International Advisor Systems Pty Ltd v XYYX Pty Ltd

[2008] NSWSC 2

CITATION:	International Advisor Systems Pty Limited v XYYX Pty Limited & anor [2008] NSWSC 2
HEARING DATE(S):	10-11 December 2007
JUDGMENT DATE :	31 January 2008
JURISDICTION:	Equity Division Expedition List
JUDGMENT OF:	Brereton J
DECISION:	Declaration that in breach of contract first defendant has failed to complete contract in accordance with its terms. Judgment for plaintiff against first and second defendants for damages to be assessed. Order that first cross-claim be dismissed. Order that defendants pay plaintiff’s costs. Order that second cross-claim be dismissed, with costs.
CATCHWORDS:	CONTRACT – Sale of franchise business – Contingent conditions – whether contract conditional on grant to franchisor of new head lease of business premises – where contract conditional on grant to purchaser/franchisee “on or before completion” of franchise including licence to occupy premises – where completion has not taken place – whether condition failed so as to entitle purchaser to rescind prior to completion. - CONTRACT – Mistake – Rectification – where no common intention of parties that contract be conditional on grant to franchisor of new head lease – where unilateral mistake by purchaser, in which vendor was in no way implicated, that contract was conditional in that way – whether rescission or rectification available. - EQUITY – Remedies – Specific performance – vendor’s suit for specific performance of contract for sale of franchise business – where reasonable market for such franchises in which vendor could resell and substantial probability that damages would be slight – whether damages inadequate remedy –where serious risk that contingent condition will not be satisfied – where specific performance would have practical effect of requiring purchaser to work franchise and maintain commercial relationship with franchisor with whom it was in suit on cross-claim – where contract entered into under unilateral mistake by purchaser in which vendor was not implicated – where specific performance would impose burden disproportionate to inconvenience of leaving vendor to remedy in damages – whether even if damages inadequate remedy specific performance should be refused on discretionary grounds – where specific performance refused as damages sufficient remedy – whether damages to be ascertained by assessment or inquiry. - TRADE PRACTICES – Misleading and deceptive conduct – where franchisor’s employee represented that he did not anticipate any difficulty in obtaining new lease, and that letter from lessor’s agent contained terms upon which he expected new lease would be granted – whether also represented that there would be no problems in obtaining a new lease, or that there would be or was in place a new lease – whether such representations as made were misleading – where purchaser’s solicitor proposed amendments to contract and proceeded to exchange not in reliance on belief that there would be or was in place a new lease but on misconceived basis that contract protected purchaser’s position in event that new lease was not forthcoming – whether purchaser suffered damage by any misleading or deceptive conduct.
LEGISLATION CITED:	(NSW) Supreme Court Act 1970
CATEGORY:	Principal judgment
CASES CITED:	A. Roberts & Co Ltd v Leicestershire County Council [1961] Ch 555 Bates (Thomas) & Son Ltd v Wyndhams (Lingerie) Ltd [1981] 1 WLR 505 Boyns v Lackey (1958) 58 SR (NSW) 395 Commonwealth of Australia v VL Investments Pty Ltd (VSC, Marks J, 18 December 1987, unreported) Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1 Dillon v Nash [1950] VLR 293 Doyle v Heenan [1946] VLR 77 Dougan v Ley (1946) 71 CLR 142 Dowsett v Reid (1912) 15 CLR 695 Easyfind (NSW) Pty Ltd v Paterson (1987) 11 NSWLR 98 Harnett v Yielding (1805) 2 Sch & Lef 549 Kennedy v Vercoe (1960) 105 CLR 521 King v Poggioli (1923) 32 CLR 222 McIntosh v Dalwood (No. 4) (1930) 30 SR (NSW) 415 Misiaris v Saydels Pty Ltd (1989) NSWConvR 55-474 Pukallus v Cameron (1982) 180 CLR 447 R D McKinnon Holdings Pty Ltd v Hind [1984] 2 NSWLR 121 Riverlate Properties Ltd v Paul [1975] Ch 133 Slee v Warke (1949) 86 CLR 271 Solle v Butcher [1950] 1 KB 671 Stocznia Gdanska SA v Latvian Shipping Co [2002] 2 Lloyds Rep 436 Svanosio v McNamara (1956) 96 CLR 186 Tamplin v James (1880) 15 Ch D 215 Taylor v Johnson (1983) 151 CLR 422 Torrance v Bolton (1872) LR 8 Ch App 118 Turner v Bladin (1951) 82 CLR 463 Warmington v Miller [1973] QB 877 Waterways Authority of New South Wales v Coal and Allied (Operations) Pty Ltd [2007] NSWCA 276 Watson v Foxman (1995) 49 NSWLR 315 Weatherall v Gearing (1806) 12 Ves 504; 33 ER 191 Willmott v Barber (1880) 15 Ch D 96
TEXTS CITED:	The Laws of Australia – Contract Spry, Equitable Remedies, 5th ed (1997) LBC Information Services
PARTIES:	International Advisor Systems Pty Limited (plaintiff) XYYX Pty Limited (first defendant/cross-claimant) Xin Yong (second defendant/cross-claimant) Jonamill Pty Limited (cross-defendant)
FILE NUMBER(S):	SC 2607/07
COUNSEL:	Mr M S Zammit (plaintiff/first cross-defendant) Mr P J Gow (defendants/cross-claimants) Mrs C Champion (second cross-defendant)
SOLICITORS:	Baybridge Lawyers (plaintiff/first cross-defendant) Ren Zhou Lawyers (defendants/cross-claimants) Mason Sier Turnbull Lawyers (second cross-defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
EXPEDITION LIST

BRERETON J

Thursday, 31 January 2008

2607/07 International Advisor Systems Pty Limited v XYYX Pty Limited & anor

JUDGMENT

1 HIS HONOUR: The plaintiff International Advisor Systems Pty Limited (“IAS”) is the franchisee, from the cross-defendant Jonamill Pty Limited, of a Michel’s Patisserie outlet in premises in central Sydney. Jonamill is the lessee of the premises, which it licenses to IAS for the term of the franchise. By contract dated 19 December 2006, IAS agreed to sell the franchise business to the first defendant XYYX Pty Limited; the second defendant Xin Yong, who was the sole director and shareholder of XYYX, guaranteed its obligations under the contract. In March 2007, before the contract was completed, it appeared that the registered proprietors of the premises would not grant Jonamill a new lease upon expiry of the existing lease on 15 September 2007, with the consequence that the franchise business would have a remaining tenure in the premises of only about six months, and XYYX purported to rescind the contract on the basis that the contract was conditional on the grant of a new lease. IAS denies that XYYX was entitled to rescind and claims specific performance of the contract, which XYYX resists on the bases that the contract was conditional on the grant of a new lease, or ought to be rectified so as to be so conditional, or that another condition (that Jonamill enter into a franchise agreement with it on or before completion) has also failed. By its first cross-claim, XYYX claims a declaration that it was entitled to rescind and has validly and effectively done so, and alternatively rectification. On the claim and first cross-claim, the issues are:

· was the contract conditional on the grant of a new lease;

· if not, should the contract be rectified so as to be conditional on the grant of a new lease, or avoided for mistake;

· was XYYX entitled to rescind for Jonamill’s failure to enter into a franchise agreement with it on or before completion;

· if not, should specific performance be decreed, or are damages a sufficient remedy.

