North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
List c

S CI 2012 02700

NORTH EAST SOLUTION PTY LTD (ACN 129 466 851)
Plaintiff
v
MASTERS HOME IMPROVEMENT AUSTRALIA PTY LTD (FORMERLY SHELLBELT PTY LTD) (ABN 21 066 891 307)	First Defendant
and
WOOLWORTHS LIMITED (ABN 88 000 014 675)	Second Defendant

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JUDGE:	CROFT J
WHERE HELD:	Melbourne
DATE OF HEARING:	18–21 May, 25–28 May, 1–4 June, 17–18 August and 16–17 September 2015
DATE OF JUDGMENT:	28 January 2016
CASE MAY BE CITED AS:	North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd
MEDIUM NEUTRAL CITATION:	[2016] VSC 1

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CONTRACT – Good faith – Enforceability of agreement to negotiate in good faith – Breach of obligation to act reasonably and in good faith – Relationship between obligation to act “reasonably” and obligation to act “in good faith” – Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 – Construction of commercial contracts – Terms implied in order to give business efficacy to agreement – Incorporation of terms of earlier agreement into subsequent agreement – Different named parties in subsequent agreement.

DAMAGES – Quantification of loss and damage – Lost opportunity to develop and lease land – Date at which damages are assessed – Capitalisation of Income method of valuation not the most appropriate method of estimating loss and damage – Discounted Cash Flow method of valuation – Sellars discount – Sellars v Adelaide Petroleum NL (1994) 179 CLR 332.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	P.J. Bick QC with B. Gibson	Tisher Liner FC Law
For the Defendants	P.D. Crutchfield QC with N. McAteer	Minter Ellison

TABLE OF CONTENTS

Introduction........................................................................................................................................ 1

Evidence............................................................................................................................................... 3

Approach to the evidence................................................................................................................. 5

Agreements between the parties..................................................................................................... 7

Contractual framework................................................................................................................... 16

Letter of Offer........................................................................................................ 16
Agreement for Lease............................................................................................ 23

Nature and effect of contractual obligations.............................................................................. 35

Factual issues.................................................................................................................................... 58

Letter of Offer..................................................................................................................... 58
Costing of generic design briefs...................................................................................... 59
Agreement for Lease......................................................................................................... 61
Events preceding negotiation of Landlord’s Works Costs.......................................... 61
Discussions regarding Masters’ contribution to Landlord’s Works Costs............... 67
The 22 April 2010 meeting.............................................................................................. 106
Events after 22 April 2010............................................................................................... 119

Plaintiff’s allegations of breach.................................................................................................. 121

Woolworths did not act reasonably to identify and resolve any differences......... 127
Role of Vaughan Constructions..................................................................................... 136
Woolworths did not act in good faith to identify and resolve any differences...... 146
Woolworths’ unwillingness to engage with NES.......................................... 146
The effect of Woolworths’ undisclosed budget............................................. 148

Other matters affecting Woolworths’ performance of its obligations..................... 151
Pursuit of the Hume & Iser site........................................................................ 151
Other considerations.......................................................................................... 159
Greater Bendigo City Council opposition...................................................... 159
Financial position of NES.................................................................................. 161

Agreement for Lease terminated by Woolworths for reasons not contemplated by its terms................................................................................................................................ 164

Conclusion in relation to liability.............................................................................................. 168

Loss and damage............................................................................................................................ 173

Applicable principles...................................................................................................... 173
What was the opportunity lost by NES?...................................................................... 180
Would NES have acted on the opportunity had it been offered?............................ 183
Did the opportunity have some (not negligible) value?............................................ 185
Would agreement have been reached in relation to the Landlord’s Works Costs? 186
Would Bendigo Bank have funded the development?.............................................. 188
Would flood inundation issues have prevented the development?........................ 200
Would the requisite planning approvals have been obtained?................................ 208
Would NES have realised the opportunity to develop and lease the Bendigo site? 219

Quantification of loss.................................................................................................................... 221

If NES has lost a valuable opportunity, what was that opportunity worth?.......... 221
Valuing the lost opportunity.......................................................................................... 222
Appropriate methodology for assessing value of lost opportunity......................... 222
Cash flow methodology.................................................................................................. 224
Comparison of cash flows................................................................................. 224

Valuing the cash flows that would have been achieved............................................ 225
The Discounted Cash Flow method.............................................................................. 226
The Capitalisation of Income method.......................................................................... 229
The validity of the Discounted Cash Flow method for valuing the cash flows..... 231
The application of the Discounted Cash Flow method.............................................. 233
Valuing the cash flows together as at the date of completion.................................. 234
Issues with valuing cash flows as at the date of completion.................................... 235
The evidence of Ms Wright and Mr Jackson on valuation........................................ 239
The appropriate yield...................................................................................................... 244
What date should be used when determining the applicable yield?....................... 244
The yield selected by Mr Jackson.................................................................................. 248

Conclusion: value of the lost opportunity................................................................................ 252

Discount to reflect risks................................................................................................................ 253

Orders............................................................................................................................................... 255

HIS HONOUR:

Introduction

In broad terms, this case concerns agreements and dealings between the Plaintiff, North East Solution Pty Ltd (“NES”), and the Defendants, Masters Home Improvement Australia Pty Ltd (“Masters”) and Woolworths Limited (“Woolworths”), with respect to the development of what is described as a Masters store at Strathdale, a suburb of Bendigo. The actual site of the proposed Masters store is at 195 McIvor Road, Bendigo, which, for convenience, is referred to as “the Strathdale site” or “the Bendigo site”. Also, for convenience—unless a distinction needs to be drawn in a particular context—“Masters and Woolworths” are referred to as “Woolworths”.[1] Also, for the sake of clarity, it should be noted that a reference to “Oxygen”, an “Oxygen store”, “Project Oxygen” and the like is a reference to Masters, a Masters store or the Masters stores rollout by Woolworths, respectively.
[1]References in the evidence to “WOW” should be read as referring to “Woolworths”.

The broader context of the proposals for the development of a Masters store at the Strathdale site was the development by Woolworths of the Masters store brand to compete with the Bunnings chain of hardware stores nationally. As is discussed in further detail in these reasons, the intention was to roll out the Masters stores nationally very quickly in competition with Bunnings. In a major development of this kind, one might normally expect detailed design briefs, agreements for lease, and lease and building contracts. However, in the circumstances affecting the present case, the time constraints Woolworths saw as imposed on the Masters rollout meant that arrangements and agreements needed to move far more quickly than might usually be the case. So, again in broad terms, Woolworths adopted the approach of agreeing to contribute the difference between the estimated cost of building a Bunnings store on a particular site and the cost of building a Masters store on that site. The difference arose—the Masters store development being more expensive—as a result of the view taken that there would be a marked advantage in enhancing the Masters store premises by, for example, providing concrete, rather than metal side walls and some other features. It was thought that these enhancements would be more attractive to potential customers, particularly female customers. A reader of these reasons might, in light of extensive coverage recently in the financial and other business press, have some thoughts about this strategy. I mention this coverage in this context to emphasise whether or not such a business strategy is or is likely to be successful is not a matter relevant to these proceedings and is not a matter with which the Court has had or should have regard. The assessment of the position of the parties in these proceedings is based entirely on the evidence before the Court, written and oral; evidence which does not include these recent press reports.

The case concerns the nature and extent of contractual obligations between the parties with respect to the development of and leasing of the Strathdale site for the Masters store. More particularly, but nevertheless in general terms, a critical issue in this context is the nature and extent of the obligations of the parties to act reasonably and in good faith in pursuing their agreement with respect to the development.

The agreement between the parties with respect to the Strathdale site development was the subject of a Letter of Offer which effected a binding agreement between the parties by 2 June 2009 (“the Letter of Offer”)[2] and an agreement for lease which was executed on 24 February 2010 (“the Agreement for Lease”).[3]
[2]Court Book 1039.
[3]Court Book 2939.

In substance, these agreements provided that NES would develop a Masters Home Improvement store for Woolworths at the Strathdale site and, once it had been developed, Masters would lease that store from NES for a period of 12 years with options for a further five terms of six years each.

These agreements were binding on the parties and, relevantly to these proceedings, could only be terminated if the parties, acting reasonably and in good faith, were unable to resolve any disagreement that arose in relation to the construction costs, specifically a Landlord’s Works Costs amount and Masters’ contribution to that amount. The precise terms of these agreements and the extent of these obligations is discussed in detail in the reasons which follow. It is common ground in these proceedings that in May 2010, Woolworths purported to terminate the agreements on the basis that the parties could not resolve disagreements in relation to the Landlord’s Works Costs and the Masters contribution.

The gravamen of the NES case is its contention that there was no genuine disagreement in relation to the calculation of the Landlord’s Works Costs or, if there was such a disagreement, Woolworths had not acted reasonably or in good faith to resolve it. NES contends, instead, that Woolworths terminated the agreement for other reasons. It is said that these reasons included construction costs exceeding an undisclosed budget (a budget which Woolworths kept to itself), a desire to purchase an alternative site in Bendigo, perceived opposition from the Greater Bendigo City Council (“the Council”) and residents, and perceived funding issues affecting NES. None of these grounds, NES contends, entitled Masters or Woolworths to terminate the Agreement for Lease according to its terms.

Woolworths, on the other hand, contend that this case concerns a contractual obligation as between two sophisticated commercial parties (apparently treating Masters and Woolworths as one) to act reasonably and in good faith in attempting to agree commercial terms to form part of an agreement for lease. The commercial terms to be agreed were, it is said, the Landlord’s Works Costs, the amount that Masters must contribute (being the Masters contribution), and the manner in which such a contribution would be made. Woolworths deny that there was any failure to comply with its obligations under the agreements, and observe—as a truism—that the fact that the parties did not reach agreement on these commercial terms is not evidence of any such failure. Rather, it is contended that for NES to succeed in its case, it must identify a course of conduct on the part of the Defendants, Masters and Woolworths, in relevant negotiations, which offends conscience or is otherwise wholly unreasonable given the relevant circumstances and context.

Evidence

A number of individuals gave evidence in these proceedings, including the following:

(a) Mr Andrew Thomas Biacsi, Director of Contour Consultants Australia Pty Ltd;

(b) Mr Brendan Edward Blake, Property Developer and sole director of the Plaintiff;

(c) Mr Richard Charles Douglas Champion, National Property Manager at Woolworths;

(d) Mr Gerald Peter Davis, Senior Associate at Blackstone Waterhouse Zouki Lawyers (formerly a Lawyer at Fetter Gdanski);

(e) Mr Michael David Fetter, Principal Lawyer at Tisher Liner FC Law (formerly a Partner of Fetter Gdanski);

(f) Mr Michael Joseph Graves, Partner of Allens;

(g) Mr Grant Andrew Jackson, CEO of m3property;

(h) Mr Timothy Stuart Macmillan, Group Property Operations Manager—South at Woolworths;

(i) Mr Ewen Kenneth McDonald, Director of Rider Levett Bucknall;[4]
[4]In these reasons, for convenience, the firm Rider Levett Bucknall is referred to as “Rider Hunt”. In the evidence, it is variously referred to as “Rider Levett Bucknall”, “RLB”, “Riders” and “Rider Hunt”.

