Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria St Doncaster Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2010 0104

RETIREMENT SERVICES AUSTRALIA (RSA) PTY LTD (ACN 078 532 402)	Appellant
	v
3143 VICTORIA ST DONCASTER PTY LTD (ACN 091 532 320)	Respondent

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JUDGES:	WARREN CJ, HARPER JA and ROBSON AJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	19 AUGUST 2011
DATE OF JUDGMENT:	22 JUNE 2012
MEDIUM NEUTRAL CITATION:	[2012] VSCA 134
JUDGMENT APPEALED FROM:	3143 Victoria St Doncaster Pty Ltd v RSA Pty Ltd [2010] VSC 317 (Pagone J)

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CONTRACTS – Management agreement in respect of a retirement village – Entitlement to serve a notice to terminate – Principles of construction – Whether trial judge erred in having regard to evidence of surrounding circumstances – Whether findings contrary to the contractual context contained in the management agreement and other related contracts and in the legislative framework governing retirement villages – Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 164 and Western Export Services Inc & Ors v Jireh International Pty Ltd [2011] HCA 45 applied – Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64 referred to – Entire contract clause – Gordon v Macgregor (1909) 8 CLR 316 and Hope v RCA Photophone of Australia Pty Ltd (1937) CLR 348 applied – Estoppel by convention – Johnson Matthey v AC Rochester Overseas Corp (1990) 23 NSWLR 190 applied – Appeal allowed.

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Mr C M Caleo SC with Mr R M Peters	Minter Ellison
For the Respondent	Mr M R Scott	Gadens Lawyers

WARREN CJ
HARPER JA
ROBSON AJA:

The issues on this appeal

The parties to this litigation are in dispute over the management of a retirement village known as ‘The Domaine’. The village, which is located at 31-34 Victoria Street, Doncaster, is principally designed to cater for residents who, although falling within the definition of a ‘retired person’ as defined in s 3 of the Retirement Villages Act 1986, remain generally independent. By that definition, ‘retired person’ means:

(a) a person who has attained the age of 55 or has retired from full-time employment; and

(b) the spouse or domestic partner of such a person; and
(c) if the person mentioned in paragraph (a) has died, the person who was the spouse or domestic partner of that deceased person.

The respondent, which is a member of a group of companies known as the ‘Darnley Group’ and which in the relevant contractual documentation and throughout this litigation has been referred to as ‘Darnley’, owns the land upon which the complex has been constructed. Its business is, and since 1972 or thereabouts has been, land development. Before January 2001, when it entered into the contracts which are the subject of this appeal, it had had no experience in the management of a retirement village.

By contrast, the business of the appellant, Retirement Services Australia Pty Ltd (‘RSA’), has always been the provision of management and other services to retired people. As Darnley was informed by the firm Arthur Anderson, which Darnley appointed as its consultant for the purpose of examining the prospects of the Doncaster project, RSA in April 2000 operated eight aged care facilities, all of which save two were categorised by Arthur Anderson as exclusively ‘supported residential services’, (an expression defined in the Health Services Act 1988) rather than offering independent living accommodation — as contemplated for The Domaine. The two exceptions were facilities for the elderly known respectively as Templestowe Manor, Templestowe (where 58 rooms were ‘supported residential services’ and 20 were independent living units) and The Concierge in Moorabbin, a retirement village with, in April 2000, 85 independent living units under construction. RSA then had another three retirement villages also under construction.

The distinction between a retirement village such as The Domaine and an aged care facility which provides ‘supported residential services’ is, for present purposes, significant. An important aspect of this litigation is a dispute over the services which are to be provided by RSA as the manager of The Domaine. In this and other contexts, due account must be taken of the legislation governing the provision of accommodation and services to the elderly. Such legislation is one of the ingredients in ‘the objective framework of facts’ within which, together with the parties’ ‘presumed intention in this setting’, the contractual arrangements between the parties came into existence. It is therefore something to which the courts must look ‘when the issue [as in this litigation] is which of two or more possible meanings is to be given’ to the terms of those contractual arrangements.[1]
[1]The quotations in this paragraph are taken from the judgment of Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352 (‘Codelfa’).

It is, we think, important in this context — and at an early point in this judgment — to refer to a provision which is found in one of the two agreements which govern the relationship between the present appellant and the present respondent. Despite what in our opinion is its significance, it is not a provision to which the judgment under appeal refers. It is clause 4.1(k) of an agreement made on 25 January 2001 and entitled by the parties to it as the ‘joint venture agreement’. By clause 4.1(k) the parties agreed:

that it is not intended that the retirement village will be a health service establishment as so defined in the Health Services Act 1988 (Vic).

The relevance of this clause is that it takes The Domaine out of the category of a facility which provides supported residential services to those who live in the village. A ‘health service establishment’ is defined in s 3 of the Health Services Act as a private hospital, a day procedure centre or a ‘supported residential service’. In turn, the expression ‘supported residential service’ is for presently relevant purposes defined in s 3 as meaning premises where accommodation and special or personal care are provided for fee or reward. And that section also provides that ‘special or personal care’ means:

(a)     assistance with one or more of the following –
(i)        bathing, showering or personal hygiene;
(ii)       toileting;
(iii)      dressing or undressing;
(iv)     meals; or

(b) physical assistance for persons with mobility problems; or
(c)assistance for persons who are mobile but require some form of supervision or assistance; or

(d) assistance or supervision in dispensing medicine; or
(e) the provision of substantial emotional support.

The joint venture agreement was drawn by Darnley’s solicitors after receipt by Darnley of the Arthur Anderson report. It is, it seems to us, clear from the insertion by those solicitors of clause 4.1(k) into that agreement, that the parties specifically eschewed the notion that the residents of The Domaine were to be offered ‘special or personal care’, or any of its constituent elements, as part of the package of benefits available to them as residents in return for the fee paid by them to RSA. The point is reinforced by s 111 of the Health Services Act, which provides for the imposition of a penalty (including a daily penalty) upon a proprietor of a health service establishment who carries on that establishment without it being registered under Part 4 of the Act. It follows, it seems to us, that the provision of special or personal care can only be lawfully provided for a fee in a duly registered health service establishment. The Domaine is not such a place.

For the moment, however, any further examination, of The Domaine’s package of benefits will disturb the chronological narrative. It is to this narrative that we now return.

The joint venture agreement in which some of those benefits have part of their genesis came about with the recognition by two businessmen of the potential advantages accruing to their organisations were they to join forces in creating in Doncaster an up-market facility for the accommodation of elderly but generally independent persons. Clinton Casey, the founder of RSA, was actively involved with an AFL football club. So too was a director of Darnley, Mr Gary Hutchins. When the Doncaster land, then an orchard, was offered for sale, Mr Hutchins saw its potential for development, while it seems that Mr Casey appreciated that its development as a retirement village might well put it, in the jargon of the planning profession, to its highest and best use. Mr Casey therefore approached Mr Hutchins with a proposal that the two companies exploit their differing but complementary expertise so as to maximise that potential. Mr Hutchins was receptive, although other potential managers were also in Darnley’s contemplation.

While the project itself was ambitious, the basic concept was simple. Darnley would develop the Doncaster property as a retirement village. It would thereafter be managed by RSA or some like organisation. A joint venture would put the concept into effect.

The negotiations with RSA resulted in it being accepted as the joint venture partner. The aim was to create a ‘first class’ facility. This necessitated not only a joint venture agreement for the development of the land, but a management agreement as well. In addition, residents of the village would be required to enter into contracts which governed their relations with RSA as the village manager; but, in cases where the resident did not own, but merely rented, accommodation in the village, contractual arrangements would need to be made not only with RSA as the manager, but also with Darnley as the lessor.

The joint venture agreement and the management agreement were executed on 25 January 2001. The outcome of this appeal depends upon their proper construction.

Darnley claims that RSA is in breach of three contractual obligations: first, to provide at the village, during at least weekly business hours and at no additional costs to residents (and therefore at RSA’s expense), the services of a qualified nurse; secondly, to make available, promote the use of, and let out as respite units, some 12 single bedroom units which following their construction at some time after January 2001 would be set aside for that purpose at a reasonable rate competitive with facilities of a like kind in the general vicinity; and, thirdly, to refrain from parting with possession of any of its contractual rights or obligations without first obtaining Darnley’s consent.

As RSA admits in its defence, on each of (i) 24 May 2007, (ii) the following 30 August, and (iii) 5 September 2008, Darnley served upon RSA notices specifying what Darnley claimed were RSA’s breaches of the management agreement. This, Darnley submits, has given rise to its entitlement to serve a notice terminating the management agreement immediately. RSA denies that entitlement. With the issues thus joined, Darnley at trial sought a declaration that RSA was in material default or breach of the management agreement and that as a consequence it (Darnley) was entitled to the immediate termination of the relationship.

The trial judge accepted Darnley’s claim. For the reasons given in his judgment, his Honour declared that RSA ‘is and was in material default or breach of the management agreement and that in the circumstances [Darnley] is entitled to terminate the management agreement immediately by service of a notice to that effect.’

RSA contends that his Honour was in error in making that declaration. It: (i) denies any obligation to provide the services of an on-site nurse;[2] (ii) likewise, denies any obligation to make available, promote the use of, and let out respite units;[3] (iii) claims that, while it has no obligation to ‘provide’ respite units, it always stood ready to do so whenever Darnley ‘furnished and fitted out single bed units at its expense for that purpose’;[4] and (iii) asserts that it has not parted with possession of any right or obligation arising out of its contractual relations with Darnley.[5] Enlarging upon the last of these three responses, RSA adds that, far from there being any parting with anything, the only change in its circumstances has no relevance to either the management agreement or the joint venture agreement: that change is merely in the ownership of its share capital; and, because no such change is covered by any contractual term, it is irrelevant.
[2]Defence [11(a)].
[3]Ibid.
[4]Ibid [11(e)].
[5]Ibid [15(b)].

We now turn to consider in some detail the statement of claim and the defence to it. This will provide an opportunity to acquire some necessary familiarity with those contractual terms which are important in the analysis of the issues raised in this appeal.

