Merilla Pty Ltd v Commonwealth of Australia - [2015] WASC 309

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: MERILLA PTY LTD -v- COMMONWEALTH OF AUSTRALIA [2015] WASC 309

CORAM: BEECH J

HEARD: 2224 JULY 2015

DELIVERED : 20 AUGUST 2015

FILE NO/S: CIV 1879 of 2014

BETWEEN: MERILLA PTY LTD
ARTUS PTY LTD
Plaintiffs
AND
COMMONWEALTH OF AUSTRALIA
Defendant

Catchwords:

Contracts - Lease - Proper construction - Whether rent review provision void for uncertainty - Whether parties reached an informal agreement as to rent for review period - Effect of determination of rent by valuer - Whether determination complied with terms of lease - Turns on own facts

Equity - Equitable estoppel - Whether circumstances gave rise to an estoppel - Turns on own facts

Legislation:

Nil

Result:

Parties not bound by the determination of rent made by valuer

Category: B

Representation:

Counsel:

Plaintiffs: Mr M J Feutrill
Defendant: Ms C H Thompson

Solicitors:

Plaintiffs: Lawfield Legal Practice
Defendant: Minter Ellison

Case(s) referred to in judgment(s):

Adams v Lambert [2006] HCA 10; (2006) 228 CLR 409
Alpine Shire Council v MHSC Transportation Services Pty Ltd [2002] VSC 22
Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd [2000] WASCA 27; (2000) 22 WAR 101
Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14
Australian Goldfields NL (in liq) v North Australian Diamonds NL [2009] WASCA 98; (2009) 40 WAR 191
Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130
Birla Nifty Pty Ltd v International Mining Industry Underwriters Ltd [2014] WASCA 180; (2014) 47 WAR 522
Boland v Yates Property Corp Pty Ltd [1999] HCA 64; (1999) 167 ALR 575
Brisbane Water County Council v Commissioner of Stamp Duties [1979] 1 NSWLR 320
Coghlan v SH Lock (Australia) Ltd (1985) 4 NSWLR 158
Commonwealth v Verwayen [1990] HCA 39; (1990) 170 CLR 394
Cosmopolitan Hotel (Vic) Pty Ltd v Crown Melbourne Ltd [2014] VSCA 353
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640
Fazio v Fazio [2010] WASC 263
Fazio v Fazio [2012] WASCA 72
Fitzgerald v Masters (1956) 95 CLR 420
Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101
Gollin & Co Ltd v Karenlee Nominees Pty Ltd [1983] HCA 38; (1983) 153 CLR 455
Government Employees Superannuation Board v Martin (1997) 19 WAR 224
Grundt v Great Boulder Pty Ltd Gold Mines Ltd (1937) 59 CLR 641
Hughes v St Barbara Ltd [2010] WASC 160
Jowett v Federal Commissioner of Taxation (1926) 38 CLR 325
Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25; (1999) 199 CLR 413
Kidd v The State of Western Australia [2014] WASC 99
Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314
Letizia Building Co Pty Ltd v Redglow Asset Pty Ltd [2013] WASC 171
Mander Pty Ltd v Clements [2005] WASCA 67
Meehan v Jones [1982] HCA 52; (1982) 149 CLR 571
Melreef Pty Ltd v Glenn [2015] WASCA 111
MMAL Rentals Pty Ltd v Bruning [2004] NWCA 451; (2004) 63 NSWLR 167
Montreal v Sunlife Assurance Co of Canada [1952] 2 DLR 81
Mordecai v Mordecai (1988) 12 NSWLR 58
Mount Lawley Pty Ltd v Western Australian Planning Commission [2004] WASCA 149; (2004) 29 WAR 273
Norman v FEA Plantation Ltd [2011] FCAFC 99; (2011) 280 ALR 470
Palermo v Palermo [2015] WASCA 49
Pastoral Finance Association Ltd v Minister [1914] AC 1083
Primewest (Mandurah) Pty Ltd v Ryom Pty Ltd [2014] WASCA 28
RCR Tomlinson Ltd v Russell [2015] WASCA 154
Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323
RJ Baker Nominees Pty Ltd v Parsons Management Group Pty Ltd [2010] WASCA 128
Robertson v Unique Lifestyle Investments Pty Ltd [2007] VSCA 29
Sidhu v Van Dyke [2014] HCA 19; (2014) 251 CLR 505
Spencer v The Commonwealth (1907) 5 CLR 418
Straits Exploration (Australia) Pty Ltd v Murchison United NL [2005] WASCA 241; (2005) 31 WAR 187
Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164
The Bell Group Ltd (in Liq) v Westpac Banking Corporation [No 9] [2008] WASC 239; (2008) 39 WAR 1
Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429
Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority [2008] HCA 5; (2008) 233 CLR 259
Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387
Westpac Banking Corporation v The Bell Group Ltd (in liq) [No 3] [2012] WASCA 157; (2012) 44 WAR 1
Wilden Pty Ltd v Green [2009] WASCA 38; (2009) 38 WAR 429
BEECH J:

Introduction

The plaintiffs (the Owners) own land in Busselton that is leased by the defendant (the Commonwealth). The parties are in dispute about the rent review for the fourth Rent Period of the lease.
It is convenient to outline the salient terms of the lease, and set out the facts, before identifying the issues by reference to the competing claims and counterclaims made by the parties in this action.
The balance of these reasons are organised as follows, reflecting the major issues:
(2)The Lease.
(3)The Facts.
(4)The Issues.
(5)Is cl 5.7.1 void for uncertainty? What is the proper construction of the clause?
(6)Rectification.
(7)Was the rent for the fourth Rent Period agreed between the parties?
(8)Was cl 5.7.1 never engaged by reason that there was, before August 2013, no genuine attempt by the Commonwealth to agree rent for the fourth Rent Period?
(9)Did the Valuer Agreement alter the parties' rights under the Lease?
(10)Was the Determination binding?
(11)Does an estoppel operate in favour of the Commonwealth?
(12)Conclusion.

The Lease

On 10 September 2010, the Owners as lessor and the Commonwealth as lessee entered into a lease (the Lease). The Lease is for a term of seven years commencing 4 May 2010, with two options of renewal for further terms of three years in favour of the Commonwealth.
In July 2009, Merilla Pty Ltd and the Commonwealth had contracted for Merilla to design, construct and lease the premises (the DCL Agreement). I will say more about the DCL Agreement in dealing with questions of construction of provisions of the Lease.
The annual rental was stated as $287,500, calculated as $575 per square metre.[1]
[1] Exhibit A50, sch 1, item L.
Generally the Lease provides for rent reviews to the greater of an increase of 3.5% or a CPI increase.[2]
[2] Exhibit A50, cl 5.3, cl 5.4, cl 5.5.
There is an exception to this general rent review regime. Clause 5.7.1 provides that 'the rent for the fourth Rent Period of the Term shall be the rent which is agreed between the Parties and failing agreement within three months after the commencement of that Period, the market rent determined in accordance with the procedure set out in Schedule 7'.
The date of the review at the third anniversary of the Commencement Date, referrable to the fourth Rent Period, is termed the 'Market Review Date'.[3]
[3] Exhibit A50, cl 5.2.1, sch 1, item N.
Clause 5.6 provides as follows:
5.6.1The Rent fixed under this clause 5 is payable from the commencement of the relevant Rent Period.
5.6.2Until the Landlord notifies the Tenant of a change in Rent, the Tenant must pay the Rent which applies immediately prior to the Review Date.
5.6.3If the Rent changes by the operation of clause 5, the Parties must make any necessary adjustment by payment or repayment within 30 days after the Landlord gives the Tenant notice under clause 5.6.2.
Clause 5.8 is in the following terms:
5.8.1.Subject to clause 5.8.2 if a review notice is given, until such time as the Rent for the Rent Period has been agreed by the Parties or determined by the Valuer, the Tenant must continue to pay the Rent payable immediately prior to the commencement of that Rent Period and the Parties must make any necessary adjustment within 30 days after the Rent has been agreed or determined.
5.8.2.If the Rent for the Rent Period which is increased under clause 5.3 or is agreed or determined under clause 5.7 exceeds the Rent for the immediately preceding Rent Period, until the Landlord provides the Tenant with the documents referred to in clauses 18.6 and 18.8 ('the Documents') in respect of the anniversary of the Commencement Date which coincides with the commencement of the Rent Period for which Rent is increased or agreed or determined under this clause 5 ('the Relevant Rent Period'), the Landlord must continue to accept the Rent payable immediately prior to the commencement of the Relevant Rent Period and the Parties must make any necessary adjustment within 30 days after the Landlord provides the Documents to the Tenant.
Clause 33 provides as follows:
33.1.1If:
aa Further term is set out in Item S;
bthe Tenant wishes to lease the Premises for that Further Term commencing upon the expiration of the Term granted by this Lease;
cthe Tenant gives notice to the Landlord of that wish not less than 3 months prior to the expiration of the Term; and
dany breach or default by the Tenant under this Lease prior to that notice which has been notified to the Tenant by the Landlord has been either waived or rectified or in the case of a negative covenant, has been discontinued,
then the Landlord must grant to the Tenant a new lease of the Premises for the Further Term:
eat an initial Rent for the first Rent Period which is agreed between the Parties or failing agreement within 3 months after the commencement of the new lease determined in accordance with the procedure set out in schedule 7; and
fotherwise, on the same terms contained in this Lease except that:
ithis clause 33 will be omitted unless Item S refers to a Further Term after that for which the new lease is being granted;
iithe Review Dates in the Further Term will be those set out in Item T; and
iiithe items in Schedule 1 will be amended as appropriate.
Item T of sch 1 provides that Rent Review Dates are each anniversary of the Commencement Date of the Further Term and provides that the Market Review Date was the Commencement Date of the Further Term.
Clause 36.2 provides that a notice from a party can be signed by one of its officers or by its representative designated in item U or item V of sch 1. Clause 36.3 provides, in effect, that a notice could be served by, among other things, sending it to the party's representative as set out at the address shown in item U or item V. Item U identified the tenant's representative and address for service as Russell Smith, Jones Lang LaSalle (JLL), with an identified address. Item V identified the landlord's representative and address for service as Grant Pitman, care of Property Matrix Pty Ltd, with an identified address.
Schedule 7 provides as follows:
A.1.1.If the Parties fail to agree the Rent for the fourth Rent Period of the Term in accordance with clause 5.7 or the first Rent Period of the Further Term in accordance with clause 33.1.1.e, the Rent will be determined by a Valuer appointed in accordance with clause A.2.1 of this Schedule.
A.2.1.If the Parties fail to agree on a Valuer within 14 days after the expiration of a period of 3 months following the commencement of the Further Term either Party may request the president of the Institute to appoint a Valuer.
B.Valuer's determination of Rent
B.1.Role of Valuer
B.1.1.The Valuer must:
a.determine the open market rental value of the Premises at the commencement date of the Further Term (the Effective Date);
b.act as an expert and not as an arbitrator; and
c.give a written determination with reasons within 28 days after the Valuer's appointment.
B.2.Submissions
B.2.1.In making a determination the Valuer must consider the written and oral submissions of a Party received within 14 days after the Valuer's appointment.
B.3.Fees
B.3.1.The fees and expenses of the Valuer must be paid by the Landlord and the Tenant equally.
B.4.Determination final
B.4.1.The Valuer's determination is final and binding.
B.4.2.The Valuer must determine the open market rental value of the Premises at the Effective Date assuming that:
a.the Landlord is a willing but not anxious landlord and the Tenant is a willing but not anxious tenant;
b.the Premises are available with vacant possession;
and taking into account:
c.the open market rental value (other than rental values which have been escalated to a predetermined amount or in accordance with movements in the consumer price index or any other index) at the Effective Date of comparable premises, in the town or city within which the Building is situated whether that value is determined in respect of new lettings with vacant possession or in respect of occupied premises;
d.the Permitted Use of the Premises;
e.the period which will elapse between the Effective Date and the first review date in the Further Term or, if there is no review date, the end of the Further Term;
f.the increased value of the Premises occasioned by the Landlord repainting or recarpeting the Premises pursuant to this Lease (provided that nothing in this clause will require the Tenant to reimburse the Landlord for the cost of that repainting or recarpeting);
g.the restriction on user, assignment or sub‑letting;
h.the terms and conditions generally of the lease for the Further Term;
i.any rent‑free period, financial contribution (including any contribution towards the cost of fitout) or other concession customarily or likely to be offered to new tenants of comparable vacant premises.
but not taking into account:
j.the adverse effect on the condition or rental value of the Premises of any breach of this Lease by the Tenant;
k.any Fittings and other improvements or alterations installed in or made to the Premises by or for the Tenant, its sub-tenants or their respective predecessors in title during the Term, the Further Term or an period of prior occupation to the intent that the Premises for the purpose of determining the open market rental value will be regarded as cleared space but otherwise serviced and habitable;
l.any increase in value in the Premises as a result of any structural alterations or other voluntary improvements made to the Premises or the Building (including installation of equipment) by the Landlord at its discretion for any reason at any time (except any carried out at the prior request of the Tenant to which the Tenant has not contributed either by way of service charge or otherwise);
m.any special interest of the Tenant, its sub-tenants or their respective predecessors in title including the fact that the Tenant is a sitting tenant;
n.goodwill occasioned by the Tenant, its sub-tenants or their respective predecessors in title;
o.any right of the Tenant to use any part of the Building or the Land other than the net lettable area of the Premises and the Car Parking Bays; or
p.any naming rights the Tenant may have in respect of the Building.
C.If Valuer fails to make a determination
C.1Replacement of valuer
C.1.1If the Valuer fails to make a determination under clause B of this Schedule within 28 days after the date of the Valuer's appointment, a Party may request the president of the Institute to appoint another Valuer to make a determination in accordance with that clause.
C.1.2A Valuer appointed under this clause C will be deemed to have been appointed under Clause A of this Schedule and must make the determination in accordance with Clause B of this Schedule.

