Perpetual Ltd v Myer Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2018 0033

PERPETUAL LIMITED (ACN 000 431 827) (and others according to the attached schedule)	Applicants
v
MYER PTY LTD (ACN 004 143 239)	Respondent

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JUDGES:	WHELAN, NIALL and HARGRAVE JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	30 January 2019
DATE OF JUDGMENT:	7 May 2019
MEDIUM NEUTRAL CITATION:	[2019] VSCA 98
JUDGMENT APPEALED FROM:	[2018] VSC 2 (Croft J)

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LEASES – Rectification – Long-term commercial lease to anchor tenant in shopping centre – Formula for calculating tenant’s contribution to increases in variable outgoings contains alleged mistake – Applicants contend common intention evident from earlier draft heads of agreement – Where draft heads of agreement one step in continuing negotiation process – Applicants unable to provide alternative formulation which reflects alleged common intention – Necessary to prove true intention not merely that some mistake has been made – Energy World Corporation Ltd v Maurice Hayes & Associates Pty Ltd [2007] FCAFC 34 applied – No convincing proof provided to prove alleged common intention – Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 applied.

LEASES – Construction – Where the tenant’s bargaining position was strong – Where formula as written leads to peculiar result but unambiguous and capable of sensible operation – Alleged mistake not noticed for 12 years or acted upon for 16 years – Lease negotiated over long period by well-represented parties – Court not satisfied formula absurd or mistaken – Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25 considered – Seymour White Constructions Pty Ltd v Oswald Bros Pty Ltd (in liq) [2019] NSWCA 11; Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633 applied.

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APPEARANCES:	Counsel	Solicitors
For the Applicants	Mr C M Scerri QC with Mr R M Peters	Gadens
For the Respondent	Mr I G Waller QC with Mr P S Noonan	Clayton Utz

TABLE OF CONTENTS

The course of the negotiations
Subsequent conduct: The owners take 12 years to appreciate the alleged mistake
Relevant lease provisions
Grounds of appeal
Judge’s reasons: construction grounds
Judge’s reasons: rectification ground
Rectification: Was it the common intention of the parties that the increases would be calculated from the base year?
Construction: Was the agreed commercial purpose to calculate increases from the base year?
Construction: Is the fourth schedule commercially absurd?

Applicable legal principles
Owners’ contentions
Judge’s reasons on the absurdity contention

Analysis

Notice of contention: Did the subsequent conduct create a defence of account stated?
Summary of conclusions
ANNEXURE A: FOURTH SCHEDULE
ANNEXURE B: PROPOSED AMENDMENTS TO FOURTH SCHEDULE
ANNEXURE C: KEY TERMS OF THE LEASE
SCHEDULE OF PARTIES

WHELAN JA
NIALL JA
HARGRAVE JA:

This case concerns whether the provisions of a commercial lease, which state the amount of the tenant’s contributions to the landlord’s increases in variable outgoings, contain a mistake. If they do, can they be construed in a different way, or rectified, to remedy such a mistake? If so, the tenant must pay tens of millions of dollars in increased contributions.

More than 20 years ago, the owners of the Chadstone shopping centre and its anchor tenant, Myer Pty Ltd, assisted by both internal and external solicitors, negotiated a new long-term lease. At the time, the owners were proposing major re-development works at the shopping centre, for purposes including introducing a second anchor tenant, David Jones Ltd — Myer’s major competitor.

The proposed redevelopment and addition of David Jones as a tenant of the shopping centre could not take place unless Myer surrendered its existing lease. At the time — in the mid-1990s — Myer had a lease expiring on 31 July 2008 with one five year option, giving it a maximum tenure to 31 July 2013. Effectively, Myer had a right of veto over the redevelopment until that time. During the course of negotiations, Myer estimated that the effect of introducing a David Jones department store into the shopping centre would cause Myer’s revenue to reduce by about $16 million in the first year alone. Further, the owners were proposing that Myer pay a significantly increased rent for only a small increase in floor area. These circumstances placed Myer in a strong bargaining position in negotiating a new lease.

The key negotiations occurred in 1996 and 1997. An agreement for lease, annexing an agreed form of lease, was executed in September 1997. Following an extensive delay, during which the redevelopment took place, the lease was executed on 4 September 2001. The defined ‘Commencing Date’ of the lease is 23 November 1998. The term of the lease is 30 years with a 15 year option. If the option is exercised the lease will continue until November 2043. The annual rent and fixed contribution to variable outgoings in the first year of the lease was $5.858 million.

The lease requires Myer to pay a fixed contribution to ‘variable outgoings’ of the shopping centre for every year of the lease, defined as the ‘Base Variable Outgoings Payment’ (‘base outgoings payment’).[1] This was the only contribution which Myer was required to pay in the first part-year (adjusted pro-rata) and the first full financial year of the lease. The variable outgoings — which the parties sometimes referred to as ‘non-statutory outgoings’ — do not include statutory outgoings, such as land tax, which are separately dealt with in the lease.
[1]Clauses 3.16 and 3.17 of the lease, and item 10 of the first schedule to the lease, set out below at [70] and in Annexure C. When quoting from the lease, the owners are referred to as ‘the Lessors’ and Myer is referred to as ‘the Lessee’.

From 1 July 2000, the lease provides that Myer must, in addition to the base outgoings payment, pay an 80 per cent contribution towards increases in its proportion of the variable outgoings of the shopping centre over the previous year, calculated in accordance with the provisions of the fourth schedule to the lease.[2] The contribution is to be paid monthly, based on an estimate prepared by the owners, and later adjusted after an accounting following the end of the relevant financial year.
[2]Clause 4.6 of the lease, set out below at [70] and in Annexure C.

The fourth schedule to the lease (set out in full in Annexure A to these reasons) fixes Myer’s contribution to increases in variable outgoings by reference to the difference between the variable outgoings for each year and the variable outgoings for the year immediately preceding that year. For the first 16 years of the lease, the owners demanded — and Myer paid — contributions to increases in variable outgoings calculated in accordance with those provisions of the fourth schedule.

Myer’s contribution to increases in variable outgoings calculated in accordance with the relevant provisions of the fourth schedule produces what might be seen as (to use a neutral term) a ‘peculiar’ outcome. The provisions result in an outcome whereby Myer pays 80 per cent of the discrete increase in each individual year. Thus, it pays 80 per cent of each annual increase only once, although the increases are cumulative and the owners pay the amount of each annual increase in every subsequent year. A simple illustration reveals the peculiarity. Assume that in the first year variable outgoings are $100, and that thereafter they increase by $10 each year, so that over four years the variable outgoings are $100, $110, $120 and $130. Under the relevant provisions, Myer would pay $8 each year, totalling $24, as a contribution to increases over the entire period totalling $60. This is because Myer’s 80 per cent contribution is confined to the discrete $10 increase each year, not the cumulative increases from commencement. As indicated, the owners calculated Myer’s contributions on this basis, and Myer paid them on this basis, for 16 years before any relevant issue was raised between the parties as to the basis of the calculation.

The owners now contend that the fourth schedule contains an obvious mistake, and that it does not reflect the negotiated commercial deal as to the basis on which Myer would contribute to increases in variable outgoings. The owners contend that the agreed commercial deal was that Myer’s 80 per cent contribution to increases in its proportion of variable outgoings would be calculated by reference to increases over the base outgoings payment, not by reference to increases over the previous year.

In February 2016, the owners commenced a proceeding in the Commercial Court seeking to have the Court declare that the provision should be amended to reflect that commercial deal, either by construction of the fourth schedule so as to avoid absurdity or inconsistency, or by rectification of the fourth schedule so as to accurately reflect the true agreement between the parties. On that basis, the owners claimed that Myer should pay increased contributions to variable outgoings for the period of the lease to 30 June 2016 of about $19 million — and increasing contributions for the remainder of the lease period. Those calculations were based on an amended version of the fourth schedule annexed to the statement of claim as Annexure B, and which is also Annexure B to these reasons.

Myer resists each of the claims made (construction and rectification) and denies the existence of the commercial deal as characterised by the owners.

Although there is overlap, the admissible evidence on each claim is not identical. Evidence of subjective intention is only admissible on the rectification claim and not on the construction claim.

After hearing detailed evidence about the negotiations, the trial judge rejected the owners’ claims.[3] The owners seek leave to appeal.
[3]Perpetual Ltd v Myer Pty Ltd [2018] VSC 2 (‘Reasons’).

They contend in summary that the trial judge erred by failing to find as a fact that, during the negotiations, the parties agreed — or it was their common intention — that Myer’s 80 per cent contribution to increases in variable outgoings would be calculated by reference to the amount by which variable outgoings in a given year exceeded the base outgoings payment; and not, as stated in the fourth schedule, by reference to the amount by which the variable outgoings exceed those in the immediately preceding year.

There is another feature of the relevant provisions of the fourth schedule which is important. The fourth schedule contains provisions, including two formulas, which limit Myer’s contributions by reference to the Consumer Price Index (‘CPI’). It is common ground that the intended effect of the formulas was to ‘cap’ Myer’s contribution to increases at CPI increases. That is, Myer’s contribution was to be calculated by reference to the actual increase, or the increase calculated by applying the CPI increase, whichever was the lesser (‘the CPI cap’).

The difference between the provisions of the fourth schedule as they have been applied, and the provisions as the owners say they ought to be applied, exceeded $2 million per year by the year ending June 2014, and will continue to increase into the future.[4]
[4]By way of hypothetical example, under the provisions as written (ignoring the CPI cap for present purposes), if Myer’s proportion of variable outgoings in the year ending June 2019 increased by $100,000 over the year ending June 2018, Myer would have to pay $80,000 in addition to the base amount of $1,607,016.70. Under the provisions as contended for by the owners, it is the increase over the base outgoings payment (the figure from almost two decades earlier) that is relevant. If Myer’s proportion of that increase was $3,000,000, this would require Myer to pay $2,400,000 in addition to the base amount of $1,607,016.70.

The owners contend that the trial judge failed to give proper consideration to the evidence, including by failing to draw — from contemporaneous documents and other non-contentious facts — inferences for which they contend.

The arguments on appeal concerning construction and rectification were the subject of overlapping submissions. In substance, the owners contend that the provisions as written are commercially absurd or inconsistent with a construction of the lease as a whole when read in light of the alleged objective commercial purpose of the deal, or that the common subjective intention of the parties was that the provisions should reflect that commercial deal and that they should be rectified accordingly.

It is now convenient to set out the relevant parts of the fourth schedule, marked-up to show the amendments sought by the owners in Annexure B to their statement of claim:

FOURTH SCHEDULE TO LEASE
VARIABLE OUTGOINGS – DEFINITION AND CALCULATION
For the calculation of the Lessee’s contribution to increases in Variable Outgoings:
1.“Base Accounting Period” means the Accounting Period of twelve months commencing on 1 July following the Commencing Date [ie 23 November 1998].
2.“Lessee’s Proportion” means eighty per cent (80%) of that part of the whole of the Increase in Variable Outgoings which bears the same proportion to the whole of the Increase in Variable Outgoings as the Gross Lettable Area of the Demised Premises bears to the Gross Lettable Area of all buildings in the Centre.

3. “Increase in Variable Outgoings” means
(a)in respect of the second full Accounting Period after the Commencing Date (that is the Accounting Period commencing on the second 1st July falling after the Commencing date [ie 1 July 2000]) the lesser of:
(i)the amount by which the Variable Outgoings for that Accounting Period exceed the Variable Outgoings [for] the immediately preceding Accounting Period; and

(ii) an amount equal to
—VO

(b)in respect of each subsequent Accounting Period [ie from 1 July 2001 onward] the lesser of:
(i)the amount by which the Variable Outgoings for that Accounting Period exceed the Variable Outgoings for the ~~immediately preceding~~ Base Accounting Period; and

(ii) an amount equal to
—BVO

where
VO is the Variable Outgoings for the Accounting Period preceding the Accounting Period [in] respect of which the calculation is being made
BVO is the Variable Outgoings for the Base Accounting Period
CPI(2) is the Index issued for the quarter ended 31 March during the Accounting Period preceding the Accounting Period in respect of which the calculation is being made
CPI(1) is the Index issued for the quarter ended 31 March twelve months prior to CPI(2).

