Waters Lane v Sweeney

No judgment structure available for this case.

New South Wales

Court of Appeal

CITATION: Waters Lane & Anor v Sweeney & Ors [2007] NSWCA 200
This decision has been amended. Please see the end of the judgment for a list of the amendments.

HEARING DATE(S): 18-20 July 2007

JUDGMENT DATE:
16 August 2007

JUDGMENT OF: Giles JA at 1; Santow JA at 2; Tobias JA at 3

DECISION: (a) ORDER that the appeal be dismissed; (b) DECLARE that the Heads of Agreement dated 9 March 2004 between the appellants and the respondents was validly terminated by the respondents with effect as from 1 May 2006 pursuant to an undated “Notice under Clause 8.2(b) Notice of Termination” forwarded under cover of a letter from David Begg & Associates to Gadens Lawyers dated 1 May 2006; (c) ORDER that the appellants pay the respondents’ costs of the appeal.

CATCHWORDS: CONTRACTS – Construction and interpretation – All reasonable endeavours – Conditions subsequent not satisfied by sunset date – Whether to take into account an unexercised unilateral right to extend sunset date in determining breach – Termination – Contractual right of termination enlivened only after notice giving time to cure breach – Whether a breach that is not capable of being cured in the given time is one for which such a notice can be validly given – Election – Whether giving notice of termination pursuant to contractual clause constitutes election and waives right to terminate at common law

LEGISLATION CITED: Conveyancing Act 1919
Real Property Act 1900
Environmental Planning and Assessment Act 1978
Environmental Planning Assessment Amendment (Infrastructure and Other Planning Reform) Act 2005

CASES CITED: Batson v De Carvalho (1948) 48 SR (NSW) 417
Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187
Champtaloup v Thomas [1976] 2 NSWLR 264
Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41
Hungry Jack’s Pty Ltd v Burger King Corp [1999] NSWSC 1029
Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26; [1993] HCA 27
L Schuler AG v Wickman Machine Tools Sales Ltd [1974] AC 235
Sargent v ASL Developments Pty Ltd (1974) 131 CLR 634
Sheffield District Court Railway Co v Great Central Railway Co (1911) 27 TLR 451
Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359
Terrell v Mabie Todd & Co Ltd (1952) 69 RPC 234
The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17
Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632
Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689

PARTIES: Waters Lane Pty Ltd
Sean Martin Howard
David James Sweeney
Gregory Sweeney
Cynthia June Sweeney
Rhonda June Collison

FILE NUMBER(S): CA 40296/06

COUNSEL: 1-2A: F Kunc / C Bova
1,3-4R: J Simpkins SC / T Wong
2R: Mr Xanos

SOLICITORS: 1-2A: Gadens, Lawyers, Sydney
1-4R: David Begg & Associates, Sydney

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): SC 1321/06

LOWER COURT JUDICIAL OFFICER: Rein AJ

LOWER COURT DATE OF DECISION: 26 April 2006

LOWER COURT MEDIUM NEUTRAL CITATION: Waters Lane Pty Limited v Sweeney [2006] NSWSC 222

CA 40296/06
SC 1321/06

GILES JA
SANTOW JA
TOBIAS JA
Thursday 16 August 2007

WATERS LANE PTY LTD & ANOR v DAVID JAMES SWEENEY & ORS

The respondents owned a 200ha property at Denham Court, bounded on the south by the M5 Motorway and Campbelltown Road and located approximately 8km to the north of the main business district of Campbelltown (the property), which they had been running as a horse riding range. The first appellant (Waters Lane) was a company formed by the second appellant (together the appellants).

Howard saw potential to develop the property and entered into a Heads of Agreement (HoA) with the respondents. Pursuant to the HoA, in or about December 2003, Howard, through his companies, advanced a total of $9,900,000 to the respondents which, at the direction of the respondents, was paid to their creditors. A significant portion of this was secured by a first registered mortgage on the property in favour of a company controlled by Howard.

The HoA included a clause (4.1) which required Waters Lane to use “all reasonable endeavours” to satisfy certain “Conditions Subsequent” by the “Sunset Date”, defined as two years after the commencement of the HoA. The appellants also had, under cl 4.5 of the HoA, a unilateral right to extend that sunset date by a further two years by serving a notice on the respondents to that effect. The “Conditions Subsequent” related to the rezoning of the property and the granting of a development consent to its development for residential purposes.

Clause 12.1 of the HoA required Waters Lane to provide a further $2 million to the Sweeneys 30 days after giving a notice pursuant to cl 4.5. The original sunset date was 9 March 2006 and at no time did the appellants issue a notice compliant with cl 4.5.

On 15 December 2005 the respondents served on the appellants a document entitled “Notice under clause 8.2(a) of the HoA” (the December notice), which specified 11 alleged material breaches within the meaning of cl 8.1(b) of the HoA and gave notice of the respondents’ intention to terminate the HoA at any time after 20 January 2006 in respect of those breaches. The appellants then instituted the proceedings on 20 January 2006 and sought declarations that they were not in material breach and that the December notice was invalid and ineffective, and orders restraining the respondents from terminating the HoA. On 26 April 2006 the summons was dismissed and on 5 May 2006 the parties each served notices of termination on each other.

HELD: (per Tobias JA, Giles and Santow JJA agreeing)

1) It was at all times necessary that the Sunset Date be ascertainable so as to ensure that there was always a benchmark against which Waters Lane’s compliance with its obligation to use all reasonable endeavours to satisfy the Conditions Subsequent by the Sunset Date could be measured. Unless and until the Sunset Date was extended by notice given pursuant to cl 4.5, it was fixed at its original value – 9 March 2006.

2) Once it was accepted that the Sunset Date was 9 March 2006 then, unless and until that date wais extended by notice given pursuant to cl 4.5, whether or not there has been a breach of cl 4.1 at any particular time could only be measured as against that date and not against the possibility that it may be extended.

3) Clause 8.2(a) was limited only by the requirement that a breach be “material” as stated in cl 8.1(b). Accordingly, prima facie, cl 8.2(a) applied irrespective of whether the breach was capable of being cured within 20 Business Days or, perhaps, at all.

4) There was insufficient substance in the criticisms of the primary judge’s findings regarding Howard’s credibility to justify the submission that his overall conclusion in that respect and his preference for Ms Everett’s evidence where it conflicted with that of Howard, was in error.

5) Clause 4.1 required Waters Lane to do all it reasonably could in the circumstances to satisfy the Conditions Subsequent by 9 March 2006 although it was not required in doing so to go beyond the bounds of reason. In the context of the contractual obligation undertaken by it to use all reasonable endeavours to satisfy the Conditions Subsequent by the Sunset Date, the adoption by the appellants of a “softly, softly” approach which in other circumstances would have been both prudent and reasonable, was insufficient to constitute the use by Waters Lane of all reasonable endeavours to satisfy the Conditions Subsequent by 9 March 2006.

6) Clause 4.3 of the HoA imposed upon Waters Lane the obligation to promptly notify the Sweeneys in writing once it was clear that, notwithstanding its use of all reasonable endeavours, either or both of the Conditions Subsequent could not be satisfied by the Sunset Date, being 9 March 2006 in the absence of notice otherwise. However, that breach was not a material breach within the meaning of cl 8.1(b).

7) The obligation upon Waters Lane as the Developer to use all reasonable endeavours to satisfy the Conditions Subsequent by the Sunset Date was clearly fundamental to, and went to the root of, the HoA.

8) The doctrine of election arises where two rights are inconsistent, in the sense that exercise of one affirms the continued existence of the contract whereas the other terminates it. When the choice is between termination of the contract according to its terms or termination at common law, each involves a right to terminate with the result that neither is inconsistent with the other and the doctrine of election has no part to play. The giving of the December notice did not constitute an unequivocal act on the part of the respondents which either affirmed or purported to affirm the continuing existence of the HoA. The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17, applied

.

CA 40296/06
SC 1321/06

GILES JA
SANTOW JA
TOBIAS JA
Thursday 16 August 2007

WATERS LANE PTY LTD & ANOR v DAVID JAMES SWEENEY & ORS

Judgment

1 GILES JA: I agree with Tobias JA.

2 SANTOW JA: I agree with Tobias JA.

3 TOBIAS JA: On 9 March 2004 the appellants and the respondents entered into Heads of Agreement (HoA) with a view to the rezoning and development of the respondents’ land near Campbelltown. In December 2005 the respondents gave notice of their intention to terminate the HoA for material breaches by the first appellant of certain of its obligations thereunder. The appellants instituted proceedings by way of summons in the Equity Division of the Supreme Court seeking declarations that the first appellant was not in material breach and that the respondents were not entitled to terminate the HoA, and for an order restraining them from doing so (the proceedings).

4 The proceedings were heard by Rein AJ who on 26 April 2006 found in favour of the respondents and dismissed the appellants’ summons with costs. The appellants now appeal from that decision. The appeal raises a number of construction issues with respect to various provisions of the HoA as well as the critical factual issue as to whether the first appellant was relevantly in material breach of its obligations thereunder. If it was, as the primary judge held, then a further issue arises involving the doctrine of election between allegedly inconsistent rights or remedies.

The background facts and the course of the proceedings

5 The respondents (the Sweeneys) are the owners of Lot 1 DP541916 (the Property). The first appellant (Waters Lane) was a company formed by the second appellant, Mr Sean Martin Howard (Howard) and of which he was a director for the purpose of entering into an agreement with the Sweeneys for the development of the Property. I shall refer to Waters Lane and Howard together as the appellants.

6 The Property comprises 200 hectares of land known as the Scenic Hills Riding Ranch at Denham Court bounded on the south by the M5 Motorway and Campbelltown Road and located approximately 8km to the north of the main business district of Campbelltown. A large proportion of the Property is cleared grazing land whereas the remainder is heavily vegetated with various species including Cumberland Plain Woodland, an endangered ecological community. Generally speaking the Property slopes from the northwest to the southeast, the elevated areas in the northwest reaching heights of approximately 150m above sea level with slopes of 20%-40%. Less elevated areas to the southeast are approximately 30m-60m above sea level and exhibit slopes of less than 10%.

7 At all material times the Property was within Zone 7(d1) (Environmental Protection (Scenic)) under Campbelltown Local Environmental Plan – District 8 which was gazetted in 1988. Under that zoning any form of urban development, and in particular development for the purposes of a residential retirement village, was prohibited. Furthermore, the Property lay within an Escarpment Preservation Area which imposed various controls relating to height limits for development and vegetation coverage.

8 In or around November 2003 Howard was introduced to the Property and learned that it was heavily encumbered by a registered first mortgage in favour of Statewide Secured Investments Pty Ltd (Statewide) and subject to four caveats lodged by other financiers. At that time Statewide, having issued a notice pursuant to s 57(2)(b) of the Real Property Act 1900 in late September 2003 with respect to a debt of over $2,888,000, was preparing to sell the Property. As Howard saw an opportunity to develop the Property for retirement housing, he agreed to refinance the debts owed by the Sweeneys on the understanding that Waters Lane would enter into a form of joint venture agreement with them which would enable the Property to be developed and, if development was approved by the relevant authorities, purchased by an entity associated with Howard.

9 Accordingly, in or about December 2003, Sintan Pty Ltd (Sintan) as bare trustee for Kaygen Pty Ltd (Kaygen), companies controlled by Howard, advanced approximately $6,900,000 which, at the direction of the Sweeneys, was paid to their creditors. Sintan took a first registered mortgage over the Property to secure the loan (the Sintan mortgage).