The facts

There were no issues of primary fact of any significance, or any credibility disputes between the witnesses.
I make the following findings of fact.
I begin with communications between the parties in April 2013.

3.1 April 2013 until 20 October 2013

On 1 April 2013, the Owners issued an invoice to Centrelink care of JLL for the rent and variable outgoings for the Busselton premises for May 2013. The amount of the invoice was $25,664.77 plus GST.[4]
[4] Exhibit A61.
On 2 April 2013 Ms Sara Zhang, of JLL, had sent an email to Ms Sara Ronald of Property Matrix. The email stated that the Busselton premises
is due for CPI review on 4 May 2013. We require CPI review notice, copy of service contracts, air‑con certificate and NABERS certificate prior to processing the increase. Although we have to wait for March quarter index to be published to calculate the CPI increase, it is better to obtain all other required documents now so we can process the increase on time.[5]
[5] Exhibit A65, 1029 ‑ 1030.
By letter of 4 April 2013 Ms Cynthia Becher, business manager of Property Matrix, wrote to Centrelink, care of JLL.[6] Property Matrix was agent for the Owners; JLL was agent for the Commonwealth.
[6] Exhibit A62.
The letter was in the following terms:
Please be advised that in accordance with your lease agreement the annual rent for [the Busselton premises] is due for increase as of 4 May 2013.
As per your lease agreement we use the calculation of the greater figure between 3.5% and that of the annual CPI increase. The March 2013 CPI figure is due out on 26 April 2013.
I will calculate the rent increase after that has been published and include a rental increase back to 4 May 2013 in your May 2013 invoice.
If you have any questions in regards to this matter please do not hesitate to contact me.
The Owners issued an invoice dated 1 May 2013 for rent and variable outgoings for the Busselton premises for June 2013 in the amount of $25,664.77 plus GST.[7]
[7] Exhibit A64.
After a follow‑up to the email of 2 April 2013, by email of 8 May 2013, Ms Becher advised Ms Zhang that Ms Ronald no longer worked at Property Matrix and that the CPI adjustment was being attended to by David Henry.[8]
[8] Exhibit A65.
On 30 May 2013, David Henry of Property Matrix sent an email to Russell Smith at JLL.[9] In substance, the email:
(a)stated that the Owners had undertaken a NABERS assessment for the premises leading to a 4 star rating, whereas the previous rating had been 4.5 stars;[10]
(b)provided an explanation for the decrease in NABERS rating, relating to a change in use of part of the office leading to a higher energy use per square metre of assessable area;
(c)stated that the change of use had not been initiated by the owners; and
(d)sought confirmation that the annual rent review, now due, would not be affected by the reduced NABERS rating.
[9] Exhibit A66, 1038.
[10] NABERS means National Australian Built Environment Rating Scheme.
By email of 3 June 2013 John Sullivan of JLL sought further information from David Henry.[11]
[11] Exhibit A66, 1037.
By email of 5 June 2013 David Henry provided a response, concluding that what they (the Owners' agent) want to do is to the progress rental review.[12]
[12] Exhibit A66, 1036.
There were email communications and discussions between John Sullivan of JLL, Michael Heaney of JLL, and Vanessa Anderson, an officer of the Department of Human Services (DHS).[13]
[13] Exhibit A69, A70.
On 18 June 2013, Ms Anderson sent an email to Mr Heaney saying that 'we can agree to process the rent review', and asking him to progress the matter.[14]
[14] Exhibit A70, 1055.
After further follow up from Mr Henry,[15] Mr Heaney responded to Mr Henry by email of 25 June 2013.[16] The response was in the following terms:
We have discussed with DHS and given the circumstances they have agreed to process the rent review(s). However, while the premises may not be able to achieve the required rating due to the NLA issue, DHS is still anxious to make sure that the energy efficiency of the premises doesn't suffer. To that end they would still like the landlord to complete the annual NABERS ratings and provide copies of the certificates to us. The result will no longer affect the rent reviews and failure to achieve the 4.5 stars will not be considered a breach of the lease, however DHS reserves the right to review their position on this if the NABERS rating drops further over time for reasons unrelated to the NLA calculation issue or other things outside of the landlord's control.
We have already instructed our lease admin team to process the pending rent review and have saved a copy of DHS's instructions regarding the NABERS issue on the file for future reference. If you have a problem next time around just refer whoever is querying you on the NABERS rating to those instructions.
Please let me know if you would like to discuss.
[15] Exhibit A66, 1035.
[16] Exhibit A66, 1034.

On 28 June 2013, Ms Becher sent an email to Sara Zhang of JLL. The email referred to Mr Heaney's email confirming the go ahead to issue the rent review for the Busselton premises, stating that the rent increase calculations were enclosed for review.[17] Later that day Ms Zhang sent an email acknowledging receipt of those documents, and stating that they still required copies of service contracts (which can cover at least 12 months prior to the review date) and the current air‑conditioning certificate.
[17] Exhibit A77, 1080.
On 1 July 2013, Ms Becher wrote to Centrelink, care of JLL.[18] The letter:
(a)stated that the rent review for the premises was due on 4 May 2013;
(b)stated that as per the agreement the rent is calculated by using the greater of either 3.5% or the CPI annual increase as at 31 May 2013;
(c)stated that they had used 3.5%, as it was greater than CPI, and attached calculations;
(d)stated that the annual rent had increased to $318,716.39 plus GST, with a monthly payment being $26,563.03 plus GST; and
(e)provided calculations for backdated rent for the periods of May and June 2013 with those amounts appearing on the invoice for July 2013.
[18] Exhibit A75, 1070.
On 16 July 2013, Ms Zhang sent a further email to Property Matrix requesting copies of the service contracts and current air‑conditioning certificate so that the rent review due May 2013 could be completed.[19]
[19] Exhibit A77, 1079.
Later that day Ms Becher sent an email to Ms Zhang stating that David Henry, the project manager, was on leave until 22 July 2013 and that as he handles the contracts he would respond after he returned.[20]
[20] Exhibit A77, 1079.
On 16 October 2013, Mr Henry wrote to Ms Zhang by email. The email attached the current air‑conditioning certificate and service contract, fire equipment service contract and auto‑door service contract, stating that he trusted that that fulfilled their obligations to progress the rent review.[21] In response, that day Ms Zhang passed on DHS's request for some further material and stated that what had been provided did not meet the requirements.[22] Mr Henry then attached some further service contracts, and said that by oversight, there was a period in which no air‑conditioning service contract was in place. He requested that that oversight not preclude the processing of the current rent review.[23]
[21] Exhibit A78, 1084.
[22] Exhibit A78, 1084.
[23] Exhibit A78, 1083.
On 17 October 2013, Ms Zhang sent an email to Mr Henry asking whether any paperwork had been signed for the acceptance of the quotation for fire services and stating that she could submit the CPI review and documents to DHS for approval and would let him know if there was any issue with the oversight concerning air‑conditioning. Mr Henry sent an email attaching an email authorising the acceptance of the fire services proposal.[24]
[24] Exhibit A78, 1082.
On 21 October 2013, Ms Becher sent an email to Ms Zhang.[25] The email referred to the process of waiting until completion of the NABERS requirement for the payment of a new rent. In the meantime the email attached Ms Becher's list of outstanding invoices for the property to see if it reconciled with Ms Zhang's.

3.2 21 October 2013 until February 2014

[25] Exhibit A81, 1096.

