Reading Properties Pty Ltd v Mackie Group Pty Ltd
[2012] VSCA 90
•11 May 2012
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2010 0076
| READING PROPERTIES PTY LTD (ACN 071 195 429) | |
| Appellant | |
| v. | |
| MACKIE GROUP PTY LTD (ACN 006 524 456) | Respondent |
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JUDGES: | WARREN CJ, MANDIE JA and JUDD AJA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 17 October 2011 | |
DATE OF JUDGMENT: | 11 May 2012 | |
MEDIUM NEUTRAL CITATION: | [2012] VSCA 90 | |
JUDGMENT APPEALED FROM: | Mackie Group Pty Ltd v Reading Properties Pty Ltd [2010] VSC 131 (Byrne J) | |
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CONTRACT – Construction of agreement – Operation of clause providing for compensation in the event that a further agreement was not reached – Ambiguity of words and scope – Entitlement to compensation in a fixed amount – Trial judge held that party was entitled to that sum – Appeal dismissed.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr C Caleo SC with | Minter Ellison |
| For the Respondent | Mr P Bingham | Khorr & Burr |
WARREN CJ
MANDIE JA
JUDD AJA:
This appeal concerns the interpretation of a short contract, dated 25 May 1998, between the appellant, Reading Properties Pty Ltd (‘Reading’), and the respondent, Mackie Group Pty Ltd (‘Mackie’). The contract (the ‘Negotiation Agreement’) related to a proposed development project on land in Frankston involving the Public Transport Corporation (‘PTC’). The operative provisions were as follows:
[1]Mackie and Reading will negotiate in good faith to agree on a construction agreement generally in accordance with the attached “Summary of Proposed Construction Agreement”.
[2]Mackie and Reading agree that if either party believes that they are unable to agree [sic] the construction agreement, then it may notify the other in writing that it wishes to terminate further negotiations and upon such notice being sent then Reading will pay Mackie the sum of $1 Million within 21 days of notification in writing by either party, in satisfaction of all claims under this Agreement.
[3]This Agreement in no way affects Mackie’s entitlement to the “Success Fee” which is subject to a separate agreement, of even date herewith.
[4]In consideration of this Agreement Mackie and Reading agree to execute the PTC Agreement in its current form.
(clause numbers added)
After the execution of the Negotiation Agreement, the parties continued working on the proposed development project but they never agreed on the terms of the contemplated construction agreement. In 2001 Reading decided that the proposed project would not be profitable and terminated the project in November of that year without informing Mackie. Upon discovering that the project had been cancelled by Reading, Mackie purported to give a notice under cl 2 of the Negotiation Agreement and claimed $1m. Reading refused to pay. Mackie then commenced proceedings against Reading seeking the sum of $1m, alternatively damages. The learned trial judge gave judgment for Mackie in the sum of $1m together with interest[1] and Reading appeals from that decision.
[1]Mackie Group Pty Ltd v Reading Properties Pty Ltd [2010] VSC 131 (‘trial judgment’).
Reading’s essential defence to Mackie’s claim was and remains that a valid notice under cl 2 could only be given while negotiations were still on foot and that once the whole project was cancelled, negotiations had ended and cl 2 was no longer applicable. Accordingly, Mackie’s purported notice was not authorised by cl 2 and Mackie was not entitled to any payment thereunder.
In our view, for the reasons that follow, Reading’s construction should be rejected and the appeal dismissed.
Background facts
The facts may be briefly summarised as follows.[2]
[2]This summary is based on [3]–[24] of the trial judgment.
Mackie was a developer of land. It was associated with two other companies — Mackie & Staff Pty Ltd and MSM & Associates Pty Ltd — which carried out building work and architectural work respectively.
In 1995 Mackie entered into a Project Feasibility and Facilitation Agreement with the PTC. The agreement concerned a proposed development of land adjoining the Frankston Railway Station and gave Mackie exclusive rights to the development for the duration of the agreement.
