Supabarn Supermarkets Pty Ltd v Cotrell Pty Ltd

[2021] ACTCA 2

SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
COURT OF APPEAL

Case Title:

Supabarn Supermarkets Pty Ltd v Cotrell Pty Ltd

Citation:

[2021] ACTCA 2

Hearing Dates:

10, 11 and 12 February 2021

DecisionDate:

18 February 2021

Before:

Burns, Elkaim and Mossop JJ 

Decision:

See [57]

Catchwords:

APPEALS – CONTRACT – Construction and Interpretation of Commercial Lease – Causation – quantification of loss – significant delay in judgment delivery

Cases Cited:

ASSK Investments Pty Ltd v AMA Group Limited [2020] NSWSC 1756
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 256 CLR 104
Supabarn Supermarkets Pty Ltd v Cotrell Pty Ltd (No 3) [2020] ACTSC 53

Parties:

Supabarn Supermarkets Pty Ltd (Appellant)

Cotrell Pty Ltd (Respondent)

Representation:

Counsel

J Giles SC with S Hartford Davis and N Riordan (Appellant)

P A Walker SC with J Larkings (Respondent)

Solicitors

Corrs Chambers Westgarth (Appellant)

Denton’s Australia Limited (Respondent)

File Number:

ACTCA 16 of 2020

Decision under appeal: 

Court:  ACT Supreme Court

Before:  Penfold J

Date of Decision:          10 March 2020

Case Title:  Supabarn Supermarkets Pty Ltd v Cotrell Pty Ltd (No 3)

Citation: [2020] ACTSC 53

Court File Number:      SC 1030 of 2009

THE COURT:

1. This is an appeal from a decision of Penfold J delivered on 10 March 2020 (Supabarn Supermarkets Pty Ltd v Cotrell Pty Ltd(No 3) [2020] ACTSC 53).

1. The litigation commenced in the Magistrates Court, but was, perhaps unfortunately, transferred to the Supreme Court in 2009. The possible lack of fortune arises from the matter not coming on for final hearing until 16 September 2013 and then occupying 18 hearing days until its conclusion on 15 July 2014, to be followed by a lamentable delay of almost 6 years until the delivery of a judgment in which the appellant succeeded in recovering damages of $20.00.

1. The grounds of appeal are contained in a Further Amended Notice of Appeal filed on 10 June 2020. Although the Notice contains eight grounds, the appellant only pressed grounds 1,2,3,5, 6 (a), (b) and (c) and 8.

1. The respondent filed a Notice of Contention on 31 July 2020. The Notice was not pressed.

1. The appellant said that the appeal focused on two issues: firstly the construction of clause 10.7 in the Lease Agreement (the Lease) between the parties, and secondly, the assessment of damages (both in relation to causation and quantum).

1. The respondent was the owner of a shopping centre in the ACT suburb of Kaleen. It is called Kaleen Plaza. The appellant leased part of those premises from the respondent to conduct the business of a supermarket.

1. The relevant lease between the parties was executed on 7 September 2001. It was for a term of seven years and two months. There was provision for two extensions of the Lease, at the option of the appellant, each of ten years.

1. A previous lease between the parties had been in place from February 1999. It was for a term of ten years, but a new lease was required to accommodate the expanded dimensions of the leased premises.  

1. Clause 10.7 in the Lease states:

The Landlord must conduct, manage and operate the Centre as a high quality retail shopping centre and in an efficient manner at all times.

1. “Centre” is defined in the Lease as:

Centre means:

(a)the Land and any other land which the Landlord uses with the Land for a shopping centre and a carparking area or other undertakings relating to a shopping centre;

(b)all improvements on the Land and the other land; and

(c)all plant, equipment, fittings, fixtures, furniture and furnishings of the Landlord for use in the Centre.

