Manning Motel Pty Limited v DH MB Pty Limited
[2013] NSWSC 1582
•01 November 2013
Supreme Court
New South Wales
- Amendment notes
Medium Neutral Citation: Manning Motel Pty Limited v DH MB Pty Limited [2013] NSWSC 1582 Hearing dates: 8, 9 October 2013 Decision date: 01 November 2013 Jurisdiction: Equity Division Before: Lindsay J Decision: Direct that the plaintiff bring in Short Minutes of Orders giving effect to these Reasons for Judgment, providing for entry of judgment against the first defendant in the sum of $76,160.00 and against the second defendant in the sum of $156,607.20.
All questions relating to orders for pre-judgment interest and costs reserved for further consideration.
Catchwords: CONTRACT - Collateral Contract - Validity - Tripartite Collateral Contract - Whether consistency between collateral and principal agreements required - Finding of collateral contract requires that a representation made as an inducement to enter the principal contract to be intended as a promise
CONTRACT - Collateral Contract - Contract Collateral to a Lease does not necessarily have to be in, or evidenced by, writing notwithstanding a statutory requirement that the Lease be in, or evidenced by, writing.Legislation Cited: Civil Procedure Act 2005 NSW)
Conveyancing Act 1919 NSW, s 23C, s 54A
Statute of Frauds provisions of ss 36C and 54A of the Conveyancing Act 1919 NSW
Evidence Act 1995 NSW
Real Property Act 1900 NSW
Uniform Civil Procedure Rules 2005 NSW, r 35.2Cases Cited: Accounting Systems 2000 (Developments) Pty Limited v CCH Australia Limited (1993) 42 FCR 470 at 505
Beaton v Moore Acceptance Corporation Pty Ltd (1959) 33 ALJR 345
Campbell v Backoffice Investments Pty Limited (2009) 238 CLR 304 at 322 [34]-[36]
Cutts v Buckley (1933) 49 CLR 189 at 197-198 and 201-202
CJ Grais & Sons Pty Ltd v F Jones & Co Pty Ltd [1962] NSWR 22 at 28 (1961) 62 SR (NSW) 410 at 416 and (1961) 78 WN (NSW) 955 at 959
Dobbs v National Bank of Australasia Limited (1935) 53 CLR 643 at 650-654)
Drummond and Rosen Pty Ltd v Easey (No 2) [2013] NSWCA [2009] NSWCA 331
Equuscorp Pty Limited v HGT Investments Pty Limited (2005) 218 CLR 471 at 483 [33]-484 [36]
Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217 at 240-241
Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1 at 5, 6, 11
Gillfillan v Australian Securities and Investments Commission (No 2) [2013] NSWCA 143 at [33]-[40]
Hoyt's Proprietary Limited v Spencer (1919) 27 CLR 133 at 139 and 147-148
JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 at 442
Lahoud v Lahoud [2006] NSWSC 126 at [91]
Leda Pty Ltd v Weerden (No 2) [2007] NSWCA 283
Leipner v McLean (1909) 8 CLR 306 at 314
Maybury v Atlantic Union Oil Company Limited (1953) 89 CLR 507 at 517
Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234 at 256 and 263-268
Shepperd v Ryde Municipal Council (1952) 85 CLR 1 at 12-14
Symons and Co v Buckleton [1913] AC 30 at 49-51
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at 285-286 [13]
Toll [FGCT] Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at 177 [35]-183[50]
Wright v Madden [1992] 1 Qd R 343 at 347-348 and 349
Zhu v Treasurer of NSW (2004) 218 CLR 530 at 574-575 [128]Texts Cited: JW Carter, Contract Law in Australia (Butterworths, Aust, 6th ed, 2013), para 10.14 (p 219)
OW Holmes Jnr, The Common Law (little Brown & C o, Boston, 1881), pp 299-303
OW Holmes Jnr, "The Path of the Law" (1897) 10 Harvard Law Review 457 at 462
Cheshire and Fifoot's Law of Contract (10th ed, 2012)Category: Principal judgment Parties: Plaintiff: Manning Motel Pty Limited ACN 132 265 457
First Defendant: DH MB Pty Limited ACN 128 786 112
Second Defendant: DHBI Pty Limited ACN 128 786 158
Third Defendant: Matthew John DuffyRepresentation: Counsel:
Plaintiff: AP Cheshire
Defendants: L Tyndall
Solicitors:
Plaintiff: Goldrick Farrell Mullan
Defendants: MacKellars Lawyers
File Number(s): 2011/00410040
Judgment
INTRODUCTION
A Lease of the Manning Hotel, Bowral
Between September 2008 and 21 June 2013 or thereabouts the plaintiff, as lessee from the first defendant, occupied premises known as the Manning Motel at Bowral, New South Wales, and there operated the business of a motel.
It did so pursuant to a lease (executed by the plaintiff on or about 8 September 2008 but dated 16 September 2008), registered under the Real Property Act 1900 NSW, which provided for a term of 15 years commencing on 22 September 2008 and expiring on 21 September 2023.
Controversy attends the circumstances in which: (a) after negotiations between June-August 2008 or thereabouts, the plaintiff came to enter the lease in September 2008; (b) the lease was performed; and (c) the lease came to an end, in 2013, a decade before expiry of the agreed fixed term.
Pre-Lease negotiations
In negotiations for the lease the parties had (to put the point neutrally) discussions about the availability to the Manning Motel (colloquially described as "the Manning"), under the plaintiff's prospective management, of business (variously described as "overflow", "referral" or "guaranteed" business) emanating from another Bowral motel, The Briars County Lodge and Inn (colloquially known as "The Briars").
At all material times, The Briars was owned and operated by the second defendant.
