Karacominakis v Big Country Developments Pty Ltd
[2000] NSWCA 313
•17 November 2000
NEW SOUTH WALES COURT OF APPEAL
CITATION: Karacominakis v Big Country Developments Pty Ltd & Ors Big Country Developments Pty Ltd v Chadlace Pty Ltd & Ors J W Wall Investment Co Pty Ltd & Ors v Big Country Developments Pty Ltd & Ors Hollingsworth & Anor v Big Country Developments Pty Ltd & Ors [2000] NSWCA 313
FILE NUMBER(S):
40696/97
40698/97
40702/97
40877/97
HEARING DATE(S): 20, 21, 22, 23, 24, 28 March & 21 August 2000
JUDGMENT DATE: 17/11/2000
PARTIES:
Nicholas Karacominakis - Appellant in 40696/97, Fourth Respondent in 40702/97, Fifth Respondent in 40877/97
Big Country Developments Pty Ltd - First Respondent in 40696/97, Appellant/First Cross Respondent in 40698/97, First Respondent in 40702/97 & First Respondent in 40877/97
Peter Herman Hesky - Second Cross-Respondent in 40698/97
J W Wall Investment Co Pty Ltd, John William Wall & Cecilia Ellen Wall - Second, Third and Fourth Respondents in 40696/97, First, Second and Third Appellants in 40702/97, Second, Third & Fourth Respondents in 40877/97
Jeffrey Hollingsworth & Gillian Gai Hollingsworth - Fifth and Sixth Respondents in 40696/97, Second and Third Respondents in 40702/97, First and Second Appellants in 40877/97
Chadlace Pty Ltd, Glen Johnston & Karen Schmitz - Seventh, Eighth & Ninth Respondents in 40696/97, First and Second Respondents/Cross Appellants in 40698/97, Fifth, Sixth & Seventh Respondents in 40702/97, Sixth, Seventh & Eighth Respondents in 40877/97
JUDGMENT OF: Handley JA Stein JA Giles JA
LOWER COURT JURISDICTION: Supreme Court
LOWER COURT FILE NUMBER(S): 50306/94
LOWER COURT JUDICIAL OFFICER: Bainton J
COUNSEL:
G C Lindsay SC & C A Marlow - Nicholas Karacominakis
B A Coles QC & P P Strasser - Big Country Developments Pty Ltd & P H Hesky
J C Kelly SC - J W Wall Investment Co Pty Ltd, J W Wall & C E Wall
V Stefano - J Hollingsworth and G G Hollingsworth
C M Harris - Chadlace Pty Ltd, G Johnston and K Schmitz
SOLICITORS:
James Soulos, Ashfield - N Karacominakis
Denes Ebner, Sydney - Big Country Developments Pty Ltd & P H Hesky
David Hand, Hurstville - J W Wall Investment Co Pty Ltd, J W Wall & C E Wall
Shaddock Baker & Paul, Richmond - J Hollingsworth & G G Hollingsworth
Matthew Folbigg, Blacktown - Chadlace Pty Ltd, G Johnston & K Schmitz
CATCHWORDS:
LEGISLATION CITED:
DECISION:
See paragraph 331.
JUDGMENT:
THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 40696, 40698, 40702, 40877/97
Com Div 50306/94
HANDLEY JA
STEIN JA
GILES JA
Friday 17 November 2000
KARACOMINAKIS v BIG COUNTRY DEVELOPMENTS PTY LTD & ORS
BIG COUNTRY DEVELOPMENTS PTY LTD v CHADLACE PTY LTD & ORS
J W WALL INVESTMENT CO PTY LTD & ORS v BIG COUNTRY DEVELOPMENTS PTY LTD & ORS
HOLLINGSWORTH & ANOR v BIG COUNTRY DEVELOPMENTS PTY LTD
& ORS
SUMMARY
Big Country Developments Pty Ltd (Big Country), a land developer controlled by Mr Hesky, acquired land near Windsor for the staged development of a shopping centre, by the construction first of a squash centre and gymnasium, then a tavern and shops, then a supermarket and more shops.
Big Country obtained finance by mortgaging the Windsor land. The mortgages were registered as dealings T424525 and V747997.
Mortgages T424525 and V747997 were given to Finance Corporation of Australia Ltd. Mortgage V747997 was later transferred to Esanda Finance Corporation Ltd (Esanda).
By deed (24 December 1986) Big Country agreed to lease the tavern to JW Wall Investment Co Pty Ltd (Wall Investment). Wall Investment also took a lease of the squash centre and gymnasium for a ten year term. Mr Wall and his mother Mrs Cecilia Wall (the Walls) guaranteed the lease. As executed (sometime prior to 17 November 1988) the lease contained no entry in the space provided for the noting of prior encumbrances on the land.
Wall Investment agreed to sell the squash centre and gymnasium business (the business) to Mr Geoffrey Hollingsworth and his wife Mrs Jillian Hollingsworth (the Hollingsworths). The agreement for sale of the business (5 May 1989) included an indemnity by the Hollingsworths in favour of Wall Investment and the Walls against any action which Big Country might take to enforce the covenants in the lease against them “as a result of default or any action of the Purchasers which could give rise to any such action”.
By deed of assignment (22 May 1989) Wall Investment assigned to the Hollingsworths “all its right title and interest in and to the lease on and from 22 May 1989”. Big Country was a party to the deed and took a covenant from the Hollingsworths to be liable for performance of the lessee’s obligations under the lease. The Hollingsworths covenanted to indemnify Wall Investment and the Walls against loss by reason of their failure to perform the lessee’s obligations. The Hollingsworths took over the business and entered into possession.
Big Country’s solicitors sent the executed and stamped lease to Esanda “for consent by your company and return to us”. Esanda returned the lease with the addition of a page containing a form of consent to the lease. The lease was lodged for registration at the Land Titles Office which issued a requisition that “mortgages T424525 & V747997 are to be noted as prior encumbrances”. Without reference to the outgoing or incoming lessees, Big Country’s solicitors caused mortgage T424525 to be noted as a prior encumbrance in the appropriate space in the lease. So supplemented, the lease was registered on 13 July 1990. Shortly thereafter a transfer of the lease to the Hollingsworths was registered.
The Hollingsworths agreed to sell the business to Mr Nicholas Karacominakis. By deed (24 April 1992), with Big Country as a party, the lease was transferred from the Hollingsworths to Mr Karacominakis. The Hollingsworths’ liability under the lease was preserved and Mr Karacominakis would become liable under the lease. Mr Karacominakis took over the business. A transfer of the lease was executed and registered on May 4 1992.
By an agreement for sale (6 July 1993) Mr Karacominakis agreed to sell the business to Chadlace Pty Ltd (Chadlace). By deed (13 August 1993), with Big Country as a party, Mr Karacominakis agreed to transfer the lease to Chadlace. Mr Karacominakis’ liability under the lease under the lease was preserved and Chadlace would become liable under the lease, and as well the Johnstons guaranteed Chadlace’s obligations. A transfer of the lease in registrable form was executed but not registered. Chadlace took over the business.
On 24 December 1993 Chadlace closed the business down and on 29 December1993 it vacated the squash centre and gymnasium. Big Country took possession of the premises on 13 January 1994. In September 1994 Big Country granted a four year lease to Nelville Pty Ltd (Nelville) at a rent much lower than the rent under lease to Wall Investment.
At first instance
At trial before Bainton J, Big Country claimed the unpaid rent as at 13 January 1994 and, alleging acceptance of a repudiation of the lease by Chadlace, damages calculated as the rent for the balance of the ten year term less the lower rent received under the lease to Nelville. The defendants contested their liability to Big Country on a variety of grounds and brought a number of defensive and other cross-claims, including between themselves in relation to indemnity and false representations.
Bainton J upheld Big Country’s claims against the defendants other than Chadlace and the Johnstons. The defensive cross-claims were dismissed. The claims for indemnity were dismissed, but a declaration as to entitlement to contribution between the defendants found liable was made. The false representation claims by the Chadlace parties against Big Country and Mr Hesky were dismissed, but the Chadlace parties succeeded in their false representation claims against Mr Karacominakis and obtained damages.
The Appeal
All parties appealed or cross-appealed. In general terms, Big Country sought to overturn the failure of its claims against the Chadlace parties; each of the Wall parties, the Hollingsworths and Mr Karacominakis sought to overturn the success of Big Country’s claims against them or the quantification of the claims; the Wall parties indirectly supported Big Country’s claim against Chadlace by seeking to extend the contribution between the defendants to include contribution by Chadlace; Mr Karacominakis sought to overturn the success of the Chadlace parties’ false representation claims against him or the quantification of the claims; and Chadlace parties sought to overturn the failure of their false representation claims against Big Country and Mr Hesky.
In the course of the appeals the manner in which Big Country claimed against the defendants changed pursuant to amendment, by leave, of its summons.
Held (Giles JA, Handley and Stein JJA agreeing)
Big Country’s claims against the defendants
As to the issues on which the claims depended -
(a) Whether the lease for a term was effective/ the status of the lease - excluding the Walls’ guarantee
If the lease became void by operation of the rule in Pigot’s case (1614) 11 Coke 26b; 77 ER 1177 in consequence of the addition of mortgage T424525 as a prior encumbrance, on its registration by virtue of indefeasibility under the Real Property Act the lessee’s covenant to pay rent became effective. Big Country was entitled to enforce payment of rent under the lease and to recover damages following repudiation.
Other cases referred to:
Armor Coatings (Marketing) Pty Ltd v General Credits (Finance) Pty Ltd (1978) 17 SASR 259;
Bahr v Nicholay (No 2) (1988) 164 CLR 604;
Boyd v Mayor of Wellington (1924) NZLR 1174;
Breskvar v Wall (1971) 126 CLR 376;
Consolidated Development Pty Ltd v Holt (1986) 6 NSWLR 607;
Consolidated Trust Co Ltd v Naylor (1936) 55 CLR 423;
Duncan v McDonald (1997) 3 NZLR 669;
Farrow Mortgage Services Pty Ltd (in liq) v Slade (1996) 38 NSWLR 636;
Frazer v Walker (1967) 1 AC 569;
Garofano v Reliance Finance Corporation Ltd (1992) NSW Conv R 55-640;
Goss v Chilcott (1996) AC 788;
Grgic v Australian and New Zealand Banking Group Ltd (1994) 33 NSWLR 202;
Grundy v Ley (1984) 2 NSWLR 467;
Junghenn v Wood (1958) SR (NSW) 327;
re Lehrer and the Real Property Act (1961) 61 SR (NSW) 353;
Mayer v Coe (1968) 88 WN (Pt 1) (NSW) 549;
Mercantile Credits Ltd v Shell Co of Australia Ltd (1976) 136 CLR 326;
Morton v Black (1986) 4 BPR 97250;
PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643;
Ratcliffe v Watters (1969) 89 WN (Pt 1)(NSW) 497;
re Ridgeway and Smiths’s Contract (1930) VLR 111;
Schultz v Corwill Properties Ltd (1969) 90 WN (Pt 1) (NSW) 529;
Sutherland Shire Council v Moir (1982) 49 LGRA 114;
In Travinto Nominees Pty Ltd v Vlattas [1972] 1 NSWLR 24;
Warburton v National Westminster Finance Australia Ltd (1988) 15 NSWLR 238.(b) The status of the Walls’ guarantee
On registration of the lease the Walls’ guarantee was without a subject-matter because the registered lease, with T424525 noted as a prior encumbrance, was not the lease they had guaranteed. The lease the Walls guaranteed was not to be subject to the rights or interest of any mortgagee, but was to be with the consent of any mortgagee. Although Wall Investment was liable to pay rent under the lease, the Walls were not liable for that rent as guarantors.