10 Thereafter, on 9 March 2004 the appellants entered into the HoA with the Sweeneys with respect to the development of the Property. Clause 2 of the HoA provided that it created a binding agreement between the parties to carry out its terms. Pursuant to cl 12.1(a) and (b) Waters Lane was to procure the advance of a further $3,000,000 to the Sweeneys by June 2004. Accordingly, the total amount advanced by Howard or entities associated with him and secured by the Sintan mortgage was approximately $9,910,000. Further, pursuant to cl 12.2 of the HoA, Waters Lane was required to procure Sintan to waive payment of the interest otherwise payable on the principal of $9,910,000 under the Sintan mortgage for the term of the HoA. Sintan was so procured.

11 On 15 December 2005 the Sweeneys served on the appellants a document entitled “Notice under clause 8.2(a) of the HoA” (the December notice). The notice specified 11 alleged material breaches of the HoA set out in a schedule thereto and gave notice of the Sweeneys’ intention to terminate the HoA at any time after 20 January 2006 in respect of material breaches of the HoA within the meaning of cl 8.1(b) thereof.

12 In response to the issue of the December notice, the appellants instituted the proceedings on 20 January 2006. By an amended summons filed 8 February 2006 the appellants sought declarations that they were not in material breach of the HoA as alleged by the Sweeneys or at all, that the December notice was invalid and ineffective, that the Sweeneys were not entitled to terminate the HoA and orders restraining the Sweeneys from terminating the HoA and requiring that it be specifically performed.

13 By agreement between the parties reached in light of the institution of the proceedings, the Sweeney’s undertook not to take steps to terminate the HoA until 3 March 2006 on which date, in order to further preserve the rights and obligations of the parties until judgment in the proceedings, the parties agreed, notwithstanding the provisions of the HoA, to maintain the status quo until, relevantly, the earlier of a date which was seven days after judgment was delivered in the proceedings or 5 May 2006.

14 The proceedings were heard by Rein AJ who on 26 April 2006 found in favour of the Sweeneys, ordering that the appellants’ summons be dismissed and that the appellants pay the Sweeneys’ costs. Accordingly, on 1 May 2006 the Sweeneys gave notice to the appellants pursuant to cl 8.2(b) terminating the HoA under cl 8.1 for material breach. In so doing, the Sweeneys relied upon the failure of the appellants to rectify one or more of the material breaches set out in [2]-[4], [5] and [8] of the schedule to the December notice.

15 The appellants responded to this notice by denying the right of the Sweeneys to terminate the HoA (it at all times asserted and continued to assert that it was not in material breach of the HoA) and by their solicitor’s letter dated 4 May 2006 gave notice pursuant to cl 5.1 of Waters Lane’s intention to terminate the HoA on a date 10 Business Days (as defined) after the date of that notice. In fact by notice on the same date the appellants purported to terminate the HoA under cl 5.1. They also asserted that the Sweeneys’ notice of termination was a repudiation of their obligations under the HoA which the appellants accepted in the letter of 4 May 2006 by themselves terminating the HoA for fundamental breach with immediate effect.

16 It was common ground that the effect of the foregoing was that the HoA was at an end having been validly terminated by the Sweeneys pursuant to cl 8.2(b) of the HoA or at common law for fundamental breach as a result of the failure of Waters Lane to comply with its obligations under cls 4.1 and 7.1 of the HoA. Alternatively, if the Sweeneys were disentitled from so terminating the HoA because their purported termination constituted a repudiation of their obligations under the HoA which entitled the appellants to terminate the HoA accordingly.

17 Given that one way or another the HoA had been terminated, the relevance of the continuing dispute between the parties was that if the appellants were entitled to terminate the HoA rather than the Sweeneys, then Waters Lane would continue to be entitled to the benefit of cl 8.3(a) under which for a period of 24 months after the date of the termination of the HoA other than for default by Waters Lane, the Sweeneys had granted Waters Lane a right of first refusal to proceed with the development or purchase of the Property on terms no less favourable than those which Sweeneys would otherwise wish to obtain with respect to its development or sale to third parties.

18 Accordingly, the appellants, in order to preserve Waters Lane’s rights under cl 8.3, appeal against the decision of the primary judge that they had not established that Waters Lane was not in material breach of the HoA thus entitling the Sweeneys to terminate the HoA pursuant to cl 8.2(b) thereof or at common law.

The structure of the Heads of Agreement

19 Relevantly, Recital B of the HoA provided as follows:

“The Developer [Waters Lane] proposes, subject to the granting of all necessary approvals and the satisfaction of the Conditions Subsequent to undertake the Project and purchase the Sweeney Property.”

20 The expression “Conditions Subsequent” was defined in cl 18 of the HoA to mean

“(a) The Rezoning of the Land; and

(b) The granting of the Development Consent.”

21 The term “Rezoning” was defined to mean

“the making and gazettal of all environmental plans as may be required to permit the Land to be developed and to enable the Development Consent to be granted.”

22 The expression “Development Consent” was defined to mean

“a consent issue by an Authority [which included Campbelltown City Council (the Council) as well as the Minister for Planning (the Minister)] in response to the Development Application permitting the Land to be developed for residential use including but not limited to a retirement village and all other uses which support and provide for residential use within a residential area and includes a modified, subsequent or replacement consent for the whole or any part of the Land.”

23 “Development Application” was defined to mean

“that application or those applications to be prepared and lodged by the Developer at its cost under the Environmental Planning and Assessment Act 1974 (sic) or other applicable legislation for the development of the Land …”

24 It will be apparent that the rezoning of the Property (referred to in the HoA as “the Land”) was required as its existing zoning prohibited any form of residential use. It was in this context that cl 3.1(a) of the HoA relevantly provided that:

“The parties agree that they will conduct themselves in good faith with each other so as to

(i) …,

(ii) …,

(iii) achieve the objectives expressed in these Heads of Agreement

as expeditiously as reasonably possible.”

25 Critically to the issues debated on the appeal, cl 4.1 provided as follows:

“4.1 The Developer must use all reasonable endeavours to satisfy the Conditions Subsequent by the Sunset Date and shall for those purposes at its cost:

(a) engage and retain appropriate experienced and qualified consultants for the preparation of all necessary designs, plans (including plans of subdivision) and specifications for the Project;

(b) obtain written consents to proceed with those design plans and specifications as shall be incorporated in the Development Application. Sweeney must not withhold its consent to such designs, plans and specifications where all of the Sweeney Requirements are satisfied in the Development Application.”

26 The expression “Sunset Date” was defined to mean the later of two dates of which the relevant one was

“(a) two years after the date of these Heads of Agreement;

(b) …

but subject to any extension claimed in accordance with Clause 4.5 of these Heads of Agreement.”

27 Clause 4.5 provided as follows:

“4.5 Despite any other term of these heads of Agreement, the Developer may extend the Sunset Date for 2 years by serving a notice in writing on Sweeney whereupon:

(a) the reference to ‘2 years’ in (a) and (b) of the definition of Sunset Date is changed to ‘4 years’; and

(b) the amount in clause 12.1(c) becomes payable.”

28 As noted in [10] above, cl 12.1(a) and (b) provided for Waters Lane to procure Sintan to advance to the Sweeneys the amounts referred to therein to be secured by the Sintan mortgage. Clause 12.1(c) provided for the advancement of a further sum of $2 million to the Sweeneys 30 days after the date of the giving of a notice of extension of the Sunset Date under cl 4.5. As a consequence of cl 12.2, if Waters Lane gave that notice it was required to procure Sintan to advance the $2 million to the Sweeneys during the term of the HoA. It is to be noted that the $2 million was to be a secured interest-free loan – an advance which the Sweeneys would have to repay in accordance with the terms of the Sintan mortgage.

29 Complementary to cl 4.1 was cl 7.1 which was in the following terms:

“The Developer must use all reasonable endeavours to achieve satisfaction of the Conditions Subsequent and will bear all costs, expenses and risks associated therewith.”

30 Related to the question of risk referred to in cl 7.1 was cl 9.2 which relevantly provided:

“9.2 The Developer agrees to absolutely and solely bear and indemnify Sweeney against all risks, liability, obligations and the consequences of any unforseen circumstances as arise or may arise in relation to the carrying out of the Project, and in particular, without limitation:

(a) …

(b) the risks, costs, delays and expenses as have been or may be incurred by the Developer in satisfying the Conditions Subsequent;

(c) the risks, obligations and liabilities as will be incurred by the Developer in obtaining all other approvals necessary for any relevant authority for the Project;

(d) the overall viability or otherwise of the Project having regard to changing market conditions as will be experienced over the life of the design, construction and development of the Land;

…”

31 Under the schedule to the December notice, the Sweeneys alleged the following “material breaches” of the HoA which the primary judge found had not been negatived by Waters Lane:

Breach 3

In breach of clauses 4.1 and 7.1 of the HoA, Waters Lane as the Developer has failed to use all reasonable endeavours to satisfy the conditions subsequent by the Sunset Date of 9 March 2006.

Breach 4

In breach of clause 4.1(a) of the HoA, Waters Lane as the Developer has failed to engage and retain appropriate experienced and qualified consultants for the preparation of all necessary designs, plans (including plans of subdivision) and specifications for the Project for the purpose of satisfying the conditions subsequent by the Sunset Date.

Breach 5

In breach of clause 4.3 of the HoA, Waters Lane as the developer has failed to promptly notify the Sweeneys in writing that any condition subsequent cannot be satisfied by the Sunset Date of 9 March 2006.

…

Breach 8

In breach of clauses 4.1 and 9.4(b) of the HoA, Waters Lane as the Developer has not lodged any applications for the Project or, alternatively, has not lodged all applications necessary to satisfy the condition subsequent by the Sunset Date.”

32 Relevant to Breaches 5 and 8 were clauses 4.3 and 9.4(b) of the HoA which provided as follows:

“4.3 The Developer must promptly notify Sweeney in writing if any Condition Subsequent is satisfied or cannot be satisfied.

…

9.4 The parties agree that:

(a) …

(b) the Developer must prepare and lodge all applications for the project in accordance with these Heads of Agreement;

(c) …”

33 With respect to the alleged breaches the following facts were not in dispute:

(a) At no time did Waters Lane serve a notice pursuant to cl 4.5 of the HoA extending the Sunset Date for two years;

(b) As at the date of the December notice, 15 December 2005, and as at 20 January 2006 (being the date 20 Business Days (as defined) after the receipt of that notice by Waters Lane), neither Waters Lane nor Howard had determined whether Waters Lane would or would not serve a notice under cl 4.5;

(c) At no time had Waters Lane prepared and lodged with the Council or the Minister either an application or request to rezone the Property or a Development Application (as defined);

(d) As at both 15 December 2005 and 20 January 2006, the only document prepared and lodged with the Council by Waters Lane was that entitled “Scenic Hills Development Strategy” (the Development Strategy) which was presented to a meeting with Council’s Manager, Development Services on 30 May 2005;

34 Relevant to the obligation of Waters Lane to comply with cl 4.1 of the HoA is cl 4.4 which relevantly provided as follows:

“The Conditions Subsequent will not be taken to be satisfied unless

(a) the Development Consent contains, subject to the procedures set out in clause 7, the attributes set out in the Minimum Acceptable Development Consent;

(b) …

(c) …”

35 The expression “Minimum Acceptable Development Consent” was relevantly defined in cl 18 to mean

“a Development Consent which when considered in its totality contains the following elements:

(a) 2,500 retirement village dwellings and amenities to support them which will, based on a feasibility study, produce a Profit from the Project of not less than $150 million exclusive of GST.”

36 It follows from the foregoing that the structure of the HoA was directed to Waters Lane, as required by cls 4.1 and 7.1, using “all reasonable endeavours” to obtain by the Sunset Date first, the rezoning of the Property by the gazettal of a local environmental plan which would permit its development for residential use including the construction of 2,500 retirement village dwellings and supporting amenities and, second, the granting of Development Consent to a Development Application for that development.

