Southstar Homes Pty Ltd v Form8 Constructions Pty Ltd
[2023] VCC 1420
•17 August 2023 (revised 1 September 2023)
nal
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CI-22-02214
| SOUTHSTAR HOMES PTY LTD (ACN 096 297 022) | Plaintiff |
| v | |
| FORM8 CONSTRUCTIONS PTY LTD (ACN 629 634 215) BRENDON FEENEY NICOLA SOFIA KARAKATSANIS | First defendant Second defendant Third defendant |
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JUDGE: | HIS HONOUR JUDGE COSGRAVE | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 17, 18, 20 and 21 July 2023 | |
DATE OF JUDGMENT: | 17 August 2023 (revised 1 September 2023) | |
CASE MAY BE CITED AS: | Southstar Homes Pty Ltd v Form8 Constructions Pty Ltd & Ors | |
MEDIUM NEUTRAL CITATION: | [2023] VCC 1420 | |
REASONS FOR JUDGMENT
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Subject: CONTRACT – PRINCIPLES OF CONSTRUCTION
Catchwords: Construction of contract – implied term – contractual breach – assignment of debt – accord and satisfaction – approbation and reprobation – term implied to give effect to contract – effect of voluntary administration upon existing contracts – assignment valid – no accord and satisfaction – plaintiff has not approbated and reprobated
Legislation Cited: Building and Construction Industry Security of Payment Act 2002 (Vic)
Cases Cited:Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201; Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; Ballantyne v Phillott (1961) 105 CLR 379; Baltic Shipping Co v Merchant (1994) 36 NSWLR 361; Banque des Marchands de Moscou (Koupetschesky) v Kindersley [1950] 2 All ER 549; Beerens v Bluescope Distribution Pty Ltd (2012) 39 VR 1; Bensons Property Group Pty Ltd v Key Infrastructure Australia Pty Ltd [2021] VSCA 69; Blue Moon Grill Pty Ltd v Yorkey’s Knob Boating Club Inc [2006] QCA 253; BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266; Butt v McDonald (1896) 7 QLJ 68; Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; Canale v G W & R Mould Pty Ltd [2018] VSCA 346; Clifton (liquidator) v Kerry J Investment Pty Ltd trading as Clenergy (2020) 379 ALR 593; Codelfa Construction Pty Ltd v State Rail Authority of N.S.W. (1982) 149 CLR 337; Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; Council of the City of Sydney v Goldspar Australia Pty Ltd (2006) 230 ALR 437; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; El-Mir v Risk [2005] NSWCA 215; Eureka Operations Pty Ltd v Viva Energy Australia Ltd [2016] VSCA 95; Farrow Mortgage Services Pty Ltd v Hogg (1995) 64 SASR 450; Fitzgerald v Masters (1956) 95 CLR 420; Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500; Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; Hera Project Pty Ltd v Bisognin [No 3] [2017] VSC 268; Jingalong Pty Ltd v Todd [2015] NSWCA 7; Kimberley Securities Ltd v Esber [2008] NSWCA 301; Lopes v Taranto [2018] VSCA 288; Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; Mandurah Enterprises Pty Ltd v Western Australia Planning Commission [2008] WASCA 211; McDermott v Black (1940) 63 CLR 161; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; National Carbonising Co Ltd v British Coal Distillation Ltd (1936) 54 RPC 41; North v Marina [2003] NSWSC 64; Osborn v McDermott [1998] 3 VR 1; Porter v Sundance Resources Ltd (No 2) [2015] WASC 493; Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; Pilbara Iron Ore Pty Ltd v Ammon [2020] 14 ARLR 148; Pridmore v Magenta Nominees Pty Ltd (1999) 161 ALR 458; Ratcliffe v Oceanic Life Ltd [1998] NSWSC 31; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; Smith v Deputy Commissioner of Taxation (1996) 71 FCR 150; Tolhurst v The Associated Portland Cement Manufacturers (1900) Ltd [1903] AC 414; Travis Royce Smith as trustee of the Smith Investment Trust v Sandalwood Properties Ltd [2019] WASC 109; Zivkovic v Parke [2022] VSCA 43
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr L Freckelton | Baker Jones |
| For the Defendant | Mr B Petrie | Rigby Cooke |
HIS HONOUR:
Introduction
1The critical issue in this case is whether the plaintiff (“Southstar”) can recover $345,000 (“the Settlement Sum”) from the second defendant (“Feeney”) and the third defendant (“Karakatsanis”), each of whom guaranteed the obligations of the first defendant (“Form8”) to Southstar under a deed of settlement (“the Deed”) entered on 17 January 2020.
Background
2Southstar worked in the construction industry specialising in the building of mid-size apartment blocks. Its usual method of operation was to obtain the tender documents for a project and then liaise with a variety of subcontractors to submit a tender. In late June 2019, Southstar and Form8 entered into a subcontract agreement in relation to the development at 182 Johnston Street, Fitzroy (“the Johnston Street project”). Under the agreement with Southstar, Form8 agreed to provide formwork concreting services.
3During the construction of the project, a dispute arose about the work performed by Form8. There were discussions and correspondence between the parties including an unsuccessful mediation. Ultimately, on 17 January 2020 the parties entered the Deed to resolve their dispute. The Deed dealt with two main issues, namely, the rectification work at the Johnston Street project and the compensation due to Southstar for the problems it suffered on that project.
4A lawyer employed by Southstar drafted the Deed. The Deed appeared to be a provisional document to the extent that, although it was immediately binding upon the parties, it expressly contemplated that the substance of the Deed was to be reproduced later in another document drawn by the plaintiff’s lawyer. No subsequent deed was ever prepared and signed by the parties.
5From January 2020 into March 2020, Southstar and Form8 negotiated about Southstar engaging Form8 to perform subcontract works at a new project at 64 – 68 Walpole Street, Kew (“the Walpole Street project”). The negotiations related to matters including the scope of the work to be performed, the amount of credit to be applied to the project and the terms of the subcontract agreement.
6In connection with the Walpole Street project, Form8 arranged a bill of quantities from Zeke Group,[1] engineering design drawings from PTX Pty Ltd (“PTX”) in relation to the post-tensioning work[2] and steel from the Australian Reinforcing Company (“ARC”).[3]
[1]Court book at 46
[2]Court book at 291
[3] Court book at 295
7Ultimately, Southstar and Form8 agreed upon the scope of work and the amount of the credit to be applied to the Walpole Street project.
8On 7 April 2020, just before Form8 was to commence work on site at Walpole Street, Southstar entered voluntary administration. Southstar’s site manager contacted Feeney, the construction manager of Form8, to advise him of this event and to tell him not to attend for work at Walpole Street.
9On 12 August 2020, Southstar executed a deed of company arrangement (“the Southstar DOCA”).
10On 5 August 2021, the Southstar DOCA terminated, and control of the company was returned to its director, Tino Filippelli. He paid the administrators $400,000 in order to terminate the administration and recover control of the company.
11On 12 August 2021, Southstar and Steven Mansour of Mansour Lawyers purported to enter into a deed of assignment of debt (“First Deed of Assignment”). Mansour agreed to pay Southstar $1 for the assignment of the debt in the Deed, being the Settlement Sum of $345,000 owing by Form8 and/or Feeney and Karakatsanis as guarantors. Southstar assigned all of its interest in the debt and all of its rights, title and interest to claim a benefit under the Deed.
12In October 2021, Mansour commenced proceedings in the County Court of Victoria against the defendants for an alleged debt of $379,000.
13On 17 March 2021, the court made orders by consent that the proceedings be discontinued. The court ordered Mansour to pay the defendants’ costs. On 14 April 2022, Southstar and Mansour entered a second deed of assignment whereby Mansour purported to assign back to Southstar the alleged debt under the Deed (“Second Deed of Assignment”).
14Southstar commenced this action against the defendants in June 2022.
15On 26 April 2023, Form8 went into voluntary administration. The company executed a deed of company arrangement on 17 June 2023. Accordingly, the claim against Form8 is stayed.
Issues
16The parties agreed that the issues to be determined by the court in this case are follows:
(i)what is the proper construction of the terms of the Deed dated 17 January 2020?
(ii)does the Deed contain the implied term alleged by Southstar?
(iii)did Southstar and Form8 enter into the Walpole Street project subcontract? If so:
(a)did the agreement, alternatively the events surrounding the agreement, meet the descriptions of a “future project” that Southstar “engaged” Form8 on as a subcontractor within “6 months”, for the purposes of the Deed?
(b)was the agreement mutually abandoned?
(c)what, if any, is the significance of the answers to the questions stated in sub-paragraphs (a) and (b) above?
(iv)did Southstar and Form8 agree that the “Settlement Sum” under the Deed was to be reduced by $120,000 by reason of Southstar engaging Form8 under the Walpole Street Subcontract (if the court finds that the parties entered into that agreement and that Southstar engaged Form8 in relation to the Walpole Street project)?
(v)did Form8 breach the Deed? In particular,
(a)did Form8 “default” in “crediting or paying” the Settlement Sum for the purposes of the Deed?
(b) what is the significance of:
(i)the fact that Southstar entered voluntary administration on 7 April 2020?
(ii)the fact that Southstar did not seek to engage Form8 on any further projects (whether or not the Walpole Street contract was abandoned)?
(vi)in relation to the First Deed of Assignment dated 12 August 2021:
(a)what was the effect of the parties entering into that agreement, on its proper construction?
(b)did Southstar receive accord and satisfaction with the effect that any claims it had against Form8 and the second and third defendants were extinguished, abandoned or released?
(c)alternatively, does the doctrine of approbation and reprobation apply so as to prevent Southstar from pursuing its claim against Form8 and the second and third defendants?
(vii)in the event the court finds that Southstar received accord and satisfaction under the First Deed of Assignment, or was prevented from pursuing this claim by the doctrine of approbation and reprobation, did the Second Deed of Assignment have the effect of conferring on Southstar a new or different right to pursue this claim?
(viii)is Form8 liable to Southstar under the Deed and, if so, for what sum? Are the second and third defendants liable as guarantors to pay Southstar in respect of any sums owed by Form8?
Issue 1: What is the proper construction of the terms of the Deed dated 17 January 2020?
