Keo Waleta Property Pty Ltd v 1693 Malvern Road Pty Ltd
[2019] VSC 239
•12 April 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
Commercial Court
S CI 2017 00499
| KEO WALETA PROPERTY PTY LTD (ACN 603 409 392) | Plaintiff |
| v | |
| 1693 MALVERN ROAD PTY LTD (ACN 603 414 839) | Defendant |
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JUDGE: | ALMOND J |
WHERE HELD: | Melbourne |
DATESOF HEARING: | 12-13 March 2019 |
DATE OF JUDGMENT: | 12 April 2019 |
CASE MAY BE CITED AS: | Keo Waleta Property Pty Ltd v 1693 Malvern Road Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2019] VSC 239 |
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CONTRACTS – Construction and Interpretation – Joint venture relationship in respect of the development of a property – Parties entered into an agreement to end relationship – Construction of payment mechanism under the agreement – Principles in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544 for interpretation of a commercial contract applied.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Y Bearman | Lewis Holdway Lawyers |
| For the Defendant | Mr D F Aghion | KCL Law |
HIS HONOUR:
This proceeding concerns the proper construction of a written agreement entered into between the plaintiff, Keo Waleta Property Pty Ltd (‘KWP’) and the defendant, 1693 Malvern Road Pty Ltd (‘1693’) on the termination of a property development joint venture.
Background[1]
[1]The background facts are substantially derived from a Statement of Agreed Facts dated 10 March 2019.
In mid-2014, Mr Mong Keomanivong (known as Mark Keo), Mr Yang Zhang and Ms Xuelian Jiang agreed to undertake a property development joint venture. At that time Mr Keo was an experienced property developer specialising in residential townhouse developments. At that time neither Mr Zhang nor Ms Jiang had property development expertise. The parties agreed that Mr Keo would identify a property in Melbourne suitable for development in return for a procurement fee, and Mr Zhang and Ms Jiang would obtain funds to purchase the property and work together with Mr Keo to develop it.
In December 2014, Mr Keo identified a property at 1693 Malvern Road, Glen Iris (‘the property’) and entered into a contract to purchase it.
Thereafter a corporate and trust structure was established with Mr Keo and Mr Zhang becoming directors of KWP with half of the issued share capital owned by a corporate entity associated with Mr Keo and the other half owned by corporate entities associated with Ms Jiang. KWP became the trustee of a unit trust, Keo Waleta Property Trust, the units of which were owned as to one half by the corporate entity associated with Keo and as to the other half by the corporate entities associated with Ms Jiang.
Prior to settlement of the property purchase Mr Keo nominated 1693 to be the purchaser of the property under the contract of sale, and on 7 April 2015 1693 completed the purchase by paying the balance of the purchase price. Subsequently, 1693 became registered as its proprietor.
From the time of settlement until 21 March 2016 KWP undertook steps necessary to develop the property on the basis of the construction and sale of 22 townhouses. Concurrently, the parties engaged in negotiations with the object of entering into a development management agreement to formally govern their relationship. It is common ground that several draft development management agreements came into existence but the parties were ultimately unable to reach agreement on the terms of any development management agreement.
On 10 March 2016, Ms Jiang advised Mr Keo by email that the joint venture had been terminated at a meeting the previous day.[2]
[2]CB 711.
On 21 March 2016, Mr Keo, Mr Zhang and Ms Jiang attended a lengthy meeting which culminated in an agreement (described as a Resolution) which was documented and signed by each of them (‘the Resolution’).[3]
[3]CB 712-713. Mr Sherman Mak also attended the meeting and was also a signatory.
The parties agree that the Resolution is a binding contract but cannot agree on its true meaning and effect. During the course of the trial I acceded to a joint application that the hearing and determination of the issue of liability be separated from the hearing and determination of the issue of quantum. Accordingly, for present purposes it is only necessary to determine the question of the proper construction of the Resolution.
Applicable legal principles
The parties are agreed on the legal principles applicable to the construction of a commercial contract which are conveniently set out in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd:[4]
It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it.
… It follows, as was pointed out in the joint judgment in Electricity Generation Corporation v Woodside Energy Ltd, that the court is entitled to approach the task of construction of the clause on the basis that the parties intended to produce a commercial result, one which makes commercial sense. It goes without saying that this requires that the construction placed upon cl 4 be consistent with the commercial object of the agreement.
