Sox Holdings Pty Ltd v South East Developments (Vic) Pty Ltd
[2018] VCC 1864
•19 November 2018
| IN THE COUNTY COURT OF VICTORIA AT Melbourne COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
EXPEDITED LIST
Case Nos. CI-16-04826 and CI-16-03285
| SOX HOLDINGS PTY LTD | Plaintiff |
| v | |
| SOUTH EAST DEVELOPMENTS (VIC) PTY LTD | Defendant |
AND
| SPIRAL DEVELOPMENTS PTY LTD | Plaintiff / Defendant by Counterclaim |
| v | |
| SOX HOLDINGS PTY LTD | First Defendant / Plaintiff by Counterclaim |
| and | |
| SIMON ANTHONY MORRIS | Second Defendant |
| and | |
| SOX ENTERPRISES PTY LTD | Third Defendant |
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| JUDGE: | HIS HONOUR JUDGE DEAN | |
| WHERE HELD: | Melbourne | |
| DATE OF HEARING: | 27, 28, 29 and 30 August; 3, 4, 5 and 12 September; 1, 2, 3, 4, 8, 9 and 10 October 2018 | |
| DATE OF JUDGMENT: | 19 November 2018 | |
| CASE MAY BE CITED AS: | Sox Holdings Pty Ltd v South East Developments (Vic) Pty Ltd and Anor | |
| MEDIUM NEUTRAL CITATION: | [2018] VCC 1864 | |
REASONS FOR JUDGMENT
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Subject:CONTRACT
Catchwords: CONTRACT – construction and interpretation – commercial contract –termination – ambiguity – surrounding circumstances – whether one transaction or two distinct transactions – entire agreement clause – related entities – implied good faith term – whether termination was in breach of an implied good faith term – penalty clause
Legislation Cited: Corporations Act 2001 (Cth)
Cases Cited:Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903; Li and Anor v The Herald and Weekly Times and Anor [2007] VSC 109; McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579; McVeigh v National Australia Bank (2000) 278 ALR 429; Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656; Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; Spiral Developments v Whittlesea City Council [2017] VCAT 428; State of Victoria v Tatts Group Limited (2016) 328 ALR 564; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A Strahan Ms E Nikou Madalin | Colin Biggers & Paisley |
| For the Defendant | Mr T Wodak | Lander & Rogers |
HIS HONOUR:
Introduction
1 On 28 July 2016, Spiral Developments Pty Ltd (Spiral) commenced proceeding CI-16-03285 against defendants Sox Holdings Pty Ltd (Sox Holdings), Sox Enterprises Pty Ltd (Sox Enterprises) and Simon Anthony Morris (Morris). Spiral seeks an order for damages in the sum of $427,500 plus interest and costs in respect of the failure of the defendants to pay to the plaintiff the sum owed pursuant to a deed of variation entered by the parties on 17 May 2016. The deed of variation was signed in relation to a set of Agreement for Leases (AFLs) and a Put and Call Option Agreement (Option Agreement).
2 On 20 September 2016, the first defendant, Sox Holdings, filed a counterclaim against Spiral under the same proceeding. Sox Holdings seeks an order for damages in a sum of $5,175,000 plus interest and costs, or alternatively damages as determined by the court. The order is sought in accordance with particulars provided in its counterclaim by reason of Spiral’s wrongful termination of a series of Option Agreements, one or more of which the deed of variation effected, entered into the by the parties on 9 November 2015.
3 On 26 October 2016, Sox Holdings also commenced a separate proceeding, CI-16-04826 against the defendant, South East Developments (Vic) Pty Ltd (SED). Sox Holdings seeks an order for damages in the sum of $1,200,000 plus interest and costs or in the alternative, damages determined by the court in accordance with the particulars set out in its claim plus interest and costs, also by reason of the defendant’s wrongful termination of an Option Agreement entered into by the parties on 9 November 2015.
4 At the commencement of the trial on 27 August 2018, senior counsel for the defendants in proceeding CI-16-03258 informed the court that Spiral’s claim for $427,500 plus interest and costs would not be defended. As the issues to be determined in the remaining action involved Sox Holdings’ claims, the trial was conducted by reference to Sox Holdings as the plaintiff and Spiral and SED as the defendants.
Background
5 In June 2015, Morris was the sole director of both Sox Holdings and Sparrow House Early Learning Pty Ltd (SHEL). Sox Holdings predominantly traded in the acquisition of freeholds in property and SHEL predominantly traded as a business operator of childcare centres.
6 In June 2015, Morris began negotiations with Steven Sass (Sass) in relation to a transaction involving the construction, operation, and acquisition of eight childcare centres located in Victoria. Sass represented both Spiral and SED throughout negotiations of their respective agreements. Sass negotiated with the express authority of the directors of Spiral and through his capacity as a director of SED.
7 On 22 July 2015, a document entitled Heads of Agreement: Proposed Terms for Childcare Sites (Heads of Agreement) was executed between Morris and Sass on behalf of corporations they then operated.[1] Under the Heads of Agreement, a Sass corporation, Pivot Construction Group, agreed to lease eight premises to be used as childcare centres to Sparrow Group Investment Fund Pty Ltd, a corporation operated by Morris. The Heads of Agreement contemplated the construction of childcare centres to be leased to the lessee for net rent provided for in the agreement. The agreement further provided for capital contributions and agreed purchase prices for each of the properties. It is clear from the terms of the Heads of Agreement that Morris and Sass agreed that call and put options would also be in place in respect of the properties the subject of the leases.
[1]Court Book (CB) 1045
8 At the time the Heads of Agreement was entered into, Sass, on behalf of Kiddie Kingdom Childcare Pty Ltd, agreed to sell a childcare business to Sparrow Group Three Pty Ltd, a corporation operated by Morris, at premises at Turva Avenue, Tarneit, for the sum of $1,750,000.[2]
[2]CB 1048
9 Following execution of the Heads of Agreement, it was concluded that the site located at Racecourse Road, Pakenham referred to in the Heads of Agreement was unsuitable for the development of a childcare centre.
10 Construction in relation to the childcare centres at the other sites was in various stages of commencement and completion, and in early November 2015 it became apparent that the construction of a childcare centre at Mercantour Boulevard, Tarneit, was nearing completion. As a result, on 6 November 2015, Spiral agreed with Sparrow Group (Vic) Pty Ltd, a corporation operated by Morris, that the lessee would not be required to deliver any Construction Bank Guarantees pursuant to the AFL in respect of that property, but would be required to pay a “Construction Contribution” of $715,000 ten days after the date for practical completion of the premises.[3]
[3]CB 1220
11 On 9 November 2015, a series of AFLs were executed between Spiral and SHEL. Each AFL has the same terms and conditions, except for the agreement relating to the Mercantour Boulevard, Tarneit, property outlined above. The executed AFLs, titles and the properties they related to are as follows:
(a)Agreement for Lease – Mercantour Boulevard, Tarneit (Tarneit AFL), in relation to land known as 20-26 Mercantour Boulevard and 3 Kensington Drive, Tarneit (Tarneit property);
(b)Agreement for Lease – Atlantic Drive, Pakenham (Pakenham AFL) in relation to land known as Atlantic Drive, Pakenham (Pakenham property);
(c)Agreement for Lease – Greens Road, Wyndham Vale (Wyndham Vale AFL) in relation to land known as 163-173 Greens Road, Wyndham Vale (Wyndham Vale property);
(d)Agreement for Lease – Macedon Street, Sunbury (Sunbury AFL) in relation to land known as 55-57 Macedon Street, Sunbury (Sunbury property);
(e)Agreement for Lease – Lithgow Street, Beveridge (Beveridge AFL) in relation to land known as Lot S3 Lithgow Street, Beveridge (Beveridge property); and
(f)Agreement for Lease – Plenty Road, Mernda (Mernda AFL) in relation to land known as 1395 Plenty Road, Mernda (Mernda property).
12 In addition to the six AFLs listed above, SHEL executed an identical AFL with SED in relation to property at Frankston North as follows:
Agreement for Lease – Alpina Street, Frankston North (Frankston North AFL) in relation to land known as 15 Alpina Street, Frankston (Frankston North property).
This was necessary as Spiral did not own that land.
13 Furthermore, on 9 November 2015, a series of Option Agreements were executed between Sox Holdings and Spiral in relation to the relevant properties. The Option Agreements between Sox Holdings and Spiral were as follows:
(a) Put and Call Option Agreement – Tarneit (Tarneit Option Agreement) in relation to the Tarneit property. The purchase price was $3,112,000;
(b) Put and Call Option Agreement – Pakenham (Pakenham Option Agreement) in relation to the Pakenham property. The purchase price was $2,964,000;
(c) Put and Call Option Agreement – Wyndham Vale (Wyndham Vale Option Agreement) in relation to the Wyndham Vale property. The purchase price was $3,280,000;
(d) Put and Call Option Agreement – Sunbury (Sunbury Option Agreement) in relation to the Sunbury property. The purchase price was $3,196,000;
(e) Put and Call Option Agreement – Beveridge (Beveridge Option Agreement) in relation to the Beveridge property. The purchase price was $2,680,000; and
(f) Put and Call Option Agreement – Mernda (Mernda Option Agreement) in relation to the Mernda property. The purchase price was $3,015,000.
14 In addition to the six Option Agreements above, Sox Holdings executed an identical Option Agreement with SED in relation to the Frankston North property entitled:
Put and Call Option Agreement – Frankston North (Frankston North Option Agreement) in relation to the Frankston North property. The purchase price was $3,035,000.
