Mackie Group Pty Ltd v Reading Properties Pty Ltd
[2010] VSC 131
•16 April 2010
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 9121 of 2005
| MACKIE GROUP PTY LTD (ACN 006 524 456) | Plaintiff |
| v | |
| READING PROPERTIES PTY LTD (ACN 071 195 429) | Defendant |
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JUDGE: | BYRNE J |
WHERE HELD: | Melbourne |
DATES OF HEARING: | 18, 19, 22, 23 and 24 March 2010 |
DATE OF JUDGMENT: | 16 April 2010 |
CASE MAY BE CITED AS: | Mackie Group Pty Ltd v Reading Properties Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2010] VSC 131 (FIRST REVISION – 20.05.2010) |
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CONTRACT – Agreement to pay if a party to negotiations forms belief that building contract would not be agreed – whether belief may be formed when negotiations no longer on foot due to abandonment of the project – construction of agreement – whether agreement wholly in writing – matrix of facts as aid to construction – commercial purpose of agreement – whether sufficient notice of decision to terminate negotiations
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P. Bingham | Khor & Burr |
| For the Defendant | Mr M. Sifris SC, with Mr M. Wise | Minter Ellison |
HIS HONOUR:
Background
In this proceeding, the plaintiff, Mackie Group Pty Ltd, seeks to recover $1 million said to be due from the defendant, Reading Properties Pty Ltd, under an agreement entered into in May 1998. The circumstances may be shortly stated.
In 1995 Mackie Group entered into a Project Feasibility and Facilitation Agreement with the Public Transport Corporation (“PTC”) for the development of land adjoining the Frankston Railway Station for retail shops and multi-deck car parking. In general terms, the obligation of Mackie Group under this agreement was to prepare a scheme for the development of the railway land by 30 June 1996. For the term of this agreement Mackie Group had exclusive rights to the development.[1]
[1]Clause 3.2.
The feasibility work was not completed by the due date, which was from time to time extended until about May 1998.
During this three year period, Mackie Group became attracted to the idea of developing the land for a cinema complex and, for this purpose, entered into discussions with the Reading organisation; a United States based group which owned and constructed cinemas. The relevant Australian companies within this group were Reading Entertainment Australia Pty Ltd (formerly called Reading Australia Pty Ltd) and Reading Properties.
The business of the Mackie organisation was that of developers of land, architectural designers and building contractors. Within the organisation, Mackie Group carried out the development work, Mackie & Staff Pty Ltd the building work, and MSM & Associates Pty Ltd the architectural work.
As the project enlarged and the cinema component became more significant, Reading Properties appears to have taken an increasingly active role in it. By heads of agreement dated 28 May 1997, Mackie Group and Reading Properties agreed to develop the project as joint venturers.
By 1998 the project structure had changed again. What was then agreed in principle, and with the approval of the PTC, was that Reading Properties should develop the project alone and that the role of Mackie Group should be that of design and construct contractor and later as construction contractor.
In early 1998 the details of this structure were still being worked out and a Development Agreement under which Reading Properties was to carry out the project was being settled. There was, however, a deadline, for the PTC required the contracts to be in place by the end of May 1998.
In May 1998 the parties entered into three contracts for the carrying out of the project.
First, the Development Agreement dated 28 May 1998 (“PTC Development Agreement”), was entered into between the PTC as principal and Reading Properties as developer. Mackie Group was also a party to this agreement for the purpose of assigning its rights in the development to Reading Properties.[2] The date for practical completion of the project was 28 May 2001. The works to be carried out under the PTC Development Agreement were certain works to the railway tracks and associated infrastructure, which were called the “PTC Infrastructure Works”, and the building work for the complex.
[2]Clause 18.
By cl 8 of the PTC Development Agreement, Reading Properties was entitled to subcontract any part of the works with a proviso that the subcontractor for the PTC Infrastructure Works had to be approved by PTC. It appeared from the evidence that PTC required that the PTC Infrastructure Works be carried out by its nominated subcontractor; the work could not be carried out by Reading Properties.
It will be apparent from this brief summary that this project structure required Mackie Group to relinquish two potential benefits which it enjoyed as sole developer or joint venturer. The first was the prospect of receiving profit from the completed project by way of income or capital if its interest were sold. The second was the benefit which might be obtained by Mackie Group or its associated building company carrying out the building work. It was, of course, possible that neither of these benefits would accrue if the project was not profitable as expected. There was the further possibility that Mackie Group or its associated building company would not have the capacity to carry out a project of this size or complexity, as some of the Reading Properties witnesses opined and which the Mackie Group witnesses rejected.
To address the first of these relinquished benefits, Reading Properties and Mackie Group entered into the second of the three agreements, a success fee agreement dated 21 May 1998. Broadly speaking, under this agreement, Mackie Group would become entitled to receive $400,000 if, following completion, the income stream from the project exceeded a certain figure.
The second of the relinquished benefits was that which might be gained from carrying out the construction. This was dealt with by the third of the agreements, an agreement between Reading Properties and Mackie Group dated 25 May 1998, referred to by counsel at trial as the “Negotiation Agreement”. It is this Negotiation Agreement which is the subject of this litigation and under which, upon the happening of certain events, Reading Properties agreed to pay $1 million to Mackie Group. This agreement is very short and I set it out in full:
Mackie and Reading will negotiate in good faith to agree on a construction agreement generally in accordance with the attached “Summary of Proposed Construction Agreement”.
Mackie and Reading agree that if either party believes that they are unable to agree the construction agreement, then it may notify the other in writing that it wishes to terminate further negotiations and upon such notice being sent then Reading will pay Mackie the sum of $1 Million within 21 days of notification in writing by either party, in satisfaction of all claims under this Agreement.
