Kirkby v Turner - [2009] NSWCA 131

NEW SOUTH WALES COURT OF APPEAL

CITATION:
Kirkby v Turner [2009] NSWCA 131

FILE NUMBER(S):
40088/08

HEARING DATE(S):
18 May 2009

JUDGMENT DATE:
2 June 2009

PARTIES:
Brett David Kirkby (Appellant)
Noel Robert Turner (Respondent)

JUDGMENT OF:
Beazley JA Tobias JA Campbell JA

LOWER COURT JURISDICTION:
Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S):
6088/06

LOWER COURT JUDICIAL OFFICER:
Nicholas J

LOWER COURT DATE OF DECISION:
31 January 2008

LOWER COURT MEDIUM NEUTRAL CITATION:
Schulz v Turner [2008] NSWSC 24

COUNSEL:
B Crowley, solicitor (Appellant)
JM White (Respondent)

SOLICITORS:
The Peoples Solicitors, Darlinghurst (Appellant)
Michael Michell & Associates (Respondent)

CATCHWORDS:
CONTRACTS - general contractual principles - agreement to negotiate - whether parties are bound to negotiate if a precondition of the obligation to negotiate has not occurred - contract preconditioned obligation to negotiate on the likelihood of rezoning being imminent - objective approach to construction of agreements to negotiate - WORDS AND PHRASES - "agreement to negotiate"

LEGISLATION CITED:
Environmental Planning and Assessment Act 1979

CATEGORY:
Principal judgment

CASES CITED:
Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104
Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1
Hunyor v Tilelli (1997) 8 BPR 15, 629 (NSWSC)
Schulz v Turner [2008] NSWSC 24
Suttor v Gundowda Pty Ltd (1950) 81 CLR 418
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165

TEXTS CITED:

DECISION:
Appeal dismissed with costs.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40088/08
SC 6088/06
BEAZLEY JA
TOBIAS JA
CAMPBELL JA
2 JUNE 2009

