Reading Entertainment Aust Pty Ltd & Anor v Whitehorse Property Group Pty Ltd & Ors

[2008] HCATrans 208

[2008] HCATrans 208

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M9 of 2008

B e t w e e n -

READING ENTERTAINMENT AUSTRALIA PTY LTD

First Applicant

READING PROPERTIES PTY LTD

Second Applicant

and

WHITEHORSE PROPERTY GROUP PTY LTD (PROVISIONAL LIQUIDATOR APPOINTED)

First Respondent

BURSTONE VICTORIA PTY LTD

Second Respondent

MAY WAN KHOR

Third Respondent

DAVID FREDERICK BURR

Fourth Respondent

Application for special leave to appeal

GLEESON CJ
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 23 MAY 2008, AT 10.12 AM

Copyright in the High Court of Australia

__________________

MR C.L. PANNAM, QC:   If the Court pleases, I appear with my learned friend, MR S.A. GLACKEN, on behalf of the applicants.  (instructed by Middletons)

MR A.J. MYERS, QC:   May it please the Court, I appear with MR D.I. STAR, for the second, third and fourth respondents.  (instructed by Khor & Burr)

GLEESON CJ:   Yes, Dr Pannam. 

MR PANNAM:   If the Court pleases.  Your Honours, in our submission, this application raises a very short, interesting and important point in the law of contract.  Can I expose the point in this way by a brief reference to the essential facts that give rise to the point.

Your Honours will have seen that Reading in this case renounced its obligations under the joint venture in mid‑October 1999.  It did that in part, as the court found below, that the primary judge found below, in part because of its concern about the financial ability of the other joint venture partner to meet some obligations that arose in the future.  At all events, on 6 December 1999, that renunciation was accepted by the other joint venture partner as determining the joint venture and an action was commenced for, among other things, substantial damages.

In relation to that claim for substantial damages, what was required to be demonstrated was that there was some loss of a commercial opportunity to make a profit if the joint venture had gone ahead.  Your Honours will have seen that the judge assessed the profit that may have been made in the joint venture at some $10 million and discounted that by 30 per cent, because he took the view that 30 per cent represented the degree of likelihood that that profit would be achieved.

Now, against that background in the cause of actions for breach of contract, what was required to be shown on the balance of probabilities was that at the time of termination the complaining joint venture partner was ready, willing and able to meet future obligations that arose under the joint venture agreement.  At that stage, the finding of the primary judge was that the interest associated with the complaining joint venturer was that there would have to be found some $3 million to $5.5 million by mid‑May 2000.  So that was six months away.

After looking at the ability to fund other obligations that arose in the future and finding there was an ability to fund those, the critical question was, and so described by the primary judge as being critical, whether there was an ability to meet that $3 to $5.5 million contribution that was going to be required in mid‑May 2000.  The only asset that was available at that stage was an investment in a company called Charactec Propriety Limited, which then stood in the statement of assets and liabilities of the company that held that investment that was associated with Messrs Burr and Khor, who were in effect the other joint venture parties.  It stood in the books as being worth $400,000.

The primary judge held at paragraph 355 that there would be no cash from that source in late 1999.  What happened was was that in May 2000, that investment in Charactec produced a return of $5.8 million.  Acting on that basis, the learned primary judge said when the liability to contribute the $3 to $5.5 million arose in mid‑May 2000, at that time there would have been an ability to make that contribution.

Can I take your Honours to the passage in the judgment of the trial judge that deals with that matter, first of all at appeal book 108, at 359.  Your Honours will there see that the learned primary judge said:

A large part of the increase from $10.6m to over $15m is referable to Ms Khor and Mr Burr’s interest in a company named Charactec Pty Ltd.  There was no cash available to Mr Burr and Ms Khor from that source in late 1999.  That was not the case in 2000, and, when considering the capacity of the Burstone interest to provide equity contributions for the development, the Charactec interest is –

and he uses there the phrase “important”.  Can I invite your Honours over to paragraph 369, where importance “becomes critical”:

When one turns to the question of the capacity of the Burstone parties to contribute the equity required for construction funding, the interest in Charactec Pty Ltd become critical.