At all material times the third defendant was the sole director and shareholder of both the first and second defendants, and was their controlling mind.
The plaintiff contends that it has an entitlement to compensation against one or more of the defendants arising from statements made to representatives of the plaintiff (the patriarch of the Gye Family, Mr Bill Gye, his daughter Julie and his son Steven) by a commercial property agent instructed by the defendants (Mr Ray Larkin) and the third defendant.
Each of these persons swore an affidavit in the proceedings.
Mr Gye Senior died earlier this year. His affidavit was read, notwithstanding his unavailability at trial, by reliance upon ss 62, 63 and 67 of the Evidence Act 1995 NSW or, alternatively, the Uniform Civil Procedure Rules 2005 NSW, r 35.2. Had he been available for cross-examination his evidence would have been the centre of attention, given his seniority in the conduct of the affairs of the plaintiff.
As events unfolded, neither his evidence nor his unavailability is decisive to the outcome of these proceedings. His version of events has been corroborated by the evidence of his (adult) children, Julie and Steven, and they have both been tested by cross examination. For convenience, and without disrespect, I refer to them as "Julie" and "Steven". In the conduct of the affairs of the plaintiff, Julie's principal duty was to manage the Manning after the plaintiff's entry into possession of the property; Steven's principal duty was to keep the plaintiff's books of account.
The plaintiff's claim for compensation arising out of pre-lease negotiations is pleaded as: (a) a claim for common law damages in contract for breach of a contract between the plaintiff and the second defendant alleged to be collateral to the lease; (b) a statutory claim for compensation for misleading and deceptive conduct, proscribed by commonwealth and state trade practices legislation, arising from essentially the same factual matrix; and (c) semble, a claim for equitable compensation arising from an alleged estoppel by representation in substantially the same terms as the alleged, collateral warranty advanced as the plaintiff's primary case.
The plaintiff's claim for compensation arising out of pre-lease negotiations can, and should, be dealt with by reference to the law of contract. Its alternative claims for relief add nothing to an analysis of its entitlements, save possibly that they might allow the plaintiff to recover compensation against the first and third defendants, as well as the second. However, the facts of the case fit neatly within a contract law paradigm, without attribution of misleading or deceptive conduct, or unconscientious conduct, to any of the defendants.
I am not prepared to find that the defendants' conduct was misleading, deceptive or unconscientious. That is because if, as I find, the alleged representations of the second defendant were in character promissory, neither the making of the representations nor subsequent events warrant an attribution to the defendants of wrongful conduct beyond a breach of contract, for which an award of damages against the second defendant is both the correct and an adequate remedy.
The mindset of the second defendant, personified in that of the third defendant, is reminiscent of Oliver Wendell Holmes' description (based, in part, on his reading of Lord Coke) of the obligation of a contracting party at common law: OW Holmes Jnr, The Common Law (Little Brown & Co, Boston, 1881), pp 299-303; OW Holmes Jnr, "The Path of the Law" (1897) 10 Harvard Law Review 457 at 462; Zhu v Treasurer of NSW (2004) 218 CLR 530 at 574-575 [128]; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at 285-286 [13]. On that view of the world, a contract may be characterised as a promise to perform or to pay compensation, at the election of the promissor.
Here, having made a promise to the plaintiff and (on the findings made in this judgment) bound itself in contract to perform the promise, the second defendant subsequently chose not to perform, with a consequential exposure to an award of damages. Characterisation of its conduct as wrongful focuses on the decision not to perform a contractually binding promise, not the earlier making of the promise.
In reaching that conclusion I acknowledge that a contractual statement may be capable, in some circumstances, of characterisation as "misleading and deceptive" for the purposes of trade practices legislation: Accounting Systems 2000 (Developments) Pty Limited v CCH Australia Limited (1993) 42 FCR 470 at 505; Campbell v Backoffice Investments Pty Limited (2009) 238 CLR 304 at 322 [34]-[36]; Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217 at 240-241. Here, however, the plaintiff alleges, in substance, that the second defendant made, and subsequently did not honour, a promise. That is essentially different from a misrepresentation about an existing fact, or a forecast constituting a representation as to future matter, enveloped in a promise.
The plaintiff's primary case is that, in consideration of its entry into the lease of the Manning offered by the first defendant, the second defendant (by the third defendant) orally warranted that it, as the operator of The Briars, would "purchase" from the plaintiff, as the operator of the Manning, accommodation of not less than $4,000 per month throughout the term of the lease.
The defendants accept that in oral negotiations for the lease the availability of custom for the Manning, from The Briars, was the subject of discussions involving, on two separate occasions, Mr Larkin and the third defendant. However, they deny that any promise was ever made by either man about the availability of business from The Briars, either in general or in dollar terms. In that denial lies a central dispute of fact.
In addition to their particular denial of the oral statements attributed to their representatives, the defendants assert three general defences.
First, they contend that the lease was intended to contain all of the terms and conditions upon which the plaintiff entered into possession of the Manning and (consistently with authorities such as Equuscorp Pty Limited v HGT Investments Pty Limited (2005) 218 CLR 471 at 483 [33]-484 [36] and Toll [FGCT] Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at 177 [35]-183[50]) the Court should be slow to find another, oral contract outside those terms and conditions.
Secondly, they contend that any oral contract alleged by the plaintiff must be held to be unenforceable for non-compliance with the Statute of Frauds provisions of ss 23C and 54A of the Conveyancing Act 1919 NSW.