(j) Mr Andrew Maxwell McGregor, Business Banking Manager at Bendigo Bank;

(k) Mr Stuart Andrew McGurn, Partner of Environmental Resources Management Australia Pty Ltd;

(l) Mr Trevor Ernest Stockwell, Senior Partner of MCP Group (Bendigo) (formerly National Manager for Complex Business, and Regional Credit Manager at Bendigo Bank);

(m) Mr Owain Stone, Partner of KordaMentha;[5]
[5]Expert Report of Owain Stone (1 May 2015) and Expert Report of Owain Stone (22 May 2015) were tendered by consent, without the need for Mr Stone to be called: Transcript 543.

(n) Mr Grant David Sutherland, Director of Sutherland Farrelly Pty Ltd;

(o) Mr Peter John Svanosio, Director of Jacanne Pty Ltd, the owner of blocks of land located at 195, 197 and 199 McIvor Road, Strathdale;[6]
[6]Outline of Evidence in Reply of Peter John Svanosio (17 March 2015) was tendered by consent, without the need for Mr Svanosio to be called: Transcript 519.

(p) Mr Christopher Ronald Thomas, Principal Hydrologist, Environment & Water Resources at WorleyParsons;

(q) Mr Steven Craig Troon, Managing Director of H. Troon Pty Ltd (“Troons”); and

(r) Ms Dawna Kathleen Wright, Senior Managing Director at FTI Consulting.

Approach to the evidence

In the course of proceedings, Woolworths emphasised a number of times that the Court should be wary of oral evidence as to events around five years ago, particularly from witnesses who have or may have an interest in the outcome of the proceedings. I did not take this submission to be the casting of aspersions on any individuals, but rather, a submission seeking to draw upon what might be said to be the realities of human recollection in particular circumstances. The point emphasised by Woolworths is that evidence provided by contemporaneous documents should be given great weight and relied upon unless there is compelling unambiguous oral evidence to the contrary. I did not take NES to be arguing to the contrary, at least in general principle, but, of course, the parties differed to the extent that oral evidence might be given greater weight.

In any event, these submissions and the nature of the issues raised in this case led me to mention to the parties the decision of Lewison J (as his Lordship then was) in the Chancery Division in Foodco Uk LLP v Henry Boot Developments Ltd, where issues arose with respect to evidence as to conversations between parties and the weight that might be given to that evidence as distinct from evidence provided by contemporaneous written documents.[7] Thus, his Lordship said:[8]
[7][2010] EWHC 358 (Ch).
[8]Foodco Uk LLP v Henry Boot Developments Ltd [2010] EWHC 358 (Ch), [3]–[5] (citations omitted) (“the Henry Boot case”).

3.The burden of proof lies on the tenants to establish their case. They must persuade me that it is more probable than not that Henry Boot made fraudulent misrepresentations. Although the standard of proof is the same in every civil case, where fraud is alleged cogent evidence is needed to prove it, because the evidence must overcome the inherent improbability that people act dishonestly rather than carelessly. On the other hand inherent probabilities must be assessed in the light of the actual circumstances of the case.
4.Although some of the representations on which the tenants rely were made in writing, in all cases they allege that these representations were confirmed, expanded, or supplemented by oral representations. These oral representations were made in conversations and at meetings of which there is scant record. In approaching the evidence I have tended to place weight on contemporaneous documents and documents which came into existence before the problems emerged. In assessing the recollections of witnesses, it is also important to avoid the benefit of hindsight. I must try to assess what people did, said and thought at the time. In that connection I have borne in mind the words of Lord Pearce in his dissenting speech in:[9]

Credibility involves wider problems than mere “demeanour” which is mostly concerned with whether the witness appears to be telling the truth as he now believes it to be. Credibility covers the following problems. First, is the witness a truthful or untruthful person? Secondly, is he, though a truthful person, telling something less than the truth on this issue, or, though an untruthful person, telling the truth on this issue? Thirdly, though he is a truthful person telling the truth as he sees it, did he register the intentions of the conversation correctly and, if so, has his memory correctly retained them? Also, has his recollection been subsequently altered by unconscious bias or wishful thinking or by overmuch discussion of it with others? Witnesses, especially those who are emotional, who think that they are morally in the right, tend very easily and unconsciously to conjure up a legal right that did not exist. It is a truism, often used in accident cases, that with every day that passes the memory becomes fainter and the imagination becomes more active. For that reason a witness, however honest, rarely persuades a Judge that his present recollection is preferable to that which was taken down in writing immediately after the accident occurred. Therefore, contemporary documents are always of the utmost importance. And lastly, although the honest witness believes he heard or saw this or that, is it so improbable that it is on balance more likely that he was mistaken? On this point it is essential that the balance of probability is put correctly into the scales in weighing the credibility of a witness, and motive is one aspect of probability. All these problems compendiously are entailed when a Judge assesses the credibility of a witness; they are all part of one judicial process and in the process contemporary documents and admitted or incontrovertible facts and probabilities must play their proper part.

5.None of the witnesses had a good recollection of precisely what was said by them or to them in the course of meetings or telephone conversations. Some were clearly reconstructing what, with hindsight, they thought must have happened. I do not, however, consider that any of the witnesses I heard were deliberately giving untruthful evidence. All were doing their honest best.

[9]Onassis v Vergottis [1968] 2 Lloyd's Rep 403 at 431.

In my view, the approach to the evidence as adopted by Lewison J in the Henry Boot case is appropriately applied in the present circumstances. I do, however, make the obvious point that the facts and circumstances before the court in the Henry Boot case were quite different from those before the Court in the present proceedings and there was no suggestion in these proceedings that issues of fraud arise, whether by fraudulent misrepresentations or otherwise. Nevertheless, this does not affect the approach to the evidence to be applied.

Agreements between the parties

The agreements between the parties were, as indicated, constituted by the Letter of Offer and the Agreement for Lease.

For present purposes, the critical provisions of the Letter of Offer are as follows:[10]
[10]Court Book 1039.

Re: Proposed Woolworths Hardware (Home Improvement) Store
195 McIvor Road, Strathdale

Further to our discussions last week regarding the potential for a Woolworths hardware store at 195 McIvor Road, Strathdale, Woolworths are pleased to provide the following terms and conditions that Woolworths would be willing to enter into an Agreement for Lease and Lease with the Maxi Foods Group for the abovementioned premises, subject to Woolworths Board Approval.
1.        Premises
This offer is based on the attached plan (Reference Sketch Design Site Plan – Option 1: SK01 dated 13 May 2009) and the latest discussions and information. In the event of further amendments, redesigns and changes to configuration, Woolworths reserves its right to amend this offer.
2.        Lease Area
The total estimated area for the hardware store is 10,535 square metres on a site area of 24,700 square metres (subject to survey).
3.        Lessee
Woolworths Limited (ABN 88 000 014 675)
4.        Lessor
Maxi Foods Group
…
13.      Design Brief
A design brief will be issued in due course which will contain Woolworths’ current standard Specification. The Landlord is to provide a turn-key premises in accordance with the obligations contained in the Specification. Should the design brief differ in cost to other major trade supply/restricted retail premises (full height precast brief), the difference in cost is to be made by payment as a lump sum. Rider Hunt quantity surveyors, are to verify the cost difference.
14.      Programming
The Landlord must provide a development program acceptable to Woolworths, which specifies the date of handover following practical completion, for inclusion in the Agreement for Lease. The Landlord must comply with the construction program, with a normal industry allowance for delays.
Woolworths is not obliged to open the store prior to 1 July 2011.
15.      Fitout Period
Following the practical completion of works as detailed in the Specification, Woolworths will require a period of 12 weeks to fitout the store prior to opening. The Landlord is to provide uninterrupted access to the Premises for this purpose.
16.      Conduct of Works, Schedule of Finishes and Scope of Works
The Landlord must conduct works on site to a high standard. The Landlord will document the project fully and provide all necessary details, contractual clauses and condition precedents regarding the development of the site.
In particular, documents covering Schedule of Finishes and Scope of Works, together with an appropriate Landlord’s Drawing Transmittal schedule, all satisfactory to Woolworths, will be required for inclusion in the Agreement for Lease.
We look forward to the opportunity to collaborate throughout the design phase and to review detailed plans so as to provide our comments on issues including trolley access, sight-lines, services, dock areas, car parking, internal vehicle circulation, lighting, customer access, public safety and customer amenities.
The final plans and specifications for the development are to be to Woolworths’ satisfaction.
…
21.      Documentation & Approvals
This offer is subject to:
1.Finalisation of development plans, programming, condition precedents regarding the development, Scope of Works and finishes to Woolworths’ satisfaction;
2.Maxi Foods Group gaining control of all the land on the site in order to undertake the development; and
3.Approval of Woolworths Board.

Approvals by the Woolworths Board, will be operative for a period of 12 months. If formal documentation is not executed within that time, Woolworths can elect to terminate the agreement and withdraw from the project.
…
24. Binding Agreement
Although it is intended that a formal agreement for lease will be executed based on the Woolworths standard documentation, including the commercial terms in this letter, it is intended that acceptance by you of the terms and conditions in this letter will create a binding agreement between you and Woolworths.

The letter was signed on behalf of Woolworths by Mr Macmillan as its Senior Development Manager and by Mr Blake on behalf of Maxi Foods Group and is dated 2 June 2009.

In the present context, the critical provisions of the Agreement for Lease are as follows:[11]
[11]Court Book 2939.

Parties
1.     North East Solution Pty Ltd (ACN 129 466 851) of 17 Hargraves Street, Castlemaine VIC 3450 (the Landlord);
2.     Shellbelt Pty Limited (ABN 21 066 891 307) of 1 Woolworths Way, Bella Vista NSW 2153 (the Tenant); and
3.     Woolworths Limited (ABN 88 000 014 675) of 1 Woolworths Way, Bella Vista NSW 2153 (the Guarantor).

Recitals
A     The Landlord is, or will be entitled to be, the registered owner of the Land.
B      The Landlord proposes to undertake the Landlord’s Works.
C     The Landlord has agreed to grant and the Tenant has agreed to take the Lease of the Premises, subject to the terms and conditions in this Agreement.

1. Interpretation
1.1 Definitions
The following definitions, together with those in the Reference Schedule, apply unless the context otherwise requires.
…
Briefing Kit means the specification briefing kit to be provided in accordance with clause 2.1, as it may be updated in accordance with clause 3.3(a).
…
Landlord’s Works means the works required to complete the construction of the Improvements as described in the Plans and Specifications.
Landlord’s Works Costs means the estimated costs that will be incurred by the Landlord in constructing the Landlord’s Works based on construction on a level and benched site and excluding costs for works external to the Premises. To avoid doubt it does not include any other costs such as design costs, consultants’ fees and any fees, costs or charges incurred in connection with obtaining the Development Approval.
…
Premises means the home improvement centre identified in the Plans and Specifications and on the Site Plan.
…
Site Plan means a site plan showing the layout of the Store and the Premises on the Land, to be provided by the Tenant to the Landlord pursuant to clause 2.1.

2. Development Approval
2.1 Briefing Kit
The Tenant must, as soon as practicable after the date of this Agreement, and in any case on or before 15 January 2010, develop and give to the Landlord the Briefing Kit and the Site Plan.

2.2 Costs Estimate
(a)As soon as reasonably practicable after receipt by the Landlord of the Briefing Kit the Landlord, acting reasonably and in good faith, must:
(i)determine the Landlord’s Works Costs and advise the Tenant in writing of the Landlord’s Works Costs;
(ii)provide, on an open book basis, its costing of the Landlord’s Works Costs; and
(iii)advise the Tenant whether it requires the Tenant to contribute towards the Landlord’s Works Costs and the amount of that contribution (if any).