37 As Waters Lane had at no time served a notice pursuant to cl 4.5 of the HoA extending the Sunset Date for a further two years, the Sweeneys contended that for the purpose of determining whether Waters Lane had breached its obligations under cl 4.1, the reference in that provision to “the Sunset Date” should be construed as a reference to “9 March 2006”.

38 The appellants on the other hand, contended that it should be construed as a reference to 9 March 2006 with at least the possibility of an extension to 9 March 2008. That dispute became known as the Sunset Date issue which was determined by the primary judge in favour of the Sweeneys.

39 I have already referred to the Sweeneys’ December notice pursuant to which they ultimately terminated the HoA in reliance upon cl 8.2(b). With respect to the termination of the HoA, a number of scenarios were utilised by the parties. The first was termination pursuant to cl 5.1 which was in the following terms:

“If the Conditions Subsequent, or any of them, are not satisfied or waived by the Sunset Date (subject to any claimed extension) then provided the party giving such notice has complied with its obligations under these Heads, either Sweeney or the Developer may, by not less than 10 Business Days written notice to the other, terminate these Heads of Agreement …”

40 As noted in [15] above, Waters Lane purported to terminate the HoA pursuant to cl 5.1 on 4 May 2006. However, it could not utilise that method of termination if, as the Sweeneys claimed, it had not complied with its obligations under the HoA. For this reason the Sweeneys had on 1 May 2006 purported to terminate the HoA pursuant to cl 8.2(b), alternatively cl 8.1(b); and alternatively again, pursuant to its common law entitlement to terminate for fundamental breach.

41 Upon the assumption that Waters Lane had failed to comply with its obligations under the HoA, thus preventing it from relying on cl 5.1 to terminate the HoA, the appellants relied on the fundamental breach of the HoA by the Sweeneys being its repudiation of their obligations thereunder by the giving of the 1 May 2006 notice of termination pursuant to cl 8.2(b).

42 The second and third scenarios of termination are provided by cls 8.1 and 8.2 of the HoA which were in the following terms:

“8.1 In addition to the provisions in clause 5.1, either party is entitled to effect a Termination of these Heads of Agreement, if:

(a) an Insolvency Event occurs in relation to the other party; or

(b) there is a material breach of these Heads of Agreement.

8.2 If at any time either party becomes entitled to effect a Termination of these Heads of Agreement other than for an Insolvency Event, then the following provisions shall apply:

(a) prior to the terminating party exercising such right of Termination, it must serve on the other party a notice of its intention to terminate not earlier than 20 Business Days after giving the notice, stating the reason for its intended Termination, and giving the other party an opportunity to rectify or correct the non-performance within that period of 20 Business Days, which would otherwise give rise to that right of Termination;

“the termination of these Heads of Agreement by either party entitled to do so in accordance with these Heads of Agreement.”

43 The appellants contended that the provisions of cls 8.1(b) and 8.2 provided only one method of termination of the HoA, namely, by the giving of a notice pursuant to cl 8.2(a) which provided an opportunity to rectify a curable material breach and, in the event of failure to so rectify that breach, by the service of a notice pursuant to cl 8.2(b). On the other hand, the Sweeneys contended that even if termination pursuant to cl 8.2(b) was unavailable because the material breach relied upon was not curable within the period of 20 Business Days referred to in cl 8.2(a), nevertheless cl 8.1(b) provided an independent ground for termination irrespective of the provisions of cl 8.2. That contention was upheld by the primary judge.

44 The fourth ground of termination, depending upon which of the parties is correct in their construction of cls 8.1 and 8.2, is the right to terminate at common law which was preserved by cl 17.8 of the HoA which provided as follows:

“The rights of a party under this document are cumulative and not exclusive of any rights provided by law.”

45 The foregoing contractual methods of termination as well as cl 17.8 became relevant to the election argument advanced by the appellants in their challenge to the purported termination of the HoA by the Sweeneys at common law for breach by Waters Lane of a fundamental term.

The nature of the relevant issues on the appeal

46 In its written submissions on the appeal the appellants identified six errors on the part of the primary judge which I shall address under the following subheadings:

(a) The Sunset Date Issue

(b) The Construction of cls 8.1 and 8.2 Issue

(c) The Credibility Findings Issue

(d) The All Reasonable Endeavours Issue

(e) The cl 4.3 Construction Issue

(f) The Fundamental Breach Issue.

The Sunset Date Issue

47 The appellant’s submissions on this issue had both a primary and secondary focus. Their primary submission was that the definition of “Sunset Date” meant for relevant purposes not simply 9 March 2006, but 9 March 2006 or, if notice was given under cl 4.5 of the HoA, 9 March 2008. This was refined in argument to the submission that in cl 4.1 the reference to “Sunset Date” should be read as 9 March 2006 subject to the possibility of it being extended pursuant to cl 4.5 to 9 March 2008.

48 The secondary submission was that when determining whether Waters Lane had used “all reasonable endeavours” to satisfy the Conditions Subsequent by the Sunset Date within the meaning of cl 4.1 (Breach 3), the Court had to take into account the fact that Waters Lane could, at any time up to 9 March 2006, extend that date to 9 March 2008 within which time it was required to use all reasonable endeavours to satisfy the Conditions Subsequent. Accordingly, so it was contended, one had to take into account the possibility of the Sunset Date being extended pursuant to a notice given under cl 4.5 when determining whether Waters Lane had used “all reasonable endeavours” to satisfy the Conditions Subsequent by 9 March 2006. Precisely how that possibility was to be taken into account in such a determination was never elucidated.

49 The primary judge held (at [46]) that the Sunset Date was 9 March 2006. Although he accepted that that date could be extended for two years by notice given by Waters Lane under cl 4.5 of the HoA and the advance of $2 million, unless and until that notice was given there was no extension. Accordingly his Honour rejected the appellant’s submission that the Sunset Date was “ambulatory” for as long as Waters Lane had the right to exercise the option of extending it.

50 The appellants submitted that the fundamental vice of his Honour’s reasoning was that he had written out of the definition of “Sunset Date” the concluding words “but subject to any extension claimed in accordance with clause 4.5 of these Heads of Agreement”. If the man in the street was asked: what was the Sunset Date provided for by the HoA, his answer would be: two years subject to extension for a further two years under cl 4.5. It was thus contended that the correct construction of the expression “Sunset Date” where appearing in cl 4.1 was “9 March 2006 subject to any extension claimed in accordance with clause 4.5”.

51 The difficulty with this construction is that it is meaningless in terms of providing a benchmark against which compliance with the “all reasonable endeavours” requirement contained in cl 4.1 is to be measured. It is not surprising, therefore, that in their written submissions (par 40) the appellants submitted that whether there had been contractual performance of cl 4.1 by the Sunset Date could only be determined once the cl 4.5 notice had been given or the time for giving such a notice had expired.

52 Accordingly, it was submitted that the December notice was invalid insofar as it alleged that breaches 3, 4, 5 and 8 depended upon an asserted date for performance of 9 March 2006 when at the time the notice was given, the date for performance of the relevant obligations could, at the sole discretion of Waters Lane, be extended to 9 March 2008. The notice was therefore premature as there was no date by which the obligation of Waters Lane under cl 4.1 was required to be satisfied unless and until the Sunset Date had either been extended to 9 March 2008 or the time for the giving of a notice pursuant to cl 4.5 had expired. The effect of this submission was that, in the absence of any waiver by Waters Lane of its right to extend under cl 4.5, the earliest point of time when there could have been a breach of cl 4.1 was on 10 March 2006. In my view these contentions should be rejected.

53 It was at all times necessary that the “Sunset Date” be ascertainable so as to ensure that there was always a benchmark against which Waters Lane’s compliance with its obligation to use all reasonable endeavours under cl 4.1 to satisfy the Conditions Subsequent by the Sunset Date could be measured. There was no warrant for construing cl 4.1, in the absence of the Sunset Date being extended under cl 4.5 so as to deny the possibility of a breach of cl 4.1 occurring prior to 10 March 2006.

54 Importantly, the appellant’s contention involves a misconstruction of the definition of “Sunset Date”. That expression is defined to mean the later of two dates of which the first is two years after the date of the HoA, namely 9 March 2006. It is true that that date is made subject “to any extension claimed in accordance with clause 4.5 of the” HoA. However, the date two years after the date of the HoA can only be extended where such an extension is in fact “claimed in accordance with clause 4.5”. Unless and until there is any such claim there is no extension.

55 The provisions of cl 4.5 emphasise that the concluding words of the definition of “Sunset Date” upon which the appellants place so much reliance do not of themselves have any operative effect. Clause 4.5 provides for the reference to “two years” in subparagraph (a) of the definition of Sunset Date to be changed to “four years” only upon the serving of a notice in writing and the payment of the amount referred to in cl 12.1(c). Unless and until those events are satisfied, the Sunset Date is, relevantly, two years from the date of the HoA. In my opinion the primary judge was therefore correct to construe the “Sunset Date” in cl 4.1 as at 15 December 2005 as “9 March 2006”.

56 The appellants’ fallback position or secondary submission was that when determining whether there was a breach of cl 4.1, it was necessary to factor into the context of “all reasonable endeavours” the possibility of the Sunset Date being extended for a further two years. It was contended that had his Honour taken that possibility into account, he would have necessarily come to a different factual conclusion as to whether there had been a breach of the “all reasonable endeavours” obligation under cl 4.1. In this respect the appellant’s written submissions (at par 41) asserted the following:

“Specifically, in the context of clause 4.1 of the HoA, in determining whether, at a particular time, Waters Lane has used ‘all reasonable endeavours’ to satisfy the condition subsequent by the Sunset Date, that determination must be one which takes account of the fact that Waters Lane has (or may have, at its absolute discretion) until 9 March 2008 to satisfy the condition subsequent.”

57 It was thus submitted that Waters Lane’s acts and omissions must be viewed in light of the fact that at all times up to 9 March 2006, the Sunset Date could be extended to 9 March 2008. It was therefore inappropriate to simply measure its conduct as against a fixed point of time without considering its unilateral ability to extend that date to 9 March 2008 at any time prior to 9 March 2006.

58 Initially, this argument had some superficial attraction until one appreciates the practical difficulty, if not impossibility, of determining just how the possibility of the Sunset Date being extended is to be taken into account in any meaningful sense when assessing whether “all reasonable endeavours” have been used. Thus the following factors militated against its acceptance. First, how can it be said that Waters Lane’s endeavours were reasonable because the Sunset Date might be extended, when at the time of the endeavours it is not known whether or not it will be extended, there is no obligation to extend it, and Waters Lane might decline to extend it for reasons quite unconnected with the venture, for example, because it thinks it can make a better profit in a different venture. Second, the Sweeneys must be able to rely on the failure of Waters Lane to use all reasonable endeavours, but how can they when they cannot assess the possibility of an extension, that being a matter entirely within the discretion of Waters Lane? These questions to which there is no meaningful answer suggest that a concept of “all reasonable endeavours” which takes account of the theoretical possibility of an extension of the Sunset Date from 9 March 2006 to 9 March 2008 is illusory.

59 Third, if one assumes that as at 15 December 2005 Waters Lane had not used all reasonable endeavours to satisfy the Conditions Subsequent by 9 March 2006, how is one to measure its obligation under cl 4.1 upon the basis that notwithstanding a prima facie breach of that obligation, nevertheless it is still open to Waters Lane to extend the Sunset Date for a further two years? Does that mean that the breach will be cured or, more relevantly, that there is no breach given that possibility even though there is no evidence one way or another as to whether or not Waters Lane is intending to give a cl 4.5 notice? Again, the appellants proffered no meaningful answers to these questions.

