Symbion Medical Centre Operations Pty Ltd v Thomco (No 2113) Pty Ltd
[2009] SASC 65
•6 March 2009
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
SYMBION MEDICAL CENTRE OPERATIONS PTY LTD v THOMCO (NO 2113) PTY LTD
[2009] SASC 65
Judgment of The Full Court
(The Honourable Justice Gray, The Honourable Justice Sulan and The Honourable Justice Kourakis)
6 March 2009
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS
Appeal from Master of Court dismissing application to set aside Statutory Demand - parties executed heads of agreement - ambiguities in wording of agreement - appeal turned on construction of heads of agreement - whether binding agreement entered into - commercial construction of contracts - parol evidence rule and exceptions to it - evidence of surrounding circumstances.
Held: appeal allowed - genuine dispute shown to exist - Master’s orders set aside - Statutory Demand set aside.
Corporations Act 2001 (Cth) s 459G and s 459H, referred to.
Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452; Bentham Management Pty Ltd v Union Finance Pty Ltd (2007) 247 LSJS 103; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Hardy Wine Co Ltd v Tasman Liquor Traders Pty Ltd (in liq) (2006) 95 SASR 21; Lake v Simmons [1927] AC 487; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896; Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289; Wholesale Distributors Ltd v Gibbons Holdings Ltd [2007] NZSC 37; James Miller v Whitworth Street Estates [1970] AC 583; L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235; Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149; Sagacious Procurement Pty Ltd v Symbion Health Ltd [2009] HCA Trans 23; Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348; Bacchus Marsh Concentrated Milk Co Ltd (in liq) v Joseph Nathan & Co Ltd (1919) 26 CLR 410; Masters v Cameron (1954) 91 CLR 353; Richard III in New Zealand: Case Note on Wholesale Distributors v Gibbons Holdings [2008] 124 LQR 6, considered.
SYMBION MEDICAL CENTRE OPERATIONS PTY LTD v THOMCO (NO 2113) PTY LTD
[2009] SASC 65Full Court Gray, Sulan and Kourakis JJ
GRAY J.
This is an appeal from a decision of a Master of the Court dismissing the application of Symbion Medical Centre Operations Pty Ltd to set aside a statutory demand served on Symbion Medical Centre by Thomco (No 2113) Pty Ltd. The application was made pursuant to section 459G of the Corporations Act 2001.[1]
[1] Company may apply
(1)A company may apply to the Court for an order setting aside a statutory demand served on the company.
(2)An application may only be made within 21 days after the demand is so served.
(3)An application is made in accordance with this section only if, within those 21 days:
(a) an affidavit supporting the application is filed with the Court; and
(b) a copy of the application, and a copy of the supporting affidavit, are served on the person who served the demand on the company.
Symbion Medical Centre was entitled to an order setting aside the Statutory Demand if it could establish that there was a genuine dispute between Symbion Medical Centre and Thomco about the existence of the debt.[2] A genuine dispute is one that is bona fide and where the grounds for alleging the existence of the dispute are real.[3] The role of the Court is not to resolve competing claims but to determine whether a genuine dispute exists. The Court is not to try the claim but merely to establish its genuineness.[4]
[2] Corporations Act section 459H.
[3]Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452.
Bentham Management Pty Ltd v Union Finance Pty Ltd (2007) 247 LSJS 103.
[4] Bentham Management Pty Ltdv Union Finance Pty Ltd (2007) 247 LSJS 103 at 107.
Background Facts
On 14 December 2006, the parties prepared and executed a heads of agreement. The appeal turned on the construction of the heads of agreement. It is convenient at the outset to set out the agreement in its entirety.
Ms Olive McGabhann
National Manager Network Development
Mitsubishi Motors Australia Limited.(MMAL)
1284 South Road
Clovelly Park SA 5042Dear Olive,
Re: Proposed Sub Lease – 780-790 High Street, Kew VIC 3102
I write following our discussions in relation to the possible Sub Lease of the above premises by Symbion Medical Centre Operations Pty Limited (“SMCO”), a subsidiary of Symbion Health Limited (“SHL”). The details contained within this offer (dated Monday, 16 October 2006) supersede any previous offer(s) you have received from SMCO, and any prior offer(s) are withdrawn.