If the Burstone parties had repaid the Reading loan plus interest in November 1999, they then would have had little or no capacity to make further cash equity contributions (without recourse to sources of funds overseas, which I am not prepared to take into account).  However, in May 2000 the investment in Charactec Pty Ltd resulted in Timswee -

That was a company associated with the complainants, a family trust company of Ms Khor and Mr Burr -

the trustee of Mr Burr and Ms Khor’s family trust, receiving a sum of $5,840,000.

I pass over an argument that that was the property of somebody else, and go to the second‑last line: 

I must proceed on the basis that the family trust company of Ms Khor and Mr Burr, Timswee, in May 2000 had available to it in excess of $5,800,000.  In those circumstances I conclude that the Burstone interests would have had the capacity to make an equity contribution up to that amount if it had been required in mid‑May 2000.  Given my findings in relation to finance, that is likely to have been about the time an equity contribution would have been required. 

Pausing at that point, the judge dealt with the question not by looking and analysing the position as it was on 6 December 1999, but rather taking the fact that an investment that was valued at $400,000 at that time had now produced $5.8 million and because that sum had fallen to hand by May, they would have been in a position to do it, then he adopted a sort of “wait and see” test or approach. 

HEYDON J:   Cannot a later high value be some evidence of the fact that higher than $400,000 was the real value in 1999? 

MR PANNAM:   If there was evidence to that effect, I will come to the evidence in a moment, but there was nothing in the evidence that was before the court that essayed, for example, an evaluation of whether that $400,000 investment may have had the capacity to materialise into any, or if so, what amount. 

GLEESON CJ:   But it is not as though they won the lottery.  There must have been value there to produce that consequence in May 2000, must there not? 

MR PANNAM:   We do not contest that, but the question is, one does not know.  The mere fact that you add two facts together, namely $400,000 as the value of the asset and it realises $5.8, and you ask the question, if the relevant inquiry is, as at 6 December 1999, were you then ready, willing and able to meet an obligation that arose in mid‑May the next year of $3 million to $5.5 million, in our respectful submission, you cannot, just from those facts, conclude the mere fact that you had the investment that may have produced that result satisfies the test, simple as that. 

GLEESON CJ:   I understand the criticism that you make of the factual finding, but what is the point of principle? 

MR PANNAM:   The point of principle is this.  What are the principles that inform the exercise of determining readiness, willingness and ability to satisfy a future obligation when what you have is simply a known fact, namely that as at the time where the obligation had to be filled you had the money, and your position as at the date in which you asked the question.  We could have no complaint at all if there was evidence before the court to suggest that that $400,000 investment would have, could have, and possibly may have by May the next year, produced enough money.  There was no evidence of that at all, as the judge pointed out.

Now, all that happened then, if I can just go to the Court of Appeal for a moment, the Court of Appeal just stated, at application book 220, at paragraph 43:

It was said for Reading that, in determining this matter, the $6 million that became available to Burstone in early 2000 through Charactec should be disregarded as a windfall that could not have been taken properly into account for relevant purposes in December 1999. 

All one gets by way of reasoning is the following:

We consider, however, that in assessing the value of Burstone’s financial position in December 1999 for the purpose of determining if it could meet its relevant obligations under the contract as and when they fell due it was permissible for his Honour to take into account the amount for which the investment was realised. 

Then there is but a sentence:

The subsequent realisation of it shed light on its value in December 1999, making plain that the $400,000 that was attributed to it in late 1999 materially undervalued the asset. 

Can we apply that to the facts of this case?  Here you have one of the joint venture partners saying one of the significant reasons why we do not want to go on with this and we renounce our obligations is because we are concerned about your financial ability.  That was the basis of it.  How can a commercial party in that situation then ask itself, “Hang on a minute, we might be wrong; they may have an investment that next year may produce a lot of money, and then if it does then they might be able to meet their obligations”?  You must be able, as a matter of commerce, to give a clearer answer than simply to say we will wait and see what happens, in our respectful submission.