2 Against the eventuality that the contract might be found enforceable, XYYX by its second cross-claim claims indemnity from Jonamill, alleging that it entered into the contract in reliance on representations made by Jonamill to the effect that a new lease would be forthcoming. On the second cross-claim, the issues are:

· did Jonamill engage in misleading and deceptive conduct;

· if so, did XYYX suffer damage as a result of that conduct, which at least in this case is a question of reliance.

Was the contract conditional on the grant of a new lease?

3 Following interviews between Xin Yong on behalf of XYYX and Paul Stearn, a franchise recruitment executive for Jonamill, which culminated in a provisional approval of Xin Yong as a franchisee, on 14 November 2006 IAS instructed its lawyers Baybridge Lawyers to prepare a contract for sale. Baybridges sent a draft contract to XYYX’s lawyers Ren Zhou on 22 November 2006. It was in form of the 2004 edition of the standard contract for sale of business. In the “Choices”, the item “Sale subject to grant of new lease” had no choice selected, by default it was therefore “No”. There were six special conditions. Special Condition 5 was a guarantee and indemnity by Xin Yong of the obligations of the purchaser XYYX. Special Condition 6 provided as follows:

6. The parties agree and acknowledge that this contract is conditional upon the Franchisor on or before completion entering into a franchise agreement with the Purchaser (in the then current form used by the Franchisor) pursuant to which the Purchaser will operate the Business and occupy the Premises.

4 The choice “Sale subject to grant of new lease” referred to standard conditions 27 and 28, which were as follows:

27. Lease of premises – general provisions
27.1 This clause applies only if the premises are, or are on completion to be, subject to a lease.
27.2 The purchaser must -

27.2.1 supply references and other information reasonably required by the landlord to allow the landlord to consider the application;

27.2.2 pay or bear the costs and expenses of the landlord (including the costs of a landlord’s mortgagee) arising from any negotiations between the landlord and the purchaser for proposed changes to a lease disclosed in this contract, whether or not this contract is completed; and

27.2.3 if this contract says the purchaser must provide a suitable guarantee, provide any guarantee reasonably required by the landlord to support performance of the obligations of the tenant under the lease.
27.3 The vendor must –

27.3.1 apply to the landlord for the consent of the landlord to the purchaser becoming the tenant; and

27.3.2 pay or bear the costs and expenses of the landlord arising under this contract, apart from those payable under clause 27.2 (including the costs of a landlord’s mortgagee), whether or not this contract is completed.
27.4 If the consent of the landlord’s mortgagee is required, and the landlord’s mortgagee does not consent by the completion date, a party can rescind, but only if the party has complied with this clause.
27.5 A party cannot rescind under clause 27.4 after the other party has served notice of the consent of the landlord’s mortgagee.
28. Grant of new lease
28.1 This clause applies only if this contract says the sale is subject to the grant of a new lease.
28.2 The parties intend that the landlord is to grant to the purchaser a lease of the premises -

28.2.1 in the form of the proposed lease of premises attached to the contract; or

28.2.2 if no proposed lease is attached to the contract, with the lease particulars as set out in this contract, and on other terms substantially similar to those in force between the landlord and the vendor.
28.3 If the landlord does not grant a lease in accordance with this clause -

28.3.1 by the completion date, the purchaser can rescind; or

28.3.2 by the 90th day after the contract date, a party can rescind.
28.4 A party cannot rescind under clause 28.3 after the landlord has granted a lease in accordance with this clause.

5 The then current form of franchise agreement in use by Jonamill included the following relevant provisions:

10.1 The Franchisor will procure a Lease of the Location for the establishment and conduct of the Franchised Operation.
10.2 The Franchisor may at the Franchisor’s discretion:
10.2.1 Take the Lease of the Location in its own name or in the name of its nominee; or
10.2.2 Require the Franchisee to take the Lease in the Franchisee’s own name.
…
10.4 If the Franchisor takes the Lease in its own name or in the name of its nominee then:
10.41 The Franchisor will provide to the Franchisee a copy of the Lease at or prior to the commencement of this agreement and on any renewal of the Lease.
10.4.2 The Franchisor will obtain for the Franchisee the right to occupy and use the Location for the establishment and conduct of the Franchised Business.
10.4.3 The Franchisee will observe and perform all of the terms and conditions of the Lease as if it was the Lessee named in the Lease and the Franchisee’s Guarantors will observe and perform all of the obligations of the Guarantors named in the Lease as if they were the Guarantors named in the Lease.
10.4.4 Each Party indemnifies the other from any loss, harm or liability which might be suffered or incurred by the other by reason of any failure on the part of the other party and in the case of the Franchisee of the Franchisee’s Guarantor to observe or perform any of their obligations pursuant to this clause.
10.4.5 The Franchisee shall subject to the express terms of this Agreement retain title to all fixtures and fittings installed and paid for by the Franchisee in the Location in so far as the Lease acknowledges the right of the Lessee to sever the same as tenant’s fixtures.
10.4.6 The Franchisor grants to the Franchisee the non exclusive Licence to occupy the Location to conduct the Franchised Business in accordance with this Agreement terminable in any event entitling the Franchisor or the Franchisee to terminate this Agreement.
10.4.7 The Franchisor will not assign, surrender or otherwise deal with the Lease in a manner which would affect the Franchisee’s right to occupy the Location provided that the Franchisee is not in breach of this Agreement so as to entitle the Franchisor to terminate it.
10.4.8 The Franchisor will exercise any option for renewal contained in the Lease in accordance with its terms.
10.5.1 In the event that the Franchisor’s tenancy or lease rights in respect of the Location expire or are terminated for any reason other than default on the part of the Franchisee, the Franchisor and the Franchisee will use their best endeavours to secure a Lease of an Alternative Location within the area specified in Item 7 (referred to as the “Alternative Location”) which is acceptable to the Franchisee and which satisfies the reasonable requirements of the Franchisor and the provisions of this Franchise shall thenceforth apply to the Alternative Location.
10.5.2 In such event the Franchisee shall fit out the Alternative Location at its cost and in accordance with the Franchisor’s requirements and will meet and pay all costs incurred in relocating to the Alternative Location including the Lessor’s solicitor’s reasonable costs and disbursements, stamp duty, the Franchisor’s solicitor’s costs and disbursements and its own solicitor’s costs and disbursements.
10.5.3 In the event that the parties are unable to procure a tenancy or Lease rights in respect of any Alternative Location in accordance with this clause within nine (9) months of the Franchisee ceasing trading in the Location either party may terminate this Agreement by notice in writing to the other. Such termination shall:

10.5.3.1 Not entitle either party to compensation from the other;

10.5.3.2 Not affect any rights or obligations which have accrued up to the date of termination; and

10.5.3.3 Not entitle the Franchisee to a refund of the Franchise Fee or the Fit Out cost or any part of them or any other moneys paid to the Franchisor.
10.5.4 The Franchisee may not carry on the Franchised business in any premises which have not been approved by the Franchisor as a Location.
10.6 The Franchisor will if:
10.6.1 The Franchisee so requests in writing;
10.6.2 The Lease of the Location permits; and
10.6.3 The Franchisee pays its own costs, the Franchisor’s reasonable costs and out of pocket expenses, the Lessor’s costs and out of pocket expenses and any stamp duty
- grant a Sub Lease of the Location to the Franchisee.
10.7 A Sub Lease granted pursuant to this Clause will:
10.7.1 Be for the term of the Lease less one (1) day;
10.7.2 Provide that the Franchisee must perform all of the obligations of the Lessee under the Lease;

10.7.3 Be in such form and on such terms as the Franchisor reasonably requires; and

10.7.4 In the case of a corporate Franchisee include personal guarantees and indemnities by a person or persons as required and approved by the Franchisor acting reasonably.

