and damages.

Background

22. It is helpful at this point to provide some further details of the relevant events and, in particular, of the relevant communications which passed between the parties.

23. Prior to the December 2009 letter of offer, acceptance of which his Honour found had given rise to a valid and enforceable contract, the respective parties had been in discussion in relation to the proposed lease of the Newtown premises, to be fitted out as a supermarket. Reliance is placed by Finger & Co on the fact of the earlier negotiations as part of the surrounding matrix of facts against which the December 2009 letter of offer is to be construed (see Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 351). For present purposes, however, all that need be noted is that, not only had there been earlier draft letters of offer, but also, by October 2009, both parties had instructed solicitors in relation to the proposed transaction and Karellas’ solicitor had been instructed to prepare an agreement for lease and lease in relation to the premises. The December 2009 letter of offer emanated from Karellas itself rather than from its legal representatives and the primary judge appeared to accept that it had not been the subject of legal advice prior to its acceptance by Finger & Co (see [119]). However, it is clear that the penultimate draft of the letter of offer was forwarded by Karellas’ solicitors to Mr Harold Finger, who then forwarded the draft to Finger & Co’s solicitors on 30 October 2009 with the message “[p]lease look at this and call me after”. Hence it may well be that one or both of the parties had received some legal advice as to one or other of the draft letters of offer before execution of the final version. Nevertheless, the case seems to have proceeded on the basis that lawyers were not involved in drafting the terms of the document that was accepted by Finger & Co in January 2010.

December 2009 letter of offer

24. As noted above, the December 2009 letter of offer purported to present a:

… binding offer to enter into an Agreement for Lease and Lease with our organization for the above mentioned new supermarket premises, on the following terms and conditions.

The words “above mentioned” clearly referred to the subject header of the letter, namely “New Store Project at Newtown …”.

25. The description of this letter as a letter of offer accords with the footer appearing on the letter (“Karellas Group Letter of Offer”). Unlike an earlier draft, the December 2009 letter of offer was not headed “Binding Heads of Agreement”. However, cl 24, to which I will shortly refer, expressly made provision for a binding heads of agreement to come into existence on acceptance of its terms and conditions.

26. The December 2009 letter of offer contained a list of numbered terms and conditions, each separately headed. It is necessary to set out a number of those. I will refer to them as clauses, though they could equally be described as items.

27. Clause 1 of the December 2009 letter of offer, headed “Premises”, provided that:

This offer is based on the plans (Reference DA15 Revision C dated 1/10/09) with the final version to be attached to the lease. A copy of the current approved plans are attached to this letter and marked “A”. In the event of further amendments, redesigns or changes to configuration, Karellas Group reserves its right to amend this offer.

28. It was common ground that there was no attachment “A” to the December 2009 letter of offer. It was also common ground that the reference to the “plans” on which the offer was based – identified in the letter as “DA15 Revision C dated 1/10/09” – was a reference to a one-page document, being a ground floor plan showing an area labelled “Thomas Dux Trading Area & Back Office”, in one corner of which there was a shaded area labelled “Owners Area for future access to upper floor” of 22m2 as well as a shaded area for an electricity sub-station. The parties are also agreed that the primary judge’s reference in his reasons (at [31] and [260]) to the Revision C plan was an erroneous reference to a different plan, namely a plan labelled DA04. Relevantly, the DA15 plan did not (unlike DA04) depict a proposed slab over that part of what was shown in DA15 as the Trading Area & Back Office. Relevantly, the primary judge was incorrect when he said that Revision C showed a new ceiling to be constructed over the trading area, back of house and loading area. It showed no slab over any part of the ground floor at all.

29. Clause 2 was headed “Lease Area”. It provided, relevantly, as follows:

This offer is based on supermarket building of approx 863 square metres lettable area which will be confirmed on final survey and adjusted accordingly (lettable area excludes any Licensed Areas, mezzanine areas, lobby, plant rooms, switch rooms, loading docks, loading bay areas, truck standing apron or similar area, car park and landlord areas) conforming to the Karellas Group Design Brief as referred to [in cl 11] below.

The approximate lettable area of 863 square metres includes an area of 22 square metres that is highlighted on the attached plans. The Karellas Group confirms that the Landlord has reserved the right to excise this area from the area subject to the Lease. If you [presumably, the Landlord] elect to do so the Landlord will pay all costs relating to any change to the fit-out and also costs related to the disruption to the operation of the Supermarket. The rent under this Lease is to be reduced proportionally to the reduction of that lettable area at the time you commence work to refit this area.

…

30. Clause 2 went on to make provision for a reduction in rent during any such refit period and while the business was disrupted; and also contemplated that extra storage area might be made available above the car park for lease at a payable rent of $350/m2-$450/m2 that it was said “needs to be negotiated and confirmed when relevant”. As already noted, there were no plans attached to the December 2009 letter of offer.

31. Clause 3 identified the tenant as “Karellas Investments Pty Limited or Nominee”; cl 4 identified the landlord as “Harold R Finger or Nominee”. The initial lease term (cl 5) was to be 15 years from the commencement of trade. Clause 6 provided for there to be two “Options to Review” (sic; presumably the parties intended to refer to options to renew the lease): one of ten years and one of five years. The letter of offer did not contain any provision as to the terms of any such renewed lease or method of exercise of the options to renew; nor did it make provision for any mechanism for the determination of rent from the commencement of any renewed lease.

32. Clause 7 dealt with permitted use; cl 8 specified the commencement date of the lease as the date on which Karellas Group commenced trading from the new premises. Clause 9, headed “Occupancy Costs”, set out the base rent, including provision for base rent review at consumer price index (CPI) yearly up to and including year 5 and then from year 6 it was to be “either the greater of, 3% of audited GST exclusive turnover figures or the base rent at the end of year 5”; as well as outgoings. It also stated that it was essential that there be 24 hour access to the premises for staff “with the ability to trade [within specified hours] must be permitted by council” [sic]. Clause 10 dealt with GST. It contemplated the incorporation of Karellas’ standard GST clause into the lease documentation.

33. Clause 11 contemplated that a design brief would be issued “which will contain Karellas Groups [sic] current standard Specification”. It went on to state that “[t]he Landlord is to deliver a turn-key supermarket premises in accordance with the obligations contained in the Specification”. (“Turn-key” premises are, in general terms, ones built and delivered to the tenant as complete without the tenant being required to bear any part of the construction costs.) Clause 11 also stated that the “transmittal documents for the Specification” were to be attached to the Agreement for Lease and that the delivery of premises in accordance with this specification was to be a condition of the lease; thus clearly distinguishing between the agreement for lease and the lease itself. No specification was attached to the letter of offer.

34. Under the heading “Programming”, cl 12 provided that:

The Landlord must provide a development program acceptable to Karellas Group, which specifies the date of handover following practical completion, for inclusion in the Agreement for Lease. The Landlord must comply with the construction program, with normal industry allowance for delays.

It is essential from the opening date that Karellas Group has the full enjoyment of the property. The Landlord will have to satisfy specified completion criteria before Karellas Group will commence to trade, including the Car park complete and fully accessible;

If these criteria are not met but Karellas Group commence to trade, Karellas Group will pay 1% of turnover instead of base rent from commencement of trade until all criteria are met.

35. Clause 13 dealt with the fit-out period; cl 14 with the conduct of works, schedule of finishes and scope of works. The latter contemplated that documents covering the schedule of finishes and scope of works, together with appropriate landlord’s drawing transmittal schedule, “all satisfactory to Karellas Group”, would be required for inclusion in the agreement for lease.