1. The appellant said that the respondent had breached this clause and sought damages approaching $8 million. The damages were essentially calculated on the appellant’s assessment of the profit it would have made had the Centre been operated, in its submission, as a “high quality retail shopping centre”. Because the Centre was not operated in this manner the appellant had not been able to make that profit, this being the foundation for the damages claim.

1. The respondent said that the obligation upon it arising from clause 10.7 was not that contended for by the appellant, and in any event, any losses suffered by the appellant had not been caused by the asserted breach of clause 10.7.

1. The litigation before the trial judge was more extensive than the above summary; for example, breaches were alleged of other clauses, but these are not the subject of the appeal.

1. It is noted that the award of $20.00 in damages arose from a finding of a breach of an obligation to provide cleaning services pursuant to clause 10.6. The damages awarded were in a nominal amount.

1. Her Honour, at [9], summarised the relevant claim as follows:

In summary, Supabarn’s central claim is:

(a)that the disputed clauses in the Lease obliged Cotrell to undertake a substantial refurbishment of Kaleen Plaza and to upgrade its tenancy mix;

(b)that by the end of 2004, Cotrell was in breach of that obligation;

(c)that if such refurbishment had been undertaken, and the tenancy mix had been improved, the Supabarn supermarket would thereafter have been more competitive with the supermarkets in new or improved shopping centres in surrounding areas (including in particular the Jamison shopping centre); and

(d)that the supermarket would accordingly have been significantly more profitable over the following few years than it actually was.

1. The issues before her Honour, so far as remain relevant to the appeal, were:

(a)What is the proper construction of clause 10.7 of the lease?

(b)Had the respondent breached clause 10.7?

(c)If so, did any breach cause loss to the appellant and if so, what was the amount of the loss, and to what damages is the appellant entitled?

1. Her Honour gave a brief statement of her conclusions on the above issues at [12]. In essence, her Honour found that the construction of clause 10.7 urged by the appellant was not available. Her Honour also found that even if the appellant’s construction of clause 10.7 had been available, the appellant had failed to prove that it had suffered any loss by reason of any breach of the clause by the respondent.

1. This appeal is primarily concerned with the first conclusion, that the construction of clause 10.7 advanced by the appellant was not available. The submissions made by the appellant that her Honour had erred in the assessment of damages were contingent upon it succeeding on its construction of clause 10.7.

1. The appellant, in the court below, said that the appropriate construction of clause 10.7 was such that the respondent was obliged “to undertake a substantial refurbishment of Kaleen Plaza and to upgrade its tenancy mix” (Supabarn Supermarkets Pty Ltd v Cotrell Pty Ltd (No 3) [2020] ACTSC 53 at [9]). Clearly, thought the appellant, the shopping centre and its other tenants did not sit comfortably within the phrase “high quality”.

1. In this Court, the appellant was anxious to assert that clause 10.7 was not a “refurbishment clause”.  In its written submissions, at [16], the appellant stated:

It is a distraction to seek to recast the clause as a “refurbishment obligation”, a label which distracts from the construction of the words used.

1. But a few paragraphs later, at [21], the appellant submitted:

The length of the term of the Lease is consistent with and supportive of the proposition that clause 10.7 contemplated that physical works or refurbishments may be required for Cotrell to discharge its obligations.

1. It is also abundantly clear that the case below was run on the basis that clause 10.7 required refurbishment. In opening the case learned senior counsel said (T131-35):

…[I]s Kaleen a high-quality retail shopping centre? No. Second, had Kaleen and its owner complied with the clause 10.7 obligation to become a high-quality retail shopping centre, what would have happened? Answer, refurbishment.

1. In the Amended Final Submissions in the proceedings below the appellant said:

244 That common purpose is promoted by construing clause 10.7 to impose an obligation to refurbish the Centre if to do so is necessary to achieve and maintain the agreed standard of high-quality.

…

334Supabarn’s case is that failure to refurbish the Centre was the primary reason for the lost sales.