Thirdly, they contend that the collateral contract alleged by the plaintiff is inconsistent with terms of the lease (clauses 2.1 and 4.1) requiring the plaintiff to pay a specified rent, including expenses, without set off or deduction and, accordingly, as established by authority (principally Hoyt's Proprietary Limited v Spencer (1919) 27 CLR 133 at 139 and 147-148, but also a long line of cases including Maybury v Atlantic Union Oil Company Limited (1953) 89 CLR 507 at 517, Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 5-6 and 11, and Equuscorp Pty Ltd v HGT Investments Pty Ltd (2004) 218 CLR 472 at 484 [36]), it cannot be legally effective.
In its rejoinder, the plaintiff accepts that the subject matter of the alleged collateral contract is not dealt with in the lease but also observes, correctly, that, unlike many modern leases, the current lease contains neither an "entire contract clause" nor a "non-reliance clause". Had it done, the plaintiff might have been forced to place greater reliance upon a claim to relief under trade practices legislation, where such clauses have less scope for operation: Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at 319 [27]- 321 [31]. As it happens, the lease contained no express acknowledgement that the terms and conditions it contained represented the entire agreement between the parties to the lease. Nor was there any disclaimer by the plaintiff in the lease of reliance upon oral representations made in negotiations leading to its execution.
More fundamentally, the plaintiff submits (and I accept) that a significant feature of the alleged collateral contract is that it is a contract said to have been made, not between the plaintiff and the first defendant (lessee and lessor respectively), but between the plaintiff and the second defendant, a third party.
The significance of this observation is twofold. First, there is no bright line rule of law that a collateral contract between a party to the principal contract and a stranger to the principal contract must be consistent with the terms of the principal contract. JW Carter, Contract Law in Australia (Butterworths, Aust, 6th ed, 2013), para 10.4 (at p 219) emphatically rejects any necessity for consistency in such a case. The Australian edition of Cheshire and Fifoot's Law of Contract (10th ed, 2012), at para 3.7, makes the same point by reference to CJ Grais & Sons Pty Ltd v F Jones & Co Pty Ltd [1962] NSWR 22 at 28 (also reported, with a reversal of the names of the parties, at (1961) 62 SR (NSW) 410 at 416 and (1961) 78 WN (NSW) 955 at 959) which, in turn, refers to Beaton v Moore Acceptance Corporation Pty Ltd (1959) 33 ALJR 345. A third party collateral contract is, or at least may be, different from a case in which a collateral agreement and a principal one are made between the same parties.
The so-called "rule in Hoyt's v Spencer", derived from a case involving common parties, without the presence of a third party, is largely grounded upon the proposition that there cannot logically be a collateral contract, the consideration for which is entry into a principal contract, where the two contracts cannot consistently stand together so that the provisions of the principal agreement remain in force and effect notwithstanding the collateral one. Hoyt's v Spencer says little, if anything, about a collateral contract between one of two parties to a principal contract and a third party.
The proposition that a collateral contract cannot be inconsistent with the principal contract (entry into which provides consideration for the collateral agreement) because the two agreements must be able to stand together must operate differently (if it operates at all) in the context of a tripartite collateral agreement than it does in the context of inter-related agreements between the same parties.
It may be that a court would not readily find, as a fact, a collateral contract made between A and B not to do X, made in consideration of B's entry into a principal contract with C to do X, but short of such a direct and fundamental contradiction there appears to be no logical necessity for a third party collateral contract to be consistent with a principal contract with a stranger to it.
Even if (as the defendants contend) the rule in Hoyts v Spencer were to have scope for operation in the current proceedings, there is nothing inconsistent between (on the one hand) a lease provision requiring a lessee to make rental payments and the like without deduction and (on the other hand) a warranty by another entity that, if the lease is entered, it will provide business to the lessee calculated to assist the lessee's due and punctual satisfaction of rental obligations.
Incidentally, I note, there is no complaint from the defendants (the first defendant in particular) that the plaintiff did not meet its rental obligations in a timely manner throughout the duration of the lease.
Secondly, the fact that a principal contract must comply with Statute of Frauds provisions in order to be enforceable does not necessarily mean (and, in this case in particular, does not mean) that a contract collateral to it must also be in writing: Leipner v McLean (1909) 8 CLR 306 at 314; Wright v Madden [1992] 1 Qd R 343 at 347-348 and 349. The collateral contract alleged in these proceedings did not purport to create or dispose of an interest in land so as to come within s 23C of the Conveyancing Act, or to be a contract for the sale or other disposition of land or an interest in land so as to come within s 54A. Neither section operates to render the alleged collateral contract unenforceable.
The fate of the plaintiff's claim depends not on the propositions of law advanced against it by the defendants, but upon a question of fact: Did the second defendant make a contractual promise to the plaintiff as an inducement to it to enter into the lease?
If that question is answered in favour of the plaintiff, there appears to be no real contest as to the quantum of relief to which the plaintiff is entitled. Accounting evidence given by the plaintiff in support of its claim was not the subject of cross examination or any substantial challenge.
Performance of the Lease : Landlord's breach of repair covenant
The plaintiff contends that the first defendant, as lessor, failed to comply with its contractual obligation (under clause 8.1(c) of the lease) to keep the leased property in "a good state of repair and condition", with the consequence that it suffered damage.
The plaintiff's statement of claim alleges a breach of clause 6.2 of the lease, as well as a breach of clause 8.1(c); but, at trial, counsel for the plaintiff did not separately address the provisions of clause 6.2. That may be because: (a) clause 6.2 relates to a rental rebate during a period in which the leased property may have been, in whole or part, damaged or destroyed, substantially affecting the plaintiff's enjoyment of the property; and (b) the plaintiff's complaint, about the unavailability of a "manager's residence" at the property because a stairway to it fell into disrepair, fits more neatly within the terms of lease clause 8.1(c).
There is no dispute that, in their entry into the lease, the plaintiff and the first defendant, both objectively and subjectively, had it within their contemplation that that part of the property commonly known as "the manager's residence" would be available to the plaintiff for use by a resident manager of the motel.