36. Clause 15, to which I will refer in more detail later, was headed “Master Plan”. This appears to be a misnomer since (while an earlier draft) no provision was there made for any such document to be prepared or provided to Karellas. Rather, cl 15 contained an acknowledgment, in effect, that the landlord had a right to redevelop the property and an expectation that “such works” be in accordance with Karellas’ trading requirements. It also contained a statement as to the essentiality of Karellas understanding the “proposed development direction of this property for the future”.

37. Clause 17, headed “Amenity Provisions”, provided as follows:

Karellas Group requires a number of covenants to ensure that premises standards are maintained. These are not intended to impose onerous conditions on the Landlord, but are necessary to ensure that the Karellas Group supermarket trades to its optimum level. These provisions include requirements relating to car parking, building re-development, management standards, strata titling and services, and preservation of the arrangements shown on the site plan referred to below. [There was no further reference to a site plan in the signed letter of offer, though there had been reference to a site plan as part of this clause in the previous draft offer.]

Karellas Group will rely on the preservation of these covenants, rights, and amenities over the term of the lease. These are fundamental to the ongoing success of the supermarket and will be specified within the lease. Failures by the Landlord to observe these principles will result in Karellas Group suffering sales and profitability losses that result from the breach by the landlord. The Landlord will be required to compensate Karellas Group for any losses and must work to maintain a trading environment consisted with that presently contemplated.

38. Clause 16 dealt with any application Karellas Group might make in relation to a liquor licence; cl 18 with car parking; cl 19 with signage; cl 20 with statutory approvals; and cl 23 with documentation costs (each party being required to pay its own costs including legal costs in connection with the negotiation and preparation of the relevant documentation). Clause 25 provided for the dealings between the parties to be confidential and cl 26 dealt with the provision by Karellas of a bank guarantee by way of security, the amount of which was to be reduced progressively over the term of the lease.

39. Clauses 21, 22 and 24 should be set out in full:

21.   Specific Performance Following Board Approval

The Landlord must acknowledge that Karellas Groups’ [sic] agreement to proceed is based on the Landlord’s commitment to the project and to the Landlord’s development programs. The Landlord must acknowledge that Karellas Group is incurring costs in the negotiation and documentation process and has allocated capital for the completion of the supermarket within the nominated period. If the Landlord fails to perform in accordance with the agreements and approvals, or markets or sells the property (in whole or in part) then Karellas Group may withdraw from the project and claim for costs and loss of profits.

Notwithstanding the above, the Landlord may seek and must obtain Karellas Groups’ [sic] consent to a sale or other dealing with the ownership of the property. Karellas Groups’ [sic] consent will not be unreasonably withheld if the Landlord can satisfy Karellas Group that the purchaser has the capacity to undertake the development and the Landlord guarantees the completion of the store and all other aspects of the agreement to Karellas Groups’ [sic] satisfaction.

22.   Documentation & Approvals

This offer has been approved by the Karellas Group Board. The approval by the Karellas Group Board will be operative for a period of 12 months from the date of this letter. If formal documentation is not executed within that time, Karellas Group can elect to terminate the agreement and withdraw from the project.

This offer is subject to finalisation of development plans, programming, Scope of Works specification and finishes to Karellas Group satisfaction.

…

24.   Binding Agreement

Although it is intended that a formal agreement for lease will be executed based on the Karellas Group standard documentation, including the commercial terms in this letter, it is intended that acceptance by you of the terms and conditions in this letter will create a binding heads of agreement between you and the Karellas Group.

40. Pausing there, I note the apparent inconsistency between the statement in cl 22 that the “offer” was subject to finalisation of certain matters and the statement in cl 24 that acceptance of the terms and conditions in the letter was to create a “binding” heads of agreement between the parties. Similarly, the statement in cl 1 that Karellas reserved its right, in the circumstances there specified, to amend its “offer”, sits uneasily with cl 24 of the letter of offer. His Honour concluded (at [159]) that cl 1 would only have effect up to the time of the execution of the agreement for lease.

Conduct after acceptance of the December 2009 letter of offer

41. The December 2009 letter of offer was signed for Finger & Co in January 2010. Thus, in accordance with the express words of cl 24, a “binding heads of agreement” thereupon came into existence.

42. After acceptance of the offer, both parties incurred costs in retaining consultants for the purposes of designing and obtaining approval for the construction and fit-out of the supermarket and took steps to negotiate the documentation for the project and agreement for lease/lease.

43. During the course of the parties’ discussions in the period from January 2010 to June 2010, various changes were agreed as to some of the terms set out in the December 2009 letter of offer, such as the inclusion in the proposed demised premises of a mezzanine floor, which was the subject of an approved development application lodged by Karellas with Finger & Co’s consent in February 2010, and a change as to the manner in which outgoings were to be borne. In their submissions on appeal, Karellas points out that, rather than requiring Finger & Co to provide a “turn-key” supermarket, by June 2010 the draft agreement for lease provided for the sharing of the costs and obligations of various aspects of construction of the supermarket ([3]).

41. In March 2010, Finger & Co lodged its own development application seeking approval for the modification of the development consent in particular respects (see [265]). The primary judge noted that this application did not include reference to a first floor slab above the ground floor ([267]).

42. By 3 June 2010, the parties were close to agreement as to the terms of both the proposed agreement for lease and the lease. This is apparent from the fact that, by email of 3 June 2010, Mr Ben Finger (a director of Finger & Co) requested Mr Vasilli Karellas (a director of Karellas) to send certain amendments to his solicitor “to make the final version of the lease ready for signing” and Mr Karellas responded to the effect that he would get his solicitor to “get the lease off to” the solicitor acting for Finger & Co. However, it was not contended by Finger & Co that, as at June 2010, the then current drafts of the agreement for lease and lease were binding on the parties; nor was it suggested that there had been any binding variation to the terms contained in the heads of agreement.

43. His Honour found (at [118]) that the parties had not finally bound themselves to proceed on the basis of the variations and additions to the terms contemplated by the heads of agreement as at June 2010. The relevance of there being no binding agreement to the then current “provisionally agreed terms”, as his Honour referred to them, is as to the import of the later refusal by Finger & Co to revisit or renegotiate those terms at least insofar as they incorporated the rent specified in the letter of offer.

8/9 June 2010 correspondence

47. On 8 June 2010, Mr Karellas sent to Mr Finger an email, attaching a recently obtained turnover forecast, and advising, relevantly, that “[w]ith this level of turnover and on the proposed lease terms the business is not viable for us”. Mr Karellas invited Mr Finger to call him to discuss this.

48. Mr Finger's response to that email was sent by an email later that same day. Mr Finger there noted that there was nothing in the heads of agreement that made Karellas’ offer to lease contingent upon any economic report and stated that “[w]e have acted in good faith in the negotiations and expect you to honour your agreement with us to lease the premises”. Mr Finger also pointed out that Karellas was aware that the company had already reached an agreement with Woolworths prior to receiving the Karellas offer; and that, on the basis of the Karellas offer, Finger & Co had negotiated to be released from the agreement with Woolworths and had proceeded over the last six months with Finger & Co. Reference was made to the considerable cost at which this had occurred, in terms of holding costs and legal fees. Mr Finger expressed the hope that the matter could be resolved amicably.