15 In January 2016, it became apparent that a management company, Advanced Management, then managing the Turva Avenue, Tarneit property, held a first right of refusal pursuant to its management agreement in the event that the childcare business was put up for sale. When Sass took steps to sell the business to Sparrow Group Three Pty Ltd pursuant to the agreement entered into in July 2015,[4] Advanced Management exercised its rights. On 29 January 2016, Spiral agreed to waive SHEL’s obligation to pay its Contribution in relation to the Mercantour Boulevard, Tarneit, property which had then reached practical completion, because it was not possible to sell the Turva Avenue, Tarneit, business to Sparrow Group Three Pty Ltd.[5]
[4]CB 1048
[5]CB 986; T705-707
16 The AFLs and Option Agreements were executed by the parties following discussions between Morris and Sass that were initially only in relation to the childcare businesses.[6] Morris gave evidence that when the discussions commenced, the freeholds for the sites were not part of the discussion.[7] He gave evidence that his group could not “make the value of the sites work”[8] and he then asked Sass what he was “looking to do” with the freeholds.[9] Sass informed Morris that he wanted to sell the freeholds and Morris proposed the Option Agreements.[10] Morris gave evidence that this would assist his group to absorb the initial losses in the operation of the childcare centres[11] and he stated that the agreed prices in the Option Agreements were arrived at by his group to facilitate “the ramping up” of the businesses and making revenue.[12] The purchase price in the Option Agreements was calculated by reference to the rent in the AFLs and accordingly the yield in respect of each property.[13]
[6]T229
[7]T229
[8]T229
[9]T230
[10]T230
[11]T231
[12]T232
[13]T233
17 Christopher Sandner (Sandner), a director of Spiral, gave evidence that the overall price negotiated for the freeholds would be made up of the Contribution provided for in the AFLs and the purchase price provided for in the Option Agreements. He gave evidence that these sums would equal an acceptable outcome to Spiral.[14]
[14]T548
18 It is convenient at this point to refer to what the evidence discloses in relation to the construction of the childcare centres and the performance by the parties of their respective obligations pursuant to the AFLs and Option Agreements.
Tarneit property
19 Pursuant to clause 2.3 of the Tarneit Option Agreement, a call option fee in the sum of $5,000 was to be paid by the Grantee, Sox Holdings, within 30 days of executing the Option Agreement. The call option fee was paid into Spiral’s solicitors trust account on 9 February 2016.[15]
[15]CB 1285
20 Pursuant to clause 2 of the Tarneit AFL, a security deposit in the sum of one month’s rent was due to be paid by the lessee, Sparrow Group (Vic) Pty Ltd, within 30 days of the signing of the AFL. The security deposit was provided by a bank guarantee in the sum of $24,250.42 on 10 February 2016.[16]
[16]CB 1283
21 Construction of the childcare centre had commenced in June 2015 and was well advanced when the parties entered the Tarneit AFL on 9 November 2015. By operation of clause 7.1 of the Tarneit AFL, Sparrow Group (Vic) Pty Ltd was obliged to pay to Spiral the sum of $715,000 on or prior to the commencement date of the lease. By reason of Spiral’s inability to meet the agreement in relation to the Turva Avenue, Tarneit, childcare centre, as referred to above, this Contribution payment was waived by Spiral.[17]
[17]CB 986
22 Construction of the childcare centre at the Tarneit property was completed on 19 February 2016. Following completion, a lease between Spiral and Sparrow Group (Vic) Pty Ltd was entered on 4 April 2016. Sox Holdings then sought to exercise its rights held pursuant to the Tarneit Option Agreement, and secured a nominee purchaser, Talsi Pty Ltd, which executed a contract of sale on 10 May 2016.
23 By this time, SHEL had failed to meet any of its Contribution obligations pursuant to the various AFLs as and when they fell due. Sox Enterprises, a corporation controlled by Morris, held $377,500 in deposit funds paid to it by Talsi Pty Ltd prior to the execution of the contract of sale. These moneys became, in part, the subject of the deed of variation executed on 17 May 2016, and in turn the subject of proceeding CI‑16‑03285, a subject I will return to below. Settlement of the sale of the Tarneit property took place on 1 July 2016.
Pakenham property
24 Pursuant to clause 2.3 of the Pakenham Option Agreement, a call option fee in the sum of $5,000 was to be paid by the grantee, Sox Holdings, within 30 days of executing the Option Agreement. The call option fee was paid into Spiral’s solicitors trust account on 9 February 2016.[18]
[18]CB 1285
25 Pursuant to clause 2 of the Pakenham AFL, a security deposit in the sum of one month’s rent was due within 30 days of the signing of the AFL. On 10 February 2016, in a letter entitled ‘Bank guarantees’, the solicitors for SHEL provided a bank guarantee in the sum of $23,100 in respect of that obligation.
26 Pursuant to clause 7.1 of the AFL, SHEL agreed to provide a Contribution in the sum of $660,000. The Contribution was to be provided in three tranches of Construction Bank Guarantees. Each tranche would become payable five business days after notice of particular construction stages, outlined in ‘Schedule 1’ of the AFL, being reached.
27 On 24 February 2016, the solicitors for Spiral provided notice that the first two tranches of Construction Bank Guarantees were now payable under the Pakenham AFL, totalling $440,000. In accordance with the AFL, Spiral asked for the original Construction Bank Guarantees to be provided by 2 March 2016.[19] No Construction Bank Guarantees were delivered by 2 March 2016.
[19]CB 1331
28 On 17 March 2016, the solicitors for Spiral informed the solicitors for SHEL that their client was in breach of their obligations to provide the bank guarantees under clause 7.2 of the AFLs.[20] Furthermore, they provided notice that the full Construction Bank Guarantee was now payable, as the works on the Pakenham property were complete. A demand was made for the full Construction Bank Guarantee for Pakenham to be delivered by 24 March 2016, totalling $660,000.[21] No Construction Bank Guarantees were delivered on 24 March 2016.
[20]CB 1331
[21]CB 1331
29 Instead, on 24 March 2016 the solicitors for SHEL informed the solicitors for Spiral that the first two Construction Bank Guarantees in the sum of $440,000 “will be provided by the end of next week”, and the further Construction Bank Guarantee of $220,000 “should be provided by the end of the following week”.[22]
[22]CB 1346
30 On 1 April 2016 the solicitors for Spiral informed the solicitors for SHEL that unless the Pakenham Construction Bank Guarantees were received on that day, they were instructed to issue a notice of breach under the Pakenham AFL.[23] In reply, the solicitors for SHEL stated:
“1. The bank guarantees have been prepared by our client’s financier;
2. Due to some issues with an investor our client cannot provide their financier with instructions to draw down on the funds required to issue the bank guarantee at this time; and
3. Our client anticipates being able to provide instructions to their financier to issue the original bank guarantees during the course of next week.”[24]
[23]CB 1345
[24]CB 1345
31 On 21 April 2016, Morris indicated that two bank guarantees had been released and that the originals would be forwarded by his solicitors.[25] On the following day, the solicitors for Spiral followed up Morris’ claim that the original bank guarantees would be sent.[26] It eventuated that one original bank guarantee had been sent, but only in relation to the Tarneit lease, and no original Construction Bank Guarantees for any property were provided.[27]
[25]CB 1026.1
[26]CB 1419
[27]CB 1419
32 On 23 April 2016, the following text message exchange took place between Sass and Morris:
Sass: “Hi Simon the bank guarantee received was only for the Mercantour lease although nothing for the construction of the other centres. Can you please let me know what is happening with the bank guarantees that were sopose [sic] to be paid for the construction of the construction of the centres so I can get back to my partners”
Morris: “? Really. I saw 2 go out. I’ll chase down first thing Tuesday”
Sass: “Thanks do you know what the other one was for?”
Morris: “Pakenham. Plus I saw an email going around yesterday for Frankston. I know there [sic] starting to kick in.”[28]
[28]CB 1027
33 On 26 April 2016, a further text message was sent by Sass to Morris asking if he was able to confirm the Pakenham payment, to which Morris says “I’ll call them now”. On the following day at 4.00pm Morris sent an email to Sass that read as follows:
“Steve
Sorry to take so long.
Attached guarantees are now being drawn down. Cash facility has been deposited into the nominated accounts today. So NAB will release originals to CBP tomorrow.
Frankston’s first stage guarantee has been now submitted for drawing. The cash facility will be deposited to NAB tomorrow, which means this will be issued in original by Friday.
I’m sorry its taking so long, but they are coming through.”[29]
[29]CB 1425
34 The next day, on 28 April 2016, another text message was sent by Morris to Sass asking ‘Did u get them?’ to which there is no reply from Sass.[30] No Construction Bank Guarantees were delivered by 28 April 2016.
[30]CB 1027.01
35 Further negotiations between the parties took place in relation to the provision of the Construction Bank Guarantees, and on 4 May 2016 the solicitors for Spiral agreed to an extension to 11 May 2016 for the provision of all the owed Construction Bank Guarantees, including the full Construction Bank Guarantee for Pakenham.[31]
[31]CB 1435
36 On 11 May 2016, Morris wrote to Sass attaching a letter from the National Australia Bank in the following terms:[32]
[32]CB 1496
“To Whom it may Concern
We confirm that the below facilities for guarantees by bank for Sparrow House Early Learning CAN [sic] 607 297 478 have been approved
· Lithgow Street, Beverage [sic], $200,000
· Alpina Street, Frankston North, $690,000
· Atlantic Drive, Pakenham, $660,000
NAB have a strong relationship with Mr Simon Morris and his group of companies since the inception of Sparrow Group. Please let us know if there is anything further we can do to assist in the process for the transaction at hand.”[33]
[33]CB 1498
37 In the email, Morris went on to state that he was not, however, in a position to release the bank guarantees.[34] Consequently, no Construction Bank Guarantees were provided by 11 May 2016.
[34]CB 1496
38 On 17 May 2016, pursuant to the deed of variation, Spiral agreed to extend the time of the payment of the Construction Bank Guarantees to 8 June 2016.[35] No Construction Bank Guarantees were provided by 8 June 2016.
[35]CB 1606
39 On 9 June 2016, the solicitors for Spiral informed the solicitors for SHEL that a further extension would be granted for the delivery of the Pakenham Construction Bank Guarantees to 24 June 2016.[36] The extension was conditional upon SHEL providing the original Construction Bank Guarantees owed under the Frankston North AFL by 14 June 2016. The Frankston North Construction Bank Guarantees were not delivered by that time, and accordingly the extension for the Pakenham Construction Bank Guarantees never eventuated.[37]
[36]CB 1717
[37]CB 1717
40 On 17 June 2016, Spiral issued a notice of default to SHEL in respect of the unpaid Construction Bank Guarantees in relation to the Pakenham property, providing for the default to be remedied by 5pm on Monday, 4 July 2016.[38]
[38]CB 1733
41 On 4 July 2016, solicitors for SHEL wrote to the solicitors for Spiral advising that their client would deposit the sum of $660,000, being the total amount of the owed Construction Bank Guarantees under the Pakenham AFL, conditional upon the notice of default being withdrawn.[39] This offer was accepted in the following terms:
“Provided that the funds are received in our trust account (details below) by 12pm tomorrow we are instructed that our client agrees to the proposal set out in your letters.