The defendants contend that the fact that the plaintiff was able to use the manager's residence for storage precludes the plaintiff from success on its claim for damages, despite evidence (which I accept) to the effect that the stairway was hazardous to life and limb and that, by reason of its dangerous character, the plaintiff's manager (Ms Julie Gye) was compelled, in the interests of the safety of herself and her family, to find rental accommodation away from the property.
Termination of the Lease
The lease came to an end on or about 21 June 2013, upon the expiry of 12 months after service upon the plaintiff by the first defendant of a written notice (dated 21 June 2012) purporting to have been served by the first defendant pursuant to a contractual right of termination of the lease found in clause 20.
The plaintiff, having been served with the first defendant's notice, vacated the property in conformity with an implicit demand in the notice for delivery up of vacant possession at the time of expiry of the notice period.
Clause 20 conferred upon the first defendant, as lessor, a contractual right of termination in the event that the leased property was "genuinely required for the purpose of demolition, redevelopment or renovation by the landlord".
The plaintiff contends that: (a) the first defendant was not entitled to rely upon clause 20 because it did not "genuinely require" the property for the stated purpose; (b) the first defendant's service, and enforcement, of the notice asserting otherwise constituted conduct on the first defendant's part amounting to a repudiation of its obligations under the lease, which repudiation the plaintiff accepted (upon its vacation of the property) as putting an end to the lease, entitling it to loss of bargain damages for the unexpired term of the lease.
THE PLAINTIFF'S COLLATERAL CONTRACT CLAIM
The plaintiff's claim to damages for breach of an alleged collateral contract depends on findings of fact as to: (a) what was said in negotiations for the lease; and (b) the intention of the parties evidenced by their words and conduct.
The defendants accept that something was said, giving rise to some form of agreement, about the second defendant (as owner and operator of The Briars) referring to the plaintiff, as the operator of the Manning, custom that could not be serviced by the limited accommodation available to The Briars, a thriving business.
The third defendant accepted, in cross examination, that, having offered the plaintiff The Briar's overflow customers, he felt under an obligation (albeit, he said, it was an obligation arising "in the spirit of goodwill") to refer such customers to the Manning: transcript pp 129-130.
The defendants accept that, whatever was said or agreed giving rise to a sense of obligation in the third defendant, it was said and agreed in the course of negotiations leading to the plaintiff's decision to enter the lease proffered to it by the first defendant.
Objectively, whatever was said or agreed by or on behalf of the defendants was intended by them to operate (and it did in fact operate) as an inducement to the plaintiff to enter into the lease. Without that inducement the plaintiff would not have entered the lease.
The fact that a pre-contractual representation was intended to operate as an inducement to the representee to enter a contract does not, of itself, justify characterisation of the representation as "contractual". For that step to be taken, the Court must be satisfied that, objectively, the parties intended the representation to be promissory in character: Cutts v Buckley (1933) 49 CLR 189 at 197-198 and 201-202 and Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1 at 5, both citing Heilbut, Symons and Co v Buckleton [1913] AC 30 at 49-51; JJ Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 at 442.
In any event, a focus for attention is, primarily, on the parties' dispute about what was said and agreed.
The evidence on the plaintiff's side of the record is to the following effect:
(a) On or about 10 June 2008 Mr Gye Senior, his daughter Julie and his son Steven met with Mr Larkin at the site of the Manning, in the course of which the Gye Family (representing the plaintiff) expressed concerns about the viability of prospective business operations at the Manning (yet to be re-established after closure of the motel for renovations effected by the defendants) and Mr Larkin said words to the following effect:
"In addition to [income figures set out in the agent's Listing Details sheet] The Briars will purchase at least $60,000 per year in accommodation from the Manning for their overflow and maybe a lot more.... The Briars and the Manning are inextricably linked. The Manning should not be considered as a stand-alone business. The Manning operates to satisfy the accommodation needs of The Briars Convention Business and without such convention accommodation business to send to the Manning, the owners would not be opening it. The $60,000 in trade that The Briars will send the Manning is guaranteed".
(b) On or about 11 June 2008 Mr Gye Senior had a telephone conversation with Mr Larkin to the following effect:
Mr Gye said: "Where does this figure of $60,000 room sales from The Briars you mentioned... come from? It's not in your income assessment [in the Listing Details Sheet]".
Mr Larkin said: "The directors of the Briars [sic] have each told me to make this offer known to all enquirers to the Manning Lease".
Mr Gye said: "Did they tell you this when they were together?"
Mr Larkin said: "Each one told me this separately".
(c) On or about 13 June 2008 Mr Gye Senior (then contemplating taking a lease of the Manning through another corporate vehicle of the Gye family other than the plaintiff) said to Mr Larkin words to the following effect: "We will go ahead on the lease on the understanding that The Briars take the $60,000 in accommodation per year".
(d) On or about 27 August 2008 Mr Gye Senior and his daughter Julie (again representing the plaintiff) met the third defendant (a director, and the controlling mind, of both the first and second defendants) at the property, during the course of which an exchange between Mr Gye Senior and the third defendant to the following effect took place:
"The third defendant said:
'When are you going to sign the Lease?'
Mr Gye said:
'We will not sign the Lease unless we have your assurance that you will take up the $5,000 per month in room sales that has been promised.'
The third defendant then said:
'The Briars will take $4,000 per month in room sales from you.'
Mr Gye said:
'Very well, we'll accept that and I'll sign the Lease when it is ready.'
