Reading Entertainment Australia Pty Ltd v Burstone Victoria Pty Ltd & Osr

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 2098 of 2000

READING ENTERTAINMENT AUSTRALIA PTY LTD (ACN 070 893 908)	Plaintiff
v
BURSTONE VICTORIA PTY LTD (ACN 078 645 155) and Others	Defendants
BURSTONE VICTORIA PTY LTD (ACN 078 645 155) and Others	Plaintiffs To The Counterclaim
v
READING ENTERTAINMENT AUSTRALIA PTY LTD (ACN 070 893 908) and Others	Defendants To The Counterclaim

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JUDGE:	WHELAN J.
WHERE HELD:	MELBOURNE
DATE OF HEARING:	19, 21-23, 26-30 July 2004; 2-5, 9-12, 16-20, 23-26 August 2004; 30 and 31 August, 1 and 2 September 2004; 6-9, 13-16, 20-21, 23 September 2004; 1 and 4 October 2004.
DATE OF JUDGMENT:	22 December 2004
CASE MAY BE CITED AS:	Reading Entertainment Australia v Burstone Victoria
MEDIUM NEUTRAL CITATION:	[2004] VSC 546

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CONTRACTS – Construction and interpretation of contracts – Obligations owed by plaintiff/defendants by counterclaim – Whether implied terms and fiduciary obligations - relevant obligations owed by plaintiff/defendants by counterclaim are those expressed in writing.

CONTRACTS – Construction and interpretation of contracts – Uncertainty and incompleteness – Whether a clause of the joint venture agreement required further agreement by the parties - Whether the expression ‘mutually acceptable proposal and program’ is incapable of definite or precise meaning.

CONTRACTS – Discharge, breach and defences to action for breach – Anticipatory breach – Whether repudiation and acceptance – Whether the parties accepting repudiation were ready and willing to perform their obligations – Whether substantial incapacity or definitive resolve not to perform.

Foran v Wight (1989) 168 CLR 385, applied.

TRUSTEE – Action by beneficiary – Trustee’s cause of action – Trustee defendant – Order made in favour of trustee.

Lidden v Composite Buyers Ltd (1996) 67 FCR 560; Lamra Pty Ltd v Katian Pty Ltd (1998) 44 NSWLR 432, followed.

DAMAGES – Measure and remoteness of damage in actions for breach of contract – Deprivation of a commercial opportunity of some value – Degree of probability of benefit of redevelopment being realised.

Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; Malec v JC Hutton Pty Ltd (1990) 169 CLR 38, applied.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff and the Defendants to the counterclaim	Mr T. North S.C. with Mr S. Glacken	Middletons
For the Defendants and the Plaintiffs to the counterclaim	Mr J. Judd Q.C. with Mr A. Schlicht and Ms S. Burchell	Khor & Burr

TABLE OF CONTENTS

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

Factual overview........................................................................................................................... 1

The three proceedings.................................................................................................................. 2

The principal issues...................................................................................................................... 4

Principal terms of the relevant agreements................................................................................... 5

The joint venture agreement....................................................................................................... 5

The loan agreement...................................................................................................................... 7

The securities mortgage............................................................................................................... 8

The agreement for lease............................................................................................................... 8

Parties and relevant personnel...................................................................................................... 10

The Burstone parties................................................................................................................... 10

The Reading parties.................................................................................................................... 11

The joint venture vehicle........................................................................................................... 13

The sequence of events to August 1999....................................................................................... 13

Initial acquisition of the leasehold interest............................................................................. 13

Introduction of Reading............................................................................................................. 15

The project begins....................................................................................................................... 17

Late 1998: problems begin to emerge..................................................................................... 20

Early 1999: the funding problem becomes more serious..................................................... 26

Mid 1999: Khor and Burr assume responsibility for finance.............................................. 33

August 1999................................................................................................................................. 41

The Landmark White valuation: August 1999........................................................................... 46

Overview of valuation and evidence relating to it................................................................ 46

The assumptions......................................................................................................................... 48

Capitalisation rates..................................................................................................................... 49

Rental projections....................................................................................................................... 50

Analysis by Shane Close............................................................................................................ 50

Other issues................................................................................................................................. 52

Significance and conclusions..................................................................................................... 53

Sequence of events from August to October 1999..................................................................... 54

Events of October 1999.................................................................................................................... 63

The relevant allegations............................................................................................................. 63

Evidence of Khor and Burr........................................................................................................ 64

The documentary record............................................................................................................ 67

Reading’s evidence..................................................................................................................... 75

Meeting with Mr Cotter on 23 August 2000............................................................................ 83

Conclusions as to the events of October 1999......................................................................... 83

Other events in October 1999.................................................................................................... 86

Assessment of the project at the time Reading withdrew........................................................ 88

Matters outstanding.................................................................................................................... 88

Finance: GE................................................................................................................................. 88

Finance: Australian bank finance.............................................................................................. 96

Equity contributions................................................................................................................. 101

Town planning.......................................................................................................................... 105

Construction programme/scope of works........................................................................... 105

Coles lease and specialty pre-commitment.......................................................................... 107

Construction cost estimates..................................................................................................... 108

Relationship/cooperation....................................................................................................... 108

Agreement to sell and the sale process....................................................................................... 109

Agreement to sell...................................................................................................................... 109

The sale process........................................................................................................................ 109

The price achieved.................................................................................................................... 114

The principal issues: Reading’s obligations............................................................................ 115

The pleadings............................................................................................................................ 115

Fiduciary obligations and implied terms............................................................................. 118

Reading’s construction............................................................................................................. 118

Incompleteness and uncertainty............................................................................................. 120

Reading Properties................................................................................................................... 125

Conclusions on Reading’s obligations.................................................................................. 126

The principal issues: Repudiation and acceptance................................................................ 126

Repudiation............................................................................................................................... 126

Acceptance................................................................................................................................. 127

Decision to sell not determinative.......................................................................................... 128

Was Burstone ready and willing to perform?...................................................................... 129

The principal issues: loss and damage...................................................................................... 130

The primary claim and legal principles................................................................................ 130

Assessing the value of the redevelopment assuming it went as planned....................... 133

Probabilities of the benefit being realised – ordinary risks............................................... 135

Probabilities of the benefit being realised – peculiar risks................................................ 136

Other issues..................................................................................................................................... 138

Discharge, extinguishment, dispensation, events beyond Reading’s control................. 138

Reliance loss.............................................................................................................................. 139

Other matters raised in the pleadings................................................................................... 141

Orders............................................................................................................................................... 142

HIS HONOUR:

Introduction
Factual overview

In November 1997 a subsidiary of a US company, Reading Entertainment Inc, entered into a joint venture with a company controlled by two Australian property developers named May Khor and David Burr. The object of the venture was to redevelop the Whitehorse Plaza Shopping Centre in Box Hill. That redevelopment was to involve the refurbishment of the existing Centre and the construction of a cinema complex. Entities controlled by or associated with Ms Khor and Mr Burr had acquired leasehold interests in the Centre in 1996, financed in part by borrowings from the Bank of Melbourne.

The subsidiary of the US group was Reading Australia Pty Ltd (“Reading Australia”). It entered into a written joint venture agreement with a company controlled by Ms Khor and Mr Burr, named Burstone Victoria Pty Ltd (“Burstone Victoria”), and with another company named Whitehorse Property Group Pty Ltd (“WPG”) which was to be, and which became, the joint venture vehicle. A subsidiary of Reading Australia named Reading Properties Pty Ltd (“Reading Properties”), entered into an agreement for lease with WPG. Reading Australia, Ms Khor and Mr Burr entered into a loan agreement. Reading Australia lent Ms Khor and Mr Burr $2.2m under that agreement.

During 1998 the parties engaged and dealt with consultants and pursued town planning approval for the redevelopment. Differences between them began to emerge in late 1998 and the differences became more serious throughout 1999. The venture encountered significant problems in repaying or refinancing the Bank of Melbourne facility when it fell due and in obtaining finance for the proposed re‑development. This issue was a source of dispute between the joint venturers.

In the latter part of 1999 the Reading parties determined that the project could, or should, proceed no further. The redevelopment project ceased and the property was eventually sold in late 2001, after considerable conflict between the joint venturers, and at a considerable loss to the joint venturers.

The loan made by Reading Australia to Ms Khor and Mr Burr under the loan agreement, which was due to be repaid in November 1999, was not, and has not been, repaid.

The three proceedings

This proceeding is one of three related proceedings which were issued concerning the circumstances referred to.

In this proceeding, which the parties refer to as the “main proceeding”, Reading Australia seeks to recover the loan made to Ms Khor and Mr Burr. The true substance of the proceeding is, however, in the counterclaim that is brought by Burstone Victoria, Ms Khor, and Mr Burr against Reading Australia and Reading Properties, seeking, amongst other things, damages for alleged repudiation and for breach of the joint venture agreement and of the agreement for lease. WPG is also a party to that counterclaim as Burstone Victoria claims recovery on its behalf. WPG is trustee of the Whitehorse Plaza Trust, of which Burstone Victoria is a unitholder. The only issues of controversy arise on the allegations made in the counterclaim; the case was opened by the plaintiffs to the counterclaim, and the trial was conducted on that basis.

The two related proceedings are a proceeding referred to as the “winding up proceeding” (7844 of 2000) and a proceeding referred to as the “USIPF proceeding” (4949 of 2003). The winding up proceeding was issued by Reading Australia and seeks, amongst other things, a winding up of WPG. The proceeding was prompted by a perceived deadlock at the time it was issued in 2000 between the respective parties over the sale of the Centre. To a large extent, events have overtaken the relief claimed in that proceeding.

The eventual sale of the Centre was not effected by WPG itself but rather by another Reading subsidiary named US International Property Finance Pty Ltd (“USIPF”). USIPF acquired the secured debt owed by WPG to the Bank of Melbourne, took possession of the property as a controller, and sold the property to a developer named Centro Properties Limited. The USIPF proceeding was issued by Burstone Victoria and David Burr against USIPF, Reading Properties, Reading Australia and WPG, and concerns, amongst other things, alleged breaches of duty and contraventions of corporations legislation by USIPF.