On 21 October 2013, Mr Sullivan of JLL sent an email to Ms Becher.[26] The email referred to a notice, said to be attached, which had been sent some time ago. The email stated that according to the Lease the third anniversary of the Commencement Date is actually a market rent review not a standard annual increase. The email stated that as the rent had not been set, the Lease states that this should go straight to a determining Valuer. The letter asked whether Ms Becher had any issue with this and if not, whether the process could be started.
[26] Exhibit A80, 1093; exhibit A82, 1099.
The next day Ms Zhang sent an email to Ms Becher, referring to Mr Sullivan's email.[27] Ms Zhang's email stated that:
(a)we were thinking the increase was CPI or 3.5%. However, according to the Lease the increase is true market;
(b)therefore, the parties needed to agree to a rental according to the market; and
(c)all of the usual supporting documentation would be submitted to DHS for review once the rental had been agreed.
[27] Exhibit A83, 1100.
Later on 22 October 2013 Ms Becher responded to Ms Zhang by email.[28] Ms Becher's email:
(a)stated that she had received the email from John Sullivan;
(b)apologised for missing 'that date', evidently a reference to the review date; and
(c)stated that she would speak to the Owners and organise the full review.
[28] Exhibit A81, 1095.
On 1 November 2013, Ms Becher sent an email to Ms Zhang in response to Ms Zhang's email of 22 October 2013.[29] Ms Becher's email apologised to Ms Zhang, saying that she did not know it was 'a different review'. Ms Becher's email stated that the review information had been handed over to Mr Pitman, the Owner, who would deal directly with Mr Sullivan.
[29] Exhibit A83, 1100; exhibit A129, 1461.
On 1 November 2013, Mr Pitman sent an email to Mr Sullivan.[30] The email:
(a)stated that Mr Pitman was the landlord of the property;
(b)referred to the attached landlord notice, stating that on 4 April 2013 they had proposed a new rent to DHS to which he had not had a response at that time;
(c)on that basis stated that the Owners did not see that cl 5.7 applied and stated that they did not consent to the matter being referred to a Valuer; and
(d)stated that their opinion was that the rent could be agreed between the parties but that they were waiting on a counter proposal from DHS.
[30] Exhibit A82, 1098.
On 1 November 2013, Mr Sullivan sent an email to Mr Pitman.[31] The email:
(a)stated that the wording of Mr Pitman's email had thrown him a bit and that he thought that he was of the view that a standard annual increase was required; and
(b)sought confirmation that the parties agreed they were going through a market rent review and that the new annual rent was proposed by the Owners.
[31] Exhibit A85, 1105.
On 5 November 2013, Mr Pitman sent an email to Mr Sullivan. The email:
(a)apologised for his email, stating that it was a bit misleading;
(b)for clarity stated that the Owners proposed that the standard fixed increase formula be used to determine the market rent;
(c)stated that they looked forward to a response.
On 13 December 2013, Mr Sullivan sent an email to Mr Pitman enquiring whether they had any market evidence to support the market rent they were proposing.[32]
[32] Exhibit A85, 1104.
In response, on 18 December 2013 Mr Pitman sent an email to Mr Sullivan.[33] The email:
(a)stated that, as Mr Sullivan knew, Centrelink demands high rents because of the comprehensive performance specifications;
(b)referred to the significant recent increases in electricity costs;
(c)stated that they were not privy to other Centrelink rents around Western Australia but said that they could say with 'absolute confidence that the rent reflects the cost to develop a new DHS service centre of the same size and location';
(d)on that basis stated that the present rent could be considered the market rent for that facility; and
(e)sought confirmation that they accepted the proposal stating that the property was in the process of being sold.
[33] Exhibit A85, 1104.
On 18 December 2013, Mr Sullivan sent an email in response.[34] The email:
(a)stated that on his reading of the lease the rent needed to be an open market rental value;
(b)stated that he took this to mean a rent review to comparable tenancies within Busselton and surrounding areas, not necessarily other DHS/Centrelink sites;
(c)stated that 'as we are both aware' Centrelink sites that are custom built have an economic rent for the first term in which the developer takes into account the cost to develop the property;
(d)stated that as a result it was wrong to compare custom built sites in their first term to older sites which should be at market rent; and
(e)stated that the lessor's proposal was not accepted and their expectation would be a reduction in rent to about $290 gross per square metre.
[34] Exhibit A85, 1103 ‑ 1104.
Later that day Mr Pitman responded by email.[35] His email:
(a)stated that the Owners did not agree with JLL's assumptions as to the proposed rent;
(b)agreed that it had to be a fair comparable rent that would have to take into account comparable buildings of a 4.5 star NABERS rating and the direct costs associated with the gross rent; and
(c)stated that their proposed rent remained and that if it was not accepted by the Commonwealth, the Owners would seek a remedy in accordance with the Lease.
[35] Exhibit A85, 1103.
Later that day Mr Sullivan responded saying that he thought it was best that this went to determination, saying that they would need to contact the API (Australian Property Institute) and asking whether the process should be done in the New Year.[36] Mr Pitman responded that he agreed and that he would respond in the New Year.[37]
[36] Exhibit A85, 1103.
[37] Exhibit A80, 1087; exhibit A85, 1103.
On 10 January 2014, there was further email communication between Mr Pitman and Mr Sullivan.[38]
[38] Exhibit A80, 1087.
On 14 January 2014, Mr Sullivan sent an email to Mr Pitman. The email stated that either party could request the API to appoint a valuer. The email requested that Mr Pitman do this and send through the paperwork and invoice for them to process. On the same day Mr Pitman responded by email in terms 'no problem, leave it to me'.[39]
[39] Exhibit A80, 1086; exhibit A89,1132.
On 20 January 2014, the Owners sent an application to the President of the API requesting him to appoint a valuer.[40]
[40] Exhibit 1.
On 27 January 2014, Mr Sullivan sent an email to Mr Pitman asking him how he was going in having that progressed.[41]
[41] Exhibit A78, 1086; exhibit A89, 1132.
On 28 January 2014, Mr Pitman sent an email to Mr Sullivan.[42] The email:
(a)stated that the Owners had sent the relevant form to the President of the API, with a copy of a lease;
(b)stated that the Owners were waiting on a response from the President and for him to allocate a valuer;
(c)stated that he understood that each party then had an opportunity to make submissions; and
(d)concluded by stating that he would let them know as soon as they had received something.

3.3 The Valuer Agreement

[42] Exhibit A89, 1132.

On 19 February 2014, the Owners signed an agreement with Mr Ross Hughes of RH Property.[43] The Commonwealth also signed a copy of the agreement.[44] The agreement stated that the President of API had nominated Mr Hughes to carry out the determination of the open market rental value as described in the Lease and referred to him as the Valuer. Clause 6 of the agreement provided that both parties must provide the Valuer with written submissions on matters which the party considers could affect the open market rental value. Clause 19 provides that the Valuer will make the Determination in accordance with the terms of the Lease. Clause 21 provides that the Determination is final and binding on both parties.
[43] Exhibit A90, 1140 ‑ 1144.
[44] Exhibit A90, 1145 ‑ 1149.
I will refer in greater detail to the terms of this agreement later in these reasons.

3.4 March 2014

In early March 2014, Mr Pitman chased up with Mr Hughes when the Owners' submissions were due, and whether the Commonwealth had signed the Valuer Agreement.[45]
[45] Exhibit A131; exhibit A132.
By letter of 7 March 2014, Mr Hughes stated that submissions were required to be filed by 17 March 2014. He noted that a submission had already been received from the Commonwealth.[46]
[46] Exhibit 2.
By letter of 12 March 2014, Mr Pitman lodged a submission on behalf of the Owners with Mr Hughes.[47] There is no evidence that a copy of the submission was provided to, or required to be provided to, the Commonwealth. I will say more about the content of the Owners' submission in dealing with the estoppel claim made by the Commonwealth.
[47] Exhibit 3.
Also on 12 March 2014, Mr Pitman sent Mr Hughes three emails containing information regarding the Busselton property.[48]
[48] Exhibits 4, 5, 6.
By letter of 14 March 2014, Mr Hughes wrote to the parties stating that submissions had been received from both parties and that pursuant to cl 9 of the Valuer Agreement, the estimated date by which he would provide his determination was 7 April 2014.[49]

3.5 The Determination

[49] Exhibit 7.

By instrument dated 17 April 2014 (the Determination) Mr Hughes determined, or purported to determine, the open market rental value for the premises as at 4 May 2013.[50]
[50] See exhibit A92.
In the Determination, Mr Hughes set out details of the Lease.[51] He stated that the Lease was silent as to a definition of open market rental value. However sch 7, specifically cl B.4.2, prescribes assumptions and items that must be taken into account and excluded in the determination.[52]
[51] Exhibit A92, 1167 ‑ 1169, 11.
[52] Exhibit A92, 1168; see also exhibit A92, recitals C, D.
In the Determination, Mr Hughes quoted a statement from a decided case to the effect that there was no difference between an open market rent and a market rent.[53] He also stated that in arriving at an open market rental value he had had regard to the API Guidance Note entitled 'Assessing Rental Value'.
[53] Exhibit A92, 1172.
Mr Hughes determined the open market rental value of the premises as at 4 May 2013 to be $250,000 per annum.
I will say more about the terms of the Determination later in these reasons.
Following the Determination, the Owners denied that they were bound by it. Thereafter, the parties remained in dispute, leading to the commencement of these proceedings.

The issues

4.1 The Owners' claims

The Owners' primary claim is that in June 2013, the parties agreed that the rent for the fourth Rent Period would be the rent calculated as an increase of the rent from the third Rent Period by the greater of 3.5% or annual CPI.[54]
[54] Amended Statement of Claim dated 11 February 2015 [6F], [6G], [6H], [6I], [6J], prayer for relief aa.
The Owners' alternative case is that the rent for the fourth Rent Period is the same as the rent for the third Rent Period, namely $307,977.24 per annum plus GST.
The Owners put two alternative routes to that conclusion.
First, the Owners plead that cl 5.7.1 of the Lease was void for uncertainty in that there was no procedure set out in sch 7 of the Lease for determining 'market rent' or for determining 'market rent' as at 4 May 2013.[55]
[55] Statement of Claim [6D], [6], prayer for relief (a).
Alternatively, the Owners plead that:
(1)on a proper construction of the Lease, there were terms to the effect that:
(a)if a party wanted the rent to be reviewed for the fourth Rent Period it was to give the other party a notice to the effect that it wished the rent to be reviewed and, thereafter, the parties were to genuinely attempt to reach agreement on the rent for that period;
(b)if no notice of a rent review was given for the fourth Rent Period or no genuine attempt to reach agreement on the rent for that period was made in the period between 4 May and 4 August 2013, the Commonwealth was to pay the Owners the same rent as for the third Rent Period;[56] and
(2)the Commonwealth made no genuine attempt to reach agreement with the Owners as to the rent for the fourth Rent Period before 4 August 2013 in that it did not attempt to process the rent review and respond to the Owners' offer of 4 April 2013 until 21 October 2013 by reason of which the rent for the fourth Rent Period was the same as the rent for the third Rent Period.[57]

4.2 The Commonwealth's defence and the Owners' reply

[56] Statement of Claim [6C(a)], [6C(c)].

