Tenth Vandy Pty Ltd v Natwest Markets Australia Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2010 0026
TENTH VANDY PTY LTD	Appellant
v
NATWEST MARKETS AUSTRALIA PTY LTD	Respondent
S APCI 2010 0027
LESLIE JAMES THOMAS	Appellant
v
NATWEST MARKETS AUSTRALIA PTY LTD	Respondent

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JUDGES:	NETTLE and NEAVE JJA and BELL AJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	2 May 2012
DATE OF JUDGMENT:	28 May 2012
MEDIUM NEUTRAL CITATION:	[2012] VSCA 103	1^st Revision 13 Dec 2012 – [175]
JUDGMENT APPEALED FROM:	[2010] VSC 2 (Croft J) [2010] VSC 70 (Croft J)

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LANDLORD AND TENANT – Retail shopping centre lease – Forfeiture of Lease – Relief against forfeiture – Equitable compensation – Unconscionable conduct – Whether unconscionable for Landlord to exercise legal right of re-entry following non-payment of rent – Whether respondent’s ‘impugned conduct‘ contributed to appellant’s failure to pay rent and outgoings – Arbitration –Whether re-entry calculated to ‘gazump’ jurisdiction of arbitrator – Hearsay evidence – Whether appellant misled as to evidence to be led when no witnesses called – Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315, considered; Bowfinger v Kingsway Group Ltd (2009) 239 CLR 269; Australian Consumer Commissioner v Samton Holdings Pty Ltd (2002) 117 FCR 301; Legione v Hately (1983) 152 CLR 406; Stern v Mac Arthur (1988) 165 CLR 459; Jones v Dunkel (1959) 101 CLR 298 referred to – Retail Tenancies Act 1986 ss 17(1)(b) and 17(2).

COSTS – Applications for leave to appeal against order for costs on an indemnity basis – Offer of compromise – Calderbank offer – Effect of an unaccepted offer – Whether refusal of settlement offer unreasonable – Costs against a non-party – Whether appropriate for director of appellant to be made personally liable for costs – Applications refused.

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APPEARANCES:	Counsel	Solicitors
For the Appellant Tenth Vandy	Mr J M Selimi	Radebe & Co
For the Appellant Thomas	Mr L S Thomas (in person)
For the Respondent Natwest	Mr J H Karkar QC with Mr J F Styring	King & Wood Mallesons

NETTLE JA

NEAVE JA:

This is an appeal from a judgment given in the Commercial and Equity Division. There is also a related appeal against costs orders made personally against a director of the appellant. The judge dismissed the appellant’s claim for equitable compensation for losses which it alleged it suffered by reason of the unconscionable conduct of the respondent in forfeiting a lease (‘the Lease’) of shops 15.10 and 15.11 (‘the premises’) in the Waverley Gardens Shopping Centre (‘the Centre’), of which the respondent stood in the position of lessor as mortgagee in possession and the appellant was lessee.

The facts

The premises were leased by Handevel Pty Ltd (receiver of Rents and Profits Appointed) (‘Handevel’) to the appellant as trustee of the LJ & L Thomas Family Trust for a term of five years commencing on 28 July 1990. There was no option to renew for a further term. The permitted user and nature of business to be carried on in the premises was described in the lease as ‘Coffee Lounge, Restaurant and Take Away Food’.

The appellant purchased the business on 23 August 1985 and took an assignment of the lease under which the vendor of the business then held the premises. That lease expired upon the commencement of the Lease.

The respondent was the second mortgagee of the Centre freehold. On 27 July 1989 Handevel was placed in receivership and on 16 August 1990, was wound up. On 1 February 1991, the respondent entered as mortgagee into possession of the Centre freehold, including the premises. On 28 February 1994, the respondent changed its name to Natwest Australia Bank Ltd and, on 25 June 1999, it changed again to Natwest Markets Australia Pty Ltd.

The premises were located on the corner of two corridors at the north-east end of the Centre, within the area known as the fresh food hall. The northern wall of the premises was glazed and faced the secondary mall running in an east-west direction. The eastern wall of the premises was also glazed and faced the Target store. As appeared from various photographs tendered at trial, the words ‘The Inn Thing’ appeared in scripted sign writing in a large arc over three panels of the east facing windows of the premises with the words ‘Eat Inn Take Away’ in block letters centred below the apogee of the arc. Similar sign writing, but of smaller size, appeared on a north-east facing window near the entrance to the premises. It could be seen from outside the premises that front counter service was across bain-maries with provision for dining at rectangular tables and fixed bench seats. Soft drinks were on display for purchase from a refrigerated unit with a beverage company logo displayed across the top of the unit.

Until the Centre was refurbished in 1992, the bulkhead of the shop had three panels of lit tubular scripted signage affixed to it, with the words ‘The Inn Thing’ and, under those words, ‘Eat Inn Take Away’. There were also white plastic round tables and pink plastic chairs on white frames located down the east-west corridor of the Centre adjacent to the premises. The nature of the business conducted at the premises was self-evident to passers by.

The business was never more than modestly profitable. The judge found it to be as follows:[1]

[1]Reasons, [68]–[81].

Financial Year

Sales

EBIT

Net profit

30/6/86

$11,264

30/6/87

$398,952

$52,909

$25,909

30/6/88

$390,952

$45,588

$26,224

30/6/89

$426,331

$44,573

$30,967

30/6/90

$498,007 (best sales year)

$40,456

$25,733

30/6/91 (before the Works)

$395,707

$30,271

$17,531

30/6/92

$343,382

$33,000 (approx)

$209 (net loss due to a large interest expense of $35,676)

30/6/93

$292,256

$34,273

$11,071 (interest expense reduced to $23,202).

The Centre originally opened in 1977 as a small neighbourhood shopping centre but was expanded on two subsequent occasions. By 1990, however, it was drab, poorly designed and generally unattractive and uninspiring. Building maintenance had been neglected and, by then, there had been a significant reduction in the level of retail activity and an increase in vacant premises.

Richard Ellis Professional Services Asset Management advised the Centre management company, Retail Realty Pty Ltd, that the Centre looked tired and was in desperate need of refurbishment. It had been let go and required professional management, ‘a return to the basics of retailing’ and a ‘rationalisation of tenancy mix’.

Based on that advice, the respondent commissioned AT Cox and Partners Pty Ltd to carry out a feasibility study for the refurbishment of the Centre.AT Cox proposed a significant refurbishment with a view to expanding retail activity. It opined that:

The proposed works program offers many advantages and little drawback other than cost. If properly executed it will allow the introduction of another major tenant into the centre. This will improve the draw of the centre, firstly because of the new attraction and secondly because the proposed tenant Franklins is well suited to the difficult economic times and the demographics of the area. Importantly, this would be the only Franklins amongst the surrounding shopping centres.

The proposed works will also allow the establishment of a cohesive food court. Current trends in shopping centre planning indicate that food courts are instrumental in attracting shoppers to centres and help keep shoppers in centres longer which will result in a higher dollar spend per customer. This initiative will also help to enliven a flat spot which exists in the centre because of poor mall design.
Franklins' presence will similarly improve traffic flows through the rear mall at the east end of the centre and allow a successful food hall to be conducted. Other relocations resulting from the works program will enable tenant mix to be improved by agglomerating like uses to give the centre a pattern of shopping precincts, in keeping with modern trends.
Removal of the ramp leading to centre management will simply reduce waste space and provide for replacement of lost retail floor area. At the same time installation of a lift will, in conjunction with entry upgrading and canopy erection, signify to customers an overall improvement in the level of amenity offered at Waverley Gardens.

A T Cocks noted in particular that:
The introduction of a food court is well justified according to data from other centres where this has been done. Shoppers are more inclined to increase their stay and in turn increase their spending in centres which have food courts. The development of a food hall is a logical adjunct to the introduction of a Franklins store given the complementary nature of these two operations.

The year of income ended 30 June 1990 was, relatively speaking, the best year for the appellant’s business on record. Sales during that year reached $498,007 albeit that EBIT fell by approximately 10 per cent to $40,456, with net profit declining to $25,733. Interest paid in that year amounted to $14,723.

In the following year of income, however, sales fell dramatically to $395,707 with a corresponding reduction in EBIT to $30,271 and a reduction in net profit to $17,531. The diminution in sales and net profit posed a serious problem for the business. In face of those difficulties, on 6 March 1991, the appellant executed a debenture in favour of Provident Finance Corporation Ltd to secure an advance of $70,000 and, on 30 September 1991, it was up-stamped to cover an advance of $107,800.

On 15 May 1991, Mr Thomas of the appellant wrote to the Centre management seeking a rent reduction of 25 per cent on account of the then current economic recession. Centre management replied by letter dated 24 May 1991 noting a concern about the current appearance of the appellant's tenancy.

On 27 June 1991, Centre management notified the appellant of a rental increase of $319.73 per calendar month to $4,887.23 per month but, in apparent recognition of the appellant’s financial difficulties, that increase was never enforced and rent continued to be payable at the initial rate of $4,567.50 per month.

During the 1991 year of income, the respondent commissioned Yencken Project Services Pty Ltd to provide general project management services for the refurbishment of the Centre, with the construction works to be undertaken by ProBuild Constructions Pty Ltd under a Construction and Management Contract. The project budget for refurbishment was $7.5M. Work was scheduled to commence in late 1991, with the completion of the final stages coinciding with the opening of the new Franklins Discount Supermarket in late October 1992.

Stage 1 and 2 works involved the successful completion of the following:

Stage 1A -- The upgrading and refurbishment of the main entrances [to the Centre]. [This consisted largely of the refurbishment of the Police Road elevation of the Centre, the construction of two major entrance canopies, a bus shelter and substantial landscape works.] ...
Stage 1B -- The removal of the [internal] foot ramp and the introduction of additional commercial space and a lift at the Target end [east end] of the Centre, including construction of a new foot ramp between the lower carpark level and the main retail level.
Stage 2A -- The introduction of a new Food Court surrounded by speciality food shops contained within a conservatorium-type space with setdown seating areas, together with a McDonald's drive-through [This was essentially a completely new food court but in the location of the original food court in the north-western part of the Centre].
Stage 2B -- The subdivision of the existing Venture area to allow for the inclusion of a Franklins discount supermarket.
Stage 2C -- the upgrading and substantial extension of the existing Fresh Food Hall.
Stage 2D -- The upgrading and relocation of part of the existing gymnasium tenancy, including refurbishment of the area.

