Horsell Nominees Pty Ltd v NAJB Pty Ltd - [2010] SASC 321

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
HORSELL NOMINEES PTY LTD & ORS v NAJB PTY LTD
[2010] SASC 321
Judgment of The Honourable Justice Vanstone
24 November 2010
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - PENALTIES AND LIQUIDATED DAMAGES - GENERAL PRINCIPLES
DAMAGES - GENERAL PRINCIPLES - MITIGATION OF DAMAGES
Defendant failed to settle on contract for sale of shares in a company and units in a trust - assets of the trust subsequently sold to third party - plaintiffs sought loss of bargain damages and other costs.
Held: claim for damages upheld.
Concut Pty Ltd v Worrell (2000) 75 ALJR 312; Holland v Wiltshire (1954) 90 CLR 409; W & R Pty Ltd v Birdseye (2008) 102 SASR 477; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; Taylor v Raglan Developments Pty Ltd [1981] 2 NSWLR 117; Stocznia Gdanska SA v Latvian Shipping Co (1998) 1 WLR 574, applied.
Waterways Authority of New South Wales v Coal and Allied (Operations) Pty Ltd [2007] NSWCA 276, discussed.
Commercial & General Acceptance Corporation Ltd v Nixon (1981) 152 CLR 491; AHR Constructions Pty Ltd v Maloney [1994] 1 Qd R 460, considered.

HORSELL NOMINEES PTY LTD & ORS v NAJB PTY LTD
[2010] SASC 321
Civil

VANSTONE J: The plaintiffs agreed in writing to sell to the defendant, for $3.5m, the legal and beneficial interest in shares in two companies and units in a trust which formed the ownership structure of the Walnut Grove Retirement Village. The defendant failed to settle. The plaintiffs terminated the contract and found a new purchaser. The subject matter of the new contract, although the same in substance, was described in terms of the land and chattels owned by the unit trust. The vendor was now the trustee of the unit trust, rather than the plaintiffs. The purchase price under the second contract was $3.275m, being $0.225m less than the original price. The plaintiffs sued for loss of bargain damages and consequential damages and interest.
Two principal issues are raised at trial. They are:
1.did the default clause in the contract exclude common law remedies for breach of contract which would otherwise have been available to the plaintiffs, and
2.if the plaintiffs can otherwise recover, have they proved that they had mitigated their damages.
Background
The matters I shall now set out are not in dispute and I find these facts proved. The second plaintiff, Terence Amyat Horsell, and the third plaintiff, Maxwell John Horsell, each owned half of the shares in Walnut Grove Nominees Pty ltd and Walnut Grove Estate Pty ltd (Walnut Grove). Walnut Grove was the trustee for the Walnut Grove Unit Trust (the Unit Trust), the units in which were owned equally by the first plaintiff, Horsell Nominees Pty Limited and the second plaintiff both as trustees. The only substantial assets of the Unit Trust were the land on which the retirement village stood and its rights to fees under licence agreements with the residents of the village.
In the latter part of 2007, the third plaintiff was put under some pressure by his bankers to reduce debt. In order to placate his bankers the third plaintiff obtained a valuation of the Walnut Grove Retirement Village prepared by Egan National Valuers (the Egan valuation). It was the opinion of the author that on 9 November 2007 the Retirement Village was valued at $3m exclusive of GST. Notwithstanding receipt of the valuation, the bankers encouraged the third plaintiff to place the retirement village on the market. He contacted Mr Sutton, a chartered accountant of the firm PKF, to help with the sale. Through Mr Sutton several interested parties presented themselves as potential purchasers. One was a Queensland entity. Another was the defendant, NAJB Pty Limited, represented by Mr Michalakas. Another, which came via the third plaintiff’s son, was Masonic Homes Incorporated (Masonic). Masonic became the purchaser of the retirement village under the second contract. Mr Sutton conducted the negotiations on behalf of the plaintiffs.