6 On 23 November 2006, Ren Zhou wrote to Mr Eric Louca, who had the conduct of the matter at Baybridges, requesting a number of amendments, including:

6. Choices: please tick yes to sale subject to grant of new lease.

7 On 24 November 2006, Baybridges responded to Ren Zhou, in respect of the request that the choice “sale subject to grant of new lease” be ticked yes:

6. Agreed. We shall add the following special condition 7:
“The parties agree that for the purposes of this Contract, the term ‘new lease’ as marked in the Choices provision of page 2 of this Contract may also mean a new licence to occupy the Premises which licence may be granted by the Franchisor under the franchise agreement referred to in Special Condition 6.”
In relation to this point, we strongly advise that you contact the Franchisor to obtain lease disclosure and a copy of the lease.

8 Further negotiations, not relevant for present purposes, continued until on 12 December 2006, Baybridges sent a facsimile letter to Ren Zhou, relevantly as follows (emphasis added):

Further, in relation to point 6 of your letter dated 23 November 2006, we regard that as our understanding is that the licence to occupy the Premises will be granted under the Franchise Agreement to be entered into by your client it is not necessary to tick “yes” in respect of a grant of a new lease, as our Special Condition 6 already caters for the grant of the licence to occupy. As we understand it, the lease to occupy will be granted to your client under the Franchise Agreement in respect of the lease currently in place . Special Condition 6 adequately deals with this issue and ticking “yes” in respect of the grant of a new lease (or licence to occupy) is hence merely duplicating the effect of our Special Condition 6.

9 Ren Zhou responded by facsimile on the same date:

We refer to your fax today and advise that we are instructed to agree the same.
Our client wishes the settlement shall take place on 20 February 2007 and he will hand over a bank cheque for the 10% deposit to our office on this Friday.

10 Between 12 and 19 December Ren Zhou deleted from the counterpart held by him the tick he had previously inserted in the choices item “subject to grant of a new lease”. He says that he also wrote out in longhand, for incorporation in the contract, the suggested special condition 7 that Baybridges had proposed in their letter of 24 November.

11 Contracts were exchanged, and a deposit of $25,000 paid, on 19 December 2006. Ren Zhou attended on behalf of XYYX. He says that he and Mr Louca sat down and checked every page of the contract, that the copy which he had brought to exchange executed by the purchaser included a page containing the proposed special condition 7 in his handwriting, that Mr Louca made a copy of that page and inserted it into the copy executed by IAS, and that following exchange Ren Zhou retained a copy executed by IAS and Baybridges retained a copy executed by XYYX. Mr Ren Zhou exhibits a copy of the contract, executed by IAS, which includes a page bearing proposed special condition 7 in his handwriting.

12 Mr Louca denies that any such page was in the contract upon exchange. He says that, immediately prior to exchange, he made a copy of the page of special conditions on which a facsimile of Xin Yong’s signature appeared beneath the guarantee clause: Ren Zhou brought a facsimile to exchange, since there had been insufficient time for the copy originally signed by Xin Yong to be returned before exchange, and the facsimile was accepted upon Ren Zhou’s undertaking to provide the original as soon as possible.

13 So far as the documentary evidence goes, the counterpart retained following exchange by XYYX apparently includes a page containing handwritten special condition 7. The copy retained by IAS does not, but it is known that the page of special conditions containing Xin Yong’s originally signed guarantee has since been substituted for the facsimile copy. In neither case does it appear that the contract was stapled together. Failure to observe this traditional and conventional practice reduces the significance that might otherwise be attached to the documentary evidence, because it cannot be ascertained whether the relevant page was always part of the document. The physical state of the contracts is therefore of minimal assistance in resolving the dispute as to the state of the counterparts when exchanged.

14 I do not regard it of significance that Ren Zhou’s letter of 19 December 2006, submitting the contract by way of exchange and referring to some other documents, did not explicitly refer to the handwritten special condition (because if it were included in the contract, like a zoning certificate and the other special conditions, one would not have expected it to be separately mentioned). Nor is it of significance that Ren Zhou’s letter of 15 January 2007, which purported to “enclose the original special conditions signed by our client”, enclosed only the originally signed typewritten conditions 1 to 6, and not the handwritten condition 7, because its purpose was to provide Xin Yong’s originally signed guarantee in substitution for the facsimile copy, and it appeared only on the typewritten, and not on the additional handwritten, page.

15 The significance of ticking the choice “subject to grant of new lease” is that in respect of business premises occupied under lease, a purchaser may either take an assignment of the existing lease, or the vendor may surrender the existing lease with the purchaser to be granted a new lease. Ordinarily, the lessee is the owner of the business, and if the choice is ticked “yes” and clause 28 is imported, then it is the purchaser to whom a new lease is granted. As, in the present case, the lease was to Jonamill (not the franchisee), and the franchisee occupied under a license from Jonamill, the terms of clause 28 were inapt. Baybridges letter of 24 November 2006 reveals that Mr Louca was alert to this, and sought to address the problem by proposed special condition 7, so that the condition would be satisfied, not by the grant of a new lease, but by the grant by Jonamill to XYYX of a new licence. Baybridges’ letter of 12 December 2006, to which Ren Zhou’s response expressed agreement, makes explicit that what was envisaged was that the franchisor would grant XYYX a new licence, under the existing old head lease. Moreover, the existing lease (not any proposed new lease) was annexed to each counterpart.

16 The exchange of correspondence of 12 December manifests a consensus that the “tick” in “choices” should be deleted. The handwritten special condition 7 (incorrectly numbered 6) was in effect a definition for the purposes of the contract of the term “new lease”, which was relevant only if that choice was ticked “yes”. Once that choice was deleted, the handwritten special condition served no purpose and had no work to do.

17 It was recognition that the subject premises were occupied by the business, not under a lease, but under license from the franchisor, which in turn held a lease from the registered proprietors, that had occasioned Mr Louca’s original suggestion of the additional special condition. Then, Baybridges’ 12 December letter clearly contemplated not only that distinction between a lease (from the head lessor to the franchisor) and a licence (from the franchisor to the franchisee), but also that the franchisee was intended to obtain a new licence from the franchisor, which it would under the franchise agreement, making a separate stipulation for “subject to new licence” unnecessary; thus the deletion of the “tick”. Bearing in mind that it was only the proposal to tick “yes” in the subject to lease choice that occasioned the need for the proposed additional special condition in the first place, and that Mr Louca had by the time of his 12 December letter clearly considered the position and formulated a view about the sufficiency of existing special condition 6 to address the situation, and communicated that view in his letter of 12 December, it is highly improbable that he would have photocopied and included in the contract upon exchange the handwritten special condition in a context in which it would have no work to do and serve no purpose. On the probabilities, therefore, I prefer his version of the state of the contracts upon exchange to that of Mr Ren Zhou.

18 Even if the handwritten special condition had been included, it is not a contingent condition, upon which either formation of contract or performance was conditioned. It is simply a definitional provision, defining the meaning of “new lease” for the purposes of the contract. Accordingly, even if it were included in the contract, it would not have had the effect of making the contract conditional on the grant of a new lease.

19 It follows that the contract as made was not conditional on the grant of a new lease.

Should the contract be rectified, or avoided for mistake?