External works were begun and completed in the last quarter of 1991. Stage 1A of the external works began on 24 October 1991 and reached practical completion on 23 December 1991.

Minutes of a meeting between Centre management and the appellant held on 24 October 1991 show that, as at that date, the appellant was already two months in arrears in rent. As a result of discussions at the meeting, Centre management instructed project architects, Buchanan Laird & Bawden, to prepare for the appellant the most inexpensive, viable upgrade for the appellant’s premises and undertook to pay the architects’ fees of $400 for the plan.

In following correspondence between Centre management and Mr Thomas, Centre management offered to waive the rental increase, credit arrears and decrease rent for three months by $1,000 per month if the appellant would agree to commit equivalent funds to an upgrade of the premises. The appellant did not respond to the offer and it was withdrawn on 14 November 1991.

On 18 November 1991, Buchanan Laird & Bawden reported that

Rather than a ‘budget’ refurbishment which will have only minimal effect the tenant should be encouraged to undertake a much more comprehensive refurbishment which addresses the following aspects:
·The shopfront and interior needs to have a distinct image which reinforces the name of the tenancy. ‘The Inn Thing’ implies something that is fashionable and up to date as well as of a reasonable quality. This could be achieved by the imaginative use of laminates and neon signage and at a cost which is not too prohibitive.
·The lighting needs to be updated and the display counters in particular need to be adequately illuminated as does the menu board.
·The counter area needs to be reorganised with perhaps some elements being relocated (eg milkshake equipment) so that the food can be presented more effectively.

The internal works at the eastern end of the Centre (where the premises were situate) started in March 1992 and were completed in October 1992. Internal works at the western end of the Centre started in April 1992 and were completed in September 1992. Centre tenants, including the appellant, were informed regularly of the progress of the Centre works by newsletters, memoranda, and bulletins from Centre management, and there were also meetings between Centre management and the tenants.

In a memorandum from Centre management to all retailers dated 15 January 1992, retailers, including the appellant, were informed about works that were still planned for 1992 at the cost of approximately $6M. They were described in the memorandum as ‘improved access to both the undercover and rooftop car parking via a lift at the Target end of the Centre, a new food court and the creation of a speciality Fresh Food Hall’.

In the year of income ended 30 June 1992, the appellant suffered a further decrease in sales to $343,382. EBIT rose by 10 per cent as a result of savings in expenses but the business suffered a net loss of $209 as the result of a large interest expense of $35,676 associated with the loan of $107,800 from Provident Finance Corporation.

In his evidence at trial, Mr Thomas expressed the view that the fall in sales in 1992 was principally due to the economic recession but that the internal works, which started on 11 March 1992 and were completed in October 1992, had an ‘effect’ on his figures. In his witness statement, which he adopted in evidence, he estimated that the refurbishment works were responsible for a decline of approximately 25% in the number of patrons attending the premises from March 1992 until September 1992. He added that he was unable to be more precise about it because his records of daily customer counts and sales records for that period had been lost when the respondent re-entered the premises. He maintained, however, that, after the works had been completed and the Fresh Food Court opened in September 1992, traffic flow to the premises did not recover but declined further due to the respondent’s refusal to replace signage of all but one Food Hall tenant and to the fact that there were five empty shops, plus the Commonwealth Bank using a number of other shops as offices, which gave the precinct a derelict appearance shunned by shoppers. The position was further exacerbated, he said, by the removal of his table and chairs with consequent reduced customer comfort levels.

Meanwhile, correspondence from the appellant in relation to rent relief continued with a letter dated 1 March 1992 from Mr Thomas to Mr Lonton, the then Centre manager. In that letter, Mr Thomas referred to the recession and stated that ‘capital expenditure [for refurbishment and upgrading of the tenancy] can only be generated from profits’. He sought immediate rental relief to a rent of 10 per cent of turnover from time to time, and a proportionate reduction in Centre charges.

By letter dated 4 March 1992, Mr Lonton replied, informing Mr Thomas that the appellant's monthly rental for the premises would be reduced to $3,909.83 for the period 1 March 1992 to 31 August 1992 and expressing the hope that it would assist Mr Thomas with his plans to upgrade the tenancy.

On 14 May 1992, Mr Thomas wrote again to Mr Lonton as follows:

Because of the refurbishment…traffic flow has been severely restricted. Added to this the temporarily [sic] closure of public toilets on our end of the centre and the restriction of traffic from the underground car park and gymnasium have meant that sales have declined to an impossible level.
Rental reduction to $1419.21 pm and outgoing representing 10% of turnover – total: $2784
The viability of [the] business is at stake and as promised, I have made an earnest effort to improve the appearance and function of my business.

In a memorandum from Mr Lonton to Ms Gray of Centre management, Mr Lonton wrote:

Re [42] Tenant’s sales figures are consistently low and is due primarily to the uninviting condition of his tenancy and product range.

On 29 May 1992, Mr Fraser, a Senior Manager at Credit Management of the respondent, wrote to Mr Thomas offering a further reduction if the appellant would commit to an upgrade of the premises:

I am sorry that you were too busy to have a chat with me during my visit to the Centre today. As you know, we have committed substantial funds to refurbishing the Shopping Centre and in the circumstances it is difficult for us to agree rent reductions. However, if you would be willing to give us a commitment that the appearance of the shop you occupy will be improved in the short term, we would be willing to consider your request further. Perhaps you would discuss this aspect with Michael Lonton who has the necessary authority to agree a short term rent reduction.

In a letter dated 27 July 1992 to Mr Lonton, Mr Thomas wrote that:

I am optimistic as to the long term positive effect of these works, particularly the supermarket will have on the centre, and more particularly, my own business.

Mr Thomas, however, did not commit to an upgrade of the premises. Rather, he persisted in his request for a rent reduction and reduction of Centre charges to ‘more equitably reflect the lack of trade and current turnover’. In his letter he stated that:
With both entrances to FFH loaded up, traffic flow has declined even further. … [and] it is still more than four months until the anticipated opening and with both entrances to the Fresh Food Hall hoarded up traffic flow has declined even further.

He asked for a reduction in rent from $4,887.22 to $1,951.21 for July and August 1992 and he requested further financial assistance to upgrade the premises fit out.

On 29 July 1992, Mr Lonton wrote to Mr Thomas granting a rent reduction from $4,887.22 to $1,951.91 for July and August 1992 but declining the request for financial assistance to upgrade fit out.

On 16 July 1992, work started on stage 2B (Franklins) and stage 2C (Fresh Food Hall). On 20 July 1992, Centre management circulated a memorandum to traders in the fresh food hall, including the appellant, informing them that the respondent would be providing new shopfront bulkheads and that traders would need to consider upgrading their current bulkhead signage. The memorandum stated that trade may fluctuate over the next couple of months.

On 1 August 1992, the appellant’s bulkhead signs were removed in order to install the new bulkheads. On that day, Mr Thomas wrote to Mr Lonton informing him that: ‘I have agreed to landlord altering bulkhead at its expense. I reserve the right to have my signs replaced…’.

On 17 September 1992, the Fresh Food Hall opened for trading.

On 12 October 1992, Centre management wrote to the appellant advising that monthly charges were payable on or before the first day of each calendar month and setting out a payment schedule.

On 13 October 1992, stage 2B Franklin works, which involved the subdivision of the then existing Venture store area to allow for the inclusion of a Franklins Discount Supermarket, reached practical completion.

Two days later, on 15 October 1992, Mr Thomas wrote to Mr Lonton expressing his concern and anger at the current rental and outgoings ‘being charged on my premises’. Mr Thomas stated that his business was being adversely affected by the fresh food hall works which ‘were still far from complete and traffic flow remains severely affected’. In that letter, Mr Thomas attributed a 30 per cent decline in turnover to the opening of the new food court in September and sought an immediate reduction in rent to more equitably reflect the current situation.

On 30 October 1992, the Fresh Food Hall reached practical completion and on 12 November 1992 it opened for trading. A McDonald’s takeaway restaurant opened on 11 December 1992.

Meanwhile, on 6 November 1992, Mr Lonton wrote to Mr Thomas that it was not appropriate to review the appellant’s lease at that time and expressing disappointment that the appellant had made no effort to upgrade the tenancy. He asked that attention be paid to the upgrade of the tenancy ‘as a matter of urgency’.

On 11 November 1992, Mr Thomas replied to Mr Lonton, again requesting a rent and Centre charges reduction as indicated in previous correspondence. In his letter he made clear that his complaint was about disruption to the appellant’s business since works commenced in March 1992, which he said was continuing, and that the absence of signs was having a detrimental effect on his business. He stated that the appellant had no funds to invest in the business because of the recession and the effects of the refurbishment programme on patronage. He conceded that the landlord had made a substantial contribution to refurbish the Centre and he said it was appreciated but stated that the refurbishment costs were unrelated to turnover/charges ratio.

A meeting was held between Mr Lonton and Mr Thomas on the following day. At that meeting, Mr Thomas was informed that his signs did not meet the requirements of Centre management or the respondent and that they should be replaced.

Mr Thomas and his family then undertook some painting works in the premises, although without the respondent’s prior approval. On 25 November 1992, Mr Lonton wrote to Mr Thomas informing him that the colour and finish were totally unsatisfactory. Mr Lonton also advised that all works within the premises, particularly relating to finishes, were not to be implemented without prior approval. He urged Mr Thomas to prepare a full specification, including a colour board for the refurbishment of the tenancy, as soon as possible. None was ever prepared.

On 10 December 1992 Mr Lonton wrote to Mr Thomas noting that rent was continually being paid one month in arrears and that the rent for December 1992 was outstanding. Mr Lonton stated:

Every effort must be made to pay all outstanding charges with 7 days or you leave us little alternative but to exercise our rights under the lease.

Mr Lonton also noted that there had been a marked increase in traffic.

On 17 December 1992 Mr Thomas wrote to Mr Lonton stating that:

An increase in traffic flow has been noted… more ‘lookers’ than ‘buyers’.

He added that signs designed to identify and attract custom had not been replaced and that their absence was having a damaging effect on the appellant’s ability to trade successfully.

On 23 December 1992, Mr Lonton replied that rental and other charges were due and payable one month in advance and that the appellant’s request for a variation could not be granted. He stated that a great deal of money and effort had been expended to upgrade the appearance and tenancy mix of the Centre and that traffic flow had improved dramatically in the appellant’s area of the Centre. As to the bulkhead signage, he added that:

With regard to your bulkhead signage we have again discussed this at great length on many occasions and we reiterate our previous advice to you, which was that we would be very happy to receive your design for new signage or alternatively a proposal to upgrade the existing signage to reflect the changes that have been made generally within the centre.