For the sake of convenience, the statements here attributed to Mr Larkin and the third defendant are taken from the affidavit of Mr Gye Senior: Affidavit of WG Gye affirmed 20 March 2013, paras 5-17. However, the evidence given by his daughter and son (in their respective affidavits and orally, in cross examination) was, in substance, to the same effect: Affidavit of J Gye sworn 20 March 2013, paras 2-4; Affidavit of S Gye sworn 20 March 2013: transcript pp 41, 43-44, 45-46, 47 and 64 (Julie) and pp 78, 80 and 81 (Steven). The evidence of both was challenged, in cross examination, by a suggestion that all three members of the family may have colluded in their presentation of the facts: transcript pp 36-37 (Julie) and p 80 (Steven). They rejected that suggestion, and I accept the veracity of their evidence.
The evidence on the defendants' side of the record is to the following effect:
(a) On or about 10 June 2008 Mr Gye Senior and his daughter Julie (but not his son Steven) did meet at the Manning for a preliminary inspection of the property.
(b) On a subsequent date the third defendant met Mr Gye and Julie at the property for an inspection "to discuss the completion and finalisation" of works to be undertaken by the first defendant in anticipation of execution of a lease.
(c) At their respective meetings with Mr Gye and Julie, Mr Larkin and the third defendant did discuss with Mr Gye and Julie an offer by The Briars to refer customers to the operator of the Manning but neither Mr Larkin nor the third defendant guaranteed any (let alone a dollar amount of) referral business.
I accept that, subjectively, each of Mr Larkin and the third defendant may, in retrospect, conscientiously believe that he made no legally binding promise to the plaintiff's representatives, let alone a guarantee of business. Their evidence appears to involve a large element of reconstruction, based upon a retrospective assessment of what they believe they would, or would not, have said rather than (as Julie and Steven Gye assert of their evidence) actual recollection: eg, transcript pp 133-134.
The Court is bound, by the law of contract, to apply an objective standard to an assessment of the words and conduct of the parties, at the time a contract is said to have been made, having regard to the surrounding circumstances known to the parties and the purpose and object of the transaction: Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at 179 [40].
I prefer the evidence of the witnesses of the plaintiff over those of the defendants. Under cross-examination, each witness, on either side of the record, was tempted to stray from the role of a witness to that of an advocate. None of them was otherwise than an honest witness, but each of them was conscious of the cause their evidence might serve. On the whole there was greater consistency in the evidence on the plaintiff's side than on the defendants. In my assessment, objective facts (including the defendants' confession that some form of agreement about the availability of business to the Manning came from The Briars) favour the account of events given by the Gye family.
The defendants were keen to lease the Manning. Mr Gye Senior was experienced in the motel business and the plaintiff, under his control, was evidently a good prospect as a prospective manager of a business that would need to be built up. The Manning had been acquired, and renovated, by the defendants as an adjunct to the conduct of business at The Briars. Mid-week conference bookings were an important feature of the motel/hotel trade in the Bowral area. As an established, popular outlet, The Briars had access to that trade, but insufficient rooms to accommodate it. For that reason the defendants looked to the Manning as a means of benefiting The Briars' business. For the same reason, the plaintiff took comfort in the assurances given to the Gye family by Mr Larkin and the third defendant about a guaranteed source of critically important mid-week business. As instructed by the third defendant, Mr Larkin told all prospective tenants that "The Briars would refer the overflow of their bookings to the Manning Motel".
The third defendant, himself, concedes having said to Mr Gye Senior and Julie: "The Briars will refer their overflow bookings and you will have priority in respect of those overflows and we are happy to work with you in any way". He understood that Mr Gye (and, hence, the plaintiff) might regard this as a bonus from entry into the Manning lease: transcript p 130.
Statements of the character made by Mr Larkin and the third defendant having been made, they would have prompted (and, on the plaintiff's evidence, did prompt) a supplementary inquiry on the part of the prospective lessee about the quantum of business available via The Briars. And such an inquiry would, objectively, have taken the form of a request for an assurance about the quantum of business available in a context in which, as was the fact, the plaintiff was concerned about he viability of the Manning as a stand-alone business.
Neither Mr Larkin nor the third defendant expressly qualified their assurances to the plaintiff about business from The Briars with a warning: (a) that customers referred to the Manning by The Briars might choose not to stay at the Manning; or (b) that conditions, other than entry into the lease, attached to the assurances given on behalf of the second defendant: transcript pp 88-89 and 130.
The defendants urged the Court not to accept the plaintiff's evidence because, they contend: first, had the oral statements attributed to the defendants in fact been made, the plaintiff could reasonably have been expected to insist upon the inclusion of some form of guarantee or warranty in the lease document; and, secondly, the plaintiff subsequently conducted the business of the Manning as the lessee without regular, vociferous complaints about the lack of referral customers from The Briars and without invoicing The Briars for allegedly promised purchases of accommodation that, it is agreed, had not materialised.
As to the first of these contentions, it may be sufficient, in my assessment, to notice that Mr Guy was an experienced motel operator who, as his family attests, was of the "old school" that conducted business of the type here under consideration on a handshake, offering and expecting an ongoing commercial relationship to flow from mutual accommodation. It might also be noted that there was nothing in the terms of the lease document (such as an entire contract clause or a non-reliance clause) that would have warned the plaintiff off such an approach to business.
More to the point: Mr Larkin and the third defendant voluntarily, deliberately made statements about the intention of the second defendant to refer overflow bookings to the Manning. Those statements were made in a context in which the plaintiff sought and obtained assurances reflecting the critical importance of the availability of a particular amount of The Briars' business to the plaintiff's preparedness to lease the Manning. The statement made by the third defendant, in particular, constituted part of the whole transaction which, objectively, the parties (the plaintiff as lessee, the first defendant as lessor and the second defendant as operator of The Briars) intended to enter when the plaintiff executed the lease of the Manning: Shepperd v Ryde Municipal Council (1952) 85 CLR 1 at 12-14. It was not unnatural for the parties to treat the lease document as devoted to the terms upon which the plaintiff should take title to the Manning from the first defendant, relying upon the second defendant's antecedent promise of business from The Briars.