This Agreement in no way affects Mackie’s entitlement to the “Success Fee” which is subject to a separate agreement, of even date herewith.
In consideration of this Agreement Mackie and Reading agree to execute the PTC [Development] Agreement in its current form.
After the execution of the three agreements, the work of designing and advancing the project continued. By about November 2001, however, Reading Properties formed the view that the project was no longer profitable. In an internal memorandum dated 9 November 2001 Peter Jack Farrell, the Reading Development Manager, recommended that Reading Properties enter into an agreement with PTC terminating its involvement in the project. In due course, a Deed of Termination and Release was entered into, terminating the PTC Development Agreement as from 26 November 2001. Mackie Group was not a party to this Deed of Termination and Release. Reading Group did not at this time inform Mackie Group of its decision to terminate the project or of its entering into of this deed with PTC.
The project at the time of termination had not progressed to the stage of working drawings, no construction had commenced and no construction contract had been let, although negotiations had continued for some time between Reading Properties and Mackie Group as to the form and content of the construction agreement, and numerous drafts had been exchanged between the parties. These negotiations were affected by ongoing project design changes so that the contract could not be settled until the works themselves were settled. In this sense, the project, in one form or another, was on foot until the PTC Development Agreement was terminated in November 2001 and, from the perspective of Mackie Group, until it became aware of this termination.
Graham Duckitt, a director of Mackie Group, said that he first heard of the termination of the project in April or May 2002 when he was told of it by an employee of PTC. He said that in late June or early July 2002 he telephoned Mr Farrell about the matter, and that Mr Farrell confirmed that the project had been terminated but he refused to provide Mr Duckitt with a copy of the termination deed. In cross-examination, Mr Duckitt acknowledged that, when he learnt of this, he understood that there was no need to negotiate further the contract for the construction of the works; there were no longer any works to construct.
At this time there was in contention between Mackie Group and Reading Properties a claim by Mackie Group on behalf of an associated architectural company, MSM & Associates Pty Ltd, for about $30,000 for unpaid architectural design work. This claim had been pressed in the correspondence for some two years prior to June 2002 with Reading Properties contending that the work was not authorised so that no sum was payable for it.
Mr Duckitt said that in his telephone conversation with Mr Farrell in late June or early July 2002, he told Mr Farrell that he looked forward to receiving the outstanding fees for the architectural works and also the $1 million payable under the Negotiation Agreement. Mr Farrell, responded by letter dated 5 July 2002 informing Mr Duckitt that he had previously advised Reading’s views on these matters but, nonetheless, inviting Mackie Group to submit details of their claims.
Mr Duckitt said that, upon receipt of this letter and in the light of the earlier conversation, he formed the view that Mackie Group was unable to agree the construction agreement. He gave as reasons for this the fact that Reading Properties was no longer willing or able to proceed with the project and no longer willing or able to negotiate or enter into the proposed construction contract. I accept his evidence as to this.
Having formed this view in about July 2002, Mackie Group did not act upon it immediately. It was not until 16 January 2003 that its then solicitors, Bayside Solicitors, wrote to Reading setting out the work performed by Mackie Group in pursuance of the project and stating that their client intended to hold Reading to its contractual obligations pursuant to the Negotiation Agreement. On 25 March 2003, Ralph Mackie himself wrote to Mr Farrell in similar terms and provided the details sought in Mr Farrell’s letter of 5 July 2002.
These letters were followed by personal contacts by Mr Mackie, at first with Mr Farrell, and later, with James Joseph Cotter, the Chairman and CEO of the US parent, Reading International Inc. I accept the evidence of Mr Cotter that this latter meeting took place in July 2003.
In his evidence in relation to this July 2003 meeting, Mr Mackie said that Mr Cotter acknowledged that Mackie Group was entitled to the $1 million under the Negotiation Agreement. This was denied by Mr Cotter. What was not disputed however, is that throughout 2004, Mackie Group continued to seek payment of the $1 million. Its efforts in this regard appear in its letters to Reading dated 26 February 2004, 7 June 2004, 11 August 2004 and 9 November 2004. They also appear in the letters from the Mackie Group lawyers of 16 January 2003 and 22 December 2003. Throughout this period, Reading Group made no formal response to the Mackie Group demands for this payment.
Eventually, by letter dated 8 April 2005, Craig Tompkins, the Reading in-house US lawyer, responded rejecting the claims. In this letter Mr Tompkins states that the intention of the parties in May 1998 was that compensation under the Negotiation Agreement should be payable only where the project went ahead but with a contractor other than a Mackie Group company.
The Issues
There are in essence four live[3] issues raised in this proceeding:
1.Whether, upon its proper construction, compensation under the Negotiation Agreement, was payable in circumstances where the project did not proceed.[4]
2.Whether the Negotiation Agreement was discharged on or about 16 November 1999 by reason of changes to the manner of construction of the project.[5]
3.Whether the notice requirements of the Negotiation Agreement were complied with by Mackie Group.[6]
4.Matters relating to the Mackie Group misleading and deceptive conduct claim.[7]
[3]The contentions of Reading Properties in paragraph 26(e) of the defence and those of Mackie Group in paragraphs 2-13 of the reply were not pressed.
[4]Defence para 24.
[5]Defence para 25.
[6]Defence para 14.
[7]Statement of claim paras 18 – 23.
The Construction Point
The first issue here is to determine whether the Negotiation Agreement is wholly in writing, as Reading Properties contended, or partly in writing, partly oral and partly to be implied, as is pleaded in paragraph 7 of Mackie Group’s statement of claim.