60 In my opinion it follows that cl 4.1 is not open to the construction contended for. Once it is accepted that the Sunset Date is 9 March 2006, then unless and until that date is extended by notice given pursuant to cl 4.5, whether or not there has been a breach of cl 4.1 at any particular time can only be measured as against that date and not the possibility that it may be extended. It was always open to Waters Lane at any time to give a notice under cl 4.5 extending the Sunset Date to 9 March 2008 although it would be required to advance a further $2 million on the security of the Sintan mortgage in order for the extension to be effective. But that was the bargain it made.

61 If Waters Lane was concerned that whilst the Sunset Date remained 9 March 2006 it might be in breach of its obligation under cl 4.1, it could avoid that possibility by simply giving notice extending the Sunset Date and advancing the relevant funds. In this context it needs to be remembered that under cl 12.1(c) Waters Lane was only bound to procure an advance of $2 million which would be secured by the Sintan mortgage. The only down side was that the advance would be interest free whilst the HoA remained on foot: it was at all times repayable under the terms of the Sintan mortgage.

62 As the appellants were at pains to point out, Waters Lane had an absolute discretion as to if and when it might give a notice extending the Sunset Date. Further, it could exercise that discretion whether or not it was in breach of any of its obligations under the HoA at the time. If it failed to do so, then it carried the risk that it would be in breach. In these circumstances I see no basis for measuring the obligation of Waters Lane under cl 4.1 to use all reasonable endeavours to satisfy the Conditions Subsequent by the Sunset Date by, in effect, requiring the determination of breach or no breach to be measured against the possibility that the Sunset Date might be extended. The practical effect of the appellants’ contention is that there could be no breach of cl 4.1 by Waters Lane unless and until either a notice was given under cl 4.5 or the time for giving such a notice had expired. In my opinion that could not have advanced the commercial purpose of the agreement.

63 It follows that whether or not Waters Lane used all reasonable endeavours to satisfy the Conditions Subsequent by the Sunset Date must be determined upon the basis that that date was 9 March 2006.

The Construction Issue: were Breaches 3 and 4 subject to the provisions of cl 8.2?

64 The appellants submitted both before the primary judge and this Court that first, a breach to which cl 8 applies must be a “material breach” within the meaning of cl 8.1(b) and, second, it must be one which, objectively speaking, is in fact capable of being rectified within 20 Business Days of the receipt of a notice under cl 8.2(a). If the breach is not so capable of being rectified and is, therefore, relevantly incurable, the Sweeneys nevertheless submitted that it was entitled to effect a Termination of the HoA pursuant to cl 8.1(b) which stood as an independent source of power to terminate irrespective of whether a notice was given under cl 8.2(a).

65 It is convenient to deal with the second point first. The primary judge held (at [97]) that if, as the appellants submitted, cl 8.2 had no application to a breach of cl 4.1 of the HoA (as it was incapable of cure within 20 Business Days of receipt of notice of the breach), the Sweeneys were entitled to terminate pursuant to cl 8.1(b) which permitted such termination for a material breach without notice. If this were not so, the HoA would permit a notice to be given with respect to a material breach that was remediable and, in the absence of it being rectified, permit termination pursuant to cl 8.2(b) but would not permit termination for any irremediable, material (but not fundamental) breach. In other words, if such a breach, although material, was not fundamental then the HoA would not be terminable at common law; yet it would also not be terminable under cl 8 which, on the appellants’ argument, was applicable only to material breaches which were in fact capable of rectification within 20 Business Days of the receipt of a notice of intention to terminate. In these circumstances the Sweeneys would have no remedy except for damages (if any).

66 In my opinion the right of either party to effect a Termination of the HoA pursuant to cl 8.1(b) did not exist independently of cl 8.2. It is clear from the chapeau to cl 8.2 that it is referring back to the entitlement of either party to effect the Termination of the HoA pursuant to cl 8.1(b) in which event the provisions of subparagraphs (a) and (b) are to apply. Unless the right to terminate for material breach pursuant to cl 8.1(b) is qualified by the terms of cl 8.2 then the latter would be otiose.

67 I appreciate that the Sweeneys’ contention is that if the appellants are correct that cl 8.2 is applicable only to a material breach which is in fact capable of being rectified within 20 Business Days of the receipt of a notice under cl 8.2(a), then a material breach which is not so capable would be left in a state of limbo unless cl 8.1(b) was construed to apply to it. However, this would require the chapeau of cl 8.2 to be construed as applying only to the entitlement of a party to effect the Termination of the HoA for a material breach which was capable of being rectified pursuant to cl 8.2(a). To so construe the chapeau would require it to be rewritten whereas the construction contended for by the appellants requires only that the reference in the chapeau to either party becoming “entitled to effect a Termination of” the HoA to be construed as an entitlement to so effect a Termination pursuant to cl 8.1.

68 Of course, the problem disappears once the appellants’ contention that cl 8.2(a) applies only to a material breach which is in fact capable of being rectified within 20 Business Days of the receipt of a notice served pursuant to cl 8.2(a) is rejected as in my view it should for the reasons articulated by the primary judge. This is the first point referred to in [64] above and to which I now turn.

69 Essentially, the primary judge considered (at [92]) that the construction of cl 8.2(a) was governed by the reasoning of Rolfe J in Hungry Jack’s Pty Ltd v Burger King Corp [1999] NSWSC 1029 at [247]-[264] which this Court considered to be correct on appeal: Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187 at [124].

70 The relevant clause of the contract in Burger King was cl 15.2 which provided as follows:

“15.2 In the case of any breach which is capable of being cured, BKC shall not terminate this Agreement unless and until HUNGRY JACK’S shall have failed to cure such breach within ten (10) days in the case of default of any obligation to pay money to BKC and within thirty (30) days in the case of any breach after being notified by BKC of the nature of the default.”

71 Burger King claimed that Hungry Jacks was in default of the development agreement. However, no notice was given under cl 15.2 although it was conceded that had notice been given the relevant default could not have been rectified within the 30 days specified. It was asserted that the failure to give a cl 15.2 notice precluded termination by Burger King notwithstanding that the breach in respect of which the notice should have been given was incapable of being rectified within the time period referred to.

72 Rolfe J relevantly held that upon the proper construction of cl 15.2 notice was required to be given even though the default was not capable of cure within the period specified in the clause.

73 At [87] the primary judge summarised Rolfe J’s analysis of cl 15.2 of which the following points are presently relevant:

(a) The reference in cl 15.2 to a “breach capable of being cured” was not one to a breach capable of being cured within a particular period;

(b) The fact that the relevant default could not be rectified within 30 days did not render the breach one that was not capable of being cured;

(c) “Capable of remedy” is not concerned with whether the breach will be remedied;

74 The primary judge then referred to three points of distinction between cl 15.2 in Burger King and cl 8.2(a) of the HoA. The first (at [90]) was that the Burger King clause specifically referred to breaches that were “capable of being cured” whereas cl 8.2(a) did not. Although the appellants contended that cl 8.2(a) should be implicitly read as only applicable to breaches that were capable of cure, the point of distinction referred to would tend support the construction that cl 8.2(a) applied to any material breach irrespective of whether it was capable of being cured within the period of 20 Business Days referred to therein.

75 The second point of distinction referred to by his Honour (at [91]) was that the Burger King clause spoke about curing the relevant breach within 30 days whereas cl 8.2 spoke of giving a notice to provide an opportunity to rectify or correct the breach. Given the provisions of cl 8.2(b) I find it difficult to regard this as a distinction of any substance. It is true that cl 8.2(a) requires the relevant notice to give the defaulting party “an opportunity to rectify or correct the non-performance” within 20 Business Days whereas the Burger King clause merely prohibits termination unless and until Hungry Jacks had failed to cure the relevant breach within 30 days after being notified of the nature of its default. In my opinion this is a distinction without a difference.

76 The third distinction referred to by his Honour (at [91]) was that the defect in Burger King was capable of rectification in the future even if not capable of rectification within 30 days, whereas in the present case the alleged breach of cl 4.1 was not capable of rectification within 30 days or at all (prior to 9 March 2006).

77 The primary judge’s conclusion with respect to this issue was as follows:

Burger King

L Schuler AG v Wickman Machine Tools Sales Ltd

Burger King

78 The appellants submitted that the Hungry Jack’s clause 15.2, like the relevant clauses in Schuler, Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 and Batson v De Carvalho (1948) 48 SR (NSW) 417 (which related to s 129(1) of the Conveyancing Act 1919 (NSW)) were distinguishable from cl 15.2 in Burger King in that they did not, at least explicitly, seek to limit the time by which an alleged breach must be capable of being cured. Nevertheless, in my opinion they did so implicitly as each clause provided for the notifying party to terminate if the breach was not cured within the period specified in the notice. Thus in Tricontinental the relevant part of the clause was in these terms:

“An event of Default which is capable of rectification has occurred and remains unrectified at the expiration of seven (7) days after the date of the notice in writing from Tricontinental to the Obligor requiring rectification of such Event of Default …”

79 Section 129(1) of the Conveyancing Act provides for the giving of a notice by a lessee specifying the particular breach complained of and

“if the breach is capable of remedy, requiring the lessee to remedy the breach;

…

and the lessee fails within a reasonable time thereafter to remedy the breach, if it is capable of remedy …”

80 It was submitted first, that there was a fundamental difference between the language of cl 8.2(a) of the HoA and that of cl 15.2 in Burger King in that the former did not provide, but the latter did, that the breach must be capable of being cured at some future point in time (i.e. it is possible for the breach to be cured). Second, if it was not cured within 30 days Burger King was entitled under cl 15.2 to terminate. On the other hand, cl 8.2(a) of the HoA expressly limited the breaches which could be characterised as “material” for the purpose of cl 8.1(b) to those which the other party was to have “an opportunity to rectify or correct” within 20 Business Days. It was the express use of a timeframe within which the defending party was to have the opportunity or chance to cure the “material breach” that was said to distinguish cl 8.2(a) from the Burger King clause.

81 It was further submitted that the language of cl 8.2(a) provided that the 20 Business Day period allowed for must be one in which an alleged “material” breach was capable of being remedied because the right to terminate was enlivened only at the end of that period. Should it be impossible to remedy an alleged “material” breach within the 20 day period then, just as was the case of a breach which was incapable of being rectified, the party upon whom the cl 8.2(a) notice had been served was not in reality given an “opportunity” or a second chance, to rectify the alleged breach. If a party is required to be given an opportunity to rectify or correct a breach it must, so it was submitted, be a meaningful opportunity, namely, the period within which the breach is to be rectified must be one in which the breach may in fact be capable of rectification. Accordingly, cl 8.2(a) could only apply to such a breach.

82 As I have already observed, cl 8.2(a) is limited only by the requirement that the breach be “material” as stated in cl 8.1(b) whereas cl 15.2 in Burger King expressly stated the notice provisions applied to “any breach which is capable of being cured”. Accordingly, prima facie, cl 8.2(a) applies irrespective of whether the breach is capable of being cured within 20 Business Days or, perhaps, at all.

83 The Sweeneys therefore submitted that cl 8.2(a) provided an opportunity to the defaulting party to rectify and correct a material breach of the HoA even if that opportunity could not be successfully availed of. To read that provision as a requirement that the identified breach be capable of being remedied within 20 Business Days required cl 8.1 to be rewritten so that it applied only to a material breach “that can be rectified or corrected in 20 Business Days”.

84 The appellants nonetheless submitted that it was conceivable that it could have been intended that a material breach capable of rectification or correction within 20 Business Days could be the subject of termination by notice under cl 8.2(b) but that a material breach incapable of rectification could only result in termination if the breach was not only material but fundamental and so gave rise to a right to terminate at common law but not pursuant to cl 8.

85 In my opinion the Sweeneys’ submissions should be accepted and those of the appellants rejected. I agree with the primary judge that in essence cl 8.2(a) is identical to cl 15.2 in Burger King. The particular breach in Burger King was the failure of Hungry Jacks to develop four new Burger King restaurants per annum in a particular region of Australia. Hungry Jacks was in breach of that obligation which, literally, could not be rectified except for in the future. Certainly, it was incapable of rectification within 30 days of Hungry Jacks being notified of its default.