(b)The Landlord and the Tenant, acting reasonably and in good faith, must attempt to resolve any differences they may have in relation to:
(i)the Landlord’s determination of the Landlord’s Works Costs; and
(ii)the amount that the Tenant must contribute towards the Landlord’s Works Costs (if any) and the manner in which this contribution will be made.

(c)If, by the later of:
(i)20 April 2010; and
(ii)the date which is 6 weeks after the date of receipt by the Tenant of notice of the Landlord’s Works Costs,

or such later date to which the parties agree, the Landlord and the Tenant cannot agree on:
(iii)the Landlord’s Works Costs; or
(iv)the amount that the Tenant must contribute towards the Landlord’s Works Costs (if any) and the terms and conditions on which this contribution will be made,
the Landlord or the Tenant may:
(v)terminate this Agreement by giving notice in writing to the other; and
(vi)procure the withdrawal of the application for Development Approval.

(d)Termination of this Agreement pursuant to clause 2.2(c)(v) does not prejudice any claim which either party to this Agreement may have arising from the non-compliance by the other party of any of its obligations under this Agreement.
(e)Subject to each party’s rights under clause 2.2(d), if this Agreement is terminated pursuant to clause 2.2(c), each party will bear their own legal and other costs and expenses in connection with this Agreement arising before termination.
(f)The parties:
(i)acknowledge that to expedite the Development Approval, assistance will be sought from the State Government pursuant to clause 2.8; and
(ii)undertake to monitor, as closely as reasonably practicable, progress of the Government Development Assistance and to inform each other of such progress when known.

(g)Without limiting the Tenant’s obligations under clause 2.2(f), the Tenant undertakes to provide the Landlord with not less than 10 Business Days prior notice of:
(i)the date set down for the closing of the public exhibition of the rezoning of the Land proposed as part of the Development Approval;
(ii)the date set down for any panel hearing required to be held in relation to the application for the Development Approval; and
(iii)to the extent possible, any other material steps to be taken by the State Government as part of the process of its consideration of the Landlord’s application for Development Approval.

…

3. Landlord’s Works
3.1 Completion of Landlord’s Works
The Landlord must at its Cost cause the Landlord’s Works to be carried out:
(a)in accordance with the Plans and Specifications;
(b)in accordance with the Development Approval, all Laws and consents of and complying with the requirements of all Government Authorities;
(c)as expeditiously as possible;
(d)in a proper and workmanlike manner;
(e)under adequate and competent supervision; and
(f)in accordance with the Development Program.

…
6. Tenant’s Works
6.1 Carrying out Tenant’s Works
In carrying out the Tenant’s Works, the Tenant must:
(a)comply, and ensure that the Tenant’s Contractors comply, with the reasonable directions of the Landlord’s Architect for the delivery, unloading and storage of materials;
(b)ensure that the Tenant’s Contractors effect and maintain public liability insurance for cover of not less than $20 million, contractors all risks insurance for a level of cover reasonably satisfactory to the Landlord and workers compensation insurance;
(c)be responsible for all work carried out on the Tenant’s behalf;
(d)ensure that the Tenant’s Contractors remove rubbish and debris on completion of the Tenant’s Works. Any rubbish or debris not removed from the Land by the Tenant’s Contractors may be removed by the Landlord. The costs of removal must be paid by the Tenant; and
(e)pay for the repair of any damage to the Premises caused as a result of the Tenant’s Works.

…

9. The Lease
9.1 Grant of Lease
The Landlord must grant to the Tenant and the Tenant must accept the Lease for the Term commencing on the Commencement Date.

…
11. Termination
If for any reason the Landlord’s Works have not reached Practical Completion by the Termination Date, the Tenant may terminate this Agreement by notice in writing to the Landlord. If the Tenant terminates this Agreement, the Landlord must reimburse the Tenant, on demand, for all Costs and expenses incurred by the Tenant in connection with this Agreement and anything done by the Tenant in relation to this Agreement, and for loss of profits in the amount certified by the Tenant’s Auditor.

…
14. Right of First Refusal – Land
14.1 Offer by Landlord
The Landlord must not:
(a)sell, transfer or otherwise dispose of the Land (or any part of the Land); or
(b)cause or permit any change in shareholding of the Landlord or any holding or parent company of the Landlord as contemplated under clause 10.2(c).

during the period commencing on the date of this Agreement and expiring on the Commencement Date, unless the Landlord first offers to sell the Land (or any part of the Land) to the Tenant by executing and delivering to the Tenant a contract detailing the price and the terms and conditions on which the Landlord intends to sell, transfer or dispose of the Land or any part of the Land.

…
16. Land
(a)The Tenant acknowledges that the Landlord is not the registered proprietor of the Land.
(b)The Landlord warrants that it has no reason to believe that the option to purchase the property comprised in Certificates of Title Volume 8505 Folio 634, Volume 8204 Folio 513, Volume 9051 Folio 930 and Volume 9051 Folio 931 granted to it by the registered proprietors of that property is not valid and enforceable.
(c)The Landlord must use its best endeavours to become the registered proprietor of the Land on or before the Development Approval Date.
(d)If on or before 30 June 2010, the Landlord has not entered into contracts for the purchase of the Land settlement of which will take place no more than sixty (60) days after the Development Approval Date, the Tenant may terminate this Agreement by giving notice in writing to the Landlord at any time prior to the Landlord entering into such contracts.
(e)Subject to paragraph (f), if the Landlord has not become the registered proprietor of the Land on or before the Development Approval Date, the Tenant may terminate this Agreement by giving notice in writing to the Landlord at any time prior to the Landlord becoming the registered proprietor of the Land.
(f)If the Landlord has not become the registered proprietor of the Land on or before the Development Approval Date but has entered into contracts for the purchase of the Land settlement of which will take place no more than sixty (60) days after the Development Approval Date and the Landlord has proven to the reasonable satisfaction of the Tenant that, despite the fact that it has not become the registered proprietor of the Land by the Development Approval Date, it will be able to comply with its obligations under the Agreement, then the Tenant may not terminate this Agreement under paragraph (e) but, if the Landlord has not become the registered proprietor of the Land on a date which is sixty (60) days after the Development Approval Date, the Tenant may terminate this Agreement by giving notice in writing to the Landlord at any time prior to the Landlord becoming the registered proprietor of the Land.
(g)If this Agreement is terminated pursuant to sub-paras (d), (e) or (f), the Landlord and the Tenant will bear their respective costs and expenses incurred prior to the date of termination.

…
Reference Schedule

Item Number Item Term

1. Land Certificates of Title Volume 8505 Folio 633, Volume 8505 Folio 634, Volume 8204 Folio 513, Volume 9051 Folio 930, Volume 9051 Folio 931 and Volume 7863 Folio 135

2. Anticipated Date of Practical Completion The date 12 months after the Development Approval is obtained.

3. Approximate Lettable Area 10,738 square metres.

4. Termination Date The date which is 12 months after the Anticipated Date of Practical Completion (ignoring any extension under clause 3.5)

5. EIS Period 12 weeks

6. Term 12 years

7. Further Terms 6 further terms of 5 years each.

8. Square Metre Rate $120 per square meter

9. Maximum Rent Amount Not applicable.

10. Development Approval Date The date which is 18 months after the date of this Agreement.
…
Annexure A
Plans and Specifications
SITE PLAN SCALE 1:1000 @ A3

Contractual framework
Letter of Offer

On 2 June 2009, Woolworths and Mr Blake, on behalf of the “Maxi Foods Group”, signed the Letter of Offer in respect of a proposed agreement for lease and lease of the Strathdale site. The principal provisions of the Letter of Offer presently of relevance have been set out previously.[12] The Letter of Offer states expressly in para 24 that it would, on acceptance by the offeree of its terms and conditions, “create a binding agreement between you and Woolworths”. Paragraph 24 also expressly records the intention of the parties that a formal agreement for lease would be executed “based on the Woolworths standard documentation, including the commercial terms in this letter”. Nevertheless, the manner in which para 24 is expressed does make it clear that, absent a formal agreement for lease being executed, there is, nevertheless, a binding agreement created by the Letter of Offer.[13]
[12]See above [14].
[13]See Masters v Cameron (1954) 91 CLR 353 at 360. See also John W Carter, Contract Law in Australia (LexisNexis Butterworths, 6^th ed, 2013) [5-02]–[5-04].

The commercial terms included provision for a lease term of 12 years, together with six five year options for renewal.[14] The total estimated area for the hardware store was 10,535 square metres on a site area of 24,700 square metres (subject to survey).[15] Provision was made for a base rent of $1,264,200 per annum, payable as to one twelfth of that sum monthly.[16] This agreed base rent produced a base rent per metre of $120.[17] Provision was made for annual rent increases to CPI, with a cap of four per cent, including at the commencement of the option periods.[18] It was agreed that the tenant would pay for all services directly supplied to the lease premises and separately metered, including electricity, gas, telephone and water, and also separately assessed rates and taxes, including land tax (assessed on a single holding basis).[19]
[14]See Letter of Offer [5]–[6].
[15]See Letter of Offer [2].
[16]See Letter of Offer [9].
[17]See Letter of Offer [9].
[18]See Letter of Offer [10].
[19]See Letter of Offer [11].

The Letter of Offer contemplated in its provisions that the parties to the lease would be Maxi Foods Group as landlord and Woolworths Limited as tenant.[20] Having regard to the circumstances of the Letter of Offer and the desire of Woolworths to “roll out” the Masters stores in as short a period as possible, it is probably not surprising that the parties to the Letter of Offer had not then determined which corporate entities would be the parties to the contemplated agreement for lease and lease. In any event, the position of NES with respect to the operation of the provisions of the Agreement for Lease with respect to the commercial terms contained in the Letter of Offer would transcend any issues with respect to congruence of parties as between the Letter of Offer and the Agreement for Lease and, in any event, Woolworths is a defendant and I do not take it to be disputed that NES is a corporate entity within the “Maxi Foods Group”.
[20]See Letter of Offer [3]–[4].

The Letter of Offer was also specifically and expressly subject to various documentation and approvals.[21] The documentation required was the finalisation of development plans, programming, conditions precedent regarding their development, Scope of Works and finishes to the satisfaction of Woolworths. Additionally, in terms of matters involving Woolworths, the offer was subject to the approval of the Woolworths Board. The process of Woolworths Board approval had been delegated to the Oxygen Property Committee of Management (“the Property Committee”), which committee was also delegatee of the Board’s power to approve sites.[22] As far as these conditional provisions were concerned, the offer was subject to the Maxi Foods Group gaining control of all the land on the Strathdale site in order to undertake the development. Again, as with respect to the parties to this and contemplated subsequent agreements, there was no specificity with respect to the corporate entity within that Group which was to obtain the land.
[21]See Letter of Offer [21].
[22]Transcript 1084.

