Stepping Stones Child Care Centre (ACT) Pty Ltd v Early Learning Services Ltd

STEPPING STONES CHILD CARE CENTRE (ACT) PTY LIMITED V EARLY LEARNING SERVICES LIMITED
[2013] ACTSC 173 (9 September 2013)

CONTRACTS – General contractual principles – construction and interpretation of contracts – ‘best endeavours’ vs ‘reasonable endeavours’ – whether best endeavours were used – whether termination was effective – turns on its own facts

CONTRACTS – Remedies – specific performance – meaning of ready, willing and able

CORPORATIONS – knowledge of – means of imputing knowledge

Corporations Act 2001 (Cth)
Court Procedures Rules 2006 (ACT), r 50(2)

Elizabeth Peden, Good Faith in the Performance of Contracts (LexisNexis Butterworths, 2003)
A F Mason, “Contract, Good Faith and Equitable Standards in Fair Dealing” (2000) 116 Law Quarterly Review 66

Actall Pty Ltd v Pacific Bay Development Pty Ltd [2006] NSWCA 190
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Arthur Guiness, Sons & Co (Dublin) Ltd v The Freshfield (owners) [1965] P 294
Artifakts Design Group Ltd v N P Rigg Ltd [1993] 1 NZLR 196
Australia Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104
Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251

Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) and (No 10) (2001) 39 WAR 1

Bell v Scott (1922) 30 CLR 387
Bosca Land Pty Ltd v Wruck [1982] Qd R 111
Bowes v Chaleyer (1923) 32 CLR 159
British and Beningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48
Butt v McDonald (1896) 2 QLJ 68
Caltex Australia Petroleum Pty Ltd v Commissioner of Taxation (2008) 173 FCR 359
Carlill v Carbolic Smokeball Co [1893] 1 QB 256
Central Exchange Ltd v Anaconda Nickel Ltd (2002) 26 WAR 33
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Fileman v Liddle (1974) 2 BPR 9192
Fitzgerald v Masters (1956) 95 CLR 420
Foran v Wight (1989) 168 CLR 385
Fylayne Pty Ltd v Berck (Unreported, Queensland Supreme Court, Full Court, 24 November 1988)
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Gold Coast Waterways Authority v Salmead Pty Ltd [1997] 1 Qd R 346
Green v Sommerville (1979) 141 CLR 594
Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641
Hamilton v Whitehead (1988) 166 CLR 121
Hawkins v Pender Bros Pty Ltd [1990] 1 Qd R 135
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Heyman v DarwinsLtd [1942] AC 356
H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd [1957] 1 QB 159
Honner v Ashton (1979) 1 BPR 9478
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
Hunyor v Tilelli (1997) 8 BPR 15,629
Italo-Australian Club Ltd v National Australia Bank Ltd (1989) NSW Conv R 55-461
Jackson Nominees Pty Ltd v Hanson Building Products Pty Ltd [2006] QCA 126
J C Houghton & Co v Nothard, Lowe and Wills Ltd [1928] AC 1
J C Williamson Ltd v Lukey (1931) 45 CLR 282
Jetcity Pty Ltd v Yenald Nominees Pty Ltd (Unreported, Supreme Court of WA, Owen J, 9 April 1999)
Jolley v Carmel Ltd [2000] 2 EGLR 153
Kayserian Nominees (No 1) Pty Ltd v J R Garner Pty Ltd [2008] NSWSC 803
Kennedy v Vercoe (1960) 105 CLR 521
Lakatoi Universal Pty Ltd v Walker [2000] NSWSC 113
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Mackay v Dick (1881) 6 App Cas 251
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McCourt v Cranston (2012) ANZ ConvR 12-006
Meehan v Jones (1982) 149 CLR 571
Nationwide News Pty Ltd v Naidu (2007) 71 NSWLR 471
Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444
Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2003] NSWSC 288
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Paltara Pty Ltd v Dempster (1991) 6 WAR 85
Parland Pty Ltd v Mariposa Pty Ltd (1995) 5 Tas R 121
Peter Turnbull and Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235
Pioneer Plastic Containers Ltd v Commissioner for Customs and Excise (1967) 1 Ch 597
Placer Development Limited v Commonwealth (1969) 121 CLR 353
Progress and Properties (Strathfield) Pty Ltd v Crumblin (1984) 3 BPR 9496
Rafferty v Madgwicks (2012) 203 FCR 1
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Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd (rec & mgr apptd) (1997) 42 NSWLR 462
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No. SC 400 of 2008

Judge: Refshauge J
Supreme Court of the ACT

Date: 9 September 2013

IN THE SUPREME COURT OF THE     )
  )          No. SC 400 of 2008
AUSTRALIAN CAPITAL TERRITORY )

BETWEEN:STEPPING STONES CHILD CARE CENTRE (ACT) PTY LIMITED
ACN 120 005 503

Plaintiff

AND:EARLY LEARNING SERVICES LIMITED
ACN 123 828 553

Defendant

ORDER

Judge:  Refshauge J
Date:  9 September 2013
Place:  Canberra

THE COURT ORDERS THAT:

There be judgment for the defendant.

The parties be heard as to costs.

In Australia historically, the day care for children in the years before school had two European roots: the idea of the crèche from France and the kindergarten movement in Germany.

While there had long been “for profit” child care in Australia, subsidies were made available to the private sector and companies were established to enter the market. Funding changes in 1996 provided the opportunity for larger companies to invest in the sector. One way in which this was done was by purchasing child care centres from other operators.

Companies of which Ms Fiona O’Donnell was sole director, Stepping Stones Child Care Centre (ACT) Pty Ltd (Stepping Stones), the plaintiff, and Conder Child Care Services Pty Ltd, conducted four child care centres in the ACT, three of them being conducted by Stepping Stones at Symonston, Bonython and Gungahlin. The other, conducted at Conder by Conder Child Care Services Pty Ltd, was called Lavender Lane Child Care Services.

On 6 December 2007, the defendant, Early Learning Services Limited (ELS), entered into contracts with Stepping Stones and Conder Child Care Services Pty Ltd to purchase the four child care centres. Incorporated in February 2007, ELS was a public company listed on the Australian Stock Exchange and, by 30 December 2007, owning twenty-nine child care centres and purchasing another forty-four.

The sale of each of the four centres was the subject of a separate contract, though most of the terms of each contract were identical.

The sales of the Gungahlin centre and of the Lavender Lane centre were duly completed in accordance with the relevant contracts. On 29 February 2008, however, ELS purported to terminate the contracts for the purchase of the Symonston and Bonython centres. Stepping Stones did not accept the purported termination, and continued to prepare for completion of these two contracts.

By 4 April 2008, described in the contracts as the “Sunset Date”, Stepping Stones purported to be in a position to complete the contracts, but ELS did not complete the contracts.

On 19 May 2008, Stepping Stones commenced these proceedings seeking a declaration that both the contract for sale of the Symonston centre and the contract for sale of the Bonython centre were valid and enforceable, and for orders that the contracts be specifically performed.

THE PLEADINGS

The proceedings were commenced by Originating Claim filed on 19 May 2008, to which was attached a Statement of Claim (r 50(2) of the Court Procedures Rules 2006 (ACT)).

ELS filed a defence on 23 June 2008. It was, however, amended a number of times and the final defence, a further amended defence, was filed by leave on 20 April 2009.

A reply was filed by Stepping Stones on 26 September 2008, and, by leave on 22 April 2009, an amended reply was filed to the further amended defence.

The pleadings showed the following. Both Stepping Stones and ELS were corporations registered under the Corporations Act 2001 (Cth) and ELS was listed as a public company on the Australian Stock Exchange.

The Symonston Contract

On 6 December 2007, Stepping Stones and ELS entered into an agreement in writing (the Symonston Contract) for the sale of the child care business conducted by Stepping Stones at Symonston in the Australian Capital Territory. The Symonston Contract included the sale of the lease of the premises on which the child care centre was conducted; the landlord and lessor of the premises on which the child care centre was conducted was BNR Pty Ltd (the Symonston landlord). The price for purchase of the child care centre was $2,250,000.00.

The purchase price under the Symonston Contract was to be paid in two payments, one as to $5,000 on receipt by ELS of a properly completed and signed contract, and the balance thereafter on completion, in accordance with the terms of the Symonston Contract.

‘Completion’ meant the sale of the business assets; the ‘completion date’ was defined, by the Symonston Contract, in cl 26.1 in the following terms:

“Completion Date” means that later of:
(a)the date which is 7 days after the satisfaction or waiver of all of the Conditions (with the exception of clause 2.1(j));
(b)the date which is thirty (30) days after the satisfaction of the Condition contained in clause 2.1(j); and
(c)1 February 2008,

and in the event that the Completion Date is not a Business Day, then the following Business Day.

The Symonston Contract also provided for a “Sunset Date”, which was to mean 120 days from the date of the signing. The date of signing was 6 December 2007 and the Sunset Date was 4 April 2008.

The Symonston Contract set out certain conditions precedent (the Conditions Precedent) which were contained in cll 2.1 and 9.1, and Stepping Stones and ELS were only obliged to complete the Symonston Contract if these Conditions Precedent were fulfilled. The Conditions Precedent are set out below (at [51]). These conditions included conditions about the Symonston landlord’s consent to the transfer of the lease of the premises.

Stepping Stones and ELS agreed in the Symonston Contract that they would use their reasonable endeavours to satisfy the Conditions Precedent in the Symonston Contract.

The Symonston Contract also provided that ELS may approach the Symonston landlord to attempt to either negotiate amendments to the lease of the premises, or to enter into a new lease on terms and conditions satisfactory to ELS; the contract provided further that failure to achieve either of these would not delay completion. These provisions were set out in cl 9.1(l) which is set out below (at [51]).

ELS was entitled to terminate the Symonston Contract under cll 2.2(c) or 9.1(e), the terms of which are also set out below (at [51]).

ELS alleged, and Stepping Stones denied, that the Symonston landlord either:

(i) represented that, as a condition of consent to the transfer of the lease of the premises to ELS or entry into the Deed of Right of Entry (as defined by the Symonston Contract), it would impose a condition which was not satisfactory to ELS in its absolute discretion; or

(ii) provided written consent to the transfer of the lease of the premises but on a condition which was not satisfactory to ELS in its absolute discretion.

ELS sought, and Stepping Stones agreed, to three extensions of the 30 day period within which ELS was, under the Symonston Contract, to complete its due diligence, and these were granted; the last of these extensions expired on 29 January 2008, though Stepping Stones alleged, and ELS denied, that these were sought in order that ELS might “approach the Symonston landlord to attempt to negotiate amendments to the Symonston Lease”.

In January 2008, ELS negotiated with the Symonston landlord about amendments to the lease; in January and February 2008, ELS negotiated with the landlord further regarding the terms and conditions of the assignment of the lease and the entry by the Symonston landlord into a Deed of Right of Entry.

The parties disagreed about the outcome of these negotiations. In brief, for the details will need to be explored in some detail later, Stepping Stones alleged and ELS denied that the Symonston landlord agreed to execute the Deed of Right of Entry, to transfer the lease of the premises, not to require personal guarantees of the directors of ELS but to require a certain bank guarantee and cash bond. ELS alleged that the negotiations resulted in requirements which the Symonston landlord described as a final position and which were unacceptable to ELS. ELS further alleged that Stepping Stones told ELS that it was unwilling to negotiate further with the Symonston landlord. Stepping Stones denied the allegations made by ELS.

Stepping Stones further denied that the terms under which the Symonston landlord would consent to transfer of the lease, would make variations to it and would execute the Deed of Right of Entry were unacceptable to ELS, even though it admitted that these provisions would impose obligations on ELS.

ELS alleged that if, which it denied but which Stepping Stones alleged, it accepted the conditions imposed by the Symonston landlord, it was open to it to change its mind and it formed the view, between 13 and 29 February 2008, that the conditions were unacceptable. Stepping Stones said that the decision to change its mind was the result of ELS taking into account unrelated considerations which it says it was not entitled to do.

