Tarongo Land Pty Ltd v Lyons

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 2017 of 2005

TARONGO LAND PTY LTD (ACN 070 316 915)	Plaintiff
v
DARYL JOHN LYONS and FAYE JANETTE LYONS	Defendants

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JUDGE:	DODDS-STREETON J
WHERE HELD:	Melbourne
DATE OF HEARING:	18-20, 24, 26 October 2005
DATE OF JUDGMENT:	16 December 2005
CASE MAY BE CITED AS:	Tarongo Land Pty Ltd v Lyons
MEDIUM NEUTRAL CITATION:	[2005] VSC 491

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CONTRACT – Construction of option agreement to purchase land – Whether exercise of option subject to condition that portion of land be rezoned residential within term of the option – Ambiguity of relevant clause – Extrinsic evidence – Whether grantor entitled to avoid option agreement due to option holder’s failure to lodge rezoning application by specified date – Whether defendants estopped by their conduct from reliance on any such breach.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr P. N. Vickery Q.C. with Mr J. Barber	Harwood Andrews Lawyers
For the Defendant	Mr R.M. Garratt Q.C. with Mr R.C. Wells	Birdsey, Dedman & Bartlett Solicitors

TABLE OF CONTENTS

INTRODUCTION

SUMMARY OF FACTS AND EVIDENCE

RELEVANT LEGAL PRINCIPLES - CONSTRUCTION

WHETHER EXERCISE OF OPTION CONDITIONAL ON REZONING

The plaintiff’s contentions

The defendants’ contentions

Application

Whether clause 12 for plaintiff’s sole benefit if a term of the option agreement

WHETHER PLAINTIFF BREACHED CLAUSE 16

Whether defendants estopped from reliance on breach of clause 16

CONCLUSION

HER HONOUR:

INTRODUCTION

In this proceeding, the plaintiff, Tarongo Land Pty Ltd (“Tarongo”), a corporate land developer, seeks orders including specific performance of an option agreement dated 1 May 2002 conferring on it an option to purchase the defendants’ land situated at Leopold, near Geelong. The land is currently zoned ‘rural’, but that zoning is under review and its imminent rezoning to ‘residential’ is almost certain. The purchase price of the land pursuant to the option agreement is $8,069,250. The value of the land has increased since the date of execution of the option agreement to the current estimated market value of $15,600,000.

The plaintiff claims that it validly exercised its option by serving a notice dated 17 January 2005, but that the defendants wrongfully rejected the exercise on the basis that the plaintiff had breached clause 16 of the option agreement by failing to lodge a request for rezoning to “residential” with the Council of the City of Greater Geelong (“the council”) on or before 30 April 2003. The plaintiff contends that it did not breach clause 16 of the option agreement, which, on a proper construction, did not require it to lodge a rezoning request by a deadline of 30 April 2003, but only to use due diligence and its best endeavours to prepare and prosecute a rezoning request. It had satisfied those requirements. Alternatively, the plaintiff argues that the defendants are estopped from reliance on any breach of clause 16 (which was, in any event, trivial) by their conduct, which induced the plaintiff to continue to work, incur expense in relation to, and advance, the rezoning of the land.

The defendants, however, contend that the exercise of the option was subject to a further condition that the rezoning of at least 100 acres of the land to ‘residential’ be achieved on or before 30 April 2005. The rezoning did not occur. The plaintiffs argue that, on a proper construction, the requirement to achieve rezoning of at least 100 acres to ‘residential’ by 30 April 2005 is a condition not of the option agreement, but of the contract for sale of land annexed to it. The plaintiff submits that it waived the relevant condition, which enured for its sole benefit. As such, the plaintiff is entitled to specific performance, and seeks to purchase the land for the option price.

The plaintiff contends that the increase in the value of the land is wholly attributable to its efforts and expenditure in advancing the rezoning to the point where it is now virtually inevitable, and if the defendants are permitted to avoid the option, they will reap the benefit of the plaintiff’s endeavours at no cost to themselves.

SUMMARY OF FACTS AND EVIDENCE

The defendants, Mr Daryl Lyons and his mother, Mrs Faye Lyons, are the owners of a piece of square-shaped farming land of 147 acres situated at Leopold, near Geelong, in Victoria (“the land”). The defendants’ equal shares in the land were inherited in 1999 from Mrs Lyons’ father, who purchased it in 1938 and who thereafter conducted a small dairy farm on the land. Mr Daryl Lyons, Mrs Faye Lyons and Mr Lyons Senior (who is Daryl Lyons’ father and Mrs Lyons’ husband) reside on the land, on which they now run beef cattle. Mrs Lyons and Mr Lyons Senior also own three blocks of land adjacent to the boundary of the land. The land and the adjacent blocks belonging to Mrs Lyons and Mr Lyons Senior, are currently zoned “Rural Zone” under the Leopold Planning Structure, which was introduced in 1990, and, while still in place, is under review.

The boundary of the land abuts the southern boundary of the existing township of Leopold. There is residential land generally zoned “Residential 1 Zone” to the north and less dense residential areas zoned “Rural Living” to the south of the land. To the south of the land is Lake Conneware, a sensitive wetland. To the west is another sensitive wetland known as Reedy Lake.

The plaintiff, Tarongo, is a company within a group of companies (“the Tareeda group”) controlled by Mr John Callanan. Mr Callanan is the sole director and shareholder of Tarongo. Mr Callanan is a licensed real estate agent who previously worked as a real estate agent and a builder. Since 1982 he has worked as a land developer. He has undertaken residential and industrial land developments in Geelong, including three residential developments in the town of Leopold. He has also undertaken residential land developments in New South Wales and Queensland.

Mr Callanan has had a longstanding interest in acquiring the land, which is situated close to the outskirts of the existing town. Most of the land has a good slope and is not subject to flooding. It is one of the largest remaining undeveloped and unsubdivided parcels of land suitable for residential development in the Leopold region.

Mr Callanan gave evidence that he had entered negotiations for an option to purchase the land with Mrs Lyons’ father prior to the latter’s death, but the proposed transaction did not occur, because the council refused to rezone the land as it drained into Lake Conneware.

At some point during the 1990s, Mr Callanan first approached Mr St Quentin, a land surveyor with whom he had worked on numerous projects, about the redevelopment of the land.

In 2001, Mr Callanan first approached Mr and Mrs Lyons in relation to the land.

By a letter of Tareeda Properties Pty Ltd (“Tareeda Properties”) dated 4 June 2001 to Mrs Faye and “Darren” (sic) Lyons, Mr Callanan referred to problems which might be encountered in relation to the rezoning of the land. The letter relevantly stated:

“However the most unpredictable factor is the time frame that a successful result may take. It is more than likely that a negative response from the authorities will take less time than a successful rezoning.
Having considered the above factors may I suggest the following option arrangements would be mutually beneficial.
You grant my company an option to purchase all of the 147 acres at any time within 3 years for a set price based on the number of acres rezoned for housing allotments multiplied by $10,000 per acre, plus CPI from the date of the agreement. If all of the land were rezoned suitable for residential housing the price would be $1,470,000 plus the Consumer Price Index increases for the period it takes to obtain the rezoning.
In consideration for the option, I would be responsible for all the costs associated with the rezoning application and appeals etc including all consultants’ fees and in addition I would be willing to pay all of your costs associated with the preparation of the option to purchase.”

By a letter of Tareeda Properties dated 27 August 2001 to the Lyons, Mr Callanan referred to the desirability of applying to rezone the land as soon as possible. The letter asserted that the problem of the land’s drainage into Lake Conneware was the single most powerful factor against residential development. It referred to the company’s experience and success as a land developer, evidenced by the winning of a number of specified environmental awards. The letter also stated:

“… I am prepared to offer you $18,000 per acre for the residential zoned acres and $2,000 for any balance on the same terms as those previously advised.”

On 5 October 2001, Mr Callanan met the Lyons at the offices of the Lyons’ accountant. He told Mr and Mrs Lyons that he believed that the first application for rezoning would be rejected because of problems associated with Lake Conneware. He stated that the entire rezoning process might take up to five years. He requested at least three years to undertake it.

At trial, Mr Callanan agreed that in the course of the conversation, he probably implied that his organisation was best equipped to undertake the development of the land and had recognised expertise in environmentally sensitive development.

He gave evidence that, as at 5 October 2001, he thought that dealing with the council and the drainage problem were the principal matters which could take up to five years to resolve. He was unaware, at the time, of what a review of the existing Leopold Structure Plan would entail. He principally relied on expert consultants and conceded that his view of the maximum time frame was simply “a global view”.

Mr Lyons gave evidence that he and his mother planned to have the land rezoned from ‘rural to ‘residential’ and then sell it in order to buy a larger viable farm in the area. His parents intended to retain their blocks of land adjacent to the subject land and continue to reside in the area.

He gave evidence that the plaintiff’s expertise in environmentally sensitive development was an attractive feature of its offer. He asserted, and I accept, that Mr Callanan indicated, at the meeting on 5 October 2001, that he or his companies would not only pursue the rezoning but would carry out an environmentally sensitive development.

After the meeting on 5 October 2001, Mr Callanan had no further meetings with the Lyons. Negotiations thereafter proceeded by correspondence between Mr Callanan or his solicitors, Harwood Andrews, and the Lyons’ solicitors, Birdsey, Dedman & Bartlett.

By letter dated 8 October 2001, Mr Callanan offered $2,500,000 for the land “… subject to the rezoning of not less than 100 acres for residential purposes within 5 years. During the contract period my company would be obligated to maintain a current application to the appropriate authorities at all times. A default clause would provide that if there was no current application in any 18 month period then the contract would be avoidable by the vendor.”

The letter offered one payment of $2,500,000 for settlement prior to the expiration of ‘year two’.

The letter of Lorraine Secen of Birdsey, Dedman & Bartlett to Mr Callanan of Tareeda Properties dated 16 November 2001, stated that the Lyons had received a potentially more attractive offer for a land than Mr Callanan’s present proposal, and invited him to revise it.

In response, Mr Callanan, by a letter dated 20 November 2001 to Mrs Secen, made a revised offer of $3,000,000 for settlement prior to the expiration of ‘year one’, with graduated payments rising annually to the maximum price of $3,630,000 for settlement prior to the expiration of ‘year four’.

The letter of Lorraine Secen to Mr Callanan dated 18 December 2001 stated that the Lyons had again received a more attractive offer for the land than his most recent proposal and invited Mr Callanan to submit a revised proposal.

By a letter to Lorraine Secen dated 20 December 2001, Mr Callanan increased the proposed purchase price from $3 million to $3.75 million, with a similar annual inflation rate as previously advised.

The letter of Mrs Secen to Mr Callanan dated 8 January 2002 stated that his most recent offer was “still considerably inferior in financial terms to another offer received by [the Lyons]” and again invited him to submit a revised offer. The letter stated that the rival offer included shorter time frames for rezoning and final payment, and a substantial non‑refundable option fee.

By letter to Mrs Secen dated 10 January 2002, Mr Callanan increased the proposed purchase price to $6 million and reduced the time period to three years. The letter referred to the awards his organisation had won for environmentally sensitive landscaping. It offered the vendors the opportunity to name streets and parkland in order to preserve some of their family history.

The letter of Mrs Secen to Mr Callanan dated 30 January 2002 referred to a more attractive counter‑offer received by the Lyons, and again invited him to submit a revised proposal.

By letter dated 4 February 2002, Mr Callanan increased the proposed purchase price to $7.25 million and offered to pay an option fee of $10,000.

At trial, Mr Lyons asserted that he and his mother intended that the plaintiff should be required to pursue the rezoning of the land expeditiously, so that the option period would not expire without any progress being accomplished.

Further, Mr Lyons and his mother desired a significant proportion of the land to be rezoned ‘residential’, as they did not wish a large portion to remain as wasteland. They did not wish to lose “control and ownership of the land, without being assured that the redevelopment of all, or a significant majority of the land, to a residential development was going to proceed”.