It is clear, and we accept and could not contradict the proposition that this Court in cases like Kizbeau and HTW Valuers has said that when you are looking at calculating damages, of course you would prefer facts as they subsequently become known.  In those two cases, that principle was applied.  It is better to proceed on the basis of facts that are subsequently materialised rather than speculation about them at an earlier point of time.  But that is not this case.  In this case, the element of readiness, willingness and ability goes to the cause of action itself as the judgments of the then Chief Justice Mason, and two of the other Judges of the High Court, Justices Brennan and Dawson make clear, it goes to the heart of the cause of action.

Now, in our respectful submission, when one looks at what the facts were about this $400,000, it was not possible simply to wait and see whether it produced some result and whether that result was produced early enough to meet the obligation in May of the following year.  Could we go to the evidence and it is brief.  It is summarised at pages 275 and 279 of the application book.  At 275, one may see what the evidence was: 

Interest in Charactec Pty Ltd

...The A & L Statement –

Line 5, under that heading –

listed the value of May Wan Khor and my beneficial interest -

This is an affidavit of Mr Burr -

in the company at $400,000.  At the Relevant Time, this company owned a technology (“the Technology”), which it had been developing for a number of years.  It had been attempting to sell all or part of its interest in the Technology, and in December 1999, [pursuant] to a Memorandum of Understanding it began negotiations with a publicly listed company in Hong Kong, for the sale of a majority interest in the Technology.

It does not tell you anything about the negotiations or the state that they had breached.  It goes on simply to say:

On 22 March 2000, a Deed of Agreement was entered into by Charactech and a company called Easykeys Limited –

and there was the sale that produced the money.  Then if one goes to 279, the subject is dealt with again.  It tells you what the Charactec investment was at the first bullet point under paragraph 11.  It was “a Chinese‑language keyboard which involved some new technologies”.  Then late in 1999, the negotiations with Hing Kong commenced.

On 20 December 1999, [Charactec] and Hing Kong signed a Memorandum of Understanding . . . which acknowledged an in principle agreement –

It does not tell you what it is.  Then, lo and behold, on 22 March the sum of money is realised that produces the $5.8 million.  The onus being upon the plaintiff in establishing readiness, willingness and ability to complete, in our respectful submission, the principle that arises is, it is not enough simply to say there was an asset, $400,000, that produced the $5.8 million.  One might just as well say, “I paid $54 for a quick pick in the lottery and it produced some money two weeks later.”  There is really no difference, in our respectful submission, in terms of principle if you apply it that way.

If you add to it, and this is the leave point, if the court states the principles that would enable you to connect, the ultimate realisation that would have enabled the future obligation to be met to the anterior point of time where the asset stood in the books of account of the relevant company at a lower point, then you could work your way around this.  You can say we will call some evidence to the effect that these negotiations we will advance, they involve this sum of money, they had reached the stage where only lawyers had to be involved to document it, all manner of things.  But all of that was lacking in this case, and the only parties who had any knowledge of it elected not to put before the court.

In our respectful submission, those facts that were dealt with by his Honour on a “wait and see” and by the Court of Appeal on the basis of, it had some value, it produced a much larger sum, that is enough, that that was contrary to the principle that applied, the onus being here, upon the persons who were claiming damages to breach of contract, substantial damages of some $3 million, had to prove that there was some reasonable

likelihood that that investment would have produced the required sum of money by May of the following year.  They did not leak that onus.

That is the point.  It was, in our respectful submission, dealt with in a completely unsatisfactory way, first by the primary judge, which was the wrong test; secondly by the Court of Appeal simply asserting a conclusion, without any reasoning at all, in our respectful submission and the point that we rely upon for the grant of leave in this case is for the Court to take the opportunity in this area of the law of contract to state the informing principle that would relate the meeting of the future obligation only by reference to a future happening to the state of affairs that existed at the relevant time, namely, the acceptance and the repudiation that terminated the contract.  That is the point, if the Court pleases. 