…
5.If the Lessee exercises the option given to it for a further term of fifteen years the Base Accounting Period will not be updated and the lease for the further term shall incorporate such alterations as are necessary to provide for the Lessee to contribute to Increases in Variable Outgoings as if such further term were a continuation of this Lease.[5]

[5]The owners’ amendments are highlighted in bold and underlined.

As is apparent from the owners’ re-formulation of the fourth schedule, the owners do not contend that sub-clause 3(a) contains any error; the asserted error is in sub-clause 3(b). In argument before us, attention focused on sub-clause 3(b)(ii) containing the formula, because, in practice, contributions have been calculated under that provision. It is important to emphasise, however, that the error the owners assert is present in both sub-clause 3(b)(i) and sub-clause 3(b)(ii). Whilst it might be thought that the asserted error in sub-clause 3(b)(ii) is obscured by the formula (at least to the non-mathematician), the wording of sub-clause 3(b)(i) is clear. The calculation is between the relevant ‘Accounting Period’ and the ‘immediately preceding Accounting Period’. As noted earlier, the effect produced is peculiar; but the words are clear.

In order to consider the proposed grounds of appeal, it is necessary for us to summarise the relevant aspects of the negotiations concerning Myer’s agreement to contribute to the variable outgoings of the shopping centre. In the course of doing so, we will set out the facts surrounding the development of the relevant lease provisions.

The course of the negotiations

Against the background of the general context described above, the negotiations had the following key features.[6]
[6]The trial judge’s description of the negotiations is to be found at: Reasons [6]–[57].

It is first necessary to note that the owners are and were at all relevant times Perpetual Limited and Bridgehead Pty Ltd. At relevant times, Perpetual has held 50 per cent of the Chadstone Shopping Centre as trustee of, or custodian for, a publicly listed trust. Bridgehead has held the other 50 per cent interest. Gandel Management Limited was the manager, and later the responsible entity, of the trust. In 2002, Vicinity Funds Re Limited replaced Gandel Management as responsible entity of the trust and assumed its rights with respect to the lease. For convenience, Perpetual, Bridgehead and Gandel Management, and for the period after October 2002 Perpetual, Bridgehead and Vicinity, are collectively referred to as ‘the owners’. However, it is apparent that the combined intention of the owners at all relevant times prior to execution of the lease was that of Bridgehead and Gandel Management. Both were companies controlled by John Gandel and associated interests.

The negotiations commenced in 1994, following provision to Myer of the concept plans for the proposed redevelopment.

The principal negotiators and legal advisors representing the owners were:

(1) Peter Leslie — commercial negotiator;

(2) Neville Beer — commercial negotiator;

(3) Paul Powderly — employee ‘in charge of outgoings’ for all shopping centres owned or controlled by the Gandel group;

(4) Angelika Dickschen — internal solicitor for the owners; and

(5) Andrew Erikson — external solicitor for the owners (a partner of Mallesons Stephen Jaques).

The principal negotiators and legal advisors representing Myer were:

(1) Raymond McNamara — commercial negotiator;

(2) Gabrielle Noonan — internal solicitor employed by Myer, who reported to and received instructions from McNamara; and

(3) Campbell Paine — external solicitor for Myer (a partner of Phillips Fox).

During the course of the negotiations, successive versions of heads of agreement were prepared, purporting to set out the essential elements of the proposed lease. None of these heads of agreement were intended to be legally binding. Following preparation of the final version of the heads of agreement, the parties turned their attention to drafting the terms of an agreement for lease and lease. An agreement for lease was necessary because the lease would not come into operation until completion of the proposed redevelopment.

The first version of the heads of agreement was prepared by 20 September 1995. The final version is dated 26 November 1996. There were at least 14 versions of the heads of agreement exchanged between the parties.[7] Many versions of the heads of agreement were headed ‘Invitation to Make an Offer’,[8] reinforcing the fact that both parties were keen to ensure that no version of the heads of agreement was intended to be binding.
[7]Reasons [17].
[8]Reasons [11].

The parties continued to exchange drafts during 1996. After a negotiating meeting on 14 August 1996, McNamara (Myer) sent Leslie (owners) a letter which enclosed a marked up version of the then current ‘Invitation to Make An Offer’ ‘Heads of Agreement’ dated 13 May 1996. That document had contained a provision in item 8 requiring Myer to pay ‘increases in variable or non statutory outgoings over the base year (Year 1)’. McNamara had put a line through that provision and had written ‘DELETE’ above it, and ‘See 6’ next to it. Item 6 had dealt with rent reviews. McNamara had also put a line through that provision and in notes next to it had written (amongst other things) ‘GROSS UP BASE VARIABLES’. He drew a line from item 4, which provided for a base rental ‘inclusive of non statutory outgoings’ down to the deleted item 6. Beer (owners) in his witness statement said that, after reading the minutes of the meeting on 14 August 1996 and the ‘prior Heads’, he could explain an otherwise cryptic reference in those minutes to ‘Outgoings arrangements’ as a reference to the fact that ‘Myer would not agree to pay increases in variable outgoings over a base year as referred to in clause 8’.

Item 8 of the next draft dated 1 September 1996 stated that variable outgoings were included in the annual base gross rental, reflecting in this respect McNamara’s notes on the prior draft. No separate provision was made for Myer to contribute to actual increases in variable outgoings; although some contribution would necessarily be made in the rent review process. The effect of this was that, had this proposal been proceeded with, the gross rent — including the amount included in it for variable outgoings — would have been increased under the proposed rent review provisions.

The negotiations at this time concerned much more than the variable outgoings issue. For example, Myer were seeking a longer lease period and challenging the owners’ proposals as to the timing and basis of rent reviews. There was also an issue about the ‘percentage rent’ to be paid by Myer based on its gross annual sales, and the method of calculating reviews of that rental. This was an important issue, because the owners were proposing that the gross rent was to be increased by the ‘greater of’ the percentage increases of that base rent or the average of the percentage rent (if any) paid in the preceding period.

The penultimate draft heads of agreement was prepared by the owners and dated 15 October 1996. It is common ground that it contained an obvious duplication; as it included variable outgoings in both the base gross rental ― to be subject to rent reviews under items 4 to 7 ― and separately in a new non-statutory outgoings provision in item 8. This version of item 8 provided for Myer to pay 80 per cent of the annual increases in variable outgoings ‘over the base year (year 1)’, subject to a cap: ‘These annual increases are to be the lesser of CPI or actual’. If implemented, Myer would have contributed to increases in variable outgoings both through the rent review process and under the item 8 provision. It was common ground before us that that was not intended.

The directors of Gandel Management met on 6 November 1996. The minutes of this meeting record that Beer ‘stressed’ that the 15 October 1996 heads of agreement were not intended to be binding on Gandel or the trust. The minutes record:

It was discussed what clauses should be added to the Agreement for Lease and Lease which would allow documentation to proceed, but at the same time give the Company and the Trust the opportunity to withdraw from the leases and project if final feasibilities and/or market conditions are deemed by the Board to be unsuitable.

The minutes record the Gandel Management board authorising the continuation of negotiations on the basis of the 15 October 1996 heads of agreement:

subject to the Company in its own capacity and in its capacity as manager of the Gandel Retail Trust not being legally bound to those respective Heads of Agreement and that a clause confirming their non-binding nature being added.

As mentioned, the non-binding nature of the heads of agreement had been a constant throughout the negotiations.

There was a further negotiating meeting on or prior to 25 November 1996. Following that meeting, Noonan (Myer — internal solicitor) wrote to Beer (owners) in the following terms:

I refer to our recent meeting and note that a draft of the Agreement for Lease will be available hopefully tomorrow. I note in the meantime however, that I have not yet received from you the redrafted Heads of Agreement and confirmation that the existing Lease (with some amendments to be agreed) will be used for the new store.
I would be grateful if you could provide me with the redrafted Heads of Agreement and a list of the issues which you require amended in our existing lease.

The next day, the owners wrote to Noonan enclosing ‘updated Heads of Agreement, as requested’. The letter included the final version of the heads of agreement dated 26 November 1996. Importantly, the evidence disclosed that McNamara (Myer) never saw the final heads of agreement. The letter noted that there had been variations made to three items, including item 6, ‘as discussed’. Relevantly, item 6 had been amended from the 15 October 1996 heads of agreement to introduce a concept of ‘Nett Rental’ as follows:

5 yearly review. At the end of the first five (5) years and each three (3) years thereafter, the Nett Rental will be increased by the average of the percentage rent paid (if any) in the previous three (3) year period. (The Nett Rental equates to the Annual Base Gross Rental less the then applicable non-statutory outgoings).

The amendment to item 6 from the 15 October 1996 heads of agreement had the effect of eliminating the duplication in the penultimate draft — leaving item 8 as the proposed method for calculating Myer’s contributions to increases in variable outgoings. It may be that this was discussed and agreed by Beer (owners) and Noonan (Myer — internal solicitor) at their meeting before the final heads of agreement were prepared, but Beer does not remember that meeting and Noonan was not called to give evidence. In any event, the owners do not rely upon any oral agreement reached at that meeting to support their proof of commercial purpose or common intention but, rather, rely upon the terms of the final heads of agreement as constituting an offer by them to Myer, which they contend Myer accepted by a letter dated 3 April 1997 discussed below.

Next, on 4 December 1996, the Gandel board met and discussed the terms on which negotiations would continue with David Jones. From the minutes, it is apparent that the board recommended entering into an ‘agreement to lease’ and a lease with David Jones on the basis of clauses in the agreement to lease enabling the owners to withdraw from the transaction on terms similar to those resolved on at the 6 November 1996 meeting — as set out above. In that regard, the minutes record:

The Board noted that it assumes that management will negotiate comparable ‘out’ clauses to those contained within David Jones’ lease when finalising negotiations with Coles Myer Limited for its lease at Chadstone.

Thus, in common with the position maintained throughout the negotiations, the owners’ position was that nothing was binding until the transaction documents were finalised and executed.

On 18 February 1997, the Gandel board resolved that the ‘overall principle for the expansion of Chadstone Shopping Centre … be approved’. The board papers included a summary of the key terms of the heads of agreement for each of Myer and David Jones in a comparative table. The summary included the statement, consistent with item 8, that Myer would pay variable outgoings at the ‘lesser of 80% of increases in outgoings over year 1 or CPI’.

On 5 March 1997, a negotiating meeting was held between Beer for the owners and McNamara and Noonan on behalf of Myer. It was agreed that the basis for drafting the lease would be the existing lease, as Myer had requested.[9]
[9]Reasons [36].

The first draft of the lease was prepared by Myer by reference to the existing lease. It was provided by Noonan (Myer — internal solicitor) to Dickschen (owners — internal solicitor) by courier on 3 April 1997, under cover of a letter which included the following statements:

I now enclose the first draft of the Lease for your review. Please note:-
1. the Lease reflects word for word the Lease of the existing store, except for changes necessary to reflect the Heads of Agreement and other changes to reflect changes in law.
…
I look forward to your comments.[10]

[10]Emphasis added.