On 23 April 2003, Master Kings made orders in each of the three proceedings, fixing the main proceeding for trial together with the other two, and ordering that, subject to any contrary order of the trial Judge, evidence in each was adduced as evidence in all. On 19 July 2004 the joint trial commenced. On 21 September 2004 counsel for all the respective parties in each proceeding sought to have issues in the USIPF proceeding and the winding up proceeding deferred, pending a determination of the main proceeding. What they proposed was that certain issues in the USIPF proceeding and in the winding up proceeding should be decided together with all issues in the main proceeding, and that a specified course then be taken in the USIPF proceeding and the winding up proceeding consequent upon that determination. I indicated that I would not do that, but that I would adjourn the USIPF proceeding and the winding up proceeding pending determination of the main proceeding, and both counsel indicated to me that they supported that course.

I pointed out to counsel that there was the potential for problems in the course they proposed, but I observed that I thought those problems ought to be able to be dealt with if they arose.

The course proposed was put forward on the basis, accepted by all counsel, that all the evidence I had heard during the trial would remain evidence in each of the three proceedings, and that each party to the USIPF proceeding and the winding up proceeding would be at liberty to lead further evidence, if so advised, upon resumption of the trial in those proceedings.

Each party’s case in the main proceeding was closed. No party’s case has been closed in the USIPF proceeding or the winding up proceeding, and on 21 September 2004 I adjourned those two proceedings sine die. They will be re-listed before me as soon as the parties have had an opportunity to consider these reasons.

The principal issues

The pleadings in the main proceeding raise a great number of issues, but the principal issues are these:

(a)What obligations did the Reading parties owe to the Burstone parties and to WPG? The alleged obligations include express contractual obligations, implied contractual obligations, and fiduciary obligations.
(b)Did the Reading parties repudiate those obligations, or breach those obligations, in October of 1999 and thereafter?
(c)What loss, if any, was suffered, and by which entity, as a result of any such breach or repudiation?

Further issues which relate closely to these principal issues are:

(a)Whether, if there was a repudiation by the Reading parties, it was or has been accepted?
(b)Whether Reading’s obligations were discharged or extinguished or “dispensed with”?
(c)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?

There are a number of other issues raised, including whether Ms Khor and Mr Burr can set-off any damages to which they may be held to be entitled against their loan obligation.

Resolution of the three principal issues and the issues closely related to them will resolve most of the other matters raised on the pleadings.

Finally, a claim is made by Burstone Victoria, on behalf of WPG, for town planning costs which, it is alleged, Reading Australia is liable to reimburse to WPG pursuant to a provision of the joint venture agreement. During the course of the trial this figure was agreed between the parties at the sum of $100,000, and in submissions counsel for Reading Australia conceded an indebtedness to WPG for this sum.

Principal terms of the relevant agreements
The joint venture agreement

The joint venture agreement was executed on 21 November 1997. The parties to the agreement are Reading Australia, Burstone Victoria, Ms Khor, Mr Burr, and WPG.

Recital A records that the parties had agreed to enter into an agreement with one another for the principal purpose of redeveloping the property known as Whitehorse Plaza Shopping Centre by the construction of a state-of-the-art cinema complex, supported and complemented by the introduction of new general retail shops, various entertainment, food, lifestyle and leisure retail shops, and restaurants. This purpose is defined as “the Redevelopment”.

Certain other definitions, which are contained in clause 1.1, ought to be noted. They are:

“’Concept Redevelopment Plan’ means a Plan for the Property which sets out the intentions of the parties with respect to the Redevelopment at the date of entering into this agreement which is more particularly set out in clauses 8 to 11 (inclusive) hereof;
‘Master Plan’ means the final Master Plan developed from the Concept Redevelopment Plan setting out the details of the Redevelopment.”

By clause 2, Reading Australia agreed to pay a total consideration of $8,125,000, plus a sum equal to 50 per cent of all costs and disbursements incurred by Burstone Victoria and WPG to that point, as consideration for Burstone Victoria delivering to Reading Australia 50 per cent of the issued units in the Whitehorse Plaza Trust and 50 per cent of the issued shares in WPG.

Clause 7 is the most important provision of the agreement for the purposes of this case. It relevantly provides:

“7.1 The parties agree that the construction of cinemas by Reading (as provided in this Agreement) is a fundamental term of this Agreement, provided that on or before the date of commencement of construction thereof WPG has agreed to a mutually acceptable proposal and program for the refurbishment of the Property, including but not necessarily limited to a specific scope of works and construction program.
7.2 Subject to Clause 7.1 Reading agrees that it shall construct at its own cost and expense on the Property a first class state-of-the-art cinema complex (“the Cinema Complex”) of not less than 5000 square metres with between 10 and 14 full size cinema screens and with no less than 2300 seats at an anticipated cost of no less than ten million dollars ($10,000,000) plus the usual cinema operator’s fit-out costs and Reading further acknowledges and agrees that such construction is a fundamental term of this Agreement and that any failure to so construct the Cinema Complex for reasons other than those reasonably beyond its control shall constitute a fundamental breach of this Agreement rendering Reading liable for damages to the other parties.”

Clause 15 of the joint venture agreement is also important. It provides as follows:

“In the event that a determination is made to raise additional capital for the purposes of the development of the Property, then the parties agree that as far as is possible such capital shall be borrowed from third parties (upon the usual commercial and prudential basis and to the extent that the Property can reasonably and commercially bear), and that to the extent that borrowing is not possible the parties themselves shall contribute capital in proportion to their respective interests in the Trust whether by way of loans to the Trust, the issue of additional units in the Trust or otherwise.”

Other provisions of the joint venture agreement to which reference ought to be made are clause 3, which essentially reflects the loan agreement; clause 6, which provides that the administration, collection of rentals and management of the Property shall be carried out by a party related to Burstone Victoria named Capstone Properties Pty Ltd; clause 8, pursuant to which WPG agrees to lease to Reading Australia and Reading Australia agrees to take a lease from WPG of the cinema complex for a period of 20 years, with two options for a further term of 20 years each at a rental of $1 per year; clauses 9 and 10, which refer to a residential tower and other development opportunities; clause 11, which provides for a mechanism whereby one party may dispose of its interest to the other (or the parties may agree to sell the Property) if the development objectives, as set out in the Master Plan, are not substantially commenced within 24 months of the date of the agreement; clause 12, which provides for sale of a party’s interest in other circumstances; clause 17, which provides that Reading Australia and Burstone Victoria agree that the Concept Redevelopment Plan presented to them by Buchans Architects is in a form generally acceptable to all parties, and that all parties agree to cooperate in good faith in the preparation of the Concept Redevelopment Plan; clause 18 which provides that Reading Australia is responsible for all costs associated with construction of the cinema complex; clause 19, which provides that WPG is responsible for all other re‑development costs; clause 20, which provides that the parties are to cooperate together and work in good faith in the course of the Redevelopment to preserve the current level of rental and to minimise reductions in rental; clause 22, which provides that it is intended that WPG would attempt to obtain the freehold of the property; and clause 30.2, which entitles Reading Australia to nominate a wholly‑owned subsidiary to undertake its obligations and/or assume the benefits of the agreement, provided that performance shall be guaranteed by Reading Australia.

The loan agreement

A loan agreement between Ms Khor and Mr Burr as borrowers, Reading Australia as lender, and Burstone Victoria was entered into at the same time as the joint venture agreement. The loan agreement included a wide definition of “Monies Advanced” and provided in clause 2.1 that Reading Australia would lend to Ms Khor and Mr Burr a sum of $2,200,000. By clause 3, Ms Khor and Mr Burr covenanted with Reading to pay interest on the Monies Advanced calculated and payable in the manner and at the time or times as provided in the Schedule. The Schedule provided for repayment of the Monies Advanced from distributions made by WPG to Burstone Victoria, and provided that any unpaid amount would be repaid in full not later than the second anniversary of the loan. Paragraph 3 of the Schedule provided that interest would be payable by Ms Khor and Mr Burr at the rate of 7.5% per annum, compounded annually in arrears.

The securities mortgage

The loan from Reading Australia was secured by a securities mortgage dated 20 November 1997. Whilst the document in evidence (B 41) is marked “draft”, it was executed by the parties and is the operative security.

Under that agreement, Burstone Victoria as mortgagor charged in favour of Reading Australia all of its interest in the “Mortgagor’s Securities”. The Mortgagor’s Securities were defined to include all of the issued shares in WPG acquired or to be acquired by Burstone Victoria, and all units held from time to time by Burstone Victoria in the Whitehorse Property Group Unit Trust.

May Khor and David Burr as borrowers charged in favour of Reading Australia all their interests in the “Borrowers’ Securities”. The Borrowers’ Securities were defined to include all shares and other interests which they held then or thereafter in Burstone Victoria.

The agreement for lease

An agreement for lease was executed at the same time as the joint venture agreement. The agreement for lease is between WPG as Lessor and Reading Properties as Lessee. Reading Properties was, and remains, a wholly-owned subsidiary of Reading Australia.

Recital B records that Reading Properties had agreed to construct the “Cinema Complex” on the property and had agreed to take upon completion a lease of the “Demised Premises”.

Clause 1 defines the “Demised Premises” as being “the Demised Premises described in item 3 of the first schedule (as per the attached plan) and inclusive of the Cinema Complex”. Three other definitions ought to be noted. “Cinema Complex” is defined as a building to be constructed for the purposes of a cinema complex in accordance with the Lessee’s Works. “Lessee’s Works” is defined as the work set out in the second schedule. “Plans” is defined as “the plans, drawings and specifications for the construction of the Cinema Complex and approved by the responsible authorities and approved by the Lessor and Lessee”.

Clause 2.1 of the agreement for lease provides:

“The Lessee agrees with the Lessor to construct the Cinema Complex substantially in accordance with the Plans at the cost of the Lessee. The Lessee shall complete or cause to complete the said construction in a timely proper and workman like manner.”

By clause 3.1, WPG agrees that upon completion of construction of the Cinema Complex, it would lease the Demised Premises on certain specified terms for a term of 20 years, with two further terms each of 20 years, and Reading Properties agrees to take that lease.

By clause 4, the commencement date of the lease is to be the date of commencement of construction of the Lessee’s Works.