20 IAS’s claim for rectification of the contract is closely connected with its claim to avoid the contract for mistake, because mistake lies at the heart of both. Although the remedies of rescission and rectification may not necessarily be alternatives in every case in which mistake entitles a plaintiff to relief, both are manifestations of “the ordinary jurisdiction of equity to deal with any instrument or other transaction ‘in which the court is of opinion that it is unconscientious for a person to avail himself of the legal advantage which he has obtained’ ” [Torrance v Bolton (1872) LR 8 Ch App 118, 124 (James LJ, with whom Mellish LJ agreed, explaining the basis upon which a contract was set aside in a case of unilateral mistake); cf Taylor v Johnson (1983) 151 CLR 422, 431; Commonwealth of Australia v VL Investments (VSC, Marks J, 18 December 1987, unreported); Misiaris v Saydels Pty Ltd (1989) NSWConvR ¶55-474 (Young J)]. Accordingly, similar considerations inform the grant of both remedies.

21 The requirements of a claim for rectification for common mistake can, for present purposes, be sufficiently summarised by reference to the judgment of Wilson J in Pukallus v Cameron (1982) 180 CLR 447, 452, where his Honour said that the essential principles were (1) that though there need not be a concluded antecedent contract, there must be an intention common to both parties at the time of the contract to include in their bargain a term which by mutual mistake is omitted from it; (2) that a plaintiff must advance convincing proof that the written contract does not embody the final intention of the parties; and (3) that the omitted ingredient must be compatible of such proof in clear and precise terms, so that the Court must not assume for itself the task of making the contract for the parties.

22 As well as for common mistake, rectification can be founded on the unilateral mistake of one party, of which the other party knew [A. Roberts & Co Ltd v Leicestershire County Council [1961] Ch 555]. The requirement for rectification in a case of unilateral (as distinct from common) mistake is, at least, knowledge on the part of the defendant of the plaintiff’s mistake coupled with silence amounting to sharp practice [Taylor v Johnson, 431; Commonwealth of Australia v VL Investments; Bates (Thomas) and Son Ltd v Wyndhams (Lingerie) Ltd [1981] 1 WLR 505, 516 (Buckley LJ); Riverlate Properties Ltd v Paul [1975] Ch 133, 140]. In Easyfind (NSW) Pty Ltd v Paterson (1987) 11 NSWLR 98, Young J (as his Honour the Chief Judge then was), following those authorities, in concluding that a compromise of litigation was not voidable for unilateral mistake where a legal adviser, though knowing of the other party's mistake, neither induced nor deliberately cloaked it, held (at 107-108):

In Australia a contract may be avoided not only where the mistake was induced by the person in the part of the present plaintiff, but also where he has deliberately cloaked the mistake or has otherwise behaved unconscionably.

23 Accordingly, sharp practice falling short of actual fraud may suffice [cf Taylor v Johnson, 444, (Dawson J)]. And actual knowledge of the mistake is not required; it is sufficient that the other party “must have known” or “strongly suspect” that the first party is making a mistake, as Young J explained in Misiaris v Saydels:

In Bates' case, at p 516, Buckley, LJ said that the following must be shown, "First, that one party A erroneously believed that the document sought to be rectified contained a particular term or provision, or possibly did not contain a particular term or provision which, mistakenly, it did contain; secondly, that the other party B was aware of the omission or the inclusion and that it was due to a mistake on the part of A; thirdly, that B has omitted to draw the mistake to the notice of A. And I think there must be a fourth element involved, namely, that the mistake must be one calculated to benefit B. If these requirements are satisfied, the court may regard it as inequitable to allow B to resist rectification to give effect to A's intention on the ground that the mistake was not, at the time of execution of the document, a mutual mistake."

In Taylor v Johnson supra at p 431, the High Court appeared to accept this statement of Buckley, LJ as representing the law.

…

In Riverlate Properties Ltd v Paul at p 145, the English Court of Appeal said they could not grant rectification because the defendant "neither ... knew of the lessor's mistake and was not guilty of anything approaching sharp practice in relation thereto." In Greig and Davis on Contract at p 937, the learned authors remark, "It will be noted that in the case of rectification for unilateral mistake, the unmistaken party must, on the present state of the authorities, know of the other's mistake, whereas in the case of rescission for unilateral mistake it is sufficient that the unmistaken party merely ought to have been aware of the mistake ... ".

A great deal of debate has taken place before me as to when a party is to be taken to have known of the other party's mistake. On one side it was put that so long as there is a strong suspicion that the other party has made a mistake it is sufficient, indeed, it might be sufficient if the unmistaken party is totally innocent of knowledge of the mistake. On the other side it is said that actual knowledge of the mistake is necessary.

The authorities to which Grieg and Davis refer are not spelt out on p 937 of their work, but would seem to include cases such as Roberts (A) and Co Ltd v Leicestershire CC [1961] Ch 555, 572, and Leighton v Parton [1976] 1 NZLR 165, 168. However, it must be remembered that in the Roberts ' case at p 573, Pennycuick, J found knowledge because he said of Mr Smith, "Only if he was unusually stupid or unusually heedless could he have failed to understand the company's state of mind at least by the end of the meeting. I am satisfied he was neither stupid nor heedless, and it seems to me he did realise the company's mistake." It is also significant that in Bates ' case, Buckley, LJ did not use the word "knew" but rather used the words "was aware". In the Riverlate case at p 145, the English Court of Appeal referred to the decision of Stamp, J in Redbridge LBC v Robinson Rentals Ltd (1969) 211 EG 1125, as a case where "It was clearly held that mere unilateral mistake on the part of the plaintiff, unknown to the defendant was no ground ... to make an order for rescission with an option to the defendant to accept rectification."

In my view it is enough that the defendant strongly suspects that the plaintiff has made a mistake of a fundamental nature about the contract for the court to provide the remedy of rectification. However, I am of the view that in the instant case, applying the same sort of test to Mr Wrigg as Pennycuick, J applied to Mr Smith, the circumstances were so glaring that he must have known that the plaintiffs were making a mistake in proffering the lease as referring to No 29 only.

24 The circumstances in which a contract can be rescinded for unilateral mistake are limited to those in which it is unconscionable for the other party to enforce the contract [Solle v Butcher [1950] 1 KB 671, 691 (Lord Denning MR); Svanosio v McNamara (1956) 96 CLR 186, 196 (Dixon CJ and Fullagar J); Taylor v Johnson, 431 (Mason ACJ, Murphy and Deane JJ)]. In Taylor v Johnson, Mason ACJ, Murphy and Deane JJ concluded (at 432):

A party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension.

25 However, rescission for mistake is not available where the defendant neither shares nor knows of the plaintiff’s mistake, and the mistake was not attributable to anything said or done by the defendant [Riverlate Properties Ltd v Paul, 140-141].

26 I accept that it was the subjective intent of Mr Ren Zhou and of Xin Yong on behalf of XYYX that the contract be subject to the grant of a new lease by the head lessor to Jonamill. Their evidence to that effect is supported by the initial request that the choice “subject to new lease” be ticked “yes”, by the relatively short term of the existing tenure which would remain to XYYX as incoming franchisee if there were no new lease, by the evidence of Mr Stearn (who accepted that Xin Yong said to him on several occasions that he did not want to buy unless there was a new lease, and that he wanted tenure), and by the record of interview between Mr Stearn and Xin Yong, which records the latter answering the question, "What did your accountant/solicitor say about buying the Michel's franchise", with the response, "Fine, as long as lease is there".

27 However, I also accept that Mr Louca on behalf of IAS did not share that intention, as appears from Baybridges’ 12 December letter. The intent of IAS and its agent Mr Louca was that the contract be subject to the grant of a new licence by Jonamill under the existing lease. It was in order to make that clear that Mr Louca originally proposed handwritten special condition 7. That this was his intent is confirmed by Baybridges’ 12 December letter. Mr Ren Zhou did not appreciate this at the time, but, objectively ascertained, there was no common intent that the contract be subject to the grant of a new lease by the head lessor to Jonamill.