Cases referred to:
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549;
Armor Coatings (Marketing) Pty Ltd v General Credits (Finance) Pty Ltd (1978) 17 SASR 259;
Barker v Weld (1884) 3 NZLR 104;
Brunker v Perpetual Trustee Co Ltd (1937) 57 CLR 555;
Chan v Cresdon Pty Ltd (1989) 168 CLR 242;
Consolidated Trust Co Ltd v Naylor (1936) 55 CLR 423
Daniker v Fitzgerald (1919) 19 SR (NSW) 260;
Iron Trades Employers Insurance Association Ltd v Union Land and House Investors Ltd (1937) Ch 313;
Keysen v Gregg (1932) 32 SR (NSW) 288;
Parkinson v Braham (1962) SR (NSW) 663;
Stranks v St John (1867) LR 2 CP 376;
Telado Pty Ltd v Vincent (1996) NSW Conv R 55-786;
Warburton v National Westminster Finance Australia Ltd (1988) 15 NSWLR 238.(c) Liability in damages for repudiation of the lease
The covenant to pay rent was made an essential term, and in the event that rent was overdue for more than 7 days Big Country was entitled by acceptance of a repudiation of the lease to terminate it and, in accordance with Progressive Mailing House Pty Ltd v Tabali (1985) 157 CLR 17, to claim for damages for loss of bargain. If there was repudiation of the lease, the repudiation was accepted.
There was repudiation of the lease by Wall Investment, as the original lessee.
Wall Investment is liable for unpaid rent and in damages for repudiation of the lease.Section 51 of the Real Property Act 1900 subjects the transferee of a lease to the lessee’s obligations only while the transferee is registered as the proprietor of the lease, so that following a further transfer the transferee is no longer liable under the lease to pay the rent thereafter falling due. The Hollingsworths were not liable under the lease to pay the rent falling due at the end of 1993, and accordingly Chadlace’s failure to pay the rent did not bring repudiation of the lease by the Hollingsworths.
There was repudiation of the lease (in the sense of breach of an essential term) by Mr Karacominakis. Mr Karacominakis is liable for unpaid rent and in damages for repudiation of the lease.
Chadlace was not a transferee of the lease, it did not become liable to pay rent under the lease, and the claim against it was not for repudiation of the lease.
Other cases referred to:
Andrews v Hogan (1952) 86 CLR 223;
Auscott Ltd v Panizza (1988) NSW Conv R 55-395;
Ellis v Rowbotham (1900) 1 QB 740;
Estates Gazette Ltd v Benjamin Restaurants Ltd (1994) 1 WLR 1528;
Grescot v Green (1700) 1 Salk 199; 91 ER 179;
Hindcastle Ltd v Barbara Attenborough Ltd (1995) QB 95;
Konica Business Machines Australia Pty Ltd v Tizine Pty Ltd (1992) 26 NSWLR 687;
J Lyons Co Ltd v Knowles (1943) KB 366;
MacDonald v Robins (1954) 90 CLR 515;
Mahoney v Lindsay (1980) 33 ALR 601;
March v EH & M Stramare Pty Ltd (1991) 171 CLR 506;
Measures v McFadyen (1910) 11 CLR 723;
Majik Markets Pty Ltd v S & M Motor Repairs Pty Ltd (No 1) (1987) 10 NSWLR 49;
Murphy v Harris (1924) St R Qd 187;
ex parte O’Neill; re Ryan (1925) 25 SR (NSW) 416
Parker v Webb (1693) 3 Salk 5; 91 ER 656;
Paul v Nurse (1828) 8 B & C 486; 108 ER 1123;
Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235;
Phillips v Bridge (1873) LR 9 CP 48;
Renshaw v Mahr (1907) VLR 520;
Sargent v ASL Developments Pty Ltd (1974) 131 CLR 634;
Shevill v Builders Licensing Board (1982) 149 CLR 620;
Spencer’s case (1583) 5 Co Rep 16a; 77 ER 72;
Wilson & King v Brightling (1885) NZLR 4;
Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105.(d) Liability under the deeds
In their (incoming) deed of 22 May 1989 the Hollingsworths undertook liability for payment of rent by the lessee “pursuant to the Lease”. The Hollingsworths are not liable for payment of rent by the lessee pursuant to the different lease which came about on registration of the altered instrument.
The Hollingsworths’ (outgoing) deed of 24 April 1992 does not give Big Country a basis for its claims against the Hollingsworths. So far as it preserves the Hollingsworths’ liability, it does not assist Big Country; the indemnity the Hollingsworths gave is not as to unpaid rent.
Mr Karacominakis is liable for unpaid rent under the lease by his (incoming) deed of 24 April 1992. His contractual liability did not come to an end when he agreed to transfer the lease away. Mr Karacominakis is liable for damages for breach of the contract including compensation for loss of bargain in the same amount as the damages for repudiation of the lease.
Mr Karacominakis’ (outgoing) deed of 13 August 1993 does not give Big Country a basis for its claims against Mr Karacominakis, see as to the Hollingsworths.
Chadlace is contractually liable by their (incoming and only) deed of 13 August 1993 for the unpaid rent and for damages for breach of the contract, including compensation for loss of bargain in the same amount as the damages for repudiation of the lease. The Johnstons are liable as guarantors.
Cases referred to:
J Lyons Co Ltd v Knowles (1943) KB 366;
Estates Gazette Ltd v Benjamin Restaurants Ltd (1994) 1 WLR 1528.(e) The need for a demand
Clause 3.2 of the deeds of 24 April 1992 (Hollingsworths’ outgoing) and 13 August 1993 (Mr Karacominakis’ outgoing) did not make demand a precondition to any liability for the rent and damages to which the Hollingsworths and Mr Karacominakis were already exposed.
Cases referred to:
Bradford Old Bank Ltd v Sutcliffe (1918) 2 KB 833;
Tricontinental Corporation Ltd v HDFI Ltd (1987) 21 NSWLR 689;
Wolveridge v Steward (1833) 1 C & M 646; 149 ER 557.(f) Relief from liability under principles of contribution between sureties
Principles of contribution between sureties do not come into play.
Cases referred to:
Burnett v Lynch (1826) 5 B & C 589; 108 ER 220;
Carter v White (1883) 25 Ch D 666;
Hancock v Williams (1942) 42 SR (NSW) 252;
JGL Investments Pty Ltd v Maracorp Financial Services Ltd (1991) 2 VR 168;
Marston v Charles H Griffith & Co Pty Ltd (1985) 3 NSWLR 294;
Moule v Garrett (1872) LR 7 Ex 101;
Williams v Frayne (1937) 58 CLR 710;
Wolveridge v Steward (1833) 1 C & M 646.(g) Mitigation of loss
The failure to mitigate for which Mr Karacominakis contended is not made out. Big Country did not act unreasonably in the extent of its communication with him, in declining to take up the suggestion of a new lease, or by any delay in re-letting the premises to Nelville.
In the result, subject to the defensive cross-claims Big Country can recover the rent and damages from Wall Investment, Mr Karacominakis, Chadlace and the Johnstons, but not from the Walls or the Hollingsworths.
Cases referred to:
Banco de Portugal v Waterlow and Sons Ltd (1932) AC 452;
Bracer v Calder (1895) 2 QB 253;
Houndsditch Warehouse Co Ltd v Waltex Ltd (1944) KB 579;
Pilkington v Wood (1953) Ch 770;
Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd (1976) 1 NSWLR 5;
Shindler v Northern Raincoat Co Ltd (1960) 1 WLR 1038;
TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130.The defensive cross-claims
The only extant defensive cross-claims were by Mr Karacominakis, and were limited to reliance on the Fair Trading Act and the Contracts Review Act.
(a) The Fair Trading Act
Bainton J’s rejection of the misleading representations on which the Fair Trading Act cross-claim was founded should not be overturned. The submission so far as dependent on factual errors is not made good. His Honour’s view of Mr Karacominakis’ credit is not properly open to appellate review.(b) The Contracts Review Act
Mr Karacominakis entered into the deed of 24 April 1992 in the course of or for the purpose of his carrying on the business. Section 6(2) of the Contracts Review Act 1980 precludes the grant of relief in relation to the deed of 24 April 1992.In the result, the defensive cross-claims failed.
Cases referred to:
Coombs v Bahama Palm Trading Pty Ltd (1991) ASC 56-097;
Ellison v Vukicevic (1986) 7 NSWLR 104;
Vukicevic v Alliance Acceptance Co Ltd (1987) 9 NSWLR 13 (CA).The claims for indemnity and contribution
(i) In favour of Wall Investment
Mr Karacominakis was the last legal assignee of the lease. The breach of covenant occurred while he was assignee and he must indemnify Wall Investment.
The breach of covenant did not occur while the Hollingsworths were assignee, and they are not liable under the general law to indemnify Wall Investment.
The 5 May 1998 indemnity must be read as referring to any default of the Hollingsworths or other action of the Hollingsworths by which the Walls parties were liable to Big Country. There was not such default or other action.
The non-payment of rent was not a failure by the Hollingsworths within the 22 May 1989 indemnity, because they were not obliged to pay the rent.
Chadlace, albeit only an equitable assignee, undertook direct liability to Big Country under the 13 August 1993 deed. As between itself and Wall Investment it had the full benefit of the lease and was responsible for payment of the rent. Wall Investment is entitled to recoupment from Chadlace if Wall Investment pays Big Country.
Wall Investment is also entitled to recoupment from the Johnstons.
There is no room for contribution in favour of Wall Investment.
Cases referred to:
Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342;
Becton Dickinson UK Ltd v Zwebner (1989) 1 QB 208;
Moule v Garrett (1872) LR 7 Ex 101.(i) In favour of Mr Karacominakis
Since Mr Karacominakis must indemnify Wall Investment, he is not entitled to indemnity or contribution from Wall Investment. There is no ground for indemnity or contribution from the Hollingsworths.
Mr Karacominakis is entitled to recoupment from Chadlace and the Johnstons. There is no occasion for contribution from them.
(ii) In favour of Chadlace
Since Chadlace must indemnify Wall Investment and Mr Karacominakis, it is not entitled to indemnity or contribution from either of them. There is no ground for indemnity or contribution from the Hollingsworths.
(iii) In favour of the Johnstons
(Same position as Chadlace) Since the Johnstons must indemnify Wall Investment and Mr Karacominakis, they are not entitled to indemnity or contribution from either of them.
In the result, Wall Investment and Mr Karacominakis are entitled to declarations of their entitlement to recoupment from Chadlace and the Johnstons in the event that either pays the unpaid rent and damages to Big Country.