Mackie became attracted to the idea of developing the land for a cinema complex. It discussed this idea with the Reading organisation, a United States-based group which owned and constructed cinemas. The relevant Australian companies within this group were Reading Entertainment Australia Pty Ltd (formerly called Reading Australia Pty Ltd) and the appellant, Reading. In 1997 Mackie and Reading agreed to develop the project as joint venturers. By 1998 the project structure had changed again. With PTC’s approval, Reading and Mackie agreed in principle that Reading should develop the project alone, with Mackie being the design contractor and later the construction contractor.
In May 1998, Mackie and Reading entered into three agreements.
The first agreement (the ‘Success Fee Agreement’) was an untitled agreement dated 21 May 1998. The parties were Reading and Mackie. Broadly speaking, the Success Fee Agreement required Reading to pay Mackie the sum of $400,000 if, following completion of the project, the project income stream exceeded a certain figure.
The second agreement was the Negotiation Agreement dated 25 May 1998— the subject of the present dispute between the parties.
The third agreement was the PTC Agreement contemplated by cl 4 of the Negotiation Agreement. It was dated 28 May 1998 and the PTC was also a party to this agreement. The PTC Agreement assigned Mackie’s rights in the development to Reading. Reading was to carry out specified works on the land — the building works for the cinema complex as well as certain works to the railway tracks and associated infrastructure. Reading was entitled to subcontract any part of the works, although the subcontractor for the infrastructure works had to be approved by PTC.
The Negotiation Agreement and the Success Fee Agreement primarily arose out of Mackie’s concerns about the change in the project structure in 1998 whereby Mackie had been relegated from a co-developer to merely a prospective builder. By that time Mackie had done general preparatory work on the project for which it expected to be paid from the proceeds of the development. The new project structure entailed Mackie relinquishing two potential benefits: profit from the project itself and the fees that Mackie & Staff would receive for the construction work. The Negotiation Agreement and the Success Fee Agreement were executed to compensate Mackie for these relinquished benefits.
In November 2001 Reading decided that the project was no longer profitable. Reading then entered into an agreement with PTC’s successor, Victorian Rail Track, terminating the project. Mackie was not a party to this agreement and it was not informed of Reading’s decision to terminate the project or of the agreement with Victorian Rail Track.
Mackie subsequently discovered that the project had been terminated by Reading and later purported to give a notice under cl 2 claiming $1m.
Grounds of appeal
Reading’s Notice of Appeal contains 25 grounds. Two of the grounds and a portion of another ground were withdrawn.[3] The remaining grounds are largely overlapping. The grounds in effect describe Reading’s construction of the Negotiation Agreement and set out the arguments in support of that construction that are summarised below.
[3]Appellant’s Outline of Submissions (12 October 2010), [26].
The parties’ position on the construction of cl 2
The critical provisions of the Negotiation Agreement are cll 1 and 2 and we set them out again:
[1]Mackie and Reading will negotiate in good faith to agree on a construction agreement generally in accordance with the attached “Summary of Proposed Construction Agreement”.
[2]Mackie and Reading agree that if either party believes that they are unable to agree the construction agreement, then it may notify the other in writing that it wishes to terminate further negotiations and upon such notice being sent then Reading will pay Mackie the sum of $1 Million within 21 days of notification in writing by either party, in satisfaction of all claims under this Agreement.
Reading’s overarching position was that cl 2 could ‘only [operate] in circumstances where the requisite belief was formed and the requisite notice given at a time when negotiations between the parties were still on foot in respect of a construction agreement for a development project that remained extant’.[4]
[4]Appellant’s Outline of Submissions (12 October 2010), [2].
Mackie, on the other hand, contended that the sole precondition to be satisfied before a party could give a valid notice under cl 2 was that the party must form the belief that it was ‘unable to agree the construction project’ and that a party could form this belief and give a valid notice even when negotiations were no longer on foot.[5] Mackie submitted that the expression ‘they are unable to agree the construction agreement’ applied to all circumstances in which the parties were or would be unable to agree to a construction agreement for whatever reason.
[5]Respondent’s Outline of Submissions (21 March 2011), [2].
References to surrounding circumstances
To support their respective constructions and their arguments as to how cl 2 was intended to operate, both parties made extensive reference to the surrounding circumstances and to the object of the transaction.