It is common ground that the document came into existence as the last step in negotiations which had taken place in April and May 1998, principally between Mr Duckitt, on behalf of Mackie Group, and Jonathan Graeme Altson, on behalf of Reading Properties. At this time, and until June 2000, Mr Altson was a director of both the local Reading companies, and he was also the director of real estate for Reading Properties. Broadly speaking, in the negotiations he was responsible for the commercial aspects; the constructions aspects were in the hands of Peter John Axup, who was development manager until he, too, left the Reading organisation in late 2000.
As pleaded, Mackie Group’s position is that the Negotiation Agreement is contained in conversations between Mr Duckitt and Mr Alston and in a number of letters in addition to the document itself. The letters which were said to form part of the contract were dated 6 April 1998, 30 April 1998, 1 May 1998, 18 May 1988, 20 May 1998, and two letters dated 25 May 1998. Little, if anything was said of the allegation that the agreement or its terms were implied. Counsel for Mackie Group in his final address contended in the alternative that it was contained wholly in the document dated 25 May 1998, as counsel for Reading Properties argued. In this event, reliance was placed on the conversations and letters to which I have referred as the context or matrix in which the document should be construed. Accordingly, on any basis, I must consider these pre-contractual communications. And it is to these that I now turn.
I preface this by observing that the events occurred in 1998 – some 12 years ago. It appears that none of the witness retained a note of any conversation during the relevant period and there was a degree of uncertainty among them as to the precise sequence of the conversations, if not their dates. I observed each of the witnesses, Mr Mackie, Mr Duckitt, Mr Altson and Mr Axup as they gave their evidence. My impression is that each of them was doing his best to recollect the events which he described. They were honest witnesses. This is not, however, to say that their evidence was reliable. It was apparent that the passage of time and subsequent events had, in some respects, eroded or tended to distort their recollections. Their first account which I had in evidence dates from 2006, eight years after the events, in affidavits filed in a summary judgment application in this proceeding.
The point at issue in the varying accounts of these witnesses was a fine one. It is common ground that, in these conversations, it was agreed that the Mackie Group should have compensation if it was not awarded the construction contract which was then under negotiation. The controversy is whether it was agreed that the Mackie Group should receive this compensation where this occurred in circumstances where the project did not go ahead at all. It is the more difficult because all parties expected the project to go ahead. Because the point in issue is such a fine one, and because of the time that elapsed between the relevant events and giving of evidence by the witnesses, I lean heavily upon the contemporaneous documents.
It is convenient to start in April 1998 and in particular with a letter sent by the Mackie Group to Reading Properties on 6 April 1998. The letter documents the discussions that were on foot at the time between Mackie Group and Reading Properties regarding the cost of aspects of the project including the building work which was then to be carried out on a construct only basis. There is nothing further of significance in the Mackie Group letter of 6 April 1998.
At about this time, in early 1998 the companies within the Mackie Group were involved in design work for the project, for which they were being paid by Reading, and general preparatory work for the construction, for which they were not. Payment for this was expected to be recouped from the proceeds of the expected construction contract.
At about this time, too, in March or April of 1998 Mr Axup had told Mr Duckitt that Reading Properties, as prospective assignee of the development, wanted the ability to put the construction contract to competitive tender. This caused Mr Duckitt some concern. He was fearful that his company was being relegated from developer to the position of a prospective tender party. Mr Duckitt said that he accepted that this might occur and that he was concerned to protect his company’s interests in the event that it did not win the contract or in the event that the project did not proceed. The interests which he then sought to protect were that Mackie Group had invested a good deal of money in the preparatory work which it would not recover if it did not win the construction contract.
Accordingly, on 30 April 1998, Mr Duckitt sent to Mr Axup for execution, heads of agreement setting out a proposal for the terms of the construction contract. Under this document, Mackie Group reverted to a design and construct role with a date for commencement fixed at 1 October 1998. This contract contained in paragraphs 16 and 17 provisions to protect Mackie Group against risk.
Paragraph 16 conferred on Mackie Group the option of two remedies “If, for any reason, the building agreement is not entered into by Mackie and Reading on or by” an as-yet un identified ‘trigger date’. The two options available, at the election of Mackie Group, were as follows:
(i) that Reading Properties would reimburse Mackie & Staff for all project costs incurred plus a 10% margin, and that Reading Properties would pay Mackie Group the sum of $320,000; or
(ii) that Reading Properties would reassign the project to Mackie Group.
Paragraph 17 would prevent Reading Properties from exercising any rights under the PTC Development Agreement in a way which would adversely affect the interests of Mackie Group, unless:
(i) Mackie Group had given its approval for the exercising of such rights; or
(ii) Mackie Group had solely caused the circumstances giving rise to need for Reading Properties to exercise such rights.
It should be noted that the second of the options to be conferred by paragraph 16 would not be effective where the trigger event was only that the construction contract for the ongoing project had been let to another contractor.
This 30 April 1998 letter provoked a reaction from Mr Axup who saw in it changes to pre-existing arrangements which might disadvantage his company. Many of these changes are of no importance for present purposes. Those which are of significance are contained in paragraphs 16 and 17 to which I have referred.
It soon became apparent that reassignment was not an option. Nor was another Mackie Group suggestion that it step into the project in the event of default by Reading Properties. PTC would not agree to reassignment; Reading Properties would not agree to either course.