[4](2017) 261 CLR 544, 551 [16]-[17] (Kiefel, Bell and Gordon JJ) (citations omitted). See also 571 [73], 578 [93] (Nettle J).
In giving a commercial contract a business-like interpretation, it is necessary to consider the language used by the parties, the circumstances addressed by the contract and the objects which it is intended to secure. An appreciation of the commercial purpose of a contract calls for an understanding of the genesis of the transaction, the background, and the market.[5]
[5]Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181, 188 [11] (Gleeson CJ, Gummow and Hayne JJ); International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151, 160 [8] (Gleeson CJ).
Evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning.[6] Recourse to surrounding circumstances may also be necessary in determining the proper construction where there is a constructional choice.[7]
[6]Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 332, 347 (Mason J).
[7]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 117 [49] (French CJ, Nettle and Gordon JJ. Note commentary in Maha Chaar, ‘Construction of Contracts: the Ambiguity Gateway and the Current State of the Law’ (2018) 44(1) University of Western Australia Law Review 65, 85.
Relevant background knowledge
For at least nine months prior to the date of the Resolution, the parties had been trying unsuccessfully to negotiate terms of a development management agreement between KWP as developer and 1693 as landowner. The first draft of the development management agreement (‘the DM Agreement’) was provided on 12 May 2015 under cover of an email from Mr Zhang to Mr Keo, inviting Mr Keo to review and comment on the draft.[8] The draft DM Agreement provided that KWP would undertake the project, being the development and realisation of the property in accordance with certain plans and specifications, including obtaining all approvals for the development into 22 townhouses and associated infrastructure.[9]
[8]Email from Mr Zhang to Mr Keo dated 12 May 2015, CB 283.
[9]Clause 3.7, CB 294; definition of ‘project’, CB 291.
It was proposed that an Initial Project Budget in Schedule 3 of the draft would be replaced by a Final Project Budget which the developer was to prepare in draft for submission and approval by the landowner.[10] For remuneration, it was contemplated that the developer would be paid a development management fee[11] and be reimbursed for the payment of any project costs.[12]
[10]Clause 3.7.2 - 3.7.6, CB 294; definition of ‘final project budget’ CB 289.
[11]Clause 4.11, CB 295.
[12]Clause 4.2.1, CB 295.
The development management fee was to comprise a market fee, being 2% of the total sale price excluding GST for the townhouses in the project, a development management base fee, being 5% of the total development costs which was estimated at $450,563 based on the Initial Project Budget[13] and an incentive fee, being half of the expected internal rate of return exceeding 30%. The expected internal rate of return was based on a formula which is referred to later.[14]
[13]Schedule 2, Item 1.2, CB 312.
[14]Schedule 2, Items 1.3, CB 312.
The proposed development management base fee was also calculated according to a formula.[15] It was contemplated that this fee would be paid progressively at various stages of completion of the development.[16] Any market fee and any incentive fee were to be payable within 45 business days after the last settlement date of the sales of all the townhouses in the project.[17]
[15]Schedule 2, Item 2.1, CB 312-13.
[16]Schedule 2, Item 1.1, CB 312. Concept design 15%, planning statutory approvals 15%, schematic design 5%, design development 5%, tender assessment and contract award 10%, construction documentation 5%, construction 35%, and practical completion 10%; CB 312-313.
[17]Schedule 2, Item 2.2 and Item 2.3, CB 313.
Schedule 3 to the draft comprised an Initial Project Budget which took the form of a spreadsheet setting out estimated revenue and costs of the project. The total estimated revenue was $24,900,000, the total costs of the project were estimated at $18,699,866, and the profit was estimated at $4,248,440 with a profit percentage (i.e. return on investment) specified at 22.73%.[18]
[18]Schedule 3, Initial Project Budget, CB 357-359.
