Contract Uncertainty: Special Conditions in Land Sale Agreements, Exams of Finance

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SUPREME COURT OF QUEENSLAND CITATION: Bellmere Park P/L as trustee for the Bellmere Park Development Trust v Cameron Samuel Benson (as personal representative of the estate of Eric Gordon Benson [2007] QCA 102 PARTIES: BELLMERE PARK PTY LTD ACN 121 087 447 (as trustee for the BELLMERE PARK DEVELOPMENT TRUST) (applicant/respondent) v CAMERON SAMUEL BENSON (as personal representative of the estate of ERIC GORDON BENSON deceased) (respondent/appellant) FILE NO/S: Appeal No 949 of 2007 Appeal No 951 of 2007 SC No 542 of 2007 DIVISION: Court of Appeal PROCEEDING: General Civil Appeal ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 30 March 2007 DELIVERED AT: Brisbane HEARING DATE: 13 March 2007 JUDGES: Williams JA, Muir and Philip McMurdo JJ Separate reasons for judgment of each member of the Court, each concurring with the order made ORDER: That an order for costs on the standard basis be substituted for the indemnity costs order made on 2 February 2007 and otherwise that the appeal be dismissed with costs. CATCHWORDS: CONTRACTS − GENERAL CONTRACTUAL PRINCIPLES − CONSTRUCTION AND INTERPRETATION OF CONTRACTS− OTHER MATTERS − where contract entered into between appellant vendor and respondent purchaser for sale and purchase of land − where contract included a due diligence special condition − where respondent purchaser sought specific performance − whether the special condition of the contract was uncertain − whether the condition could be satisfied as a matter of subjective or objective fact − whether contract was illusory in nature − whether condition was for the benefit of both parties and thus capable of being waived by the 2 respondent − whether costs on an indemnity basis should have been awarded Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502, approved Charles Lodge Pty Ltd v Mehahen, [1966] VR 161, distinguished Gange v Sullivan (1966) 116 CLR 418, applied Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2004] 1 AC 715, cited Mallet v Mallet (1984) 156 CLR 605, cited Meehan v Jones (1981-1982) 149 CLR 571, distinguished Re Wickham Developments (Australia) Pty Ltd v Feros & Ors, Unreported, Supreme Court of Queensland, QS No 232 of 1994, Thomas J, 6 April 1994, compared Sandra Investments Pty ltd v Booth (1983) 153 CLR 153, cited Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, distinguished The Queensland Electricity Generating Board v New Hope Collieries Pty Ltd [1989] 1 LL Rep 205, cited Toll (FBCT) Pty Limited v Alphapharm Pty Ltd (2004) 219 CLR 165, cited Upper Hunter County District Council v Australia Chilling and Freezing Co Ltd (1968) 118 CLR 429, cited York Air Conditioning and Refrigeration (Australasia) Pty Ltd v The Commonwealth (1949) 80 CLR 11, approved COUNSEL: F L Harrison SC, with D P O’Brien, for the respondent/appellant A M Daubney SC, with D J Morgan, for the applicant/respondent SOLICITORS: W T Purcell Chadwick & Skelly for the respondent/appellant Crilly Lawyers for the applicant/respondent [1] WILLIAMS JA: I have had the advantage of reading the reasons for judgment of Muir J and I agree with all that is said therein. I agree with the order he has proposed. [2] MUIR J: Introduction The critical issue in this appeal from a decision of a judge of the Trial Division in a specific performance action is whether special condition 1 of the subject contract is void for uncertainty. [3] The contract, dated 7 August 2006, was entered into between the appellant as vendor and the respondent as purchaser for the sale and purchase of 178.1 ha of vacant land for a price of $3,750,000. The contract specified 5 February 2007 as the date for completion. It included these special conditions: “1. A due diligence period of 120 days from the date of Contract to enable us to investigate with the State Government and the Caboolture Shire Council to ascertain the liability of the proposed 5 “The whole thrust of the law today is to attempt to give proper effect to commercial transactions. It is for this reason that uncertainty, a concept so much loved by lawyers, has fallen into disfavour as a tool for striking down commercial bargains. If the statements are appropriately promissory in character, courts should enforce them when they are uttered in the course of business and there is no clear indication that they are not intended to be legally enforceable.” [13] Such sentiments are not applicable only to commercial transactions. Referring to subject to finance clauses in contracts of sale and purchase, Mason J remarked in Meehan v Jones:5 “To say that clauses of this kind are void for uncertainty is to ignore the traditional doctrine that courts should be astute to adopt a construction which will preserve the validity of the contract.” [14] Sir Robin Cooke gave expression to the contemporary approach to uncertainty arguments in the following passage from the reasons in The Queensland Electricity Generating Board v New Hope Collieries Pty Ltd as: “Arguments invoking alleged uncertainty, or alleged inadequacy in the machinery available to the courts for making contractual rights effective, exert minimal attraction. Sudbrook is now the leading English case in the field. The same tendency has been apparent elsewhere in the Commonwealth, as illustrated by Calvan Consolidated Oil and Gas Co Ltd v Manning, [1959] SCR 253; Attorney-General v Barker Bros Ltd [1976] 2 NZLR 495; and Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd, [1982] 56 ALJR 825.” 