[57] Statement of Claim [6K], [6L], prayer for relief (a).

The Commonwealth denies that cl 5.7.1 is void for uncertainty.[58]
[58] Further Amended Defence and Counterclaim dated 23 July 2015 [15].
The Commonwealth denies that the letters of 4 April 2013 and 25 June 2013 gave rise to an agreement about the rent payable for the fourth Rent Period.[59]
[59] Defence [16], [17].
The Commonwealth pleads that, the parties having failed to agree on a new rent for the fourth Rent Period within three months after 4 May 2013, the procedure in sch 7 was used to determine the rent, and market rent was determined in accordance with the procedure set out in sch 7, in that on or about 17 April 2014 the rent for the period commencing 4 May 2013 was determined in accordance with the Lease.[60] It says in consequence, the rent for the fourth Rent Period was determined as $250,000 per annum plus GST.[61]
[60] Defence [23].
[61] Defence [24].
In reply, the Owners plead that the purported Determination has no effect as it was not the market rent determined in accordance with the procedure set out in sch 7.[62]

4.2.1 Nature and effect of the Valuer Agreement

[62] Further Amended Reply and Defence to Counterclaim dated 20 March 2015 [2A].

The Commonwealth pleads that on or about 14 February 2014 the parties entered into the Valuer Agreement pursuant to which they agreed to the appointment of Mr Ross Hughes of RH Property to conduct a rent determination. Pursuant to cl 21 of the Valuer Agreement, the parties agreed to be bound by the Valuer's Rent Determination.[63]
[63] Defence [26], [27].
In reply, the Owners plead that the Valuer Agreement:
(a)is not in accordance with the Lease because it was entered into outside the period provided in cl 5.7.1 and the period in sch 7 cl A.2.1;[64]
(b)was entered into by the Owners in reliance on representations by the Commonwealth's agent that the rent review process in sch 7 applied to the rent review for the fourth Rent Period;[65]
(c)was entered into on the basis that the Owners expressly deny the application of cl 5.7 of the Lease;[66] and
(d)on a proper construction, the parties did not agree that any determination by the Valuer under the Valuer Agreement was to have the effect of setting the rent for the fourth Rent Period under the Lease;[67] and
(e)was based on a mistaken belief that the parties had not already agreed the rent for the fourth Rent Period.[68]
[64] Reply [2(b)] ‑ [2(d)].
[65] Reply [2(e)].
[66] Reply[2(f)].
[67] Reply [2(g)].
[68] Reply[2(h), (i)].
Specifically, the Owners plead that the purported Determination is not in accordance with the Lease because:
(a)clause B.1.1.a of sch 7 required the Valuer to determine the open market rental value of the premises at the Commencement Date of the Further Term whereas the purposed Determination is made as at 4 May 2013;[69]
[69] Reply [3(a)].
(b)the Valuer's Determination and reasons were not given within 28 days of appointment as required by sch 7 cl B.1.1.c;[70]
(c)the Determination was induced by the representation of the Commonwealth's agent and the mistaken belief referred to;[71]
(d)clause 5.7.1 of the Lease requires determination of market rent and not 'open market rental value';[72] and
(e)the determination of market rent requires the Valuer to take into account:
(i)that the Owners and the Commonwealth were participants in the relevant market;
(ii)as at 4 May 2013 the Commonwealth was willing to pay and the Owners were willing to accept the Lease applicable in the third Rent Period; and
(iii)that the Commonwealth was willing to pay a premium for a building of the standard and specifications of the Building. In failing to take those matters into account the Valuer did not determine the market rent in accordance with cl 5.7.1.[73]

4.2.2 The Commonwealth's estoppel claim

[70] Reply [3(b)].

[71] Reply [3(c)].

[72] Reply [3(d)].

[73] Reply [3(e)].

Further, the Commonwealth pleads that the Owners are estopped from claiming that the Determination was not made in accordance with the Lease and claiming that they are not bound by the Valuer Agreement and the Determination. That is said to arise from a number of matters including:
(a)during negotiations the Owners sought, and the Commonwealth agreed, that a clause be inserted in the Lease to provide for a mid‑term market rent review;[74]
(b)the terms of the Lease providing that failing agreement, the process for determining the rent for the fourth rent review period was that set out in sch 7 and the rent so determined was the rent for the fourth Rent Period;[75]
(c)in January 2014, the parties agreed that the President of the API would be asked to nominate a Valuer to undertake a determination of the market rent in accordance with the process in sch 7, referring to emails of 18 December 2013, 10 January 2014, 14 January 2014 and 27 January 2014;[76] and
(d)on 19 February 2014, the Owners expressly agreed to the appointment of the Valuer to undertake the Determination in accordance with the terms of the Valuer Agreement by executing the agreement for rent determination and paying their share of the costs.[77]
[74] Defence [30].
[75] Defence [32].
[76] Defence [33].
[77] Defence [34].
In response to the Commonwealth's estoppel plea, the Owners raise various contentions already raised in other contexts.

4.2.3 The Commonwealth's counterclaim

The Commonwealth makes a counterclaim for the extent it has overpaid rent, being the difference between the rent it has paid and the Determined Rent. That counterclaim is said to be founded on breach of the Lease,[78] alternatively, breach of the Valuer Agreement.[79]

4.2.4 The claim for rectification

[78] Defence [42] - [48].

[79] Defence [49] - [53].

Finally, further and in the alternative, the Commonwealth pleads that the parties both intended that sch 7 of the Lease would apply to the fourth Rent Period and that the Lease as executed inadvertently omitted to include a reference to the fourth Rent Period in cl A.2.1, cl B.1.1.a, cl B.4.2.e, cl B.4.2.h, and cl B.4.2.k of sch 7, and that the Lease should be rectified to include reference to it in those provisions.[80]
[80] Defence [54] ‑ [57].
In reply, the Owners say that if the Lease is to be rectified in the manner pleaded in the counterclaim then it must also be rectified to include a ratchet clause.

4.3 Primary issues for determination

The primary issues that arise are:
(1)Is cl 5.7.1 void for uncertainty?
(2)If so, should the Lease be rectified?
(3)Did the parties agree during 2013 that the rent for the fourth Rent Period would be the greater of an increase of 3.5% or CPI?
(4)Was cl 5.7.1 of the lease never engaged by reason that there was, before 4 August 2013, no genuine attempt by the Commonwealth to agree rent for the fourth Rent Period?
(5)What is the effect of the Valuer Agreement?
(6)In light of the answers to issues (1) to (5), are the parties bound by the Determination?
(7)Does any estoppel arise in favour of the Commonwealth that affects the answer to issue (6)?
I will deal with these issues in turn.
I begin with the question of whether cl 5.7.1 of the Lease is void for uncertainty.

Is cl 5.7.1 void for uncertainty? What is the proper construction of the clause?

As counsel for both parties accepted, the starting point in considering the claim that cl 5.7.1 is void for uncertainty is to construe the clause.

5.1 Principles of construction

The principles relevant to the proper construction of contracts in writing are well established, and were not disputed in this case. I apply the principles stated in Red Hill Iron Ltd v API Management Pty Ltd[81] and in Kidd v The State of Western Australia.[82] In the latter case I set out the following outline.[83]
[81] Red Hill Iron Ltd v API Management Pty Ltd [2012] WASC 323 [106] ‑ [112]; Primewest (Mandurah) Pty Ltd v Ryom Pty Ltd [2014] WASCA 28 [55] (Martin CJ, Murphy JA agreeing); for recent confirmation of these principles see Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 [35] (French CJ, Hayne, Crennan & Kiefel JJ).
[82] Kidd v The State of Western Australia [2014] WASC 99.
[83] Kidd v The State of Western Australia [117], [122] ‑ [124], [126] ‑ [127] footnotes omitted; as to the proposition in the third paragraph quoted from Kidd see also Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014] WASCA 164 [45] (McLure P, Newnes JA agreeing).
In summary:
(1)the primary duty of the court in construing an instrument is to endeavour to discover the intention of the parties as embodied in the words they have used in the instrument;
(2)it is the objectively ascertained intention of the parties, as it is expressed in the instrument, that matters, not the parties' subjective intentions. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood the terms to mean;
(3)the objectively ascertained purpose and objective of the transaction may be taken into account in construing the instrument. That may invite attention to the genesis of the transaction, its background and context;
(4)the apparent purpose or object can be inferred from the express and implied terms of the contract, and from any admissible evidence of surrounding circumstances; and
(5)an instrument can be construed so as to avoid it making commercial nonsense or giving rise to commercial inconvenience. However it must be borne in mind that business common sense may be a topic on which minds may differ.
…
A contract, like a statute, must be constructed as a whole. A construction that makes the various parts of an instrument harmonious is preferable. If possible, each part of an instrument should be construed so as to have some operation.
On the proper construction of a contract, evidence of surrounding circumstances is not admissible unless the court determines that the contract is ambiguous or susceptible of more than one meaning.
Ambiguity is not confined to lexical, grammatical or syntactical ambiguity. It is enough if the instrument is susceptible of more than one meaning or if the scope or applicability of the contract is doubtful.
...
There are limits on the extent to which surrounding circumstances can influence the proper construction of an instrument. Reliance on the surrounding circumstances must be tempered by loyalty to the text of the instrument.
There are also limits on the kind of evidence which is admissible as background to construction of a contract, and the purposes for which it is admissible. Evidence of prior negotiations is admissible for some purposes but not for others. Insofar as such evidence establishes objective background facts known to the parties or the genesis, purpose or object of the transaction it is admissible. Insofar as it consists of statements and actions of the parties reflective of their actual intentions and expectations it is inadmissible. Such statements reveal the terms of the contracts which the party intended or hoped to make. They are superseded by, or merged into, the contract.
Where there are obvious errors in the terms of an instrument, a court will construe the instrument to conform with the objectively determined contractual intent without any need for rectification.[84] The court can supply, omit, correct or interpret words where it is necessary in order to avoid absurdity or inconsistency, or to make the instrument sensible as a matter of construction.[85]
[84] Mander Pty Ltd v Clements [2005] WASCA 67 [92] (McLure J).
[85] Fitzgerald v Masters (1956) 95 CLR 420, 426 ‑ 427 (Dixon CJ & Fullagar J); Adams v Lambert [2006] HCA 10; (2006) 228 CLR 409 [21] (Gleeson CJ, Gummow, Kirby, Hayne, Callinan, Heydon & Crennan JJ); Mander v Clements [92].
The fact that there is scope for considerable disagreement as to the meaning of a contract, or a particular provision in a contract, does not in itself make the contract or the provision void for uncertainty. In a passage cited in many cases[86] Barwick CJ explained the approach to be adopted in Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd:[87]
But a contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not therefore void for uncertainty. As long as it is capable of a meaning, it will ultimately bear that meaning which the courts, or in an appropriate case, an arbitrator, decides is its proper construction: and the court or arbitrator will decide its application. The question becomes one of construction, of ascertaining the intention of the parties, and of applying it. … So long as the language employed by the parties, to use Lord Wright's words in Scammell (G) & Nephew Ltd v Ouston is not 'so obscure and so incapable of any definite or precise meaning that the court is unable to attribute to the parties any particular contractual intention', the contract cannot be held to be void or uncertain or meaningless. In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Thus will uncertainty of meaning, as distinct from absence of meaning or of intention, be resolved.
[86] See, for example, Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd [2000] WASCA 27; (2000) 22 WAR 101 [30] (Ipp J, Pidgeon J agreeing); Australian Goldfields NL (in liq) v North Australian Diamonds NL [2009] WASCA 98; (2009) 40 WAR 191 [142] (Buss JA).
[87] Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429, 436 ‑ 437 footnotes omitted; see also Meehan v Jones [1982] HCA 52; (1982) 149 CLR 571, 578 (Gibbs J).
It is only if the court is unable to put any definite meaning on the contract that it can be said to be uncertain.[88] If the contractual provision is irremediably obscure, the court cannot, in effect, make the contract for the parties.[89] Thus, there are limits on how far the court can go to avoid a conclusion of uncertainty.
[88] Meehan v Jones (578); Anaconda Nickel [31]; Australian Goldfields NL v North Australian Diamonds [6] ‑ [7] (McLure JA).
[89] Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130, 135 (Kirby P); Robertson v Unique Lifestyle Investments Pty Ltd [2007] VSCA 29 [38] (Habersberger AJA, Warren CJ & Neave JA agreeing).
The distinction may be expressed, as Barwick CJ put it, as being between uncertainty of meaning on the one hand and absence of meaning or of expressed intention on the other.