Clause 7 provides:

“7.1The Lessee shall at its own cost and expense carry out and complete the Lessee’s Works set out in the Second Schedule and carry out any other works or install such other equipment or items as the Lessee may require or be obliged to carry out or install due to the nature of the Lessee’s proposed business or required by any authority or department.
7.2The Lessee’s Works shall be performed in accordance with applicable laws and in a manner and to a standard reasonably satisfactory to the Lessor.”

The first schedule names the Lessor and the Lessee. Next to the item “Demised Premises” it refers to areas delineated and coloured blue on annexed plans. There are no plans annexed to the copy agreement to lease tendered in this proceeding (B 50). Next to an item ”Possession Date to Commence Lessee’s Works” the schedule is blank.

The second schedule is headed “Lessee’s Works” and reads:

“The Lessee shall construct at its cost:
a.a first class cinema complex of not less than 5,000 square metres with between 10 and 14 full size cinema screens with no less than 2300 seats at an anticipated cost of no less than ten million dollars ($10,000,000).”

The third schedule is headed “Principal Terms of the Lease”. It provides for construction of a cinema complex by the Lessee in terms which are the same as those set out in the second schedule. It provides for a rent of $1 per year.

Parties and relevant personnel
The Burstone parties

The joint venturer, Burstone Victoria, is a company controlled by May Wan Khor and David Frederick Burr. Ms Khor is qualified as a solicitor and is the only principal of the solicitors’ firm, Khor & Burr. She does very little solicitors’ work. She told me in evidence that the only solicitors’ work she does is pro bono. She has been a property investor and developer for about 20 years. Her firm acts for companies associated with her and for other clients. The legal work is done by employee solicitors.

Ms Khor’s husband is David Burr. He is also qualified as a solicitor. He is a consultant to the firm Khor & Burr. He is principally occupied with property development projects.

Ms Khor’s mother lives in Malaysia and members of her family live throughout South East Asia.

Ms Khor and Mr Burr control a number of companies. Amongst those companies are an operating company named Burstone Australia Pty Ltd (“Burstone Australia”), and their family trust company which is named Timswee Pty Ltd (“Timswee”). Burstone Victoria itself was incorporated on 22 May 1997. There is no evidence that it has ever had any business or assets, other than its interest in the Whitehorse Plaza project.

Ms Khor has associations with other business people and entities that invest in projects with which she is associated. Two such investment entities are Gold Koes (Victoria) Pty Ltd (“Gold Koes”) and Angwu Pty Ltd (“Angwu”).

When individual identification is unnecessary and cumbersome, I refer to Ms Khor and Mr Burr and the companies they control as simply Burstone, or as the Burstone interests or parties.

In this proceeding evidence was given by Mr Burr and Ms Khor. The Burstone parties also called evidence from Mr Bruce Shaw, the managing director of The Buchan Group, Architects and Planners; Mr Douglas Kinnear, a valuer employed by Richard Ellis (Victoria) Pty Ltd; Mr Cameron Mason, a valuer employed by Colliers Jardine Consultancy and Valuation Pty Limited; Mr Miles Snow, a land economist and managing director of Snow Group Retail Property Services (Aust) Pty Ltd; Mr Mark Beattie, the managing director of Davis Langdon Australia Pty Ltd, quantity surveyors; Mr Stuart Fox, a certified practising valuer and a partner and director of Landmark White (Vic) Pty Ltd; Mr Robert Taylor, a director of the finance broker Balmain NB Commercial Mortgages Limited; Mr Patrick Sim, an accountant employed by Capstone Corporation Pty Ltd; Mr Brian Roberts, a consultant and former banker who gave expert evidence on finance issues; and Mr Michael Smith, a partner in the chartered accounting firm Horwarth Melbourne, who gave evidence on matters related to damages.

The Reading parties

At the relevant time the ultimate parent company of the Reading group was a company incorporated in the US named Reading Entertainment Inc. The chief executive officer of Reading Entertainment Inc, and the chairman of its board, was James Joseph Cotter. I use the past tense only because a subsequent merger has led to a restructure. Mr Cotter is an attorney licensed to practise law in the State of California. Craig Tompkins was the US parent company’s executive vice-president and director of business affairs. He is also an attorney licensed to practise law in the State of California.

Reading Australia was incorporated in Australia in November 1995. Reading Properties is also incorporated in Australia. Originally named Burgundy Two Pty Ltd, it changed its name to Reading Properties Pty Limited in November 1996. USIPF is another Reading group subsidiary incorporated in Australia. This company was incorporated on 5 October 2000.

For ease of reference I will at times compendiously refer to companies in the Reading group as simply Reading, or as the Reading interests or parties.

During the relevant period the principal officers of Reading in Australia who were concerned with the Whitehorse Plaza project were David John Adam Lawson and Jonathan Graeme Altson. Mr Lawson was, and remains, the director of development for Reading Properties. He has an architecture degree. He has worked as a development manager for Lend Lease. He was group general manager, property development for Coles Myer Limited, and has held the position of asset general manager at Westfield. Mr Altson was a director of Reading Australia.

Mr Lawson and Mr Altson each gave evidence in this proceeding. The Reading parties also called as witnesses Mr Peter Farrell, the Development Manager of Reading Australia; Mr Eugene Cheah, the financial controller and company secretary of both Reading Australia and Reading Properties; Mr Simon McDonald, an executive director at the relevant time with GE Capital Real Estate Australia, a business unit of GE Capital Finance Pty Ltd (for ease of reference, I will at times refer to this company and its related entities simply as “GE”); Mr Paul Notaras, who was at the time director, Property Finance and Investment, with GE; Mr Tompkins and Mr Cotter from Reading Entertainment Inc; Mr Geoffrey Clifton, who was at the time managing director of Clifton Project Management Pty Ltd, a project and development management company; Mr Graeme Terry, who in 2000 and 2001 was the chief operating officer of the Centro Properties Group, a group of companies that includes the purchaser of the Centre in 2001, Centro Properties Limited; Mr Pasquale Franzese, a consultant and former banker who gave expert evidence on finance issues; Mr Shane Close, a certified practising valuer and a director of Charter Keck Cramer; and Ms Helen Murphy, who was at the time the property manager of Reading Australia. In addition, witness statements were tendered by consent on behalf of the Reading parties from Mr Taky Kaplan, who was at the time a development manager employed by Reading Australia; Mr Peter Axup, another development manager employed by Reading Australia at the time; Mr Vincent Zawodny, a US architect who is vice-president of the US architectural firm RTKL Associates Inc; from a number of solicitors from Middletons Moore & Bevins (now named Middletons), the firm of solicitors acting on behalf of the Reading parties at all relevant times, being Mr Whittle, Mr Begg, Mr Syme and Mr Dodds; from Mr John Selak, a partner in the firm Ernst & Young, who gave evidence on damages issues; and finally from Ms Fiona Tellefson, a former employee of Clifton Project Management Pty Ltd.

The joint venture vehicle

WPG was incorporated in May 1996. During the relevant period each of the joint venture parties appointed two directors. Ms Khor and Mr Burr acted as Burstone appointees throughout. Reading’s first appointees were Beresford John Rochester, and Mr Altson. Mr Lawson replaced Mr Rochester in March 1999.

The Whitehorse Property Unit Trust (“the Trust”) was established by a deed dated 21 May 1996. The original unit holding, and the transition to a position where 50 per cent of the units were held by Burstone Victoria and 50 per cent by Reading Australia, were matters of controversy in the trial. There was no controversy that after November 1997, 50 per cent of the units in the Trust and 50 per cent of the shares in WPG were held by each of the joint venture parties, being Burstone Victoria and Reading Australia.

The sequence of events to August 1999
Initial acquisition of the leasehold interest

On 22 November 1973, the City of Box Hill demised to Lustig (Box Hill) Pty Ltd 99‑year leases of the Whitehorse Plaza shopping centre and of its carpark, each commencing on 22 November 1973 and terminating on 21 November 2072. Prior to April 1996, Lustig (Box Hill) Pty Ltd assigned the leases to Straker Nominees Pty Ltd, and the City of Whitehorse became the successor in title to the City of Box Hill. By assignments each dated 11 April 1996, the two leases were assigned by Straker Nominees Pty Ltd to Burstone Australia with the consent of the City of Whitehorse. The consideration payable by Burstone Australia to Straker Nominees Pty Ltd for the assignment of the shopping centre lease was the sum of $16,250,000. The settlement date was 11 April 1997. There was no additional cash consideration payable for the assignment of the carpark lease.

In March 1997, Burstone Australia arranged for a valuation of the leasehold interest by Richard Ellis (Victoria) Pty Ltd. The valuation was carried out by Mr Douglas Kinnear. He valued the leasehold interest at that time at the sum of $17,300,000. Mr Kinnear made the following observation in his valuation:

“We note that most specialty shop leases expire by the year 2000 generally coinciding with the Kmart/Coles and Spotlight leases. Whilst this suggests insecurity of the income, it also provides the opportunity to redevelop or reconfigure the centre. Clearly the centre and particularly the Kmart and Coles tenancies are under performing and works will be required to improve the centre.”

By a letter of offer dated 5 May 1997, the Bank of Melbourne advised May Khor that it had approved an application on behalf of WPG to borrow the sum of $12,300,000 for a term of two years. The terms of the facility required repayment of a principal sum of $500,000 after 12 months. The letter set out what the bank understood to be the then current unit holding in the Trust, being Burstone Australia 30 per cent, Gold Koes 40 per cent, and Angwu 30 per cent. In her evidence Ms Khor confirmed that that was the state of the unit holding as at May 1997. By a variation letter of 23 May 1997, the Bank of Melbourne agreed to “substitute” Burstone Victoria as a unitholder for Burstone Australia.

An architectural firm named The Buchan Group had prepared plans for a redevelopment of the shopping centre for Straker Nominees Pty Ltd. In August 1997 the managing director of The Buchan Group, Mr Bruce Shaw, met with Ms Khor and with a Mr Mark Leadbeater from the real estate agents’ firm, Madison & Masters, and was briefed to draw up new plans for a proposed redevelopment of the Centre. The Buchan Group produced hand-drawn concept plans for the purpose of exploring ideas in August 1997. It was common ground between the parties that these plans are the “Concept Redevelopment Plan” which is referred to in the first sentence of clause 17 of the joint venture agreement. Mr Shaw, in his witness statement, explained that these plans were “hand-drawn concept plans, for the purpose of exploring ideas, and getting an indication of the direction in which the project was going”. The plans include provision on level 6 for a 12-screen cinema complex seating 2,530, with an adjacent area described as “optional cinema expansion”.