They also considered that a condition requiring at least 100 acres of the land to be rezoned “residential” would give further protection against the possibility that Mr Callanan would do nothing or “go slow”, on the rezoning.

Mr Lyons testified that the defendants still expected significant benefits from the steps taken by the plaintiff to achieve rezoning of the land during the option period, even if the rezoning were not achieved within the three year term, as the work undertaken would provide information and groundwork for the future.

The letter of Birdsey, Dedman & Bartlett to Mr Callanan of Tareeda Properties dated 8 February 2002 stated:

“Re: Faye & Daryl Lyons – Leopold Land
We have passed on your offer dated 4^th February, to our clients who have instructed us to accept the increased purchase price of 7.25 million dollars together with the payment of an option fee. We detail below the terms on which the option documents will be prepared.
1. Purchase Price 7.25 million dollars as follows:
a) Rezoning and settlement prior to end of year 1 – 7.25 million dollars
b) Rezoning and settlement prior to end of year 2 – plus 5%
c) Rezoning and settlement prior to end of year 3 – plus 6%
2.Subject to rezoning of not less than 100 acres for residential purposes with 3 years of 1.3.2002
3.Price payable 60 days after date of obtaining rezoning.
4.Your company would be obliged to maintain a current application to the local authorities at all times – If during any 12 month period there was no current application the option is voidable at the vendors [sic] option.
5.All costs and expenses associated with rezoning applications or appeal etc to be borne by your company.
6.Our clients to sign all forms and co-operate with your company as required to assist the application. Any costs associated to be paid by your company.
7.Non refundable option fee of $10,000.00 payable on signing of Option Contract.
8.Our clients to have the opportunity to name streets and parkland to preserve some of the family history of the area.

Please confirm that these terms are the terms as agreed as a result of the negotiation, and we shall prepare legal documents for signature.”

At trial, Mr Callanan stated that, on reading the letter of Birdsey Dedman & Bartlett dated 8 February 2002, he did not recall turning his mind to whether any money would be payable if the rezoning did not occur. He testified that on 18 May 2000, he had had a motor bike accident and had sustained very serious injuries, which required treatment with strong painkillers until April or May 2002. In consequence, Mr Callanan was unable to recall his thoughts on reading the correspondence. He thought it possible that he did not understand the correspondence when he read and responded to the letter of Birdsey, Dedman & Bartlett dated 8 February 2002.

The letter of Tareeda Properties to Mrs Secen of Birdsey, Dedman & Bartlett dated 8 February 2002 relevantly stated:

“RE: Faye and Daryl Lyons 0 Leopold Land
Thank you for your letter of acceptance.
In reply:
1. agreed
2. replace “1.3.2002” with “the date of exchange of contract.”
3. replace 60 days with 90 days
4. agreed
5. agreed
6. agreed
7. agreed
8. agreed”

By a covering letter to Mr Callanan dated 8 March 2002, Birdsey, Dedman & Bartlett forwarded a draft option agreement, Schedule 1, Schedule B, contract of sale and s.32 statement.

Mr Callanan did not recollect reading the draft option agreement and other documents enclosed in Birdsey, Dedman & Bartlett’s letter of 8 March 2002, but believed that he probably read them before forwarding them to Mr Simmonds of Harwood Andrews, his solicitors.

The letter of Mr Simmonds of Harwood Andrews to Birdsey, Dedman & Bartlett dated 22 March 2002 stated:

“Tarongo Land Pty Ltd from Lyons
We act for Tarongo Land Pty Ltd and John Callanan. Our clients have requested us to review the option agreement forwarded with your letter of 8 March 2002.
We make the following comments or queries in relation to the draft option agreement and contract:
1.We seek clarification that it was a term of the agreement between the parties that the option fee was not to be applied as part of the purchase price in the event that the option is exercised.
2.Although the term "contract” is used throughout the option agreement, it is not defined. It should be defined by reference to the contract annexed to the option agreement.
3.The owners should be required, pursuant to clause 10(b) of the option agreement, to keep the property insured.
4.Whilst our client does not object to the terms and conditions of clause 11 of the option agreement, it must be made clear that if an innocent party as defined in that clause, determines not to exercise its right to terminate in the circumstances that that is an event of default, the right is not waived in relation to subsequent breaches, that is a waiver clause should be included. Further, it must be made clear that the terms of the agreement are enforceable against the successors and assigns of the parties.
5.Clause 12 of the option agreement should be deleted. Our client has an option to purchase the land. If our client does not exercise the option before 15 March 2005, it will lapse. For this reason, clauses 15 and 16 are also inappropriate.
6.Clauses 13 and 17 of the agreement should make it clear that the nature of the rezoning applied for and whether any rezoning granted is acceptable, is entirely at the discretion of our client.
7.Is it intended by clause 14 of the option agreement that the owners may name all of the streets?
8.The date of sale in the particulars of sale of the contract for sale of land should not make reference to 2002.
9.Please clarify the position in relation to GST. Why is it provided by proposed special condition 4 of the contract for sale of land that the margin scheme will not be applied. What is your clients' GST status? Are they registered for GST and if not, surely this sale will not be a taxable supply, and therefore not one that attracts GST.

I look forward to receiving your comments on these matters.”

In relation to the letter of Harwood Andrews to Birdsey Dedman Bartlett dated 22 March 2002, requesting deletion of clauses 12, 15 and 16, Mr Lyons asserted that “my mother and I considered these clauses very important to us and not negotiable and instructed Lorraine Secen to convey this to Mr Callanan”.

The letter of Birdsey, Dedman & Bartlett to Harwood Andrews dated 26 March 2002 stated:

“We refer to your letter of 22^nd March last and make the following responses to your comments and queries:‑
1.Yes the option fee was not to be part of the purchase price, whether or not the option is exercised.
2.The contract is referred to in Clause 1 as being annexed to the agreement.
3.Clause 10 will be amended to include a requirement that the owner keep the property insured.
4.(i) A waiver clause will be inserted
(ii)The agreement will be enforceable against the successor and assigns of the parties and a clause will be inserted to this effect.

5.Clause 12 refers to the type of rezoning of the property to be applied for.
6.Clauses 12, 13, 15 and 16 were the terms specifically agreed upon between our respective clients and we refer in particular to your clients letters of 8^thOctober 2001, 10^th January 2002, 4^thFebruary 2002 and 8^thFebruary 2002 and our letter of 8^athFebruary 2002.

There was never an intention that this be just a bare option to be exercised at the end of the period of time. Our clients were interested in an agreement with your client on the basis that he desired to develop the land, and would make every effort during the period of the option to have the land rezoned residential, and for development to proceed. During the negotiations your client indicated on many occasions that the clauses as inserted were as he also wished and that he was agreeable and that he indeed intended to proceed on this basis.
7.Clause 14 was proffered by your, [sic] client and our clients would be happy to name a couple of streets or parkland on the property.
8.The reference to 2002 will be removed from the Contract of Sale.
9.Our clients are presently registered for GST. As it could be 1, 2 or 3 years before the Contract would be signed it is wished to cover the GST situation if applicable in the future as one is unable to predict future government plans in this area.

We would like to have Contract of Sale signed before Easter. Please let us have your comments.”

The letter of Harwood Andrews to Birdsey, Dedman & Bartlett dated 5 April 2002 stated:

“We have conferred with our client in relation to your letter of 26 March. We are instructed as follows (adopting the pre-existing paragraph numbering):
1.Our client has no recollection of there being any discussion in relation to the position of the option fee, but accepts your client’s position.
2.On the basis of the acknowledgement contained in your letter of 26 March our client is happy to proceed.
3.Noted, please amend the contract accordingly.
4.Noted, please amend the contract accordingly.
5.Our concern was that the option as drafted in effect contained conditions, which is not typical. Our client instructs us that in the light of his previous discussions with you, he is prepared to accept your client’s position in relation to clause 5. However, some of the matters still require clarification. First, whilst clause 13 provides our client a right to apply for re‑zoning from 15 March, it may take a significant period of time for him to make initial application. Provision must be made for this. Secondly, clause 16 should specifically acknowledge that if an initial application is rejected, our client has the right to make further applications throughout the option period. Thirdly, is it your intent that clause 16 requires an application be on foot for the whole 12 month period, as that is one interpretation of the wording “…maintain a current re-zoning application… during any 12 month period…”. It is our client’s understanding that he would have the ability to bring an application, prosecute that application, including any appeal process (for which provision must be made in the agreement) and if that was rejected, could subsequently bring another application and would have a reasonable period of time to do so.
6.Please amend clause 14 to acknowledge that the right to name streets and parklands is for a selected number of streets and parkland to be agreed between the parties.
7.Noted, please make the necessary amendment.
8.The position in relation to GST is noted.

As a result of the position in relation to clauses 12, 13, 15 and 16 expressed in your letter, a further issue arises. If the application for re‑zoning is successful, our client still requires the ability to exercise the option at any time before the final option exercise date of 15 March, 2005. Please ensure that a clause to this effect is included in the agreement.”

Mr Callanan had no clear recollection of giving instructions in relation to the above letter, but acknowledged that he must have had “a reasonable discussion” with Mr Simmonds about it.

The letter of Birdsey, Dedman & Bartlett to Harwood Andrews dated 16 April 2002 stated:

“We believe that Clause 16 covers the time frames agreed. The Purchaser has the right to apply from 15^th March 2002 for a rezoning and so long as he has a current rezoning application with the local authorities during any 12 month period, the agreement will be complied with.
Clause 13 covers further applications as he has the right from 15^th March 2002 to apply for rezoning and this right is not limited as to time.
We will amend “maintain a current re-zoning application during any 12 month period..” to include “bringing an application, prosecuting that application, including any appeal process related to such application”.
We refer to the last paragraph of your letter and refer to Clause 8 of the agreement which gives the purchaser the right to “exercise the option on or before the expiry date which is defined as 15^th March 2005”.
We enclose amended Agreement. Please confirm as soon as possible and we shall draw final documents.”

The letter of Harwood Andrews to Birdsey, Dedman & Bartlett dated 29 April 2002 stated:

“Thank you for emailing the amended agreement.
We have forwarded it to our client for comment, and if appropriate execution. We have requested that he deliver to us copies together with a cheque for the option fee if he agrees to the terms.”

The option agreement dated 1 May 2002 was executed on behalf of Tarongo (the selected company in the Tareeda Group) by Mr Callanan as sole director and by Faye Lyons and Daryl Lyons. Mr Callanan did not recollect the execution of the option agreement, but acknowledged that he would have read it prior to executing it.

The option agreement dated 1 May 2002 stated:

“THIS AGREEMENT is made the 1^st day of May 2002 BETWEEN:
PARTIES:
A.FAYE JANETTE LYONS and DARYL JOHN LYONS both of 50 Como Road Leopold (“the owner”).
B.TARONGO LAND PTY. LTD. ACN 070 316 915 as Trustee for Leopold Development Trust of 3 Fitzroy Street Geelong (“the prospective purchaser”).

RECITALS:
The owner in consideration of being paid the option fee has agreed to grant to the prospective purchaser an option to purchase the property referred to in the Contract ("the property") on the terms set out in this agreement.
THE PARTIES AGREE:
1.The schedules and the contract and the Section 32 Statement annexed hereto form part of this agreement.
2.As the prospective purchaser is a company it shall procure the execution by its director of a guarantee in the form annexed hereto on the signing of this agreement.
3.This agreement is to be construed and interpreted as a conditional contract.
4.On the signing of this agreement by the parties an option fee of $10,000.00 will be payable by the prospective purchaser by cheque in favour of the owners.
5.The option fee will not form part of the purchase price of the property but upon payment will become the absolute property of the owners.
6.In consideration of the prospective purchaser paying to the owner the option fee, (the receipt of which is acknowledged by the owner), the owner hereby grants to the prospective purchaser an option to purchase the property on the terms set out in the contract.
7.The prospective purchaser may exercise the option on or before the 30^th April 2005 ("the expiry day").
8.The prospective purchaser may:‑
(a)exercise the option on or before the expiry day by serving on the solicitors for the owner, the Notice of Exercise of Option; and
(b)deliver with the'Notice of Exercise of Option the deposit as a bank cheque in favour of the owners for either
$725,000-00 if payment of the residue takes place on or before 30^th April 2003;
or $761,250-00 if payment of the residue takes place on or before 30^th April 2004;
or $806,950-00 if payment of the residue takes place on or before 30^th April 2005.