On the basis that the funds are received by 12pm tomorrow we will also require the parties to enter into a separate side deed of variation to document the changes under the respective AFLs. In particular, the side deed must clarify that once the contribution under the respective AFLs becomes payable by the tenant under clause 7.1 that we are directed to apply the security bond held in our trust account (under clause 7.2 as varied) to our client as payment for the contribution. In this regard we will shortly provide you with a side deed of variation for your review.
Please confirm that this is agreed and we otherwise look forward to receiving the funds.”[40]
[39]CB 1827
[40]CB 1821
42 The funds, which related to three of the properties, were not deposited into the trust account by 12pm on 5 July 2016. At 11.43am that day, Morris sent a text message to Sass asking him to chase his solicitor for the draft side deed, to which Sass asked if the cut-off time was met, otherwise the solicitor was instructed to do no further work.[41] At 12.33pm, solicitors for SHEL wrote to the solicitors for Spiral requesting the draft side deed of variation for their client’s review. Morris was asked the following question in his evidence in chief:
“Where was the $1.75 million coming from, as at 4 July 2016?---Just various sweeping accounts that we would have had.”
[41]CB 1033
43 And further:
“And you had that money then, did you?---Yes, money – well, in various accounts that would have been swept, yes.”
44 Further:
“What accounts are you sweeping from?---Various accounts on childcare businesses.”[42]
[42]T 267
45 On 6 July 2016, Spiral issued a notice of termination of the Pakenham AFL by reason of SHEL’s failure to provide the Construction Bank Guarantees.[43] It is not in issue in the proceeding that the Pakenham AFL was validly terminated. It is clear from the evidence that SHEL failed to comply with its obligations pursuant to the Pakenham AFL, despite being provided with a number of extensions of time for compliance by Spiral.
[43]CB 1844
46 In my opinion it is plain that SHEL did not have the funds or facilities available to it to meet its obligations.
47 Each AFL contained a cross-default provision permitting Spiral to terminate the other AFLs in the event of default for one.
48 Notice of termination in relation to the Pakenham Option Agreement was served on 25 August 2016.[44] The solicitors for Spiral set out the ‘relevant facts’ of termination in the notice, which reads as follows:
[44]CB 1882
49 On 16 August 2016 the Pakenham childcare centre was leased to the Amiga Montessori Group, and construction of the childcare centre was completed on 3 October 2016.
50 On 22 February 2017 the Pakenham childcare centre freehold was sold for the sum of $5,120,000.
Wyndham Vale property
51 Pursuant to clause 2.3 of the Wyndham Vale Option Agreement, a call option fee in the sum of $5,000 was to be paid by the grantee, Sox Holdings, within 30 days of executing the Option Agreement. The call option fee was paid into Spiral’s solicitors trust account on 9 February 2016.[45]
[45]CB 1285
52 Pursuant to clause 2 of the Wyndham Vale AFL, a security deposit in the sum of one month’s rent was due within 30 days of the signing of the AFL. On 10 February 2016, SHEL provided a bank guarantee to Spiral in the sum of $25,561.25 for the security deposit.[46]
[46]CB 1283
53 On 5 November 2015 a building permit was issued in relation to the Wyndham Vale property,[47] and construction of the childcare centre commenced thereafter. Clause 7.1 of the Wyndham Vale AFL required SHEL to provide a Contribution in the sum of $786,500. Schedule 1 of the AFL provided that the Contribution be provided in three Construction Bank Guarantees, the first of which was due five business days after Spiral informed SHEL that the footings and slab work had been carried out and inspected.
[47]CB 2158
54 On 3 March 2016 the concrete slab and footings were completed.[48] However, there is no evidence in the proceeding that notice was provided to SHEL by Spiral as to the first Construction Bank Guarantee becoming payable under the Wyndham Vale AFL.
[48]CB 2158
55 On 6 July 2016 notice of termination of the Wyndham Vale AFL was provided to SHEL by Spiral, notifying them that the AFL is automatically terminated pursuant to the cross-default provision previously mentioned, as an ‘Other Agreement’ was lawfully ended due to SHEL’s default.[49]
[49]CB 1840
56 On 25 August 2016, termination of the Wyndham Vale Option Agreement was provided by Spiral to Sox Holdings.
57 On 27 September 2016 the timber frame of the Wyndham Vale property was completed, and on 31 January 2017 all construction work at the property was completed.[50] A certificate of occupancy was issued on 31 January 2017.
[50]CB 2158
58 On 13 September 2016 the Wyndham Vale childcare centre was leased to the Amiga Montessori Group, and the property was handed over to the lessee on 13 February 2017.[51]
[51]CB 2159
59 On 24 May 2017, Spiral sold the Wyndham Vale childcare centre for the sum of $6,930,000.
Sunbury property
60 Pursuant to clause 2.3 of the Sunbury Option Agreement, a call option fee in the sum of $5,000 was to be paid by the grantee, Sox Holdings, within 30 days of executing the Option Agreement. The call option fee was paid into Spiral’s solicitors trust account on 9 February 2016.[52]
[52]CB 1285
61 Pursuant to clause 2 of the Sunbury AFL, a security deposit in the sum of one month’s rent was due within 30 days of the signing of the AFL. On 10 February 2016, SHEL provided to Spiral a bank guarantee in the sum of $24,905.83.[53]
[53]CB 1283
62 Pursuant to clause 7.1 of the Sunbury AFL, SHEL agreed to pay to Spiral a Contribution in the sum of $715,000. The Contribution was to be paid by three tranches as provided for in schedule 1 of the AFL. Each tranche would become payable five business days after notice of particular construction stages, outlined in Schedule 1 of the AFL, being reached
63 Completion of the concrete slab and footings occurred on 25 August 2016,[54] and accordingly no Construction Bank Guarantees became payable prior to the termination of the Sunbury AFL on 6 July 2016, or the termination of the Sunbury Option Agreement on 25 August 2016.
[54]CB 2161
64 The Sunbury childcare centre was leased to the Amiga Montessori Group by Spiral on 13 September 2016.[55]
[55]CB 2097
65 On 10 July 2017 construction of the Sunbury childcare centre was completed, and a certificate of occupancy issued on 19 July 2017.[56]
[56]CB 2161
66 On 30 July 2017 Spiral sold the Sunbury childcare centre for the sum of $5,900,000.
Beveridge property
67 Pursuant to clause 2.3 of the Beveridge Option Agreement, a call option fee in the sum of $5,000 was to be paid by the grantee, Sox Holdings, within 30 days of executing the Option Agreement. The call option fee was paid into Spiral’s solicitors trust account on 9 February 2016.[57]
[57]CB 1285
68 Pursuant to clause 2 of the Beveridge AFL, a security deposit in the sum of one month’s rent was due within 30 days of the signing of the AFL. On 10 February 2016, SHEL provided a bank guarantee to Spiral in the sum of $20,900 in respect of the security deposit.[58]
[58]CB 1283
69 Pursuant to clause 7.1 of the AFL, SHEL agreed to pay to Spiral a Contribution in the sum of $600,000 to be provided in three tranches of Construction Bank Guarantees. Each tranche would become payable five business days after notice of particular construction stages, outlined in ‘Schedule 1’ of the AFL, being reached.
70 On 19 February 2016 the footings and slab for the construction of the childcare centre were completed.[59] On 24 February 2016, the solicitors for Spiral provided notice that the first Construction Bank Guarantee was now payable under the Beveridge AFL, totalling $200,000. In accordance with the AFL, Spiral asked for the original Construction Bank Guarantee to be provided by 2 March 2016.[60] No Construction Bank Guarantees were delivered by 2 March 2016.
[59]CB 2151
[60]CB 1331
71 On 17 March 2016 the solicitors for Spiral wrote to the solicitors for SHEL, informing them that their client was in breach of the Beveridge AFL by reason of its failure to provide the respective Construction Bank Guarantee pursuant to clause 7.2 of the AFL.[61]
[61]CB 1331
72 On 24 March 2016 the solicitors for SHEL wrote to the solicitors for Spiral, advising:
“… Beveridge ($200,000) bank guarantees will be provided by the end of next week.”[62]
[62]CB 1337
73 On 1 April 2016 the solicitors for Spiral wrote to the solicitors for SHEL, stating that the Construction Bank Guarantee in relation to Beveridge was required to be delivered by that day. The bank guarantee was not provided, and following further requests for extensions on 4 May 2016, the solicitors for Spiral agreed to an extension of the provision of the Beveridge Construction Bank Guarantees in the sum of $400,000, being two-thirds of the Contribution amount pursuant to the Beveridge AFL.[63] The second Construction Bank Guarantee was now also payable as the timber framework was completed on 30 March 2016.
[63]CB 1435
74 The Construction Bank Guarantees were not provided by 11 May 2016, and on that date Morris wrote to Sass attaching the email from the NAB dated 11 May 2016 which referred to the approval of a facility for a bank guarantee for “Lithgow Street, Beverage [sic], $200,000”.[64] In the email of 11 May 2016, Morris sought a further extension for the provision of the Construction Bank Guarantees, as he sought refinancing of his group.
[64]CB 1498
75 The deed of variation entered by the parties on 17 May 2016 provided that the date for the outstanding Construction Bank Guarantees in respect of the Beveridge AFL be extended to 8 June 2016. No Construction Bank Guarantees were delivered on 8 June 2016.
76 On 9 June 2016, the solicitors for Spiral informed the solicitors for SHEL that a further extension would be granted for the delivery of the Beveridge Construction Bank Guarantees to 1 July 2016.[65] The extension was conditional upon SHEL providing the original Construction Bank Guarantees owed for the Frankston North property by 14 June 2016. As previously stated, these Construction Bank Guarantees were not delivered by that time, and accordingly, the extension for the Beveridge Construction Bank Guarantees also never eventuated.
[65]CB 1717
77 On 17 June 2016, Spiral issued a notice of default to SHEL in respect of the unpaid Construction Bank Guarantees in relation to the Beveridge property, providing for the default to be remedied by 5pm on Monday, 4 July 2016.[66]
[66]CB 1733
78 In the event, remedy by delivery of the bank guarantees was not made, and the negotiations that took place in early July 2016 between Morris and his solicitors with Spiral in relation to the Pakenham property also concerned the Beveridge property.