On 28 September 2015, Mr Keo provided a response to the draft DM Agreement with marked up amendments and a letter from KWP’s solicitor to the then solicitor for 1693, with specific comments where the changes were not self-explanatory.[19] Proposed amendments included an amendment to allow the Final Project Budget to be determined by joint decision of the parties (and not be solely dependent on the approval of the landowner[20]) and amendments to Schedule 2 in relation to how the development management base fee would be determined. These amendments proposed a reduction to the internal rate of return threshold for the incentive fee from 30% to 28% and provided that the entire profit above that internal rate of return would be paid to the developer,[21] and proposed changing the formula to be used for the calculation of the development management base fee by deleting one of the variables in the formula (‘variable C’). According to the solicitor for KWP, including variable C in the calculation would reduce ‘the pro rata Development Management Fee payment… described in clause 2.1.1 by 30%’.[22] No amendment to the Schedule 3 Initial Project Budget was proposed.
[19]Email from Mark Keo to Sunshine Jiang and Yang Zhang dated 28 September 2015, CB 319-360.
[20]Clause 3.7.2(d) of the draft DM Agreement, CB 320.
[21]Item 10, Schedule 2, Commentary, CB 321.
[22]Item 10, Schedule 2, Commentary, CB 321.
On 12 January 2016, Mr Zhang emailed Mr Keo and attached a third version of the draft DM Agreement and a document headed ‘Project Feasibility (Indicative)’. Suggested amendments included a significant change to the incentive fee.
Relevantly, the email states:
Please find the updated DM and the initial feaso with IRR comparison you want. Please be mindful that the numbers in the feaso are just a reference which should be different from what the actual numbers would be at end.
In the DM, there are several main places being edited:
1. …
2.Clarify the way to calculate the incentive fee. Besides considering the IRR>30% for profit share as reward to the Developer, we now include the case when IRR<30%. In this case we will still compute the difference between the Expected IRR and 30%: (expected IRR-30%), which however, will be a negative number. This means a penalty to the Developer if IRR<30%.…[23]
[23]Email from Yang Zhang to Mark Keo dated 12 January 2016, CB 390.
There were also proposed amendments:
(a)to change the definition of one of the factors in the formula for determining the expected internal rate of return;[24]
(b)to clarify that the market fee applied only to townhouses which were sold and not to those which were retained;[25]
(c)to add a delay clause to shift to the developer the costs, losses and expenses incurred or suffered due to delay in the project caused indirectly or directly by the developer;[26]
(d)to reinstate the requirement that the draft of the Final Project Budget would not become the Final Project Budget until approved by the landowner;[27]
(e)to change the basis upon which the development management fee would be payable in the event of the contingency that the property was sold by the landowner at any time before completion of the project;
(f)to remove any restriction on the landowner selling the property for less than market value;[28] and
(g)to reject a proposal that the landowner would grant a security interest and provide a personal guarantee to secure the obligations owed by the landowner to the developer.[29]
[24]Schedule 2, Item 1.3, Factor F, CB 427.
[25]Schedule 2, Item 1.1, CB 404, 427.
[26]Clause 3.1.1, CB 405.
[27]Clause 3.7.2(c), CB 407.
[28]Clause 4.1.3-4.1.6, CB 408-409.
[29]Clause 4.7 (deleted), CB 411.
The Schedule 3 Initial Project Budget remained unchanged in this version of the management agreement.
Also attached to the 12 January 2016 was a spreadsheet headed ‘Project Feasibility (Indicative)’, which includes all of the information contained in the Schedule 3 Initial Project Budget. Estimates for revenue, costs, profit and percentage return on investment were unchanged.
At the beginning of the document there were changes as follows:
Glen Iris 22 units no basement
Project duration 2 yrs
Loan interest rate 5.00%
Loan to value ratio 70.00%
At the end of the document there were changes as follows:
Profit Percentage Total (IRR) 37.89%
Fees to Keo Group
Introduction Fee $ 127,500
Market Fee $ 232,159
Development Management Base Fee $ 225,282
Incentive Fee $ 221,066
Total Fee $ 806,007
Profit Share 18.97%
Counsel for 1693 informed the Court that the IRR (internal rate of return) percentage is derived from the formula for determining the expected internal rate of return set out in Schedule 2 to the draft DM agreement sent under cover of the 12 January 2016 email. The formula is as follows:
Expected IRR =
where: P =profit, being the amount calculated by the accountant appointed by the Landowner acting reasonably as fairly represents the net profit before tax received by the Landowner in the course of undertaking the Project, calculated without taking the Incentive Fee into account (Profit).