The draft lease contained a first draft of the fourth schedule, recording the basis on which Myer would contribute to increases in the cost of variable outgoings. It is common ground that the formulas in sub-clauses 3(a)(ii) and 3(b)(ii) of the first draft did not make sense. Clause 3 read:

3.“Increase in Variable Outgoings” means
(a)in respect of the second full Accounting Period after the Commencing Date (that is the Accounting Period commencing on the second 1^st July falling after the Commencing Date) the lesser of:
(i)the amount by which the Variable Outgoings for that Accounting Period exceed the Variable Outgoings fir [sic] the immediately preceding Accounting Period: and
(ii)an amount equal to
VOx

(b) in respect of each subsequent Accounting Period the lesser of:
(i) the amount by which the Variable Outgoings for that Accounting Period exceed the Variable Outgoings for the immediately preceding Accounting Period; and
(ii) an amount equal to
VOx

where
VO is the Variable Outgoings for the Accounting Period preceding the Accounting Period is [sic] respect of which the calculation is being made
CPI(2) is the Index issued for the quarter ended 31 March during the Accounting Period preceding the Accounting Period is [sic] respect of which the calculation is being made
CPI(1) is the Index issued for the quarter ended 31 March twelve months prior to CPI(2).

The formulas in sub-clauses 3(a)(ii) and 3(b)(ii) of the first draft did not make sense because, without subtracting a previous amount of variable outgoings, it did not produce an increase over previous variable outgoings; which is the sole purpose of clause 3. This was later addressed.

Except for the formula in sub-clauses 3(a)(ii) and 3(b)(ii), the first draft of the fourth schedule is identical to that in the executed lease — including the spelling and grammatical mistakes. Sub-clause 3(a)(i) and 3(b)(i) provided for Myer to pay a contribution to increases in variable outgoings by reference to the discrete increases in each separate year, as earlier described.

Next, Noonan and Dickschen met on 15 April 1997 to discuss a range of drafting issues. The next day, 16 April 1997, Dickschen wrote to Noonan and enclosed ‘suggested clauses in relation to payment of increases in variable outgoings’. Dickschen’s suggested clauses were wholly new, and included a proposed new formula. As appears below, Dickschen’s suggested clauses and proposed new formula were not accepted by Myer, and not pressed by the owners.

There were some further negotiations and a second draft of the lease was prepared by Myer and sent to Dickschen in a marked-up form on 23 April 1997. That draft of the lease has not been located. However, Dickschen prepared a summary of that draft lease on 24 April 1997. In that summary, Dickschen noted under the heading ‘Outgoings’ that:

In relation to statutory outgoings which are separate assessments, the Lessee pays those assessments and where not separately assessed, pays an amount equal to the proportion [that the] Gross Lettable Area of the demised premises bears to Gross Lettable Area of all buildings in the centre. In addition, the Lessee is to pay increases in outgoings above the base year. There is ongoing discussion and negotiation as to what is to be the base year for the purposes of the Lease.[11]

[11]Emphasis added.

It seems most unlikely that the draft Dickschen was purporting to summarise did provide for Myer to pay increases in outgoings ‘above the base year’. The first draft had provided (in sub-clauses 3(a)(i) and 3(b)(i)) for the contributions to be made by reference to the amount by which the variable outgoings in a given year exceed those of the immediately preceding year, not the base year, and the subsequent drafts and the final lease itself also did so in relevantly identical terms.

On 9 May 1997, Dickschen prepared detailed comments on the second draft of the agreement for lease and lease. In respect of the fourth schedule, she commented that the current draft was ‘incorrect [in] dealing with outgoings’. Dickschen noted that the fourth schedule was a ‘priority 1’ item for negotiation. She took her summary and comments with her to a negotiating meeting on 12 May 1997, also attended by Erikson, the owners’ external solicitor. In respect of this meeting, Dickschen’s handwritten notes record discussion about the commencement of the second full accounting period for the purposes of variable outgoings. Erikson made notes against the item ‘Outgoings’ as follows:

Outgoings – base year.
Open Oct ‘98 – June ‘99
June ‘00 – increase in outgoings.
from July 2000.
2nd accounting period.

In his witness statement, Erikson said he had no independent memory of the meeting but, aided by his notes, recalls that the issues in Dickschen’s summary of issues were discussed. Erikson added a comment in his witness statement:

The reason there was a discussion about the base year is that Myer’s contribution to non-statutory outgoings was to commence in the following year to the base year and was to be based on increases in the amount of those non-statutory outgoings over the amount of those non-statutory outgoings in the base year. It was therefore important that there be no dispute about what base year it was to be.

Erikson’s comment reveals his subjective understanding of the reasons for that aspect of the meeting.

On 20 May 1997, Paine (Myer — external solicitor) prepared a third draft of the lease. The fourth schedule was identical to the first draft of the fourth schedule. It provided for contributions by reference to the increase over the prior year, not the base year. This draft was provided to the owners and bears handwritten amendments by Dickschen — including a new suggested formula concerning the CPI calculation which had come from a Powderly (owners) memorandum, as set out below. It is that revised CPI formula which appears in the executed lease.

On 22 May 1997, Dickschen received a memorandum from Powderly in response to her request that he check that the fourth schedule was correct. Powderly informed Dickschen that the CPI formula was incorrect and, in his view, should be amended in a specified form — being the formula contained in the executed lease. Powderly’s comment, and replacement formula, was expressed as relating to both limbs of the clause concerning CPI increases, namely, sub-clauses 3(a)(ii) and 3(b)(ii). It appears that this is how those drafting the lease understood Powderly’s advice, as the same formula appears in both the final sub-clauses. However, following receipt of Powderly’s memorandum, Dickschen wrote the new formula on the 20 May 1997 draft lease opposite only sub-clause 3(a)(ii). It is not apparent why she did so, as both sub-clauses were mistaken and needed amendment.

On 23 May 1997, Dickschen prepared a list of comments about the draft agreement for lease and lease dated 20 May 1997 prepared by Paine. With respect to the fourth schedule of the draft lease, she noted a typographical error (which remains in the executed lease) and commented that the formula in clause 3(a)(ii) was incorrect, and should be amended in accordance with Powderly’s advice.

On 22 or 23 May 1997, Dickschen made some handwritten calculations in an endeavour to satisfy herself how the Powderly formula would work on certain assumptions.

On 30 May 1997, Dickschen sent a facsimile to Paine requesting amendments to his 20 May 1997 draft of the lease. She stated that the formula in clause 3(a)(ii) was ‘incorrect’ and should be amended to its final form. She made no mention of the formula in clause 3(b)(ii).

On 20 June 1997, Paine sent Dickschen another draft of the lease. He inserted Powderly’s correction in both sub-clauses 3(a)(ii) and 3(b)(ii), but otherwise did not amend the fourth schedule.

The parties then proceeded to finalise the agreement for lease and lease. During this process, Myer raised a new issue relating to variable outgoings. Myer was concerned that including the variable outgoings in the base rent would have significant adverse stamp duty implications for it. Accordingly, Noonan (Myer — internal solicitor) wrote to Dickschen (owners — internal solicitor) and asked if the lease could be redrafted to accord with advice from Paine (Myer — external solicitor) concerning the stamp duty implications. Noonan informed Dickschen that the requested changes would not ‘affect the commercial deal struck’. Following this request, the parties negotiated the amount of the base variable outgoings payment and deducted that amount from the commencing annual rental amount. These amendments led to the insertion of clauses 3.16 and 3.17 in the lease, and item 10 of the first schedule to the lease.[12]
[12]Set out below at [70] and in Annexure C.

The final execution versions of the agreement for lease and lease were completed by 8 September 1997. On that day, Erikson (owners — external solicitor) signed a certification letter addressed to Perpetual and Bridgehead as the proprietors of the Chadstone Shopping Centre. The letter states as follows:

Dear Sirs
Myer Stores Limited - Chadstone Shopping Centre
I have reviewed the engrossed form of the Agreement for Lease between your companies and Myer Stores Limited with respect to Chadstone Shopping Centre and also the accompanying lease.
The Agreement for Lease and Lease:
(a)have been engrossed (following the incorporation of hand written amendments) in accordance with my instructions;
(b)reflect the commercial terms of the transaction agreed;
(c)contain no unusually onerous or objectionable provisions which are inconsistent with my instructions;
(d)contain limitation of liability clauses for the benefit of the trustee; and
(e)the Agreement for Lease is in order for execution.

Yours sincerely
[signed]
Andrew Erikson
Partner[13]

[13]Emphasis added.

Before signing his certification letter, Erikson had reviewed the execution documents and identified five discrepancies, including as to the manner of calculating the minimum rent. By letter dated 25 August 1997, he wrote to Paine and sought Paine’s agreement to amend the execution documents to rectify the discrepancies he identified. None of the discrepancies related to variable outgoings.

Notwithstanding the terms of his certification letter, Erikson gave evidence that he did not believe that he compared the final documents with the 26 November 1996 heads of agreement, the document which the owners now contend contained the relevant commercial arrangement concerning increases in variable outgoings.

The agreement for lease was executed on 15 September 1997. It annexed the final form of the lease. The redevelopment of the Chadstone Shopping Centre then proceeded and, following delays, the lease was executed on 4 September 2001 with a commencement date of 23 November 1998.

Subsequent conduct: The owners take 12 years to appreciate the alleged mistake

As we have mentioned, for the first 16 years of the lease the owners demanded — and Myer paid — contributions to increases in variable outgoings calculated in accordance with the provisions of the fourth schedule. The trial judge set this out in his Reasons.[14] Until 2012 (about 12 years into the lease term), the owners monitored the recovery of variable outgoings for their own accounting and budgeting purposes, applying the provisions of the fourth schedule.[15] During this period, the owners’ accounting records ‘clearly and readily showed’:[16]
[14]Reasons [61]–[62].
[15]Ibid [63].
[16]Ibid.

(1) the amount Myer was paying for increases in variable outgoings;

(2) the fact that Myer’s contribution to variable outgoings was below CPI increases over the base outgoings payment;

(3) that, despite the fact that Myer occupied larger premises than David Jones, Myer was contributing less than David Jones to variable outgoings and the gap was projected to widen over time; and

(4) the above information was available in a form which made for easy comparison with other major tenants.[17]

[17]Ibid.

None of this information caused the owners or any of their employees responsible for the tracking and recovery of variable outgoings to suggest that there was something uncommercial about the fourth schedule. Indeed, Beer gave evidence that the level of Myer’s contribution to variable outgoings as shown in rolling five year budgets ‘would not have caused him any concern’.[18]
[18]Ibid [64].

Similarly, Ashley Brown — a senior asset analyst employed by Vicinity — gave evidence that ‘a major or speciality tenant having a very good deal on what it contributed to outgoings was not in itself a cause for concern’.[19] There was evidence at trial that a large tenant (the AMF bowling alley) paid no contribution at all for some time.
[19]Ibid.

In ‘peculiar circumstances’ involving a mistake by a property analyst employed by the owners, the owners came to believe that the provisions of the fourth schedule were mistaken.[20] This view was formed by looking at contemporaneous documents surrounding the negotiation of the lease, but without asking anyone involved in the negotiations as to their belief.[21]
[20]Ibid [65]–[66].
[21]Ibid [67].

However, despite having formed the view that there was a mistake, the owners did not immediately inform Myer of their view. Instead, for commercial reasons associated with ongoing negotiations with Myer, they decided not to notify Myer of the alleged mistake until December 2015. This was because they anticipated that Myer might withhold its consent to a further proposed development of the Chadstone Shopping Centre until all issues arising from the alleged mistake were resolved. Thus, for a period of three years, the owners continued to demand, and Myer continued to pay, contributions to increases in variable outgoings calculated in accordance with the fourth schedule.[22] This conduct by the owners was pleaded by Myer in defence to the owners’ claims, on the equitable ground of laches. The trial judge found that this equitable defence would not have been made out if the owners had otherwise succeeded in their claims.[23] This issue does not arise on appeal, as Myer has not filed any notice of contention based on it.
[22]Ibid [65]–[70].
[23]Ibid [136]–[144].