5.2 The competing approaches

Clause 5.7.1 expresses the intention that:
(a)if the parties reach agreement as to the rent for the fourth Rent Period of the Term, the rent for that period will be as agreed;
(b)if no agreement has been reached by three months after the commencement of the fourth Rent Period, the rent will be the market rent determined in accordance with the procedure set out in sch 7.
The parties thereby expressed an intention that the procedure set out in sch 7 would apply to the determination of a market rent for the fourth Rent Period. However, difficulties arise when the provisions in sch 7 are considered.
The procedure in sch 7 is tailored to a determination of the open market rental value at the commencement of the Further Term (ie - the term arising upon the exercise of an option by the Commonwealth). It is not apposite to a determination of rent for the fourth Rent Period of the Term. This is apparent from consideration of cl A.2.1, and, especially, cl B.1.1(a) and cl B.4.2.
The Owners submit that the difficulties thus arising are irremediable; the parties' intentions have misfired and, especially when account is taken of the commercial context revealed in the DCL Agreement, no proper process of construing the clause can permissibly resolve these difficulties. The result is that cl 5.7.1 is void for uncertainty.
Prior to the trial, the response of the Commonwealth to the Owners' pleaded contentions was, with respect, less than clear. Certainly, one of the Commonwealth's responses was to plead that if cl 5.7.1 was uncertain, the Lease should be rectified to make sch 7 applicable to the determination of rent for the fourth Rent Period. Whether it was clear before trial or not, by the trial it was also part of the Commonwealth's case that the difficulties I have referred to could be resolved by construction of cl 5.7.1. At trial it was common ground that, before any conclusion that a clause was void for uncertainty could be reached, the instrument and the clause must be construed.[90]
[90] ts 33, 206, 210.
The Commonwealth submits,[91] in effect, that:
(1)clause 5.7.1 should be construed as meaning 'the market rent determined in accordance with the procedure set out in sch 7 with any necessary modifications';
(2)the necessary modifications to sch 7 when it is applied to the determination of market rent for the fourth period are:
(a)to insert the words 'the fourth Rent Period of the Term or' before the words 'the Further Term' in cl A.2.1; and
(b)to insert the same words before the words 'the Further Term' in cl B.1.1(a).
[91] ts 268 ‑ 269.
It is an element of the Commonwealth's construction that the parties objectively intended that market rent in cl 5.7.1 and open market rental value as referred to in sch 7 mean the same thing.[92] An alternative construction is that market rent is not to be equated with open market rental value. That gives rise to the following possible construction:
(1)clause 5.7.1 should be construed as meaning 'the market rent determined in accordance with the procedure set out in sch 7, with any necessary modifications';
(2)the necessary changes to sch 7 when it is applied to the determination of market rent for the fourth period are the:
(a)insertion of the words 'the fourth Rent Period of the Term' immediately before the words 'the Further Term' in cl A.2.1;
(b)modification of cl B.1.1(a) to read that the 'Valuer must determine the market rent of the premises at the commencement date of the fourth Rent Period of the Term (Effective Date)'; and
(c)deletion of cl B.4.2.
[92] ts 271 ‑ 273.
At trial, the court proffered this as an available construction that needed to be considered and rejected before it could be concluded that cl 5.7.1 was void for uncertainty.[93] The parties addressed submissions to this alternative construction.

5.3 The DCL Agreement

[93] ts 66, 81, 209 ‑ 210.

It is common ground that, in construing the Lease, regard can be had to the DCL Agreement.[94] The DCL Agreement was the genesis of the Lease. It assists in identifying the commercial context and objects of the Lease. The DCL Agreement was entered into between Merilla and the Commonwealth. It is an express exception to the entire agreement clause in cl 1.2.9 of the Lease.[95]
[94] ts 41, 214.
[95] See exhibit A50, sch 1, item F.
By the DCL Agreement, Merilla agreed to design and construct a building to the Commonwealth's specifications, and then to lease that land and building to the Commonwealth. The terms of the contemplated lease were a schedule to the DCL Agreement. Those terms reflect the terms of the Lease.
The DCL Agreement provides for exacting and detailed specifications reflecting the requirements and standards expected by the Commonwealth.[96] The DCL Agreement contained a number of provisions commonly found in a construction contract. These included provisions as to practical completion, building standards and defects liability.
[96] See, for example, the performance specifications in exhibit A45, sch 7.
Under the DCL Agreement, with one exception relating to variations,[97] the Commonwealth was not obliged to pay for the costs of construction of the building that was to be purpose‑built for it. The only payments by the Commonwealth to Merilla contemplated under the DCL Agreement were the payments of rent to be made under the Lease that was subsequently to be entered. The connection between the rate of rent and the costs of construction was made explicit by cl 9 of the DCL Agreement. That clause permits the Commonwealth to make variations to the building to be constructed. If the variation leads to a decrease in construction costs, that results in a decrease in the Rent Rate to be applied under the Lease.
[97] See exhibit A45, cl 9, especially cl 9.3.1.
That aspect of cl 9.2.1 makes clear what is anyway plainly implicit in the scheme of the DCL Agreement. The owner would recoup the costs of construction of the building through the rent to be paid under the Lease, and the rent under the Lease would be fixed with that object squarely in mind. In this context, the detailed and exacting standards and specifications required by the Commonwealth must be borne in mind. Reasonable commercial parties would not assume that those costs could be recovered through rent under a lease involving other tenants, particularly in a relatively small regional city such as Busselton. Thus, an objectively apparent object is for a party in the position of the Owners to obtain a reasonable rate of return on its construction costs, and the costs of acquisition of the land, through the rent during the Term. The position in relation to any further term is different. A further term will only arise at the election of the Commonwealth. Thus, reasonable commercial parties would know or expect that a party in the position of the Owners would not reasonably rely on the rent during a further term to recoup its costs of constructing a purpose built building.

5.4 Summary of conclusions

In my view, cl 5.7.1 is not void for uncertainty. I consider that it should be construed in accordance with the alternative construction proffered by the court. In explaining my reasons for those conclusions, first, I will explain why I prefer the alternative construction to the Commonwealth's construction. I will then explain why I adopt the alternative construction and reject the Owners' contention that no meaning can be ascribed to cl 5.7.1 such that it is void for uncertainty.

5.5 Is the Commonwealth's construction or the alternative construction preferable?

The Commonwealth submits that the language of cl 5.7.1 echoes the language of cl 33.1 in that both use the phrase 'determined in accordance with the procedure set out in schedule 7'. The Commonwealth submits that that is indicative of the parties' intention in cl 5.7.1 to import reference to the open market rental value in sch 7, given that that is what occurs in the case of cl 33. In my view, there are two reasons why this submission has little weight.
First, it is clear that the terms of sch 7 require some modification when they are to be applied to cl 5.7.1. Consequently, in my view, the common elements in the language of cl 5.7.1 and cl 33.1 cannot be given too much weight.
Secondly, and more importantly, the language of the two clauses is materially different. Clause 33 gives rise to a new lease, whereas the fourth Rent Period is simply one period of the existing Lease. Further, cl 5.7.1 refers expressly to the new rent as being 'the market rent'; there is no reference to market rent in cl 33.1.
Further, the Commonwealth points to the fact that in items N and T of sch 1 the term Market Review Date is used to describe two different dates. Market Review Date is the third anniversary of the commencement date and, in item T, the same term, Market Review Date is used to refer to the commencement date of the Further Term(s). The Commonwealth suggests that is an indication that the two reviews are intended to be of the same character, such that there is no difference between market rent and open market rental value.[98] To my mind, this feature of the contractual scheme is of very limited assistance. The definitions in items N and T are used to define review dates. They do not purport to, and do not, elucidate the criteria of the review that is to occur. That is to be found in other provisions.
[98] ts 271.