Based on our review of the current land and buildings and its projected future use, Symbion would like to make the following formal offer:
SUB-LEASE
Symbion Offer to Current Tenant – Thomco (No 2113) Pty Ltd (‘THOMCO’)
Sub-Lessee: Symbion Medical Centre Operations Pty Limited (“SMCO”)
Sub-Lessor: Thomco (No 2113) Pty Ltd (‘THOMCO’)
Premises: 780-790 High Street, Kew VIC 3102
Premitted use: Medical Centre, Child Care Centre, Pharmacy, and other related allied health services, as Permitted by any Government/ Licensing Authority
Sub-lease commencement: 1 July 2007 (approximately) or on provision of a certified environmentally clean and safe premises, as determined by council, in order to carry on SMCO’s Permitted Use.
Sub-lease expiry 6 March 2010
Options:Not applicable
Rental:$130,000 p.a. plus GST.
Rent reviews: Annual CPI up to a maximum of 4%
Outgoings:Single Holding Land Tax assessment, Council rates, Body Corporate fees, and other Freehold expenses, Total outgoings in year one (1) not to exceed $150,000 plus GST.
Sub-Lessor’s Contribution to Not applicable.
Development Works
Sub-Lessee’s Contribution to $90,000 plus GST paid direct to MMAL upon
Environmental Cleanup 1. Provision of a certified environmentally clean and safe premises, as determined by council, in order to carry on SMCO’s Permitted Use.
2.Receipt of a Development and Building Approval for the Permitted Use.
Insurance:The Sub-Lessee is insured under the worldwide policies of Symbion Health Limited. As such, the Sub-Lessee will not provide copies, policies, receipts, etc but will provide certificates of currency if requested. The Sub-Lessee is a self-insurer for workers compensation. The Sub-Lessee will not insure plate glass but will replace if necessary.
Guarantees: Symbion Medical Centre Operations Pty Limited is a substantial company and is a subsidiary of Symbion Health Limited, SMCO will not provide any form of guarantee or security deposit.
Sub-lease documentation: Sub-lease documentation will comply with SMCO’s Critical Lease Requirements.
Legal costs:Each party to bear its own legal costs with respect to the negotiation and preparation of the sublease.
Special Conditions of Agreement
The following conditions of agreement apply to THOMCO, are in addition to the above conditions, and are to be met prior to Sub-lease commencement:
1 THOMCO to provide a certified environmentally clean and safe premises, as determined by council, in order to carry on SMCO’s Permitted Use.
2 THOMCO to pay all costs associated with Environmental Inspection works required to determine the level of contaminated soil and it’s [sic] hazardous condition (if any).
3 THOMCO to pay all costs associated with the environmental cleanup works required to provide a certified environmentally clean and safe premises, as determined by council in order to carry on SMCO’s Permitted Use.
4 SMCO to be granted Development and Building Approval for the Permitted use of the premises on terms which are satisfactory to SMCO.
5 Property Owner to waive the obligation on SMCO to make-good any of its construction and fitout works.
6 SMCO is required to obtain both THOMCO and Property Owner approval of its construction & redevelopment plan prior to any construction commencement.
7 SMCO is required to obtain both THOMCO and Property Owner approval to sublease its space to its chosen sub tenants.
8 SMCO to be granted SHL board approval for the proposed sub-lease (with THOMCO) and lease (with the Property Owner).
9 SMCO to receive satisfactory assurance and proof that THOMCO has the authority to Sub Lease the Premises to SMCO.
10 The sublease is subject to the grant of the Head lease to THOMCO by the Property Owner and consent by the mortgagee.
11 THOMCO to be granted MMAL board approval for the proposed sub-lease.
12 Should the Special Conditions, namely clauses 1,4, 5, 8, 9, 10 and 11, above, not be met by 1 January 2008 then THOMCO and SMCO have the right to terminate the agreement without any liability to the other party, provided that rent and outgoing due are payable by Symbion from 1 July 2007, shall be forfeited to THOMCO.