79 On 6 July 2016 notice of termination in respect of the Beveridge AFL was served by Spiral on SHEL.[67]
[67]CB 1841
80 On 25 August 2016 notice of termination of the Beveridge Option Agreement was served on Sox Holdings by Spiral.[68]
[68]CB 1880
81 The Beveridge childcare centre was leased to the Amiga Montessori Group on 16 August 2016. Building works were completed on the childcare centre on 19 September 2016, and the certificate of occupancy issued on 21 September 2016.[69]
[69]CB 2151
82 On 22 June 2018, Spiral sold the Beveridge childcare centre for the sum of $4,000,100.
Mernda property
83 Pursuant to clause 2.3 of the Mernda Option Agreement, a call option fee in the sum of $5,000 was to be paid by the grantee, Sox Holdings, within 30 days of executing the Option Agreement. The call option fee was paid into Spiral’s solicitors trust account on 9 February 2016.[70]
[70]CB 1285
84 Pursuant to clause 2 of the Mernda AFL, a security deposit in the sum of one month’s rent was due within 30 days of the signing of the AFL. On 10 February 2016, SHEL provided to Spiral a bank guarantee in the sum of $23,485 for the security deposit.[71]
[71]CB 1283
85 Following the signing of the Mernda AFL and the Mernda Option Agreement, the responsible local authority refused a permit for a childcare centre to be constructed on the site. This refusal was confirmed by VCAT on 22 March 2017.[72] As a result, the Mernda property is not the subject of the proceedings.
[72]T343; citing Spiral Developments v Whittlesea City Council [2017] VCAT 428
Frankston North property
86 Pursuant to clause 2.3 of the Frankston North Option Agreement, a call option fee in the sum of $5,000 was to be paid by the grantee, Sox Holdings, within 30 days of executing the Option Agreement. The call option fee was paid into SED’s solicitors trust account on 9 February 2016.[73]
[73]CB 1285
87 Pursuant to clause 2 of the Frankston North AFL, a security deposit in the sum of one month’s rent was due within 30 days of the signing of the AFL. On 10 February 2016, SHEL provided to SED a bank guarantee in the sum of $23,402.50 in respect of the security deposit.
88 Pursuant to clause 7.1 of the Frankston North AFL, SHEL agreed to pay to SED a Contribution in the sum of $690,000, payable in three tranches by way of bank guarantee pursuant to Schedule 1 of the AFL.
89 The property the subject of the Frankston North AFL was a disused former school which was being refurbished for use as a childcare centre. The refurbishment works were well underway at the time the AFL was executed, and the framework was completed on 24 February 2016.[74]
[74]CB 1879
90 On 1 March 2016, the solicitors for SED advised the solicitors for SHEL that the total construction contribution of $690,000 was now due. Attached to the email were certificates confirming that the works had been completed at the property in accordance with all applicable regulatory requirements.[75] In response, SHEL stated that the Frankston North AFL required a certificate from a registered building surveyor regarding the completion of the works pursuant to the AFL.[76]
[75]CB 1339
[76]CB 1339
91 On 30 March 2016, the solicitors for SED wrote to the solicitors for SHEL advising that the Frankston North property had reached lock‑up stage and it had been inspected by SHEL to confirm this. SED provided an extension to 7 April 2016 for the delivery of the full Construction Bank Guarantee.[77]
[77]CB 1338
92 The full Construction Bank Guarantee was not provided by SHEL in relation to the Frankston North property on 7 April 2016. The following exchange took place that day via text message:
Sass: “Hi Simon just wanting to know how you went with the guarantees today?”
Morris: “Good mate. I signed off on the new entity forms, so they would be releasing tomorrow. I’ll call you once that happens.”[78]
[78]CB 1024
93 Sass made further enquiries in relation to the bank guarantees via text message on 11 April 2016:
Sass: “Hi Simon just wanting to confirm if the guarantees were released”
Morris: “Sorry mate for late reply. There [sic] ready to release, but no haven’t yet. Just waiting on draw down to nab. I’m pulling my hair out cause I know u need then [sic] now. I’m pushing it mate, sorry.”[79]
[79]CB 1025
94 On 12 April 2016, Sass sent Morris a text message warning that his partner will be sending through a default notice if he cannot give them a proper answer.[80] Morris responded that day advising that “Sparrow is doing it’s very best to have this hiccup resolved”. An email from SHEL’s solicitors to SED’s solicitors on the same day at 4.12pm echoed the same message:
“1. Our client has spoken directly with Steven Sass from Pivot Group and advised him that they are endeavouring to have bank guarantees released as soon as possible.
2. Our client is doing everything that [it] can to have this drawing issue resolved for release of the current and any further bank guarantee releases.”[81]
[80]CB 1026
[81]CB 1349
95 Regardless, no Construction Bank Guarantees were delivered and on 18 April 2016 SED issued a notice of default to SHEL pursuant to the Frankston North AFL.[82] The notice of default required the provision of all Construction Bank Guarantees owed pursuant to the Frankston North AFL by 27 April 2016.[83] However SED’s solicitors outlined in the service e-mail on 20 April 2016 that the default is to be remedied by 5 May 2016, being 10 business days from the date of service.[84]
[82]CB 1385
[83]CB 1385
[84]CB 1413
96 On 4 May 2016 solicitors for SED agreed to extend, until 11 May 2016, payment of the Contribution pursuant to the Frankston North AFL.
97 Payment was not made prior to 11 May 2016, and on that date Morris wrote to Sass enclosing the letter from the NAB dated 11 May 2016 and referred to above. Morris sought a further extension in relation to the payment of the Frankston North Contribution. On 17 May 2016, in the deed of variation, SED agreed to the extension of time for the provision of the Construction Bank Guarantee in respect of the Frankston North AFL until 8 June 2016.
98 SHEL did not provide the Construction Bank Guarantee to SED by 8 June 2016, and, in the correspondence referred to above, on 4 July 2016 agreed to the payment of $690,000 in cash to SED. In the event, this payment was not made, and the Frankston North AFL was terminated on 6 July 2016.
99 On 25 August 2016 the Frankston North Option Agreement was also terminated.
100 The completed Frankston North childcare centre was leased to the Amiga Montessori Group on 16 August 2016.
101 SED sold the property on 3 May 2017 for the sum of $5,400,000.
Deed of variation
102 In the email Morris sent to Sass on 11 May 2016, Morris acknowledged that Sox Holdings had failed to perform its obligations to provide Construction Bank Guarantees pursuant to the terms of the AFLs. In the email, Morris stated:
“We do understand the enormous pressures and financial/legal ramifications this issue has and is causing you all, not to mention what this can do to Sparrow Group.”[85]
[85]CB 1497
103 Morris also informed Sass that he had secured a purchaser for the Mercantour Boulevard, Tarneit property, and that Sox Holdings would pass the “uplift” to Spiral in order to obtain a further extension of time to meet its obligations pursuant to the AFLs. Morris offered Spiral the sum of $500,000 in consideration for this. At that time, Sox Enterprises already held the $377,500 deposit paid by Talsi Pty Ltd for the purchase of the Mercantour Boulevard, Tarneit property.
104 Spiral and SED agreed to Morris’s proposal, and on 17 May 2016 the deed of variation was executed between them and Morris, Sox Holdings and SHEL. Pursuant to the deed, Morris, Sox Holdings and SHEL agreed to pay Spiral and SED $500,000, $100,000 of which was to be paid that day. Morris, Sox Holdings and SHEL also agreed that the $377,500 deposit moneys would be paid directly to Spiral as soon as reasonably practicable following the settlement of the contract for sale in respect of the Mercantour Boulevard, Tarneit property.
105 Morris provided a personal guarantee in the sum of $400,000 in respect of the balance of the consideration owing, which sum would be offset by receipt of the deposit moneys by Spiral. In turn, Spiral agreed to an extension of time in respect of the provision of the Frankston North, Beveridge and Pakenham Construction Bank Guarantees in a total sum of $1,750,000 until 8 June 2016.
106 Settlement of the Mercantour Boulevard, Tarneit, childcare centre sale took place on 1 July 2016, and Spiral received $22,500 from Talsi Holdings as payment for the difference between the deposit moneys and the agreed settlement payment.
107 At the time of settlement, SHEL had not provided any of the Construction Bank Guarantees pursuant to the deed of variation, and, furthermore, Sox Holdings did not transfer the deposit moneys it held to Spiral. Morris, Sox Holdings, and SHEL each breached their obligations pursuant to the deed of variation, resulting in the sum of $427,500 being payable to Spiral pursuant to the deed of variation. This sum comprised the original agreement sum of $500,000, less $100,000 received on 17 May 2016 and $22,500 received on 1 July 2016, plus $50,000 in GST payable on the original $500,000 fee.
108 Accordingly, by 6 July 2016, the date of the termination of the AFLs, SHEL had failed to provide any of the Construction Bank Guarantees due under the AFLs to Spiral, and Morris, Sox Holdings, and SHEL had breached the terms of the deed of variation.
109 As I have already observed, it is plain from the evidence that SHEL did not have available to it the funds or facilities to meet any of its Contribution obligations pursuant to the AFLs it entered. Furthermore, Morris, Sox Holdings, and SHEL were unable to meet their financial obligations pursuant to the deed of variation. The evidence establishes that prior to the termination of the AFLs, Morris, Sox Holdings and SHEL sought a number of extensions and accommodations to meet their financial obligations, and ultimately failed to do so. I accept that prior to the termination of the AFLs on 6 July 2016, Spiral was willing to accommodate Sox Holdings, Morris and SHEL, and took all reasonable steps available to it to do so.
110 On 6 July 2016, Sass sent a text message to Morris at 6.08pm stating that the $400,000 owing from the deed of variation had not been transferred to Spiral. He did not receive a reply from Morris. On 8 July 2016, at 9.49am, Sass sent a further text to Morris informing him that the moneys were trust moneys, and that it was a criminal offence to not transfer funds that did not belong to him. He stated that Morris had misled him.[86] Morris replied that he would call the bank and check the account details, further stating that he was “at the airport”.[87] In a further text message, he stated the funds had not been transferred, and requested from Sass the account to which the moneys were to be deposited.[88] In the event, the moneys were not transferred, and remained outstanding. I am satisfied that Morris deliberately misled Sass in this exchange of text messages in relation to moneys that were owing to Spiral.
[86]CB 1035
[87]CB 1036
[88]CB 1037
The credit of the witnesses
Simon Morris
111 It was submitted on behalf of Spiral that I should not accept Morris’ evidence unless independently supported by other evidence. It was submitted that Morris’ demeanour as a witness was extremely poor, and this submission was accepted by counsel for Sox Holdings.