The false representation claims by the Chadlace parties against Big Country and Mr Hesky
The business was not making sufficient money to cover the rent and other expenses. There was misleading conduct in what was said about payment of rent on the part of Big Country in which Mr Hesky was knowingly concerned. Mr Johnston, and via him the other Chadlace parties, relied on what Mr Hesky told him in purchasing the business. The Chadlace parties are entitled to recover from Big Country and Mr Hesky the loss or damages suffered by the misleading conduct of Big Country.
Cases referred to:
Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84;
Demagogue Pty Ltd v Ramensky (1992) 110 ALR 608;
Gould v Vaggelas (1985) 157 CLR 215;
Kabwand v National Australia Bank Ltd (1989) ATPR 40-950;
Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563;
Leda Holdings Pty Ltd v Oraka Pty Ltd (1998) ATPR 46-601;
Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 111 ALR 649.The false representation claims by the Chadlace parties against Mr Karacominakis
Mr Karacominakis made misrepresentations as to turnover and profitability. The Chadlace parties relied on what was said. The Chadlace parties are entitled to recover from Mr Karacominakis the loss or damages suffered by the misleading conduct of Mr Karacominakis.
Cases referred to:
Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281;
McAllister v Richmond Brewing Co (NSW) Pty Ltd (1942) 42 SR (NSW) 187;
R v Lock (1926) 26 SR (NSW) 272;
Selman v Minogue (1937) 37 SR (NSW) 280.Damages in the false representation claims
The business had no value when purchased by Chadlace. The trading losses (and other losses so far as properly recoverable) did not cease to be recoverable from mid November 1993 when Chadlace could have realised that the turnover and profitability were not as represented. So far as the damages included Mr Johnston’s lost salary and the Johnstons’ financing expenses those amounts were recoverable. The damages in the false representation claim against Mr Karacominakis awarded by Bainton J stand and are potentially increased by the amount of the rent and damages if Chadlace or the Johnstons pay that to Big Country.
Cases referred to:
Burns v MAN Automotive Pty Ltd (1986) 61 ALJR 81;
Dodd Properties Ltd v Canterbury City Council (1980) 1 WLR 433;
Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1;
Gould v Vaggelas (1985) 157 CLR 215;
Leisbosch Dredger v SS Edison (1933) AC 449;
Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494;
Sanrod Pty Ltd v Dainford Pty Ltd (1984) 54 ALR 179;
Toteff v Antonas (1952) 87 CLR 647;
Yorke v Ross Lucas Pty Ltd (1982) 45 ALR 299.
___________
CONTENTS
Paragraph
Handley JA 1
Stein JA 2
Giles JA 3
Outline facts 4
The proceedings below 33
The appeal 40
Big Country’s claims against the defendants 43
(a) The status of the lease - excluding the Walls’ guarantee 45
(b) The status of the Walls’ guarantee 70
(c) Liability in damages for repudiation of the lease 106
(d) Liability under the deeds 157
(e) The need for a demand 176
(f) Relief from liability under principles of contribution betweensureties 180
(g) Mitigation of loss 186
The defensive cross-claims 209
(a) The Fair Trading Act 210
(b) The Contracts Review Act 218The claims for indemnity and contribution 224
(i) In favour of Wall Investment 234
(ii) In favour of Mr Karacominakis 244
(iii) In favour of Chadlace 245
(iv) In favour of the Johnstons 246
The false representation claims by the Chadlace parties
against Big Country and Mr Hesky 248The false representation claims by the Chadlace parties
against Mr Karacominakis 273Damages in the false representation claims 311
Orders 330
THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 40696, 40698, 40702, 40877/97
Com Div 50306/94
HANDLEY JA
STEIN JA
GILES JA
Friday 17 November 2000
KARACOMINAKIS v BIG COUNTRY DEVELOPMENTS PTY LTD & ORS
BIG COUNTRY DEVELOPMENTS PTY LTD v CHADLACE PTY LTD & ORS
J W WALL INVESTMENT CO PTY LTD & ORS v BIG COUNTRY DEVELOPMENTS PTY LTD & ORS
HOLLINGSWORTH & ANOR v BIG COUNTRY DEVELOPMENTS PTY LTD & ORS
JUDGMENT
HANDLEY JA: I agree with Giles JA.
STEIN JA: I agree with Giles JA.
GILES JA: The trial before Bainton J occupied eight days, excluding submissions which were then made in writing. The hearing of these appeals from his Honour’s decision occupied seven days. Many matters were raised, and the arguments were wide-ranging. In some respects the focus of the arguments on the appeals was different from that at the trial. It is not necessary for the disposal of the appeals to decide all the matters raised or canvass all the arguments.
Outline facts
An outline of facts, to be developed and supplemented as appropriate when dealing with the issues necessary to be decided, will assist in understanding these reasons.
Big Country Developments Pty Ltd (“Big Country”) was a land developer. It was controlled by Mr Peter Hesky. It acquired land near Windsor in New South Wales for the staged development of a shopping centre, by the construction first of a squash centre and gymnasium, secondly of a tavern and shops, and thirdly of a supermarket and more shops.
The squash centre and gymnasium was completed in 1980. The premises were a two storey building with squash courts at ground level and a gymnasium on the first floor. From 1985 the squash centre and gymnasium was operated by Mr Alan Chiswick. Mr Chiswick was a long-time business associate of Mr Hesky. The evidence did not disclose the basis on which he occupied the premises.
As might be expected, Big Country had obtained finance by mortgaging the Windsor land. The land was Torrens Title land, being the land in Certificate of Title volume 12079 folio 147. As at 1986 and at all material times thereafter mortgages were registered as dealings T424525 and V747997.
Mortgage T424525 had been given to Finance Corporation of Australia Ltd (“FCA”) in January 1983 to secure an advance of $1,750,000, and mortgage V747997 had been given to FCA in April 1985 to secure a further advance of $1,200,000. By a transfer dated 26 June 1987 registered as dealing W962570 FCA transferred mortgage V747997 to Esanda Finance Corporation Ltd (“Esanda”). There was no like transfer of mortgage T424525. There was no explanation of the different treatment of the mortgages.
The transfer of mortgage V747997 by FCA to Esanda was expressed to be for a consideration of $1.00. It was executed by the same person as attorney for both FCA and Esanda, the person’s description being that of an officer of Esanda. It is tolerably clear that, at least as at June 1987, there was a relationship of some kind between FCA and Esanda. This was not explored in the evidence.
By the end of 1986 the construction of the tavern was planned or in progress, with completion expected in March 1988. By a deed dated 24 December 1986 Big Country agreed to lease the tavern to J W Wall Investment Co Pty Ltd (“Wall Investment”) for a term of ten years from the time it was ready for occupation.
Wall Investment came also to take a lease of the squash centre and gymnasium. There was no deed similar to the deed of 24 December 1986. According to Mr Hesky, in November or December 1987 Mr John Wall of Wall Investment asked him about taking over the operation of the squash centre and gymnasium, and he referred Mr Wall to Mr Chiswick. He was later told by Mr Chiswick that Mr Chiswick and Mr Wall had agreed on a sale of the squash centre and gymnasium business (“the business”) and that Mr Wall wanted “a new lease running concurrently with his tavern lease”. According to Mr Wall, Mr Hesky asked if he would be interested in operating the squash centre and gymnasium, and after consideration he said that he would and asked Mr Hesky to submit “the terms on which the premises would be leased”. By a letter dated 12 February 1988 Big Country’s solicitors sent to Wall Investment’s solicitors a lease of the squash centre and gymnasium, in a form appropriate for registration under the Real Property Act 1900 (NSW), for approval and execution. The letter said that the lease was to “run for the same term as the tavern” and that the dates inserted would be advised in due course. The evidence did not amplify the communications or the circumstances in which the lease came about.
The lease of the squash centre and gymnasium was executed by Wall Investment as lessee, and by Mr Wall and his mother Mrs Cecilia Wall (“the Walls”; together with Wall Investment, “the Wall parties”) as guarantors. It provided for payment in advance and without demand of rent of $8,000 per month and 58 per cent of the “operating expenses” of the shopping centre (hereafter referred to only as rent), with an escalation clause.
After execution the lease was returned to Big Country’s solicitors. When returned it was undated, and the dates of commencement and termination of the term of ten years were left blank. As executed, the lease had no entry in the space provided for noting of prior encumbrances on the land. The evidence did not disclose when the execution or return to Big Country’s solicitors took place, save that it must have been prior to 17 November 1988 when the solicitors sent the lease to their law stationers to be lodged for assessment and payment of stamp duty. When the lease was executed by Big Country did not appear from the evidence.
Before sending the lease to the law stationers Big Country’s solicitors wrote in 6 April 1988 as the commencement and 5 April 1998 as the termination of the term, the former date apparently being the date on which Wall Investment went into occupation of the tavern and the squash centre and gymnasium. The solicitors also dated the lease 1 November 1988. There was still no entry in the space provided for noting of prior encumbrances on the land.
In circumstances which need not be recounted, stamp duty on the lease was not assessed and paid until September 1989. In the meantime, Wall Investment agreed to sell the business to Mr Jeffrey Hollingsworth and his wife Mrs Gillian Hollingsworth (“the Hollingsworths”). The agreement for sale of the business dated 5 May 1989 included an indemnity by the Hollingsworths in favour of Wall Investment and the Walls against any action which Big Country might take to enforce the covenants in the lease against them “as a result of default or any action of the Purchasers which could give rise to any such action”.
The Hollingsworths took over the business on 22 May 1989. By a deed of assignment dated 22 May 1989 Wall Investment assigned to the Hollingsworths “all its right title and interest in and to the lease on and from 22 May 1989”. Big Country was a party to the deed of assignment. It consented to the assignment and took a covenant from the Hollingsworths to be liable for performance of the lessee’s obligations under the lease. The Hollingsworths covenanted to indemnify Wall Investment and the Walls against loss by reason of their failure to perform the lessee’s obligations. The deed of assignment provided that in all other respects the lease was confirmed. It will be necessary to go to the precise wording of the covenants.
In early August 1989 a transfer of the lease from Wall Investment to the Hollingsworths was executed and sent to Big Country’s solicitors for the endorsement of Big Country’s consent. At this time the lease itself had not been registered, and was still with the Office of State Revenue.
Following payment of stamp duty on the lease in September 1989, in October 1989 Big Country’s solicitors sent the executed and stamped lease to Esanda “for consent by your company and return to us”. In December 1989 the lease was returned by Esanda with the addition of a page containing a form of consent to the lease. So far as the evidence revealed, the consent of FCA to the lease was not sought. The evidence did not disclose why consent was sought from one mortgagee, Esanda under mortgage V747997, but not from the other mortgagee, FCA under mortgage T424525.
In January 1990 Big Country’s solicitors sent the lease to their law stationers for lodgment for registration. The law stationers were told that the certificate of title would be produced by Esanda, and that must have happened. Why FCA, then the prior mortgagee, did not produce the certificate of title was not explored in the evidence.