Once the alleged mistake was uncovered, Brown (owners — Vicinity analyst) discussed it with a solicitor acting for one of the owners, David Seward. They did not discuss their view that a mistake had been made with anyone involved in the negotiation or drafting of the lease. Instead, assisted by other analysts employed by Vicinity, they considered what the correct calculation should have been and came up with a range of different formulas, yielding a range of different amounts said to have been underpaid by Myer as contributions to increases in variable outgoings.[24] For example, although the owners now have a claim for under-payments of about $19 million to 30 June 2016, their initial calculations produced estimated underpayments of about $6 million as at 30 June 2016. These amounts are broadly consistent with hypothetical calculations made on behalf of Myer, by reference to calculations including the CPI cap which forms an essential element of item 8. These calculations result in figures of about $5 million or $6 million as at 30 June 2016. However, as noted, the owners prosecuted the trial on the basis that the formula in Annexure B was what was intended by the parties — resulting in a claim for underpayment in the sum of about $19 million. As discussed below, the owners maintained that case, notwithstanding an acknowledgment by their senior counsel in reply before us that Annexure B does not give effect to the CPI cap.
[24]Ibid [72].

Relevant lease provisions

Against the background of the above facts, it is now convenient to set out the relevant provisions of the lease:

3.16The Lessee covenants with the Lessor that during the whole of the term of the Lease it will pay to the Lessor at its address herein set out or to such other place as the Lessor shall from time to time in writing direct free of all deductions a yearly Base Variable Outgoings Payment of the amount expressed in Item 10 of the First Schedule. The Base Variable Outgoings Payment shall be made by monthly instalments in advance the first such payment to be made on the Commencing Date and each subsequent payment on the first day of each subsequent month each such monthly payment to be one twelfth of the Base Variable Outgoings Payment (except that the first and last payments shall if necessary bear the same proportion to the Base Variable Outgoings Payment as the number of days in respect of which such payment is made bears to 365);
3.17The Lessor and the Lessee acknowledge and agree that the amount payable by the Lessee pursuant to Clause 3.16 is neither a representation of nor an estimate of the actual amount of Variable Outgoings for the Accounting Period commencing on 1 July following after the Commencing Date (‘Base Year’). The parties agree that irrespective of the actual amount of Variable Outgoings for the Base Year there will be no adjustment to the amounts payable pursuant to Clauses 3.16 and 4.6.
…
4.6(a)     Commencing on the second full Accounting Period after the Commencing Date (that is the Accounting Period commencing on the second 1st July falling after the Commencing date) the Lessee shall pay to the Lessor the Lessee’s Proportion of Increases in the Variable Outgoings as defined and calculated in accordance with the provisions of the Fourth Schedule.
(b)Provided that the Lessor shall have notified the Lessee of the estimated increases in Variable Outgoings, the Lessee’s Proportion of the increases in Variable Outgoings shall be paid progressively throughout each Accounting Period by twelve instalments, each being one-twelfth of the Lessee’s Proportion of the estimated increases in Variable Outgoings for that Accounting Period, and payable monthly in advance contemporaneously with the instalments of the Minimum Rent with an appropriate adjustment as provided in sub-clause (c) of this clause after the Variable Outgoings are determined.
(c)The actual increases in Variable Outgoings shall be determined as soon as may be practicable after the end of each Accounting Period and if the amount of the Lessee’s required contribution to increases in Variable Outgoings calculated by reference to the Fourth Schedule exceeds the sums paid by the Lessee in respect thereof on the basis of the Lessor’s estimate the deficiency shall be paid by the Lessee to the Lessor upon demand; and if the amount thereof is less than the sums paid by the Lessee in respect thereof the Lessor shall forthwith refund the excess to the Lessee.
(d)The Lessor shall keep accurate records of the Variable Outgoings and as soon as practicable after the Variable Outgoings for the Accounting Period then concluded have been determined shall furnish an audited itemised statement thereof to the Lessee,
(e)If any dispute shall arise between the Lessor and the Lessee as to whether any item or whether the amount of any item has properly been included in Variable Outgoings the matter shall be referred to expert determination in the manner provided for in Clause 13.8.
(f)(i)     Subject to Clause 4.6(f)(ii) the liability of the Lessee to pay the Lessee’s Proportion of Variable Outgoings will not cease or otherwise be prejudiced by the expiry or other termination of this Lease.
(ii)     If this Lease ends during an Accounting Period then the Variable Outgoings both actual and estimated will be deemed to accrue equally from day to day over a full Accounting Period and the Lessee’s Proportion of Variable Outgoings will be calculated accordingly.

…

FIRST SCHEDULE TO LEASE

…

10. BASE VARIABLE OUTGOINGS PAYMENT $1,607,016.70
…

FOURTH SCHEDULE TO LEASE
VARIABLE OUTGOINGS — DEFINITION AND CALCULATION

… [See Annexure A to these reasons].

The amendments sought by the owners to the fourth schedule all appear in clause 3(b) and are highlighted in paragraph [19] above. For convenience, they also appear in Annexure B. The owners describe these amendments as the minimum amendments necessary to enable clause 3(b) to reflect what is contended to be the agreed commercial deal that contributions to increases in variable outgoings would be calculated by reference to the base outgoings payment, and not, after the second full accounting period which is the subject of clause 3(a) of the fourth schedule, to the immediately preceding year.

It is convenient to note at this stage that the proposed amendments put forward by the owners, and on which their statement of claim at trial and application for leave to appeal is based, are now conceded to be inconsistent with an essential element of the commercial deal for which they contend. This is because, while the parties agree that it was their agreement and common intention for Myer’s contributions to increases in variable outgoings to be ‘capped’ at CPI increases, the amendments sought by the owner’s would effectively eliminate the CPI cap. Put simply, the proposed amended formula to be inserted in clause 3(b)(ii) — by the substitution of ‘BVO’ for ‘VO’ — would have the effect that, in every subsequent year, the uncapped amount of the increase in variable outgoings over the base payment would be recoverable. This concession was made for the first time in senior counsel’s reply on the hearing of the application for leave to appeal. When asked by the Court, senior counsel unambiguously stated that the owners nevertheless maintained their proposed amendment; but contended that this does not mean that their proposed appeal must fail because, if the Court is satisfied that a mistake has been made in drafting clause 3(b), it is the responsibility of the Court to do justice by formulating an appropriate amended form of clause 3(b) which conforms with both aspects of what they contend to be the commercial deal — namely, a contribution based upon increases over the base outgoings payment (payable for the Base Accounting Period) and the CPI cap. The effect of this concession by the owners is discussed below.

Grounds of appeal [25]

[25]Proposed grounds of appeal will be referred to simply as ‘grounds of appeal’ for convenience.

Ground 1 (construction grounds): The owners contend that the trial judge erred in failing to hold that the mistake should be corrected as a matter of construction of the lease. In particular, in holding that the lease should not be so corrected, the trial judge:

(1) misapplied the relevant legal principles;

(2) failed to consider evidence or give sufficient weight to evidence relevant to the questions of construction presented by the owners;

(3) took into account evidence of the owners’ subjective actions which was not relevant to the construction of the lease; and

(4) took into account evidence which post-dated the lease which was not relevant to the construction of the lease.

Ground 2 (rectification ground): alternatively to ground 1, the owners contend that the trial judge erred in failing to hold that the mistake in the lease should be corrected by rectification. In particular, in doing so, the trial judge failed to consider, or gave insufficient weight to:

(1) evidence of and surrounding the meeting of the parties on about 25 November 1996;

(2) evidence of and surrounding the meeting of the parties on about 12 May 1997;

(3) evidence of board meetings of the owners; and

(4) evidence given about the involvement of Dickschen and Powderly.

Judge’s reasons: construction grounds

The trial judge summarised the general principles to be applied in the construction of commercial contracts. There is no dispute that he did so correctly. The principles were summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd in the following terms:[26]
[26](2015) 256 CLR 104, 116–17 [46]–[51] (citations in original).

Applicable legal principles in these appeals
The rights and liabilities of parties under a provision of a contract are determined objectively,[27] by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.[28]
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean.[29] That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.[30]
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.[31]
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’.[32] It may be necessary in determining the proper construction where there is a constructional choice.
…
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.[33]
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’.[34] Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.[35]

[27]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656 [35].

[28]Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350 (citing Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–6), 352. See also Sir Anthony Mason, ‘Opening Address’ (2009) 25 Journal of Contract Law 1, 3.

[29]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656 [35].

[30]Ibid 656–7 [35].

[31]Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352. See also Sir Anthony Mason, ‘Opening Address’ (2009) 25 Journal of Contract Law 1, 3.

[32]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 657 [35], citing Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350, in turn citing Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–6.

[33]Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352; Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–6.

[34]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 657 [35], citing Re Golden Key Ltd [2009] EWCA Civ 636 [28].

[35]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 657 [35], citing Zhu v Treasurer (NSW) (2004) 218 CLR 530, 559 [82].

To this summary, we would add, as did the trial judge,[36] that the Court should have regard to all of the words used in the agreement ‘so as to render them all harmonious one with another’[37] and to ensure the ‘congruent operation of the various components as a whole’.[38]
[36]Reasons [74].
[37]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109.
[38]Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, 529 [16].

The trial judge then considered the extent of the admissible evidence to identify the commercial purpose or objects of the fourth schedule to the lease. He referred to the ‘strict limitations on the sort of materials going to surrounding circumstances that can be used for the purpose of detecting the objective intention of the parties’, and noted that, while evidence of negotiations may be admissible to establish the objective commercial purpose or objects of a contract as a whole or a particular provision, evidence of negotiations is inadmissible to establish the actual intentions of the parties.[39]
[39]Reasons [77], referring to Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603, 619 [24] (Allsop P) (‘Metcash’). See also Lopes v Taranto [2018] VSCA 288 [65]–[71]; Canale v G W & R Mould Pty Ltd [2018] VSCA 346 [45].

The trial judge then set out the principles to be applied in determining whether a commercial contract is commercial nonsense — or ‘gives rise to an absurdity’[40] — and, if so, the manner in which a court can amend the absurd words by way of construction without needing to resort to rectification.[41]
[40]Reasons [78].
[41]Ibid [78]–[82].

The trial judge then noted the owners’ submissions that:

(1) clause 3(b) — read in the context of the lease as a whole but without reference to any extrinsic evidence — gave rise to a commercially absurd result (‘absurdity contention’); and

(2) the extrinsic evidence established an agreed commercial purpose that Myer’s contributions to increases in variable outgoings would be in accordance with item 8 of the 26 November 1996 heads of agreement (‘agreed commercial purpose contention’).

The judge rejected both these contentions.

As to the absurdity contention, the trial judge concluded that there was no commercial absurdity in the operation of clause 3(b), which was unambiguous and had operated without any issue for many years. We will set out the judge’s reasons on this issue below when considering the proposed construction ground of appeal.

As to the agreed commercial purpose contention, the trial judge found that the evidence did not establish the agreement alleged (item 8 of the Heads of Agreement of 26 November 1996). The trial judge also noted that, in any event, the amendments proposed by the owners to remedy the alleged mistake did not accord with the whole of the agreement alleged, because the amendments had the effect of eliminating the CPI cap, which was an essential component of item 8.[42]
[42]Ibid [88]–[96].

The construction claims accordingly failed.

We note that the trial judge reached his conclusion on the agreed commercial purpose contention without determining whether the extrinsic evidence relied on by the owners was admissible. While the evidence was admissible on the rectification case, it may be doubted that some or all of it was admissible for the purpose of determining the agreed commercial purpose contention. It is unnecessary to resolve this admissibility question, because, for the reasons given below — which take account of all the evidence — the owners have not established the agreement, common intention or commercial purpose for which they contend.

Judge’s reasons: rectification ground

The trial judge set out the legal principles to be applied in a rectification claim such as the present.[43] He set out the key elements of a rectification claim by quoting from the judgment of Gageler, Nettle and Gordon JJ in Simic v New South Wales Land and Housing Corporation:

Rectification is an equitable remedy, the purpose of which is to make a written instrument ‘conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately’. For relief by rectification, it must be demonstrated that, at the time of the execution of the written instrument sought to be rectified, there was an ‘agreement’ between the parties in the sense that the parties had a ‘common intention’, and that the written instrument was to conform to that agreement. Critically, it must also be demonstrated that the written instrument does not reflect the ‘agreement’ because of a common mistake. Unless those elements are established, the ‘hypothesis arising from execution of the written instrument, namely, that it is the true agreement of the parties’ cannot be displaced.