The Commonwealth submits that the composite phrase in cl 5.7.1 'the market rent determined in accordance with the procedure set out in schedule 7' should be taken to reflect an objective intention that the open market rental value in sch 7 is the intended defining and elucidating of the market rent referred to in cl 5.7.1, because it is to sch 7 that cl 5.7.1 directs attention in order to determine market rent, and sch 7 identifies a process of determining open market rental value.[99]
[99] ts 271.
I accept that there is some force in that submission. However, for the reasons that follow, I prefer the alternative construction.
To my mind, the use of different language supports the alternative construction. The natural starting point is that the different phrases 'market value' and 'open market rental value' are intended to mean different things. The Commonwealth's submission just referred to might be thought to militate against that starting point. If, apart from the difference in reference to market rent and open market rental value, no other modifications of sch 7 were necessary in order for it to be applied to the determination to market rent, the Commonwealth's argument would have had more force. However, it is clear that, even apart from the question of market rent versus open market rental value, some other modifications of sch 7 are necessary. To my mind, that detracts from the weight to be given to the Commonwealth's argument.
In my view, consideration of the commercial genesis, context and object of the Lease, revealed in the DCL Agreement, distinctly favours the alternative construction. That commercial context seems to me to reinforce the textual indication that when the parties used the two different phrases 'market rent' and 'open market rental value', they meant different things.
To recap, the commercial context as revealed by the DCL Agreement is that:
(a)Merilla was obliged to design and construct a building to the Commonwealth's specifications, tailor‑made to suit the Commonwealth's needs; and
(b)subject to an immaterial exception, the only payments to be made by the Commonwealth in respect of the construction costs were in paying rent under the Lease.
The market rent review under cl 5.7.1 applies to the fourth Rent Period of the Term of the Lease.
Schedule 7 in its terms is expressed to apply to the determination of the rent for the Further Term. In substance, that is a determination of rent for a new lease that may or may not come into existence, depending upon whether the Commonwealth exercises its option.
Clause B.4.2 of sch 7 provides that the valuer must determine the 'open market rental value of the premises at the effective date' assuming:
(a)the landlord is a willing but not anxious landlord and the tenant is a willing but not anxious tenant;
(b)the premises are available with vacant possession;
(c)and taking into account the factors listed in cl B.4.2(c) to cl B.4.2(i), but not taking into account the factors listed in cl B.4.2(j) to cl B.4.2(p).
Among other things, that means that the valuation exercise:
(a)assumes the premises are available with vacant possession;[100]
(b)is to be done on the basis that only comparable premises in Busselton are to be considered;[101]
(c)excludes the special interests of the Commonwealth as tenant, including a sitting tenant;[102] and
(d)excludes any right of the Commonwealth to use any part of the building or land other than the net lettable area of the premises and car parking bays.[103]
[100] Exhibit A50, sch 7, cl B.4.2(b).
[101] Exhibit A50, sch 7, cl B.4.2(c).
[102] Exhibit A50, sch 7, cl B.4.2(m).
[103] Exhibit A50, sch 7, cl B.4.2(o).
In my view, a determination of 'market rent', if not expressly required to be done in accordance with cl B.4.2, and when done in the context of the fourth Rent Period of the seven year lease of a property with a building that had been purpose built for the tenant, would not be constrained in these various ways. In other words, the specific criteria excluded and included by cl B.4.2 differ from the position that would apply under a general provision for market rent.
In particular, under a general provision the range of hypothetical tenants and landlord would include the landlord who had spent a considerable amount of money on building a purpose‑built building, and the tenant for whom the building had been built and whose needs it was specifically designed to meet. That owner would tend to hold out to recover an appropriate return on the capital costs of construction through the rent. That tenant would tend to pay a higher rent to reflect the special suitability of the property for that tenant's needs. For the reasons in the following four paragraphs, these matters would be relevant to the determination of 'market rent' if no criteria were stipulated.
In some land acquisition valuation cases it is recognised that land may have a special value to its owner over and above its market value.[104] However, there is often not a hard and fast distinction between considerations that inform market value and those that might be thought to give land a special value to the owner.
[104] Pastoral Finance Association Ltd v Minister [1914] AC 1083; Boland v Yates Property Corp Pty Ltd [1999] HCA 64; (1999) 167 ALR 575 [80] ‑ [82] (Gleeson CJ), [292] (Callinan J); Mount Lawley Pty Ltd v Western Australian Planning Commission [2004] WASCA 149; (2004) 29 WAR 273 [281] ‑ [287] (the Court); Hyam AA, The Law Affecting Valuation of Land in Australia (5^th ed, 2014) 384 ‑ 399.
The point is illustrated by the High Court's decision in Boland v Yates.[105] In that case, a party which had made a claim for compensation for land compulsorily acquired sued its solicitors and counsel for negligence in the way the claimant's case had been formulated and presented. Relevantly, the negligence was said to be in failing to present a claim for loss in relation to the owner's 'head start', as an element of a claim of special value to the owner. The High Court held that most, if not all, of the considerations said to have given rise to the head start element of special value were in fact part of the market value case presented by the defendants at trial, and that was consistent with a proper understanding of the determination of market value.[106]
[105] Boland v Yates [1999] HCA 64; (1999) 167 ALR 575.
[106] Boland v Yates [53] ‑ [54], [83] ‑ [84], [90] (Gleeson CJ), [266] ‑ [275], [298] (Callinan J).
As the Full Court observed in Mount Lawley Pty Ltd v WAPC[107] factors indicating a special value to the owner are likely to be components of the market value which are recognisable as such by a notional vendor and purchaser who are 'conversant' or 'perfectly acquainted' with the land and all its features.
[107] Mount Lawley Pty Ltd v WAPC [286].
In assessing market value:
(1)the hypothetical parties are taken to be perfectly acquainted with the land and all circumstances affecting its value;[108]
(2)all possible purchasers should be considered, including the owner;[109] and
(3)costs that have been incurred by the owner are relevant to the assessment of market value.[110]
[108] Spencer v The Commonwealth (1907) 5 CLR 418, 432 (Griffith CJ), 441 (Isaacs J); Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25; (1999) 199 CLR 413 [49] ‑ [50] (McHugh J); Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority [2008] HCA 5; (2008) 233 CLR 259 [51] (Gleeson CJ, Gummow, Hayne, Heydon & Crennan JJ).
[109] Montreal v Sunlife Assurance Co of Canada [1952] 2 DLR 81, 90, 101 ‑ 102 (Lord Porter on behalf of the Privy Council); Brisbane Water County Council v Commissioner of Stamp Duties [1979] 1 NSWLR 320, 324 (Waddell J); Mordecai v Mordecai (1988) 12 NSWLR 58, 69 ‑ 70 (Hope JA); MMAL Rentals Pty Ltd v Bruning [2004] NWCA 451; (2004) 63 NSWLR 167 [73] ‑ [74] (Spigelman CJ); Alpine Shire Council v MHSC Transportation Services Pty Ltd [2002] VSC 22 [82] ‑ [83] (Balmford J).
[110] Montreal v Sunlife Assurance (90, 101 ‑ 102); Alpine Shire Council [82] ‑ [83].
Under cl B.4.2, the special interest of the Commonwealth as tenant in premises that had been purpose built to its exacting specifications is expressly excluded from consideration in determining the open market rental value.[111]
[111] Exhibit A50, sch 7, cl B.4.2(m).
Further, in determining the market value of land, an arms‑length sale of the subject land is a good means, perhaps the best means, of arriving at its value.[112] By analogy, in determining the market rent, the terms of a recent arms‑length lease for the subject property, including its rent, would generally be relevant. However, under cl B.4.2(m), the weight to be given to that consideration is diminished by the requirement to ignore the special interest of the Commonwealth in the premises.
[112] Jowett v Federal Commissioner of Taxation (1926) 38 CLR 325, 329 (Rich J).
In short, factors conducive to the Owners recovering rent that takes account of the development costs of the site, and of the Commonwealth's interest in securing a building purpose built for its requirements, are excluded from consideration in determining the open market rental value under cl B.4.2 of sch 7. Given the commercial objects of the Lease, that is a reason to favour the alternative construction over the Commonwealth's construction.
In my view, consideration of the commercial context and evident object of the Lease, construed in light of the DCL Agreement supports the conclusion that in using different language, by referring to market rental in cl 5.7.1 while not doing so in cl 33.1, and in referring to open market rental value in sch 7, the parties intended a different approach to the determination of the rent in those two situations. To my mind, the text and context indicate that the parties intended to distinguish between the setting of rent for the Further Term, for which a narrower range of considerations would be relevant, and the setting of a mid‑term rent during the Term. The review under cl 33 is for the Further Term. In that context the parties intended that rent be set in accordance with the open market rental value, and that that be determined under sch 7 including, in particular, by reference to the requirements set out in cl B.4.2 of sch 7. By contrast, for the review of rent under cl 5.7.1, for the fourth Rent Period for the Term, the parties intended that, if they could not agree, the rent would be determined as the 'market rent'. That would involve a broader assessment, unconstrained by the specific requirements and exclusions in cl B.4.2 of sch 7.
The difference between the two approaches makes commercial sense in light of the commercial context and object of the Lease, as revealed by the DCL Agreement.[113]
[113] See [106] above.
For these reasons, I prefer the alternative construction to the Commonwealth's construction.

5.6 Clause 5.7.1 is not uncertain

Views may differ as to whether the alternative construction, which I have adopted, or the Commonwealth's construction is to be preferred. The existence of that question of construction does not render cl 5.7.1 void for uncertainty.
It is only where the language of the instrument is so obscure and so incapable of any definite or precise meaning that a court is unable to attribute to the parties any particular contractual intention that a court should conclude that the contract, or a clause, fails for uncertainty.[114]
[114] See [91] ‑ [93] above.
It is true, as the Owners emphasise, that the terms of sch 7 cannot be applied literally and without modification to determination of market rent for the fourth Rent Period. In my view, that can be resolved as a matter of construction, by reading the Lease as a whole and construing it to conform with the objectively determined common intent.[115] The evident intention of the parties, as expressed in cl 5.7.1, is given effect by construing cl 5.7.1 as if it included the words 'with all necessary modifications'. Those words can be read into the clause because it is necessary to do so to make the instrument sensible as a matter of construction.[116]
[115] See [90] above.
[116] See [90] above.
The Owners submit that there is nothing in the terms of sch 7 that links it to, or makes it apposite for, a determination of market rent, or otherwise reveals an intention that sch 7 be applied to a market rent determination.[117] It is true that, apart from the appointment process under cl A.2.1, sch 7 does not, by its terms, purport to apply of its own force to a determination of market rent. But that work is done by cl 5.7.1 itself. Clause 5.7.1 evinces the intention that sch 7 apply to a determination of market rent.
[117] ts 308.
The Owners accept that a provision requiring a valuer to determine 'market rent' without stating the criteria, is not unworkably uncertain.[118]
[118] ts 81.
The Owners submit that:
(1)the court must be satisfied that the words to be added, by construction, to the words used in the clause reflect the objective intention of the parties;[119]
(2)part of the commercial context and object of the Lease is that it is objectively intended that the rent for the Term enables the Owners to cover the construction costs that would not, or might not, be recovered from an ordinary tenant;[120]
(3)that object or aim is not met by the alternative construction, because that construction would enable the rent to fall;[121] and
(4)thus the court should not be satisfied there is a sufficient basis to infer that the parties intended that their contract, in effect, contained the words 'with any necessary modifications' in cl 5.7.1.[122]
[119] ts 63, 64, 68, 309 ‑ 310.
[120] ts 68; plaintiffs' opening submissions dated 11 June 2015 [30] ‑ [31].
[121] ts 56 ‑ 57, 68, 310 ‑ 312.
[122] ts 68, 69, 310 ‑ 312.
Although I accept the first and second of these propositions, I do not accept the conclusion reflected in the fourth proposition.
The parties express their intention in cl 5.7.1 that, if not agreed, the rent for the fourth Rent Period would be the market rent determined in accordance with the procedure set out in sch 7. By its nature, the notion of market rent involves the prospect that the rent may go up or down. There is nothing in what is said in sch 7 that qualifies or changes that position. Thus, the language of the relevant parts of the instrument allows for rent to rise or fall on the review for the fourth Rent Period. I am not persuaded that consideration of the commercial object of the transaction justifies the rejection of an otherwise available construction of the language of the instrument on the ground that it would permit the rent to fall.
In the process of construction, there is a limit to the work that can be done by considerations of background facts, object and purpose. Those considerations do not permit the court to ignore the language of the text, or to rewrite it to include provisions reflecting what the court might infer from the background facts to have been intended by the parties. Reliance on background must be tempered by loyalty to the contractual text.[123] Similarly, in the process of determining whether the provisions of the Lease in cl 5.7.1 and sch 7 are so obscure that the court cannot put any definite meaning on them, there is a limit to the work that can be done by considerations of background facts, object and purpose.
[123] Kidd v The State of Western Australia [126]; Red Hill Iron Pty Ltd v API Management Pty Ltd [121], and cases there cited.
In my opinion, it is evident from cl 5.7.1, and to a lesser extent from cl A.1.1 of sch 7, that the parties intended that the process of determining market rent under cl 5.7.1 would be governed by sch 7. If effect is to be given to that intention, some modification to the provisions of sch 7 is required. A question arises in that context as to whether market rent is or is not to be equated to open market rental value. I have considered and determined that question in the preceding part of these reasons. I have concluded that the commercial context supports the conclusion that the parties did not intend that 'market rent' be equated with 'open market rental value'. In that way, the commercial context and object of the transaction is properly brought to bear on the question of construction that arises.
It is one thing to have regard to considerations of context and object to inform a choice between competing constructions. It is another thing to have regard to such considerations in rejecting a construction that is available on the language of the instrument so as to reach a conclusion that the language of the instrument is irremediably obscure and incapable of being given any definite meaning. Moreover, the Owners invite such an approach without identifying any particular alternative meaning that might be said to arise. Rather, the Owners submit that the parties' attempt to express their intention has misfired, and so the provision fails.
In my view, the language of cl 5.7.1, read with sch 7 and in the context of the Lease as a whole, is not expressed so irremediably obscurely that the court is unable to put any definite meaning on it; and consideration of the commercial context and object does not sustain a contrary conclusion.
For these reasons, I adopt the alternative construction of that clause and reject the Owners' contention that cl 5.7.1 is uncertain.
Given my conclusion that cl 5.7.1 is not void for uncertainty, the Commonwealth's counterclaim for rectification does not arise. Nevertheless, for the sake of completeness, I will state my conclusions in relation to the counterclaim on the assumption that cl 5.7.1 is void for uncertainty.