Introduction of Reading

Reading first showed interest in the Whitehorse Plaza in 1996.

In September 1997 the board of Reading Entertainment Inc considered a proposal that Reading Australia enter into a joint venture with the Burstone interests to refurbish and re-tenant the Whitehorse Plaza shopping centre as “a convenience and entertainment destination anchored by a 12-screen Cinema to be constructed at the site by Reading Australia”. The proposal was outlined and assessed in a report prepared by Reading Australia to the Reading Entertainment Inc board (B 34).

There are a number of aspects of that report which are relevant. They are:

(a)The terms of purchase foreshadowed reflect, without precisely replicating, the terms eventually agreed upon in the joint venture agreement (paras 1.4, 3.6 and 4.2).
(b)The projected return on investment before leverage was calculated in the report at 10.2% and after leverage at 16.4% (para 1.5). These returns were further broken down into what was described as the “joint venture” component and the “cinema” component. The respective returns were described as follows:

Joint Venture: (pre tax) *

ROI

At purchase

11.1%

ROI

Re-development

14.1%

Cinema: (pre-tax) *

ROI

22.03%

IRR

32.11%

*Unleveraged

(c)The report emphasised that a feasibility assessment based on redevelopment was premature and that, accordingly, the decision to proceed should be determined on the fundamentals of the investment as it currently stood (para 1.5). The current yield identified by the report was “a conservative cash flow of $1.8m”. Notwithstanding this approach, the report also pointed out that “the aim of the venture is to explore the feasibility and financial viability of a redevelopment to an entertainment complex with an element of convenience shopping” (para 4.2).
(d)The report relied upon the Richard Ellis valuation (paras 3.1 and 3.6) and also upon an expert analysis of the likely patronage of a 12-screen cinema complex at Box Hill carried out by a Mr Bernard Salt from Coopers & Lybrand Consultants. Mr Salt’s analysis, which was attached as Appendix F to the report, was expressed in guarded terms, but was interpreted by the Reading executives who wrote the report as supporting a conclusion that assessment of the project should be based upon a projected annual visitation level of 1,000,000 (para 6.2).
(e)The report indicated that obtaining the fee simple was crucial to the redevelopment and that there was an expectation that it could be obtained for $6m (para 3.2).
(f)The report referred to the fact that the Centre was trading poorly (para 3.4), but also indicated that in terms of redevelopment this represented an opportunity, as tenants would be receptive to reconfiguration (para 5.1).
(g)The report addressed the potential problems that might be experienced in obtaining town planning approval. The report observed that it was likely that objectors would attempt to delay the process, but that in the end the applicant should prevail (para 5.2).
(h)In relation to costs the report predicted total development costs, excluding the cinemas, at “around $40m”, inclusive of the acquisition of both the freehold and leasehold interests at $23m (para 5.4). Thus, the anticipated cost of construction and other expenses was $17m. The cost anticipated for the cinema construction was “in the region of $15m” (para 5.5).
(i)In relation to cinema viability, whilst the report indicated that Coopers & Lybrand’s analysis suggested an annual attendance figure of 1,000,000, the report stated the cinemas “would need to achieve an attendance of approximately 750,000 to show a pre-tax 20% IRR” (para 5.5).

A version of the joint venture agreement was executed on 26 September 1997, but this agreement was supplanted by the agreement subsequently executed in November. The terms of the joint venture agreement were negotiated in detail and were reviewed and considered by lawyers on both sides. Prior to executing the agreements, Mr Tompkins obtained a statement of assets and liabilities for May Khor and David Burr, which indicated that together they had net assets totalling $3,277,500.

By variation letters dated 18 November 1997 and 19 November 1997, the Bank of Melbourne varied the terms of the existing facility so as to alter the identity of the guarantors. Reading Australia was introduced as a guarantor “limited to one half (50%) of the facility limit namely $6,150,000”. A guarantee given by Burstone Victoria and by Ms Khor and Mr Burr was similarly so limited.

The project begins

Under the joint venture arrangements, Reading Australia and Burstone Victoria were each entitled to nominate two directors. The directors initially nominated by the Reading interests were Mr Altson and the chief executive officer of Reading Australia, Beresford John Rochester. The Burstone nominees were Ms Khor and Mr Burr. One of the first steps taken by Mr Altson was to introduce the project to Clifton Project Management Pty Ltd (“Clifton Project Management”). The managing director of Clifton Project Management was Jeffrey Clifton. Mr Altson first discussed the project with Mr Clifton in about November 1997. Clifton Project Management was formally appointed as project manager in June of 1998.

One of the initial steps contemplated by both the joint venture agreement (clause 22) and by Reading Australia in the report to the Reading Entertainment Inc board was acquisition of the freehold. On 3 December 1997, the chief executive officer of the City of Whitehorse offered to sell the freehold to WPG at a price based upon a valuation by the Valuer-General “subject to commitment to redevelopment of the centre and approval by Council of a redevelopment proposal for the centre to a minimum value of $10m”.

The Centre was still an operating shopping centre and in early 1998 the parties attempted to delineate their respective responsibilities in relation to day-to-day centre operations, development operations and centre operations more generally. For present purposes it is not necessary to consider that delineation in detail, other than to note that at the time it was expressly recorded that the Reading executives would have primary responsibility for development operations, and that Ms Khor would have primary responsibility for centre operations.

In April 1998 Madison & Masters and other WPG staff concerned with centre operations instigated meetings with specialty tenants in order to discuss with them the impending redevelopment. The intention to redevelop meant that it was necessary to persuade tenants to vacate, but it was also necessary to communicate enthusiasm to tenants perceived to be suitable for the end development and to maximise income pending redevelopment. By April 1998, tenants were beginning to vacate and two significant tenants, Spotlight and Franklins, had agreed to vacate by the end of 1998. In a letter of 30 April 1998, Madison & Masters advised WPG as follows:

“The management committee consider the relevant termination dates of Franklins and Spotlight to be a ‘CRITICAL POINT’ in the overall viability of Whitehorse Plaza as a functioning shopping centre. At the expiration of the 1998 calendar year the area surrounding Spotlight and Franklins will essentially cease to operate. Compounding this situation there are six specialty shop tenants. . . that will be effectively lost to the Centre unless immediate action is taken. This will undoubtedly have a major flow on effect throughout the Centre.”

On 5 June 1998, a meeting described as a “management meeting of WPG” was conducted, attended by Ms Khor and Mr Altson from the joint venturers, and by a Mr Italiano and Mr Leadbeater from Madison & Masters. The meeting resolved to appoint Clifton Project Management as project manager. On 11 June 1998 the same persons had a further meeting, joined this time by Mr Peter Axup and Mr Mark McNamara from Reading, and by Mr Jeff Clifton and Ms Fiona Tellefson from Clifton Project Management. The minutes of that meeting record the fact that Mr Altson summarised the project for Mr Clifton and that the parties then undertook a detailed discussion in relation to the project, concentrating predominantly on the consultants who had been engaged or were to be engaged, and upon the steps required in order to obtain a town planning permit for the project.

At the time Clifton Project Management was appointed, WPG had already received proposals from some consultants and had engaged others for the purposes of preparing a town planning application. Clifton Project Management engaged further consultants. Clifton Project Management also arranged for two types of meetings to be conducted in order to deal with the proposed development, project meetings and design meetings. The design consultants engaged by WPG attended the design meetings; representatives of the joint venture parties attended the project meetings. Clifton Project Management devised a new organisational structure centred around an entity it described as the “Project Control Group”. In his evidence, Mr Burr did not accept that Clifton Project Management’s organisational structure was ever agreed to, although he also maintained that, whether it was agreed or not, there was no practical change to the manner in which the joint venture parties dealt with issues arising in relation to the development consequent upon the introduction of Clifton Project Management.

Clifton Project Management prepared from time to time, and distributed to the parties, project timeframes or programmes, and commercial assessments or feasibility studies. The purpose of the feasibility studies was to assess the financial viability of the proposed development, having regard to the information available, the estimated costs of the development, and the estimated income during the carrying out of the development and upon its completion. Cost estimates were provided by the quantity surveyors, Davis Langdon Australia. Income estimates were provided by Madison & Masters. The first of these feasibilities was produced in August 1998.

Late 1998: problems begin to emerge

In late 1998 a dispute began between the Burstone interests on the one hand and the Reading interests on the other concerning a proposed tenancy for a Coles supermarket in the redeveloped shopping centre. Coles Myer Ltd (“Coles”) was an existing tenant at the Whitehorse Plaza. The Burstone interests perceived it to be critical that a commitment be obtained from Coles to lease premises for a new supermarket in the redeveloped Centre. Coles had made an offer to lease in August 1998, and in early September 1998 Ms Khor was most anxious that that offer be accepted. In that context she also expressed concerns to Reading about the continuing decline in the cash flow of the Centre and what she considered to be delay in the lodging of the application for the town planning permit. Mr Altson’s response to these concerns was to indicate that Reading could not assess the Coles offer until it had confirmed the feasibility of the redevelopment that related to Coles; he otherwise indicated Reading shared Ms Khor’s concerns. Ms Khor was not satisfied with this response and began expressing her concern in strong terms.

The feasibility analysis that Mr Altson was waiting for was completed by 13 October 1998. In relation to level 2 (the proposed Coles area), that analysis concluded “the return is deemed acceptable in terms of the investment yield and in regard to ameliorating the current diminishing income”. The analysis indicated that a feasibility study for the total development was “under examination and refinement”.

On 14 October 1998, Mr Altson, Reading Australia’s financial controller, Mr Eugene Cheah, and Reading Australia’s development manager, Mr Taky Kaplan, attended a meeting with Mr Craig Burgess and Mr Kevin Moss from the Bank of Melbourne to discuss development finance. Mr Cheah reported on the meeting to Mr Cotter in the US, in positive terms. On 15 October 1998 the Bank of Melbourne wrote to Mr Cheah setting out the information that it required. The letter read in part:

“Bank of Melbourne is delighted to be part of the Whitehorse Plaza development through our association with your joint venture partner, and is keen to build upon the relationship with Reading Entertainment.”