The pleadings

The statement of claim is not a particularly complex document. It commences, after the formal pleadings, by alleging that in the year 2000 the parties agreed, following negotiations, to jointly develop and market the Doncaster land as a first class retirement village.[6] It is next alleged (in paragraph [4]) that, during the course of the negotiations, RSA ‘advised’ Darnley about, and Darnley ‘accepted’ as fact, a number of things. These included: (i) that RSA had relevant expertise; (ii) that the land could be developed ‘at or higher than the standard of’ another RSA retirement village — this being the 85 unit independent living facility in Moorabbin known as The Concierge; (iii) that RSA had a board of directors, executives and staff sufficiently skilled to properly discharge their managerial duties; (iv) that Clinton Casey was a director of RSA, and that both he and his brother Mark Casey ‘had and would retain an interest and active involvement in the operation of RSA’s retirement villages’; (v) that a high standard retirement village offered, as essential elements, specialised aged care nursing and personal counselling, highly skilled and trained specialist staff (including an experienced State Registered nurse employed full time and provided with an office ‘featuring a glass window to enable discreet daily observation of residents’) and units set aside as respite accommodation; (vi) that RSA would ‘facilitate’ each of these elements; and (vii) that the ‘provision of respite units was a critical method of introducing potential purchasers to a retirement village’.[7]
[6]Statement of claim [3].
[7]Here we paraphrase, but with occasional direct quotations from, paragraph [4] of the statement of claim.

It is not put that this ‘advice’ found its way directly into the written contracts. On the contrary, in opening the case for Darnley at the trial, senior counsel conceded that ‘[u]nfortunately from [Darnley’s] point of view, neither the respite units nor the nature of the nursing services are referred to in the management agreement.’[8] Rather, the particulars presage the submission, made during the course of the trial and relied upon also during the appeal, that, by furnishing Darnley with this ‘advice’, representatives of RSA erected a platform upon which Darnley could base a credible argument that, although neither the matters ‘accepted’ nor the advice received were mirrored in the words of the contractual documents which Darnley’s solicitors prepared, nevertheless those pre-contractual statements formed — at least in part — evidence of ‘the surrounding circumstances known to the parties, and the purpose and object of the transaction.’[9] It was therefore permissible to have resort to them when construing the joint venture agreement and the management agreement. Alternatively, the ‘advice’ of RSA, when accepted by Darnley and acted upon by both parties was sufficient to form thereafter the conventional basis of their dealing with each other. RSA was therefore estopped from denying the binding effect of the representations.
[8]Transcript 18.
[9]Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 179 [40].

That this would be, and is, the position taken by Darnley throughout this litigation is confirmed by the paragraphs of the statement of claim which follow paragraph [4]. Paragraph [5] alleges that, in reliance on the advice, Darnley applied for planning permission to develop the land in accordance with it; and paragraph [6] pleads that, on or about 31 October 2000, the Manningham City Council, as the relevant planning authority, indicated that any planning permit would include a requirement that ‘a range of medical and para–medical services be available to residents including nursing and respite care.’

Three months after receiving this indication from the planning authority, the parties ‘formally entered into an agreement in which they recorded their unincorporated joint venture’.[10] There were, according to paragraph [8] of the statement of claim, terms of the joint venture agreement to the following effect:

(a) Darnley would design and construct the village: clause 4.1(b)(i);
(b)Darnley could in its total discretion seek advice from RSA on all aspects of the project (as defined) including design, construction and marketing strategy and RSA would use its best endeavours to provide advice and information, acknowledging that Darnley would rely upon it for the establishment and operation of the village: clause 4.1(e);
(c)the development of the project would incorporate appropriate facilities which in the normal course would be available to all residents: clause 4.1(f);
(d)RSA would be responsible for the management of the village and would enter into a management agreement in the form set out in a schedule to the joint venture agreement: clause 4.3.

[10]Statement of claim [7].

The management agreement was incorporated into the joint venture agreement as schedule 4 of the latter. As pleaded in paragraph [10] of the statement of claim, the management agreement included terms to the effect that:

(a)RSA would conduct, manage and administer the operation of the retirement village as a ‘first class retirement village’ and would provide ‘management services to a high standard’: clause 7(a);
(b)‘management services’ meant the management of the day to day operation of the village and included ‘services necessary for the care and benefit of residents’: clause 29.1 – definition of ‘management services’;
(c)RSA would be just and faithful in its dealings with Darnley: clause 8(a);
(d)RSA would perform its obligations and commitments under the management agreement: clause 8(b);
(e)if a party is in material default or breach of the management agreement and if such default or breach is not rectified within 30 days of receipt of written notice from the non-defaulting party, the non-defaulting party may serve on the defaulting party a notice immediately terminating the management agreement: clause 14.1;
(f)no party will sell, transfer, license, franchise or otherwise part with possession of or mortgage, charge or otherwise encumber any right or obligation under the management agreement without the prior written consent of the non assigning party: clause 23.

It may be observed at this point that, in its amended defence, RSA denies that it gave the ‘advice’ alleged in paragraph [4] of the statement of claim, and denies that Darnley’s application to the Manningham City Council included any reference to respite units, or to an office designed to allow observation of residents by a full time employee nurse. By contrast, the defence admits (in effect) the allegations made by paragraphs [6]-[10] of the statement of claim. These are that the Manningham City Council required that a range of medical and para-medical services including nursing and respite care be available to residents; that the joint venture agreement was made on 25 January 2001, and included certain terms (which are specified in the pleading); that, by the management agreement, RSA was on 25 January 2001 appointed manager of the village; and that the management agreement contained certain terms (which, again, are specified in the pleading). Then, by its defence, RSA alleges that the management agreement also included a term (to be ascertained by reading together clause 3 and item 4 of the schedule to the agreement) that the appointment of RSA as manager would be for a period of 99 years from 25 January 2001.

The substantive difference between the parties is revealed by the response of RSA to the allegation, made by paragraph [11] of the statement of claim and the paragraphs which follow, that, on the proper construction of the management agreement, its terms as pleaded mean something other than the meaning conveyed by a strict reading of the words themselves without reference to the surrounding circumstances or the purpose and object of the transaction. Thus, paragraph [11] of the statement of claim alleges that on the proper construction of the management agreement and in the circumstances alleged in paragraphs [4]-[8]:

(a)The ‘services necessary for the care and benefit of residents’, provision of the management services ‘to a high standard’, and the conduct, management and administration of the operation of the village as a ‘first class retirement village’ means:
(i)RSA retaining a qualified nurse to staff the nursing station and reception during at least weekly business hours (at no additional cost to residents); and
(ii)RSA making available, promoting the use of and letting out single bedroom units set aside for respite care as respite units at a reasonable rate competitive with facilities of this kind in the general vicinity;

(b)RSA’s obligations under the management agreement were to be performed by its directors, executives and employees of RSA and not vicariously.

The practical importance of the last assertion, even were it made good, must be somewhat uncertain given that the joint venture agreement has a projected life of 99 years. What is quite clear, of course, is the inherently nonsensical notion that, as contended in paragraph [4] of the statement of claim, Clinton Casey and his brother Mark ‘had and would retain an interest and active involvement in the operation of RSA’s retirement villages’ for all 99 years of the duration of the joint venture agreement.

There then follows, in paragraph [12] of the statement of claim, an allegation which raises an issue of estoppel by convention. The effect of this paragraph is to allege that ‘it was the common assumption of Darnley and RSA’ that the matters which are pleaded in paragraphs [4]-[8] of the statement of claim ‘formed the conventional basis of their dealing at the time of entering into the joint venture agreement and management agreement’. (Our emphasis). RSA is therefore now estopped from departing from that assumption.

The ‘dealing’ to which the statement of claim refers is, however, post contractual dealing. It is set out — in paragraph [14] of the statement of claim — in terms which refer only to conduct which took place after 25 January 2001. It is alleged in paragraph [14] that, in consultation with RSA and pursuant to the joint venture agreement, Darnley designed and constructed the village, and included in that design and construction an office for a director of nursing and 12 single bedroom apartments. Not only that, but the two parties promoted and marketed the village as offering both respite care and nursing services while, for its part, RSA provided management services.

The next paragraph of the statement of claim (paragraph [15]) sets the relevant allegations even more squarely into the post-contractual relationship. Darnley there asserts that, in breach of clause 7(a) of the management agreement,

RSA has failed to provide the management services to a high standard in that:
(i)it has failed, properly or at all, to make available, promote the use of or let out the 12 single bedroom units set aside for respite care at a reasonable rate competitive with facilities of this kind in the general vicinity; and
(ii)it has failed to retain a qualified nurse to staff the nursing station and reception during weekly business hours.

Paragraph [15] of the statement of claim further alleges that, in breach of clause 23 of the management agreement, RSA has ‘parted with its rights under the management agreement without the prior written consent of Darnley, and the day to day management of the retirement village has in fact from about 14 June 2006 been conducted by’ an entity known as Australian Retirement Homes Ltd.

In its defence, RSA is at pains to refer to specific clauses in the management agreement. One of these is the agreed duration of RSA’s appointment as manager for 99 years from 25 January 2001. During that period, RSA (in the words of paragraph [10A(3)] of its defence) accepts that it is bound by clause 7 to conduct, manage and administer the operation of the retirement village as a first class retirement village. Consistently with this (the defence continues) RSA will:

(a)provide the management services [as defined in the management agreement] … to a high standard in accordance with this agreement;
(b)if reasonably requested by a resident, provide at the expense of the resident, within the resident’s villa unit or serviced apartment:
(i)hairdressing services by appointment;
(ii)podiatry services by appointment;
(iii)specialised nursing care (when also requested by the resident’s doctor);

…
(d)comply at all times … with all laws and applicable legislation …;
…
(g)enter into a service agreement with each resident;
(h)be responsible for all management services in accordance with guidelines and policies agreed between the manager and Darnley;
…
(j)do all things necessary for the purpose of facilitating the conduct of the management services in a profitable and efficient manner;
(k) supervise and be responsible for the administration of the accounting, staffing and other administrative tasks included in the conduct of the management services;
(l)… bear all costs associated with the operation of the business from the premises, including but not limited to;
(i)the costs of the provision of the management services;
…
(vii)management and administration costs …;
…
but not including any costs and expenses to be borne by the residents pursuant to the service agreements;
…[11]

[11]Defence [10A(3)].

Having in this way replicated (in part) the ipissima verba of clause 7 of the management agreement, the defence — by paragraph [10A] — continues to quote directly from other clauses in that agreement. So far as is presently relevant, these include clause 8(e) which provides that the manager agrees with Darnley that ‘it will not engage … in any activity in respect of or use the assets except as provided or authorised by this agreement’; clause 14.1, to which we refer in paragraph [22] above; clause 23, also referred to in that paragraph; and, importantly for the purposes of construction, clause 27.3, the effect of which is that the totality of the agreement between RSA and Darnley is to be found entirely within the four walls of the relevant contractual documentation. We shall refer to the full text of this clause later in this judgment; for the present it is sufficient to note that the entirety of the ‘agreements and understandings between the parties ... are embodied in this agreement which, as from the date of execution, supersedes all prior agreements and understandings’.[12]
[12]Given that the management agreement is schedule 4 to the joint venture agreement, it seems to us that the expression ‘this agreement’ must, in this context, mean the agreement constituted by the joint venture agreement and the management agreement; and these in turn must be read against a background which includes the service agreements to which the management agreement refers.