Olive, I look forward to your response.
Yours faithfully
Signed:
Adam Sevdalis
National Business Development Manager
Symbion Medical Centres
_____________________________________________________________These Heads of Agreement set out the basic terms agreed upon by the parties. A legally binding agreement between the Sublessor and the Sublessee will only eventuate upon execution of a Sublease agreement prepared by solicitors and signed by the Sublessor and the Sublessee.
Signed: Signed:
Mr Tony Breugem for and on behalf of Mr Adam Sevdalis for and on behalf of Thomco (No 2113) Pty Ltd (‘THOMCO’) Symbion Medical Centre Operations P/L
Following the execution of the heads of agreement Thomco undertook works and expended monies in regard to “the environmental clean and safe premises” certification.
Following the signing of the heads of agreement, Symbion Medical Centre agreed to contribute to the costs of an environmental audit. On the case of Symbion Medical Centre this was the subject of a separate agreement. Thomco argued that the agreement to contribute was a variation to the heads of agreement. The amounts agreed to be paid in respect of the audit have in fact been paid by Symbion Medical Centre.
The parties negotiated with respect to the terms of the proposed sub lease but in the event a sub lease was not agreed nor executed. At no time did Symbion Medical Centre enter into occupation or possession of the premises the subject of the proposed sub lease.
At some time after 1 January 2008, Thomco terminated the heads of agreement pursuant to special condition 12. It was the case of Thomco that, notwithstanding that the terms of the proposed sub lease had not been agreed nor executed and notwithstanding that Symbion had not entered into occupation or possession of the premises, rent and outgoings were due and payable by Symbion from 1 July 2007. On appeal the primary submission of Thomco was that the rent and outgoings for which Symbion was responsible were the rent and outgoings paid by Thomco as lessee to the owner of the premises.
On 28 May 2008, Thomco served the statutory demand asserting that Symbion Medical Centre owed Thomco the total amount of debts described in a schedule to the statutory demand. The schedule provided:
Rent & Outgoings owed pursuant to a Heads of Agreement dated
14 December 2006 between the company and the creditor
attached hereto and marked “A”; and $135,962.37Kew Environmental Audit cost owed pursuant to an agreement
between the company and the creditor as particularised in the
email exchange attached hereto and marked “b”. $ 53,829.86
TOTAL $189,792.23The second of the debts forming part of the schedule relates to the environmental audit and, as earlier observed, that amount has been paid by Symbion.
It was agreed between the parties that, if Thomco was correct in its construction of the heads of agreement, $135,962.37 was the amount owing. To put it another way, the amount of the alleged debt was not in dispute. What was in dispute was the existence of any debt at all.
A Commercial Agreement
The present dispute between the parties is to be resolved by the construction of the terms of the heads of agreement.[5] It was the submission of Thomco that the Court should give a business-like interpretation to the heads of agreement and have regard to the commercial context including the later conduct of the parties and their agents.
[5] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 177.
The general principles that govern the construction of commercial contracts have been the subject of extensive judicial comment.[6] In Lake v Simmons,[7] Viscount Sumner observed:[8]
Every one must agree that commercial contracts are to be interpreted with regard to the circumstances of commerce with which they deal, the language used by those who are parties to them, and the objects which they are intended to secure.
These words were drawn on in McCann v Switzerland Insurance Australia Ltd,[9] where Gleeson CJ observed:
A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.
[6] See discussion in Hardy Wine Co Ltd v Tasman Liquor Traders Pty Ltd (in liq) (2006) 95 SASR 21.
[7] Lake v Simmons [1927] AC 487.
[8] Lake v Simmons [1927] AC 487 at 509.
[9] McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589. (footnotes omitted)
In Pacific Carriers Ltd v BNP Paribas,[10] the High Court restated the general principles in regard to the construction of commercial contracts:[11]
The case provides a good example of the reason why the meaning of commercial documents is determined objectively: it was only the documents that spoke to Pacific. The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean. That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction. In Codelfa Constructions Pty Ltd v State Rail Authority of NSW, Mason J set out with evident approval the statement by Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen:
“In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.”