28 There is, therefore, no ground for rectification, nor for rescission, for common mistake.

29 However, I accept that there was a unilateral mistake in this respect on the part of XYYX and Mr Ren Zhou. Mr Gow for XYYX submitted that IAS must have known of, or at least strongly suspected, that XYYX mistakenly believed that the counterparts contained a provision which would have the effect that the contract was conditional on the grant of a new head lease, and that IAS’s conduct in remaining silent was sufficiently “sharp practice” to justify rectification, or alternatively rescission. In particular, Mr Gow referred to the following matters:

· That IAS (by Mr Louca) knew that XYYX would only enter into a contract on the basis that the sale be subject to the grant of a new lease to Jonamill . I am unable to agree. The evidence does not establish XYYX told IAS (as distinct from Jonamill) that a new lease was fundamental to any decision on its part to proceed. The request that the sale be made “subject to new lease”, in the light of the subsequent correspondence including proposed special condition 7, and the subsequent 12 December correspondence, is entirely consistent with IAS and Baybridges understanding that XYYX would only contract on the basis that it be granted a new licence under the existing lease;

· That it was Baybridges that suggested proposed special condition 7 after agreeing to the choices box being ticked “yes”, and the quote “no” was never ticked . There is no significance in the “no” box not having been ticked; “no” is the default answer. Baybridges’ proposal of special condition 7 is entirely consistent with IAS having the understanding to which I have just referred, and does not bespeak appreciation of any apprehension that XYYX was insistent upon the contract being conditional on a new head-lease;

· That Mr Louca knew that if the contract did not include a provision making it subject to a new lease, then the purchaser would be buying a business for $250,000 which it could only operate for seven months . This is not entirely correct. Clause 10.5.1 of the franchise agreement provided for what was to happen in the event that the franchisor’s lease rights expired during the term of the franchise, namely that the franchisee and the franchisor would use their best endeavours to secure a lease of an alternative location within the territory.

30 In those circumstances, and in the context of the negotiations, as illuminated by the correspondence, I am quite unconvinced that Mr Louca actually knew, “must have known” or “strongly suspected” that XYYX believed that the contract was conditional on a new lease being granted to Jonamill. Indeed, I am satisfied – primarily by the terms of his own contemporaneous correspondence and Mr Ren Zhou’s expressed assent to it – that he did not do so.

31 Accordingly, it is not unconscionable for IAS to resist a claim for rectification, nor to insist on its strict contractual rights. The claim for rectification fails, together with the claim to rescind the contract for mistake.

Was XYYX entitled to rescind under special condition 6?

32 Xin Yong commenced his training on 22 January 2007 and brought with him that day the franchise agreement between XYYX and Jonamill, executed by him and XYYX, which he left with Jonamill.

33 On 16 February 2007 Marwin Kojok of Baybridges, who had assumed conduct of the matter following the departure from the firm of Mr Louca, received an email from Julie Ricci, Jonamill’s solicitor, to the effect that Xin Yong would not complete his training until 23 February, and as the Michel’s conference was being held during the week of 26 February, settlement would have to occur on Monday 5 March 2007.

34 On 1 March 2007, the head lessor informed Jonamill that it did not propose to renew the lease. On 12 March, Baybridges sent to Ms Ricci an executed Deed of Surrender and Release of IAS’s franchise, providing for the surrender of the premises and the occupancy. Also on 12 March, the head lessor having confirmed its earlier advice that Jonamill would not be offered a new lease, Jonamill informed Ren Zhou and Baybridges accordingly. Ren Zhou wrote to Baybridges that “in the event that a new licence/lease is not granted to our client, our client will not be in a position to settle the matter”. Baybridges responded on 13 March, to the effect that the contract was not conditional upon the grant of a new lease. Baybridges on 13 March served a Notice to Complete appointing 27 March 2007 for completion. On 16 March 2007, Ren Zhou by facsimile to Baybridges served a Notice of Rescission to the effect that whereas it was a condition of sale that the purchaser be granted a new lease or a new licence, and that the landlord had declined to grant a new lease to the franchisor, with the consequence that the proposed purchaser could not be granted a new licence and that the condition had not been realised, XYYX rescinded the contract on the ground that a new lease or a new licence was not granted, and required refund of the deposit. On 23 March, Baybridges responded that, having taken counsel’s opinion, it was their view that there was no entitlement to rescind and that the contract remained on foot; and that the vendor would not refund the deposit and required completion on 27 March in accordance with the Notice to Complete. XYYX did not complete and IAS commenced proceedings for specific performance on 8 May 2007.

35 For reasons already explained, as I have concluded that the contract was not conditional upon the grant of a new lease, but only of a new franchise agreement containing a licence on the ordinary terms of that agreement, XYYX was not entitled to rescind upon the ground on which its notice relied. However, it is well established that a party may rely on any available grounds to support a rescission notwithstanding that they were not invoked or even known of at the time of the purported rescission, and an election to terminate may be validly exercised even if the wrong reason for doing so or no reason at all is given [Stocznia Gdanska SA v Latvian Shipping Co [2002] 2 Lloyds Rep 436, 443 (Rix LJ); The Laws of Australia – Contract, [119]].

36 XYYX submits that it was entitled to rescind pursuant to Special Condition 6, Jonamill not having on or before completion entered into a franchise agreement with it.

37 The condition in question is a contingent condition of performance of the contract. It confers a right to rescind the contract upon the purchaser XYYX, in the event that “on or before completion” the franchisor does not enter into the relevant franchise agreement. The time by which the condition must be satisfied is “completion”, which is not synonymous with the “completion date” specified under the contract, and means the act of completion; this is apparent inter alia from a comparison of standard condition 19 with standard condition 20. The reference to “on or before completion” in its context means that the franchisor may enter into the agreement either before or upon completion, and that if it fails to do so XYYX can rescind. In such a case, generally the condition can be satisfied at any time up to completion, and cannot be said to have failed until completion, even where there has been an initial refusal to enter into the relevant agreement, although there may be cases in which a final refusal can justify an anticipatory termination before completion [cf Smith v Butler [1900] 1 QB 694, 699; Doyle v Heenan [1946] VLR 77, 80-2]. In the present case, there has been no refusal. Completion was not appointed (save pursuant to IAS’s notice, in respect of which XYYX made clear that it would not participate). When XYYX purported to rescind, it could not be said that “on or before completion” Jonamill had not entered the relevant agreement, because completion had not yet taken place.

38 Accordingly XYYX was not entitled to rescind, either on the basis upon which it relied (non-fulfilment of the supposed “subject to new lease” condition), or on the alternative basis advanced in argument (failure of the “subject to franchise contract” condition). It follows that XYYX’s first cross-claim must be dismissed.

Should specific performance be granted?

39 Despite the lessor’s indication in March 2007 that it would not grant a new lease of the business premises to Jonamill, further negotiations between the lessor and Jonamill resulted in the lessor, on 30 July 2007, offering to enter into a new lease with Jonamill. Jonamill accepted that offer on 31 July, and on 8 October 2007 a new lease was executed between the lessor and Jonamill for a term of five years commencing on 16 September 2007.

40 This is a vendor’s suit for specific performance of a contract for sale of business. The vendor could terminate for the purchaser’s breach, resell and recover any deficiency as damages. Moreover if IAS were now to terminate and resell, it would do so in the enhanced position that Jonamill now has a new lease from the lessor.