The defence next turns, in paragraph [10A(8)] to services which RSA admits it has an obligation to provide. These are defined in clause 29.1 of the management agreement. They include ‘management services’, which — relevantly for present purposes — means the management of the day to day operations of the retirement village, including but not limited to:

(a)ensuring that the emergency call service is monitored continually 24 hours a day to enable a staff member to attend promptly in response to any emergency call and to render such first aid or assistance as can be provided, and thereafter such medical assistance, ambulance transport or other assistance deemed necessary;
…
(j)generally assisting residents of the retirement village where reasonably requested;
…
(l)other services as necessary for the care and benefit of the residents.

Another definition of relevance is that of ‘service agreement’. It is defined in clause 29.1 of the management agreement as meaning ‘the agreement entered into by RSA and a resident in respect of the services to be provided by RSA to that resident in consideration of the payment of the management fees … in a form to be approved by Darnley.’

It may be helpful at this point to return briefly to the two categories of accommodation available at The Domaine. One such category is known as ‘independent living units’ or ‘ILUs’. These are owned not by Darnley but by the residents who occupy them. The other is known as ‘independent living apartments’ or ‘ILAs’, which are leased by Darnley to their occupiers. The inclusion of the word ‘independent’ in each name has some purpose: as mentioned in paragraph [5] above, the village is a retirement village, not a health service establishment providing supported residential services.

The two categories of accommodation are reflected in two categories of service agreement. While both are required by their contractual definition to be in a form approved by Darnley, to only one category is Darnley a party. The standard form service agreement for an ILA is a tripartite agreement between Darnley as landlord, the resident as lessee, and RSA as manager. That for an ILU is between the owner and RSA. Darnley is not a party to any service agreement associated with an ILU. As against this, the evidence at the trial was that the standard form of ILU service agreement was in existence and known to the parties at the time of the execution of the joint venture agreement and the management agreement on 25 January 2001.

The defence next, in paragraph [11], deals with the allegations made in paragraph [11] of the statement of claim. It denies that it was required by its contractual obligations to Darnley to retain a qualified nurse, and alleges ‘that the only obligation it had to Darnley in relation to nursing services was to provide specialised nursing care to a resident — but only in the circumstances specified in clause 7(b)(iii) of the management agreement’.

In paragraph [11] of the defence, RSA also alleges that it had no obligation to provide respite care units, although it was prepared to do so upon those units being furnished and fitted out by Darnley at Darnley’s expense. In addition, RSA claims that it has a contractually-conferred discretion, which is to be found in clause 7(k) of the management agreement, to determine how its accounting, staffing and administrative arrangements were provided; and by that means it was enabled it ‘to enter into arrangements with third parties for the provision of such services by those third parties and for whom RSA remained legally responsible to Darnley for the performance of those services.’

RSA further denies that it was obliged to perform its obligations under the management agreement ‘by its directors, executives and employees … and not vicariously.’ The defence adds, as a general proposition, that:

the construction for which Darnley contends is inconsistent with the subsequent written … agreements [the service agreements] made between Darnley, RSA and persons occupying serviced apartments and, if the words alleged once bore the construction contended for, the meaning of those words has been varied by those … agreements.

For presently relevant purposes, the remainder of the allegations in the statement of claim, save for those concerning the service of the notices of default, are denied. By paragraph [17A] of the defence, however, RSA makes the assertion that Darnley was, from at least August 2006, aware that the shares in RSA had been sold and that the Casey interests no longer controlled RSA. But, despite this knowledge, Darnley continued to enter into tripartite agreements between itself, RSA and residents; continued to take the benefit of the management services, including the fees generated by them; worked with the new owners of RSA in the formulation of protocols for the management and marketing of The Domaine; and has thereby acquiesced in the changed circumstances, and waived any entitlement it had to give a termination notice.

As noted in paragraph [16] above, RSA admits service of each of the three notices of default,[13] but denies that this has given rise to any entitlement on the part of Darnley to serve a notice terminating the management agreement.

The judgment[14]

[13]Defence [16].

[14]3143 Victoria St Doncaster Pty Ltd v Retirement Services Australia (RSA) Pty Ltd [2010] VSC 317 (‘Judgment’).

The judgment commences by noting that clause 14 of the management agreement provides for its termination if (i) either party commits any material default which is not rectified within 30 days of receipt of a notice requiring rectification, and (ii) the non-defaulting party subsequently serves a notice of termination. His Honour then refers to the two provisions which Darnley alleges have been breached: clauses 7(a) (by failing to provide nursing and respite services) and 23 (by parting with its rights under the management agreement without the prior written consent of Darnley).

The substantive portion of the judgment begins at [5], where his Honour observes that the success of Darnley’s claim that RSA breached the terms of clause 7(a) depends upon the proper construction of that term. His Honour then recites its opening words, concluding with the words of sub-clause (a). Given its importance in this litigation, we reproduce below so much of clause 7 as was referred to by his Honour:

Subject to and in accordance with such instructions as the manager may receive from time to time from [the respondent] for the duration of the project, the manager will conduct, manage and administer the operation of the retirement village as a first class retirement village and will provide all services to residents which the manager agrees to provide under the service agreements, and without limitation, will:
(a) provide the management services at and from the premises to a high standard in accordance with this agreement ...

As will have been seen, among the opening words of clause 7 is the expression ‘a first class retirement village’. For its part, sub-clause (a) includes the phrase ‘to a high standard’. Both are wide in their potential import. To these must be added that part of the definition of ‘management services’ which is to be found in clause 29.1(l) of the management agreement: ‘other services necessary for the care and benefit of residents’. Their specific application to the circumstances which the parties confronted at The Domaine was one of the principal points of contention in this litigation.

In opening their respective cases at the trial, the parties addressed this issue by putting to the judge their differing submissions about the nature of the evidence to which it was permissible to have regard in the interpretation of a written contract. His Honour adopted the course of allowing the controversial evidence to be led subject to objection, the strength of which could best be assessed after the evidence had been given.

It is in this context that paragraph [5] of the judgment continues:

Darnley contended that the proper construction of this provision, in the circumstances relevant to the agreement, means that RSA was required to retain a qualified nurse to staff a nursing station and reception during at least weekday business hours (at no additional cost to the residents) and that RSA was to make available, and to promote the use of and letting out of single bedroom units set aside for respite care as respite units at a reasonable rate competitive with facilities of this kind in the general vicinity. The same contention was also maintained by Darnley, in the event that its construction was not upheld, on the basis of a conventional assumption between Darnley and RSA that the meaning of the obligation in clause 7(a) was to the effect contended as its proper construction.

The judge, having observed that ‘[c]ounsel for both parties agreed that there was no dispute between them about the principles of statutory [scil. contractual] construction relevant to my determination but disagreed about how those principles were to be applied on the facts’,[15] accepted the submissions put on behalf of Darnley. They were to the effect that, in deciding what the contracts meant, his Honour was entitled to receive evidence of ‘contextual material, including statements made between the parties both before and after contracting’.[16] RSA on the other hand ‘maintained that such evidence was inadmissible and irrelevant to the proper determination of the contractual obligations entered into or to the basis upon which any conventional estoppel might apply.’[17]
[15]Judgment [6].
[16]Ibid.
[17]Ibid.

The judge next turned his attention to the means by which any necessary specificity should be given to the general words of clause 7(a). His Honour began this part of his judgment by saying that:

What the parties expressed was a broad obligation which they intended would be given detailed content in the context of their undertaking. In this case the context was a retirement village for people to live in a community and who might from time to time require assistance. The commercial purpose of Darnley and RSA was to create such a facility which would attract people seeking to retire in the comfortable surroundings of a community. In the context of this agreement that included the presence of a person with nursing qualifications and the active marketing of the respite units: both are but instances of the obligations expressly found in clause 7(a) to conduct, manage and administer the operation of the retirement village as ‘a first class retirement village’ and to provide services at and from the premises ‘to a high standard’.[18]

[18]Ibid [8].

The judgment turned, to an important extent, on the judge’s acceptance of the Darnley position as described in paragraph [45] above. In the course of coming to this conclusion, his Honour resorted to, and quoted from, the well known passage in the judgment of Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW):

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, as we have seen, if the facts are notorious knowledge of them will be presumed.
It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.

Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.

The passage goes on to say:

There may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention. If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal. After all, the court is interpreting the contract which the parties have made and in that exercise the court takes into account what reasonable men in that situation would have intended to convey by the words chosen. But is it right to carry that exercise to the point of placing on the words of the contract a meaning which the parties have united in rejecting? It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances. See Heimann.[19]
The importance of this evolution of the law as it affects the construction of contracts is that it centres upon the presumed, rather than the actual, intention of the parties. Once it is accepted that in the construction of the contract account is taken of the presumed intention of the parties it naturally follows that account should also be taken of their presumed intention when the court is called upon to decide whether a term is to be implied. The existence of the remedy of rectification and the purpose which it serves makes it obvious that the actual intention of the parties cannot constitute the basis of an implied term.[20]

[19](1938) 38 SR (NSW) 691, 695 (Jordan CJ).

[20](1982) 149 CLR 337, 352.

What was said by Mason J in this passage remains good authority. That this is so was affirmed by the High Court in Royal Botanic Gardens and Domain Trust v South Sydney City Council[21] and reaffirmed in Western Export Services Inc & Ors v Jireh International Pty Ltd.[22] In the second of these cases, Gummow, Heydon and Bell JJ — having cited the relevant text from the judgment of Mason J — said:[23]

We do not read anything said in this Court in Pacific Carriers Ltd v BNP Paribas;[24] Toll (FGCT) Pty ltd v Alphapharm Pty Ltd;[25] Wilkie v Gordon Runoff Ltd[26] and International Air Transport Association v Ansett Australia Holdings Ltd[27] as operating inconsistently with what was said by Mason J in the passage in Codelfa to which we have referred.

[21](2002) 240 CLR 45, 62-63 [39].

[22][2011] HCA 45

[23]At [5].

[24](2004) 218 CLR 452, 461-462 [22].

[25](2004) 219 CLR 165, 179 [40].

[26](2005) 221 CLR 522, 528-529 [15].

[27](2008) 234 CLR 151, 160 [8], 174 [53].

As the trial judge correctly noted in the present case, it is made clear in this passage from Codelfa that statements and actions of parties which reflect their ‘actual’ intentions may not be used to displace their written agreement. The underlying reasoning behind this principle was outlined by the judge as follows:

The point is that contracts are to be construed by objective circumstances by reference to the words used by the parties in their written document as those chosen to govern their relations (in the absence of any claim for rectification).[28]

[28]Judgment [7].