[10] Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451.
[11] Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461-462. (footnotes omitted)
The High Court considered that the construction of the letters of indemnity in question was to be determined upon what a reasonable person in the position of Pacific would have understood the letters to mean. The Court recognised that such an enquiry requires a consideration not only of the text of the letters, but also of the surrounding circumstances known to the parties to the letters and the purpose and object of the letters. In respect of this latter proposition, their Honours referred with apparent approval to the decision of the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society,[12] where Lord Hoffmann observed:
Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. …Subject to the requirement that it should have been reasonably available to the parties, … it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
Lord Hoffmann further explained these remarks in Bank of Credit and Commerce International SA v Ali:[13]
I should in passing say that when, in Investors Compensation Scheme Ltd v West Bromwich Building Society, ... I said that the admissible background included ‘absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man’, I did not think it necessary to emphasise that I meant anything which a reasonable man would have regarded as relevant. I was merely saying that there is no conceptual limit to what can be regarded as background. It is not, for example, confined to the factual background but can include the state of the law (as in cases in which one takes into account that the parties are unlikely to have intended to agree to something unlawful or legally ineffective) or proved common assumptions which were in fact quite mistaken. But the primary source for understanding what the parties meant is their language interpreted in accordance with conventional usage … I was certainly not encouraging a trawl through ‘background’ which could not have made a reasonable person think that the parties must have departed from conventional usage. (original emphasis)
[12] Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912-913.
[13] Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 at 269.
In Pacific Carriers, the High Court made reference to the evident approval given by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW[14] to Lord Wilberforce’s remarks in Reardon Smith Line Ltd v Hansen-Tangen.[15] By a further footnote, the Court made reference to its decision in Royal Botanic Gardens and Domain Trust v South Sydney City Council.[16]In Royal Botanic, Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ in their joint judgment observed:[17]
Two further matters should be noticed. First, reference was made in argument to several decisions of the House of Lords, delivered since Codelfa but without reference to it. Particular reference was made to passages in the speeches of Lord Hoffmann in Investors Compensations Scheme Ltd v West Bromwich Society and of Lord Bingham of Cornhill and Lord Hoffmann in Bank of Credit and Commerce International SA v Ali, in which the principles of contractual construction are discussed. It is unnecessary to determine whether their Lordships there took a broader view of the admissible “background” than was taken in Codelfa or, if so, whether those views should be preferred to those of this Court. Until that determination is made by this Court, other Australian courts, if they discern any inconsistency with Codelfa, should continue to follow Codelfa.
[14] CodelfaConstruction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 347.
[15] Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989.
[16] Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289.
[17] RoyalBotanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 at [39] (footnotes omitted).
It may be understood from the decision of Pacific Carriers that notwithstanding the observations of the joint judgment in Royal Botanic, when approaching the construction of a commercial contract, it is not only the text of the document that is relevant, but also the surrounding circumstances known to the parties and the purpose and object of the transaction. That inquiry allows a determination to be made by the court of what a reasonable person in the position of the parties would have understood the terms of the contract to mean.
The observations in Pacific Carriers were applied by the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd.[18] The Court restated the principle that the meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean and that that normally requires consideration not only of the text but also of the surrounding circumstances known to the parties and the purpose and the object of the transaction.[19]
[18] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179.
[19] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179.
In New Zealand, the consideration of surrounding circumstances in order to ascertain the meaning of a contract extends to the consideration of how the parties acted after the contract was made. In Wholesale Distributors Ltd v Gibbons Holdings Ltd,[20] the New Zealand Supreme Court refused to apply the English exclusionary rule which provides that such evidence is inadmissible.[21] Thomas J, who delivered the leading judgment of the Court, found that his interpretation of the original contractual document was confirmed by the terms of an assignment occurring some three years later. Although Thomas J was the only member of the court who expressly had regard to post-contractual matters, Elias CJ, Tipping and Anderson JJ all agreed with the general proposition that the parties’ conduct post-contract was admissible and relevant to the construction of the contract.