41 It is not in doubt that a vendor may obtain specific performance of a contract for sale [Turner v Bladin (1951) 82 CLR 463, 473], including a contract for the sale of a business as a going concern, at least where the goodwill is not dependent upon any personal element but is attached to the premises [Kennedy v Vercoe (1960) 105 CLR 521, 528-9]. The cases which support a vendor’s right to specific performance are explained by Spry and by Meagher, Gummow & Lehane as resting on two bases: first, mutuality – in that if such a contract is specifically enforceable by the purchaser, so it is by the vendor; and secondly, that damages are not an adequate remedy because the vendor is entitled to be divested of the property sold.

42 Inadequacy of damages as a remedy is a pre-requisite for a decree of specific performance, and not just one of several considerations informing the exercise of the discretion to grant or withhold specific relief, as has recently been restated by the Court of Appeal in Waterways Authority of New South Wales v Coal and Allied (Operations) Pty Ltd [2007] NSWCA 276, [75]-[77], [95]-[97], with reference to the decision of the High Court in Dougan v Ley (1946) 71 CLR 142, and the decision of the House of Lords in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1, 11. The question is whether relegating the plaintiff to damages would leave it in as favourable a position in all respects as would exist if the defendant’s obligation were specifically performed [Spry, Equitable Remedies, 5th ed, p 59; Harnett v Yielding (1805) 2 Sch & Lef 549, 553; McIntosh v Dalwood(No. 4) (1930) 30 SR (NSW) 415]. In Dougan v Ley, Dixon J said (at 150):

So it became the received doctrine that the foundation of decrees for specific performance was ‘that damages at law would not give the party the compensation to which he was entitled; that is, would not put him in a situation as beneficial to him as if the agreement were specifically performed’ (per Lord Redesdale, Harnett v Yielding ).
‘The court gives specific performance instead of damages, only when it can by that means do more perfect and complete justice’ (per Lord Selborne, W ilson v Northampton and Banbury Junction Railway Co ).
In the case of goods or securities obtainable upon the market, damages at law place the disappointed buyer or seller in as good a position as delivery of the articles or receipt of the price because it enables him to go upon the market. But damages at law for the refusal of a vendor of land to go on with the contract might not be a complete remedy to the purchaser, to whom the land might have a special value ( Adderley v Dixon ), and the vendor’s failure to complete through defect of title left the purchaser without any adequate remedy at law ( Flureau v Thornhill ; Bain v Fothergill ).

43 Williams J said (at 153):

It is clear that the Court of Equity will not decree specific performance of a contract where a money payment, or in other words damages, will afford an adequate remedy for the breach …

44 There is evidence that there are 341 Michel’s Patisserie stores throughout Australia, and that Michel’s is generally a highly sought after tenant for major shopping centres. Jonamill keeps a waiting list of potential purchasers of franchises. I infer that there is a reasonable market for such franchises. Particularly now that a new lease has been negotiated, there is no reason to suppose that there will be any particular difficulty in IAS finding a new purchaser. If it does so, then assessment of its damages (if any) will be relatively straightforward. Even if it does not, it will still be practicable to assess its loss of bargain damages.

45 The vendor’s entitlement to be divested of the business does not, in the context of this case – a sale of personal property (albeit a business) for which there is a market – mean that damages are an inadequate remedy. Although there is some very slight evidence of an indirect nature – via Mr Stearn – to the effect that IAS was “disenchanted” with the business, there is no evidence that its retention will occasion any difficulty or detriment to it. It is true that the new lease imposes some obligations on the lessee to renovate, which under the cl 10.4.3 of the franchise agreement devolve on the franchisee. On the one hand, IAS points to this as a circumstance favouring a grant of specific performance, because it may result in it incurring an obligation that it does not wish to incur. But the consideration is a two-edged one, because specific performance would involve forcing XYYX to assume the same obligation. If IAS does incur any such obligation, the cost to it will be measurable and recoverable as part of its damages.

46 In my view, it has not been established that damages are an inadequate remedy, and that is itself sufficient ground for refusing to decree specific performance.

47 However, there are additional reasons for declining specific performance as a matter of discretion.

48 First, the order would in any event have to be conditioned upon Jonamill entering into a franchise agreement with XYYX. While it is clear that the circumstance that the consent of a third party might be required is not an obstacle to a decree of specific performance – although the order will be expressed in terms of requiring the defendant to do all things necessary to obtain the relevant consent and thereafter specifically to perform the contract [Dougan v Ley; Kennedy v Vercoe] – no decree of specific performance will be granted, and the parties will be left to their remedies at law, if it is clear that the consent will not be given [Weatherall v Geering (1806) 12 Ves 504, 511; 33 ER 191, 193-194; Willmott v Barber (1880) 15 Ch D 96; Warmington v Miller [1973] QB 877; Dillon v Nash [1950] VLR 293, 298]. Although in this case it is not clear that consent cannot be obtained [cf Doyle v Heenan [1946] VLR 77, 81-2], nonetheless it is not without significance as a discretionary consideration that, in these proceedings, XYYX has cross-claimed for damages for misleading and deceptive conduct against Jonamill, and it must now be seriously doubted whether Jonamill would enter into a franchise agreement with XYYX.

49 Secondly, although a decree would not directly compel the maintenance of a personal relationship, it would have the practical effect of requiring XYYX to enter into a franchise agreement for a term of 7 years (until 11 September 2012 [Franchise Agreement, cl 5.1.2 and Reference Schedule, item 13]) with Jonamill (if Jonamill is still willing to do so); indirectly, that would practically compel Xin Yong to work in the business unless and until XYYX is able to sell it. Thus specific performance would practically compel XYYX and Jonamill – antagonists in this litigation – to sustain an ongoing commercial relationship.

50 Thirdly, unilateral mistake by the defendant, in which the plaintiff is in no way implicated, and which would there not be a ground for rescission or rectification, may nonetheless exceptionally be a reason for declining specific performance [Riverlate Properties Ltd v Paul, 140F]. While equity only reluctantly refuses specific performance in the case of a mistake which is entirely that of the defendant and in no way contributed to by the plaintiff, it may do so, at least in cases where a hardship amounting to injustice would be inflicted upon the defendant by holding him to the bargain [Tamplin v James (1880) 15 Ch D 215, 221]. In Slee v Warke (1949) 86 CLR 271, the High Court explained (at 278-9) that, in the case of unilateral mistake by the defendant in which the plaintiff was in no way implicated, the question whether the court should as a matter of discretion grant specific performance or leave the plaintiff to damages must depend on the circumstances of the particular case, but the general rule governing the exercise of that discretion was as stated by James LJ in Tamplin v James:

Where there is a unilateral mistake on the part of the defendant not contributed to by the plaintiff, the question whether the Court should in the exercise of its discretion make a decree for specific performance or leave the plaintiff to sue for damages must, we think, depend on the circumstances of the particular case. But the general rule governing the exercise of the discretion is, we think, that laid down by James L.J. in Tamplin v. James [(1880) 15 Ch. D., at p. 221], where he said: "for the most part the cases where a Defendant has escaped on the ground of a mistake not contributed to by the Plaintiff, have been cases where a hardship amounting to injustice would have been inflicted upon him by holding him to his bargain, and it was unreasonable to hold him to it". There are passages to the same effect in the judgment of Cotton L.J. in Preston v. Luck [(1884) 27 Ch. D. 497], at p. 506 and in the judgments of this Court in Gall v. Mitchell [(1924) 35 C.L.R. 222].