9.Upon the owner receiving the Notice of Exercise Option and the deposit there will be simultaneously entered into and completed between the owner and the prospective purchaser an agreement for the sale and purchase of the property upon the terms and conditions set out in the contract.
10.From the date of this agreement until receiving Notice of Exercise of Option or until the 30⁰ⁱ April 2005 whichever shall first occur the owner:-
(a)will maintain the property subject to fair wear and tear; and
(b)will not deal with the property in any manner inconsistent with the prospective purchasers rights under this agreement; and
(c)will keep the house on the property insured for its insurable value.

11.(1) If either party or the director who signs the guarantee annexed hereto:
(a)fails to perform its obligations to the other party under this agreement;
(b)has a receiver, manager, receiver and manager, liquidator (including a provisional liquidator), special investigator, statutory manager or similar person appointed (whether by a court or other persons) concerning any of its property, assets, business or affairs;
(c)becomes bankrupt, insolvent or enters into a composition scheme of arrangement (whether formal or informal) with creditors;
(d)assigns its property, assets, business or affairs for the benefit of its creditors;
(e)has any bona fide distress, execution, attachment or other process made or levied against any of its assets which is not satisfied within seven days after service;

then there has been an act of default.
(2)The non-defaulting party is known as "the innocent party".
(3)Each party undertakes to the other that it will promptly notify, in writing, the other of any event which constitutes an act of default by it.
(4)Upon the occurrence of an act of default the innocent party, in its absolute discretion, and at such time as it may determine, may terminate this agreement and/or exercise any other power or right which the innocent party may have under this agreement or in law or in equity.
(5)No failure, delay, relaxation or indulgence on the part of either party in exercising any power or right arising out of or in connection with this agreement or otherwise will operate as a waiver of such power or right, nor will any single or partial exercise of such power or right preclude any future exercise thereof.

12.The contract is subject to and conditional upon the prospective purchaser obtain [sic] a rezoning of not less than 100 acres of the property for residential purposes on or before 30^th April 2005.
13.The prospective purchaser has the right from 30^thApril 2002 to apply to the relevant authorities for a rezoning of the property.
14.The prospective purchaser will allow the owner to have the opportunity to name a selected number of streets and parkland on the property to preserve some of the family history in the area as agreed between the parties.
15.If the prospective purchaser fails to obtain a rezoning of not less than 100 acres of the property for residential purposes on or before 30^th April 2005 then this option shall expire and any rights the prospective purchaser may have to exercise the option shall be at an end.
16.If the prospective purchaser fails to maintain a current rezoning application, which includes bringing an application, prosecuting such application and including any appeal process associated with such application, with the appropriate local authorities during any twelve month period ending on the 30^th April in each of the years 2003, 2004 and 2005 or until the owner receives Notice of Exercise of Option on or before the 30^th April 2005 whichever shall first occur, unless the land has been rezoned, then this option is voidable at the owners absolute discretion, and at such time as they may determine.
17.The prospective purchaser shall as [sic] its own cost arrange for the rezoning application and comply with all requirements of the relevant authorities in regard to the proposed rezoning application for the property, including paying all necessary fees and expenses, and shall use its best endeavours to have the property rezoned. The owner agrees to sign all applications, consents or other documents and to do all such acts and things as are necessary or desirable for having the property rezoned by the relevant authorities. The owners reasonable legal costs and all fees and costs in regard to such matters shall be borne and paid by the prospective purchaser. The prospective purchaser also agrees to indemnify the owner against all other costs expenses claims and demands relating to or arising from the rezoning application for the property during the life of the option and until settlement of the Contract of Sale entered into upon Exercise of the Option.
18.The owner agrees to allow the prospective purchaser to have reasonable access to the property for any purpose connected with the proposed rezoning application for the property, but such access shall be limited to access by the prospective purchaser, his agent, architect, or engineer and any official of any competent authority for the purposes of inspection, the taking of measurements, soil testing and analysis and preliminary works connected with the rezoning application for the property but that no development of the property shall take place prior to the date on which the purchaser is entitled to enter into possession of the property under the contract
19.Neither party has the right to assign any of its rights or benefits under this agreement without the prior written consent of the other.
20.This agreement shall bind the respective personal representatives and assigns of the owner, the purchaser, the directors of the purchaser or the assigns and director or personal representatives of the purchaser.”

Mr McCartney, the Senior Strategic Planner for the City of Greater Geelong, is a qualified town planner with extensive professional experience. He gave evidence pursuant to a subpoena on the process involved in making a request for rezoning.

Pursuant to the Planning and Environment Act 1987, the council of a relevant municipality is the body empowered to grant an application for rezoning. There is no prescribed form of application for rezoning. Rather, a request for rezoning is made to the relevant council. There is no right to appeal from the rejection of such a request.

Mr McCartney deposed that a preliminary consultation process precedes the lodging of a formal application for rezoning. Intending applicants for rezoning were “advised to seek preliminary discussions with the planning staff of the council and other relevant authorities to resolve any potential problems early and give the proposal the best chance of success.” Detailed advice on appropriate preliminary steps was contained in a brochure prepared by the council and provided to applicants.

Although there was no prescribed form of application for a rezoning request, intending applicants were advised that an application should contain a location plan, property description, site condition description, description or plan of surrounding development or use and its relationship to the site, details of the availability of services, a clear and full explanation of the requested planning scheme amendment together with intended use, and plans of any specific development or subdivision. The applicant should also justify why the existing zoning was inappropriate and why the planning scheme should be changed. The proposed amendments should be consistent with state and local planning policies, which must be addressed in the application, as should any perceived advantages or disadvantages.

Mr McCartney deposed that in consequence of the matters which should be included in a rezoning request, “… a significant level of preparation will be required for a rezoning application by a Proponent prior to the lodging of a request, particularly if the project is substantial. In most cases, professional consultants will be engaged to prepare the application, even if the Proponent is a professional property developer well acquainted with rezoning requirements.”

At trial, Mr McCartney agreed that if a request were defective or inadequate, the council would not ordinarily reject it out of hand.

Mr McCartney also deposed that:

“The consultation stage of the process, prior to the lodging of a rezoning request, is of particular importance. Any problems which should be addressed, what additional information may be required and its level of detail, will usually be established at the consultation stage undertaken with the council planning staff and other relevant government bodies prior to lodgement of the formal application.
Depending on the nature and scale of the proposed project, the consultation stage may take many months, or even some years in a major development, and may involve the applicant in considerable time, expenditure and effort.
This work undertaken by the applicant in the consultation stage is not only a usual step, but is an integral part of the rezoning process. It is an essential and necessary stage of the process prior to the lodgement of a formal application.”

Following the lodging of the rezoning request, accompanied by the appropriate fee and necessary supporting documents, the council would usually conduct a preliminary internal assessment. Consultation with other government agencies and bodies would occur if the proposed development were significant and their input was required.

Mr Callanan testified that he originally planned to develop the land himself. Following the execution of the option agreement on 1 May 2005 on behalf of Tarongo, he engaged consultants to assist in achieving the rezoning of the land. He first engaged Mr Grant St Quentin, an experienced licensed surveyor. Mr St Quentin opened his file in relation to the land on 30 May 2001. He knew Mr Callanan well, having worked with him on a number of developments. He had previously discussed the land with Mr Callanan.

In 2001 Mr Callanan also engaged Peter Berry & Associates Pty Ltd on behalf of Tarongo in connection with the proposed redevelopment of the land. Mr Berry, a civil engineer and a director of the company, had previously worked with Mr Callanan on other land developments in the Geelong region.

Although Mr Berry’s file relating to the land has been lost or mislaid, he recollected that since February 2002, his company, on Tarongo’s behalf, had undertaken two major items of work: a report on drainage and services for submission to council in support of the rezoning application; and a preliminary estimate of development costs for the land.

Mr St Quentin was aware, from the outset, that the rezoning of the land would require aspects of the existing Leopold Structure Plan to be “revisited”. As at May 2001, he did not regard it as a foregone conclusion that the rezoning could not be finalised before a review of the existing Leopold Structure Plan had taken place. He did not warn Mr Callanan that a review of the Leopold Structure Plan might be a necessary pre-requisite of achieving the rezoning.

Mr St Quentin sent a letter dated 5 March 2002 to Tract Consultants Pty Ltd (“Tract”), a town planning company, seeking its fee proposal for preparing a submission for a rezoning application for the land. Messrs Callanan and St Quentin subsequently met Mr Nevan Wadeson, a director of Tract, in March 2002 to discuss the matter.

Tract sent Mr St Quentin a formal proposal dated 15 April 2002, which stated that the work should be completed in the following four stages: rezoning strategy, preparation of rezoning request, assessment of rezoning and amendment approval process.

By letter dated 23 April 2002 to Tract, Mr St Quentin, on behalf of Tarongo, appointed Tract as the planning consultant in relation to the land. The letter stated that only stage 1 of the work should be undertaken until further analysis was completed. The letter further noted that Landlink Consultants had been appointed to undertake an analysis of residential development requirements at Leopold.

Tract opened a file in relation to the rezoning of the land. Mr Wadeson communicated with Mr St Quentin about aspects of the project during the course of 2002. He conducted a site inspection at the land in August 2002 and, with other staff, prepared a draft table of scheme and policy issues in August 2002. He also had discussions, and a meeting, with Mr McCartney of the council during 2002.

Mr Wadeson did not see a copy of the option agreement during this time and, at trial, could not recall whether he was aware of a specific deadline by which to lodge the rezoning request with the council.

At some time after November 2002, Tract personnel began to draft the submission to the council. Much of the work was done by Ms Alison Glynn and Ms Jenny Futcher, two town planners employed by Tract, who worked under Mr Wadeson’s supervision.

Ms Glynn worked on the rezoning application from early 2003, by which time most of the necessary preliminary work had already been performed. With input from Ms Futcher, she produced a draft rezoning submission in February 2003.

Ms Glynn communicated with Mr St Quentin in relation to the draft submission. She sent him a facsimile dated 24 March 2003. She did not see a copy of the option agreement at this time, and was not informed that the rezoning request to the council must be lodged by 30 April 2003. Ms Glynn testified that if she been aware that it was necessary to lodge the request by 30 April 2003, it would have been possible to prepare a request by that date. On 5 May 2003, she sent a draft submission to Mr Callanan.

She received Mr Callanan’s comments on the draft submission and amended it accordingly. On 7 May 2003, she sent the amended submission and rezoning request, together with a covering letter dated 7 May 2003, and a cheque for the lodging fee of $700, to the council.

Ms Glynn could not recall by what method Tract sent the letter and the request to the council. She believed that such documents would normally have been posted.

The letter of Tract to Mr McCartney of the council dated 7 May 2003 relevantly stated:

“On behalf of the Tareedo Properties Pty Ltd we are pleased to lodge the request to rezone the land in Melaluka Road, Leopold to facilitate additional residential development in South Leopold.
Please find enclosed a cheque of $700 as fee for lodging the amendment and 5 copies of supporting documentation. An engineering report by Peter Berry and Associates is also being prepared and will be forwarded separately.
…
We look forward to your favourable consideration of this rezoning request.”