Shortly after the hearing of this appeal, the High Court gave reasons for refusing special leave in the case of Western Export Services Inc v Jireh International Pty Ltd.[6] The applicant claimed that it is ‘[not] essential to identify ambiguity in the language of the contract before the court may have regard to the surrounding circumstances and object of the transaction’.[7] The applicant relied on MBF Investments Pty Ltd v Nolan[8] (a decision of this Court) and Franklins Pty Ltd v Metcash Trading Ltd[9] (a decision of the NSW Court of Appeal) as authorities for this proposition. The High Court (Gummow, Heydon and Bell JJ) said[10] that the proposition is inconsistent with the well-known passage in Codelfa Construction Pty Ltd v State Rail Authority (NSW)[11] dealing with admissibility of surrounding circumstances:[12]
The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although … if the facts are notorious knowledge of them will be presumed.
[6][2011] HCA 45 (‘Jireh’).
[7]Jireh [2011] HCA 45, [2].
[8][2011] VSCA 114.
[9](2009) 76 NSWLR 603.
[10]Ibid, [3].
[11](1982) 149 CLR 337, (‘Codelfa’).
[12]Ibid, 352 (Mason J, Stephen and Wilson JJ agreeing).
After referring to this passage, the High Court in Jireh emphatically stated that until it ‘embarks upon [the exercise of reconsidering Codelfa] and disapproves or revises what was said in Codelfa, intermediate appellate courts are bound to follow that precedent’.
We did not invite the parties to make further submissions in light of Jireh because, as will appear below, we consider that cl 2 of the Negotiation Agreement is latently, if not patently, ambiguous and does not have a plain meaning or clear scope of operation, when considered in its application to the actual facts and events of this case. It is therefore necessary, as both parties recognised, to have recourse to surrounding circumstances in order to understand the purpose and object of the agreement and the meaning and effect of cl 2.
Mackie’s construction should be preferred to Reading’s
Reading’s primary submission was that the words ‘wishes to terminate further negotiations’ cannot ‘relate only to the form and content of the notice that must be given’. To do so would strip the words of any sensible content. The correct approach was to give the words a substantive meaning. The express pre-condition to the giving of the notice was the formation of a belief by either party ‘that they are unable to agree the construction agreement’. But, Reading submitted, the phrase ‘wishes to terminate further negotiations’ qualified that express pre-condition. What was being notified was a wish ‘to terminate further negotiations’. This made it clear that the requisite belief could only be formed when negotiations were still on foot, otherwise there would be nothing to terminate.
We accept that the phrase ‘wishes to terminate further negotiations’ is not simply an incantation that opens Aladdin’s cave containing $1m. But, contrary to Reading’s submission, Mackie’s construction does not reduce the phrase ‘wishes to terminate further negotiations’ to a mere incantation. On Mackie’s construction, the phrase means in substance ‘does not wish to engage in any further negotiations’. The phrase refers to future negotiations, not current or past negotiations. We accept that, on Mackie’s construction, the notice could be given in circumstances where it had already become clear to both parties that there would not be, or could not be, any further negotiations. Nevertheless, the notice communicates a substantive message: that the party giving the notice ‘is no longer willing to conduct negotiations in the future’[13] and, in that regard, the notice will have a substantive effect on the negotiations. The notice will terminate any negotiations that are still on foot and will unambiguously bring to an end any obligation to continue negotiating under cl 1.
[13]Respondent’s Outline of Submissions (21 March 2011), [3].
Admittedly, there is a lack of precision in the language used in cll 1 and 2 of the Negotiation Agreement, and, as the learned trial judge noted, while the Negotiation Agreement was drafted by a lawyer, it does not bear the hallmarks of a formal and precise legal document but rather of an informal commercial agreement.[14] It should not be construed in an overly technical or legalistic way.
[14]Trial judgment, [59].
The constructions advanced by the parties are each open upon a literal reading of cl 2. The task of the judge was to ascertain the objective intention of the parties by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement. Given that each of the competing constructions was open, that required consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction. The purpose of this agreement was to compensate Mackie in the event that it was denied the potential profit from a construction contract. The agreement did not seek to limit the circumstances in which that might occur. There are a number of possibilities which, upon analysis, inform the parties’ intention and expose the flaws in Reading’s construction
The first set of circumstances is that, after extensive good faith negotiations, the parties failed to reach an agreement and stopped negotiating (scenario 1). That must be an obvious situation that the parties would have plainly contemplated might occur and would entitle Mackie to compensation. Yet, on Reading’s construction, it would seem that Mackie could not issue a notice because negotiations had ceased and were no longer ‘on foot’. Reading attempted to avoid this result by submitting that, for the purposes of cl 2, negotiations remain ‘on foot’ so long as they have ‘not been terminated, expressly or constructively, by one of the parties’.[15]
[15]Notice of Appeal, Ground 11.