As to the second contention, although the plaintiff may reasonably be said to have been restrained in the complaints it made, there is sufficient contemporaneous evidence of complaint to corroborate its evidence of the second defendant's pre-lease promise of business. Moreover, the nature of the business support offered did not lend itself, necessarily, to the issue of invoices to the second defendant.
The evidence establishes that, within the motel/hotel industry, there was nothing unusual about one outlet "purchasing" accommodation at another by means, either, of a direct purchase or indirectly through establishment of a connection between a prospective guest and the supplier of accommodation: transcript p 96.
I find as a fact that:
(a) as an inducement to the plaintiff to execute the lease and with the intention that the plaintiff would rely upon its promise, the second defendant (by the third defendant) promised the plaintiff that, if the plaintiff executed the lease, the second defendant (as the operator of The Briars) would take $4,000 per month in room sales from the plaintiff, as the operator of the Manning, throughout the duration of the lease; and
(b) the plaintiff executed the lease in reliance upon that promise, and would not have executed the lease but for the promise.
These findings are sufficient to ground a finding of a contract, between the plaintiff and the second defendant, collateral to the lease between the plaintiff and the first defendant.
It is on that contract that the plaintiff, in this part of the case, sues for damages for breach.
Following the plaintiff's execution of the lease the second defendant "purchased" accommodation from the plaintiff on only two occasions. The first occasion was in November 2008, when $6,736.00 accommodation was purchased. The second occasion was in September 2011, when $1,820.00 accommodation was purchased.
In commercial terms, the failure of the second defendant to purchase more accommodation than that from the plaintiff was, in part, a result of disputation between the plaintiff and the first defendant about the state of repair of the Manning and, perhaps, about the quality of service provided to guests at the Manning.
By its defence, the second defendant contends that, having agreed (in an agreement separate and unrelated to the lease) to include the plaintiff on a list of preferred hotels used by the second defendant to refer customers to when it was unable to accommodate its overflow of customers from time to time, that agreement was subject to a term that the plaintiff would act in a fit and proper professional manner, that overflow customers would be treated appropriately, that pricing would be discounted and that, in consideration of the referral of its overflow by the second defendant, the plaintiff would in turn refer its guests to the second plaintiff's business for breakfast and dinners.
I do not accept that the agreement between the plaintiff and the second defendant bore the character attributed to it by the second defendant, or that it was qualified by a term about quality, pricing and reciprocity for which the second defendant contends. In cross examination, the third defendant accepted that the agreement, he says, was made with the plaintiff had no terms and conditions attached to the assurances given to the plaintiff: transcript p 130.
The second defendant's version of the agreement said to have been made between it and the plaintiff does not accord with the course, or content, of the dealings between the parties leading to execution of the lease. It appears to be based on a reconstruction of events, by Mr Larkin and the third defendant, about what they now believe they would, or would not, have said in negotiations for the Manning lease.
Nor does evidence about alleged misconduct of business at the Manning by the plaintiff rise high enough to sustain the second defendant's contention that the plaintiff's provision of services at the Manning was sub-standard, over-priced or wanting in reciprocity. The assurances given to the plaintiff about the availability of business from The Briars were not conditional on anything other than the plaintiff's entry into the Manning lease. In any event, I do not accept that the plaintiff was in breach of any obligations it may have had about the operation of business at the Manning. Insofar as the defendants assert that they fielded complaints about the quality of service at the Manning, I am not satisfied that any such complaints were beyond the norm or, to put the point differently, indicative of anything other than life experience that nobody can please everybody all the time.
On my findings, the plaintiff is entitled to an award of damages, for breach of the collateral contract made between it and the second defendant, in the sum of $159,765.60 representing the gross revenue of $4,000 per month, less a percentage for accommodation expenses, for 57 months between 22 September 2008 and 21 June 2013, and less the $8,556.00 actually received.
The plaintiff's evidence about the cost of providing accommodation (expressed as a proportion of the total accommodation sales), found in paragraph 28 of the affidavit of Mr WG Gye (sworn 20 March 2013) was not contradicted at trial.
Allowing for a typographical error in paragraph 28(c) (where I read the date "31 July 2011" as "30 June 2011"), and extrapolating to 21 June 2013 the rate set out in paragraph 28(d), I take the cost of providing accommodation at the Manning to have been, as a percentage of accommodation sales: 21% between 22 September 2008 and 30 June 2010; 27.58%, between 1 July 2010 and 30 June 2011; and 30%, between 1 July 2011 and 21 June 2013.
At those rates, the compensation due to the plaintiff comprises the sum of $66,360.00 (21 months at $4,000.00 less $840.00, or $3,160.00 net, per month), $34,761.20 (12 months at $4,000.00 less $1,103.20, or $2,896.80 net, per month) and $67,200.00 (24 months at $4,000.00 less $1,200.00, or $2,800.00 net, per month), less the sum of $8,556.00 received in two instalments (the first, in November 2008, of $6,736.00 and the second, in September 2011, of $1,820.00).
Insofar as the plaintiff claims damages going beyond the date upon which it in fact vacated the Manning, I decline to grant any such relief. The plaintiff's claim is predicated upon an assumption that the first defendant did not validly exercise a contractual right of termination of the lease. That assumption does not accord with facts as found.