Mr McCartney testified that a request for rezoning might be stamped with the date of its receipt by the council, but there was no uniform practice. In the present case, the council file did not reveal the date of receipt of Tarongo’s request. I conclude that it was received on 8 May 2003 or a few days thereafter.

It is common ground that the letter of request and accompanying documents constituted the first request for rezoning of the land to ‘residential’ lodged with the council and that no request had been lodged on or before 30 April 2003.

Mr Lyons gave evidence that in May 2003, he and his mother became concerned that little was being done in relation to the rezoning of the land, as they were aware that no representatives of the plaintiff had sought to enter the land to conduct investigations or surveys.

He therefore instructed Mrs Secen of his solicitors, Birdsey, Dedman & Bartlett, to write to Mr Callanan requesting details of any rezoning application lodged with the council.

The letter of Birdsey, Dedman & Bartlett to the plaintiff dated 7 May 2003 relevantly stated:

”Could you please forward to us documentation indicating the maintenance of “a current rezoning application”, which could include “bringing an application, prosecuting such application and including any appeal process associated with such application”, in accordance with Clause 16 of the Option Agreement dated 1 May 2002”.

Mr Lyons stated that around this time, he also spoke to Ian McCartney regarding the progress of the rezoning application.

By facsimile dated 13 May 2003, Mr Callanan replied to the defendant’s enquiry attaching a copy of a letter dated 12 May 2003 from Mr St Quentin of St Quentin Surveyors. The letter confirmed that Tract had been engaged to undertake the rezoning of the land; that the rezoning application had been submitted; and that Mr Callanan would be advised of its progress in due course.

By a further facsimile to Birdsey, Dedman & Bartlett dated 15 May 2003, Mr Callanan attached a letter dated 15 May 2003 from Nevan Wadeson of Tract, prepared by Ms Glynn. The letter stated:

“After a number of discussions with the City of Greater Geelong a formal set of rezoning documents was lodged with Council on Thursday 8^th May 2003.”

The letter advised that after Mr Berry’s engineering report had been received, the material would be circulated internally and to the relevant authorities for comment. Council officers would then prepare a report on whether the amendment should be exhibited which would take approximately three to four months. If the question of exhibition were resolved, the likely timeframe for processing the application would be 10 months from the time of amendment exhibition resolution.

It stated that if the council decided to defer consideration of the rezoning request until further consideration of a new Structure Plan for Leopold, the time between receipt of referral comments and a resolution to exhibit the amendment could be extended by one to two years. Tract would seek to progress the matter with council officers, so that the amendment could proceed expeditiously. The letter stated: “[t]his may include a strategic review of all expansion options for Leopold by ourselves and Peter Berry to confirm that the subject land is the logical location for township expansion of Leopold”.

Mr Callanan received no response from the Lyons in response to the facsimiles dated 13 May 2003 and 15 May 2003, and received no further communication from them until August 2003.

Mr Lyons confirmed that following receipt of the two facsimiles from Mr Callanan dated 13 and 15 May 2003, he was aware that Tarongo had engaged experts to prosecute the rezoning application at Tarongo’s expense. He assumed that the bulk of expenditure would probably have been incurred prior to lodgment of the application, but was aware that there would be further expense, and that work would continue in accordance with the information contained in Tract’s letter of 15 May 2003.

On 11 August 2003, an internal council report prepared for presentation to council recommended that determination of Tarongo’s application for rezoning the land be deferred until a review of the Leopold Structure Plan had occurred.

By a letter to Birdsey, Dedman & Bartlett dated 25 August 2003, Mr Callanan stated that the proposed review of the Leopold Structure Plan and subsequent rezoning was unlikely to be completed prior to 30 April 2005. He requested an extension to the option agreement of one year to 30 April 2006. A copy of the letter from Ms Glynn of Tract to the council dated 18 August 2003 was attached. That letter queried the council’s financial capacity to achieve progress in the development of a new structure plan for Leopold. It offered, on behalf of Tareeda, to assist in funding such a project on certain terms.

By letter to Mr Callanan dated 27 August 2003, Mrs Secen acknowledged receipt of Mr Callanan’s letter and informed him that she would seek instructions from the Lyons.

The letter of Birdsey, Dedman & Bartlett dated 27 November 2003 to Mr Callanan responded to the request for an extension. It stated that the Lyons “always intended that the Agreement be for three years only, and they are not overly keen to enter into any extension of the settlement date at this stage”. The letter invited Mr Callanan to submit an “appropriate offer” as consideration for the extension, bearing in mind the “significant increase in property value in the Geelong region”. The letter made no mention of any non-compliance with clause 16.

The letter of Mr Callanan to Birdsey, Dedman & Bartlett dated 11 December 2003, stated that “diligence, input and lobbying” would be required in order to secure the rezoning. It stated that, given the limited time remaining on the option, such efforts may not be justified. The letter contained a proposal to extend the option by two years on the basis of price increase of 7%, to $8,772,500 if the contract were exercised by 30 April 2006, and by 8%, to $9,570,000, if it were exercised by 30 April 2007.

Almost two months elapsed before Mr Callanan received a response to his offer of 11 December 2003. The letter of Birdsey, Dedman & Bartlett dated 2 February 2004 informed Mr Callanan that the proposed offer was not acceptable to the Lyons, as its terms did not “reflect the rapid increase in property values since the Contract was signed”. The letter made no mention of any non-compliance with clause 16 of the option agreement, and proposed a one year extension on the following terms:

“the present year three contract value of $8,069,250 – revised to $10,500,000
the year four contract value revised to $12,000,000
an additional option fee of $5,000 to cover costs associated with this contract extension”.

The letter of Mr Callanan to Birdsey, Dedman & Bartlett dated 1 March 2004 rejected the Lyons’ revised offer. It offered $10,000 to extend the option for one year, left the three year contract price as agreed in the existing contract and increased the price payable upon the four year contract to $9,250,000.000.

The letter of Birdsey, Dedman & Bartlett to Mr Callanan dated 15 March 2004 rejected Mr Callanan’s revised offer. The letter raised for the first time the alleged non-compliance with clause 16, stating:

”Our clients consider their demands to be fair and reasonable, given the rapid increases in property values that have occurred since the Contract was signed.
We note that your application for rezoning was not received by the Council until 7 May 2003, which was outside the 12 month period required by the Contract.
We would point out that the terms set out in Clause 16 of the Contract have not been complied with.”

The letter of Harwood Andrews to Birdsey Dedman & Bartlett dated 24 March 2004 stated that Tarongo did not wish to pursue the application for an extension of the option as proposed in its letter of 11 December 2003. The letter denied that Tarongo had not complied with clause 16 of the option agreement and stated “In any event what was your point? By their conduct, and by the terms of your letters of 2 February and 15 March 2004 in referring to “the contract” your clients have confirmed the terms and conditions of the existing options”.

Tract continued to work on the rezoning application. Ms Glynn’s work included liaison with council staff; coordinating correspondence between Tarongo, its representatives and the council; and preparation of a submission to the council dated 10 May 2004 on the proposed amendments to the Leopold Structure Plan.

Mr Callanan heard nothing further from the defendants until November 2004. He stated that the fact that “no more was said about any late lodgment of the re-zoning application confirmed in my mind that the Lyons did not intend to void the option”. He gave evidence that in reliance on that, he invested considerable time and substantial further expense in pursuing the rezoning application. In particular, he instructed Mr St Quentin to write submissions on Tarongo’s behalf to the council on the proposed amendments to the Leopold Structure Plan, and to prepare a detailed concept plan of lot sizes. He instructed Mr Berry to prepare a detailed costing of drainage works. He instructed Tract to write a submission on Tarongo’s behalf to the council on the proposed amendments to the Leopold Structure Plan.

Mr McCartney of the council gave evidence that, in his view, Tarongo’s rezoning application had been prosecuted by Tarongo and its consultants with “as much vigour and professional input as was possible in the circumstances”.

The letter of Harwood Andrews to Birdsey, Dedman & Bartlett dated 17 November 2004 again sought to negotiate an extension of the option. A two year extension was sought in return for two payments of $250,000, paid at the commencement of each year. The fees would be payable irrespective of whether the option was exercised, and if the option was exercised prior to the commencement of year two, the second payment would be brought forward to that date. In addition, the letter offered an increase in the purchase price under the option of “a rate equivalent to 8% (but not compounding) to the time that the option was exercised.”

The letter of Birdsey, Dedman & Bartlett to Harwood Andrews dated 23 November 2004 sought clarification of the terms of the offer dated 17 November 2004. The letter further stated “[p]lease advise what is the present position with regard to your client’s application”.

The letter of Harwood Andrews to Birdsey, Dedman & Bartlett dated 6 December 2004 outlined the terms of the extension offer and stated “[t]he land has been included within the Leopold structure plan for future residential development”.

The letter of Birdsey, Dedman & Bartlett to Harwood Andrews dated 7 December 2004 again sought information regarding Tarongo’s application to council.

The letter of Harwood Andrews to Birdsey, Dedman & Bartlett dated 14 December 2004 outlined the progress made with the rezoning application. The letter stated, inter alia, that the application was proceeding well and had strong council officer and authority support. It further stated that the new Leopold Structure Plan, adopted on 28 September 2004 gave unambiguous support to the future development of the site as part of the preferred expansion of the Leopold township.

Mr Lyons stated that although the Lyons believed that in the event of non-compliance with clause 16, they were entitled to avoid the option agreement at any time they decided to do so only on 14 January 2005 because it then appeared that Mr Callanan may have been purposely delaying progressing the rezoning application until an extension of the option was secured, and was negotiating the on-sale of the land to another party. Mr Lyons stated that this was “very upset[ting]….since one of the important factors for us in agreeing to grant the option to Mr Callanan was that his company would not merely purchase our land, but would redevelop (all, or at least 100 acres of it) into a high quality residential development, similar to previous award winning development that he had been involved in…..”

On approximately 14 January 2005, the Lyons, for the first time, instructed their solicitors to avoid the option agreement on the basis of breach of clause 16.

The letter of Birdsey, Dedman & Bartlett to Harwood Andrews dated 14 January 2005 stated that the Lyons avoided the option “in accordance with clause 16 and 11 of the option agreement…..because of the failure of your client to maintain a rezoning application with the council during the period ending on 30^th April 2003”.

The letter of Harwood Andrews to Birdsey, Dedman & Bartlett dated 17 January 2005 replied, inter alia, that “in previous correspondence you had raised an allegation that our client had not maintained a rezoning application. We responded to this assertion by our letter of 24 March 20004 [sic]. No response was received to that letter. If your client takes this issue, our client will be relying on the matters raised in the letter of 24 March and the delay of your client”.

Mr Berry stated that he had not yet invoiced the plaintiff for work undertaken on the rezoning application, but anticipated that his company would charge a total of $9,058.50, of which $3564.00 was incurred after April 2003. He stated that while, when doing business with Mr Callanan, he usually reviewed costs after the outcome of a development project was known and sent a bill reflecting his “total involvement”, the final invoice in this case would not be contingent on the outcome of the development proposal.

Mr St Quentin deposed that following submission of the rezoning request on 7 May 2003, his firm prepared: a submission to council dated 15 April 2004 in favour of proposed new Leopold Structure Plan, a detailed concept plan of land lot sizes dated 20 August 2004 to enable Peter Berry to do detailed drainage costing, sourced quotations from consultants for drainage design and for flora, fauna and archaeological surveys; and prepared a submission to council dated 20 December 2004 in support of amendment to Leopold Structure Plan. He anticipated that his company would charge Tarongo over $33,000 for work undertaken from 1 May 2003 onwards, in addition to $2,750 already charged.

Mr St Quentin conceded that he usually billed Mr Callanan for work only where a project was successful.

Mr Wadeson desposed that Tract had billed, and been paid, over $8,000 for work it had performed for Tarongo from March 2003 on the rezoning application.