The issue may be approached by asking — what was the actual or true common intention of the parties? There is no requirement for communication of that common intention by express statement, but it must at least be the parties’ actual intentions, viewed objectively from their words or actions, and must be correspondingly held by each party.[44]

[43]Ibid [98]–[106].

[44](2016) 260 CLR 85, 117 [103]–[104] (citations omitted) (‘Simic’); Reasons [98].

The trial judge reviewed the evidence of: (1) the negotiations leading to the execution of the agreement for lease and lease; and (2) the subjective intentions of the parties, and concluded that the owners had not proved the necessary agreement or common intention that the lease would conform to item 8 of the 26 November 1996 heads of agreement.[45] Further, the trial judge repeated his finding that the proposed form of rectification put forward by the owners was in any event inconsistent with an essential element of item 8, namely, that Myer’s contribution to increases in variable outgoings would be subject to the CPI cap.[46] Again, we will set out the judge’s reasons in more detail when considering the rectification ground of appeal.
[45]Reasons [107]–[121].
[46]Ibid [122]–[124].

We will first deal with the rectification ground. This is because: (1) it involves a consideration of all the evidence, without needing to decide questions of admissibility; and (2) it was the central focus at the hearing of the application for leave to appeal. We will then deal with the construction ground.

Rectification: Was it the common intention of the parties that the increases would be calculated from the base year?

The owners contend that the evidence of the negotiations shows a clear agreement that the lease would be in accordance with ― ‘reflect’ ― the 26 November 1996 heads of agreement, and, in particular, item 8. Their contention involves the following steps:

(1)Item 8 was contained in the 15 October 1996 heads of agreement and was never changed; notwithstanding the amendments to item 6 in the 26 November 1996 heads of agreement to eliminate the obvious duplication in the 15 October 1996 document.
(2)There was a further negotiating meeting between the parties on or before 25 November 1996. On that day Noonan wrote to Beer and asked for ‘redrafted’ heads of agreement. The redrafted heads of agreement were provided by the owners on 26 November 1996 and described as ‘updated’ heads of agreement. The covering letter noted the variations which had been discussed, including item 6, and two items which remained unresolved. There was no mention of item 8 in the covering letter ― either as being varied or requiring resolution.
(3)From that point until 3 April 1997, there was no evidence of the parties conducting further negotiations concerning the basis on which Myer would contribute to increases in variable outgoings. In particular, there was no evidence of any further discussion of item 8.
(4)On 5 March 1997, the parties agreed that the basis for drafting the lease would be the existing lease, as Myer had requested. Myer then prepared the first draft of the lease.
(5)The first draft of the lease was sent to the owners by Noonan’s letter to Dickschen dated 3 April 1997. In that letter, Noonan stated that:
the Lease reflects word for word the Lease of the existing store, except for changes necessary to reflect the Heads of Agreement and other changes to reflect changes in law.

(6)The file notes of Erikson and Dickschen of the negotiating meeting on 12 May 1997 record discussion concerning the variable outgoings issue, and agreement on the ‘base year’ and the date for commencement of the second full accounting period. This can only have been relevant if the ‘base year’ related to the basis on which Myer’s contributions to variable outgoings would be assessed under item 8.
(7)The only other negotiations concerning the method of Myer’s contributions to increases in variable outgoings related to fixing the base outgoings payment and separating it from the base rent, as then provided for in clauses 3.16, 3.17 and item 10 in the lease. Noonan informed Dickschen that these changes would not ‘affect the commercial deal struck’.
(8)The Gandel Management board approved execution of an ‘agreement to lease’ on the basis of advice to the effect that Myer would contribute to increases in variable outgoings in accordance with item 8. Myer offered no evidence as to the advice given to its board; the relevant documents have been lost or destroyed with the passage of time and corporate takeover. McNamara’s witness statement said he could not recall the negotiations or board approval, and Noonan was (without explanation) not called as a witness.
(9)There were no further discussions or negotiations between the parties as to the basis on which Myer would contribute to increases in variable outgoings before the agreement for lease was executed. In particular, Myer never said that they did not agree with item 8; while the 3 April 1997 letter indicated that everything in the 26 November 1996 heads of agreement was agreed to.
(10)In those circumstances, the Court should infer that the parties made a commercial deal that Myer would contribute to increases in variable outgoings on the basis recorded in item 8. The trial judge was in error in rejecting that case.

We return to the trial judge’s reasons for rejecting the above contentions. They are to be found in a number of places in the Reasons, and may be summarised as follows.

First, the trial judge noted that Myer was in a good bargaining position, given that the proposed redevelopment could not proceed without its consent.[47]
[47]Ibid [8].

Second, the trial judge noted the obvious fact that, as the negotiations occurred many years ago, the contemporaneous documents are the best guide to the content of the negotiations and any agreements reached during then ― rather than the ‘now sporadic and hazy’ recollections of those involved.[48]
[48]Ibid [16].

Third, the trial judge set out in great detail the history of the negotiations, and internal thought processes of the parties, which culminated in the execution of the agreement for lease ― which bound the parties to the form of the annexed lease.[49] As the trial judge noted, the negotiations involved ‘proposals and counterproposals’,[50] which were put during negotiating meetings, correspondence and various drafts of heads of agreement. The judge noted in particular that, as late as 15 August 1996, McNamara struck out the then current draft of item 8 and wrote the word ‘DELETE’ next to it in the margin.[51]
[49]Ibid [17]–[56].
[50]Ibid [17].
[51]Ibid [22], [30].

Fourth, the trial judge found that Noonan’s 3 April 1997 letter was only part of a drafting progression by reference to the 26 November 1996 heads of agreement; and was superseded by Powderly’s amended formula which was ultimately proposed to Myer on 30 May 1997, agreed to by Myer, and used in clause 3(b) of the executed lease.[52] The trial judge held that the 3 April 1997 letter did not represent Myer’s final negotiating position ― in particular, that item 8 was agreed to. To the contrary, the trial judge considered the letter made it clear that the enclosed draft lease was ‘just that, a first draft, and that Myer’s position … was not necessarily static and might change during the subsequent negotiation process’.[53] Moreover, the judge reasoned that a reference to a draft being prepared to ‘reflect’, or ‘by reference to’, the 26 November 1996 heads of agreement:

does not mean the parties intended to implement every part of the [26 November 1996 heads of agreement], especially when the parties then implemented a Base Variable Outgoings Payment which is nowhere to be found in any draft [heads of agreement].[54]

[52]Ibid [38]–[42].

[53]Ibid [92].

[54]Ibid [117].

Fifth, the trial judge reasoned that, whatever the position may have been when Noonan provided the first draft of the lease by her 3 April 1997 letter, there followed ‘a thorough reworking of the formula’ by Powderly,[55] and that reworked formula was ‘checked by numerous highly qualified and experienced professionals’ on both sides of the transaction.[56] The trial judge reasoned that ‘from this point on’ the parties intended to implement the lease as it was finally drafted, without any reference to item 8.[57]
[55]Ibid.
[56]Ibid [117]–[118].
[57]Ibid [117]–[120].

Sixth, item 8 ‘was never intended as a final description’ of the commercial deal.[58] By this statement, we infer that the trial judge was referring to evidence that the board of Gandel Management was at all times insistent that heads of agreement would not be binding, and the only binding agreement would be that executed;[59] and McNamara’s unchallenged evidence that:

A heads of agreement for a specific store would never actually be approved because the only documents ultimately put to the [Myer] Board … and [Myer’s Management Committee] for approval would be a lease or agreement for lease.[60]

[58]Ibid [124].

[59]See the evidence referred to at [33] to [35] above.

[60]Reasons [120].

Seventh, the trial judge held that item 8 was in ‘vague and general terms [and] gives rise to a number of different theoretical possibilities’.[61] In this regard, the trial judge referred to the varying formulations put forward by the parties during the negotiations,[62] and the owners’ own ‘multiple different formulations’ since the discovery of the alleged mistake.[63]
[61]Ibid [124].
[62]Ibid [40], [124].
[63]Ibid [124].

Eighth, this was a case where the presumption that a written contract executed by the parties is a true record of their agreement has not been displaced.[64] The judge held that this presumption was ‘powerful’ in the circumstances of this case where:[65]

(1)‘there was a carefully considered negotiation process over a significant period of time in the hands of experienced professionals acting on behalf of each party’;[66]
(2)there was a ‘careful redrafting process in May 1997, [a] review of that drafting read by several experienced professional people, [and] the subsequent procuring of [Gandel Management] board approval [on the basis of] the certification by Mr Erikson that the documents were in accordance with the commercial terms of the transaction agreed’;[67] and
(3)the unlikelihood of such ‘endemic incompetence’ by all the negotiators and professionals involved.[68]

[64]Ibid [103], [121]; Simic (2016) 260 CLR 85, 117 [103].

[65]Reasons [121].

[66]Ibid. See also at [103], citing Leibler v Air New Zealand Ltd [No 2] [1999] 1 VR 1, 19 [49]; Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd (2001) 3 VR 526, 539 [38]; Metcash (2009) 76 NSWLR 603, 713–14 [460]–[461].

[67]Reasons [121].

[68]Ibid.

Ninth, the form of the amendments sought by the owners, by a process of construction or rectification, was inconsistent with the CPI cap in item 8.[69]
[69]Ibid [123].

Tenth, the conduct of the parties in applying the fourth schedule for many years ‘without demur is, in all the circumstances, indicative of a common intention to be bound by the terms of the lease as executed ― a position which militates against the [owners’] arguments with respect to common intention’.[70]
[70]Ibid [125], citing Metcash (2009) 76 NSWLR 603, 724 [512].

Finally, even if Noonan’s 3 April 1997 letter could be construed as acceptance of an offer contained in the 26 November 1996 heads of agreement ― particularly item 8 ― Noonan was not the ‘directing mind and will’ of Myer for the purpose of binding it to an agreement capable of constituting an agreed commercial purpose or reflecting Myer’s common intention.[71]
[71]Reasons [92], [104]–[106].

For these reasons, the trial judge concluded that the owners had not established by clear and convincing proof that the parties agreed to implement item 8 but failed to do so by reason of common mistake.[72]
[72]Ibid [125].

We agree with the judge’s conclusion and, generally, his reasons.

As did the trial judge, we commence with reference to the statement of the plurality (Gageler, Nettle and Gordon JJ) in Simic. The relevant passage is quoted in full at [85] above. We emphasise that the starting point is the ‘hypothesis arising from execution of [a] written instrument, namely, that it is the true agreement of the parties’.[73] Thus, the trial judge was right to refer to a presumption that a written contract executed by the parties is a true record of their agreement.[74] There is, of course, an onus on the party seeking rectification to establish the necessary elements of agreement or common intention and mistake. This requires ‘convincing proof’ of these elements.[75]
[73]Simic (2016) 260 CLR 85, 117 [103], quoting Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336, 350.
[74]Reasons [121].
[75]Leibler v Air New Zealand (No 2) [1999] 1 VR 1, 15 [38], 28 [73]; Metcash (2009) 76 NSWLR 603, 712 [451]; Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2019] NSWCA 11 [13]; Simic (2016) 260 CLR 85, 102 [41] (‘proved to a high standard’).

The trial judge was also correct in considering the conduct of the parties in implementing the formula for many years before the owners alleged the mistake for which they contend,[76] and to place emphasis on the fact that both parties were represented in lengthy negotiations by experienced negotiators, internal solicitors and external solicitors — leading to an ‘unlikelihood’ of no one realising the alleged mistake before the agreement for lease was executed.[77]
[76]Frankelly Nominees Pty Ltd v Abrugiatio [2013] WASCA 285 [182]; Anfrank Nominees Pty Ltd v Connel (1989) 1 ACSR 365, 388; Metcash (2009) 76 NSWLR 603, 724 [512].
[77]Metcash (2009) 76 NSWLR 603, 713–4 [459]–[461].