1. During the hearing below her Honour conducted a view of the shopping centre which she did not find particularly helpful. Her observations however are useful in placing Kaleen Plaza within the range of ACT shopping centres. Her Honour, at [103] said this:

103All of the shopping centres except the SupaExpress in Kaleen were in group centres, and the view confirmed what had been assumed throughout the hearing, being that both the Kaleen group centre and the Kaleen Plaza shopping centre were small or very small compared with the other viewed group centres and shopping centres. Details about the size of the shopping centres and supermarkets were not obtained during the view, but for convenience these details have been included in the following material where available from other evidence.

104 The fact that Kaleen Plaza was a small shopping centre in a small group centre seemed to put it at a double disadvantage, in that quite apart from the size of a shopping centre itself, the size of the group centre affected the number of businesses and services located in the vicinity of the shopping centre, and must have an effect on the shopping centre’s capacity to attract potential customers. For instance, the Calwell group centre had a medium-sized shopping centre anchored by a very large and recently renovated Woolworths supermarket and including around 14 specialty stores and a medical centre. In the vicinity of the shopping centre were a club, a service station, a car wash and a tavern. 

1. There was other evidence to the effect that, other than the refurbished Supabarn supermarket, the balance of the Centre was ‘tired’. It had been built in 1988 and not much seems to have been done to it since. It was painted in a dated colour, the floor tiling was old and there were assorted difficulties asserted by the appellant. These were summarised by her Honour at [449]:

449 Several witnesses criticised the colour scheme, tiling, lighting and facilities of the Centre:

(a)  James Koundouris said that both in 1988 when the Centre was built and in 2013 when he gave evidence, it had 1970s colour schemes, although there had been some repainting, and an original colour scheme including internal cream walls with touches of brown had been replaced with some “baby blue”. James Koundouris said that to his knowledge, the tiles had never been replaced, and the building still featured the original tiles.

(b)  Mr Powderly said that the tiles “just don’t look modern”: the colour (light brown) is old-fashioned, and the tiles are smaller than modern tiles. He noted that chipped ones should be repaired, which counsel conceded on behalf of Cotrell. Mr Powderly said that the floor covering at the Kippax shopping centre was “more modern and more contemporary”, and “certainly better quality” than a tiled floor. He also said that the floor outside the Supabarn entrance at the Wanniassa shopping centre was “marginally better” than the tiles at Kaleen Plaza, but that he didn’t like the tiles at the Calwell shopping centre (which are similar to the Kaleen Plaza tiles) either.

(c)  Mr Powderly explained that his view about what constituted “higher quality” came from the current trends he saw when viewing retail properties. He said that tiled floors are an “older style”, and polished concrete is more modern.

(d)  Mr Sukroo did not agree that in July 2004, it would have been desirable in the interests of improving Kaleen Plaza’s competitive position to refurbish or upgrade the floor tiling; he agreed in 2013 that the tiles “look a bit dated now”, but was not sure that they looked quite as dated in 2004. Mr Sukroo agreed that shopping centre toilets need to be functional, clean, presentable and workable, and that renovation of the toilets would have been desirable, but said that improvements in the toilets would not necessarily have increased patronage of the Centre.

(e)  James Koundouris said that when the light globes were not working, the lighting was inadequate.

(f)   Mr Sukroo said there had been internal and external repainting. He agreed that it would have been nice to upgrade the external rendering and painting and to have a new colour scheme, but he was not sure whether that would necessarily increase the amount of traffic through the shopping centre. He noted that at some point there had been a new internal colour scheme applied, but he was not sure of the timing.

1. The overall impression therefore is of an old, small and ‘tired’ shopping centre in which the appellant’s supermarket, notwithstanding its own attributes, failed to meet its owner’s expectations. This failure was the fault of the respondent, submitted the appellant, because the respondent had not upgraded the quality of the Centre. Clause 10.7 was said to be the avenue through which the respondent was obliged to remedy this circumstance.