49. By letter dated 9 June 2010, Karellas' solicitors wrote to the solicitors acting for Finger & Co. Among other things, their letter conveyed the following:

I confirm that my client will not be proceeding with the above proposed Lease on the current proposed terms. The reasons for my client’s position are explained below. Having regard to the efforts of both parties to achieve an agreement, my client is willing to continue negotiations to see if a suitable outcome could be achieved for both parties. (my emphasis)

The email from your client sent yesterday seems to suggest that there is already a concluded agreement for lease. In the circumstances my client does not believe that this is a proposition that is seriously made by your client. There is no executed Agreement of [sic] Lease and the terms of the Lease are still being negotiated. The letter of 21 December clearly confirmed that the parties would negotiate final terms of an AFL and Lease. Whilst the letter outlined some of the contemplated lease conditions there have been significant changes to the terms as contemplated in the letter of 21 December. There are other aspects of the letter still to be addressed. Importantly there were also a number of important matters that had not been discussed as at December 2009.

…

My client is genuinely disappointed that a final agreement has not been reached at this stage. They were certainly looking forward to a long term relationship with your client and saw the potential for development of this site in this particular suburb.

50. The letter went on to say that there were a number of contributing factors to Karellas’ decision, the first being the concern Karellas had in relation to the impact of a future development of the site on the supermarket business and the second being that a market analysis report recently commissioned by Karellas showed a significantly reduced turnover to that which Karellas had been factoring into its business analysis. The letter stated that it appeared from the report that there were limitations on the possible turnover that could be achieved in that area having regard to the size of the supermarket currently proposed. The letter concluded with the following two paragraphs:

We note that you have previously indicated to the writer that your client has a number of other parties that would be interested in operating a Supermarket business from the site.

As indicated above, my client is prepared to continue negotiations with your client to see if the proposed lease terms could accommodate the above matters.

Subsequent correspondence

51. Finger & Co’s response to the 9 June 2010 letter, conveyed by its solicitors’ letter dated 11 June 2010, was, relevantly, as follows:

… We note your advice that your client will not be proceeding with the lease “on the current proposed terms”. The thrust of your letter appears to be that your client would proceed with the lease of the premises but on negotiated terms favourable to your client. We are instructed by our client that it is not interested in renegotiating the terms of the lease with your client. After over five months of protracted and detailed negotiations not only on the terms of the lease but on the specifications for the building works to be carried out (both by your client and by our client) final agreement was reached between our clients. It was only after Sydney Council refused your client’s Section 96 Application to use trolleys that your client sought to withdraw from the lease.

…

As you are no doubt aware your client’s withdrawal from the lease will result in our client incurring substantial losses. Our client will endeavour to mitigate those losses. However, we are instructed to put your client on notice that our client will hold it liable for all losses incurred by our client as a result of your client's actions including but not limited to loss of future income, holding charges, consultants’ fees and legal fees.

We will communicate further with you when our client’s loss has been quantified.

52. Thereafter, there was debate between the respective legal representatives as to whether (which Finger & Co asserted and Karellas disputed) Karellas had withdrawn from the negotiations for the agreement for lease and lease as contemplated by the heads of agreement. In their letter dated 21 June 2010, Karellas’ solicitors twice noted that Finger & Co had no interest in continuing with negotiations as to the terms of the lease. Finger & Co did not in terms reject that proposition; rather, its solicitor’s response, by letter dated 22 June 2010, was to the effect that Karellas’ solicitors’ letter was self-serving and achieved no purpose, and that “[w]e do not intend to engage in any further correspondence in relation to whether or not negotiations had been finalised. You are well aware of our client’s position in relation to the matter”.

53. By letter dated 5 July 2010, Karellas’ solicitors wrote to the solicitors acting for Finger & Co, stating that:

We note from your correspondence that you do not intend to engage in any further correspondence in relation to whether or not negotiations had been completed. We take from your statement that your client does not intend to negotiate further in relation to a lease of the Premises. In short your client has ended all negotiations with our client. Our client has accepted that position but reserves all its rights in respect to your client’s actions.

54. Finally, on 16 August 2010, the solicitors acting for Finger & Co wrote to Karellas’ solicitors, referring to Mr Karellas’ email of 8 June and to the 9 June 2010 letter, stating:

It is clear from the above two pieces of correspondence that your client is not prepared to proceed with the proposed Lease on the terms set out in the heads of agreement dated 21 December 2009 (the “Contract”).

As such, your client has repudiated the Contract. Our client accepts your client’s repudiation and hereby terminates the Contract.

55. Both parties accept that, by 16 August 2010 at the latest, the heads of agreement had come to an end.

Conduct following termination of the heads of agreement

56. Meanwhile, on 23 June 2010, Mr Finger met with design consultants, following which a proposed sketch of a residential scheme was forwarded to Mr Finger with alterations to the entry stair that had the effect of reducing the original proposed supermarket trading floor area from 707m2 to 677m2. Also at around that time agents acting for Finger & Co began communicating with other prospective tenants for the supermarket premises.

57. An agreement for lease dated 16 May 2011 was subsequently executed with Woolworths under which Finger & Co was obliged to carry out specified works to the supermarket premises to reach practical completion by the anticipated date of practical completion (1 June 2012). The premises the subject of the Woolworths agreement for lease were not wholly identical with those the subject of the proposed lease to Karellas. In particular, there were changes to the means of access to the first floor and the trading and back areas in the Woolworths plan were smaller in floor area, primarily because of the area excised from the trading floor in order to be used for a stairway and lift to the upper floor.

58. The primary judge noted (at [478]) that a revised build programme circulated to Woolworths on 23 December 2011 contemplated the construction of the supermarket premises and the residential development as part of the one construction project, which is what ultimately occurred. Construction of the residential premises was complete by 8 March 2013, that being the handover date under the Woolworths agreement for lease at which Finger & Co gave possession of the supermarket to Woolworths. Had the construction of any such residential development taken place while Karellas was in occupation of the supermarket premises, it seems a matter of commonsense to infer that there would have been constraints on the manner in which the building work was carried out, having regard to the covenant for quiet enjoyment that would be implied (if not express) in any supermarket lease entered into between Finger & Co and Karellas, which constraints would not have arisen if the development occurred while the supermarket premises were unoccupied (as it ultimately did). Mr Ben Finger appeared to accept as much in cross-examination (T 92.38-93.5).

59. Mr Ben Finger also accepted in cross-examination that in gross terms Finger & Co had received about $11 million from the sale of the 20 residential units (T 90.29) and that the cost of the building and development was about $4.7m (T 90.33), though he maintained that an interest component had to be taken into account when calculating the profit from the residential development (T 91.3) and that the net profit was in the order only of hundreds of thousands of dollars (not in the millions).

Appeal

60. Finger & Co’s appeal is predicated on the existence of a binding contract that was repudiated by Karellas. Since Karellas maintains that his Honour erred in concluding both that there was a binding contract on the terms set out in the letter of offer, as varied or supplemented by formal documentation ([218], [452]), and that, if there was a binding agreement in those terms, Karellas had repudiated it ([450]), it is convenient to deal first with grounds 1-11 of Karellas’ notice of contention before addressing Finger & Co’s appeal grounds in relation to the termination of the contract.

Was there a binding contract on the terms found by the primary judge? – grounds 1 and 4 of the notice of contention

• Findings of the primary judge

61. The primary judge concluded that it was intended by the parties that the heads of agreement be final and binding; not a “mere agreement to agree” (see [119]-[126]). (Karellas maintains that its position was not that it was a mere agreement to negotiate, acknowledging that obligations of exclusivity and confidentiality were imposed by the December 2009 letter of offer – AT 28.)

62. At [208], the primary judge made a number of findings.

63. First, that the parties intended to be bound immediately when they executed the heads of agreement (Karellas accepts that this was the case). Second, that they had agreed the essential terms of the lease (as to premises, commencement, term and rent). Third, that they had agreed “most” of the other important terms, or a mechanism for determining those terms; and that they contemplated spending considerable time, effort and money in implementing the agreement, and did so. (Karellas also accepts those second and third matters, though it argues that the agreed terms could legitimately be made the subject of further negotiations.) Fourth, that the effect of the agreement was to stultify Finger & Co’s property for a period of up to one year while the negotiations took place. (Karellas does not accept that the heads of agreement had this effect.)