Stepping Stones said that ELS was required to undertake its reasonable endeavours to fulfil and co-operate in fulfilling the Conditions Precedent, and the non-acceptance of the offer of the Symonston landlord it was in breach of that obligation.

As a consequence of the failures to satisfy or waive the Conditions Precedent alleged by ELS, it alleged, and Stepping Stones denied, that it was entitled to terminate the Symonston Contract.

Stepping Stones claimed, and ELS denied, that the Conditions Precedents were, in fact, satisfied and that Stepping Stones was ready and willing to complete the Symonston Contract.

Stepping Stones claimed that ELS wrongfully issued a Termination Notice for the Symonston Contract because it had no entitlement to issue it, including that the Sunset Date had not yet occurred and that the proper construction of the Symonston Contract did not justify it. ELS denied these allegations.

On 29 February 2008, Stepping Stones informed ELS that it did not accept the Termination Notice and issued a Notice to Complete nominating 14 March 2008 as the date for completion.

On the same day, Stepping Stones alleged, but ELS denied, that Stepping Stones agreed with the Symonston landlord that it would provide the bank guarantee that had been required by the Symonston landlord to effect the transfer of the lease and execution of the Deed of Right of Entry.

ELS alleged, and Stepping Stones denied, that the Symonston Contract was terminated on 29 February 2008 but, in any event, on 14 March 2008, the Conditions Precedent had not been fulfilled, particularly the requirement for:

(a) a written consent to the transfer of the lease of the centre at Symonston;

(b) the written consent of the mortgagee of those premises;

(c) a transfer of the lease on terms acceptable to ELS;

(d) the Symonston landlord to enter into a Deed of Right of Entry and return that to ELS; and

(e) all, or alternatively 75%, of the employees of the child care centre enter into contracts with ELS on terms of the invitation made to them.

As a result, ELS alleged, and Stepping Stones denied, that Stepping Stones was not ready, willing or able to complete the Symonston Contract on 14 March 2008.

Stepping Stones denied that the conditions on which a transfer of the lease would have occurred were not acceptable to ELS and denied that the transfer had not occurred because ELS was in breach of its obligations; in particular, it denied that it failed to use its reasonable endeavours to effect the transfer. Stepping Stones also alleged that the Symonston landlord would have entered into the Deed of Right of Entry, but the failure of ELS to complete caused the Symonston landlord not to enter into the Deed and that ELS failed to use its reasonable endeavours to have that done. Stepping Stones further alleged that 75% or more of its employees had entered into such contracts but, in any event, ELS had not made invitations as required under the Symonston Contract.

Stepping Stones alleged, and ELS denied, that on the Sunset Date, 4 April 2008, the Symonston landlord provided a written agreement that accepted the guarantee that Stepping Stones would provide, instead of requiring ELS to provide the guarantee, and delivered a copy of its transfer consent of the lease to ELS, whereupon all Conditions Precedent had been satisfied or waived and Stepping Stones remained ready, willing and able to complete the Symonston Contract.

ELS further responded, and Stepping Stones denied, that as at 4 April 2008, first, there was no written consent to the transfer of lease by the Symonston landlord nor was there written consent of the mortgagee of the premises or alternatively no written consent to the transfer had been given on terms acceptable to the ELS and, second, that a transfer of the lease on terms acceptable to ELS had not occurred. Third, ELS submitted that none or less than 75% of employees of the child care centre had entered into contracts of employment with ELS.

ELS alleged, and Stepping Stones denied, fourthly, that the Symonston landlord had, on 4 April 2008, changed its position on the provision of a consent to the transfer of the lease and entry to a Deed of Right of Entry, but on terms that were still unacceptable to ELS in ways set out in the pleading.

While admitting that the terms would impose an obligation on ELS, Stepping Stones denied that the terms were unacceptable to ELS. It further alleged that ELS had breached its duty to make reasonable endeavours to have the Conditions Precedent satisfied or waived.

Stepping Stones further alleged that ELS was estopped from denying that it had accepted the conditions imposed by the Symonston landlord on the giving of its consent to the transfer of the lease further when first imposed and then when subsequently changed.

ELS alleged, and Stepping Stones denied, that if ELS had not effectively terminated the Symonston Contract on 29 February 2008 (which it denied, saying it had then effectually terminated the Symonston Contract), then it was entitled to terminate the Symonston Contract by 4 April 2008 and on 9 April it effectively did so.

Stepping Stones further alleged that the conditions under which the Symonston landlord had consented to the transfer of the lease were acceptable to ELS, and that ELS had breached its obligation to use reasonable endeavours to have the Conditions Precedent waived or satisfied.

Stepping Stones alleged, and ELS denied, that ELS wrongfully issued a second Termination Notice on 9 April 2008, purporting to terminate the Symonston Contract. It further alleged, and ELS denied, that ELS had no entitlement to issue the notice and that the Conditions Precedent having been satisfied or waived, the notice was invalid and of no effect.

ELS refused to complete the Symonston Contract. At issue between the parties was whether the Conditions Precedent had been fulfilled and whether Stepping Stones was, at 4 April 2008, ready willing and able to complete the Symonston Contract or whether ELS had effectively terminated it.

In summary, the specific issues identified in the pleadings in relation to the Symonston Contract are:

A. Was the purported termination by ELS of the Symonston Contract on 29 February 2008 wrongful, or effective? That is to say, in particular:

(a) were events and negotiations as at 28 February 2008 such that ELS was entitled to terminate the Symonston Contract on that date; and

(b) had these events and negotiations been the result of the failure of ELS to perform its obligation under the Symonston Contract to use its reasonable endeavours to waive or satisfy the Conditions Precedent, such as to disentitle it to terminate the Symonston Contract?

B.
Was ELS required to complete the Symonston Contract on 4 April 2008?

That is to say, in particular:

(a) did ELS have a duty to perform its obligation to use its reasonable endeavours to satisfy the Conditions Precedent in the Symonston Contract between 29 February 2008 and 4 April 2008, and, if so, did it fail to do so; and

(b) had the Conditions Precedent in the Symonston Contract been fulfilled by 4 April 2008?

C. Was ELS estopped from denying:

(a) that it had accepted the conditions imposed by the Symonston landlord on its consent to transfer the lease of the premises and to enter into the Deed of Right of Entry prior to 28 February 2008; and

(b) that it had accepted the conditions imposed by the Symonston landlord or its consent to transfer the lease of the premises and to enter into the Deed of Right of Entry on or about 4 April 2008?

The Bonython Contract

The pleadings then deal with the sale of the Stepping Stones business which it conducted at Bonython. On 6 December 2007 the parties entered into a contract (the Bonython Contract) for the sale of that business on land from Mr John Pfeiffer and Mrs May Pfeiffer, as lessor of the premises on which the child care centre was conducted (the Bonython landlord).

The pleading of the claim by Stepping Stones in relation to the Bonython Contract, and the defence by ELS, are in relevantly identical terms to the pleadings in relation to the Symonston Contract, though the detail of the arrangements with the Bonython landlord under which the landlords would consent to a transfer of the premises were slightly different and some non-critical dates differ.

I do not need to repeat what is set out above; the relevant facts are dealt with later and the matters raised in the pleadings paralleled the matters I have already identified.

The same issues, therefore, arise in connection with the Bonython Contract. They are as follows:

A. Was the purported termination by ELS of the Bonython Contract on 29 February 2008 wrongful, or effective? That is to say, in particular:

(a) were events and negotiations as at 28 February 2008 such that ELS was entitled to terminate the Bonython Contract on that date; and

(b) had these events and negotiations been the result of the failure of ELS to perform its obligation under the Bonython Contract to use its reasonable endeavours to waive or satisfy the Conditions Precedent in the Bonython Contract?

B. Was ELS required to complete the Bonython Contract on 4 April 2008? That is to say, in particular:

(a) did ELS have a duty to perform its obligations to use its reasonable endeavours to satisfy the Conditions Precedent in the Bonython Contract between 29 February 2008 and 4 April 2008 and, if so, did it fail to do so; and

(b) had the Conditions Precedent in the Bonython Contract been fulfilled by 4 April 2008?

C. Was ELS estopped from denying:

(a) that it had accepted the conditions imposed by the landlord of the premises on which the Bonython centre was conducted (the Bonython landlord) or its consent to transfer the lease of the premises and to enter into the Deed of Right of Entry prior to 28 February 2008; and

(b) that it had accepted the conditions imposed by the Bonython landlord on its consent to transfer the lease of the premises and to enter into the Deed of Right of Entry on or about 4 April 2008?

THE CONTRACTS

The Symonston Contract and the Bonython Contract are identical in the relevant terms. It is, therefore, only necessary to set out the terms once.

The central terms are clause 2.1, 2.2, 8.2, 8.3 and 9 of each contract. They are as follows:

2. Conditions precedent to completion -----
2.1Conditions precedent
ELS and the Seller are only obliged to Complete if the following Conditions are satisfied or waived:
(a)Child care licence: the Department providing written approval for ELS to hold a Child Care Licence to operate the Business in accordance with the Child Care Act and accommodate a minimum of the Child Placements on terms and conditions acceptable to ELS in its absolute discretion.
(b)Child care rebate: the Department providing written approval for ELS to receive all child care benefits government rebates, including for out-of-pocket child care fees in respect of the Business effective from Completion, on terms and conditions acceptable to ELS in its absolute discretion.
(c)Authorisations: all Authorisations necessary for:
(i)the parties to sign and complete this Agreement; and
(ii)ELS to own, operate and conduct the Business,

are obtained either without condition or on terms reasonably acceptable to ELS and are fully effective as at Completion or in the case of the Child Care Licence, will be fully effective after Completion.
(d)Consent of Landlord of Premises: the Landlord under the Premises Lease either consenting in writing to the transfer of the Premises Lease to ELS (or other entity nominated by ELS) or entering into the New ELS Lease on conditions acceptable to ELS, as provided for in this Agreement.
(e)Transfer of Premises Lease: if Item 13 of the Items Schedule so indicates, the Seller transferring the Premises Lease to ELS (or other entity nominated by ELS) as provided for in this Agreement.
(f)New ELS Lease: if Item 14 of the Item Schedule is completed, the Landlord providing the New ELS Lease and Undertaking to ELS as required by clause 9.2 of this Agreement.
(g)Deed of Right of Entry: the Landlord under the Premises Lease or the New ELS Lease entering into a Deed of Right of Entry and return it to the ELS prior to Completion, to be held in escrow by ELS pending Completion being effected.
(h)Discharge of Asset Leases: the Seller paying out or otherwise discharging all Security Interests over the Business Assets, including the Plant and Equipment, so that they must be transferred to ELS free of any Security Interests.
(i)Other conditions: as at the Completion Date:
(i)no breach of Agreement: the Seller has not materially breached this Agreement;
(ii)warranties true: none of the Warranties is or has become materially false, misleading or incorrect; and
(iii)no material adverse change: there has been no material adverse change affecting the Business, the Business Assets or the financial or trading position or prospects of the Business since the Accounts Date.

(j)Due diligence:
(i)ELS completing due diligence investigations to the absolute satisfaction of ELS within thirty (30) days from the Agreement Date in respect to the following:
(A)the Accounts;
(B)the Business Records;
(C)the requirements of any Government Agency in respect to the Business, the Premises or the Business Assets;
(D)the Premises Lease and any issues in respect to the Premises;
(E)the Authorisations required to operate the Business;
(F)the Employees; and
(G)any other matter determined by ELS to be relevant to the acquisition of the Business or the Business Assets.

(k)Employees: 75% of Employees enter into employment contracts with ELS on the terms of the invitation made by ELS under clause 8.2.

2.2 Satisfaction of Conditions
(a)Reasonable endeavours: ELS and the Seller must each use their reasonable endeavours to satisfy the Conditions.
(b)Notice: ELS and the Seller must each promptly notify the other in writing if it becomes aware that a Condition is satisfied or becomes incapable of being satisfied.
(c)Termination by ELS: ELS may terminate this Agreement if a Condition is not:
(i)satisfied on the date specified in the Condition;
(ii)satisfied on or before the Sunset Date, where not date is specified; or
(iii)waived by ELS on or before the date specified in the Condition or, if no date is specified, on or before the Sunset Date.
If any Condition is neither satisfied nor waived by ELS on or before the date specified in the Condition or if no date is specified in the Condition, on or before the Sunset Date, then either Party may terminate this Agreement by giving written notice to that effect to the other Party.