Mr Lyons further confirmed that during the period between 15 March 2004 (when the alleged breach of clause 16 was first raised by the Lyons) and 14 January 2005 (when the Lyons purported to terminate the option agreement pursuant to clauses 16 and 11) neither he nor Mrs Lyons gave instructions to their solicitors to take any action in relation to a breach of clause 16.

RELEVANT LEGAL PRINCIPLES - CONSTRUCTION

The principles applicable to the construction of the option agreement are well established. The Court should enquire what reasonable persons in the position of the parties would have intended the clauses to mean.[1]
[1]Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 at 996.

While there are varying judicial statements of the principles applicable in this context, it is established that where language is ambiguous or susceptible of more than one meaning, evidence of surrounding circumstances, either known to both parties or notorious facts, will be admissible in aid of construction. The objective framework of facts within which the contract came into existence, and the parties’ presumed intention in that setting, rather than actual intentions, are admissible.

In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales,[2] Mason J stated:

“The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.”

[2](1982) 149 CLR 337 at 350.

In Biotechnology Australia Ltd v Pace,[3] Kirby J, observed that:

“The determination of every case depends upon its own facts. The meaning of the agreement between the parties must be discovered objectively. Where there is suggested ambiguity or vagueness or where it is urged that a term is illusory, it may sometimes be both necessary and appropriate to have regard to extrinsic evidence in order to give meaning to that to which the parties have agreed; see, eg Kell v Harris (1915) 15 SR (NSW) 473 at 479; 32 WN (NSW) 133 at 136 and Raffles v Wichelhaus (1864) 2 H&C 906; 159 ER 375.
The court will endeavour to uphold the validity of the agreement between the parties: see Hillas & Co Ltd v Access Ltd. The court will attempt to avoid frustrating the wishes of the contracting parties so far as those wishes may be ascertained from the agreement between them: see Meehan (at 589); see also Barwick CJ in Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437 where his Honour said that: ‘ … In the search for that intention no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements.’
But the court will not do so, where, in effect, it is asked to spell out, to an unacceptable extent, that to which the parties have themselves failed to agree. Nor will the court clarify that which is irremediably obscure … ”.

[3][1988] 15 NSWLR 130 at 136.

Relevant authority establishes that the modern approach to the construction of commercial agreements of business people is, generally, to endeavour to uphold the bargain by eschewing a narrow or pedantic approach in favour of a commercially sensible construction, unless irremediable obscurity or a like fundamental flaw indicates that there is, in fact, no agreement.

In Hillas & Co Ltd v Arcos Ltd,[4] Lord Tomlin stated:

“the problem for a court of construction must always be so to balance matters that, without violation of essential principle, the dealings of men may as far as possible be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains.”

[4][1932] All ER 494 at 499.

Lord Wright stated:

“Businessmen often record the most important agreements in crude and summary fashion. Modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is, accordingly, the duty of the court to construe such documents fairly and broadly, without being too astute or subtle in finding defects.”[5]

[5]Ibid at 503-4.

In CCP Australian Airships Ltd v Primus Telecomunications Pty Ltd,[6] Nettle JA rejected a construction under which a non‑refundable deposit would be non‑refundable in any circumstances, including total failure of consideration due to the recipient’s breach of contract. His Honour endorsed the approach of Isaacs J in Cohen & Co v Ockerby & Co Limited[7] and stated:

“Authority makes plain that elliptical expressions in mercantile contracts are to be read in no narrow spirit of construction but as the Court would suppose two honest business men would understand the words they have actually used with reference to their subject matter and the surrounding circumstances. One is thus to approach the crucial issue of construction by making the inquiry as to what reasonable business people in the position of the parties would have intended the clause to mean. In my opinion, it would fly in the face of honest dealing and common sense to construe [the clause] in the manner suggested by the appellants.”[8]

[6][2004] VSCA 232.

[7](1917) 24 CLR 288 at 300.

[8][2004] VSCA 232 at [9].

In Di Dio Nominees Pty Ltd v Brian Mark Real Estate Pty Ltd,[9] Hedigan J observed that:

“ … the agreement was a commercial agreement and it should be construed against the matrix of facts that underpinned the arrangement made between [the parties] and in accordance with authorities providing guidance as to the correct approach to the construction of commercial contracts.”

[9][1992] 2 VR 732 at 741-2.

His Honour referred to Cohen and Co v Ockerby and Co Ltd and stated:

“These principles have been echoed in countless courts in different ways during the 75 years since Sir Isaac Isaacs wrote them, but in my view, the seminal principle that a business contract should be interpreted so as to accord with business common sense remains intact.”

Consistently with the above principles, in MLW Technology Pty Ltd v May,[10] Gillard AJA, (with whom Winneke P and Buchanan JA agreed), stated:

“The court, in construing contracts between businessmen and also their actions, should proceed in a common sense, non-technical way. How would the businessmen construe the agreement in the light of the commercial purpose of the setting … “
[10][2005] VSCA 29 at [76].

WHETHER EXERCISE OF OPTION CONDITIONAL ON REZONING
The plaintiff’s contentions

The option agreement annexes a Contract of Sale of the land which contains particulars of sale, general conditions and special conditions. By clause 9 of the option agreement, the contract of sale will become binding on the parties, simultaneously with the owners’ receipt of notice of exercise of the option and of a bank cheque for the amount of the deposit.

Clause 12 of the option agreement provides:

“The contract is subject to and conditional upon the prospective purchaser obtain [sic] a rezoning of not less than 100 acres of the property for residential purposes on or before 30^th April 2005.”

It was common ground that clause 12 was ambiguous in the relevant sense, and extrinsic material was admissible to aid its construction.

The plaintiff contends that clause 12 is not a term of the option agreement and does not impose a condition on the exercise of the option, but rather, is a term of the Contract of Sale, in which it operates as a condition subsequent analogous to a “subject to finance” clause. As such, it enured for the plaintiff’s sole benefit, and the plaintiff in fact waived it.

Mr Vickery, senior counsel for the plaintiff, argued that the option agreement must be construed by reference to its commercial purpose, which could be inferred from the surrounding circumstances and “notorious facts” known to the parties at the date of executing the option agreement.

He submitted that, in circumstances, where to the parties’ knowledge;

(a)Mr Callanan was an experienced land developer;
(b)the rezoning of the land would increase its value;
(c)Tarongo would have to do a considerable amount of work and incur expense in preparation for lodging a rezoning request;
(d)rezoning the land was likely to take a considerable period of time, which could not be predicted with precision but was between three and to five years;
(e)Mr Callanan, between 8 October 2001 and 1 May 2002, had made five offers of terms for an option, which successively increased the purchase price payable;
(f)negotiations on the terms of the option relating to the purchase price and payment of the purchase price had substantially occurred between the parties.

“the distilled purpose of the option agreement” was to achieve payment to the Lyons of the agreed purchase price to the Lyons and transfer of the land to of Tarongo within the 3 year time frame.

Mr Vickery argued that the option agreement therefore required Tarongo to use its best endeavours to secure the rezoning, which would increase the land value, enabling it to pay the option price; but, as it was uncertain whether rezoning would be achieved in the three years, Tarongo would only be obliged to pay the purchase price if a minimum of 100 acres was rezoned “residential” within the life of the option agreement.

The plaintiff argued that pursuant to the express terms of clause 7 of the option agreement, it was entitled to exercise the option at any time up to and including 30 April 2005 by serving the requisite notice and forwarding a bank cheque for the deposit pursuant to clause 8 of the option agreement. The entitlement to exercise the option established by clauses 7 and 8 was unqualified and not subject to any requirement that a minimum of 100 acres of the land must first be rezoned to ‘residential’.

The plaintiff acknowledged that the option agreement was a conditional contract, as clause 3 expressly stated, but argued that the only conditions were those contained in clauses 16 and 17 (relating to the requirement to maintain a current rezoning application and to use best endeavours to have the property rezoned) and possibly, a further condition contained in clause 15.

Although clause 12 appeared in the text of the option agreement, rather than the annexed Contract of Sale, Mr Vickery argued that it was, properly construed, a special condition of the Contract of Sale which worked to secure necessary flexibility for the plaintiff during the period commencing 90 days before 30 April 2005, if rezoning had not occurred and the plaintiff needed to enter the contract in order to secure finance. He submitted that during that period, the plaintiff could either settle the contract or it could wait until 30 April 2004, and if rezoning ultimately did not occur by that date, it could rescind. In contrast, if the plaintiff exercised the option more than 90 days before 30 April 2005, it would not be entitled to avoid the contract if rezoning had not occurred by 30 April 2005. In such a case, it would be taken to have elected to assume the risk that rezoning would not occur. Merger would then operate and the condition in clause 12 would have no further effect or operation.

The grounds on which the plaintiff relied in support of the contention that clause 12 is a term of Contract of Sale were:

(a)The express reference in clause 12 to ‘the contract’ as being subject to the condition.
(b)Clause 12, if a condition of the option agreement, would defeat the commercial purposes of the option agreement identified by the plaintiff.
(c)If clause 12 were a condition of the option agreement, it would have no useful operation, because it covered the same ground as clause 15.
(d)In contrast, if clause 12 were a term of the Contract of Sale, it promoted the commercial purposes of the option agreement as a whole, by providing the plaintiff with the necessary flexibility to rescind the Contract of Sale at the ‘eleventh hour’.

The plaintiff ultimately contended that “when the Agreement is considered in the light of the surrounding circumstances, it was clear that the commercial purpose of achieving the rezoning was … the pre‑condition for Tarongo’s obligation to pay the purchase price to the Lyons,” rather than a precondition of the plaintiff’s entitlement to exercise the option. It also submitted that, given that the option agreement obliged Tarongo to commit an indeterminate amount of work and expenditure to rezoning, a construction which upheld its proprietary interest should be preferred.

The defendants’ contentions

In contrast, the defendants argued that the exercise of the option was conditional on the achievement of the specified rezoning by 30 April 2005. As rezoning had not occurred on 17 January 2005, the plaintiff’s purported exercise of the option on that date was ineffective, irrespective of whether it had also breached clause 16. As the rezoning did not occur by 30 April 2005, the plaintiff was never entitled to exercise the option and was not entitled to specific performance.

Mr Garratt, senior counsel for the defendants, emphasised that the option agreement must be construed as a whole and in accordance with what honest and reasonable business people in the position of the parties would have taken the relevant clauses to mean. He argued that, when viewed in the light of the factual matrix, the manifest intention of the parties was to provide for an option subject to and conditional upon the achievement of the specified rezoning within the term of the option. He contended that the plaintiff’s construction was based on a premature and selective attribution of paramountcy to particular terms, which ignored their context and the recurrent reference to a requirement of rezoning by 30 April 2005.

In that context, he pointed out that, although clause 12 stated that “this contract is conditional upon [the required rezoning]”, it also referred to “the prospective purchaser”, rather than “the purchaser”. The Contract of Sale referred to “the purchaser”. The reference in clause 12 to the “prospective purchaser” was thus consistent with its status as a term of the option agreement, rather than of the Contract of Sale. Most importantly, clause 12 appeared within the text of the option agreement. It was not included in the attached Contract of Sale.

Further, Mr Garratt submitted that the operation of clause 12 in the attached Contract of Sale was highly contrived and artificial, and antithetical to the understanding which reasonable business people would adopt.

The defendants contended that the meaning of clause 12 was clear, despite its the obvious error in the use of the word “obtain”, and its drafting defects. Viewed in the light of the repeated references in the option agreement to the specified rezoning, and the extrinsic evidence, clause 12 meant that the exercise of the option was conditional upon the achievement of the rezoning by 30 April 2005. Alternatively, the extrinsic evidence justified the rectification of clause 12 to read:

“The exercise of the option is subject to and conditional upon the prospective purchaser having obtained a rezoning of not less than 100 acres of the property for residential purposes on or before 30^th April 2005.”