Upon receipt of the 30 April 1998 letter Mr Axup spoke by telephone with Mr Duckitt complaining of the fundamental alterations which Mr Duckitt had proposed in it, including those in paragraphs 16 and 17. Mr Duckitt said that, in this conversation, he insisted upon the insertion of terms such as those in his draft to protect his company if the parties had not agreed upon a building contract by a particular date. He told Mr Axup that if his proposed terms, or something like them, were not agreed to, Mackie Group would not enter the PTC Development Agreement. Mr Duckitt said that at some later stage he was told by Mr Axup that this was a commercial matter which he should take up with Mr Altson.
The following day, 1 May 1998, Mr Duckitt wrote a conciliatory letter to Mr Axup protesting that he did not intend to fundamentally alter their agreement. With respect to the contentious protective paragraphs he wrote this:
Clauses 14, 15 and 17[8] inclusive reflect the changed approach to the project and budgets, together with a proposed reassignment should Readings decide not to proceed for any reason with the proposed development.
Please understand by October this year we will have had a relationship with Readings for almost 2 years with no recompense for lost opportunities on this site. Whilst remaining positive and hopefully assisting to accommodate Readings move into the Australian market, we do not wish to be total losers should you not go ahead for reasons beyond our control.
Note that we deliberately left the “trigger” date blank to facilitate an initially acceptable time scale to these proposals.
[8]Mr Duckitt said this was intended to include a reference to paragraph 16 as well.
At an internal Reading meeting held on 5 May 1998 the question of the resolution of the building contract was discussed. Two options were considered. The first was to defer the execution of all the development documents until the construction contract was finalised; the second was to sign the development documents and to insert a penalty clause in favour of Mackie Group “in the event that Reading elected not to proceed with Mackie”. The second option was decided upon and Mr Alston was directed to take up the matter with Mr Duckitt and Mr Mackie. This is, of course, not said to be a contractual conversation or part of the matrix of facts.
After 1 May 1998 these matters as to compensation and the like were not included in the drafts of the summary building contract conditions. It was put by counsel on behalf of Reading Properties that this showed that their client rejected these clauses. I do not so conclude. What happened was that they continued to be discussed by Mr Alston with the Mackie Group directors as a separate agreement, as was the case with the success fee agreement.
Although redrafts of the building contract principal terms continued to be exchanged, there is little in the correspondence after 1 May 1998 dealing with the subject-matter of the Negotiation Agreement. Mr Alston simply said that the $1 million figure was agreed to. Mr Duckitt said that he explained to Mr Alston the position of Mackie Group that it should receive recompense for work done in the project and that Mr Alston accepted this. Mr Alston said he would talk to the United States office and come back with a proposal.
Nothing appears to have happened until 20 May 1998 when Mackie & Staff wrote to Mr Axup dealing with various aspects of the building contract terms. At the end of this letter the question of protecting the interests of Mackie Group was again raised. It was said that the deletion of paragraphs 14 – 18 of the 30 April 1998 letter remained unacceptable and that they were necessary to cover its exposure to nearly $1 million in losses. The letter then continued –
Based on this we require these clauses to be reinserted or alternatively John Alston has suggested that a new clause could be drafted that details a lump sum compensation we require should the project fail to proceed. We require a couple of days to calculate this sum.
On the same day Mr Axup made a file note recording that Mr Duckitt was waiting for Mr Alston to submit a form of agreement for lump sum compensation.
Soon after this[9] Mr Alston submitted a draft which was substantially[10] in terms of the agreement ultimately executed.[11] This document was prepared by Mr Tompkins, the United States in-house lawyer of the Reading organisation.
[9]The footer of the document bears date 21 May 1998.
[10]The differences between this and the executed document are minimal and of no present consequence.
[11]The document as executed is set out at para [14] above.
This draft provoked two concerns in Mr Duckitt and Mr Mackie. The first, and one of some significance for the present case, was that there was no trigger date – no date on which the agreement would operate if the construction contract had not been agreed. The second was the amount of compensation payable; Mackie Group wanted more than $1 million. Both concerns were put aside by Reading. Mr Alston said that the terms of the draft could not be changed without approval from the United States and this would cause an unacceptable delay. It does not appear that there was any concern about the terms of the second paragraph of the draft which dealt with the event upon which compensation should be payable. Mr Mackie said he expressed concern about the brevity and apparent informality of the document but that Mr Alston told him that the draft could not be changed. And so it was accepted.
By letter dated 22 May 1998 the Mackie companies confirmed that they would execute the agreements. I interpret this as a readiness to execute the PTC Development Agreement, the agreement as to the principal terms of the construction contract, the success fee agreement and the Negotiation Agreement.
The final drafts of these agreements, other than the PTC Development Agreement, were submitted by Mr Axup to Mr Duckitt at 2.10pm on 25 May 1998 with a covering fax reminding him that execution of them and the PTC Development Agreement was to take place at 5pm on that day.
Even at this late stage, there were letters sent on this date about the terms of the Negotiation Agreement. Mackie & Staff wrote a letter about a number of matters including its concern to “clarify that our understanding of $1 million compensation is that ‘a line is drawn in the sand’ at today’s date”. Mr Axup’s letter in response said of this concern “When $1 million becomes payable it shall be in satisfaction of all claims under this agreement or otherwise relating to the failure of the parties to agree upon and enter into a construction agreement”. The agreements were duly executed, probably on 25 May 1998.
I am satisfied that the Negotiation Agreement was intended to be reduced to writing and to be included in the single page agreement which the parties executed. The exchanges from 20 May 1998 to 25 May 1998 clearly show that Mr Alston insisted that this document constituted the contract and that, notwithstanding some misgivings, Mr Mackie and Mr Duckitt accepted this.