Legal principles
17In broad terms the parties agreed on the legal principles which applied to the construction of the Deed. Both parties referred to the decision of the Victorian Court of Appeal in Adaz Nominees Pty Ltd v Castleway Pty Ltd[4] where Whelan JA and Riordan AJA said:
[4] [2020] VSCA 201
“‘[T]he reasonable businessperson [is] placed in the position of the parties’, and the Court applies the following principles:
(ll)The terms are construed objectively, and the subjective intentions of the parties are irrelevant.
(mm)The objective approach requires reference to the text and its ordinary meaning, together with:
(i) the context, being the entire text of the contract including matters referred to in the text; and
(ii) the purpose.
These matters will ordinarily be identified by reference to the contract alone, but evidence of mutually known objective background circumstances relevant to the purpose is admissible ‘no matter how clear the “ordinary meaning” of the words’. Identification of purpose may allow admission of evidence of the genesis of the transaction, the background, the context and the market in which the parties are operating.
(nn)Unless a contrary intention appears in the contract, the court is entitled to approach the task of interpretation on the assumption that the parties intended to produce a commercial result, and should construe it so as to avoid a commercial nonsense. However, the court does not weigh the commerciality of the agreement, and business common sense is a topic on which reasonable minds may differ.
(oo)If, after completion of this process, the language used in the contract ‘is ambiguous or susceptible of more than one meaning’, then evidence of surrounding circumstances external to the contract is admissible to assist with interpretation of the language in question.
(pp)However, ‘evidence of the parties’ statements and actions reflecting their actual intentions and expectations’ is inadmissible. Although evidence of prior negotiations is admissible to establish objective background facts known to both parties and the subject matter of the contract, evidence of negotiations reflective of actual intentions and expectations is not receivable.
(qq)Post-contractual conduct is inadmissible to construe the terms of the contract. However, the parties’ subsequent communications may be relevant to determine whether the parties intended to enter into a binding contract.”[5]
(footnotes omitted).
[5]Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201 at [70]. McLeish JA agreed also with this part of the judgment see [254].
18This passage from the judgment summarised the position as set out in cases such as Codelfa Construction Pty Ltd v State Rail Authority of N.S.W.,[6] Maggbury Pty Ltd v Hafele Australia Pty Ltd,[7] Royal Botanic Gardens and Domain Trust v South Sydney City Council,[8] Electricity Generation Corporation v Woodside Energy Ltd,[9] Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd,[10] Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd,[11] Eureka Operations Pty Ltd v Viva Energy Australia Ltd,[12] Lopes v Taranto[13] and Canale v G W & R Mould Pty Ltd.[14]
[6] (1982) 149 CLR 337 at 352
[7] (2001) 210 CLR 181 at [43]
[8] (2002) 240 CLR 45 at [39]
[9] (2014) 251 CLR 640 at [35]
[10] (2015) 256 CLR 104 at [47]-[52]
[11] (2017) 261 CLR 544 at [16]
[12] [2016] VSCA 95 at [45]-[47]
[13] [2018] VSCA 288 at [66]-[72]
[14] [2018] VSCA 346 at [45]
19There is no doubt that when interpreting contracts, the court is to approach the task objectively, determining the parties’ intention as expressed in the words used in the written document. The court is to ask itself what a reasonable businessperson would have understood those terms to mean.[15]
[15] Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [25]
20Prior negotiations between the parties, conducted before the contract was made, can create a difficulty. They are admissible insofar as they establish objective background known to both parties and the subject matter of the contract. However, they are not admissible insofar as they comprise statements or actions of the parties which reflect their actual intentions and expectations.[16] Accordingly, courts must be careful in the use they make of such negotiations.
[16]Codelfa Construction Pty Ltd v State Rail Authority of N.S.W. (1982) 149 CLR 337 at 352; Kimberley Securities Ltd v Esber [2008] NSWCA 301 at [5] per Macfarlan JA quoted with approval by Allsop P in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 at [24]
The Deed
21The Deed comprised four pages. The initial terms of the Deed were as follows:
·You agree to complete the Incomplete Works and Defective Works at no cost to us, and you waive and forgo your rights and/or entitlement to any further unpaid monies payable under the Subcontract (including retentions) as at the date of this offer. For the avoidance of any doubt, of the total adjusted Subcontract amount of $2,379,000.00 exl. GST we have paid you $2,202,991.21 exl. GST, with a balance of $176,008.79 exl. GST payable under the Subcontract (‘Subcontract Balance’). You agree that you are not entitled to payment of the Subcontract Balance and forever waive and forgo your rights and entitlements to the Subcontract Balance.
·The parties agree that if there is a dispute between them as to whether the Incomplete Works or Defective Works are complete, in particular whether you have satisfactorily rectified the Defective Works or Incomplete Works, then the parties agree that they will mutually appoint an independent third party to determine whether the defect or incomplete work(s) have been satisfactorily completed. In the event that the parties are unable to mutually appoint an independent third party, they agree to the President of the Law Institute of Victoria appointing that third party on their behalf. The parties further agree that the cost of the Independent third party will be equally bourne [sic] between the parties. The parties also agree that the decision of the independent third party is binding and final upon the parties.
·You agree that by accepting this offer that you will not issue a payment claim under the Subcontract pursuant to the Building and Construction Industry Security of Payments Act 2002 against us. You also agree to indemnify us for any loss, cost, fee, expense, order, damage and/or any liability whatsoever, that we may incur or are required to pay you, by reason of you issuing a payment claim pursuant to the Building and Construction Industry Security of Payments Act 2002 and by you either obtaining a adjudication determination or a judgment of court against us.
22Thus, the first part of the Deed dealt with allegedly incomplete and/or defective concrete works at the Johnston Street project and Form8’s obligation to complete those works at no cost to Southstar. The Deed addressed the financial consequences for the parties: Form8 was to forego rights and entitlements to unpaid money payable under the subcontract; Form8 agreed to forego any rights and entitlement to the subcontract balance; Form8 agreed it would not issue any payment claims under the Building and Construction Industry Security of Payment Act 2002 (Vic) against Southstar.
23The next part of the Deed concerned the Settlement Sum of $345,000 and how Southstar was to obtain its benefit. The material terms of the Deed were as follows:
· You agree to pay us $345,000.00 exl. GST ('Settlement Sum') by way of credit in our favour, by us applying the Settlement Sum against the subcontract sum of any future projects (maximum 2 x projects unless mutually agreed otherwise) we may engage you as a subcontractor to complete for us (“Credit Obligation Clause”).
· You must credit us the Settlement Sum by no later than 12 months from the date you accept this offer, however, if we do not engage you as a subcontractor on any future project within 6 months from the date you accept this offer, you agree that you must pay us the Settlement Sum by way of instalments into our nominated bank account, as follows:
o 10 x equal consecutive monthly payments of $34,500 exl. GST commencing 8 months from the date you accept this offer; (“Mechanical Clause”)
· You agree that in the event you default in crediting or paying the Settlement Sum in accordance with the payment terms above, the entire amount of the Settlement Sum less any amounts already paid by you or credited to us, will become immediately due and owing to us ('Default Amount'). Should this be the case, you agree that we may issue legal proceedings against you in a court of competent jurisdiction and enter default judgment against you for the Default Amount, plus all our legal costs and expenses incurred in entering the default judgment (“Default Clause”).
· The parties mutually release each other from all matters related to the Subcontract, the works and the head contract between us and the principal for the project. However, although your release of us will be immediately upon you accepting this offer, our release of you will not take effect until the Settlement Sum is paid/credited to us in full. Our release of you will not apply to any claim that we may have against you in relation to any defects or incomplete works that we are not aware of, or ought not to be reasonably aware of, at the date of you accept this offer [sic] (“Release”).
24The other important provision of the Deed concerned the guarantee given by Feeney and Karakatsanis in favour of Southstar in respect of the obligations of Form8 under the Deed. It read as follows:
“To secure our rights and interests under the these [sic] settlement terms, Mr Brendon Feeney and Mrs Nicola Sofia Karakatsanis agree to jointly and severally guarantying the obligations of Form8 Constructions Pty Ltd under these settlement terms with immediate effect upon signing these settlement terms”.
25The remainder of the contract concerned itself with what qualified as incomplete or defective works, confidentiality and disparagement provisions and a clause obligating Form8 to procure the signatures of the guarantors within three business days to ensure that they are bound (“the Remainder Provisions”).
General statement of parties’ positions
26While broadly agreeing as to the applicable principles, the parties nonetheless held notably different views about how the court should construe the Deed. The plaintiff contended that the Credit Obligation, the Mechanical Clause and the Default Clause should operate as follows:
(a) Southstar had a right to elect whether to “engage” Form8 on any future projects (with a maximum of two projects) within six months of entry into the Deed and a co-relative obligation was imposed upon Form8 to “credit” Southstar the Settlement Sum within 12 months in that event;
(b) if Southstar did not engage Form8 on any projects within six months, Form8 was required to pay Southstar the Settlement Sum in 10 monthly instalments of $34,500 (excluding GST) commencing eight months after entry into the Deed;
(c) if Form8 failed to comply with either obligation, Southstar was entitled to immediately recover the outstanding balance of the Settlement Sum from Form8.
27The Deed speaks of the concepts of engagement (which Southstar was to do, if at all, within six months) and the application of the credit (which was to occur within 12 months). I agree with Southstar’s reading of the Deed whereby it contends that:
· Southstar’s engagement of Form8 does not constitute the giving of credit against the Settlement Sum;
· the giving of credit against the Settlement Sum cannot precede the engagement.
28Hence, where the credit is given by works in kind, the credit could not take effect when the parties agreed upon the amount of the credit to be applied to a particular job. It could take effect only when Form8 actually performed works to the value of the credit agreed on that job. This means that for Southstar to get the full benefit of the credit, Form8 needs to complete the work agreed or at least complete enough of the work so that the value of the work equals or exceeds the value of the agreed credit on that job.
29The defendants contended that the obligations of the parties under the Deed were as follows:
(a) Form8 was required to “pay” Southstar a Settlement Sum of $345,000 “by way of credit”;
(b) the Settlement Sum was to be applied “against the subcontract sum of any future projects”;
(c) the Settlement Sum was to be applied by Southstar, and not Form8;
(d) each party had an implied duty to co-operate to enable the other to receive the benefit of the Deed. Because Southstar was the party required to apply the credit, Form8 depended on Southstar giving it the opportunity to supply subcontracting services to the value of the Settlement Sum just as Southstar depended on Form8 being ready, willing and able to provide such services;
(e) Form8’s obligation to credit Southstar with the Settlement Sum was limited to a period of only 12 months;
(f) there were only two circumstances in which Form8 would be required to make a cash payment:
(i)in the event that Southstar did not “engage” Form8 on a project within six months;
(ii)in the event Form8 “defaulted” in either crediting or paying the Settlement Sum. In this context, default meant a failure to perform an obligation when the time for performance fell due.