On 15 October 1998 Mr Altson wrote to Ms Khor and Mr Burr in relation to the proposed Coles tenancy in the redeveloped Centre. In the light of subsequent events, the issues raised by Mr Altson in that letter are significant. Amongst other things, he said:

“[W]e believe that it would be imprudent for the Trust or the Trustee to accept any such proposal [a reference to the Coles’ proposal in August 1998] until such time as it is certain that the Trust will have the economic wherewithal to meet its obligations as landlord under any such proposal.”

The problem was that the Coles proposal required WPG as landlord to undertake the redevelopment. WPG at that time was working towards redevelopment of the entire Centre. Mr Altson pointed out that the estimated cost of making the premises ready for Coles was $8m, but at that time there was no cash flow available to finance that $8m commitment. In his letter Mr Altson accordingly asked “whether Burstone is currently in a position to irrevocably commit to provide 50% of the capital required to satisfy the Trust’s obligations under the Coles Myer proposal, in the event that conventional sources of finance should not prove to be available at commercially reasonable rates.” He suggested that, pending the availability of construction finance, the unitholders ought to consider acquiring sufficient units to enable the Trust to be able to fund the obligations to Coles “out of capital on hand”. As subsequently became apparent, this approach to financing the redevelopment was utterly unacceptable to Mr Burr and Ms Khor.

At Design Meeting No 7, held on 5 November 1998, the architect (Buchan) reported that it had completed the drawings for the town planning permit application. These plans had been drawn up by Buchan after extensive involvement and consultation with the US architect, RTKL Associates Inc (“RTKL”). RTKL had been introduced to the design process by Reading in April 1998.

On 8 December 1998 town planning consultants engaged on behalf of WPG, ERM Mitchell McCotter, lodged an application for a town planning permit. The plans that accompanied that application are dated November 1998 and they bear the logos of both The Buchan Group and RTKL. They provide for a 14-screen cinema complex on level 7 of a redeveloped Whitehorse Plaza. In his witness statement, Mr Shaw from The Buchan Group described the major differences between the Concept Redevelopment Plans of August 1997 and the initial town planning application plans lodged in December 1998 as being the size of the cinema complex and the number of screens, the seating capacity of the cinemas, the configuration of the food court, the location of the ticketing box, and the relocation of various tenancies. In his witness statement, Mr Clifton described the plans lodged for the town planning application as being appropriate only for that purpose. He said they were not of sufficient detail to support an application for a building permit.

Ms Khor signed the application for the town planning permit but felt it necessary to place on record a reservation which she had at that time. By a letter of 8 December 1998, addressed to Mr Altson, Ms Khor advised as follows:

“. . . I have signed the application only for the purpose of expediting the process of obtaining the planning permit. I note that several matters remain unresolved between us including the design of the Centre, the estimated costs of the proposed development of the Centre, the estimated apportionment of the costs between Burstone and your company and the tenancy mix for the Centre. Accordingly, my signing of the application should not be taken as consent or approval by Burstone to any of the matters as yet unresolved between us.”

In her evidence before me, Ms Khor maintained that these matters were not really unresolved at all, and that she was only concerned that some alterations had been made to the plans between the time when she had approved them and the time when they had been lodged. Mr Burr in his evidence stated that he was unsure what his wife had meant by this letter and otherwise he supported Ms Khor’s oral explanation. I do not accept Ms Khor’s evidence on this issue. It seems to me that the letter is clear and unambiguous in its terms, and that the matters set out as being unresolved were indeed unresolved, precisely as Ms Khor had indicated.

Ms Khor and Mr Burr, at various times, complained in strong terms about what they alleged were delays in the lodgement of the town planning application as a result of Reading’s conduct. These complaints once formed part of the allegations made in this proceeding; they no longer do so. However, given the extent of complaint in this regard in the correspondence which is in evidence, it should be observed that considerable evidence was led on behalf of Reading as to the reasons why the town planning application was lodged when it was. This evidence was unchallenged in the trial. If the issue has any continuing relevance, I do not accept that there was any wrongful or unreasonable delay by Reading or by the consultants employed by WPG in this respect. This is not to say, however, that the cinema complex did not significantly complicate the planning process, as it is clear that it did do so.

In November 1998, Reading’s officers prepared and submitted to the Bank of Melbourne an information package in support of a proposal that the Bank of Melbourne should finance the redevelopment. This information package was prepared without the involvement or assistance of Ms Khor or Mr Burr. Mr Burr and Ms Khor were critical of the manner in which the project was presented in this information pack. In particular they considered that insufficient emphasis was given to Reading’s obligation to construct the cinema complex at its own expense. The information package does refer to that obligation in a number of places. Allegations as to the alleged inadequacies of this information package once formed part of the Counterclaim in this proceeding; they no longer do so.

On 14 December 1998, Mr Moss and Mr Burgess from the Bank of Melbourne met with Mr Altson, Mr Kaplan and Mr Cheah from Reading. Mr Cheah made a file note of that meeting, in which he recorded what took place. In the meeting the Bank of Melbourne officers advised the Reading officers that they were “not able to finance the project”. Mr Cheah’s file note reads:

“Implicit in their reasons was that their property financing division was part of Westpac who are Khor and Burr’s financiers and who are aware of the risk involved with them as JV partners of this project. When asked whether the situation would be different if Reading owned the property development outright or another JV partner was in place, BOM said that they would have no problem financing the project as it is a viable project.”

An earlier version of this file note is also in evidence. This version of the file note includes an additional paragraph in which Mr Cheah observes that the property development will not be able to proceed unless Reading finances the entire amount. Sometime prior to December 1998, the evidence in this case does not reveal when, Westpac Banking Corporation (“Westpac”) had taken over the Bank of Melbourne.

Mr Cheah sent a short memo to Mr Altson and Ms Khor on 22 December 1998, confirming that “the Bank of Melbourne have advised that they will not be providing development finance”.

In the meantime significant progress had been made in acquiring the freehold of the property. Following a valuation process, the parties agreed upon a purchase price of $6m. The terms of a contract of sale were then negotiated, in the course of which the Reading interests advised the Burstone interests that the contract should not provide for an obligation to proceed with redevelopment, but only a right to purchase if redevelopment does proceed.

A freehold contract of sale was entered into dated 23 December 1998. The purchase price was $6m, payable by a deposit of $60,000, with the balance to be paid two years after the day of sale or earlier at the purchaser’s election if development had commenced. The contract was conditional on the purchaser being granted, within two years, a planning permit (Special Condition 3.1), and it provided that the vendor was entering into the contract on the basis of the purchaser undertaking a redevelopment in accordance with approved plans (Special Condition 6.1). The contract provided that if redevelopment had not commenced at least one month prior to the date appointed for settlement, then the contract would be avoided if development did not commence within 21 days of a notice given by the vendor, or if the purchaser gave a notice of avoidance. The contract of sale also contained a special condition (Special Condition 9.1) which provided that the contract of sale was conditional upon WPG entering into an agreement with Coles which had become unconditional within 180 days save for the issue of a planning permit.

On 21 December 1998, Ms Khor wrote to Mr Altson advising that her execution of the contract of sale on behalf of WPG was conditional upon Reading agreeing that if WPG did not enter into an unconditional agreement with Coles within the time specified, then either the Reading interests or the Burstone interests could avoid the contract. The letter concluded:

“The execution of the Contract by Reading Properties Pty Ltd and the approval by yourself and/or Mr Rochester and the approval by Reading Properties Pty Ltd to exchange the Contract shall be taken as agreement by yourself, Mr Rochester and Reading Properties Pty Ltd to the matters set out in this letter.”

Mr Altson responded to that letter by a brief and terse letter of 22 December 1998, in which he advised that Reading did not agree to any of those conditions and that the only agreement would be that provided for by the contract itself. On the same day Ms Khor wrote to Mr Altson. Ms Khor wrote that the purpose of this letter was to “clear the air between us”. She sought to justify the terms of her letter of 21 December 1998, and to suggest that that letter “ought not to have disturbed you”. She maintained that “all I intended to do was to protect both the joint venture partners”.

In my view, Mr Altson had every reason to be “disturbed” by Ms Khor’s letter of 21 December 1998. It was a letter designed to position Burstone with a view to possible dispute in the future.

By the end of 1998, a number of problems had emerged for the joint venture. They were problems that were to persist throughout 1999. The three significant problems were these. First, the Bank of Melbourne would not finance the redevelopment and alternative sources of finance would need to be found. Second, Reading was not prepared to make a commitment to Coles unless the capital required to at least refurbish the Coles section of the redevelopment was in place. Finally, relations between the joint venture parties were strained.

Early 1999: the funding problem becomes more serious

The issue that led to the Bank of Melbourne altering its attitude to financing the proposed redevelopment concerned relations between Westpac and Mr Burr and Ms Khor, and in particular their dealings in relation to a project known as the “Grand Russell”. On 15 January 1999, Mr Burr wrote to Mr Trevor Wilson at Westpac on behalf of the developer of the Grand Russell, a company named 222 Russell Pty Ltd. The letter was apparently prompted by advice given to Mr Burr by Mr Wilson that Westpac was about to serve a Notice of Demand/Default. The letter requested Westpac to reconsider its position. The letter stated:

“We give you notice that if we suffer losses which we consider are due to this action, we will vigorously enforce all of our rights against the Bank . . . We will also strenuously resist any Notice of Demand or Notice of default.”

By this time the Reading personnel were aware that the problem with the Bank of Melbourne concerned Ms Khor and Mr Burr’s involvement in the Grand Russell project. At the same time, Ms Khor was continuing her complaints to Reading personnel about what she considered to be procrastination by Reading.

On 8 February 1999, Mr Patrick Sim, who was, in effect, the accountant for the Burstone parties, was asked to provide an audit confirmation of the outstanding loan to Ms Khor and Mr Burr in the sum of $2,200,000 for principal and $184,438.36 for interest. He was requested to send the confirmation to Mr Bruce Knowles, of the accounting firm Ernst & Young.