As I have mentioned, the dealings which I have summarised may provide material in aid of the construction of this contractual document. It may be convenient that I summarise their more important aspects.
First and foremost, all parties believed that the project would go ahead. Insofar as Reading Properties was concerned, its entering into of the PTC Development Agreement demonstrated this. Moreover, it had committed substantial sums in the project to date. Likewise, Mackie Group was committed to the project and it was keen to carry out the construction work. The fact that the Development agreement had as its commencement date 28 May 1998, with practical completion to be achieved within 36 months, further demonstrates that, as at 25 May 1998, the parties believed that the project would go ahead and that it would be immediately progressed.
As I have already mentioned,[12] there was a suggestion from Mr Axup in March or April 1998 that he wanted to put the construction work out to tender. This caused Mr Duckitt to have concern that the Mackie Group might not win the contract. It was this concern which provided a reason for his efforts to obtain protection against the prospect that, if this occurred, moneys already expended would be lost.
[12]See para 34 above.
Mr Duckitt, however, maintained that this was not his principal concern on this topic. He wanted protection if the project did not go ahead. Mr Mackie said that these were both matters of concern to him. In my estimation, the recollections of Mr Duckitt and Mr Mackie on this matter were affected by their knowledge of the events which followed. I am not prepared to find that in the discussions which took place in the last days before the Negotiation Agreement was entered into, any negotiator stated in terms that the $1 million compensation would be payable if the project did not proceed. The contemporaneous documentation shows that the risk which the negotiators sought in their discussions to avoid was the loss which would follow if the construction contract was not awarded to Mackie & Staff. This might occur in a number of circumstances including that where the project for some reason was abandoned before the construction contract was agreed and entered into. They wanted to have an entitlement to compensation if, for any reason, they failed to win the contract, giving them a $1 million advantage over any other tenderer and, if they were unsuccessful, a right to recompense for expenses lost.
References in the earlier letters of 1 May 1998 and 20 May 1998, such as “should Reading decide not to proceed for any reason with the proposed development” were made at a time when reassignment was considered an option. It would only be in such a circumstance that reassignment would be commercially feasible. In terms of establishing the matrix of matters known to the parties, I conclude that one such matter was the acknowledged concern that Mackie Group would suffer a significant loss if its company was not the contractor. This is what had been discussed between the parties; it was the principal commercial objective of the Negotiation Agreement known to both the negotiating parties.
It was, of course, known to the parties that the terms of the construction contract and its price were not finally settled and that the implementation of the development program would require them to be resolved soon. Until this was achieved, the bargaining position of Mackie Group was weak. It was for this reason that the parties agreed to negotiate in good faith. This and the good relationship which existed between the negotiating parties was an important factor. This is apparent from the Mackie Group letter of 22 May 1998.
I turn now to the text of the Negotiation Agreement itself and the question of whether the agreement was capable of operating in circumstances where the project did not proceed.
I preface my remarks with the observation that the document, although drawn by a lawyer, appears to be in fairly informal terms. The precise parties to it are not clearly identified and the terminology is not that of a formal legal document. I approach it as an informal commercial agreement placing emphasis upon its commercial purpose and context as well as upon its text.
The first paragraph contains an obligation on both parties to negotiate the construction agreement in good faith.
I set out the important second paragraph again:
Mackie and Reading agree that if either party believes that they are unable to agree the construction agreement, then it may notify the other in writing that it wishes to terminate further negotiations and upon such notice being sent then Reading will pay Mackie the sum of $1 Million within 21 days of notification in writing by either party, in satisfaction of all claims under this Agreement.
It is clear enough that there are two requirements to be satisfied. The first is the forming of a belief by either party that it is “unable to agree the construction agreement”. In this case, Mr Duckitt said, and I accept, that he formed this belief in late May or early June 2002 when he spoke to Mr Farrell. The second is the giving of notice in writing by that party that “it wishes to terminate further negotiations”.
Counsel for Reading Properties contended that this first requirement must be read in light of the second. Therefore the belief that the parties were unable to agree needed to be formed whilst negotiations were actually on foot. This necessarily meant that the compensation provisions of the Negotiation Agreement could not operate in circumstances where the project did not proceed because, once the project was terminated, it was a nonsense for a party to state that it wished to terminate further negotiations; there were no negotiations then to terminate. The requirements of the Negotiation Agreement could not possibly have been satisfied in May or June 2002, when Mr Duckitt spoke to Mr Farrell, because the project had already been abandoned some six months before. In the alternative, they argued that the pre-contractual discussions indicated that the Mackie Group entitlement to compensation arises where the project proceeds, but with another builder. In resisting these contentions, counsel for Mackie Group relied upon the text and provenance of the agreement.
Turning first to the text, the Negotiation Agreement does not expressly state that it will not operate if the project does not proceed at all. Equally, it does not expressly state that it is intended to cover only the situation where the project proceeds, but with a builder other than a Mackie company. Finally, it does not, in terms, state that the requisite belief must be formed at a time when negotiations are actually on foot. Any such limitation upon its application must therefore be found by implication from its terms. Counsel for Reading Properties did not shrink from this. They said that such an implication is to be drawn from the two requirements in the second paragraph. Each contemplates that, at the time of forming to belief and the giving of the notice, the building contract was still under negotiation.