30As a result of the above, in the circumstances obtaining here, the defendants contended that they were under no obligation to credit or pay any amount to Southstar beyond the $120,024[17] credit given in respect of the Walpole Street project.
[17]I note that the parties refer to the credit figure of $120,000 in their agreed list of issues. The exact proposed credit figure was $120,024.
31On the defendants’ construction, Southstar would receive no real practical benefit from the Deed. Because Southstar entered administration and then executed the Southstar DOCA, all work at the Walpole Street project stopped. Form8 was not required to provide concrete formwork services at the Walpole Street site. Thus, Form8 performed no work on site and conferred no credit benefit upon Southstar. It was not a situation in which Form8 performed work at the Walpole Street project which was worth, for example, $800,000 but for which Southstar paid only $680,000. Nor did Form8 or the guarantors have to give any further credit or make any cash payment to Southstar. The defendants’ contention was that this outcome represented the result required by the proper construction of the parties’ agreement. So, although the Deed stated that Form8 should credit Southstar with an amount of $345,000 (excluding GST), the defendants submitted that properly construed, the Deed permitted them on the present facts to avoid providing Southstar with any benefit from the credit.
Facts
32When considering this construction issue, the parties (and the defendants in particular) placed some reliance upon both pre-contractual and post-contractual events. Accordingly, I shall address this matter first.
33A dispute broke out between Southstar and Form8 about the Johnston Street project and the subcontract work which Form8 undertook at that project. Southstar alleged that Form8’s work was defective and had to be rectified.
34Initially, there was an unsuccessful mediation between the parties. Later, Filippelli said that he initiated a meeting with Feeney at Form8’s offices to try and resolve the dispute directly in the absence of lawyers. Filippelli said that he told Feeney that, if he was willing to take accountability for Form8’s errors on the Johnston Street project, he was prepared to resolve the dispute. Feeney agreed and then Filippelli tried to fashion a solution which took account of Form8’s cash flow issues. Filippelli learned about these concerns from Feeney.
35After the meeting on 19 December 2019, Feeney emailed Filippelli (and other representatives of Southstar and Form8) with an offer that the dispute be resolved by Form8 granting Southstar a credit for $200,000 on future works. This would enable Form8 to work the debt off. I note that Feeney referred also to an amount of about $311,000 which he claimed Form8 was walking away from under this scenario. This was in addition to finishing off or making good the defective works valued at approximately $115,000.
36At 1.02pm on 20 December 2019, Filippelli emailed Feeney rejecting his offer but making a counter-offer. Filippelli said that if Form8 agreed to promptly complete the balance of the rectification works (which he estimated at $115,000) then he would settle on the basis that:
(a) there would be no further payments against the contract for the Johnston Street project;
(b) Form8 would credit Southstar with $385,000 to be repaid by works in kind. This would give Form8 the opportunity to make good the loss, restore Southstar’s confidence in Form8’s ability to deliver acceptable work and possibly “regain yourself a customer”.
37On 7 January 2020 at 1.51pm, after the Christmas/New Year break, Feeney indicated his willingness to accept Southstar’s offer if the credit amount were $295,000. Feeney’s email said that he knew Form8 could deliver good work if given the opportunity. He recognised that working with Filippelli’s company, Liberty Builders, was a “good feather in our cap”.
38By email at 3.24pm on 16 January 2020, Filippelli presented his rationale for rejecting Feeney’s counter-offer and explained why the agreed compromise figure for the credit should be $340,000. The email said that this proposal was a genuine opportunity for Form8 to regain a long-term customer. Filippelli also said that his team would email Feeney documents for Liberty’s next project which they were about to price.
39At 3.53pm the same day, Feeney emailed to say that he agreed to the credit of $345,000 if Form8 could let it run over a couple of jobs. He said that it might be too hard to manage cash flow if the whole credit were applied to a single job.
40Filippelli said in evidence that a lawyer who worked for Southstar prepared the Deed shortly after he and Feeney reached their “in principle” agreement. The parties then signed the Deed the following day on 17 January 2020.
41The defendants argued that the fact that the Deed mentioned the “last offer” made by Feeney meant that this should be taken into account when trying to understand the agreement.[18] The date referred to in the Deed, namely 7 January 2020, was not the last offer which Feeney made. In fact, the last offer was made on 16 January 2020 so the reference to the earlier date was inaccurate. The defendants contended that, because Filippelli and Feeney were the only ones who negotiated the terms of the Deed and there was a chain of emails concerning the sequence of offers and counter-offers, each of the emails was a necessary aid in the construction of the Deed.[19]
[18] Defendants’ closing submissions at [23]
[19] Defendants’ closing submissions at [24]
42The defendants contended that the pre-contractual negotiations were significant because they exclusively supported the defendants’ interpretation of the Deed and were directly opposed to Southstar’s interpretation. They said that the body of correspondence revealed that:
(a) the parties discussed exclusively the concept of Form8 “working off” the debt; and
(b) the parties did not make any mention of Form8 making a cash payment to Southstar.
43The defendants made much of the references in the correspondence to “works in kind” and giving Form8 an “opportunity” to make good.
44The defendants also relied upon what they said were admissions by Filippelli in his evidence about the purpose of the Deed. They argued first, that the email references to the opportunity to work off the debt were in marked contrast with the notion of Form8 making cash payments. Secondly, they referred to Filippelli noting that in creating the form of obligation for Form8, he sought to take account of Form8’s cash flow issues. Filippelli’s knowledge of the cash flow issues before creating the Deed was said to support the notion that the agreement was not to entail a cash payment by Form8 (except where there was a default).[20]
[20] Defendants’ closing submissions at [40] – [41]
45The defendants argued that other aspects of Filippelli’s post-contractual conduct reinforced the point that Form8 was not required to make a cash payment “unless it first defaulted on an obligation to work off the debt”.[21] They said that:
(a) Filippelli failed to advise the administrators of Southstar of any alleged debt owed to the company by Form8. Filippelli completed a Report on Company Activities and Property (“ROCAP”) and made no mention of any debt or obligation owed by Form8;
(b) Southstar, neither through Filippelli nor any other officer or member of the company, made any demand upon Form8 that it pay the Settlement Sum in cash.
[21] Defendants’ closing submissions at [42]
46In my view the defendants’ claims are exaggerated and/or erroneous.
47The defendants seek to give the various emails referred to a status which they do not merit. Although in the exchange of emails, the parties might not have discussed the making of a cash payment by Form8, the Deed expressly provides for a situation in which Form8 makes 10 monthly payments of $34,500. Hence, it is wrong to say that the agreement was not to entail a cash payment unless Form8 defaulted on its obligations. The defendants’ submission is clearly inconsistent with the terms of the Deed. It reflects poorly on the bona fides of the defendants to advance a submission which they knew, or ought to have known, was obviously not supported by the Deed.
48The defendants also appear not to give much attention to the fact that the release by Southstar in favour of Form8 did not take effect “until the Settlement Sum is paid/credited to [Southstar] in full”. This means that the Deed contemplated that Southstar would be entitled to the full benefit of the Settlement Sum whether the benefit was payment in kind, payment in cash or a combination of the two methods.
49The defendants also paid limited attention to the statement in the Default Clause that in some circumstances, “the entire amount of the Settlement Sum less any amounts already paid by [Form8] or credited to [Southstar], will become immediately due and owing”. This provision envisages a scenario, inter alia, in which Southstar engages Form8 for works which are valued at less than the whole of the Settlement Sum. Further, in contemplating both the possibilities of payment and credit in kind, the Deed reinforces the point made in paragraph 48 above.
50Filippelli made some allowance for the cash flow problems of Form8 by including in the Deed an option whereby Form8 could work out the credit amount granted to Southstar. Further, in the event that Form8 were required to pay the Settlement Sum by instalments, Filippelli delayed the commencement of monthly payments until eight months after the execution of the Deed. This was in circumstances where the obligation to pay arose because Southstar did not engage Form8 within six months of execution of the Deed.
51It is true that it would be more consistent with Southstar’s current case if Filippelli had included a reference in the ROCAP to the Form8 debt or made demand on Form8 for payment of the Settlement Sum. However, for reasons which were not revealed, Filippelli was not asked about his reasons for neither including Form8 as a debtor of the business or asking that Form8 pay the outstanding credit amount in cash. The court does not know if Filippelli acted as he did because for example, he forgot about this aspect of the dispute, or because he was concerned that there might be problems with enforcing such a claim, or because he did not think there was a debt or liability owed by Form8 to Southstar. The court does not know the true explanation.
52It appears from the fact of this litigation that Filippelli believes, now at least, that Southstar can recover the Settlement Sum from the guarantors. It follows from this that Filippelli believes that Form8 was responsible for the payment of that money to Southstar. The evidence also discloses that Filippelli was upset about the collapse of the Southstar business into administration. He felt that he had lost 20 years of his life.[22] The only clients Filippelli spoke to about the administration were those with whom he had a longstanding relationship.
[22] Transcript at 103
53No doubt the administration and the events leading up to it were worrying and stressful for Filippelli. An important joinery business which supplied joinery to four of Southstar’s projects ran out of cash. Filippelli decided that Southstar should support the business and so, not only did he provide financial support and pay creditors but he ultimately ran the business. This had massive cost consequences for Southstar which, together with lesser problems like those involving Form8, caused Filippelli to put Southstar into administration.
54The defendants argued that Filippelli’s conduct referred to in paragraph 51 above should be construed as an admission that Form8 owed no debt. It seems to me an equally plausible explanation that Filippelli was overwhelmed by events and the emotional and financial toll of losing an established family business which, in each of the three financial years June 2017 to June 2019 inclusive, posted net profits of at least $1,056,958. In circumstances where Filippelli produced the ROCAP on 18 April 2020, 11 days after the administrators were appointed at around 5.15pm on 7 April, I am not prepared to draw an inference one way or another about Filippelli’s conduct. That being so, I do not treat Filippelli’s conduct as an admission by Southstar that Form8 was not indebted to Southstar.