F =the total monies invested in the Project by the Landowner which will be treated as the equity contribution of the Landowner
including all costs of and relating to the acquisition of the Property [Loans from the bank will not be considered as money from Landowner here];D =the number of days after 26 February 2015 to the last settlement date in relation to the sale of all the
dwellingstownhouses other than the RetainedDwellingsTownhouses in the Project.[30]
[30]Schedule 2, Item 1.3, CB 427.
Initially there was a difference between the parties as to whether the formula ‘worked’ in the sense that KWP submitted that on the relevant variables the formula could never produce an expected internal rate of return of 30%, which was contemplated in the proposed draft DM Agreement sent under cover of the email of 12 January 2016.
Counsel for 1693 submitted in opening that the formula did indeed ‘work’ and demonstrated how the percentage internal rate of return of 37.89% shown in the ‘Project Feasibility (Indicative)’ attachment was calculated. It became apparent that 1693 had proceeded on the assumption that variable F (being the total monies invested in the project by the landowner) included all monies invested, including borrowings from a third party financier, whereas variable F was intended only to factor in the equity contribution of 1693 and excluded funds borrowed externally.
KWP submits that nothing turns on this save that it is a relevant surrounding circumstance evident from correspondence between solicitors that during the negotiations KWP considered the formula not to work.
There was an ongoing dispute about the accuracy of cross-references to various clauses within the Resolution which will be elaborated upon below.
As at 21 March 2016 KWP had performed development work with respect to the property to the point where the project was at the stage of marketing units for sales off the plan; one of the 22 proposed townhouses had been sold unconditionally and another had been reserved ‘with conditions’ though these had not been agreed to by 1693.[31]
[31]Evidence of Mr Keo, T 126.29-31-127.1-24.
With this context in mind, it is convenient to set out the Resolution in full:
Keo Waleta Property (Glen Iris) Pty Ltd Resolution
with Keo Waleta Property Pty Ltd
on 21/03/2016
1.KWPGI with good intentions to close up the relationship with consultants, builder, etc. anyone involved.
2. Payment mechanism:
1)Profit share calculation should be based on IRR scheme as defined in the DM Agreement. We only talk about the profit share number, once IRR >30%, no penalty for IRR <30%.
2)KWPGI will update the feaso asap to provide a base feaso for both parties to refer to later on within 2 months subject to KWPGI can engage a new PM/DM legally.
3)Once the project sale target achieves 19 units, then KWPGI and [KWP] will update the feaso to get the updated one on
i. Timeline;
ii. Profit calculation; and
iii. All related items in the feaso;
4)Based on the updated feaso calculated in point 2.2) above, KWPGI will pay [KWP] 50% of the total profit share calculated based on the updated feaso and market fee for units sold by Hocking Stuart within its current Authority Period. Then KWPGI will pay the balance of the remaining portion of the profit share and market fee for units sold by Hocking Stuart within its current Authority Period at end of the project once the 19 units are settled successfully. If any unit sold by Hocking Stuart in its current Authority Period can’t be settled, we will only pay [KWP] the portion of the remaining 50% of the profit share and market fee based on the units sold by Hocking Stuart in its current Authority Period and settled successfully. The other portion of the payment will be paid once the unsettled units are resold and settled.
5)KWPGI will issue [KWP] some sort of warranty/guarantee for the remaining part of the profit share calculated based on the updated feaso in point 2.3) when KWPGI pays the first 50% of the profit share calculated based on updated feaso in point 2.3).
3. Commencement date should be 26/02/2015.
4.Each party will appoint its own QS. If the numbers can’t be agreed between both QS, the each party/QS will appoint a 3rd party independent QS. Both parties will share the cost of appointing the 3rd independent QS. The 3rd party independent QS will make the final call/decision on the numbers.
5.Once both parties: Keo Waleta Property (Glen Iris) Pty Ltd and Keo Waleta Property Pty Ltd, sign this resolution, the formal legal documents with the original intents in this resolution will be prepared and executed by both parties as soon as possible.