The lease was lodged for registration at the Land Titles Office as dealing Y837222. After some other requisitions had been made and apparently satisfied, on 27 June 1990 the Land Titles Office issued a requisition in relation to the lease that “mortgages T424525 & V747997 are to be noted as prior encumbrances”. Presumably because it was pointed out to the Land Titles Office that mortgage V747997 had been transferred to Esanda and the lease was accompanied by a form of consent from Esanda, again there being no evidence on the matter, nothing was done to note mortgage V747997 as a prior encumbrance. But Big Country’s solicitors caused mortgage T424525 to be noted as a prior encumbrance by having “T424525” written into the appropriate space in the lease. So supplemented, the lease was registered on 13 July 1990.
On 17 July 1990 Big Country’s solicitors sent the transfer of the lease to the Hollingsworths to their law stationers, with Big Country’s consent endorsed, with instructions to lodge it for registration. The transfer was lodged for registration, and was registered on 31 July 1990 as dealing Z138646.
In April 1992 the Hollingsworths agreed to sell the business to Mr Nicholas Karacominakis. It seems that there was agreement for the sale of the business dated 6 April 1992, but it was not in the appeal papers.
Mr Karacominakis took over the business on 24 April 1992. A deed dated 24 April 1992 was executed. The parties to the deed were Big Country as lessor, the Hollingsworths as transferor, and Mr Karacominakis as transferee. The deed did not in terms provide for assignment of the lease. It recited that the Hollingsworths wished to “transfer its [sic] right title and interest in and to the Lease” to Mr Karacominakis “with effect from the date stated in Item 6 of the Reference Schedule (“the Transfer Date”)”. The date was blank in the Reference Schedule, but it was accepted in the proceedings that the intended date was 24 April 1992. To the extent to which the proceedings involved an agreement to transfer the lease between the Hollingsworths and Mr Karacominakis, the parties proceeded on the basis that the deed evidenced such an agreement.
The deed of 24 April 1992 included covenants with Big Country broadly to the effect that the Hollingsworths would remain liable under the lease and Mr Karacominakis would become liable under the lease. The wording of the covenants was taken up in a later sale of the business by Mr Karacominakis, and it will be necessary to consider the precise wording. I will set it out so far as necessary later in these reasons.
A transfer of the lease from the Hollingsworths to Mr Karacominakis was executed and the consent of Big Country was endorsed on it. The transfer was lodged for registration, and was registered on 4 May 1992 as dealing E429360.
By an agreement for sale dated 6 July 1993 Mr Karacominakis agreed to sell the business to Chadlace Pty Ltd (“Chadlace”). Chadlace was established for the purposes of the sale as the trustee of a family trust of Mr Glenn Johnston and his wife Ms Karen Schmitz (for ease of reference, “the Johnstons”; together with Chadlace, “the Chadlace parties”). The agreement for sale provided that Mr Karacominakis would transfer the lease to Chadlace, that the transfer was subject to the lessor and any mortgagee consenting to the transfer, and that Mr Karacominakis would apply for their consents.
Chadlace took over the business on 18 August 1993. A deed dated 13 August 1993 was executed. The parties to the deed were Big Country as lessor, Mr Karacominakis as transferor, Chadlace as transferee, and the Johnstons as guarantor. Like the deed of 24 April 1992, the form and language of which it generally adopted, the deed did not in terms provide for assignment of the lease. It recited Mr Karacominakis’ wish to transfer the lease to Chadlace in like language to that in the deed of 24 April 1992, and contained the covenant shortly mentioned to lodge a transfer of the lease for registration. Again the Transfer Date in the Reference Schedule was left blank. In the circumstances later described, Bainton J considered that because the Transfer Date was not stated, the deed of 13 August 1993 had no effect. It was accepted in these appeals that the intended date was 18 August 1993 and that the deed had effect as if that date were stated; so it was accepted that, to the extent to which the proceedings involved an agreement to transfer the lease between Mr Karacominakis and Chadlace, the deed evidenced such an agreement.
Again like the deed of 24 April 1992, the deed of 13 August 1993 recorded covenants broadly to the effect that Mr Karacominakis would remain liable under the lease and Chadlace would become liable under the lease, and as well the Johnstons guaranteed Chadlace’s obligations; the deed also recorded a covenant by Mr Karacominakis and Chadlace with Big Country “to lodge or cause to be lodged a Transfer of Lease at the Land Titles Office immediately after the Transfer Date”. The corresponding clauses of the deed were materially in the same terms as the clauses in the deed of 24 April 1992. Different counterparts of the deed were executed by all of Big Country, Mr Karacominakis, Chadlace and the Johnstons. It follows from the acceptance that the deed had effect as if the date 18 August 1993 were stated in the Reference Schedule that the deed had effect so far as containing these covenants.
A transfer of the lease in registrable form was executed by Mr Karacominakis as transferor and by Chadlace’s solicitor on behalf of the transferee. However, the transfer was not registered. The evidence did not go into why it was not registered - indeed, it seems that until Bainton J made the point in his reasons the parties gave no thought to whether or not it had been registered.
Chadlace was unable to operate the business profitably. By the end of November 1993 it was in arrears with the rent, which had increased over the years pursuant to the escalation clause. On 24 December 1993 Chadlace closed the business down, and on 29 December 1993 it vacated the squash centre and gymnasium.
On 7 January 1994 the solicitor for the Chadlace parties wrote to Big Country advising that Chadlace had vacated the premises “due to our client’s inability to make the business trade at all profitably”. On 13 January 1994 Big Country took possession of the premises. Its solicitors wrote to Chadlace’s solicitors saying that Big Country had “exercised its rights of re-entry into and has repossessed the premises, and accordingly the Lease herein has been determined”.
At the request of Mr Hesky, on 16 January 1994 Mr Chiswick took over the operation of the squash centre and gymnasium. He arranged for Ms Vicki Morley to manage it. A deal of work was done refurbishing the premises. In September 1994 Big Country granted a four year lease of the premises to Nelville Pty Ltd (“Nelville”), a Chiswick company, at a rent much lower than the rent under the lease to Wall Investment.
The proceedings below
Big Country claimed the unpaid rent as at 13 January 1994 and, alleging acceptance of a repudiation by Chadlace of “the lease”, damages calculated as the rent for the balance of the ten year term less the lower rent received under the lease to Nelville. It claimed against Wall Investment “pursuant to the lease” and against the Hollingsworths, Mr Karacominakis and Chadlace “pursuant to the lease, each respective deed of assignment, Section 70A of the Conveyancing Act 1919 and the general law”; it also claimed against the Walls and the Johnstons as guarantors of the obligations of their respective companies. In due course I will come to the complications flowing from the manner in which the allegation of a repudiation and the claims were expressed.
The defendants contested their liability to Big Country on a variety of grounds, including by defensive cross-claims brought by the Hollingsworths, Mr Karacominakis and the Chadlace parties against Big Country. In the defensive cross-claims -
(a)the Hollingsworths claimed relief from the deed of assignment of 22 May 1989 on unconscionability grounds;
(b)Mr Karacominakis claimed relief from the lease and the deed of 24 April 1992 on grounds of estoppel, misleading conduct within the Fair Trading Act 1987 (NSW), injustice within the Contracts Review Act 1980 (NSW), and unconscionability; and
(c)the Chadlace parties claimed relief from the deed of 13 August 1993 on grounds of misleading conduct within the Trade Practices Act 1974 (C’th) and the Fair Trading Act.
The defendants brought a number of other cross-claims. They may be summarised as follows -
(a)the Wall parties claimed indemnity from the Hollingsworths and indemnity or contribution from Mr Karacominakis and Chadlace;
(b)the Hollingsworths claimed indemnity or contribution from Mr Karacominakis and Chadlace;
(c)Mr Karacominakis claimed indemnity from the Chadlace parties, plus some relatively minor relief to do with fitness equipment said to have been leased by Mr Karacominakis to the Johnstons and used by Chadlace in the business; and
(d)the Chadlace parties claimed damages from Big Country and Mr Hesky, and from Mr Karacominakis, alleging that they had purchased the business and given the guarantee in reliance on false representations broadly as to the turnover and profitability of the business.
Bainton J upheld Big Country’s claims against the defendants other than the Chadlace parties, and judgment was entered against each of them for $517,311. The claims by Big Country against the Chadlace parties were dismissed. The defensive cross-claims were dismissed. The critical difference between the Chadlace parties and the prior occupants of the premises, in his Honour’s view, was that there was neither a registered transfer nor an operative equitable assignment of the lease to Chadlace.
The claims for indemnity were all dismissed, but his Honour held that the Wall parties, the Hollingsworths and Mr Karacominakis were under co-ordinate liabilities to Big Country so that there should be contribution between them.
Mr Karacominakis’ claim for relief to do with fitness equipment was effectively dismissed. His Honour said that he was not satisfied as to part of the claim but that the whole claim, if correct, would be cancelled out by a corresponding increase in the damages in the claim by the Chadlace parties against Mr Karacominakis.
The false representation claims by the Chadlace parties against Big Country and Mr Hesky were dismissed, but the Chadlace parties succeeded in their false representation claims against Mr Karacominakis and obtained damages. Judgments were entered against Mr Karacominakis for $119,263 in favour of Chadlace and for $65,087 in favour of the Johnstons.
The appeal
All parties appealed or cross-appealed. In general terms, Big Country sought to overturn the failure of its claims against the Chadlace parties; each of the Wall parties, the Hollingsworths and Mr Karacominakis sought to overturn the success of Big Country’s claims against them or the quantification of the claims; the Wall parties indirectly supported Big Country’s claim against Chadlace by seeking to extend the contribution between the defendants to include contribution by Chadlace; Mr Karacominakis sought to overturn the success of the Chadlace parties’ false representation claims against him or the quantification of the claims; and the Chadlace parties sought to overturn the failure of their false representation claims against Big Country and Mr Hesky.
Notices of contention were filed by Big Country and by the Chadlace parties, the effect of which is taken up in the issues the subject of these reasons.
As I have said, many matters were raised in the hearing of the appeals. The proceedings before Bainton J were marked by deficiency or obscurity in the summons and defences, the cross-claims and defences, the evidence, and the submissions. The formulation and extent of the grounds of appeal and cross-appeal and the contentions in the appeals brought their own difficulties to establishing and giving effect to the rights and obligations between the parties in relation to the lease, the premises and the business. Rather than attempt a more detailed analysis of the grounds of appeal and cross-appeal and contentions, I consider it preferable to deal with the issues thrown up by the arguments and necessary to establish the rights and obligations of the parties.
Big Country’s claims against the defendants
In brief, the issues on these claims went to (a) whether the lease for a term was effective; (b) whether the Walls’ guarantee was effective; (c) whether the defendants were liable in damages for repudiation of the lease; (d) whether the Hollingsworths, Mr Karacominakis and Chadlace were otherwise liable for the rent or damages under the various deeds; (e) whether the provisions of the deeds of 24 April 1992 and 13 August 1993 meant that the Hollingsworths and Mr Karacominakis were not liable for the rent or damages in the absence of a demand; (f) whether principles of contribution between sureties operated to discharge any liability; and (g) whether there had been a failure by Big Country to mitigate its loss.