Preliminary issues
55The defendants raised some preliminary issues which need to be addressed.
56First, the defendants rely heavily in their written and oral submissions upon the duty to co-operate. They say that this duty, whereby each party to a contract must do all such things as are necessary to enable the other party to have the benefit of the contract, applies to all contracts but, especially in this context, to Southstar.[23] The guarantors emphasised that Form8 depended upon Southstar’s co-operation in granting Form8 the opportunity to supply subcontracting services to the value of the $345,000 agreed in the Deed.[24]
[23] Defendants’ closing submissions at [51]
[24] Ibid at [51]
57The defendants argued that if Southstar were not subject to such an implied duty, it would render meaningless the idea that Form8 could be engaged on future projects.[25] The Deed could have simply said that Form8 was to pay Southstar a cash sum at the discretion of Southstar. Similarly, if there were no duty to co-operate, the defendants said that it would result in a commercial absurdity because the obvious purpose of the Deed – namely, the working off of the credit in favour of Southstar[26] – would be undermined.
[25]Ibid at [52]
[26] Transcript at 204
58I do not accept the submissions of the defendants on this point. The submissions pay insufficient attention to the words of the Deed. That is the critical document and the court’s task is to construe that document. In my opinion, the Deed plainly confers a discretion upon Southstar. The Deed says that Southstar “may engage [Form8] as a subcontractor”. Southstar can, if it so chooses, engage Form8 as a subcontractor within six months of executing the Deed. However, there is no obligation upon Southstar to engage Form8. If Southstar does not engage Form8 within six months to work on a job, then Form8 must pay the Settlement Sum by 10 consecutive monthly instalments commencing eight months after the execution of the Deed. It seems to me that the defendants wish to elevate the duty to co-operate to a position where it overrides, or takes precedence over, the words of the Deed.[27] The duty to co-operate cannot be invoked to compel Southstar to engage Form8 and to contend that Southstar is in breach of its obligations if it chooses not to do so.
[27]Similarly, the defendants appear to place great weight upon the pre-contractual communications between the parties because they were said to be incorporated into the Deed and thereby merit primacy.
59On the defendants’ approach, it appears that a failure to provide a project opportunity to Form8 is tantamount to a breach of the Deed and the parties’ agreement because Southstar is not co-operating to give Form8 the opportunity to work off the credit and is thereby depriving it of the benefit of the agreement.[28]
[28] Transcript at 213/10-12
60Secondly, the defendants were insistent that two general rules of construction applied to this case:
(a) because the claim before the court was to enforce a guarantee against the defendants, the terms of the guarantee must be strictly construed and where there is any doubt, the construction of the provisions must be resolved in favour of the guarantors;[29]
(b) because a lawyer working for Southstar prepared the Deed, if there were any ambiguity or doubt about its meaning, the Deed is to be construed contra proferentem;[30]
[29] Defendants’ closing submissions at [15]
[30] Defendants’ closing submissions at [16]
61As to the concept of the guarantor’s liability being construed strictissimi juris, I note that the defendants contend that this applies not only to the provisions of the guarantee but to the instrument in respect of which the guarantee is given.[31] The defendants appear to rely upon the High Court decision of Ankar Pty Ltd v National Westminster Finance (Australia) Ltd[32] for this proposition. There, the plurality said that “liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety”.[33] While that comment did appear in the judgment,[34] the plurality did not explicitly say that the strictissimi juris requirement extended to the agreement between the creditor and the principal debtor. Comments made by the plurality in Ankar refer to the suretyship contract being construed in the surety’s favour and any doubts about the status of a provision in a guarantee being resolved in favour of the surety. The judgment did not directly refer to the agreement between the creditor and the principal debtor in this context.
[31] Defendants’ closing submissions at [15]
[32] (1987) 162 CLR 549
[33] Ibid at 561, and defendants’ closing submissions at [15]
[34] Deane J in a separate judgment made the same point at [569]
62The contra proferentem principle has been part of the common law since the days of Lord Coke in the late 18th century. The concept of construing the document against the party who put it forward is an inherently ambiguous concept. Is the relevant person the one who put forward the whole document or just the particular words the subject of dispute? Is it the person who actually drafted the document or the relevant clause or the person on whose behalf the document or clause was drafted?[35]
[35] See the discussion in Lewison, The Interpretation of Contracts (3rd edition) at [7.07]
63Regardless of the competing and conflicting lines of authority on this issue, it seems well accepted that the contra proferentem rule applies only where the document itself is ambiguous. In deciding this, a court should not adopt a strained or artificial approach to the construction of the document.[36] It is not a proper use of the principle to say that two meanings of a provision are possible so the meaning less favourable to the proferens should be chosen.[37]
[36] North v Marina [2003] NSWSC 64 at [74]-[76]
[37] Ibid at [75]
64Further, the rule is one of last resort and applies only when, having applied all the other usual aids to construction, ambiguity remains.[38]
[38] Ibid at [77]-[78] and the cases cited therein.
65A major area of contest in this case is the situation created by Southstar entering administration and later executing a deed of company arrangement and the extent to which that scenario falls within the terms of the Deed. Broadly speaking, Southstar contends that the parties did not turn their minds to the question of Southstar and Form8 agreeing to work on only one project for which, ultimately, Form8 provided no concrete construction work on site and which, on a best case for the defendants, discharged only $120,024 of the $345,000 credit.
66The defendants submit that, because Form8 was engaged by Southstar to work on the Walpole Street project and agreed on the scope of works and the contract price, including the amount of the credit, Southstar received the benefit of the $120,024 credit. Because the administration of Southstar was caused not by Form8 but by factors referable to Southstar itself, Southstar could not seek to recover any further part of the credit in cash from Form8. Due to the administration of Southstar and the closure of its business, including the Walpole Street project, the prevention principle applied whereby Form8 was absolved from any further performance of its obligations under the agreement with Southstar. The defendants argued that Southstar in effect deprived Form8 of the opportunity to work off the credit. Thus, Form8 had no obligation to grant or provide the credit to Southstar in any other form. This meant that, notwithstanding the acknowledged debt which Form8 owed to Southstar, Form8 had no obligation to discharge or honour the debt in cash or in kind because Southstar, through its administration, had failed to provide the opportunity to Form8 to redeem the debt through work in kind.
67Overall, I prefer the approach for which Southstar contends. It is consistent with the Deed and the admissible history that Southstar and Form8 agreed to a commercial arrangement whereby:
· the parties resolved their differences over the Johnston Street project without going to trial;
· notwithstanding the claim or entitlements which Form8 had, or may have had, in relation to the Johnston Street project, Form8 agreed to compensate Southstar for the loss and damage alleged regarding that project;
· the compensation was $345,000 and was payable by work in kind or in cash or a combination of the two;
· it was only when Southstar received the full benefit of the credit that the release of Form8 became operative and effective. Until then, Form8 remained exposed.
68The crux of the dispute concerns the obligations of Southstar and Form8 under the Deed. There is no dispute about the construction of the guarantors’ obligations under the relevant clause in the Deed. For that reason, I consider the reference to the strictissimi juris doctrine does not really illuminate the matter.
69The contra proferentem dictum is not especially pertinent in this case. First, I consider that the document in question is not ambiguous. Employing the traditional rules of interpretation is enough to deal with the point of construction. Secondly, the circumstances in which the Deed was created and its very terms show that the Deed was drafted hastily and that there was intended to be a more complete and polished version produced later for the parties. That being so, it seems to me inappropriate to employ the contra proferentem dictum vigorously against Southstar.
70In short, I find that where the plaintiff and defendants differ in their construction of the contract, the plaintiff’s interpretation is to be preferred. In particular, I reject the defendants’ interpretation of the purpose of the Deed, namely, that apart from settling the Johnston Street dispute, it was a mechanism to give Form8 the chance to work off its debt by providing work in kind for Southstar.[39] Instead, I favour the plaintiff’s understanding. The underlying purpose of the Deed was to resolve the dispute between Southstar and Form8 stemming from the Johnston Street project quickly, cheaply and without resort to litigation. The Deed did this by providing Form8 a path by which to restore the Johnston Street project and an option to satisfy the outstanding debt by way of cash payment or work in kind.
[39]See transcript at 204 where the defendants focus only on work in kind and make no reference to the possibility of payment. This was consistent with their general attitude during the trial where they addressed the possibility of a cash payment primarily in the event of a default by Form8.
Issue 2: Does the Deed contain the implied term alleged by Southstar?
71It is clear from the preceding discussion that the purpose of the Deed was to resolve the dispute between Form8 and Southstar regarding the Johnston Street project. The amounts in contest were significant, in that with the various allegations made by both parties, they were around $1 million. The Deed was a practical mechanism designed to resolve the dispute more cheaply and expeditiously than engaging in protracted litigation. It also gave Form8 an opportunity to prove itself and to gain Southstar as a long-term client.
72The Deed did not explicitly address the scenario faced in this case – after Southstar engaged Form8 on a project for which Form8 could allow a partial credit, there was, due to the administration, no subsequent project against which Form8 could work off the balance of the credit in Southstar’s favour.
73Southstar contends that the court should imply a term in the Deed to the following effect:
“If Southstar engaged the First Defendant on any project(s) within 6 months of entry into the Deed of Settlement for which it is agreed that the First Defendant will credit Southstar only a portion of the total amount of the Settlement Sum:
(a)the First Defendant must credit Southstar the agreed amount within 12 months of entry into the Settlement Deed in accordance with the settlement sum provisions; and
(b)the balance of the Settlement Sum is payable in monthly instalments in accordance with the clause pleaded in the settlement sum provisions (with no further monthly payments required after the balance of the Settlement Sum less the amount of the agreed credit has been discharged in full).”[40]
[40] A clause to the same effect is found in the plaintiff’s closing submissions at [66]
74Southstar contends that if there were no engagement of Form8 on the Walpole Street project, the court does not need to determine whether there is an implied term.