In that context, Mr Garratt contended that the correspondence and related evidence of the parties’ negotiations established that clauses 12 and 15 were terms of the option agreement and not of the annexed Contract of Sale. The parties had agreed that the exercise of the option would be conditional on achievement of the specified rezoning by the exercise date (which must necessarily occur prior to the expiry of the option on 30 April 2005). Further, he submitted that clauses 12 and 15 were not exclusively for Tarongo’s benefit, and were thus not amenable to waiver by it.

Mr Garratt submitted that clause 15 did not completely overlap with clause 12, although it implicitly embodied the same condition. Within the scheme of the poorly drafted option agreement, it set the date by which, on any view, the option was no longer exercisable. It added a repetitive emphasis.

Mr Garratt argued that the effect of conferring the option on Tarongo was to “lock up” for three years the defendants’ land from sale to any party other than Tarongo, and any sale to Tarongo would be at prices struck in 2002. The option agreement did not, of course, compel Tarongo to purchase the land, and it could be inferred that Tarongo would not do so unless the option price exceeded market price. The defendants obtained only the non‑refundable option fee of $10,000 and the likelihood that the plaintiff would work diligently to achieve the rezoning, in order to avoid the loss of the option.

Application

The Recitals to the option agreement acknowledge that “the owner in consideration of being paid the option fee has agreed to grant the prospective purchase an option to purchase the property referred to in the contract (“the property”) on the terms set out in this agreement.”

By clause 1 of the option agreement, the schedules, the contract and the section 32 statement annexed to it, form part of “this agreement”. By clause 3, “this agreement is to be construed and interpreted as a conditional contract”.

Although the Contract of Sale is expressly stated to form part of “this agreement”, by clause 9, it is clear that it is distinct, and unlike the option agreement, will not be entered into unless and until the option is exercised. The terms ‘contract’, ‘contract of sale’ and ‘this agreement’ are used in the option agreement without consistency or clarity. In some contexts, the term ‘contract’ appears to refer exclusively to the Contract of Sale, as in the Recital and clause 9 (which provides that on receipt of notice of the exercise of the option and the deposit, the owner and prospective purchaser will simultaneously enter into and complete an agreement for the sale and purchase of the property upon the terms and conditions set out in the contract).

Similarly, in clause 1, the term “contract” appears to refer exclusively to the Contract of Sale. Further, in clause 4, the reference to “this agreement” must be a reference to the option agreement exclusive of the Contract of Sale, as it refers to the payment of an option fee of $10,000 on the signing of “this agreement”.

While the terms “this agreement” and “contract” are generally used to refer to the option agreement and the contract of sale respectively, the terms are not consistently used as unambiguously distinctive designations. For example, in one instance the capitalised word “Contract” is used to refer to the Contract of Sale.[11] In another instance, the term “Contract of Sale” is used.[12] In other instances, the term “contract” does not clearly exclude the option agreement.[13] Sometimes the usage of the terms is obscure, as a comparison of the Recital and clause 6 demonstrates.
[11]Recital.
[12]Clause 17.
[13]Clause 3.

Further, while in the text of the option agreement, the term “contract” in many instances refers to the Contract of Sale, clause 12 refers to the “prospective purchaser”. In contrast, the Contract of Sale consistently refers to the ‘Purchaser’ or ‘purchaser’.

It is not disputed that the option agreement is poorly drafted. The inclusion of clause 12 within the text of the option agreement is, however, an obvious and powerful factor in favour of its status as a term of that agreement.

In my opinion, given the lack of precision which characterises the option agreement as a whole, its want of clear and comprehensive definitions of central terms, and its obscure or inconsistent use of terms, the reference in clause 12 to “the contract” does not outweigh the factors which indicate that clause 12 is a term of the option agreement. First, there is the presence of the clause in the text of the option agreement. There is no indication that the terms of the option agreement and the Contract of Sale are intermingled or intended to overlap. On the contrary, the Recitals expressly state that the option is granted on the terms set out in “this agreement”, while clause 9 states that the sale and purchase of the property will be “upon the terms and conditions set out in the contract”. The Contract of Sale is complete within itself, containing particulars of the sale, general conditions and special conditions. Clause 9 of the Option Agreement also makes clear that the terms and conditions of the Contract of Sale will operate only after the notice of exercise of the option and the deposit are received. In my view, reasonable business people would not construe the option agreement to contain a mixture of terms, some operative upon its execution and others not operative unless and until the option were exercised.

Secondly, clause 12 refers to the “prospective purchaser”, as do the other clauses of the option agreement.

A consideration of the option agreement as a whole establishes, in my view, that the primacy attributed by the plaintiff to clauses 7 and 8 is unjustified and ultimately, inconsistent with the plaintiff’s wider approach. The option agreement is conditional, as clause 3 expressly states. The plaintiff ultimately acknowledged its conditional character, but identified clauses 16, 17 and, possibly, clause 15, as embodying the conditions. Clause 17 does not set out a condition to which the option agreement is subject. Rather, it establishes certain obligations of the parties. Clause 16 does not, in terms, set out a condition of the option agreement, but establishes grounds on which the option is voidable at the owner’s discretion. Clause 15 does not, in terms, set out a condition, but identifies circumstances in which the option will end, at a date which coincides with the natural expiration of its term. While clause 15 implicitly embodies a condition, clause 12 employs the express language of a condition.

The contention that clause 12 will defeat the commercial purposes of the option agreement if construed as a term of the option agreement depends on acceptance of the plaintiff’s identification of those commercial purposes.

The plaintiff’s contention that the commercial purpose of the option agreement was to achieve the sale of the land to Tarongo at the option price begs the question of the proper construction of the option agreement, including the disputed clauses.

In construing the disputed clauses, the plaintiff relies on extrinsic evidence to infer a commercial purpose and construes the language of the option agreement to conform to it. The plaintiff’s analysis of surrounding circumstances is, however, in my opinion selective and, in some significant respects, inaccurate. The plaintiff’s written submissions repeatedly misdescribe Mr Callanan’s offer as an offer to purchase the land on specified terms. On any view, it was not an offer to purchase the land, but a proposal to acquire an option to purchase it on specified terms. Similarly, the plaintiff’s written submissions state that Mr Callanan had substantially accepted the terms set out in the Birdsey, Dedman & Bartlett letter dated 8 February 2002. The submissions omit, however, any reference to the subsequent correspondence between the parties’ solicitors, which immediately preceded the execution of the option agreement. The defendants there insisted on the retention of clauses 12, 13, 15 and 16 in the option agreement, despite the plaintiff’s request to remove them, on the basis that “there was never an intention that there be just a bare option to be exercised at the end of the period of time.” The submissions also omit any reference to Mr Lyons’ evidence of his goals in relation to the land.

Most importantly, the plaintiff’s analysis overlooks the manifest, fundamental character of the option agreement, which conferred on the plaintiff an option, not an obligation, to purchase the land. The annexation of a contract of sale which would apply if the option were exercised did not negate that essential character. The plaintiff’s analysis conflates the commercial purpose of the option agreement with its own probable aims in the event that, during the option term, the value of the land increased above the option price.

Further, I do not consider the plaintiff’s analysis of the operation of clause 12 as a term of the Contract of Sale persuasive. The plaintiff contends that “clause 12 operates to render the obligation of Tarongo to pay the purchase price to the Lyons subject to the achievement of the defined rezoning” but that payment pursuant to special condition 2 operates ipso facto as a waiver of its entitlement, save for payment after 30 January 2005.

Special condition 2(c) of the Contract of Sale relevantly provides that if payment of the residue takes place on or before 30 April 2005, the purchase price shall be paid as follows –

Price $8,069,250.00 payable by a deposit of $806,950.00 on Notice of Exercise of Option
Residue within 90 days of Exercise of Option but prior to 30^th April 2005.

In Special Condition 2(c), the definition of the time for payment of the residue is circular. It also embodies a stipulation which cannot be applied literally. It states that if payment of the residue takes place on (or before) 30 April 2005 – the residue is to be paid within 90 days of the exercise of the option but prior to 30 April 2005.

Despite its lack of precision and clarity, it was not disputed that Special Condition 2 functions to prescribe three different amounts and dates for the payment of the residue of the purchase price. (The amounts increase with each succeeding year.) If clause 12 were, as the plaintiff contends, a condition subsequent of the contract, operating analogously to a ‘subject to finance clause’ for the plaintiff’s sole benefit, in my opinion its operation, and any qualification to it, would be expressly set out. Its operation and effect would not be implicitly dependent on, or qualified by, Special Condition 2 (which, in terms, deals with dates and amounts of payment) in the extremely complicated manner submitted by the plaintiff.

Further, on analysis, there is no necessity for the operation of such a condition subsequent. The plaintiff argues that it was entitled to exercise the option at any time up to and including 30 April 2005 independently of the rezoning being achieved, and that upon the exercise of the option, it would enter the Contract of Sale. If the plaintiff exercised the option on 30 April 2005 (the last day of the option), it would have to pay both the prescribed deposit and the residue on that day, pursuant to Special Condition 2(c) of the Contract of Sale.

There would thus be no need for clause 12 to function as an “escape clause” conferring “11^th hour” flexibility, which permitted the plaintiff to avoid the Contract if the option were exercised after 30 January 2005, but on or before 30 April 2005. That flexibility would exist independently of such a condition subsequent, if the plaintiff were, in any event, entitled to wait until the last day of the term of the option in order to ascertain whether the specified rezoning had occurred, and could then exercise the option at that point if it chose.

The plaintiff submitted that it might be required to exercise the option and thereby enter the Contract of Sale as a precondition of obtaining finance or attracting joint venture financial support. The distinction between the option and the Contract of Sale in that context is unpersuasive. If, as the plaintiff contends, the option were not conditional on rezoning, its entitlement to purchase the land would be equally secure whether or not it had exercised the option.

Further, the plaintiff argues that clause 12 would overlap with clause 15 if clause 12 is a term of the option agreement. Clause 15 provides that “if the prospective purchaser fails to obtain a rezoning of not less than 100 acres of the property for residential purposes on or before 30 April 2005, then this option shall expire and any rights the prospective purchaser may have to exercise the option shall be at an end”.

Clause 15 is, on any view, awkwardly expressed and its relationship to other terms of the option agreement is not without difficulty. It must be construed in the context of the option agreement as a whole, in accordance with how it would be understood by reasonable business people.

The plaintiff’s argument on the status of clause 15 shifted somewhat in the course of argument. At one point, Mr Vickery appeared to contend that it did not embody a condition, but simply delimited the term of the option agreement. Mr Vickery contended that:

“Clause 15, although it appeared to render the exercise of the option conditional upon achievement of the rezoning of at least 100 acres of land, simply means that the option is at an end if by 30 April 2005 if the rezoning had not been achieved. It did not preclude the exercise of the option at any time prior to 30 April 2005 if the rezoning had not been achieved.”
Clause 15 was simply a self‑executing term whereby the agreement “automatically terminated on the failure to obtain the rezoning by 30 April 2005.”

At another point, Mr Vickery appeared to concede that clause 15 was a condition of the exercise of the option, but maintained that “fails to obtain a rezoning” applied only where the request for rezoning had been lodged with the council or other relevant authority, but was unequivocally or absolutely rejected. It did not apply to a deferral of the Council’s decision, such as occurred in the present case, or to the plaintiff’s lack of success in achieving rezoning for any reason other than unequivocal rejection of the request.

The defendants argued that, in a context where, as the plaintiff conceded, the option agreement and the parties clearly contemplated the possibility of several successive rezoning requests, the plaintiff’s construction of clause 15 was untenable.

Clause 15 does not, in terms, state that it applies only if the rezoning application is absolutely rejected. The plaintiff’s construction imposes a narrow and artificial gloss on the words “fail to obtain”. It is not contended that “fails” in the context of clause 15 imports any connotation of culpability. In my opinion, “fails to obtain” in clause 15 is directed at the plaintiff’s pursuit of the application and “fails” bears one of its established ordinary meanings, namely, that of being unsuccessful in achieving a desired end. I consider that, construed in context and according to the applicable principles, clause 15 means that if the plaintiff does not succeed, for whatever reason, in obtaining the specified rezoning by 30 April 2005, the option will expire and the option holder will have no right to exercise the option.