An element of the arguments was the effect on the lease, as a lease and so far as the document included the Walls’ guarantee, of the writing in of mortgage T424525 as a prior encumbrance and the addition of the page containing Esanda’s consent, and of the registration of the document in that form. As will appear, in my view attention should be concentrated on the lease as registered for the rights and obligations of the parties.
(a) The status of the lease - excluding the Walls’ guarantee
All of the defendants, possibly with the exception of Mr Karacominakis, submitted that Big Country could not claim either rent under the lease or damages for its repudiation because the lease had been avoided pursuant to the so-called rule in Pigot’s case (1614) 11 Coke 26b; 77 ER 1177. They relied on alteration of the lease after its execution by Big Country through its solicitors, by having mortgage T424525 written into the space in the lease as a prior encumbrance, and by adding to the lease the page containing the consent of Esanda. If the lease had been avoided, it was said, then as at the end of 1993 the premises were occupied by Chadlace under a tenancy at will determinable on one month’s notice pursuant to s 127 of the Conveyancing Act 1919 (NSW), and Big Country was not entitled either to rent under the lease or to damages for its repudiation.
Big Country accepted that, if there were no more than the tenancy at will, its claims to the outstanding rent under the lease and to damages for its repudiation would fail. It would follow that the claims against the Walls and the Johnstons as guarantors would fail for want of a primary indebtedness or obligation. Big Country did not fall back on a claim to recover from Chadlace any rent unpaid under the tenancy at will. But it denied that the rule in Pigot’s case had been brought into operation, and said that, in any event, the immediate indefeasibility gained by the lease upon registration relevantly cured any invalidity.
Sufficiently for present purposes, by the rule in Pigot’s case where a deed or other written contract is, after execution, materially altered by the obligor without the consent of the obligee, it becomes void. To greater or lesser extents there are debates over aspects of the rule, including whether or when the rule also operates in the event of alteration by a stranger, whether the alteration must have been made with a fraudulent intention, and whether the deed or other written contract is voidable rather than void. The rule had its origin in considerations now largely inapplicable, its operation is to be confined to cases which fall strictly within its ambit, and it is to be interpreted as liberally and reasonably as possible: see Armor Coatings (Marketing) Pty Ltd v General Credits (Finance) Pty Ltd (1978) 17 SASR 259; Warburton v National Westminster Finance Australia Ltd (1988) 15 NSWLR 238; Farrow Mortgage Services Pty Ltd (in liq) v Slade (1996) 38 NSWLR 636.
I will assume that the lease became void by the operation of the rule in Pigot’s case, excluding for the present any effect on the guarantee, because in my view on registration any invalidity was cured sufficiently to entitle Big Country to enforce the payment of rent under the lease and to recover damages following repudiation measured by the lost rent.
Remarkably, Big Country had not relied on indefeasibility before Bainton J. His Honour had briefly referred to it, saying that “It is possible to subserve the Real Property Act provisions to the Pigot case principle, but all learning as to the effects of that Act is to the contrary”. Big Country did not initially rely on indefeasibility in the appeals. It was given leave to rely on it, without opposition from the defendants.
By s 41 of the Real Property Act the lease was not effectual to pass any interest in the premises until registered, but on registration the leasehold interest passed “in manner and subject to the covenants, conditions and contingencies set forth and specified in such dealing, or by this Act declared to be implied in instruments of a like nature”. Section 42 of the Real Property Act provides so far as relevant that the registered proprietor for the time being of an estate or interest in land recorded in a folio of the register shall -
“ … except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded … “.
The effect of these provisions is that upon registration of the lease, fraud not being suggested, Wall Investment had an indefeasible title to the leasehold estate. The registration of the lease conferred title, and did not merely record a title acquired under the lease (Frazer v Walker (1967) 1 AC 569 at 584; see also Breskvar v Wall (1971) 126 CLR 376; Bahr v Nicholay (No 2) (1988) 164 CLR 604). Registration of a void instrument may be effective to confer title, as in registration of a forged instrument (Frazer v Walker; Mayer v Coe (1968) 88 WN (Pt 1)(NSW) 549; Ratcliffe v Watters (1969) 89 WN (Pt 1)(NSW) 497; Schultz v Corwill Properties Limited (1969) 90 WN (Pt 1)(NSW) 529; Grundy v Ley (1984) 2 NSWLR 467; Garofano v Reliance Finance Corporation Ltd (1992) NSW Conv R 55-640; Grgic v Australian and New Zealand Banking Group Limited (1994) 33 NSWLR 202), registration of an instrument void because of statutory prohibition or failure to meet statutory requirements (Boyd v Mayor of Wellington (1924) NZLR 1174; Breskvar v Wall; Sutherland Shire Council v Moir (1982) 49 LGRA 114), and registration of an instrument avoided by the operation of the rule against perpetuities (Consolidated Development Pty Ltd v Holt (1986) 6 NSWLR 607). There is no reason why registration should not cure invalidity from the operation of the rule in Pigot’s case, and in Morton v Black (1986) 4 BPR 97250 it was held that it does. (Indeed, it was held that in any event the rule has no operation in respect of a registered document; no-one argued this point, and it is not necessary to consider it.)
Registration does not cure a defective transaction if the instrument itself is ineffective, for example because purporting to create an interest not known to the law (re Ridgeway and Smith’s Contract (1930) VLR 111) or purporting to grant a lease but void for uncertainty of the term (re Lehrer and the Real Property Act (1961) 61 SR(NSW) 353). It was suggested in the appeals that, because the operation of the rule in Pigot’s case would avoid the lease, there would be nothing to be made indefeasible. That flies in the face of the established effect of s 42, the point of the cases last mentioned being that the instrument was inherently incapable of having effect even by virtue of s 42. The lease was not an instrument of that kind.
The further question is whether and to what extent, as well as conferring title to the leasehold estate, registration gave validity to the contractual rights and obligations under the lease, and in particular whether (on the same assumption that the lease became void by the operation of the rule in Pigot’s case) it entitled Big Country to enforce payment of rent by the lessee.
I considered a related question in PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643, namely, whether registration of a void mortgage entitled the mortgagee to enforce the personal covenant in the mortgage to pay the money it secured. It is convenient to repeat part of what I there said (at 677-9), as a way of referring to earlier authority -
“In Travinto Nominees Pty Ltd v Vlattas [1972] 1 NSWLR 24, a lease had been registered containing an option to renew which was void for non-compliance with statutory requirements. It was held that registration of the lease did not make the option enforceable. Asprey JA (with whom Holmes JA agreed) observed (at 41) that the indefeasible title by registration was conferred on an estate or interest in land, that contractual rights and obligations were not affected, and that the registration of the lease did not confer on the lessee an indefeasible right to obtain the grant of a further lease pursuant to the option. Mason JA dealt with the matter more widely, saying (at 48):
‘But a problem of a special kind arises when it is sought to apply the principle of indefeasibility to a registered lease which contains covenants, including an option to renew. Are the ordinary covenants in the lease enforceable by the parties, notwithstanding that the instrument, apart from the effect given to it by registration, is expressed to be void and illegal by statute? Is the option to renew enforceable?
The leasehold estate vested in the lessee on registration of a memorandum of lease is held upon and subject to the covenants contained in the memorandum. I am prepared to assume that the indefeasibility of title which arises in virtue of registration is not something which exists in the abstract, independently of the provisions of the lease, but that it relates to the terms and conditions upon which the estate is held, certainly so far as they have a direct application to the term vested in the lessee by registration. Thus it may be that a consequence of registration is that within the limits which I have mentioned the covenants in the lease are enforceable between the parties. If so, in an action brought on those covenants the defendant could not successfully plead the invalidity of the lease as a defence because to do so would be to deny the effect of registration.’
His Honour characterised the option to renew as an incident of the estate vested in the lessee, notwithstanding that its exercise created a fresh term. After pointing out that the relevant statutory provisions made the option as well as the lease illegal and void, and concluding that the option to renew would not be capable of specific performance because the court would not lend its assistance to the enforcement of an illegal agreement, his Honour continued (at 49-50):
‘To hold that the option to renew is an illegal agreement incapable of specific performance is not in my opinion a finding which is inconsistent with the indefeasible title which arises from registration. As I have already remarked, registration of a void lease will vest the leasehold estate in the lessee; as well it may enable enforcement of the covenants referable to the term thereby vested. Even if registration can have a like effect in relation to a covenant creating an option to renew such a lease, it cannot do so when that covenant is made void and illegal by statute. There is no reason why the indefeasiblity which arises from registration should extend to a future and distinct estate which has not been registered and which can arise, if at all, from the exercise of an option under a covenant which is itself made void and illegal by statute. In such a case there is no estate unless the exercise of the option given by the covenant is capable of specific performance; because it is void and illegal it is incapable of specific performance. Whatever may be the effect of registration on the lease for its terms of five years and the covenants referable to that term, it does not confer an indefeasible title to an option for renewal of the lease.’
The case went on appeal ((1973) 129 CLR 1), where it was again held that registration of the lease had not given the lessee an indefeasible right to renew. Two different paths were taken to that conclusion.
Barwick CJ, with whom McTiernan J and Stephen J agreed on this point, considered the critical circumstance to be that the relevant statutory provisions made the option illegal and thus unenforceable by specific performance. His Honour found it unnecessary to decide whether an equitable interest arising on the grant of an option, which when exercised was capable of specific performance, formed part of the interest in the land which the registration of the lease protected, but some of his Honour's observations bore upon the extent of the indefeasibility obtained on registration. His Honour said (at 17):
‘ ... Though as a term 'indefeasibility' is convenient enough, it must always be remembered that it is the title to and possession of the land or of the interest in the land of which there is a registered proprietor which is rendered secure by the registration. In the case of a leasehold it may be and frequently is the case that the extent of the leasehold interest is not merely described by reference to a term of years but must of necessity be determined by reference to the operation and effect of those terms and conditions of the lease which affect or qualify the interest in the land which the lease purports to create. It may be noted that the Real Property Act recognizes that there may be terms and conditions in the memorandum of lease, see the Real Property Act, s53(3). These considerations seem to me to result in the conclusion that registration of the memorandum of lease does not ensure the validity of every term and condition of the lease or indeed of the enforceability of every covenant it contains. In my opinion, it must depend on the nature of the covenant and its relation to the limitation of the interest created in the land by the memorandum of lease itself. For example, a collateral covenant tying the lessee to the lessor in respect of some matter of trade does not obtain any validity or consequence simply because the memorandum of lease is registered. The validity or enforceability of such a covenant will remain a question under the general law. The same, in my opinion, is true of the option to renew the lease. It does not mark out the extent of the term created by the lease. It is an agreement to grant a new lease contingently on the exercise of the option and the observance during its term of the covenants of the lease. Whether such an agreement creates an immediate though defeasible equitable interest must ultimately depend on the specific enforceability of that agreement.’
Gibbs J, with whom Menzies J agreed on this point, gave effect to the invalidating statutory provisions as later provisions prevailing over those of the Real Property Act 1900, and did not deal with the extent of indefeasibility obtained on registration.
The general position thus indicated is, I think, as follows. That which is attained by registration is, in the words of s 42, an estate or interest in the land. Registration does not validate all the terms and conditions of the instrument which is registered. It validates those which delimit or qualify the estate or interest or are otherwise necessary to assure that estate or interest to the registered proprietor.”