Rectification

I apply the principles stated in RCR Tomlinson Ltd v Russell.[124]
[124] RCR Tomlinson Ltd v Russell [2015] WASCA 154 [48] ‑ [54] (the Court).
The matters on which the Commonwealth relies in support of its plea of rectification are certain written communications between the parties prior to execution of the Lease, and cl 5.7.1, sch 1 and sch 7 of the Lease.[125] The claim for rectification only arises if cl 5.7.1 is void for uncertainty.[126] By definition, that means that the tensions between the language of cl 5.7.1 on the one hand and the language and structure of sch 7 on the other hand have been unable to be resolved by a process of construction. None of the matters on which the Commonwealth relies in support of its claim for rectification advance the resolution of the tension just referred to beyond the position reflected in the terms of the Lease as executed. In my view, in the circumstances of this case, if the tensions referred to cannot be solved by the process of construction, they cannot be solved by rectification.
[125] See the particulars of [54] of the defence.
[126] ts 40.
For these reasons I would have dismissed the Commonwealth's counterclaim for rectification.

Was the rent for the fourth Rent Period agreed between the parties?

7.1 The Owners' case

The Owners' pleaded case is that the letter of 4 April 2013 from Property Matrix to JLL was an offer which was accepted by Property Matrix's email of 25 June 2013.[127] The Owners' written and oral submissions put their case as to the agreement regarding rent in a different way. The Owners contend that when regard is had to the communications between the parties in the period from April 2013 until October 2013, by some time prior to 21 October 2013 an inferred agreement was reached between the parties.
[127] Statement of Claim [6F], [6G].
In support of that contention, the Owners submit, in summary, that:
(1)the references in the email of 2 April 2013 and the letter of 4 April 2013 to an increase in rent reveals the parties' intention that the rent would increase;[128]
(2)there are repeated references in the communications in this period to the need to provide a NABERS certificate and relevant services contracts. These documents are only required under cl 5.8.2 if the rent was to be increased. Accordingly, the fact they were requested indicates that the parties had agreed that the rent would increase;[129]
(3)JLL's email of 25 June 2013 stated that DHS have 'agreed to process the rent review(s)'.[130] The effect of cl 5.8.1 is that there is no rent review to process unless the parties had agreed to an increase in rent for the fourth Rent Period;[131]
(4)JLL had the express authority of DHS for the communication of 25 June 2013. That authority was provided by Ms Anderson's email of 18 June 2013;[132]
(5)Property Matrix's letter of 1 July 2013 stated that the rent review was due on 4 May 2013 and 'as per the [lease] agreement' the rent was calculated using the greater of either 3.5% or the annual CPI increase, stating that 3.5% had been used and attaching the calculations. In the following three and a half months, neither JLL nor the Commonwealth responded with any statement to the effect that the rent was not increasing in the manner stated in the letter of 1 July 2013;[133]
(6)by emails of 16 and 17 October 2013, JLL continued to request the documents required under cl 18.6 and cl 18.8;[134] and
(7)all the communications between the parties in the period between 2 April and 17 October 2013 are consistent with an assumption that the rent for the fourth Rent Period was to be determined in accordance with a mechanism in cl 5.3 of the Lease, namely the greater of 3.5% or CPI.[135]

I am not satisfied that I should:
(a)infer that the Owners resiling from the Assumption would cause the Commonwealth detriment in the form of a loss of opportunity to negotiate with the Owners in early 2014 to reach an agreed solution; and
(b)conclude that that detriment sustains enforcement of the Assumption.
For these reasons, I am not satisfied that the Commonwealth has demonstrated the elements of reliance and detriment.
For these reasons, I reject the Commonwealth's estoppel claim.

Conclusion

I have reached the following conclusions:
(1)cl 5.7.1 is not uncertain;
(2)on its proper construction, cl 5.7.1 requires the determination of market rent for the fourth Rent Period of the Term, such determination to be made in accordance with sch 7, with all necessary changes;
(3)the necessary changes to sch 7 when it is applied to the determination of market rent for the fourth period are:
(a)the insertion of the words 'the fourth Rent Period of the Term' immediately before the words 'the Further Term' in cl A.2.1;
(b)the modification of cl B.1.1(a) to read that the 'Valuer must determine the market rent of the premises at the commencement date of the fourth Rent Period of the Term (Effective Date)'; and
(c)the deletion of cl B.4.2;
(4)the Owners and the Commonwealth did not make an agreement during 2013 as to the rent for the fourth Rent Period;
(5)the Owners' contention that cl 5.7.1 was never engaged fails;
(6)the Valuer Agreement does not alter the rights of the parties under the Lease, except insofar as cl 9 does so;
(7)the parties are not bound by the Determination, because it was not made in accordance with the Lease; and
(8)the Commonwealth has not established any estoppel in its favour.
I will hear further from the parties as to the declarations and orders that should be made to give effect to these conclusions.
I will also hear from the parties as to costs.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION: MERILLA PTY LTD -v- COMMONWEALTH OF AUSTRALIA [2015] WASC 309 (S)

CORAM: BEECH J

HEARD: ON THE PAPERS

DELIVERED : 11 SEPTEMBER 2015

FILE NO/S: CIV 1879 of 2014

BETWEEN: MERILLA PTY LTD
ARTUS PTY LTD
Plaintiffs
AND
COMMONWEALTH OF AUSTRALIA
Defendant

Catchwords:

Costs - Whether any party was successful in the action - Appropriate exercise of the costs discretion - Turns on own facts

Legislation:

Rules of the Supreme Court 1971 (WA), O 66 r 1, O 66 r 2

Result:

No order as to costs

Category: B

Representation:

Counsel:

Plaintiffs: No appearance (on the papers)
Defendant: No appearance (on the papers)

Solicitors:

Plaintiffs: Lawfield Legal Practice
Defendant: Minter Ellison

Case(s) referred to in judgment(s):

Chen v Chan (No 2) [2009] VSCA 233
Merilla Pty Ltd v Commonwealth of Australia [2015] WASC 309
Souter v Condor Developments Pty Ltd [2012] WASCA 227
BEECH J:

Introduction

On 20 August 2015, I delivered reasons for decision after the trial of this action.[199] On that day, I made declarations that:
[199] Merilla Pty Ltd v Commonwealth of Australia [2015] WASC 309 (Primary Reasons). In these reasons I use the terminology and abbreviations used in the Primary Reasons.
(1)the rent payable under the Lease for the period from 4 May 2013 to 3 May 2014 has not been agreed or determined in accordance with cl 5.7.1 of the Lease;
(2)the rent determination (the Determination) of Mr Ross A Hughes dated 17 April 2014 was not made in accordance with the terms of the Lease and is not binding on the plaintiffs and the defendant; and
(3)cl 5.7.1 of the Lease is not void for uncertainty.
I also made orders otherwise dismissing the plaintiffs' claims and dismissing the defendant's counterclaim; and for the exchange of submissions and affidavits on the question of costs. I ordered that the question of costs be determined on the papers. These reasons deal with the costs of the action, including the counterclaim.

The competing positions on costs

The Owners seek an order that the Commonwealth pay their costs of the action, including the counterclaim. In summary, they point to the following matters in support of that conclusion:[200]
[200] Plaintiffs' submissions dated 28 August 2015 [2].
(1)the Commonwealth was entirely unsuccessful in its counterclaim;
(2)the Owners were generally successful in their claim, in that they obtained declaratory relief inconsistent with the Commonwealth's assertion that the Determination was binding;
(3)although the Owners were unsuccessful on some issues, those issues did not add to the costs of the proceedings in a significant and readily discernible way, and were, in any event, part of a single substantive contest about whether the Commonwealth was entitled to a reduction of the rent for the fourth Rent Period to $250,000 per annum, plus GST, in accordance with the Determination; and
(4)in 2014, the Owners asked the Commonwealth to accept that the Determination was not binding and that the Commonwealth was obliged to continue paying the rental for the previous rent period. The Commonwealth's refusal to accept that position was the effective cause of the action and the costs associated with it, and the Commonwealth failed to achieve a better outcome than that in the proceedings.
The Commonwealth submits that each party should bear its own costs. In support of that contention, it submits that:
(1)neither party should be considered to have been successful for the purposes of O 66 r 1;[201] and
[201] Defendant's submissions dated 28 August 2015 [5] ‑ [8].
(2)alternatively, if and insofar as the Owners are considered to be the successful party for the purposes of O 66 r 1, they should nevertheless not recover their costs because of the limited extent of their success.[202]
[202] Defendant's submissions dated 28 August 2015 [10].