(d)No further obligations: On termination of this Agreement in accordance with clause 2.2(c), no party has any further Obligations under this Agreement except under:
(i)clause 16 (Confidentiality);
(ii)clause 17 (Tax);
(iii)Clause 3.2(b) (Return of information); or
(iv)a Right or Claim which arises before termination.

...
8.2 Offer
(a) Conditional Offer
Within a reasonable time after the satisfactory completion of ELS’ due diligence enquiries as provided for in this Agreement, but before Completion, ELS may in its absolute discretion invite any Employees (in its discretion) to apply for employment with ELS, conditional on:
(i)the Seller terminating the employment of the Employees with the Seller, with effect from the Date for Completion and the Seller providing ELS with satisfactory evidence that this has occurred at Completion; and
(ii)Completion occurring and effective from the Completion Date.

(b)Acceptance
ELS’ invitation to apply for employment must require an Employee to advise ELS or the Seller of the Employee’s acceptance of the invitation within 10 Business Days of the date of the invitation, or, if the Employee is on leave, within 5 Business Days of the date the Employee returns from leave.

(c) Advice of acceptance
If an Employee advises the Seller that the Employee accepts ELS’ invitation to apply for employment, then the Seller must immediately notify ELS.

(d) Reasonable endeavours
The Seller must use in its reasonable endeavours to encourage the Employees to accept ELS’ invitation to apply for employment.

...
8.3Termination of Employees
On Completion, the Seller must:
(a)Terminate employment: by way of Notice provided to each Employee at least 14 days prior to the Completion Date, in a form approved by ELS, terminate the employment of all the Employees with the Seller, with effect from the Completion Date and provide to ELS satisfactory evidence that this has occurred; and
(b)Release employees: release each Employee from the Obligations of their employment to the Seller with effect from the Completion Date.

...

9. Premises lease -----
9.1 Assignment of Premises Lease
(a)Assignment
If Item 13 of the Item Schedule so indicates, this Agreement is conditional upon the Seller transferring the Premises Lease to ELS at Completion on terms and conditions satisfactory to ELS in its absolute discretion. If the Seller is unable to arrange for the transfer of the Premises Lease to ELS on Completion as required by this Agreement, ELS may terminate this Agreement by providing Notice that effect to the Seller, in which case this Agreement will be at an end and the Deposit, all interest earned on the Deposit and any other monies paid by ELS must be returned to ELS, and neither party shall have any further Claims against the other.

(b)Provide copy of the Premises Lease
The Seller or the Seller’s Solicitors must deliver to ELS’ solicitor a true copy of the Premises Lease not later than seven (7) business days after the date of this Agreement.

(c)Assignment or novation
The transfer of the Premises Lease may be by assignment or by novation, at ELS’ option, but if the method selected by ELS is not possible, the Seller must effect the transfer by the other method.

(d)Consents
The Seller must use its best endeavours to obtain any consent of any third party (including the Landlord and the mortgagee of the Premises (the “Premises Mortgagee”)) requires for:
(i)the assignment or novation of the Premises Lease; and
(ii)the registration of the assignment or novation with the relevant government Agency,

at the Seller’s Cost in all respects.

(e) Conditional upon consents
This Agreement is conditional upon the Landlord and the Premises Mortgagee of the Premises consenting in writing to the transfer of the Premises Lease from the Seller to ELS. If those consents are not given by the Sunset Date, ELS may by Notice to the Seller terminate this Agreement, in which event the Deposit, all interest earned on the Deposit and any other monies paid by ELS to the Seller or the Stakeholder on account of Purchase Price shall be refunded to ELS by the Seller or the Stakeholder as the case may be.

(f)Seller’s application
The Seller must apply for the consents required by clause 9.1(d) promptly after the Agreement Date and ELS must supply such references and such other information as may be reasonably required by the Seller or the Landlord in considering any such application, and both Parties shall use their best endeavours to obtain any such consents as expeditiously as possible, but in any event by no later than the Sunset Date.

(g)Deed of Covenant
If, as a condition to the Landlord providing its consent as required by this Agreement, the Landlord requires a deed of covenant from ELS, then the Cost of that deed of covenant must be paid by the Seller. ELS is only required to enter into a deed of covenant, provided it is on terms that are acceptable to ELS, in its absolute discretion.

(h)Negotiation as to terms
At any time prior to Completion, ELS may approach the Landlord to attempt to negotiate amendments to the Premises Lease or to enter into a new lease of the Premises directly with the Landlord on terms and conditions satisfactory to ELS. If ELS reaches Agreement with the Landlord to enter into a new lease of the Premises (the “New Lease”) then the Parties agree:
(i)this Agreement shall be subject to and conditional upon the Landlord and ELS executing the New Lease and the New Lease being delivered to ELS at settlement with consent of the Premises Mortgagee and a stamped surrender of the Premises Lease, effective as at the day after the Date for Completion;
(ii)the Premises Lease will still be assigned to ELS as required by this Agreement;
(iii)ELS shall be responsible for the Landlord’s legal Costs of the preparation, negotiation and execution of the New Lease and surrender of the Premises Lease; and
(iv)Any Stamp Duty and registration fees payable on the New Lease shall be the responsibility of ELS.

The failure of the Landlord to agree to amend the Premises Lease or enter into a New Lease shall not prevent or delay Completion.

Basis of the termination

It is helpful to identify with precision at this stage the basis on which ELS claimed that it was entitled to terminate the two contracts on 29 February 2008 and, later, the basis on which it claims it was not required to complete on 4 April 2008.

A. Symonston Contract

The ground for the termination on 29 February 2008 was that ELS considered that, based on what it knew at 28 February 2008 to be the final position of the Symonston landlord, the obligations of the Symonston landlord unacceptable. That final position required that ELS:

(i) provide to the Symonston landlord a bank guarantee in an amount equal to 21 months rent plus GST;

(ii) provide a cash bond to the Symonston landlord equal to 3 months rent plus GST;

(iii) agree that the Symonston landlord could call on the bank guarantee and/or cash bond if ELS did not comply with any of its obligations under the lease;

(iv) provide a replacement bank guarantee within 7 days, should the Symonston landlord call on the bank guarantee;

(v) if the amount of the bank guarantee ceased to be equal to 21 months rent plus GST at that time, provide an additional bank guarantee so that the amount guaranteed is equal to 21 months rent plus GST at that time;

(vi) supply a replacement cash-bond within 7 days, should the Symonston landlord call on the cash bond;

(vii) if the amount of the cash bond ceased to be equal to 3 months rent plus GST at that time, supply an additional cash bond, so that the amount guaranteed is equal to three months rent plus GST at that time;

(viii) agree that the obligations in (i)-(vii) are essential terms of the lease.

The grounds on which ELS submitted it was not required to complete on 4 April 2008 are listed above (at [37]-[38]).

B. Bonython Contract

The ground for the termination on 29 February 2008 was that ELS considered that, based on what was known on 28 February 2008 to be the final position of the Bonython landlord, the obligations of the Bonython landlord unacceptable. That final position required ELS to:

(i) provide to the Bonython landlord a bank guarantee in an amount equal to 12 months rent plus GST and 12 months outgoings plus GST from time to time;

(ii) provide to the Bonython landlord a bank guarantee in an amount equal to three months rent plus GST and three months outgoings plus GST from time to time;

(iii) if the Bonython landlord assigned its interest in the premises, provide within 14 days of notice from the Bonython landlord a substitute bank guarantee in favour of any such transferee as named by the Bonython landlord;

(iv) agree that, if ELS refused to provide comply with the obligation in subparagraph (iii) above, the Bonython landlord could call up the bank guarantees;

(v) agree that the bank guarantee referred to in subparagraph (ii) above could be called upon by the Bonython landlord without notice to the defendant if the defendant did not comply with any of its obligations under the lease.

The grounds on which ELS submitted it was not required to complete on 4 April 2008 were relevantly identical to above (see [37]-[38] and [47]).

These, then, are the issues that will need to be addressed in the proceedings.

THE FACTS

In about September 2007, Ms Fiona O’Donnell negotiated with ELS to sell four child care centres that her companies owned in Canberra.

At the time, ELS had a standard “National Business Acquisition Contract”, and this formed the basis of the contractual arrangements under which ELS was prepared to purchase the centres.

Ms O’Donnell, or interests controlled by her, owned the premises on which the child care centre at Gungahlin was conducted, but other third parties were the landlords for the other centres.

As noted above (at [4]), the contracts were finally entered into on 6 December 2007.

It is not necessary to outline the various pre-contractual negotiations, as the issues in these proceedings relate to the terms of the contracts themselves and the events that subsequently happened.

The Symonston Contract

On 11 December 2007, following the entry into the Symonston Contract by both parties, the lawyers for ELS wrote to the lawyers for Stepping Stones pointing out that Stepping Stones was to apply for the Symonston landlord’s consent to the transfer of the premises, asking for that to be done “as quickly as possible” with a submission to them of the Symonston landlord’s consent and Deed of Covenant for Assignment. They offered to provide any references or other material required for a proper consideration of the application.

The next day, the lawyers for Stepping Stones contacted the lawyers for the Symonston landlord, seeking approval for the assignment.

On 17 January 2008, ELS’ lawyers wrote to Stepping Stones’ lawyers complaining that they had made several attempts to contact the Symonston landlord’s lawyers but had not been advised of the latter’s instructions about the transfer. They sought an extension of the due diligence condition. The extension, to 22 January 2013, was agreed.

Subsequently, however, the lawyers for ELS were able to contact the Symonston landlord’s lawyers directly and to be advised of the terms that were required by it for the transfer, including the provision of personal guarantees by the ELS directors. These created a problem for ELS, which stated, in a letter on 14 January 2008:

We advise that our client is a public listed company and accordingly, is unable to provide personal guarantees by its directors ...
Our client is prepared to provide a bank guarantee and to sign your client’s standard form of deed of consent. We look forward to receipt of the deed at your earliest convenience.

There was some resistance from the Symonston landlord to a variation of the lease required to waive the obligation to provide director’s guarantees and, because of the delay caused by consideration of this issue, the lawyers for ELS, on 22 January 2008, requested a further extension of the due diligence condition to 29 January 2008, which was agreed. There was further communication, which I do not need to set out in detail, save to note that the lawyers for ELS offered to the Symonston landlord a bank guarantee equivalent to six months’ rent plus GST and repeated the statement that, as a public listed company, ELS was unable to provide personal guarantees by directors.

One of the issues which arose in the correspondence was a resistance by the Symonston landlord to enter into the Deed of Right of Entry, which was required by ELS’ banker.

The Deed of Right of Entry was a document to be entered into between the Symonston landlord, ELS, as the tenant of the landlord, and ELS’ banker, the banker being described in it as the mortgagee. It provided for a restraint by the Symonston landlord on varying the lease, accepting a surrender, taking an assignment or directing an assignment of the lease by agreement or otherwise without the mortgagee’s consent, which would not be unreasonably withheld, and further that the Symonston landlord would not, without fourteen days notice to the mortgagee:

· exercise a right to determine the lease, or

· treat it as determined, or

· re-enter the premises, or

· discontinue or suspend performance of the Symonston landlord’s obligations under the lease,

The Deed provided that, as a response to such a notice, the mortgagee might remedy the breach or pay compensation and, if it did so, the breach would be excused. The Deed also provided that, while the mortgagee had security over chattels in the premises, the mortgage and persons authorised by it may enter the premises to take possession of those chattels.

ELS, as a result of the expressed resistance by the Symonston landlord to executing the Deed of Right of Entry, approached its banker to see whether that requirement made by it could be waived.