1. In the present appeal it was accepted by the respondent that Kaleen Plaza was not, and had not at any relevant time been, a high quality retail shopping centre.

1. Her Honour gave an “overview” of the appellant’s submission on construction from [179]:

179The general effect of Supabarn’s submissions seems to be that clauses 10.7 and 10.13 of the Lease (read in the context of the rest of the Lease and having regard to such extrinsic evidence as is admissible for the purpose) should be construed as requiring the “cosmetic appearance” of “the Centre”, being the “structure, fittings, fixtures and furnishings which constitute the physical structure and amenity of the Centre”, and the tenancy mix at the Centre, to be those of a high quality retail shopping centre and therefore as having obliged Cotrell to ensure:

(a)  that the Centre was brought up to the physical standard of a high quality retail shopping centre via an early and substantial refurbishment of the physical structure (the refurbishment obligation); and

(b)  that the tenancy mix should also have been improved (the tenancy mix obligation).

180 I note at this point that most of Supabarn’s submissions focussed on refurbishment, and only at certain points mentioned tenancy mix at all.

181 This seemed to be partly because of counsel’s focus on establishing that the cosmetic aspects of the shopping centre were of fundamental importance in attracting customers (despite evidence from several witnesses to the effect that tenancy mix might in fact be more important for that purpose).

1. Ultimately, at [389] her Honour concluded:

I consider that the meaning to be given to cl 10.7, read in the light of all the other provisions of the Lease including those specifically relied on by Supabarn, is that it required the Centre to be run by Cotrell, day to day on a continuing basis, and including maintenance, repair and at least some aspects of tenancy management, in a manner, or at a standard, appropriate to a high quality retail shopping centre. I do not understand this proposition to be disputed as far as it goes.

1. It is important to note here that her Honour did not find clause 10.7 to be uncertain (at [388]). The appellant agrees with this conclusion but says her Honour’s construction is a product of her “re-arranging” the words in the clause. The appellant said its construction arose from the actual wording and, importantly, did not require any other material to reach its preferred construction.

1. The High Court in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 256 CLR 104, from [46], stated the relevant principles to be applied in interpreting a commercial agreement:

46The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.

47In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.

48Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.

49However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.

50Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.

51Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption "that the parties ... intended to produce a commercial result". Put another way, a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".

(Citations omitted)

1. Hammerschlag J, in ASSK Investments Pty Ltd v AMA Group Limited [2020] NSWSC 1756 succinctly summarised the relevant principles, at [29]:

The HOA is a commercial contract which is to be given a business-like interpretation. Interpreting it requires attention to the language used by the parties, the commercial circumstances which it addresses, and the objects which it is intended it secures. The meaning of the words chosen is determined objectively by reference to its text, context, and purpose, the question being what a reasonable person would have understood them to mean. Preference is given to a construction supplying a congruent operation to the various components of the whole and so as to avoid commercial inconvenience. Where language is open to more than one construction, the Court will prefer a construction which avoids consequences which are capricious, unreasonable, inconvenient or unjust: see Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99 at 109 ; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589 [22]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22] ; Zhu v Treasurer of the New South Wales (2004) 218 CLR 530 at 559 [82]; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 528 [15]; Electricity Generation Corporation Ltd v Woodside Energy Ltd (2014) 251 CLR 640 at [35] ; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 117.

1. The construction issue was whether the landlord promised to turn a shopping centre which was not a high quality shopping centre into a high quality shopping centre or whether the obligation was to manage what existed in the manner of a high quality shopping centre.

1. Clause 10.7 certainly imposes a standard of management. But it does not impose an obligation to transform a centre which was not of high quality (by comparison with other centres) into something that met this description.