[20] Wholesale Distributors Ltd v Gibbons Holdings Ltd [2007] NZSC 37.
[21] James Miller v Whitworth Street Estates [1970] AC 583; L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235.
In the course of his reasons, Tipping J highlighted the relevance of post-contract conduct in ascertaining the intentions of the parties as follows:[22]
As a matter of principle, the court should not deprive itself of any material which may be helpful in ascertaining the parties’ jointly intended meaning, unless there are sufficiently strong policy reasons for the court to limit itself in that way. I say that on the basis that any form of material extrinsic to the document should be admissible only if capable of shedding light on the meaning intended by both parties. Extrinsic material which bears only on the meaning intended or understood by one party should be excluded. The need for the extrinsic material to shed light on the shared intention of the parties applies to both pre-contract and post-contract evidence. Provided this point is kept firmly in mind, I consider the advantages of admitting evidence of post-contract conduct outweigh the disadvantages.
...
For good policy reasons the common law has consistently adhered to what is usually called an objective approach to contract interpretation. An objective inference from conduct in which the parties are mutually involved after they have contracted does not significantly depart from the conventional approach. I will call conduct in which both parties are involved, either actively or passively, mutual or shared conduct. Inviting inferences from the conduct of one party, in which the other party is not involved, would make a significant inroad into the need to ascertain objectively the shared intention of the parties as to their meaning. The words they have used, construed in the light of all the relevant and objective circumstances in which the parties have used them, must prima facie be the best guide to their meaning. But, if some mutual or shared post-contract conduct of the parties is objectively capable of shedding light on the meaning they themselves placed on the words in dispute, I consider more is to be gained than lost by allowing the court to take it into account
In this manner, in New Zealand, post-contract conduct is an aspect of the relevant surrounding circumstances to be considered in resolving ambiguities in contractual documents. [23]
[22] Wholesale Distributors Ltd v Gibbons Holdings Ltd [2007] NZSC 37 at [52]-[53].
[23] The question of the relevance of post contract conduct to interpretation is discussed at some length in a detailed case note review in Richard III in New Zealand: Case Note on Wholesale Distributors v Gibbons Holdings [2008] 124 LQR 6.
Although the Australian Courts have generally applied the English exclusionary rule, the relevance of post-contract conduct in Australia is unclear. The Australian approach to post-contract conduct is not necessarily in conflict with the New Zealand approach, as the concept of surrounding circumstances does not exclude the proposition that those circumstances may both precede and post-date the contract. The recognition of this appears implicit in the recent New South Wales Court of Appeal decision of Sagacious Procurement Pty Ltd v Symbion Health Ltd,[24] where the Court considered the use of subsequent communications in interpreting the earlier communications. Giles JA (with whom Hodgson and Campbell JA agreed) summarised as follows:[25]
I respectfully suggest that subsequent communications are not simply aids to interpretation, or a source of information as to matters with which a concluded contract should deal. Their probative value may be more direct. To repeat, the objective intention of the parties is fact-based, and found in all the circumstances. That in their subsequent communications the parties have continued in negotiations, or have expressed the common understanding that they are not legally bound unless and until a formal contract is executed, is of itself probative as to their contractual intention: see Howard Smith and Co Ltd v Varawa, stating simply that any statements or conduct inconsistent with the existence of a concluded contract are relevant.
[24] Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149. Special leave to appeal this decision was refused by the High Court in Sagacious Procurement Pty Ltd v Symbion Health Ltd [2009] HCATrans 23.
[25] Sagacious Procurement Pty Ltd v Symbion Health Ltd [2008] NSWCA 149 at [105].
Extrinsic evidence may be admissible when a contract is partly written and partly oral. In these circumstances, “…the parties to the contract have not expressed all the terms of their contract in writing, and, accordingly, parol evidence is admitted to complete the written contract”.[26] Extrinsic evidence of the parties’ intention may also be admissible for the purpose of rectifying a document so that it expresses that intention. The consideration of extrinsic evidence in these circumstances does not import additional or different terms into the contract, but reforms the instrument so that it accords with what the parties actually agreed to.[27] Similarly, extrinsic evidence can be used to resolve ambiguity in contracts, although, as observed earlier, this admissible evidence generally excludes subsequent conduct.[28]
[26] Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348 at 357.