Despite that invitation, the appellant did not provide a design for new signage or provide a proposal to upgrade the signage. Mr Thomas gave evidence at trial that the reason he did not do so was because tenants of the fresh food hall were told at a meeting that their bulkhead signage would be ‘carefully stored and replaced at the completion of the works’. He also said that he was later told by Mr Lonton that ‘new signs, which met with the Landlord's approval, would be provided at a cost [to the appellant] of $15,000’. The judge did not accept that evidence. As his Honour observed, the correspondence concerning the bulkhead signage question did not contain any suggestion that signs would be stored and refitted or that Mr Lonton later ‘informed the plaintiff that new signs which met with the Landlord's approval would be provided at a cost of $15,000’. If that figure had been put, the judge said, it would surely have found its way into a letter of complaint from Mr Thomas to Mr Lonton. In his Honour’s view, the contemporaneous written record was to be preferred to the recollected and unreliable memory of an event more than 15 years before, and his Honour said that he was strengthened in that conclusion by the statement in the Buchanan Laird & Bawden report that new neon signage could be obtained at a ‘reasonable cost’.

The judge also found that, despite the absence of the signs, it was clear from the various photographs referred to at trial that the signage on the windows of the premises (along with the internal set up of the premises and its location on the corner of two intersecting internal malls) meant that the nature of the appellant’s business and the products and services it offered remained clear to passing customers.

On 25 January 1993, Ms Gray of Centre management wrote to Mr Thomas noting that unauthorised fit out works had been carried out in the premises. She observed that the counter wall paint was chipping and was badly marked due to the poor quality of the paint which had been used. She stated that she was disappointed that Mr Thomas had cancelled their appointment to meet.

The judge found that, from about that point on, Mr Thomas ceased to engage with Centre management for the purpose of obtaining a reduction in rent. Thenceforth, his correspondence was directed to the appellant vacating the premises with a payment of compensation from the respondent.

On 29 March 1993, Mr Thomas wrote to the respondent stating that the appellant’s business had ceased to be viable and was near to bankrupt. He attributed that to three things including loss of business as the result of the refurbishment works. He claimed that, since refurbishment works commenced 12 months ago, the business had suffered severe damage and that, since the opening of the Food Court, the position had deteriorated to the point of financial ruin. He noted that there had been a change in tenancy mix with a 43% increase in food outlets and that Centre charges had increased to 25% while there were surrounding empty shops. He argued that claims that the appearance of the appellant’s shop was the reason for the problem were absurd and that the concept of a food court was never economically viable. He said that while he was well aware of the impact of the recession:

The matter I refer to is not a function of the recession but rather a consequence of the change in the tenancy mix.

He invited the respondent to examine the moral implications of the case.

On 4 April 1993, Mr Lonton wrote to Mr Thomas inviting him to a ‘brain storming session’ on 11 May 1993.

On 13 April 1993, the chief executive officer of the respondent, Mr Alan Cox, wrote to Thomas stating that Mr Thomas’ 29 March 1993 letter had been referred to Mr D Teroxy, since the Centre formed part of his responsibility.

On 16 April 1993, Mr Teroxy (the Chief Manager, Credit Management of the respondent at its Sydney office) wrote to Mr Thomas advising that his concerns would be discussed with Mr Teroxy's colleagues and Centre management before replying.

On 9 May 1993, Mr Thomas complained to Mr Lonton of ‘unconscionable conduct’.

On 12 May 1993, Norman Sturrock, the Senior Manager, Credit Management of the respondent at its Melbourne office, wrote to Mr Thomas that the respondent was concerned that Mr Thomas considered he had been disadvantaged. He stated:

It was not intended that refurbishment works would cause any hardship to our existing tenants, but rather to improve the Centre to the benefit of both shopkeepers and shoppers.

Mr Sturrock also pointed out that:
Your sales have been slipping since 1992 although the Food Court refurbishment did not start until June 1992.

He noted, too, that there had been an increase in foot traffic of approximately 10,000 per week directly attributable to the Franklins store and that:
Franklins heads the mall you occupy and consequently we are at loss to understand why your market share is decreasing.

On 16 May 1993, Mr Thomas replied to Mr Sturrock. He wrote that he considered the conduct and actions of Centre management to be ‘vindictive, vexatious and deliberate’. He claimed that, as a result the actions of Centre management, he had lost his house; ‘been financially ruined’; had his ‘prospect for the future aborted’; suffered health problems; and that: ‘Were it not for the assistance of family and friends I would not still be open because my business is ruined’. He alleged that the operation of the Food Court was the reason for the demise of the appellant's business. He added that he had little faith in Mr Teroxy’s ability to handle the matter objectively. He referred to what he said was Mr Teroxy’s displeasure over Mr Thomas’ involvement in the Tenants’ Union and alleged that Mr Teroxy had said that if he did not back off he would be out of the Centre sidewards.

It is to be noted that the claim that Mr Thomas had lost his house as a result of the refurbishment works was false. Mr Thomas had sold his house during the year of income ended June 30 1989, at least two years before the refurbishment works began.

Following the letter of 16 May 1993, there were meetings between Mr Thomas and Mr Sturrock on 8 June 1993 and 15 June 1993. After the second meeting, Mr Sturrock wrote to Mr Thomas suggesting a further meeting to get a clearer idea of what the respondent was realistically supposed to do before responding to the letter of 16 May 1993.

On 17 June 1993, Mr Thomas wrote to Mr Sturrock that a rent free period and re-fit were unacceptable. He alleged that continued employment of Retail Realty Pty Ltd as Centre manager, and more especially of Susan Gray of that company, was a gross dereliction of duty. He warned that, unless the matter were resolved within seven days, he would take it out of Mr Sturrock's hands. The matter was not resolved within seven days.

On 18 June 1993, Retail Realty Pty Ltd wrote to Mr Thomas requesting sales turnover figures for April and May 1993.

On 27 June 1993, Mr Thomas wrote to Mr Cox alleging that the management fees charged by Retail Realty Pty Ltd were fraudulently imposed. He stated that:

Mr Sturrock informed me at our most recent meeting that it was the bank’s wish that I leave the centre and that my offer to assist solving the many problems of Waverley Gardens was rejected.

Mr Thomas sought a release from the appellant's obligations under the lease and a payment of $1.4 million by way of what he claimed would be ‘reasonable compensation’, and a suspension of Centre charges [rent and outgoings] pending resolution of the dispute.

On 28 June 1993, Mr Sturrock replied to Mr Thomas’ letter of 17 June 1992. He noted that Mr Thomas had attributed virtually all of his problems to the ‘alleged misdeeds’ of the respondent and Centre management. He observed that the various possibilities discussed – sale of business, surrender of term, relocation of premises and refurbishment of current premises – had all come to nothing. He stated that his aim had been to explore a basis for the remaining period of the tenancy to pass happily and profitably for both the appellant and the respondent. Mr Sturrock added that the respondent was prepared to consider any reasonable proposal which Mr Thomas might care to put to achieve that outcome and, as a starting point, he proposed that the respondent spend $25,000 on the appellant's business in a manner to be agreed. That offer was not accepted.

The appellant’s financial results for the year of income ended 30 June 1993 were in some respects worse again than the previous year. Sales fell from $343,382 to $292,256 with an EBIT of $34,273 and a net profit of $11,071 plus goods for own use of $1,956. Interest expense was, however, significantly reduced to $23,202 as the result of the appellant being able to repay from earnings some of the money it had borrowed in the previous financial year.

On 12 July 1993, Mr Holdsworth of Retail Realty Pty Ltd, wrote to the appellant as follows:

We note from our records that we are yet to receive your July monthly charges, and remind you that all charges are due and payable on or before the first of the month.
You failure to meet your obligations under the lease agreement will cause interest to be charged on all outstanding balances as at the 15th of each month, backdated to the 1st of every month.
If payment has been made within the last few days, we thank you and please disregard this notice.

Payment was not made and thus, by a letter dated 19 July 1993, Mr Holdsworth made a further demand for payment of $5,216.21. The letter stated that ‘[t]his demand is final and forwarded without prejudice to all of our other rights against you as consequence of breach of your lease’. Following further correspondence, the appellant paid the sum demanded.

On 28 July 1993 Mr Thomas wrote to Ms Gray of Centre management seeking clarification of the inclusion of $220,000 in Management Fees in the Centre budget of outgoings for 1993-94. In his letter, Mr Thomas referred to provisions of the Lease and also to the Retail Tenancies Act and contended that they precluded the respondent charging the appellant for management fees or commissions paid to Retail Realty Pty Ltd.

By letter of 3 August 1993, Holding Redlich, solicitors, replied on behalf of the respondent, as follows:

The exclusion in the Lease and the Regulations precludes our client from charging management fees or commissions (or any other similar charge) where the imposition of those fees or that commission arises from the collection by our client's managing agent of rent. The Lease and the Regulations do not preclude the charging of management fees or commissions by our client's managing agent for any management tasks other than the collection of rent which are conducted by the agent in connection with the management of the Waverley Gardens Shopping Centre.

On 21 September 1993, Mr Teroxy wrote to Mr Thomas that the respondent did not accept responsibility for the diminution in the trading profile of the appellant’s leasehold but that in order to settle the dispute it was prepared to allow the appellant to vacate the premises without penalty or alternatively to grant rental relief and to give consideration to financial participation in the cost of upgrading the premises.

On 25 September 1993, Mr Thomas replied to Mr Teroxy. In his letter he complained of a loss of income due to the refurbishment works and the creation of the Fresh Food Court and that the respondent’s actions had led to the destruction of his business. He stated that he would consider a reasonable proposal based on a list of considerations which included the value of the appellant’s business in the absence of the Fresh Food Court, and the forced sale of his house.

On 28 September 1993, Mr Teroxy wrote in reply to Mr Thomas requesting an estimate of the diminution in the value of the appellant’s business caused by the Fresh Food Court and of the loss of revenue directly attributable to disruptions caused by construction works during the refurbishment.

On 3 October 1993, Mr Thomas wrote back that, in the absence of the Fresh Food Court, the appellant’s business would have been trading at a vastly increased level and that a total refit would have been economically viable. He asked for a fair and reasonable proposal.