GLEESON CJ:   Thank you, Dr Pannam.  Yes, Mr Myers. 

MR MYERS:   Thank you, your Honours.  Your Honours, there is no error in the Court of Appeal’s reasons.  There is no question of principle involved.  The facts were correctly found in accordance with authority and the issue that my learned friend now wishes to put to this Court was not squarely put in issue at trial.

On that last matter, may I direct your Honours again to our written submission on page 267, first of all at paragraph 3.8.  The oral and written closing submissions of the applicants to the primary judge concerning the respondents’ readiness and willingness were confined.  The applicants’ closing submissions did not contend that there was a lack of readiness and willingness by the respondents by reason of the matters now advanced to this Court namely, it is impermissible to have regard to the funds from the sale of Charactec or the failure of the respondents to repay the Reading loan.

Over the page, 3.12 and 3.13, Charactec was not referred to in any of the parties’ pleadings.  The applicants put Charactec into issue only insofar as it was contended there was a dispute over the ownership of funds derived from the investment.  The applicants’ case at trial did not include the case concerning Charactec now made by the applicants to this Court.  As I understand it, that is not controverted in my learned friend’s submissions. 

Next, your Honours, what was said by the Court of Appeal at page 220 of the application book, lines 43 and following, the passage that my learned friend read, does not contain any error of principle or of approach.  Indeed, my learned friend did not point out anything that was said there that was wrong.  What he said, in substance, is that assuming that one has to determine capacity in December, then it is simply wrong to take into account what a few months later the asset in question realised.

The agreement to sell the asset was made on 22 March.  The value of the asset is to be determined by reference to any evidence which could rationally be taken into account for that purpose.  Why one should prefer an opinion in some accounts over the facts that occurred by the time the court had to consider the matter, my friend does not explain.  Indeed, it is just good sense that the approach of the Court of Appeal taken is correct.

We also draw attention to the fact that the approach accords with the approach that the courts take in relation to assessment of damages where an asset has to be valued, the Potts v Miller sort of case.  We refer of course to the decisions of this Court in Kizbeau and HTW Valuers, and those cases were provided to the Court. 

Your Honours, one of the authorities that is in the book, and my friends refer to it, is the decision of this Court in Foran v Wight.  I use that as a way to identify a passage in Psaltis v Schultz.  Could your Honours go to Foran v Wight, page 425 of the report.  Certainly, Psaltis v Schultz was a rather different case, a case of breach of promise to marry, but Justice Dixon said, and this is quoted in the reasons for decision of Justice Brennan:

“To be ready and willing to perform a contract a party must not only be disposed to do the act promised but also have the capacity to do it.  But the tenor of the promise will show when and how the act is to be performed and it is to that time and mode of performance that the capacity and disposition to fulfil the promise are to be directed.  It is enough that he is not presently incapacitated from future performance and is not indisposed to do, when the time comes, what the contract requires.”

That passage was also cited at page 453 of the report by Justice Dawson.  Applying that sort of analysis to the present case, it would be sufficient, in our respectful submission, that in December the parties who had accepted the repudiation of the contract were not presently incapacitated and that by the time they were required to perform the contract, they had to hand the funds necessary to do so.

This is not an approach that was taken by the Court of Appeal below, but we say, with respect, it is an appropriate approach sanctioned by longstanding authority.  It is common ground that was found by the trial judge that the obligation in question was to be performed in May by which time the funds were in hand.  Indeed, from the time the contract was entered into in March, there was an ability to perform it.  If your Honours please, this is not a case for special leave. 

GLEESON CJ:   Thank you, Mr Myers.  Yes, Dr Pannam.

MR PANNAM:   Your Honours, can we deal with the last point first.  Our learned friend referred to that test that was stated by Sir Owen Dixon in Psaltis v Schultz.  That citation was made in the context of Foran v Wight, which was not a case where a claim was made for substantial damages.  The claim there was for a declaration that there would be an appropriate rescission of the contract with consequential repayment orders of a deposit, which did not sound in damages, but rather variously were described by members of the court as either having effect in terms of restitution or unjust enrichment or matters of that kind.

