IHG Hotels Management (Australia) Pty Ltd v Green Garden Development No. 1 Pty Ltd

[2021] NSWSC 1310

Supreme Court

New South Wales

Medium Neutral Citation:

IHG Hotels Management (Australia) Pty Ltd v Green Garden Development No. 1 Pty Ltd [2021] NSWSC 1310

Hearing dates:

13 October 2021

Decision date:

15 October 2021

Jurisdiction:

Equity - Commercial List

Before:

Ball J

Decision:

(1)   Judgment for the plaintiff in the sum of $11,378,000.

(2)   The defendant pay the plaintiff’s costs of the proceedings.

Catchwords:

CONTRACTS — Breach of contract — Damages — No issue of principle

Cases Cited:

Clark v Macourt (2013) 253 CLR 1

Robinson v Harman (1848) 1 Exch 850

Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272

Category:

Principal judgment

Parties:

IHG Hotels Management (Australia) Pty Ltd (Plaintiff)
Green Garden Development No. 1 Pty Ltd (Defendant)

Representation:

Counsel:
R A Jedrzejczyk (Plaintiff)

Solicitors:
Clayton Utz (Plaintiff)

File Number(s):

2021/101369

Judgment

1. In these proceedings the plaintiff, IHG Hotels Management (Australia) Pty Ltd (IHG), seeks damages from the defendant, Green Garden Development No. 1 Pty Ltd (Green Garden), for breach of a hotel management agreement entered into between them on 16 March 2018 (the Management Agreement). Under the terms of the agreement, Green Garden agreed to build and to fit-out a hotel in Haymarket, Sydney (the Hotel) and, as soon as the Hotel was completed, to grant to IHG the right to manage the Hotel for an initial term of 20 years with an automatic renewal for a term of 5 years unless either party gave notice within the time specified in the Management Agreement that it did not want to renew it.

2. Under cl 1.2 of the Management Agreement, Green Garden represented and warranted that “it shall from the date of this Agreement and for the duration of the Term maintain full ownership or other legal right to the exclusive use and occupancy of the Hotel …” Green Garden was, however, entitled under cl 19.1 “to assign its interest in this Agreement either directly or indirectly … to a third party provided it first obtains the prior written consent of [IHG]”. Under cl 19.1, IHG agreed that it would not unreasonably withhold its consent if the Hotel was sold or leased to a third party and the third party relevantly executed an appropriate deed agreeing to be bound by the terms of the Management Agreement.

3. On or about 20 December 2019, Green Garden entered into a contract to sell the Hotel to Forte & LFG Pty Ltd (Forte). That contract was completed on 2 September 2020 without Forte agreeing to be bound by the terms of the Management Agreement. Following an unsuccessful attempt at mediation, IHG commenced these proceedings.

4. The proceedings were served on Green Garden on 12 April 2021. However, Green Garden has not filed an appearance (or a Commercial List Response).

5. On 21 May 2021, the Court directed IHG to serve its evidence by 2 July 2021. On 1 July 2021, the Court extended that time until 30 July 2021.

6. On 29 September 2021, IHG gave formal notice accepting Green Garden’s repudiation of the Management Agreement and terminating the agreement.

7. Following service of its evidence, IHG filed a notice of motion seeking default judgment. On 5 October 2021, that motion was dismissed with no order as to costs and instead the Court set the matter down for a final hearing on 13 October 2021. At the same time, it directed IHG to notify Green Garden of that order. I am satisfied that that direction was complied with. There was no appearance on behalf of Green Garden at the hearing.

8. It is plain on the evidence before the Court that the parties entered into the Management Agreement and in breach of that agreement Green Garden has sold the Hotel on terms that mean Forte is not bound by the terms of the Management Agreement. The only issues that require resolution are damages to which IHG is entitled and costs.

9. IHG claims as damages the capitalised value of the lost net cash flows that it would have earned under the Management Agreement assessed as at the date of breach.

10. In principle, IHG’s method of calculating damages is appropriate. As IHG points out in its written submissions, an award of damages for breach of contract should, so far as money can do it, put the promisee in the position it would have been if the contract had been performed as promised: Clark v Macourt (2013) 253 CLR 1 at [26] per Crennan and Bell JJ; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at [13]; Robinson v Harman (1848) 1 Exch 850 at 855. That involves estimating the revenue that IHG would have earned under the Management Agreement, deducting any costs it would have incurred to earn that revenue and discounting the difference to arrive at a lump sum.

11. Under cl 9.1 of the Management Agreement, IHG was entitled to be paid the “Base Management Fee” and the “Incentive Management Fee” for “the duration of the Term”. Under cl 9.4, IHG was also entitled to be paid the “Technical Services Fee” of $150,000, $75,000 of which has been paid, $45,000 of which was to be paid 12 months after the Management Agreement was entered into and $30,000 of which was to be paid 24 months after the Management Agreement was entered into. The latter two amounts have not been paid. Under cl 10.2(a), IHG was also entitled to be paid a “Technology Service Fee” of USD$13.26 per room per month.