1. If the appellant was correct in its approach the entire centre needed to be refurbished and the tenant mix “upgraded”. It was accepted by the appellant that these requirements would place a significant cost burden on the respondent. All this was to be done in the knowledge that the initial term of the contract was 7 years and 2 months after which the appellant might or might not have opted for a further term of 10 years. But, according to the appellant, the respondent was obliged to carry out the refurbishment notwithstanding that there was only a relatively short period in which to recoup its expenditure.

1. There is no suggestion that the rent being paid was so much over a market rent that it contemplated a return to the landlord, essentially funding a refurbishment. The uplift arising from the appellant’s turnover (1.5% per million dollars) could hardly meet the landlord’s expenses in refurbishing the Centre, let alone meeting the expenses of divesting itself of old (low or medium quality tenants) and securing high quality and “national” tenants.

1. The primary judge, perhaps prompted by the arguments with which she was presented, followed a long and tortuous path to what should have been a straightforward and easily reached conclusion. This is that clause 10.7 simply does not come close to the interpretation suggested by the appellant.

1. The interpretation put forward by the appellant is replete with flaws. It placed the respondent in breach of the Lease from the first day of its operation. The appellant, when confronted with this suggestion sought to distance itself from such a conclusion by suggesting that the obligation imposed by the clause was to bring the Centre up to the appropriate standard over time. This is contrary to its own pleadings:

14 From on or about the Date and up to the date hereof and continuing, Cotrell, in breach of its obligations under the Lease, has failed and continues to fail, to conduct, manage and operate the Centre:

(a)  as a high quality retail shopping centre; and

(b)  in an efficient manner at all times;

by doing or omitting to do each of the acts identified in the Schedule.

1. The “Date” referred to in the pleading is the date of the commencement of the Lease. The schedule lists a number of breaches but includes this breach (at [4](f)(ii)):

The defendant has failed to carry out any capital works or improvements at the Centre to make it consistent with a high quality retail shopping centre.

1. Even if the appellant did not assert there was a breach from the first day of the Lease, but only from 2004, when it asserted the refurbishment should have been completed, there was no yardstick by which the parties could ascertain at any particular time whether the landlord was in breach of clause 10.7. It may be argued that the obligation was to refurbish within a reasonable time, but this highlights the other uncertainty inherent in the appellant’s asserted construction of clause 10.7: the scope of the works required. The Lease contains no definition of what, for its purposes, constitutes a high quality retail shopping centre. It was accepted by the appellant that this is not a term that has an agreed meaning within the retail shopping centre industry. Minds, and even those of persons within the industry, may differ as to what is required of a centre to reach this standard. One cannot meaningfully contemplate what a reasonable time for the completion of the works would be, adopting the appellant’s construction of the clause, unless one first identifies the works.

1. If, as urged by the appellant, the clause required the landlord to undertake significant and costly capital works, one would reasonably expect that the parties (being commercial entities experienced in these matters) would have set out the scope of the works and a timetable for their completion, either in the Lease or in a collateral agreement. The undertaking of capital works would have the potential to affect the appellant’s trading and it is difficult to accept that an experienced trader would not have required specific stipulations as to the nature and timetable for the works. At the minimum, such works would impact upon the appellant’s capacity to trade. The appellant would presumably have wished, at the very least, to have notice of the works so as to ameliorate their effect upon its trading.

1. The appellant correctly stated that the text was the starting point for the construction of clause 10.7 and it must be “read as a whole, and in the context of the Lease”.

1. It is trite to say that a lease, be it commercial or otherwise, is an agreement designed to regulate the relationship between a landlord and a tenant. Each side will have obligations, for example on a tenant to pay rent and on a landlord to carry out repairs.

1. This is not to say that a lease cannot have terms concerning a refurbishment. No doubt many commercial leases include provisions for new or renewed ‘fit outs’ of premises. These provisions will normally be specific and understood to be achieving their purpose. They will not be disguised within a term, such as clause 10.7, which requires a strained or ‘behind-the-scenes’ interpretation to give it such a meaning.