In late May or early June 2009, members of the Woolworths Board inspected the Bendigo site.[23] A submission to the Property Committee, on 22 July 2009, noted that the Bendigo site presented an opportunity for Oxygen to establish a presence within Bendigo, had excellent exposure to the McIvor Highway, was well suited to service the Bendigo area and was well positioned to compete with existing hardware stores in Bendigo. It was also noted in the submission that strong interest in the Strathdale site had been shown by Bunnings, as a site for its second store in Bendigo. The Strathdale site was recommended for approval subject to a site visit and confirmation of whether the strategy for Bendigo was to pursue one or two stores. The Property Committee approved the Strathdale site on 4 August 2009; a site which it considered was in a good location. On 11 August 2009, the Maxi Foods Group was notified of the approval to proceed according to the binding Letter of Offer.
[23]Transcript 573.

Critically, the submission to the Property Committee also included a business case for the Bendigo site including an amount that Woolworths was prepared to contribute to the construction of the Bendigo store. The Property Committee was required to approve the level of contribution that Woolworths would make towards the construction of a Masters store.[24] In the case of the Bendigo site the business case justified, and the Property Committee approved, a contribution of up to $1.7 million.[25] This budget, however, was never disclosed to NES. Moreover, Woolworths was working to a “target” $12 million store cost based on a 13,500 square metre store. This target was also never disclosed to NES.
[24]Transcript 1123.
[25]Transcript 1124, 1143. See Court Book 1212.

At the same time that the Property Committee resolved to approve the Bendigo site, the Committee also resolved that Woolworths would pursue only one store in Bendigo in the foreseeable future—the One Store Policy.[26] At that time, the Bendigo site was considered to be the best site to serve the entire urban area of Bendigo[27] and the feasibility of the site had been rated “best” amongst the sites being pursued by Woolworths. The competitive risk from Bunnings was considered to be “high”.[28]
[26]Court Book 1232, 1238.
[27]Court Book 4488, 4679.
[28]Court Book 4682.

On 25 August 2009, three weeks after the Property Committee approved the binding Letter of Offer, Woolworths launched its takeover bid to acquire Danks Holdings Limited (“Danks”).[29] In November 2009 and June 2010 Woolworths provided undertakings to the Australian Competition and Consumer Commission (“ACCC”) to extend the same terms and conditions to Danks’ members within 10 kilometres of a Woolworths store to those provided to any other Danks customer, to permit those members to purchase products from elsewhere and to permit those members to terminate their agreements with Danks without consequence.[30] On 11 November 2009 the ACCC announced its decision not to oppose the acquisition.[31] In spite of the One Store Policy, Woolworths had identified another Home Timber & Hardware store in Bendigo, the Hume & Iser site, as a priority site to acquire as part of its Danks acquisition.[32]
[29]Transcript 26.
[30]Court Book 4535.
[31]Transcript 26.
[32]Court Book 4448: Project Jupiter – Home Improvement (Project Oxygen) – Board Presentation (26 February 2009.

Thus far, it may be thought that the provisions of the Letter of Offer were not unusual. The circumstances in which the Letter of Offer was developed and agreed were, however, somewhat out of the ordinary, principally because of the speed with which Woolworths was concerned to “roll out” 150 “big box” hardware stores within five years. While, at this time, this strategy had been developed on the part of Woolworths and critical sites had been identified, the detailed designs and specifications for the Masters stores were not yet complete and the exact cost to construct one of these stores to the Woolworths specifications was not then known. This strategy was developed in early 2009 and, by around September 2009, there was conflict between the strategic objective on the part of Woolworths of entering the market quickly, securing key sites before Bunnings could secure them and establishing an immediate market presence on the one hand; and the practical necessity of completing the designs and specifications and determining the cost to complete these specifications before entering into binding agreements on the other.

As a result of the Woolworths strategy and the urgency involved, Woolworths decided to enter into binding agreements to secure the critical sites before Bunnings could secure them and to make arrangements for their development, notwithstanding that there was no briefing kit, even if this meant that Woolworths had to assume the risks of unknown construction costs at the time of entering into agreements for the development of these sites.[33] This position is well illustrated in email correspondence between Mr Grant O’Brien, then Woolworths’ General Manager for Business Development, and Mr Champion concerning the Strathdale site and two other sites on 12 and 13 September 2009, in which Mr O’Brien said:[34]
[33]Transcript 722, 724.
[34]Court Book 1640.

[I d]o however want to challenge the “we don’t have a [design] kit response”. Big issue here that really demonstrates what I’m talking about—bunnings have a kit and could, as a result beat us to the punch.
We must find a remedy by Monday to this ie strike a cost above which we contribute—we don’t have a choice …
I remain nervous on these critical issues

And:[35]

We are aligned—I agree the kits need to be done “tomorrow/asap/ pronto/NOW!!” and I will provide whatever is needed to make this happen.
The point that I was trying to make was not that I am happy for the kits to take weeks, but even if they are 3 days away I still want to make these lease deals more binding right now—even if we expose ourselves to the cost of the unknowns—I don’t want us waiting for the kits—if they come in the next few days that’s a bonus—but we must act as if they are weeks away and we need to protect ourselves as though that were the case.

It is noted that NES contends that this correspondence is admissible for the construction of cl 2.2 of the Agreement for Lease, in that it casts light on the genesis of these provisions of the Agreement for Lease, its objective aim and meaning; relying upon Codelfa Construction Pty Ltd v State Rail Authority (NSW)[36] and Brambles Holdings Ltd v Bathurst City Council.[37] In my view this correspondence is admissible on this basis, though it is not critical to the findings which follow.

[35]Court Book 1639.

[36](1982) 149 CLR 337 at 347–52.

[37](2001) 53 NSWLR 153 at 163 [24].

As appears from the evidence,[38] in order to enable Woolworths to bind the owners of identified critical sites to agreements to develop and lease their land before the construction costs were known, agreements were entered into whereby:

(a)the rent to be paid by Woolworths for the developed site would be fixed (by reference to the cost to construct an equivalent store to Bunnings’ specifications, which specifications and costs were known);
(b)if the cost to construct the store to the Woolworths plans and specifications exceeded the cost to construct the store to Bunnings’ specifications (which was expected to be the case given the higher specifications), Woolworths would pay the landlord, by way of a lump-sum contribution to the construction costs, the difference between the actual cost to construct the Masters store and the cost that had been estimated to construct an equivalent Bunnings store (on which the rent had been based); and
(c)the difference between the cost to construct the Masters store in accordance with Woolworths’ plans and specifications and the cost to construct an equivalent Bunnings store in accordance with the Bunnings specifications, being the amount to be contributed by Woolworths, was termed the Landlord’s Works Costs.

[38]See especially Transcript 117.

It followed that at the time the Letter of Offer was agreed, Woolworths had not developed a design brief of the proposed store at the Strathdale site and, consequently, it was simply not possible for the parties to agree on the cost difference between the development and construction of that store and an equivalent Bunnings store on that site. As a result, Woolworths and the Maxi Foods Group agreed that “Rider Hunt quantity surveyors, are to verify the cost difference” once the Woolworths design brief was issued containing the then current standard specifications to the proposed new store.[39] The parties did not specify what the cost of a Bunnings store was, or even specify a particular Bunnings design brief that was to be used by Rider Hunt in verifying the cost difference, or whether the entire cost of construction for each type of store was to be compared. For example, it is not specified whether the cost comparison would exclude certain categories of cost, such as site costs. The Letter of Offer also provided for payment of the difference in cost as a lump sum, but without specifying the time of payment. The latter also became an issue between the parties, though Mr Champion’s evidence was to the effect that all the leasehold deals that had been done by Woolworths involved an agreement to pay the difference between the Masters and Bunnings costs after the commencement of the lease.[40]

Agreement for Lease

[39]See Letter of Offer [13].

[40]Transcript 997.

On or about 24 February 2010, the Agreement for Lease was executed.[41] The critical provisions of the Agreement for Lease have already been set out.[42] The commercial terms of the Agreement for Lease were the same as the Letter of Offer as to the lease term, options to renew the lease and the base rent rate. The proposed area for lease was, however, increased to 10,738 square metres, as opposed to 10,535 square metres under the Letter of Offer. The parties had not, however, by this time, agreed the cost of the relevant construction works, now defined in the Agreement for Lease as “Landlord’s Works Costs” for the Strathdale site, how much Masters would contribute to those costs or the time and manner at and in which Masters would make that contribution. Thus, the mechanism adopted was to define Landlord’s Works Costs in relatively general terms, as follows:
Landlord’s Works Costs means the estimated costs that will be incurred by the Landlord in constructing the Landlord’s Works based on constructions on a level and benched site and excluding costs for works external to the Premises. To avoid doubt it does not include any other costs such as design costs, consultants’ fees and any fees, costs or charges incurred in connection with obtaining the Development Approval.
This general definition was, in turn, supported by the provisions of cl 2.2 of the Agreement for Lease, which, putting it in very general terms and subject to the discussion of these provisions which follows in the course of these reasons, required the parties to resolve these matters between themselves, acting in good faith. Prior to this process, or in aid of it, cl 2.1 of the Agreement for Lease required the Tenant, now Shellbelt Pty Limited (guaranteed by Woolworths Limited) to develop and provide to the Landlord (now North East Solution Pty Ltd, the Plaintiff) the “Briefing Kit” and the “Site Plan”.[43]
[41]Transcript 997.
[42]See above [15].
[43]Both the expression “Briefing Kit” and the expression “Site Plan” are defined in clause 1.1 of the Agreement for Lease: See above [15].

Woolworths contend that cl 2.2 of the Agreement for Lease anticipated a materially different method for resolving outstanding issues with respect to the construction costs—the Landlord’s Works Costs—how Masters would contribute to those costs and the manner in which they would be paid from the method adopted in the Letter of Offer. More particularly, they contend that:

(a)the Letter of Offer had provided that the differences in cost between the Masters store and a Bunnings store was to be “verified” by Rider Hunt. It is said, that, on its face, this left the final say on this key matter entirely to Rider Hunt. On the other hand, it is said, that cl 2.2 of the Agreement for Lease anticipated that NES would:
(i)first “determine” the Landlord’s Works Costs;
(ii)provide its costing of the Landlord’s Works Costs to Masters on an open book basis;
(iii)advise Masters if it required Masters to contribute to the Landlord’s Works Costs; and
(iv)with Masters, acting reasonably and in good faith, “attempt to resolve any differences they may have” as to, among other things, the Landlord’s Works Costs and how much Masters would contribute to the Landlord’s Works Costs.

Thus, it is said that, the “determination” by NES was in no way binding upon the parties, and it was agreed that NES and Masters would negotiate and attempt to agree the Landlord’s Works Costs, how much Masters would contribute to the Landlord’s Works Costs, as well as how any contribution would be paid. On this basis, Woolworths contend that these provisions are, classically, an agreement to agree, accepting that the parties were bound to conduct such negotiations reasonably and in good faith.
(b)the Letter of Offer provided that the tenant was to pay the whole of the difference in cost as between the construction of a Masters store and a Bunnings store. On the other hand, it is said that cl 2.2 of the Agreement for Lease did not even make reference to the calculation of any difference. Rather, it left the amount that Masters would contribute to the Landlord’s Works Costs entirely open to good faith negotiations. Moreover, Woolworths emphasise in their contentions in this respect that the Agreement for Lease did not necessarily contemplate any contribution to Landlord’s Works Costs. Moreover, it is said that, as Mr Blake’s evidence made plain, it was also possible that NES would make a payment to Masters;[44] and
(c)the Letter of Offer provided that the tenant was to pay the difference in the cost of construction as between a Masters store and a Bunnings store as a lump sum. It is observed that, on the other hand, cl 2.2 of the Agreement for Lease provided that if the parties agreed that the Tenant would make a contribution to the Landlord’s Works Costs, the parties were also to negotiate and attempt to agree the manner in which such contribution would be made. Thus, it is said that this, again, was a matter left entirely open to good faith negotiations.