Prompted by concerns expressed by Mr Jim Wunderle, the financial controller for Reading in the US, Mr Cheah sought and obtained oral assurances from Mr Moss and Mr Burgess at the Bank of Melbourne that there would be no problems in refinancing the existing loan from the Bank of Melbourne. The two year term of this loan was to expire in June 1999. He recorded these assurances in a memorandum to Mr Wunderle of 11 February 1999.

In January 1999, Mr Lawson had taken up the position of Director of development at Reading Properties. Between 1993 and 1996 Mr Lawson had been employed with Coles. On 15 February 1999, Mr Lawson rang Ms Khor and told her that he wanted to meet the responsible officers of Coles and that he believed they would be prepared to speak to them in a frank and open manner. The next day Ms Khor wrote to Mr Lawson confirming, amongst other things, her agreement to a request that she not attend the meeting with Coles, and reiterating her desire that an agreement be reached with Coles expeditiously.

On 17 February 1999, Mr Cheah wrote to Ms Khor and Mr Burr requesting payment of the sum of $184,438 for interest said to be due pursuant to the loan agreement. Mr Cheah handed this letter to Ms Khor in person on 18 February 1999. Ms Khor’s response to this request included complaints by her as to the delays in the project, which she attributed to Reading, and a suggestion that she would “consider her options” in November when the loan fell due. No attempt was made at that time to recover the interest claimed.

Regular design meetings and project meetings were suspended between February 1999 and August 1999 whilst the town planning application was being considered by the responsible authorities.

During the first week of March 1999, a series of meetings of Reading personnel were held in Los Angeles in which various Reading projects in Australia at that time were addressed. The meetings were presided over by Mr Cotter and minutes were drawn up and circulated by Mr Tompkins. Mr Lawson attended these meetings.

During February and early March 1999 there had been a dispute between Mr Burr on the one hand and Reading executives on the other in relation to the proper characterisation of the proprietary interests of the various parties in the proposed cinemas. The substance of that dispute is not relevant, save that its existence prompted Mr Tompkins to record the March discussions concerning the Whitehorse Plaza in a memorandum of 8 March 1999. Much of Mr Tompkin’s memorandum concerns an analysis of the respective parties’ obligations. It is not necessary to go into the detail of that analysis. It is necessary to observe that there is no suggestion in this memorandum that Reading had decided that it was not proceeding with the development. The issue of finance was identified as a potential problem. Amongst the matters that Mr Tompkins recorded as having been resolved upon was that David Lawson should succeed John Rochester as a Reading representative on the WPG board, and that Reading should formally request Burstone, if it were dissatisfied with progress, to become more actively involved in developing a redevelopment plan and in identifying appropriate sources of finance. Mr Tompkins observed:

“I would be inclined to put the burden on Khor & Burr to come up with the financing, unless they are going to reimburse us for our time on the matter. David Lawson should do the first cut of this letter.”

Minutes of the entire series of meetings concerning the Reading Australian projects were eventually prepared and circulated on 6 April 1999. Those minutes record the meeting concerning Whitehorse Plaza as having occurred at 12.30 pm on 3 March 1999. Those minutes record advice given by Mr Lawson to the meeting that in his view “the center was a viable center”. The minutes also record Mr Cotter expressing an interest “in seeing, as an alternative, an approach which would develop the entire complex as an entertainment center”. When Mr Cotter gave evidence in this proceeding, he could not recall expressing that interest. The minutes also record reference having been made to the loan falling due in November, and to Mr Lawson having expressed the view that May Khor would find the money to pay “through her family connections”. Mr Lawson subsequently requested deletion of this passage from the minutes. Again, it should be noted that there is no suggestion in these minutes of any intention on Reading’s part not to proceed with the development, indeed, the record of the meetings in March suggests precisely the contrary. I refer to this only because it is alleged by Burstone, and was repeatedly put to witnesses called on behalf of Reading by counsel for the Burstone parties, that Reading had determined not to proceed with the venture by early 1999, and that all of its conduct thereafter was essentially a charade. In my view there is no evidence that could sustain this proposition and I reject it.

As suggested by Mr Tompkins in his memo of 8 March 1999, Mr Lawson wrote to Ms Khor on 15 March 1999, addressing what he described as “the critical issue of funding of the development”. The letter referred to approaches instigated by Ms Khor to Colonial State Bank, and to what Mr Lawson described as discussions with “our bankers”. There is no evidence as to what he meant by this reference to “our bankers”.

On 15 March 1999, the City of Whitehorse granted a planning permit for the redevelopment.

By a letter of 16 March 1999 addressed to Mr Cheah at Reading Australia, Madison & Masters analysed in some detail the value of the leasehold interest in the shopping centre. This letter was prompted by a request made to Madison & Masters by Mr Cheah, consequent upon inquiries made to him by Mr Wunderle at Reading Entertainment Inc in the US. By an e-mail of 12 March 1999, Mr Wunderle had requested Mr Cheah to undertake a review of the Whitehorse leasehold valuation. In responding to Mr Wunderle, Mr Cheah forwarded a copy of the analysis Madison & Masters had forwarded to him.

For present purposes there are two matters to be noted in relation to the Madison & Masters analysis upon which Mr Cheah relied. The first is that Madison & Masters confirmed that they had embarked on a course of renegotiation with incumbent tenants to convert leases to licences and to insert relocation and redevelopment clauses in the leases. The result of this process had been that there were no legal impediments to redevelopment, but as a consequence, vacancies had been created and there was diminished income. The second noteworthy matter is Madison & Masters’ analysis of the residual value of the lease. The approach they took was to estimate a gross realisation value upon completion by applying a capitalisation net yield of 9.5 per cent to their assessment of the projected net income. From that figure they deducted a profit and risk allowance and the projected costs of the redevelopment, reaching a residual value of the leasehold interests of $17,145,989. In that context they advised that a “realistic and conservative” approach to value for “internal book purposes” would be to adopt the original acquisition price of $16.25m. Madison & Masters concluded by observing that if a formal valuation was required, they would recommend either C B Richard Ellis or Landmark White.

In his covering memorandum to Mr Wunderle, Mr Cheah added some observations of his own to those made by Madison & Masters. His process of reasoning led him to conclude that “the value of $16.25m is realistic”. In his evidence before me he agreed that that value was conservative. In his memorandum Mr Cheah made the following observations:

“The net income of the centre is currently around $1.3m. At a conservative 11% capitalisation rate, this equates to a mathematical value of $12m. At 10%, a mathematical value of $13m.
We know that this does not reflect the true market value of the centre as it is in a redevelopment environment with short term leases resulting in vacancies and reduced rentals for existing tenants. If the centre were to be redeveloped or to trade on an ongoing basis, the value would be considerably higher.”

By a letter of 17 March 1999, Ms Khor responded to Mr Lawson’s letter of 15 March 1999, dealing with the funding issue. She advised that a meeting had been arranged with Colonial State Bank (“Colonial”) for Friday 19 March 1999. She then dealt with a number of other matters that Mr Lawson had raised. Amongst other things, she disputed the suggestion that attempts to obtain finance with the Bank of Melbourne had “come to nil”. She asserted that the Bank of Melbourne was interested in funding the project, but that they considered the issue of funding was premature at that point. The material in evidence in this proceeding reveals Ms Khor’s assessment of the position with the Bank of Melbourne to be incorrect. The Bank of Melbourne did not want to deal further with Ms Khor.

As had always been anticipated, objectors to the planning permit lodged applications for review with the Victorian Civil and Administrative Tribunal (“VCAT”). ERM Mitchell McCotter circulated copies of the applications (described as “appeals”) to the joint venture parties on 16 April 1999.

On 20 April 1999, Colonial forwarded to Mr Burr and to Mr Cheah a document headed “indicative term sheet”, which the covering letter described as “a term sheet outlining the broad indicative terms and conditions that would form the basis of a proposal by Colonial”. The covering letter stated that the enclosed indicative term sheet had not been submitted to Colonial’s Board of Credit Committee for approval and was subject to the approval of that committee.

The Colonial indicative term sheet provided for a construction facility to refinance the existing loan and to finance the refurbishment of the Centre, converting to a term facility at the end of the construction period. The facility at the construction stage was a maximum of $26,300,000, comprised of $11,300,000 being the refinance of the Bank of Melbourne, and $15,000,000 being the retail construction component. This facility converted to a term stage facility of a maximum of $35,000,000, being the $26,300,000 construction stage facility, a freehold facility of $6,000,000, and a residual sum of $2,700,000. Fees and interest rates were provided for, as were certain other conditions. One condition was that the maximum construction funding component of $15,000,000 was to represent no more than 50 per cent of the Centre’s entire refurbishment cost, including the cinema component. Another was that the peak term facility was to be the lesser of $35,000,000 or 65 per cent of the “on completion” value as verified by a bank appointed valuer.

Mr Burr’s evidence was that facilities in these terms would have been acceptable, and that he had calculated that such facilities would require a cash equity contribution by each of the joint venture partners. In his witness statement he said the sum required would have been approximately $2.85 million. In his oral evidence he said the amount was up to $3 million. Mr Cheah also attempted to calculate the equity contribution required by facilities on these terms at the time. His handwritten calculations are in evidence (R 469). These calculations indicate that the total equity required during the construction phase would be $10.1m and the total equity required post-development would be $7.4m. Mr Cheah reported on his conclusions in this respect in a memorandum to Mr Altson, Mr Cotter and Mr Wunderle of 23 April 1999. In that memorandum he observed:

“The effect of this is that the JV will require injecting equity of around $10 million of which Khor & Burr needs to find $5 million.”

His memorandum also went on to deal with the question of pricing. He advised that the terms resulted in an effective rate of 3.5% over the bank bill rate. He said that this was an issue that needed to be addressed.

In his witness statement, Mr Cheah said that his expectation of pricing was 1.5 per cent to 2 per cent, rather than 3.5 per cent, over the bank bill rate. He confirmed his conclusion that a total equity contribution of $10m would be required for the construction stage, requiring a further contribution of $5m from each of the joint venture partners. In cross-examination, Mr Cheah agreed that his construction equity calculation of $10m did not account for equity already in the project, and he said that the $5m figure he referred to ought to in fact be $2.5m each. In other words, the cash equity required was $2.5m each. In re-examination, Cheah said his revised assessment of $2.5m each had overlooked the freehold acquisition costs of $6m. I do not think that is completely correct. The freehold acquisition costs of $6m had not been overlooked. The Colonial facility provided for it to be fully financed, but Colonial included it in the term facility. This did not necessarily reflect the arrangements which the joint venturers had entered into with the City of Whitehorse, as the $6m would have been payable by December 2000 at the latest. That issue needed to be addressed. If Colonial were not prepared to finance that acquisition until completion of construction, then additional cash equity would have been required of $3m each in December 2000.