75Southstar contends that the proposed implied term satisfies each of the criteria identified in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (‘BP Refinery’)[41], namely: it must be reasonable and equitable; it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; it must be so obvious that “it goes without saying”; it must be capable of clear expression; it must not contradict any express term of the contract.[42]
[41](1977) 180 CLR 266
[42] Ibid at 283
76Southstar submits that:
(a) the implied term is reasonable and equitable because it is consistent with the discretion reserved to Southstar as to whether or not to engage Form8 in future projects.[43] It is also consistent with the intention evinced by the express terms that Southstar would obtain the complete benefit of the Settlement Sum[44] either by credit, cash, or a combination of the two. The implied term would allow Southstar to engage Form8 for certain works but request the balance of the debt in cash payments.[45] The implied term is not capricious or prejudicial against Form8[46] because it merely holds Form8 to its critical obligation – giving Southstar the full benefit of the Settlement Sum – in a scenario the parties did not turn their minds to;[47]
(b) it is necessary to give business efficacy to the Deed because there is a gap in the contract. Without it, other terms of the contract could not operate.[48] Southstar would not receive the full benefit of the Settlement Sum and Form8 would not be released from all disputed matters relating to the Johnston Street project.[49] This would deprive both parties of core benefits derived from the agreement and lead to an uncommercial result;[50]
(c) the implied term merely responds to a gap in the drafting of the Deed and does not contradict any express term.[51] Instead, it ensures that Southstar would obtain the full benefit of the Settlement Sum and that Form8 obtains its release from Southstar as contemplated by the Release clause;[52]
(d) the implied term itself is capable of clear expression as evidenced by its formulation;[53] and
(e) the cumulative weight of the submissions renders the implied term so obvious that it goes without saying.[54]
[43] Transcript at 271
[44] Ibid
[45] Ibid
[46] Plaintiff’s closing submissions at [72]
[47] Ibid at [72]
[48] Ibid at [73]
[49] Ibid at [73]
[50] Ibid at [73]
[51] Transcript at 270
[52] Plaintiff’s closing submissions at [70]
[53] Ibid at [71]
[54] Ibid at [74]
77Beyond the BP Refinery criteria, Southstar says that the rougher and less sophisticated a commercial document is, the more inclined a court should be to imply a term.[55]
[55]Southstar argues that this is a corollary of the principle outlined in Pilbara Iron Ore Pty Ltd v Ammon [2020] 14 ARLR 148 at [88] citing Codelfa Constructions Pty Ltd v State Rail Authority of N.S.W. (1982) 149 CLR 337 at 352
78The guarantors contend for their part that the implied term is an attempt by Southstar to avoid the plain and ordinary meaning of the words of the agreement.[56]
[56] Defendants’ closing submissions at [57]
79In relation to the BP Refinery criteria, the guarantors submit that:
(a) in accordance with their construction of the contract, it would not be reasonable to require Form8 to make a cash payment upon the expiration of the 12 month period.[57] That is because the object of the contract was to provide Form8 an opportunity to satisfy the debt by work in kind and because Feeney and Filippelli did not discuss the prospect of a cash payment being made.[58] Further, the value of the credit would not automatically convert to a cash payment unless Form8 was in default.[59] Because Form8 was not in default and was ready, willing and able to perform the concreting works on the Walpole Street project,[60] the default provision is not enlivened, and the Deed should not then transform the credit into a cash payment;[61]
(b) the implied term is not necessary to give business efficacy to the contract. In light of their construction of the contract, it works without the implied term;[62]
(c) the term reads as a legal submission[63] and it is not so obvious that is goes without saying. In pre-contractual negotiations, Southstar and Form8 discussed exclusively the idea that Form8 was to work off the debt.[64] Furthermore, the language in the implied term does not reflect the language that the parties would have used;[65]
(d) the parties did turn their minds to the situation that the implied term addressed.[66] The guarantors argue that, because the parties decided to divide the application of the credit between two jobs and not one,[67] this demonstrates that the parties did contemplate the present situation. Furthermore, they also argue that the parties turned their minds to this situation because, if Form8 is engaged but does not apply the credit within 12 months, then the default provision requires Form8 to pay the whole of the Settlement Sum.[68] If there is no default, then the credit expires;[69]
(e) it is inconsistent with the express terms of the contract.[70] The guarantors submitted that the implied term covers the same ground as the express terms of the contract and that the express terms were intended to deal exhaustively with the matter.[71] The express terms of the contract, according to the guarantors, provide only two situations in which a cash payment is to be made.[72] The first is if Form8 is not engaged within six months. The second is if Form8 defaulted. If neither of those events occurred, then Form8 was not required to make a cash payment. As the implied term provides a third situation in which a cash payment is required, it is inherently inconsistent with those terms.[73] Further, the guarantors say that the implied term is inconsistent with the actual intention of the parties as evidenced by the express terms and surrounding circumstances;[74]
(f) any ambiguity in the terms expressed in the contract is not of itself a reason to imply a term.[75]
[57] Transcript at 243/4
[58] Ibid at 243/11
[59] Ibid at 242/20
[60] Ibid at 243/27
[61] Ibid at 243/30 – 244/4
[62] Ibid at 242/6
[63] Defendants’ closing submissions at [58]
[64] Transcript at 244/28 – 245/2
[65] Transcript at 240/18
[66] Transcript at 240/20 – 241/2
[67] Ibid
[68] Defendants’ closing submissions at [60]
[69] Transcript at 239/29
[70] Defendants’ closing submissions at [59]
[71] Defendants’ closing submissions at [59]
[72] Transcript at 245/24
[73] Transcript at 245/24
[74] Defendants’ closing submissions at [59]
[75] Defendants’ closing submission at [61]
Analysis
80When deciding whether to imply a term, the court’s task is to identify a term “which it is presumed that the parties would have agreed upon had they turned their minds to it”.[76] Courts should be slow to imply a term.[77] The onus lies upon the party alleging the implied term to establish that the term ought be implied.
[76] Codelfa Construction Pty Ltd v State Rail Authority of N.S.W. (1982) 149 CLR 337 at 346 per Mason J
[77] Ibid
81The more detailed and comprehensive the contract, the less willing the court should be to identify ground that the parties did not consider.[78]
[78] Ibid
82I consider that the Deed was not an especially well drafted or comprehensive document. It was prepared within a day of the final email between the parties providing critical parts of the Deed, being the value of the credit and the way in which it was to be applied. The contract itself provides that the terms were to be further refined and recorded in a formal settlement deed drafted by a lawyer.
83In the circumstances, I am satisfied that the court should not be overly reticent to imply a term. The history of the negotiations leading to the execution of the Deed was very different from a situation in which experienced lawyers for each party negotiated an agreement over a period of months with draft documents being sent back and forth.
84On balance, I consider the better view is that the term alleged by Southstar should be implied. I reach this view for several reasons.
85First, I find that the Southstar’s submissions were more persuasive than the defendants’ in addressing the factors set out in BP Refinery.
86Secondly, the business efficacy test is important because a term should be implied only if it is necessary to make the contract effective in a business sense. Where a contract is commercially effective without the implied term, a court will not imply one. However, it will imply a term to make the agreement workable. Here, the Deed would not be workable if Southstar could not obtain the full benefit of the credit and Form8 could not obtain a release. If neither outcome were achievable, there would be little or no commercial utility in the Deed.
87As to the obviousness requirement, I note that some commentators have suggested the contracting parties often have different interests so there may well be points where their response to the officious bystander[79] would be neither unanimous nor instantaneous. After all, that is, at least in part, why the parties are presently in court – one relies upon an implied term to which the other objects.[80] The authors of Cheshire & Fifoot: Law of Contract suggest that, with implication beginning where actual intention leaves off, it might be better to alter the role of the bystander from being officious to reasonable. That person would no longer ask the parties what they would have instantaneously agreed to. Rather than asking the parties this question, the bystander would decide, as a reasonable person, whether and what term should be included in the agreement.[81]
[79]BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 at 286
[80]NC Seddon and RA Bigwood, Cheshire and Fifoot: Law of Contract (LexisNexis, 12th ed, 2023) at [10.61]
[81] Ibid
88Thirdly, parts of the defendants’ submissions are simply not made out. It is incorrect to imply that the principal or sole object of the Deed was to provide Form8 with an opportunity to satisfy the credit by work in kind. I accept that it was one among several objects of the Deed. Other purposes included the resolution of the parties’ dispute over the Johnston Street project and the agreement to the amount of compensation for Southstar in relation to the loss and damage suffered on that project.
89As mentioned elsewhere in the judgment,[82] it is not the case that Form8 was to make a cash payment to Southstar only if it defaulted on its other obligations. The Deed expressly contemplated a scenario in which Form8 would make monthly cash payments to discharge the agreed credit even though it did not default.
[82] See [47] above
90Contrary to the defendants’ assertion, the evidence does not disclose that the pre-contractual negotiations between the parties involved discussion of incomplete payment of the credit amount. To say that agreeing to divide the credit between two jobs showed that they contemplated the present scenario is inaccurate. I accept that the Deed explicitly referred to applying the credit on two jobs, and to that extent, part of the credit was applied to each job. Beyond this point however, there is no basis to say that the negotiations or the Deed contemplated a situation in which:
· the parties agreed to how much of the credit would be applied to a particular project;
· that project did not proceed; and
· there was no subsequent project to which the balance of the credit could be applied.
91The defendants say that the proposed term is inconsistent with the express terms of the Deed because those terms provide only two circumstances in which a cash payment is to be made. The first is when the plaintiff does not engage Form8 within six months. The second is if Form8 defaults on its obligations. Therefore, creating another situation which requires a cash payment is said to be inherently inconsistent with the Deed.
92I do not agree that because the Deed provides only two circumstances in which Form8 is to make a cash payment, the proposed term is inconsistent with the express terms of the Deed. The purpose of implying a term is to address a gap – a situation to which the contracting parties did not explicitly turn their minds. To permit the implied term contended for does not insert an inconsistent term into the Deed in the sense of contradicting the terms of the Deed. Rather, it simply expands the circumstances in which Form8 might have to make a cash payment for Southstar to obtain the full benefit of the credit.
93If there is no implied term, Southstar will not receive any practical benefit from the credit and Form8 will not obtain a release. Had the parties contemplated the current scenario, I cannot imagine that Southstar would have agreed that Form8 should consider itself discharged from the performance of any further obligations under the Deed. There is no sound commercial reason why Form8 should receive such a windfall outcome where it did not perform the concrete works on the Walpole Street project (but still gets the benefit of $120,024 for the partial credit) and has no ongoing obligation to Southstar for the balance of the agreed credit of $345,000. I accept that Feeney complained that, in entering the Deed, Form8 had to forego financial benefits of about $300,000. However, even allowing for this, he still entered the Deed knowing that Form8 agreed to a credit of $345,000 in favour of Southstar. I consider it extremely unlikely that Southstar and Form8 would have agreed upon any scenario which enabled Form8 to be released without Southstar obtaining the full benefit of the credit. The factual context and terms of the Deed indicate that, in order to release Form8, Southstar wants to receive the actual benefit of the credit, not just a commitment by Form8 to provide the credit in the future. In my view, this outcome is supported by, and consistent with, the terms of the Deed which made Southstar’s release of Form8 dependent on this very fact.