On 7 October 1993, Mr Teroxy replied that he was at a loss to quantify the amount necessary to achieve ‘our mutual aims’.

On 11 October 1993, Mr Thomas rejoined that he had confidence in Mr Teroxy to act fairly and reasonably.

On 25 October 1993 and 24 November 1993, Centre management demanded payment of late Centre charges of $5,043.08 and $7,777.81.

On 28 November 1993, Mr Thomas wrote to Centre management:

I have indicated in previous correspondence, to both Retail Reality and the Bank, the hardship and difficulties experienced for approximately two years, since refurbishment works commenced and the food court was established.
Income from business insufficient to meet obligations.
Cheque for $2,500

On 6 December 1993, Mr Thomas wrote to Mr Teroxy setting out the conduct which he claimed was grounds for compensation and requested $400,000. He allowed seven days to reply ‘failing which I shall revert to arbitration’.

On 13 December 1993, Mr Holdsworth wrote to Mr Thomas demanding payment of $10,452.93. The letter set out details of the sum claimed.

On 14 December 1993, Mr Thomas wrote back that circumstances had not changed and enclosed a cheque for $1,000.

On 16 December 1993, Mr Teroxy replied to Mr Thomas’ letter of 6 December 1993 that:

You indicated in our last conversation some weeks ago that legal redress was your preferred option…

and that the matter had been referred to the respondent’s legal advisers for their opinion.

On 22 December 1993, Centre management made a further demand for payment of $9,452.93, again setting out the details of the amount claimed. There was no response.

On 13 January 1994, the appellant’s solicitors served on the respondent a Notice of Dispute to the Secretary-General of Australian Centre of International Commercial Arbitration for the purpose of commencing an arbitration under the Retail TenanciesAct. It included the issue of whether the respondent was entitled to charge the appellant for management fees paid to Retail Realty Pty Ltd. Mr John Permewan was subsequently appointed as arbitrator.

By letter dated 19 January 1994 Holding Redlich on behalf of the respondent made a final demand for $13,634.05. The letter stated that:

Unless your current arrears in the sum of $13,634.05 are paid prior to 4 pm on Friday 21 January, 1994 the Lessor of those premises may have recourse to its rights at law in respect of these arrears without further notice.

The arrears were not paid and on the evening of Sunday 23 January 1994, the respondent re-entered the premises and terminated the lease.

Despite the re-entry, on 7 March 1994 Mr Permewan determined that he had jurisdiction to continue with the arbitration in respect of matters which occurred before the re-entry.

On 25 March 1994, the respondent instituted proceedings in the Trial Division of the Supreme Court seeking a declaration and injunction to restrain Mr Permewan from proceeding with the arbitration, on the basis that his jurisdiction had been brought to an end upon termination of the Lease. On 27 April 1994, Southwell J dismissed the application.

Subsequently, Mr Permewan was replaced as arbitrator by Mr Maurice Phipps QC and, on 15 December 1994, Mr Phipps declared that he had jurisdiction over the dispute referred to in the Notice of Dispute in respect of matters up to the termination of the Lease.

At a preliminary conference held on 5 May 1995, Mr Phipps informed Mr Thomas on behalf of the appellant that that he would not allow a representative of the Trade Practices Commission to be present at the hearing of the arbitration scheduled for 15 May 1995. That seems to have put an end to Mr Thomas’ interest in proceeding with the arbitration.

On 11 May 1995 Mr Thomas, on behalf of the appellant, wrote to Holding Redlich enclosing a letter dated 11 May 1995 to Mr Phipps seeking to ‘cancel’ the hearing set down for 15 May 1995. Mr Thomas stated that the reason he had asked Mr Phipps to ‘cancel’ the arbitration was because he considered that an arbitration under the Retail Tenancies Act was inadequate to address a dispute of this nature and that he intended to hand the matter over to the Trade Practices Commission to investigate a contravention of s 51AA of the Trade Practices Act 1974.

The respondent was represented at the hearing on 15 May 1995 but the appellant did not appear. Consequently, by letter dated 8 June 1995, Mr Phipps advised the parties that ‘since neither party proceeded with the hearing, the arbitration is now at an end’

On 14 February 2000, the appellant instituted this proceeding in the Commercial and Equity Division. As the claim was originally framed, it alleged that it had been unlawful for the respondent to re-enter the premises without first giving notice under clause 12.05 of the Lease, and that by re-entry without first giving notice, the respondent had repudiated the lease, which repudiation the appellant had accepted, whereby the appellant lost the value of its business and suffered loss and damage. That part of the claim was determined as preliminary point and ultimately decided by this court adversely to the appellant.[2]
[2]Natwest Markets Australia Pty Ltd v Tenth Vandy Pty Ltd (2008) 21 VR 68.

In its amended Statement of Claim, the appellant advanced a substantially modified claim of considerable complexity, made up of several parts. The first was comprised of allegations that the respondent had engaged in ‘impugned conduct’ constituted of carrying out the refurbishment works and creating a new Food Court without disclosing to the appellant when it entered into the Lease on 14 June 1990 that respondent intended to carry out the re-development; commencing with the ramp works adjacent to the premises in March 1992 and continuing them to August 1992, during which time the public toilets close to the premises were closed; carrying out the Food Hall works until about October 1992; taking away the appellant’s bulkhead signs; taking away the appellant’s table and chairs in the common area while allowing other tenants’ tables and chairs to remain; altering the tenant mix of the Centre in such a way as to take away the flow of customers from the appellant’s business and to direct them to the appellant’s competitors; and placing advertising signs in a fashion which exacerbated that effect.

The second was a claim that, by reason of the ‘impugned conduct’, there had been a substantial reduction in customers flowing to the appellant’s business, whereby the appellant suffered a reduction in income which rendered the appellant unable to meet its obligations under the Lease.

The third was a claim that, by reason of the impugned conduct and the loss and damage thus suffered, the appellant was entitled to seek an order in the arbitration pursuant to s 17(1)(b) of the Retail Tenancies Act for compensation in the amount of loss and damage thus suffered; an order that the compensation be set off in extinguishment of the amount due under the Lease; a declaration that, accordingly, the respondent was estopped and precluded from re-entering the premises; and an injunction to restrain re-entry on that basis.

The fourth was to allege that the re-entry had been effected in an attempt to oust the arbitrator’s jurisdiction and thereby to deprive the appellant of the ability to obtain that relief, and thus was unconscionable and unjust.

Alternatively, it was said that, by re-entering the premises while the arbitration was on foot, the respondent breached an implied term of the Lease which entitled the appellant to damages equal in amount to the compensation which it would have recovered in the arbitration, and that the appellant was entitled in equity to set off those damages in extinguishment of the amount due under the Lease, thereby annihilating the respondent’s claimed basis for re-entry and rendering it unlawful.

The final step was an averment that, in those circumstances, the respondent was estopped and precluded from contending that it had a legal right to re-enter the premises; with the result that its re-entry of the premises was unlawful and a repudiation of the Lease, which the appellant had accepted; with the consequence that the appellant was entitled to damages at law for the loss and damage suffered by reason of the repudiation of the lease; and that the amount of damages to which the appellant was entitled was the sum of the value of the appellant’s business including the good will of the business, profits of $80,000 per annum for the remainder of the term of the Lease, and the value of the foregone commercial opportunity of entering into a new lease upon the expiration of the Lease.

Alternatively, it was claimed that, because of the impugned conduct, the respondent’s re-entry to the premises was unconscionable conduct which caused the appellant loss and damage comprised of the loss of its business; loss of profits for the remainder of the term of the Lease; loss of the commercial opportunity to enter into a new lease at the conclusion of the Lease and to continue to operate the business thereafter, for which the appellant was entitled to recover damages at common law and ‘such further or other equitable relief as this Court deems just and equitable’.

The appellant’s submissions below

There was only a limited degree of correspondence between the appellant’s amended statement of claim and the appellant’s final submissions at trial.

In the written outline of those submissions, there was no mention of estoppel or equitable set-off. The case was put solely on the basis that, although it was accepted the respondent had a legal right to re-enter the premises, the re-entry was ‘unconscientious’ in seven respects:

(a) the [respondent] caused and/or, at the very least, contributed to the [appellant’s] failure to pay rent as a result of the various works undertaken by the [respondent] during the period March 1991, and November 1992;
(b)the [respondent] caused and/or, at the very least, contributed to the [appellant’s] failure to pay rent as a result of the removal of the [appellant’s] illuminated signage on 1 August 1992;
(c)the [respondent] caused and/or, at the very least, contributed to the [appellant]s] failure to pay rent as a result of the removal of the [appellant’s] external tables and chairs’ … and because other tenants were permitted to have tables and chairs adjacent to their premises thereby precluding the [appellant] from embarking upon fair competition with other tenants;
(d)the [respondent] caused and/or, at the very least, contributed to the [appellant’s] failure to pay rent as a result of the creation of the New Food Court;
(e)the [respondent] caused and/or, at the very least, contributed to the [appellant’s] failure to pay rent as a result of the installation of illuminated signage advertising the Food Court and McDonald’s throughout the Centre;
(f)the [respondent’ caused and/or, at the very least, contributed to the [appellant’s] failure to pay rent as a result of the change in the tenancy mix;
(g)the [respondent] failed to give any explicit warning that it would exercise its right of re-entry to the premises in the event that the [appellant] continued to be late in payment or rent …
(h)the [respondent] re-entered the premises for the improper purpose of attempting to ‘gazump’ the jurisdiction of the Arbitrator to inquire into each of the matters alleged in the Notice of Dispute dated 13^th January, 1994…

In final oral submissions at trial, counsel for the appellant added that the respondent’s conduct in re-entering the premises, although in accordance with its rights at law, was unconscionable, because:

(1)… just as the [appellant] was about to pick itself up from the ground, the [respondent] surreptitiously for improper motive re-entered…
(2)… the re-entry was motivated by a desire to gazump the jurisdiction of the Arbitrator and … it was unconscientious, it was highhanded, it was oppressive of the [respondent] to re-enter in those circumstances for that purpose, particularly when it knew that the [appellant] … was continuing to suffer the effects of, partly the recession, and moreover, the effects of the refurbishment works including the opening of the new food court and food hall …
(3)… During the term of the tenancy the landlord has acted in a manner which has been vexatious, discriminatory, unconscionable, prejudicial to the tenancy and the tenant’s quiet enjoyment and enjoyment of the premises and in breach of s 17(1)(b) of the Retail Tenancies Act 1986 including (a) removal of signage of the premises: (b) failure to replace signage from the premises; (c) constructing signs which unfairly direct customers to other tenancies; (d) the creation of the food court; (e) charging management fees; (f) removal of furniture in areas adjacent to the premises …
(4)… it is unconscionable … to exercise a legal right of re-entry pursuant to (a) provision of the contract, vis-à-vis clause 12.01 of the Lease [sic], in disregard of the lessee’s corresponding complaint in respect of an alleged breach of the fundament[al] covenant of quiet enjoyment…
(5)… it is unconscionable … to re-enter premises in circumstances where [the respondent] has been served with a Notice of Dispute pursuant to the provisions of the Retail Tenancies Act 1986 and in circumstances where [the respondent] knows, by reason of the content of that document itself, that one of the fundamental complaints being made by the tenant is a serious allegation of a breach of the obligation of quiet enjoyment…’
(6)… It’s unconscientious for the landlord to have re-entered in circumstances where the [appellant] was attacking the very right of the [respondent] to seek the payment of rent, and [the appellant] was seeking … relief pursuant to statute…
(7)… it was completely unconscientious in circumstances where there was an atmosphere of – an endeavour, at least, to achieve a commercial settlement, it was completely high handed and oppressive of the [respondent] to take the law into its own hands by effectively resorting to self-help via 12.01 without even telling the [appellant] that that’s what it intended to do.