One of the options offered by Ms O’Donnell was that she would herself provide a personal guarantee to the Symonston landlord and ELS would then provide her with a personal guarantee to protect her if it could not perform the lease obligations.

On 1 February 2008, the Symonston landlord’s lawyers wrote to ELS’ lawyers advising that:

[O]ur client would only agree to vary the lease by deleting the requirement for it to be personally guaranteed if your client were to offer it both a cash bond equivalent to 3 month’s rent in addition to a bank guarantee equivalent to 21 month’s.

They also indicated that the Symonston landlord would be prepared to enter into the Deed of Right of Entry if it was limited in three ways set out in the correspondence.

On 4 February 2008, ELS’ lawyers wrote by email to the lawyers for its banker with suggested amendments by the Symonston landlord to the Deed of Entry, and sought advice as to their acceptability. The response was that, while two of three suggested amendments were acceptable, one of them was not, and that would prevent the property being included in the security pool which, of course, would affect the Loan to Valuation Ratio (LVR) (on which one of the relevant finance facilities the banker had made available to ELS depended) and, therefore, the financing of ELS.

On 4 February 2008, the Symonston landlord contacted ELS directly by email stating:

After reading the prospectus with my partners the position is quite firm in the response we sent on Friday [being the letter of 1 February 2008].

On 6 February 2008, the lawyers for ELS advised the Symonston landlord’s lawyers that it had been “involved in lengthy negotiations with its [banker]” but that “[d]espite persistent effort” their banker had “confirmed its position that it is not prepared to agree to any amendment to the form of the Deed”, being the Deed of Right of Entry.

On the same day, the Symonston landlord’s lawyers confirmed its offer which it was “under the impression” that ELS was to offer, namely, that it would vary the lease not to require directors’ guarantees and would sign the Deed of Right of Entry if ELS would provide a cash bond equivalent to three months gross rent together with a bank guarantee equivalent to twenty-one months gross rent.

The email continued:

We confirm that our client will not be in a position to reconsider its previously stated position with respect to the right of entry waiver until your client makes the above offer.

The evidence of Mr Brett Barton, a director of the Symonston landlord, confirmed that it required an “actual bank guarantee or bond equivalent to 24 months” before the Deed of Right of Entry would be acceptable.

Despite advising that ELS had not yet contacted its banker in connection with the bank guarantee, ELS’ lawyers wrote to the Symonston landlord’s lawyers on 7 February 2008, saying:

[O]ur client offers to your client a cash bond equivalent to three (3) months’ rent in addition to a bank guarantee equivalent to twenty one (21) months’ rent.

As a result, the Symonston landlord’s lawyers prepared a Deed of Assignment and a Transfer and sent it to ELS’ lawyers, and later sent a Deed of Variation and an Instrument of Variation.

About four hours later, ELS’ lawyers indicated that they had had an opportunity to consider the Deed of Variation and made some comments on it, including that the Deed provided that the amounts guaranteed might vary over the course of the lease as rental increases took effect. They requested that “the amount of the Bank Guarantee and the Cash Bond remain as the amounts based on the Rent payable at the Effective Date”.

About an hour later, the Symonston landlord’s lawyers indicated that they agreed in part, namely that “the amount bonded and guaranteed can be held static during the initial term, but requires that both be updated if the option is exercised”. Amended documents, in accordance with the discussions, were then forwarded to ELS’ lawyers.

ELS’ lawyers responded that “subject to any final instructions from my client ... these documents look OK”.

In oral evidence, Mr D Lilley, lawyer for ELS, said about this statement:

[I]t’s clear from what’s [in the email] that you are saying to [the landlord’s lawyers] that you are reserving the right to obtain final instructions from your client about the precise form of the documents, are you not, before your final agreement to the documents that are provided? --- Well I’m saying that I’m waiting for final instructions from my client. That’s what the document says, yes.
Yes. But on the fundamental issue of whether your client had agreed to make payment of a 21-month bank guarantee - - - ? ---Yes.
- - - and a three-month cash bond - - - ? --- Yes.
- - - I suggest that what’s happening ... in your e-mail is not qualifying that at all. It’s merely a qualification relating to looking at the form of the documents, isn’t it? --- No. I don’t think that’s what the e-mail ... says at all.

Mr Barton said in oral evidence that, in early February, he had a number of conversations with Mr Grant Rumball, then Company Secretary and Chief Financial Officer of ELS. Mr Barton said that, in the first of these conversations, he told Mr Rumball that if ELS would not provide personal guarantees, then the landlord would require a “fairly substantial bank guarantee of up to two years”. He said that Mr Rumball told him that ELS wanted to buy the Symonston business and wanted to make every effort to secure it, and that he would need to speak to ELS’ bankers about providing such a guarantee.

Mr Barton then said that Mr Rumball had telephoned him and his evidence was:

He said ‘we don’t see any issues putting this guarantee in place subject to our approvals of our financials – finance being approved and I’ll let you know’ and then within a week it was basically in place.

He further said:

[T]hey had a facility and the facility came from the bank for the bank guarantee and he had to check whether that was okay and the bank confirmed it was okay. And then he said, ‘[i]t’s all been confirmed. Our solicitor will write to your solicitor to confirm’ and we received a letter on 8 February.

He added in his oral evidence that the guarantee was “[f]or two years”.

In cross-examination, Mr Barton said that the final conversation was on 8 February 2008.

When challenged on the timing, Mr Barton said that he had an “unbelievable memory”.

I accept that Mr Barton appeared to have quite a good memory but when scrutinising his evidence carefully, it is clear that some of it was quite confused and he was also prone to making assumptions about the contents of communications.

For example, having read the email from ELS’ lawyers to his lawyer with comments on the draft Deed of Variation forwarded earlier, he assumed that it confirmed that the ELS banker had approved the bank guarantee facility. In fact, it did nothing of the sort.

Again, his evidence in re-examination about the last conversation that he had with Mr Rumball about the issue he described as follows:

Before 8 February, right, and I actually followed him up in a phone call and said ‘how did you go?’ And he actually said, ‘the lawyers have had instructions to write now to our lawyer’.

This, of course, did not necessarily mean that the ELS bankers had agreed to anything; it appears to have been an assumption that Mr Barton made.

When asked, however, when that conversation had taken place, he said that it “would have been either the 7th or 8 February”, not evidence of “an unbelievable memory”.

He gave further evidence as follows:

But he didn’t use the words, ‘I have been to the bank and they have consented’? --- He actually – in one of the actual conversations we had, because it was frustrating for him as well as frustrating for us, and he actually said, you know, ‘We’re trying every way to get this bloody sale put to bed’, right, ‘And I’m seeking facility’, and he said, you know, ‘It shouldn’t be an issue and go from there.’ And I actually phoned him up and said, ‘Have you got it?’ Because I actually had Fiona calling me and asking me, ‘Is it there?’ And I just kept assuring her saying, ‘Don’t worry, it’s in place.’ Otherwise she was probably going to provide it.

Mr Rumball gave evidence as to the arrangements that ELS had with its bankers. It included three components, each of which had a limit, one arrangement was for commercial bills, one was an overdraft facility and one was an original bank guarantee facility (that is, a facility to permit ELS to provide to landlords of centres it was purchasing bank guarantees). Further facilities were in the course of negotiation, such as for leasing and credit cards.

Under the facilities, it was necessary to manage the LVR, which was required to be at 50%. Thus, a complex calculation was required before it could be assessed as to whether the bank guarantee sought by the Symonston landlord could be accommodated.

Despite the evidence of Mr Barton, the other evidence strongly suggested that it would not have been possible for Mr Rumball to have obtained clearance from the bankers in the way or time suggested in Mr Barton’s evidence.

When asked about whether he had told Mr Barton over the phone on or prior to 8 February 2008 that he had approached the ELS banker and heard from it that it had approved the funding, Mr Rumball said:

I don’t think that that was correct. I would have known that I could provide a certain limit of guarantee but all of our settlements were still subject to the NAB approval process. We had to have all the documentation, as you’ve seen under the facility agreement in place. So while I knew I had an unused portion of my facility at that stage, to do one of those settlements, I knew that we had that, but it would be unlikely I would have said that we’ve had it approved at that stage. I don’t believe I would have.

Indeed, from the calculations that were in evidence about the state of the facility so far as bank guarantees are concerned, it was clear that, at 8 February 2008, ELS did not have the capacity to provide the bank guarantees that would have enabled the settlement of the Symonston contract and the Bonython contract as well as the other two contracts.

In addition, when asked specifically about when he first contacted the bank to see whether additional guarantee facility would be available, Mr Rumball indicated that he spoke to one of its officers by telephone and then emailed another the next day. That email appears to have been sent on 21 February 2008. The terms of the email make it reasonably clear that it was the first occasion on which the banker had been approached for approval. In fact, the discussions and email communications with the banker occupied some days.

Mr Rumball was not cross-examined about this evidence, which is supported by documentary and other evidence, and I accept it. I do not accept the contrary evidence of Mr Barton.

As noted above, at [82], the lawyers for the Symonston landlord sent, by email on 8 February 2008, a draft of the Deed of Assignment of the Lease, the Transfer of the Lease and Execution pages for the transfer. They stated that the Deed of Variation of the Lease would follow shortly.

Later that day, the lawyers for the Symonston landlord sent as an attachment to an email a Deed of Variation of the Lease, an Instrument of Variation and the execution pages of the Instrument of Variation.

The Deed of Variation required ELS to provide a cash bond equal to three month’s rent from time to time, and a bank guarantee equal to twenty-one month’s rent from time to time. Clause 4 of the Deed also required that, if the bank guarantee was called upon or if the rent of the premises was increased, ELS had, within seven days of a notice by the Symonston landlord, to deliver a replacement or additional bank guarantee, so that the amount guaranteed remained equal to twenty-one month’s rent plus GST.

Mr Barton gave evidence that he had not been contacted by Mr Rumball or Mr John Hutchison, former director and then CEO of ELS, or anyone else from ELS about the obligation in the Deed of Variation of Lease to give a replacement bank guarantee for twenty-one months should the original guarantee be called upon. He said that he only wanted a bank guarantee for twenty-one months and that the extension set out in the letter from his corporation’s lawyers was, in his view, “uncommercial”. He said “I don’t think no-one would ever give it [the replacement guarantee]. So we would actually, with that particular clause, would not be part of it”. That was, so far as I can tell, never communicated to anyone until this hearing.

Ms O’Donnell, the sole director of Stepping Stones, was aware, at least by early February 2008, that the requirements required by the Symonston landlord were proving difficult for ELS. By 12 February 2008, she knew that ELS had an issue concerning the rental guarantees being sought by the Symonston landlord.

Although Ms O’Donnell resisted actually articulating that conclusion in cross-examination, I am satisfied from her evidence that she was aware that ELS considered that the rental guarantee demands by the Symonston landlord (as well as those from the Bonython landlord) were excessive. There is no doubt that her lawyers knew that.

On 12 and 13 February 2008, Ms O’Donnell communicated with Mr Rumball and Mr Hutchison about the various conditions. At the same time, the lawyers for the parties were also communicating.

ELS proposed, as a compromise, to permit the sales to proceed on the Symonston landlord’s terms, that the purchase price of each contract (that is the Symonston Contract and the Bonython Contract) be reduced by $100,000, a total of $200,000. Ms O’Donnell responded that she would “sleep on the offer” and answer it the next day. She wanted an opportunity to seek some advice from her lawyer before responding.

The next day on 13 February 2013, her lawyers responded to ELS’ lawyers by email as follows:

In consideration of your client satisfying all of the assignment and R/E [Right of Entry] requirements of the landlords at Symonston and Bonython, she will accept a reduction in the contract price on both those centres of $50,000 each ie total $100,000.
I am not to contact her again under any circumstances in relation to anything that may be seen as some sort of ‘counter-offer’, and I will not do so.
This offer is open for acceptance by 1.00pm Canberra time today, failing which it will be formally withdrawn with notice after that time.
I am further instructed not to provide my client’s contact details in Japan.