112 During the course of his evidence Morris was discourteous to counsel for Spiral, and at times was argumentative, abrasive, and non-responsive in answering questions put to him. Morris gave evidence of his personal financial circumstances in general and opaque terms. No accounts, valuations, or other like evidence was relied upon to support his testimony, and, as I have observed, it is plain that the corporations that he controlled at the relevant time did not have the capacity to meet their financial obligations.
113 Morris gave evidence that in 2016 he sought to refinance his group with a Hong Kong-based investor called Full Share. To support this evidence, counsel for Sox Holdings tendered a financial report of Sparrow Early Learning Pty Ltd for the financial year ending 30 June 2016, which disclosed that the entity had suffered a trading loss as at 30 June 2016 of $3,712,677, and had a net liability position of $4,237,886. No accounts for any other entity controlled by Morris for the relevant period were produced in evidence.
114 A bank statement dated 27 January 2017, in the name of Sox Childcare Centres as Trustee for the Simbel Discretionary Trust, disclosed that $18,381,000 was deposited into the bank account on 23 January 2017. $17,881,001.70 was disbursed from the account in two days. This bank statement was introduced into evidence to support Morris’s evidence that Full Share had acquired a 90 per cent stake in his group which was valued for $85,000,000 for this purpose. In further support of this evidence, counsel for Sox Holdings tendered an article from the Australian Financial Review dated 12 December 2016 in relation to the Full Share refinancing of the Sparrow Group. This was the extent of the evidentiary material relied upon by the plaintiff to support its case that Sox Holdings and related entities were in a position to meet their financial obligations.
115 This evidence may properly be described as scant, and balanced with it are the undisputed facts: namely, that SHEL did not meet its financial obligations pursuant to the AFLs, and Sox Holdings, Morris, and SHEL did not meet their financial obligations pursuant to the deed of variation. Morris’s evidence regarding his group’s financial capacity was not supported by any cogent independent evidence, and I do not accept it. Counsel for Sox Holdings described Morris’s evidence as “opaque, generalised or even extravagant”,[89] and in my opinion this is an accurate description. In my opinion it is also plain from the evidence that Morris continually misled Sass and Spiral in relation to the circumstances surrounding SHEL’s failure to meet its obligations pursuant to the AFLs.
[89]Closing submissions, page 3
116 I accept that where the plaintiff relies on the evidence of Morris in relation to a significant fact in issue in the proceeding, it is incumbent upon me to carefully scrutinise that evidence and be cautious to accept it unless it is supported by other independent evidence.
Jeffrey Jorgensen
117 Jeffrey Jorgensen (Jorgensen) gave evidence in relation to a telephone conversation he had with Morris in July 2016. I will deal with the circumstances in relation to the conversation and my findings in relation to it below. Jorgensen’s evidence was of short compass. He is a close friend of Morris, and employed by Sox Enterprises. I accept that his close relationship with Morris bears on his independence and the weight that ought to be attached to his evidence.
David Knuppel
118 David Knuppel (Knuppel) gave evidence in relation to the contents of a report prepared by him regarding the sale of childcare assets and the state of the market for childcare assets in Victoria in 2016 and 2017. Morris is a longstanding client of Knuppel, and has paid him $775,000 in commission since 2015. I accept that Knuppel is an expert in relation to the sale of childcare assets but that the contents of his report are based in part of evidentiary material that Spiral was not able to test. I accept that this deficiency in Knuppel’s evidence is relevant to the weight that should be attached to it.
Christopher Sandner
119 Sandner is a director of Spiral, and a business partner of Sass. He holds Honours degrees in Computer Science and Electronic Engineering. His responsibilities with Spiral involve the management of construction of properties undertaken by it. He was responsible for the construction of all of the childcare centres the subject of the proceeding, with the exception of Frankston North. He gave evidence in relation to the surrounding circumstances of the entry into the AFLs and the Option Agreements, and SHEL’s performance of its obligations. He further gave evidence of a telephone conversation between himself and Morris in July 2016, a subject I will return to below.
120 Sandner was cross-examined extensively about the circumstances of the decision to terminate the Option Agreements and Spiral’s reasons for doing so.[90] During the course of cross-examination Sandner gave evidence that he was in communication with Spiral’s banker, the Commonwealth Bank, in relation to the non-payment of the Contributions by SHEL.[91] He described the communications as by email, and counsel for Sox Holdings then called for the emails to be produced. Ultimately the emails and accompanying bank valuations were produced,[92] and Sandner was recalled and cross-examined about their content.
[90]T643–644
[91]T629
[92]Exhibit 6
121 As a director of Spiral, Sandner swore affidavits of documents on 5 December 2016, 30 January 2017, 23 April 2018, and 21 August 2018.[93] The documents tendered in evidence in Exhibit 6 were not referred to in any of the affidavits.
[93]T1183–1184
122 I accept that the evidence contained in Exhibit 6 is relevant to the proceeding and ought to have been discovered by Spiral. I accept that Sandner’s failure to do so is a matter which is relevant to his credit. I also accept that Sandner has a strong financial interest in the outcome of the proceeding, and it is necessary for his evidence to be approached with caution for that reason.
Steven Sass
123 Sass is a director of SED, and engaged in residential and commercial property development throughout Victoria. Spiral is a joint venture between Sandner’s business, Snowdon Developments, and South East Developments. Sass’s principal responsibilities were the management of acquisitions, planning, and development of commercial and residential property. Sass’ evidence concerned the development of the childcare centres the subject of the proceedings, and his dealings with Morris in relation to Sox Holdings and SHEL becoming involved in the development of the properties. Sass was the principal witness for Spiral and SED in the proceedings. I accept that he has a significant financial interest in the outcome of the proceedings and I will take that into account in my assessment of his evidence in relation to matters in issue.
124 Sass was also extensively cross-examined about the circumstances of the termination of the Option Agreements and his awareness of the value of the properties in an improving market.[94] During the course of his cross-examination, Sass gave evidence that his solicitors had advised him that the termination of the AFLs resulted in the termination of the Option Agreements.[95] He gave further evidence under cross-examination that the advice of his current lawyers was to send termination notices of the Option Agreements as a formality.[96]
[94]T777; 804–806
[95]T798
[96]T816
125 Following submissions regarding the waiver of client legal privilege and a ruling delivered by me,[97] I inspected a number of documents produced to the court on behalf of Spiral. In the result, an email from Spiral’s solicitors to Sass dated 23 August 2016, enclosing an email from Spiral’s previous solicitors to its current solicitors dated 19 August 2016, was introduced into evidence.[98] I accept that the contents of the email contradict the evidence that Sass gave regarding the tenor of his legal advice in relation to termination of the Option Agreements, and, having regard to the significance of that issue in this trial, it is also a matter relevant to his credit and my assessment of his evidence, in particular in relation to the termination of the Option Agreements.
[97]T1106
[98]Exhibit 7
126 On 3 October 2018, during the hearing of the trial and after all of the evidence was closed, counsel for Sox Holdings informed the court that by reason of company searches undertaken by his instructing solicitor it was revealed that on 23 August 2018 Sass applied to ASIC to deregister SED – that is, four days prior to the commencement of this trial. The application for deregistration filed with ASIC declared, inter alia, that SED was presently not carrying on business, had assets worth less than $1,000, and was not currently a party to any legal proceedings.
127 The legal representatives of Sox Holdings informed the court that it had written to ASIC informing it that legal proceedings were currently on foot, and, further, made application for a freezing order pursuant to Order 37A of the County Court Civil Procedure Rules 2008 in respect of the assets of SED. The freezing order was consented to by SED.[99] Sass did not provide an explanation to the court in relation to the circumstances of the application to deregister SED.
[99]Ruling at T1492–1494
128 I permitted Sox Holdings to reopen its case and tender evidence in relation to the company searches undertaken by its legal representatives and the transcript in relation to the application for the freezing order. In doing so, I ruled that the evidence was not purely credibility evidence, but a piece of circumstantial evidence that the court may take into account, disclosing that a litigant does not have confidence in its own claim.[100]
[100]See Li and Anor v The Herald and Weekly Times and Anor [2007] VSC 109
129 I accept that the steps taken by Mr Sass to deregister SED may be taken into account by me as a step taken by him calculated to defeat the court proceedings in relation to a corporation of which he is a director. It is a matter that I may have regard to in relation to my assessment of the circumstances surrounding the termination of the Option Agreements and Spiral and SED’s motives in doing so.
130 The matters I have referred to in relation to the credibility of witnesses are the principal matters relied upon by the parties in relation to that subject. During the course of these reasons I will refer to further and more specific aspects of the evidence, and in arriving at conclusions of fact I have had regard to the issues surrounding the credit of the witnesses that I have referred to.
131 That said, it was apparent to the parties that the principal issue for resolution by the court is the construction of the relevant provisions of the Option Agreements and an examination of the surrounding circumstances in which they were entered and the intention of the parties in their contractual relations.
132 The credit issues that I have referred to principally concern the assessment of the witnesses in relation to their testimony relevant to the performance of their obligations and rights pursuant to the Option Agreements.
One transaction
133 The Heads of Agreement entered by Morris and Sass on behalf of their respective corporate entities, on 22 July 2015, list the premises’ net rent, capital contributions, and purchase prices that were provided for in the AFLs and Option Agreements.[101]
[101]CB 1045
134 On 9 November 2015 each AFL, with the exception of the Frankston North AFL, was executed by Spiral Developments Pty Ltd and signed by Sandner and Anthony Sass, Steven Sass’s brother, a director of Spiral. The Frankston North AFL was executed by South East Developments Pty Ltd and signed by Steven Sass and Sasha Soloveychik as directors of SED. Each AFL was executed by SHEL and signed by Morris as a director of that corporation.
135 On the same day, each Option Agreement, with the exception of the Frankston North Option Agreement, was executed by Spiral and signed by Anthony Sass and Sandner as directors of that corporation. The Frankston North Option Agreement was executed by SED and signed by Steven Sass and Soloveychik on behalf of that corporation. Each Option Agreement, was executed by Sox Holdings and signed by Morris as the sole director and company secretary of that corporation.
136 With the exception of the Mercantour Boulevard, Tarneit, AFL and Option Agreement, the terms of each AFL and Option Agreement in respect of each property were identical. The terms of the Mercantour Boulevard, Tarneit, documents differed for the reasons that I have already referred to.
137 SED was the contracting party in respect of Frankston North because the property was not the subject of the joint venture between Sandner and Sass.