[44]See Transcript 189.

It is also observed by Woolworths that cl 2.2 of the Agreement for Lease did, however, provide a certain timeframe within which the parties were to agree the various outstanding matters. They were to do so by the later of 20 April 2010 and the date six weeks after Masters received a notice from NES of its “determination” of the Landlord’s Works Costs, or such later date that may be agreed. If agreement was not reached within that time on each of these matters, then either party could terminate the Agreement for Lease.

NES, on the other hand, contends that the effect of the Agreement for Lease, particularly cl 2.2, is much more than simply an agreement to agree and did, as the parties intended, incorporate the commercial terms and the agreement which was contained in the Letter of Offer. In aid of this position, NES makes reference to the rules of construction which have been accepted by the courts with respect to commercial contracts of this kind. It is, therefore, to these principles to which I now turn briefly as providing a basis to the contentions which follow.

As is contended, the principles of contractual interpretation are well established and are not in this context, as distinct from their application, in controversy between the parties. In order to determine the meaning or legal effect of a particular contractual term, the court must construe the contract as a whole.[45] Interpretation of a commercial document requires attention to the purpose of the transaction and the objects which it is intended to secure.[46] Commercial documents of this kind are to be construed practically and so as to give effect to their “presumed commercial purposes”.[47]
[45]Bettini v Gye (1876) 1 QBD 183 at 188; Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641.
[46]Bytan Pty Ltd v BB Australia Pty Ltd (2012) 41 VR 46 at 65 [96].
[47]Pan Foods Co Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 170 ALR 579 at 584 [24].

The second important principle is where the language of the commercial contract is ambiguous or susceptible of more than one meaning, evidence of the surrounding circumstances is admissible to assist in the interpretation of the contract.[48] The objective theory of contract is not, however, departed from in this process as the surrounding circumstances to which reference may be made are the objective framework of facts within which the contract came into existence.[49] This includes evidence of the “genesis” and the objective “aim” of the transaction.[50]
[48]Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 352.
[49]Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 352.
[50]Prenn v Simmonds (1971) 1 WLR 1381 approved by the High Court in DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 429.

The third principle is that where the language of a contract is open to more than one interpretation, the court should prefer a construction that does not lead to capricious or unreasonable results.[51] This principle is applicable even though the construction adopted may not represent the most obvious or grammatically accurate interpretation.[52] The fact that a particular construction leads to an unreasonable result must be a relevant consideration, as it is unlikely that the parties intended such a result.[53] In circumstances such as this, the language of the contract must be made to yield to “business common-sense”.[54] The underlying assumption behind this principle, which accords with ordinary experience, is that commercial parties will not enter into contracts for capricious or unreasonable results, at least in the course of ordinary commercial relations. True it is that some capricious or unreasonable results may be desired by a party in certain circumstances, but these circumstances are usually those addressed by legislation such as the Australian Consumer Law or, for example, by equity in relieving against certain unconscionable bargains. These are, however, not the sort of circumstances that arise in the ordinary course of commercial agreements. Also, in the application of a principle such as this, courts must take care not to impose their own views as to what they think “business common-sense” might be in particular circumstances. Rather, what amounts to “business common-sense” must be gleaned from the commercial contract and its context and objective matters to which courts may have regard. Thus, when interpreting a contract, a presumption is applied by the courts that the parties did not intend the terms of the contract to operate unreasonably.[55] Where a particular construction would achieve an unreasonable result, a court will be reluctant to accept that this was meant by the parties.[56] A common sense approach is taken with an emphasis on the need to arrive at an interpretation which is practical and commercially sensible; having regard to the proper role of a court in this respect, to which reference has been made.[57]
[51]Bytan Pty Ltd v BB Australia Pty Ltd (2012) 41 VR 46 at 50 [12] citing Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109.
[52]Bytan Pty Ltd v BB Australia Pty Ltd (2012) 41 VR 46 at 50 [12] citing Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109.
[53]Memery v Trilogy Funds Management Ltd [2012] QCA 160, [14] quoting Elderslie Property Investments No 2 Pty Ltd v Dunn [2008] QCA 158, [20]–[22].
[54]Memery v Trilogy Funds Management Ltd [2012] QCA 160, [14] quoting Elderslie Property Investments No 2 Pty Ltd v Dunn [2008] QCA 158, [20]–[22].
[55]Hankey v. Clavering [1942] 2 KB 326 at 329–30.
[56]See, eg, Gollin & Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455 at 464.
[57]See, eg, Concut Pty Ltd v Worrell (2000) 176 ALR 693 at 708–9 (practical, businesslike and commercially realistic interpretation); Attaleia Marine Co Ltd v Bimeh Iran (Iran Insurance Co) (The Zeus) [1993] 2 Lloyd’s Rep 497 at 500 (construction of insurance policy so as to achieve sensible business efficacy).

The fourth and perhaps most important and overriding principle or consideration is that the courts will look to enforce agreements that have been freely entered into by the parties and to give effect to the objective intention of the parties, rather than to avoid the agreements.[58] The court will be slow to find ambiguity or uncertainty in a commercial contract where the intention of the parties can be reasonably inferred.[59]
[58]Watson v Phipps (1985) 60 ALJR 1 at 3; Fitzgerald v Masters (1956) 95 CLR 420; Secured Interest Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596.
[59]Upper Hunter County District Council v Australian Chilling & Freezing Co (1968) 118 CLR 429; Meehan v Jones (1982) 149 CLR 571; Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 616–17. See also Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326.

Thus, it is contended by NES that the Letter of Offer and the Agreement for Lease are clear and unambiguous in their terms, and that the intention of the parties is clear from the surrounding circumstances. Moreover, it is contended that it is well established that the terms of a contract will include those terms that the parties objectively intended to include in it.[60] This includes not only those terms that are articulated in the written document but also, where the nature and context of the transaction requires it, unexpressed content that it can legitimately be inferred was intended by the parties.[61] Terms such as this are to be inferred, rather than implied, on the basis of the objective intention of the parties.[62]
[60]Riverwood International Australia Pty Ltd v McCormick (2000) 177 ALR 193 at 208.
[61]See Nick C Seddon, Rick A Bigwood and Manfred P Ellinghaus, Cheshire & Fifoot Law of Contract (LexisNexis Butterworths, 10^th ed, 2012) [10.18].
[62]Hawkins v Clayton (1988) 164 CLR 539 at 570; Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 422; Breen v Williams (1996) 186 CLR 71 at 91.

Thus, in the present circumstances, NES contends that to the extent that it is necessary to determine whether or not terms of the Letter of Offer are incorporated into the Agreement for Lease,[63] either by inference or by implication, the intention of the parties is clear in that para 24 of the Letter of Offer relevantly provided that the Agreement for Lease was to include “the commercial terms in this letter”. Consequently, it is submitted that in order to give effect to the intention of the parties, as stated, it must follow that where a commercial term in the Letter of Offer has not been included in the Agreement for Lease, then that term will be incorporated by inference into the Agreement for Lease. Similarly, where the Agreement for Lease is silent on a commercial term, or part of a commercial term, such as the method of payment of the Landlord’s Works Costs, then that term will also be incorporated. It is submitted that it is only where the Agreement for Lease expressly purports to vary or rescind the existing agreement—the terms of which were agreed to be incorporated—or contains a term that expressly contradicts a commercial term in the Letter of Offer, that it should be inferred that the parties intended for the Letter of Offer or any of its terms to be discarded or disregarded. Thus, it is contended that the Court should construe both the Letter of Offer and the Agreement for Lease so as to do the least harm to what the parties objectively intended.
[63]For example, if it was necessary to determine whether the contribution payment was to be paid as a “lump sum” as provided by cl 13 of the Letter of Offer.

Additionally, it is contended that, in equity, where the Letter of Offer promises the inclusion of terms in the Agreement for Lease, but such terms are omitted, equity will take as done that which ought to have been done absent evidence of an intention to vary the original agreement.[64]
[64]Porters v Cessnock City Council (2005) 12 BPR 23,209; Re Anstis (1886) 31 Ch D 596; De Beers Consolidated Mines Ltd v British South Africa Co [1912] AC 52 at 65–6; Frederick v Frederick (1721) 93 ER 632.

For these reasons, NES contends that the requirement that the Masters contribution be paid by a lump sum, for example, which is contained in para 13 of the Letter of Offer, a commercial term that is not inconsistent with any express term in the Agreement for Lease, will be taken to be incorporated by inference or implication into the Agreement for Lease. The same, it is said, will be true of the requirement in para 13 of the Letter of Offer that any cost difference be verified by Rider Hunt, the nominated quantity surveyors. Additionally, it is submitted by NES that the parties have in fact acted as if these contractual terms from the Letter of Offer had been incorporated in the Agreement for Lease. An example contended for by NES is the permitting of Rider Hunt to conduct the open book review process, as further evidence of the common assumption of the parties that the commercial terms of the Letter of Offer be incorporated into the Agreement for Lease. With respect to this example, it should be noted that there is controversy between the parties as to the nature of the open book process and which party was required to initiate and carry out the process. In any event, returning to the contentions of NES, it is said that, if necessary, the departure from any such common assumption of the kind to which reference has been made would give rise to a conventional estoppel.[65]
[65]Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 at 244; Davis v CGU Insurance Ltd (2009) 104 SASR 422; Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Co Ltd (2008) 66 ACSR 594 at 602 [27], 629 [164].

In relation to the interaction between the Letter of Offer and the Agreement for Lease, the contention of Woolworths is that the latter, formal agreement, replaced the former entirely.

More particularly, as a matter of pleading, Woolworths draw attention to paras 4, 7 and 8 of the Further Amended Statement of Claim (“the FASC”)[66] which plead two agreements to lease—the Letter of Offer and the Agreement for Lease, and plead that the first was “succeeded and replaced” by the second, except where there were commercial terms that had not been superseded by or in conflict with the second, such terms being incorporated into the second.[67] It is said, however, that the FASC does not identify the commercial terms of the first agreement that it says were not superseded by or in conflict with the second agreement. This pleading is not, however, in my view, inconsistent with the position contended for by NES and, to the extent that the pleading does not identify commercial terms, I am of the opinion that it is clear from the manner in which the case was conducted by the parties that the relevant commercial terms the subject of contentions by NES in this respect are clear; particularly having regard to the relative brevity and, though perhaps deceptive, simplicity of the provisions of the Letter of Offer and the Agreement for Lease.
[66]Further Amended Statement of Claim (25 May 2015) [4], [7]–[8].
[67]Defendants’ Closing Submissions (3 September 2015) [42].