64. His Honour had earlier concluded (at [130]) that, subject to the qualification that an obligation to act reasonably might not be effective to lead to the settlement of formal documentation complying with the intentions in the heads of agreement, the heads of agreement contained an implied term of the type referred to by Macfarlan J in Perini Corporation v The Commonwealth [1969] 2 NSWR 530 at 545 whereby the parties were bound to do all cooperative acts necessary to bring about the contractual result. Nevertheless, his Honour accepted that the duty to cooperate could not apply to the negotiation of varied or additional terms ([140]).

65. His Honour concluded (at [210]) that the “heads of agreement” was a valid and enforceable contract from the date of its execution for two stated reasons. First, that cl 17 (which required negotiation of amenity provisions) was not too uncertain or incomplete for the heads of agreement as a whole to be unenforceable ([214]), since his Honour was not satisfied that the court could not have determined the terms of the covenants required to satisfy cl 17 if it had been required to do so ([211]). Second, and even if the court would not have been able to determine the covenants required by cl 17 in the absence of agreement by the parties, that the parties had impliedly agreed to conduct negotiations ([216]).

66. His Honour considered the parties’ contract to be a particular species of the type of contract described by Giles JA in Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149 at [66], where the parties agree to be bound immediately by existing terms but contemplate that variations or additions may be included in the formal documentation ([121]; [218]).

• Challenges to those findings

67. By ground 1 of its notice of contention, Karellas maintains that his Honour erred in holding, at least implicitly, that under the heads of agreement the parties agreed to grant and take a lease on the commercial terms there set out or as varied or supplemented by formal documentation and contends that his Honour should have held that:

a.   it was only if and when all relevant terms were agreed and formal documents executed that binding obligations to grant and take a lease on particular terms would have arisen;

b.   the heads of agreement created binding obligations on the parties to negotiate towards agreeing and settling relevant terms (including any additional terms) and formal documentation, and to do so exclusively and confidentially, but gave the parties an express right to terminate if those negotiations were not concluded by 21 December 2010; and

c.   either party was entitled to seek to renegotiate or vary the commercial terms specified in the heads of agreement as part of the negotiation process and to consider the overall position reached at the end of negotiations (including in relation to the commercial terms in the heads of agreement and any additional terms) in deciding whether or not to execute formal documentation.

68. Similarly, by ground 4 of the notice of contention Karellas maintains that:

4.   The primary judge erred in holding that Finger was entitled to insist upon Karellas entering into formal documents that contained the commercial terms in the heads of agreement, including rent (J [404], [452]).

69. Broadly speaking, the difference between the parties’ respective positions as to the consequence of Finger & Co’s acceptance of the December 2009 letter of offer seems to be that, on Karellas’ construction, the “binding heads of agreement” were the equivalent of an agreement to negotiate, albeit implicitly to do so in good faith and containing certain binding obligations as to confidentiality and exclusivity, whereas Finger & Co argues for the existence of an agreement of a kind falling within the so-called fourth Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 category, namely an immediately binding agreement to enter into an agreement for lease/lease, on certain specified terms and on such other terms as are either subsequently agreed by the parties or able to be determined by the court (whether having regard to the Karellas standard lease/specification documents or by reference to the implied obligation to Karellas to cooperate in order that Finger & Co might have the benefit of its agreement (citing by way of example Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235).

• Pleading

70. As noted in the introduction to these reasons, the “contract” on which Finger & Co relies, being one “made” by the December 2009 letter of offer (statement of claim [5]), was alleged to be a contract by which the parties had agreed: first, that they would enter into an agreement for lease by which Finger & Co would grant and Karellas would take “a lease of a supermarket building to be constructed on the land, for a term of fifteen years from commencement of trade, and otherwise on the terms and conditions set out in the contract”; and, second, that the parties or their nominees would respectively grant and take a lease of the supermarket building on those terms (statement of claim [7]). The “contract” was particularised as comprising the letter of offer, the then current approved plans for the construction of a new building referred to in the letter (i.e., DA15 Revision C); and further terms implied by the express terms or as a matter of law (statement of claim [7]).

71. Finger & Co further alleged (at [10]), by reference to cll 24 and 22 of the December 2009 letter of offer, that the parties were subject to implied obligations to act reasonably to settle and execute the formal documentation for the agreement for lease within 12 months of the date of the December 2009 letter of offer and (at [11]) that the said obligations were essential terms of the contract because, unless both parties complied with those obligations, Karellas could elect to terminate the contract and in so doing would deprive Finger & Co of the whole of the benefit of the contract.

72. That there was a distinction drawn in the pleading between an agreement to enter into an agreement for lease (and ultimately a lease) and an agreement for lease itself is made clear by other allegations in the pleading that referred to the settlement, and execution, of formal documentation for an agreement for lease “embodying the terms and conditions set out in the contract (with such variations or further terms as the parties might subsequently agree on)” (see for example statement of claim [10]).

• Submissions

73. Karellas argues that it is implicit in his Honour’s reasons (at [218], [404], [452]) that his Honour concluded that, on the proper construction of the heads of agreement, Finger & Co could have required Karellas to enter into an agreement for lease containing only the commercial terms in the heads of agreement ([17]). It points in this regard to the finding (at [404]) that, as at 9 June 2010, Finger & Co was entitled to insist upon Karellas entering into formal documents that contained the commercial terms of the heads of agreement (but was not then entitled to refuse to re-negotiate other terms); and to his Honour’s statement (at [452]) that, as at 16 August 2010, Finger & Co “had a right under the heads of agreement to hold Karellas to the rent, and the other commercial terms, set out in that document”.

74. Karellas contends that such a conclusion was incorrect. While accepting that the heads of agreement imposed a binding obligation on the parties, during the period to 21 December 2010, to negotiate in good faith as to the terms of the proposed agreement for lease/lease, Karellas submits that neither party could be compelled to enter into an agreement for lease/lease that did not contain a final bargain with which it agreed ([19]). It characterises the heads of agreement as comprising an offer as to the critical commercial terms for the proposed agreement for lease, which would be accepted by execution of the formal documentation if and when that occurred, together with an obligation to negotiate the formal documentation in accordance with a binding framework to govern that process.

75. Karellas points to various clauses of the letter of offer as supporting its construction of the heads of agreement ([20]), including: cl 1, which gave Karellas the right to amend its offer in the event of further amendments to the plans or configuration of the premises; cll 11-19, which identified a range of matters required to be provided and/or agreed during the negotiation period for inclusion in the final agreement for lease/lease documentation; and cl 22, which provided that the offer was subject to finalisation of various matters to Karellas’ satisfaction.

76. It maintains that the first paragraph of cl 21 identifies the particular (and, on Karellas’ argument, seemingly the only) respect in which the heads of agreement document was binding, namely the obligation to negotiate exclusively and confidentially towards mutually acceptable formal documentation ([23]). Karellas argues that the express right to terminate the heads of agreement if formal documentation was not executed within 12 months (cl 22) is inconsistent with a construction that the heads of agreement constituted an immediately binding contract to grant and take a lease ([24]).

77. Relevantly, Karellas argues that the “agreed” terms contained in the heads of agreement, such as the rent, were not terms that were “set in stone” but were, like all the other terms of the proposed agreement for lease/lease, amenable to negotiation ([19]).