138 At all material times, Morris was the sole director and company secretary of SHEL and Sox Holdings, and all of the negotiations between SHEL, Spiral and Sox Holdings were carried out by him.
139 Sass was not a director of Spiral, but was authorised by it to carry out all of the negotiations with Morris on its behalf. At all material times Sass was a director of SED. The evidence discloses that all of the relevant negotiations in relation to the AFLs and Option Agreements were carried out by Morris and Sass, and their respective legal representatives received instructions from them.
140 In opening the case for Sox Holdings, counsel described Sox Holdings as the company that is the counter-party in respect of the Put and Call Option Agreements. He then referred to the Simbel Discretionary Trust, which owns a series of companies, and SHEL is one of them. He went on to describe the companies operated by the Simbel Discretionary Trust as operating childcare centres, and stated:
“It all flows back up into the Simbel discretionary trust and ultimately to Mr and Mrs Morris.”[102]
[102]T15
141 Sox Holdings and SHEL were, at the relevant time, corporations controlled by Morris and related entities for the purposes of the Corporations Act.[103] The corporate structure reflected the business activity undertaken by Morris; SHEL was an operator of childcare centres, and Sox Holdings a corporation that traded in childcare centre properties. The mere fact that the AFLs and Option Agreements were entered into by different entities, namely Sox Holdings and SHEL, does not of itself lead to the conclusion that the AFLs and Option Agreements recorded separate and distinct transactions. This was done to reflect the businesses carried on by the entities controlled by Morris.
[103]S9 Corporations Act 2001
142 The AFLs and Option Agreements record interrelated commercial activity. Spiral agreed to construct a childcare centre and lease it to SHEL at an agreed price. SHEL agreed to pay a substantial contribution toward the construction cost of each childcare centre. That contribution amounted to approximately 30 per cent of the construction costs.[104]
[104]T545
143 Spiral and SED agreed to Sox Holdings having a call option at an agreed purchase price over each childcare centre, and the price was calculated by reference to the construction contribution which had been made by SHEL. Spiral had a put option to require Sox Holdings to purchase each childcare centre in the event that Sox Holdings did not exercise the call option. Each Option Agreement had attached to it a draft contract of sale, which recorded that the sale was subject to a lease.[105] “Lease” is defined in the Option Agreements as “a lease of the Childcare Centre substantially in the form of the lease prescribed under the Agreement for Lease”.[106] “Agreement for lease” is defined as:
“Agreement Date between the Grantor [Spiral] and [SHEL] in respect of the Land and the Childcare Centre.”[107]
[105]CB 770
[106]CB 750
[107]CB 749
144 As I have already observed, the principal question for resolution in the proceeding is the proper construction of the specific provisions of the Option Agreements relied upon by Spiral in the termination of the Option Agreements.
145 I will refer to the applicable principles of construction below, but, before doing so, it is appropriate to address the submission made on behalf of Spiral that the AFLs and Option Agreements in respect of each property formed part of one transaction. It was submitted that they should be construed as if they formed one indivisible document recording one transaction. This submission was disputed by Sox Holdings, who submitted that the AFL and Option Agreement in respect of each property represented a separate and distinct transaction.
146 In McVeigh v National Australia Bank,[108] Finkelstein J stated:
“The starting point for the construction of any instrument is to look at the language used, not just to the particular words in question but at the whole of the instrument, to gather the intention of the parties: Leader v Duffey (1888) 13 App Cas 294. The words actually used must also be construed in light of the surrounding circumstances, such circumstances being proved by recitals (if any) or by extrinsic evidence: Inland Revenue Commissioners vRaphael [1935] AC 96; Reardon Smith Line Ltd vYngvar Hansen-Tangen (trading as H E Hansen-Tangen) [1976] 1 WLR 989.”
In some cases it is also permissible to have regard to other instruments. Thus, where several instruments are made as part of one transaction they will be construed together and each will be construed with reference to the other.” [109]
[108](2000) 278 ALR 429
[109](2000) 278 ALR 429 at 438
147 His Honour went on to state:
“The reason for the rule is that when a series of documents is necessary to give effect to a single transaction each is executed on the faith of the others being executed and each is intended to operate only as part of that transaction and therefore, as a matter of substance, they should be regarded as one: Manks v Whiteley [1912] 1 Ch 735 at 754.”[110]
[110]Ibid at 438. See also Kenny J at 451
148 It is also important to note that the Option Agreements (and the AFLs)[111] include an ‘entire agreement’ clause under 9.11 in the following terms:
[111]See clause 15.13 CB 189
149 The entire agreement clause does not of itself mean the Option Agreements have been executed as one distinct transaction. It is a factor supporting that conclusion, but all of the surrounding circumstances are to be taken into account.
150 In my opinion, the AFLs and Option Agreements record closely-related but distinct aspects of a single transaction in relation to each of the subject properties; that transaction being the commercial development and operation of a childcare centre. It is not, however, necessary for the court to resolve any inconsistency or conflict between specific provisions in the AFLs and Option Agreements. The fact that the parties recorded distinct aspects of one transaction in separate agreements forms part of the surrounding circumstances I am to have regard to in construing the relevant provisions of the Option Agreements relied upon by Spiral in support of the termination of them.
Applicable principles of construction
151 It is necessary to construe the relevant provisions of the Option Agreement in accordance with the general principles to be applied in giving commercial contracts a businesslike interpretation.[112] This requires the court to consider what reasonable persons in the position of the parties would have understood the words to mean, by reference to the text of the agreement, the surrounding circumstances known to the parties, and the purpose or object of the transaction.[113]
[112]McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 at 589
[113]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461; Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 105 at 116
152 In interpreting the words and resolving any ambiguity, the court is to proceed in a common sense and non-technical way, and give the agreement a commercially sensible construction.[114] The court is to have regard to all of the words used in the agreement “so as to render them all harmonious one with another”[115] and to ensure the “congruent operation of the various components as a whole”.[116]
[114]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656
[115]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109
[116]Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 529
153 In giving contracts a businesslike interpretation, the court approaches the task on the assumption that the parties intended to produce a commercial result, and accordingly a commercial contract is to be construed so as to avoid “making commercial nonsense or working commercial inconvenience”.[117]
[117]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656
154 The task of interpreting a commercial term begins with the words used, and, if they are unambiguous and do not give rise to commercial nonsense or commercial inconvenience, the court must give effect to them, notwithstanding that it may be guessed or suspected that the parties intended something different.[118] As to whether a particular construction of a term produces commercial nonsense or inconvenience, the court must, in accordance with the objective approach to the interpretation of commercial contracts, assess those matters by reference to what persons in the position of the parties would have reasonably understood at the time that the contract was made. The task of contractual interpretation involves consideration of the “text, context and purpose of the relevant provision”.[119]
[118]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109
[119]See State of Victoria v Tatts Group Limited (2016) 328 ALR 564 at 575
Relevant clauses
155 The three principal clauses to be construed by the court are as follows:
The Call Option
2. Call Option
156 Clause 2.1 provides that in consideration of the Call Option Fee, Spiral grants to Sox Holdings an option to call for the property to be sold to it or its nominee for the purchase price on the terms set out in the Option Agreement and the contract for sale of the property attached to the Option Agreement.
157 As noted above, the contract of sale is subject to a lease being in place. The special conditions in the contract of sale define “Lease” as “lease of the Property between the Vendor (as lessor) and the Tenant”.[120] The vendor is defined as Spiral,[121] and the tenant is defined as “the tenant under the Lease, [SHEL].”[122] The contract of sale therefore contemplates the existence of a lease between SHEL and Spiral pursuant to the relevant AFL.
[120]CB 780
[121]CB 769
[122]CB 781
158 Clause 2.4 of the Option Agreement provides that the Call Option is exercisable during the Call Option Period, which is the period commencing on the agreement date and expiring 60 days after the commencement of the lease. “Lease” means a lease of the childcare centre substantially in the form of the lease required by the AFL between Spiral and SHEL.[123]
[123]CB 750
159 Clause 2.4(a)(iii) and Clause 2.4(b)(iii) provide that the Call Option may be exercised during the Call Option Period only by “a properly executed Contract dated the date of the exercise of the Call Option”. The contract referred to is the contract annexed to the Option Agreement.[124]
[124]CB 749
160 In my opinion, the terms of Clause 2 of the Option Agreement provide that the Call Option is to be exercised by the execution of the contract of sale attached to the Option Agreement, which is in turn subject to a lease between SHEL and Spiral. It is clear from the context and surrounding circumstances of the execution of the AFLs and Option Agreements that the parties intended that a lease between SHEL and Spiral would be in place pursuant to the respective AFL when the Call Option was exercised.
161 In addition to the surrounding circumstances that I have already referred to in relation to the execution of the AFLs and Option Agreements, the purchase price pursuant to a particular Option Agreement was calculated by reference to the rent due under the corresponding AFL.[125]
[125]T232–235
162 Furthermore, the Contribution payable pursuant to a particular AFL gave SHEL the right to become lessee and operate a childcare business at that site.[126] The grant of a lease by Spiral to SHEL was subject to the payment by SHEL of the Contribution.[127]
[126]T774–775
[127]AFL Clause 8.1, CB 182
163 Morris did not give evidence in relation to how the specific calculation of the Contribution to be made in respect of a particular property was arrived at. He also did not give evidence that contributions are common generally in commercial leases and did not state that capital contributions are common in the leasing of new childcare centres. Despite this, it was put to Sass by counsel for Sox Holdings that capital contributions are common in the leasing of new childcare centres. Sass did not agree.[128] The only evidence in the trial is that capital contributions in this context are unusual, which supports Spiral’s case that the Contribution under the AFL and purchase price under the Option Agreement made up the entire price to be paid for each property.
[128]T845–846
The Put Option
3. Put Option
164 Clause 3 provides that, in consideration for the grant of the Call Option, Sox Holdings grants Spiral a Put Option to sell the property to Sox Holdings for the purchase price and on the terms set out in the relevant Option Agreement.[129] The Put Option may only be exercised if the condition in Clause 5 has been satisfied or waived by the grantee.[130] This clause does not identify which part of Clause 5 is to be satisfied or waived, although it would appear this is a reference to Clause 5.1(a). Furthermore, the Put Option may only be exercised by the delivery by Spiral to Sox Holdings of a properly signed option notice and two copies of the contract executed by Spiral and dated the same date as the date of exercise of the Put Option.[131]
[129]Clause 3.1
[130]Clause 3.3(a)
[131]Clause 3.3(b)
165 As noted above, the contract is subject to the lease between Spiral and SHEL. It is therefore clear that there is ambiguity in Clause 3.3 in relation to the exercise of the Put Option by the grantor as it may only be exercised if Clause 5 is satisfied or waived by the grantee. But clause 3.3(b) provides that the Put Option is exercised by the delivery of two copies of the contract, which as I have already observed is subject to the lease.