BRETT KIRKBY v NOEL ROBERT TURNER

Judgment

BEAZLEY JA: I agree with Campbell JA.
TOBIAS JA: I agree with Campbell JA.
CAMPBELL JA:
Nature of the Case
This appeal concerns whether a written agreement that the parties drafted for themselves requires the Appellant, Mr Brett Kirkby, to transfer to the Respondent, Mr Noel Turner, all his interest in a company, Upper Hunter Developers Pty Ltd (“the Company”).
Facts
The Company was incorporated in June 2004 by the Appellant and a Mr Allan Hartigan. Their plan was that the Company would acquire a particular parcel of land at Lot 30 Denman Road, Muswellbrook (“the Property”) that then had a rural zoning, obtain a rezoning of the Property, and subdivide it into residential lots. The Appellant and Mr Hartigan each held half the shares in the Company, and each was a director.
In August 2004 the Company exchanged contracts to purchase the Property from its then owner.
Soon after exchange of contracts, Mr Hartigan told the Appellant that he no longer wished to be involved in the transaction. From then on, the Appellant was in effect the embodiment of the Company, but he did not actually acquire Mr Hartigan’s shares until 9 November 2004.
The Respondent is a property consultant. In about mid October 2004 the Appellant and the Respondent met, and the Appellant told him that he needed a new partner in place of Mr Hartigan. The judge found that the Appellant “expressed confidence that he could successfully arrange for rezoning of the property to rural residential.”
Notwithstanding that contracts to purchase the Property had been exchanged on 4 August 2004, with a deposit being paid by Mr Hartigan from his personal funds, there were no arrangements for obtaining finance to complete the purchase.
The Respondent was at the time in a de facto relationship with Ms Karin Schulz. The Respondent asked her to finance the project.
On 1 November 2004 there was a meeting in Muswellbrook between the Appellant, the Respondent, Mr Hartigan and Ms Schulz, at which the document whose meaning is in contention in this appeal was executed by the three men. The provisions that are presently relevant are:
“(b)The purpose of this aquisition [sic] is to endeavour to have the said property re-zoned to Rural Residential and ultimately develop the area into a number or [sic] allotments. For the benefit of this agreement, a time frame required to finalise the re-zoning is 2 years. If this time frame proves to be insufficient, the parties agree to negotiate an extension based on the likelyhood [sic] of re-zoning being imminent.
(c)In the event of the re-zoning being approved, Noel Turner (or his nominated company) agrees to pay to Allan Hartigan, an additional sum of $350,000.00, being payment in full. These funds are to be made available to Allan within ..90 days.. [sic] of approval of the re-zoning. Furthermore, I Brett Kirkby, upon the re-zoning being approved, agree to pay to Allan Hartigan the sum of $225,000.00 being payment in full for 50% of the 42 acres and the inventory attached thereto.
(d)In the event of the re-zoning being unsuccessful, the abovementioned clause (c) will be abrogated thus making any further payment by Noel Turner or Brett Kirkby to Allan Hartigan null and void. Furthermore, all interests held in “UPPER HUNTER DEVELOPERS” will be terminated and transferred in full to Noel Robert Turner (or his nominated company). The implementation of this facility will see Noel Turner as the owner of the property in it’s [sic] entirety.
(e)I, Brett David Kirkby, agree to take responsibility for the co-ordination of the re-zoning procedure including liaising with all parties and Government bodies with an interest in it’s [sic] successful implementation[.] Further, I agree that Noel Turner be given the responsibility to co-ordinate the development procedure in consultation with myself.”
The purchase of the Property was settled on 10 November 2004, after Ms Schulz had paid the solicitors acting for the Company on the purchase an amount of $450,000 to fund the purchase. The Property was transferred to the Respondent and the Company as tenants in common in equal shares.
With the express authority of both the Appellant and the Respondent, the solicitors who had acted on the purchase delivered the Certificate of Title for the Property to the Respondent. He passed it on to Ms Schulz.
The Appellant engaged various firms to work on the proposal for rezoning of the Property. However, no rezoning had been achieved within two years of the date of the Agreement. Indeed, by the date of the hearing in the court below (5 November 2007) the rezoning had not been achieved.
The evidence established that the Council had prepared a draft local environmental plan (the draft plan) for the whole Shire which was intended to replace Muswellbrook Local Environmental Plan 1985. The appellant had submitted a request to the Council in December 2005 to rezone the Property to Rural Residential which was included in the draft plan. However, there remained a number of issues with respect to the lot size which would be permissible within that zone and which had still to be resolved with the relevant government departments. On 18 June 2007 the Council resolved to adopt the draft plan for the purpose of undertaking consultations with the Department of Planning over outstanding issues and to seek a certificate under section 65 of the Environmental Planning and Assessment Act 1979 to progress the matter to the public exhibition stage.
That certificate had not issued at the time of the hearing. There were still several steps to be gone through after issue of a certificate (if it ever happened) before the draft plan could be made and gazetted by the Minister and thus come into force. It was common ground that at the time of the hearing the applicable zoning was not “Rural Residential”.
The Litigation Below
The litigation below started as an application by Ms Schulz, brought against the Respondent, the Appellant, Mr Hartigan and the Company, seeking (inter alia) an order that the Appellant and the Company execute a first mortgage in her favour over the Property.
The Respondent filed a Cross-Claim in those proceedings against the Company, the Appellant and Mr Hartigan, seeking a declaration that the Company had no beneficial interest in the Property, that the Respondent had acquired the whole of the beneficial interest in the Property, and that a transfer be executed to give effect to that entitlement.