Having thus outlined the alleged unconscionableness of the respondent’s conduct, counsel told the judge that:

[T]he plaintiff simply relies upon well settled fundamental equitable principle … based upon the … joint judgment of Justice[s] Mason and Dean in Legione v Hately where their Honours after referring to the Dock case said – referring to the expansive view of the equitable jurisdiction said, ‘This in turn conforms to the fundamental principle according to which equity acts, namely that a party having a legal right shall not be permitted to exercise it in such a way that the exercise amounts to unconscionable conduct’…[3]
[3]Citation omitted.

Thus it was contended that the appellant was entitled to ‘equitable compensation’ equal in amount to the damages at common law which it had sought in its statement of claim. There was no other claim.
The judgment below

In his reasons for judgment, the judge identified the issues to be determined as follows:

It was common ground that the effect of the decision of the Court of Appeal was that the re-entry was valid and effective as a matter of law. The principal difference between the parties, however, was whether there was some basis, as claimed by the plaintiff, for characterising the exercise of that legal right of re-entry as unconscionable in the eyes of equity and, consequently, conduct which would give a right to equitable relief; including relief by way of equitable damages, equitable compensation and, additionally, an equitable set off in answer to the defendant's claim for unpaid rental.
Additional relief of various kinds was also claimed in the further amended statement of claim filed pursuant to leave granted by the Court of Appeal on 4 May 2007. This claim for further relief included a claim for a declaration that the defendant was estopped and precluded from re-entering the premises on 24 January 1994. Additional declarations were also sought. These included a declaration that the defendant had wrongly re-entered the premises on 24 January 1994 and repudiated its obligations under the lease. The plaintiff, as tenant, claimed to have accepted this repudiation. Compensation was also sought, specifically, pursuant to s 17(1)(b) of the Retail Tenancies Act.[4]
In any event, the claim based on estoppel was not pressed by the plaintiff.
[4]Reasons, [7]–[8].
(i) Estoppel – not referred to in final submissions

Although the claim based on estoppel ‘was not pressed’, the judge dealt with it, and rejected it. His Honour reasoned that the claim was based solely upon a claimed entitlement to compensation under s 17(1)(b) of the Retail Tenancies Act;[5] there was no entitlement to compensation under s 17(1)(b); and the appellant was thus or in any event unable to bring itself within the principles of estoppel essayed in Waltons Stores Interstate Ltd v Maher[6] and Commonwealth v Verwayen.[7] As his Honour put it:

It was also alleged, in para 50 of the statement of claim, that the defendant was estopped and precluded from re-entering the premises as it was unconscionable and unconscientious of the defendant to purport to exercise the legal right of re-entry whilst the arbitration was extant and without taking into account the plaintiff's statutory right to compensation pursuant to s 17(1)(b) of the Retail Tenancies Act. The defendant submitted, with respect to this claim, that it is ‘without any relevant content and is not meaningfully formulated’. I accept the defendant's submissions in this respect. I do so on the basis of the pleading (as it appears in the further amended statement of claim), and having regard to the argument and submissions by the plaintiff (which did not indicate how the estoppel claim was formulated or came within the principles spelt out in this respect in cases such as Waltons Stores Interstate Ltd v Maher or Commonwealth v Verwayen, for example). In any event, it appears to me that any claim of estoppel as formulated on the basis of para 17(1)(b) of the Retail Tenancies Act must depend upon the extent to which these statutory provisions might operate in the present circumstances.
…
I accept the defendant's submission that there is no evidence of any written notice from the plaintiff to the defendant to ‘rectify the matter’ and, consequently, no relevant failure by the defendant to rectify pursuant to these provisions of s 17 of the Retail Tenancies Act. Additionally, I am not satisfied that the other requisite elements of para 17(1)(b), in the context of s 17(1) of the Retail Tenancies Act, have been made out. On the basis of the evidence of Mr Thomas on behalf of the plaintiff, it seems clear that the plaintiff did consent to the works (or the ‘action’, as the defendant puts it). Further, there was no evidence provided by the plaintiff of any substantial alteration or inhibition of the flow of customers to the retail premises.[8] Finally, I am not satisfied that there is any evidence that the landlord did not carry out the works within a reasonably practicable time, in other words ‘rectify the matter’; even assuming that the plaintiff had given written notice to the landlord in accordance with these provisions before the commencement or during the progress of the works.
I accept that the provisions of para 17(1)(b) of the Retail Tenancies Act do not operate at large but, rather, require a written notice from the tenant to the landlord to ‘rectify the matter’ and it is from the time of the giving of such notice that an assessment needs to be made as to whether ‘the matter’ is rectified ‘within a reasonably practicable time’. However, in the absence of any evidence of a written notice from the plaintiff to the defendant to ‘rectify the matter’, the issue of what is or is not ‘a reasonable practicable time’ does not arise. Hence there is no relevant failure by the defendant to ‘rectify’ and no right to compensation arises in favour of the tenant. In summary, I am of the opinion that para 17(1)(b) of the Retail Tenancies Act has no application in the circumstances of this matter. Any of the plaintiff's claims by reference to the applicability and operation of these provisions in its favour must therefore fail...[9]
(ii) Gazumping the arbitration – final written submission (h) and final oral submissions (1),(2),(4), (5) and (6)

[5]At relevant times, s 17(1)(b) of the Retail Tenancies Act 1986 was as follows:

17 (1)A retail premises lease is to be taken to provide that if the landlord—

(a) …

(b)except with the consent of the tenant, takes any action (other than action lawfully required by any public statutory authority or government department) that would substantially alter or inhibit the flow of customers to the retail premises.

…

and the landlord does not rectify the matter within a reasonably practicable time after receiving from the tenant a written notice asking the landlord to do so, then the landlord is liable to pay the tenant for any loss or damage suffered by the tenant as a consequence reasonable compensation as agreed in writing between the parties or, in the absence of agreement, determined under Part 3.

[6](1988) 164 CLR 387.

[7](1990) 170 CLR 394.

[8]Apart from the general assertions by Mr Thomas in this respect; assertions which were not supported by any evidence of actual customer flow numbers or evidence of changed customer flows within the shopping centre. In contrast the defendant provided detailed monthly figures of customer flows in the shopping centre; figures which were at odds with these general assertions (see the document entitled ‘Waverley Gardens Customer Counts’, in volume three of the court book at p 772) [ABC810].

[9]Reasons, [51]–[54] (citations omitted except, but not the footnote).

The judge dealt next with the contention that the respondent had acted unconscionably by re-entering the premises for the improper purpose of attempting to ‘gazump’ the jurisdiction of the arbitrator to inquire into the matters alleged in the Notice of Dispute of 13 January 1994.

Evidently, his Honour did not consider that it was necessary to decide the point. After noting the respondent’s submissions that there was no evidence sufficient from which to infer that the re-entry was motivated by a wish to terminate the arbitration; or, alternatively, if there were, that there was nothing unconscionable in the respondent seeking to wrest the matter from the exclusive jurisdiction of the arbitrator and thereby exposing it to the jurisdiction of the court, his Honour said that:

In any event, it is not necessary in my opinion to pursue this matter further, save to note that I do not accept that in the circumstances the defendant's recourse to the court to challenge the arbitrator's jurisdiction could be regarded as unconscionable conduct -- if only because of the difficulties which are evidenced in many reported cases with respect to the jurisdiction of arbitrators under the Retail Tenancies Act. These cases both indicate the degree of uncertainty as to the ambit of that jurisdiction and the relative frequency with which applications of this kind were made to this court.[10]
(iii) Removal of illuminated signs – final written submission (b) and final oral submission (3)

[10]Reasons, [103] (citations omitted).

The judge rejected the contention that the removal of the appellant’s illuminated bulk-head signs was the cause of a significant reduction in the appellant’s volume of trade. His Honour added that, if the removal of signage had made a difference, the appellant had only itself to blame because it failed to avail itself of a number of opportunities to obtain replacement signage by complying with the respondent’s lawful requirements, either at reasonable cost or at the respondent’s cost:

On the basis of the defendant's submissions and by reference to communications and discussions between the plaintiff and defendant with respect to signage for the premises, it appears that to the extent that the new and attractive bulkhead signage may have been desirable (which was the defendant's view) it was apparently not regarded by the plaintiff as critical to the business. There were, on the evidence, a number of opportunities the plaintiff could have availed itself of in order to obtain new bulkhead signage at reasonable cost or at the defendant's expense directly or through indirect financial assistance to it by the defendant (in terms of release of obligations which the plaintiff would otherwise have had to meet under the terms of the Lease). In any event, there is no evidence, apart from the general assertions of Mr Thomas, that bulkhead signage would have made any significant difference to the trading at the plaintiff's premises having regard to the location, window signage and obvious nature of the business to potential customers. Further, in my opinion, the evidence supports the view that the plaintiff's premises was in need of significant refurbishment and that the un-refurbished state was likely to be as or more important as a negative attribute in the eyes of potential customers than the lack of bulkhead signage (which would only confirm the obvious nature of the business in any event).[11]
(iv)Change of tenancy mix and inclusion of McDonald’s – final written submissions (e) and (f) and final oral submissions (2) and (3)

[11]Reasons, [92].