6.KWPGI will pay Unit Holders of KWP the 55% of the Base Management Fee based on the Initial Feasibility in the DM Agreement within 7 business days after both parties sign the legal documents prepared in point 5 above. Then KWPGI will do the adjustment of the 55% of the Base Management Fee once KWPGI has the updated feaso mentioned in the point 2.2).[32]
[32]CB 712-713.
The Resolution was signed by Mr Keo, Mr Zhang and Ms Jiang, each dated on
21 March 2016.
KWP’s submissions
KWP submits that:
(a)on the proper construction of the Resolution, the ‘feaso’, which is to be updated to provide a ‘base feaso’, is a reference to the ‘Project Feasibility (Indicative)’ document attached to the 12 January 2016 email to Mr Keo;[33]
(b)that the process of updating that document required the replacement of the estimated amount of expenditure with the actual amount where it had been received or spent after the Project Feasibility (Indicative) had been written, or ‘the latest calculation, quote, contract or estimate of such amount prior to or on 21 March 2016’ but not otherwise;[34]
(c)the Resolution should be construed as if:
(i)the reference to clause 2.2 in clause 2.4 and in clause 6 respectively is correct; and
(ii)the reference to clause 2.3 at the end of clause 2.5 is incorrect and should instead be a reference to clause 2.2.
[33]Plaintiff’s Outline of Submissions in Closing p 8, [36](b); Second Further Amended Statement of Claim dated 25 March 2019 (SFASOC), p 4, [14](d). In oral submissions, counsel for the plaintiff may have conceded that the initial feaso was the initial feasibility study in Schedule 3 of the draft DM Agreement, but in view of the position maintained in the final version of the plaintiff’s pleadings SFASOC, [13], [14](d), which post-date oral closing submissions, the issue has been addressed and ruled upon on the assumption that the issue remained in dispute.
[34]Second Further Amended Statement of Claim dated 25 March 2019, [14](e)(ii).
In aid of its preferred construction, KWP relies on the objective context in which the Resolution arose, its stated purpose and on textual and grammatical considerations.
As to the objective context, KWP submits that the Resolution should be understood as a document which was intended to terminate ongoing work on the project performed by KWP for 1693, including termination of ongoing work with the builder and other parties selected by KWP and with whom KWP had been dealing. In this sense, the Resolution represents a compromise for KWP’s role to be ended consensually. As a result of the relationship ending, KWP lost all right to participate in or to influence the outcome of the project. KWP’s construction of clause 2.2 supports the proposition that it was to be paid a notional amount to be calculated by way of compromise upon a document already used as a budget document and for feasibility analysis. KWP submits that it is unlikely that a reasonable person in the position of KWP would agree to a compromise by allowing its entitlement to a profit share to arise wholly in the hands of the party terminating the arrangement. The parties may be seen to have adapted parts of the profit share arrangements contemplated in (several) draft DM Agreements and to have applied them to the separation by using the Project Feasibility (Indicative) document to arrive at a (necessarily) notional compromise amount.
As to the stated purpose, KWP points to clause 1, which speaks of KWPGI having ‘good intentions to close up the relationship with consultants, builder, etc. anyone involved’, which reflects the fact that the Resolution was intended to terminate ongoing work on the project performed by KWP (and everyone else).
As to textual and grammatical considerations, KWP submits that:
(a)its construction gives meaning to the words ‘update the feaso’, which is a reference to the Project Feasibility (Indicative) document attached to the 12 January 2016 email;[35]
(b)the words only make sense if read so as to contemplate the amendment of that document by more recent information to create notional amounts, as the document chosen by the parties was not the best or most complete basis to determine an outcome nor were the parameters of the document accurate;
(c)the concept of an update of a spreadsheet was well understood by the parties and was used by Mr Zhang in his cover email of 12 January 2016 reflecting consistent linguistic usage;
(e)the word ‘feaso’ implies a reference to a document referred to as a ‘feasibility’; and
(f)the period of two months contemplated by clause 2.2 correlated with the end of the selling agent’s authority period. The selling agent, Hocking Stuart, was appointed on 16 February 2016 for 90 days.[36]
[35]CB 435-438.
[36]CB 383S.
KWP submits that, on this construction, the reference to ‘point 2.2’ in the first sentence of clause 2.4 is correct. This reflects that 1693 would, within two months, ‘update the feaso’, that the updated document was to provide a ‘base feaso for both parties to refer to later on’, and based on that document 1693 would pay KWP 50% of the total profit share.