51 The hardship occasioned to a defendant by a decree – even if not contributed to by any fault of the plaintiff – may justify declining relief, if it is oppressive and far outweighs the inconvenience of leaving the plaintiff to a remedy in damages [R D McKinnon Holdings Pty Ltd v Hind [1984] 2 NSWLR 121; Dowsett v Reid (1912) 15 CLR 695].

52 For reasons already explained, I am satisfied that the contract was entered into by XYYX under a unilateral mistake, in which IAS was not implicated. To compel XYYX to complete the purchase and pay the full price for a business which had less than seven months tenure would have involved considerable hardship. Although that hardship is now much mitigated by the circumstance that a new lease has since been granted, nonetheless there remains the circumstance that, with the benefit of the new lease, IAS might well be able to resell with little if any deficiency, and the burden of payment of the balance purchase price of $225,000 (which specific performance would compel) in those circumstances is disproportionate to the inconvenience of leaving IAS to a remedy in damages.

53 Accordingly, even if damages were not an adequate remedy so that specific performance might have been granted, nonetheless the circumstances that any decree would have to be conditional and that there is a serious risk that the condition would not be satisfied, that specific enforcement would have the effect of requiring XYYX (and Xin Yong) to work the franchise, and that the contract was entered into under XYYX’s unilateral mistake and the burden of specific performance would be disproportionate to the inconvenience of leaving IAS to a remedy in damages, taken together, would have resulted in the refusal of specific performance on discretionary grounds.

54 As the primary basis for refusing specific performance is that damages at law are a sufficient remedy, the traditional course would have been, not to order an inquiry as to damages under Lord Cairns’ Act – which assumes that the case was one in which specific performance could have been ordered – but to dismiss the suit without prejudice to the plaintiff’s right to proceed at common law [Boyns v Lackey (1958) 58 SR (NSW) 395, 405; King v Poggioli (1923) 32 CLR 222]. Since the (NSW) Supreme Court Act 1970 that course is no longer necessary, and damages at law can be assessed and awarded in the Equity Division. I will therefore give judgment for the plaintiff against both defendants for damages for the first defendant’s breach of contract (the second defendant being liable on his guarantee), such damages to be assessed.

The second cross-claim: misleading and deceptive conduct?

55 On the cross-claim against Jonamill, XYYX and Xin Yong contend that, between August and October 2006, Jonamill’s employee Paul Stearn made representations to the effect that there would be “no problems” in getting a new lease, and that there would be a new lease on the terms contained in a letter of offer from the lessor’s agent CB Richard Ellis to Jonamill, a copy of which was provided to Xin Yong, which representations induced XYYX to enter into the contract with IAS.

56 In his affidavits, Xin Yong deposed that in several telephone conversations Mr Stearn said that although the current lease expired in around September 2007 “there will be no problems to get a new lease”, and that in response to Xin Yong’s answer “I prefer to sign the contract when a new lease is confirmed by the landlord in writing” Mr Stearn responded “don’t worry Jack, no problem for the lease. Don’t tell me you want to sign the contract next September?”. He says that on or about 9 October 2006 he told Mr Stearn “I am not going to buy this shop unless I see the documents for new lease”, and that on about 23 October he was provided with a copy facsimile letter from CB Richard Ellis (the landlord’s agent) to Jonamill dated 16 October 2006 “which contained an offer of a new lease”. He asked Mr Stearn “What does this fax mean”, to which Mr Stearn replied: “This is the lease you wanted. You will have a new lease as exact terms as setting out in this letter. Now you shouldn’t worry about new lease. … You should exchange the contract quickly. Otherwise you won’t be able to attend the training before this Christmas.” Xin Yong says that he responded: “If I can definitely get a new lease, as you said, I will continue this purchase”, and Mr Stearn responded “Of course you will have the new lease. Now you have got the written letter, what are you still waiting for?”. In a supplementary affidavit, Xin Yong elaborated that Mr Stearn had said that a year still remained on the lease, that there was no need to rush for a new lease now and that Jonamill usually renewed before the lease expired. He maintained that Mr Stearn said, in respect of the copy letter from CB Richard Ellis: “The lease terms on that fax will be your new lease’s terms”.

57 The facsimile letter from the lessor to Jonamill, which was provided by Mr Stearn to Xin Yong, in its terms did not purport to be a binding agreement for lease, and made as clear as could be that the offer it contained was not capable of immediate acceptance, but was subject to the lessor’s approval. It was captioned “strictly subject to lessor’s approval and contract”. It commenced:

Thank you for your expression of interest in renewing your lease at Metcentre. As managing agents on behalf of the lessor, we confirm our offer of a lease to you over shop MG19 in Metcentre based on the terms set out below.
The complete terms and conditions for the granting of a lease for the shop will be contained in the documentation to be prepared by the lessor’s solicitors, based on the specimen lease provided to you and incorporating the terms and conditions set out in this offer.

58 The letter proceeded to set out various terms and conditions, including:

40. Subject to Lease . The information contained in this letter is not intended to be a binding lease or agreement to lease between the lessee and the lessor. All the parties acknowledge that:
(a) the lessee may withdraw (subject to the lessor’s rights in respect of the legal costs and other costs as set out in the letter) until such time as signed lease documentation has been delivered to the lessor’s solicitors in a form agreed to and reasonably accepted by the lessor.
(b) the lessor may withdraw at any time until it receives the signed lease documentation and confirms to the lessee that the lease has been accepted by he lessor.
No other act or conduct of any party will be considered as giving rise to a lease or agreement to lease.
41. Acknowledgement . I/we (the lessee) acknowledge that:
this offer is subject to acceptance by the lessor and that no legal right or obligations will arise unless and until lease documents signed by the lessor are received.
…

59 The letter concluded:

Upon receipt of the signed letter of offer we will seek lessor approval for the above terms. Should approval be granted we will issue a lessor and lessee disclosure statement that must also be signed and returned to us. Once received and approved, the lessor will instruct the lessor’s solicitors to prepare the lease and any associated documentation and issue it as you have directed. Please note that no negotiation of the terms of the specimen lease or any associated documentation will be entered into until such time as the lessee’s disclosure statement is received.

60 Xin Yong gave his oral evidence through a Mandarin interpreter, although his affidavits do not bear any formal indications of interpretation. At the end of Mr Xin Yong’s cross-examination, he was asked to explain in English, what Mr Stearn told him:

Q. As best you can, what were the words he used about the new lease when he spoke to you, in English? Answer me in English please. Tell me in English what Mr Stearn told you.
A. He said, “That’s the lease you wanted”.
Q. “That’s the lease you want”?
A. Yes. Nothing else as far as I remember, “That’s the lease”.

61 In his oral evidence, Xin Yong said that he believed that a new lease had been granted when he signed the contract for sale. The crux of the claim became that Mr Stearn sent Xin Yong a “faxed copy of the new lease” – a reference to the CBRE letter, which he then regarded as a formal lease and sent to Ren Zhou “and told him we had a new lease in hand”.

62 Mr Stearn denies that he made representations to Xin Yong to the effect that there would be “no problems” in getting a new lease, or that there would be a new lease on the terms contained in the CBRE letter, let alone that the letter was such a lease. He says that he recommended that Xin Yong contact the centre manager to see if they would negotiate a new lease, in order to enable him to get some comfort from centre management as to whether they were looking to renew at a later date. However he accepted that Mr Xin Yong said on a number of occasions that he did not want to buy a business unless there was a new lease, and that he did not want anything to do with the business unless he could secure some tenure in the place.