His Honour then entered into territory which, at trial and on this appeal, was heavily controversial. In his Honour’s opinion:

Darnley did not seek to rely upon the facts and circumstances outside of the contract ‘to contradict the language of the contract’ or ‘at the expense of the actual language of the written contract’, but, rather, sought to rely upon evidence of surrounding circumstances ‘to assist in the interpretation of the contract’.[29]

[29]Ibid.

In RSA’s submission, his Honour ought to have come to the opposite conclusion. According to RSA, the judge did not construe the ‘contracts ... by objective circumstances by reference to the words used by the parties in their written document’.[30] Rather, the judge allowed Darnley to rely upon facts and circumstances ‘outside of the contract’; and it did so ‘to contradict’, or ‘at the expense of the actual language of the written contract’.[31] This Darnley was permitted to do (so RSA’s submission continued) because the judge failed to place the words of clause 7(a) of the management agreement in their true contractual context. Rather, (adopting the phraseology of Mason J in Codelfa) his Honour diverted his focus away from the contractual context and towards ‘statements and actions of the parties which [were] reflective of their actual intentions and expectations’ and, in particular, to post-contractual conduct. As such, and for the reasons given by Mason J in Codelfa, those statements and actions were not receivable.
[30]Ibid.
[31]Ibid.

RSA contends that this complaint is strengthened by resort to the words of the judgment presently under appeal. So that the grounds of appeal may be better understood, it is necessary to quote at some length from that judgment. His Honour there said:

Darnley sought to rely upon evidence that the parties, when formulating their agreement in 2000, intended that RSA would provide a qualified nurse to staff a nursing station and reception area and provide respite services as part of the obligations which found expression in clause 7(a) of the management agreement.[32]
…
The ‘surrounding circumstances known to the parties, and the purpose and object of the transaction’[33] bearing upon the meaning of the words adopted in clause 7(a) of the management agreement may be seen from the commencement of the relationship between RSA (through Mr Mark Casey) and Darnley (through Mr Gary Hutchins). … Mr Hutchins was taken by Mr Mark Casey to see villages operated by RSA including those known as Concierge and Veronica Gardens and had many meetings in 2000. Mr Paul Shaw, the architect for Darnley, was provided with RSA’s plans for Concierge when preparing the plans for what became The Domaine. Mr Mark Casey also spoke at a meeting of the Council whose approval was necessary, and was subsequently obtained, for The Domaine development.[34]
The evidence of Mr Mark Casey, who, as I have noted, was called to give evidence by RSA, was consistent with the evidence given on behalf of Darnley. Specifically, his evidence confirmed that it was contemplated by Darnley and RSA from the beginning that what would be on offer at the Domaine as an RSA managed property would include a nurse employed at The Domaine, and that respite services would be marketed and would be available. Mr Mark Casey was asked by counsel for RSA about discussions with Mr Hutchins in 2000 concerning the person who would be available on staff to respond to any emergency call by a resident. His answer was that he had told Mr Hutchins at an early stage that RSA generally employed people who had a ‘nursing background’ because such people had the capacity to handle those types of situations. When asked to explain what he meant by a ‘nursing background’ he explained that RSA ‘would generally employ a nurse to’ the position. In cross-examination Mr Casey recalled having had a conversation with representatives for Darnley to the effect that there would be a nurse on staff in a full time position. He also accepted to have said that respite care facilities would be provided as part of what was anticipated when the apartment building was built. Indeed, he regarded it as an important marketing feature for there to be such respite facilities which he considered to be attractive to potential residents.[35]
To these objective circumstances surrounding the entering into of the management agreement there may be added the undoubted objective circumstance of the building having been constructed with units for respite facilities and a nurse’s station with a window overlooking the entrance foyer to permit greater observation of residents. The evidence given by Ms Louise Testart for RSA was that any such window would have little purpose and would not enable a nurse to see very much and, indeed, her evidence was initially that she did not recall the window. In any event, a room was created with a window where an internal wall might otherwise have been built. Ms Testart may not think the window as functional for the purpose as she may have understood the questions in cross-examination, but the evidence seems otherwise clear enough that a window had been placed for the purpose of giving effect to the presence of a full time nurse at the premises. Another objective circumstance surrounding the understanding of the parties at the time of entering into the management agreement was the presentation made (which included Mr Mark Casey) to the Manningham City Council for the purpose of obtaining a planning permit. On 8 February 2001 (after the presentation) the Council issued a planning permit with a condition that Darnley was to ensure that a range of medical and paramedical services would be available to the residents of the village. The permit as issued stated that these services were specifically required to include ‘nursing/respite care’ in accordance with the presentation in which RSA, through Mr Mark Casey, participated.[36]
There is other evidence which to a greater or lesser extent supports Darnley’s contention about the way in which the parties understood the terms of the obligations in the management agreement. Two residents at The Domaine were called by Darnley to give evidence: Mr Raymond Love and Ms Dorothy Donaldson. Mr Raymond Love recalled that from the outset of his period of residence he was told that there would be respite services as well as a nurse employed at the premises. Ms Dorothy Donaldson recounted a conversation she recalled having had with Ms Testart at a display villa at around Christmas 2001. Ms Donaldson recalled being told there would be a nurse at The Domaine and that respite facilities would be available within The Domaine. Furthermore, there was the evidence of Mr Paul Shaw who prepared the architectural drawings for The Domaine on which he worked from 2000. His instructions for the preparation of the drawings in part came from Mr Mark Casey at meetings, and Mr Shaw recalled the presentation to the local Council in 2000 at which Mr Mark Casey gave an overview of the services to be provided by RSA. In addition, Darnley’s Sales Director, Mr Max Williams, had been told at meetings with Mr Mark Casey that the management services to be provided by RSA would include respite facilities at The Domaine and that there would be an onsite nurse. He had been told that the availability of respite facilities helped sales because residents who needed respite would not need to leave the village if they needed respite in circumstances in which they could not otherwise stay in their own residence in the village. The availability of respite facilities at the village would mean that the residents could remain within the broader community in which they lived in circumstances where they might not otherwise be able to stay in their own home independently. Mr Christopher Tucker was the advertising executive who handled Darnley’s advertising of The Domaine. He produced a number of brochures and was briefed by Mr Mark Casey about the key concepts involved in the project. His evidence was to the effect that the village would provide facilities for personal care, including nursing, and respite care.[37]
In my view the duties of RSA under clause 7(a) to provide the management services (as defined) includes, and if it be relevant was understood by the parties to include, obligations to employ a nurse as a full time member of staff located at The Domaine and to market the respite services in the units in the apartment building which were built and exist for that purpose.[38]

[32]Ibid [8].

[33]Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 179 [40] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).

[34]Judgment [9].

[35]Ibid [10].

[36]Ibid [11].

[37]Ibid [12].

[38]Ibid [13].

In addition to Darnley’s complaint about the failure by RSA to provide either the nursing or the marketing services is its claim that, in breach of clause 23 of the management agreement, RSA has parted with possession of its contractual rights and obligations without first obtaining Darnley’s consent. This, according to Darnley, was the result of the sale in 2006 of a group of companies, of which RSA was one, to a joint venture between Macquarie Bank Ltd and KFP Ltd.

Two agreements were put in evidence in support of this claim. It is unnecessary to examine them. RSA is not a party to either. His Honour held that their effect was to deprive RSA of any ‘independent existence or control in any practical way beyond the barest of the legal entitlement or obligation in respect of the business which it had agreed with Darnley to conduct.’[39] The judgment continued:

It was correctly conceded by counsel for RSA that the day to day tasks of operating the Domaine Retirement Village fell not to the account of people employed by RSA but to people employed by FKP. It was also correctly conceded by counsel that I could infer (and I do infer) that RSA had agreed to, and consented to, the appointment of FKP to conduct the business previously conducted by RSA.[40]
…
The plain fact is that RSA cannot in any meaningful sense be considered to be in possession of the business or of any right to conduct the business. It, through its directors, has permitted the arrangements by which it, its servants and agents, no longer conduct the business. There is no meaningful or practical sense in which RSA continued to be the party managing the business after the transactions in 2006 in which FKP has secured, amongst other things, the business conducted at the Domaine.[41]

[39]Ibid [15].

[40]Ibid [15].

[41]Ibid [16].

The judge finally considered, and dismissed, the argument put by RSA that the default notices were invalid.[42] He accordingly made the declaration sought by Darnley.
[42]See [14] above.

The notice of appeal

By its notice of appeal, RSA asserts that the judge ought not to have admitted — or, more strictly put, once received ought to have put aside — evidence of what representatives of RSA said either to Darnley, or to the Manningham City Council, or to prospective residents. Nor should his Honour have had regard to the evidence of post-contractual conduct. In other words, error was perpetuated in admitting evidence of parties’ intentions and pre and post-contractual conduct. One consequence of acting upon that evidence was, according to the notice of appeal, that his Honour ‘erred in deciding ... that clause 7(a) of the management agreement ... required RSA to employ a nurse as a full time member of staff located at The Domaine’.[43] That conclusion was equally incorrect to the extent that it was said to be justified by a conventional estoppel; and in any event, or so RSA maintains, the judgment suffers from its failure to specify with the necessary precision what his Honour considered to be the contractual requirements concerning the hours during which the nurse was to be available, at whose expense she or he was to be engaged, and where she or he was to be located within The Domaine complex.
[43]Notice of appeal [3].

There were, according to the notice of appeal, other consequences of what RSA claims to be the judge’s mistaken decision to act upon evidence which ought to have been disregarded. RSA maintains that his Honour ‘erred in deciding ... that clause 7(a) of the management agreement, or a conventional estoppel, required RSA to market the “respite services” in the [respite] units in the apartment building located at The Domaine which were built and exist for that purpose’.[44] And having decided that RSA was obliged to market these services, his Honour ‘erred in failing to determine [their] nature and content’.[45]
[44]Ibid [7].
[45]Ibid [9].

There is in its notice of appeal a second string to this aspect of RSA’s contentions. It is that, having decided that RSA was (by the management agreement or by a conventional estoppel) required to employ a nurse as a full time member of staff located at The Domaine, the judge erred in failing to decide that the parties subsequently varied their contractual arrangements in such a way as to oblige RSA to provide nursing services only when requested to do so by a resident and the resident’s doctor, and at the resident’s expense.

The notice of appeal puts forward two other errors which, RSA claims, were made by the judge. First, his Honour ‘erred in deciding ... that RSA had parted with possession of its right to manage The Domaine in breach of clause 23 of the management agreement.’[46] Secondly, the judge ‘erred in deciding ... that the rectification notices given to RSA by Darnley pursuant to clause 14.1 of the management agreement ... were valid.’[47]
[46]Ibid [11].
[47]Ibid [13].