In PT Ltd v Maradona Pty Ltd I held (at 679-80), referring to s 52(1) of the Real Property Act by which the right to sue upon the mortgage passed on registration of a transfer and to Consolidated Trust Co Ltd v Naylor (1936) 55 CLR 423, that the mortgagee’s cause of action to recover the debt due from a mortgagor would be included in the rights rendered secure by registration, being necessary to assure to the mortgagee his interest in the land since without the debt his security would be nugatory. In Consolidated Trust Co Ltd v Naylor Dixon and Evatt JJ had said that, in prescribing how mortgages might be transferred and with what consequences, the Real Property Act -
“ … is concerned with the mortgage transaction in its entirety as it affects the land, and, therefore, extends to the personal liability of the mortgagor for the mortgage debt because that liability is intimately connected with the rights of property arising out of the mortgage transaction.”
Mercantile Credits Ltd v Shell Co of Australia Ltd (1976) 136 CLR 326 considered the effect of registration on a right of renewal in a lease, free from the illegality which was critical to the result in Travinto Nominees Pty Ltd v Vlattas. Barwick CJ said (at 338-9) that the right of renewal was “part of the delineation of the lessee’s total interest in the land” and that, because it was specifically enforceable, it created “an interest in the land commensurate with the extent of the covenant”; the right of renewal obtained indefeasibility on registration of the lease. Gibbs J said (at 345) that the right of renewal was “so intimately connected with the term granted to the lease, which it qualifies and defines that it should be regarded as part of the estate or interest which the lessee obtains under the lease”, and although his Honour specifically addressed priority rather than indefeasibility his reasoning would lead to the same conclusion. Stephen J (at 351-2) regarded a right of renewal as “intimately concerned with the existing relationship between lessor and lessee” and as “in a sense, definitive of the term of a lease”, as “an incident of the lease creating an interest in the land and forming part of a lessee’s interest in the land”, and as such entitled to the protection afforded by registration.
In Duncan v McDonald (1997) 3 NZLR 669, a decision of a five member bench of the Court of Appeal in New Zealand, it was held that registration of a void mortgage validated it to the extent of the charge in favour of the mortgagee but no further, so that the mortgagee could exercise a power of sale over the land but could not recover any deficiency from the mortgagors. In delivering the judgment of the Court, Blanchard J said (at 682-3) -
“What registration of an otherwise void mortgage gives the innocent mortgagee in these circumstances is the right of recourse to the security for such value as the land may have. The charged property is rendered liable for the debt by the registration. The covenants to pay and supporting covenants given by the registered proprietor then become operative to such extent only as is necessary to enable realisation of the security and recovery of the advance or part thereof by that means.”
This recognised validation of the personal covenant to pay the mortgage debt up to a point, as a necessary underpinning to recovery from the security. Of more importance for present purposes, his Honour had emphasised the particular nature of covenants in a mortgage, and had distinguished them from covenants in a lease, saying (at 682) -
“In the case of registration of an otherwise void transfer, ordinarily the instrument will be effective in its entirety. Its function is no more than the conveyance of title, perhaps with the benefit or burden of covenants affecting the land (for example, creating or preserving an easement of right of way); such covenants add to or subtract from the ordinary incidents of the unencumbered title. Likewise, the covenants in a memorandum of lease setting forth the conditions upon which the leasehold interest is held are intimately related to the title under the Act created by its registration.
The position of covenants in a mortgage or charge is different because the property interest serves a more limited and collateral purpose. The primary transaction is the incurring of an obligation by A to B. That does not involve any dealing with property. Collaterally A provides security over property to B subject to a right of redemption. If the security takes the form of a memorandum of mortgage over land and is registered it operates as a legal charge on the estate or interest of the mortgagor. It is intended to give the mortgagee an interest in the land for, and only for, a particular purpose - in order that in the event of default, the mortgagee may have recourse to the land to satisfy the obligation secured by the mortgage. It is therefore only the right of recourse for the principal, interest and expenses in the event of default which is integral to the mortgage. See Whenuapai Joinery (1988) Ltd v Trust Bank Central Ltd (1994) 1 NZLR 406 at p 411.
A registered mortgage consists of a covenant to pay and other supporting covenants by the mortgagor and a charge to secure their performance. Where, apart from registration, the mortgage would have been a nullity, registration protects the charge. In that situation the covenants are effective and enforceable to enable the charge to operate and moneys owing to be recovered by that means, but the covenants are not enforceable against the mortgagor separately from the right of recourse by means of a proceeding for the recovery of debt.”
Duncan v McDonald differs from PT Ltd v Maradona Pty Ltd in the extent of the operation given to the mortgagor’s personal covenant. The Wall parties submitted that the operation given to a lessee’s covenant to pay rent would be akin to that given to the mortgagor’s personal covenant in Duncan v McDonald, so that the lessor could re-enter on failure to pay rent but could not sue to recover unpaid rent. Whatever be the position as to a mortgagor’s personal covenant, in my opinion registration would give wider operation to a lessee’s covenant to pay rent, entitling the lessor to enforce the covenant. Payment of the agreed rent is an essential part of the transaction between the lessor and the lessee. The lessor gives the lessee an estate or interest in land in return for the lessee giving the lessor rent, rent being “a sum issuing out of the land demised payable by the lessee to the lessor for the right to occupy that land and all that went with it”: Junghenn v Wood (1958) SR (NSW) 327 at 330 per Owen J. The covenant to pay rent, to adopt the words of Blanchard J in Duncan v McDonald, is a condition upon which the leasehold interest is held and intimately related to the lessee’s title created upon registration; taking up concepts found in Travinto Nominees Pty Ltd v Vlattas and in Mercantile Credits Ltd v Shell Co of Australia Ltd, because of its connection with the continuance of the lessee’s interest in the land, it delimits or defines that interest.
Hence, in my view, if the lease became void by the operation of the rule in Pigot’s case, on its registration the lessee’s covenant to pay rent became effective and Big Country was entitled to enforce payment of rent under the lease.
The Wall parties submitted that, even if the covenant to pay rent became effective, the common law entitlement to damages for repudiation of the lease if rent were not paid was in a different position, because the obligation to pay damages was not necessary to assure the continuance of the lessee’s title or otherwise intimately related to the lessee’s title. Indeed, it was said, the obligation was the antithesis of something necessary to assure the continuance of the lessee’s title, because it arose only upon termination of the lease. So, it was said, Big Country’s entitlement to damages would be lost if the lease were avoided by the operation of the rule in Pigot’s case, and would not become effective on registration of the lease.
The reasoning is astray. If the lease were avoided by the operation of the rule in Pigot’s case, that would not avoid an entitlement to damages. There would be no obligations to repudiate, no repudiation, and so no damages for repudiation, but the reason why there would be no damages for repudiation would be avoidance of a primary obligation, not avoidance of a common law entitlement to damages. Equally, if the covenant to pay rent becomes effective on registration of the lease, and failure to pay rent is a repudiation in consequence of which damages are payable, the damages may be recovered. The common law so far as it attributes consequences to a breach of contract is outside the areas of avoidance by the operation of the rule in Pigot’s case and validation by the provisions of the Real Property Act.
At the time the lease was registered, 13 July 1990, Wall Investment was no longer in occupation of the squash centre and gymnasium. By the deed of assignment of 22 May 1989 it had assigned to the Hollingsworths “all its right title and interest in and to the lease on and from 22 May 1989”, and the Hollingsworths had entered into occupation. But at the time Wall Investment was a tenant at law, having entered and paid rent, and it was also a tenant in equity on the terms of the unregistered lease. Although no doubt oblivious of any operation of the rule in Pigot’s case, it must have intended that the lease be registered. If the lease had not become void by the operation of the rule in Pigot’s case Wall Investment was liable as periodical tenant or tenant at will to pay rent and, from registration of the lease, liable under its covenant to pay rent, and if the lease had become void by the operation of the rule in Pigot’s case there was liability to pay rent under the lease upon and from its registration. Wall Investment had both the benefit and the burden of the indefeasibility conferred by the provisions of the Real Property Act.
The Wall parties did not dispute that, as the original lessee, after its registration Wall Investment remained liable to pay the rent under the lease notwithstanding the transfer to the Hollingsworths. That was undoubtedly so by privity of contract if the rule in Pigot’s case did not operate, and it was not suggested that the validity given by registration to an otherwise ineffective covenant to pay rent created any lesser liability. The deed of assignment of 22 May 1989 did not relieve Wall Investment from their responsibilities in relation to payment of rent. Accordingly, Big Country was entitled to enforce payment of rent under the lease as against Wall Investment.
The Hollingsworths took a transfer of the registered lease. The transfer was registered. Whether or not the lease had become void by the operation of the rule in Pigot’s case, upon its registration Wall Investment had an estate or interest in the premises which it transferred to the Hollingsworths. By force of s 51 of the Real Property Act, at least until transfer away (see later in these reasons) the Hollingsworths became subject to and liable for the same requirements and liabilities to which Wall Investment had been subject and liable, including the requirement and liability to pay rent. Putting aside for the present their direct covenant with Big Country in the deed of assignment of 22 May 1989, both the benefit and the burden of the indefeasibility extended to them, so that any pre-registration avoidance of the lease by the operation of the rule in Pigot’s case was overcome in relation to their interest in the land and their obligation to pay rent. Accordingly, at least until transfer away Big Country was entitled to enforce payment of rent under the lease as against the Hollingsworths.
Mr Karacominakis also took a transfer of the registered lease, and the transfer was registered. As with the Hollingsworths, and again putting aside for the present his direct covenant with Big Country in the deed of 24 April 1992, by force of s 51 of the Real PropertyAct he became liable to Big Country to pay rent, at least until transfer away. Accordingly, at least until transfer away Big Country was entitled to enforce payment of rent under the lease as against Mr Karacominakis.
Chadlace did not take a transfer of the lease, although the deed of 13 August 1993 evidenced an agreement to transfer the lease between Mr Karacominakis and Chadlace. Under the deed of 13 August 1993 Chadlace covenanted with Big Country to the effect that it would become liable under the lease, but it was not liable to pay rent to Big Country by force of s 51 of the Real Property Act: it was liable by force of that covenant. Even if the lease was void at an earlier time by the operation of the rule in Pigot’s case, as at July 1993 and thereafter there was in effect a lease, with a covenant by the lessee to pay rent, which could be the subject of Chadlace’s covenant. But its liability arose not from the covenant to pay rent in the lease, but from the covenant in the deed of 13 August 1993, and Big Country was not entitled to enforce payment of rent under the lease as against Chadlace.
On the assumption, contrary to his holding, that the lease was avoided by the operation of the rule in Pigot’s case, Bainton J considered whether principles of unjust enrichment could assist Big Country. Founding himself on Goss v Chilcott (1996) AC 788, he thought that if by reason of Pigot’s case Wall Investment’s contractual liability to pay rent ceased, with Wall Investment nonetheless having a legal interest in the premises consequent on registration of the lease, it would be unjustly enriched. There may be a number of difficulties in this, and more difficulties in its consequences for the liability of the Hollingsworths and Mr Karacominakis. I prefer to express no view on unjust enrichment.