86 In the present case, upon the assumption that Waters Lane was in breach of its obligation under cl 4.1, that breach was incapable of being rectified within 20 days or at all insofar as it was a past breach of the HoA. Although in Burger King it may well be that the requirement to develop four new Burger King restaurants per annum could be achieved in the future, that was essentially irrelevant as Burger King had the right to terminate once it was established that there was a breach of that requirement and a failure to rectify it within 30 days. So in the present case the breach of cl 4.1 was incapable of being rectified within 20 Business Days, thereby giving rise to the right to terminate the HoA pursuant to cl 8.2(b). It follows that there is no relevant distinction between the two cases.

87 In my opinion the primary judge was correct to conclude that the failure of Waters Lane to rectify not only Breaches 5 and 8 but also Breaches 3 and 4 on or before 20 January 2006 entitled the Sweeneys to terminate the HoA by notice in writing pursuant to cl 8.2(b).

The Credibility Finding Issue

88 This issue concerns the primary judge’s finding that where their evidence conflicted, he preferred the evidence of a Ms Everett over that of Howard. Ms Everett was a town planner retained by Howard in or about June 2004 for the purpose of preparing or coordinating the studies necessary to support an application to the Council for a rezoning of the Property.

89 The appellants challenged the primary judge’s finding (at [117]) that the Sweeneys’ submissions as to Howard’s credit were well-founded. Those submissions were set out by his Honour at [113] of his judgment supplemented by his references to Howard’s letter of 21 May 2004 (referred to in [114]) and to his oral evidence extracted at [115] and commented upon at [116] and [119]. The appellants contended that his Honour’s findings as to Howard’s credibility were in error although its only relevance, and then only in a relatively minor way, was to the factual issue with respect to whether or not Waters Lane was in breach of its “all reasonable endeavours” obligations under cl 4.1.

90 The appellants generally relied upon their written submissions on this issue which were essentially confined to criticising his Honour’s reliance upon the extracts from Howard’s oral testimony set out in [115] of his judgment. In [119] his Honour concluded on the basis of Howard’s cross-examination that he could not reasonably have believed at any time after November 2005 that the Conditions Subsequent could be satisfied by 9 March 2006 because it was clear that the project for which he was seeking approval was not the development for which the HoA called. This was a reference to Howard’s evidence that it was unlikely that development consent would be obtained for 2,500 retirement dwellings. In cross-examination (at Black 3410) Howard agreed that in late 2004/early 2005 the studies he had commenced were directed towards a development of about 1,200 retirement dwellings.

91 It is to be noted that at Black 35G-36E Howard also agreed that at a meeting with the Sweeneys on or about 3 June 2005 he held the view that there was no prospect at all of obtaining a rezoning and a development consent for 2,500 units. This was somewhat at odds with the evidence relied upon by the appellants (at Black 11) that in November 2005 Howard considered that it might be possible to have the property rezoned and development consent granted for 2,500 retirement village dwellings and amenities by March 2006.

92 It was on the basis of that evidence that the appellants submitted that Howard reasonably believed as at November/December 2005 that “approval could be obtained by March 2006”, his optimism being buoyed by the introduction of a new statutory regime in October 2005 that permitted the Minister to issue a development consent, notwithstanding that the relevant development was prohibited by the zoning, if he considered it to be of State significance.

93 However the relevance of the primary judge’s credibility findings related, as he indicated in [117], to his preference for Ms Everett’s evidence where it conflicted with that of Howard. No submissions were directed by the appellants to those conflicts. They related to whether Waters Lane was in breach of its obligation under cl 4.1 of the HoA. It was not suggested by the appellants that those areas of conflict did not exist. Nor was it submitted by the appellants that Howard’s evidence should have been accepted and Ms Everett’s rejected. His Honour had, therefore, to determine whose evidence he accepted and he was clearly entitled to regard Ms Everett’s evidence as being more creditworthy than that of Howard. In my opinion no error has been demonstrated in his Honour’s findings with respect to Howard’s credit insofar as that finding reflected upon his Honour’s preference for Ms Everett’s evidence over that of Howard where they were in conflict.

94 Nor was there any challenge to his Honour’s acceptance of the Sweeneys’ submissions which he had summarised at [113] of his judgment. His Honour’s credibility findings therefore rested on a number of inconsistencies in Howard’s evidence which were not addressed by the appellants in their written submissions.

95 As the Sweeneys submitted, even if there was some substance in the appellants’ criticism of his Honour’s findings in [115], that was insufficient to justify the submission that his Honour’s overall conclusion with respect to Howard’s credibility and for his preference for Ms Everett’s evidence where it conflicted with that of Howard, was in error.

96 In my opinion, the appellants’ challenge to his Honour’s findings on Howard’s credibility should be rejected.

The All Reasonable Endeavours Issue

97 This issue arises out of the primary judge’s finding that he was not persuaded that Waters Lane was not in breach of its obligation under cl 4.1 to use all reasonable endeavours to satisfy the Conditions Subsequent by 9 March 2006 (Breach 3) or that it was not in breach of its obligation to engage and retain appropriate experts and qualified consultants as required by cl 4.1(a) of the HoA (Breach 4). Further, his Honour was not persuaded that Waters Lane was not in breach of its obligation under cls 4.1 and 9.4(b) to lodge all applications necessary to satisfy the Conditions Subsequent by 9 March 2006 (Breach 8).

98 Of particular significance to the outcome of this appeal is the appellants’ challenge to the primary judge’s finding with respect to Waters Lane’s alleged breach of cl 4.1. In this respect it was submitted that even if the Sunset Date should be construed as a reference only to 9 March 2006, nevertheless in all the circumstances Waters Lane had used “all reasonable endeavours” to satisfy the Conditions Subsequent by that date.

99 The primary judge was not satisfied that the appellant had established on the balance of probabilities that Waters Lane was not in breach of cl 4.1 of the HoA as at 15 December 2005. Before dealing with the important factual issues that arise out of this question, it is necessary to reflect upon what is involved in the obligation of a party to a contract to “use all reasonable endeavours”. In this respect the appellants submitted that there were more than just semantic differences between an obligation of a party to use its “best endeavours”, to use “all reasonable endeavours” or to use just “reasonable endeavours”. It was submitted that an obligation to use “reasonable endeavours” only required the obligor

“to take reasonable steps in the particular circumstances applying from time to time to achieve the contractual object, recognising that the endeavourer does not have to do all that it reasonably could do”.

All reasonable endeavours

“to take all reasonable steps in the particular circumstances applying from time to time to achieve the contractual object.”

best endeavours

“take all reasonable steps in the particular circumstances applying from time to time and any other additional steps which a determined person would take, short of acting unreasonably to achieve the contractual object.”

100 The appellants further submitted that none of the foregoing standards required the obligor to act unlawfully or contrary to its commercial interests where such interests were understood in the context of the obligor having to comply with the contract. It was therefore submitted that the correct approach to determine whether the relevant standard had been met was as follows:

(a) identify the end to which the endeavours had to be directed;

(b) identify the particular factual circumstances (which may include peculiar features going to the obligor’s capacity and subjective factors such as its understanding or other state of mind) in which the obligor found itself from time to time to achieve that end;

(c) identify what was in fact done;

101 Both the appellants and the primary judge relied upon the following passage from the judgment of Gibbs CJ in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 64:

Shepherd v Felt and Textiles of Australia Ltd

an obligation to use ‘best endeavours’ does not require the person who undertakes the obligation to go beyond the bounds of reason; he is required to do all he reasonably can in the circumstances to achieve the contractual object, but no more:

Sheffield District Court Railway Co v Great Central Railway Co

Terrell v Mabie Todd & Co Ltd

102 His Honour (at [59]) observed that there appeared to be very little difference between the concept of “best endeavours” as defined by Gibbs CJ in the above passage and “all reasonable endeavours”. Each required the person undertaking the obligation to do all he or she reasonably could in the circumstances to achieve the contractual object but no more: in particular, he or she was not required to go beyond the bounds of reason. Nevertheless, his Honour did not regard the difference between the two concepts as one in which “best endeavours” was seen as more onerous than “all reasonable endeavours”: rather “best endeavours”, subject to context, required the capacity and ability of the obligor to be taken into account.

103 His Honour therefore concluded as follows (at [59]):

use all reasonable endeavours to satisfy the conditions subsequent by the Sunset Date

all reasonable endeavours

104 Furthermore, at [60] his Honour rejected the proposition that all reasonable endeavours to satisfy the Conditions Subsequent entailed some prudent economic approach which might be taken by a person not otherwise constrained by agreement to achieve the outcome mandated by the HoA.

105 The appellants submitted that the primary judge’s understanding of what was required by cl 4.1 was erroneous in that he failed to take into account the HoA as a whole as well as the circumstances in which it was entered into. In relation to the former it was contended that his Honour failed to place any weight on, or give any importance to, Waters Lane’s ability to extend the Sunset Date to 9 March 2008 pursuant to cl 4.5. In relation to the latter, it was said that he failed to place any weight on the fact that in leading up to the entering into of the HoA, Howard had stepped in to save the Property from an imminent mortgagee sale by Statewide and that Waters Lane had procured an advance of $9,910,000 interest-free to enable the Sweeneys’ numerous creditors to be paid out.

106 In my opinion the appellants’ criticism of his Honour’s formulation of the standard encapsulated in the expression “all reasonable endeavours” should be rejected. The circumstances which preceded the entering into of the HoA do not seem to me to throw any light whatsoever on the issue. I have already concluded that the ability of Waters Lane to extend the Sunset Date to 9 March 2008 pursuant to cl 4.5 is irrelevant to the determination of the issue raised by cl 4.1 (see [60] above). I see no reason not to adopt the words of Gibbs CJ in Hospital Products that cl 4.1 required Waters Lane to do all it reasonably could in the circumstances to satisfy the Conditions Subsequent by 9 March 2006 although it was not required in doing so to go beyond the bounds of reason.

107 If this means that there is no relevant difference between the standard constituted by the expression “all reasonable endeavours” and that constituted by the expression “best endeavours” then so be it. However, it is unnecessary to express any final conclusion on that possibility. Suffice it to say that in the present case the description articulated by Gibbs CJ in Hospital Products of what is required to satisfy the obligation to use “best endeavours” is directly applicable to the obligation to use “all reasonable endeavours” in cl 4.1.

108 Before dealing with the evidence in more detail, it is necessary to refer to the evidence of Mr Andy Ludvik, a consultant town planner retained by the Sweeneys who prepared a report dated February 2006 which was tendered and admitted without objection. Mr Ludvik was not required for cross-examination. In that report he answered a number of questions which were put to him. The first question was:

“What steps would need to be taken to achieve the rezoning of the Property and grant of an acceptable development consent?”

109 Having indicated that such steps needed be taken by a project manager with town planning experience, Mr Ludvik opined that the project manager would need to communicate with Council’s planning staff and to estimate the time required to complete the tasks associated with the completion of the project within the relevant time limit. Further, suitably qualified sub-consultants would need to be commissioned to undertake the required baseline studies and to determine:

“(1) whether or not the land was suitable for residential use in terms of issues, such as:

(a) potential contamination relating to past farming practices;

(b) land stability;

(c) ecological issues, such as endangered flora and fauna;

(d) flooding; and

(2) constraints on development in terms of issues, such as:

(a) environmental issues, such as escarpment preservation and scenic protection.

(b) bushfire risks;

(c) Aboriginal archaeology;

(d) utility servicing, particularly sewerage and water; and

(e) road network capacity.”