The trial judge upheld both Ms Schulz’s entitlement to a mortgage, and the Respondent’s entitlement to have transferred to him the whole of the beneficial interest in the Property: Schulz v Turner [2008] NSWSC 24.
The judge held that the word “imminent” in the third sentence of para (b) of the Agreement made on 1 November 2004 meant “likely to occur at any moment”. He found as a fact that at the time of expiry of the two year period to which para (b) of the Agreement referred, namely 1 November 2006, the likelihood of there being a rezoning of the Property was not imminent. There is no appeal from those findings.
The judge expressed the following views about the manner in which clauses (b) and (d) should be construed:
“82The first sentence of cl (b) states the twofold purpose of the acquisition as an endeavour to have the property rezoned and “ultimately” to develop it into allotments. The next sentence states that the time frame required for the finalisation of the rezoning is two years, a matter expressed to be “… for the benefit of this agreement…”. Under the terms of the final sentence the parties bound themselves to negotiate with each other for an extension of time if the time frame proved insufficient, based on the likelihood that the finalisation of the rezoning was imminent.
83In my opinion, cl (b) was intended by the parties to specify the time within which the necessary rezoning was to be obtained which, in this case, was stated to be a period of two years. It is evident from the other terms that much turned on whether or not the property was rezoned. In my opinion, it accords with commercial sense and reality that the parties would require that the period within which this process was to take place should be defined and certain in order to know whether any, and which, of cl (c), cl (d) and cl (g) was to take effect. It may also be inferred that the parties were aware that they had no control over the progress of the rezoning process. This is another reason for a business-like interpretation which gives their arrangement certainty.
84Furthermore, this interpretation is supported by the meaning which, in my opinion, should be given to the words of the third sentence. Those words reflect the intention of the parties that they should have the opportunity to negotiate an extension if (but only if) at the end of the period rezoning had not been finalised and the likelihood was that it would be imminent i.e. “likely to occur at any moment” (Macquarie Dictionary, 4th ed).”
…
87From my conclusion as to the proper construction of cl (b), it follows that the event which attracts the application of cl (d) must be determined against the condition that approval be obtained within the two year period. Consistently, therefore, the words “in the event of the rezoning being unsuccessful” should be understood to mean “in the event of the rezoning not being approved within a period of two years from the date of this agreement”. I reject the cross-defendants’ submissions to the contrary. In the circumstances, I find that the contingency provided for in cl (d) has been fulfilled, and the parties’ entitlements and obligations thereunder should be given effect.”
Appellant’s Submissions
The Appellant does not dispute the way in which the judge approached the first and second sentences of clause (b), but submits that the judge erred in construing the third sentence of clause (b).
Mr Crowley, who appeared for the Appellant, submits that the third sentence in clause (b) makes it mandatory for the parties to negotiate an extension of time at the end of the two year period, and that the only element which is negotiable was the length of the extended time frame. He accepts that the negotiations for the extended time frame were to be based, “… on the likelyhood [sic] of re-zoning being imminent”.
Mr Crowley submits that the judge erred, in para [82] of his judgment, when he said that:
“Under the terms of the final sentence the parties bound themselves to negotiate with each other for an extension of time if the time frame proved insufficient …”
He submits that the word “for” does not appear in the clause, and that the judge’s insertion of the word “for” changes the meaning of the clause. The judge’s construction would admit of the possibility that the parties could negotiate for an extension of time, but fail to actually agree on an extension of time. He submits that that is not what the clause requires – on the proper construction, he submits,
“The parties were bound to agree on an extension of time if the initial two year period was insufficient.”
In other words, there must be an extension, the only matter to be negotiated and agreed being its length.
Mr Crowley further submits that the judge made a further error in para [84] in holding that the parties intended:
“… that they should have the opportunity to negotiate an extension if (but only if) at the end of the period rezoning had not been finalised and the likelihood was that it would be imminent …”
Mr Crowley submits that inclusion of the words “if (but only if)” is incorrect, and detracts from the mandatoriness of the obligation to (actually) agree an extension and to negotiate its length. Further, he submits that the judge has misunderstood how the provision that “the likelyhood [sic] of re-zoning being imminent” operates. In para [84] the judge regards “the likelyhood [sic] of re-zoning being imminent” as a necessary and sufficient condition for the negotiation occurring. On that construction, if rezoning is not imminent, then (as the judge held) there is no obligation to agree an extension and negotiate its length. Rather, Mr Crowley submits, the words “based on the likelyhood [sic] of re-zoning being imminent” is an attribute of the extension. That it is an attribute of the extension does not, he submits, detract from the absoluteness of the obligation to agree such an extension.
However, during the course of argument Mr Crowley tended to shift position. From submitting that the third sentence of clause (b) mandated an extension with the only matter to be negotiated being its length, his ultimate submission was that the parties and, relevantly, the Respondent, had an obligation to negotiate an extension even if that negotiation came to nought and no extension was agreed.