It is common ground that in the pre-contractual discussions an, if not the only, important concern to which the Negotiation Agreement was directed was the prospect that the building contract would not be given to the Mackie company, perhaps after a tender process. Let it be assumed that this in fact occurred. When the contract is awarded to the competitor, it cannot be said that negotiations between Mackie Group and Reading Properties are still on foot. It is a little unreal for Mackie Group then to form a belief that “they are unable agree the construction contract”. It is even less real for it to give a notice that “it wishes to terminate further negotiations”. It must be accepted that the Negotiation Agreement must be construed to give effect to its commercial purpose. Notwithstanding the unrealities involved, it must be construed to permit the forming of the belief where, in the supposed circumstance, negotiations are no longer on foot and to permit the giving of a notice to terminate those negotiations.
Consider the situation of a drawn out set of negotiations, involving periods of productive discussions, intermingled with periods of stalemate and inactivity where negotiations at times cease entirely. During these stalemate periods, there is always the possibility that negotiations will recommence but there is no guarantee that this will occur. It is possible that, during one of these stalemate periods, one party could properly form a belief capable of satisfying the first requirement of the Negotiation Agreement notwithstanding that there were actually no negotiations then on foot. This is one of several situations in which the Negotiation Agreement was intended to operate and, it would seem, the position in this case, at least until the project was terminated.
Moving to a scenario closer to the facts of this case, let it be supposed that in 2000 or thereabouts Reading Properties began to have doubts about the viability of the project. It then explored the options available, including that of abandoning the whole project. It did not disclose this to Mackie Group, simply suspending the negotiations about the construction contract because it was not at all certain that the construction would take place. Let it be supposed that, contrary to the facts of this case, Mackie Group becoming dissatisfied with the lack of progress in the negotiations, formed the necessary belief and gave the notice as specified in the Negotiation Agreement. In such a case, if the contention of counsel for Reading Properties be correct, its attempt to implement the Negotiation Agreement would be ineffectual by reason of the fact that, unbeknown to it, the negotiations were no longer on foot.
Taking the facts one step closer to the present, let be assumed in the circumstances set out in the preceding paragraph that, having explored options available, Reading Properties decided to terminate the project and did so. Assume too, that Mackie was not aware of this but that when it became aware, it formed the belief and gave the notice. Again, it was the contention of Reading Properties that its attempt to implement the Negotiation Agreement would be ineffectual by reason of the fact that negotiations were no longer on foot and the further fact that the project itself was no longer on foot. The response to this scenario of counsel for Reading Properties was simply that this was an unfortunate consequence of the terms of the contract which the parties had agreed to; it was regrettable that the Negotiation Agreement did not provide Mackie Group with the compensation which at the time of contract all parties would have accepted as its commercial objective.
Indeed, upon the construction of the Negotiation Agreement offered by Reading Properties it is difficult to see how the entitlement to compensation might arise other than the case where the ongoing negotiations for the construction contract appeared to be so protracted that one or other of the parties decided to abandon them. Given that the loosely drawn terms of the document do not compel this result and, indeed that it would be achieved only by the implication from its terms of a limitation upon its application, I cannot accept that it is a correct interpretation of the document. I conclude that, as a matter of construction, the Negotiation Agreement does provide for compensation where its procedures are put in play where the building contract had not been agreed and where, for some reason, the negotiations are suspended or no longer on foot.
The requirement for giving of notice that a party “wishes to terminate further negotiations” does not necessarily detract from this conclusion. This second requirement should be seen as relating to the form and content of the notice that must be given once the first requirement is satisfied.
The terms and objectives of the Negotiation Agreement show that attention must be directed to whether a party has formed a belief as to an inability to agree, rather than to the cause of that inability or as to when it occurs. It is sufficient that, having regard to the obligation of good faith imposed by the first paragraph of the agreement, this belief is genuinely and reasonably formed. There is no warrant to impose further limitations upon the operation of the second paragraph such as the submission put on behalf of Reading Properties would require.
I conclude that the belief formed by Mr Duckitt in late May or early June 2002 was sufficient to satisfy the first requirement of the Negotiation Agreement, despite the fact that the negotiations were no longer on foot because the project had been already terminated.
The Discharge Point
The second issue in this proceeding is whether the Negotiation Agreement was discharged on or about 16 November 1999 by reason of changes to the manner of construction of the project.
The construction of the development was initially to be carried out under a single stage approach and under a single construction agreement. On or about 16 November 1999 the parties agreed to carry out the work in two stages rather than one, and that a separate construction agreement would be used for each stage. This change, it was pleaded by Reading Properties, discharged the Negotiation Agreement because of the inconsistencies between the requirements of the Negotiation Agreement and the agreed two-stage approach. I say immediately that I do not find this to be the case.
The Negotiation Agreement is particularly general in its terms and it certainly does not contain any specific reference to a single stage procurement method. Furthermore, at the time the Negotiation Agreement was signed there remained considerable uncertainty as to the precise scope and nature of the project works. As such, it must be assumed that the Negotiation Agreement was intended to apply to what would be an evolving project scope.
As the project progressed after 25 May 1998, it became apparent that the PTC Infrastructure Works would need to be completed prior to the commencement of the other work for the complex. As I have mentioned, it was a requirement of PTC, accepted by both of the parties to this proceeding that the PTC Infrastructure Works would be carried out by a PTC approved contractor, perhaps as a sub-contractor to Mackie & Staff. Whether this should be done as part of the development project under the single contract or under a separate contract is not a matter of significance and the evidence did not show otherwise. In these circumstances, and in light of the general and non-specific nature of the Negotiation Agreement itself, it can hardly be said that the agreement was incapable of applying to a two-stage construction method.
It was suggested in argument that the discharge could arise only by the agreement, express or implied, of the parties to vary or discharge the Negotiation Agreement by reason of the change in the works. No such contention was pleaded and there was no evidence which would warrant such a conclusion.
I reject Reading Properties’ argument that the Negotiation Agreement was discharged on this basis.