It seems to me that, making allowance for the broad nature of the calculations, the likelihood is that the Colonial offer would have involved a cash equity contribution during the construction phase of at least $2.5m-$3m each. Greater cash equity may have been required depending upon the timing of the finance for the freehold acquisition.

In submissions, counsel for the Burstone parties disavowed any claim for what they described as “continuing revenue profit”. This was a reference to a calculation made by Mr Smith whereby he calculated a loss based upon the end value of the Centre and then added to that loss the profit that would have been made year by year thereafter by WPG. On this basis, WPG’s loss would continue to mount indefinitely and it would recover both the full capital value of the centre upon completion and the loss of profit year by year. In my view, counsel for the Burstone parties were correct in not seeking to recover both the lost capital value and a continuing revenue loss.

The loss WPG suffered is said to be the “benefit of the redevelopment”. Any such benefit lay in the future. The redevelopment was a commercial opportunity of which WPG was deprived. The applicable legal principles are those set out by the High Court in Sellars v Adelaide Petroleum NL.[10] At 355, in the joint judgment of Mason CJ and Dawson, Toohey and Gaudron JJ, their Honours said:

“ . . . we consider that acceptance of the principle enunciated in Malec requires the damages for deprivation of a commercial opportunity, whether the deprivation occurred by reason of breach of contract, tort or contravention of s 52(1), should be ascertained by reference to the court’s assessment of the prospects of success of that opportunity had it been pursued . . . [T]he general standard of proof in civil actions would ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. Hence the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It is no answer to that way of viewing an applicant’s case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable.”

[10](1994) 179 CLR 332.

The reference at the beginning of the passage quoted was to the High Court decision in Malec v JC Hutton Pty Ltd.[11] That was a personal injury case. In the joint judgment of Deane, Gaudron and McHugh JJ, a judgment with which the other judges of the court (being Brennan and Dawson JJ) agreed subject to qualifications that are not at present relevant, their Honours said at pages 642 - 643:

“When liability has been established and a common law court has to assess damages, its approach to events that allegedly would have occurred, but cannot now occur, or that allegedly might occur, is different from its approach to events which allegedly have occurred. A common law court determines on the balance of probabilities whether an event has occurred. If the probability of the event having occurred is greater than it not having occurred, the occurrence of the event is treated as certain; if the probability of it having occurred is less than it not having occurred, it is treated as not having occurred. Hence, in respect of events which have or have not occurred, damages are assessed on an all or nothing approach. But in the case of an event which it is alleged would or would not have occurred, or might or might not yet occur, the approach of the court is different. The future may be predicted and the hypothetical may be conjectured. . . . If the law is to take account of future or hypothetical events in assessing damages, it can only do so in terms of the degree of probability of those events occurring. The probability may be very high – 99.9 per cent - or very low – 0.1 per cent. But unless the chance is so low as to be regarded as speculative – say less than 1 per cent - or so high as to be practically certain – say over 99 per cent - the court will take that chance into account in assessing the damages . . . Thus, the court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect the degree of probability.”

[11](1990) 169 CLR 638.

The primary claim now made is that loss has been suffered by WPG. I agree with this approach. The claim under the agreement to lease was introduced as a claim by a beneficiary to enforce the rights of the trustee where the trustee refuses to institute proceedings. Mandie J gave leave to amend the counterclaim to make this claim on that basis by an order made on 9 March 2001. During the trial I gave leave to amend the counterclaim to make the claims against Reading Australia on the same basis. The claims are, in the circumstances here, properly brought on that basis.[12]
[12]Bhagat v Australian Securities Commission (1995) 16 ACSR 536; Lidden v Composite Buyers Ltd (1996) 67 FCR 560; Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432.

The claims made by Burstone Victoria and by Ms Khor and Mr Burr are, apart from the reliance loss claims with which I will deal separately, all consequential upon, and a reflection of, losses suffered by WPG. I doubt whether claims can properly be made in this way, but I do not need to resolve that issue because if WPG recovers on the relevant causes of action the unitholder, Burstone Victoria, and Ms Khor and Mr Burr themselves, will have suffered no loss.

The commercial opportunity of which WPG was deprived did have some value. The proper approach to the assessment of WPG’s loss is to assess the value of the redevelopment to WPG as at October 1999 if completed as planned, to compare that outcome to the outcome that did occur consequent upon Reading’s repudiation and WPG and the Burstone parties’ acceptance of that repudiation, and then to adjust the damages to reflect my assessment of the degree of probability that the more beneficial outcome of redevelopment (assuming it is more beneficial) would have occurred.

Assessing the value of the redevelopment assuming it went as planned

The starting point in assessing the value of the redevelopment as at October 1999 is the Landmark White valuation. As previously indicated, I have assessed the Landmark White valuation, and Mr Fox’s evidence, in the light of the fact that it was a valuation prepared for finance purposes. In the circumstances, I consider that the valuation is reliable, or rather is the most reliable indication of the value of the redevelopment as planned at the time the joint venture arrangement came to an end.

For the reasons previously explained, I accept Landmark White’s “as if complete” valuation of $56,500,000. Thus, had the redevelopment been successfully completed WPG would have had an asset worth $56,500,000.

In order to reach that position WPG would have incurred expenses. Again, with one qualification, I adopt the assessment of expenses which Landmark White adopted based upon the work done to the middle of 1999 by Davis Langdon Australia, the project quantity surveyors, and by Clifton Project Management, the project manager.

The total selling costs and the freehold acquisition costs adopted by Landmark White are $6,441,250. The total development costs, interest expenses, and other costs and expenses are $25,767,882. To that sum I add an additional $1,000,000 to allow for an increase in the contingency for cost overruns from 5 per cent to 10 per cent. I make this increase on the basis of the evidence of Mr Beattie previously referred to. Thus, the total development costs including interest and other expenses are $26,767,882 and the total costs, including freehold acquisition, are $33,209,132. Landmark White reduced those total costs by the sum of $2,186,635, which was Landmark White’s assessment of the income that would be received during the construction process. Adopting that figure, the total net cost of completion of the project to WPG is $31,022,497. The value of the property to WPG, less the total of these net outgoings, upon completion is accordingly $25,477,503.

As a consequence of the termination of the joint venture arrangements, the Centre was sold for the sum of $13,000,000. The difference between the net value that might have been realised if the Centre had been completed and the amount actually recovered was, in the first instance, $12,477,503. This calculation, however, overstates the true value of the $13,000,000 sale price. This is because that price was not realised for approximately two years, and during that period WPG’s position continued to deteriorate. WPG was unable to meet its obligations over this period and unitholder loans of $1,004,672 each were required to be advanced.

In Mr Smith’s report, he produces a comparison of WPG’s position in April 2000 with its position in October 2001. His analysis reveals a deterioration in net assets of $2,746,979 (using his actual not his adjusted figures). There are a number of items in the balance sheets that reflect that deterioration. Some of them are non cash items, such as the increase in amortisation and the reduction in the item “Redevelopment costs capitalised”. There is an increase in the secured debt (Bank of Melbourne in one case and USIPF in the other) which is largely offset by a substantial reduction in accruals. Most significantly, liabilities between the two dates are increased by over $2,000,000, by the unitholder loans.

It seems to me that the deterioration in WPG’s position over the two years between Reading’s repudiation and settlement of the sale to Centro is no less than $2,000,000. I am fortified in this conclusion by the fact that $2,000,000 is slightly less than the total of the unitholder loans made during the period. It seems to me that the unitholder loans might be expected to reflect the continuing deterioration in WPG’s position and its requirement for additional capital as a consequence.

It might be contended that the two year period of delay was brought about in part by Mr Burr’s assertions of a right of pre-emption and by negotiations related to those assertions for the sale of Reading’s interest to Burstone. Whilst complaint about Mr Burr’s approach might be valid, I do not think that it led to any relevant delay. It is clear from the evidence of the solicitors from Middletons Moore & Bevins that delay would have occurred anyway because of the requirements of Centro and the City of Whitehorse. In the light of that evidence, I find that the period of delay was not relevantly extended by Mr Burr’s erroneous assertions of a right of pre-emption.

Accordingly, my calculation of the difference between the value of the redevelopment as planned and the price achieved is $14,477,503.

Probabilities of the benefit being realised – ordinary risks

All property development involves risk. It is for that reason that, when Landmark White calculated their “as is” value they deducted, exactly as if it were an expense, the item “Developer’s Margin (Profit and Risk)”, which they calculated at 20% of the project costs. The deduction Landmark White made was $8,727,502.

It might have been contended that the developer’s margin ought to be included as a cost, exactly the same as every other cost, representing as it does the normal profit and risk allowance that a developer would require. On the other hand, the developer’s margin could be treated as an asset of WPG, as if its realisation was certain, the developer being WPG itself. Mr Smith adopts this approach. Indeed he goes even further and recalculates the developer’s margin so as to arrive at a significantly higher figure.

In my view, both these approaches are wrong. The developer’s margin is not an expense like the construction cost. It represents potential profit and it is compensation for risk. It is a profit that WPG had the opportunity to earn. It is not an expense. Nor is it a certain asset. If it were, property development would be guaranteed to be profitable. It is not.

The usual developer’s margin calculation does give some guide to the dimensions of the ordinary risks of property development. In effect, Landmark White are expressing the opinion that this project would not be worthwhile unless a profit of at least $8,727,502 was there to be realised as recompense for the risk being undertaken.

In order to reflect both WPG’s potential to earn the developer’s margin, as calculated by Landmark White at $8,727,502, and to also reflect the allowance for risk implicit in that figure, I consider that a deduction of half that sum, $4,363,751, is required.

Thus, deducting $4,363,751 from the deficiency previously calculated of $14,456,847 produces a figure of $10,093,096, which I round down to $10,000,000.