To test this convoluted response, we raise another set of circumstances. Suppose that, after extensive negotiations, it became clear that the parties were not able to reach agreement. What would happen if Reading terminated negotiations by means other than a valid notice under cl 2 (scenario 2)? According to Reading, Mackie would no longer be able to issue a valid notice under cl 2 because negotiations would no longer be on foot. Yet it cannot seriously be contended that the Negotiation Agreement was intended to permit Reading to avoid the obligation to pay Mackie $1m by adopting such a strategy.
Furthermore, while they were not canvassed in argument, it seems to us that there are two ways in which Reading’s construction could be refined to entitle Mackie to some remedy under scenario 2.
First, cl 2 could be construed as providing an exclusive mechanism for express termination of negotiations. We will leave aside constructive termination which, on Reading’s construction, would presumably occur if some supervening event rendered further negotiations pointless, e.g. if the project was cancelled. In the absence of constructive termination, the negotiations will remain ‘on foot’, and/or the obligation to negotiate under cl 1 will continue to apply, unless and until negotiations are terminated by a valid notice under cl 2. On that construction, Reading’s purported oral termination in scenario 2 would either be ineffective or would breach the obligation under cl 1 to continue negotiating.
Under this construction, unless negotiations are terminated under cl 2, they remain ‘on foot’ in a formal, legal, sense even if, as a matter of practical reality, it has become clear that parties will not be able to reach agreement. The difficulty with this construction, from Reading’s point of view, is that it significantly weakens Reading’s argument that, in all circumstances where a notice can be validly given, the notice does something substantive; it is more than a mere formality that triggers compensation. If the notice can, in some cases, be essentially a formality, this weakens the argument that the notice cannot be given in circumstances where, a supervening event, such as the cancellation of the project, renders further negotiations pointless. If negotiations being ‘on foot’ is merely a formal state of affairs, one might ask why that formal state of affairs could not survive the cancellation of the project. Would it not be possible for negotiations to remain ‘on foot’ in a formal sense until one of the parties gives notice under cl 2? Further, if the effect of cl 2 is, by implication, to preclude express termination of negotiations in any way other than via that clause, why should the Negotiation Agreement be construed as permitting ‘constructive’ termination by a supervening event? There is no textual support in the Negotiation Agreement for the concept of constructive termination of negotiations. The only provision dealing with termination of negotiations is cl 2.
The second way in which Reading’s construction might be refined to afford Mackie a remedy under scenario 2 is if the words ‘may notify’ in cl 2 are read as ’must notify’. Applying that construction to scenario 2, Reading would have breached cl 2 by failing to give a written notice under that clause once it had formed a belief that it was ’unable to agree the construction agreement’. We do not need to express a view as to whether this construction is possible because it would not, in any event, assist Reading’s case. On that construction, Reading was obliged to give a notice under cl 2 once it had decided to cancel the construction project, as cancellation obviously entailed that Reading and Mackie would not be able to ‘agree the construction agreement’. But for the breach, Mackie would have been entitled to $1m under cl 2. Hence, this construction is no more favourable to Reading than Mackie’s construction. As neither party contended for this construction, we will not consider it further.
A further set of circumstances in which Reading’s construction would yield an irrational outcome is one where Reading awarded the contract to another builder while the negotiations between Reading and Mackie were still ‘on foot’ (scenario 3). Again, we do not think that it can be seriously contended that the Negotiation Agreement was intended to leave Mackie without a remedy in those circumstances. Yet, as Reading’s counsel accepted in oral argument, once Reading had awarded the contract to another builder, on Reading’s construction, Mackie would no longer be able to give a valid notice under cl 2.