I do not think that the status of the lease is materially advanced, for the purposes of Big Country’s claims, by its alternative argument that the Hollingsworths, Mr Karacominakis and Chadlace (and presumably also the Johnstons) were estopped by the recitals in the deeds to which they were parties from asserting the invalidity of the lease. The deed of assignment of 22 May 1989 incompletely recited that Big Country, by a lease the date of which was not completed, had leased the premises to Wall Investment. The deeds of 24 April 1992 and 13 August 1993 incorrectly recited that Big Country, by a lease registered as dealing Y837222, had leased the premises to the Hollingsworths and to Mr Karacominakis respectively. Whether the recitals gave rise to an estoppel in favour of Big Country, and what estoppel, need not be decided.
(b) The status of the Walls’ guarantee
The Walls submitted that the alteration of the lease earlier described avoided it by the operation of the rule in Pigot’s case in relation to the guarantee in the lease, as well as in relation to the lease itself. They submitted in the alternative that either on the alteration of the lease or on the registration of the altered lease they were discharged from their obligations as guarantor. For the first limb of the alternative submission they said that avoidance of the lease by the operation of the rule in Pigot’s case left the guarantee without a subject-matter. For the second limb of the alternative submission they said that, whether or not the lease had been avoided but validated by registration, on its registration the guarantee was without a subject-matter because the registered lease was not the lease they had guaranteed.
When considering the status of the lease excluding the Walls’ guarantee I assumed that the lease became void by the operation of the rule in Pigot’s case. I do not think it necessary when considering the status of the Walls’ guarantee to go into the operation of the rule in Pigot’s case in relation to the lease or the guarantee in the lease. As I have said, attention should be concentrated on the lease as registered for the rights and obligations of the parties, and that exposes the second limb of the Walls’ alternative submission.
It is necessary for that submission, however, to determine whether the registered lease was relevantly altered in comparison with the lease as executed, which Big Country denied. Alteration was part of the argument over the operation in this case of the rule in Pigot’s case, but has independent significance to the status of the Walls’ guarantee.
I first address alteration by having mortgage T424525 written into the space in the lease as a prior encumbrance.
By s 53(4) of the Real Property Act, a lease of land which is subject to a mortgage is not valid or binding on the mortgagee unless the mortgagee has consented to the lease before it is registered. It may be otherwise if the lease is granted pursuant to the power in s 106(1) of the Conveyancing Act, but that provision authorises only a lease for less than five years; in any event, mortgages T424525 and V747997 provided that Big Country could not exercise the power without the previous written consent of FCA or Esanda. It may also be otherwise if the lease is granted pursuant to a power in the mortgage, but it was not suggested that mortgages T424525 and V747997 included an appropriate power. In the absence of consent from FCA and Esanda, Wall Investment would have had a flawed entitlement to possession of the squash centre and gymnasium, being liable to be dispossessed by the mortgagees in the event of default by Big Country under the mortgages: Iron Trades Employers Insurance Association Ltd v Union Land and House Investors Ltd (1937) Ch 313; Parkinson v Braham (1962) SR (NSW) 663.
When Big Country’s solicitors sent the lease to Wall Investment’s solicitors, Big Country offered to lease the squash centre and gymnasium to Wall Investment on the terms of the lease document. When the executed lease was returned to Big Country’s solicitors, the offer was accepted. As between Big Country and Wall Investment the lease was to be either with the consent of the mortgagees or without their consent. Which was it?
Looking only at the lease, Big Country offered to give to Wall Investment an estate or interest in the premises, and an entitlement to possession, unqualified by the existence of a prior encumbrance. It did not offer to give Wall Investment an estate or interest which was flawed because ineffective as against a mortgagee. The fact that there was no entry of a mortgage in the space for prior encumbrances indicated that the lease was not, as between Big Country and Wall Investment, to be subject to the rights or interest of any mortgagee. Thus as between Big Country and Wall Investment the lease was to be with the consent of any mortgagee, because only in that way would Big Country give Wall Investment an estate or interest effective as against the mortgagee.
Big Country submitted that an estate or interest effective as against any mortgagee was not to be taken as a starting-point, because the covenant for quiet enjoyment under a lease does not protect the lessee’s term against a person claiming by title paramount and there is no implied covenant for title in a lease. It cited in particular Daniker v Fitzgerald (1919) 19 SR (NSW) 260. This led to submissions on whether Daniker v Fitzgerald was confined to a parol lease and whether it was nonetheless open to an intending lessee to require that the lessor show good title (referring inter alia to Halsbury’s Laws of England, 4th ed, vol 27 para 68 and cases there cited, in particular Stranksv St John (1867) LR 2 CP 376). In my opinion, the submission and its sequelae were misdirected. The question is not what was to be implied in the lease once granted, or what the lessee was entitled to require in an investigation of the lessor’s title. It is what Big Country offered to the Wall parties, and the Wall parties accepted, specifically whether from the lease document the lease was not, as between them, to be subject to the rights or interest of any mortgagee.
That the Chadlace parties are entitled to damages on the basis that they relied on misleading conduct by Mr Karacominakis in the purchase of the business has not been shown to be erroneous; in my view Bainton J came to the correct conclusion.
Damages in the false representation claims
Big Country and Mr Hesky accepted that the damages of the Chadlace parties in the false representation claims against them would be the same as the damages in the false representation claims against Mr Karacominakis. Mr Karacominakis’ appeal included an appeal in relation to the amount of damages. Big Country did not put any separate submissions as to the amount of damages.
The elements in the damages awarded to Chadlace were the purchase price of the business, the costs and stamp duty incurred in relation to the business, and the trading loss for the period of Chadlace’s conduct of the business. The elements in the damages awarded to the Johnstons were “wages and superannuation contributions foregone covering the period from 13 August 1993 to 7 March 1994” and “interest and bank charges incurred after 22 December 1993 and up until 3 July 1995”. Bainton J adopted, with adjustment for one error, the assessments of loss in the report of Mr David Gurney, a chartered accountant, tendered on behalf of the Chadlace parties. Mr Gurney was cross-examined to some extent, but there were no competing accountants’ reports or other assessments of loss.
Mr Karacominakis did not challenge on appeal the detail of Mr Gurney’s assessment. He submitted that Bainton J made three errors of principle.
The first submission was that the primary measure of damages was the difference between the price Chadlace paid for the business and its true value, together in appropriate cases with damages for consequential loss such as trading losses (see for example Toteff v Antonas (1952) 87 CLR 647 at 650-1; Gould v Vaggelas at 220; Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 12). It was said that Bainton J had awarded to Chadlace the full purchase price, without considering the true value of the business, and had thereby erred.
Bainton J did not in terms advert to the primary measure of damages, or find that the business had no value at the time it was purchased by Chadlace. However, it seems to me that the finding is implicit in his Honour’s reasons, and that if it is not it is a finding which can and should now be made.
His Honour would have been alive to the history of the business. There was evidence that Wall Investment had made a trading profit of $17,020.00 for the period April 1988 to March 1989. Accordingly to the profit and loss statements, the Hollingsworths made a trading profit of $8,140 for the year ended 30 June 1991 and a trading loss of $16,715 after taking to account a profit on sale of plant for the year ended 30 June 1992. Without any reliable figures, his Honour clearly considered that the business had not been profitable when conducted by Mr Karacominakis, and he had Mr Karacominakis’ own protestations to Mr Hesky including that, without rent relief, Mr Karacominakis did not require a purchase price from any other tenant found by Mr Hesky to take a transfer of the lease and that Mr Karacominakis would vacate the premises if the lease was not transferred in the very near future. Chadlace then traded at a considerable loss over the four months for which it conducted the business. The picture was of a business in constant and marked decline. Although the Hollingsworths had sold it to Mr Karacominakis, Mr Karacominakis said that he did not buy it in reliance on past trading figures but because he had conducted small businesses before and thought that he could make a go of it: he had been proved wrong. The sale to Chadlace was vitiated, as any evidence of the value of the business, by the false representations. Mr Chiswick did take up the conduct of the business, for which in the circumstances he did not pay, and in due course Nelville took a lease of the premises, but that was only after Big Country spent a lot of money on the premises - the amount was not entirely clear, but seems to have been at least $200,000.
In the absence of evidence more specifically directed to the value of the business, and there was none, in these circumstances I consider that the proper finding is that the business had no value when purchased by Chadlace. Possibly Bainton J effectively made that finding when he said, in a discussion of the evidence of valuers leading to his conclusion that Nelville paid a proper rent -
“I am left with the impression that Mr Harrison thought he was being asked to value the lease of an established ongoing enterprise, rather than a reletting after the vacation by the previous tenant in a manner bound to be off putting to customers. The reality of the situation was that Big Country was left with a non-income producing asset: it was the entity which had to ‘pay’ whatever was necessary to overcome that problem. The price it would have to pay was to forego or at least abate rent until the recipient of that price had rebuilt the turnover to a figure in which Big Country could participate by its rental charge.”
As part of the submission it was said that it was difficult to see how the business could have no value when “a substantial amount of equipment … was conveyed with the contract”. The agreement for sale of 6 July 1993 contained an inventory of equipment to which a value of $72,635.00 was attributed. It is not easy to give any weight to this when the purchase price of the business was $50,000, and after Chadlace gave up the business some of its equipment was sold to Mr Chiswick for $2,500 and other of its equipment was sold to various police boys clubs for $3,000-$4,000. The true value of the equipment can not have been great. In any event, the equipment was only part of the package comprising the business. That an unprofitable business, carrying with it heavy obligations under a lease, would be purchased in order to acquire the equipment is to my mind not realistic.
The second submission was that Bainton J should not have awarded Chadlace its trading losses for the period after mid November 1993, because by that time Chadlace must have been aware that the turnover was less than represented, and had asked Mr Hesky for rent relief without success. Instead of complaining to Mr Karacominakis or giving him notice of their difficulties, it was said, the Chadlace parties abandoned the business at the end of the year, and their losses from mid November 1993 should be regarded as caused by the Johnstons’ decisions to keep trading for a period and then to abandon the business, rather than by the misleading conduct of Mr Karacominakis.
The Chadlace parties were in a difficult position. They had been misled into the purchase of the business. After a few months they began to realise that they had been misled, and to find out the true position. They then had to take a hard decision, and they decided to cut their losses by abandoning the business and vacating the premises. They were not required to complain to Mr Karacominakis, or to tell him what they proposed to do. The business they abandoned was not worth anything, and they were not obliged to keep incurring losses. Bainton J found that they “had no further resources to fund losses”. I do not think it was unreasonable to act as the Chadlace parties did, in the circumstances in which they were placed by the misleading conduct, and the trading losses (and other losses so far as properly recoverable) did not, in my view, cease to be recoverable from mid November 1993.