Nursing and respite care – differing approaches to the evidence

Having allowed Darnley and then, by necessity, RSA, to call evidence of intention and pre and post- contractual conversations and conduct, his Honour should have ruled that all or much of that evidence was irrelevant and was therefore to be put to one side. The evidence in question is referred to in the lengthy extract from the judgment which is reproduced in paragraph [54] above. It includes (i) the evidence given by Mr Mark Casey about the intentions of RSA in relation to (a) the employment of a nurse, (b) the marketing of respite units, and (c) RSA’s interaction with Paul Shaw, Darnley’s architect; (ii) evidence about Mr Casey’s submissions to the Manningham City Council; (iii) the evidence of the two Domaine residents, Mr Raymond Love and Ms Dorothy Donaldson; (iv) the evidence that the apartment building had been constructed with units for respite facilities and a nurse’s station with a window overlooking the entrance foyer to permit greater observation of residents; (v) the evidence given by Darnley’s sales director, Max Williams; and (vi) the evidence given by the advertising executive (Mr Christopher Tucker) who acted for Darnley in promoting The Domaine.

In his Honour’s opinion, this evidence went to the ‘surrounding circumstances known to the parties, and the purpose and object of the transaction’ and bore upon ‘the meaning of the words adopted in clause 7(a) of the management agreement’.[48] That approach was erroneous. Contrary to the requirements laid down in Codelfa, the relevant evidence was evidence ‘of statements and actions of the parties which are reflective of their actual intentions and expectations’.[49] As such, it was not receivable.
[48]Ibid [9].
[49]Codelfa (1982) 149 CLR 337, 352.

It is further necessary to examine in more detail the evidence upon which his Honour relied, and in doing so to analyse it against the principles enunciated in the authorities. Having performed that exercise, the evidence should, it seems to us, be compared and contrasted not only with the words of the management and joint venture agreements but with the service agreements as well.

However, where the dispute concerns the meaning of a contract which has been reduced to writing (especially a contract which, like the management agreement here, contains an ‘entire agreement’ clause),[50] the principal point of initial focus must be the directly relevant written words in the context of the documentary whole. In this initial phase, evidence about objective background facts should be in the foreground, but not centre stage. Evidence of statements and actions of the parties which are reflective of their actual intentions and expectations should be out of sight.
[50]Clause 27.3, which provides that ‘[a]ll the agreements and understandings between the parties ... in relation to the subject matter of this agreement are embodied in this agreement, which ... supersedes all prior agreements and understandings.’

In this judgment, we will have examined the evidence before we turn to the contentious terms in the context of the totality of the relevant contractual arrangements. This approach has been shaped by the circumstances surrounding this appeal, and in particular the judgment from which the appeal is brought. As is plain from the principles laid down by the High Court in the cases cited in paragraph [50] above, this is not an approach which should otherwise be adopted.

The evidence to which the judgment had regard

It was on the appeal submitted on behalf of Darnley that much of the evidence to which objection is now taken was called by RSA from its witness, Mr Mark Casey. If that evidence demonstrates anything, however, it is that what Mr Casey said to the representatives of Darnley before the signing of the joint venture agreement and the management agreement was aspirational — that is, it was designed to indicate to the Darnley representatives what RSA expected of — and intended for — The Domaine. The following exchange between counsel for RSA and Mr Casey during the latter’s examination in chief is illustrative:

Q:Beyond those visits to [Veronica Gardens and The Concierge, retirement villages then operated by RSA] did you attend meetings or have conversations with any Darnley representatives about the development of this land [The Domaine] in the course of the year 2000?
A:Absolutely, yes. Many visits.
Q:How many meetings would be your guess?
A:I would say at least 10.
Q:At those different meetings, which Darnley representatives attended?
A:Initially it was mainly Ian Farrer and Gary [Hutchins] that I was dealing with and trying to convince them to let RSA be the manager – firstly it was trying to convince them to do a retirement village on the site. Once they had come to the conclusion that was a good idea, then it was a matter of trying to secure the management rights for RSA as the manager. So over that year that’s what I was doing, trying to talk them into that.[51]

[51]Transcript 459.

The aspirational nature of Mr Casey’s evidence is further illustrated by what he told his Honour about the pre-contractual negotiations during which the topic of nursing was discussed. He said in evidence that he told Darnley that RSA would employ a ‘director of nursing’ when ‘the main centre [scil. the apartment building] was operational’. The construction of the apartments had not then commenced; indeed, as the parties knew, the work on the apartments would not begin for several years, and would not be completed until at least 2004.[52] When asked whether he had said anything about ‘someone living on the site’ he replied that, so far as he could recall, he did not.[53] It was put to him in cross examination that he informed the Darnley representatives that ‘if RSA was to be appointed the manager … there would be a nurse provided on staff [in] … a full time position.’ In response, he said: ‘I don’t recall exactly when I said that, but I do recall having a conversation along those lines’.[54]
[52]Ibid 303.
[53]Ibid 463.
[54]Ibid 473.

Another topic raised in pre-contractual negotiations was that of respite care. In the judgment under appeal, his Honour referred to evidence of Mr Casey to the effect ‘that respite services would be marketed and would be available.’[55] For our part, we cannot find any reference in Mr Casey’s evidence to RSA accepting the responsibility for marketing such services, although he did suggest both that they would be an attractive part of a marketing package,[56] and that respite care would be provided ‘[i]n the apartment building when it is built’.[57]
[55]Judgment [10].
[56]Transcript 469.
[57]Ibid 475.

The apartment building to which reference was thus made was constructed several years after the joint venture agreement and the management agreement were entered into. It is that building in which are found not only the independent living apartments which form part of The Domaine complex but also a nurse’s station with a window said to be strategically placed for the observation of residents. It was, according to Mr Casey, RSA who suggested that 12 of the almost 90 apartments should be ‘bed/sitter style apartments … as a sales feeder into the other apartments … that was one of the bits of feedback we gave to Darnley, that we felt that … the bedsitters should be included in the design’.[58] A little later in his evidence, Mr Casey remembered ‘having a conversation with Gary [Hutchins] in 2000/2001 that I felt from a sales and marketing point of view it was a smart way to go, to have an ‘age in place’ facility and provide all facets of services.’ Mr Casey explained that the concept was based upon the proposition that a retirement village would be enhanced were its residents able to move within the facility from independent living (but with the availability of emergency care) to accommodation with provision for more intensive assistance.
[58]Ibid 466.

In his judgment, his Honour referred to Darnley’s contention that, on the proper construction of clause 7(a) of the management agreement, ‘RSA was to make available, and to promote the use of and letting out of single bedroom units set aside for respite care as respite units at a reasonable rate competitive with facilities of this kind in the general vicinity.’[59] He later characterised Darnley’s position as one which relied ‘upon evidence that the parties, when formulating their agreement in 2000, intended that RSA would provide a … reception area and provide respite services as part of the obligations which found expression in clause 7(a)’.[60] Later in the same paragraph, the judge referred to the ‘commercial purpose of Darnley and RSA’ as including ‘the active marketing of the respite units’.[61] In paragraph [10] of the judgment, he recounted the evidence of Mr Casey as being that ‘respite services would be marketed and would be available.’ His Honour’s conclusion was that ‘the duties of RSA under clause 7(a) to provide management services … includes … obligations … to market the respite services in the units in the apartment building which were built and exist for that purpose.’[62]
[59]Judgment [5].
[60]Ibid [8].
[61]Ibid.
[62]Ibid [13].

Among the other presently relevant references in the judgement is one which picks up Mr Casey’s evidence about his contact with the architect, Mr Shaw. When asked about ‘any meetings with Mr Shaw, the architect, on his own, just the two of you, without the Darnley representatives in the year 2000’, Mr Casey answered:

I recall taking a set of plans of The Concierge to Mr Shaw’s offices and dropping them into Mr Shaw.
Q: Why did you do that?
A:To give him – Mr Shaw hadn’t done retirement before to really give him a leg up in terms of what we felt was a good retirement design, and it was really leading edge I suppose at that particular time.[63]

[63]Transcript 460.

Mr Casey was then taken to a meeting with representatives of the Manningham City Council. He responded:

I gave a briefing on the style of services that we would be providing as manager and [I] was there to answer any questions any councillor or council officer may have.[64]

[64]Ibid 461.

Condition 41 of the planning permit issued by the Manningham City Council requires that Darnley ‘ensure that a range of medical and para-medical services are available to residents of the village which must include nursing/respite care and on-site visitations by a general practitioner and physiotherapist.’ In cross examination, Mr Casey agreed that he referred, in his meeting with the Council, ‘to the provision of nursing and respite care’, to which was linked the provision at The Domaine of a ‘sort of medical suite … where a medical practitioner could come’. Nothing was said at this point about a resident or full-time nurse.

The aspirational nature of Mr Casey’s evidence was further demonstrated in cross examination. He was taken[65] to four paragraphs in an undated document headed ‘An Introduction and Proposal – Victoria Street, Doncaster’. He agreed that it was his task ‘to pass this [document] on to Darnley so that they understood the kind of services that RSA could provide’.[66] Its being given to Darnley preceded the making of the joint venture agreement and the management agreement. Each of the first two of the four paragraphs contains but a single sentence. The first reads: ‘RSA believes that each of its new developments has progressively set higher standards in quality accommodation for the retired and the aged’. The second, which follows immediately after the first, states that: ‘Added to these [are] … specialised aged care nursing and personal counselling, retirement home management, real estate expertise, and financial planning and advice for the aged.’
[65]Ibid 471.
[66]Ibid 472.

The other two paragraphs are a little longer. They read, respectively: [67]

Skilled care and attention, and immediate response to residents’ requirements is a paramount consideration, and it is the ‘onsite’ manager’s task to ensure that all staff, both nursing and domestic, are equipped with the appropriate knowledge and skill required to enable them to cope with any situation in a totally professional manner.
RSA ensures that all properties are fully staffed with qualified personal care attendants, who are skilled at providing personal and health care services, including daily personal routine assistance, such as showering and dressing, if called upon to do so.

[67]RSA to The Darnley Group – An Introduction and Proposal – Victoria Street Doncaster (undated) – trial exhibit P7.

In the end, the complaint of RSA about this aspect of his Honour’s judgment boils down to this: that there is a disconformity between the principles laid down in Codelfa and the application of those principles by the trial judge. In Codelfa, Mason J made it clear that insofar as ‘evidence of prior negotiations … consist[s] of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable.’ In the passages quoted in paragraph [54] above, his Honour the trial judge spoke (with our emphasis being imposed on the phrases which follow) of what ‘the parties, when formulating their agreement in 2000 intended that RSA would provide’.[68] The judge also referred to the parties’ expression of ‘a broad obligation which they intended would be given detailed content in the context of their undertaking’ and of evidence given by Mark Casey which ‘confirmed that it was contemplated by Darnley and RSA from the beginning that what would be on offer at The Domaine, as an RSA managed property would include a nurse employed at The Domaine, and that respite services would be marketed and would be available.’ As his Honour also recorded in the judgment, Mr Casey in cross examination

recalled having had a conversation with representatives for Darnley to the effect that there would be a nurse on staff in a full time position. He also accepted to have said that respite care facilities would be provided as part of what was anticipated when the apartment building was built.[69]

[68]Judgment [8].