78. Finger & Co, on the other hand, argues that a construction of the heads of agreement as being no more than an agreement to negotiate a formal agreement for lease/lease is irreconcilable both with the opening words of the heads of agreement, which refer to a “binding offer to enter into an Agreement for Lease and Lease”, and with cl 24, which refers to the creation of “binding heads of agreement” ([4]). It notes that the heads of agreement had been the subject of extensive negotiations between the parties prior to the execution of the final document ([5]) and emphasises the language of the heads of agreement, such as that in cl 21, as being the language of covenant and obligation ([6]). It places weight on the commercial significance of the property being ‘stultified’ for a period of 12 months, pointing out that cl 21 in its terms obliged it to seek and obtain Karellas’ consent to a sale or other dealing with the ownership of the property.

79. It submits that cl 22 is not inconsistent with an immediately binding contract to grant and take a lease, arguing that it could take effect as a “sunset clause” or a condition subsequent ([7]).

• Determination

80. There is no doubt, by reference to cl 24 of the December 2009 letter of offer, that the objectively ascertainable common intention of the parties was that they were to be immediately bound by the terms contained in the letter of offer once that letter was signed by Finger & Co. The parties referred to the agreement so concluded as a “binding heads of agreement”. However, as Karellas points out, that begs the question as to what it is that the parties thereby bound themselves to do.

81. The difficulty for Finger & Co in seeking to argue that, on acceptance of the December 2009 letter of offer, there was an immediately enforceable agreement to enter into an agreement for lease referrable to the “terms and conditions set out in” the heads of agreement is that a number of the clauses in the heads of agreement specifically contemplated the need for agreement between the parties as to particular matters; not all of which could be dismissed as non-essential terms.

82. Hence his Honour postulated (at [134]) that an examination of all or any number of the matters left undetermined by the letter of offer might lead to the conclusion that there was too great a field of uncertainty or incompleteness for the heads of agreement to be enforceable at all. Indeed, much of the reasoning of the primary judge was directed to the question whether the “binding heads of agreement” was sufficiently certain in its terms to be enforceable, having regard to the fact that the parties clearly contemplated that there were a number of matters still to be agreed for inclusion in the formal lease documents.

83. Finger & Co relies on well-known authority to the effect that there may be a binding contract even though the parties may expect to make a further contract in substitution for the first contract containing, by consent, additional terms (citing GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 634) or even though performance of some or all of the terms is conditional upon execution of a formal document (citing Masters v Cameron at 360-361). There can be no dispute that agreements of such a kind have been recognised as binding in a number of cases.

84. I agree that it is implicit, in the primary judge’s conclusion that, as at 9 June 2010, Finger & Co was entitled to insist upon Karellas entering into an agreement for lease on those agreed terms including the stipulated rent, that his Honour considered that acceptance of the letter of offer gave rise to an immediately binding and enforceable agreement to enter into an agreement for lease/lease on the commercial terms set out in the heads of agreement document alone. The difficulty I have with that conclusion is that the December 2009 letter of offer (and hence the heads of agreement) itself made clear not only that the agreement for lease/lease was to be the subject of later formal documentation but also that there were a number of important terms to be included in the agreement for lease/lease that were required to be agreed.

85. In other words, what the heads of agreement contemplated was a process of negotiation as to the additional terms required to be included in the agreement for lease/lease before any such agreement for lease was to come into existence. What was clearly also contemplated was that agreement might not ultimately be reached on those additional terms, since there was a right on the part of Karellas to withdraw from the project if formal documentation was not executed within 12 months. The content of the heads of agreement does not in my opinion permit a construction that the agreement for lease/lease would be complete without those additional terms. Hence I am unable to accept the position taken by Finger & Co (AT 11.37; 15/2/16) that specific performance (in the sense of an order that Karellas execute an agreement for lease) could have been sought at the point that the heads of agreement came into existence. That is inconsistent with the acceptance by Finger & Co (AT 25.35; 15/2/16) that the matters required by cl 17 to be included in the lease documentation were fundamental matters to be agreed; i.e., that they were essential terms to be included in the agreement for lease/lease whether or not they would be made essential terms of the agreement for lease/lease.

86. That it was contemplated (by cl 1) that Finger & Co might vary the plans for, or configuration of, the lease premises, and that Karellas would then have a right to amend its “offer”, strongly suggests that acceptance of the terms of the December 2009 letter of offer did not immediately give rise to a binding agreement for lease. On Finger & Co’s construction, this would mean that if there were to be a change to DA15 Revision C and Karellas were to exercise the right to amend its offer, then that would in effect permit Karellas either unilaterally to vary an already binding agreement for lease or, if it was open to Finger & Co on that construction of the heads of agreement not to accept the amended terms, unilaterally to terminate the binding agreement for lease – all at a time when on that hypothesis there had been no executed agreement for lease.

87. Similarly, the fact that Karellas had a right to terminate the agreement and “withdraw from the project” if the formal documentation was not executed within 12 months points to the conclusion that no immediately binding agreement for lease came into existence on acceptance of the December 2009 letter of offer. True it is that parties may enter into binding contracts containing a “sunset clause” or a condition subsequent. However, in the present case, what is contemplated on his Honour’s construction of the heads of agreement is that as at June 2010 (and logically therefore also at any time following acceptance of the December 2009 letter of offer) there was a present entitlement on the part of Finger & Co to require Karellas to execute a formal agreement for lease containing only the terms specified in the heads of agreement, irrespective of the fact that important terms of that agreement may not at that stage have been agreed and even though the heads of agreement contemplated that the parties would have up to 12 months to negotiate those terms.

88. I am therefore unable to accept that a binding and enforceable agreement for lease came into existence at any point during the negotiation period in the absence of a final and binding agreement on all the additional terms required to be included in the formal documentation. I consider that, while the drafting of the December 2009 letter of offer is infelicitous in a number of respects, what it makes very clear is that the binding heads of agreement that the parties agreed was intended to come into existence on the execution of the December 2009 letter of offer was not the same as the very subject matter of the heads of agreement; i.e., the agreement for lease. The notion of a “binding offer” to enter into an agreement for lease is better understood, in my opinion, as in effect a commitment by Karellas (if the December 2009 letter of offer were to be accepted) to keep open for 12 months the stipulated terms as part of the negotiations that were to proceed over the 12 month period – tantamount to an irrevocable offer.

89. The proposition that the court might supply any missing covenants, whether by reference some external document (such as a draft Karellas specification or standard Karellas lease) from which content could be given to covenants of the kind contemplated by the heads of agreement, or on the basis that, acting reasonably, Karellas would have been obliged to accept certain covenants, does not accommodate the fact that the parties had agreed, in effect, to a period of negotiation that could extend for up to 12 months. I have difficulty seeing how it could be said that at any particular point during that 12-month period (here, relevantly, in June 2010) a court could step in and impose on the parties terms that had not at that stage been agreed, even by reference to what it might be said could not reasonably have been refused by one or other of the parties acting reasonably in compliance with an implied duty to cooperate. The December 2009 letter of offer did not itself provide for an external mechanism for the determination of the required additional terms except insofar as the content of some of them was to be in accordance with Karellas’ standard documentation.

90. Having said that, as I read his Honour’s reasons (at [215] and [218]), what his Honour was in fact concluding was not that there was as at June 2010 a binding agreement for lease on particular terms (although I appreciate that that is inconsistent with the conclusion implicit in the findings at [218], [404] and [452]) but, rather, his Honour was concluding that, whether or not the court could permissibly have determined the content of the additional covenants required under the heads of agreement so as to meet any invalidity argument based on uncertainty, what acceptance of the letter of offer gave rise to was a binding agreement to negotiate “towards their agreement”; i.e, in colloquial terms, an agreement to agree.