6 [15] It is apparent from this review of authority that the appellant’s uncertainty argument faces formidable obstacles. Is the Condition uncertain? [16] The Condition does not expressly confer a right of termination in the event that the viability of the proposed use of the site is not ascertained within the 120 day period. However, it is reasonable to infer from the statement that the contract becomes unconditional at the end of the period that, until then, the respondent purchaser has a right to notify its intention not to proceed with the contract should the requirements of the Condition not be satisfied. [17] The appellant’s contention is that “viability” is something which must be objectively determined. It is submitted that the word is “vague and obscure” and means “feasible or practicable, esp. from an economic standpoint.” It is argued that without any indication of the proposed use or some precise proposal it is impossible to determine what constitutes viability. [18] There is nothing vague or obscure about the word “viability” once regard is had to the context in which it appears. The dictionary definition referred to by the appellant provides a meaning which is substantially appropriate. It may be inferred from the 4 (1989) 21 NSWLR 502 at 523. 5 (1981-1982) 149 CLR 571 at 589. 6 [1989] 1 LL Rep 205 at 210. 6 respondent’s name and the wording of the Condition that the acquisition of the land by the respondent was a commercial transaction undertaken for the purposes of financial gain. “Viable” in my view equates with “financially worthwhile.” [19] The Condition serves a purpose similar to the purpose of subject to finance clauses, concerning which Mason J explained in Meehan v Jones:7 “Primarily the object of such a clause is to benefit or protect the purchaser … by ensuring that he is not under a binding obligation to complete if he is unable to obtain finance.” (references to authorities omitted) [20] The object of the Condition is to enable the respondent to carry out investigations to ascertain the “viability of the proposed use of the site” and to escape the obligation to proceed with the contract in the circumstances identified in the Clause. It is for the respondent’s protection. [21] Meehan v Jones also provides useful guidance on the question of whether the assessment contemplated by the Condition is objective or subjective. Mason J said in the course of his reasons:8 “The primary object of the condition being the protection of the purchaser, it is sensible to treat it as stipulating for finance that is satisfactory to the purchaser or his nominee, subject to an implied obligation that he will act honestly, or honestly and reasonably, in endeavouring to obtain finance and in deciding whether to accept or reject proposals for finance.” [22] Gibbs CJ, addressing the same question in Meehan v Jones, said:9 “The intention of such a clause in my opinion is to leave it to the purchaser himself to decide whether the terms and conditions on which finance is available are satisfactory. The condition prevents a purchaser from being obliged to go through with a sale when he does not believe that he can raise the necessary funds. Such a condition is generally entirely for the protection of the purchaser, and it is the satisfaction of the purchaser, not that of some hypothetical reasonable man, that will satisfy the condition.” [23] In my view it is an unlikely construction that “viability” must be determined objectively. The clause is for the protection of the respondent. It is the party reserving the right to make due diligence investigations with the ultimate aim of enabling it to decide whether it is in its interests to proceed with the purchase. There is no good reason why the parties would have intended that viability be determined by values and standards other than those considered applicable by the respondent. After all, the phrase under consideration appears in a provision dealing with “due diligence” investigations by a purchaser. Such enquiries or investigations in the normal scheme of things are conducted by a purchaser to enable it to be satisfied about aspects of the property it is proposing to acquire. [24] There are other reasons which, to my mind, make it improbable that the contractual intention was to make the right of termination conferred by the Condition exercisable 7 At 588. 8 At 588. 9 At 580-581. 7 by reference to objective standards. Viability of land use in the present context is something difficult, if not impossible, to determine without reference to the circumstances and objectives of the purchaser. Relevant to such a determination, for example, may be: the purchaser’s financial position – whether it can borrow, how much it may need to borrow and at what interest rates; the availability of other more financially attractive developments; whether the subject land may be used or developed in conjunction with other land available to the purchaser; and, importantly, the purchaser’s own appreciation of the land’s potential for profitable development. The development of real property is essentially an entrepreneurial activity which almost invariably involves subjective assessments of marketability and profitability. [25] Also, to adopt the appellant’s objective test would introduce an unwarranted element of uncertainty and prospective delay into the exercise of rights under the Condition. A determination of whether a party has acted honestly in relation to the exercise of rights under such a provision is a much simpler and more limited exercise than the objective determination contemplated by the appellant’s argument. [26] For these reasons, I conclude that the test required by the Condition is subjective. It was for the respondent, acting honestly, to consider whether the proposed use of the land was viable. The lack of criteria or standards by which viability is to be judged [27] The appellant argues that, except where the condition is to be fulfilled to the