110 Mr Ludvik then stated that following completion of those studies, development concept plans would be needed to determine the extent of the development that could be accommodated on the Property in terms of its opportunities and constraints. In particular, such plans would indicate whether or not development on the scale required by the HoA was achievable. They would also provide the basis for further consultation with Council planning staff and ultimately the councillors and the local community. The meeting with Council officers would also highlight any apparent deficiencies in the baseline studies or the concept plans and identify any areas where further work might be required to satisfy their concerns.

111 Thereafter it would be appropriate to make a presentation to the councillors to apprise them of the proposal prior to the submission of a formal request for a rezoning. It would also be desirable to undertake a community consultation program prior to the submission that request. However, Mr Ludvik noted that the limited timeframe that was available (2 years) would have precluded any meaningful consultation program. Following consultation with Council officers and the councillors and finalisation of the development concept plans, a formal request for rezoning should be submitted to the Council. The steps which would then follow would be those required to be taken under the relevant provisions of the Environmental Planning and Assessment Act 1978) (the EPA Act) by the Council and over which the parties to the HoA would have no control.

112 The second question asked of Mr Ludvik was as follows:

“What is a reasonable program/timeline for those steps having regard to the Sunset Date specified in the Heads of Agreement commencing from 9 March 2004 and assuming a target completion (grant of acceptable development consent) by 9 March 2006?”

113 Mr Ludvik then set out a table of the various tasks required from the time the HoA was signed to the issuing of a development consent and the assumed time period that he had adopted for the completion of each of those tasks. It is clear that in doing so, he had worked backwards from 9 March 2006 to 9 March 2004 and divided up the time allotted for the completion of the necessary steps accordingly. Thus he allotted only two weeks for the appointment of a project manager, preliminary consultation with Council planning officers to identify the issues to be addressed, preparation of briefs for required sub-consultants and acceptance of quotes. A further three months was then allowed for completion of draft reports by the sub-consultants, discussions with Council officers, finalisation of the sub-consultants’ reports, preparation of development concept plans and preparation of a submission requesting the alteration of the zoning with the formal request for a rezoning to be submitted on 16 June 2004.

114 However, Mr Ludvik then opined that the three months allowed by him was clearly inadequate and that the work required prior to the submission of a formal request for rezoning would, in his opinion, take approximately six months. Accordingly, the request for a rezoning would reasonably be expected to be submitted on or around 10 August 2004 i.e. some two months after the date indicated in the program that he had provided if development consent was to be obtained by 9 March 2006. His mathematics is a little astray in this regard and the date of 10 August 2004 should be 10 September 2004.

115 Mr Ludvik then noted that his program allowed a 12 month period from the submission of the request for rezoning to the making of the necessary local environmental plan. However, he considered that period to be an absolute minimum time within which a rezoning of the nature proposed could be achieved as there were issues relating to the quality of the Property in its locality in terms of its

· scenic qualities

· role in escarpment preservation

· role as a rural “buffer” or green belt

· iconic value to the Campbelltown community

which would be likely to create significant community concern and thus extend the time taken for the rezoning to be achieved. He thus considered a more realistic timeframe would be to allow a period of 18 months for the rezoning after the lodging of a formal request therefor.

116 Eighteen months from 10 September 2004 takes one to 10 March 2006. Accordingly, on Mr Ludvik’s evidence the most that could be achieved by 9 March 2006 would be the rezoning of the Property which was only one of the two Conditions Subsequent.

117 In the absence of any cross-examination of Mr Ludvik and of any expert evidence called on behalf of the appellants relating to the issues addressed by Mr Ludvik, it was open to the primary judge to accept his evidence as to the appropriate steps to be taken in order to at least achieve a rezoning of the property by 9 March 2006. Given that in Mr Ludvik’s opinion it would take 18 months from the time a formal submission was lodged with the Council requesting a rezoning to the date upon which a local environmental plan effecting the rezoning was gazetted, it was necessary that that submission be lodged with the Council by 10 September 2004 being six months from the date of the HoA.

(f) I interpolate here that according to Howard’s evidence (at Black 8T-Y-9B-E) at a meeting between himself and Ms Everett in June 2004 she indicated the importance of adopting a staged toe-in-the-water approach as there was no appeal from a rejection of a rezoning application. Ms Everett indicated, according to Howard, that there should be an approach to the Council planning officers before meeting with the councillors or the Mayor. Yet, as I have indicated, it took a further six months before there was a meeting with either.

(g) The final reports from sub-consultants SGS, SKM and CPR were received in March 2005. Rather than providing studies which would be supportive of a formal application for rezoning, the so-called “ softly softly ” approach was adopted whereby the sub-consultant’s reports were utilised for the purpose of preparing the “Scenic Hills Development Strategy” to be presented to the Council planning officers on 30 May 2005 and the Mayor and three councillors on 2 June 2005.

(h) According to Ms Everett (at Black 68M-O) her fee proposal of October 2004 contemplated the lodgement of a rezoning application with the Council in July 2005. But by July 2005 nothing further had occurred since the receipt of the sub-consultants’ final reports in March 2005 except for the preparation of the Development Strategy which, it appears, was more of a marketing tool to be presented to the Council. It was no substitute for a properly researched and detailed application for a rezoning.

(i) What next occurred was in my opinion of particular importance. According to Ms Everett, in July 2005 two significant planning instruments were exhibited to the public. The first comprised amendments to the EPA Act which proposed a new Part 3A which as she understood the effect of the amendment, provided a process by which a development application could be called in and approved by the Minister if he was of the opinion that it constituted State significant development. In fact Part 3A was inserted into the EPA Act by the Environmental Planning Assessment Amendment (Infrastructure and Other Planning Reform) Act 2005 which was assented to on 16 June 2005 and relevantly commenced on 1 August 2005.

(j) However, it would appear that Ms Everett’s understanding of the effect of Part 3A was rather misplaced. Although it could apply to development that, in the opinion of the Minister, is of State or regional environmental planning significance, its actual application required the Minister to declare that development by order published in the Gazette to be a project to which Part 3A applied: s 75B. Once so declared, the development could not be carried out unless the Minister had approved it (s 75D) and that approval was subject to a detailed assessment regime (ss 75F, 75G, 75H, 75I). Critically however, s 75J(3)(b) provided that the Minister could not approve the carrying out of the development where it was wholly prohibited by an environmental planning instrument. As residential development of the Property as envisaged by the HoA was so prohibited, Part 3A could not have availed Waters Lane unless and until the Property was rezoned to permit of that form of development.

(k) The second planning change was the exhibition for public comment of the draft Metro Strategy which designated approximately two thirds of the Property as a “ Landscape and Rural Lifestyle Area ”. However, as Mr Ludvik’s evidence makes clear, that proposed designation did not involve a change in the existing zoning although it had overlaid a number of additional considerations to be taken into account in any proposed development of land to which it applied. He opined that, if it had been made in the form in which it was publicly exhibited, it would have made it more difficult to achieve an alteration of the zoning of the Property although it did not propose any statutory barrier to such an alteration.

(l) Accordingly, Mr Ludvik expressed the view that the draft Metro Strategy should not have delayed the progress of the rezoning application and that, in fact, it would have been more advantageous to proceed with that application while the Metro Strategy was in draft form rather than before it was finalised.

(m) Mr Ludvik’s view coincided with that of Ms Everett (see [119(t)] above). She was firmly of the view which she maintained until the following November, that it would be advisable to proceed with the application for rezoning concurrently with the making of a submission with respect to the draft Metro Strategy as the success of the former would make it more difficult for the draft SEPP under the Strategy to affect the outcome of the project.

141 One can understand Howard’s desire from a commercial point of view not to expend funds on undertaking studies which might ultimately be “pointless”. However, he had been advised by Ms Everett that any new SEPP would not come into force until the middle of 2006 which was well after the Sunset Date although Ms Everett was unaware of that fact. There was no suggestion in the evidence that Waters Lane and/or Howard were short of funds when it came to the commissioning of the studies which the Council had required and of the necessity for which he had been informed by Ms Everett at the time she was retained in June 2004. There was nothing the Council required that had not been anticipated by Ms Everett, if not Howard, at the time of her retainer.

142 It is in the foregoing context that his Honour (in [124]) referred to the desirability from the commercial point of view of Waters Lane not to have to expend money on taking all the steps necessary to prepare a formal application for a rezoning until it could be determined that those steps would be very likely to achieve a positive outcome. That was the strategy to which Ms Everett had referred in her evidence: see [119(o)] above. However, as his Honour then observed, the HoA did not contemplate that Waters Lane could avoid taking those steps whilst it investigated whether the whole venture was worthwhile.

143 In other words, notwithstanding the possibility that the draft SEPP as part of the Metro Strategy might make it more difficult (although not impossible) to obtain a rezoning if a significant part of the Property was retained within the proposed Landscape and Rural Lifestyle Area, cl 4.1 of the HoA did not justify the suspension for what might be an indefinite period of the commissioning of the studies necessary to support an application for rezoning. On the contrary, the overarching obligation on Waters Lane to use “all reasonable endeavours” required it to proceed expeditiously and efficiently with a well researched rezoning application, albeit that the steps so taken and the money expended in doing so might not result in a successful outcome. Acting prudently in his own commercial interests was not of itself an option.

144 That is not to say that Waters Lane failed to use all reasonable endeavours by preparing and lodging an objection to the inclusion of the Property within the proposed Landscape and Rural Lifestyle Area: rather the requirement to use all reasonable endeavours to satisfy the Conditions Subsequent, at least with respect to the rezoning of the Property by 9 March 2006, dictated that both endeavours should be pursued concurrently. If that involved an increase in the resources to be devoted to achieve those objectives with the concomitant increase in funding, then so be it: that is what cl 4.1 mandated.

145 The pursuing of the necessary studies to support the making of an application for rezoning at the same time as preparing and pursuing an objection to the draft SEPP could not be said to involve Waters Lane in taking steps that were beyond reason. In the context of the contractual obligation undertaken by it to use all reasonable endeavours to satisfy the Conditions Subsequent by the Sunset Date, the concurrent pursuit of both the rezoning application as well as the objection to the draft SEPP was in all respects reasonable.

146 Accordingly, the strategy referred to by Ms Everett was to only carry out what she referred to as the Stage 1 studies, being those necessary to obtain a favourable reaction from the Council which, if forthcoming, would then justify (presumably on financial grounds) the carrying out of the Stage 2 studies which were accepted as necessary and desirable to progress the matter to the next level.

147 Although the “softly, softly” approach may have been commercially prudent from the appellants’ perspective, it was inconsistent with the obligation to use all reasonable endeavours to satisfy the Conditions Subsequent by 9 March 2006. The difficulty of the task could neither heighten nor lessen the content of what was reasonable given the terms of the contractual undertaking. If that required the abandonment by Waters Lane of the “softly, softly” approach in order to comply with its contractual obligations under cl 4.1, then it should have done so. In my view it should have but did not.

148 The position may have been different if the attainment of the contractual objective under cl 4.1 had not been required by a specific date but within, say, a reasonable time. Ergo, if it had become impossible or at least negligible. If it had, then cl 4.3 required Waters Lane to promptly so advise the Sweeneys. Once the Sunset Date had come and gone in that circumstance, either party could terminate the HoA pursuant to cl 5.1 and, provided it had complied with its obligations under the HoA, Waters Lane would retain the benefit of its right of first refusal under cl 8.3.

149 But at no time prior to the service of the December notice did Waters Lane or Howard consider that cl 4.3 had been engaged. Howard was still optimistic that the rezoning could, at least ultimately, be achieved. In these circumstances, Waters Lane’s obligations under cl 4.1 required it to abandon the “softly, softly” approach and to proceed expeditiously with Stage 2 of Ms Everett’s program. It did neither. Accordingly, it failed to use all reasonable endeavours to satisfy either of the Conditions Subsequent by the Sunset Date.