THE PLAINTIFF'S CLAIM FOR BREACH OF THE LANDLORD'S REPAIR COVENANT
By an email addressed by Mr Gye Senior to the third defendant on 10 June 2010, the plaintiff notified the first defendant that it had asked the Workcover Authority of NSW (a government instrumentality) to undertake an inspection of "hazardous building defects" at the Manning. The email asserted that the third defendant had been informed of the defects, but had taken no action.
One of the defects alleged (and asserted to have been discussed by Mr Gye with the third defendant "over a year ago") concerned the external, wooden staircase to the manager's residence. The staircase, exposed to the weather, was said to have rotting timbers, to be slippery when wet, and to be extremely dangerous in the frosty weather of winter in Bowral.
The third defendant took 10 days to reply to Mr Gye's email. On 20 June 2010 he did so in terms that stopped well short of an admission of liability on the first defendant's part, calling for a "property report" as a prerequisite to action.
By a further email dated 22 June 2010 Mr Gye sent the third defendant a copy of what he described as a report by Workcover.
That report took the form of an "Improvement Notice" dated 11 June 2010 issued by the Workcover Authority after an inspection of the Manning that same day.
The notice, addressed to the plaintiff, records three material observations:
(a) First, in the opinion of Workcover's inspector, the plaintiff (as the operator of the Manning) was in contravention of the Occupational Health and Safety Act 2000 NSW and/or a regulation under that Act, necessitating remedial work.
(b) Secondly, the remedial work required related to the provision and maintenance of safe and suitable unhindered access to and egress from and within the stairs to the manager's residence.
(c) Thirdly, the reason for issue of the Notice was that employees and other persons may be exposed to risk to their health and safety from the stairs being slippery when wet and because the stairway landings had loose boards.
About a year later, another Workcover inspector issued another "Improvement Notice" to the same effect. It was dated 8 July 2011 and was based on an inspection of the Manning conducted on 26 May 2011.
After yet another year passed, the plaintiff obtained a private "Building Defects Report", dated 28 September 2012, based on an inspection of the Manning conducted on 26 September 2012. It was prepared by an accredited building surveyor.
It concluded that:
"1. The first floor residence is unsafe for occupation for reason that there is insufficient fire separation between the ground floor and the first floor residence;
2. There is insufficient fire protection of window and door openings on the ground floor under and adjacent to the only exist stairs from the first floor residence;
3. The stair construction is un-safe and does not comply with the Building Code of Australia (BCA 2012)."
The report recommended that the following remedial works be undertaken:
"1. Install a fire-protective ceiling to the underside of the floor of the first floor residence.
2. Provide fire protection to window and door openings under and adjacent to the first floor residence exit stairs.
3. Replace exit stairs serving the first floor residence with stairs compliant with the construction requirements of the BCA 2012."
The plaintiff had been alerted to the fire risk attending the manager's residence and its stairway by volunteer firemen billeted at the Manning.
The risks to personal safety attending occupation of the residence were well known to Julie Gye because of personal experience in slipping on the stairs and falling down them on several occasions. Two falls she particularly remembered occurred in November 2010 and early 2012 respectively.
There can be little doubt, in light of the Workcover notices, the building report and anecdotal evidence of injury, that the stairway to the residence was not in a good state of repair or condition at any time from, at least mid-2010.
Nevertheless, the responses of the first defendant (under management of the third defendant) appears to have been one of determined inaction, coupled with attempts at deflection of responsibility.
The third defendant appears to have adopted an attitude of denial and delay as a commercial policy that continued up to and including the time of trial. The plaintiff really had no foundation for any complaint, he suggested, because: firstly, Mr Gye had inspected the stairway before the plaintiff entered the lease and was apparently not overly concerned about it; secondly, the third defendant was unaccustomed, as a landlord, to having to assume liability for repairs; thirdly, the state of disrepair of the stairs could not be too bad because, having moved her family out of the manager's residence in November 2010, Julie Gye moved back in for two months in mid-2011; and, fourthly, the residence remained available for use, and was used, for storage when not occupied as a residence.
I accept Julie's explanation of her return to the manager's residence in June-July 2011 as action taken as a last resort occasioned by a need to move from one rented house to another when the first was sold by her family's landlord. The fact that she regarded it as a last resort, and moved out again as soon as she could, confirms rather than disproves the Manning's state of disrepair.
Clause 8.1(c) of the lease was in the following terms:
"The Landlord [the first defendant] must keep the Property in a good state of repair and condition except to the extent of the Tenant's obligations in this clause."
The obligations of the plaintiff, as tenant, for which clause 8.1 provided did not extend to repairs of the nature of those required by the state of disrepair of the manager's residence or, in particular, the associated stairway.
By the terms of the lease, the obligation of repair fell on the first defendant, not the plaintiff.
The plaintiff is entitled to damages for the first defendant's breach of its repair covenant. Those damages should be assessed at $76,160.00, representing the cost to the plaintiff of procuring alternative rental accommodation for July Gye as manager of the Manning and, incidentally, her family.
For 28 weeks between November 2010 and May 2011, the plaintiff paid $550 per week for rental accommodation; a total of $15,400.00. In the 98 weeks between August 2011 and June 2013, it paid $620.00 per week in rent; a total of $60,760.00.
Disregarding an arithmetical error in the final entry in the table in paragraph 11 of Julie Gye's affidavit sworn 20 March 2013, the total amount paid out by the plaintiff, for rent it would not have incurred but for the first defendant's breach of its repair covenant, was $76,160.00.
At trial, the plaintiff sought, in addition to that amount, an allowance for Julie Gye's travel between her rental accommodation and the Manning. That claim was unsupported by elaboration beyond mere assertion that Ms Gye had incurred transportation costs and spent considerable time commuting to the motel from her external, rented residences. I do not regard the evidence as sufficient to support an award of any compensation to the plaintiff, in any amount, referable to personal expenses of this character.