The importance of this, at least in the eyes of Mr Karacominakis in the litigation, seems to have been that Bainton J noted that Chadlace claimed as damages in its false representation claims any rent or damages which might be payable by it to Big Country if Big Country succeeded against it in these proceedings. It would be the same for the Johnstons, and the same as to any rent or damages which might be payable by Chadlace or the Johnstons to Wall Investment or Mr Karacominakis by way of recoupment (see above as to indemnity and contribution). Because his Honour dismissed the claims by Big Country against the Chadlace parties, the damages did not include any unpaid rent or damages. As I understand it, it was accepted in the appeals that in principle they would do so, and the submission last considered was in part directed to escaping the increased damages which would follow from upholding Big Country’s claims against the Chadlace parties. Two further submissions were made by Mr Karacominakis to the same end, and it is convenient to diverge to them.
Mr Karacominakis submitted that rent or damages payable to Big Country could not form part of the damages in the false misrepresentation claims, because the abandonment of the premises by the Chadlace parties and the re-entry by Big Country were each acts which broke the chain of causation and meant that Mr Karacominakis’ misleading conduct was not the cause of the liabilities to Big Country. I do not think that this has any substance. Acceptance of liability under the lease was an integral part of the purchase of the business, and potential liability to Big Country was undertaken as a direct result of the misleading conduct; actual liability then flowed from reasonable and foreseeable conduct on the part of Chadlace and Big Country in the event that, contrary to Mr Karacominakis’ representations, the business was unprofitable. I do not think that there was any break in the causal chain.
Mr Karacominakis also submitted, under the rather inappropriate rubric of apportionment between himself and Big Country, that he and Big Country were not equally responsible for the loss or damage suffered by the Chadlace parties referable to the period from mid-November 1993 onwards. The submission was not that there should be apportionment by Big Country paying to Mr Karacominakis a proportion of the money he had to pay to the Chadlace parties. It was that there should be apportionment in that, while Mr Karacominakis could be liable (equally with Big Country) for the loss or damage suffered “at the time Chadlace entered into possession of the premises on 18 August 1993”, Big Country alone should be liable for the later loss or damage. The argument came down to the same matters of causation as have already been considered, with the added plea that equality of responsibility “ceased to be just as the continuing dealings between Big Country and Chadlace unfolded”. There is no more substance in this submission. Both episodes of misleading conduct contributed to the purchase of the business and its all but inevitable consequences, including the liability for the unpaid rent and damages.
Mr Karacominakis thirdly submitted that, having allowed the trading losses, Bainton J “erroneously also allowed compensation for Mr Johnston and Ms Schmitz as the shareholders and directors of Chadlace, wages, superannuation and interest”. He referred to Yorke v Ross Lucas Pty Ltd (1982) 45 ALR 299 at 321, where Fisher J declined to allow claimed lost wages and interest on the finance for the purchase of a business.
The wages and superannuation contributions foregone related only to Mr Johnston. There was evidence that he had been employed until 13 August 1993, had left his employment to conduct the business, and had commenced new employment on 7 March 1994. He took no drawings from the business. The wages and superannuation contributions foregone were calculated by regard to the salary in his employment until 13 August 1993. The damages awarded were not awarded to Mr Johnston as a shareholder or director of Chadlace, but because he had suffered loss or damage by Mr Karacominakis’ misleading conduct in that he had not received the salary and superannuation contributions which he would have received if he had not acted in reliance on the misleading conduct. The present case is very different from Yorke v Ross Lucas Pty Ltd, where Yorke did not leave employment in order to conduct the business and took drawings from the business: so Fisher J thought the loss was only of an opportunity to earn wages which had not satisfactorily been quantified.
The Johnstons lent the purchase price to Chadlace, from finance obtained from their bank. Again the damages were not awarded to them as shareholders or directors of Chadlace, but because the incurring of the interest and bank charges was a loss to them in consequence of acting in reliance on Mr Karacominakis’ misleading conduct. In Yorke v Ross Lucas Pty Ltd the financing cost was regarded as the result of Yorke’s “decision, albeit obligatory in the circumstances … to finance his purchase in this way”, and as “not a direct consequence of the purchase but of Yorke’s lack of ready money” (at 321). On the other hand, in Sanrod Pty Ltd v Dainford Pty Ltd (1984) 54 ALR 179 at 191 Fitzgerald J saw no difficulty in accepting that, when money is paid in consequence of misleading conduct, the loss suffered by that conduct includes “not only the money paid but also the cost of borrowing that money or the loss from its investment, as the case may be”. This is well established in the tort of deceit, see for example Gould v Vaggelas at 224-5, 228.
Notions of damages appropriate to actions in contract or tort must give way to the provisions of the Trade Practices Act or Fair Trading Act in these situations (Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 503-4, 509-10, 528-9, 541). The use of finance for the purchase of a business is by no means unusual, even if the purchaser otherwise has funds; the part played by impecuniosity in the assessment of damages in tort and contract is in truth not one of causation but of foreseeability or remoteness, and there may be causation in fact. The decision in Leisbosch Dredger v SS Edison (1933) AC 449 was described as “much criticised” by Gibbs CJ in Burns v MAN Automotive Pty Ltd (1986) 61 ALJR 81 at 82, and was there so treated, see at 82, 87, 89; see also Dodd Properties Ltd v Canterbury City Council (1980) 1 WLR 433. For the recovery of damages pursuant to the Trade Practices Act or the Fair Trading Act it comes down to whether the incurring of interest and bank charges was loss or damage suffered “by” the misleading conduct. There is no reason to think that the Johnstons would have borrowed the money from their bank if they had not, through Chadlace, purchased the business, or that they were otherwise in funds and did not need to borrow it; indeed, as I have already noted Bainton J found that by the end of 1993 the Johnstons had reached the limit of their finances. In my opinion the financing cost was part of their loss or damage suffered by the misleading conduct, and it was open to Bainton J to include the interest and bank charges in their damages.
In the result, the damages in the false representation claims against Mr Karacominakis awarded by Bainton J stand, and are potentially increased by $517,311 to $636,574 in favour of Chadlace and $582,398 in favour of the Johnstons, and the damages in the false representation claims against Big Country and Mr Hesky are potentially $636,574, in all cases taking effect on 22 September 1997. There remains no occasion separately to deal with Mr Karacominakis’ claim for relief to do with fitness equipment.
I have referred to potential damages. Chadlace and the Johnstons will not necessarily have to pay the unpaid rent and damages to Big Country - Big Country may choose to exact the rent and damages from Wall Investment or Mr Karacominakis. In that event it is likely that Wall Investment or Mr Karacominakis would enforce recoupment from Chadlace or the Johnstons, so in the end there would be loss to Chadlace or the Johnstons which they were entitled to recover from Big Country. It is therefore inappropriate to give judgment for the full amounts stated above. A combination of judgment sums and declarations of right must be framed in order to give effect to these reasons.
Orders
Bainton J made declarations and orders on 22 September 1997. They left the amount of Big Country’s damages for later determination, and after the damages had been assessed orders were made on 5 December 1997 for judgments pursuant to some of the declarations. Making declarations and orders to give effect to these reasons is complicated by the separate appeals, and by the reopening in the manner I have described of questions of contribution and indemnity. In my view it is preferable to address the declarations and orders made below, which I will refer to simply as orders, without attributing the declarations and orders I now propose to the particular appeals. I will refer to the parties in the manner to which they have been referred in the reasons.
The following is not intended to preclude further orders in relation to the costs of the proceedings before Bainton J, which will be the subject of further consideration as hereafter indicated. To the extent to which the appeals and cross-appeals are dismissed, that does not include dismissal as to any consequential variation to Bainton J's order’s as to costs. I propose the orders -
(1) Set aside order 2(iv) made on 22 September 1997;
(2) Set aside the judgment ordered on 5 December 1997 for Big Country against the Walls for $517,311 and substitute judgments in favour of the Walls;
(3) Set aside order 3 made on 22 September 1997 and the judgment ordered on 5 December 1997 for $517,311 against the Hollingsworths, and substitute judgments in favour of the Hollingsworths;
(4) Vary order 4(i) made on 22 September 1997 by deleting the words “and on the Hollingsworth”;
(5) Set aside order 5 made on 22 September 1997 and substitute (i) a declaration that Chadlace was bound by the deed of 13 August 1993 to Big Country to pay the rent and perform the other covenants in lease Y837222 and (ii) judgment for Big Country against Chadlace for $517,311 with effect from 22 September 1997;
(6) Set aside order 6 made on 22 September 1997 and substitute (i) a declaration that the Johnstons are bound by the deed of 13 August 1993 to Big Country to pay the rent and perform the other covenants in lease Y837222 and (ii) judgment for Big Country against the Johnstons for $517,311 with effect from 22 September 1997;
(7) Set aside order 7 made on 22 September 1997 and substitute (i) a declaration that Wall Investment is entitled to be recouped by Mr Karacominakis, Chadlace and the Johnstons in respect of any moneys paid by it pursuant to the judgment for $517,311 ordered against it in favour of Big Country on 5 December 1997 and (ii) an order that the cross-claim by the Wall parties against the Hollingsworths be dismissed;
(8) Liberty to apply to the Commercial Division for consequential relief pursuant to order (7).
(9) Set aside order 9(ii) made on 22 September 1997 and substitute an order that the cross-claim by the Hollingsworths against Mr Karacominakis and Chadlace be dismissed;
(10) Set aside order 10(i) made on 22 September 1997 and substitute a declaration that Mr Karacominakis is entitled to be recouped by Chadlace and the Johnstons in respect of any money paid by him pursuant to the judgment for $517,311 entered against him in favour of Big Country on 5 December 1997;
(11) Liberty to apply to the Commercial Division for consequential relief pursuant to order (10);
(12) Add to order 11 made on 22 September 1997 as order 11(ii) a declaration that in the event and to the extent that Chadlace or the Johnstons pay to Big Country, Wall Investment or Mr Karacominakis any moneys pursuant to the judgments for $517,311 ordered on 5 December 1997 or in these orders or the entitlement to be recouped declared in these orders then Chadlace or the Johnstons are entitled to an order that Mr Karacominakis pay to it or them the amount so paid;
(13) Liberty to apply to the Commercial Division for consequential relief pursuant to order (12);
(14) Set aside order 12 made on 22 September 1997 and substitute judgments for Chadlace against Big Country and Mr Hesky for $119,263 with effect from 22 September 1997 and for the Johnstons against Big Country and Mr Hesky for $65,087 with effect from 22 September 1997;
(15) Declare that in the event that and to the extent that Chadlace or the Johnstons pays to Big Country, Wall Investment or Mr Karacominakis any moneys pursuant to the judgments for $517,311 ordered on 5 December 1997 or in these orders or the entitlement to be recouped declared in these orders then Chadlace or the Johnstons are entitled to an order that Big Country and Mr Hesky pay to it or them the amount so paid;
(16) Liberty to apply to the Commercial Division for consequential relief pursuant to order (15);
(17) Appeals and cross-appeals otherwise dismissed.
No doubt costs, of the appeals and cross-appeals and of the proceedings before Bainton J, will be of some moment to the parties. I propose orders that -
(a)each party deliver written submissions to the Court and to the other parties by 4pm on 24 November 2000, the submissions not to exceed five pages;
(b)Written submissions in reply be delivered by 4pm on11 December 2000, the submissions not to exceed five pages;
(c)Orders as to costs be made on the basis of the written submissions unless the Court informs the parties otherwise.
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