150 In my opinion, therefore, Waters Lane did not use all reasonable endeavours to satisfy the Conditions Subsequent by the Sunset Date in breach of cls 4.1 and 7.1 of the HoA. It follows that it was also in breach of cls 4.1(a) and 9.4(b). In other words, Breaches 3, 4 and 8 had been established. The primary judge was therefore correct in concluding that Waters Lane had not discharged its onus of establishing that it was not in breach of those provisions.

The Cl 4.3 Issue

151 This issue concerns a challenge to the primary judge’s finding with respect to Breach 5 that cl 4.3 should be construed as requiring Waters Lane to promptly notify the Sweeneys in writing if either of the Conditions Subsequent “could not be satisfied by the Sunset Date”. It was submitted that his Honour erred in implying a requirement to notify once Waters Lane realised that either or both of the Conditions Subsequent could not be satisfied by 9 March 2006. Rather, Waters Lane’s obligation pursuant to cl 4.3 was only to notify the Sweeneys if either of the Conditions Subsequent could not be satisfied at all, that is, at any time.

152 As Waters Lane had an unfettered right up to 9 March 2006 to extend the Sunset Date to 9 March 2008, it followed that unless as at 15 December 2005 it was of the view, or otherwise it was objectively determined, that either of the Conditions Subsequent could not be satisfied by 9 March 2008, there could be no breach of cl 4.3 until the time for the giving of a notice pursuant to cl 4.5 extending the Sunset Date for two years had expired.

153 In this context it was not contended by the Sweeneys that had the Sunset Date been so extended that the Conditions Subsequent could not have been satisfied by 9 March 2008.

154 Breach 5 alleged that Waters Lane had failed to notify the Sweeneys promptly in writing that one or both of the Conditions Subsequent could not be satisfied by 9 March 2006 in breach of cl 4.3 of the HoA. Although that provision did not specifically state that such notification must occur if any Conditions Subsequent could not be satisfied “by the Sunset Date”, his Honour concluded (at [139]) that that was implicit, observing that if Waters Lane genuinely believed on reasonable grounds that any Condition Subsequent could be satisfied where as a matter of objective fact it could not, difficult questions would arise.

155 His Honour nevertheless held (at [140]) that the objective evidence clearly established that by 15 December 2005 neither of the Conditions Subsequent could be satisfied by 9 March 2006. Accordingly, Waters Lane had not established that as at that date it was not in breach of its obligation under cl 4.3 to properly notify the Sweeneys in writing of that fact. He further held (at [153]) that Waters Lane had failed to establish that that was not a material breach of the HoA within the meaning of cl 8.1(b).

156 The appellants submitted that the obligation imposed upon Waters Lane by cl 4.3 was to notify the Sweeneys promptly in writing if either of the Conditions Subsequent could not be satisfied at all. To import the notion of the Sunset Date as being the time by which Waters Lane was obliged to notify the Sweeneys was inconsistent with the parties’ agreement in that his Honour had overlooked the unfettered right of Waters Lane to extend the Sunset Date by giving a cl 4.5 notice. Accordingly, in determining whether at any time during the existence of the HoA there was an obligation to promptly notify the Sweeneys that a Condition Subsequent could not be satisfied, the possibility of giving a cl 4.5 notice had to be considered.

157 It followed, so it was submitted, that a person in the position of Waters Lane position as at 15 December 2005, knowing that it had the right to extend the Sunset Date to 9 March 2008 and not being of the belief that the Conditions Subsequent could not be satisfied by that date, would not be in breach of cl 4.3 even if it appreciated that they could not be satisfied by 9 March 2006.

158 Alternatively, it was submitted that even if there was a breach of cl 4.3 it was not a material breach in respect of which a notice could be given pursuant to cl 8.2(a) of the HoA.

159 The Sweeneys submitted that when one read cl 4.3 in the context of the contractual obligation from which it was derived, namely cl 4.1, it was apparent that satisfaction of the Conditions Subsequent must occur by the Sunset Date, namely, 9 March 2006 and that that continued to be the case unless and until a cl 4.5 notice extending that date to 9 March 2008 was served. Once it was accepted that cl 4.1 obliged Waters Lane to use all reasonable endeavours to satisfy the Conditions Subsequent by 9 March 2006, it followed that cl 4.3 required it to promptly notify the Sweeneys in writing in the event that it became aware, or it was otherwise established as an objective fact, that there could be no such satisfaction. Prior to 15 December 2005, Waters Lane clearly knew that it was unable to achieve the contractual objective stated in cl 4.1. It was therefore required to promptly notify the Sweeneys in writing of its inability to do so.

160 In my opinion the construction contended for by the Sweeneys and adopted by the primary judge is correct. So long as the Sunset Date remained 9 March 2006, cl 4.3 imposed upon Waters Lane the obligation to promptly notify the Sweeneys in writing once it appreciated, or the fact was, that notwithstanding its use of all reasonable endeavours, either or both of the Conditions Subsequent could not be satisfied by that date. There is no doubt that that was clearly the case as his Honour found.

161 However, in my view that breach was not a material breach within the meaning of cl 8.1(b) of the HoA. It is true, as the Sweeneys submitted, that a breach of that provision was capable of having some consequences. It was suggested that it potentially impacted upon the Sweeneys’ obligations under cls 3.1, 4.2, 7.3 and 9.1 which, generally speaking, obligated them to work co-operatively with Waters Lane towards achieving the contractual objective of satisfying the Conditions Subsequent.

162 It was further submitted that it might impact upon the Sweeneys’ commercial opportunities including engaging in negotiations with Howard for extending the Sunset Date or otherwise varying the HoA to achieve a lesser development. Furthermore, once notice under cl 4.3 had been given, the Sweeneys could make their own investigations and take their own steps to achieve the Conditions Subsequent by the Sunset Date so as to lock Waters Lane into its other obligations under the HoA such as the purchase of the Property.

163 The Sweeneys submitted that the onus was on Waters Lane to establish that any breach of cl 4.3 was not material. For it to be material it was required to be of particular significance to the Sweeneys. In this respect it is to be noted that what was required was a material breach of a term of the HoA: not a breach of a material term.

164 The fact that the ultimate onus lay upon Waters Lane to establish on the balance of probabilities that any breach of cl 4.3 was not a material breach did not mean that the Sweeneys were necessarily entitled to decline to provide some evidence as to why the breach was of particular significance to them. Although evidence was filed on their behalf, it did not address the materiality of the non-notification to them of the fact that neither of the Conditions Subsequent could be satisfied by 9 March 2006. In my opinion the Sweeneys had an evidentiary onus as the impact of the breach upon them was peculiarly within their own knowledge. This was particularly the case with respect to any opportunities said to have been lost as a consequence of not being notified promptly that the Conditions Subsequent could not be satisfied by the Sunset Date.

165 In the absence of that evidence it is speculative as to whether any of the impacts alleged by the Sweeneys in argument would in fact be of any significance to them. It is not self evident that they were. In these circumstances, in my opinion the breach of cl 4.3 was not material in the relevant sense. Accordingly, it was not open to the Sweeneys to terminate the HoA pursuant to cl 8.2(b) for breach of that provision.

The Fundamental Breach Issue

166 The question arising under this head is whether, having given the December notice, the Sweeneys had elected to affirm the HoA and thus abandoned its common law right to terminate that agreement for fundamental breach, being the breach by Waters Lane of its obligations under cl 4.1. The primary judge referred to the election issue but did not directly decide it although he considered that the giving by the Sweeneys of the December notice did not prevent them from relying upon their common law rights as cl 17.8 provided that the remedies available to the Sweeneys under the HoA were cumulative to those available to them under the common law.

167 Three issues arise with respect to this matter. The first is whether the failure by Waters Lane to use “all reasonable endeavours” to satisfy the Conditions Subsequent by the Sunset Date as required by cls 4.1 and 7.1 amounted to a breach of a fundamental term entitling the Sweeneys to terminate the HoA after 20 January 2006 under the general law. The second is whether having given a notice under cl 8.2(a) with respect to the breach of cls 4.1 and 7.1, the Sweeneys had elected between alternative and inconsistent rights (being the right to terminate conferred by the combined operation of cls 8.1(b) and 8.2(b) on the one hand and the right to terminate for breach of fundamental term under the general law on the other). The third issue is whether, if there was an election by the Sweeneys which would otherwise have the legal effect of an abandonment of their right to terminate at common law for fundamental breach, nevertheless that right was preserved by the provisions of cl 17.8 of the HoA.

168 With respect to the first issue the appellants submitted that whether or not cls 4.1 and/or 7.1 constituted fundamental terms was to be determined in accordance with the well-known test formulated by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641 where the Chief Justice said:

“The question whether a term in a contract is a condition or warranty, i.e. an essential or a non-essential promise, depends upon the intention of the parties as appearing in or from the contract. The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor.”

169 It was submitted that this test was not satisfied in the present case as cl 6 of the HoA contemplated the entering into of a further development agreement to contain such other terms and conditions as were reasonably required by one party and agreed to by the other and which were not materially inconsistent with the terms of the HoA. Accordingly, as the HoA contemplated a further more detailed agreement, cls 4.1 and 7.1 were not terms which were of such importance to the Sweeneys that they would not have entered into the HoA unless they had been assured of a strict or substantial performance of them. It was further submitted that the critical promise in the HoA from the point of view of the Sweeneys was cl 12.2 under which Waters Lane was to procure Sintan to waive payment of interest on all amounts secured under the Sintan mortgage during the term of HoA and any subsequent agreement. As the Sweeneys were desperate they would have accepted just about anything provided that Waters Lane was locked into a form of development agreement with respect to the Property in order to relieve their dire financial position.

170 In my view those arguments are without merit. The fact that the HoA contemplated the entering into of a further, more detailed development agreement did not detract from the binding force of the HoA pursuant to which the obligation to enter into the further agreement was provided. Furthermore, that fact as well as the waiver of interest provision in cl 12.2 could not be said to detract from what I regard as the fundamental purpose and objective of the HoA, namely, the satisfaction of the Conditions Subsequent by the Sunset Date. So much is confirmed by Recital B to the HoA (see [19] above). Accordingly, the obligation upon Waters Lane as the Developer to use all reasonable endeavours to achieve that objective was clearly fundamental to, and went to the root of, the HoA. I have no difficulty concluding that those provisions fell within the Luna Park test of essentiality. The appellant’s contention to the contrary should be rejected.

171 The second issue raises the question of election. The most cited general statement of the doctrine is that of Stephen J in Sargent v ASL Developments Pty Ltd (1974) 131 CLR 634 at 641-642. Relevantly, his Honour said:

“The doctrine of election as between two inconsistent legal rights is well established, but certain of its features are not without their obscurities. The doctrine only applies if the rights are inconsistent the one with the other and it is this concurrent existence of inconsistent sets of rights which explains the doctrine; because they are inconsistent neither one may be enjoyed without the extinction of the other and that extinction confers upon the elector the benefit of enjoying the other, a benefit denied to him so long as both remained in existence. …

In many instances what may pass for an application of the doctrine is, in truth, but the inevitable consequence of the party's conduct, a consequence that would follow even if no such doctrine existed. Thus in the common case of avoidance of a contract for breach it is not any doctrine of election that prevents the avoiding party subsequently from enforcing the contract but rather the fact that the contract has, by his act of avoidance, ceased to exist … On the other hand, if he chooses instead to keep the contract on foot and sue for damages rather than rescind for breach, recourse must be had by the other party either to election or, if the facts will support it, to an estoppel if that breach should later be sought to be relied upon so as to avoid the contract. …

For the doctrine to operate there must be both an element of knowledge on the part of the elector and words or conduct sufficient to amount to the making of an election as between the two inconsistent rights which he possesses …

The nature of the knowledge which an elector must possess is a matter upon which the authorities are somewhat at variance. An elector must at least know of the facts which give rise to those legal rights, as between which an election must be made; without that knowledge the doctrine of election will not be available to make irrevocable his choice of one particular right … The extent of knowledge of relevant facts necessary for the doctrine of election to apply has been described as ‘full knowledge of the material facts’”

172 At 646 his Honour continued:

“The words or conduct ordinarily required to constitute an election must be unequivocal in the sense that it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other; thus for a lessor to continue to receive rent under a lease will be consistent only with his rights as lessor and inconsistent with the exercise of a right to determine the lease … However, less unequivocal conduct, only providing some evidence of an election, may suffice if coupled with actual knowledge of the right of election … There need be no expressed intention to elect, nor will an express disclaimer of such an intention be of any avail in preserving one right if in fact there be an exercise of another inconsistent right … For an election there need be no actual, subjective intention to elect … an election is the effect which the law attributes to conduct justifiable only if such an election had been made…”

173 In the same case Mason J (at 658) observed:

he has induced the other party to believe that performance of the contract is insisted upon

174 The appellants accepted that the present case fell into the category of an election by the Sweeneys between two inconsistent rights where they had performed an act which was of such a nature that, irrespective of their actual intention, the law treated them as having exercised their election to pursue only one of those rights. Within this category of case, the words or conduct ordinarily required to constitute an election must be unequivocal in the sense that they are consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other.