The Notice Point
There are two aspects of this part of the Reading Properties case. The first is whether the notices relied upon by Mackie Group complied with the formal requirements of the Negotiation Agreement; and second the effect of its delay in giving such a notice.
I again set out the second paragraph of the Negotiation Agreement:
Mackie and Reading agree that if either party believes that they are unable to agree the construction agreement, then it may notify the other in writing that it wishes to terminate further negotiations and upon such notice being sent then Reading will pay Mackie the sum of $1 million within 21 days of notification in writing by either party, in satisfaction of all claims under this Agreement.
Clearly, if Mackie Group failed to comply with this notice requirement, Reading Properties’ obligation to pay the $1 million would not arise.
It was pleaded by Mackie Group that it did notify Reading Properties that it wished to terminate further negotiations and that this notice was constituted by a letter dated 22 December 2003, alternatively by a letter dated 15 June 2005, or alternatively by a letter dated 29 July 2005.[13] The position of Reading Properties, as it emerged in argument is that the first two notices did not comply with the formal requirements of the Negotiation Agreement and that none was given at a time when it could be effective to give rise to the obligation to pay the compensation.[14]
[13]Statement of Claim, para 14,
[14]Defence para 14.
The following issues arise as a result of this pleading:
(a) did the form and content of one or all of these letters comply with the requirements of the Negotiation Agreement; and, if so,
(b) were the notice or notices served at a time when they could be effective.
The relevant requirement of the Negotiation Agreement is that the notice be in writing and that it be a notice that the party “wishes to terminate further negotiations”.
The first letter dated 22 December 2003 was sent to Reading Properties by Bayside Solicitors, who were Mackie Group’s solicitors at the time. The letter refers to several issues in relation to the project, and it contains a number of demands and assertions apparently relating both to the long outstanding demand for payment of architectural fees as well as the $1 million compensation claim. It does not contain the words “Mackie Group wishes to terminate further negotiations”. It appears to have been prepared on the basis that the required notice had already been given, for it deals in essence with reasons why the claims for the fees and compensation were not unreasonable. It ignores the fact that different companies within the Mackie organisation were claimants and also the correct identity of the relevant Reading company. It appears to have been directed to the moral rather than the legal obligations of the Reading organisation. It commences with the following:
Firstly, we note that the conditions precedent to the Agreement have been met. We also note that Readings have been previously put on notice as to the payment of $1 million. The Agreement contemplates that the payment must be made within 21 days of such notification in writing. Whilst no default interest rate was specified in the Agreement we would certainly contend that there is a basis for a claim for default interest under the Penalty Interests Act on the basis of the notification we have previously provided. Our client says that the $1 million is payable and we say that for a number of reasons.
The letter then went onto set out work performed by Mackie Group for which payment was sought.
Counsel for Mackie Group argued that the letter would be effective, regardless of the actual words used, so long as it had the effect of conveying that Mackie Group wished to terminate negotiations and be paid the $1 million. Accordingly, reliance was placed on the presence in the letter of the words “the conditions precedent to the Agreement have been met”. Whilst these were not the words specified in the Negotiation Agreement itself, they were nevertheless the same in effect. Further, counsel for Mackie Group argued that the letter, viewed in its entirety, should properly be construed as a demand for payment. Taken together, it was said that these two factors were sufficient to satisfy the notice requirements contained within the second paragraph of the Negotiation Agreement.
On behalf of Reading Properties it was submitted that the notice was ineffective for a number of reasons. First, the notice could only be effective if it used the precise terminology set out in the second paragraph of the Negotiation Agreement, and that the letter of 22 December 2003 did not even come close to using that formula. Secondly, the notice was addressed to the incorrect entity; it was addressed to a perhaps non-existent company, Reading (Australia) Pty Ltd, rather than to the contracting party, Reading Properties or Reading Entertainment Australia Pty Ltd.
I do not find that this second point, of itself, precludes the 22 December 2003 notice from being effective. The Negotiation Agreement itself demonstrates that the parties did not have much sensitivity as to the difference between Mackie Group and Mackie & Staff. Furthermore, the correspondence between the parties throughout the project, particularly in the lead up to the execution of the Negotiation Agreement, suffered from the same vice. In any case, the letter is primarily addressed to Mr Farrell, who fulfilled the role of Reading Properties’ development manager, and who had extensive involvement in the project on behalf of Reading Properties after February 2000 and in the correspondence with respect to the $1 million compensation claim. His letter of 5 July 2002 rejecting the initial claim for payment was written on the letterhead of Reading Entertainment Australia Pty Ltd. In the correspondence about this time letters to and from the Reading organisation were sent by or to Reading Australia or Reading International without very much regard for the niceties of corporate identity. In these circumstances, it can hardly be said that such a minor slip in the 22 December 2003 letter should, of itself, prevent Mackie Group from recovering any compensation to which it might otherwise be entitled.
As to the other issue, I agree with counsel for Mackie Group that the notice need not be in the precise terms of the second paragraph the Negotiation Agreement. It is sufficient that the terminology adopted be such as would convey to a recipient familiar with the agreement that the giver of the notice wished, in terms of the negotiations agreement, to terminate further negotiations regarding the construction contract.
Notwithstanding this, I am unable to conclude that this letter, or any part of it, satisfies the requirements of the second paragraph of the Negotiation Agreement. I find that the letter of 22 December 2003 is not in form an effective notice.