In our respectful submission, it is clear that the appropriate test to apply where the plaintiff is seeking substantial damages is not that test that is described by the Court of Appeal as the lower test, that is to say, not presently incapacitated from future performance and is not indisposed to do so.  That only goes to cases where the claim of the plaintiff is to have the court declare that the contract has been validly terminated.

The appropriate test to apply, as the Court of Appeal accepted by reference to authority, is, in a case of substantial damages, that there must be readiness, willingness and ability demonstrated as at the time that the contract came to an end.  There are two different tests:  the lower test and that is the higher test.  The Court of Appeal, in our respectful submission, correctly held that the higher test applied so that the notion that “As long as I have some capacity, we will wait and see what happens in the future”, is just not a test, in our respectful submission, that is appropriate where there is a claim for substantial damages.  That is the first point.

The second point is, if I can take the Court to page 220 of the application book to a finding that was made by the primary judge in relation to this investment, if I can take you to six lines down from the top of the page of application book 220:

The evidence showed that, in the latter part of 1999, Burstone’s investment in that company was valued at $400,000 although, as Reading’s counsel pointed out, there was no evidence that in late 1999 there was an expectation that the asset would rise considerably in value within a matter of months.

GLEESON CJ:   What was the basis of the valuation of $400,000?

MR PANNAM:   There was no evidence of that.

GLEESON CJ:   Was it historical cost, or ‑ ‑ ‑

MR PANNAM:   No evidence of that.  That was not probed.  The evidence was the evidence that I took the Court to before, but the point being that there was “no evidence that in late 1999 there was an expectation that the asset would rise”.  The onus clearly was upon the other side, who were claiming damages.  The onus was not upon the defending party.  What happened in this case was, there being no evidence to meet the onus, the court then erred in principle, in our respectful submission, in simply looking at what in fact happened, and without the connecting principle.

The connecting principle is the one for which we contend that ought to be stated accurately and set out by this Court on an application for leave – or rather on an appeal if leave was granted in this case - what is the informing principle that enables a court to relate the value of an asset as at the time of termination to an increase that takes place later which increases the sole foundation for an ability to meet the future obligation?  That is not a question of fact.  In our respectful submission, it was an error of principle and it is an important principle in this area of the law where there is, in our respectful submission, but little authority. 

The other point that we would make is this:  It was said that really this point was not much in play below.  Can we take the Court to two passages, first of all in application book page 8 where the learned primary judge identified the principal issues.  At paragraphs 14 and 15 on that page, he identifies them and in 15(c), one of the issues that he identifies after the close of argument was this:

Whether the Burstone parties were in breach of, or repudiated, obligations they owed, and whether, if Reading was in breach or repudiated, the Burstone parties were ready, willing and able to perform their obligations?

So his Honour certainly regarded that as being an important matter before him.  Then, can I take the Court to application book 217, footnote 13.  There the different test argument, the higher test and the lower test, it was put forward for the first time in the Court of Appeal that is clear, there was no objection taken to that course.  The point was argued fully in the Court of Appeal and the Court of Appeal gave its, what we submit, unsatisfactory reason.

So the facts are there, the point was in play, it is a live point, and it was the point upon which the damages, the $3 million, was awarded against our client.  That is the point that we desire to have the Court take up and deal with as a result of the grant of leave in this case.  If the Court pleases. 

GLEESON CJ:   The decision of the Court of Appeal turned on the application of settled principles to the particular facts and circumstances of the case.  The case does not appear to us to raise an issue suitable to a grant of special leave to appeal.  We are not persuaded that the interests of justice require such a grant.  The application is dismissed with costs.

MR PANNAM:   If the Court pleases.

MR MYERS:   We seek indemnity costs in relation to the grounds of application that were abandoned two days ago.

GLEESON CJ:   The order will be as I announced.

MR MYERS:   If the Court pleases.

AT 10.43 AM THE MATTER WAS CONCLUDED