1. It might be thought that the placing of clause 10.7 within a section of the Lease dealing with the landlord’s obligations assists the appellant’s argument. If it was merely a clause, as found by the primary judge, to control the day-to-day running of the Centre then it might have had a more logical home under clause 7 which is concerned with “Maintenance of Premises”. The difficulty however with drawing any conclusion from the clause’s location is that clause 10 contains other day-to-day obligations on the landlord.

1. For example, clauses 10.5 and 10.6 say respectively:

10.5. The Landlord must keep all services in the Centre operating during the Centre Trading Hours breakdowns or unavoidable delays excepted.

10.6. The Landlord must keep the Common Areas in good repair, clean and adequately lit.

1. Yet another difficulty with the breadth of the clause, as advocated by the appellant, is the extent of its application. The Centre to which the clause applies includes the car park surrounding the premises. This is not owned by the respondent. The appellant’s interpretation would require the respondent to, if necessary, refurbish the car park if it was thought to not reflect the standards of a car park commensurate with a high quality shopping precinct. What would be the position, one might ask, if the owner of the car park refused permission to the respondent to carry out major works?

1. The primary judge’s interpretation of clause 10.7 involves a logical extension of the landlord’s obligations by requiring the car park to be kept in good day-to-day order so as to facilitate the use of the various retail premises.

1. It is also apparent that there were a number of other tenants in the Centre. They seem to have represented, when the Lease commenced, a variety of retail and hospitality outlets. There was a butcher, a baker and a variety of stores typical of a suburban shopping centre. They would no doubt have been adversely affected during any refurbishment.

1. In addition, the refurbishment may have contravened the landlord’s obligations to the appellant under clause 10.14, which proscribes certain actions being taken by the landlord, for example, reducing accessibility by customers to common areas of the Centre.

1. Because of the state of the Centre a refurbishment would involve imposing an obligation to either conduct a substantial refurbishment of the Centre or, alternatively, a rolling program of capital works over the course of the Lease. A reasonable businesslike interpretation of clause 10.7 in the context of this lease does not permit an interpretation which imposes such an obligation.

1. It may be that some aspects of “conduct, manage and operate” could involve items of a capital nature, for example replacing worn out gutters. That process would include some element of capital improvement, new gutters for old. However just because such obligations may involve “capital” does not mean that there needs to be a rolling program of capital improvements.

1. The word “refurbishment” does appear in the Lease, for example in clause 7.5. No doubt if clause 10.7 envisaged a refurbishment it could have said so. Perhaps more importantly, as noted above, “high quality” is not defined in the lease, nor is it a recognised industry term. The appellant’s quantum expert, Mr McKinnon, used his own judgement as to what constituted high quality for the purpose of identifying comparators but that was not evidence which influences the contractual meaning of clause 10.7.

1. The straightforward words of clause 10.7, a clause which is noted to have existed in a previous lease between the parties, are plainly consistent with the day-to-day operation of the Centre. The Centre was not of a high quality nature. There is a great difference however between creating a high quality Centre and managing it in a high quality manner.

1. In essence the appellant’s interpretation is simply a quantum and illogical leap from the wording of the clause. There is nothing in clause 10.7 that a reasonable person would take to extend the scope of the clause to include a refurbishment and there is no commercial or business-like interpretation that achieves the same result.

1. The balance of the appeal, after the construction of clause 10.7, depended upon the appellant succeeding in its interpretation. The appellant having failed, the appeal must be dismissed.

Orders

1. The Court makes the following orders:

(i)The appeal is dismissed.

(ii)The appellant is to pay the respondent’s costs of the appeal.

(iii)If any alternative costs order is sought, notice must be given to the Court within 14 days of these orders.

I certify that the preceding fifty-seven [57] numbered paragraphs are a true copy of the Reasons for Judgment of their honours Justice Burns, Justice Elkaim and Justice Mossop.

Associate:

Date: 18 February 2021