Ms O’Donnell, in her oral evidence, said that these were “not my words”, but she confirmed that she had a conversation with her lawyers and that she had told them the substance of what was to be said in reply and this email was the substance of what she wanted them to tell ELS. She did say that she “would have difficulty” accepting her lawyer’s comment that “I am not to contact her again under any circumstances in relation to anything that may be seen as some sort of ‘counter-offer’” but indicated that it was quite clear that she was then relatively inaccessible, contact was hard and that, in summary, the email was in accord with her instructions.

Mr Rumball discussed the offer with Mr Hutchison. They agreed that a total of $100,000 was not adequate to permit ELS to offer the required bank guarantee in the context of the financial arrangements of ELS; the price reduction would have to be $200,000, that is $100,000 for each of the Symonston and Bonython centres.

Later in the afternoon, Stepping Stones’ lawyers sent a further email to ELS’ lawyers as follows:

I have just spoken at length to my client. She does not intend to contact yours. If ELS want to sort something out with the landlords or either of them we suggest they get on a plane and come to Canberra. As you say they have until 4/4/08 to sort it out. Needless to say my client is somewhat disenchanted with the way this matter is resolving at one minute to midnight.

There may have been further communications between Ms O’Donnell and officers of ELS, but I did not have specific evidence of that. Nevertheless, on 19 February 2008, her lawyers wrote to ELS’ lawyers as follows:

My client has just phoned me from Japan after speaking directly with yours. They told her they had had no communication from ‘us’ since their last conversation together on 12/2/08. I can only assume from that, that my correspondence to you has not been sent on, and my client made it clear that plenty had in fact been sent. I’m instructed to confirm the offer of a price reduction of $50,000 on each of the Symonston and Bonython contracts, and that that is her final offer – full stop.

Although, again, Ms O’Donnell said that “final offer, full stop, would be the kind of words that [her lawyer] would probably use”, the communication was generally in accord with her instructions.

In his evidence, her lawyer confirmed that the email was written on her instructions and expressly confirmed that the reference to “final offer” was written on her instructions.

The Bonython Contract

Apparently on 12 December 2007, the lawyers for Stepping Stones, in accordance with the requirement in the Bonython Contract, contacted the lawyers for the Bonython landlord. The same day, the Bonython landlord’s lawyers responded setting out the information they required and the conditions under which consent to transfer of the lease would be forthcoming.

On 18 December 2007, it appears that the Stepping Stones lawyers forwarded a copy of that letter to the ELS lawyers inviting them to respond directly and suggesting that they take up directly the matter of the Deed of Right of Entry required by ELS’ bankers.

On 14 January 2008, ELS’ lawyers wrote to the lawyers for the Bonython landlord declining to provide personal guarantees by its directors for the same reason as earlier noted to the lawyers for the Symonston landlord, namely that ELS was a public listed company. They also forwarded a copy of the Deed of Right of Entry required by ELS’ banker and, under the Bonython Contract, at completion.

On 14 January 2008, ELS’ lawyers wrote to Stepping Stones’ lawyers advising that they were still in the process of negotiating with the Bonython landlord’s lawyers. They sought an extension of the due diligence condition. The extension was agreed.

A similar letter was again sent on 17 January 2008 by ELS’ lawyers to Stepping Stones’ lawyers, requesting a further extension of the due diligence condition to 22 January 2008, which was agreed.

On 21 January 2008, however, the lawyers for the Bonython landlord responded to ELS’ lawyers and raised questions about access to financial information but, in relation to the other issues, it advised as follows:

· It agreed that, in exchange for a bank guarantee, it would not require personal guarantees.

· The bank guarantee required was to cover three months of rent plus GST and three months of outgoings plus GST from time to time, being an initial amount of $35,700.77.

· It required, unsurprisingly, that the bank guarantee should be unconditional and irrevocable with no sunset date.

As to the Deed of Right of Entry, they advised that the Bonython landlord was not prepared to limit, in any way, its existing rights and benefits under the lease and so would not agree to or sign the Deed of Right of Entry in its present form or as it may be amended. They also advised that the Bonython landlord would be amenable to a variation of the lease to extend the term and the option, and make other amendments which are not presently relevant.

On 22 January 2008, ELS’ lawyers wrote to Stepping Stones’ lawyers advising that they were still negotiating terms of the assignment of the lease of the Bonython Contract, and sought an extension of the due diligence period to 29 January 2008, which was agreed.

On 24 January 2008, ELS’ lawyers wrote to the Bonython landlord’s lawyers advising that they were collecting material necessary to respond to their queries and requesting that the Bonython landlord reconsider the terms of its banker’s Deed of Right of Entry. This was required, in part, because the banker was taking security over the lease and required the rights in the Deed to ensure protection for its security.

On 25 January 2008, ELS’ lawyers wrote to the Bonython landlord’s lawyers confirming that, in lieu of the provision of personal guarantees, ELS would provide a bank guarantee in the amount of $35,700.77 being three month’s rent plus GST and three month’s outgoings plus GST.

They also advised that, in view of the refusal to sign the Deed of Right of Entry, they were attempting to make alternative arrangements. They also provided the other information sought.

They confirmed the agreement to the extension of the term of the Bonython lease and consented to the other variations.

On 29 January 2008, ELS’ lawyers again wrote to the Bonython landlord’s lawyers asking for a further reconsideration of the refusal to enter into the Deed of Right of Entry, inviting them to suggest amendments if appropriate since the banker was adamant that a mortgage could not be granted without the Deed being signed by the Bonython landlord.

On 7 February 2008, officers of ELS spoke to Ms O’Donnell, and requested she speak with the Bonython landlord’s lawyers to find out what their requirements were to have the Deed of Right of Entry signed unamended. One option that was considered was that Ms O’Donnell would leave her three month bank guarantee in place and that ELS would provide a twenty-one month bank guarantee to be relevantly similar to the arrangements for the Symonston Contract.

On 8 February 2008, the lawyers for the Bonython landlord sent a draft of the Deed of Assignment and Memorandum of Variation. That provided that, in consideration of the Bonython landlord executing the Deed of Right of Entry, ELS would provide a bank guarantee in the amount equivalent to twelve month’s rent plus GST and twelve month’s outgoings plus GST from time to time, initially $143,111.00 in favour of the landlord in addition to the existing bank guarantee for three months rental.

On 12 February 2008, the Bonython landlord told ELS’ lawyers that it would not agree to vary the requirement for effectively a fifteen month bank guarantee and that this was their final position.

Indeed, on 26 February 2008, the Bonython landlord’s lawyers forwarded to ELS’ lawyers a further draft Assignment for execution, in which the terms remained the same as those forwarded in the documentation sent on 8 February 2008.

On 26 February 2008, ELS’ lawyers emailed the lawyers for the Bonython landlord as follows:

Please confirm by return that the following bank guarantee details are correct:-
3 month bank guarantee $35,777.70
12 month bank guarantee $143,111.00
To:[Mr] Pfeiffer and [Mrs] Pfeiffer
...

Further to my conversation with [the Bonython landlord’s lawyers] this morning, I note that your client will require receipt of the bank guarantees before it will provide its signed consent. Our client’s banker is unable to provide the bank guarantees before settlement. Therefore, can we suggest that you arrange for an agent to attend settlement on your client’s behalf to collect the bank guarantees in exchange for assignment/consent documentation.

The Bonython landlord’s lawyers emailed back later that day that the figures and details were correct.

Consideration by ELS Directors

Board Meeting of 31 January 2008(a)

The board of directors of ELS met on 31 January 2008 and the issue of the bank guarantees required by the Symonston landlord and the Bonython landlord was discussed. In relation to the discussion at the meeting of the report of Mr Hutchison, the following is recorded:

GK [Greg Kern] highlighted the issues we are having in finance and the centres we manage for external owners.
GR [Grant Rumball] updated the board on the status of the 4 Canberra centres being acquired from Fiona O’Donnell. It was highlighted that the two centres being leased from other than the vendor the landlords are imposing large bank guarantees in order to complete the NAB’s deed of right of entry.
JH [John Hutchison] updated the meeting on the progress of the Riverina acquisition and the delays being encountered due to the delay in obtaining copies of the plans.
TH [Tony Hartnell] asked do we have sufficient funds to settle on all 44 centres, is it all in the budget and our approved facilities?
GK responded that the approved facility is based on the prospectus which had all the centres in it.
GR highlighted that under the existing facility the funding is getting tight and that we have very little equity left in the acquisition. All acquisitions now are currently 100% debt funded.

In addition, one of the non-executive directors, Mr Tony Hartnell, gave evidence about the discussions. His recollection was as follows:

I believe John Hutchison informed the meeting that the landlords of either all the Canberra centres or some of the Canberra centres proposed to be acquired had imposed conditions that were - were outside of the conditions we expected. And we had a long discussion about those conditions.
Was it discussed - - - ? --- When I said long, I should say for me at board - a discussion of 5 minutes is long, so I’d be surprised if it was - it might have been between 5 and 10 minutes.
Was it identified what the conditions the landlords were imposing were about? --- It certainly was identified with great precision I think by John Hutchison, but for me to recollect that precision is asking too much of my creaking memory. But my general memory is there was something about three months’ payment in advance, there was something about a very sizeable - I remember being shocked by the amount of the bank guarantee required. Those are the highlights of my memory about the terms that we were informed of.
Right, and did the directors discuss those terms? --- We did discuss it as I said for a long time, something like five minutes, and - and I think every - my memory is that every director who spoke said those conditions were unacceptable and we relayed that - didn’t have to relay it, John Hutchison was in the room, but we expected John - and John Hutchison was of the group that said they were unacceptable.
Was it said as to why they were unacceptable? --- Well, first of all they were financial demands that we didn’t have the financial resources to - to meet. ... There was discussion, considerable discussion, about our financial ability to provide for the guarantee. There was discussion about the extent of the financial facility we had with the National Australia Bank, and there was discussion about whether or not we even wanted to approach the National Australia Bank, and I certainly expressed the view, and I believe others did as well, that we shouldn’t approach the National Australia Bank because the conditions weren’t acceptable.
Thank you. Was there any resolution made about these acquisitions, these contracts? --- I - I don’t remember a resolution, a direction, or - I don’t - I just remember this basically in the context of discussing issues arising in the CEO’s report. I don’t remember a resolution

In cross-examination, it was put to Mr Hartnell that board members had said that they would never agree to the bank guarantees under any circumstances. He agreed that he said that they would not have the financial ability to provide for such guarantees but was not certain that he said that they would not agree “under any circumstances”; he added “I could theoretically think of circumstances where we would agree to them”. He did agree, however, that it would be completely inconsistent that the Chief Executive Officer would authorise acceptance of those conditions shortly after the meeting. He rejected a suggestion that he was mistaken about his recollection of the firmness with which he thought the views were expressed about the bank guarantees but affirmed that he remembered the strength with which the views were put to the meeting. He agreed, however, that it was left to the discretion of the Chief Executive Officer how he was to manage the issue and “honour the board in some way”.

He said that his concern about the costs was that the quantum of the arrangement with ELS’ banker would not support such bank guarantees.

He further said that, at the meeting, the detail was not discussed but management broadly advised the position. He agreed, also, that if the Deed of Right of Entry required by the banker was acceptable to the two landlords, then may be that would have satisfied the requirements, but there was also the issue of the bank guarantees and, as he put it, “all issues had to be satisfied”. He also said in cross-examination that he did not believe that specific amounts were mentioned but could not categorically say that they were not.

He did say that what was put forward by the two landlords struck him as “being absurd”, with a suggestion that those making the demands thought they “had us over a barrel”. He agreed, however, that the Chief Executive Officer was not being instructed that under no circumstances was he to accept those terms; the Chief Executive Officer had to live within what had been put forward in the prospectus.