175 The appellants further submitted that in a case where a party to a contract has the right to terminate that contract both at common law as well as pursuant to a provision of the contract itself, the exercise of the latter right is an unequivocal act constituting an election to treat the contract as remaining in force. In other words, the exercise of the contractual right to terminate is itself an affirmation of the contract for that right would not exist unless the contract remained in force. With respect, the argument is circular.

176 In Champtaloup v Thomas [1976] 2 NSWLR 264 at 268, Glass JA, with whom Street CJ agreed, observed that the constituents of an election to affirm a contract had been recently defined by the High Court in Sargent and included the following proposition:

“If a party, aware that he must make a choice, exercises rights under the contract, he is held to have elected to affirm. This is because he has acted adversely to the other party, and induced him to believe that performance of the contract is insisted upon.”

177 In the same case, Mahoney JA, with whom Street CJ also agreed referred (at 274) to the right to elect in terms of whether to affirm or rescind a contract according to its contractual terms. In other words, for there to be an election between two inconsistent rights in the present context, one such right must be to affirm the contract or insist upon its continued performance according to its terms whereas the other right must be to terminate the contract.

178 If this is so and the doctrine of election arises only where the rights are inconsistent in the sense that exercise of one affirms the continued existence of the contract whereas the other terminates it, then when the choice is between termination of the contract according to its terms or termination at common law, each involves a right to terminate with the result that neither is inconsistent with the other and the doctrine of election has no part to play.

179 Thus in The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 31, Mason J said:

in specie

180 In the same case Brennan J (at 50) observed:

“…a lessor who enforces a forfeiture in accordance with the lease as soon as he is entitled to do so after he has knowledge of the lessee's anticipatory breach cannot be taken to elect not to enforce a claim for damages. The mere continuance of the lease pending forfeiture is not an election either way. The election to be made by a lessor is between continuing to bind the lessee to performance of his executory obligations and putting an end to those obligations so that the substitutionary liability in damages will arise.”

181 Of particular relevance to the present case is the following statement of Deane J, with whom Dawson J agreed, in Tabali at 55-56:

“It follows from the foregoing that, in the circumstances which had arisen, the landlord had both a contractual right to terminate the lease by re-entry under cl 10.1 for breach of covenant and, on the application of the ordinary principles of contract law, a common law right to terminate for fundamental breach. The landlord was not obliged to elect between the two grounds for terminating the lease: it was entitled to rely upon them both. A party entitled to terminate a contract for repudiation or fundamental breach may rely upon both a specific contractual right to terminate the contract and the common law right to terminate unless, as a matter of construction, the former excludes the latter … More specifically, where a contractual right to terminate for past breach and the common law right to terminate for repudiation or fundamental breach exist concurrently, the reliance upon the contract involved in the exercise of the contractual right to terminate will not preclude the recovery of damages for loss of the future benefit of the contract by reason of repudiation or fundamental breach unless the contract expressly or impliedly so provides …”

182 Finally, in Immer (No 145) Pty Ltd v Uniting Church of Australia Property Trust (NSW) (1993) 182 CLR 26 at 30, Brennan J remarked:

“An act amounting to an election must be unequivocal. Where a contract can be terminated at the option of a promisee, the right to terminate is not necessarily lost by the promisee doing any act consistent with the continuance of the contract. If the act is also consistent with the reservation of a right to terminate in certain events, the right to terminate is not lost by the doing of the act.”

183 The appellants submitted that by giving the December notice which expressly provided that they had an opportunity to rectify or correct the non-performance of the breaches specified in the schedule to the notice within 20 Business Days, the Sweeneys had elected to affirm the HoA thereby abandoning any common law right which they would otherwise have had to terminate it for fundamental breach.

184 The basis of this submission is that by exercising its right to give a notice under cl 8.2(a) and then to terminate pursuant to cl 8.2(b), the Sweeneys were affirming that the HoA remained on foot to enable them to exercise their rights under those provisions. In other words, whereas the right to terminate at common law would bring the HoA immediately to an end thereby discharging each party from any obligation to further perform it, the right to issue the notice under cl 8.2(a) only existed if the HoA was not brought to an end. Further, the notice required Waters Lane to perform the HoA by rectifying the alleged breaches under threat of the Sweeneys terminating pursuant to cl 8.2(b) in the event that the breaches were not rectified.

185 In my view the giving by the Sweeneys of the December notice and its purported termination of the HoA upon giving notice under cl 8.2(b) did not constitute an election to abandon its right to terminate the HoA at common law for fundamental breach. The former, contrary to the appellants’ submission, did not require Waters Lane to perform the HoA by rectifying the alleged breaches; on the contrary, it merely notified the appellants that they had an opportunity to rectify them which was purely academic in terms of the breach of cls 4.1 and 7.1. After all it was the appellants’ submission, recorded earlier in these reasons, that any breach of cl 4.1 as at 14 December 2005 was incurable within the 20 Business Days allowed by cl 8.2(a) for the rectification of that breach.

186 Furthermore the December notice itself asserted that neither the giving of the notice nor anything specified in it constituted an admission by the Sweeneys that any of the breaches specified in the schedule to the notice was capable of remedy by the appellants by 20 January 2006 or at all.

187 In my opinion, the giving of the December notice did not constitute an unequivocal act on the part of the Sweeneys which either affirmed or purported to affirm the continuing existence of the HoA. It could not have done other than have conveyed to the appellants their intention to exercise their right under cl 8.1 to terminate the HoA for material breach. As such, there was no inconsistency between exercising the right to terminate under cl 8 in accordance with its terms on the one hand or the right to terminate at common law for fundamental breach on the other. The primary judge was therefore correct to conclude that by giving the December notice, the Sweeneys had not elected to abandon their right to terminate at common law for fundamental breach.

188 Accordingly, it is unnecessary to consider whether cl 17.8 of the HoA had the effect of preserving the Sweeneys’ common law right to terminate in the event that that right had otherwise been lost as a consequence of the application of the doctrine of election.

Conclusion

189 It follows from the foregoing that apart from succeeding in their challenge to the primary judge’s finding that a breach of cl 4.3 of the HoA was a material breach, the appellants’ challenges to the other findings of the primary judge have failed. Accordingly the appeal should be dismissed with costs.

190 In [17] above I noted that events subsequent to the decision of the primary judge had had the effect of terminating the HoA irrespective of whether or not the appeal succeeds. As the appeal has failed it follows that the HoA was validly terminated by the Sweeneys on 1 May 2006 by the giving of notice of termination pursuant to cl 8.2(b). Accordingly, the appellants accepted that if their appeal was unsuccessful a declaration should be made to reflect that fact.

191 I would therefore propose the following orders and declaration in disposition of the appeal:

(a) ORDER that the appeal be dismissed;

(b) DECLARE that the Heads of Agreement dated 9 March 2004 between the appellants and the respondents was validly terminated by the respondents with effect as from 1 May 2006 pursuant to an undated “Notice under Clause 8.2(b) Notice of Termination” forwarded under cover of a letter from David Begg & Associates to Gadens Lawyers dated 1 May 2006.

ORDER

**********

20/08/2007 - Incorrect matter number in Headnote and first page of judgment. - Paragraph(s) Headnote, Page 1 of judgment

Key Legal Topics

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Contract Law
Civil Procedure

Legal Concepts

Appeal
Breach
Contract Formation
Costs
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Res Judicata

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Citations

Waters Lane v Sweeney [2007] NSWCA 200

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CITATION:	Waters Lane & Anor v Sweeney & Ors [2007] NSWCA 200 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	18-20 July 2007
JUDGMENT DATE:	16 August 2007
JUDGMENT OF:	Giles JA at 1; Santow JA at 2; Tobias JA at 3
DECISION:	(a) ORDER that the appeal be dismissed; (b) DECLARE that the Heads of Agreement dated 9 March 2004 between the appellants and the respondents was validly terminated by the respondents with effect as from 1 May 2006 pursuant to an undated “Notice under Clause 8.2(b) Notice of Termination” forwarded under cover of a letter from David Begg & Associates to Gadens Lawyers dated 1 May 2006; (c) ORDER that the appellants pay the respondents’ costs of the appeal.
CATCHWORDS:	CONTRACTS – Construction and interpretation – All reasonable endeavours – Conditions subsequent not satisfied by sunset date – Whether to take into account an unexercised unilateral right to extend sunset date in determining breach – Termination – Contractual right of termination enlivened only after notice giving time to cure breach – Whether a breach that is not capable of being cured in the given time is one for which such a notice can be validly given – Election – Whether giving notice of termination pursuant to contractual clause constitutes election and waives right to terminate at common law
LEGISLATION CITED:	Conveyancing Act 1919 Real Property Act 1900 Environmental Planning and Assessment Act 1978 Environmental Planning Assessment Amendment (Infrastructure and Other Planning Reform) Act 2005
CASES CITED:	Batson v De Carvalho (1948) 48 SR (NSW) 417 Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187 Champtaloup v Thomas [1976] 2 NSWLR 264 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 Hungry Jack’s Pty Ltd v Burger King Corp [1999] NSWSC 1029 Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26; [1993] HCA 27 L Schuler AG v Wickman Machine Tools Sales Ltd [1974] AC 235 Sargent v ASL Developments Pty Ltd (1974) 131 CLR 634 Sheffield District Court Railway Co v Great Central Railway Co (1911) 27 TLR 451 Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 Terrell v Mabie Todd & Co Ltd (1952) 69 RPC 234 The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689
PARTIES:	Waters Lane Pty Ltd Sean Martin Howard David James Sweeney Gregory Sweeney Cynthia June Sweeney Rhonda June Collison
FILE NUMBER(S):	CA 40296/06
COUNSEL:	1-2A: F Kunc / C Bova 1,3-4R: J Simpkins SC / T Wong 2R: Mr Xanos
SOLICITORS:	1-2A: Gadens, Lawyers, Sydney 1-4R: David Begg & Associates, Sydney
LOWER COURT JURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	SC 1321/06
LOWER COURT JUDICIAL OFFICER:	Rein AJ
LOWER COURT DATE OF DECISION:	26 April 2006
LOWER COURT MEDIUM NEUTRAL CITATION:	Waters Lane Pty Limited v Sweeney [2006] NSWSC 222

[2007] NSWCA 200

16 August 2007

Key Legal Topics

Areas of Law

Contract Law

Civil Procedure

Legal Concepts

Appeal

Breach

Contract Formation

Costs

Remedies

Res Judicata