KWP submits that it follows that the second reference in clause 2.5 to the ’updated feaso in point 2.3’ is erroneous in that it should instead refer to clause 2.2. Clause 2.5 refers to security for the remaining part of the profit share. KWP submits that it is more likely than not that security was sought because of the potential for delay between the first payment (within two months of the meeting on 21 March 2016 on KWP’s case) and the second payment, which would be made at the end of the project once settlement of the sale of completed townhouses had occurred.
KWP moreover submits that, on this construction, both clause 2.3 and clause 2.4 have work to do; that clause 2.3 gives the commencement date for the estimated two years in the initial feasibility and that clause 2.4 is engaged in respect of payments concerning 1693’s true profit. KWP submits that this is necessary because KWP will not have been involved in the project at all after the agreement.
1693’s submissions
1693 disputes KWP’s construction of the Resolution. 1693 submits that:
(a)clause 1 reflects the fact that the Resolution was intended to bring to an end the relationship of 1693 (referred to as KWPGI in the Resolution) with all existing consultants, builders, and other persons involved with the development of the property;
(b)clause 2 provides for a payment mechanism;
(c)clause 2.1 provides that KWP would only receive a profit share if the internal rate of return exceeds 30% calculated under the DM Agreement sent under cover of the 12 January 2016 email;
(d)clause 2.2 provides that 1693 will update the feaso (being the Initial Project Budge at Schedule 3 of the draft DM Agreement)[37] to provide a new ‘base feaso’ for both parties to refer to later on. 1693 would provide the base feaso within two months and it could do so by engaging a new project manager or development manager;
(e)clause 2.3 provides that once 19 of the 22 units are sold then 1693 and KWP will update the base feaso for (i) timeline; (ii) profit calculations; and (iii) all related items;
(f)clause 2.4 provides that, based on the updated feaso, 1693 will pay KWP fifty per cent of the total profit share calculated on the updated feaso and fifty per cent of the market fee for units sold by Hocking Stuart within the current Hocking Stuart authority period. The date of payment is implicitly when 19 units have been sold and the updated feaso has been prepared; the balance of any profit share and market fee are to be paid when the sales of the 19 units are settled;[38]
(g)clause 2.5 provides that 1693 will give KWP ‘some kind of warranty/guarantee’ for the balance of the profit share;
(h)clause 3 provides a commencement date of 26 February 2015, which is relevant to calculation of the internal rate of return (IRR);
(i)clause 4 provides a circuit breaker. Each party is to appoint its own quantity surveyor and if they cannot agree on ‘the numbers’ then a third independent quantity surveyor will be appointed to make the final decision with both parties to share the cost;
(j)clause 5 provides for the agreement to be documented and executed as soon as possible; and
(k)clause 6 provides that 1693 will pay KWP 55% of the base management fee based on the initial feasibility in the DM Agreement (within 7 days of the parties signing the formal legal documentation of the Resolution) which would be adjusted once 1693 had the updated feaso.
[37]CB 431-433; Amended Defence to Further Amended Statement of Claim, [13]. Outline of Submissions on behalf of Defendant dated 8 March 2019, [10].
[38]There was an adjustment provision for any units sold by Hocking Stuart which did not settle and had to be resold.
1693 submits that any payment under clause 2.4 is to be made on the basis of the updated feaso (clause 2.3), not the base feaso (clause 2.2); and that it follows that the reference to clause 2.2 in clause 2.4 should be a reference to clause 2.3. Similarly, 1693 submits that the updated feaso mentioned in clause 6 is reference to the updated feaso referred to in clause 2.3 not clause 2.2.
Analysis
It is common ground that:
(i)the purpose of the Resolution was to terminate the joint venture between KWP and 1693 in respect of the project with the intention of ending the relationship with the consultants, the builder and anyone else involved in the project (clause 1);
(ii)references to the ‘DM Agreement’ in the resolution are references to the draft development management agreement attached to Mr Zhang’s email of 12 January 2016.[39]
[39]CB396-434.
There is substantial controversy about clause 2, which is headed ‘Payment Mechanism’.