In late December 2007 a verbal agreement was reached, subject to conducting due diligence, that the defendant would buy the retirement village for $3.5m. The defendant paid a non-refundable deposit of $50,000. The third plaintiff said in evidence that this payment amounted to the price for “exclusivity”, in the sense that the defendant would be provided with information so that it could conduct due diligence and had the right to purchase at the price mentioned. A written contract was executed on 19 February 2008. The settlement date was to be 15 April 2008. Several days before the settlement date the defendant advised that there would be a delay and postponed the settlement date to 23 April 2008. On 22 April a further delay was foreshadowed. As a result the third plaintiff wrote, on behalf of all plaintiffs, to the defendant, in these terms:
Dear Sir,
We have just been advised that settlement of the Village will not take place tomorrow as confirmed in David Spurritt’s letter of 11 April 2008 which was written on your behalf.
We are very disappointed with this further delay and therefore advise that we reserve all rights bestowed on us by clause 9 DEFAULT of the sale agreement and we are giving you seven (7) days notice as required under clause 9.2.2 that we will now exercise our rights to resell in accordance with that clause.
This letter is signed on behalf of the Sellers as detailed in Schedule 1 of the sale agreement.
This letter is important because the defendant claims that, by its terms, the plaintiffs irrevocably elected to proceed by means of the default clause in the sale agreement and not to utilise any common law remedy otherwise available.
The default clause is in the following terms:
9.     DEFAULT
If the Buyer does not pay money due under this agreement, the Seller may decide either:
9.1    that the Buyer must pay to the Seller interest on that money at 10% per annum calculated daily from the due date to the date of actual payment;
9.2     that the deposit and accrued interest are forfeited to the Seller and:
9.2.1to keep the Shares and Units and may sue the Buyer for breach of contract; or
9.2.2after giving the Buyer 7 clear days’ written notice, to re-sell the Shares and Units together or in lots by private contract. Immediately after re-sale, the Buyer must pay the Seller any shortfall from re-sale and the expenses of re-sale. If the Buyer does not do so, the Seller may recover the shortfall and those expenses from the Buyer as liquidated damages. If the price under the re-sale exceeds the price under this agreement, the Seller may keep the excess.
It may be seen that the clause is unhappily drafted. Notwithstanding the positioning of the words “the Seller may decide either”, counsel are agreed that interest accrued from the time of the first scheduled settlement date. The contest is over the interpretation of clause 9.2.2.
As foreshadowed, the settlement did not take place on 23 April 2008. On that day the defendant again sought to delay settlement to 2 May 2008. Settlement did not take place then. It is agreed that the contract was terminated on that date.
The third plaintiff instructed Mr Sutton to look for another buyer. He asked him to speak with the other entities which had earlier expressed interest. He also spoke to his son, who had previously introduced Masonic as a potential buyer. He also took steps to contact the broker who had previously introduced the Queensland entity. Masonic indicated that it was interested and would need to obtain its own valuation of the retirement village.
In due course Masonic made an offer of $3.2m. The third plaintiff asked Masonic’s representative if it could do any better and he came back with an offer of $3.275m. The third plaintiff was told that Masonic’s lawyer had advised that Masonic should not acquire the units and the shares, but should acquire the land on which the retirement village stood and take an assignment of the rights to fees under the licence agreements. That was said to be because a purchase of the shares and units might jeopardise Masonic’s non-profit status. The third plaintiff’s evidence was that he believed this stipulation to be non-negotiable.
Masonic obtained a valuation report from Colliers International. It was dated 14 May 2008. The author did not give evidence at the trial. He concluded that the most appropriate method of valuing the retirement village was by reference to discounted cash flows. The opinion was presented in two alternative ways. On the assumption that a purchaser bought the shares and units in the ownership structure and there was no liability to pay GST, then the valuation was $3.267m, or $3.3m after application of a rounding factor. Or, if the underlying assets and associated rights were sold, and assuming GST was levied on the purchase price, then the value to the vendor was said to be $3m. As I understand it, the author’s point was that if GST were payable at the rate of 10 per cent upon the whole consideration, then it would be a transaction cost. The author did not pretend to have any expertise in respect of what part of the consideration, if any, would in fact attract GST. The higher and lower values given were $3.3m or $3m. I might say that the evidence before me suggests that no GST was paid on the eventual sale of the retirement village.
On 27 June 2008 the contract of sale and purchase with Masonic was both executed and settled. The vendor was Walnut Grove Estate Pty ltd. The subject matter of the contract was the land contained in certain certificates of title, otherwise known as the Walnut Grove Estate Retirement Village, together with the improvements, fixtures and vendor’s chattels on the land. There was to be an assignment to the purchaser of the benefit of the licence agreements.