Construction of Childcare Centre and Grant of Lease
5. Construction of Childcare Centre and Grant of Lease
166 Clause 5 is entitled ‘Construction of Childcare Centre and Grant of Lease’. Clause 5.1 is headed ‘Options subject to Lease commencement’. Clause 1.4(a) provides that “headings are for reference only and do not affect the meaning of this Agreement”. Nevertheless, the heading is a guide to the subject matter of the clause.
167 It is accepted by the parties that Clause 5.1(a) is ambiguous. The words “This Agreement” with the addition of the words “and the exercise of the Put Option” gives rise to the ambiguity. The words of Clause 5.1(a), on a literal reading, provides that the Option Agreement is subject to the commencement of the lease, while also providing that the exercise of the Put Option, but not the Call Option, is subject to the commencement of the lease. It is this ambiguity which is at the heart of the dispute between Sox Holdings and Spiral.
168 The “Sunset Date” means “the date which is 2 years after the date of this Agreement”, namely 9 November 2015.[132]
[132]Clause 1.3; CB 751
169 Clause 5.1(c) would appear to provide that waiver by Sox Holdings of the Childcare Condition would mean that Sox Holdings can exercise the Call Option at any time without the lease commencing. This would appear to be inconsistent with the provisions of Clause 2, described by counsel for Sox Holdings as “the leading provision” in his closing submissions.[133]
[133]T1272
170 In the event that the Childcare Condition is waived, Clause 5.1(b) nevertheless still contemplates the commencement of the lease, and provides for Spiral providing written notice to Sox Holdings that the lease has commenced, together with relevant supporting documentation.
171 Clause 5.1(a) is poorly drafted and, in part, inconsistent with the terms of Clause 2. It should be read to provide that “This Agreement is subject to the Lease commencing on or before the sunset date”. In arriving at this conclusion, I have had regard to the context in which the Option Agreements were entered. The evidence before the court establishes that the AFLs and Option Agreements were closely related to one another, and the parties intended that SHEL would lease the childcare centre, the subject of a particular AFL, and Sox Holdings or Spiral would then have an option in relation to it.
172 Clause 5.1(c) is also poorly drafted and whilst the circumstances it is intended to address are unclear, it could not have been intended by the parties to confer on Sox Holdings an unqualified right to purchase a childcare centre at any time and irrespective of the performance of SHEL’s obligations pursuant to the relevant AFL. What is clear is that Sox Holdings had not waived the benefit of clause 5.1(a) prior to the termination of the Option Agreements and the terms of clause 5.1(d)(ii) were thereby met.
173 Clause 5.1(d) provides that if the lease has not commenced on or before the sunset date, and the grantee does not waive the benefit of Clause 5.1(a) under Clause 5.1(c), either party may, by notice in writing, terminate the agreement, and that the agreement will be at an end. The clause further provides that any part of the deposit that has been paid will be refunded to Sox Holdings. The exercise of the Call Option requires payment of the deposit, which constitutes 2.5 per cent of the purchase price.[134] This provision contemplates that the Option Agreement may be terminated after the Call Option has been exercised and a deposit paid, where a lease has not commenced on or before the sunset date.
[134]Clause 2.4; Clause 1.1, Item 6
174 A literal reading of Clause 5.1(d) is that it provides for the termination of the Option Agreement by either party where the lease has not commenced before the sunset date. In my opinion this is consistent with Clause 5.1(a) providing for the agreement to be subject to the lease commencing on or before the sunset date.
175 However, I do not accept that the absence of the lease automatically brings the Option Agreement to an end. As submitted on behalf of Sox Holdings, such an interpretation would mean that at any time after the commencement of the Option Agreement and before the commencement of the lease, the Option Agreement confers no rights upon Sox Holdings.
176 Consistent with the principles of construction outlined above, Clause 5.1(d) confers upon either party the right to terminate the Option Agreement in accordance with its provisions. In this case, Spiral, by notices dated 25 August 2016, exercised the power conferred on it by Clause 5.1(d). In each instance the lease had not commenced and the provisions of clause 5.1(d)(i) were thereby met and as I have already stated, the provisions of clause 5.1(d)(ii) were also met.
177 The evidence demonstrates that the parties intended that a lease would be in place before the corresponding Call Option could be exercised and viewed objectively it would make “commercial nonsense” for Sox Holdings to be able to compel Spiral to sell a completed childcare centre to it in circumstances where SHEL had failed to meet its obligations pursuant to the AFL, for a price well below the property’s market value. The contrary argument advanced on behalf of Sox Holdings, namely, that it was simply a bad deal for Spiral cannot be accepted.
178 It is not necessary for me to decide how the ambiguity in Clause 5 came about and how it is in apparent contradiction to the intention of the parties revealed by Clause 2 and the surrounding circumstances. However, a relevant circumstance in this regard is disclosed by an exchange of emails between the solicitors for Sox Holdings and Spiral on 29 September 2015 concerning a proposed cross default provision between the AFLs and Option Agreements.[135] The solicitors for Sox Holdings objected to the clause on the basis that their client may lose the benefit of “section 32Q(3)(a) of the Duties Act 2000 as a result of the operation of section 32Q(4)”. The solicitors stated that the proposed cross default provision may expose their client to a stamp duty liability as its entry into the AFLs may constitute participation in land development.
[135]CB 2486
179 For this reason a cross default provision between an AFL and corresponding Option Agreement which would have expressly addressed the dispute as it unfolded, was not inserted. I do not accept that this exchange demonstrates that the parties intended that there would not be cross default; rather it suggests the provision was not inserted to avoid a possible stamp duty liability.
Implied term of good faith
180 It is the case for Sox Holdings that if Clause 5.1(d) conferred a general power on Spiral to terminate the Option Agreements, that power is to be exercised subject to an implied obligation of co-operation. In Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd,[136] Mason J stated:
“It is common ground that the contract imposed an implied obligation on each party to do all that was reasonably necessary to secure performance of the contract.”
[136](1979) 144 CLR 596
181 His Honour further stated:
“It is not to be thought that this rule of construction is confined to the imposition of an obligation on one contracting party to co-operate in doing all that is necessary to be done for the performance by the other party of his obligations under the contract. As Griffith C.J. said in Butt v. M’Donald (1896) 7 QLJ 68, at pp 70-71:
‘It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract.’ ”[137]
[137]Ibid at 607–608
182 It was also submitted on behalf of Sox Holdings that the power to terminate the Option Agreement contained in Clause 5.1(d) was to be exercised in good faith. I accept that an implied term of co-operation or to act in good faith (if there is a difference) required Spiral to:
(a)Co-operate in achieving the contractual objects: that is, show loyalty to the promise itself;
(b)Maintain honest standards of conduct; and
(c)Apply standards of conduct which are reasonable having regard to the interests of the parties.[138]
[138]Closing submissions, page 32
183 Sox Holdings relied on a series of decisions in support of its submission, the effect of which was summarised by Finkelstein J in Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903, where his Honour stated:
“Recent cases make it clear that in appropriate contracts, perhaps even in all commercial contracts, such a term will ordinarily be implied; not as an ad hoc term (based on the presumed intention of the parties) but as a legal incident of the relationship.”[139]
[139]At paragraph [34]
184 I accept that Spiral’s power to terminate the Option Agreements pursuant to Clause 5.1(d) necessarily enabled it to act in a way that was adverse to the rights of Sox Holdings. I do not accept, as was submitted on behalf of Sox Holdings, that the construction of Clause 5.1(d) that I have arrived at means that Sox Holdings purchased an option that could be terminated at any time and was therefore “worthless”. In my opinion, Sox Holdings purchased the right to exercise a Call Option when the lease pursuant to the AFL had commenced, and this was not a “worthless” right.
185 It is the case for Sox Holdings that Spiral terminated the Option Agreements not because the lease had not commenced pursuant to the AFL in circumstances where SHEL had failed to perform its obligations pursuant to the Contribution and had repeatedly misled Spiral as to the circumstances of that non-performance, but because Spiral was aware that the properties the subject of the Call Option had significantly increased in value since the purchase price had been agreed when the Heads of Agreement was executed on 22 July 2015.
186 Sox Holdings relies on the following items of evidence to establish that Spiral was aware by mid-2016 that the option prices payable under each of the Option Agreements were below the market value of the properties:
(a)The total price received by Sox Holdings on the nominated sale of the Tarneit property was $729,300 above the option price;
(b)The expert evidence of David Knuppel;
(c)The bank valuations, which were not disclosed, contained in Exhibit 6;
(d)Exhibit 7, the email from Bannister to Sass dated 23 August 2016;
(e)The agreed valuations of the properties as at 25 August 2016; and
(f)The sale prices in fact received by Spiral.[140]
[140]Closing submissions, page 35
187 Sox Holdings also relied upon evidence given by Morris and Jorgensen, in relation to a conversation that took place on 7 July 2016 between Sandner and Morris, in which Morris stated that Sandner made it clear that Spiral was aware that if Sox Holdings was permitted to exercise its Call Options it stood to make a very considerable profit.
188 In relation to the telephone conversation, when the case was opened for Sox Holdings, counsel summarised the telephone conversation and stated that Sandner had questioned Morris about the $400,000 that was owing from the Tarneit sale. Mr Strahan went on to say:
“Mr Sandner says words to the effect that Mr Morris has got no right to make so much money out of this deal and that he can forget about the deal and that Spiral is going to be backing out of the whole thing.”[141]
[141]T95
189 Mr Morris gave evidence in relation to the conversation, and stated that:
“[T]he conversation was very amicable. Mr Sandner had just asked me about the $400,000 circa that was still owing on the Mercantour [deal]. ... I said, “Look, mate, it’s coming. It’s happening”. ... I said, “We’ve got to try and get these AFLs on foot.” That’s when the whole conversation turned. ... Well, he indicated that the AFLs aren’t going to come on foot, that’s not even a discussion and I said, “Well, mate, I can’t understand that.” ... There wasn’t much then, other than I indicated that – I think there was a comment pertaining to how dare we make that sort of money and he doesn’t understand, I believe, arbitrage or uplift but it was like that sort of money. I was a bit miffed. ... I said something to the effect that, “It’s free enterprise. We buy it for $1 and sell it for $2.” It’s not even in dispute. We’ve got to try and get the relationship on board and then it ended pretty abruptly and the conversation ceased.”[142]
[142]T274–275
190 In his evidence, Morris did not attest to the terms of the conversation opened on behalf of Sox Holdings, and did not state that Sandner said Spiral was backing out of the whole thing.