Clause 2.1 adopts a formula for calculation of an internal rate of return (IRR) percentage by reference to a definition in the third draft DM Agreement and specifies a threshold (30%) above which a profit share would be payable. By this mechanism it defines the parameters for an entitlement to a profit share.
Clauses 2.2 to 2.5 sets out a series of steps, being things the parties agree to do either individually or jointly in order to arrive at the profit share (if any).
Pursuant to clause 2.2, 1693 is to ‘update the feaso asap to provide a base feaso for both parties to refer to later on’. The parties use the definite article in referring to ‘the feaso’, which suggests it is something already in existence, presumably a document. In this context, I accept that the word ‘feaso’ is shorthand for feasibility. It was an expression used by Mr Zhang in his covering email of 12 January 2016 when he wrote ‘Please find the updated DM and the initial feaso with IRR comparison you want…’.[40] It is obvious from the covering email that the initial feaso being referred to is the second attachment to the email, which is a document entitled Project Feasibility (Indicative) that modelled an internal rate of return.[41]
[40]Email from Mr Zhang to Mr Keo dated 12 January 2016, CB 390.
[41]CB 435-438.
The feaso referred to in clause 2.2 of the Resolution is not as clearly identified. Though I accept KWP’s submission that the feaso is on the balance of probabilities a reference to a specific document, I do not accept it is necessarily a reference to the second attachment to the 12 January 2016 email entitled Project Feasibility (Indicative).
It is either a reference to the Initial Project Budget at Schedule 3 of the draft DM Agreement, contained within the first attachment to Mr Zhang’s email of 12 January 2016, or to the Project Feasibility (Indicative), being the second attachment to that email (described by Mr Zhang in the email as ‘the initial feaso with IRR comparison’), which has all of the information in the Initial Project Budget and some additional information.
I consider the better view to be that the feaso referred to in clause 2.2 of the Resolution is the Initial Project Budget found at Schedule 3 of the third draft DM Agreement. This does not matter for present purposes because the substantive content of the revenue and costings needed to calculate profitability is the same in each document. What does matter for the purposes of clause 2.2, however, is that the information in the feaso is to be updated ‘asap to provide a base feaso for both parties to refer to later on within two months…’. This means that a new updated document (i.e the base feaso) is to be provided within two months for the parties to refer to later on.
On KWP’s case, the updating process contemplated in clause 2.2 for the purpose of creating the base feaso is a confined exercise which requires amendment of the initial feasibility document by replacement of the estimated amount of any receipt and/or expenditure with the actual amount where it had been received or spent after the initial feasibility had been written or ‘the latest calculation, quote, contract, or estimate of such an amount, prior to or on 21 March 2016, but not otherwise’.[42]
[42]SFASOC, [14](e)(ii) (emphasis added).
In effect, the original feasibility document is to be treated as a fixed template to be amended by 1693 through inputs updating existing figures, but not otherwise.
Doubtless a base feaso could have been produced in that fashion and could have been prepared as at 21 March 2016, the date of the Resolution. However, clause 2.2 does not prescribe a date as at which the document is to be prepared, precisely when the base feaso is to be prepared (save that it must be provided within two months), nor which individual elements are to be included when the feaso is ‘updated’.
In my view, KWP’s construction strains the use of the word ‘update’ in its context. No strictures are placed around the use of the word in the Resolution; in its ordinary meaning, ‘update’ is a broad concept and the notion of updating something is itself quite general in nature. Whilst I appreciate the intent of the argument put by KWP to the effect that the only changes able to be made to the initial feaso are to replace existing figures, I am not satisfied that it is warranted; it could not be suggested that it goes without saying. Had the parties intended to be prescriptive on this issue, it would have been easy to say so.
In my view, it is apparent from the Resolution, read as a whole and having regard to the context, that the parties’ objective intention was to provide that the base feaso would be updated jointly after 19 townhouse sales had been achieved. For that reason, there was no imperative for the base feaso to be fixed as at 21 March 2016, save that one would expect it to have been as accurate as it could practicably be whenever it was prepared during the two month period. In my view, the base feaso could include new items of costs and expenses which might have arisen which had not been originally budgeted for (e.g. following the discovery of contamination on site or which had to be taken into account as a result of the realisation that some cost category had been omitted by oversight).