[69]Ibid [10].

His Honour then described this evidence as being of ‘objective circumstances’, whereas RSA contends that it is, on the application of the Codelfa principles, more appropriately categorised as (to repeat the words of Mason J) evidence ‘reflective of [the parties] actual intentions and expectations’.

The trial judge added to his class of objective circumstances ‘the undoubted objective circumstance of the building having been constructed with units for respite facilities and a nurse’s station with a window overlooking the entrance foyer to permit greater observation of residents.’ That window, his Honour said, has ‘been placed [in the apartment building] for the purpose of giving effect to the presence of a full time nurse at the premises.’[70] Putting aside the evidence of Louise Testart, a nurse who joined the staff of RSA in 1995, that ‘any such window would have little purpose’, his Honour found that ‘a room was created with a window where an internal wall might otherwise have been built.’[71] This, in his Honour’s opinion, strengthened the conclusion that RSA was contractually bound to make available to residents of The Domaine the services of a full time nurse located in the village ‘and to market the respite services in the units in the apartment building which were built and exist for that purpose.’[72]
[70]Ibid [11].
[71]Ibid.
[72]Ibid [13].

As the judgment below reveals, evidence upon which his Honour further relied as ‘evidence that the parties, when formulating their agreement in 2000, intended that RSA would provide a qualified nurse to staff a nursing station and reception area and provide respite service as a part of the obligations which found expression in clause 7(a) of the management agreement’[73] was given by Raymond Love and Dorothy Donaldson (see [54] above). There is no need to reproduce that evidence here.
[73]Ibid [8].

Additional evidence, adjudged relevant by his Honour, was given by Darnley’s sales director (Max Williams) and an in-house advertising executive (Christopher Tucker). Mr Williams was asked in chief by senior counsel for Darnley about the ‘services [which] were to be provided’. He replied:

The services were that they would manage the village, that they would have a live-in manager, that they would also have a nurse, an onsite nurse, and we [sic] would offer respite services.[74]

In cross examination, Mr Williams was asked about proposals put by RSA in 2002 concerning aged care services. His response was:
Due to the lack of respite and nursing services, I think that it would be blatantly obvious that they [RSA] didn’t want to pursue it either, so it wasn’t something that was pursued at that later stage. It was discussed very early, but it wasn’t pursued later on.[75]

[74]Transcript 253.

[75]Ibid 268.

In his evidence in chief, Mr Tucker said that ‘we [Darnley] understood that the development included things like respite care’ but ‘[t]hat particular area wasn’t for our purposes elaborated too intently on because it was very clear to us that RSA were the ones who were going to promote that service, so we only knew about things in very general terms in terms of respite’.[76] Mr Tucker was then asked about nursing. He responded:

That was going to be an important part of the development. When the apartment building was … completed, which was going to be around 2004/2005, from what we understood, that … was going to be a key part of what I understood RSA would be providing.[77]

[76]Ibid 303.

[77]Ibid.

When Mr Tucker was reminded that the management agreement was executed in January 2001, and asked whether he remembered ‘the form and content of advertisements of the village up to that period’ he answered, in substance, that: ‘It was largely selling real estate, I guess, at that point in time.’[78] Respite and nursing care were, it seems, left for times to come.
[78]Ibid 304.

Principles of contractual construction – surrounding circumstances

A key issue in this case is the extent to which surrounding circumstances can be used to construe a contract. It is therefore useful to consider authorities dealing with this subject.

In Codelfa the High Court held that evidence of surrounding circumstances is admissible to assist in the interpretation of a contract if the language is ambiguous or susceptible of more than one meaning. If evidence of surrounding circumstances is admissible then, as discussed below, there are limits on the admission of prior negotiations.

In Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Ltd[79] the High Court considered a contention that in determining whether the meaning of ‘lease’ in a written agreement was a reference to a ‘commercial lease’ the court could rely on what was said in the course of negotiations leading up to the making of the contract. This evidence was said to be evidence of the surrounding circumstances.
[79](1979) 144 CLR 596 (‘Secured Income’).

Mason J (with whom Gibbs, Stephen and Aickin JJ agreed) rejected the argument saying:

In truth the evidence is not evidence of surrounding circumstances; it is evidence of the antecedent oral negotiations and expectations of the parties and as such it cannot be used for the purpose of construing the words of a written contract intended by the parties to comprehensively record the terms of the agreement which they have made. As Lord Wilberforce said in Prenn v.Simmonds:[80]
‘… evidence of negotiations, or of the parties' intentions … ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the 'genesis' and objectively the 'aim' of the transaction.[81]

[80](1971) 1 WLR 1381, 1385.

[81]Secured Income (1979) 144 CLR 596, 606.

In Codelfa Mason J addressed the issue of whether the authorities supported the view of the Court of Appeal, in the decision under appeal, that it is legitimate to take into account common beliefs of the parties as developed and manifested during their antecedent negotiations. After a careful examination of the authorities Mason J formulated principles that limit the extent to which evidence of prior negotiations and even those that relate to common beliefs may be admissible in construing the terms of a written contract. Before coming to those it is helpful to revisit Mason J’s examination of the prior authorities.

Mason J began by setting out the broad purpose of the parol evidence rule, stating that it is:[82]

to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument.[83]

[82]Codelfa 347.

[83]Goss v Lord Nugent (1833) 5 B & Ad 58, 64-65.

Mason J then moved to the proposition that evidence of surrounding circumstances is admissible in aid of the construction of a contract. He cited with approval Lord Wilberforce in L Schuler AG v Wickman Machine Tool Sales Ltd:[84]

The general rule is that extrinsic evidence is not admissible for the construction of a written contract; the parties' intentions must be ascertained, on legal principles of construction, from the words they have used. It is one and the same principle which excludes evidence of statements, or actions, during negotiations, at the time of the contract, or subsequent to the contract, any of which to the lay mind might at first sight seem to be proper to receive.
His Lordship noted that evidence of surrounding circumstances is an exception to the rule, but he had no occasion to discuss its scope for there it was not, as it is here, a critical question. [85]

[84][1974] AC 235, 261.

[85]Codelfa 348.

Mason J also referred with approval to Prennv Simmonds[86] where, in his Honour’s words, it was held that:

although evidence of prior negotiations and of the parties' intentions, and a fortiori the intentions of one of the parties, ought not to be received, evidence restricted to the factual background known to the parties at or before the date of the contract, including evidence of the ‘genesis’ and objectively of the ’aim’ of the transaction, was admissible. Considered in the light of this evidence ‘profits’ meant ‘consolidated profits’.[87]

[86](1971) 1 WLR 1381.

[87]Codelfa 348.

As noted by Mason J in Codelfa,[88] this principle was approved by the High Court in DTR Nominees Pty Ltd v Mona Homes Pty Ltd where Stephen, Jacobs and Mason JJ followed Prenn and said:

A court may admit evidence of surrounding circumstances in the form of ‘mutually known facts’ ‘to identify the meaning of a descriptive term’ and it may admit evidence of the ‘genesis’ and objectively the ‘aim’ of a transaction to show that the attribution of a strict legal meaning would ‘make the transaction futile.’[89]

[88]Ibid 351.

[89](1978) 138 CLR 423, 429.

In Codelfa Mason J said that in Secured Income that he ‘had accepted and applied Lord Wilberforce’s different treatment, for the purpose of construing a contract, of the evidence of surrounding circumstances on the one hand and of the parties’ intentions on the other hand. Having considered the topic in more detail on this occasion I see no reason to qualify what I then said.’ He then went onto set out the ‘true rule’ that is quoted above in paragraph [48].

It can be seen, therefore, that in determining whether prior negotiations may be admissible in construing a written contract a distinction must be drawn between negotiations that tend to establish objective background facts which were known to both parties, and the subject matter of the contract and negotiations in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations.

English position

Prenn has recently been confirmed by the House of Lords in Chartbrook Ltd v Persimmons Homes Ltd.[90] Lord Hoffmann said, after a detailed examination of the reason for the rule excluding evidence of prior negotiations in construing written contracts, that ’the rule may well mean that parties are sometimes held bound by a contract in terms which, upon a full investigation of the course of negotiations, a reasonable observer would not have taken them to have intended. But a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes.’[91]
[90][2009] 1 AC 1101, [30]-[41] (Lord Hoffmann with whom Lord Hope of Craighead, Lord Rodger of Earlsferry and Baroness Hale of Richmond agreed) (‘Chartbrook’).
[91]Ibid [41].

Exceptions or qualifications

There are some exceptions or qualifications to the rule that warrant brief examination. First, as discussed above, the High Court has accepted that prior negotiations that tend to establish objective background facts which were known to both parties are admissible.

Secondly, Mason J referred to another qualification to the parol evidence rule concerning the identification of the subject matter of the contract.[92] He cited with approval Lord Davey in Bank of New Zealand v Simpson[93] who in turn quoted with approval the remarks of Lord Campbell in Macdonald v Longbottom[94] where his Lordship said:

I am of the opinion that, when there is a contract for the sale of a specific subject matter, oral may be received for the purpose of shewing what that subject matter was, of every fact with the knowledge of the parties before and at the time of the contract.

[92]Codelfa (1982) 149 CLR 337, 349.

[93][1900] AC 182, 188-189 (Lord Davey).

[94](1859) 1 E&E 977, 983-984.

Mason J said after referring to Lord Davey and Lord Campbell:[95]

It is apparent that the principle on which the Judicial Committee acted in Simpson is that where words in a contract are susceptible of more than one meaning extrinsic evidence is admissible to show the facts which the negotiating parties had in their mind.

[95]Codelfa (1982) 149 CLR 337, 350.

In stating the ‘true rule’ in Codelfa he referred to this when he identified as an exception prior negotiations that tend to establish the subject matter of the contract.[96]
[96]Codelfa (1982) 149 CLR 337, 352.

Third, Mason J also refers to a circumstance where evidence of the actual intention of the parties should be allowed to prevail over their presumed intention.[97] He said that this arises where the parties have refused to include in the contract a provision which would give effect to the presumed intention of the persons in their position. His Honour said that it may be proper to receive evidence of that refusal. He said that it may be possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances.[98]
[97]Ibid.
[98]See Mrocki v Mountview Prestige Homes Pty Ltd [2012] VSCA 74 where the Court of Appeal relied on this exception.

After confirming the exclusionary rule formulated by Lord Wilberforce in Prenn, Lord Hoffman in Chartbrook addressed where evidence of what was said during conversations could be used:[99]

The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it.