94For the reasons outlined above, I find that the term alleged by Southstar should be implied to give effect to the Deed.
Issue 3(a): Did Southstar and Form8 enter into the Walpole Street Subcontract? If so did the agreement, alternatively the events surrounding the agreement, meet the descriptions of a “future project” that Southstar “engaged” Form8 on as a subcontractor within “6 months”, for the purposes of the Deed?
95The initial question here is whether Southstar and Form8 entered into the Walpole Street subcontract.
96Southstar submitted that the parties did not enter into a binding agreement in relation to this project.[83] It argued that there was no subcontract with Form8 because:
(a) although the parties agreed upon the contract price and the scope of works for the Walpole Street project, there were other important matters not agreed including the contract programme for the works to be undertaken;
(b) Form8 did not execute the proposed subcontract which Southstar sent to it on 12 March 2020. Rather, on 19 March 2020 Form8 sent to Southstar a subcontract which contained substantive handwritten changes to the Southstar document. The changes included completion date, contract programme and the invoicing breakdown;[84]
(c) in the circumstances, this amounted to a rejection of Southstar’s offer and a counter-offer by Form8.
[83] Plaintiff’s closing submissions at [75]
[84] There were other additional changes. See [116] below.
97Filippelli said that Southstar would not enter into a construction agreement without a completion date. The head contract between Southstar and the client for the Walpole Street project contained a liquidated damages clause of approximately $57,000 per month. Filippelli said there was “no way” he would accept an open-ended completion date for a critical path structure package like the concreting work. The inference was that the risk for Southstar was too great.[85]
[85]I note that the subcontract for the Johnston Street project did not contain a specified completion date. However, on that job, there was both a commencement date formula and an agreed construction programme. By adding the construction programme to the commencement date, one could determine the completion date.
98Southstar never executed the amended document sent by Form8 or acted in a manner which conveyed that Southstar agreed to be bound by its terms. When Form8 sent in what purported to be its first progress payment claim for assessment, Southstar said that it could not be processed until the parties agreed upon the “claim breakdown”. Feeney agreed that the reference to the claim breakdown was a reference to a schedule which Form8 had included in the amended draft contract which it sent to Southstar. The document included a notation: “Form8 will submit invoicing breakdown for approval”.
99Finally, Southstar argued that it was common ground that there was no concrete or steel products or services delivered to, or carried out by, Form8 at the Walpole Street site. For that reason, Southstar derived no benefit from any products or services for which Form8 contracted with third parties in relation to the project.
100As to the more specific question of whether Southstar “engaged” Form8 for the purposes of the Deed, Southstar argued that to “engage” meant to “enter into a contract or undertaking”. This was a meaning given in the New Shorter Oxford English Dictionary.[86] Because “engage” was not defined in the Deed, Southstar argued that the ordinary meaning of the word should apply. Southstar submitted that there was nothing in either the Credit Obligation Clause or the Mechanical Clause which required a departure from that ordinary meaning. Rather, it was said that the Mechanical Clause contained a collateral obligation regarding the payment of the Settlement Sum by instalments – this obligation arose where Southstar did not engage Form8 as a subcontractor on a future project within six months of Form8 accepting the offer constituted by the Deed.
[86] Clarendon Press, New Shorter Oxford English Dictionary (4th ed, 1993) ‘engage’ (def 2) p. 820
101Southstar contended that the meaning it relied upon was supported by the background circumstances known to the parties at the time of entering the Deed. Southstar had previously engaged Form8 on only one other project, the Johnston Street project. That engagement took the form of a formal written subcontract agreement executed by Southstar and Form8. In addition, evidence from the dealings between the parties indicated that both Southstar and Form8 expected their negotiations to result in a signed contract. This appeared from the following factors: Southstar prepared and sent a draft subcontract to Form8 on 12 March 2020; Feeney marked up the draft with various amendments and signed the same before sending it back to Southstar on 19 March 2020; Southstar refused to assess Form8’s first progress payment claim on the basis that the parties had not agreed upon a payment breakdown.
102For their part, the defendants contended that Southstar overstated the requirements to be satisfied for the engagement to be enlivened. They argued that the court should avoid an overly technical reading of the word in the context of the Deed. They said that whether an engagement had occurred or not was to be assessed by reference to the plain meaning of the agreement, having regard to the surrounding circumstances.[87] The defendants relied heavily upon the fact that Form8 undertook a reasonably significant amount of work and incurred expenses of approximately $50,000 which it said it would not have incurred had Form8 merely been participating in a tender process. The defendants argued that, having regard to the history of dealings between Southstar and Form8 in relation to the Walpole Street project, and given the encouragement from Southstar to “start scheduling steel for the footings soon”,[88] Form8 was certainly “engaged” on that project. This outcome was underlined by the fact that there was no suggestion from Southstar at any time that the engagement required a completed and signed subcontract.
[87] Defendants’ closing submissions at [55]
[88] Court book at 132
103The defendants were initially hesitant to say what “engage” meant.[89] They contended that it involved a commitment to enter into dealings with, or to give an undertaking to commence works on a project. In saying this, they eschewed the more conventional approach of deriving the meaning of a word from a dictionary. Ultimately, the defendants argued that an engagement required that there be an agreement between the parties that Form8 would undertake further works on a future project. The defendants said that there had to be an agreement and there was an agreement which arose from emails and conversations. They submitted that the parties agreed upon the scope of works and the contract price, including the credit to be allowed to Southstar. However, the defendants argued that there was no need to have a formal subcontract. Southstar did not tell Form8 at any stage that their engagement was subject to the execution of a subcontract in relation to the Walpole Street project.
[89] Transcript at 231
Analysis
104The question of engagement is important in this case. It arises in a context where the Deed provides for Form8 to give or allow credit to Southstar.
105From around the time of entering into the Deed in January until 6 April 2020, Southstar and Form8 negotiated the possible entry into an agreement under which Southstar would engage Form8 to perform subcontract concreting works at the Walpole Street project. The employees of Southstar involved on that project were: Eren Erdogan, the commercial manager who handled commercial arrangements and ensured that subcontract agreements were executed correctly; Michael Neil the project manager; and Vaughan Sheerin the contract administrator who was responsible for the day to day administration of the Walpole Street project and reported to Neil. The Form8 employees involved in the project were: Feeney who was primarily responsible for conducting negotiations with Southstar; Imran Arshad the project manager for Form8; and Russell Saunders the site foreman. The negotiations were conducted by conversations between members of the project teams and emails.
106In his email of 16 January 2020,[90] Filippelli advised Feeney that his team would email him documents for an imminent project they were about to price. This was the Walpole Street project.
[90] Refer to [38] of these reasons
107Between about 21 – 23 January 2020, there was an exchange of correspondence between Feeney and Erdogan about the proposed subcontract price and the amount of the proposed credit to be given under that subcontract. The correspondence indicated that at the time, Southstar was also seeking tenders from other concreting subcontractors.
108On 29 January 2020, Form8 sought a quote for post-tensioning works at the Walpole Street project from PTX.
109On 5 February 2020, Southstar sent a proposed scope of works to Form8. This was Southstar’s generic document for a structures package. Southstar staff then followed up Form8 several times regarding the draft scope. Form8 did not respond until 13 February 2020 when Feeney emailed Sheerin telling him that Form8 was not willing to sign the proposed scope of works. On 20 February 2020, Arshad emailed Sheerin attaching a marked up draft of the scope of works which incorporated amendments and changes proposed by Form8. On 2 March 2020, Arshad emailed Sheerin a signed scope of works which included various handwritten alterations and amendments. The parties exchanged further comments and drafts.
110On 24 February 2020, Sheerin emailed Arshad advising that Form8 should finalise the scope of works and quotations in the next couple of days because Form8 would need to “start scheduling steel for the footings soon”.
111On 25 and 26 February 2020, Southstar sought updates from From8 about the provision of its quote for the project. On 27 February 2020, Form8 provided its quote in which Feeney indicated that the company would undertake the project for the price of $850,000 excluding GST. After a conversation between Feeney and Erdogan, Sheerin emailed Feeney on 28 February 2020 with a proposed breakdown of costs for the project which included a price of $893,769 and a proposed credit against the Settlement Sum of $120,024. Sheerin sent follow up emails to Feeney asking him to confirm whether Form8 agreed to those figures. On 3 March 2020, Feeney confirmed that the figures were correct.
112Also on 26 February 2020, PTX provided the quote to Form8 for post-tensioning works in the sum of $85,000 excluding GST.
113Feeney gave evidence that Form8 accepted that quote soon after, and then on 10 March 2020, Feeney sent PTX an email asking for copies of the drawings as he was getting harassed for them. On 11 March PTX, provided the drawings to Form8 which in turn sent them to Southstar.
114On 12 March 2020, Sheerin sent an email to Feeney with a link to the proposed subcontract for the Walpole Street project and asked whether he could sign and return the document by the close of business on 16 March. Form8 did not sign and return the draft document by the date requested.
115On 19 March 2020 at 7.50am, Sheerin sent an email to Arshad and Feeney asking for an update about the remaining post-tensioning drawings. On the same day at 8.29am, Erdogan emailed Feeney commenting on the number of requests from the Southstar team to Form8 seeking to finalise procurement. Erdogan asked that Form8 co-operate more to ensure a good working relationship on the project.
116On 19 March 2020 at 1.05pm, Arshad emailed Sheerin a link to a signed contract. Later that day, Feeney emailed Sheerin pointing out that there were various corrections and amendments in the document. Feeney confirmed that the handwritten amendments in that draft were made by him and Arshad. The amendments included:
· the inclusion of an undefined term “virus risk” in the definition of Excepted Risk;
· the striking out of the retention monies clause;
· the striking out of the termination for convenience clause;
· the striking out of the set-off clause;
· the striking out of the clause regarding the date of completion of works in Annexure A;
· the striking out of the invoicing breakdown in Schedule 1 and the comment that Form8 would submit an invoicing breakdown for approval; and
· the striking out of the construction programme in Schedule 3.