Mr Greg Kern, also a non-executive director, gave evidence also about the discussions. His evidence was as follows:

Can you give us your best recollection of the discussion of that meeting regarding the acquisition of these centres in Canberra? --- Okay, the best recollection is that management advised the directors that the vendor of the centre, of the centres, was not meeting the obligations in regard to organising the provision of rights of entry that were required by Early Learning Services’ bankers. Also there was an issue of substantial and onerous bank guarantees being required. The management were concerned in regard to those issues and were bringing to the attention of the board ...
But what was said? --- What was said to the board was that the rights of entry and there were - the rights of entry required by our financiers was not acceptable to the landlords of the centres. And secondly, substantial bank guarantees were required. The board instruction or board’s decision, as I recall, was that that was unacceptable and that management should continue to liaise with the lawyers and keep the board informed but effectively what was put forward by the vendor was unacceptable.
MR O’DONNELL: You said that was the board decision, was there discussion amongst the board members in this issue? --- There was a limited discussion.
Could you give us your best recollection of that discussion, please? --- Well the board discussion was simply that the terms were unacceptable and therefore in light of that that we should consider our position.

In cross-examination, Mr Kern agreed that the minutes do not record either a firm view or a board instruction or anything to that effect, but he did not agree that he was mistaken in his recollection, despite the view he orally expressed not being recorded in the minutes.

I am satisfied that the directors at the meeting of 31 January 2008 were of the view that the bank guarantees required by both the Symonston landlord and the Bonython landlord were excessive and not in the interests of ELS. The board of directors is, as Owen J pointed out in Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) and (No 10) (2001) 39 WAR 1 at 548; [4457], one of the constitutional organs of a corporation and, as such, the primary organ of control of the corporation, hence the knowledge and opinion of the directors is the knowledge of the corporation: J C Houghton & Co v Nothard, Lowe and Wills Ltd [1928] AC 1 at 18-9.

Board Meeting of 27 February 2008(b)

The next meeting of the board was on 27 February 2008.

Prior to that meeting, the large publicly listed child care company, ABC Learning Centres Limited, suffered a substantial market reversal which clearly was likely to affect the sector. Its share price had “crashed on fears about the company’s debt” and its shares had been suspended from trading.

Mr Hutchison emailed to Mr Kern commenting on the consequence of that situation. His email raised eight points as follows:

1.Do we stop acquisitions and let the dust settle, build what we have?
2.Keep the cash in the bank, it may be seen as a responsible market announcement that we are being cautious?
3.I think centre pricing will drop.
4.People/developers will be left holding stock.
5.Terminate or re negotiate the 4 ACT (Fiona McDonald centres) Are they now worth $8m?
6.Kalgoolie and Griffith are 2 centres to settle in April, still experiencing licensing issues.
7.I have terminated the 2 Hedley Silkwood buildings for 2009.
8.All of the deals that you are reviewing have now got issues with their price expectations.

The board meeting on 27 February 2008 discussed the implications for ELS of the situation with ABC Learning Centres Limited and the issues identified by Mr Hutchison. It is not clear whether Mr Hutchison’s email was tabled at the board meeting or not. It appears it probably was not but at least Mr Kern brought up the eight points and they were openly discussed.

That discussion included the question of whether to terminate or re-negotiate the contracts to purchase the four ACT child care centres.

Mr Hutchison described the discussion at the meeting as follows:

There was discussion around the bank guarantees again and that they would cost the company an excess amount of money which we hadn’t thought was going to be needed and that that was a concern and then also having to use the – overdraft facility, sorry, use the overdraft facility. So we had concerns with the company at that point that some of the settlements had not taken place when they were meant to, we were behind where we were meant to be, and that extra cost to the company had become an issue.
So you said that you had concerns about the overdraft facility, you were behind where you wanted to be, and what else? --- The bank guarantees, we still had to have the facility changed, even with Fiona O’Donnell putting up that she would be the bank guarantor, we still had to have that money in place behind that.
So you were aware that she was by that stage prepared to be a guarantor, is that right? --- Well I believe at one stage she said that she’d put them, Fiona O’Donnell said that she’d put them up, but then in the middle of February I think when it was realised that they would be in place for 10 years that she was not so keen to go forward with that ...
There was the concern to the company of the cost of using the overdraft, the extra interest, the bank guarantees of having to have that in place, that would have been where we were at that point in time. And it just still, it was clear from the board’s direction at that point, from my memory, that we weren’t comfortable going forward, that those bank guarantees were not acceptable in that market.

In cross-examination, Mr Hutchison was asked about discussions of alternative means of meeting the bank guarantees required of ELS by the Symonston landlord and the Bonython landlord, such as by using the banked cash that ELS had, to make up the shortfall. Mr Hutchison did not remember any such discussions and denied that there was a policy decision not to use the overdraft facility on that occasion or at any time in the near future. He did not recall any suggestion to that effect, though he appreciated that there were still ongoing negotiations with ELS’ bank and that answers to those negotiations might assist in effecting settlement of the contracts through the use of the bill facility.

His view was that the overdraft was too expensive for ELS to use for this purpose and that ELS’ position was that it was not comfortable with the conditions required by the two landlords. He explained that, by “expensive”, he was referring to the extra interest that would have to be paid by using the overdraft.

He agreed that the resolution of the board was to terminate the contracts for purchase of all four centres if possible, even though two did not have problems of landlord-imposed conditions. He explained that, as a result, ELS ultimately settled those latter two contracts. He denied that the reasons for not settling the Symonston Contract and the Bonython Contract were unconnected with the demands of the respective landlords. He agreed that no one said at the meeting “how can we possibly proceed and try and settle these centres?”. He agreed that no-one said “what reasonable actions can we take to attempt to proceed with some of these centres?”. He agreed that he did not re-visit the matter with the banker after the meeting.

Accordingly, unless Stepping Stones was in a position to comply with all the condition precedent on 4 April 2008, ELS had a further right to terminate each of the Contracts.

The issues then that need to be addressed is whether on the events that occurred as already outlined, Stepping Stones could show that all the Conditions Precedent had been satisfied. The Conditions Precedent at issue were whether there had been:

(a) provision of a written consent of the Symonston landlord to the transfer of the lease;

(b) provision of a written consent of the mortgagee of the Symonston landlord;

(c) provision of a signed Deed of Right of Entry by the Symonston landlord

(d) entry into employment contracts of 75% of employees in the Symonston centre;

(e) provision of a written consent of the Bonython landlord;

(f) provision of a written consent of the mortgagee of the Bonython landlord;

(g) provision of a signed Deed of Right of Entry by the Bonython landlord;

(h) entry into employment contracts of 75% of employees in the Bonython centre;

and whether:

(i) the conditions imposed by the landlords remained unacceptable to ELS.

I shall consider each of these below in turn.

Consent of the Symonston landlord(a)

This requirement was set out in cls 2.1(e) and (g) and cl 9.1(d), (e), (f) and (g).

These required:

(1) the Symonston landlord to consent in writing to the transfer of the lease;

(2) that the conditions of such a transfer be acceptable to ELS; and

(3) the Symonston landlord’s execution of the Deed of Right of Entry to be sent to ELS to be held as an escrow until completion.

Stepping Stones traced the communications between the various parties and submitted that consent had been given to the transfer of the lease. In oral evidence, Mr Barton from the Symonston landlord said he had given his consent to the transfer of the lease.

There was, however, no document in those terms. The correspondence showed the basis on which consent would be given. That, of course, is not enough. It showed that consent would be available, necessary for an order for specific performance, but not the fulfilment of the Conditions Precedent. This is a critical difference in the consideration of this issue.

In Secure Parking (WA) Pty Ltd v Wilson [2005] WASC 264 at [75], La Miere J made clear the distinction between consent to the assignment of a lease and, alternatively, an agreement to consent in the future to such an assignment on conditions. Although an appeal from his Honour’s decision was upheld, it was expressly held that this part of his Honour’s decision was not challenged: Secure Parking (WA) Pty Ltd v Wilson (2008) 38 WAR 350 at 372; [81].

Both the Symonston Contract and the Bonython Contract contemplated that the consent to assignment of the respective leases would be effected by formal deeds of covenant and the lawyers for both landlords had prepared such deeds which it was expected would be executed and delivered as the operative consent. The documents themselves made this plain. Indeed, the consents had to be signed in conjunction with other deeds which varied the terms of the leases to give effect to the relevant arrangements.

To suggest that the provision of unsigned deeds is the consent in writing of the landlord is inconsistent with the communications between the lawyers for the Symonston landlord and the lawyers for ELS in which the former submitted unsigned documents for execution by ELS without in any way suggesting that these are the consent of the Symonston landlord already given.

The contemplated consent in writing of the Symonston landlord to the transfer of the lease of the premises was not obtained by Stepping Stones prior to the Sunset Date.

Consent of the mortgagee of the Symonston landlord(b)

It was accepted by both parties that the National Australia Bank Ltd was the mortgagee of the Symonston premises. Stepping Stones accepted that there was no consent given by the bank to the transfer of the lease of the premises.

There was evidence that the bank would likely have consented to the transfer but that is not a fulfilment of that relevant Condition Precedent. It was, however, by no means certain that the consent would be given and the bank officer who gave evidence did not have the final say on whether consent would be given.

It was submitted that ELS had breached its obligations to use reasonable endeavours to have the conditions precedent satisfied because it had not requested consent.

In fact, on 25 February 2008, the lawyers for ELS wrote to the Symonston landlords’ lawyers seeking that they obtain the Bank’s consent. As Stepping Stones submitted, “[t]he person who would ask for that consent is the Bank’s customer Mr Barton of [the Symonston landlord]”. Thus, it was entirely appropriate for ELS to write to that corporation’s lawyers, as it did.

Perhaps more significantly, it was the duty of Stepping Stones under the Symonston contract to secure the consent of the mortgagee of the premises and at its cost. ELS discharged its obligation.

While this consent was not a condition under cl 2, it was a condition to the contract under cl 9.1(e) and failure to provide those consents by the Sunset Date entitled ELS to terminate the contract.

There was no consent in writing of the mortgagee of the Symonston premises to a transfer of those premises by the Sunset Date.

Deed of Right of Entry for the Symonston centre(c)

Clause 2.1(g) required that the Symonston landlord sign a Deed of Right of Entry and provide it to ELS prior to Completion to be held as an escrow.

There was no signed Deed of Right of Entry provided to ELS by the landlord of the Symonston premises.

Stepping Stones submits that there is “no additional question” about such a Deed because “the Symonston landlord’s consent to assignment which was bargained for by ELS before 29 February 2008 ... was on the basis that if ELS (or Stepping Stones) provided the bank guarantees ... the landlord would agree to enter into a Deed of Right of Entry”.

That was, of course, relevant to the claim for specific performance, but that claim is only maintainable if the Symonston Contract remains on foot. That requires a consideration of the terminations of the Symonston Contract. So far as the termination on 9 April 2008 is concerned, ELS was, under cl 2.2(c), entitled to terminate if, in particular, cl 2.1(g) had not been satisfied. This required the provision of the signed Deed of Right of Entry to ELS before completion. The evidence was that no such document had been duly signed much less provided to ELS. There was no compliance with this Condition Precedent.

Employment Contracts for the Symonston centre(d)

The agreements which were distributed to staff members at the child care centres to be purchased provided a mechanism for the transfer of employment to ELS of the staff members of each centre at the time of sale. This is, of course, an important issue because a child care centre is unlikely reasonably and commercially to be sold as a going concern without such a transfer. To have a seamless transition with the same staff, known to the children, is an obvious advantage to the success of the transfer.

The process was set out in cl 8.2 of each of the Symonston Contract and the Bonython Contract. That clause made it clear that ELS would invite employees to apply for employment with ELS. The documents by which this invitation was to be accepted were, however, actually employment contracts. They were handed out to staff on 17 January 2008 after they had been provided by staff of ELS to the director of each centre. There was then an induction evening for the staff of all centres who were given instructions about filling in the documents and ensuring their accuracy.

A total of twenty-one staff members of the Symonston centre were invited to apply by signing the agreements that had been distributed to them. Of those invited, seventeen signed the agreements. That would satisfy cl 2.1(k) if that amounted to those staff members who signed actually “entering into employment contracts” with ELS. The signed agreements were not returned to ELS’ offices, nor signed by an employee of ELS.