191 In cross-examination, Morris stated that Sandner had said to him, in reply to him stating “We need to try and get the AFLs on foot”, that “That’s not even going to happen”.[143]
[143]T432
192 Jorgensen gave evidence that Morris telephoned him in July 2016 and recounted the terms of his telephone conversation with Sandner. Jorgensen stated:
“I can’t use the exact words but he basically just said, “I’ve just had a call from Chris Sandner”, he said, “I can’t believe the hide of the bloke. He’s just into me and basically said he cannot believe that we are going to make this much money out of the freeholds on these sites.”[144]
[144]T477
193 When Sandner gave evidence, the version of the conversation recounted by Morris to Jorgensen was not put to him. Sandner was cross-examined on the basis of Morris’s evidence,[145] which he denied. Sandner gave evidence that the telephone conversation concerned the payment of the outstanding $400,000, and that Morris had agreed to make the payment, and that he would deal with Sass in relation to it.
[145]T622
194 Sandner’s evidence in relation to the terms of the conversation is supported by the text messages sent on 8 July 2016 by Morris to Sass in relation to the outstanding moneys and the fact that those text messages do not contain any assertion by him that Sandner had asserted that Spiral was backing out of the deal because it was aware that Morris stood to make a substantial profit.
195 I do not accept Morris’s evidence in relation to the terms of this conversation. I accept that it only concerned the payment of the $400,000.
196 I do, however, accept that at the time of termination Sass and Sandner were aware that the freehold market for childcare centres was an improving one. However, the three bank valuations contained in Exhibit 6 do not support the submission that they were aware that there were very substantial increases in the valuations of the properties. In two instances, the CBA valuations correspond with the total of the Contributions and purchase prices provided for in the Option Agreements and the other valuation is similar to that combined sum.
197 The agreed valuations of the properties were arrived at by the legal representatives of the parties after proceedings were commenced and are not evidence of Sass and Sandner’s knowledge at the relevant time.
198 Furthermore, the prices of the ultimate sales of the properties were achieved by reference to the terms of the leases with Amiga Montessori, which did not require that entity to make capital contributions. The rentals in each case were substantially in excess of the rentals provided for in the AFLs and increased the value of the properties.
199 In my opinion, it is clear from the evidence in the trial that, prior to the termination of the AFLs, Spiral had sought to accommodate every request made of it by SHEL for extensions to the time for it to meet its obligations under the AFLs. Sox Holdings, SHEL, and Morris had also agreed to pay to Spiral the outstanding sum of $400,000 at the settlement of the sale of the Mercantour Boulevard, Tarneit, property by operation of the deed of variation. These funds were not paid to Spiral, and Morris misled Sass in relation to the reasons for that.
200 In these circumstances, it can hardly be suggested that Spiral behaved capriciously or unreasonably in terminating the AFLs. The reason the leases did not commence, which triggered the operation of Clause 5.1(d), is because SHEL repeatedly failed to meet its obligations as and when they fell due.
201 The contents of Exhibit 7 disclose that Spiral’s solicitors were of the view that the question as to whether or not the Option Agreements were on foot following the termination of the AFLs or whether this gave rise to a right to terminate was a complex legal question.
202 In the email from King & Wood Mallesons to Lander & Rogers dated 19 August 2016 the opinion is expressed that the Option Agreements were subject to the lease commencing, and following the termination of the AFLs this could not occur. The email further refers to the operation of Clause 5.1(d), and goes on to identify an alternative opinion held by Lander & Rogers which is set out in the email from Alex Bannister (Bannister) to Sass on 23 August 2016. In my opinion, by reference to the content of Exhibit 7, Sass did receive two different advices, as he stated when he was cross-examined regarding its contents.[146] Sass stated that he thought the advice he had received from King & Wood Mallesons was correct.[147]
[146]T1221
[147]T1222–1223
203 The proceedings commenced by Spiral for the recovery of the $427,500 owing pursuant to the deed of variation were commenced on 28 July 2016, and so, by the time of the service of the notice of termination of the Option Agreements on 25 August 2016, Spiral had commenced litigation against Sox Holdings, Sox Enterprises and Morris, and was also in receipt of two sets of advice regarding the termination of the agreements.
204 In the email from Bannister to Sass, Bannister recounts Sass’ instructions as follows:
“We understand that you wish to terminate the Options as the purchase price payable by Sox under the Options for these properties is significantly less than their market value. As set out in KWM’s email, they say that Spiral can validly terminate the Options and hence extinguish Sox’s rights to purchase.”
205 When Sass was recalled to be cross-examined about the contents of Exhibit 7, he stated that the reference to “the purchase price payable by Sox under the options for these properties is significantly less than their market value” was a reference to the fact that, in his opinion, the entire purchase price included the capital contributions.[148] Sass had previously stated that he viewed the purchase price for each childcare centre as the purchase price pursuant to the Option Agreement and the Contribution pursuant to the corresponding AFL,[149] and I accept that Bannister’s reference to the subject in his email to Sass is a reference to the fact that the purchase price pursuant to the Option Agreements did not include the Contribution.
[148]T1225
[149]T677
206 As I have already observed, I nevertheless accept that Spiral was aware of the market conditions at the time the Option Agreements were terminated, but I do not accept that it anticipated the substantial profits ultimately obtained, and I do not accept that the Option Agreements were terminated for this reason on 25 August 2016.
207 In arriving at this conclusion I have considered the evidence regarding the knowledge that Sass and Sandner had of the market conditions and the issues in relation to their credit that I have referred to, but in my opinion Sox Holdings has not established that termination was not based upon SHEL’s failure to meet its obligations pursuant to the AFLs.
208 As made clear by the Option Agreement termination notices, the termination was based upon the fact that the lease would not commence pursuant to the AFL, and in reliance on the provisions of Clause 5.1(d) of the Option Agreement.
209 In relation to the good faith argument, counsel for Sox Holdings also relied on the terms of an email Morris sent to Sass on 12 July 2016.[150] In the email, Morris told Sass that he was endeavouring to get the $427,000 that was owing to Spiral “to you as quickly as possible”. As I have observed, these moneys remain unpaid. He also stated:
“We would like to discuss a potential opportunity where Sparrow still absorbs the businesses, re-enters the ARS and Spiral Developments can also benefit from the freehold uplifts. A joint venture on the uplifts if you will. This outcome is the quickest and easiest solution from a financial and operational level.
Sparrow understands the position we have placed your firm in. But we do feel it is a harder drive for you to try and find alternate buyers to fund the new builds, and the businesses. As well that entity have the infrastructure to complete and absorb the losses from the businesses.”
[150]CB 1859
210 The email written by Morris by its terms reveals the interrelationship between the AFLs and the Option Agreements. In circumstances where SHEL had not met its obligations under the AFLs, Morris offered a joint venture in relation to any proceeds of sale from the freeholds of the properties in question. Sass did not respond to the email, and in my opinion Spiral was not under any obligation at this time to consider the proposal put to it by Morris. As I have already stated, in my opinion Spiral had done all that was reasonable in the circumstances, and I do not accept that in exercising the power conferred on it by Clause 5.1(d) of the Option Agreement, Spiral breached an implied term of good faith in the exercise of it.
211 In a letter dated 8 September 2016, the solicitors for Sox Holdings disputed that Clause 5.1(d) conferred a right on Spiral to terminate each of the Option Agreements. The letter stated that Sox Holdings considered that Spiral had repudiated each of the Option Agreements, and stated:
“Our client hereby elects to accept your clients’ repudiations of each of the Option Agreements and terminate each of the Option Agreements. For the avoidance of doubt, our client considers each of the Option Agreements to now be at an end and will pursue your clients regarding its damages, costs and interest.”[151]
[151]CB 1891
212 As I have stated, in my opinion Spiral was entitled to terminate the Option Agreements pursuant to the provisions of Clause 5.1(d) of each Option Agreement, and I am not satisfied that it breached an implied condition of good faith in doing so.
Termination by the deed of variation
213 Counsel for Spiral also relied on Clause 9 of the deed of variation as an entitlement to terminate the Option Agreements. The clause reads as follows:
214 In response, Sox Holdings submitted that Clause 9 of the deed of variation was unenforceable, as it amounts to a penalty clause. In Ringrow Pty Ltd v BP Australia Pty Ltd[152] the High Court stated:
“The law of penalties, in its standard application, is attracted where a contract stipulates that on breach the contract-breaker will pay an agreed sum which exceeds what can be regarded as a genuine pre-estimate of the damage likely to be caused by the breach.”
[152](2005) 224 CLR 656 at 660
215 Clause 9 provided that the AFLs and the Option Agreements could all be terminated by Spiral in the event that Sox Holdings, Sox Enterprises, or Morris did not pay the $400,000 owing to it following the settlement of the Mercantour Boulevard, Tarneit, sale. The moneys were owing specifically from that transaction, and, in my opinion, in such circumstances the provisions of Clause 9 may properly be described as a penalty, and I do not accept that the clause conferred an enforceable power on Spiral to terminate all of the AFLs and Option Agreements then extant.
216 By reason of the conclusions I have reached it is not necessary for me to assess damages.
217 For the foregoing reasons, the orders of the court are as follows:
(i) In proceeding CI-16-03285:
(a) There be judgment for the plaintiff;
(b) The defendants pay the plaintiff the sum of $427,500;
(c) The defendants pay the plaintiff interest in the sum of $97,820.49;
(d) The counterclaim of Sox Holdings is dismissed;
(e) The defendants pay the plaintiff’s costs of the proceeding, including any reserved costs, to be taxed on a standard basis in default of agreement;
(f) The first defendant pay the plaintiff’s costs of the counterclaim, including any reserved costs, to be taxed on a standard basis in default of agreement.
(ii) In proceeding CI-16-04826:
(a) The plaintiff’s claim is dismissed;
(b) The plaintiff pay the defendants’ costs, including any reserved costs, to be taxed on a standard basis in default of agreement.
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