117Form8 executed this document but Southstar never did. Filippelli said that the head contract with the client contained a liquidated damages clause exposing Southstar to damages of about $57,000 per month. Accordingly, he would not accept an open-ended and unconfirmed completion date for a critical path structure package such as concreting works.[91]
[91] Transcript at 99
118On 25 March 2020, PTX issued an invoice to Form8 for $17,600. Form8 paid the invoice on 21 May 2020.
119On 25 March 2020, Arshad emailed Sheerin attaching progress claim number one for the Walpole Street project. On the following day, Sheerin advised by email that the parties needed to come to an agreement on the claim breakdown before such progress claim could be considered.
120After more emails from Sheerin, on 6 April 2020 Arshad emailed him Form8’s proposed claim breakdown.
121On 17 April 2020, after Southstar had gone into administration, ARC issued an invoice to Form8 for steel which the latter had apparently ordered in connection with the Walpole Street project. It was an agreed fact between the parties that there were no concreting or steel products or services delivered to, or carried out at, the Walpole Street project.
122On the evidence, I find that:
· from around 17 January 2020, Southstar was keen to involve Form8 in the Walpole Street project if possible;
· Southstar and Form8 began negotiations from soon after that time about Form8 providing concrete formwork and/or services on that project;
· on 24 February 2020, Southstar through Sheerin advised Form8 that it should finalise the scope of works and costing quotes promptly because Form8 would need to start scheduling steel for the footings soon;
· Southstar knew in late February 2020 that Form8 had obtained a quotation from PTX for design and documentation for post-tensioning work for the project;[92]
· after negotiations, by 3 March 2020, Southstar and Form8 agreed upon the cost of the scope of works of the project and the credit to be applied from the Settlement Sum;
· on 11 March 2020, Form8 sent copies of the PTX documents to Southstar;
· also by 19 March 2020, Sheerin was telling Form8 to proceed on the architectural drawings provided even though they were marked “for information” and not totally updated;
· Form8 had ordered steel products from ARC.
[92] Court book at 144
123While I find that Southstar and Form8 never signed a written subcontract for the work to be performed at the Walpole Street project, I do not agree that it was only if such an agreement were executed by the parties that Southstar could be said to have engaged Form8 in relation to that project.
197Southstar submits that, as the First Deed of Assignment was entered into after the expiry of the 12-month credit period under the Settlement Deed, the assigned rights only comprised the choses in action against Form8 and the guarantors in connection with the debt then owing under the Settlement Deed. Both the principal debt and rights under an associated guarantee are capable of assignment.[151]
[151]W Courtney, J O’Donovan, J Phillips, Modern Contract of Guarantee (Thompson Reuters, looseleaf, 13 July 2023), at [10.2710] and authorities cited therein.
198Southstar contends that because the guarantors are not party to the Deeds of Assignment, the guarantors need to establish that a trust exists in their favour for release of Form8’s obligations to Southstar under the Deed. If the assignment is valid, Mansour must be holding the release on trust for the guarantors. The plaintiff submits that this cannot be the effect of the Deeds of Assignment.
Analysis
199I have already found that the Deed contains the implied term as alleged by Southstar. Accordingly, the obligation to make monthly cash payments under the implied term arose eight months after entering the Deed. Form8 was in default by September 2020 when it failed to perform this obligation. Nevertheless, on any construction of the Deed, by the time the First Deed of Assignment was entered in August 2021, Southstar could no longer exercise its option to receive credit from Form8 by way of works in kind. The rights it had under the Deed were related only to the recovery of that part of the Settlement Sum which was owing and unpaid. Southstar’s rights in relation to payment of the debt by Form8 are secured by the guarantors.
200Clause 2.1 of the First Deed of Assignment assigned Southstar’s interest in: (a) the debt owing by Form8 or the guarantors; and (b) its rights under the Deed. Given the First Deed of Assignment was entered into in August 2021, the rights which Southstar assigned under the First Deed of Assignment related only to cash payments, not works in kind.
201A debt may assigned by writing[152] upon notice being given to the debtor.[153] Contracts of guarantee are generally assignable as it is usually irrelevant to the guarantor whom it pays. The beneficiary can therefore generally assign its contractual right to the benefit of the guarantee.[154] Here, it is of no consequence to the guarantors whether they paid the money owing under the Settlement Deed to Southstar or to Mansour. Accordingly, both the debt and the rights under the Settlement Deed were capable of being assigned to Mansour.
[152]See section 134 of the Property Law Act 1958 (Vic)
[153]The question of notice was not raised as an issue at trial. The defendants did not contest the validity of the assignment on the basis of notice.
[154]See Ratcliffe v Oceanic Life Ltd [1998] NSWSC 31 and Farrow Mortgage Services Pty Ltd v Hogg (1995) 64 SASR 450
202The guarantors are not party to the Deeds of Assignment. Without privity, they need to establish that a trust exists in their favour for release of Form8’s obligations to Southstar under the Deed. The defendants did not plead or argue that Mansour was holding the release on trust for the guarantors, and the nature of the assignment was such that this cannot be the case. The First Deed of Assignment gives Mansour the right to recover a debt from Form8 and/or the guarantors. This is fundamentally inconsistent with the proposition that Mansour is holding the release on trust for the guarantors. I am not satisfied the First Deed of Assignment created a situation whereby Mansour was holding the release on trust for the guarantors.
203If I had found that Southstar’s rights in relation to works in kind were still valid at the time of assignment (which is a conclusion that cannot be reached on any construction of the Deed), it is possible that these rights could be described as in personam rights.
204A leading authority for the view that intention determines the personal or impersonal nature of a contractual right is Tolhurst v The Associated Portland Cement Manufacturers (1900) Ltd.[155] In that case, Tolhurst owned land that contained chalk quarries and he sold part of that land to the Imperial Portland Cement Company for the purpose of the company establishing a cement works on the land. Tolhurst entered into a contract with Imperial Portland Cement Company whereby Tolhurst would, for a term of 50 years (or at least 35 years) supply to the company and the company would take and buy at least 750 tonnes per week of chalk. Later, the Imperial Portland Cement Company assigned this right to the Associated Portland Cement Manufacturers Ltd together with a sale of the land, works and business. The Imperial Portland Cement Company went into voluntary liquidation and ceased to carry on business. Tolhurst claimed that he was no longer bound by the contract owing to the assignor’s attempted assignment and liquidation. The House of Lords held by a majority that Tolhurst was bound by the contract because the right in question (that is, supplying chalk in exchange for payment) was not intended to be personal to the assignor.
[155][1903] AC 414; See Tolhurst, The Assignment of Contractual Rights (Hart Publishing, 2nd ed, 2016) at 218 [6.69]
205Lord Macnaghten, with whom Lord Shand agreed, thought that it could not ‘make the slightest difference to anybody who the proprietors of the cement works or the actual manufacturers may be, provided they are in a position to carry out the terms of the original contract.’[156] This result depended on the true meaning and effect of the contract and he thought it was not right to construe the contract literally limiting it to the named parties.[157]
[156]Tolhurst v The Associated Portland Cement Manufacturers (1900) Ltd [1903] AC 414 at 417
[157]Ibid
206I accept that the contract between Southstar and Form8 is of a different nature. In Tolhurst, the parties intended that the contract run for up to 50 years (but at least 35 years) and this was a factor which the court considered relevant in concluding that reference in the contract to the company should also be read as including heirs, executors, administrators and assigns of the quarries and the cement works.[158] In comparison, the Deed in this case gave Form8 the opportunity to repay a debt to Southstar by completing works on projects with a relatively short credit period of 12-months.
[158]See also National Carbonising Co Ltd v British Coal Distillation Ltd (1936) 54 RPC 41
207When determining whether or not certain rights under contract have personal qualities, courts will focus primarily on the operative provisions of the contract. The nature of the duty which has been delegated will also affect the assignment of the right.[159]
[159]See Tolhurst, The Assignment of Contractual Rights (Hart Publishing, 2nd ed, 2016) at 227-8 [6.72]
208I have already concluded, based on my construction of the Deed, that the operative provisions of the Deed were concerned with a repayment of a debt. This could have been a cash repayment or by way of works if the opportunity presented itself. But the contract was not concerned exclusively with repayment by way of works in kind.
209If I considered that the operative provisions of the Deed were concerned primarily with works in kind, the nature of the duty delegated to Mansour was the duty to provide Form8 with the opportunity to complete works on future projects. There was no evidence before the court as to Mansour’s capacity to offer Form8 the opportunity to perform such works. However, I infer from the fact that Mansour is a principal at a legal firm, and not a construction company, that Mansour anticipated only receiving the debt by way of cash payment and not works in kind.
210I am satisfied that the option for Southstar to receive credit on future projects from Form8 was personal in nature and could therefore not be assigned to Mansour. However, for the reasons outlined above, given the timing of entry into the First Deed of Assignment, this option was no longer available when Southstar executed the First Deed of Assignment. The rights which were assigned to Mansour related only to the recovery of a debt from Form8 and/or its guarantors.
(b) Did Southstar receive accord and satisfaction with the effect that any claims it had against Form8 and the second and third defendants were extinguished, abandoned or released?
211The defendants submit that Southstar received accord and satisfaction in respect of whatever rights it might have had under the Deed when it entered into the First Deed of Assignment. They rely upon this principle in circumstances where the “accord” is an “assignment” by Southstar rather than a complete abandonment of its claim. Southstar did not relinquish its claim against Form8 but rather assigned the debt to Mansour.
212The contention that Southstar received accord and satisfaction when it entered into the First Deed of Assignment is a difficult position to maintain because there is no release. Without release of the parties’ obligations to perform under contract, there cannot be accord and satisfaction.[160] A release in this case would be a release of the obligations on Southstar and Form8 under the Deed. However, the agreement upon which the defendants rely as an accord and satisfaction is an agreement between the plaintiff and a non-party, Mansour, not the parties to the substantive dispute.
[160]Baltic Shipping Co v Merchant (1994) 36 NSWLR 361 at 370
213The plaintiff relies upon the definition of accord and satisfaction as set out in Zivkovic v Parke[161] namely, “a settlement agreement which becomes a binding contract when it is made and has the effect of discharging the plaintiff’s cause of action at that time, irrespective of whether the defendant complies with his or her obligations under the agreement.”[162] Southstar submits that the terms of the First Deed of Assignment did no such thing.