Any changes to revenue, additional expenses, adjustments or corrections would be brought to account at the time the updating exercise occurred as contemplated by clause 2.3.
The parties also disagree on the meaning and effect of the concluding words of clause 2.2—‘subject to KWPGI [i.e. 1693] can engage a new PM/DM legally’.
KWP says that these words mean that the task of providing the base feaso under clause 2.2 was to be without prejudice to the entitlement of 1693 to appoint a new project manager or development manager. According to KWP, this did not permit 1693 to engage a new project manager or development manager to undertake the task of preparing the base feaso.
For its part, 1693 submits that clause 2.2 requires 1693 to provide the base feaso within two months and that the concluding words enable it to engage a new project manager or development manager to do the task if it so desired.
In my view, the latter construction is to be preferred. Significantly, the directors and principals of 1693, Mr Zhang and Ms Jiang, lacked property development expertise whereas Mr Keo of KWP was an experienced property developer specialising in the particular style of development proposed for the property. From the perspective of 1693, the demise of the joint venture meant the loss of critical expertise.
In these circumstances it is reasonable to infer, and I do infer, that 1693 would need to replace KWP with an experienced project manager and/or development manager; that it may take some time for this to occur and for the newly retained project manager or development manager some time would be required to come to grips with the work which had been done on the project to that point in time.
These practicalities give some insight into the timeframe allowed for creation of the base feaso—within two months. For the avoidance of doubt, the parties have expressly agreed that 1693 is able to engage a new project manager or development manager ‘legally’, meaning in my view without being in breach of any arrangement between KWP and 1693.
Even if the concluding words of clause 2.2 were to be construed as KWP contends (namely without prejudice to 1693 engaging a new project manager or development manager), there is nothing express or implied in the Resolution which would prevent 1693 from engaging the new project manager or development manager as its agent to undertake the task of providing the base feaso.
Clause 2.2 contemplates that both parties will be able to refer to the base feaso ‘later on’. As the words plainly suggest, this means, at a later point in time, and based on the sequence of steps set out by the parties in clause 2, it is evident that the parties will need to refer to the base feaso (clause 2.2) when updating the feaso (clause 2.3), which is to occur once the project sale target achieves 19 units.
The parties chose this step in the sequence to factor in updates to the timeline, profit calculations and all related items. At this point the parties would be in a position to apply the ‘profit share’ formula. The constructional choice between the two versions is a choice between a highly theoretical ‘profit share’ calculation and a less theoretical ‘profit share’ calculation, as the latter is calculated after the project sales reach 19 units. At that point in time it follows that almost all the revenue and cost items will have crystallised into actual numbers.
As both parties acknowledged during the trial, any calculation performed before completion of the project (including settlement of all sales) will be notional in the sense that there will likely be a mix of actual and estimated revenue items and a mix of actual and estimated cost items, which would have to be used to calculate the profit share.
Having regard to the fact that the joint venture had been terminated, that Mr Keo was no longer to be involved in the project and that the trust which had previously existed between the joint venturers had, at the very least, abated, it seems to me that it would have been unlikely for reasonable business people in the position of the parties to agree upon a compromise which allowed one party to create a document (base feaso) upon which 50% of the total profit share would be calculated (which would be the case if the base feaso was the document relied upon for this purpose, as this document was to be created solely by KWPGI).
It is far more likely that a reasonable business person in the position of the parties would provide that any profit share calculation would be based on a document created with input from by both parties, which would be the case if the updated feaso was the document relied upon for the purpose of determining 50% of the total profit share and created at a time when the ‘numbers’ are substantially based on actual amounts rather than theoretical budgeted amounts.
This tends to suggest, and I find, that the updated feaso referred to in clause 2.4 is the base feaso updated jointly once the project sales target achieves 19 units, as required by clause 2.3. It follows that the reference in the first sentence of clause 2.4 to clause 2.2 should instead be a reference to clause 2.3.
Similarly, and for consistency, the reference to the updated feaso in clause 6 is a reference to the updated feaso mentioned in clause 2.3 and is not a reference to the base feaso in clause 2.2.
Accordingly, I find that the construction of the Resolution propounded by 1693 is the correct construction.
I will make orders accordingly.
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