THE PLAINTIFF'S ALLEGATION OF REPUDIATION, AND ITS CLAIM FOR LOSS OF BARGAIN DAMAGES
Clause 20 of the lease (headed "Demolition") was in the following terms:
"The Tenant [the plaintiff] agrees that if, at any time after the Commencing Date [22 September 2008], the Property is genuinely required for the purpose of demolition, redevelopment or renovation by the Landlord [the first defendant] the Landlord has the right to terminate this Lease by giving to the Tenant not less than 12 months notice in writing of such termination. It is further agreed that service of notice of such termination by the Landlord upon the Tenant is conclusive proof of the aforesaid requirements for demolition, redevelopment or renovation and that the Tenant is not entitled to make a Claim in relation to the termination. [Emphasis added].
The term "claim" was defined by clause 28.1 of the Lease to include "any claim, notice, demand, proceeding, litigation, investigation, judgment, loss, claim for compensation, cost, expense, damage or liability however arising whether present or future."
At a time when these proceedings (commenced on 21 December 2011) had been on foot for six months, the first defendant served on the plaintiff a written notice purporting to have been given pursuant to lease clause 20.
That notice included the following paragraphs:
"[The first defendant] has elected to comprehensively redevelop the land [comprising the Manning Hotel].
The redevelopment will consist of demolition of certain existing motel units, the building of further new motel units, the subdivision of part of the land into residential lots, the significant refurbishment and renovation of remaining motel units and the construction of additions to the 'Biota Dining' premises [the home of a restaurant business unrelated to that of the plaintiff at the Manning].
In all other respects the terms of the lease are affirmed and without limitation, the obligations imposed on [the plaintiff' under the lease in relation to the termination of the lease will continue to operate and are required to be observed by [the plaintiff'."
The plaintiff alleges that the first defendant's service of this notice was no more than a strategic device to bring the plaintiff's tenancy of the Manning to an end and, accordingly, it could not be relied upon by the first defendant as an effective exercise of a contractual right of termination.
The "conclusive evidence" provision in the second of lease clause 20's two sentences (apparently an attempt to accommodate Dobbs v National Bank of Australasia Limited (1935) 53 CLR 643 at 650-654) is not an impediment to the plaintiff's claim, so it asserts, because the provision has scope for operation only if the first defendant can establish that (in terms of the first sentence of clause 20) the property was "genuinely required".
The plaintiff did not plead, or separately rely upon, any allegation of a contractual duty of good faith such as that discussed in Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234 at 256 and 263-268. It relied upon the expression "genuinely required" to do whatever work might otherwise have been done by an implied term of good faith.
It is not necessary to explore this question, or the inter-relationship between the two sentences of lease clause 20, because I am satisfied that the first defendant's service of its Demolition Notice was in all respects bona fide.
I accept the evidence of the third defendant that the redevelopment plans described in the Notice were in contemplation before the commencement of these proceedings and, albeit slowly, continue towards an outcome described in the Notice.
The first defendant did not lose the contractual right for which lease clause 20 provided merely because it fell into litigation instigated by the plaintiff.
There is no factual foundation for the plaintiff's contention that the first defendant's service of the Demolition Notice constituted a wrongful repudiation by the first defendant of its obligations under the lease.
CONCLUSION
The plaintiff is entitled to an award of damages in the sum of $159,765.60 against the second defendant (on its collateral contract claim), and a separate award of damages in the sum of $76,160.00 against the first defendant (in relation to its claim for breach of the landlord's repair covenant).
I reserve for further consideration the question whether (and, if so, in what amounts) orders should be made (under the Civil Procedure Act 2005 NSW, s 100) for pre-judgment interest.
The plaintiff's claim against the third defendant, in his personal capacity, should be dismissed.
I reserve all questions of costs for further consideration.
The only order I presently make is a direction that the plaintiff bring in Short Minutes of Orders to give effect to these Reasons for Judgment.
If the parties do not reach agreement about pre-judgment interest and costs I will entertain any applications they may respectively make on those topics.
ADDENDUM (6 November 2013)
The plaintiff has brought in draft short minutes of orders. At that time the parties drew to my attention clerical errors (and I updated a reference) in the Reasons for Judgment as published to the parties on 1 November 2013. The Reasons for Judgment published here have been revised to take those matters into account.
Having heard from counsel for each party, I make the following orders to give effect to the Reasons for Judgment as revised:
(1) Judgment for the plaintiff against the first defendant in the sum of $85,123.20 inclusive of interest.
(2) Judgment for the plaintiff against the second defendant in the sum of $195,055.08 inclusive of interest.
(3) Order that the first and second defendants pay the plaintiff's costs, as agreed or assessed, on the ordinary basis.
(4) Order that the proceedings against the third defendant be dismissed.
In the interests of bringing finality to the proceedings, in the absence of any evidence about amounts paid out by the plaintiff for costs and the timing of such payments, and in the absence of any evidence of undue delay in the conduct of the proceedings, I decline the plaintiff's oral application that I make an order (under ss 101(4)-(5) of the Civil Procedure Act 2005 NSW) in terms similar to order 3 of the orders made in Lahoud v Lahoud [2006] NSWSC 126 at [91] (and considered in Leda Pty Ltd v Weerden (No 2) [2007] NSWCA 283, Drummond and Rosen Pty Ltd v Easey (No 2) [2009] NSWCA 331 and Gillfillan v Australian Securities and Investments Commission (No 2) [2013] NSWCA 143 at [33]-[40] ) for the payment of interest on costs not yet quantified.
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Amendments
11 November 2013 - The addition of Order 4.
Amended paragraphs: 119
Decision last updated: 06 November 2013
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