As I have noted above, the Symonston centre director said that she had been told that she should sign the agreements on behalf of ELS each to be held as an escrow pending completion and retain them at the centre. This was denied by ELS.

There was also no evidence that, at the induction evening, the staff members were told that they had to return the agreements within ten business days as required under cl 8.2(b). If that was not told to the staff members, then there has not been strict compliance with cl 8.2(b). It was submitted that this relieved Stepping Stones of compliance with cl 8.2(c). I am not sure that this follows, but it may not make any difference in the case of the employees at the Symonston centre. Clause 8.2(b) merely requires that each staff member return the acceptances within the specified time, it does not render them nugatory if returned after that time.

The duty is, of course, imposed on Stepping Stones and the director is an employee of Stepping Stones. Nevertheless, the return of the agreements to ELS was not specified as part of the condition precedent in cl 2.1(k); the entry into contracts with ELS was.

Evidence was given about this issue by one of ELS’ lawyers. The evidence was:

But if this matter had proceeded to settlement rather than being terminated the following day, given the information that was forwarded to you [by email about the returned employment agreements], presumably what would have happened is that in the settlement process you would have made inquiries of the solicitors for the vendor as to whether or not the employment agreements were available and could be sent so they could be checked off prior to settlement? --- That would have been one avenue. The other would have been to contact ELS and to obtain those directly from the vendor. Like I said, employment agreements was an issue dealt with between the vendor and our client directly.
...
So look, I just – that’s certainly one avenue, but I would have gone back to ELS and said look, contact the vendor and – and find out where these employment agreements are. As I’ve said in the past on previous acquisitions, there’s been a case where the vendor has held on to the employment agreements, to be handed over at settlement or there have been other arrangements, so at this point in time also I recall in previous conversations with [Stepping Stones’ lawyers] that issues such as these were to be left for the vendor and our client to – to deal with, but – yes.
So it’s your understanding of some of the settlements and some of the other child care centres that it was a not uncommon practice to deal with in effect the numbers of employment agreements, that in effect ELS said to the vendors, leave the signed agreements at the centre and we’ll pick them up - - - ? --- No - - - .

An objection was then made to this question and, after argument, some further evidence was given as follows:

Now one of the things you needed to do was a matter of practice when arranging settlement was seeing whether or not that condition precedent [namely cl 2.1(k)] had been satisfied? --- That’s right.
And how did you normally go about doing that? --- Just an email to the client, basically setting out any outstanding matters or matters that needed to be attended to. I also sent out like a draft of my settlement - of my checklist, which was basically - which was basically just saying what needs to be done. So yes, it would have included the question, you know, have you received the - I wouldn’t have said 75 percent of employee contracts, I would have said have you received the employment contracts back - - -
Yes? --- from – from the seller - - - .
And - - - ? --- or from the employees.
And may we take it, it wasn’t your practice to require them to be handed over on settlement, if I can put it that way, but - - - ? --- Not to me directly.
No? --- There were - - -
Or to your agent settling for you? --- No. The usual practice, there was quite a lot of material to be passed - - -
Yes? --- from the vendor to the buyer. And a lot of that was just left at the centre. At the time ELS of settlement, there would have been representatives of ELS, leading up to settlement and on settlement, that was at the centre so that would have been business records, obviously, and books of account.
Basically what you did was to make sure that ELS was satisfied that condition precedent had been satisfied before settlement? --- They would need to be satisfied by that, yes.

While this is by no means exact, it does support the argument of Stepping Stones that the practice in relation to the agreements was not invariable and that there may have been some flexibility exercised from time to time, though one would expect that variations would perhaps be remembered.

I have set out the circumstances surrounding the agreements under cl 8 earlier (at [230]-[264]). I take all of that into account.

Having carefully considered all the evidence, however, I am not prepared to reject the evidence of the Centre Director that she was told to sign the agreements when returned by staff members. She actually did sign the agreements, all seventeen of them, and there was nothing in her evidence or demeanour that suggested that this was some frolic of her own or a plan by Stepping Stones. To my mind, it is actually reinforced by the fact that this did not happen at the Bonython Centre, where the Centre Director was not told to do so.

There was, also, no evidence to suggest other than that the agreements would be accepted as a matter of course. Indeed, the evidence of Ms Battersby above (at [258]) was that giving of the contracts was an “offer” by ELS accepted by the signature of the staff member. There was no evidence to suggest that there was any deliberative process to be carried out by ELS after receiving the signed agreements in which a determination was made as to which staff members were accepted as employees and whether any were not; indeed, such evidence as there was suggested to the contrary.

I am satisfied that the Symonston Centre Director was authorised on behalf of ELS to receive and sign the employment contracts and that, as a result, the Condition Precedent contained in cl 2.1(k) was met by the Sunset Date.

Consent of the Bonython landlord(e)

Many of the same issues arose in respect of the Bonython Contract as in the case of the Symonston contract.

So far as the consent of the Bonython landlord is concerned, the evidence is somewhat clearer.

On 8 February 2008, the lawyers for the Bonython landlord made the position clear in a letter to ELS’ lawyers, stating:

Please note that before my client will execute the documents [namely the Deed of Assignment and the Memorandum of Variation of Lease] we require Certificate of Currency for insurance and a Bank Guarantee in the amount of $35,700.77.

On 26 February 2008, ELS’ lawyers sent an email to the Bonython landlord’s lawyer confirming an earlier conversation as follows:

Further to my conversation with Lorraine this morning, I note that your client will require receipt of the bank guarantees before it will provide its signed consent.

Later that day, the Bonython landlord’s lawyers confirmed the position as follows:

Please note that it is a condition of assignment that these Bank Guarantees are available for our client before execution of the Deed and Memorandum of Variation.

This was later confirmed in the oral evidence of Mr Pfeiffer, one of the Bonython landlords as follows:

You say there you had consented to the deed of assignment and the variation of lease, you didn’t in fact sign it, did you? --- No.
You never signed it. We lawyers distinguish between an actual consent and being prepared to consent, do you understand the distinction? --- Yes.
In your previous paragraphs of your affidavit you said you were prepared to consent to the assignment if you received the 12 month rental guarantee from the new lease? --- Yes.
Is that what you’re meaning to convey in paragraph 29, that you were prepared to consent by signing those documents if you received the rental guarantee for 12 months on the new lease? --- Correct, yes.

While Stepping Stones relied on the various correspondence to submit that there was a written consent, this evidence shows clearly that this was not correct; the Bonython landlord would only sign the consent after receiving the relevant bank guarantees and these were never produced.

I am satisfied that, as at the Sunset Date, there was no written consent of the Bonython landlord to the transfer of the lease of the premises.

Consent of the mortgagee of the Bonython landlord(f)

Again, there was no contest but that the Australian and New Zealand Banking Group Ltd was the mortgagee and that it had not consented in writing to the transfer of the lease, at least in a formal sense.

In this case, the lawyers for the Bonython landlord wrote to the bank on 25 February 2008 and informed ELS’ lawyers the next day. There was nothing more for ELS to do in discharge of its contractual obligation to use reasonable endeavours to have that Conditions Precedent satisfied.

Stepping Stones, however, relied on the fact that oral evidence from an officer of the bank was that the bank did decide, after proceeding with its usual procedures, including consideration of the matter by the bank’s legal department, that it would consent to the transfer of the lease. An email was sent to the landlord’s lawyers as follows:

I have discussed this matter with ANZ’s legal department (they have reviewed your letter). They have stated that as the lease is being varied we must prepare, and have signed, a consent to lease prior to the title being produced and ANZ consenting to the variation and assignment of the lease.
I have requested a consent to lease be prepared however this is generally a lengthy process and will definitely not be ready to settle by Friday. I will let you know when the consent to lease is ready as the Pfeiffer’s as well as the incoming tenet [sic] must sign and return.

A form of consent was then sent by email to the Bonython landlord’s lawyers. It was clearly one prepared for another property as the names of the lessor and lessee, the description of the property and the number of the mortgage and title details had been “blacked out”.

It was accepted by Stepping Stones that the bank did not take any steps to make that document appropriate to these circumstances and to sign it.

While the evidence of the bank officer was that “if the consent was prepared along these lines, the bank would sign it”, she said that the document did not come back to the bank and the bank did not sign it.

She also said that the process for obtaining formal written consent is generally a “lengthy” one and that both ELS and the Bonython landlord would have to sign the consent before the Bank did so. There is no evidence that the Bonython landlord’s lawyers sought execution of the consent by ELS or that ELS was ever advised that this was necessary.

I am satisfied that there was no written consent from the mortgagee of the Bonython landlord to the transfer of the lease from Stepping Stones to ELS.

Deed of Right of Entry for the Bonython centre(g)

As acknowledged by Stepping Stones, no executed Deed of Right of Entry had been provided by the Bonython landlord to ELS by the Sunset Date.

That it would most likely to have been signed if settlement had proceeded cannot repair that omission.

(h) Employment Contracts for the Bonython centre

There were, relevantly, nineteen employees at the Bonython Centre and so the Condition Precedent required at least fifteen to enter into employment contracts with ELS.

Again, ELS relied on “usual practice” to show what the director at the Bonython Centre had been told.

While seventeen agreements were distributed, only eight signed contracts are in evidence. None have been signed for and on behalf of ELS as were those returned to the Symonston Centre. Five more staff members gave evidence that they signed such agreements, though apparently they cannot be found.

One staff member gave evidence that he could not recall signing an agreement but he “thinks” he would have done so. In respect of two other staff members, there were errors in the agreements and they had to be amended. One of those two said that she would have signed a corrected agreement.

On 29 January 2008, the Bonython Centre Director sought from ELS an agreement for a new staff member. She received one and gave it to the person, but there is no evidence that it was signed. No evidence was given by the staff member that she would have signed it.

The Centre Director gave evidence that she could not recall the staff of ELS telling her that the signed agreements should be returned to ELS. Indeed, her evidence was that she was told to keep them at the Centre as staff from ELS would “come down to help us during takeover”. She repeated that she was told “[d]o not do anything with them”.

Stepping Stones submits that cl 2.1(k) was satisfied because there were no invitations made under cl 8.2. This is based on complaints about non-compliance with the requirements of cl 8.2. Those were:

i. a temporal requirement. Cl 8.2 requires that the invitation be issued “a reasonable time after the satisfactory completion of ELS’ due diligence enquiries”. Those inquiries were not completed until 29 January 2008 but the invitations were made on 17 January 2008, before that time.

It seems to me, however, that an earlier submission of Stepping Stones, perhaps somewhat ironically, answers the challenge to this requirement. In its submissions, Stepping Stones said:

Proper attention should be given to the words ‘on the terms of the invitation’ in clause 2.1(k). They are important. These words describe the content of the employment contracts that must be entered into by 75% of employees in order to satisfy clause 2.1(k). The words ‘under clause 8.2’ merely qualify the invitation so as to identify the particular invitation to which clause 2.1(k) refers, in order to distinguish it from other possible invitations. However the words ‘under clause 8.2’ do not import mandatory compliance with the whole of clause 8.2 as a precondition to the application of clause 2.1(k). All they mean is that the invitation must at least purport to be issued in conformity with clause 8.2 but ‘the invitation can be made by ELS under clause 8.2’ (emphasis added), even if there is not perfect conformity with clause 8.2

I accept that argument.

It is clear that the point of the temporal requirement, having regard to the other times specified in the Bonython Contract, was to ensure that employees have sufficient time to consider the invitations made to them before completion. That the invitations were issued earlier is, in my view, quite irrelevant to the validity of the invitations.

ii. a content requirement. Clause 8.2 sets out conditions on the invitations to apply for employment in paragraphs (a) and (b). The first is that the invitations are conditional on Stepping Stones terminating the employment of the staff members with effect from the date of completion. The second is that the invitation must require the staff member to accept within ten days from the date of invitation and that, if accepted, Stepping Stones must immediately notify ELS.

Stepping Stones submits that there was no satisfactory evidence to establish that these conditions had been met in respect of the invitations that had actually been issued.