63 I am prepared to accept that what Mr Stearn said and did conveyed something to the effect that he did not anticipate any difficulty in obtaining a new lease, and (once the facsimile offer had been received) that it contained the terms upon which he expected a new lease would be granted; but that falls far short of an assurance that there would be no problems, or that there would be – let alone was in place – a lease on the terms contained in the CBRE offer. While I accept that Xin Yong was alert to the need for there to be a new lease, I am unpersuaded that Mr Stearn made the alleged representations. There is no corroboration, documentary or otherwise, of them. The context – as Xin Yong and his solicitor understood – was that any new lease would be between the head lessor and Jonamill, and the ability to grant or withhold it lay with the lessor, not with Jonamill. The terms of the CBRE offer letter are quite contrary to the substance of the representations alleged. If Xin Yong in truth believed, when he signed the contract for sale, that a new lease had been granted in the form of the CBRE letter, in circumstances where he had been provided with a copy of that letter, the belief was misconceived and resulted from self-delusion, not from anything that Mr Stearn had said. That there was at least some misunderstanding of the terms of the CBRE letter is apparent from Mr Ren Zhou’s evidence that (quite contrary to what the letter of offer actually says) its terms were not negotiable and that Xin Yong should tell Mr Stearn that he accepted them, which betrays a serious misreading of what the concluding paragraph of the letter in fact says.

64 On 9 November, in the course of an interview with Mr Stearn, Xin Yong completed a pre-franchise agreement questionnaire, in which he confirmed receipt of the franchisor’s disclosure statement, confirmed that he had been advised by his solicitor, accountant and business advisor, and in response to a question which called for him to list any other representations not previously disclosed in writing that had influenced his decision to purchase, did not take the opportunity to refer to those allegedly made by Mr Stearn, although in answer to a question from Mr Stearn as to what his solicitor had said about buying a Michel’s franchise, responded “fine as long as lease is there and good name”. The sale contract provided (by special condition 1.2) that the purchaser “has not relied on any conditions, representations or statement made by the vendor or Jonamill Pty Ltd (the franchisor) or their employees, officers, agents or representatives”. Mr Ren Zhou said that on receipt of the draft contract he carefully explained to Xin Yong the special conditions and in particular condition 1.2; he did not suggest that in response there was any reference to the alleged representations. A request that the contract be made subject to the grant of a new lease was the method he advised be adopted to ensure that his client could walk away if no new lease were granted. Neither Xin Yong nor his solicitor raised the making of the alleged representations – which are said to have been made before Xin Yong was approved as a franchisee, before the vendor had submitted a draft contract of sale, and before Mr Xin had decided which of three outlets he was considering he would take up – until these proceedings were commenced.

65 I am, therefore, unable to feel actually persuaded that the alleged representations were made [cf Watson v Foxman (2000) 49 NSWLR 315, 318-319].

66 Insofar as I accept that what Mr Stearn said and did conveyed (1) that he did not anticipate any difficulty in obtaining a new lease, and (2) that the CBRE letter contained the terms upon which he expected a new lease would be granted, such representations were not misleading. Both were made in the context that it was apparent to XYYX that the grant of a new lease lay in the gift of the lessor, not of Jonamill. As to the first, Jonamill’s historical experience in dealing with lessors, the circumstance that it was a highly sought after tenant in shopping centres, and earlier correspondence from the lessor, which indicated that it would consider an application from Jonamill for a renewed lease favourably, provided more than reasonable grounds for an expectation that there would be no difficulty in obtaining a new lease. The second was accompanied by the letter itself, which very plainly made clear that it was not a lease, nor an agreement to grant a lease, nor any assurance that there would be a lease.

The second cross-claim: reliance?

67 As has already been mentioned, Mr Ren Zhou said that on receipt of the draft contract he carefully explained to Xin Yong the special conditions and in particular condition 1.2, and there was no suggestion of any reference to the alleged representations. He also said that he told Xin Yong, in the course of discussing the risks associated with no new lease being in place upon exchange of contracts, that the way to address that issue was to make the contract subject to the grant of a new lease – which Xin Yong and Ren Zhou believed (albeit as I have concluded incorrectly) they had done – so that XYYX could “walk away” if no new lease were granted. Thus Mr Ren Zhou proposed amendments to the contract, and proceeded to exchange, not on the basis of reliance on anything that Mr Stearn had said, but on the basis that the contract protected his client’s position in the event that a new lease was not forthcoming – a misconception on Ren Zhou’s part, but one which nonetheless is inconsistent with reliance on a belief that there would be, let alone was in place, a new lease.

68 Accordingly, even if the alleged representations had been made, the contention that XYYX entered into the contract in reliance on a belief, induced by them, that there would be, let alone was in place, a new lease, is negated.

Conclusion

69 The contract for sale was not conditional on the grant of a new head lease by the lessor to Jonamill. Nor was it the common intention of the parties that it be so conditional. Although XYYX mistakenly thought that it was conditional in that way, IAS was not implicated in the mistake; it follows that neither rescission nor rectification is available. As special condition 6 could be fulfilled at any time up to completion, and completion had not arrived, there was no non-fulfilment of that condition such as to entitle XYYX to rescind under it. Accordingly, there was no basis on which XYYX was entitled to rescind when it purported to do so, and its purported rescission was a repudiation for which IAS was entitled to terminate. It follows that the first cross-claim will be dismissed.

70 However, it has not been established that damages are an inadequate remedy, and that is sufficient ground for refusing to decree specific performance. Even if damages were not an adequate remedy so that specific performance might have been granted, nonetheless, the circumstances that any decree would have to be conditional and that there is a serious risk that the condition would not be satisfied, that specific enforcement would have the effect of requiring XYYX (and Xin Yong) to work the franchise, and that the contract was entered into under XYYX’s unilateral mistake and the burden of specific performance would be disproportionate to the inconvenience of leaving IAS to a remedy in damages, taken together, would have resulted in the refusal of specific performance on discretionary grounds. Accordingly, I will refuse to grant specific performance, but I will give judgment for the plaintiff against both defendants for the damages (at common law) which IAS has suffered as a result of XYYX’s refusal to complete the contract, such damages to be assessed.

71 Although what Mr Stearn said and did conveyed something to the effect that he did not anticipate any difficulty in obtaining a new lease, and (once the facsimile offer had been received) that it contained the terms upon which he expected a new lease would be granted; that falls far short of representations that there would be no problems, or that there would be – let alone was in place – a lease on the terms contained in the CBRE offer. Insofar as what Mr Stearn said and did conveyed that he did not anticipate any difficulty in obtaining a new lease, and that the CBRE letter contained the terms upon which he expected a new lease would be granted, such representations were not misleading. Even if the alleged representations had been made, the contention that XYYX entered into the contract in reliance on a belief, induced by them, that there would be, let alone was in place, a new lease, is negated by the circumstance that Mr Ren Zhou proposed amendments to the contract, and proceeded to exchange, not on the basis of reliance on anything that Mr Stearn had said, but on the (albeit misconceived) basis that the contract protected his client’s position in the event that a new lease was not forthcoming. Accordingly, I will dismiss the second cross-claim.

72 My orders are:

(1) Declare that in breach of the contract between the plaintiff as vendor, the first defendant as purchaser and the second defendant as guarantor dated 19 December 2006, the first defendant has failed to complete the said contract in accordance with its terms.

(2) Give judgment for the plaintiff against the first and second defendants for the damages which the plaintiff has suffered by reason of the said breach, such damages to be assessed.

(3) Direct that until further order, the assessment proceed before me.

(4) Order that the first cross-claim be dismissed.

(5) Order that the defendants pay the plaintiff’s costs.

(6) Order that the second cross-claim be dismissed, with costs.

**********