The figure of $10,000,000 represents my calculation of the difference between the value of the redevelopment to WPG if it had been completed as planned, and the outcome for WPG as a result of Reading’s repudiation, the consequent termination of the joint venture arrangements, and the sale of the Centre to Centro after a delay of two years after discounting for the ordinary risks of property developments of this kind.

Probabilities of the benefit being realised – peculiar risks

In assessing the prospects of WPG obtaining the benefit of the redevelopment, discounts must be made beyond the ordinary risks of property development. In the circumstances here there were other factors, factors peculiar to this project and this joint venture, that bear upon the probability of WPG ever obtaining the benefit of the redevelopment.

GE might have rejected the application for take out finance, and there may have been considerable delay in pursuing it. Other bank finance might not have been obtainable in time or might only have been obtainable upon terms which Ms Khor and Mr Burr were unable to meet. The Coles arrangement might not have become unconditional on 20 December 1999, and Coles might have vacated the centre. The Bank of Melbourne might have lost patience and appointed a receiver or otherwise have forced the joint venturers into a sale. Ms Khor and Mr Burr might have refused to repay the loan. They might have resisted contributions of equity when required because they were unwilling or unable to make them at that point. Some further significant dispute, perhaps fatal to the joint venture, could have arisen about a matter entirely unforseen as at October 1999. It may have been over the scope of works or the construction programme. The history of the venture suggests to me that further disagreement was likely. Well before October 1999, the parties had reached a point where Mr Burr was threatening legal proceedings and where the Reading executives held serious suspicions and concerns about Mr Burr and Ms Khor.

On the other hand, there were also circumstances suggesting that the redevelopment might have reached completion. GE was interested in the take out finance proposal and there were prospects that it would have been obtained. The project was one that was capable of obtaining traditional bank finance. Whilst the Coles arrangement theoretically needed to be consummated by 20 December 1999, in fact Coles remained interested in leasing premises in a redeveloped Whitehorse Plaza shopping centre after December 1999 and eventually did so from Centro. The Bank of Melbourne probably had no immediate intention of taking recovery action in the latter part of 1999, notwithstanding the reservation of their position in their correspondence. Ms Khor and Mr Burr could have repaid the Reading loan, if they had been prepared to make a major effort to do so, and could have contributed substantial capital to the project provided they were not required to do so before mid-2000. Given the time needed for the finance arrangement and the time needed to comply with the specialty leasing pre-commitment requirement, this is probably when any substantial equity contribution would have been required.

Generally, once Reading had been put in a position where third parties, whether they be banks or prospective tenants or others, had been given commitments, Reading probably would have forced the project through. Both Mr Cotter and Mr Tompkins displayed in their evidence a particular concern with Reading’s reputation in Australia. That is one of the reasons why they were loath to commit to Coles and why they were so disconcerted by the attitude of the Bank of Melbourne/Westpac to Ms Khor and Mr Burr. If the project had got to the stage where some form of commitment had been obtained from a financier or some form of commitment had been given to Coles or to others, Reading would probably have ensured that the project was completed even if that meant taking on additional costs itself.

I have canvassed the facts of this matter in detail. One of the reasons for doing that is because it seems to me that that process reveals the nature and significance of these peculiar risks. It is impossible to catalogue and assess these risks individually because they bear upon and compound each other. There are myriad circumstances that may have occurred which would have prevented WPG from ever obtaining the benefit of the redevelopment.

I have to do the best I can to assess the probabilities of WPG realising the benefit of the redevelopment. If I were deciding this issue on the balance of probabilities, I would conclude that WPG would not have realised the benefit of the redevelopment. The authorities require, however, that where the opportunity lost has some value, which this one does, I must assess the degree of probability of realisation. When dealing with hypothetical events this is never easy. Doing the best I can, I assess the degree of probability of WPG realising the benefit of the redevelopment at 30 per cent of the value of that benefit after making allowance for the ordinary risks of property development. I accordingly assess the damage to WPG for deprivation of the commercial opportunity represented by the redevelopment at 30 per cent of $10,000,000, being $3,000,000.

Other issues
Discharge, extinguishment, dispensation, events beyond Reading’s control

Amongst the matters pleaded by Reading are that Reading was discharged from its obligation to construct the cinemas, or that obligation was dispensed with, by reason of the Burstone parties’ failure to procure or permit WPG to obtain finance and their failure to contribute capital. It was also pleaded that Reading’s failure to construct the cinemas was by reason of events beyond its control. I reject these defences. Reading was certainly most dissatisfied with Ms Khor and Mr Burr’s attitude to funding and with the progress on finance they had made. However, they had no contractual entitlement to walk away from the venture at that stage because of that dissatisfaction. There were still prospects of obtaining finance, and the Reading executives knew it, as Mr Lawson’s memo of 1 October 1999 reveals in the plainest terms. They had not bargained for a contractual right to withdraw if they were unhappy with progress on finance or if their joint venturer would not make equity contributions that Reading thought were reasonable. They were not then entitled to act as if they had.

The suggestion that construction of the cinemas was impossible because of events beyond Reading’s control cannot be justified on the facts. A point where such a stance might have been justifiable had not been reached at October 1999.

Reliance loss

As I have already discussed, the Burstone parties’ primary claim for damages was on the basis of an expectation loss suffered by WPG by reason of Reading’s conduct. However, the Burstone parties also advanced a claim in the alternative for loss suffered in reliance on Reading’s acts in entering the joint venture.

As counsel for Burstone correctly acknowledged, in circumstances such as the present a court need only to consider a claim founded on reliance loss when it is unable to determine the expectation loss suffered by the claimant.[13] No such need arises in this case. Though estimating the damage suffered by WPG is not without difficulty, there is sufficient foundation for the assessment of damage on an expectation basis. [14]
[13]Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 85 per Mason CJ and Dawson J, at 104-105 per Brennan J, at 126-127 per Deane J, and at 163, 172 per McHugh J.
[14]See McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 at 411-412; Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 83.

In any event, the claims on behalf of the Burstone parties on the basis of reliance loss were not established by the evidence. In this context WPG claims the following heads of loss and expenditure alleged to have been suffered in reliance on Reading’s contractual promises:

·the difference between the value of the Centre at the commencement of the joint venture and the proceeds of the sale to Centro (conceded in argument to be $3.25 million);
·moneys expended for town planning approval, redevelopment expenses and “consulting fees” paid to Madison & Masters (totalling $396,257); and
·income lost to WPG while preparing the property for closure and redevelopment ($2,920,403).

A claim in the alternative founded on reliance loss is also made by Burstone Victoria. The principal claims made by it on this basis were:

·the unrecovered portion of the costs to the Burstone WP Trust of acquiring Gold Koes’ interest in the Trust sold to Reading, said to be “estimated at $1,211,000”;
·the value of a loan from Angwu of $1.875 million; and
·all interest, costs and other expenses due under the loan agreement.

Ms Khor and Mr Burr also claim for reliance loss, being their liability for interest and costs under the loan agreement.

The major difficulty with the claims made on this basis on behalf of WPG is that they pre-suppose that no development would have taken place were it not for the joint venture with Reading. That is inconsistent with the evidence. The Centre was bought to be redeveloped. The Centre was not bought to be re-sold in its existing condition. Assessing reliance loss in that circumstance would require me to compare the expenditures made with those that would have been made in any event. These expenses would be those incurred in some putative other redevelopment.[15] There is no proper basis in the evidence upon which this task could be undertaken.
[15]Compare McRae v Commonwealth Disposals Commission (1951) 84 CLR 377.

The basis upon which Mr Burr and Mr Sim in their evidence sought to establish the loss of profit by WPG was unconvincing and unsatisfactory.

The claim by Burstone Victoria and by Mr Burr and Ms Khor for interest and costs payable under the loan agreement is unsustainable.

The position in relation to the loan from Angwu was never made clear. Indeed, Burstone made no forthright attempt to clarify any of the alleged costs of entering into the joint venture agreement or of transferring the interests of former interest holders to Reading. Some details were exposed under lengthy cross-examination by counsel for Reading. I am satisfied, for example, that Burstone was obliged to pay, and did pay, a $450,000 premium to Gold Koes to transfer its interest in the Trust. However, the tenor of Ms Khor’s evidence, in particular, was that the Court should accept her assertions that the expenses claimed to have been incurred were incurred. I would not have been prepared to do that if the issue had required determination.

Other matters raised in the pleadings

A number of other matters were pleaded, or were raised at some point during the trial, which were not persisted in. Amongst those matters were:

(a) Allegations by the Burstone parties:
(i)concerned to establish a right of set off between the obligations under the loan agreement and damages for repudiation of the joint venture agreement. The primary claim eventually contended for by the Burstone parties was that the loss was WPG’s, as to which no issue of set off arises;
(ii)that Reading refused to cooperate in obtaining finance and/or made it impossible to obtain finance. Save for the repudiatory conduct itself, which rendered it impossible for the entire redevelopment to proceed, this allegation was not established by the evidence; and
(iii)that Reading is estopped from contending finance would not have been obtained, or that agreements or events required in the future would not have been made or would not have occurred. Again, no foundation for these pleas was established by the evidence.

(b) Allegations by the Reading parties:
(i)that misrepresentations had been made by the Burstone parties prior to entry into the joint venture agreement. No basis was established for these allegations by the evidence; and
(ii)that the effect of the Bank of Melbourne securities (assigned to USIPF) and the mortgage securities securing the loan agreement becoming enforceable was to preclude all of the defendants’ counterclaims. Whilst raised a number of times in the trial, no authority was cited in support of this proposition, and no submission was directed to it in final submissions by Reading’s counsel.

Orders

After the parties have had the opportunity to consider these reasons and to make submissions as to the appropriate form of orders, I will make orders in favour of WPG against Reading Australia and Reading Properties for $3,000,000 plus interest, in favour of WPG against Reading Australia for $100,000 plus interest, and in favour of Reading Australia against Ms Khor, Mr Burr, and Burstone Victoria for $2,200,000 plus interest, and such other orders as are necessary to give effect to these reasons.

I will hear submissions on questions of interest and costs, and as to the further hearing of the related matters.

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Joint Venture: (pre tax) *
ROI	At purchase	11.1%
ROI	Re-development	14.1%
Cinema: (pre-tax) *
ROI	22.03%
IRR	32.11%
*Unleveraged

[2004] VSC 546

22 December 2004