12. “Base Management Fee” is defined to mean 1.25 percent of “Adjusted Gross Revenue” (AGR), as defined in the agreement. The “Incentive Management Fee” (IMF) was a variable percentage of “Adjusted Gross Operating Profit” (AGOP) depending on the proportion that Gross Operating Profit (GOP) bore to AGR. For example, if GOP was less than 20 percent of AGR, IMF was 3 percent of AGOP. The IMF increased in steps as a percentage of AGOP as GOP increased as a percentage of AGR up to a maximum of 8 percent where GOP was equal to or greater than 40 percent of AGR.

13. As I have indicated, the initial term of the Management Agreement was 20 years. However, it would have been extended for a further 5 years unless either party gave notice that it did not want the extension to take effect. In addition, under cl 15.6(a) of the Management Agreement, Green Garden had a right after 10 years to sell the Hotel and to terminate the Management Agreement provided it paid a termination fee calculated in accordance with cl 15.6(a)(ii). That clause provides for a termination fee calculated in accordance with the formula A x B/24 / 2 where A is the number of months remaining in the Initial Term and B is the amount of the Base Management Fee and IMF paid or payable for the two Full Operating Years (as defined in the agreement) immediately prior to termination.

14. In calculating the amount that it would have earned under the Management Agreement, IHG relies on an expert accounting report prepared by Ms Rebecca Conoulty. Ms Conoulty calculates the revenue and profit that the Hotel would have earned using financial forecasts prepared by IHG’s investment team. Those forecasts were prepared by IHG in connection with its decision to enter into the Management Agreement. They were revised in June 2021 to take account of the Covid-19 pandemic. Mr Alexandre Personeni, the Head of Operations Finance for the Japan, Australasia and South Pacific Region at IHG gives evidence that he personally reviewed and approved the original forecast and that having reviewed the revised forecast it was his opinion that the assumptions in that forecast regarding expected revenue and expenses associated with the Hotel “are consistent with IHG’s internal benchmarks and industry standards, having regard to certain factors which are specific to the Hotel, such as its location and the operating environment over the last 12 to 18 months”.

15. For the purpose of determining IHG’s costs associated with the Hotel, Ms Conoulty relied on information obtained by staff of the InterContinental Hotels Group PLC, IHG’s parent company, using a software application used by InterContinental in its business known as the Profitability and Cost Management Cloud Service. That application is used by InterContinental to allocate the costs across its different businesses.

16. Ms Conoulty discounts the estimated revenue (after tax) IHG would have earned from the Management Agreement and the expenses allocated to the Hotel using a discount rate of 11 percent. She assumed that the date of breach of the Management Agreement was the date of the contract of sale of the Hotel — that is, 20 December 2019. She discounts the net cash flows to that date. IHG concedes that that is not the correct date. It accepts that the date of breach was the date on which the sale of the Hotel completed — that is, 2 September 2020.

17. In the absence of any challenge from Green Garden, there is no reason not to accept the forecasts relied on by Ms Conoulty or her methodology.

18. Mr Conoulty performed her calculations on three bases. Scenario 1 assumes that the Management Agreement lasted for the initial term of 20 years. On that basis she calculates IHG’s total loss (grossed up for tax payable on the judgment) as $9,968,000 to which she adds pre-judgment interest of $496,000 to reach a total amount of $10,464,000. Scenario 2 assumes that the Management Agreement lasted for 25 years. On that basis, Ms Conoulty calculates IHG’s total loss including pre-judgment interest at $11,378,000. Scenario 3 assumes that Green Garden would have elected to sell the Hotel after 10 years and paid the termination fee. On that basis, Ms Conoulty calculates IHG’s total loss including pre-judgment interest at $8,644,000.

19. IHG submits that the appropriate basis on which to calculate its loss is Scenario 2. I accept that submission. Under the terms of the Management Agreement, that agreement would have continued for 25 years unless, relevantly, Green Garden took some action. In the absence of any evidence, there is no reason to think that it or an assignee who agreed to be bound by the Management Agreement would have taken any action to terminate the agreement before its expiry.

20. Ms Conoulty has discounted the income stream under the Management Agreement to 20 December 2019. In those circumstances, there is no reason why IHG should not be entitled to recover pre-judgment interest. The only question is whether some adjustment should be made to Ms Conoulty’s calculations to allow for the fact that she has used the wrong date as the date of breach. I have concluded that no adjustment should be made. Ms Conoulty used a discount rate of 11 percent. The effect of discounting the cash flow to an earlier date is to reduce IHG’s damages. That reduction is off-set by the fact that Ms Conoulty has also calculated pre-judgment interest using Court rates from an earlier date. However, the Court pre-judgment interest rate was in the range of 4.75 percent to 5.25 percent between 20 December 2019 and 2 September 2020. The result is that the methodology used by Ms Conoulty has still resulted in a slight under-estimate of IHG’s loss.

21. Accordingly, there should be judgment for the plaintiff in the sum $11,378,000.

22. IHG seeks a gross sum costs order in the amount of $325,338.95. However, the evidence before the Court is insufficient to permit the Court to make an assessment of whether the amount claimed is reasonable. There are no special features of the case that suggest that the Court ought to make a gross sum costs order. Accordingly, it is appropriate to make the normal costs order, leaving costs to be assessed in the usual way.

23. The orders of the Court are:

1. Judgment for the plaintiff in the sum of $11,378,000.

2. The defendant pay the plaintiff’s costs of the proceedings.

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Decision last updated: 15 October 2021