The judge dealt with the allegations that it was unconscionable to change the tenancy mix and to incorporate McDonald’s, both as such and as part of the question of whether the respondent had breached the covenant of quiet enjoyment.

His Honour rejected the claim that the appellant had any entitlement as such to compensation for change in tenancy mix and the inclusion of McDonald’s. As his Honour observed, whereas the appellant’s claim for compensation for a change in tenancy mix rested on s 17(1)(b) of the Retail Tenancies Act, a tenant’s entitlement to compensation for a change in tenancy mix arises under s 17(2) of the Act, which the appellant did not suggest applied:

Any of the plaintiff's claims by reference to the applicability and operation of these provisions in its favour must therefore fail. As the plaintiff has not relied upon s 17(2) in this matter, any question of compensation under those provisions as a result of changed tenancy mix does not arise.[12]
(v) Breach of covenant of quiet enjoyment – final written submissions (c), (d), (e) and (f) and final oral submissions (2), (3), (4) and (5)

[12]Reasons, [54].

The judge rejected the claim that the various acts complained about would have entitled the appellant to compensation for breach of covenant of quiet enjoyment. The only basis on which relief was claimed in that respect was under s 17(1)(b) of the Retail Tenancies Act, and as has been noted, his Honour considered that it did not apply:

The relationship between the bases of the plaintiff's claim as set out in the Notice of Dispute was clarified in the Plaintiff's Outline of Closing Address, as follows:
26.h. (i) the allegation that the Defendant had interfered with the tenant's right to quiet possession and enjoyment of the premises in breach of section 17(1)(b) of the Retail Tenancies Act 1986. This is significant as the conduct of the works and substantial refurbishment of the Centre disrupted and diverted the flow of customers away from the Plaintiff's business thereby entailing ‘either a breach of the covenant of quiet enjoyment or derogation from the grant of the lease or inconsistent with the original basis of granting and renewing the Lease’: Softplay v Perpetual [2002] NSWSC 1059 ... and other cases cited therein at paragraph 8. This is relevant in assessing the propriety of re-entry in circumstances where there is an inquiry pending, mandated by statute which might have resulted in an order for the waiver of rent or other compensation;
(ii) the allegation that the Defendant had acted in a vexatious, discriminatory, unconscionable and prejudicial manner;
i. the Defendant re-entered the premises for the improper purpose of attempting to thwart the Arbitrator's inquiry into the recoverability of any alleged ‘management fees’; and
j. the re-entry occurred at a time when the general economic conditions in the Australian economy were improving thereby depriving the Plaintiff of the ability to recover from its previous downturn in sales.

This appears to clarify and confirm that the allegation of the breach of the tenant's quiet enjoyment was by reference to s 17(1)(b) of the Retail Tenancies Act and not a claim at large based on a breach of the Lease covenant for quiet enjoyment.[13]
(vi) Failure to warn of intention to re-enter – final written submission (g) and final oral submission (7)

[13]Reasons, [33]–[34].

The judge rejected the claim that the respondent acted unconscionably by re-entering the premises without giving notice of its intention to do so. His Honour found that the appellant was or should have been aware from the correspondence which passed between the appellant and the respondent in the latter half of 1993 and early 1994 that the respondent was prepared to exercise all of its rights and remedies under the Lease:

Particular reference was made to the letter of demand dated 19 January 1994 from the defendant's then solicitors, Holding Redlich, to Mr Thomas on behalf of the plaintiff which, omitting formal parts, is as follows:
We refer to correspondence from Retail Realty Pty Ltd dated 14 October, 25 October, 17 November, 24 November, 13 December and 22 December 1993 concerning arrears of rental due in respect of your Lease of the above premises.
Unless your current arrears in the sum of $13,634.05 are paid prior to 4 pm on Friday 21 January 1994 the Lessor of those premises may have recourse to its rights at law in respect of these arrears without further notice.

It was submitted by the plaintiff that this letter was particularly ambiguous in view of previous correspondence merely warning the plaintiff that late payment would attract interest. In support of the position with respect to ambiguity, reference was made to the comment by the defendant's senior counsel during his closing address that the letter of 19 January 1994 could have been construed in two distinct ways. The particular comment relied upon by the plaintiff as a claimed concession was, ‘what could that be other than re-entry or suing for the moneys?.[14]
…
In my opinion, the evidence establishes that the plaintiff was or should have been well aware from the correspondence received from the defendant, particularly in the latter half of 1993 and early 1994, that the defendant in the course of its various demands and letters was indicating to the plaintiff that it was prepared to exercise all its available rights and remedies under the Lease. This included termination of the lease. In my opinion, Mr Thomas' evidence and the submissions on behalf of the plaintiff that the final demand by the defendant prior to the re-entry was ambiguous in light of previous correspondence or demands for payment threatening penalty interest under the lease, is simply not plausible.[15]
[14]Reasons, [30]–[31].
[15]Reasons, [121].
(vii) Causation – final written submission (a), (b), (c), (d) and (e) and final oral submission (3)

The judge was also not satisfied that the respondent’s conduct as landlord contributed to the appellant’s breach of the Lease as tenant. After analysing the financial data which were in evidence, including the expert evidence of Mr Jones and Mr Meredith, his Honour concluded that the appellant’s financial woes were due to the fact that it was a modest business which could not survive its obligations under the Lease and that the respondent’s conduct was not causative of the appellant’s breach of the Lease:

The defendant carried out works to the centre which the plaintiff agreed were desirable and necessary. There was no evidence that the plaintiff in carrying out those works did not do everything practicable and reasonable to minimise disruption to traders in the shopping centre and to complete them in a timely manner. Indeed, as a second mortgagee in possession seeking to refurbish the shopping centre and realise its security asset, it would not reasonably be thought that the defendant would have any interest in protracting these works or disrupting trade in the centre any more than necessary. This is particularly so, given that any delay may negatively affect the income of its tenants, their rent levels, and hence the value of its security asset on sale.
Further, in my opinion, the evidence indicates that the plaintiff, as tenant, did little to help itself in a number of respects. It is clear from the evidence that the plaintiff's premises needed refurbishing and to be made more attractive and inviting for passing potential customers. The plaintiff failed to refurbish its premises to the extent required, apart from some repainting. This failure occurred in spite of requests from the shopping centre management, which can reasonably be inferred to have been made with the knowledge and authority of the defendant; and requests which also offered some incentive or indirect funding to enable the plaintiff to achieve satisfactory refurbishment in its then financial circumstances.
Finally, the evidence establishes, in my view, that the plaintiff's business was quite a modest one and produced a relatively low annual net profit during the years it was operating. There seems little doubt that the economic recession of the early 1990s had some adverse effect on the business and at various times the internal and external works may have had some adverse effect on the business as well. Nevertheless, there is, in my view, no basis for any claim under para 17(1)(b) of the Retail Tenancies Act as the elements for an entitlement for compensation under these provisions were not established, including the requirement that there be a substantial alteration or inhibition to the flow of customers. Additionally, the evidence indicates that the centre management, on behalf of the defendant, did not insist on a rent increase to which it was apparently entitled under the terms of the Lease. It also provided rent relief to varying extents over a reasonable period of time. In spite of this, the evidence is that the plaintiff was in arrears in rent payments for significant periods of time. Considering all these factors, I am of the opinion that the position as submitted by the defendant is the correct one, namely that the plaintiff's business was a modest one which, for a variety of reasons, could not survive and meet its obligations under the Lease. This was not the result of the conduct of the defendant contributing to the position of the plaintiff's business. Thus, the defendant's conduct was not causative of the plaintiff's breach of lease obligations which led to or enabled the defendant to exercise its rights and re-entering the premises (as it was entitled to do as a matter of law).[16]
(viii) Equitable jurisdiction to intervene on the basis of unconscionable conduct

[16]Reasons, [125]–[127].

Finally, the judge rejected the appellant’s contention that, although it did not seek relief against forfeiture of the Lease, it was entitled in equity to compensation in an amount equal to what it alleged was the loss and damage which it had suffered by reason of the impugned conduct.

The judge said that he took the principles to be applied by courts of equity in approaching the characterization and consequences of acts of omissions alleged to be unconscionable or unconscientious to be as stated by Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ in Tanwar Enterprises Pty Ltd v Cauci[17] and summarized in the joint judgment of Gray, French and Stone JJ in Australian Competition and Consumer Commission v Samton Holdings Pty Ltd.[18]
[17](2003) 217 CLR 315, 324 [20] (citation omitted).
[18](2002) 117 FCR 301.

In Tanwar, Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ stated that:

The terms ‘unconscientious’ and ‘unconscionable’ are, as was emphasised in Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd, used across a broad range of the equity jurisdiction. They describe in their various applications the formation and instruction of conscience by reference to well developed principles. Thus, it may be said that breaches of trust and abuses of fiduciary position manifest unconscientious conduct; but whether a particular case amounts to a breach of trust or abuse of fiduciary duty is determined by reference to well developed principles, both specific and flexible in character. It is to those principles that the court has first regard rather than entering into the case at that higher level of abstraction involved in notions of unconscientious conduct in some loose sense where all principles are at large.

In Samton Holdings, Gray, French and Stone JJ summarized the categories of circumstances in which equity will intervene on the basis of unconscientious or unconscionable conduct, as follows:
Under the rubric of unconscionable conduct, equity will:
(i)Set aside a contract of disposition resulting from the knowing exploitation by one party of the special disadvantage of another. The special disadvantage may be constitutional, deriving from age, illness, poverty, inexperience or lack of education -- Commercial Bank of Australia v Amadio. Or it may be situational, deriving from particular features of a relationship between actors in the transaction such as the emotional dependence of one on the other -- Louth v Diprose; Bridgewater v Leahy.⁶⁰
(ii)Set aside as against third parties a transaction entered into as the result of the defective comprehension by a party to the transaction, the influence of another and the want of any independent explanation to the complaining party -- Garcia v National Australia Bank Ltd.⁶¹
(iii)Prevent a party from exercising a legal right in a way that involves unconscionable departure from a representation relied upon by another to his or her detriment -- Waltons Stores (Interstate) Ltd v Maher; Commonwealth v Verwayen.
(iv)Relieve against forfeiture and penalty -- Legione v Hateley; Stern v McArthur.
(v)Rescind contracts entered into under the influence of unilateral mistake -- Taylor v Johnson…
Each of these categories of case (the list may not be exhaustive) involves the identification of unconscionable conduct, albeit its content and degree will vary according to the category. It is a term which has various shades of meaning according to its context. There are different thresholds of conduct in various categories, all of which may be described as unconscionable -- G Dal Pont, ‘The Varying Shades of ‘’Unconscionable’’ Conduct -- Same Term, Different Meaning’ (2000) 19 Aust Bar Rev 135 at p 165.[19]
[19]Ibid [48].
The judge concluded that, in light of the authorities, equity’s approach to allegations of unconscientious conduct, while ‘not strictured in a rigid way’, must be seen as based on established principles, with the result that ‘there is no general jurisdiction in equity to intervene in the circumstances of this case’.