[99]Chartbrook [2009] 1 AC 1101 [43].

This qualification was also accepted by Mason J as discussed above.

Lord Hoffman also said that evidence may always be adduced to the effect that the parties habitually used words in an unconventional sense in order to support an argument that words in a contract should bear a similar unconventional meaning. He described this as the ‘private dictionary’ principle.[100]
[100]Chartbrook [2009] 1 AC 1101 [45].

As his Honour noted, the applicable principles of contractual construction were not in contention at the trial. Nor were they before this Court. They are well settled by a series of judgments from courts of final and intermediate appeal. There is a distinction, particularly important in this case, between the parties’ subjective view of the terms of their agreement and what has become known as the principle of objectivity. The surrounding circumstances known to the parties, and the purpose and object of the transaction – these are matters of objective assessment. And the rights and liabilities of the parties to a contract are determined in accordance with the principle of objectivity. As the High Court observed in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd:[101]

This Court, in Pacific Carriers Ltd v BNP Paribas,[102] has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.

[101](2004) 219 CLR 164, 179 [40] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).

[102](2004) 218 CLR 451, 461-462 [22].

The reasoning behind the principle of objectivity was described in the following words by Campbell JA in Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council.[103] Speaking of a long lease, but using words also applicable to a management agreement with a term of 99 years, His Honour there said:

The fact that a lease is to endure for a long time, is assignable, is to be registered … and may well on occasions need to be understood and acted upon by people other than the original parties to its creation are themselves relevant surrounding circumstances to the entering of the lease. They are the sort of background circumstances that anyone could infer from a perusal of the lease document itself. They are not background circumstances that are the particular, private knowledge of the people who entered the lease, but rather background circumstances of a type ascertainable by anyone who set out to understand the lease, even many years after it was entered. They are the type of background circumstances not dependent upon the chance of the person seeking to understand the document being able to locate and communicate with the people who negotiated it, and the negotiators still having documents or enough reliable memory for the surrounding circumstances to become known. They are surrounding circumstances that should lead a reasonable person seeking to understand the meaning of the document, to leave out of consideration other surrounding circumstances that are not likely to be ascertainable by others who wish to construe the document in the future.[104]

[103][2010] NSWCA 64.

[104]Ibid [154].

Of all the objective facts available to a judge whose task it is to construe a written agreement, the writing itself stands out as the quintessentially objective means of discovering what the intentions of the contracting parties were. The point was made by Lord Blackburn in 1878 when, in a formulation later adopted by Isaacs J in Gordon v Macgregor,[105] his Lordship said:

Now I think it is quite fixed – and no more wholesome or salutary rule relative to written contracts can be devised – that where parties agree to embody, and do actually embody, their contract in a formal written deed, then in determining what the contract really was and really meant, a court must look to the formal deed and to that deed alone. That is only carrying out the will of the parties.[106]

[105](1909) 8 CLR 316, 323.

[106]Inglis v John Buttery & Co (1878) 3 App Cas 552, 577.

There may be, of course, disagreement about whether or not the parties have embodied the entirety of their contract in writing. A dispute of this kind in this case is precluded by clause 27.3 of the management agreement, which was inserted by Darnley’s solicitors when they drew that document. That clause is, as its heading describes, an ‘entire agreement’ clause. It reads:

All the agreements and understandings between the parties ... in relation to the subject matter of this agreement are embodied in this agreement which, as from the date of its execution, supersedes all prior agreements and understandings.

In Hope v RCA Photophone of Australia Pty Ltd,[107] clause 27[108] of the relevant contractual document described the whole as the ‘entire understanding’ between the parties. To make the point doubly secure, it added that the contract contained no terms other than those expressed. The High Court held that the clause in question left no room for a submission that the terms of the contract were not fully embraced within its four walls.
[107](1937) CLR 348 (Latham CJ, Rich, Starke, Dixon, Evatt and McTiernan JJ) (‘Hope’).
[108][sic] – by coincidence, the same numbered clause as in the management agreement between Darnley and RSA.

For present purposes Hope is, we think, instructive. By an agreement in writing, the respondent agreed to lease to the appellant certain sound-reproduction equipment. In a plea of cross-action by way of set-off, the appellant asserted that the equipment was to be new. The respondent replied that, the agreement being wholly in writing, and containing the ‘entire understanding’ clause, the set-off could not be sustained. The appellant demurred. As Latham CJ said in his judgment:

Upon the demurrer, two points were argued: first, that upon the true construction of the agreement, the equipment was required to be new; and, secondly, that oral evidence was admissible to show that the parties negotiated about new equipment and intended to contract with respect to new equipment.[109]

[109](1937) 59 CLR 348, 355.

The issues thus identified by the Chief Justice were dealt with by Dixon J as follows:

In the present case, we are called upon, first, to examine the agreement ... to see whether on its face there is a condition or warranty that the articles shall be new. Having done so, I am clearly of the opinion that there is not. ... But then we are called upon to ... answer the question whether ... an implication might be discoverable supporting the term or condition alleged by the plea. ... But the 27^th clause ... appears to me effectually to exclude such an implied condition or warranty.[110]

[110]Ibid 362-363.

All the judges concluded, in the words of the headnote, that ‘upon its proper construction the agreement did not require that the equipment should be new, and parole evidence was not admissible to establish that the parties intended new equipment.’[111]
[111]Ibid 348.

It was not argued before the High Court that evidence of the oral term was admissible as part of the objective background facts; and the judgments do not therefore address that point. We are nevertheless satisfied that, had the point been taken, no different conclusion would have been reached. Later authorities, including Codelfa, make this clear. For all the reasons expressed by Campbell JA in Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council,[112] logic and principle would have dictated the same result as was reached by all the judges in Hope.
[112][2010] NSWCA 64 [154].

Inglis v John Buttery & Co,[113] Gordon v Macgregor and Hope each illustrate a particular aspect of the parol evidence rule, which excludes three categories of evidence as an aid to interpretation:

(i)direct evidence of the actual (subjective) intentions of the parties;
(ii)evidence of the parties’ prior negotiations; and
(iii)evidence of the parties’ subsequent conduct.[114]

[113](1878) 3 App Cas 552.

[114]J W Carter, Elisabeth Peden and G J Tolhurst, Contract Law in Australia (LexisNexis Butterworths, 5^th ed, 2007) [12-09].

As we understand Darnley’s position, it does not dispute these propositions. Rather, as outlined above, it argues that the evidence upon which it relies must be placed in a different category to that which concerned the House of Lords and the High Court in the three cases cited in the preceding paragraph. Darnley submits that the evidence upon which it relies is evidence of the objective factual matrix in which the court must place itself when construing a contract.

We disagree. It seems to us that that evidence clearly falls within the parol evidence rule, and as such could not be used as an aide to the proper construction either of clause 7(a) of the management agreement and the words which precede it, or the phrase ‘services necessary for the care and benefit of residents’ in clause 29.1 of that agreement. It is also relevant that the oral evidence fails to identify the terms on which the nursing and respite services were to be made available. We shall return to this point later in this judgment.

There is, indeed, no consistency in the evidence or arguments upon which Darnley relies concerning the terms of any obligation upon RSA in relation to either respite or nursing services. As has been seen, the statement of claim pleads that each of (i) the ‘services necessary for the care and benefit of residents’; (ii) provision of the management services ‘to a high standard’; and (iii) the conduct, management and administration of the operation of the village as a ‘first class retirement village’ —carries with it an obligation upon RSA to retain a qualified nurse to staff the nursing station and reception during at least weekly business hours (at no additional cost to residents) and to make available, promote the use of, and let out, single bedroom units set aside for respite care as respite units at a reasonable rate competitive with facilities of this kind in the general vicinity. Yet no nursing station was, and no single bedroom units were, in existence in 2001; and the construction of the apartment building into which they are now incorporated was not begun until 2003, and not completed until 2005.

The allegations in the statement of claim may be compared with Darnley’s identification of contractual breaches as described in the three notices of default which it served upon RSA. The first of these (dated 24 May 2007) referred only to the alleged breach of clause 23. The second (dated 20 August 2007) alleged, in addition, that RSA has failed (i) properly or at all, to use, make available or operate 12 respite units provided by Darnley … for the accommodation of carers’, and (ii) ‘to provide the services of a nurse 24 hours a day for the care and benefit of the residents.’

This contrasts strikingly with the claims in Darnley’s pleading that RSA was bound to retain a qualified nurse to staff the nursing station and reception during at least weekly business hours. Even more striking is the contrast between, on the one hand, the allegation in the statement of claim that RSA was bound to make available, promote the use of, and let out, ‘single bedroom units set aside for respite care as respite units at a reasonable rate competitive with facilities of this kind in the general vicinity’; and, on the other, the reference in the notice of default to an obligation upon RSA ‘to use, make available or operate 12 respite units provided … for the accommodation of carers’.

The third notice of default (dated 5 September 2008) differs again — in two significant respects. First, it omits the words ‘for the accommodation of carers’ from its description of the failure to provide respite care. Secondly, it does not limit the alleged failure to provide nursing services to a failure to provide the services of a nurse 24 hours a day. Rather, it describes that failure as a failure to ‘provide the services of a nurse, for the care and benefit of the residents (a) 24 hours a day; or (in the alternative) (b) ‘except for the period between about 21 and 26 June 2006, to permanently staff the post of director of nursing at the facility provided therefore between 9.00 am and 5.00 pm weekdays.’

The trial judge accepted that notices of default must be clear and unambiguous.[115] In his opinion, the default notices in this case met that test. We respectfully disagree. Taken together, the notices must (it seems to us) have presented a confusing picture to RSA. And they had to be taken together, because each of the second and third notices were delivered under cover of a letter which said that the notice was served without prejudice to Darnley’s ‘right’ to rely on the earlier notice or (as the case may be) notices. To this consideration must be added the circumstance that the notice of 5 September put forward alternative forms of breach of the alleged obligation to provide nursing services. It was thus impossible for RSA to know whether delivery of the less onerous option would or would not remedy the asserted default.
[115]Judgment [19]; U108 Pty Ltd v Sing Fan [2010] VSC 12 [43]-[46].

By contrast to the propositions put forward in the notices of default, the obligations which, as his Honour held, were imposed upon RSA, were to ‘employ a nurse as a full time member of staff located at The Domaine and to market the respite services in the units in the apartment building which were built and exist for that purpose.’[116] This roughly corresponds with the obligations pleaded in the statement of claim, save that his Honour discerned only an obligation to ‘market’ or ‘promote the use of’, the units — but not an obligation to ‘make the units available’, or to ‘let them out’, whether at a reasonable and competitive rate or otherwise.
[116]Ibid [13].