Woolworths also draw attention to the fact that the parties to the Letter of Offer and the Agreement for Lease—both as to the landlord and the tenant—are different. Consequently, it is submitted that by the execution of the second agreement, the Agreement for Lease, the parties to the first, the Letter of Offer, must be taken to have agreed to the first agreement having been discharged. That is, each agreement was for a lease over the same land. The different landlords could not each have granted a lease to the different tenants. Thus, it is said that the only live question is whether any of the terms of the Letter of Offer survive, in effect, as implied terms in the Agreement for Lease. In this respect it is also said that, at trial, Senior Counsel for NES eschewed any intention to seek rectification of the Agreement for Lease, but said that the “commercial terms” of the Letter of Offer would be incorporated into the Agreement for Lease and that para 13 was one of the commercial terms.[68] Indeed, this is the position contended for by NES and, on this basis, rectification would not be necessary as the commercial terms of the Letter of Offer would simply survive by way of incorporation or implication in the Agreement for Lease and it would also follow that the differences in parties would not be significant. Moreover, as has already been observed, the parties to the Agreement for Lease are not strangers to the entities which were parties to the agreement the subject of the Letter of Offer. Thus, when one is looking at the objective factual matrix from the perspective of the Agreement for Lease and through the eyes of the parties to that agreement, it would be artificial in the extreme to treat the commercial terms and background to the Letter of Offer as extraneous to those in which the terms of and hence the construction of the provisions of the Agreement for Lease, is to take place.
[68]Transcript 35–6.

Again, with reference to the pleadings, Woolworths made submissions with respect to terms alleged by NES to be implied into the Agreement for Lease, “in order to give business efficacy” to that agreement.[69] These terms, apparently taken from or based on para 13 of the Letter of Offer, are as follows:

(a)that the design brief would contain the current standard specification of the guarantor (Woolworths);
(b)that should the design brief differ in cost from other major trade supply/restricted retail premises (full height precast brief), the difference in cost was to be paid by Masters by lump sum payment to NES; and
(c)that Rider Hunt were to verify the cost difference on behalf of Woolworths.

Woolworths also say that it should be noted that this alleged implied term differs in a material respect from para 13 of the Letter of Offer in that the latter does not contain the qualification “on behalf of Woolworths”. That is, it is said, that by para 13 of the Letter of Offer, it is arguable that Rider Hunt were to bind both parties.

[69]Further Amended Statement of Claim (25 May 2015) [10].

With respect to these alleged implied terms, Woolworths say that they are not required to give business efficacy to the Agreement for Lease and that they are also inconsistent with the express wording and, or alternatively, the scheme or effect of cl 2.2 of the Agreement for Lease and cannot, consequently, be implied.[70] Specifically, it is contended that:
[70]Maybury v Atlantic Union Oil Co Ltd (1953) 89 CLR 507.

(a)to the extent that the first alleged implied term is intended to be a reference to the “Briefing Kit” defined in cl 1.1 of the Agreement for Lease,[71] then such an implied term is not required to give business efficacy to the Agreement for Lease. To the extent that it is a reference to something else, it is inconsistent with cll 1.1 and 2.1 of the Agreement for Lease;
[71]As the “specification briefing kit to be provided in accordance with clause 2.1”.
(b)the second alleged implied term is inconsistent with cl 2.2 of the Agreement for Lease in a number of respects. That is, cl 2.2:
(i)makes no reference whatsoever to a Bunnings design brief;
(ii)leaves it to the Landlord, in the first instance, to determine the cost of the construction for the Briefing Kit;
(iii)leaves it entirely open as to the basis upon which the Landlord might determine the amount it asks the Tenant to contribute to the cost of construction; and
(iv)makes no mention of any such contribution being paid as a lump sum. Indeed, it expressly identifies that the manner in which such contribution is to be paid (if agreed) is to be a matter for further agreement; and

(c)the third alleged implied term is also contrary to cl 2.2 of the Agreement for Lease. By cl 2.2, Rider Hunt has no prescribed role. Clause 2.2(b) anticipates that the parties will attempt to resolve by agreement any differences they have. It was left up to the parties, unfettered by anything other than an obligation to act reasonably and in good faith, to determine how to resolve any differences, including whether or not to engage or involve third parties. Rider Hunt were not required to verify anything and neither Woolworths nor NES were bound by any “verification” given by Rider Hunt.

Woolworths also make the point that the Lease contains an entire agreement clause which records, significantly it is said, that the Agreement for Lease and the Lease record the entire agreement of the parties in relation to the Strathdale site.[72]

[72]But see below [46].

Concluding their submissions in this respect, Woolworths make reference to the operation of cl 2.2 of the Agreement for Lease as they say it is seen by NES as indicated by its pleadings in the FASC.[73] On the basis of these pleadings, Woolworths contend that the NES position is as follows:

(a)NES pleads compliance by NES with cl 2.2(a) of the Agreement for Lease (determination of Landlord’s Works Costs, provision of open book costings and the advice as to the required contribution by the Tenant);[74]
(b)NES pleads that Rider Hunt then verified, on behalf of Woolworths, the difference between the Landlord’s Works Costs and the cost of the Bunnings brief[75]—presumably, therefore, allegedly settling that difference insofar as Woolworths were concerned.[76] The scheme of the pleadings is, it is said, that at this stage in the process, Rider Hunt’s role is complete; and
(c)thereafter, and consistent with other pleadings,[77] the posited process anticipates that NES and Masters would seek to resolve such differences, as verified by Rider Hunt, directly between them. That is, so it seems, by a process of commercial negotiation, acting reasonably and in good faith.[78]

[73]Further Amended Statement of Claim (25 May 2015) [12]–[15].

[74]Further Amended Statement of Claim (25 May 2015) [12].

[75]In its further and better particulars, NES says that Rider Hunt’s “verification … on behalf of Masters and Woolworths is particularised in” a report that Rider Hunt prepared for Mr Macmillan on or about 22 April 2010. See Answers to the Request by the Defendants for Further and Better Particulars of the Plaintiff’s Statement of Claim and Reply (27 August 2012) [4]: Court Book 59.

[76]Further Amended Statement of Claim (25 May 2015) [13].

[77]Further Amended Statement of Claim (25 May 2015) [14]–[15].

[78]See also Further Amended Statement of Claim (25 May 2015) [15(viii)].

In my view, the principles applicable to the construction of commercial contracts, such as the Letter of Offer and the Agreement for Lease, the subject of submissions by NES are applicable in the present circumstances and would enable NES to call in aid the provisions of the Letter of Offer insofar as they have not been abrogated or varied by clear provisions of the Agreement for Lease. For the preceding reasons the entire agreement provisions to which Woolworths make reference do not provide anything in the nature of such an abrogation or variation.[79] Quite clearly, the commercial parties to the Letter of Offer intended its terms to have meaning and to be binding. It follows that the commercial context and the factual matrix in which the Agreement for Lease was entered into by corporate entities associated with and contemplated, at least in general terms, by the parties to the Letter of Offer must be accommodated and given effect to by implication or incorporation into the terms of the Agreement for Lease. The consequences in terms of the nature and effect of the contractual obligations between the parties to the Agreement for Lease are matters to which I now turn.
[79]See above [44].

[1056]Expert Report of Dawna Wright (13 May 2015) [5.2.3]–[5.2.7].
(a)Inflation;
(b)The possibility that agreement would not have been reached in relation to the Landlord’s Works Costs or Masters’ contribution;
(c)The possibility of variations, delays, cost increases or unforeseen costs or fees associated with construction;
(d)The possibility that Masters may not have exercised one or more of its options to renew the Lease (including for reason that competitors may have affected the viability of the Masters store);
(e)The possibility that NES may not have been able to exercise its options to purchase the land comprising the Strathdale site either within time or at all;
(f)The possibility that NES would not have obtained funding for the development;
(g)The possibility that NES would not have been able to obtain planning approval for the development.

It is clear from this list of risks, being precisely the same risks that the Court must consider when determining what Sellars discount to apply, that it was appropriate for Mr Stone to have determined the net present value of the stream of rent and equity on a risk-free basis. Had Mr Stone done otherwise, there would have been duplication once the Court applied a Sellars discount to any estimate of loss and damage. Ms Wright agreed that where discounts were applied for the same risks, this may result in a double-counting of risk.[1057]

[1057]Transcript 1394.

Finally, Ms Wright’s evidence is that the net equity calculation by Mr Stone (being his estimate of the exit value of the property at the end of the Lease) is flawed because by valuing the equity by reference to the rental income in the last year of the lease, it assumes an ongoing rental income even though no lease agreement would exist.[1058] In essence, Ms Wright says the Capitalisation of Income method is not appropriate where the rent is not known.
[1058]Expert Report of Dawna Wright (13 May 2015) [2.2.4], [5.3].

Mr Jackson also gives evidence that in his opinion the value of the Strathdale site at the end of the Lease should be assessed on the basis that there is no lease in place and that it is potentially a vacant site.[1059] Mr Jackson says it would be reasonable to assume that at the end of the Lease the warehouse would have reached the end of its economic life and would need upgrading, refurbishing or demolition. If the property was to be upgraded, a considerable allowance would need to be made for capital expenditure. NES contends to the contrary and, in my view correctly, that while the rental figure used by Mr Stone to determine the exit value of the property is the amount that would have been payable for the last year of the Lease, which by definition would have been terminated as at that point, the rental amount is nevertheless the best estimate of what the market rent is likely to be at that time. This is particularly so where the rent under the Lease is fixed at the lesser of CPI or 4 per cent which does not even preserve the real value of the current market rent. It is appropriate for Mr Stone to have calculated the exit value in the way that he did and his estimate should be accepted.
[1059]Expert Report of Grant Jackson (15 May 2015) [35].

Moreover, Mr Jackson’s concerns about the need for capital expenditure to upgrade the site in order for it to be rented are misconceived in that they fail to take into account that more than $2.3 million of “additional costs” of maintaining the property have already been built into Mr Stone’s Discounted Cash Flow calculations.[1060] Ms Wright conceded in cross examination that it was likely the Lease required the landlord to maintain the premises in good order.[1061] When cross-examined on the basis of his conclusion that the appreciation of the underlying land value of the Strathdale site coupled with the depreciation of the building would likely mean that the highest and best use of the property at the end of the Lease would be as vacant land for redevelopment purposes, Mr Jackson was not able to estimate the rate at which the underlying land might appreciate.[1062] Mr Jackson admitted that he had not considered that point.[1063] Mr Jackson was also unable to estimate what the appreciation of the land might be from his own experience. Having not considered the appreciation of the land or the obligation to maintain the premises, it is difficult to see how Mr Jackson can have drawn the conclusions that he did that the best use of the land at the end of the Lease would be for redevelopment.
[1060]Expert Report of Owain Stone (1 May 2015) Appendix C.
[1061]Transcript 1396.
[1062]Expert Report of Grant Jackson (15 May 2015) [40]; Transcript 1253–4.
[1063]Transcript 1253–4.

I do, however, accept, as a general proposition, when considering the exit value of the Bendigo site, the conclusion of Mr Jackson that, in addition to the net income NES would have earned under the Lease, there would likely have been “some considerable appreciation in land value” over the term of the Lease which NES would have been entitled to the benefit of at the conclusion of the Lease.[1064] Mr Stone’s estimate of the end value of the property at the conclusion of the Lease of $19,824,000 million[1065] compared with $52,082,527 million at the date of completion[1066] is approximately 2.5 per cent (compound) increase in the value of the land each year. I accept that, as a matter of common experience, such an assumption is conservative and far from unrealistic.
[1064]Expert Report of Grant Jackson (15 May 2015) [39].
[1065]Court Book 5983.
[1066]Court Book 5986.

In the result, there is nothing in the reports of Ms Wright or Mr Jackson that should dissuade the Court from accepting Mr Stone’s estimate of NES’s loss and damage, based on Mr Sutherland’s yield, being approximately $14.5 million before the application of a Sellars discount to reflect the risks of the opportunity not being realised.