The option is to expire on 30 April 2005 in any event, so the reference to its expiry in clause 15 is redundant. The statement in clause 15 that the option holder’s rights to exercise the option will end at the date of expiry is also be redundant, in the sense that such rights ipso facto end on expiry.

Although the plaintiff’s construction of clauses 12 and 15 obviates their substantial overlap, it attributes an artificially restricted meaning to the words “fails to obtain a rezoning”. Further, it assumes that the option could be prematurely determined at a date prior to 30 April 2005, contrary to the terms of clause 7 (the primacy of which the plaintiff particularly asserts) due to an “absolute rejection” of an application for rezoning. That sits uneasily with the plaintiff’s primary position that the rezoning could not have been intended as a condition of the exercise of the option, but must have been intended to protect the plaintiff. The plaintiff’s construction of clause 15 would also entail significant uncertainty in its practical application, as the circumstances in which the option would prematurely determine are not clearly defined. No criteria are set out by which to discriminate between a rejection which is “absolute” or “unequivocal” (which would determine the option), and one which is not (which the option would survive). In contrast, clauses 16 and 11 both specify the circumstances in which the option agreement will be voidable or determinable.

Whichever construction be adopted, clause 15 contains redundancies and infelicities, and states the obvious. Although, in my opinion, clause 15 substantially overlaps with clause 12, it functions in the context of, and consistently with the character of the option agreement as a whole, to delimit the circumstances in which the option will end, and to clarify or emphasis the effect of clause 12. I consider that it would be so understood by reasonable business people in the position of the parties.

Further, in my opinion the “factual matrix” and in particular the parties’ correspondence, support the defendants’ construction. The parties negotiated an option to purchase the land, not a contract to purchase it. Mr Callanan’s earliest letters dated 4 June and 27 August 2001 proposed a bare option, with no mention of any applicable conditions, although the price to be paid for the land if the option were exercised was referable to the number of acres rezoned during the option term.

By his letter dated 8 October 2001, Mr Callanan offered a price for the land subject to rezoning of not less than 100 acres for residential purposes within five years. Although the letter does not expressly state whether the condition is to be a condition of the option agreement or of the contract of sale, the option was the subject matter of the letter and the negotiations. At that stage, only the principal terms were discussed. There was no evidence that it had been decided to annex a contract of sale. It seems improbable that Mr Callanan would propose any terms of the contract of sale which would be entered into on the exercise of the option.

It is, however, unnecessary to determine that question as the letter of 8 October 2001 was succeeded by further correspondence. During the course of negotiations, Mr Callanan was informed of a rival proposal that included a shorter time frame and a higher price. By a letter dated 10 January 2002, he reduced his requested option term to three years and increased the purchase price.

The letter of Birdsey, Dedman & Bartlett dated 8 February 2003 in response, in my opinion made clear that they would prepare the option documents on the basis that the exercise of the option would be subject to the rezoning of the land to residential within the three year term. Paragraphs 1 and 2 of that letter, in my view, implicitly contemplate rezoning as a precondition of the exercise of the option, as nothing was payable unless and until rezoning had occurred. While it might be argued that the reference to rezoning in paragraphs 1 and 2 relates to the payment of the purchase price, the letter was directed at setting out fundamental terms of the option agreement, rather than the detailed terms of the consequent contract of sale. It was unlikely to include a condition subsequent of the contract of sale operating for the purchaser’s sole benefit within restricted time spans (and which could not be understood in isolation). Further, in my view, paragraph 2 of the letter necessarily refers to the option documents and makes clear that the option will be subject to the condition.

Mr Callanan’s letter in response expressly agreed to the terms in paragraphs 1 and 3, (save for changing the 60 days to 90 days), and expressly agreed to the term in paragraph 2, save for requiring the three years to be measured from the date of the exchange of contract (in this context, clearly the option agreement) rather than a fixed date.

When the draft option agreement with clauses 12 and 15 in their present form was forwarded to Harwood Andrews, Harwood Andrews, by letter dated 22 March 2002 asserted that clause 12 should be deleted implicitly on the basis that the exercise of the option was unconditional during the term, and that clauses 15 and 16 were likewise inappropriate, implicitly on the basis that they were also inconsistent with an unconditional entitlement to exercise the option during the term.

The letter of Birdsey, Dedman & Bartlett dated 26 March 2002, by paragraph 5, insisted that clauses 12, 13, 15 and 16 were terms specifically agreed and referred to and specified the preceding correspondence. In paragraph 6, it amplified that insistence by an explanation that “there was never an intention that this be just a bare option to be exercised at the end of the period of time. Our clients were interested in an agreement with your client on the basis that he desired to develop the land and would make any effort during the period of the option to have the land rezoned residential, and for the development to proceed. During the negotiations your client indicated on many occasions that the clauses as inserted were as he also wished and that he was agreeable and that he indeed intended to proceed on this basis.” It stated that: “clauses 12, 13, 15 and 16 were the terms specifically agreed upon between our respective clients and we refer in particular to your client’s letters of 8^th October 2001, 10^th January 2002, 4^th February 2002 and 8^thFebruary 2002 and our letter of 8^th February 2002”.

The letter of Harwood Andrews dated 5 April 2002, in response, by paragraph 5 expressly recognised that the option “contained conditions” which was “not typical”. It stated, however, that “our client is prepared to accept your client’s position in relation to clause 5”. Clause 5 of the option agreement refers to the option fee, which had already been specifically dealt with in paragraph 1 of the letter. There was thus no reason to refer to it again, and in my opinion, the reference to clause 5 is an erroneous reference to paragraph 5 of the Birdsey, Dedman & Bartlett letter, which refers to clause 12 of the option agreement. The Harwood Andrews letter then seeks clarification of the operation of some of other clauses which it had previously asserted to be inappropriate, but were insisted upon in paragraph 6 of the Birdsey, Dedman & Bartlett letter.

On a fair reading, the Harwood Andrews letter dated 5 April 2005 establishes the plaintiff’s acquiescence in the defendant’s insistence on the conditionality of the option. Acceptance that the option could not be exercised unless the rezoning application were successful is also implicit in paragraph 8 of the letter, which states, “If the application for rezoning is successful our client still requires the ability to exercise the option at any time before the final option exercise date of 15 March 2005.”

The option agreement was then amended in accordance with some of Harwood Andrews’ requests for clarification, but clause 12 and 15 were unchanged. It was subsequently executed by the parties.

Mr Lyons’ evidence of his aims in relation to the agreement reiterated those stated in paragraph 6 the letter of Birdsey, Dedman & Bartlett dated 26 March 2002. Mr Callanan was unable to recollect his intentions or his understanding of the correspondence at the time of executing the agreement, but he believed that he would have read the documents and forwarded them to his solicitors.

The plaintiff submitted that Mr Simmonds, the solicitor at Harwood Andrews who ultimately handled the matter on behalf of the plaintiff, may have been unaware of the correspondence preceding the Harwood Andrews letter of 26 March 2002 and may have misunderstood the import of the above correspondence. Mr Simmonds gave no evidence to that effect, and nothing in the correspondence supports such a conclusion. Further, paragraph 6 of the letter of Birdsey, Dedman & Bartlett dated 26 March 2002 expressly specified to the relevant preceding correspondence.

Mr Simmonds is and was a director of Harwood Andrews, the firm which had acted for Tarongo throughout. There is no suggestion that Harwood Andrews, or Mr Simmonds individually, was not duly authorised to act on Tarongo’s behalf. The knowledge of each member of the firm in relation to the transaction was the knowledge of all of them and further, would be imputed to their client.[14]
[14]Jared v Clements [1903] 1 Ch 428.

If the plaintiff’s analysis were correct, the condition in clause 12 would have no effect save for its possible operation in the 90 days period prior to 30 April 2005 to permit the plaintiff to elect to rescind. In my opinion, when construed within the context of the agreement as a whole, and the ‘factual matrix’, most importantly the correspondence, clause 12 is, and was intended by the parties to be, a term of the option agreement which provided that the option was exercisable only if the specified rezoning were achieved by the stipulated date. Given that conclusion, it is unnecessary to consider the rectification claim.

Whether clause 12 for plaintiff’s sole benefit if a term of the option agreement

The achievement of the specified rezoning appears at first to be a curious precondition of the exercise of the option, because the termination of the option if rezoning is not achieved does not confer an obvious advantage on the land owner. That circumstance appeared to lend some force to the plaintiff’s contention that clause 12 could not be a term of the option agreement. A closer analysis did not support that conclusion.

The defendants led evidence of goals which would be served by such a condition. Mr Lyons gave evidence that he and his mother did not wish to lose their power and control over the land unless the rezoning were secured, as they wished an environmentally sensitive development to be carried out by Tarongo.

As Mr Vickery argued, the achievement of the rezoning would not ensure that any development took place. The option agreement (and annexed Contract of Sale) did not require the plaintiff to develop the land and imposed no restriction on its entitlement to sell the land to a third party. Further, the rezoning requirement did not apply to all of the land. Nevertheless, I am satisfied that the Lyons believed that if rezoning were achieved, Tarongo would proceed to develop the area in an environmentally sensitive way.

Mr Lyons also testified that the defendants aimed to exert pressure on the plaintiff to pursue the rezoning expeditiously and considered that, even if it were not secured, the defendants would benefit from the plaintiff’s endeavours. It is also apparent that, as a condition of the option agreement, clause 12 would benefit the defendants by casting on the plaintiff the risk that its efforts to rezone the land would greatly increase its value, but that formal rezoning would not be achieved before the option expired.

Clause 12, as a term of the option agreement, would operate to benefit the defendants by reducing the plaintiff’s legal entitlements. If the specified rezoning occurred within the term of the option, the defendants could neither compel the plaintiff to purchase the land nor prevent it from doing so. In such a case, whether the plaintiff’s exercise of the option would be to the defendants’ financial benefit or detriment would depend not on the rezoning per se, but on whether the land’s value had increased to an amount which exceeded the specified option price. If it exceeded the option price, the exercise of the option would advantage the plaintiff at the defendants’ expense. If it did not, although the exercise of the option would probably benefit the defendants, the plaintiff would almost certainly not exercise the option, as it would not wish to pay an option price which exceeded the value of the land.

If, on the other hand, the specified rezoning did not occur during the term, the pre-condition of the exercise of the option would not have been satisfied. The plaintiff would not be entitled to take advantage of any increase in the value of the land above the option price. The defendants would suffer no detriment, whether the land value were greater or less than the option price, because they would not be subject to the option which in any case did not compel the plaintiff to purchase the land.

Any condition of an option which restricts its exercise necessarily advantages the grantor at the option holder’s expense, even when the condition depends on circumstances which, as a matter of fact, appear detrimental to the grantor (such as failure to achieve an advantageous rezoning of its land). As a matter of law, it benefits the grantor by restricting the option holder’s rights over the grantor’s property.

In the present case, although clause 12 embodies a circumstance which may appear disadvantageous to the Lyons, its inclusion in the option agreement would benefit them by prescribing a limitation on the plaintiff’s entitlement. As such, the plaintiff would not be entitled to waive clause 12 as a term of the option.

WHETHER PLAINTIFF BREACHED CLAUSE 16

The defendants also contend that the option was not validly exercised because the plaintiff breached clause 16 of the option agreement by failing to lodge a rezoning application with the council on or prior to 30 April 2003.

Given my construction of clauses 12 and 15, it is unnecessary to determine the arguments in relation to clause 16. The plaintiff was not, in any event, entitled to exercise the option on 17 January 2005 because the condition in clause 12 (an implicit in clause 15) was not satisfied. Further, that condition was not satisfied during the remaining term of the option. The option was never exercisable and specific performance of the Contract of Sale is unavailable. In recognition, however, of the arguments advanced in relation to clause 16, I consider them briefly.