Costs: general principles

The court's costs discretion under s 37 of the Supreme Court Act 1935 (WA) and O 66 of the Rules of the Supreme Court 1971 (WA) is broad.
Order 66 r 1(1), r 1(2) and r 1(3) are in the following terms:
1.General rules as to costs
(1)Subject to the express provisions of any statute and of these Rules the costs of and incidental to all proceedings including the administration of estates and trusts shall be in the discretion of the Court but, without limiting the general discretion conferred on the Court by the Act, and subject to this Order, the Court will generally order that the successful party to any action or matter recover his costs.
(2)If the Court is of opinion that the conduct of a party either before or after the commencement of the litigation or that a claim by a party for an unreasonably excessive amount has resulted in costs being unnecessarily or unreasonably incurred it may deprive that party of costs wholly or in part, and may further order him to pay the costs of an unsuccessful party either wholly or in part.
(3)Where a party though generally successful in an action has, by the introduction of some issue or issues on which he has failed, increased the costs the Court may order such party to pay the costs of such issue or issues.
Order 66 r 1(1) provides a statutory starting point of a costs order in favour of the successful party. That rule directs attention to identifying the successful party to the action. I will return to that question.
Order 66 r 2(a) and 2(b) provide:
In the absence of any special order ‑
(a)where the statement of claim contains more than one cause of action and the plaintiff succeeds on one or more causes of action and the defendant succeeds on another or others, costs shall be allowed to the plaintiff on the cause or causes of action on which he succeeds and to the defendant on that or those on which he succeeds, in the same manner as if separate actions had been brought;
(b)where there is judgment for one party on the claim with costs and judgment for the other party on the counterclaim with costs, the costs shall be assessed as if each party had succeeded in an independent action and charges which cover without discrimination, work referable to the claim and work referable to the counterclaim, shall be divided between the claim and the counterclaim in the proportion in which the work covered by such charge is properly attributable to the claim and to the counterclaim.
I apply the following principles stated by Newnes JA (Buss & Murphy JJA agreeing) in Souter v Condor Developments Pty Ltd:[203]
[203] Souter v Condor Developments Pty Ltd [2012] WASCA 227 [28] ‑ [30].
First, where a party, although generally successful, has failed on some issue or issues which increased the costs of the action, the court may order the party to pay the costs of those issues: O 66 r 1(3). But that is a power to be exercised with caution and not as a matter of course. While parties should be encouraged to litigate only those matters which are properly and reasonably in issue, parties should not be dissuaded by the risks of an adverse costs order from canvassing all issues which might be material to the proper determination of a case: Keet v Ward [18]. Moreover, any practice of determining costs on the basis of a painstaking analysis of which party won on which issue would simply add to the time, costs and uncertainty of litigation: see Bowen v Alsanto Nominees Pty Ltd [2011] WASCA 39 (S) [6]. Such an approach may also fail to do justice in cases where the issues were intertwined or overlapped, or there was only one substantive issue. The exercise of the power to adjust an order for costs by reference to particular issues upon which an otherwise successful party has failed will ordinarily be appropriate only where the party has failed on discrete and severable issues which have added to the costs of the action in a significant and readily discernible way: Amaca Pty Ltd (formerly James Hardie & Co Pty Ltd) v Hannell [2007] WASCA 158 (S) [7].
Where the court considers that an order as to costs should reflect the failure of the successful party on some issues in the action, the better approach will often be to award the successful party a proportion of its costs, or to make no order as to costs, rather than attempt to award costs to the respective parties on an issue by issue basis: Phillips Fox (A Firm) v Westgold Resources NL [2000] WASCA 85 [28]. Where a party is awarded only a proportion of its costs, the exercise of discretion involved will inevitably be more a matter of art than science, depending upon matters of impression and evaluation, and mathematical precision will be illusory: Amaca [6]; Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261, 272.
Secondly, where a plaintiff pleads two or more causes of action but succeeds on only some of those causes of action, the general rule is that the plaintiff is entitled to costs on the causes of action on which it was successful and the defendant is entitled to costs on the causes of action on which it was successful, as if separate actions had been brought: O 66 r 2(a). Again, and for similar reasons, an order of that kind is not to be made as a matter of course. It is necessary for the court to look at the realities of the case and attempt to do substantial justice in the particular circumstances. In some cases, while it might be strictly correct to say there are different causes of action involved, there may have been only one contest in substance. That will often be so where all causes of action arise out of the one course of dealings, the one transaction, or the same facts, in which case there would usually be one order for the general costs of the action, moulded as necessary to ensure that substantial justice is done: Permanent Building Society v Wheeler [No 2] (1993) 10 WAR 569, 574 ‑ 575; Keet v Ward [24].
In a case where the parties have had mixed success, in determining the appropriate costs order a court can take into account complications which might arise in the taxation of costs in determining where the overall interests of justice lie.[204]
[204] Chen v Chan (No 2) [2009] VSCA 233 [10] (Forrest AJA, Maxwell P & Redlich JA agreeing).

The proper exercise of the costs discretion

In my opinion, when the result of the action is considered in the framework of the competing claims and counterclaims, an order that there be no order as to costs, so that each party bears its own costs, reflects the substantial justice of the case.
The Owners' claims and the Commonwealth's counterclaim were both substantial components of the trial; each occupied a significant part of the preparation and time at trial. None of the Owners' pleaded claims were upheld. The Owners succeeded in resisting the counterclaim.
In the circumstances of this case, it would be open to make a costs order in favour of the Owners in relation to the counterclaim, and a costs order in favour of the Commonwealth on the Owners' claims. However, in my view, the justice of the case is better served by an order that deals with all of the costs globally, without requiring a line to be drawn between the costs of the action and those of the counterclaim. All of the parties' various causes of action arise out of the one course of dealing between them, involving the same set of facts. The making of a single order in respect of the whole of the costs of the action and the counterclaim seems to me to be conducive to doing substantial justice. Further, a single order avoids the difficulties which would arise upon taxation in apportioning particular parts of the parties' costs as between the action and the counterclaim. I think there would be scope for considerable disagreement between the parties in that process.
Approaching the question of costs globally invites attention to the question of which party, if any, was successful in the action as a whole, including the counterclaim. The Owners submit that in substance, there was only one contest in the proceedings, namely whether the Determination was binding and had set the rent for the fourth Rent Period.[205] I do not accept that characterisation of the substance of the proceedings. In my view, whether the Determination was binding and had determined the rent for the fourth Rent Period reflected the central issue raised by the Commonwealth's counterclaim. However, the Owners' claims travelled substantially beyond an attempt to meet, in anticipation, the Commonwealth's counterclaim.
[205] Plaintiffs' submissions dated 28 August 2015 [19].
In the Primary Reasons, I summarised the Owners' claims in the following way:[206]
[206] Primary Reasons [68] ‑ [72] (footnotes omitted).
The Owners' primary claim is that in June 2013, the parties agreed that the rent for the fourth Rent Period would be the rent calculated as an increase of the rent from the third Rent Period by the greater of 3.5% or annual CPI.
The Owners' alternative case is that the rent for the fourth Rent Period is the same as the rent for the third Rent Period, namely $307,977.24 per annum plus GST.
The Owners put two alternative routes to that conclusion.
First, the Owners plead that cl 5.7.1 of the Lease was void for uncertainty in that there was no procedure set out in sch 7 of the Lease for determining 'market rent' or for determining 'market rent' as at 4 May 2013.
Alternatively, the Owners plead that:
(1)on a proper construction of the Lease, there were terms to the effect that:
(a)if a party wanted the rent to be reviewed for the fourth Rent Period it was to give the other party a notice to the effect that it wished the rent to be reviewed and, thereafter, the parties were to genuinely attempt to reach agreement on the rent for that period;
(b)if no notice of a rent review was given for the fourth Rent Period or no genuine attempt to reach agreement on the rent for that period was made in the period between 4 May and 4 August 2013, the Commonwealth was to pay the Owners the same rent as for the third Rent Period; and
(2)the Commonwealth made no genuine attempt to reach agreement with the Owners as to the rent for the fourth Rent Period before 4 August 2013 in that it did not attempt to process the rent review and respond to the Owners' offer of 4 April 2013 until 21 October 2013 by reason of which the rent for the fourth Rent Period was the same as the rent for the third Rent Period.
By their claims, the Owners did not merely deny that the Determination had binding effect. Rather, the Owners' claims positively asserted that the course of events meant that the rent for the fourth Rent Period was either 3.5% more than the rent for the third Rent Period, or the same as for that previous period.
All three of the Owners' claims in this respect were entirely unsuccessful. I rejected the Owners' contentions that:
(1)rent for the fourth Rent Period had been agreed;
(2)cl 5.7.1 was void for uncertainty; and
(3)cl 5.7.1 had never been engaged because there was no genuine attempt by the Commonwealth, before 4 August 2013, to agree rent for the fourth Rent Period.
Just as the Commonwealth failed its assertion (through the counterclaim) that in the events that had happened it was entitled to pay a reduced annual rent of $250,000 plus GST for the fourth Rent Period, the Owners failed in their claim that in the events that had happened, rent for the fourth Rent Period was either 3.5% more than, or was the same as, the rent for the preceding year.
The outcome of the litigation does not reflect the position, or even an alternative position, asserted by the Owners. The result of the litigation is that the rent for the fourth Rent Period is, at present, unknown and yet to be determined, but is open to be determined by a valuer who determines the market rent for the Premises as at 4 May 2013.
I have considered the chain of correspondence between the parties annexed to Mr Hicks' affidavit sworn 28 August 2015 in relation to costs. I am not persuaded that those communications sustain an order for costs in favour of the Owners.
Insofar as the Owners submit that the parties' correspondence shows that the real contest in the proceedings was whether the Determination was binding, I reject that submission. The subject matter of the litigation is as revealed by the pleadings and the conduct of the action, not by correspondence preceding or during the action.
The Owners submit that the outcome of the proceedings was substantially the same as the position the Owners requested the Commonwealth to accept by correspondence in May 2014. By their solicitors' letter in May 2014, the Owners requested the Commonwealth to accept that the Determination was not binding (although for different reasons than those found by the court) and, consequently, that the Commonwealth was obliged to continue paying the rent applicable for the preceding year.
I do not accept the Owners' submission that the result of these proceedings is substantially the same as that offered by the Owners in May 2014. The Owners' offer of May 2014 involved an acceptance that the rent for the fourth Rent Period was the same as the rent for the third Rent Period. That is not the result of this action. Rather, the result of this action is that the rent for the fourth Rent Period has yet to be determined. That rent may be determined by a valuer who determines the market rent for the Premises as at 4 May 2013 in accordance with sch 7 of the Lease, with the necessary changes identified in the Primary Reasons.

Conclusion

For these reasons, I order that there be no order as to the costs of the action, including the counterclaim.