The plaintiffs seek loss of bargain damages, being the difference between the original contract price and the subsequent contract price, less the $50,000 deposit which was retained. That amounts to $175,000. They also seek costs in respect of the resale, which are agreed in the sum of $29,075. They seek interest as set out hereunder at the rate of 10 per cent. The plaintiffs acknowledge that, for periods after the Masonic settlement date, they do not have a contractual right to interest at the rate of 10 per cent, but suggest it is an appropriate figure in the circumstances. I agree with that and have used that rate in the interest calculations. The plaintiffs’ claim is summarised as follows:
Loss of bargain damages  $175,000
Costs of resale  29,076
Interest on $3,450,000 for 74 days to the Masonic settlement         69,945
Interest on $175,000 for 884 days to judgment  42,383
Interest on $29,076 for 820 days (average) to judgment                     6,536
$322,940
Arguments of the defendant
Counsel for the defendant, Mr Strawbridge, argued that the plaintiffs had failed to mitigate their damages. He pointed to the well-accepted definition of “market value” to the effect that:
Market value is the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
He emphasised that the two valuations obtained in this matter did not establish value as a fact, but were merely estimations given at a particular time. Therefore they could not be relied upon to prove that the price paid by Masonic was a fair one. He queried whether the contract with Masonic was in fact a contract at “arms length”. He suggested that from an early stage the plaintiffs had kept Masonic informed as insurance against the defendant failing to settle. In support of that he pointed to the third plaintiff’s evidence to the effect that the Egan valuation might have been given to Masonic in February 2008. In cross-examination the third plaintiff said:
… We did provide Masonic with the valuation subsequently and that would have been probably some time in February or something like that. We provided them with a copy of it, but not prior to Christmas; there was no reason to do it. …
That answer does not establish whether the provision of the Egan valuation to Masonic occurred before or after the formal agreement with the defendant was executed.
Mr Strawbridge put that, in seeking a new purchaser for the retirement village, there were obligations upon the plaintiffs which were “very much akin” to obligations upon a mortgagee in possession to obtain a proper price. He referred to the statement by Brennan J in Commercial & General Acceptance Corporation Ltd v Nixon (1981) 152 CLR 491 at 522 to this effect:
The duty of a mortgagee exercising a power of sale has been formulated sometimes as a duty to exercise the power in good faith, sometimes as a duty to take reasonable precautions to obtain a proper price.
Counsel provided no authority to support his contention that a similar duty arose here. He argued that, had the plaintiffs not been under pressure to sell the retirement village so that a separate debt could be serviced, they might have insisted on a better price and have obtained one.
Counsel argued that the Colliers’ report suggested that had the retirement village been sold by way of a sale of the shares and units (as opposed to the sale of the underlying assets) then it was likely a greater price would have been realised. As I understood his argument, he was putting that a purchaser who was not obliged to pay GST might have been prepared to pay as much as the original contract price. In that event the plaintiff would not have lost anything.
Referring to the contract between the plaintiffs and the defendant, Mr Strawbridge described the default clause as “a funny clause”. He argued that clause 9.1 was designed to allow for interest at the rate of 10 per cent per annum to run during any period when the purchaser was in default. However, at some point the vendor was obliged to make a choice under 9.2 either to keep the shares and units and sue for breach of contract, or to act under clause 9.2.2, giving notice of the intention to resell the shares and units. Counsel put that in the course of negotiations leading to the second sale the shares and units, as distinct from the assets, must have been offered to Masonic by the plaintiffs, but that since the shares and units had not been sold, no damages flow. He argued that if clause 9.2.2 provided the only remedy to the vendor, or if an election had been made to pursue that remedy, then the plaintiffs, not having sold the shares and units, could not succeed. As I understood counsel’s argument, it was that, either clause 9.2 exclusively provided remedies available to the vendors in the event of default – ousting any common law remedy – or, by the suggested election, the plaintiffs had eschewed any other remedy available and could now not resort to the common law.
Analysis
I deal first with the question of whether clause 9 of the sales agreement had the effect of ousting common law remedies otherwise available to the vendors in the face of default by the purchaser.