The appropriate yield

As discussed previously, where the Capitalisation of Income method is to be used to calculate the value of a lost opportunity, the choice of yield applied can be critical.

The evidence of Mr Sutherland was that the appropriate capitalisation rate (or yield) as at the date of his report (being 27 May 2015) was in the range of 6.5 per cent to 6.75 per cent.[1067] In contrast, Mr Jackson concludes that the applicable yield as at 1 July 2011 would be 8 per cent.[1068]
[1067]Expert Report of Grant Sutherland (27 May 2015) [59].
[1068]Expert Report of Grant Jackson (15 May 2015) [21].

In my view, the yield selected by Mr Sutherland should be accepted and the yield chosen by Mr Jackson should be rejected for a number of reasons; matters to which I now turn.

What date should be used when determining the applicable yield?

Where market yields are decreasing (or increasing) over time and the Capitalisation of Income method is highly sensitive to the choice of yield, careful consideration must be given to the date at which the yield is selected. As discussed previously, an injured party who has suffered damage as a result of a breach of contract is entitled to such a sum as will put him in the position he would actually have been in but for the breach of contract. It is this governing principle and not any temporal rule that determines what is to be taken into consideration in assessing loss and damage and what is not. An application of this principle requires “an appreciation of the plaintiff’s actual position in comparison with the position he would have been in but for the [breach of contract]”.[1069] It is for this reason that the general rule is that damages for torts and breach of contract are assessed as at the date of breach or when the cause of action arises[1070] is not absolute[1071] or universal and must “give way in particular cases to solutions best adapted to giving an injured plaintiff the amount in damages which will most fairly compensate him for the wrong he has suffered.”[1072]
[1069]Johnson v Perez (1988) 166 CLR 351 at 371.
[1070]Johnson v Perez (1988) 166 CLR 351 at 355.
[1071]Johnson v Agnew [1980] 1 AC 367 at 401–2.
[1072]Johnson v Perez (1988) 166 CLR 351 at 355–6 (citations omitted).

Where there is some good reason that the usual measure of loss and damage assessed as at the date of breach is inapposite then:[1073]

the court is entitled simply to assess the loss flowing directly from the transaction without any reference to the date of transaction or indeed any particular date. Such a course will be appropriate whenever the overriding compensatory rule requires it.

The Court’s power to depart from the general rule whenever it is necessary to do so in the interests of justice applies equally in both contract and tort cases.[1074]

[1073]HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 at 667 quoting Smith New Court Securities Ltd v Citibank NA [1997] AC 254 at 284. See also Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd [2013] VSC 464, [274].

[1074]Johnson v Perez (1988) 166 CLR 351 at 356.

One category of cases in which it is common for loss and damage to be assessed at a later date than the date of breach is where to assess the damage at the date of breach would leave the injured party exposed to deleterious effects (such as inflation or foreign exchange risk). In such cases, the selection of a later date is intended to reduce the burden (for example of inflation) on the victim and prevent any windfall to the wrongdoer. There are other cases including where damages are awarded in lieu of specific performance.[1075] There are various reasons that loss may be assessed at a later point in time, where it is necessary to properly compensate a plaintiff.[1076] These reasons include that the assessment of loss at a later point may enable the Court to take into account evidence relevant to the assessment of loss that has materialised since the date of the breach and facts that would have been mere speculation as at the date of breach.[1077] It may also be desirable to assess damages at the date of trial where compensation is for losses into the future and there is no compelling reason to select one point in time rather than another along the continuum over which the damages extend.[1078] A compelling reason for selecting a particular time along a continuum of loss and damage is often the point at which the plaintiff is able to mitigate its losses. Where there is a contract to purchase a good and there is a ready market for that good the usual point will be the point of breach.[1079]
[1075]See, eg, Johnson v Perez (1988) 166 CLR 351 at 386–8.
[1076]See, eg, Johnson v Perez (1988) 166 CLR 351 at 386–8.
[1077]Johnson v Perez (1988) 166 CLR 351 at 388.
[1078]Johnson v Perez (1988) 166 CLR 351 at 388.
[1079]Johnson v Perez (1988) 166 CLR 351 at 388–9.

In the present case, the opportunity for NES to develop and lease the Strathdale site to Masters was a unique opportunity. The evidence was that NES had acquired options to purchase the site[1080] and the development was to be fully funded from borrowings.[1081] There was no evidence to suggest that NES could or should have minimised its loss by purchasing or exploiting some other opportunity. To the contrary, NES explored alternative uses for the site but was unable to find any.[1082] Having explored all other alternatives, NES ultimately let the options to purchase the land expire so as to avoid incurring ongoing option fees.[1083] In the circumstances, there is no point of time at which it can properly be said that NES could have or should have mitigated its losses nor is there any particular point at which NES’s ongoing losses (being the ongoing loss of rent and capital appreciation over the life of the lease) should be fixed having regard to notions of fairness to the Defendants as the parties at fault.[1084] Where the market conditions for the sale of land were improving over time (yields were decreasing) there is no principled reason that NES should be fixed with the value of the Strathdale site at the completion of the development when it in fact had no intention of selling the development at that time. There is no dispute between the parties that any damages payable to NES must be discounted to the date of breach. The disagreement relates to the date on which the property should be valued. NES does not accept that this should be at the date of completion of the development. The choice of the date of valuation, as distinct from the date of assessment of loss and damage, determines the choice of comparative properties and applicable yields (which reflect the sentiment of purchasers in the market at a particular point in time). As even a small change in yield can have a disproportionate effect on value, the choice of valuation date can be, and in this case is, critical.[1085] Woolworths submit that the value should be assessed as at the date the development would have been completed. NES submits that the value should be assessed as at the earlier of the date when the property would have been sold or otherwise the date of the proceeding.
[1080]Outline of Brendan Edward Blake (6 March 2015) [35]–[46]; Court Book 785–833.
[1081]Outline of Brendan Edward Blake (6 March 2015) [430].
[1082]Outline of Brendan Edward Blake (6 March 2015) [241]–[246].
[1083]Outline of Brendan Edward Blake (6 March 2015) [240].
[1084]Johnson v Perez (1988) 166 CLR 351 at 357–8.
[1085]See the example in Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4^th ed, 2003) 373 in which a 1 per cent change in yield resulted in a $86 million or 21 per cent difference in value.

NES submits that, in fixing the valuation date, the Court should take into account (as set out above) that NES intended to lease the Strathdale site to Masters for between 12 and 42 years and did not intend to sell the site at the completion of the development. NES says that in these circumstances fixing its loss based on sales and yields set by the market as at the date of the completion of the development, when it had no intention of selling, would be unjust and contrary to the overriding compensatory rule.[1086] NES also submits that the choice of the later date for valuation enables the Court to take into account, for comparison purposes, the sales of Masters’ stores which NES submits are “truly comparable”[1087] to the Strathdale site rather than the Bunnings store sales available at the earlier date. NES submits that yields as at the date of the proceeding also take into account the increased supply of stores in the market arising from the Masters rollout, whereas the comparative sales at the date chosen by Woolworths does not.
[1086]See Johnson v Agnew [1980] 1 AC 367 at 401.
[1087]Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4^th ed, 2003) 373.

For the preceding reasons and on the basis of the material to which reference is made, I accept the submissions of NES that it is open to the Court to find, and the Court should find on the basis of the evidence of Mr Sutherland, that the appropriate date on which to capitalise the net income NES would have earned, for the purposes of fixing loss and damage, is at the date of judgment. As such, the most recent yield estimate, being that of Mr Sutherland, should be applied. The application of this yield, and Mr Stone’s Discounted Cash Flow methodology, results in the loss and damage estimate of approximately $14.5 million before a discount is applied for risk.

The yield selected by Mr Jackson

Even if, contrary to the position I have found, the loss suffered by NES is calculated by reference to yields that applied as at 1 July 2011 (as Woolworths contend) the yield of 8 per cent selected by Mr Jackson should not be accepted as it is not supported by adequate comparable sales at that date.

The use of sales of comparative properties to infer value is well accepted but it is not without its difficulties. In Redeam Pty Ltd v South Australian Land Commission, Jacobs J said:[1088]
[1088](1977) 17 SASR 508 at 513–14.

It is unnecessary for me to say very much about the use and evidentiary value of comparable sales. The method of determining market value by comparison with sales of similar land is widely accepted. The advantages and pitfalls of the method are expounded in many texts and cases. As Lord Wilberforce pointed out in Aik Hoe & Co Ltd v Superintendent of Lands and Surveys:[1089]
[1089][1969] 1 AC 1 at 18.
In the search for evidence to show the market price of a given property on a given date, there may be a continuous spectrum of cases varying from contemporaneous sales of precisely similar properties (unlikely to be found in many cases) to sales at different dates of properties differing greatly in nature and development.

The greater the difference between the two properties, the less reliable is the evidence of the sale of the allegedly comparable property. But that does not mean that the evidence is totally irrelevant, if there remain significant points of similarity. I adopt, with respect, the summary of Wells J in Crompton v Commissioner of Highways:[1090]
Upon reading some works on comparable sales, one might be pardoned for supposing that, within narrow limits of tolerance, sales of land similar to the subject land must fall into two rigid categories: comparable sales and non-comparable sales. Such a supposition would, in my opinion, be an over-simplification and could lead to error. It seems to me that, ideally, the valuer should, in the first instance, look at the sales of land over a wide geographical and temporal range, and from these select those that appear potentially useful as a basis for comparison. Those selected should then be carefully analysed by reference to an extensive list of characteristics of land sales the compilation and assessment of which fall clearly within the province of the experts. Whether or not one or more of those sales is, and how it or they ought, to be compared with the subject land becomes then a matter of degree, and a final decision is reached, often by those same experts drawing a series of nice distinctions. Obviously, no two sales of land will be found to be the same, or even similar in all respects. Those that bear a close similarity to the assumed sale of the subject land will be more reliable than those whose similarity is less proximate and in respect of which adjustments or allowances must be made before they can be safely introduced into the valuation process. At a particular point it will be found that, in respect of the remaining available sales, the adjustments and allowances that would need to be made are of such a magnitude that it ceases to be safe or sound to treat them as sufficiently similar to the assumed sale of the subject land, and they must thenceforward be rejected.

Where the valuation method employed involves the use of comparative sales, adjustments must be made to ensure, as nearly as possible, the sales are “truly comparable” and that the valuer is comparing “like with like”.[1091] The extent to which a sale can be relied upon as a comparative sale is a question of fact and degree.[1092]

[1090](1973) 5 SASR 301 at 317.

[1091]Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 458–9.

[1092]Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 523.

As the Strathdale site was to be one of the first Masters stores in Victoria, there were no comparative sales of Masters stores as at 1 July 2011 from which to derive a reliable yield.[1093] As a result, in selecting a yield of 8 per cent, Mr Jackson relied solely on sales of Bunnings stores. While there are obvious similarities between the stores—both stores being “big box” hardware stores—there are many material differences between Bunnings stores and Masters stores, including the cost and quality of construction and lease terms that are likely to have had a material impact on the yields available.[1094] No adjustment was made for these differences.
[1093]Court Book 1245.
[1094]Mr Jackson admitted as much in cross-examination: Transcript 1245.