satisfaction of one of the parties, it must provide sufficient criteria for a court to be able to determine whether the test prescribed by the parties has been met. The test, as explained above, is not objective. It is for the respondent to decide the question of viability. Its determination, if honestly made, cannot be challenged by the appellant. Accordingly, this argument does not advance the appellant’s case. The absence of evidence of “proposed use” [28] The appellant argues that there is no evidence of the “proposed use” and “the inference is that the parties have simply assumed that there was a proposed use for the site when in fact there was none.” This is said to result in a failure by the parties to agree on a fundamental aspect of their bargain and to cause the Condition to be uncertain. [29] The “proposed use”, applying the line of reasoning used earlier and having regard to the evidence that no “proposed use” was communicated by the respondent to the appellant, is the use proposed by the respondent. The respondent’s relevant state of mind is a question of fact capable of being proved by extrinsic evidence.10 The fact that there was no evidence of any proposed use does not give rise, in the circumstances of this case, to the inference that there was no proposed use. The more obvious conclusion is that the respondent did not consider it necessary to adduce evidence on the point. The focus of the appellant’s uncertainty argument prior to the trial was on the construction of the Condition, not on whether there was in fact any proposed use. If the appellant wanted to rely on the non-existence of a proposed use, it was up to him to prove it. The respondent’s case did not depend on establishing that it had given notice under the Condition: it could and did rely on the contract becoming unconditional on the expiration of the 120 day period. 10 See Meehan v Jones (supra) at 578-579. 10 the respondent to take advantage of the Condition. If the respondent does wish to rely on it, it must do so within the 120 day period. In that event, there may be a question as to whether the respondent has acted honestly. If the respondent fails to give notice of termination in reliance on the Condition within the 120 day period, the contract continues on foot. That furthers the objective of the appellant which is to have the sale completed. There can be no question in these circumstances of the respondent “taking advantage of his own wrong.” [39] The same conclusion can be arrived at by a more direct, and in my view preferable, route without reference to decisions in respect of differently worded clauses. The aim of the court in construing contractual provisions is to “ascertain and give effect to the intention of the contracting parties.”15 The intention is to be ascertained objectively.16 [40] There is no reason to suppose that it was the contractual intention that if the Condition was not satisfied within the 120 day period either party could give notice of termination at some subsequent time. That conclusion is contrary to the clear meaning of the words of the Condition. To use the language of Gibbs CJ in Sandra Investments Pty Ltd v Booth,17 the Condition “itself provides for the consequences that flow from a failure to fulfil the condition.” It is difficult to see what interest the appellant vendor would have in terminating the contract if the respondent wished to proceed. It is difficult also to understand why, if the respondent wanted to proceed irrespective of the outcome of its due diligence enquiries it should not be permitted to do so. Waiver [41] Because of the view I take of the operation of the Condition, it is unnecessary to determine whether the Condition was capable of being waived by the respondent. In deference, however, to counsels’ detailed and skilful submissions, I will state my views on the point. It was argued that the Condition was not solely for the benefit of both parties and thus not susceptible to waiver by the respondent. The reasons advanced in support of the argument were that: (a) The right of termination was not given only to the purchaser; (b) The information obtained by the respondent in the course of the enquiries could have been obtained by the appellant from the authorities of whom enquiries had been made. That information could benefit the appellant; (c) Satisfaction of the Condition ended the uncertainty as to whether the contract would proceed. In this regard reliance was placed on Charles Lodge Pty Ltd v Mehahen18 and Meehan v Jones. [42] Unlike the result produced by the clauses under consideration in Meehan v Jones and Charles Lodge Pty Ltd v Menahen, the contract became unconditional at the expiration of the period allowed by the clause for the carrying out of investigations and no notice of termination in reliance on the clause could then be given. The appellant vendor was thus not left in any uncertainty as to the continuation of the contract on the expiration of the due diligence period. Nor was this a case in which the vendor had an interest in 15 Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2004] 1 AC 715 at 737. 16 Toll (FBCT) Pty Limited v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179. 17 (1983) 153 CLR 153 at 157. 18 [1966] VR 161, 165. 11 the fulfilment of the Condition because the exercise of rights under it could affect the completion date or because the Condition was “inextricably mixed up with other parts of the transaction from which it cannot be severed.” 