His Honour said that, in principle, it would have been open to the appellant to seek equitable relief under ‘one of the recognised rubrics of unconscionable conduct, namely, relief against forfeiture and penalty’. But he considered that, in all the circumstances, relief against forfeiture or penalty would not have been granted. In order to obtain relief against forfeiture, the appellant would need to have satisfied the prerequisites essayed by Mason and Deane JJ in Legione v Hately[20] and Stern v MacArthur;[21] and the appellant could not do that because it was unable to show that the respondent had taken unfair advantage of the appellant’s relative weakness or that the respondent had caused hardship to the appellant by violating the appellant’s reasonable expectations:

Even if the plaintiff were correct in arguing for a general jurisdiction in equity to intervene on the basis it has argued, I am of the opinion that its claim would not be established.
The crucial principle or issue as stated in Legione and upon which the plaintiff relied as the basis of its case, was whether the conduct of the defendant as landlord contributed to the plaintiff's breach of the lease as tenant? In my opinion, for the reasons indicated previously with respect to both the

plaintiff's and the defendant's submissions, this question must be answered negatively.[22]
[20](1983) 152 CLR 406, 449.
[21](1988) 165 CLR 459, 501–2 and 526–7.
[22]Reasons, [123]–[124].

The appellant’s contentions
(i) Ground 1 – Error of fact

Under the heading of Ground 1, the appellant contends that the judge erred in fact by failing to find that the respondent’s ‘impugned conduct’ caused or contributed to the appellant’s failure to pay rent and outgoings during the period October 1993 to January 1994. In counsel’s submission, it was a perverse finding not reasonably and rationally open on a proper consideration of the undisputed documentary evidence which, he contended, was supported by the unchallenged testimonial evidence of Mr Thomas. It was, he said, also contrary to all reasonable inferences to be drawn from the indisputable fact that the physical works were conducted and caused disruption, as appeared plain in the contemporaneous correspondence forwarded by Mr Thomas to the respondent and its agents during the relevant period. The perverse nature of the judge’s conclusion was also highlighted, counsel submitted, by the judge’s contradictory earlier finding that ‘the internal and external works may have had some adverse effect on the business as well’. Given that finding, counsel said, it defied commercial common sense and reality for the judge then to conclude that the lessor’s conduct was not causative of the appellant’s breach of its lease obligations.

We do not accept that the judge’s conclusion was perverse or that there was any contradiction as between his Honour’s conclusion and his finding that at various times the internal and external works may have had some adverse effect on the business.

Earlier in these reasons, we referred to the judge’s observation that, apart from unsubstantiated general assertions by Mr Thomas as to the refurbishment works causing a significant decline in customer numbers, there was no evidence of any significant decline in customer flows within the Centre. In contrast, as his Honour noted, the respondent provided detailed monthly figures of customer flows in the shopping centre which by and large showed the opposite.

· By letter dated 21 September 2009, the appellant wrote to Mr Stephen Hester, Group Chief Executive, and to board members of the Royal Bank of Scotland Group[52] offering to settle the matter for $60 million. The offer was expressed to remain open for 14 days.

[52]The Royal Bank of Scotland is a related corporation to the respondent.

The trial judge’s costs reasons

Order 26.08(3) of the Supreme Court (General Civil Procedure) Rules did not apply in this case, because the appellant lost completely, rather than recovering a judgment that was no more favourable than the amount of the offer.

The judge applied the principle that a litigant who unreasonably rejects a reasonable offer to settle the proceedings which is made without prejudice, runs the risk of having a special costs order made against him or her.[53] His Honour referred to Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2),[54] where this Court said that:
[53]Calderbank v Calderbank [1976] Fam Law 93.
[54](2005) 13 VR 436 (Warren CJ, Maxwell P and Harper AJA).

The discretion with respect to costs must, like every other discretion, be exercised taking into account all relevant considerations and ignoring all irrelevant considerations. It is neither possible nor desirable to give an exhaustive list of relevant circumstances. At the same time, a court considering a submission that the rejection of a Calderbank offer was unreasonable should ordinarily have regard at least to the following matters:
(a)     the stage of the proceeding at which the offer was received;
(b)     the time allowed to the offeree to consider the offer;
(c)     the extent of the compromise offered;
(d)    the offeree’s prospects of success, assessed as at the date of the offer;
(e)     the clarity with which the terms of the offer were expressed;
(f) whether the offer foreshadowed an application for an indemnity costs in the event of the offeree’s rejecting it.[55]

[55]Ibid [25].

His Honour held that the appellant’s refusals of the offer of compromise made on 22 March 2001 and of the Calderbank offer made on 20 October 2006 were not unreasonable. When these offers were made, the Court of Appeal had not yet resolved the appeal against Byrne J’s decision on the preliminary questions.[56]
[56][2010] VSC 70, [34].

At the same time, however, by 20 October 2006, the appellant should have realised that its claim was weak. The judgment of the High Court in Tanwar Enterprises Pty Ltd v Cauchi[57] (‘Tanwar’) had been delivered on 7 October 2003 and had significantly reduced the chance of the appellant succeeding on its unconscionable conduct claim.
[57](2003) 217 CLR 315.

The judge held that it was unreasonable for the appellant to refuse the respondent’s offer of 16 March 2009 to pay the appellant $250,000 inclusive of costs.[58] By that stage of proceedings, the only remaining component of the appellant’s case was the equitable claim relating to the respondent’s allegedly unconscientious exercise of the legal right to re-entry for non-payment of rent. His Honour said that:

In my opinion, this should have been seen to be a very weak claim following the High Court judgment in Tanwar Enterprises in 2003. In terms of any likely damages, the same position existed with respect to the plaintiff’s advice on quantum. Consequently, in my view, the plaintiff, properly advised, would have sensibly assessed the weakness of its case on liability together with the risks associated with establishing the quantum of its claim and, as a result, accepted the offer of $250,000 inclusive of costs. It follows that the plaintiff’s refusal of, or failure to accept, the offer of 16 March 2009 was, in all the circumstances, unreasonable.
This position should, in my view, also be viewed in the context of the continuing correspondence of Mr Thomas containing repeated accusations of fraud and impropriety more generally, together with the quite ridiculous offers to settle with the defendant on payment of sums in the millions of dollars, millions of pounds and, finally, up to $60 million.
The plaintiff, in its submissions at the hearing of this application, said that it was clear that some of these offers were not serious offers and, I assume, merely to be taken as rejection of the defendant’s offers with a view to indicating that they were derisorily low. Nevertheless, the plaintiff’s correspondence does not indicate this and, when couched with other material, tends to indicate that the plaintiff was not behaving reasonably.
…
In my view, it is clear from the way in which previous offers were put that the defendant was seeking indemnity costs in the event that the offer of 16 March 2009 was not accepted. The defendant’s reasoning underlying its assessment of the weakness of the plaintiff’s case had been expressed clearly in earlier offers and would, in my view, go to assist the plaintiff in the assessment of its position with respect to the 16 March 2009 offer and the terms in which it was expressed. In view of the ongoing nature of the proceedings and the series of offers on both sides, I am also of the view that there was sufficient time in all the circumstances for the plaintiff to consider its position with respect to the 2009 offer within the time specified in that offer.[59]

[58][2010] VSC 70, [37].

[59]Ibid [37]–[39].

Proposed grounds of appeal and submissions

The proposed grounds of appeal in support of the leave application were that:

11.The learned trial judge’s exercise of discretion to award indemnity costs in favour of the respondent miscarried by reason of an erroneous conclusion that Tanwar’s case rendered the appellant’s equitable claim so ‘weak’ as to render it unreasonable of the appellant to refuse the respondent’s offer to pay the sum of $250,000.00 in settlement of the appellant’s claim.
12.The learned trial judge erred in law and in fact by concluding the appellant’s rejection of the respondent’s offer of $250,000.00 inclusive of costs was unreasonable in the circumstances, particularly in light of the appellant’s expert evidence on the question of quantum which estimated the appellant’s damages at in excess of $1 million.

In support of proposed ground 11, the appellant argued that the judge had incorrectly taken the view that the High Court decision in Tanwar significantly weakened its case.

It will be recalled that in Tanwar, purchasers sought relief against forfeiture of contracts of sale of land which they had failed to complete, when time was of the essence. The joint judgment of the majority cast significant doubt on the breadth of views as to the breach of the jurisdiction to relieve against forfeiture which had earlier been expressed by a differently constituted High Court in Legione v Hateley.[60]
[60](1983) 152 CLR 406.

In particular, whereas in Legione, it was conceived that a purchaser under a validly rescinded contract of sale had an ‘interest’ in the land against the forfeiture of which relief might be granted, in Tanwar, the majority unequivocally concluded that the supposed ‘”interest”, being for its existence dependent upon the administration of the very remedy in issue’,[61] it does not assist:

to found the equity of the purchaser upon the protection of rights to injunctive relief acquired under a contract the termination of which has taken place. Whilst the contracts here were on foot, breach thereof by the vendors would have been restrained. But there was no relevant breach of contract by the vendors, and the contracts were terminated in exercise of a contractual right to do so.[62]

[61](2003) 217 CLR 315, 334 [57] (Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ).

[62]Ibid 334–5 [57].