Indeed, the only sale of a Masters store identified by either expert valuer was the sale of the Masters store in Williams Landing in April 2015 which attracted a yield of 6.04 per cent. This is considerably lower than any of the yields relied upon by Mr Jackson. That no Masters stores were on the market until April 2015 also serves to reinforce NES’s contention that it would not have sold the Strathdale site at that time and should not be fixed with a yield from that date. It is well established that in selecting comparative sales a valuer must not be unreasonably selective in circumstances where a fair estimate can only be made where there is a reasonably representative group of comparable sales.[1095] Even non-comparable sales may be helpful for checking the valuation and its underlying assumptions.[1096]
[1095]Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 459.
[1096]Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 460, 523.

In reaching his yield of 8 per cent, Mr Jackson selects only three “comparative sales” being sales of Bunnings stores in Caroline Springs, Craigieburn and Pakenham. These sales are to a single purchaser, Bunnings Warehouse Property Trust. Notably, not one of those sales achieved a yield of 8 per cent or more.[1097] Mr Jackson then identifies four other “further sales” in New South Wales and Queensland which he says provide further evidence of the yield a purchaser would accept.[1098] These sales were also all made to Bunnings Warehouse Property Trust and were the four highest yielding sales in any year between 2011 and 2015.[1099] Other sales in Newcastle NSW, Gaven QLD, Singleton NSW, Ulladulla NSW and Kempsey in NSW, all of which had yields of materially less than 8 per cent were also not included. Mr Jackson does identify a sale of a Bunnings store in Bendigo, which yield was less than 8 per cent, but excludes that sale on the basis that inter alia the yield was “lower than all of the other evidence set out in the tables above.”[1100] Mr Jackson then speculates about the possible reasons for the lower yield, namely that he believed the store had been “under let” at the time.[1101] In cross examination, it was evident that Mr Jackson had no first-hand knowledge of the reasons for that yield.[1102] Mr Jackson also did not take into account yields achieved in 2013 or onwards (which are materially less than in 2011) despite this timeframe being a far more realistic assessment of when NES was likely to in fact capitalise its cash flows by selling the site. In all likelihood, NES would continue to hold the site had it not been for Woolworths’ wrongful termination of the Agreement for Lease.
[1097]7.6 per cent, 7.6 per cent and 7.9 per cent: Expert Report of Grant Jackson (15 May 2015) [21].
[1098]Expert Report of Grant Jackson (15 May 2015) [22].
[1099]Save for the former Dahlsens store in Warragul, which can be excluded. See below [361].
[1100]Expert Report of Grant Jackson (15 May 2015) [28].
[1101]Expert Report of Grant Jackson (15 May 2015) [30].
[1102]Transcript 1234.

It is well established that the location of a property is the key determinant of the value of a property[1103] and is potentially significant in identifying the comparative sales to be relied upon.[1104] Sales in the local area may, with appropriate adjustments, be more helpful than comparative sales in that they are indicative of the state of the market for properties of a similar location.[1105] In this regard, it is notable that neither Mr Jackson nor Mr Sutherland identified a single sale in the whole of Victoria (comparative or otherwise) that achieved a yield of 8 per cent or more (being the yield adopted by Mr Jackson). In order for Mr Jackson to justify his selection of such a high yield, it was necessary for him to rely as “further sales” on the four highest yielding sales[1106] that occurred in Australia between 2011 and 2015, each of which were to a single purchaser in New South Wales and Queensland.
[1103]Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4^th ed, 2003) 368.
[1104]Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 522.
[1105]Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 523.
[1106]Save for Bunnings Warragul, which can be excluded. See above [361].

Whether it be deliberately or inadvertently, Mr Jackson appears to have made a questionable selection of properties from which to derive his yield, which had the effect of diminishing the value of his assessment of NES’s loss and damage.[1107] The limited sample size and nature of the sites selected for (and excluded from) comparison by Mr Jackson, which included the four highest yielding sales nationally and which were limited to sales to a single purchaser, calls into question the validity of the yield arrived at even if the 1 July 2011 date was selected.[1108]
[1107]See Challenger Property Asset Management Pty Ltd v Stonington City Council (2011) 34 VR 445 at 511–12.
[1108]Transcript 1238.

In my view, there is no reasonable justification for Mr Jackson restricting consideration to such a limited number of stores or including high yielding but not comparable sales in New South Wales and Queensland while excluding low yielding but more comparable sales in Victoria (such as the Masters store in Williams Landing or the Bunnings store in Bendigo, Torquay and Hastings). By contrast, the approach adopted by Mr Sutherland was far more comprehensive both in terms of the number of stores and the range of yields considered and should be preferred to that of Mr Jackson. Mr Sutherland’s comparison involved a sample of 19 of the most directly comparable Bunnings and Masters stores with yields ranging from 6.04 per cent to 8.55 per cent, including eight Bunnings stores from Victoria.[1109] The stores within non-capital city locations were considered to be the most comparable. It is notable that the interstate stores upon which Mr Jackson based his analysis have significantly higher yields than any Victorian based stores considered in the analysis.[1110] Given the more comprehensive analysis undertaken by Mr Sutherland, including the inclusion of Victorian stores and a wider range of yields, as well as the absence of Masters sales or comparable sales in 2011 and the fact that NES would not have sold the site at that time all lead to the same conclusion: that the yield selected by Mr Sutherland should be preferred to the yield selected by Mr Jackson. Moreover, given the absence of comparable sales in 2011, Mr Sutherland’s evidence and conclusion as to yield should be preferred.
[1109]The yield of 8.55 per cent relates to the Bunnings Warragul which was not a purpose built Bunnings store. The store was also sold 12 months later with a yield of 7.29 per cent.
[1110]Mr Jackson admitted that the store comparisons outlined in Mr Sutherland’s report are, to the best of his knowledge, accurate: Transcript 1250.

Conclusion: value of the lost opportunity

For the preceding reasons, the submission by NES that the Discounted Cash Flow method[1111] used in Mr Stone’s second calculation should be preferred to the Capitalisation of Income method[1112] used in Mr Stone’s first calculation and adopted by Ms Wright is accepted. Whatever model is adopted, where cash flows are capitalised based on comparative sales, the Court should, in my view, find that the appropriate time for that capitalisation (and selection of the applicable yield) is as close to the date of judgment as is reasonably practicable. In this case, the yields of Mr Sutherland should apply. To do otherwise, in circumstances where NES is not a developer who intended to sell the development on completion, but is an operator of supermarkets and stores[1113] who intended to hold the Bendigo site for the duration of the Lease, would have the effect of undervaluing the actual loss suffered by NES and depriving NES of the full benefits of the Lease and the capital appreciation that it would have obtained had it held onto the site for the period of the Lease. In circumstances where NES intended to hold the land and to retain the net income under the Lease as well as the capital appreciation of the land, what the market may have paid for the Strathdale site had it been sold (or the cash flows capitalised) at completion of the development is immaterial.
[1111]See Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4^th ed, 2003) 376.
[1112]See Wayne Lonergan, The Valuation of Businesses, Shares and Other Equity (Allen & Unwin, 4^th ed, 2003) 371.
[1113]See, eg, Court Book 1207, 2631, 2633, 4803.

In the result, I accept the submissions of NES that it is open to the Court to find, and the Court should find that the value of the opportunity that NES has lost (before applying an appropriate discount for risk) is at least $14.5 million.[1114]
[1114]Being the net present value of the lost rent under the Lease (being approximately $10.7 million) plus the net present value of the lost equity at the conclusion of the Lease (using the yield of Mr Sutherland) being approximately $3.8 million, being a total of $14.5 million.

Discount to reflect risks

The question remains what discount the Court should apply to adjust the measure of loss and damage so as to reflect the Court's assessment of the prospects of that opportunity had it been pursued in accordance with the principles in Sellars.[1115]
[1115]Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 355.

In reaching that determination, the Court will assess “the degree of probability that an event would have occurred, or might occur” and adjust the award of damages accordingly.[1116]
[1116]Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 at 643.

The same body of evidence, referred to earlier in these reasons with respect to establishing the existence of loss, is also relevant to establishing the amount to be recovered.[1117] Having regard to the preceding reasons and the material relied upon, I accept that:
[1117]Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 364: “in practice it will usually be the same body of evidence that tends to establish both the existence of a loss and the amount to be recovered.”

(a)The risk of the parties not reaching agreement in relation to the Landlord’s Works Costs or Masters’ contribution if Woolworths acted reasonably and in good faith was very low;
(b)There was no more than the usual risk of delays associated with the development or risks of inflation;
(c)No allowance should be made for the risk of variations or unforeseen cost increases associated with the development (as the risk of cost increases was borne by Vaughan Constructions who provided a fixed price contract[1118] and the risk of variations was borne by Woolworths who would have been responsible for funding any such variations);
(d)There was a risk that Masters may not have exercised one or more of its options to renew the Lease (over its entire term). This risk may increase slightly with each consecutive term. However, given Woolworths’ public commitment to Masters, the importance of Bendigo as a regional centre and the fact that no Woolworths witness gave evidence that the Lease was unlikely to be renewed, NES submits that the overall risk of the Lease not being renewed was no more than moderate;
(e)Having regard to the statement of Mr Svanosio, the risk that NES may not have been able to exercise its options to purchase the land comprising the Strathdale site was extremely low;
(f)Having regard to the evidence of Mr Stockwell and Mr McGregor the risk that NES would not have obtained funding for the development was also low. The Court should find that Bendigo Bank would not have turned down the opportunity to fund such an important development in Bendigo, for a key client, with a blue chip tenant, in circumstances where the transaction in question served NES’s and the Bank’s interest that NES diversify its investments; and
(g)The risk that NES would not have been able to obtain planning approval for the development is real; however, in light of the evidence of both planning experts, and the absence of evidence from Urbis, as well as the support of the State Government and the results of the other applications for planning approval made to the Minister, the Court should find that this risk was also very unlikely to eventuate.

[1118]Court Book 3001.

While these risks are cumulative, NES submits that the total discount should be more than the 20 per cent applied in Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd,[1119] but significantly less than the 70 per cent applied in Reading Entertainment Australia Pty Ltd v Whitehorse Property Group Ltd.[1120] On balance, I accept that, as NES contends, a discount of 25 per cent would be appropriate. Applying that discount to NES’s loss and damage, as set out above, the damages amount should, in my view, be fixed at $10.875 million—being 75 per cent of $14.5 million—plus interest.
[1119][2013] VSC 464.
[1120][2007] VSCA 309.

Orders

For the preceding reasons, there will be judgment for NES for damages in the sum of $10.875 million plus interest.

I otherwise reserve the question of costs and will hear the parties further on this issue.

The parties are to bring in orders to give effect to these reasons.

Item Number	Item	Term
1.	Land	Certificates of Title Volume 8505 Folio 633, Volume 8505 Folio 634, Volume 8204 Folio 513, Volume 9051 Folio 930, Volume 9051 Folio 931 and Volume 7863 Folio 135
2.	Anticipated Date of Practical Completion	The date 12 months after the Development Approval is obtained.
3.	Approximate Lettable Area	10,738 square metres.
4.	Termination Date	The date which is 12 months after the Anticipated Date of Practical Completion (ignoring any extension under clause 3.5)
5.	EIS Period	12 weeks
6.	Term	12 years
7.	Further Terms	6 further terms of 5 years each.
8.	Square Metre Rate	$120 per square meter
9.	Maximum Rent Amount	Not applicable.
10.	Development Approval Date	The date which is 18 months after the date of this Agreement.

[2016] VSC 1

28 January 2016