[27] Bacchus Marsh Concentrated Milk Co Ltd (in liq) v Joseph Nathan & Co Ltd (1919) 26 CLR 410 at 427.
[28] See, for example, Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347.
As a consequence of the many exceptions to the parol evidence rule, the scope of the rule in Australia is difficult to define with any certainty. The English exclusionary rule is the subject of a number of exceptions. The New Zealand approach to post-contract conduct creates further doubt as to the confines of the exclusionary rule.
The Master’s Decision
Symbion Medical Centre’s submission before the Master that the effect of the final clause of the heads of agreement was that in the absence of an executed sublease there was no concluded agreement between the parties. It was further contended that rent was not due and payable because the agreement pursuant to which it was said to be payable was not binding between the parties. Accordingly, it was argued there was a genuine dispute about the existence of the debt.
The Master held that the language of special condition 12 was indicative of an agreement, the terms of which were binding between the parties, and that an irreconcilable contradiction arose between special condition 12 and the final clause of the agreement if he were to accept Symbion Medical Centre’s argument as to the construction of the document. The Master concluded that Symbion Medical Centre’s contention was untenable. The Master reasoned:
Both parties accepted that it was not the Court’s function on an application such as this to try the matters in dispute between the parties. It was for this reason that the defendant accepted that, in order to arrive at a determination that the plaintiff’s contention that the debt was genuinely disputed had not been made out, I had to conclude that the argument upon which the contention was based was untenable.
In my opinion, such a conclusion is warranted in this case. The letter of offer/Heads of Agreement contained 11 special conditions which had “to be met prior to Sub-lease commencement”. Paragraph 12 provided for the non-fulfilment of specified special conditions by 1 January 2008. The parties had “the right to terminate the agreement without any liability to the other party, provided that rent and outgoing due are [sic] payable by Symbion from 1 July 2007, shall be forfeited to THOMCO”. The language of clause 12 is clearly indicative of an agreement, the terms of which are binding between the parties. To say that the final paragraph of the letter of offer operates to deprive paragraph 12 of legal effect is to create an irreconcilable contradiction between the special conditions of the letter of offer and its final paragraph. Business efficacy is ill-served by such an interpretation. It is clear from the wording of the final paragraph that it only applies to the sub-lease. It follows that there can be no dispute, genuine or otherwise, because the ground advanced by the plaintiff upon which the alleged dispute is based is untenable.
For these reasons I consider that the plaintiff has failed to establish that the debt for rent and outgoings is genuinely disputed, the consequences of which is that the application to set aside the statutory demand should be dismissed. I will hear the parties as to costs.
The question on appeal was whether the Master was correct in concluding that there was no genuine dispute in regard to the alleged debt for rent and outgoings. Symbion Medical Centre submitted that the Master erred in concluding that the special conditions in the heads of agreement created a separate legally binding agreement and further holding that there was an irreconcilable contradiction between the special conditions and the final clause of the agreement if Symbion Medical Centre’s construction of the agreement was accepted.
Symbion Medical Centre submitted that the observations of the High Court in Masters v Cameron[29] provide the legal basis on which it may be concluded that no binding agreement giving rise to a debt was formed. In Masters v Cameron, the Court observed that where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. The three classes outlined by the Court may be summarised as follows:[30]
-It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect.
-It may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.
-The case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.
[29] Masters v Cameron (1954) 91 CLR 353.
[30] Masters v Cameron (1954) 91 CLR 353 at 360.