I turn now to the second letter, which was dated 15 June 2005. Like the 22 December 2003 letter, this letter was sent by Bayside Solicitors to Reading (Australia Pty Ltd). It incorporates by reference, all that was said in the 22 December 2003 letter. It also contains clear demand for payment of the $1 million within 14 days and states that legal proceedings will be commenced if the demand is not satisfied. Nevertheless, it does not cure the formal deficiencies of the earlier letter and cannot itself not amount to a valid notice under the Negotiation Agreement.
The third and final notice letter is dated 29 July 2005. This letter was sent to Reading Properties by Khor & Burr Solicitors, whom Mackie Group had engaged to replace Bayside Solicitors sometime in late June or July of 2005. It incorporates by reference, all that was said in the 22 December 2003 and 15 June 2005 letters and it uses the precise words of paragraph two of the Negotiation Agreement, namely, that “we formally notify Reading Properties that Mackie believes that the parties to the agreement are unable to agree the construction agreement and it accordingly notifies Reading Properties that it wishes to terminate further negotiations”. The letter also makes a demand for payment of the $1 million within 21 days and states that Mackie Group has briefed counsel and that it will commence proceedings after the 21 day period if payment is not received. This letter is good in form.
The next point taken is a short one and one which picks up the fundamental contention of the Reading Group in this proceeding. The notice was given on 29 July 2005, some three years after Mackie Group formed its belief that the construction agreed would not be agreed. It was not contended by that that there was some time within which the notice must be given or that the three year delay rendered the notice for some reason ineffective. As to these matters, I express no view. Reading Properties pleaded that there had been by reason of delay some waiver or abandonment by Mackie Group of its rights to recover compensation. As I indicated in argument, this is a difficult contention, if only because it is clear from the correspondence that, despite its failure to give a formally valid notice for three years, Mackie Group pressed its claim for payment of the $1 million compensation. The short point taken was that notice could not be given at a time when the negotiations were no longer on foot. Such a contention does not depend upon the passage of what is an extraordinary period from the time that the right to give the notice first arose. The argument would be available if Mackie Group had given an notice immediately after forming the requisite belief in July 2002.
The point, therefore, is related to the argument which I have already rejected. This is the contention that the entitlement of Mackie Group to compensation under the Negotiation Agreement is not available once the negotiations for the construction agreement are no longer on foot or where this is because the project has been terminated. If, as I have concluded, the entitlement was available in these circumstances, it is difficult to mount an independent argument that a notice cannot be then given to trigger this entitlement. Accordingly, I reject the contention that a notice could not have been given after the negotiations for the construction contract had ceased to be active.
The Misleading and Deceptive Conduct Claim
I can deal shortly with the claim based on false and misleading representation by Reading Properties. What is alleged here is that, in the discussions leading to the making of the negotiation agreement, Reading Properties stated to Mackie Group that the second paragraph of the Negotiations Agreement was applicable if the contemplated development did not proceed. I am not prepared to find that such a representation was made about the effect of the negotiation agreement. The document was not produced until perhaps 21 May 1998[15] and, after that date, nothing was said as to its legal effect in the event that the project did not proceed. Any previous mention of the events which might give rise to a right of compensation was overtaken by the production and execution of the document which the parties accepted as constituting their agreement.
[15]See para [46] above.
I conclude that Reading Properties did not contravene the Trade Practices Act s 52 as the statement of claim alleges.
Admissions
At trial counsel for Mackie Group sought to place reliance upon the evidence of informal admissions as to liability by senior executives of Reading Properties. It appeared that in the internal Reading budget papers for the project, a cost of walking away from the project included the $1 million compensation payable to Mackie Group. This budget provision was made at least up to 12 July 2000. Thereafter, the position was taken that the negotiation agreement would not apply if the project was abandoned. Mr Mackie gave evidence that in separate discussions with Mr Cotter in 2003 and with his daughter Ellen Marie Cotter, in 2000, they acknowledged to him that the $1 million compensation would be payable. Both Mr Cotter and Ms Cotter denied the statements attributed to them.
Mr Mackie spoke of two conversations with Ms Cotter, on during a visit to the site and at his office in Frankston in or about July 200 when the project was still on foot. On each occasion, in the course of a discussion about the design changes which were under consideration she told him not to be concerned as “ she understood that Mackie were getting $1 million for the site whatever happened”. Although, in my estimation, Ms Cotter downplayed her role in the Reading organisation, I am not prepared to find that she made the statement as alleged. I so conclude because Mr Mackie’s recollection of it was found to be uncertain in some respects. In any event the evidentiary value of such a statement is very limited. Ms Cotter, of course, had no involvement in the negotiating of the Negotiation Agreement. She could not be talking about any discussion at that time to the effect alleged. If her statement were the result of her reading the Negotiation Agreement or from information by someone else about this document it would not assist me in determining what the document means.
The words which Mr Mackie attributed to Mr Cotter may stand in a different light. They were uttered at a time when the project had been terminated and at a time when there was claim for payment of the compensation to which no response had been given. As such, it might amount to an admission of liability by Reading Properties. I accept the evidence of Mr Cotter denying the statement attributed to him. It is inherently improbable that he would have made any such concession in 2003, at a time when the his organisation had taken the position that Mackie Group had no entitlement to this money.
Conclusion
I conclude, therefore, that the claim of Mackie Group for payment of $1 million compensation under the Negotiation Agreement has been made out. This has the consequence that there should be judgment for this sum plus interest plus costs. I will hear counsel further as to the terms of the judgment which is to be given to give effect to this conclusion.
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CERTIFICATE
I certify that this and the 26 preceding pages are a true copy of the reasons for Judgment of Byrne J of the Supreme Court of Victoria delivered on 16 April 2010.
DATED this 21st day of May 2010.
Associate to Justice Byrne
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