Reading sought to overcome this irrational consequence by contending that the obligation to negotiate under cl 1 was an obligation to negotiate exclusively with Mackie and that, by awarding the contract to another builder while negotiations with Mackie were continuing, Reading would be in breach of the exclusivity obligation. Thus, Reading contended that, although Mackie would be unable to give a valid notice under cl 2, it would have a cause of action for breach of cl 1.
We reject that submission. In our view, cl 1 cannot be construed as requiring Reading to negotiate with Mackie exclusively. Good faith obligations do not ‘ordinarily … restrict decisions and actions, reasonably taken, which are designed to promote the legitimate interests of a party.’[16] Reading’s obligation to negotiate with Mackie in good faith was an obligation to conduct genuine negotiations with a view to reaching a construction agreement. That obligation should not be construed as precluding Reading from pursuing its legitimate commercial self-interest by also negotiating with a competing party. Nor is there any textual support in the Negotiation Agreement, nor any support to be derived from the surrounding circumstances (so far as admissible), for the proposition that the obligation to negotiate in cl 1 is exclusive.
[16]South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611 [393] (Finn J).
There is another set of circumstances which in our view demonstrates the commercial unreality of Reading’s construction. If Reading decided not to proceed with the project and started termination negotiations with the PTC (scenario 4), what then? Reading’s counsel accepted in oral argument that if Mackie were to ascertain Reading’s intention to terminate the project, Mackie could give a valid notice under cl 2 (and would then be entitled to $1m), provided it did so before the project was formally terminated by agreement between Reading and PTC. But Reading contended that if, as has in fact occurred, Mackie only found out after PTC and Reading executed a termination agreement, it could not then give a notice and would not be entitled to the payment. At the same time Reading contended that the obligation to negotiate in good faith did not extend to informing Mackie if there was no longer any purpose in negotiations. So Reading would be under no obligation to tell Mackie that it had decided to cancel the project. It follows that under scenario 4, Mackie’s entitlement to compensation would, on Reading’s construction, depend on whether Mackie happened to find out that Reading and PTC were negotiating to terminate the project.
Reading made two further submissions in support of its construction.
First, Reading submitted that Mackie’s construction did not entail any time limit within which, after the breakdown of negotiations, Mackie could give a notice under cl 2. Once it had formed a view that the parties would not be able to agree on the construction agreement, Mackie could give a notice, say, five years later and the notice would be valid. We do not think that this submission raises any obstacle to the acceptance of Mackie’s construction.
We accept that on Mackie’s construction, Mackie could, subject to any estoppel, waiver or election, give a valid notice under cl 2 long after the negotiations had finished. But there is nothing anomalous about this result. On Mackie’s construction, Mackie is effectively entitled to receive $1m if, for whatever reason, it is not awarded the construction contract. Once Mackie has formed the view that it will be ‘unable to agree the negotiation agreement’, its right to compensation is engaged. That right is exercisable by satisfying the notice requirement of cl 2. There is nothing anomalous or even unusual about a right to receive a payment that may arise upon occurrence of some event and is exercisable by notice at any time thereafter.
Second, Reading submitted that the Negotiation Agreement did not envisage the possibility that the project would cease to exist before negotiations were terminated. Reading pointed out that the consideration for entering into the Negotiation Agreement was that the parties would enter into the PTC Agreement. Under the PTC Agreement, Reading was obliged to complete the project. It could not simply walk away from it — that would be a breach of the PTC Agreement. Nor could Reading assign the project to another developer without PTC’s consent. Reading submitted that these features of the PTC Agreement showed that the Negotiation Agreement was not intended to operate if the project did not go ahead.
We would reject that submission. The Negotiation Agreement does not so provide, nor is it necessarily to be implied, that the Negotiation Agreement should be inoperative if, by agreement between Reading and the PTC, the project ceased to exist. The risk that the project might not proceed at all would have been evident to both parties, and no provision was made to exclude that eventuality in the Negotiation Agreement. There is no reason to make such an implication.
For the foregoing reasons, we are persuaded that Mackie’s construction is the correct one and, further, that there was no error by the trial judge in reaching the same conclusion. We are persuaded that Mackie established its entitlement to the sum payable under cl 2.
Disposition of the appeal
Accordingly, the appeal is dismissed.
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