91. His Honour’s recognition that the contract could be terminated if agreement as to the agreement for lease/lease documentation was not achieved within a fixed period (see [218]) puts this contract out of the class of contract contemplated by Giles JA in Sagacious where there is an immediately binding contract the terms of which might be the subject of later variation or additional terms but which would be enforceable whether or not there was any such later variation or addition. Here, absent agreement as to the required additional terms, the parties were (as his Honour found) agreed that the contract could be terminated.

92. No doubt this is the reason that his Honour said (at [139]) that, as the ultimate question was whether Karellas repudiated the contract on 9 June 2010, all that was necessary was that there be a valid contract on foot at that date and that it was not necessary that by that time the parties had finally resolved all the matters left unresolved by the heads of agreement.

93. Understood in that light, his Honour’s finding (at [218] and [452]) that there was a binding agreement on the part of Karellas to enter into an agreement for lease/lease on the terms set out in the letter of offer, as varied or supplemented by formal documentation, would in my view be incorrect only if and insofar as it contemplated that, absent the final resolution of the additional terms contemplated by the heads of agreement, Finger & Co could insist that Karellas enter into a formal agreement for lease/lease.

94. Consistent with his Honour’s finding that the agreement was one to negotiate “towards” an agreement, the agreement that came into existence on acceptance of the letter of offer would better be described as binding the parties to enter into a formal agreement for lease/lease on the terms set out in the letter of offer, together with the additional terms identified in the letter of offer, if, and only if, agreement was finally reached between the parties as to the content of those additional terms.

95. The proper characterisation of the heads of agreement in my opinion is that of an agreement to negotiate and, implicitly, as Karellas accepts, an agreement to do so in good faith.

96. It has been recognised that in some circumstances an agreement to negotiate in good faith can be enforceable. In United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177; (2009) 74 NSWLR 618, for example, this Court considered the enforceability of a dispute resolution clause requiring that a senior representative of each of the parties “meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference”. Allsop P, as his Honour then was, said (at [74]):

… a promise to negotiate (that is to treat and discuss) genuinely and in good faith with a view to resolving claims to entitlement by reference to a known body of rights and obligations, in a manner that respects the respective contractual rights of the parties, giving due allowance for honest and genuinely held views about those pre-existing rights is not vague, illusory or uncertain.

97. His Honour there distinguished between agreements to negotiate in good faith in the resolution of disputes arising out of existing contracts, and agreements to undertake good faith negotiations in bringing about commercial agreements, saying (at [69]):

It is… unnecessary to consider, in the abstract, a clause providing for good faith negotiations in bringing about a commercial agreement in the first instance. The concern in the present case is the express mutual promises of the parties to undertake genuine and good faith negotiations to resolve disputes arising from performance of a fixed body of contractual rights and obligations. The difference is of great importance.

98. I accept that insofar as the present case involves an existing contract (the binding heads of agreement) which contemplates negotiations to bring into existence another commercial agreement (the agreement for lease/lease), it might be thought to fall within the kind of case where the question of enforceability of an agreement to negotiate was expressly left open by Allsop P for later consideration.

99. However, Karellas does not contend that such an agreement in the present case would be unenforceable. Rather, in its notice of contention ([1(b)]), Karellas presses for a finding that the heads of agreement created binding obligations on the parties to negotiate towards agreeing and settling relevant terms (including any additional terms) and formal documentation, and to do so exclusively and confidentially. Hence any issue as to the enforceability of the heads of agreement as an agreement to negotiate does not arise in the present case.

100. Where I part company with Karellas’ submissions on this issue (and its ground [1(c)] of the notice of contention) is that, as I read the heads of agreement, the parties expressly set out certain terms, such as the rent, which they agreed the proposed agreement for lease/lease were to contain (to which I will refer as the “agreed terms”). Some content must be given to the parties’ agreement as to those terms. While I accept that, in the absence of some provision indicating that the agreed terms were irrevocable (or “fixed in stone”, to adopt the vernacular employed in Karellas’ submissions), there was nothing to prevent the parties re-negotiating some or all of those agreed terms. I consider that if all the additional terms contemplated by the heads of agreement were to have been finally agreed then there would have been a compelling argument that Karellas could not at that stage refuse to execute an agreement for lease containing the agreed terms and the other, on this hypothesis, finally agreed additional terms. That situation did not, however, arise in the present case. The case was conducted on the basis that there was no final resolution of the terms left unresolved in the heads of agreement. What follows from the above is that I do not accept that it would amount to a repudiation of the heads of agreement for a party (here, Karellas) to seek to renegotiate those agreed terms, though it might in some circumstances amount to a repudiation if that party refused to continue negotiations unless those agreed terms were varied.

101. Ground 1 of the notice of contention therefore broadly reflects what I consider to be the proper construction of the heads of agreement, in that I agree with propositions (a), (b) and (c) but the last only up to the point at which all additional terms were finally agreed. Ground 1 of the notice of contention is in substance made good.

293. Item 12 provided that Finger & Co must provide a development program acceptable to Karellas Investments that specified the date of handover following practical completion, for inclusion in the proposed agreement for lease. It also provided that Finger & Co must comply with the construction program, with normal industry allowances for delay. Again, while further documentation was required, there may not have been great scope for disputation between the parties, since the development program must be acceptable to Karellas Investments.

294. Item 14 provided that Finger & Co would document the project fully and provide all necessary details and contractual clauses. In particular, documents covering schedules of finishes and scope of works would be required for inclusion in the proposed agreement for lease. There was some scope for necessary negotiation in those provisions. However, the scope for disputation may have been somewhat constrained.

295. Item 22 specified that the offer was subject to finalisation of development plans, programming, scope of works, specifications and finishes to the satisfaction of Karellas Investments. Again there may not have been great scope for disputation, since Karellas Investments must be satisfied about those matters.

296. Item 19 required Finger & Co to provide space for external signage, which was to be part of the specification. It required that the locations and design of the external signage would be required to be shown and referenced on the site plan. There was in fact no site plan and it would have been necessary for such a plan to be brought into existence. Item 19 also provided that a separate elevation drawing would need to be attached to the proposed agreement for lease and lease documents.

297. Thus, while the critical matters for the grant of a lease may have been fixed and were not to be the subject of any further negotiation, there were parts of the proposed agreement for lease and lease that required further discussion and settlement. That is to say, while the premises were identified, the identity of the landlord and the tenant were identified, the rent reserved under the proposed lease was identified and the term of the proposed lease was identified, other matters were left for further discussions, although to a considerable extent those matters were left to the discretion of Karellas Investments.

298. Following acceptance of the offer by Finger & Co to give rise to the Agreement, the parties set about negotiation of the proposed agreement for lease and lease. Considerable progress was made in those negotiations, such that it would be fair to say that there was not a great deal left to be agreed upon before the parties had reached consensus as to the terms of the proposed agreement for lease and lease. It is significant, however, that several of the terms contained in the Agreement were varied in the course of the negotiations.

The Dispute

318. In early October 2009, Benjamin and Harold Finger had had a discussion with Andrew and Vasilli Karellas concerning the Property. Harold Finger said that the site was a “local supermarket” and “a trolley less supermarket and that most of the business would come from people walking and cycling and doing basket shops. Benjamin Finger said that they had intentions of developing the upper level and that it could be residential, commercial or retail. He said that they would need to designate a specific area of the supermarket as “owner’s area” to enable future access to an upper level as shown on a plan. Vasilli Karellas said that they liked the site and asked that the current plan be sent to them.