According to the Court’s analysis, in the third category of cases, there is no contract unless and until the formal contract is executed. In these cases, the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own. For example, the parties may contemplate that further details will be introduced into a formal document, or the parties may wish to reserve to themselves a right to withdraw at any time until the formal document is signed. In these circumstances, the parties are not bound until the formal agreement is executed. The Court provided further analysis in relation to the third category of cases:[31]
This being the natural meaning of "subject to contract", "subject to the preparation of a formal contract", and expressions of similar import, it has been recognized throughout the cases on the topic that such words prima facie create an overriding condition, so that what has been agreed upon must be regarded as the intended basis for a future contract and not as constituting a contract. Indeed, Lord Greene M.R. remarked during the argument in Eccles v. Bryant and Pollock… that when the expression "subject to contract" was used he had never known a case in which it had been suggested, much less held, that this did not import that there was nothing binding till the exchange of parts of the formal contract was made. The effect of the early cases on the subject was stated by Sir George Jessel M.R. in Winn v. Bull when he said in a passage which has become well-known: "It comes, therefore, to this, that where you have a proposal or agreement made in writing expressed to be subject to a formal contract being prepared, it means what it says; it is subject to and is dependent upon a formal contract being prepared. When it is not expressly stated to be subject to a formal contract it becomes a question of construction, whether the parties intended that the terms agreed on should merely be put into form, or whether they should be subject to a new agreement the terms of which are not expressed in detail".
[31] Masters v Cameron (1954) 91 CLR 353 at 362. (footnotes omitted)
Counsel for Symbion Medical Centre submitted that there was but one agreement and that agreement was within the third category referred to in Masters v Cameron[32] - that is, the parties had agreed they would not be bound by the terms of the proposed sub lease until the formal sub lease had been executed. It was said that clause 12 of the special conditions only operated in circumstances where rent and outgoings were due and payable under a formal sub lease.
[32] Masters v Cameron (1954) 91 CLR 353.
Counsel for Thomco submitted that the reference to Symbion being responsible to pay rent and outgoings was a reference to rent and outgoings payable by Thomco to the owner of the property under the head lease. It was contended that the commercial arrangement between the parties required Thomco to spend a considerable sum of money in the environmental preparation of the property and that for this reason it was agreed that, if the heads of agreement were terminated, rent and outgoings paid by Thomco to the owner would be paid to Thomco by Symbion Medical Centre. Alternatively it was submitted that the reference to rent and outgoings in clause 12 was a reference to rent under the sub lease. It was said that the intention of the parties was that rent and outgoings should be paid notwithstanding that a sub lease had not been entered into.
There are a number of hurdles that confront Thomco’s submission. The natural reading of special condition 12 suggests that it is part of the heads of agreement and subject to the final clause - that is, special condition 12 was not binding and enforceable until a sub lease had been executed. In my view, special condition 12 forms part of the heads of agreement. This was properly conceded by counsel for Thomco. That being so, the reference to rent and outgoings in the special condition would appear to be a reference to rent and outgoings to be paid by Symbion Medical Centre under the proposed sub lease. As no sub lease was executed, and as Symbion Medical Centre did not enter into occupation or possession of the premises, no rental outgoings were payable.
Thomco’s primary submission is inconsistent with the basis on which the amount of the statutory demand was calculated. That part of the demand claimed to be owing for rent and outgoings was calculated by reference to the proposed rental payable under the sublease, and not by reference to Thomco’s liability to the lessor. So much is clear from the supporting affidavit sworn by Thomco’s responsible officer. To that affidavit was annexed an invoice that showed that the rent charged was exactly one half of the annual rental under the proposed sublease. A subsequent affidavit of that officer explained that the rental was charged for a six-month period. The annual rental payable by Thomco to the lessor is not disclosed in the statutory demand, the affidavit filed in support of it or in any material received in these proceedings.
Finally, the phrase “shall be forfeited” suggests that clause 12 is concerned with the rent that Symbion may have paid if it had gone into occupation but had subsequently terminated the agreement. It is inapt to refer to a liability to reimburse Thomco for rent it had paid to the lessor.
Counsel for Thomco suggested that later conduct of Symbion Medical Centre confirmed Thomco’s interpretation of the agreement. It was suggested that an admission had been made by a solicitor for Symbion Medical Centre that the agreement was legally binding in the terms suggested by Thomco. Reference was drawn to the text of a letter from solicitors for Symbion of 19 November 2007:
Dear Olive,
In accordance with instructions from Symbion, please find attached the lease with our comments marked up.