Certainly, as the High Court took care to point out in Tanwar, different considerations apply to relief against forfeiture of a leasehold estate for breach of covenants added by way of security for the production of a stated result.[63] It does not appear that their Honours intended to cast doubt upon the idea that, in a case for relief against forfeiture of a leasehold estate, relief may be obtained even after forfeiture, depending upon the answers to the five questions identified by Lord Wilberforce in Shiloh Spinners Ltd v Harding.[64] As Lord Wilberforce said:

it remains true today that equity expects men to carry out their bargains and will not let them buy their way out by uncovenanted payment. But it is consistent with these principles that we should reaffirm the right of courts of equity in appropriate and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result. The word ‘appropriate’ involves consideration of the conduct of the applicant for relief, in particular whether his default was wilful, of the gravity of the breaches, and of the disparity between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach.

[63]Ibid 333 [55].

[64][1973] AC 691, 723–4.

This statement was endorsed by Mason and Deane JJ in Legione.

The point for present purposes, however, is that there is nothing in Tanwar which implies the existence of any broader jurisdiction to relieve against forfeiture of a leasehold estate, and hence, as the judge said, at least after Tanwar, if not before, it was clear that the appellant could only succeed by demonstrating that the respondent had acted in breach of the lease or otherwise unlawfully in forfeiting the lease or, alternatively, that the respondent had so acted that it was estopped from contending that it acted in breach of the lease or otherwise unlawfully.

As it was, the appellant never alleged breach of the lease and the only other way in which it sought to demonstrate that the respondent acted unlawfully or was estopped from contending that it had not acted unlawfully was by arguing that, but for termination of the arbitration, the appellant would have been entitled to compensation under s 17(1)(b) of the Retail Tenancies Act.

Since it was always clear, or at least should have been clear, to the appellant that the s 17(1)(b) claim was bound to fail, we consider that the judge was right to say that, after the decision in Tanwar in 2003, if not before, the appellant should have realised that its claim with respect to the unconscionable exercise of the legal right to re-entry for non-payment of rent was a very weak claim.

In support of proposed ground 12, it was submitted that the judge had ignored the report from the appellant’s expert witness, Brian Norman Jones, which suggested that an offer of $250,000 was too parsimonious to be as reasonably regarded as acceptable. Because Mr Jones had advised the appellant that it was entitled to recover millions of dollars in damages, it was not unreasonable for the appellant to reject the offer of $250,000 inclusive of costs on the basis of that advice.

In Mr Jones’ expert report dated 28 May 2009, Mr Jones quantified the appellant’s total economic loss, including interest, at between $3,658,812 and $5,157,732. That amount included a loss of between $1,464,285 and $2,963,205 for the ‘opportunity loss of not furthering business opportunities’.

In his evidence in chief, Mr Jones said that the estimate for opportunity loss was based on the assumption that the appellant would be in a position to borrow an amount sufficient to expand his business into another coffee shop or restaurant.

In his report, Mr Jones compared the levels of sales actually achieved by the respondent in the period November 1991 to termination in 1994, with figures calculated by applying to average sales for 1990 and 1991 the Australian Bureau of Statistics Index for Retail Trade – Cafes, Restaurants and Takeaway Food and upon that basis surmised that the total loss of sales which might be attributed to the refurbishment works over that period was $105,537.

In a competing report of Mr Greg Meredith of Ferrier Hodgson Forensics dated 9 June 2009, on which the respondent relied, Mr Meredith calculated supposed lost sales by taking the average of profits generated in the 1990 and 1991 income years, and applying a three percent CPI increase for each year and contrasting that with actual profits generated over the period November 1991 to January 1994. On that basis, he determined that, assuming the respondent had no right to construct the Food Court and otherwise act as it had, the loss of profits for the period up to forfeiture of the lease was $8,251.

Mr Jones calculated further losses for what he called ‘future maintainable earnings’ assuming that the business would have continued to operated profitably up to 31 March 2009 of $1,304,232, and a further loss of $405,000 being the supposed amount for which the business could have been sold as at 31 March 2009, if the lease had not been forfeited.

Mr Meredith responded that, because the lease would have expired in any event by 28 July 1995, any loss of future earnings should be limited to that date and upon that basis that the loss of future earnings would have been no more than $59,319, assuming that the respondent had not been entitled to construct the Food Court. Mr Meredith said that because the lease was due to expire on 28 July 1995, the appropriate point to assess the supposed loss of opportunity to sell the business was 24 January 1994 and that as at that date, it would have been worth nil because the lease was scheduled to expire on 28 July 1995 and because the volume of trade had been detrimentally affected by the opening of the food court and the opening of McDonald’s.

Putting aside differences as to whether elements like interest and own consumption goods were to be included in profits – which we accept are matters about which reasonable minds could differ – it is apparent that, even if the appellant had succeeded in showing that it was entitled to compensation under s 17(1)(b) of the Retail Tenancies Act, the quantum of damages which it might realistically have supposed it could recover, whether as such or by way of equitable compensation, ranged from as low as Meredith’s assessment of $8,521 to no more than Mr Jones assessment of $105,545 for the period until termination of the lease, plus interest.

We exclude the claims for loss of future profits and loss of opportunity, for, on any reasonable analysis, given the parlous state of the appellant’s business before the refurbishment works began and the lack of an option to renew the lease, there was never any reasonable prospect of recovering those sums. Like the judge, we prefer the contemporaneous documents to recollections of events which occurred the best part of 20 years’ ago, and so we prefer to rely upon Mr Thomas’ statement in his letter of 29 March 1993, that the business had ceased to be viable and was near to bankrupt, to the evidence which he gave at trial that he later realised he was wrong about that.

When cross-examined at the trial, Mr Jones said that Mr Thomas had told him that, in preparing his report, he should reach the conclusion that the appellant’s loss was $12 million. When errors in his calculation were put to Mr Jones, he said that he had been reckless in reaching that conclusion. Quite apart from the persuasive quality of Mr Meredith’s report, the fact that Mr Jones gave evidence that he was influenced by Mr Thomas in estimating the loss, and Mr Thomas’s knowledge of the meagre profits his business had made before the refurbishment of the shopping centre commenced, made it unreasonable for the appellant to rely on Mr Jones’ report to reject the respondent’s offer to settle for $250,000 inclusive of costs.[65]
[65]We note also that the email offering Mr Thomas $250,000 inclusive of costs was sent on 16 May 2009 and expired on 30 May 2009. Mr Jones’ report was dated 28 May 2009. In response to the expert report prepared by Ferrier Hodgson, Mr Jones provided an amended estimate of opportunity loss ranging from $197,595 to $525,199 and substantially reduced some of the other components of the estimate.

Conclusion on Tenth Vandy’s leave application

Because an order for costs is made in the exercise of the trial judge’s discretion, an appeal against a costs order faces a high threshold. An appellant must show that the orders were based on incorrect factual findings, that the judge applied incorrect principles, or that the decision, of itself, is so manifestly unreasonable that the judge must have made an error of law or fact.[66]
[66]House v The King (1936) 55 CLR 499. See also Spotless Group Ltd v Premier Building and Consulting Pty Ltd (recs apptd) [2008] VSCA 115, [10].

The law relating to the award of indemnity costs was set out carefully and comprehensively in the judge’s reasons. His Honour was astute to avoid determining the reasonableness of the appellant’s decision to reject offers made to him prior to the decision in Tanwar, with the benefit of hindsight as to what was decided by the High Court in that case. However, for the reasons explained above,[67] Tanwar increased the likelihood that that the appellant would fail in the claim based on the respondent’s allegedly unconscientious exercise of its right of re-entry.
[67]See [172]–[174].

It is sad that Mr Thomas, an intelligent man, convinced himself that Tenth Vendy’s claim justified the ridiculous settlement offers he made to the respondent. However, in exercising his discretion to make the orders for payment of costs on an indemnity basis, his Honour was entitled to take the absurdity of these counter-offers into account. For the reasons set out above, it was clearly open to his Honour to find that it was unreasonable for the appellant to reject the respondent’s offer of $250,000 inclusive of costs on 16 March 2009 and to order that the appellant pay the respondent’s costs on an indemnity basis.

Since the appellant has no chance of success in appealing against the costs orders made by his Honour, the application for leave to appeal should be refused.

Mr Thomas’s application

Because Mr Thomas only sought to maintain his application if the appellant succeeded in its own application, we will deal with his submissions only briefly.

In essence, Mr Thomas contended that a costs order should not have been made against him, because the trial judge had wrongly held that the appellant’s claim could not succeed. His submissions before us were intended to substantiate the claim that the respondent acted unconscientiously in exercising its right of re‑entry, rather than being directed to the order for costs which was made against him.

For the reasons given above, the appellant’s claim was weak. The trial judge correctly held that the jurisdiction to order costs against a non-party, conferred by s 24(1) of the Supreme Court Act 1986, applies when a non-party has sufficient connection with the proceedings.[68] As Mason and Deane JJ observed in Knight v FP Special Assets Ltd:[69]

Obviously, the prima facie general principle is that an order for costs is only made against a party to the litigation. As our discussion of the earlier authorities indicates, there are, however, a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party. Thus, for example, there are several long-established categories of case in which equity recognized that it may be appropriate for such an order to be made.[70]

[68]See also Supreme Court (General Civil Procedure) Rules Order 63.

[69](1992) 174 CLR 178.

[70]Ibid 192.

His Honour applied the correct legal test in determining whether the discretion to make such an order should be exercised. There is no error in his factual finding that Mr Thomas ‘was and remains the dominant figure’[71] behind the appellant, and was the directing mind in relation to the lease of the premises and the negotiations with the respondent. The proceedings would probably not have been initiated and would certainly not have been pursued for more than 10 years if it had not been for Mr Thomas’s determination to do so.
[71][2010] VSC 70, [41].

Since there is no basis for considering that his Honour erred in exercising his discretion to make an order against a non-party, the application for leave to appeal against that order should be refused.

Conclusion and orders

For the reasons we have given we would dismiss the appeal and refuse Mr Thomas’ application for leave to appeal against the order that he should pay the respondent’s costs of the proceeding.

BELL AJA:

I agree.

- - -

Financial Year	Sales	EBIT	Net profit
30/6/86	$11,264
30/6/87	$398,952	$52,909	$25,909
30/6/88	$390,952	$45,588	$26,224
30/6/89	$426,331	$44,573	$30,967
30/6/90	$498,007 (best sales year)	$40,456	$25,733
30/6/91 (before the Works)	$395,707	$30,271	$17,531
30/6/92	$343,382	$33,000 (approx)	$209 (net loss due to a large interest expense of $35,676)
30/6/93	$292,256	$34,273	$11,071 (interest expense reduced to $23,202).

[2012] VSCA 103

28 May 2012