[161][2022] VSCA 43
[162]Ibid at [82] (Kyrou JA)
Legal principles
214Accord and satisfaction is a form of compromise agreement whereby the plaintiff promises to abandon its claim in exchange for the defendant promising to do something.[163] In so doing, the plaintiff foregoes its original rights and, if the defendant fails to do what was required, the plaintiff can only enforce the settlement agreement.[164] The plaintiff therefore replaces the original claim with an enforceable contract.
[163]McDermott v Black (1940) 63 CLR 161 at 183-5 (Dixon J)
[164]Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 at [116] (Gummow J)
215In this way, accord and satisfaction can be distinguished from ‘accord executory’ whereby the plaintiff promises to abandon its claim in exchange for the defendant doing something.[165] If the defendant fails to do what was required (usually paying money), the plaintiff’s original rights continue on and can be enforced and no settlement agreement has eventuated.[166]
[165]NC Seddon and RA Bigwood, Cheshire and Fifoot: Law of Contract (LexisNexis, 12th ed, 2023) at [4.24]
[166]See for example Blue Moon Grill Pty Ltd v Yorkey’s Knob Boating Club Inc [2006] QCA 253
216Parties may alternatively make an accord and satisfaction that is conditional whereby the plaintiff only abandons its original rights so long as the defendant carries out its promise but, failing that, the plaintiff’s original rights can still be enforced.[167]
[167]Osborn v McDermott [1998] 3 VR 1 at 9-10 (Phillips JA)
217The question of whether there has been an accord and satisfaction (or another category of settlement) is one of fact.[168] The difference between the three possibilities as outlined above depends on the drafting of the agreement. Ideally, the agreement should specify what is the consequence of the defendant failing to perform.[169] The court must interpret the agreement and the parties’ intention in accordance with normal principles rather than necessarily applying these labels.[170]
[168]El-Mir v Risk [2005] NSWCA 215 at [54] (McColl JA, Handley and Ipp JJA agreeing)
[169]Osborn v McDermott [1998] 3 VR 1 at 11 (Phillips JA)
[170]Jingalong Pty Ltd v Todd [2015] NSWCA 7 at [68]-[69] (Sackville AJA with Meagher and Leeming JJA concurring)
218Whilst a release under common law must be by deed, Starke J recognised in McDermott v Black that accord and satisfaction could be achieved in equity by an agreement for valuable consideration.[171]
[171]McDermott v Black (1940) 63 CLR 161 at 176 (Starke J)
219The nature of accord and satisfaction was considered by the New South Wales Court of Appeal in El-Mir v Risk,[172] a case involving the settlement of a dispute under a building contract, in which McColl J summarised the law in the following propositions:
(a) the essence of accord and satisfaction is the acceptance of something in place of a cause of action; the accord is the agreement or consent to accept the satisfaction; upon provision of the satisfaction, there is a discharge which extinguishes the cause of action;[173]
(b) where there is an agreement to accept a promise in satisfaction of a cause of action, the original cause of action is discharged from the date on which the promise is made;[174]
(c) where there is an accord and satisfaction, only the agreement for compromise may be enforced because the previous cause of action has gone; it has been ‘satisfied’ by the making of the new agreement constituted by abandonment of the earlier cause of action in return for the promise or other benefit;[175]
(d) in other words, the role of an accord is to replace the former contract with a new one;[176]
(e) the question of whether there has been an accord and satisfaction is one of fact. It turns upon determining the parties’ intentions, which may be discerned from the terms of the document said to constitute all or part of the agreement or from the surrounding circumstances.[177]
[172] [2005] NSWCA 215
[173]Ibid at [48], referring to Federal Commissioner of Taxation v Orica Ltd (1998) 194 CLR 500 at [116] (Gummow J)
[174] Ibid at [49], referring to McDermott v Black (1940) 63 CLR 161 at 176 (Starke J)
[175] Ibid at [50], referring to Osborn v McDermott [1998] 3 VR 1 at 8 (Phillips JA)
[176] Ibid at [51]
[177] Ibid at [54], referring to Ballantyne v Phillott (1961) 105 CLR 379 at 398 (Menzies J)
Analysis
220I am not satisfied that First Deed of Assignment constitutes a release by Southstar of its claim against Form8. As outlined earlier in these reasons, the assignment by Southstar to Mansour was a valid assignment of its choses in action against Form8 and the guarantors. In entering into the First Deed of Assignment with Mansour, Southstar did not enter into any compromise with Form8 under which it abandoned its cause of action against Form8 and replaced it with a new agreement.
221I note in passing that the Deed could be described as an accord and satisfaction in relation to Southstar’s claim against Form8 for the alleged defects at the Johnston Street project. The First Deed of Assignment cannot be characterised in the same way.
(c) Does the doctrine of approbation and reprobation apply so as to prevent Southstar from pursuing its claim against Form8 and the second and third defendants?
222A person may not “approbate and reprobate” meaning that a person, having a choice between two inconsistent courses of conduct and having chosen one, is treated as having made an election from which the person cannot resile once he or she has taken some benefit from the chosen course.[178] The doctrine is a species of equitable election fastening “upon the conscience of a party taking under a deed or will and requires the party to choose between taking the benefit and accepting the burden of any stipulated conditions or rejecting the benefit.”[179]
[178]Banque des Marchands de Moscou (Koupetschesky) v Kindersley [1950] 2 All ER 549
[179]Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 at [57] (Gummow, Hayne, Kiefel JJ) citing Pridmore v Magenta Nominees Pty Ltd (1999) 161 ALR 458 at 470, [66]
223The defendants submit that Southstar approbated in accepting consideration for disposing of whatever rights it had under the Deed. Having done so, it is the defendants’ submission that they cannot now reprobate by seeking to claim the benefit of something which it has already agreed to cease to enjoy by suing the guarantors.[180]
[180]See Mandurah Enterprises Pty Ltd v Western Australia Planning Commission [2008] WASCA 211 at [109]-[110]
224Southstar submits that there has been no election under the Deed. It contends that it did not make a choice between inconsistent rights but rather assigned its rights to a third party for good consideration, and later paid good consideration for their return. Each assignment was premised upon the continued existence, rather than the merger or extinguishment of those rights.
Analysis
225I am troubled by the defendants’ contention. If I found that Southstar approbated by assigning its rights to Mansour, such that it cannot now claim the benefit of the rights which it ceased to enjoy when it entered the First Deed of Assignment, the rights which have been the subject of assignment seemingly disappear.
226As I have outlined above, I am satisfied that the assignment to Mansour under the First Deed of Assignment was valid. Accordingly, both the debt and the rights under the Deed were assigned to Mansour in August 2021.
227In order for the assignment under clause 2.1 to be effective, Southstar agreed under clause 4.1 to cease to enjoy all its rights in relation to the debt and Deed. As such, Mansour then acquired all rights in relation to the recovery of the debt from Form8 and/or the guarantors.
228In April 2022, Mansour and Southstar entered into the Second Deed of Assignment under which Southstar repaid the same amount of consideration which it had received earlier in exchange for its interests in the debt and rights under the Deed.
229The effect of this second assignment was, in my view, to return the parties to the position that they were in before entering into the First Deed of Assignment. In other words, Southstar was re-assigned its rights in relation to the debt and Deed and Mansour ceased to enjoy those rights.
230I agree with Southstar that no election was made when entering into the First Deed of Assignment. In so acting, Southstar was not choosing between two inconsistent rights. Rather, it was assigning whatever rights it had under the Deed in exchange for consideration. Later, these rights were returned to Southstar in exchange for the same consideration.
231Form8’s position ultimately remains unchanged throughout the course of the Deeds of Assignment. At all times, there remains a debt owing by Form8 under the Deed. If this cannot be repaid by Form8 then the obligation for repayment falls onto the guarantors. It matters not whether Form8 and/or the guarantors pay the Settlement Sum to Southstar, or Mansour.
232I accept that circumstances in which there is an election between inconsistent rights are radically different from some others in which there is said to be a waiver of rights.[181] But I am not satisfied that either of these circumstances was enlivened by the two Deeds of Assignment. Southstar has not approbated by entering into the First Deed of Assignment. Rather, the First Deed of Assignment simply assigned to Mansour Southstar’s rights arising under the Deed. The Second Deed of Assignment returned those rights to Southstar giving them the standing to bring this claim.
[181]See Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 at [60]
Issue 7: In the event the court finds that Southstar received accord and satisfaction under the First Deed of Assignment, or was prevented from pursuing this claim by the doctrine of approbation and reprobation, did the Second Deed of Assignment have the effect of conferring on Southstar a new or different right to pursue this claim?
233For the reasons outlined above, I am satisfied that the assignments made under both the First and Second Deeds of Assignment were valid. The Deeds of Assignment did not constitute settlement agreements of such a nature that it could be said that Southstar has received accord and satisfaction. Further, Southstar was not prevented from bringing this claim because of the doctrine of approbation and reprobation. The Second Deed of Assignment simply re-assigned Southstar’s rights to pursue the claim that is now before me.
Issue 8: Is Form8 liable to Southstar under the Deed and, if so, for what sum? Are the second and third defendants liable as guarantors to pay Southstar in respect of any sums owed by Form8?
234Form8 is liable to Southstar under the Deed. Because no credit was applied in relation to the Walpole Street project, the full amount of $345,000 is owed to Southstar. In its statement of claim Southstar conceded that the amount claimed should be reduced by $5,000. Because Form8 has gone into administration Southstar cannot enforce its claim against it. Accordingly, Feeney and Karakatsanis will be liable as guarantors of Form8’s obligations under the Deed.
Conclusion
235For the reasons set out, I find that Southstar’s claim succeeds and Feeney and Karakatsanis are liable as guarantors.
236I direct the parties to confer about the form of final order and costs in an effort to agree upon orders giving effect to this judgment. If they cannot agree, then by 4:00pm on 23 August 2023, each party is to file with my chambers and serve a written submission setting out the final orders sought and the reasons therefor. The submissions are not to exceed five A4 pages, a minimum 14-point typeface, and 40mm margins on either side of the page. By 10:00am on 28 August 2023, each party may file a reply submission limited to no more than three A4 pages.
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