The defendants argued that in order to comply with clause 16, on a proper construction, the plaintiff was required to lodge a rezoning request with the council on or before 30 April 2003 and to maintain a lodged rezoning request in each 12 month period thereafter.

They contended that, alternatively, clause 16 should be rectified to read: “If the prospective purchase does not lodge the rezoning application in the first 12 month period or fails to maintain a current rezoning application … “.

The plaintiff, in contrast, contended that compliance with clause 16 did not require the lodging of an application with the council by a deadline of 3 April 2003. It submitted that the broad language of clause 16, and the inclusive reference to “bringing an application” applied to the preparation and background work which preceded the lodging of a rezoning request. The reference to “the relevant authorities” indicated that clause 16 contemplated the making of preliminary inquiries to a number of authorities, prior to lodging the request with the council. Clause 16 (consistently with the requirement in clause 17 that the plaintiff use its “best endeavours” to have the land rezoned) therefore merely required the plaintiff to carry out the preliminary works and inquiries with diligence within each specified period. As the plaintiff had undertaken the background work with all possible diligence, it had complied with the requirements of clause 16.

Alternatively, the plaintiff contended that the defendants are estopped by their conduct from relying on any breach of clause 16 constituted by the failure to lodge a request for rezoning with the council by 30 April 2003.

Alternatively, the plaintiff argued that, in circumstances where the value of the land had greatly increased due solely to its expenditure and efforts, it was entitled to relief against forfeiture in order to preclude the defendants from unconscientious reliance upon their legal right to terminate the option agreement pursuant to clause 16.

Clause 16 is poorly drafted and ambiguous in the relevant sense, justifying reference to extrinsic evidence as an aid to construction.

It was common ground that no request for rezoning had been lodged at the date of the execution of the option agreement. “Maintain” in the context of clause 16 therefore could not bear its usual meaning to refer to keeping in place an application which had already been lodged. It was also common ground that there is no prescribed application form for rezoning, so the “application” could only refer to a rezoning request, which takes no particular form, although it is typically accompanied by the kinds of information deposed to by Mr McCartney. It was not disputed that substantial preparation was required as a preliminary to lodging a rezoning request incorporating the required level of detail and information to enable it to be considered by the council. It was common ground that there was only one authority, the council, with which the request could be lodged (although the council might subsequently refer to the Minister of Planning). It was also common ground that there is no appeal from the rejection of a rezoning request, so, on any view, the reference to “any appeal process” in clause 16 was mistaken.

An examination of the correspondence indicates that the letter of Birdsey, Dedman & Bartlett dated 8 February 2002, by clause 4, required that “Your company would be obliged to maintain a current application to the local authorities at all times – if during any 12 month period there was no current application the option is voidable at the vendor’s option”. Mr Callanan, by letter in response dated 8 February 2002, stated “agreed”.

The letter of Harwood Andrews dated 22 March 2002, however, objected that clause 16 was inappropriate as a term of the option agreement, implicitly on the basis that the option should not be subject to any conditions. By the letter of Birdsey, Dedman & Bartlett dated 26 March 2002, the inclusion of clause 16 in the option agreement was insisted upon, as discussed above. The letter of Harwood Andrews dated 5 April 2002 implicitly accepted its inclusion, but sought clarification. It stated, “clause 16 should specifically acknowledge that if an initial application is rejected our client has the right to make further applications throughout the option period. Thirdly, is it your intent that clause 16 requires an application to be on foot for the whole 12 month period, as that is one interpretation of the wording “maintain a current rezoning application … during any 12 month period …”’. It is our client’s understanding that he would have the ability to bring an application, prosecute that application, including any appeal process (for which provision must be made in the agreement) and if that was rejected, could subsequently bring another application and would have a reasonable period of time to do so.”

In response, Birdsey, Dedman & Bartlett, by letter dated 16 April 2002, stated that clause 13 covered the entitlement to make further applications and further, that “[w]e will amend maintain a current rezoning application during any 12 month period … to include “bringing an application”, prosecuting that application, including any appeal process related to such application.” The draft option agreement was then amended to include clause 16 in its present form.

Some of the problematical wording of clause 16, including the mistaken reference to an appeal, is thus derived directly from the letter of Harwood Andrews dated 5 April 2002.

In my opinion, the above correspondence, taken in context, makes clear that by “bringing an application” the parties contemplated the lodging of an application with the authority which had power to accept or reject it, and from whose decision an appeal was wrongly assumed to lie.

I am satisfied that, although the parties did not contemplate that the initial application to the empowered authority was already lodged, or would be lodged immediately, they contemplated that it must be brought (or lodged) within the initial 12 month period. Although they were apparently ignorant of the precise identity of that authority and wrongly contemplated that there were more than one, I am satisfied that clause 16 did not require mere preliminary inquiries to authorities which had no power to receive or approve a rezoning request.

In my opinion, clause 16 requires an application (a request in no prescribed form) to be lodged with the council, (the sole authority which can receive and determine the request) prior to the expiration of the first 12 month period; and that a rezoning request (or requests) be lodged during each successive 12 month period, although not necessarily kept in place continuously, as the requests could be refused or withdrawn and succeeded by new requests.

That conclusion is supported by the extrinsic evidence. It also avoids the illogical results of the plaintiff’s construction. If, as the plaintiff submits, the requirements of clause 16 were limited to necessary preparation and preliminary work, they would entirely overlap with the “best endeavours” obligation imposed by clause 17. The plaintiff would not be obliged to lodge a request with the council at any stage, or at all, during the three year term of the option agreement. An obligation to use diligence in preparation or “best endeavours”, suggests a continuous process. The division in clause 16 of the option term into three 12 month periods, and the requirement that the relevant obligation be satisfied in relation to each separate period, would have no apparent purpose.

It follows that, in my opinion, the plaintiff breached the requirements of clause 16 by failing to lodge a rezoning request with the council on or before 30 April 2003.

Whether defendants estopped from reliance on breach of clause 16

The plaintiff, however, submitted that the Lyons, by their conduct, represented to Mr Callanan that they would not rely upon any breach of clause 16 in order to avoid the option agreement.

Mr Vickery contended that the Lyons had sat on their rights under clause 16 since at least 13 May 2003, when they first became aware that the rezoning application had been lodged by the specified date. Over the course of negotiations that ensued from May 2003 to March 2004, including the negotiations to extend the option agreement, they never indicated that the option agreement was at risk due to late lodgement of the application. Whilst the purported breach of clause 16 was raised by the Lyons in the letter of 15 March 2004, it was immediately denied by Tarongo and the Lyons failed to take any further action. Moreover, the Lyons’ continued negotiations to vary the option agreement amounted to a confirmation that it remained on foot. They took steps to end the option agreement only on 14 January 2005, when it became apparent that Tarongo intended to exercise the option.

He argued that throughout the relevant period, the Lyons were aware that Tarongo was continuing to prosecute the application and was expending time, money and effort to that end. Mr Callanan’s evidence regarding the substantial amounts of work done on prosecuting the application after 7 May 2003 was not challenged.

In such circumstances, Mr Vickery argued the Lyons were estopped from avoiding the option under clause 16, pursuant to the principles in Legione v Hately,[15] Waltons Stores (Interstate) Ltd v Maher[16] and The Commonwealth v Verweyan.[17] He relied particularly upon the holding of Gibbs CJ and Murphy J in Legione that statements of the vendor’s representative had induced a belief that the vendors would not enforce their strict legal rights without further notice, which, coupled with their failure promptly to communicate any change of attitude, caused or contributed to the purchasers’ failure to pay by the due date. Mr Vickery argued that the extended period of the Lyons’ silence in relation to the purported breach of clause 16 fortified the promissory estoppel in the present case.
[15](1983) 152 CLR 406.
[16](1987) 164 CLR 387.
[17](1990) 170 CLR 394.

It was common ground that the appropriate remedy is that which will effect the “minimum equity to do justice” between the parties, but Mr Vickery, in reliance on the observations of Brennan J in Verwayan, contended that in this case, the “minimum equity will not be satisfied by anything short of enforcing the promise”.[18]
[18]At 428-9.

He argued if Tarongo received only compensation for monies expended on the rezoning to date, it would be denied the fruits of its labour, and the Lyons would receive a windfall.

Mr Garratt submitted that the Lyons did not unambiguously and clearly represent that they would not rely upon their rights under clause 16 and that Mr Callanan never formed the assumption that they would not rely on the possible breach of clause 16 to avoid the option agreement. He relied, in that context, on AG of Hong Kong v Humphreys Estate (Queens Gardens) Ltd,[19] in which the Privy Council held that, as the plaintiff was aware that the defendant retained the right to resile from the agreement, and the defendant had not created or encouraged a belief to the contrary, the defendant was not estopped.
[19][1987] 1 AC 114.

Alternatively, he submitted that the plaintiff had not established that it relied to its detriment on any representation, and that the minimum equity would be satisfied by payment of the plaintiff’s expenses of approximately $12,000 incurred during the period from approximately June 2003 to January 2005.

In my opinion, the defendants’ conduct in maintaining a silence about the breach of clause 16, of which they were aware from May 2003, and subsequently negotiating between August 2003 and March 2004 for the extension of the option agreement (implicitly on the basis that it remained on foot) constituted a clear and unambiguous assertion that the defendants would not rely on the relevant breach of clause 16. The representation was fortified by the defendants’ subsequent failure to reply to the plaintiff’s query, coupled with its denial of breach and assertion of confirmation of the contract, made by the letter of Harwood Andrews dated 24 March 2004.

I am satisfied that, as he testified, Mr Callanan “assumed it [the threat] was going away” and acted accordingly, as “we got no response and got offers of further extension of contract. So I acted as if we had a further contract – ongoing contract and continued with the process”. In contrast to AG of Hong Kong v Humphreys Estate (Queens Gardens Ltd), in my opinion, in the present case, the plaintiff was not aware that the defendants intended to assert the right to avoid the option agreement, and the defendants’ conduct implicitly, from at least August 2003, indicated that they would not seek to rely on such rights.

In the present case, from May 2003, to the defendants’ knowledge, the plaintiff continued to invest substantial effort and to incur expense in pursuit of the rezoning. While one contractor retained by the plaintiff had not yet invoiced it for its work, it intended to do so. Another contractor had already been paid. Mr St Quentin testified that although he frequently did not charge Mr Callanan for unsuccessful projects, he expected to do so in this case.

In Waltons Stores, Brennan J stated that the minimum equity would be satisfied by the representor “doing or abstaining from doing something in order to prevent detriment to the party raising the estoppel which that party would otherwise suffer by having acted or abstained from acting in reliance on the assumption or expectation which he has been induced to adopt”.[20]
[20]At 419.

In my view, the plaintiff’s detriment in the present case cannot fairly be limited to its expenditure on the services of contractors. The plaintiff, through Mr Callanan, orchestrated, directed and was involved in, the steps taken by its consultants to advance the rezoning.

As Marks J stated in Commonwealth of Australia v Clark[21] “It is artificial in the extreme to regard detriment narrowly, that is, as a discrete condition disembodied from the dashing of hopes and expectations by the breach of the promise”. Ormiston J there stated that the test should be applied generously.[22]
[21][1994] 2 VR 333.
[22]At 383.

I consider therefore, that were the plaintiff otherwise entitled to exercise the option, the defendants would be estopped in the circumstances from relying on the breach of clause 16 in order to avoid the option agreement.

CONCLUSION

It follows that, for the reasons set out in detail above, the condition in clause 12 enlivening the plaintiff’s entitlement to exercise the option was not satisfied during the term of the option agreement and the plaintiff is not entitled to specific performance of the Contract of Sale. The plaintiff’s claim should therefore be dismissed.

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[2005] VSC 491

16 December 2005