It is an agreed fact that the plaintiffs were entitled to terminate the agreement with the defendant on or about 2 May 2008. The defendant contends that from this point, the plaintiffs’ rights were contained exclusively in clause 9.
Whether clause 9 of the agreement is to be construed as removing rights at common law is to be determined primarily by reference to the agreement itself. A clause which deals with relief upon breach may be intended to augment rather than to restrict or remove rights at common law: Concut Pty Ltd v Worrell (2000) 75 ALJR 312; Holland v Wiltshire (1954) 90 CLR 409 at 414-416 per Dixon CJ; W & R Pty Ltd v Birdseye (2008) 102 SASR 477 at [33] per Doyle CJ; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 30 per Mason J. Courts have been reluctant to interpret such clauses as restricting common law rights otherwise available: Taylor v Raglan Developments Pty Ltd [1981] 2 NSWLR 117 at 135 per Powell J; Stocznia Gdanska SA v Latvian Shipping Co (1998) 1 WLR 574 at 585; Waterways Authority of New South Wales v Coal and Allied (Operations) Pty Ltd [2007] NSWCA 276. In the lattermost case, the New South Wales Court of Appeal considered the question of whether a particular clause of a contract amounted to a code such that the rights and obligations of the parties in relation to the removal or retention of a wharf, including the entitlement to damages, were governed solely by that clause. All members of the court agreed that the clause did amount to a code. McColl JA, in her separate judgment, at [214-238], undertook a survey of the relevant authorities. Citing Stocznia Gdanska at 585, her Honour observed that the authorities establish that “clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of the contract arising by operation of law”.
I have not found it necessary to reproduce the sales agreement, apart from clause 9. In my view there is nothing in the balance of the agreement to suggest that the options or remedies provided to the vendor under clause 9 were intended to be anything but additional to the vendors’ rights at common law.
The next question is whether, by the letter of 22 April 2008, the plaintiffs elected to proceed under clause 9.2.2. Earlier in these reasons I set out the terms of the letter. In my view the thrust of the letter was to put the defendant on notice that any further delay could result in the defendant being deprived of the benefit of the agreement. The letter did not amount to any election as to how the plaintiffs would proceed. That decision would necessarily be made after notice was given. Indeed, at the date of its sending, a third settlement date had been foreshadowed and was pending. Plainly, the agreement between the plaintiffs and defendant could still have been executed. As I have said, I consider that the essence of the letter was to give notice to the defendant that the plaintiff was considering and was perhaps on the verge of exercising its rights. If I am wrong, and the doctrine of election did apply, then it seems clear that the time at which an election would be irrevocable would not be earlier than the time of entry into an agreement to resell the “shares and units”.
I turn to the question of mitigation of damages. At the outset I make the observation that I do not see the obligations on the plaintiffs in reselling the retirement village as comparable to those resting on a mortgagee in possession. As noted in AHR Constructions Pty Ltd v Maloney [1994] 1 Qd R 460 at 465 by Thomas J, where a vendor exercises the contractual right to sell, the defaulting purchaser has no proprietary right in need of protection. I doubt that anything turns on the difference in this case.
I consider that the plaintiffs have demonstrated that damages were mitigated. It may be accepted that the two valuations obtained in relation to the retirement village were no more than estimations of market value at particular times. However, the date of each valuation was proximate to the eventual sale date and the price achieved significantly exceeded the Egan valuation and exceeded the higher figure given in the Colliers’ valuation prior to rounding up. As Mr Duggan, for the plaintiffs, argued, the fact that the property was sold at a particular price at arms length to Masonic is some evidence of market value.

I might say that I do not accept that the later agreement was anything but one struck at arms length. There is no evidence which suggests otherwise. It is noteworthy that the price paid by Masonic was within a few per cent of the price which the defendant had agreed to pay. In my mind there is no significance in terms of market value in the fact that what was sold to Masonic was not the shares and units in the ownership structure, but was the real assets and associated rights. I do not consider it to be of consequence that, when Mr Horsell took steps to resell the retirement village, he did not seek the services of an agent specialising in the sale of that sort of asset and did not advertise the sale. What he did was exactly what he had done in late 2007 and in both instances those steps achieved contracts at prices above valuation.
Conclusion
The plaintiffs have proved their case. There will be judgment in the amount of $322,940 with costs.