Mr Crowley also submits that, between them, clauses (c) and (d) provide an exclusive code as to the eventual ownership of the land in question. It is only “in the event of the re-zoning being unsuccessful” that clause (d) is triggered, and it is only pursuant to clause (d) that the respondent has any entitlement to have the interest of the Company in the Property transferred to him. At the time of the hearing in the court below the rezoning had not been approved, but processes towards it were still going on, so neither could it be said that the rezoning had been unsuccessful. As I understood his ultimate oral submissions, what he submits is the breach by the Respondent of his obligation to actually negotiate an extension, under the third sentence of clause (b) also assists in the conclusion that it is wrong to say that the rezoning has been unsuccessful.
An Assumption
There is still some unclarity about the circumstances in which a contractual obligation to negotiate can be enforceable. In Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 Kirby P (with whom Waddell AJA agreed) held that, while there was no general principle that a contract to negotiate in good faith was never enforceable, whether a particular contractual obligation to negotiate is enforceable is a matter of construction of the particular contract (see especially at 26-27). To similar effect is the decision of the Court of Appeal in Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 at 126-129 per Mason P, Beazley and Stein JJA. Neither in the court below, nor in the written submissions on the appeal did the legal representatives for the parties recognise, let alone explore, the relevance of the principles discussed in Coal Cliff Collieries v Sijehama and Australis Media Holdings to the present case.
In those circumstances, I shall proceed by assuming, without expressly deciding, that there is nothing inherently unenforceable about the third sentence of clause (b).
Decision
I do not accept the submissions that Mr Crowley puts concerning the construction of the Agreement. In my view, the question of whether the rezoning had been unsuccessful, and therefore whether clause (d) operated, needs to be decided within the frame of reference of the Agreement itself.
When clause (d) talks about “the re-zoning” it is talking about not just rezoning of the Property to Rural Residential, but rezoning within the parameters that the Agreement itself sets out. That rezoning is a rezoning that has either been “finalised” within two years, or within such longer period as might arise under an extension arrived at pursuant to the final sentence of clause (b).
It appears on the evidence that neither the Appellant nor the Respondent made any attempt to negotiate an extension of the two year period. Whether the failure of the Appellant to seek to negotiate an extension disentitles him from relying upon any failure of the Respondent to even try to negotiate an extension was not explored in the argument, so I put that consideration to one side: cf Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 440-443; Hunyor v Tilelli (1997) 8 BPR 15, 629 (NSWSC).
On the assumption of enforceability of the final sentence of clause (b) that I am making, it is clear that, as at 1 November 2006, the precondition for the operation of that sentence (“[i]f this time frame proves to be insufficient …”) had been satisfied. Considered just as a piece of language, there is syntactic ambiguity in the words “the parties agree to negotiate an extension based on the likelyhood [sic] of re-zoning being imminent”. The ambiguity concerns whether “based on the likelyhood [sic] of re-zoning being imminent” is an adjectival phrase that describes “extension”, or is an adverbial phrase that qualifies “negotiate”.
I do not think it matters which of these alternative constructions is correct. An “extension based on the likelyhood [sic] of re-zoning being imminent” was, in the events that actually presented themselves to the parties as at 1 November 2006, something that was impossible to negotiate, because in fact a rezoning was not imminent. Similarly, for the parties to attempt to “negotiate … based on the likelyhood [sic] of re-zoning being imminent” would be to carry out a negotiation on a basis that was factually incorrect in a fundamental way. Giving a commercial construction to the Agreement, a court would be very slow to conclude that the parties have agreed to carry out impossible tasks, or to engage in a negotiation on a basis that they both know is fundamentally incorrect and would therefore be futile, if another construction is open on the language of the agreement.
The “intention of the parties” to a contract is, when one is considering questions of construction, the objective intention that reasonable observers with knowledge of any surrounding circumstances would attribute to the parties from their words and actions: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at 179, [40]. When a reasonable observer would treat the contracting parties in this case as not intending to agree to a futility, or engage in a negotiation on a basis that fundamentally differs from reality, in my view the trial judge was right in finding that it was:
“… the intention of the parties that they should have the opportunity to negotiate an extension if (but only if) at the end of the period rezoning had not been finalised and the likelihood was that it would be imminent”.

Notwithstanding the attention given to the third sentence of clause (b) in argument, that sentence is relevant to the judge’s conclusion only insofar as it bears upon whether a rezoning has been “unsuccessful”, within the meaning of clause (d), thus triggering the obligation of the Company to transfer the Property to the Respondent. In my view if at the end of the two year period fixed by clause (b) the rezoning has not been achieved, and the only negotiation for an extension of time in which the parties could engage is a negotiation to achieve a result that was impossible to achieve, or a negotiation that is conducted on a basis that does not accord with reality in a fundamental way, then the rezoning has been “unsuccessful” within the meaning of clause (d). That is so whether or not the parties go through the pretence of carrying out such a negotiation. That is the situation here.
Orders
I propose that the appeal be dismissed with costs.
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LAST UPDATED:
3 June 2009