Please note the following:
(a)some further changes may be required to the lease following finalisation of discussions that Symbion is having in relation to construction and ownership of the building;
(b)whilst Symbion has agreed to pay rent from 1 July 2007, as the commencement date should be linked to when Symbion takes possession of the Premises i.e. when the building permit is issued we have included a special condition to deal with Symbion’s requirement to pay rent from 1 July 2007 until the Commencement Date; and
(c)once the lease is in an agreed form, as the lease is conditional on the Statement of Environmental Audit and the Building Permit, we suggest that the parties sign the lease and that the lease is then held in escrow by these offices until these conditions are satisfied.
Kind regards
It was argued that paragraph (b) of this letter was conduct by the authorised agent of Symbion Medical Centre amounting to a concession or admission that rent was payable by Symbion Medical Centre from 1 July 2007. I should say immediately that I consider this to be misconstruction of the letter. The letter was written in clarification of an attached proposed sub lease and went no further than that. It was not directed to the operation of special condition 12 and in any event was being written in the context of explaining the proposed terms of the sub lease. These terms involved some variation from the terms expressed in the heads of agreement.
In my view the proper construction of the heads of agreement is open to some debate. The submissions of Thomco that the construction of the heads of agreement is clear beyond doubt and that the Master’s ruling should be upheld should be rejected. There are ambiguities in the wording of the agreement. I consider that the contentions of Symbion Medical Centre are of substance and plainly open. In these circumstances I am of the view that a genuine dispute has been shown to exist. The order of the Master should be set aside. The statutory demand should be set aside.
Conclusion
I would allow the appeal, set aside the orders of the Master and set aside the Statutory Demand.
SULAN J: I have read the reasons of Gray J. I agree with him that a genuine dispute has been demonstrated to exist. The construction of the heads of agreement is far from beyond doubt. I consider it is inappropriate to express any view about which construction should be preferred.
It is unnecessary to express any view about post-contractual conduct and the extent to which it is relevant in resolving ambiguities in the construction of agreements. That question is open to further consideration in an appropriate case. I consider that there may be circumstances when post-contractual conduct may be relevant, but the extent to which the court will rely upon such conduct will depend on the circumstances of each case. I am cautious about the relevance or weight to be given to one party’s interpretation of the agreement after the event, particularly when a dispute has arisen between the contracting parties.
The appeal should be allowed. I agree with the orders proposed by Gray J.
KOURAKIS J: I agree, for the reasons given by Gray J that the appeal should be allowed. It is not necessary in this matter, where the only question is whether the appellant has demonstrated a genuine dispute, to finally resolve the extent to which the extraneous material relied on by the respondent is admissible and, if admissible, the purpose for which it can be used. I would make only the following observations.
First, I understand the reasons of the High Court in Pacific Carriers Ltd v BNP Paribas[33] to preserve the direction given in Royal Botanic Gardens and Domain Trust v South Sydney City Council[34] that Australian Courts, if they discern any difference, should continue to follow Codelfa Construction Pty Ltd v State Rail Authority of New South Wales[35] in preference to English authority on the same question.
[33] (2004) 218 CLR 451 at 462, [22].
[34] (2002) 76 ALJR 436 at 445, [39].
[35] (1982) 149 CLR 337 at 350.
Secondly, the admissibility of post-contractual conduct will depend on the purpose for which it is led. It will be admissible if it is led as evidence of an admission that a party, did, by words or conduct, agree to a term or terms that he or she now denies form part of the contract. On the other hand, if there is no dispute about the extent of the contractual conduct, for example because it is agreed that an identified written document contains all the terms of the contract, evidence of conduct which discloses one party’s view of the meaning of the contract so identified would seem to me to be inadmissible. It could hardly be otherwise if the objective approach to contractual construction is to be maintained. If an objective construction of the meaning of the contract must prevail, it is difficult to see how, on that issue at least, the subjective opinion of a party about the meaning of the contract is of any relevance. As I have said, quite different considerations may apply where the issue is whether or not the parties did, as a matter of fact, agree by words or conduct to terms which, on an objective construction, must have the meaning pressed by one of the parties.
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