19 [43] Only the respondent had the right to carry out the subject investigations. They were for its purposes and the appellant had no right to any of the information obtained by the respondent. The fact that the appellant was free to make its own enquiries unrelated to any provision of the contract can hardly bear on the appellant’s rights under the Condition. [44] The right of termination was not given expressly to the respondent or only to the respondent but it is difficult to see how the appellant could exercise the right of termination. It was for the respondent to determine viability on a subjective basis. An argument was advanced by reference to a hypothetical factual situation in which the authorities to which enquiries were directed, stated clearly near the beginning of the 120 day period that subdivision was impossible. In such a case, it was submitted, the appellant should not have to wait until the conclusion of the period: he should be able to give notice of termination so as to be free of contractual restraints. There may be something in that argument if the test was objective. As it is subjective, there is no reason why the respondent could not attempt, by various means, to procure more favourable decisions or even decide to hold the land for a substantial period in the hope that the attitudes of the authorities might change. The latter approach would not be incompatible with an opinion that the proposed use was viable. [45] Another difficulty with the appellant’s construction is that it is incompatible with the respondent’s rights under the Condition. The respondent had a right but no obligation to give notice under the Condition in the circumstances contemplated by it. The right existed for 120 days. The formation of an opinion by the respondent during the 120 day period that the proposed use of the site was not viable had no contractual consequence. The respondent was entitled under the clause to wait until immediately prior to the expiration of the period to see if its views on viability might change. And, of course, it could decide, whatever its views on viability, not to exercise its rights. [46] As a general proposition the right on the part of one party to a contract to waive a condition depends on whether the condition was for the sole benefit20 or, perhaps, the primary benefit21 of that party. The foregoing considerations strongly suggest that the Condition was for the respondent’s sole benefit and was thus capable of being waived by the respondent. Costs [47] The appellant appeals against an order of the primary judge on 2 February 2007 decreeing specific performance of the contract and ordering that the respondent pay the applicant’s costs of the application that day on an indemnity basis. At the hearing on 30 January 2007 the respondent’s counsel intimated to her Honour that the respondent 19 Cf Re Wickham Developments (Australia) Pty Ltd v Feros & Ors, Unreported, Supreme Court of Queensland, QS No 232 of 1994, Thomas J, 6 April 1994. 20 Gange v Sullivan (1966) 116 CLR 418 at 430 and Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153 at 159. 21 Gange v Sullivan at 443. 12 would be content with a declaration that the contract was valid and subsisting. The appellant’s solicitors had written to the respondent’s solicitors on 24 January stating: “We have previously indicated to you that we have instructions that should the Court determine that an enforceable contract is in effect, in the circumstances currently known to our client, our client will complete such a contract. That position stands. Can we suggest that if it is finally determined, either at first instance or on appeal, that the contract contended for in your client’s Application is in force and effect, such contract be completed within 14 days of either – . delivery of judgment in your client’s current Application; or . if an appeal is instituted, delivery of judgment on such appeal.” [48] The letter noted that the respondent “has a right to extend the settlement date of its on- sale contract.” [49] On 30 January, in the course of the hearing, the primary judge asked Senior Counsel for the respondent if an order for specific performance was being sought. Counsel replied, “…we rather apprehend that a declaration will be sufficient for their purposes for performing.” Senior Counsel for the appellant then said, “Yes, that’s so, your Honour.” Her Honour then referred to 5 February as the settlement date. [50] It is submitted on behalf of the appellant that this exchange needs to be considered in the light of the correspondence including the background fact known to the parties but probably not to the primary judge that there was no pressing need for completion. [51] On 1 February 2007 the appellant’s solicitors wrote to the respondent’s solicitors referring to the exchange before the primary judge referred to above, and stating that they did not regard anything said by the appellant’s Senior Counsel as departing from the position stated in the letter of 24 January 2007. The respondent’s solicitors in a letter of 2 February 2007, asserted that if confirmation was not received by noon that day that the appellant would complete on 5 February, the respondent reserved its right to apply urgently for an order for specific performance. No such confirmation was received. An application was made to the primary judge and she made an order for specific performance and the costs order referred to earlier. [52] In her reasons on 2 February her Honour noted that it was not suggested by Senior Counsel for the respondent that anything said by Senior Counsel for the appellant on the initial hearing was “misleading or inappropriate.” She indicated that that was her view also. Her Honour further said: “The way to deal with an adverse judgment is by an application for stay. That has been foreshadowed but, in the circumstances, this application for specific performance today is, in a sense, unnecessary and could have been forestalled by an application for stay brought on today. Now it will be brought on on Monday.”