Against this background, in our opinion, the owners have not established the agreement or common intention for which they contend. Our reasons follow.

At the outset, we note that the owners’ contentions depend upon acceptance of the propositions that: (1) an agreement encompassing the common intention for which they contend was made when Noonan, in her 3 April 1997 letter, accepted the 26 November 1996 heads of agreement; and (2) nothing occurred thereafter which altered the common intention of the parties — in particular as to item 8 representing the commercial deal as to the basis on which Myer would contribute to increases in variable outgoings. Based on this proposition, the owners contend that nothing which occurred thereafter, including the redrafting of the formula by Powderly on behalf of the owners, altered the agreement struck on 3 April 1997. For the following reasons, we reject these essential planks in the owners’ case.

First, while the formula in sub-clause 3(b)(ii) might cause a non-mathematician confusion, the words of sub-clause 3(b)(i) are clear. The contributions are calculated by reference to ‘the immediately preceding’ year, not by reference to the base year. The words are not ambiguous or confusing. They do not reflect item 8. They were in every draft of the fourth schedule.

Second, none of the heads of agreement were intended to be binding. Indeed, the Gandel Management board insisted that they not be so.

Third, the language of the 3 April 1997 letter did not unambiguously accept any offer made by the 26 November 1996 heads of agreement: (1) the letter enclosed a ‘first draft’ of the lease for review; (2) that draft contained an obviously incorrect draft formula in clause 3 of the fourth schedule which needed to be — and was later — corrected in some way; and (3) in any event Myer reserved its right to make further changes pending receipt of comments from the owners. That last qualification was unnecessary, given the status of all heads of agreement as non-binding, with only the final execution documents to be the subject of board approval, as evidenced by Erikson’s certification letter and McNamara’s evidence as to the Myer board approval process.

Fourth, the draft formula in the first draft lease was the subject of further negotiation. Dickschen obviously realised that it did not work, and prepared her own re-draft of some terms in the fourth schedule and a further draft formula — which were consistent with item 8 — and provided those redrafts to Noonan. Paine then prepared a second draft lease, which did not accept Dickschen’s redrafting. Although the second draft lease has not been located, Dickschen’s summaries of it are equivocal. On the one hand, in a note about statutory outgoings, she referred to Myer paying ‘increases in outgoings above the base year’, and on the other hand she later prepared detailed comments on the second draft, in which she specifically commented that the draft fourth schedule was ‘incorrect [in] dealing with outgoings’, and noted that this was a ‘priority 1’ item remaining for negotiation.

We do not accept the owners’ contentions that the evidence of the negotiating meeting on 12 May 1997 is only explicable on the basis that agreement had been reached that item 8 would govern the basis on which Myer would contribute to increases in variable outgoings; or that there were no subsequent relevant negotiations on that issue. The issue remained alive before the meeting, as Dickschen’s detailed comments on the second draft lease show. It seems to us that, at this stage, the whole of the fourth schedule remained ‘on the table’ for negotiation, and that this was appreciated by Dickschen. This conclusion is reinforced by the third draft lease prepared by Paine on 20 May 1997 and provided to the owners, in which the fourth schedule remained unchanged from the first draft. The provision of this draft must, in our view, be seen as a rejection of Dickschen’s 16 April 1997 suggested draft clauses and new formula (insofar as they had not already been rejected by the provision of the second draft); and it is also inconsistent with item 8 in that it does not provide for contributions based upon increases over the base year. Dickschen reviewed this draft and made handwritten amendments to it, including a new suggested formula as drafted by Powderly.

Fifth, the final CPI formula was drafted by Powderly in the context of the second draft lease which, we infer from the third draft, made no changes to the first draft of the fourth schedule. The formula drafted by Powderly, which remains in the executed lease, is directly inconsistent with the owners’ case. The evidence discloses that it was the adoption by the parties of the formula which brought an end to the negotiations as to the underlying basis on which Myer was to contribute to increases in variable outgoings. As we have noted, the next draft of the lease, prepared by Paine on behalf of Myer, inserted Powderly’s formula in both clauses 3(a)(ii) and 3(b)(ii) of the fourth schedule, but otherwise did not amend the fourth schedule.

Sixth, the later inclusion of clauses 3.16, 3.17 and item 10 in the lease at Myer’s request, and Noonan’s statement to Dickschen that those changes would not ‘affect the commercial deal struck’, do not alter this situation. Noonan’s statement is the first reference in the evidence to ‘the commercial deal’ and it begs the question — what was that deal? At that stage, all that can be said is that it was the deal reflected in the draft lease as it then stood, which, apart from the insertion of the formula drafted by Powderly, remained — and still remains — in the same form as the first draft lease.

Seventh, the owners’ case is inconsistent with Erikson’s 8 September 1997 certification letter addressed to Perpetual and Bridgehead as the proprietors of the Chadstone Shopping Centre. The certification letter unequivocally states that it ‘reflect[s] the commercial terms of the transaction agreed’. The fact that Erikson may not have compared the final documents for execution with the 26 November 1996 heads of agreement, which he never saw, is not to the point. By this time, the documents had been subject to review by a team of experienced professional negotiators and solicitors. Moreover, in the course of satisfying himself as to the correctness of the certification letter, Erikson himself suggested amendments to the document.

A recent example of rectification by construction based on inconsistency is that considered by this Court in MAAG Developments Pty Ltd v Oxanda Childcare Pty Ltd.[100] In that case, there were four clauses giving the parties a right to terminate an agreement for lease on specified dates. The clause governing the right to terminate on the first specified date contained a sub-clause which was found to be clearly inconsistent with the contractual scheme as a whole,[101] and thus contained a clear mistake.[102] In the context of the contractual scheme as a whole, it was held that the obvious (or self-evident) intention of the parties was thwarted by the mistaken sub-clause,[103] and the clear and only means of correcting the mistake was to treat the sub-clause as ‘clear surplusage’,[104] which should be disregarded as a matter of construction.[105]
[100][2018] VSCA 289 (McLeish and Hargrave JJA and Almond AJA) (‘MAAG’).
[101]Ibid [69]–[75].
[102]Ibid.
[103]Ibid.
[104]Ibid [73].
[105]Ibid [75].

The owners place particular reliance on the decision of the New South Wales Court of Appeal in Westpac Banking Corporation v Tanzone Pty Ltd,[106] which they contend is directly comparable to this case and supports their contentions. The issue considered in Tanzone was whether a two-yearly rent review clause was clearly absurd. The Court held it was, because ‘there could be no rational reason supporting a common intention’ that the clause should be read literally, as the lessor alleged.[107] The Court was also influenced by the consequences of applying the literal meaning of the relevant sub-clause,[108] which it described as ‘absurd possible consequences’ which could not have been intended by the parties.[109] The Court concluded that there was an obvious mistake which produced an absurdity, and that the addition of words set out in the judgment,[110] ‘or some convenient equivalent’,[111] should be inserted to produce a re-written clause which ‘properly reflect[ed] the intention of the parties to be gathered objectively from the whole context of the lease’.[112]

Owners’ contentions

[106][2000] NSWCA 25.

[107]Ibid [27].

[108]Ibid [28].

[109]Ibid [29].

[110]Ibid [36].

[111]Ibid [37].

[112]Ibid.

The owners’ absurdity contention involves the following steps:

(1) Clause 4.6(a) provides that the amount Myer must contribute towards increases in variable outgoings is that ‘defined and calculated in accordance with the provisions of the Fourth Schedule’.

(2) Clause 1 of the fourth schedule defines the ‘Base Accounting Period’, in terms fixing it as the 12-month period between 1 July 1999 and 30 June 2000.

(3) The obvious intention is that the definition of ‘Base Accounting Period’ will have some work to do in fixing the amount of Myer’s contribution to increases in variable outgoings, which is the sole purpose of the fourth schedule.

(4) Notwithstanding this obvious intention, the defined term ‘Base Accounting Period’ does not appear in clauses 2, 3, or 4 of the fourth schedule. In particular, the definition is not used in clause 3 — which defines ‘Increases in Variable Outgoings’ by reference to accounting periods. The definitions in clauses 2 and 4 of the fourth schedule do not refer to any accounting periods.

(5) The only use of the defined term ‘Base Accounting Period’ is in clause 5 of the fourth schedule, which says nothing about the amount or basis of calculation of Myer’s contributions to increases in variable outgoings during the initial 30-year term of the lease. Clause 5 provides only that the defined term will remain the same in any new lease following exercise of the 15-year option to renew. That is an unlikely reason for the definition, especially as it precedes clause 3.

(6) Further, the obvious intent that the defined term will have work to do in clause 3 is reinforced by the fact that clause 3 is broken into two limbs:

(a) Clause 3(a) — which applies to the single annual accounting period commencing on 1 July 2000; and

(b) Clause 3(b) — which applies to every subsequent annual accounting period for the remaining 26 years of the lease term commencing on 1 July 2001.

The separate treatment of these periods discloses an intention to differentiate between the subject matter of the clauses. However, sub-clauses 3(a)(i) and (ii) are identical to sub-clauses (3)(b)(i) and (ii). If the draftsperson of clause 3 had intended to deal with all the accounting periods in the same way, there was no need for two limbs — which are mere duplication and thus contain redundant words.

(7) These factors show that, when clause 4.6(a) of the lease and the fourth schedule are read as a whole, an obvious mistake has been made in drafting clause 3(b), as ‘something has clearly gone wrong with the language’. The owners rely on MAAG to support this contention.[113]
[113]MAAG [2018] VSCA 289 [55].

(8) The mistake renders clause 3(b) commercially absurd, as there is no commercially sensible reason why the immediately preceding year would be used instead of the ‘Base Accounting Period’ for the remaining 26 years of the lease. The owners rely on Tanzone to support this contention.

(9) The literal application of clause 3(b) would produce absurd results if the amount of variable outgoings in one year is less than in the immediately preceding year; because application of clause 3(b) would have the effect that there were no increases. For example, a decrease in variable outgoings may occur because of a technological advance or the cost of a significant outgoing, such as electricity, suddenly falling. The owners postulate a decrease in variable outgoings between the 2014 and 2015 accounting periods, with the result that Myer would pay only the fixed base outgoings payment towards variable outgoings for the 2015 year — notwithstanding large increases in those outgoings between 2000 and 2014. They contend that this is an absurd result, because clause 4.6(a) and the fourth schedule assume there will be ‘increases’ and require Myer to contribute to them. The owners rely on Tanzone to support this contention also.

Judge’s reasons on the absurdity contention

In rejecting the absurdity contention, the trial judge reasoned as follows:

(1) The ‘highest’ case for the owners is that clause 3(b) is ‘poorly drafted’.[114] In that regard, the trial judge said:
[114]Reasons [89].

It is neither surprising nor remarkable to have redundant drafting or duplication in complicated legal documents. Additionally, it might also be inferred that the draftsperson did not see themselves as drafting a redundant provision, but maintained the same terminology as between the sub-paragraphs for the sake of emphasis and clarity, rather than relying upon some other drafting, grammatical or syntactical shorthand to achieve the same result but in a manner which might have been thought to be less clear or to cause confusion in the future.[115]
[115]Ibid.

(2) The fact that clause 3(b) ‘does not provide for as large a contribution to variable outgoings as the [owners] would like’,[116] or may produce an anomalous result such as ‘a reduction in Myer’s contribution to variable outgoings’,[117] does not make it an absurd provision.[118]
[116]Ibid.
[117]Ibid [90]–[91].
[118]Ibid.

(3) It is not self-evident that the parties intended that clause 3(b) should operate as the owners contend.[119]
[119]Ibid [95].