319. On 14 December 2009, Benjamin and Harold Finger met Andrew and Vasilli Karellas to go through a draft of the proposed offer. In dealing with proposed clause 9, the Karellas brothers showed Finger father and son a spread sheet that set out the projected turnover for the supermarket. Vasilli Karellas then said that, based on the projected turnover, it was impossible for them to pay $675,000 per square metre. They then negotiated a new base rent of $620 per square metre.

320. In early January 2010, Andrew Karellas told Benjamin Finger that Karellas Investments was seeking amendment to the development application for the Property, to add a mezzanine area within the store, to change the approved layout and to seek the use of trolleys within the store. At the end of January 2010, Harold and Benjamin Finger and Andrew Karellas and Michael Briscas, the project manager (quaere) for Karellas Investments met with officers of the City Council to discuss the proposed amendments to the development application. The officers were supportive of the proposal but one of the officers suggested that Karellas Investments would have the best chance of getting approval if they were to use “basket trolleys rather than traditional trolleys”. At a further meeting with Council’s officers, one of the Council officers recommended that Karellas Investments use “basket trolleys”. On 10 February 2010 Karellas Investments lodged a formal application to amend the development approval.

321. On 24 May 2010, Benjamin Finger, Vasilli Karellas and Michael Biscas attended a meeting of the Council’s Planning Development and Transport Committee, which was considering the application to amend the development approval. During the meeting, one of the members of the Committee referred to an economic report that Finger & Co had used in connection with its development application in 2009, saying that the report estimated that the turnover from the proposed supermarket would be between $7 million and $8 million. Several of the members of the Committee said that they had approved the application “as a trolley less supermarket’ and that now Karellas Investments was trying “to get trolleys approved”.

322. Following the meeting, Vasilli Karellas said to Harold Finger that he was not aware of the economic report to which reference had been made. He said that the turnover projection seemed very low and asked for a copy of the economic report. Benjamin Finger subsequently sent a copy of the report to the Vasilli Karellas. On 25 May 2010, Benjamin and Harold Finger strongly recommended to the Karellas Brothers that they amend their application and provide for basket trolleys. Vasilli Karellas said that they were going to “stick to our guns on the trolleys”. On 31 May 2010, the Council rejected the application on behalf of Karellas Investments for the use of trolleys in the proposed supermarket.

323. On 8 June 2010, Vasilli Karellas sent an email to Benjamin Finger in relation to the economic report, saying that “the conclusions in the report obviously changes the basis that we have been proceeding” (sic). He said that, “with this level of turnover and on the proposed lease terms the business is not viable for us”. He asked Benjamin Finger to telephone him to discuss the matter.

324. Benjamin Finger responded in the following terms later on the same day,:

You are experienced business man/supermarket operators no doubt you did you due diligence before entering into the heads of agreement with us. There is nothing in the heads of agreement which makes your offer to lease, contingent upon any economic report. We have acted in good faith in the negotiations and expect you to honour your agreement with us to lease the premises. As you are aware we had already reached an agreement with Woolworth’s prior to receiving your offer. On the basis of your offer we negotiated to be released from our agreement with Woolworths and have proceeded over the last six months with you.

You will understand that this has been at a considerable cost to us both in holding costs and legal fees.

I hope that this matter can be resolved amicably and look forward to your favourable response. [See 2792]

325. On 9 June 2010, Williams Love and Nicol, the solicitors for Finger & Co, sent an email to Reid & Vesely, the solicitors for Karellas Investments, in relation to Benjamin Finger’s email of 8 June 2010. The solicitors’ email relevantly said as follows:

I confirm that my client will not be proceeding with the above proposed Lease on the current proposed terms. The reason for my client’s position are explained below. Having regard to the efforts of both parties to achieve an agreement, my client is willing to continue negotiations to see if a suitable outcome could be achieved for both parties.

The email from your client sent yesterday seems to suggest that there is already a concluded agreement for lease. In the circumstances my client does not believe that this is a proposition that is seriously made by your client. There is no executed Agreement of Lease and the terms of the Lease are still being negotiated. The letter of 21 December clearly confirmed that the parties would negotiate final terms of an AFL and Lease. Whilst the letter outlined some of the contemplated lease conditions there have been significant changes to the terms as contemplated in the letter of 21 December. There are other aspects of the letter still to be addressed. Importantly there were also a number of important matters that had not been discussed as at December 2009.

…

My client is genuinely disappointed that a final agreement has not been reached at this stage.

…

There are a number contributing factors to my client’s decision. One factor is the concern that my client has in relation to the impact of a future development of the site on the Supermarket business.

…

My client has decided that any redevelopment of the site will have a significant detrimental impact on the Supermarket business to be operated from the site.

The second significant development is that my client recently commissioned their own market analysis report. Prior to this report my client has been relying upon analysis of a likely turnover based on information provided by your client (such as the terms of the Woolworths offer).

The report recently received by my client shows a significantly reduced turnover to what my client had been factoring into their business analysis. I understand that a copy of the report has been provided by my client. You may also be aware that the report received by my client is consistent with two other market reports that your client had previously received but my client was only recently made aware of as a consequence of attending a recent council meeting.

It would appear from the report that there are limitations on the possible turnover that can be achieved in this area having regard to the size of the Supermarket currently proposed.

We note that you have previously indicated to the writer that your client has a number of other parties that would be interested in operating a Supermarket business from the site.

As indicated above, my client is prepared to continue negotiations with your client to see if the proposed lease terms could accommodate the above matters. [2814]

326. Reid & Vesely responded to Williams Love and Nichol on 11 June 2010, relevantly saying as follows [2815]:

The thrust of your letter appears to be that your client would proceed with the lease of the premises but on negotiated terms favourable to your client. We are instructed by our client that it is not interested in renegotiating the terms of the lease with your clients. After over five months of protracted and detailed negotiations not only on the terms of the lease but on the specifications for the building works to be carried out (both by your client and by our client) final agreement was reached between our clients. It was only after Sydney Council refused your client’s Section 96 Application to use trolleys that your client sought to withdraw from the lease.

Your client was aware from the commencement of negotiations back in 2009 that the development approval held by our client precluded the use of trolleys. As you are aware our client totally redesigned the internal layout of the premises and added a mezzanine to accommodate the requirements of your client.

Your letter suggests that you may not be aware of the several Heads of Agreement which exist between our respective clients.

…

It is clear from the Heads of Agreement that your client as early as October 2009 was aware that our client intended to further develop the property.

…

Your clients on 14 December 2009 agreed that any future development on the site by our client would not need to be approved by your client.

…

Our client finds it difficult to accept that your client, being extremely experienced supermarket operators, owning three supermarkets, would enter into a binding heads of agreement without first carrying out full and proper due diligence. To suggest that your client simply relied on analysis of likely turnover based on information provided by our client defies belief. We are informed by our client that in fact no likely turnover information was provided by it to your client. You might kindly forward to us the information your client claims was provided by our client and relied upon by your client.

As your client is aware and is reflected in the Heads of Agreement dated 2 November 2009 our client had entered an arrangement with Woolworths for the lease of the premises. On the basis of your client’s Binding heads of Agreement our client obtained a release from Woolworths to that arrangement and proceeded with your client.

As you are no doubt aware your client’s withdrawal from the lease will result in our client incurring substantial losses. Our client will endeavour to mitigate those losses. However, we are instructed to put your client on notice that our client will hold it liable for all losses incurred by our client as a result of your client’s actions including but not limited to loss of future income, holding charges, consultants’ fees and legal fees.

We will communicate further with you when your client’s loss has been quantified.