Again, strict compliance with cl 8.2 does not render the invitations that were made invalid. It is not in dispute that, at the induction evening, the staff were told to return the signed agreements to the Centre Director and most did.

To permit the staff a longer time within which to respond cannot be inimical to the validity of the invitation. There seems to me to be no question of what prejudice any of Stepping Stones, ELS or the staff members would suffer in these circumstances. Accordingly, while there was no evidence of strict compliance with cl 8.2(b), I do not regard that as relevant to the validity of the invitation.

As to the condition that the employment with Stepping Stones of each staff member was to be terminated, it seems to me that this is not required to be express in the document or stated at the induction evening as long as it is an integral part of the process.

On 4 January 2008, Ms O’Donnell circulated a letter to all staff about the purchase of the centres by ELS. That letter made it clear that the staff would cease to be employees of Stepping Stones and would become employees of ELS at completion, described as “cessation of business”. It seems to me that this met the requirements of cl 8.2(a).

I reject the submission by Stepping Stones that cl 2.1(k) was satisfied because there were no invitations issued under cl 8.2.

I do not consider that the receipt by the Centre Director of the agreements amounted to receipt by ELS of the agreements in this case. It was not suggested in any of the evidence, unlike the position with the Symonston Centre, that this was advised by ELS. The evidence was, if accepted, that they should be kept at the Centre.

There is, however, an issue as to whether the correct legal position, in respect of the distribution of the agreements, is that they were an invitation to treat (cf, Carlill v Carbolic Smokeball Co [1893] 1 QB 256) or rather an offer; my inclination in the circumstances being the latter on the evidence, especially that of Ms Battersby. Thus, if they are an offer, then the signature on the agreement by the named staff members amounts to an acceptance and, once communicated, constitutes a contract.

Nevertheless, the offer (if the request to sign the agreement is an invitation to treat) or the acceptance of the offer, either of which were constituted by the staff member signing the document, both require communication to ELS before a concluded contract can occur. In this case, there was no such communication and so no concluded contracts.

In my view, Stepping Stones cannot show in relation to the Bonython centre that Condition Precedent 2.1(k) was satisfied by the Sunset Date.

(i) The conditions of transfer by the Symonston landlord remained unacceptable

ELS submitted that, even if the Symonston landlord had consented in writing to the transfer of the lease of those premises, the revised conditions remained unacceptable to ELS. This was because the drafting of the Deed of Assignment of Lease and the Variation of the Lease sent to ELS on 4 April 2008 meant that, although Ms O’Donnell would be required to provide a bank guarantee for the amount of twenty-one month’s rent, it was still provided that if Ms O’Donnell’s guarantee was called upon by virtue of a breach of the lease, then ELS would have to provide a replacement bank guarantee for the twenty-one month’s rent within seven days. ELS was also required to provide a cash bond of three months' rent. It also required ELS to provide an additional bank guarantee if that bank guarantee was called upon to ensure at all times the amount secured was twenty-one months' rent. The documents also provided, in respect of the cash bond, that if it was called upon, then ELS was required within fourteen days to restore the full amount of the bond. It further provided that the terms relating to the bank guarantee were essential terms of the Deed.

Mr Hutchison, Mr Rumball and Mr Sacre each gave affidavit evidence that these terms were unacceptable because of the obligation to provide a replacement guarantee if the bank guarantee provided by Ms O’Donnell was called upon. This was onerous because it would require ELS to provide a bank guarantee of $280,000 within seven days.

It also required ELS to keep the guarantee at that level at all times which would have reduced the funds otherwise available to ELS.

The replacement guarantee was required if the Symonston landlord called upon the bank guarantee provided by Ms O’Donnell. That could be for any breach of the law including an unwitting one or, indeed, even where there was a dispute about whether there was a breach in the first place; the requirement for the replacement guarantee being triggered by the calling on of the bank guarantee provided by Ms O’Donnell, not by the resolution of any such dispute.

The term was uncommercial. Mr Barton of the landlord agreed with that as I have earlier noted (at [109] above).

Further, as that requirement was an essential term of the lease, the failure to provide a replacement guarantee on time would result in forfeiture of the lease.

Stepping Stones submitted that the likelihood of the replacement guarantee to be provided by ELS was “theoretical” and “so remote as to be almost fanciful”. In a sense that may make the requirement even more unacceptable. A public company would then be required to act with prudence and make appropriate provision for the possibility of the bank guarantee being required on seven day’s notice, but for a risk that was unlikely. This, in itself, makes the requirement unacceptable as a matter of logic.

Stepping Stones also submitted that the lease for one of the centres that ELS did purchase from Stepping Stones, namely that at Gungahlin, had a similar clause, yet ELS completed that purchase. The difference, however, was that the bank guarantee in that case was for only three months. That in those circumstances ELS did not terminate that contract but proceeded to complete, even though its board wanted to terminate all four purchase contracts, re-inforces that ELS made a genuine appraisal of its interests and honestly considered that the obligations required of the Symonston landlord were unacceptable.

Reasonable endeavours prior to 4 April 2008

Stepping Stones contended that, if condition 2.1(d) was not satisfied, it was because after 29 February 2008, ELS failed to comply with its contractual duty to use its reasonable endeavours to achieve compliance with the Conditions Precedent and also failed in its duty to co-operate, an implied term said to form part of the contracts.

To consider this, it is, of course, necessary to assume that the contracts were not validly terminated on 29 February 2008.

It was submitted that there was also a duty to co-operate implied in the contracts by law. Thus, Stepping Stones referred to what the High Court said in Kennedy v Vercoe at 526:

No doubt it was the obligation of the vendor, the plaintiff, to obtain the acceptance of the defendant as a tenant, although an implied obligation lay on the purchaser, the defendant, to do on his [or her] part whatever might reasonably be required of him [or her] to enable the vendor to obtain the landlord’s consent.

In that case, the contract was for the sale of a business including the transfer of the lease of the premises which the business occupied. The contract contained a term that the purchaser be accepted by the landlord as a tenant.

This duty was said in Butt v McDonald (1896) 2 QLJ 68 at 70-1 to be implied in every contract. The obligation was recognised by the House of Lords in Mackay v Dick (1881) 6 App Cas 251, where Lord Blackburn said (at 263):

[A]s a general rule, ... where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his [or her] part for the carrying out of that thing, though there may be no express words to that effect.

There are, however, limits to the obligation. It only appears to be relevant to what cannot be done without the concurrence or co-operation of both parties. As McMurdo J, with whom Jerrard JA agreed, said in Jackson Nominees Pty Ltd v Hanson Building Products Pty Ltd [2006] QCA 126 at [51]-[52]:

51.In the same way, the duty to do what is necessary to enable the other party to have the benefit of the contract is limited to acts which are necessary to the performance of obligations under the contract. To assess the scope of the duty in a particular case, it is first necessary to define the relevant obligations, and in particular, to define the circumstances in which the parties have agreed that a certain obligation must be performed. It is not a duty upon one party to act so as to enhance the commercial value to the other party of the contract.
52.As appears from the above passage, in Mackay v Dick, the duty of co-operation is one which applies to a certain type of contract, which is where the parties have agreed that something shall be done which cannot be done unless both concur in doing it.

There are other limits. In particular, it is not required that the duty be to preserve the benefit of a party but only the benefit of the contract. As the NSW Court of Appeal put it in Australia Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 at 124-5:

[T]here cannot be a duty to co-operate in bringing about something which the contract does not require to happen. ... A contract may ‘contemplate’ many benefits for the respective parties, but each can only call on the other to provide, or co-operate in the providing of, benefits promised by that party.

The obligation is also limited to what can reasonably be required in the circumstances, as decided by Mason J, with whom the other members of the High Court agreed, in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 615.

Further, the duty will not exist if inconsistent with the express terms of the contract. Thus, in Central Exchange Ltd v Anaconda Nickel Ltd (2002) 26 WAR 33, Steytler J rejected the contention that an implied duty to co-operate required disclosure of certain information and documents, saying at 56; [78]:

[A] requirement of the kind contended for would, in my opinion, be inconsistent with the express provisions of the contract itself. As has been said by Parker J ... the express agreement of the parties to the dispute resolution procedure, which protects the confidentiality of the respondent’s documents and information, tells strongly against the implication of an obligation on the respondent to make available to the appellant the documents and information sought.

It is also worth quoting a passage, to which his Honour referred at 55; [76], by Sir Anthony Mason, writing extra-curially in A F Mason, “Contract, Good Faith and Equitable Standards in Fair Dealing” (2000) 116 Law Quarterly Review 66 at 75:

Once it is accepted that the common law implies an obligation of the kind just discussed [an obligation to do all things necessary to enable the other party to have the benefit of the contract] and that the obligation extends to the situations described, then the Australian (and the Canadian) law of contract comes very close to recognising that aspect of the good faith doctrine to which I have referred as ‘loyalty to the promise itself’. Of course, the implied obligation does not override the express provisions of the contract so every case depends to a significant extent on the intention of the parties as manifested in the particular contract (Secured Income (at 607-608)).
In this context, it may be going too far to say that the implied obligation results in a duty to co-operate to achieve the contractual objects. The implied obligation does no more than spell out what, on the true construction of the contract, is the effect of promises and undertakings entered into by the party. In reaching that construction, it will be relevant to take account of the legitimate or reasonable expectations of the parties when they make the contract.

In this case, the parties set out in a very detailed contract in express terms the obligations of each other. They were represented by legal advisers in doing so and must be taken to have agreed to the expression within the contract of their respective duties. In particular, such an implied term cannot override the express term that the conditions of any consent to transfer of the respective leases be acceptable to ELS.

In my view, if there is an implied obligation to co-operate then it does not add to the express obligation to use reasonable endeavours to achieve the satisfaction (or waiver) of the Conditions Precedent.

In this regard, despite assertions by Stepping Stones, there was no conduct required of ELS which was necessary to achieve compliance with the relevant Conditions Precedent over and above what was actually done.

The real failure is, as ELS contends, that Stepping Stones did not, prior to 4 April 2008 present ELS with revised conditions with which the two landlords were prepared to consent. Thus, the evidence demonstrates that it was not until late on the afternoon of the Sunset Date, namely 4 April 2008, that Stepping Stones had finally made arrangements with the landlords for revised conditions of their consent such that they could be presented to ELS. The position of each landlord was not as portrayed by the lawyers for Stepping Stones on 29 February 2008 at all.

There was simply no time on the Sunset Date for ELS to consider the terms of the various documents properly and that was caused by a failure of Stepping Stones to use its reasonable endeavours – it, after all, had the direct relationship with the landlords – to have the revised conditions agreed and submitted to ELS well before the Sunset Date. Indeed, the evidence suggests that little was done by Stepping Stones for most of March until a high level of activity in the early days of April.

There was no evidence from either of the witnesses called from the landlords that the revised terms of consent were not finalised until 4 April 2008 because of any inaction or lack of co-operation by ELS.

CONCLUSION

ELS was entitled to terminate each of the Symonston Contract and the Bonython Contract on 29 February 2008. Alternatively, ELS was also entitled to terminate these Contracts on 9 April 2008.

The terminations of the Symonston Contract and of the Bonython Contract on 29 February 2008 was valid and effective.

The termination of the Symonston Contract and the Bonython Contract on 9 April 2008 would have been effective had the Contracts not been earlier terminated.

I shall make orders accordingly.
I certify that the preceding five hundred and fifty-five (555) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Refshauge.
Associate:
Date: September 2013

Counsel for the Plaintiff:  Mr M J Slattery QC, Mr M J Walsh
Solicitor for the Plaintiff:  Meyer Vandenberg
Counsel for the Respondent:  Mr B O’Donnell QC, Mr S B Hooper
Solicitor for the Respondent:  Minter Ellison as agents for Herbert Geer

Date of hearing: 21-24, 28-30 April 2009, 1 May 2009

Date of judgment: 9 September 2013

[2013] ACTSC 173

9 September 2013

Key Legal Topics

Areas of Law

Contract Law

Legal Concepts

Contract Formation

Specific Performance