(4) Clause 3(b) provides a ‘perfectly functional formulation’, as evidenced by the fact it was applied by the parties without any difficulty or concern for many years before the owners first believed there was a mistake.[120] This aspect of the Reasons is referable to the evidence of subsequent conduct described above,[121] and elsewhere in the Reasons.[122]
[120]Ibid [88].
[121]The subsequent conduct is set out at [64] above.
[122]Reasons [61]–[63].

(5) Beer and Brown ‘saw nothing troubling’ about the level of Myer’s contributions to variable outgoings.[123] This aspect of the trial judge’s reasons is referable to the evidence of Beer and Brown set out in paragraphs [65] and [66] above and in the Reasons at [64].

(6) The formula in clause 3(b) was drafted by Powderly. He did not think it was absurd and nor did Dickschen. Each of them examined the formula closely in the context of the ‘full text of the Fourth Schedule’.[124]

Analysis

[123]Ibid [90].

[124]Ibid [92].

The owners contend that the trial judge erred in rejecting the absurdity contention. They rely on the same arguments they advanced to the trial judge — as summarised above. Further, they contend that the trial judge erred in having regard to the subsequent conduct and subjective views of the owners and their representatives.

We reject these contentions.

In our view the trial judge was correct to consider the subsequent conduct of the parties in implementing the fourth schedule for many years in determining whether it is commercially absurd.[125] The owners contend that this approach offends against the principle that subsequent conduct is not admissible to construe contractual words.[126] But that is not the use which the trial judge made of the subsequent conduct. He referred to it as an answer to the contention that the parties could not have intended sub-clause 3(b) of the fourth schedule to operate literally. This use of the evidence is consistent with the approach taken in Tanzone, with which we agree.
[125]The subsequent conduct is set out at [64] above.
[126]Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570, 582 [35] (Gummow, Hayne and Kiefel JJ).

We note that the absurd consequences in Tanzone are far removed from the circumstances here. In that case, the rent review clause disclosed a clear intention to protect the lessor against inflation. The clause (read literally) provided that the rent would be reviewed and increased every two years to ‘the greater of’: (1) a formula producing increases of 8 per cent compounded annually;[127] and (2) a formula providing for an increase ‘arrived at by applying the entire CPI increase since the commencement of the term of the lease to a rental which had already been so increased to the last review date’.[128] The actual experience in applying, and the possible results of continuing to apply, the second limb were obviously absurd, as the lessor ‘got at least a multiple inflation effect increase at every rent review after the first.’[129] Such a result was held to have no ‘rational explanation’ on its face,[130] with none being identified by the lessor.[131] This conclusion was bolstered by the fact that applying the literal meaning would produce increases from a base annual rent of approximately $70,000 to $1,660,000 at the seventh review date after 14 years.[132] When compared with a rent review clause which on its face was intended to guarantee only 8 per cent minimum compound increases, it was objectively absurd that the CPI limb of the rent review clause could have been intended to produce such fantastic rates of increase.[133] On the other hand, applying the CPI limb of the rent review clause as requiring a calculation of the amount by which the CPI had increased over that applying at the immediately preceding rent review date, produced an increased annual rental at the seventh review date of only $208,510.[134]
[127]Tanzone [2000] NSWCA 25 [3], [24].
[128]Ibid [26].
[129]Ibid.
[130]Ibid [27].
[131]Ibid.
[132]Ibid [28].
[133]Ibid [27]–[28].
[134]Ibid [28].

We will not take evidence of the negotiations into account. For the reasons given, they do not disclose an objective commercial purpose other than that Myer agreed to contribute to increases in variable outgoings in some way. That fact is plain from the words of the lease in clauses 3.16, 3.17, 4.6(a) and the fourth schedule. The negotiations establish only the subjective intentions of the parties from time to time, culminating in the execution of the agreement for lease and lease. The evidence of the negotiations is inadmissible on this aspect of the owners’ case.

Finally, with respect to the evidence to be considered in determining the absurdity contention, we do not think that it was right for the trial judge take into account the subsequent subjective views expressed by Beer and Brown as to the results produced by sub-clause 3(b) of the fourth schedule. While there may be cases where independent objective opinion evidence will be admissible to establish absurdity or lack of it (on which we express no concluded view), this was not such a case. Further, while Beer’s evidence was against the owners’ interests, it may be seen to be in his own interests — as an employee said to be responsible for a mistake costing his previous employer many millions of dollars. We do not, however, see the trial judge’s reliance on this evidence of subjective belief as decisive in his reasoning; and we do not take any account of it in our analysis.

In the context of these preliminary comments, we turn to consider the owners’ contentions. For the following reasons, we reject them.

First, we again note that Myer’s bargaining position was strong.

Second, there was no evidence that all tenants of the shopping centre contributed to their pro-rata proportion of variable outgoings in a consistent way. Commercial deals appear to have been struck on a tenancy-by-tenancy basis. For example, there is evidence that a large tenant (the AMF bowling alley) paid no contribution to variable outgoings for at least some years.

Any consideration of alleged commercial absurdity must take these two factors into account. Thus, this is a case distinguishable from Tanzone, where the clear commercial intent — evident on the face of the rent review clause — was to ensure that the lessor received an identified minimum rental increase to protect it against inflation. This case is also distinguishable from MAAG, where the relevant sub-clause was clearly inconsistent with the contractual scheme, and also absurd on that basis. In this case, there is no inconsistency in the language used in sub-clause 3(b) of the fourth schedule — either with that schedule as a whole, or the lease as a whole.

Third, we do not accept that the definition of Base Accounting Period in clause 1 of the fourth schedule, or the duplication of the words and symbols in sub-clauses 3(a)(i) and (ii) and 3(b)(i) and (ii), results in redundant words which are indicative of a clear mistake. As to the definition of Base Accounting Period, it is used in clause 5 of the fourth schedule, in connection with the exercise of the option for a further 15 year term, and clause 5 is referred to in clause 14.1(i) of the lease itself — expressly providing that the terms and conditions of the new lease for the option period will ‘implement the intent of clause 5 of the Fourth Schedule’. It cannot be said that the definition of ‘Base Accounting Period’ and its subsequent use or absence reveals a clear mistake.

As to the duplication in sub-clauses 3(a)(i) and (ii) and 3(b)(i) and (ii), we agree with the trial judge that, while unnecessary as a drafting technique — because clauses 3(a) and 3(b) could have been combined in one clause — the existence of the two separate provisions does not reveal a clear mistake. As the trial judge held, the repetition is consistent with an endeavour to introduce emphasis and clarity.[135] Moreover, as we have noted above, ambiguity is not enough to establish that a clear mistake resulting in self-evident absurdity has been made.[136]
[135]Reasons [89].
[136]Mainteck (2014) 89 NSWLR 633, 662 [120], citing Tanzone [2000] NSWCA 25 [21].

Fourth, even if we were satisfied that absurdity had been established, it is far from clear what correction ought be made. As noted in paragraph [72] above, the amendments sought by the owners to rectify the alleged absurdity have the effect of eliminating the CPI cap. Thus, although the proposed amendments would give further meaning to the definition of Base Accounting Period, they would negate the clear contractual intention to impose the CPI cap.

Extraordinarily, having conceded that the formulation contended for was flawed, counsel for the owners refused to put forward a version of the fourth schedule which would both rectify what they contend to be the clear mistake and provide for the CPI cap. Counsel for Myer suggested there were many possible formulations which might be adopted, none of which had ever been expressly addressed and considered by the parties in the course of the negotiations. Counsel for the owners submitted that if the Court found that a mistake of the requisite kind existed, it was for the Court to formulate the necessary correction. In our view, this issue illustrates the weakness of the owners’ position. Even if it were accepted that a ‘mistake’ had been made, it is entirely unclear what ‘correction’ ought to be made.[137]
[137]Seymour Whyte [2019] NSWCA 11 [9]; Mainteck (2014) 89 NSWLR 633, 662 [119]; Energy World [2007] FCAFC 34 [11].

For these reasons, we conclude that the trial judge was right to emphasise and exercise the caution required in assessing the owners’ absurdity contention. He was not satisfied to the requisite ‘high level of conviction’ that a mistake has been made or that there is any absurdity in the unambiguous words used in clause 3(b) of the fourth schedule — and nor are we. Ground 1 is not made out.

Notice of contention: Did the subsequent conduct create a defence of account stated?

Myer contends that even if this Court were to find in favour of the owners on this appeal, and either construe or rectify the lease in a way more favourable to the owners, that it has a defence of account stated. This defence is said to arise from the procedure in clause 4.6 of the lease whereby the owners would give Myer an estimate of the increase in variable outgoings for the subsequent year, Myer would pay monthly instalments based on this estimate, and then at the end of the year would either be refunded any excess or have to meet any shortfall.

As we have rejected the owners’ contentions on construction and rectification, it is not necessary to determine this issue. However, we will make some brief observations.

It was also not necessary for the trial judge to decide this issue due to his conclusions on the primary issues, but he stated that he would not have accepted Myer’s defence in any case.[138] His Honour set out the law on account stated — which both parties accepted as accurate — as follows:[139]
[138]Reasons [155].
[139]Reasons [148]–[151] (citations in original).

An account stated is a cause of action that exists at common law. There are numerous statements of what constitutes an account stated contained in old English and Australian authority. These statements note two forms of account stated. Jordan CJ’s statement in Commonwealth DairyProduce Equalisation Committee Ltd v McCabe[140] is often referred to in Australian cases as stating the two forms of account stated. Jordan CJ said as follows:[141]
[140](1938) 38 SR (NSW) 397.
[141](1938) 38 SR (NSW) 397, 401. See also Lewis v Wilson (1997) 42 NSWLR 228, 230; Lewis v Lamb [2011] NSWSC 873 [18]; Steiner v Strang [2016] NSWSC 9 [37]–[38], [40]–[41]; Bank of NSW v Brown (1983) 151 CLR 514, 535; and see Middleditch v Ellis (1848) 2 Exch 623; 154 ER 640.
An action for money found to be due on accounts stated may take one of two forms. It is always essential in such an action that there should have been before action brought an admission by the defendant or his agent to the plaintiff or his agent that the sum claimed is due by the defendant to the plaintiff. But this admission may be so framed as to be merely an acknowledgment of indebtedness, in which case although it supplies evidence of the debt the evidence may be rebutted by proof that no debt in fact existed. Or it may take the form of an account stated and agreed to between two parties, by which it is in effect agreed that the items on both sides shall be set off and the balance paid. In the latter type of case, the agreement for set-off supplies good consideration for the promise to pay the amount of the balance; and the account stated is itself an agreement for valuable consideration constituting a cause of action, and not merely evidence of liability.

[Myer’s emphasis; citations omitted]

Myer relies upon the second type of account stated, which is often called a ‘real account stated’.[142] For a real account stated, ‘several items of claim are brought into account on either side, and, being set against each other, a balance is struck, and the consideration for the payment of the balance is the discharge of the items on each side’.[143] A real account stated is a contract supported by consideration;[144] which has been said to belong ‘to the field of contract’.[145]
There must, however, be mutual credits and debits for a ‘real account stated’ otherwise there is no consideration.[146] If ‘the whole accounting is to be rendered by one party to the other’, there is no consideration.[147] The issue of mutual credits and debits was addressed by Brennan J in Bank of NSW v Brown:[148]
It is not necessary that there should be debts or claims on both sides: all that is required is that there be cross items of account the liability for which and the credit for which are discharged by the account stated.

An account stated may be pleaded as a defence provided the defendant has paid the amount which it alleges is owing to the plaintiff. A defensive account stated is a ‘species of accord and satisfaction’.[149]

[142]Laycock v Pickles (1863) 4 B&S 497, 506; 122 ER 546, 549, cited in Hampton Gold Mining Areas Ltd v Metals Exploration Ltd (1995) 17 WAR 30, 38, 46; Bank of NSW v Brown (1983) 151 CLR 514, 535; Executor Trustee & Agency Co of South Australia Ltd v Thompson (1919) 27 CLR 162, 170.