The problem remains that some meaning must be given to the contractual obligation, placed by clause 7(a) upon RSA, to provide such ‘high standard’ services to the residents of The Domaine as will ensure that that facility meets the description of ‘a first class retirement village’. RSA accepts as much. But it also argues that, as clause 4(k) of the joint venture agreement makes plain, the first class retirement village is not to equate to a first class health service establishment; and, likewise, the high standard services are not to equate to those required of the latter facility.

We agree with RSA. We also accept the argument put by RSA that, when the management agreement, taken together with the provisions of both the joint venture agreement and the service agreements, are read as a whole, it can be seen that RSA is obliged to provide neither the nursing services nor the respite care for which Darnley contends.

It is the management agreement itself which identifies and defines the management services which RSA must provide at its own cost — the funds for which will doubtless be largely if not wholly derived from the fees paid to RSA by the residents. Those services, as so identified and defined, do not include the provision of a full time on-site nurse, or indeed any on-site nurse at all. Clause 7(b)(iii) does, however, provide that, if a resident reasonably requires specialised nursing care, and the resident’s doctor joins in the request, RSA is bound to provide that service at the resident’s expense.[117]
[117]Management agreement, clause 7(b)(iii).

The word ‘specialised’ might be thought to leave room for an obligation upon RSA, albeit not one explicitly imposed by any written contractual term, to provide general nursing care at the expense of RSA. That this conclusion is not open is in our opinion a consequence not only of the failure of any written term to impose the obligation for which Darnley contends, but also from the fact that The Domaine is not, and is not to be, a health service establishment. As explained in paragraph [6] above, assistance of the kind which nurses or nursing aides commonly provide —for example, supervision in dispensing medicine, or with bathing, showering or personal hygiene and toileting — are integral to the services which health service establishments make available. The Domaine not being a health service establishment, and non-specialised nursing assistance of this kind not being included in the definition of ‘management services’ in the management agreement, such assistance is, it seems to us, implicitly excluded from the services which RSA is required to provide. Moreover, because such assistance can be distinguished from specialised nursing care, it also provides an explanation for the use of the latter expression in clause 7(b)(iii).

Clause 7(g) of the management agreement requires RSA to ‘enter into a service agreement with each resident’. As explained above, Darnley is a party to all service agreements made with the residents of the independent living apartments. These agreements (sometimes referred to by the parties as ‘lease/loan agreements’) are in standard form. Clause 10 is headed ‘Manager’s covenants’. Clause 10.5 requires RSA ‘to maintain an emergency call system and arrange for answering 24 hour a day, of emergency calls only’. Clause 10.7 provides that, ‘if so requested by a resident,’ RSA will ‘use all reasonable endeavours to arrange (at the resident’s expense) for any ... nursing care’. There is no reference at this point, or anywhere else in the service agreement, to specialised nursing care. Clause 10.12 imposes upon RSA the obligation ‘to arrange (at the expense of the resident) for the provision of medical and para-medical services for the use and benefit of the residents at the village’.

Consistently with the contractual arrangements between Darnley and RSA, by clause 11.1 of the lease/loan agreements the resident acknowledges that payment of the service fee does not entitle the resident to receive personal care services. These are defined in clause 28.1 as meaning personal assistance with one or more of (among other things not relevant here) bathing, showering, personal hygiene and grooming, maintaining continence or managing incontinence, eating and dressing and undressing. In this way, this clause further distinguishes The Domaine from a health service establishment, and from a facility at which nursing services are provided for a fee as part of the in-house residential package.

Under schedule B of the standard service agreement with owners of independent living units, RSA is obliged to monitor a 24 hour emergency call system. The agreement contains no other requirement to provide any medical or para-medical service.

It is in these circumstances unsurprising that it was 2002 before any of the architectural plans for The Domaine included the construction of a nurse’s station.

For all these reasons, RSA was not in our opinion obliged by any of its contractual arrangements with Darnley to provide in-house (or indeed any) nursing care at its cost.

Neither class of service agreement makes any provision for respite care. Whatever the obligation to provide such care, it was not to be found in the words of the contractual documentation. It follows that respite care can only be a service which RSA is required to provide if it is integral to the ‘services necessary for the care and benefit of residents’, or is an integral element in any applicable definition of ‘a first class retirement village’ at which management services are supplied ‘to a high standard’. Even then, the ‘high standard’ is, as clause 7(a) of the management agreement explicitly states, to be ‘a high standard in accordance with this agreement’. And, like the service agreements, the agreement says nothing about respite services.

In these circumstances, Darnley sought to sustain its allegation that RSA was obliged to make available, promote the use of and let out ‘single bedroom units set aside for respite care at a reasonable rate competitive with facilities of this kind in the general vicinity’ by reference to oral evidence which, for the reasons given above, cannot be used in the way it must be used if this aspect of Darnley’s case is to be made good. The trial judge, nevertheless, held that RSA was obliged ‘to market the respite services in the units in the apartment building which were built and exist for that purpose.’[118] As we have observed, his Honour did not find that RSA had any obligation to make those units available, or let them out. Nor did his Honour find that RSA was obliged to provide the respite services for the provision of which the units were (at least on one view of the evidence) designed.
[118]Judgment [13].

Clause 4.2 of the joint venture agreement provides that RSA will at its own cost undertake ‘the marketing services’ until the termination date. The expression ‘marketing services’ is defined in clause 18.1 of that agreement as meaning the services to be performed by RSA as set out in schedule B. This schedule simply lists entities and professions to whom RSA is to make its marketing pitch (for example, doctors and hospitals) and with what materials in support (for example, RSA’s existing database, and company brochures). There is no reference to respite services. In any event, clause 4.2(j) of the joint venture agreement provides that ‘Darnley may review the appointment of RSA to undertake the marketing services at the commencement of stage 2’, that is, at the commencement of the construction of the apartment building. Such a review did take place, and as a consequence Darnley assumed responsibility for the marketing of that building.

In our opinion, and for these reasons, RSA was not obliged by any of its contractual arrangements with Darnley to market, let alone provide, respite services at The Domaine.

Darnley submitted that even if, as a matter of contract law, its contentions regarding the use of pre-and post-contractual statements and actions could not be used in the construction of its agreements with RSA, the ‘advice’ given to it by RSA before 25 January thereafter formed the basis of their mutual relations. RSA was therefore estopped from denying the binding effect of its representations.

We cannot accept this submission. In fact, neither respite care, nor the marketing of such care, nor in-house nursing services, were ever provided by RSA. This was not a case in which particular dealings of that kind ever formed any basis of or for the relationship between the parties, let alone the conventional basis for such relationship. In truth, Darnley’s complaint is not that it dealt with RSA on a particular basis, and that as a result it would disadvantaged were RSA now permitted to change or disavow the relationship thus established. Rather, Darnley complains that RSA never dealt with Darnley in accordance with the arrangements upon which Darnley claims to be entitled to rely.

In any event, we agree with McLelland J, who in Johnson Matthey v AC Rochester Overseas Corp[119] held that ‘the parol evidence rule operates to exclude evidence of an estoppel by convention alleged to arise from pre-contractual negotiations.’ His Honour continued:

In substance an estoppel by convention is in the nature of an agreement. There is no less reason in principle that such an agreement be treated as superseded by the subsequent written contract than that any other agreement arrived at during pre-contract negotiations be so treated. Furthermore, it would be subversive of the policy on which the parole evidence rule is founded, and would unduly shake the security of written contracts, if proof were permitted of such alleged estoppels.

[119](1990) 23 NSWLR 190, 195 (‘Johnson Matthey’).

We accept that Johnson Matthey was not followed by Rolfe J in the rather different case of Whittet v State Bank of New South Wales.[120] Whittet was essentially about unconscionability. That claim was not made at trial and, so far as relevant, was raised for the first time on appeal. If the two authorities cannot be distinguished, and we think they can, we prefer Johnson Matthey.[121]
[120](1991) 24 NSWLR 146, 153 (‘Whittet’).
[121]See also Equuscorp Pty Ltd & Anor v Glengallan Investments Pty Ltd & Ors [2006] QCA 194 [30] (McPherson JA); Saleh v Romanous [2010] NWSCA 274.

In our opinion, no estoppel by convention arises on the facts of this case, and if it did it was superseded by the written agreements prepared by Darnley’s solicitors.

As senior counsel for RSA submitted during argument on the appeal, the dispute about the existence of the nursing and respite obligations generated almost all of the oral evidence that was led at the trial. Another alleged breach was also in issue, however, and this now becomes the final matter for consideration. It is the effect of clause 23 of the management agreement. Darnley alleges that RSA has breached this clause by selling or otherwise parting with its rights under the management agreement without first obtaining the consent of Darnley.

There is a difficulty in principle in matching the disposition of the rights of one contracting party with any damage to the other. But damage is not a necessary element in an action for breach of contract, so that consideration may be put to one side. The real difficulty for Darnley is that nothing has changed in the catalogue of duties owed to, and rights enforceable against, either party to these contracts. As the trial judge observed, the rights created by the management agreement ‘still belong to RSA as a legal entity.’[122] The change is in the ownership of RSA, and the corresponding change in the identity of the employer of many employees who work at The Domaine (although many of those originally employed by RSA remained with the same duties and responsibilities after their employer changed with the change in the ownership of RSA). But all Darnley’s rights as against RSA are retained, as are all the obligations each party owes to the other.
[122]Judgment [14].

As for the fact that different entities are carrying out different duties at The Domaine, that merely reflects the right RSA always had to contract out, or delegate, the provision of its services — meals are a prime example. In short, RSA’s principal obligation under the management agreement — to conduct, manage and administer The Domaine as a retirement village — does not prohibit RSA from doing so vicariously. Indeed, clause 7(k) of the management agreement implicitly confers upon RSA the right to act through agents or sub-contactors in this way. It provides that RSA will ‘supervise and be responsible for the administration of the accounting, staffing and other administrative tasks included in the conduct of the management services’.

Despite the changes in its ownership, RSA remains obliged by its contractual arrangements with Darnley to supervise and be responsible for the performance of those tasks. As the evidence established, RSA is the relevantly ultimate source of funds for the provision of the management services, RSA engages contractors, and RSA maintains the bank accounts into which the fees received from the residents are paid. RSA also receives moneys paid by Darnley pursuant to Darnley’s contractual obligations.

As recorded in paragraph [60] above, RSA contended that, having decided that RSA was (by the management agreement or by a conventional estoppel) required to employ a nurse as a full time member of staff located at The Domaine, the judge erred in failing to decide that the parties subsequently varied their contractual arrangements in such a way as to oblige RSA to provide nursing services only when requested to do so by a resident and the resident’s doctor, and at the resident’s expense. Given the conclusions to which we have come in this judgment, it is unnecessary to further consider this point.

For the reasons given above, each ground of appeal upon which RSA relies is made out.

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[2012] VSCA 134

22 JUNE 2012