327. Williams Love & Nicol replied on 22 June 2010 relevantly saying as follows:

Our client did not withdraw from negotiations of the Agreement for Lease and the Lease as contemplated by the Heads of Agreement. We note that your client has no interest in continuing with the negotiations of the Lease. We are firmly of the view that the negotiations of the lease were not completed.

We cannot agree that as a result of the negotiations that have been occurring over the last five months that “final agreement was reached between our clients” as to the terms of the Lease and the specifications for the building works. It is clear to us that the parties contemplated that upon agreement of the terms of AFL and the Lease, the AFL would be signed by the parties. That obviously has not occurred. The contents of your letter only highlight our view that there is no concluded agreement as to the terms of the Lease.

We agree that the negotiations of the AFL and the Lease have been extensive and protracted but they are incomplete.

This outcome of protracted negotiations of the AFL and the Lease was necessary because of the many matters still to be agreed by our respective clients and also because of the nature of your client’s proposed development of the existing Building.

The Heads of Agreement did refer to potential future redevelopment of the Building during the term of the lease but it would appear that the nature of the potential redevelopment was not apparent to either party until recently.

As one example of the incomplete nature of the arrangements, the current version of the draft Lease Annexure includes a clause…dealing with the abatement of rent during the period of the proposed future redevelopment that your client is planning during the term of the Lease. This clause is incapable of being finalised until after our client has reviewed the Mater Plan that is contemplated by the heads of Agreement. Now that your client has obtained approval from the Sydney Council to the amendment of the current development we expect that your client will not be able to provide our client with a detailed Master Plan for future development of the Building.

We note that your client has no interest in continuing with negotiations of the terms of the lease with our client.

You can assume from the above that our client will not be paying any compensation to your client.

328. Reid & Vesely responded on 22 June 2010 relevantly saying:

We do not intend to engage in any further correspondence in relation to whether or not negotiations had been finalised. You are well aware of our client’s position in relation to the matter.

As stated previously our client will hold your client liable for all losses incurred by our client as a result of your client’s actions. We confirm that we will be in further contact with you when our client has quantified its losses. [2842]

329. Williams Love & Nicol wrote again on 5 July 2010 relevantly saying as follows:

We note from your correspondence that you do not intend to engage in any further correspondence in relation to whether or not negotiations had been completed. We take from your statement that your client does not intend to negotiate further in relation to a lease of the Premises. In short your client has ended all negotiations with our client. Our client has accepted that position but reserves all its rights in respect to your client’s actions.

…

We note that you again state that your client will hold our client liable for “all losses incurred as a result of your client’s actions”. Your letter however fails to identify any actions by our client and specifically your correspondence fails to identify any actions that your client alleges have caused losses for your clients We again reiterate that our client did not withdraw from negotiations – it was your client that expressly terminate negotiations.

We confirm that our client will strenuously defend any claim bought by your client and will mount a counterclaim for misleading and deceptive conduct on behalf of your client in addition to a breach of an obligation to act with good faith. [2860]

330. The next relevant correspondence between the solicitors was from Reid & Vesely to Williams Love & Nicol on 16 August 2010. After referring to the exchanges of 8 and 9 June 2010, Reid & Vesely relevantly said:

It is clear from the above two pieces of correspondence that your client is not prepared to proceed with the proposed Lease on the terms set out in the heads of agreement dated 21 December 2009 (the “Contract”).

A such, your client has repudiated the Contract. Our client accepts your client’s repudiation and hereby terminates the contract.

We shall advise you of our client’s claim for damages once they have fully crystallised. [2902]

The Proceedings

331. Finger & Co commenced proceedings against Karellas Group and Karellas Investments claiming damages for the repudiation of the Agreement. On 2 April 2015, a judge of the Equity Division concluded that, while the conduct of Karellas Investments constituted a repudiation of the Agreement, Finger & Co did not purport terminate the Agreement until August 2010. However, at that time, his Honour held, Finger & Co was not ready, willing and able to perform the Agreement because it was in breach of item 15. His Honour held that there was an implied obligation under item 15 for Finger & Co to provide to Karellas Investments details of any proposal for development of the Property and that, at the time of the purported termination, Finger & Co had proposals, albeit in a nebulous state, that it had failed to disclose adequately to Karellas Investments and Karellas Group. His Honour concluded, therefore, that Finger & Co was not entitled to terminate the Agreement and that its purported termination was itself a repudiation of the Agreement, which Karellas Investments subsequently accepted. His Honour therefore ordered that the proceedings be dismissed with costs.

The Appeal

332. Finger & Co complained about the conclusion reached by the Primary Judge that it had not terminated the Agreement until August and asserted that it had effectively terminated the Agreement in June, such that the findings that it was in breach of the Agreement were irrelevant. Alternatively, Finger & Co complained about the conclusion made by his Honour that it was in breach of item 15 at the time when it purported to terminate the Agreement in August 2010. In accordance with its notice of contention, Karellas Investments contended that the Primary Judge erred in concluding that Karellas Investments acted in breach of the Agreement and that Finger & Co was entitled to terminate at any time.

332. The first question, as a matter of logical analysis, is whether Karellas Investments was in breach in July 2010. The second question, as a matter of logical analysis, is whether Finger & Co was ready, willing and able to perform the Agreement.

333. The terms of the proposed agreement for lease and lease, in the form they had reached in July 2010 differed significantly from the bargain represented by the Agreement. While it may be correct to conclude that certain aspects of the proposed agreement for lease and lease were fixed by the Agreement, there were clearly further provisions that required negotiation between the parties. The Agreement provided that, ultimately, if negotiations failed to reach consensus within twelve months, Karellas Investments could bring the Agreement to an end. Thus, it is clear that the parties recognised that they may never reach finality or consensus in relation to the proposed agreement for lease and lease contemplated by the Agreement.

334. It follows that it was not necessarily a repudiation of the Agreement for Karellas Investments to say, in July 2010, that it wished to renegotiate terms of the Agreement, including terms that had been fixed. The language of the communications on behalf of Karellas Investments should not be understood as a statement that Karellas Investments was no longer prepared to perform its obligations under the Agreement. It should understood as no more than a statement that information had come to light as a consequence of which, it wished to renegotiate. Its language did not amount to a refusal to perform the Agreement further.

335. On the other hand, the communications on behalf of Finger & Co evinced a desire to enter into an agreement of lease and lease in the terms of the draft documents that existed as at July 2010. Those terms differed significantly from the terms of the Agreement. At no stage did Finger & Co say that it wished to hold Karellas Investments to the terms of the Agreement on the basis that Finger & Co would also perform its obligations under the Agreement. It is clear that Finger & Co regarded the parties’ positions as having advanced well past the positions disclosed in the Agreement.

336. In those circumstances, Finger & Co was never entitled to terminate the Agreement. At no stage did it evince a desire to perform the Agreement. Its wish was to enter into documentation along the lines of the drafts that had been negotiated over a period of some six months. On the other hand, it was not contended before the Primary Judge or before this Court that a binding agreement had been reached in the terms of the July drafts.

337. The Primary Judge did not err in the ultimate conclusion reached by him that the proceedings brought by Finger & Co should be dismissed. However, his Honour reached that conclusion for the wrong reasons. In the light of that conclusion, it is not necessary to say anything about the conclusions reached by his Honour on the question of damages. It appears to be common ground that his Honour proceeded on a wrong basis and both parties contended that his Honour erred in his analysis. Failure to deal with the damages questions should not be taken as an acceptance of the correctness of his Honour’s analysis of the damages questions.

Conclusion

339. The Appeal should be dismissed. Finger & Co should pay the costs of Karellas Group and Karellas Investments of the appeal.

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