[143]J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (LexisNexis Butterworths, 5^th ed, 2015) [26-105] quoting Laycock v Pickles (1863) 4 B&S 497, 506; 122 ER 546, 549.

[144]Executor Trustee & Agency Co of South Australia Ltd v Thompson (1919) 27 CLR 162, 170; Commonwealth Dairy Produce Equalisation Committee Ltd v McCabe (1938) 38 SR (NSW) 397, 401; Lockyer v Macready [1965] NSWR 801 at 819–20; Lewis v Lamb [2011] NSWSC 873 [18].

[145]Hampton Gold Mining Areas Ltd v Metals Exploration Ltd (1995) 17 WAR 30, 44.

[146]J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (LexisNexis Butterworths, 5^th ed, 2015) [26-110].

[147]Anglo-American Asphalt Co v Crowley Russel & Co [1945] 2 All ER 324, 331.

[148](1983) 151 CLR 514, 536.

[149]J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (LexisNexis Butterworths, 5^th ed, 2015) [26-110]; Hampton Gold Mining Areas Ltd v Metals Exploration Ltd (1995) 17 WAR 30, 44, 46.

Myer characterises the process under clause 4.6 as one of setting off, whereby there are separate agreements reached for the amount of variable outgoings in each accounting period and the amount owed by Myer based on a true accounting is set off against the amount it has already paid in the monthly instalments based on the estimate. This offsetting is said to amount to consideration for these separate agreements. If this were correct, these binding separate agreements would stand for financial years 2002 to 2015, even if this Court were to construe or rectify the formula in a different way.

The trial judge concluded as follows:

In my view, Myer’s claim by way of account stated must fail because there were no mutual dealings involved in the process relied upon. Each Adjustment Statement delivered by the Plaintiffs to Myer was ‘one-sided’. Moreover, there is no evidence about each Adjustment Statement to suggest it was negotiated, agreed between the parties or final. Clause 4.6 of the Lease did not say an Adjustment Statement was to be any such thing. On the contrary, these provisions, particularly sub-cl 4.6(e), envisaged that Adjustment Statements were not final and could be disputed. The parties did not negotiate and agree that a balance was to be paid. The parties merely performed sub-cll 4.6(b) and (c) of the Lease. If the Adjustment Statements are to be regarded as an account, each such statement is the first form of account and is merely an acknowledgment of the debt so that evidence may be tendered to show that it is erroneous. It is not a real account stated which is binding subject to being reopened.[150]

[150]Reasons [155].

We agree with the trial judge that there were no mutual dealings. And nor were there any cross items of account leading to a species of accord and satisfaction. This was not a set-off arrangement of the kind required to establish a defence of account stated. There was only the performance of the terms of the lease, by early payment of an estimate of variable outgoings and an adjustment for over or underpayment. This was by reference to objective criteria, and if there was a dispute about the calculations (which there never was) it would be referred for expert determination.

The owners contended that if they succeeded on their construction or rectification case, but the facts constituted an account stated, the account stated should be set aside on the grounds of mistake. The trial judge did not need to decide this issue but stated he would have rejected this contention, as there was a common intention to implement the lease (as written) and that common intention was carried out.[151] While we think there is some attraction in the owners’ contention on this point, it is not necessary to consider it in light of our other findings.
[151]Ibid [156].

Summary of conclusions

While the two grounds of appeal were arguable, and thus leave to appeal will be granted, neither ground has been established. The appeal will be dismissed.

- - -

ANNEXURE A: FOURTH SCHEDULE

FOURTH SCHEDULE TO LEASE

VARIABLE OUTGOINGS – DEFINITION AND CALCULATION

For the calculation of the Lessee’s contribution to increases in Variable Outgoings:

“Base Accounting Period” means the Accounting Period of twelve months commencing on 1 July following the Commencing Date [ie 23 November 1998].
“Lessee’s Proportion” means eighty per cent (80%) of that part of the whole of the Increase in Variable Outgoings which bears the same proportion to the whole of the Increase in Variable Outgoings as the Gross Lettable Area of the Demised Premises bears to the Gross Lettable Area of all buildings in the Centre.
“Increase in Variable Outgoings” means
(a)in respect of the second full Accounting Period after the Commencing Date (that is the Accounting Period commencing on the second 1st July falling after the Commencing date [ie 1 July 2000]) the lesser of:
(i)the amount by which the Variable Outgoings for that Accounting Period exceed the Variable Outgoings [for] the immediately preceding Accounting Period; and
(ii) an amount equal to
—VO
(b)in respect of each subsequent Accounting Period [ie from 1 July 2001 onward] the lesser of:
(i)the amount by which the Variable Outgoings for that Accounting Period exceed the Variable Outgoings for the immediately preceding Accounting Period; and
(ii) an amount equal to
—VO
where
VO is the Variable Outgoings for the Accounting Period preceding the Accounting Period [in] respect of which the calculation is being made
CPI(2) is the Index issued for the quarter ended 31 March during the Accounting Period preceding the Accounting Period in respect of which the calculation is being made
CPI(1) is the Index issued for the quarter ended 31 March twelve months prior to CPI(2).
“Variable Outgoings” means …
If the Lessee exercises the option given to it for a further term of fifteen years the Base Accounting Period will not be updated and the lease for the further term shall incorporate such alterations as are necessary to provide for the Lessee to contribute to Increases in Variable Outgoings as if such further term were a continuation of this Lease.

ANNEXURE B: PROPOSED AMENDMENTS TO FOURTH SCHEDULE

FOURTH SCHEDULE TO LEASE

VARIABLE OUTGOINGS – DEFINITION AND CALCULATION

For the calculation of the Lessee’s contribution to increases in Variable Outgoings:

“Base Accounting Period” means the Accounting Period of twelve months commencing on 1 July following the Commencing Date [ie 23 November 1998].
“Lessee’s Proportion” means eighty per cent (80%) of that part of the whole of the Increase in Variable Outgoings which bears the same proportion to the whole of the Increase in Variable Outgoings as the Gross Lettable Area of the Demised Premises bears to the Gross Lettable Area of all buildings in the Centre.
“Increase in Variable Outgoings” means
(a)in respect of the second full Accounting Period after the Commencing Date (that is the Accounting Period commencing on the second 1st July falling after the Commencing date [ie 1 July 2000]) the lesser of:
(i)the amount by which the Variable Outgoings for that Accounting Period exceed the Variable Outgoings [for] the immediately preceding Accounting Period; and
(ii) an amount equal to
—VO
(b)in respect of each subsequent Accounting Period [ie from 1 July 2001 onward] the lesser of:
(i)the amount by which the Variable Outgoings for that Accounting Period exceed the Variable Outgoings for the ~~immediately preceding~~ Base Accounting Period; and
(ii) an amount equal to
—BVO
where
VO is the Variable Outgoings for the Accounting Period preceding the Accounting Period [in] respect of which the calculation is being made
BVO is the Variable Outgoings for the Base Accounting Period
CPI(2) is the Index issued for the quarter ended 31 March during the Accounting Period preceding the Accounting Period in respect of which the calculation is being made
CPI(1) is the Index issued for the quarter ended 31 March twelve months prior to CPI(2).
“Variable Outgoings” means …
If the Lessee exercises the option given to it for a further term of fifteen years the Base Accounting Period will not be updated and the lease for the further term shall incorporate such alterations as are necessary to provide for the Lessee to contribute to Increases in Variable Outgoings as if such further term were a continuation of this Lease.

ANNEXURE C: KEY TERMS OF THE LEASE
3.16The Lessee covenants with the Lessor that during the whole of the term of the Lease it will pay to the Lessor at its address herein set out or to such other place as the Lessor shall from time to time in writing direct free of all deductions a yearly Base Variable Outgoings Payment of the amount expressed in Item 10 of the First Schedule. The Base Variable Outgoings Payment shall be made by monthly instalments in advance the first such payment to be made on the Commencing Date and each subsequent payment on the first day of each subsequent month each such monthly payment to be one twelfth of the Base Variable Outgoings Payment (except that the first and last payments shall if necessary bear the same proportion to the Base Variable Outgoings Payment as the number of days in respect of which such payment is made bears to 365);
3.17The Lessor and the Lessee acknowledge and agree that the amount payable by the Lessee pursuant to Clause 3.16 is neither a representation of nor an estimate of the actual amount of Variable Outgoings for the Accounting Period commencing on 1 July following after the Commencing Date (‘Base Year’). The parties agree that irrespective of the actual amount of Variable Outgoings for the Base Year there will be no adjustment to the amounts payable pursuant to Clauses 3.16 and 4.6.

…

4.6(a) Commencing on the second full Accounting Period after the Commencing Date (that is the Accounting Period commencing on the second 1st July falling after the Commencing date) the Lessee shall pay to the Lessor the Lessee’s Proportion of Increases in the Variable Outgoings as defined and calculated in accordance with the provisions of the Fourth Schedule.
(b)Provided that the Lessor shall have notified the Lessee of the estimated increases in Variable Outgoings, the Lessee’s Proportion of the increases in Variable Outgoings shall be paid progressively throughout each Accounting Period by twelve instalments, each being one-twelfth of the Lessee’s Proportion of the estimated increases in Variable Outgoings for that Accounting Period, and payable monthly in advance contemporaneously with the instalments of the Minimum Rent with an appropriate adjustment as provided in sub-clause (c) of this clause after the Variable Outgoings are determined.
(c)The actual increases in Variable Outgoings shall be determined as soon as may be practicable after the end of each Accounting Period and if the amount of the Lessee’s required contribution to increases in Variable Outgoings calculated by reference to the Fourth Schedule exceeds the sums paid by the Lessee in respect thereof on the basis of the Lessor’s estimate the deficiency shall be paid by the Lessee to the Lessor upon demand; and if the amount thereof is less than the sums paid by the Lessee in respect thereof the Lessor shall forthwith refund the excess to the Lessee.
(d)The Lessor shall keep accurate records of the Variable Outgoings and as soon as practicable after the Variable Outgoings for the Accounting Period then concluded have been determined shall furnish an audited itemised statement thereof to the Lessee,
(e)If any dispute shall arise between the Lessor and the Lessee as to whether any item or whether the amount of any item has properly been included in Variable Outgoings the matter shall be referred to expert determination in the manner provided for in Clause 13.8.
(f)(i) Subject to Clause 4.6(f)(ii) the liability of the Lessee to pay the Lessee’s Proportion of Variable Outgoings will not cease or otherwise be prejudiced by the expiry or other termination of this Lease.
(ii)If this Lease ends during an Accounting Period then the Variable Outgoings both actual and estimated will be deemed to accrue equally from day to day over a full Accounting Period and the Lessee’s Proportion of Variable Outgoings will be calculated accordingly.

…

FIRST SCHEDULE TO LEASE

1. …

…

10. BASE VARIABLE OUTGOINGS PAYMENT $1,607,016.70

…

FOURTH SCHEDULE TO LEASE
VARIABLE OUTGOINGS — DEFINITION AND CALCULATION

…[See Annexure A to these reasons].

SCHEDULE OF PARTIES

PERPETUAL LIMITED (ACN 000 431 827)	First Applicant
BRIDGEHEAD PTY LTD (ACN 006 082 515)	Second Applicant
VICINITY FUNDS RE LIMITED (ACN 084 098 180)	Third Applicant
MYER PTY LTD (ACN 004 143 239)	Respondent

FIRST SCHEDULE TO LEASE
…
10.	BASE VARIABLE OUTGOINGS PAYMENT	$1,607,016.70

FIRST SCHEDULE TO LEASE
1. …
…
10.	BASE VARIABLE OUTGOINGS PAYMENT	$1,607,016.70

[2019] VSCA 98

7 May 2019